May 20 (Bloomberg) -- Mergers and acquisitions among Japan’s regional banks may accelerate as they struggle to absorb rising costs during the economic recession, the head of the nation’s third-largest regional lender said.

“We’ve reached a point where it’s difficult for many to shoulder costs and operate independently,” Hidetoshi Sakuma, president of Chiba Bank Ltd., Japan’s third-biggest regional bank by assets, said in an interview in Tokyo yesterday. “A big realignment in the industry will likely occur.”

More than half of Japan’s 87 publicly traded regional banks reported losses in the year ended March 31 as their investments lost value and the steepest economic contraction since 1945 drove bad-loan costs higher. Bankruptcies in Japan rose for an 11th straight month in April as exports dropped, indicating defaults may continue to spread.

“We still haven’t seen bad-loan costs at regional banks peak out,” said Masahiko Sato, an analyst at Nomura Holdings Inc. in Tokyo. “A real recovery in earnings remains far off.”

Corporate bankruptcies climbed 9.4 percent last month from a year earlier to 1,329 cases, according to Tokyo Shoko Research Ltd. Exports fell 45.6 percent in March from a year earlier, compared with February’s record decline of 49.4 percent, the Finance Ministry said April 22.

Kansai Urban, Biwako

Tie-ups among regional lenders have already gathered pace. Kansai Urban Banking Corp., an Osaka-based unit of Sumitomo Mitsui Financial Group Inc., plans to merge with Biwako Bank Ltd. next year. Kansai Urban posted a deficit of 25 billion yen in the year ended March 31, its first in a decade, after taking losses on loans to bankrupt property firms.

Bank of Ikeda Ltd., also based in Osaka, is set to join forces with a regional banking unit of Mitsubishi UFJ Financial Group Inc. in October. Bank of Ikeda reported 92.4 billion yen in losses over the past two years -- more than five times its combined profit for the previous five years -- after taking losses on real-estate investment trusts.

Japan’s regional banks typically extend about three- quarters of their loans to small and medium-sized companies, according to data compiled by Bloomberg. The government has identified these firms as being at risk as the economy declines, and is inspecting banks to ensure they don’t cut off lending to the companies.

Aozora-Shinsei Talks

Among nationwide lenders, Tokyo-based Aozora Bank Ltd., controlled by Cerberus Capital Management LP, is in talks to merge with bigger rival Shinsei Bank Ltd., two people familiar with the matter said last month. Aozora posted a loss of 242.6 billion yen in the fiscal year ended March 31 as it booked 134.6 billion yen of bad-loan charges.

Japan’s three biggest banks, Mitsubishi UFJ, Mizuho Financial Group Inc. and Sumitomo Mitsui, posted combined annual losses of 1.22 trillion yen as bad-debt costs totaled 1.9 trillion yen.

At Chiba Bank, profit plunged 73 percent in the year ended March 31 as bad loans surged 10-fold. The lender is forecasting 31 billion yen in bad-debt costs for the current fiscal year, compared with 37 billion yen in the year ended March 31.

Japan’s government announced plans in December to inject as much as 12 trillion yen into the nation’s banks to make it easier for them to lend. The government also passed a bill on March 4 allowing it to provide an additional 20 trillion yen in guarantees to buy back stocks from banks to boost their capital ratios and encourage lending.

North Pacific Bank Ltd., Minami-Nippon Bank Ltd. and Fukuho Bank Ltd. are the regional lenders who have agreed to accept public funds so far. Bank of Kochi Ltd. and Nagano Bank Ltd. said this month they may also apply.

Capital pressure may also force Japan’s biggest banks to apply for public funds, Fitch Ratings Ltd. said last month, without naming specific companies.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

Last Updated: May 19, 2009 11:01 EDT