May 15, 2018 / 10:27 AM / in 4 months

Japan's biggest banks revamp, close branches in efficiency drive

TOKYO (Reuters) - Japan’s biggest banks have begun major revamps of their domestic retail networks, as the cost of maintaining traditional branches weighs heavily at a time of diminishing revenue and a shift in how consumers conduct financial transactions.

FILE PHOTO: A man walks past signboards of Sumitomo Mitsui Banking Corporation (R), Mizuho Bank (3rd L), MUFG Bank (2nd L), and Resona Bank in Tokyo, Japan April 3, 2018. REUTERS/Toru Hanai

The top three lenders reported weak earnings at their core commercial banking units, propped up by lower bad loan costs, gains in stock holdings and other factors.

Mitsubishi UFJ Financial Group Inc (MUFG) (8306.T), Japan’s largest lender, said on Tuesday it will cut its number of domestic branches by 20 percent over six years from about 500.

Under the plan, part of a medium-term strategy, MUFG said the number of conventional retail branches will be halved, as many will be replaced by self service-style branches.

“Domestic branch network’s profitability has been falling,” said Chief Executive Nobuyuki Hirano at an earnings briefing. He also said the bank will accelerate a shift to digital, hoping to increase the number of internet banking users by three times to 12 million in the six years.

MUFG and rivals are under growing pressure to reduce costs, which have steadily risen amid a slowdown in revenue growth in recent years. At the same time, aggressive overseas expansion has brought increased expenses.

Mizuho Financial Group Inc (8411.T), the least profitable among Japan’s biggest three lenders, has also suffered a rise in costs in recent years.

The bank has said it would cut about 100 domestic locations, or one-fifth of the current total, by the end of March 2025. Together with a headcount reduction of 14,000 by that time, the bank plans to cut more than 100 billion yen ($913.99 million) in costs.

“We have not been able to offset revenue decline with cost control,” said Mizuho CEO Tatsufumi Sakai at an earnings briefing.

Traditionally, banks have kept spacious branches in prime, high-rent locations with dozens of staff working behind counters to process documents.

“As the importance of physical retail branches declines, banks should not stick to keeping full-scale, big branches if they determine they cannot be No. 1 in the market the branches cover,” said banking analyst Keisuke Moriyama at Macquarie Capital Securities.

Sumitomo Mitsui Financial Group Inc (SMFG) (8316.T), Japan’s second-largest lender by market valuation, has said it does not plan to reduce the number of domestic branches, currently at about 430. But it has started to replace them with “next generation branches”, with a plan for a complete switch by the end of March 2020.

Replacement includes relocation to less convenient spots, reduced size and staff, and with the bulk of back-office work consolidated at off-site centers. SMFG has said the move will eventually cut 30 billion yen in costs, or about 20 percent of retail branch expenses.

“We don’t necessarily have to have branches in the prime spots, like we did in the past, in order to meet customers’ needs,” said SMFG CEO Takeshi Kunibe at an earnings briefing on Monday.

Reporting by Taiga UranakaEditing by Christopher Cushing

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