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Regional bank in Japan battles ultra-low rates with wine bar, sea urchins

By Leika Kihara and Takahiko Wada
Local products that Yamaguchi Financial helps distribute in Japan are displayed at Yamaguchi Financial's headquarters in Shimonoseki, Yamaguchi prefecture, Japan, May 14, 2019. REUTERSLeika Kihara

By Leika Kihara and Takahiko Wada

SHIMONOSEKI, Japan (Reuters) - As years of near-zero interest rates in Japan make traditional lending barely profitable, one regional bank is seeking to drum up business through less conventional enterprises, from opening wine bars to helping local fishermen farm sea urchins.

The new approach comes as Japan's regulators cautiously loosen rules to allow banks to venture into other businesses to help offset the hit to their net interest income from ultra-loose monetary policy.

For Takeshi Yoshimura, the 59-year-old president of Yamaguchi Financial Group, the effects of the Bank of Japan's zero interest rates are compounded by other challenges his region faces, notably a dwindling population and an exodus of firms to bigger cities like Tokyo.

That is why he is prodding young employees to come up with ideas to make better use of the roughly 280 branch offices spread across Yamaguchi and Hiroshima, the western Japan prefectures where Yamaguchi Financial mainly operates.

One idea was to rent out space to a wine bar at a branch in Yuya, a sleepy town with hot springs where such businesses aren't common.

"Yuya is a nice tourist destination, but there are very few places to drink and dine," Yoshimura said. "Visitors to the bar can open a bank account or get consulting services from one of our bankers," he told Reuters on Tuesday. The bar opens in July.

The goal is to transform all other branches into community hubs of various kinds, such as cafes or child-care centres, that break the stereotype of traditional banking.

"Closing branches would cut costs. But we're not doing that because we want to maintain a place where we have face-to-face interaction with our customers," Yoshimura said.

Years of heavy money printing by the BOJ have pushed borrowing costs to near-zero, benefiting borrowers but hurting Japan's regional banks that are already suffering from a dwindling population and a lack of fund demand.

Yamaguchi Financial, which ranks 11th among Japan's 78 listed regional banks in total assets, is no exception. Its consolidated net profit in the year that ended March fell 30% from a year earlier. Profits from core lending operations were down 26%.

Nearly 60% of regional banks could suffer net losses a decade from now if corporate borrowing keeps falling at the current trend, the BOJ warned in a report in April.

Aside from utilising its branches, Yamaguchi Financial is seeking to boost the region's fishery industry. After local fishermen complained they were catching fewer natural sea urchins, its bankers created a network of local academics and researchers to experiment ways to farm the creatures.

If the farming is successful, the bank would provide loans to build plants, market the urchins across Japan and possibly open a restaurant with a view of the sea where visitors can try the delicacy over a glass of wine, Yoshimura said.

Yamaguchi Financial also helps local food producers with the branding and marketing of goods ranging from honey, beef to sake.

The group hopes to make such non-financial businesses profitable in the next three to five years, which would in turn drive fresh business opportunities for the bank.

"Banking is still important. But we also need to come up with other business models to prepare for the day when banks would be allowed to do many other things," he said.

"One day, people could barely remember the day we were a bank. That's fine."

(Reporting by Leika Kihara and Takahiko Wada; Editing by Sam Holmes)