Japan's SBI wants to shake up regional banks. It may get a Yoshihide Suga boost

Japanese financial firm SBI Holdings Inc has ambitions to revive struggling regional banks by taking stakes and pushing them into higher-margin businesses - a strategy that may get a boost from the country's new prime minister.

Although regional lenders are dominant outside of Tokyo and other big cities, many are tied to areas where the population is ageing rapidly, and business has been hollowed out. The pandemic has deepened the pain after years of low-margin lending.

Yoshihide Suga has pledged to strengthen local economies and encourage regional banks to consolidate, a shakeup that many say is long overdue.

"If the government is going to focus on revitalising local economies, there absolutely will be a business opportunity in that," SBI Chief Executive Yoshitaka Kitao said in an interview.

Kitao spoke to Reuters before Suga announced his intention to run as leader of the ruling party to replace Shinzo Abe.

SBI has so far invested in four regional banks, and Kitao says he wants to expand that to 10. The remaining six tie-ups should come by the end of the financial year, he told Reuters.

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If Suga pushes to revive local economies, regional banks could benefit, said Natsumu Tsujino of Mitsubishi UFJ Morgan Stanley Securities.

"Under such circumstances, SBI's framework would be more attractive for regional banks, and that could be a tailwind for SBI," she said.

Close Relationship

"There are a lot of regional banks, and some of them don't seem to have changed very much," Suga told Reuters in an interview last month, while still chief cabinet secretary.

Without prompting, Suga mentioned SBI's CEO, saying: "I hear many regional banks are going to see Mr Kitao".

The two are close, according to one source. Suga has asked Kitao for help with regional banks, Kyodo news agency reported.

SBI declined to comment on Kitao's relationship with Suga or how the company could benefit under the new administration.

Founded in 1999, SBI was the financial unit of SoftBank Group until the tech firm exited in 2006. SBI owns an online bank, an asset manager and Japan's largest online brokerage.

Kitao says he wants to create the fourth-biggest banking force in Japan, behind "megabanks" such as Mitsubishi UFJ Financial Group Inc.

His strategy is to use regional banks to expand SBI's customer base, said Brian Waterhouse of Windamee Research, who publishes on the Smartkarma platform.

"He is not trying to rescue the banking industry or save regional banks. He sees this as an opportunity to expand his empire," Waterhouse said.

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Smaller cities have plenty of wealthy people, many of whom don't know how to invest, especially in riskier assets with potentially higher returns, Kitao said.

Small banks, Big money

Combined net profits of regional banks tumbled 40% in the last four years, according to the country's Financial Services Agency. Yet regional lenders still account for nearly half of all bank deposits in Japan, holding some 368 trillion yen ($3.5 trillion) in cash deposits, according to central bank data.

For Shimane Bank, in the western part of the main island, SBI's 34% stake has meant a "dramatic change" in how it invests, a spokesman said.

Profits from its securities portfolio improved after it invested with SBI Asset Management, which has connections with global fund managers such as BlackRock Inc, the spokesman said.

Chikuho Bank, on the southern island of Kyushu, has been able to tap an SBI investee company, BASE, to help build e-commerce sites for its customers, something the bank couldn't do itself, a spokesman said.

"The biggest advantage from the alliance has been SBI's connection with technology firms," the spokesman said. SBI had a 2.9% stake in Chikuho as of March, according to Refinitiv data.

Fukushima Bank, which is 19% owned by SBI, has teamed up with an SBI-owned staffing company to help its customers secure workers.

The bank, a distant third in the prefecture, needs to expand beyond traditional lending, a representative said. As Japan's population falls and market shrinks, some banks may not want to merge, said Windamee's Waterhouse.

"For these banks who are looking for more capital and rescue, Kitao is perhaps the only option at the moment."