Things Can Get Worse for Japan’s Struggling Regional Banks

Ultralow interest rates are making it a miserable year for Japanese banks, with many stocks hitting historic lows. The bad news is that things can still get worse.


Chiba Bank,

8331 -0.76%

in particular, the market doesn’t yet seem to be fully accounting for all the risks it faces as one of the country’s largest regional lenders.

The bank is already priced for misery, at just 0.42 times its book value. Yet the current state of affairs may actually be as good as it gets: Defaults are so low as to be practically nonexistent, economic growth is low but positive—not a guaranteed state of affairs in Japan—and nonperforming loans are minimal.

The squeeze on margins caused by three decades of declining and now subzero benchmark interest rates has cut Chiba Bank’s interest income as a share of total assets in half over the last 10 years, down to below 0.25%. Unlike the country’s megabanks, such as Mitsubishi UFJ Financial and Sumitomo Mitsui Financial, it can’t reasonably escape by venturing overseas for other assets.

Instead, the bank has garnered significant exposure to the property market in its home prefecture southeast of Tokyo. Commercial real-estate loans, mostly against rented housing, now make up around 27% of the bank’s loan book, up nearly 5 percentage points in as many years. Household mortgages account for another 35% of the book.

The residential vacancy rate in the region, where the bank’s loans are overwhelmingly concentrated, runs to almost 17%, up from below 13% four years ago and higher than in neighboring Kanagawa and Saitama, according to real estate information company TAS Corp.

So Chiba Bank is exposed not only to the margin pressure haunting all of Japan’s regional banks, but also the particular risk of a downturn in a single prefecture’s property market that is already showing signs of strain.

The bank has significant exposure to Chiba Prefecture’s property market.


kim kyung-hoon/Reuters

Any knock to the housing market in Japan caused by an economic downturn would hit Chiba Bank disproportionately hard. And if the

Bank of Japan

attempts to combat economic problems by cutting interest rates even further, as it insists it is prepared to do, the pressure on profitability would be compounded.

Unlike European banks, which have similar profitability challenges but look increasingly well-capitalized after years of painful fundraising, many of Japan’s lenders have moved in the opposite direction. Chiba Bank’s Tier 1 capital ratio stands at 12%, down by around a percentage point in the last four years.

Oddly, the stock has yet to plumb new lows during the current sector selloff, keeping above its 2012 and 2016 troughs even though the lender’s prospects have probably deteriorated. It can’t be too long before the market catches up with the grim reality for Chiba Bank.

Heard on the Street’s Summertime Stock Picks Leaderboard

Write to Mike Bird at

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