Regional banks clear subprime hurdle but face bad loans



Regional banks evaded most of the fallout from the U.S. mortgage market implosion only to face a homespun credit crisis.

Sixteen regional lenders, including Kansai Urban Banking Corp. and Yachiyo Bank Ltd., cut profit forecasts in the last two months as bankruptcies among condominium builders and commercial property companies forced them to set aside money for delinquent debt. Bad-loan cost ratios may rise by about 50 percent, HSBC Holdings PLC predicts.

“We have to be very, very cautious about regional banks,” said Yuichi Chiguchi, a fund manager at DLIBJ Asset Management in Tokyo. “It’s obvious that small and midsize real estate firms are in trouble over funding.”

Regional banks stepped in after the collapse of the property bubble in the early 1990s left larger, nationwide lenders such as Mizuho Financial Group Inc. reluctant to lend to developers. Their shares tumbled as much as 51 percent in the three months before Monday as the highest number of bankruptcies in five years drove loan losses up 81 percent in the quarter that ended June 30.

Takeo Higuchi, chairman of Daiwa House Industry Co., and Minoru Mori, chairman of Mori Building Co., Japan’s biggest privately held developer, said the crisis will deepen as banks stop lending to property companies, causing more to go bust.

“We’re in a vicious circle,” said Nicholas Smith, director of equity sales at HSBC in Tokyo. “As banks pull in loans to real estate and construction, property values fall, causing bankruptcies. Banks are forced to rein in lending when credit costs rise, causing further bankruptcies.”

New lending to the real estate industry tumbled 19 percent in the latest quarter, according to Credit Suisse Group. When real estate developer Sohken Homes Co. filed for court protection on Aug. 26 with ¥33.9 billion in liabilities, it cited difficulty refinancing debts as a reason.

Nine of the 12 bankruptcies among publicly traded companies this year were in the real estate or construction industries, listing a combined ¥553 billion in liabilities, according to data compiled by Bloomberg.

Failures have involved mostly smaller and startup developers, which typically borrow from regional banks, said Deutsche Bank AG analyst Shinichi Tamura.

Kansai Urban is the biggest decliner among the 84 banks in the Topix Bank Index, dropping 51 percent over the three months through Aug. 29. Nine other regional banks lost more than 40 percent. Resona Holdings Inc., the worst performing nationwide bank, is down 28 percent.

“We’ve had a bit of a bust in the real estate sector,” said Michael Wood-Martin, London-based manager of Asian stocks at Henderson Global Investors. “That’s been the main problem for banks.”

Housing investment in Japan unexpectedly fell in the quarter that ended June 30 as demand for new condominiums slackened and the wider economy edged closer to its first recession in six years. Liabilities at bankrupt real estate companies almost quadrupled to ¥487 billion in the same period from a year earlier, according to HSBC.

Urban Corp., a Hiroshima-based commercial property investor and condominium builder, collapsed Aug. 13 in the largest bankruptcy of a listed company in six years. At least nine regional banks, including Hiroshima Bank Ltd. and Kansai Urban, said they may fail to recover their share of Urban’s ¥255.8 billion in debt.

Losses on bad loans rose 81 percent to ¥149 billion at Japan’s 108 regional banks in the three months to June 30 from a year earlier, according to the Financial Services Agency. At the 11 nationwide banks, such credit costs rose 62 percent.

HSBC cut its ratings Aug. 26 on the three largest regional lenders by assets — Bank of Yokohama, Fukuoka Financial Group Inc. and Chiba Bank — and lowered its profit estimates for all three.

KBC Securities cut Bank of Yokohama to “hold” from “buy” in a report dated Aug. 29, citing lending to real estate companies, including Urban and Sohken.

The FSA, seeking to head off a repeat of the 1990s, when real estate prices dropped an average 8.5 percent a year, told banks late in 2006 to tighten lending to firms that loaded up on debt to buy property.

About 10 percent of lending by regional banks is to the real estate industry, according to Kentaro Kogi, a Tokyo analyst at HSBC.

Kansai Urban and Tokyo-based Yachiyo had more than 30 percent of their loans out to property companies as of March 31, he estimated.

Kansai, which lent to Urban, Sebon Corp. and Zephyr Co. — all of which have filed for bankruptcy — cut its profit forecast 32 percent to ¥8.5 billion July 29. The bank told investors it may not be able to recover its loans. Yachiyo, which lent ¥4.7 billion to Sebon, cut its profit forecast 72 percent.

“Kansai Urban may be in trouble,” said Deutsche’s Tamura. “Some smaller banks may need to be rescued.”