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BOJ misfire seen in regional banks’ turn to aircraft loans

by Monami Yui, Emi Urabe, and Finbarr Flynn

Bloomberg

Chugoku Bank Ltd. wants to get into the global airline debt market after loans to local businesses fell for a fourth straight year.

“It’s the same everywhere: loans aren’t increasing and margins aren’t good,” Eriko Manabe, who works on the bank’s overseas lending, said in an interview from the city of Okayama. “We’re looking for our first aircraft financing deal.”

Manabe’s bank isn’t the only regional lender trying to get a piece of the aircraft financing market valued at $104 billion last year after Sumitomo Mitsui Financial Group Inc.’s $7.3 billion purchase of Royal Bank of Scotland Group’s aviation division in 2012. While unprecedented Bank of Japan monetary easing is spurring lenders to take more risk, little of that is in domestic loans due to record low margins and weak demand.

Average interest rates on private-sector aircraft finance lending are about 150 to 200 basis points more than the three-month London interbank offered rate for 12-year deals with good credit ratings, according to BNP Paribas SA. That compares with the average yen lending rate in Japan of 34 basis points, or 0.34 percentage point, according to data compiled by Bloomberg.

“Demand for bank loans isn’t strong yet because smaller companies are cash-rich, and also lenders can’t expect much profit from lending,” said Masahiko Sato, an analyst at Nomura Securities Co. “With customer deposits growing faster than lending, regional banks that want to extend loans yielding more profit than returns on government bonds may be interested in the aircraft finance market.”

Boeing Co. expects aircraft in stock to double to about 40,000 planes within 20 years as low-cost carriers boost demand. The company predicts funding requirements for airplane purchases will increase to $135 billion in 2017 from $104 billion in 2013.

BNP and aircraft lessor Avolon are seeking to tap into Japanese funds as returns on domestic credit investments shrink under pressure from BOJ bond buying.

“The Japanese economy offers very limited investment opportunities for large financial institutions to deploy their capital and make a reasonable return,” said John Higgins, the president and chief commercial officer at Avolon, a Dublin-based aircraft lessor with airline customers in 25 countries. “The global aircraft finance sector offers them exactly that.”

Avolon held an investor forum in Tokyo last March and is discussing fundraising with a number of Japanese banks, Higgins said. He comes to Japan three or four times a year to meet with investors, financial institutions and customers.

Low-cost carriers such as Southwest Airlines in the U.S. and Ryanair Holdings in Europe fly more passengers in their respective markets than any other carriers, helping to boost flights with budget offerings.

LCCs such as AirAsia are also increasing market share in Asia, making up 8.7 percent of the region’s passenger traffic in 2012, double the 3.7 percent in 2008, according to data compiled Bloomberg.

“We’re seeing opportunities predominately coming from China, Singapore and the Middle East,” said John Chauvel, the head of debt capital markets at Westpac Banking Corp. in Sydney. “So from our perspective, the pipeline in that sector is looking like we have not seen it in a long time.”

Hachijuni Bank Ltd., based in the city of Nagano, began aircraft financing in 2012. Last year, the lender bought part of the loans that Sumitomo Mitsui had made to Korean Air Lines Co. to fund plane purchases.

“We consider aircraft loans an investment in prime assets,” Naotake Murayama, a lending officer at Hachijuni Bank, said in an interview. “As much as we want to boost the balance, the fact is we can’t get as much as we want. The spread is getting tighter too.”

Spurring Japanese banks into aircraft loans are falling domestic lending rates, as the BOJ buys an unprecedented ¥7 trillion in bonds a month to beat deflation. The stimulus has weighed on loan profitability, with domestic long-term lending rates dropping to a record low 0.869 percent in November, according to BOJ data.

The BOJ is trying to boost lending with its monetary easing, Gov. Haruhiko Kuroda said in a speech Dec. 25. While bank loans increased 2.6 percent from a year earlier in December, the fastest pace in 4½ years, deposits still exceeded lending by close to a record amount, at ¥185 trillion, according to BOJ data.

Loans to local businesses by Chugoku Bank fell 0.8 percent to ¥1.56 trillion at the end of September from the year-earlier period, marking a fourth consecutive year of declines, according to its earnings statement.

The nation’s largest banking groups are also acquiring aircraft finance businesses. After Sumitomo Mitsui’s RBS aviation unit takeover, an affiliate of Mitsubishi UFJ Financial Group bought Jackson Square Aviation later that same year for ¥100 billion.

At Chugoku Bank, a department to handle overseas deals was opened in June for the first time in 12 years, according to Manabe. The lender has made ship-related loans in the area, and Manabe said that experience will help the bank with aircraft financing.

Okayama, where Chugoku Bank is based, is the nation’s biggest producer of white peaches and home of the popular Japanese legend of Momotaro, the boy found in a giant peach who defeated ogres.

“We want to grab a straightforward aircraft deal possibly in the secondary market first,” Manabe said. “We want to increase such financing deals in coming years.”