Not just NYCB: Japanese bank issues warning on U.S. offices, as Deutsche Bank increases provisions

Aozora Bank shares skidded 21% in Tokyo trade

Aozora cut the value of nonperforming office loans in Chicago by 63%.

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On the heels of a profit warning from New York Community Bancorp that was at least partly due to the deteriorating office-loan market, a Japanese bank cut the value of some of its own U.S. office loans by more than 50%.

Aozora Bank’s stock 8304, -15.92% slumped 21%, making it the worst performer in the Nikkei 225 JP:NIK on Thursday, after cutting its annual profit forecast by 52% and its revenue forecast by 35%.

Aozora said the U.S. office market faces adverse conditions due to higher U.S. interest rates and a shift to remote work. It cut the value of its nonperforming office loans by 58%, including a 63% reduction in Chicago and reductions of between 51% and 59% in New York; Washington, D.C.; Los Angeles; and San Francisco.

Its commentary on the Chicago market was particularly bleak: “A considerable amount of time is required to recover supply and demand balances in urban areas. The volume of property sales remains very low.” It was a bit less negative on New York, saying supply and demand is expected to recover in Manhattan earlier than other cities.

U.S. office loans of $1.89 billion were 6.6% of Aozora’s total, and it classified 21 of those office loans worth $719 million as nonperforming. It boosted its loan-loss reserve ratio on U.S. offices to 18.8% from 9.1%.

Aozora also reduced its securities portfolio after being burdened by losses from foreign bonds, mostly due to the rise in U.S. interest rates.

It sold 9.3 billion yen’s worth of the portfolio in its third fiscal quarter and is selling another 26.7 billion yen worth in its current, fourth quarter, as it records losses on U.S. and European government bonds, U.S. mortgage-backed securities and U.S. investment-grade bond ETFs.

New York Community Bancorp stock NYCB, -11.13% ended 38% lower on Wednesday after a surprise loss and dividend cut, news that also hit shares of other U.S. regional banks KRE. Shares of both NYCB and the regional banking sector fell for a second day on Thursday.

Deutsche Bank DBK, +2.71% devoted two pages of its 53-slide investor presentation on its fourth-quarter results to commercial real estate, where it has a €38 billion portfolio, accounting for 8% of total loans. It said it’s taken €365 million of credit-loss provisions on €8 billion in loans over the last six quarters, a majority from offices. In the fourth quarter alone, Deutsche Bank U.S. commercial real-estate provisions rose to €123 million from €26 million.

“The [i]nterest-rate environment remains [a] 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,” said the Deutsche Bank presentation.

Separately, BNP Paribas shares BNP, +0.18% slumped Thursday as the French banking giant cut its longer-term profit forecast.

Read on: Banks’ office-loan exposure remains a ‘mixed bag’ as lenders manage through downturn