JFSA-ADBI-IMF Joint Conference January 27, 2014 Current Situation, Challenges and Future of Regional Finance in Japan Hisashi Ono Deputy Director-General, Supervisory Bureau, JFSA January 27 2014 * Any views expressed in this presentation are those of the speaker, and do not represent the official views of JFSA.
I. Current Situation of Regional Finance 1
Banks Loans to SMEs Outstanding amount of banks loans to SMEs had been decreasing year on year for some time, but it increased in July 2013, with year-on-year change of 1.29 % in October 2013. Source: Amount outstanding of loans is calculated from the total of loans to SMEs by city banks, regional banks and regional banks II in Bank of Japan s statistics Deposits, Vault Cash, and Loans and Bills Discounted. 2
Regional Banks Loans to SMEs Outstanding amount of regional banks loans to SMEs have been increasing year on year. In October 2013, the loans increased by 1.60 % year on year. Source: Amount outstanding of loans is calculated from the total of loans to SMEs by regional banks and regional banks II in Bank of Japan s statistics Deposits, Vault Cash, and Loans and Bills Discounted. 3
Regional Banks Loans to SMEs in the Area Struck by the Great Earthquake Outstanding amount of regional banks loans to SMEs in the three prefectures hit by the Great East Japan Earthquake (Iwate, Miyagi and Fukushima) are increasing after the earthquake. In October 2013, the loans increased by 3.83% year on year. Note: (1) Charts are prepared based on figures from the Bank of Japan s statistics Deposits, Vault Cash, and Loans and Bills Discounted. (2) Figures for 3 Tohoku prefectures are total of loans of regional banks whose headquarters are located in Iwate, Miyagi and Fukushima prefectures. Figures for 6 Tohoku prefectures are the total of loans of regional banks whose headquarters are located in Aomori, Akita and Yamagata, in addition to the 3 Tohoku prefectures. (3) Nationwide total is the total of loans to SMEs by regional banks and regional banks II in Bank of Japan s statistics Deposits, Vault Cash, and Loans and Bills Discounted. 4
Deposits, Loans and Loan-Deposit Ratios of Regional Banks (%) 80.0 70.0 60.0 50.0 40.0 (Tril. yen) 350 300 250 200 150 30.0 20.0 10.0 Deposit s (Right axis) Loan s (Right axis) Loan-to-Deposit ratio(left axis) Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 100 50 0 Deposit s (Right axis) Loan s (Right axis) Loan-to-Deposit ratio (Left axis) 241.2 241.8 246.0 248.0 254.0 257.3 262.1 270.4 277.2 289.5 298.9 178.3 177.2 177.7 181.7 186.6 191.4 198.6 198.4 201.5 206.6 212.5 73.9 73.3 72.2 73.3 73.5 74.4 75.8 73.4 72.7 71.4 71.1 Source: Figures are calculated based on the statistics of the Japanese Bankers Association 5
Deposits, Loans and Loan-Deposit Ratios of Credit Associations (%) 70.5 60.5 50.5 40.5 30.5 (Tril. yen) 140 120 100 80 60 20.5 10.5 0.5 Deposit s (Right axis) Loan s (Right axis) Loan-to-Deposit ratio (Left axis) Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 40 20 0 Deposit s (Right axis) Loan s (Right axis) Loan-to-Deposit ratio (Left axis) 103.5 105.5 107.5 109.3 111.4 113.8 115.5 117.4 119.7 122.6 124.8 62.6 62.2 62.0 62.6 63.4 63.5 64.8 64.1 63.7 63.7 63.6 60.5 58.9 57.7 57.3 57.0 55.8 56.2 54.6 53.2 52.0 51.0 Source: Figures are calculated based on the statistics of the Shinkin Central Bank. 6
Deposits, Loans and Loan-Deposit Ratios of Credit Unions 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 (%) ( 兆 円 ) 預 金 ( 右 軸 ) 貸 出 金 ( 右 軸 ) 預 貸 率 ( 左 軸 ) 15/3 末 16/3 末 17/3 末 18/3 末 19/3 末 20/3 末 21/3 末 22/3 末 23/3 末 24/3 末 25/3 末 20 18 16 14 12 10 8 6 4 2 0 s s (Right axis) (Right axis) Deposit s (Right axis) Loan s (Right axis) Loan-to-Deposit ratio (Left axis) Source: Figures are calculated based on the statistics of the Shinkumi Federation Bank. 14.8 15.2 15.6 15.9 16.0 16.3 16.3 16.7 17.2 17.7 18.2 9.1 9.1 9.1 9.3 9.3 9.3 9.4 9.4 9.4 9.4 9.5 61.7 59.8 58.8 58.3 58.2 57.4 57.4 56.1 54.7 53.3 52.4 7
(Tril. yen) Regional Banks Financial Statements (%) 2.5 2.0 1.5 1.0 0.5 0.0 0.5 1.0 1.5 2.04 2.04 1.98 2.00 1.96 4.5 10.2 0.24 0.18 0.64 1.01 4.0 0.77 0.80 1.79 0.71 0.64 1.82 10.8 10.7 10.6 3.7 1.14 0.09 0.41 0.41 1.18 (internationally active banks based on the Basel III requirements) 1.70 11.31.64 1.80 1.79 11.6 1.58 0.64 0.65 11.9 1.71 1.54 0.72 3.4 3.2 3.2 3.2 0.72 3.1 14.2 (domestic banks based on the Basel II requirements) 11.2 1.73 0.81 0.03 0.10 0.12 0.08 0.61 0.29 0.36 Core net business profits Credit-related expenses Net profit Non-perfoming loan ratio Real net business profits Stock-related income Capital adequacy ratio Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Note: (1) Capital adequacy ratios from March 2006 to March 2009 do not include Ashikaga Bank, which was under special public management during that period. (2) Operating profits from core business is equal to operating profits excluding realized gains/losses on JGB holdings. 14 12 10 8 6 4 2 0 8
Credit Associations Financial Statements (Tril. yen) 10 8 6 4 2 0 2 4 6 11.2 6.15 6.30 6.47 6.26 7.1 3.05 2.66 2.70 0.62 0.70 11.9 11.7 11.8 3.26 5.61 4.82 6.5 6.4 0.03 0.90 5.20 5.10 3.03 3.11 5.35 5.8 5.8 3.37 1.57 2.09 12.3 12.6 12.8 2.75 1.54 0.06 4.75 5.96 2.00 5.33 5.46 4.34 4.17 1.36 0.57 0.43 0.41 2.30 2.31 13.0 6.0 6.3 6.4 2.02 Core net business profits Real net business profits Credit-related expenses Stock-related income Net profit Capital adequacy ratio Non-perfoming loan ratio Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Note: Total of net profits do not include the total net loss of 10.1 billion yen for those credit associations that used measures under Act on Special Measures for Strengthening Financial Functions. (%) 2.17 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 0 2.0 4.0 6.0 8.0 9
Credit Unions Financial Statements (Tril. yen) 2.0 ( (%) 14.0 1.6 1.2 0.8 0.4 0.0 0.4 0.8 1.2 11.90 10.10 9.60 9.60 10.00 1.08 0.98 1.02 1.06 0.95 0.900.92 0.94 0.20 10.70 0.15 0.03 0.06 0.06 10.30 10.30 0.24 10.10 9.00 0.93 0.81 0.830.85 0.85 0.78 0.810.84 0.81 0.59 0.02 0.02 0.18 0.37 10.90 11.00 11.14 11.30 8.20 8.00 0.14 0.08 0.01 0.03 0.03 0.10 8.50 8.40 Core net business profits Real net business profits Loss related to stocks Net income Capital adequacy ratio Non-performing loan ratio 0.27 0.00 2005/03 2006/03 2007/03 2008/03 2009/03 2010/03 2011/03 2012/03 2013/03 Note: Total of net profits do not include the total net loss of 21 billion yen for those credit unions that used measures under Act on Special Measures for Strengthening Financial Functions. 12.0 10.0 8.0 6.0 4.0 2.0 0.0 0 2.0 4.0 6.0 8.0 10
Financial Institutions Response to SMEs Requests for Loan Term Change Even after the expiration of the Act on Temporary Measures to Facilitate Financing for Small and Medium-Sized Enterprises, more than 90 % of applications for changes in loan terms are accepted by financial institutions. Expiration of the Act on Temporary Measures to Facilitate Financing for SMEs as of August 2013 87.9% 90.0% 91.8% 92.3% 93.0% 93.3% 93.4% 93.4% 93.5% 93.6% 93.6% (the rate of requests loan term change accepted: number of loan terms changed/number of applications) 11
II. Challenges of Regional Finance 12
Financial Institutions Situation and Challenges Financial institutions loan-deposit ratios and profitability - Deposits have been increasing but lending has been flat. As deposits are not used for lending, loan-deposit ratio has declined. - Interest margin is diminishing due mainly to a decline in loan rates. Profits from lending have also decreased. (%) (Tril. Yen) Banks JGB holdings have been increasing. Tril. yen 500 450 400 350 Depository Institution holdings Banks JGB holdings Share of Assers Assets 25.0% 20.0% 300 15.0% 250 200 10.0% 150 100 5.0% 50 0 0.0% Source: the Japanese Bankers Association Source: Japan s Flow of Funds statistics, Bank of Japan. FY Margin between deposit rates and loan rates Loan rates Nominal interest rates and real interest rates in deflation In the last 20 years, although nominal interest rates (contracted loan rates) have been declining, the level of real interest rates have not declined due to deflation. Margin between deposit rates and loan rates Interest rates on deposit and bonds *Margin between deposit rates and loan rates = loan rates interest rates on deposits and bonds Source: the Japanese Bankers Association Real interest rates = contracted loan rates rate of inflation (GDP deflator) Loan interest rates are rates for long-term loans, calculated for all banks. Source: Bank of Japan, Cabinet Office. 13
Declining Trend of Banks Loan-to-Deposit Ratio Loan-to-deposit ratios of domestic banks by areas 120 (%) 110 100 90 80 70 60 50 1998 98 年 1999 年 2000 年 2001 01 年 2002 02 年 2003 03 年 2004 04 年 2005 05 年 2006 06 年 2007 07 年 2008 08 年 2009 09 年 2010 年 2011 年 全 All 国 region 北 Hokkaido 海 道 東 Tohoku 北 関 Kanto 東 北 Hokuriku 陸 中 Chubu 部 近 Kinki 畿 中 Chugoku 国 四 Shikoku 国 九 Kyushu 州 沖 縄 / Okinawa Figures at end-march, except for 1998 for which figures at end-april are used. Loan-deposit ratios are calculated as loans divided by deposits (including negotiable deposits) and multiplied by 100. Source: Deposits, Vault Cash, Loans and Bills Discounted by Prefecture (Domestically Licensed Banks), Bank of Japan. 14
Increasing Importance of Management of Financial Assets in Aging Japan Savings of households by different age groups Share of households savings by different age groups 2,500 ( Ten 万 円 thousands ) Desired 年 金 支 給 amount 開 始 時 of に financial 最 低 準 備 assets してお at く pensionable 金 融 資 産 残 高 age ( (based 家 計 の on 金 the 融 行 poll) 動 に 関 する 世 論 調 査 ) 30 歳 30 s ~39 歳 5.2% ~29 20 s 歳 0.4% 2,000 40 s 40 歳 ~49 歳 12.5% 70 s~ 歳 ~ 28.3% 1,500 1,000 一 世 帯 当 たりの 貯 蓄 保 有 額 ( 家 計 調 査 ) Savings per household 50 s 50 歳 ~59 歳 19.5% 500 0 ~29 20 s 歳 30~39 30 s 歳 40~49 40 s 歳 50~59 50 s 歳 60~69 60 s 歳 70 s~ 歳 ~ (Age groups) 60 歳 60 s ~69 歳 34.1% Source: Family Income and Expenditure Survey (Savings and Liabilities) (2010), Ministry of Internal Affairs and Communications; Public Opinion Survey on Household Financial Assets and Liabilities (2010), Bank of Japan. Source: Family Income and Expenditure Survey (Savings and Liabilities) (2010), Ministry of Internal Affairs and Communications. 15
Japanese SMEs Going Overseas Number of firms with overseas affiliated companies by size of equity capital 1,200 ( 社 ) 1,000 2004 年 度 末 As of end-march 2005 2009 年 度 末 As of end-march 2010 800 600 400 200 0 5 less 千 万 than 円 以 50 下 over 5 千 50 万 円 超 over 1 億 100 円 超 over 3 億 300 円 超 over 10 億 1 billion 円 超 over 100 10 億 billion 円 超 million yen million yen million yen million yen million yen million yen Source: Survey of Overseas Business Activities, Ministry of Economy, Trade and Industry. 16
Financial System Council: Working Group on the Medium- and Long-Term Modalities of the Japanese Financial Industry In March 2011, the Minister of State for Financial Services requested the Council to investigate: the medium- and long-term agenda for developing the Japanese economy and financial industry, by enhancing the international competitiveness of Japanese financial institutions, improving financial functions in regional economies, and combining these two. In June 2011, the Financial System Council: Working Group on the Medium- and Long-Term Modalities of the Japanese Financial Industry was established. On May 28, 2012, the Working Group compiled and released the report titled The Japanese Financial Industry: Desirable State in the Medium- and Long-Term (Present State and Future Outlook). The report focused on three challenges: Enhancement of the international competitiveness of the Japanese Financial Industry Improvement of the financial functions in regional economies Provision of financial services that meet the needs of the people The report is available here: http://www.fsa.go.jp/en/refer/councils/singie_kinyu/reports/20120831.html 17
Towards a New Financial Industry The roles of the financial industry (1) To support the real economy (2) To lead the economy as a growing industry itself Towards a financial industry creating values that meet the needs of customers Financial institutions are required to play roles such as; Fulfillment of the risk conversion function Function of the information transmission Execution of management strategies with a greater emphasis on the customer perspective Development and expansion of business foundations Nurturing of experts in finance 18
How Financial Institutions Should Be Local corporate financial services Urgent issues faced by regional economies (1) Rehabilitation and revival of local SMEs (2) General revitalization of individual rural communities (3) Promotion of new industries and New Town Planning ( compact-city projects ) Broadening financial institutions means of taking risks (1) Strengthening of the risk conversion function Making loans and investment without depending on real estate for collateral (utilization of Asset Based Lending [ABL], etc.) Utilization of investment funds (venture capital, business turnaround funds, and region-based funds, etc.) (2) Expansion of the function of information production and transmission Industry, academia, finance + government collaboration ( accumulation of knowledge and information in finance ) Development of human resources with the ability to discern the sustainable business potential of companies and industries; utilization of outside experts (3) Reforms on human resources and know-how, financial affairs, and organizational affairs Implementation of integration/realignments and cooperation/alliances among different financial institutions, etc. 19
How Financial Institutions Should Be Personal financial services Challenge for Japanese financial institutions: Enhancement of their capacity to develop and sell investment products in response to a wide variety of needs of financial services users Development of human resources (personnel who possess financial knowledge and attach importance to the customer perspective, cultivation of sales people assuming the professional responsibility [autonomous professional responsibility backed by specialist knowledge], etc.); and, improvement of the transparency of financial products and services Reviewing the state of institutional investors asset management (including the development of microfinance-based funds, which mediate small contributions by ordinary people in empathy with investment projects) Managerial efforts for the development of products and services in appropriate response to a wide variety of needs of services users Fostering of independent financial intermediaries and neutral financial advisors; and, reviewing the state of the production and sales separation for financial services Reviewing the state of distributors sales channels 20
Public-Private Collaboration Efforts Local corporate financial services Correction of factors that are preventing financial institutions from supplying funds in ways conducive to economic growth Development of promising new industries and markets related to medical and geriatric care, environment and biotechnology, and agriculture in local communities through the Industry, academia, finance + government collaboration efforts Development of an environment which encourages financial institutions to actively exercise their risk conversion and function of information production and transmission. For example, (1) institutional improvement for ABL, (2) spread and promotion of electronic monetary claims, and (3) diversification of financing methods, mainly a method for the provision of quasi-equity, such as the use of Debt Debt Swaps (DDSs). Support for financial institutions to expand and reinforce their business foundations 21
Public-Private Collaboration Efforts - Personal financial services Strengthening human resources for the enhancement of personal financial services Promoting financial and economic education to improve financial literacy of customers Supporting the entry and development of new players (independent financial intermediaries and neutral financial advisors, etc.) Creating environments helpful for developing and providing financial services in flexible response to changes in the needs of individuals Transformation of personal funds into capital inducing economic growth Expansion of the capacity to supply funds in ways conducive to economic growth through institutional investors risk conversion function Opening up of new fund mediation channels (For example, nurturing of microfinance-based funds) 22
III. Future of Financial Institution 23
1. Summary of Financial Monitoring Policy for Fiscal Year 2013 Current situation Financial inspections have generally been aimed at ensuring the financial soundness and legal compliance of financial institutions Future challenges (1) Monitor timely and address appropriately economic and market changes within/outside Japan (2) Contribute to the current economic policy to overcome deflation, leading to the following positive cycle Effective financial intermediation with appropriate risk management by financial institutions Sustainable safety and soundness of each financial institution and the entire financial system Complete end of deflation and contribute to sustainable economic growth and business expansion Past financial inspection Fixed point observations of each financial institution Focus on the examination of whether financial institutions meet the criteria set in laws, regulations and inspection manuals (minimum standards) New financial inspection (New financial monitoring) Identify developments within financial institutions and markets on a real-time basis and address potential risks. Identify and analyze important issues across the industry, identify challenges, examine remedies, and develop policy responses. As a general rule, major financial institutions are subject to the monitoring from the viewpoint of better business operations (best practice). New framework The Inspection Bureau and the Supervisory Bureau shall work together to deeply understand the actual conditions of financial institutions and systems. (*The FSA will review its organizational structure as necessary.) Monitoring of financial systems (with macro-prudential perspectives) The FSA continuously monitors what is happening in the financial system, and identifies and addresses potential threats against the financial system at an early stage. Introduction of horizontal review (three mega financial groups, some regional banks, and major insurance companies, etc.) The FSA selects important issues for examination which are common to multiple financial institutions and examines the efforts for such issues across institutions from a unified viewpoint. The FSA improves the quality of financial institutions management and raises the level of the financial industry through the review. Review and challenges of the monitoring method: (1) Analyze the sustainability of financial institutions earnings structure, (2) focus on customers business potential in credit screening, and (3) respect the financial institutions assessment for small assets, etc. 24
2. Outline of the Annual Supervisory Policy for Regional Financial Institutions for Fiscal Year 2013 Areas to Be Emphasized in Supervision 1. Performing an Active Financial Intermediary Function, including Management Support for SMEs 2. Risk Management and Regional Financial Systems Stability 3. Improvement of Customer Protection and Convenience for Users To pull Japan out of deflation and achieve powerful growth, financial institutions are expected not only to support business improvement and recovery of customer enterprises, but also to play their primary role more effectively and give strong support for the development and growth of their customer enterprises, by actively providing funds including new loans, while controlling risk appropriately. As such, it is important to encourage regional financial institutions to become actively involved in the provision of new loans that will likely result in business improvement and recovery, development and growth of customer enterprises, taking into consideration the Japan Revitalization Strategy adopted by the Cabinet in June 2013. Considering the above, in this fiscal year, the FSA will supervise the performance of financial intermediary functions by regional financial institutions from the following viewpoints. (1) Promotion of Initiatives of New Loans by Financial Institutions which Emphasize Growth Potential (2) Deepen Region-based Relationship Banking (3) Support for Business Improvement, etc., to SMEs 25
3. Viewpoints for Supervising the Performance of Financial Intermediary Functions (1) Promotion of Initiatives of New Loans by Financial Institutions which Emphasize Growth Potential The FSA will encourage the active involvement of regional financial institutions in the provision of new loans, by intensively verifying their efforts to promote new loans that will likely result in business improvement, business recovery, development and growth of their customer enterprises. (2) Deepen Region-based Relationship Banking Regional financial institutions should continue and reinforce the efforts to promote region-based relationship banking involving an entire organization, by setting up a business model looking ahead to the future, recognizing that region-based relationship banking is a way to contribute to users, the economy, and society in the relevant region, as well as improving their own financial profiles. (3) Support for Business Improvement, etc., to SMEs This fiscal year is considered crucial for financial institutions to start their full scale support for improvement of SMEs business profiles, and reinforcement of business structure. Each financial institution should work towards real improvement of SMEs business profiles, by providing greater support for business improvement and recovery, such as support for devising highly effective business rehabilitation plans through performing an active consulting function while coordinating and cooperating with outside experts and other financial institutions. 26
4. Outline of the Regional Economy Vitalization Corporation of Japan On March 18, 2013, the Enterprise Turnaround Initiative Corporation of Japan was fundamentally reorganized and initiated operations with expanded functions as the Regional Economy Vitalization Corporation of Japan (REVIC). The objective of REVIC is to vitalize regional economies through the formation of groups of healthy companies and the securing/creation of jobs by providing support for business turnaround based on selection and concentration of business and business restructuring; and support for starting up new business/implementing business change, and regional revitalization projects. Main Functions (1) Direct support for business turnaround Deadline for deciding support: End of March 2018 Support period: Less than five years In the case of a large company, the name of the company will be publicly announced. (2) Enhancement of regional revitalization ability Enhancement of cooperation such as dispatching experts to the SME Business Rehabilitation Support Cooperatives and to regional financial institutions Dispatch of experts to, and capital injection/loans to, subsidiaries for business turnaround Dispatch of experts and capital injection for business turnaround funds (3) Support for regional revitalization Dispatch of experts to regional financial institutions Dispatch of experts and capital injection for regional revitalization funds 27
5. Casebook for the Provision of New Loans and Support for Business Improvement/Business Turnaround Purpose: The casebook collects examples of pioneering initiatives or cases that should be widely practiced with regards to: providing new loans, improving profits in the main business, supporting business and turnaround, and support for initiating business. These cases are promulgated and published in order to encourage financial institutions to take voluntary action while also serving as a reference for other parties supporting business improvements. Main structure: 1: Providing New loans - Efforts to provide new loans to start new businesses/ companies - Efforts to support business improvement - Efforts to provide loans that don t rely excessively on mortgage collateral, etc. 2: Improving profits in the main business (support for expanding sales) - Efforts to expand sales channels - Efforts to expand business, etc. 3: Support for business improvement/business turnaround, etc. - Active efforts for business turnaround - Efforts in cooperation with outside organizations - Efforts through the utilization of investment funds, etc. 4: Support for initiating business - Efforts for identifying customers aiming to start new businesses - Efforts through industry, government, academia, finance collaboration, etc. New loans and support for the commercialization of projects to solve regional problems Support for business turnaround through the utilization of management support funds Upgrading actions for ABL: Development Manual for ABL Business and the introduction of Assessment System for Movable Properties Matching business demands and supplies through the utilization of databases Support for new product development and the development of sales channels in order to increase sales Examples of business improvements led by second-tier main banks Consultation and information provision in cooperation with the Federation of Small Business Associations Support for business turnaround through the utilization of regional revitalization funds and the conversion of debt into equity-like debt (DDS) Support for business start-ups through regional industries, government, academia collaboration (management of support facilities established by cities) Support for the establishment of public-private joint entities through project finance 28
Thank you for your attention. 29