Can going overseas salvage struggling Japanese banks?

New markets and new target demographics may just help banks stay afloat.

As Japanese banks continue to struggle against unfavourable business conditions in their home turf including ultra-low interest rates and declining loans, tapping on new overseas markets and new demographics may just hold the key to their survival, according to Moody’s Investors Service.

“With the private sector, Japan’s low growth prospects and the overall maturity of its domestic markets mean that more companies – including financial institutions, such as banks and insurers, as well as industrial and other corporates – will look overseas for growth opportunities,” forecasted Moody’s, 

This comes as banks across the country have been battling profit woes amidst a negative interest rate environment engineered by the Bank of Japan. Major players like MUFG have taken hits as it is expected to register $470m in losses from unprofitable branches but it has been regional banks that have been bearing the brunt of the fallout.

Also read: Should Japanese banks consider mergers to combat profit woes?

“Falling loan demand and a shift toward lower-risk deposits are pressuring the profitability and growth prospects of banks, and Japan's three megabanks have announced structural overhauls that will result in a reduction of their headcount by 32,000,” according to Moody’s. “And faced with ultralow interest rates, both banks and insurers continue to seek opportunities for growth abroad.”

Banks are also battling steadily declining loan demand as the country rapidly ages. In fact, the United Nations expects the proportion of the population aged 65 and above to account for a third of the population by 2030, making it the oldest country in the world.

As loans for the banking sector are generally tied to nominal GDP growth, the growing preference of older generations for low-risk and risk-free assets have caused a decline in loan to deposit ratios, in effect squeezing profits.

To respond to this problem, banks are similarly directing their efforts into developing new apps and digitising their systems, suggesting a shift in target market and growing their shrinking customer base. Last month, banks submitted draft policies on application programming interfaces, or APIs, that will open up their systems to fintech firms. 

“Releasing their own coins and payment methods is what the banks need to be doing,” Eiichiro Yanagawa, a senior technology and banking analyst at Celent told Bloomberg. “Banks that move too slowly will have their tastiest business eaten up.”