Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Japan’s Aozora Bank blamed souring office loans in the US as it forecast its first full-year loss since 2009, in a sign of the rising stress in the American commercial property market.
Shares in Aozora fell by their maximum limit on Thursday after the midsized bank projected a full-year loss on overseas real estate loans and warned that it would take as much as two years for the US office market to stabilise.
Aozora’s profit warning echoed the previous day’s announcement by New York Community Bancorp, which said it had lost $260mn in the final three months of 2023. The lender, which had bought the failed Signature Bank during last year’s regional banking turmoil, said the expected losses were related to US office building loans.
The US commercial real estate market has been stressed by rising rates and the structural shift towards remote work, which accelerated during the Covid-19 pandemic. Fitch forecast last week that commercial mortgage-backed securities delinquencies in the US would increase from 3.3 per cent to 8.1 per cent in 2024, as refinancing challenges result in defaults.
Aozora, which had previously forecast a profit of ¥24bn ($164mn) for the financial year ending in March, revised that down to a net loss of ¥28bn. The bank said its new forecast reflected additional allowances for loan losses amid rising risks of property-related loans turning sour.
The Tokyo-based lender said in its results presentation that it had $1.89 billion in outstanding US office loans, accounting for 6.6 per cent of the bank’s total loans. As of December 31 last year, $719mn were considered non-performing.
Aozora’s highest financial exposure, in terms of non-performing loans in the US, was to the city of Chicago. In Chicago a “considerable amount of time is required to recover supply and demand balances in urban areas”, the bank said. “The volume of property sales remains very low.”
Ahead of the announcement, shares in the bank had been trading close to a five-year high. Shares plunged by more than 21.4 per cent after the profit warning, triggering an automatic trading halt because it hit the lower limit.
Analysts in Japan said Aozora has particularly high exposure to the US market. “US [commercial real estate] is not likely to present a systemic risk, given that it accounts for less than 0.1 per cent of loans at the big Japanese banks which disclose this exposure,” said Makoto Kuroda, Japan financials analyst at Goldman Sachs in Tokyo.
“Investor interest in the Japanese banking sector is high, given expectations around a potential departure from negative interest rates, and we think this storyline will remain largely intact,” said Kuroda.
In recent months, Japan’s financial regulators have been putting pressure on regional banks and midsized lenders such as Aozora to prepare for any disruption from the country’s first interest rate rise in more than a decade, which could happen later this year.
Last year, the Bank of Japan’s governor Kazuo Ueda said the country’s banking system was robust enough to withstand some increase in short-term interest rates if it were to begin policy normalisation. But he added: “It’s a matter of degree so . . . we’ll have to monitor the situation carefully.”
