On Thursday, February 1, 2024, Aozora Bank Ltd., headquartered in Tokyo, Japan, surprised investors by revealing losses associated with U.S. commercial property, becoming the second lender in a span of hours to do so. This development caused shares to plummet, heightening concerns about global banks’ exposure to declining real estate investments.
Following the announcement, Aozora Bank’s shares hit near three-year lows on Friday as investors continued to react negatively. The Japanese commercial lender downgraded its annual outlook to a loss due to bad U.S. commercial real estate loans. The shares experienced an 18.5% decline, reaching their lowest levels since February 2021 during early Friday Tokyo trade, while the Nikkei 225 benchmark was up 0.5%.
Aozora Bank’s Tokyo-listed shares continued to fall for a second consecutive day, reflecting losses in U.S. regional lenders’ performance overnight.
Aozora Bank (Credits: Bloomberg)
Aozora Bank’s net loss projection for the fiscal year ending March 31 is 28 billion Japanese yen ($191 million), a significant departure from its previous outlook of a net profit of 24 billion yen. The bank anticipates a net profit of 17 billion yen for the next fiscal year.
Goldman Sachs analysts maintained their sell rating on Aozora’s shares with a price target of approximately 2,460 yen per share. They cited concerns about the short to medium-term outlook for the bank’s profits.
Aozora Bank noted on Thursday that it expects its Common Equity Tier 1 ratio to fall to 6.6% by the end of the current fiscal year, temporarily dropping below its 7% target.
Analysts, including Masahiko Sato from SMBC Nikko Securities, expressed concerns about the decline in the CET1 ratio, attributing it to U.S. commercial real estate credit costs and valuation losses on available-for-sale securities. Sato emphasized that the impact on other banks remains uncertain.
The update from Aozora Bank closely followed U.S. regional bank New York Community Bancorp’s surprise net loss of $252 million for the fourth quarter. NYCB had also reduced its dividend, attributing the move to building reserves to address weaknesses in the office sector. This renewed fears about the strength of U.S. regional banks, which faced a liquidity crisis the previous year.
Bank of America analysts noted that the sell-off in U.S. regional banking shares might be overdone due to idiosyncratic factors tied to NYCB. However, they highlighted the higher losses related to commercial real estate office exposure and an increase in criticized loans tied to multi-family CRE as reminders of ongoing credit normalization across the industry.
The analysts added that NYCB’s credit/liquidity build was largely the bank catching up to actions taken by larger regional peers over the past year.
