Japan to order Suruga Bank to halt new property loans after scandal -sources

TOKYO (Reuters) - Japan's financial regulator will order Suruga Bank to stop making new loans for property investments in the aftermath of a lending scandal that has slammed the regional bank's shares and led to the exits of its top executives, two sources said.

Suruga Bank's shares, however, surged as much as 16 percent on Wednesday as the measures were not as harsh as expected, some market participants said.

The bank's chairman and president resigned last month after a third-party panel found the lender falsified documents on loans made to retail investors who built "share houses" where tenants share bathrooms and other facilities.

Suruga Bank's improper loan practices came as many regional banks struggled to find profits with their depopulating local economies shrinking and the Bank of Japan's near-zero interest rates squeezing lending margins.

Japan's Financial Services Agency (FSA) has determined that improper lending at Suruga Bank was widespread and its governance functions had failed, the two people who had direct knowledge of the matter told Reuters.

Following onsite probes ending in late September, the FSA in coming days will order Suruga to stop extending new loans for property investment and to improve its governance, the sources said.

An FSA spokesman declined to comment. Suruga said in a statement it has not been informed of any such measures by the FSA. The sources spoke on condition of anonymity as the order has not been announced.

Suruga Bank's shares surged to an intra-day high of 678 yen in Tokyo, and were later trading up around 9.8 percent. The shares have fallen about 75 percent since the loan problems began to surface in August 2017.

"It seems there has been buying on all the bad news having come out, along with the view that the measures are lighter than anticipated," said one Japan-based analyst.

Shizuoka prefecture-based Suruga Bank said in a statement to Reuters early this year it operated 11,259 share-house units in 845 buildings, mainly in Tokyo, owned by about 700 investors. Nearly 90 percent of its 3.28 trillion yen of outstanding loans as of December were to retail customers, according to a bank statement.

Suruga Bank is the only regional lender to have branched out into share-house loans, according to analysts.

But ratings agency Fitch said last month pressure to find new revenue sources could have led to slipping governance standards at its peers too. Regional banks are limited in their ability to find alternative income by offering complex products or overseas expansion, it said.

More than half of them - 54 banks - suffered losses in their core business profits, or earnings from lending and fees, for the year ended in March, the FSA reported last month.

($1 = 113.7800 yen)

(Reporting by Takahiko Wada; Additional reporting by Sam Nussey and Daiki Iga; Editing by Richard Pullin and Muralikumar Anantharaman)