Magazine article American Banker

Wave of Loan Sales by Japanese Banks Seen as Unlikely

Magazine article American Banker

Wave of Loan Sales by Japanese Banks Seen as Unlikely

Article excerpt

Fire sales of U.S. real estate loans by Japanese banks are considered unlikely despite their need to raise capital after the plunge in the Tokyo stock market.

"The banks are reluctant to recognize their loan losses," said Jack Rodman, managing partner of Kenneth Leventhal & Co., an accounting firm that specializes in trouble-debt restructurings. "For the most part they're standing pat."

Sales of more liquid assets, such as U.S. Treasury securities and stocks, are the probable scenario if Japanese banks need to raise cash to bolster their faltering capital ratios, Mr. Rodman said.

The 25% drop in the Nikkei index of 225 stocks this year has been partly responsible for the volatile price movements seen in the U.S. stock market, as investors worry about how the Tokyo plunge will affect depressed U.S. real estate prices.

The Slide Continues

The Nikkei fell again on Monday, losing 614.01 points to 17, 850.66.

But even without widespread loan sales by banks, the plummeting Nikkei could have repercussions for the U.S. real estate market.

For example, it could cause "a withdrawal of capital from U.S. markets," adding to downward pressure on prices and further reducing liquidity for real estate transactions, said David Shulman, managing director of Salomon Brothers Inc.

In addition, real estate debt restructurings may become more difficult if Japan's Finance Ministry and individual bank home offices, in response to banks' sagging capital, set tight constraints on granting new credit to troubled developers.

Investment Falls Off

Japanese investors and banks hold $76 billion of real estate equity and more than $200 billion of loans and participations in U.S. property. Their investments are mainly in Hawaii, Los Angeles, and New York, real estate experts said.

Japanese equity investment in U.S. real estate soared in the 1980s, peaking at $16.54 billion in new investments in 1988, according to Leventhal & Co. New investment slowed to a relative trickle last year. at just over $5 billion.

Worldwide, the Japanese banks hold $1.8 trillion of assets, 20% in real estate loans and another 20% in loans to trading and leasing companies, which have typically put the money into the riskiest projects.

Like other banks, the Japanese face international capital standards that have forced them to reduce lending and shed assets to improve ratios. The 8% risk-based standard goes into effect in 12 months.

In addition to the pressure to raise capital, the declining market also adds to the pressure on the banks to do something about nonperforming loans.

"When the stock market was booming, banks could offset their losses on such loans with gains on their stock portfolios," Mr. …

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