• Lender's London unit to start operations as soon as March
  • Attracted by `stable' funding costs in euros versus dollar

Aozora Bank Ltd., the Japanese lender that repaid a taxpayer bailout last year, plans to increase loans in Europe to borrowers including lower-rated companies as economies in the region recover and dollar funding costs rise.

The Tokyo-based bank will make the loans through its new London unit, which opened in December and will be running as soon as March, Hideaki Kuraishi, head of the international finance division, said in an interview on Jan. 6.

Aozora is seeking to take advantage of lower euro and pound funding costs as dollars become more expensive after the Federal Reserve ended its zero interest-rate policy. Unlike its larger peers such as Mizuho Financial Group Inc., which lend to top-tier companies overseas at razor-thin margins and try to profit from fee business once relationships are cemented, Aozora is focusing on earning higher returns by lending to firms with the non-investment grade ratings of BB to B.

“Economic growth in almost all countries in Europe is positive now, so loan markets will grow,” said Kuraishi. “We’re taking a major step forward.”

Aozora plans to boost loans outside Japan to 1 trillion yen ($8.5 billion) by March 2018 from 750 billion yen as of March 2015, Kuraishi said, without providing a breakdown for Europe. Currently only about 6 percent of the bank’s overseas loans are from the region, and Kuraishi is seeking to increase the proportion to more than 10 percent.

The lender, whose name means “blue sky” in English, has tried to expand in the U.K. before. Aozora closed its former London representative office in 2001 as it refocused on business in Japan after receiving the government bailout. A second attempt at operating in the city in 2006 was curtailed by the global financial crisis in 2008.

Aozora’s predecessor, Nippon Credit Bank, failed as bad loans mounted amid a nationwide banking crisis following the collapse of an asset bubble. The lender completed the repayment of public funds last June, a month after outlining a three-year business plan. Part of the strategy involves boosting profitability by seeking higher-margin lending overseas amid lackluster returns in Japan, where interest rates remain near record lows.

Despite its focus on higher-yielding credit, Aozora’s non-performing loans fell to less than 1 percent of the total as of Sept. 30 from 1.35 percent six months earlier, the company’s financial statements show. 

Diversifying Loans

About 30 percent of Aozora’s 2.6 trillion yen loan portfolio was from overseas as of September. North America made up the majority of credit abroad with 76 percent, followed by Asia with 15 percent. Kuraishi said he wants to boost the European proportion to improve geographic diversification as well as increase loan profitability.

“Even as dollar funding costs increase, euro and pound funding remain stable,” said Kuraishi. He said that while the margins above the London interbank offered rate received on loans made in the U.S. and Europe were basically the same, the relatively lower funding costs in Europe have made doing business there more profitable.

Dollar Demand

The five-year cost of swapping yen into U.S. currency, one way the nation’s banks raise dollars to lend to their customers, rose to 83 basis points as of Dec. 31 from 61 basis points at the start of 2015. The trend will continue for the time being, according to Japanese Bankers Association Chairman Yasuhiro Sato.

“Given that the U.S. remains the only real economic winner for now, demand for dollars and in turn dollar funding costs will continue to rise,” Sato said at a news briefing in December.

Kuraishi said Aozora will focus on lending in countries including the U.K., Germany and the Netherlands. The bank will seek to provide finance for mergers and acquisitions and infrastructure projects in addition to syndicated loans, he said.

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