The head office of Aozora Bank Ltd. in Tokyo, Japan, Thursday, Feb. 1, 2024. Japan’s Aozora Bank became the second lender in a matter of hours to surprise investors with losses linked to U.S. commercial real estate, sending shares below a threshold and raising concerns about exposure of global banks in exhausted real estate bets.
Akios Kon | Bloomberg | Getty Images
Aozora Bank Shares hit near three-year lows on Friday as investors continued to hammer the Japanese commercial lender after it downgraded its annual outlook on losses from bad U.S. commercial real estate loans.
Aozora, which had earlier forecast a profit, saw its shares fall as much as 18.5 percent to their lowest levels since February 2021 in early Tokyo trading on Friday. Nikkei 225 The benchmark rose 0.5%.
Shares in the Tokyo-listed bank fell for a second day, tracking losses in US regional lenders overnight.
Aozora Bank is down again
The commercial lender said Thursday it expects to post a net loss of 28 billion Japanese yen ($191 million) for the fiscal year ended March 31, compared with its previous outlook for a net profit of 24 billion yen. The bank forecast a net profit of 17 billion yen for the next fiscal year.
“Aozora is a major mid-tier lender whose strength lies in its relationships with real estate finance/business revitalization companies and regional financial institutions,” Goldman Sachs analysts wrote in a Friday note.
They maintained a sell rating on Aozora shares with a price target of around ¥2,460 per share, mainly due to the bank’s short- to medium-term earnings outlook.
Aozora said on Thursday it expects its Common Equity Tier 1 ratio, which compares a bank’s capital to its assets, to fall to 6.6 percent by the end of the current fiscal year, temporarily below its 7 percent target.
“There have been some concerns in recent years about a decline in the CET1 ratio due to worsening US commercial real estate credit costs and valuation losses on available-for-sale securities,” wrote Masahiko Sato, senior analyst at SMBC Nikko Securities. in a Thursday note to clients.
“How this will affect other banks is another question,” Sato added. “U.S. real estate lending for around 10% of (their) total lending with a CET1 ratio below 7% due to unrealized losses on securities is unprecedented.”
Aozora’s update came shortly after US regional bank New York Community Bancorp announced a surprise net loss of $252 million for the fourth quarter.
NYCB also cut its dividend and said it had “[built] reserves during the quarter to address weakness in the office sector” — renewing some fears about the strength of regional US banks, which were embroiled in a liquidity crunch last year.
The lender said this was in response to buying the assets of Signature Bank, one of the regional banks that collapsed in last year’s crisis. This purchase increased their total assets to $100 billion, placing them in a category which subjects the bank to stricter liquidity standards.
Analysts at Bank of America said in a note on Wednesday that the sell-off in US regional bank stocks on contagion fears is “likely overdone given the idiosyncratic factors associated with NYCB.”
“However, higher losses are associated with exposure to commercial real estate agencies, an increase in nonperforming loans linked to multifamily CRE [commercial real estate] is a reminder of the ongoing credit normalization we are likely to witness across the industry,” bank analysts at US Bank of America wrote.
“It’s worth noting that credit/liquidity build-up at NYCB is mostly the bank responding to actions taken by larger regional firms over the past year,” they added.
— CNBC’s Michael Bloom contributed to this story.