US property losses trigger 20% drop in Japanese Bank Aozora
JAPAN’S Aozora Bank became the second lender in a span of hours to surprise investors with losses tied to US commercial property, sending shares down and heightening concern over global banks’ exposure to souring real estate bets.
The bank, Japan’s 16th biggest by market value, said it expects to post a net loss of 28 billion yen (S$255.9 million) for the fiscal year, compared with its previous forecast of a 24 billion yen profit. Shares sank more than 20 per cent in Tokyo.
Aozora’s woes echo those of New York Community Bancorp, which slashed its dividend and is stockpiling reserves due to its exposure to the US office market. In South Korea, banks and asset managers are expecting a wave of bad loans in the coming months from an ill-timed splurge on overseas office blocks and local infrastructure.
As recently as November, Aozora President Kei Tanikawa said the bank would likely not need large additional reserves for its US property loans, signalling how some lenders may have underestimated the depth of the market slump. Aozora said on Thursday (Feb 1) that Tanikawa will step down and be succeeded by Deputy President Hideto Oomi, with the change effective on April 1.
“It’s a shock,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities. “The expectation was the worst was over and that the bank had set aside enough provisions.”
The US commercial real estate market has been hit as rising borrowing costs pummel valuations. Office properties in particular have come under pressure since the start of the pandemic when the rise in remote work chipped away at demand from tenants. Prices for offices in the US slumped 25 per cent in the 12 months through December, according to real estate analytics firm Green Street.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Aozora is known for relatively large exposure to overseas property loans in proportion to its balance sheet. Over one-third of its 4 trillion yen loan book is made up of overseas lending. Its US office loans stood at US$1.89 billion as of December.
Other banks were unlikely to be affected, said Matsui’s Kubota, adding that Aozora had taken on more risk than competitors. Japan’s three largest banks have adequate risk control in place, he said.
A senior official at Japan’s Financial Services Agency said in response to queries from Bloomberg News that the impact on major banks is limited since overseas property lending is about 3 per cent of their loan book. The regulator continues to closely monitor the situation, added the official, who asked not to be named.
Toshinori Yashiki, deputy director-general at the FSA, said last month that the regulator will examine banks’ exposure to property loans, given the worsening conditions of real estate markets in the US and Europe. That followed its warning in August about exposure to overseas commercial real estate.
Aozora made an additional reserve of 32.4 billion yen against bad loans related to US office real estate in the third quarter. It said this will help prepare for a potential rise in the number of workouts, including debt collection through a sale of the underlying property assets. It may take another year or two for the market to stabilise, the bank said.
Aozora also said it decided to accelerate the sale of securities given unrealised losses on its portfolio, consisting mainly of foreign bonds, primarily due to the rise in US interest rates. BLOOMBERG
Share with us your feedback on BT's products and services
