Japan's Mid-tier and Retail Banks Q3 FY2026: Rising rates boost regional lenders

The Bank of Japan's policy shift has driven domestic interest rates higher, finally ending the long era of ultra-low rates. This has dramatically improved lending margins and boosted net interest income, providing a powerful tailwind across the sector. Many banks reported record-high profits in their core businesses as yields on Japanese government bonds and other investment assets steadily rose. Competition for retail deposits is also heating up as institutions look to leverage their strong deposit bases to maximize the benefits of rising rates.

Regional lender Mebuki emerged as a standout performer, posting a 31.6% year-on-year surge in net profit to 64.7 billion yen. Its core business thrived as lending yields rose to 1.16%, earning market praise alongside an announced dividend hike. Conversely, Seven Bank struggled, with net profit plunging 41.4% to 8.8 billion yen. While ATM usage remained steady, impairment losses in its credit card division dragged down earnings, underscoring the challenges of digital-only business models. The quarter marked the starkest contrast in performance yet, driven by diverging business models.

Banks are actively repositioning themselves for future growth. SuMi TRUST divested its card subsidiary, booking a 41.2 billion yen gain on the sale of affiliate shares as it focuses resources on core asset management and trust operations. Seven Bank announced a capital and business alliance with Itochu, aiming to accelerate its transition to an open financial infrastructure. Meanwhile, Resona revised its full-year net profit target upward to 250.0 billion yen, planning to leverage its strong branch network to expand loans to individuals and small and midsize enterprises.

Despite the strong performance, several risks loom on the horizon:

• Paper losses on bond holdings driven by rapid interest rate hikes
• Higher funding costs from intensifying competition for deposits
• An increase in SME bankruptcies fueled by persistent inflation and rising labor costs
• Rising expenditures for system maintenance and cybersecurity measures

The critical challenge for banks will be absorbing these rising costs through core business earnings.

The return of positive interest rates has revitalized banking as a growth sector. Stronger core profitability is translating into better compensation and shareholder returns, driving high demand for digital talent and asset management specialists. Employers like Resona and Mebuki also offer appealing opportunities to drive regional revitalization. Providing both stability and dynamic change, this era represents the perfect opportunity for those seeking a career in finance.