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(Bloomberg) – Japanese lender Aozora Bank fell for a second day in a row after it said it would be in the red for the first time in 15 years due to bad loans tied to U.S. real estate.
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The company’s two-day plunge wiped out 33% of its value, equivalent to a market capitalization of 128 billion yen ($870 million).
“The situation in commercial real estate in the United States is dire,” said Yasuo Sakuma, president of Libra Investments. “Aozora really surprised the market. Once you do that, you’re in trouble.”
Aozora aggressively made loans in the United States, betting that the office market would provide safe and stable returns. When the coronavirus spread and many people started working from home, commercial real estate prices skyrocketed and banks’ strategies were upended.
This makes it a target for short sellers. The stock is the second most shorted stock in the Nikkei 225 average.
“Having so much exposure to non-core markets is almost a failure of risk management,” said Puri de Silva, senior analyst at Bloomberg Intelligence.
Read more: Gambling on US commercial real estate explodes due to Japan’s blue skies
The bank lacks the reach of Japan’s megabanks and the geographic advantage of Japan’s regional banks. As a result, the company has adopted a strategy of directing about one-third of its loans to overseas borrowers.
“Aozora is a special case and we have no concerns about other banks’ exposure,” said Toshinori Yashiki, deputy director of Japan’s Financial Services Agency. “Japanese banks’ exposure to U.S. commercial real estate is generally well within their risk management capabilities.”
Because of its relatively small size, the bank is also pursuing internet deposits. Personal deposits account for approximately 64% of the bank’s core funds, of which more than 70% are made via the internet.
Japan offers deposit insurance for individuals that protects up to 10 million yen plus interest. Payment and settlement accounts used by businesses are typically fully covered.
According to the bank, the average balance in Aozora’s personal accounts was about 4.8 million yen as of March last year, and about 80% of personal deposits were covered by insurance.
Hironari Nozaki, a professor at Toyo University who previously worked as a bank analyst, said the system limits the chances of a bank run occurring in Japan compared to the United States.
“There’s a big difference in the safety net,” he said.
–With assistance from Lisa Do, Taro Fuse, Kurt Schussler, Nao Sano, and Takashi Umekawa.
(Added comments from Japan’s Financial Services Agency in the 8th paragraph)
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