As negative rates bite, Japan bank Shizuoka boosts unsecured retail loans

TOKYO, Feb 26 (Reuters) – Japanese regional lender Shizuoka Bank plans to increase its focus on unsecured retail loans as the introduction of negative interest rates in the country erodes its margins on corporate and mortgage lending, its CEO said on Friday.

Regional banks like Shizuoka, already hit by low returns on lending and weak corporate borrowing, are expected to bear the brunt of an unexpected move by the Bank of Japan last month to cut a benchmark interest rate below zero to stimulate the economy.

In that scenario, unsecured loans to retail borrowers have emerged as a bright spot for the regional banks.

"We have been seeing growth in unsecured loans to retail clients. We would like to increase further since they are profitable," Katsunori Nakanishi, CEO of Japan’s fifth-largest regional lender with 11 trillion yen ($97.5 billion) in assets, said in an interview.

Unlike Japan’s major banks that have a growing overseas presence and fee-earning businesses such as investment banking, regional banks have few alternatives to fall back upon.

Unsecured retail loans may be a tiny corner of all retail lending in Japan, but it is profitable and the risks are shared with specialized companies that guarantee repayment in cases of default by borrowers.

Margins on such loans are higher, with lenders charging anywhere between 4.5 percent to 14 percent, depending on borrowers’ creditworthiness. By comparison, rates on mortgage loans currently are only around 1 percent.

To illustrate the point, Nakanishi said his bank can earn the same sum when it lends 60 billion yen to large corporate clients at 0.01 percent or makes 100 million yen in unsecured retail loans at 6 percent rate.

For Shizuoka Bank, in less than three years, outstanding balances of unsecured retail loans have more than doubled to 63.1 billion yen at the end of December.

Unsecured retail loans had been mainly provided by non-bank speciality companies, but many of those companies are struggling in recent years following stricter regulation. They are being replaced by regional banks.

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"We have spent two and a half years to build the operations," Nakanishi said of unsecured retail lending. He declined to disclose targets for loan growth in the segment.

The BOJ’s move to charge fees on part of excess reserves parked by lenders such as Shizuoka Bank has raised concern among clients whether banks will eventually pass on the costs by charging fees on retail deposits.

"We cannot charge fees. In Japan, people have accounts at more than one bank and they would just stop using our bank," the CEO said.

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