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Working from home has reshaped many parts of the economy. Evidence of its impact is now starting to emerge in unexpected places. The latest to be affected is a quiet, stable Japanese bank, which was pummelled by panic selling this week. That looks overdone.
The US commercial real estate market, which has taken a hit from companies shifting to remote work over the pandemic, had once been seen as a safe place for return-starved Japanese lenders. Midsize banks such as Aozora Bank, the 16th-biggest lender in the country, had placed aggressive bets in the US, hoping to offset narrow domestic yields.
For years before the pandemic, the strategy made sense. But it is now unravelling. The US commercial property market, the largest in the world, has been sliding. Prices are down more than a tenth since the Federal Reserve started raising interest rates in March 2022, according to the IMF. Tighter financial conditions have been compounded by the drop in demand and rise in vacancy rates catalysed by the pandemic.
Against this backdrop, Aozora’s exposure to overseas loans — which account for more than a third of its total — has aroused concern.
That was reflected in shares of Aozora becoming the second-most shorted on the benchmark Nikkei 225 index this week. The stock plunged for a second straight day on Friday, falling a third over the past two days. The fallout has already spread to other sectors including local insurance groups. The sector’s shares fell on the back of investors’ fears about their potential exposure.
However, larger local peers such as Mizuho Financial Group have stuck to a more conservative overseas strategy. The risk of similar losses being uncovered at big lenders is low.
Even at hard-hit Aozora, US office loans make up less than a tenth of its total loan book. While its latest forecast of a net loss of ¥28bn ($191mn) for the fiscal year is a sharp reversal from previous expectations that it would turn a profit, it would be its first loss in 15 years.
Shares trade at 0.6 times tangible book value, a discount to local rivals. A rise in bad debt reserves in recent quarters has given investors time to price in part of the risks. Further declines should be expected as the full extent and effects of its US investments come to light. But contagion risk for the wider financial sector is low.
