Japan Banks 26 May 2020

Regional banks subsector

Eyes on assistance to companies on capital front
 Envision capital assistance on top of existing financing support measures Takahiro Yano
(81) 3 5555-7125
 Shoring up capital of borrowers could provide boost to regional banks taka.yano@daiwa.co.jp

 Details/scale of measures could hinge on course of COVID-19 pandemic

Daiwa Securities Co. Ltd

What's new: On the evening of 25 May, a media report indicated that the
Japanese government has compiled a draft second supplementary budget.
Judging from a set of proposals for the second supplementary budget
issued by the ruling Liberal Democratic Party (LDP) on 21 May, we think the
menu of options for assisting companies will expand, which could work as
an indirect boost for earnings in the regional bank subsector.

Results overview: Chart 1 on the next page provides an overview of the

main funding support measures that are now in place. Backed by this
system, regional banks are now stepping up emergency lending (Chart 2).
However, if the impact of the COVID-19 pandemic proves to be protracted,
we think that concerns could steadily heighten over the risk that lending
(borrowing from the perspective of businesses), albeit emergency lending,
could swell. Against this backdrop, the LDP proposals unveiled on 21 May
for a second supplementary budget highlight the possibility that financial
health problems could emerge if corporate earnings, not just liquidity,
worsen seriously. In this regard, the LDP notes the necessity of
establishing a new system to provide capital via subordinated bonds,
subordinated loans, and preferred shares. More concretely, the LDP
appears to envision strengthening business recovery assistance provided
through Regional Economy Vitalization Corporation of Japan (REVIC) as
well as establishing a special fund within the Organization for Small &
Medium Enterprises and Regional Innovation specifically to provide
assistance to SMEs in order to shore up operations.

What we recommend: In our view, the degree of the potential impact from
COVID-19 on Japan’s regional economy is still highly uncertain, and as a
result, we see considerable concern over the medium-term earnings outlook
for the regional bank subsector. However, in light of the proposals noted
above, we envision that the menu of assistance options will expand on the
“capital” front, in addition to the ongoing funding support via emergency
lending. Assuming expectations increase that such “capital” support is
conducted on a scale and at a stage that does not harm the interests of
existing creditors, we think that at a minimum, fears over a rise in credit
costs could subside in the short term. Of note, however, the details and
size of the actual measures, as well as their effectiveness, could hinge on
the future course of the pandemic.

Important disclosures, including any required research certifications, are provided on the last two pages of this report.
 Regional banks subsector: 26 May 2020

Chart 1: Key Features of Funding Support System

Lending by government-affiliated financial institutions
No interest rate reduction 0.9% interest rate reduction Effectively zero interest rate
Safety-net lending Same as left
COVID-19 special loan
Same as left
COVID-19 marukei (managerial
Same as left
improvement)loan
+
Crisis response loan
Special interest rate subsidy system

No requirements regarding sales, etc. Individual business owners: no conditions

Sales down by 5% or more
Small-scale: sales down 15%
Applied flexibly for individual business owners
SMEs: sales down 20%

Loans by private-sector financial institutions backed by credit guarantees

Safety net guarantees No. 4 and No. 5 Crisis-related guarantee
No. 4: 100% guarantee 100% guarantee under separate framework than safety net guarantee
No. 5: 80% guarantee
No. 4: Sales down by 20% or more, etc. Sales down by 10% or more, etc.
No. 5: Sales down by 5% or more, etc.
Reduction/exemption of guarantee fees/interest rates on loans backed by credit guarantees
 Use of safety net guarantees No. 4, No. 5 and crisis-related guarantees when certain conditions are met
 Zero guarantee fee & zero interest rate for individual business owners with sales down 5%
 Guarantee fees at 50% for SMEs with sales down 5%; zero guarantee fee & zero interest rate for SMEs with sales down 15%
Source: Ministry of Economy, Trade and Industry; compiled by Daiwa.
Note: COVID-19 special loans, COVID-19 marukei loans by Japan Finance Corporation, etc.; crisis-response loans by Shoko Chukin Bank, etc.

Chart 2: Emergency Lending by Major Regional Banks (Y bn)

Total loans Emergency
Banks outstanding as of loans Data as of Notes
end-FY19 (parent) extended
Y12bn in direct loans not backed by credit guarantees; Y22bn in loans through credit guarantee system. In addition,
The Bank of Yokohama 11,553.2 34.0 14 May
Y240bn in committed lines of credit established primarily for large companies.
Chiba Bank 10,616.5 241.4 14 May Y203.1bn in direct loans not backed by credit guarantees; Y38.3bn in loans through credit guarantee system.
Mebuki Financial Group 11,477.4 76.0 15 May New loans extended. In addition, Y16bn in loans for which borrowers have requested revised terms.
Source: Company materials; compiled by Daiwa.
Note: Excerpted from presentation materials from post-results analyst meetings.

Translation/style check/accuracy check: New York Translation Team

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 Regional banks subsector: 26 May 2020

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