Japan/mike1st/mark2nd

By JASON BOOTH

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.

The most pronounced result of the Japanese pullback is the country’s withdrawal from the U.S. loan market.

Japanese banks now account for less than 10 percent of the syndicated loans to investment-grade U.S. companies, down from around 25 percent in early 1997, according to Loan Pricing Corp., a market research firm in New York.

“A lot of Japanese banks have pulled out,” said Tara Balfour, senior vice president of structure finance at BankAmerica Corp. “As a result of their domestic issues, they have elected not to be active players in the U.S. loan market.”

While the withdrawal has become most pronounced this year, it has been going on since at least the start of 1997.

“First they pulled out of the investment-grade market. Then they pulled out of the near-investment-grade market. Now there is almost no activity on their part,” said Meredith Coffer, an analyst at Loan Pricing.

Banks with the biggest problems at the home office in Tokyo tend to be the ones making the fewest loans out of L.A.

According to state figures, there were no outstanding loans held by the L.A. office of Long Term Credit Bank as of June 30, compared with $1.6 billion worth of loans at the start of the year and $2.4 billion at the beginning of 1997.

On Sept. 29, the share price of LTCB on the Tokyo stock exchange plunged 40 percent after the bank announced that its subsidiary, Japan Leasing Corp., was declaring bankruptcy with a debt load of $27 billion.

Another Japanese bank that has closed out its L.A. office loan portfolio is Sumitomo Trust & Bank Ltd. As of Dec. 31, 1997, the bank’s local office had a loan portfolio valued at more than $900 million, but it had no loans outstanding as of June 30.

The L.A. office of Sakura Bank also saw a sharp contraction in its lending operations. In the first six months of the year, the branch’s loan portfolio fell from more than $2.4 billion to around $1 billion. During the same six-month period, the assets of Sakura’s L.A. branch fell from $2.5 billion to a little over $1 billion.

California banks with Japanese parents, while less affected than Japanese banks’ L.A. offices, have not been immune to the contraction.

The loan portfolio of Dai-Ichi Kangyo Bank of California stood at around $93 million as of June 30, down from $99 million at the start of the year and $123 million at the start of 1997.

Officials at both Sanwa Bank of California, which is currently the largest commercial bank based in Los Angeles County, and Tokai Bank of California, which is the fifth-largest L.A.-based bank, denied that their institutions are being negatively impacted by the economic difficulties in Asia.

Indeed, both banks’ loan portfolios remained essentially unchanged in the first six months of this year. But even that flatness came at a time when most other U.S. banks saw their loan portfolios expand.

Doug Stewart, group executive vice president at Sanwa Bank California, attributed the relatively unchanged loan portfolio to conservative lending policies, rather than to the Asian economic meltdown.

“We are aggressively seeking business,” he said. “But we know that all markets have their reversals. And when you are too aggressive on the upside you are going to be more vulnerable on the pullback.”