Japan’s Aozora Bank Ltd. has shocked investors by revealing a projected net loss of ¥28 billion ($191 million) for the fiscal year, a significant departure from its earlier forecast of a ¥24 billion profit. The announcement resulted in a more than 21% drop in the bank’s shares, reaching 2,557 yen in Tokyo. This unexpected setback has intensified concerns about global banks’ vulnerability to deteriorating real estate investments, particularly in the US market.
Aozora’s situation mirrors that of New York Community Bancorp, which recently slashed its dividend and bolstered reserves due to its exposure to the US office market. This trend extends to South Korea, where financial institutions anticipate a surge in bad loans stemming from ill-fated investments in overseas office blocks and local infrastructure.
Despite Aozora President Kei Tanikawa’s statement in November that the bank likely wouldn’t require substantial additional reserves for its US property loans, the recent revelation suggests some lenders may have underestimated the depth of the market downturn.
The US commercial real estate market has been adversely affected by rising borrowing costs, particularly impacting office properties. The onset of the pandemic, with the rise in remote work reducing demand from tenants, has led to a 25% decline in office prices in the past 12 months through December, according to Green Street, a real estate analytics firm.
Aozora, known for its relatively large exposure to overseas property loans, with over one-third of its ¥4 trillion loan book comprising overseas lending, holds US office loans totaling $1.89 billion as of December.
Matsui Securities Co.’s senior market analyst, Tomoichiro Kubota, suggests that other banks are less likely to be affected, given that Aozora assumed more risk than its competitors. Japan’s three largest banks reportedly have robust risk control measures in place, with overseas property lending constituting about 3% of their loan book, according to a senior official at Japan’s Financial Services Agency.
In response to queries from Bloomberg News, the regulator asserted that the impact on major banks is limited, but it continues to closely monitor the situation. The Financial Services Agency had previously warned in August about the exposure of banks to overseas commercial real estate, and Toshinori Yashiki, deputy director-general at the FSA, reiterated last month that the regulator would examine banks’ exposure to property loans, given the worsening conditions in US and European real estate markets.
To prepare for a potential rise in workouts, including debt collection through the sale of underlying property assets, Aozora made an additional reserve of ¥32.4 billion against bad loans related to US office real estate in the third quarter. The bank anticipates that it may take another year or two for the market to stabilize.
Additionally, Aozora announced the acceleration of the sale of securities due to unrealized losses on its portfolio, primarily composed of foreign bonds, attributed to the increase in US interest rates. The bank is scheduled to brief reporters on its earnings at 5 p.m. local time on Thursday and disclosed that CEO Tanikawa will step down, being succeeded by Deputy President Hideto Oomi, effective April 1. Aozora Bank currently ranks as Japan’s 16th largest bank by market value, as per data compiled by Bloomberg.
