Rising rates put Kyoto bank’s $6 billion gain on stakes in play

Japan’s rising interest rates are giving Kyoto Financial Group more reason to cash in on some of its $6 billion in paper gains on cross-shareholdings.

“We’re entering an era where we can make more money by turning those shares into cash and lending it out,” Nobuhiro Doi, president of the regional lender, said in an interview at its headquarters in Kyoto. “We should reconsider our strategic shareholdings.”

Kyoto Financial has long held stakes in large Japanese companies based in the ancient capital, including Nintendo and Kyocera. That’s put the lender under the spotlight in the long-held tradition of cross-shareholdings, where banks and businesses own pieces of each other to cement ties.

Japanese authorities have been urging lenders to phase out the practice to improve corporate governance. Until recently, Kyoto Financial was reluctant to heed those calls, with Doi saying two years ago that he wanted to keep the stakes given the potential for the companies to grow further, though his position started to thaw last year.

Now, rising interest rates are adding another rationale to reduce them. While stock dividends used to shore up earnings when loan demand was weak and rates were near zero, that income is losing its relative value now as net interest margins widen. Proceeds from selling stakes would give the bank room to lend more or pursue acquisitions.

“The environment has changed, and we have to accept that,” Doi, 70, said.

The Bank of Japan is widely expected to hold its policy rate at a 31-year high of 1.25% later this week. But economists and traders expect the central bank to hike again in December, with further increases likely next year as inflation takes hold.

In April, Kyoto Financial pledged to cut more than ¥300 billion of strategic shareholdings by March 2029. That’s triple the size of a previous reduction target, and Doi said the company can go even further. In the fiscal year ended March, it sold about ¥160 billion of shareholdings, including a part of its Nintendo stake, while the value of the remaining holdings increased faster thanks to a rally in Japanese stocks.

Nobuhiro Doi, president of Kyoto Financial Group | bloomberg

Unrealized gains on the group’s strategic holdings totaled more than ¥1 trillion at the end of June, similar to its own market capitalization. Shares of Kyoto Financial have gained 18% this year, underperforming the Topix Banks Index’s 34% advance.

“For a while, no matter how much we sold, our unrealized gains just kept increasing,” Doi said. “It’s something we should be grateful for, but I wonder why we get criticized for it.”

Doi said he started engaging with the CEOs and chairmen of about 15 top companies on Kyoto Financial’s shareholding list last year. All of them have shown understanding of the bank’s plans to sell down the stakes, he said.

That doesn’t mean it will offload everything at once. Doi said the lender will adopt a critical approach to individual stakes from a pure-investment perspective. “If the dividend is low, or there is no dividend at all, it becomes quite difficult to justify holding the shares,” he said.

Also among Kyoto Financial’s shareholdings is Nidec, the motor maker that has been mired in an accounting scandal. Doi declined to comment on the matter.

Investors are closely watching how Kyoto Financial will use the proceeds from share sales. Doi set up a team in April to study growth through acquisitions. Rival regional lenders, online banks and other financial firms are all potential targets, he said. Investment banks have made a range of proposals, but the company isn’t working on any specific deals now, he added.

Kyoto Financial doesn’t need to rush to join a recent wave of regional bank consolidation, Doi said, while adding that the “option is always in the back of our minds, and we’re always interested in what other banks are doing.”

Two of its peers are in talks to merge in a deal that could make them the biggest regional banking group in the Kansai region, surpassing Kyoto Financial. Senshu Ikeda Holdings and Shiga Bank may make an announcement as soon as this week, people familiar with the matter have said.

Japanese banks are facing intensifying competition for deposits as households look to invest more of their savings. Doi said banks are concerned that a potential move by policymakers to offer tax breaks to individuals to buy Japanese government bonds would further siphon away household money.

“It’s unthinkable,” Doi said. “They’re already selling well enough now” without tax incentives, he said.

Retail JGBs sold by the bank in the first half of this fiscal year doubled from a year earlier. “There are very few products that can really compete with them, which makes things difficult for banks,” he said.

Global investors are watching whether Japanese financial institutions will also return to JGBs as yields climb. But Doi said the bank is putting its money in loans rather than bonds, to meet strong demand from corporate borrowers such as small manufacturers.

Kyoto Financial drastically cut its securities portfolio last fiscal year, when it realized losses on domestic bonds. Its securities holdings stood at roughly ¥1.7 trillion at the end of June, down from about ¥2.5 trillion in March 2025.

The bank will consider reinvesting in domestic bonds once it has a clearer sense of where the Bank of Japan’s policy rate peaks, he said.

“We could just end up sitting on unrealized losses again,” he said. “For now, we still need to wait.”