Japan’s Aozora Bank Ltd., the country’s 16th largest by market value, has stunned investors with an announcement of expected fiscal year losses due to its investments in US commercial property. This news, marking the second such disclosure within hours from a global lender, led to a 20% plunge in its shares and amplified worries about the exposure of worldwide banks to declining real estate markets.
Financial Revisions and Leadership Changes
Initially forecasting a ¥24 billion profit for the fiscal year, Aozora now anticipates a net loss of ¥28 billion ($191 million or RM904.43 million). This adjustment comes in the wake of similar concerns from New York Community Bancorp in the US and growing anxieties among South Korean financial institutions over bad loans linked to foreign and local real estate investments. Aozora has also announced a leadership change, with President Kei Tanikawa stepping down in favor of Deputy President Hideto Oomi, effective April 1.
Market Conditions and Aozora’s Exposure
The downturn in the US commercial real estate market, exacerbated by higher borrowing costs and reduced demand due to the rise of remote work, has particularly affected office properties. A significant exposure to overseas property loans, comprising over a third of its ¥4 trillion loan portfolio, has left Aozora vulnerable. The bank’s US office loan portfolio was valued at $1.89 billion as of December.
Comparison with Other Banks and Regulatory Response
Despite Aozora’s struggles, other Japanese banks, particularly the country’s three largest, are believed to be less affected due to their more conservative risk management strategies. Japan’s Financial Services Agency (FSA) has indicated that the impact on major banks is minimal, with overseas property lending constituting about 3% of their total loan books. Nonetheless, the FSA plans to scrutinize banks’ exposure to real estate loans more closely, responding to the deteriorating conditions in the US and European real estate markets.
Provisions for Bad Loans and Strategic Adjustments
Aozora has set aside an additional ¥32.4 billion for bad loans related to US office real estate in the third quarter, preparing for potential debt recoveries through property sales. The bank anticipates it may take another year or two for the market to stabilize. Additionally, Aozora plans to expedite the sale of securities, including foreign bonds, to mitigate unrealized losses exacerbated by rising US interest rates.
The bank is scheduled to provide more details on its earnings and strategic responses to these challenges in a briefing with reporters at 5 pm local time on Thursday.
Featured image credit: Akio Kon via Getty Images