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Aozora Bank’s shares plummeted to near three-year lows as the Japanese commercial lender downgraded its annual outlook to a loss, citing challenges with bad U.S. commercial real estate loans. The bank, which initially anticipated a profit, experienced a sharp decline of up to 18.5%, reaching its lowest levels since February 2021 in early Tokyo trade on Friday. This drop occurred amid concerns over global banks’ exposure to deteriorating real estate investments, echoing losses in U.S. regional lenders.
Aozora Bank’s Revised Outlook
– The bank disclosed a revised net loss forecast of 28 billion Japanese yen ($191 million) for the fiscal year ending March 31, in stark contrast to its prior projection of a net profit of 24 billion yen.
– Aozora Bank anticipates a net profit of 17 billion yen for the next fiscal year, signaling ongoing challenges.
Analysts’ Perspectives
– Goldman Sachs analysts maintained a sell rating on Aozora’s shares with a price target of about 2,460 yen per share, emphasizing concerns about the short to medium-term profitability outlook.
– Aozora’s strength in relationships with real estate and business revitalization financing firms and regional financial institutions was highlighted as a key aspect of its position in the market.
Impact on Common Equity Tier 1 (CET1) Ratio
– Aozora expects its Common Equity Tier 1 ratio, a measure of a bank’s capital against its assets, to dip to 6.6% by the fiscal year-end, temporarily falling below its 7% target.
– Concerns have been raised about the decline in the CET1 ratio due to U.S. commercial real estate credit costs and valuation losses on available-for-sale securities.
Contagion Fears and U.S. Regional Banking
– The update from Aozora followed U.S. regional bank New York Community Bancorp’s surprise net loss announcement for the fourth quarter, contributing to contagion fears.
– Analysts from Bank of America noted that the sell-off in U.S. regional banking shares might be overdone but emphasized ongoing credit normalization challenges, particularly in the commercial real estate sector.
Ongoing Challenges and Industry Outlook
– Challenges related to U.S. commercial real estate office exposure and an increase in criticized loans tied to multi-family commercial real estate serve as reminders of ongoing credit normalization across the banking industry.
– Analysts suggest that Aozora’s situation reflects broader industry trends and should be viewed in the context of larger regional peers taking similar actions over the past year.