TOKYO: Two regional banks in Japan’s northern prefecture of Aomori said they were considering consolidating their businesses, joining a flurry of lenders seeking to survive amid narrowing margins from a rapidly ageing population and ultra-low interest rates.

Aomori Bank and Michinoku Bank, both listed lenders based in Aomori, said in a statement on Tuesday they were “considering” a business consolidation.

The statement came in response to a report by public broadcaster NHK on Monday they were in talks to consolidate, a move that would give them a 70% share in the prefecture.

“Regional banks are facing a difficult business environment,” Finance Minister Taro Aso told reporters, when asked about the reported talks.

Prime Minister Yoshihide Suga has emphasised the need for regional banks to consolidate, as years of ultra-loose monetary policy and a dwindling regional population erode their profits.

While regional banks have played a key role in supporting firms hit by the COVID-19 pandemic, some policymakers warn they could be saddled with a pile of bad debt if the crisis persists.

“Even after the pandemic subsides, financial institutions’ profits will remain under pressure from low interest rates and structural factors,” the Bank of Japan warned in a report last month.

Regulators have long prodded regional banks to merge, including by changing laws to exempt regional bank consolidations from antitrust rules.

The BOJ has also created a scheme aimed at incentivising regional lenders to consolidate, underscoring its concern over the health of the banking system.

Reuters