Staff Reporter

Faced with mounting bad loans at home and a weaker U.S. client base, Japanese banks are retreating from the Los Angeles market.

For the first six months of this year, the local offices of Japanese banks, and to a lesser extent several California banks with Japanese parents, have seen a noticeable decline in both assets and loans outstanding.

It's a dramatic reversal from the 1980s, when an influx of Japanese banks into California raised concerns that local banking would be dictated from Tokyo.

"You have to look at the underlying issue, which is the state of the Japanese economy," said Walt Mix, commissioner of the California Department of Financial Institutions. "They are reconsidering the allocation of capital worldwide, including California. They are trying to minimize their risk by centralizing in the home country."

The L.A. offices of Japanese banks, often referred to as agencies, have seen the greatest contraction of loans and assets.

In the six months ended June 30, the 10 largest locally based agencies saw their combined loan portfolios fall more than 35 percent, to $11.5 billion, from $17.9 billion at the start of the year, according the Department of Financial Institutions.

There has been a similar steep decline in assets held by these branches, from more than $20 billion at the start of the year to $12.7 billion as of June 30.

The primary reason for the pullback is that Japanese companies, beset by financial difficulties back home, have been downsizing their U.S. operations. At the same time, Japan's mounting bad-debt problems have made it more expensive for Japanese banks to borrow money, in turn making it less profitable to lend in the United States.

In September, Standard & Poor's downgraded its outlook for Dai-Ichi Kangyo Bank, Sanwa Bank, Fuji Bank Ltd. and Industrial Bank of Japan Ltd. from stable to negative. With lower credit ratings, Japanese banks must pay more in interest when borrowing dollars. As a result, they are less able to compete against American and European banks, which typically have stronger credit ratings.

Meanwhile, the devaluation of the yen against the dollar has provided added incentive for Japanese banks to pull money out of the United States to repay debts back home, and disincentive to pour new money into the United States, through loans or investments.

That situation may change, however, if last week's sharp rebound in the yen continues.


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