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Rating Cuts Ratchet Up Pressure on Japan’s Regional Banks

Ayai Tomisawa

(Bloomberg) -- The future of some Japanese regional banks looks increasingly precarious after the sector had the most credit rating downgrades in the country last year.

The latest blow to the troubled lenders adds to pressure on the weakest among them to consolidate and boost profitability. Local banks are battling to revive lending as the population shrinks and negative interest rates persist in the world’s third-largest economy.

Downgrades in Japan more than doubled overall last year to 49, according to data compiled by Bloomberg, and of that 13 were banks. All except Japan Post Bank Ltd. were regional lenders.

Read how stricken local banks in Japan are buying riskier debt to survive

“Regional banks’ credit won’t likely recover unless yields start to rise,” said Shunsuke Oshida, a senior credit analyst at Manulife Asset Management in Tokyo, adding that there’s too much competition among too many lenders. “There’s a need to reduce the number of banks through consolidation.”

The Financial Services Agency is seeking to make it easier for banks to merge by ensuring they are exempt from anti-monopoly rates. Core business profit at Japan’s regional lenders fell to the lowest in more than a decade in the year ended March 2019, FSA figures show.

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Among the downgrades, Shizuoka Bank Ltd. was cut to AA- from AA at Rating & Investment Information Inc., while Gunma Bank Ltd. was lowered to A3 from A2 by Moody’s Investors Service.

Low rates in Japan have forced some regional lenders to buy riskier assets such as collateralized loan obligations, and dump holdings of Japanese government bonds, which traditionally made up the bulk of their investments.

Upgrades overall slowed to 79, compared with 118 in 2018, according to the data from five rating agencies. Of that, only one lender’s rating increased, that of Kiyo Bank Ltd., which is based in the western prefecture of Wakayama.

(Adds shift to riskier assets in seventh paragraph.)

--With assistance from Rie Morita, Rimi Yoneya and Adam Wahid.

To contact the reporter on this story: Ayai Tomisawa in Tokyo at atomisawa@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Beth Thomas, Russell Ward

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