TOKYO – Bad news stemming from banks’ real estate exposure is coming on thick and fast. On Feb 2, shares in Japanese lender Aozora Bank plunged for a second straight day after it said it would post its first loss in 15 years because of bad loans tied to US property.
The company’s two-day tumble wiped out 33 per cent of its value, equivalent to 128 billion yen (S$1.2 billion) in market capitalisation.
“The situation in US commercial real estate is terrible,” said Mr Yasuo Sakuma, president of Libra Investments.
Concerns are mounting about the potential pain for banks as elevated interest rates push down commercial property values in the United States and elsewhere, and make it more difficult for developers in refinancing their debt.
The downbeat news from banks comes just as the US Federal Reserve this week pushed back against the prospect of an interest rate cut in March.
Shares in US regional lender New York Community Bancorp slid by almost 50 per cent over the past two days after it ramped up provisions for loan losses, while Deutsche Bank reported on Feb 1 that it more than quadrupled its US property loss provisions.
“For the first time since late October, market sentiment has turned markedly negative,” Goldman Sachs analysts in New York wrote in a research note.
Investors should add “a dose of hedges to credit portfolio” as weaknesses in US regional banks add to the risk-off mood, they said.
In the case of Aozora, the Tokyo-based lender is tiny compared with the megabanks that dominate the nation’s financial industry and lacks the well-defined customer base of regional lenders.
So about 10 years ago, it decided to expand aggressively overseas, to the point where nearly a third of its lending was outside Japan.
That strategy blew up in spectacular fashion this week, with pain inflicted from bad loans in the US commercial real estate market, where valuations have been hammered by rising borrowing costs and lower demand as more people work from home.
While the downturn was well-known, Aozora president Kei Tanikawa assured investors as recently as November that the bank was adequately prepared and likely would not need large additional reserves.
That all changed on Feb 1, when the bank stunned the market by setting aside 32.4 billion yen to deal with bad loans.
It forecast an annual loss of 28 billion yen, compared with a previous estimate of a 24 billion yen profit.
“We thought office properties were the most stable,” said Mr Tanikawa, who plans to step down on April 1. “It turned out they had the biggest impact.”
Investors panicked on the news. Aozora shares fell 21 per cent on Feb 1, hitting the maximum allowed on the Tokyo exchange for its biggest decline in 15 years.
Trading volume surged to seven times the three-month average. At least five brokerages released reports trying to make sense of what happened.
“It’s almost a failure in risk management that they had this much exposure to a non-core market,” said Bloomberg Intelligence senior analyst Pri de Silva. BLOOMBERG
