Investing.com -- Moody’s Ratings has stated that the planned integration of The Daishi Hokuetsu Bank, Ltd. (Daishi Hokuetsu, A3 stable, baseline credit assessment baa2), and The Gunma Bank, Ltd. (Gunma, A3 stable, baseline credit assessment baa2) is set to be credit positive for both banks in the mid- to long-term. However, it will not have an immediate impact on the banks’ A3 long-term deposit ratings. The outlooks on their long-term deposit ratings will remain stable.
On Saturday, Daishi Hokuetsu Financial Group, Inc. (Daishi Hokuetsu FG), the parent holding company of Daishi Hokuetsu, and Gunma confirmed that they have signed a memorandum of understanding to merge the two banks under Daishi Hokuetsu FG in April 2027. The name and head office location of Daishi Hokuetsu FG at the time of integration will be determined in the definitive agreement scheduled for March 2026. The actual impact on the ratings, if any, will be assessed when the definitive agreement is signed.
Daishi Hokuetsu and Gunma are leading regional banks with dominant market shares in terms of loans and deposits in their home prefectures, Niigata Prefecture and Gunma Prefecture, respectively. If the integration is completed, it will create one of the largest regional bank groups in Japan with consolidated total assets of JPY21 trillion as of December 2024.
The consolidated credit profile of the banks is expected to remain broadly stable, supported primarily by their strong liquidity and improving profitability. However, Daishi Hokuetsu’s relatively weaker asset quality and higher interest rate risk will increase the combined entity’s overall asset risk.
The planned integration, if completed, will help improve the banks’ profitability through synergies in the mid- to long-term. Integration risk will be reduced by the already established relationship between the two banks. The existing alliance has enabled them to accumulate synergies over the past three years. The banks will benefit from collaborating on syndicated loans as well as inter-prefecture business matching and successions, leading to higher net interest income and fee income. In addition, sharing branches, headquarters functions and system investments will enhance their efficiency.
Business opportunities will gradually decrease in Japan, especially in the regional economies including the two banks’ home prefectures, which will lead to lower loan demand. Daishi Hokuetsu’s very low loan-to-deposit ratio of 64% as of September 2024 and relatively low loan growth highlight the bank’s difficulty in utilizing ample liquidity. Gunma Bank’s experience and expertise in lending in metropolitan areas will assist Daishi Hokuetsu in addressing the challenges posed by the shrinking demographic trend in the local market.
Increased domestic interest rates will boost Japanese banks’ profitability driven by widening net interest margins. However, the mid- to long-term credit challenges, such as severe competition in the banking industry and Japan’s shrinking population, will continue to drive the mergers, integration and alliances among regional banks.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.