Dominoes: After NYCB, Shares Of Japanese Bank Implode On Massive US CRE Writedown

Following a profit warning from New York Community Bancorp on Wednesday, partially attributed to turmoil in the commercial real estate sector, Japan’s Aozora Bank Ltd. slashed the value of some of its US office tower loans by a staggering 50%. 

New York Community Bancorp’s move to slash its dividend and bolster reserves led to a 38% plunge in its shares yesterday, also triggering the largest drop in the KBW Regional Banking Index since the collapse of Silicon Valley Bank last March.

Like rows of falling dominoes, Aozora Bank, the 16th largest in Japan by market value, recorded a 20% plunge in shares on Thursday after reporting a net loss of 28 billion yen ($191 million) for the fiscal year. This was in stark contrast to its earlier projection of a 24 billion yen profit.

US Property Losses Trigger 20% Plunge in Japanese Bank Aozorahttps://t.co/VZiDAZrhH6 https://t.co/DOlz0ZobbF

— zerohedge (@zerohedge) February 1, 2024

Aozora wrote down the value of its non-performing office loans by 58%, including a 63% reduction in Chicago and between 51% and 59% in New York, Washington D.C., Los Angeles, and San Francisco – all of these cities are plagued with violent crime and controlled by radical Democrats. 

US office loans totaled about 6.6%, or approximately $1.89 billion. It said 21 office loans worth $719 million were classified as non-performing. It increased its loan-loss reserve ratio on US offices to 18.8% from 9.1%. 

Several months ago, we pointed out: “Next bank failure will be in Japan.” 

Next bank failure will be in Japan https://t.co/51eCSNZeIh

— zerohedge (@zerohedge) October 3, 2023

“It’s a shock,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities Co., adding, “The expectation was the worst was over and that the bank had set aside enough provisions.”

For lenders, this development is a major warning sign that a tsunami of office loan defaults could be on the horizon. Many landlords struggle to repay or finance existing loans in an environment with high-interest rates. Some are simply walking away from properties. 

“This is a huge issue that the market has to reckon with,” said Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, specializing in renegotiating distressed properties.

Bordwin said, “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.”

Besides New York Community Bancorp and Aozora Bank, Deutsche Bank noted in fourth-quarter results: 

“Interest rate environment remains key driver for refinancing risk and potential [credit-loss provisions] in 2024 especially in office, with further drivers being ongoing sponsor support and expiring rental agreements.”

Fed chair Powell delivered bad news for the CRE world in yesterday’s FOMC meeting:

took him a while

*POWELL: DON’T THINK IT’S LIKELY FED WILL CUT IN MARCH https://t.co/2ymHSHgVPe

— zerohedge (@zerohedge) January 31, 2024

Perhaps most notably, the Fed removed the following sentence from the FOMC statement: “The US banking system is sound and resilient.”

The question remains is why the Fed no longer sees “the US banking system is sound and resilient” and could be a clear indication of rumblings in the economy near-term. 

Here’s a warning from Justin Onuekwusi, chief investment officer at wealth manager St. James’s Place: 

“It’s clear that the link between commercial property and regional banks is a tail risk for 2024, and if any cracks emerge, they could be in the commercial, housing and bank sector.” 

To sum up, the CRE/regional bank mess is not over and may even be gathering momentum during an election cycle that could pose challenges for the Biden administration.