Negative Rates Boost Appeal of Consumer Loans, Shinsei Says

  • Sub-zero rates may trim bank's funding costs, widen spreads
  • Japan consumer-finance industry is recovering from crackdown

As negative interest rates look set to wreak havoc on Japanese banks’ loan profits, one lender is seeing the bright side.

Shinsei Bank Ltd. plans to boost unsecured loans to consumers because sub-zero rates may actually make them more profitable than they were previously, said Hideyuki Kudo, president of the Tokyo-based lender. The Bank of Japan’s policy has the potential to widen interest margins by reducing the bank’s funding costs, while borrowers of consumer loans remain relatively insensitive to changes in interest rates, he said in an interview.

QuickTake Negative Rates

Hideyuki Kudo
Hideyuki Kudo
Photographer: Akio Kon/Bloomberg

“Given the weight of this business in our portfolio, we’re actually in a position to benefit,” Kudo said. “The unsecured loan market bottomed out about two to three years ago, and I think we can expect growth for the foreseeable future,” he said, adding that he plans to expand the business by about 10 percent annually over the next three years.

Kudo, 52, expects banks and other companies in the industry to also step up consumer lending as plunging interest rates erode income from traditional loans. Japan’s moneylenders have showed signs of a recovery from a government crackdown that forced them to cap rates at 20 percent -- a level that suddenly looks more attractive even when considering that such loans are often made to the riskiest borrowers.

One Way

“Strengthening consumer finance is one way of supporting earnings as negative rates weigh on domestic profitability,” said Toyoki Sameshima, a Tokyo-based senior analyst at BNP Paribas SA. “The key to gaining new customers is a creative marketing strategy.”

Shares of Shinsei climbed 8.2 percent at 12:40 p.m. in Tokyo, the most among the 86 stocks on the Topix Banks Index, paring this year’s decline to 35 percent.

While consumer finance makes up about 12 percent of Shinsei’s total loan balance, it accounts for 56 percent of net interest income. The company’s net interest margin, a measure of loan profitability, is 1.96 percent, more than the 1.21 percent average for members of the Topix Banks Index, according to data compiled by Bloomberg. Shinsei had 536 billion yen ($5 billion) of retail loans at the end of December.

Loans Slow

The Bank of Japan started charging banks 0.1 percent interest rates on some of their reserves in February to encourage them to step up lending and help revive the economy. So far that hasn’t happened, with loan growth slowing to 2 percent in March from a year earlier, the weakest pace in three years, central bank figures showed Tuesday.

Consumer lenders in Japan provide fast, unsecured credit for spending on anything from vacations to household appliances. Over the years, the industry faced criticism from politicians and lawyers for exploiting vulnerable borrowers. A law change in 2006 imposed the 20 percent limit and forced companies to refund billions of yen in overcharged interest, leading to the bankruptcy of firms including Takefuji Corp.

Shares of Acom Co. and Aiful Corp., two of the country’s biggest consumer lenders, have risen at least 10 percent since Jan. 28, the day before the BOJ announced negative rates. 

Japan’s largest commercial banks including Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. are also in the consumer-finance business. MUFG has a minority stake in Acom and Sumitomo Mitsui operates a unit that offers unsecured loans under the Promise brand.

AKB48 Idols

“The problem is that as the business becomes more attractive, the competition also gets stronger,” said Kudo. Shinsei plans to boost its brand recognition by enhancing its marketing, he said. It runs television commercials featuring the popular idol group AKB48.

Under its Lake brand, Shinsei advertises interest rates from 4.5 percent to 18 percent, a range it hasn’t changed since negative rates took effect in February. By comparison, the average rate on all new loans at the nation’s banks plunged to a record-low 0.793 percent in February, central bank figures show.

Shinsei also plans to focus on earning fees by working with regional lenders to guarantee retail loans. It has entered agreements to do so with 13 firms including Shizuoka Bank Ltd. and Ikeda Senshu Holdings Inc., Kudo said. With fewer options to put cash to use since rates turned negative, many local banks are also considering boosting unsecured consumer loans, he said.

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