How has the interest rate hike changed the interest margins of regional banks?

With the end of the Bank of Japan’s unconventional monetary easing and the return of interest rates, changes have occurred in the profit structures of banks. No, the word ‘change’ is insufficient; they are smashing record profits one after another (*1).

On the other hand, there is information such as ‘17 credit unions nationwide fall into the red; unrealized losses on bonds due to rising interest rates, a headwind for small and medium-sized enterprises‘ (Nikkei Shimbun Web Edition, August 26, 2026) and ‘Competition for deposits ‘reaches its limit’, first decline since the financial crisis; redesigning lending operations‘ (Nikkei Shimbun Web Edition, May 19, 2026), so it is not as if all deposit-taking financial institutions are sailing with the wind.

Movements in the unsecured overnight call rate

Bank of Japan Time-Series Statistical Data Search Site is where this unsecured overnight call rate was obtained (*2). It has risen by 0.621 percentage points from the fiscal year ending March 2024 to the fiscal year ending March 2026.

The unsecured overnight call rate is the rate used for interbank transactions, but it also serves as a benchmark for deposit and lending rates. To put it crudely, it is the cost of funds. Regardless of whether it is funds or not, if the cost of goods sold rises, that portion must be passed on to users and purchasers. So, to what extent has this pass-through progressed? Since the fiscal year 2025 financial results have been published in the Japanese Bankers Association’s ‘Annual: Analysis of Financial Statements of All Banks‘, I would like to consider this (*3).

Deposit yield and lending yield

Since yields are not included in the Japanese Bankers Association data, it is necessary to calculate them independently (*4).

The upward trend in both lending yields and deposit yields began about two years before the end of unconventional monetary easing (*5). The upward trend has accelerated since the end of unconventional monetary easing, but it is lackluster compared to the slope of the unsecured overnight call rate.

What is even more interesting is this: the breakdown of the interest margin.

• Lending margins are declining, and the rise in the cost of funds has not yet been fully passed on

• Deposit margins are rising, and deposit interest rates have not risen as much as the cost of funds

• The interest margin is rising, but the content is due to the expansion of deposit margins

Changes in yield by bank

I have graphed how lending yields and deposit yields have changed by bank. Those plotted above the dashed line are banks where the interest margin has shrunk (*6). It can be seen that they are concentrated in the Chugoku and Shikoku regions. It does not seem to be related to the size of the bank.

What was happening in the Chugoku and Shikoku regions?

In the Chugoku and Shikoku regions, banks with sluggish growth in lending yields have a high weight of foreign currency-denominated loans (*7). The table below shows the percentage of foreign currency-denominated loans in total loans for the two banks with the lowest changes in lending yield (March 2024 to March 2026) in both regions, as well as for regional banks as a whole (*8).

The yield on foreign currency-denominated loans has been falling, peaking in March 2024. The decline is significant, ranging from 1.31 percentage points to 1.39 percentage points. Note that Chugoku 1 did not disclose its foreign currency-denominated lending yield.

The significant drop in the yield on foreign currency-denominated loans, which account for a large weight in the portfolio, pushed down (or suppressed) the total lending yield for yen and foreign currency combined.

So, for what reason did the yield on foreign currency-denominated loans fall? It is just a guess, but I think it is related to the US policy interest rate (*9).

Summary

Looking at regional banks as a whole, interest margins have expanded. However, the primary reason for this was not an increase in lending yields, but rather the fact that the rise in deposit interest rates has lagged behind market interest rates. On the other hand, some banks have seen the rise in lending yields suppressed due to the impact of foreign currency-denominated lending, meaning the impact of rising interest rates is not uniform.

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(*1) If you search for “bank record profits” on the Nihon Keizai Shimbun website, many articles will appear.

(*2) The daily rates for each business day during the six-month period of each fiscal term (for example, 2026/03 is from October 2025 to March 2026) are simply averaged.

(*3) Under accounting standards, revenue items immediately after a merger do not equal the simple sum of those before the merger, so data for the following banks that underwent mergers during the analysis period were excluded. The analysis covers 91 banks.

• January 2020: Tokushima Taisho Bank

• October 2020: The Eighteenth Bank and The Shinwa Bank

• January 2021: The Daishi Bank and The Hokuetsu Bank

• January 2025: Aomori Bank and The Michinoku Bank, Aichi Bank

(*4) Since profit and loss at the end of the fiscal year (March 31) is the cumulative total for the full year, the profit and loss for the interim period of the same fiscal year (September 30) was subtracted to adjust for the second half of the year. Other calculations were performed as follows: For yields, the same formula was used for both deposits and loans, with the semi-annual interest doubled to convert to an annual rate. Expenses were not deducted from the interest margin.

$$
begin{align*}
text{Average Balance} &= frac{1}{2} left( text{Previous semi-annual end balance} + text{Current semi-annual end balance} right) [1em]
text{Yield} &= frac{2 cdot Semi-annual interest}{Average Balance} [1em]
text{Margin (Deposit)} &= text{Call O/N} – text{Deposit Yield} [1em]
text{Margin (Lending)} &= text{Lending Yield} – text{Call O/N} [1em]
text{Margin} &= Lending Yield – Deposit Yield
&= text{Margin (Deposit)} + text{Margin (Lending)}
end{align*}
$$

(*5) Even before the Bank of Japan’s interest rate hike, both US interest rates and domestic long-term interest rates (government bond yields) were rising. Since dollar-denominated transactions are influenced by US interest rates and fixed-rate loans are influenced by government bond yields, it is believed that the rise during this period includes both factors. Here, no distinction is made between yen-denominated and foreign currency-denominated, or fixed-rate and variable-rate.

(*6) Specifically, calculations are performed as follows.

(*7) Not all banks with shrinking margins have a high volume of foreign currency-denominated loans. Banks with smaller margins of contraction also include second-tier regional banks, which are thought to have a smaller proportion of foreign currency-denominated assets.

(*8) Obtained from Table 24 of the Japanese Bankers Association’s “Analysis of Financial Statements of All Banks, Fiscal Year 2025 Settlement, Supplementary Tables“.

(*9) The US policy interest rate (FRED) peaked around March 2024 and has been declining, which closely resembles the movement of foreign currency-denominated lending yields for banks in the Chugoku and Shikoku regions. However, while the movements are similar, it has not been determined that there is a causal relationship.