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FRBSF WEEKLY LETTEA Number 93-36, October 22, 1993 - ."". ....... ,.. .. UITTlcUlt limeS tor Japanese Agencies and Hranches . . During the second half of the 1980s, the Japanese economy prospered. A rise in the japanese stock market added to the so-called hidden reserves of Japanese financial institutions, giving them an abundance of capital. As Japanese individuals and institutions invested heavily in the U.s., Japanese banks built a major presence here, increasing their market share substantially. This was notably true in California, where Japanese banks have long been active. The sustained decline in the Japanese stock market that began in late 1989 severely affected the capital of Japanese banks. As growth in the japanese and u.s. economies faltered, Japanese banks also faced increasingly serious asset quality problems, especially in their real estate loan portfolios. This Letter examines the rapid expansion of Japanese-owned banking institutions in the United States since 1985 and analyzes the impact of problems in real estate markets on the condition of japanese-owned banking institutions, with an emphasis on California. Rapid growth In the late 1980s, the growth of japanese banking institutions in the u.s. was dramatic. Between 1985 and the peak in 1990, Japanese-owned banking institutions' assets rose from $180 billion to almost $436 billion, and their market share of U.S. banking assets nearly doubled, from 6.5 percent to 11.8 percent. The change in market share was even more striking in California, where Japanese institutions went from 16 percent of the market in 1985 to 27.5 percent at the end of 1990. The totals for Japanese banks in the United States reflect two distinct groups of Japanese-owned banking institutions: (1) agencies and branches and (2) subsidiaries. A branch of a foreign bank has full banking powers and can accept deposits; WESTERn BAnKinG an agency of a foreign bank offers limited banking services, and cannot accept domestic deposits. At year-end 1992, Japanese-owned banks operated 121 agencies and branches in the U.s. with combined assets of over $344 billion, about 85 percent of the U.S. total for Japanese banking institutions; 32 of these agencies and branches were in California, with combined assets of $59 billion. (Most of the others were in New York.) These entities traditionally have been oriented toward wholesale banking, including tradefinancing and money-market services, so they are relative newcomers to real estate lending in the United States. Unlike commercial banks, which generally make a mix of both commercial and residential loans, the real estate loans of foreign agencies and branches are almost all for commercial real estate or construction. Subsidiaries of japanese banks are U.S. banks, chartered and regulated by u.s. banking agencies, but at least 25 percent owned by a Japanese bank. At year-end 1992 Japanese banks had 21 U.s. subsidiaries with assets of $63 billion. Japanese subsidiaries are generally full service banks, offering a wide array of wholesale and retail banking services, including residential and commercial real estate loans, consumer loans and middle market business loans. Nowhere is this more true than in California, where the combined assets of the ten japanese-owned subsidiaries were about $40 billion at the end of 1992, and four of them ranked among the state's ten largest commercial banks. Many of these subsidiary banks have long been active real estate lenders, mostly for residential rather than commercial mortgages. Between 1985 and 1991, real estate lending in the u.s. surged, especially for Japanese-owned agencies and branches: For U.S. domestic banks real Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth Friday of january, April, July, and October. FRBSF estate loans doubled; for Japanese-owned subsidiaries they quadrupled, peaking at $18.4 billion; and for japanese-owned agencies and branches, which lent largely for commercial real estate, they rose from $250 million to $40.5 billion, about one-ninth of the total assets of these offices. This activity resulted in a tremendous shift in market share in the United States. japaneseowned banking institutions held only 1 percent of outstanding bank real estate loans in the United States in 1985. In six years that figure went to 6.7 percent. Part of the surge in real estate lending may have been related to the well-documented rise in japanese investment in U.s. real estate. Foreign customers often prefer dealing with a bank rooted in their home country, because they have established customer relationships with tnese banks and are familiar with the language, customs, and banking practices. The bulk of japanese real estate investment was in office buildings and hotels, corresponding to the rise in real estate lending by the agencies and branches with their traditional commercial orientation. Loan problems As the Japanese banking institutions added to their real estate portfolios, many U.s. real estate markets began to show signs of stress. These market developments are reflected in the loan portfolios of the japanese institutions, particularly the agencies and branches. A customary measure of problem loans is the ratio of non accrual loans plus loans 30 day or more past due divided by total loans of that type outstanding. Over the last two years the aggregate problem real estate loan ratio for California banks has risen from 5.8 percent to 8.5 percent, reflecting the market downturn. The trend of problem loan ratios at japanese-owned subsidiaries in California has been similar, although the level has been higher. The pattern of problem loans at japanese agencies and branches has differed notably. Problem real estate loan ratios rose much more sharply, from 2.3 percent at the beginning of 1991 to 9.4 percent at the end of 1992. Such a change was significant, since real estate loans were about one-third of the total lending of these agencies and branches. The problems have not been limited to California; japanese agencies and branches in New York fared even worse. Like Califoinia, real estate markets in ~~evv York have been hit hard since 1990. At year-end 1992, the problem rea! estate loan ratio for Japanese agencies and branches in New York stood at 15.5 percent. Thus, japanese agencies and branches have paid a heavy price for their recent deep involvement in real estate. The deterioration in loan portfolios has affected the profitability of japanese operations in California, where the California State Banking Department tracks income for statelicensed agencies and branches. Although income figures for individual offices should be interpreted with caution, the state data show that many japanese offices lost money in 1992; the 23 state-licensed japanese agencies and branches had a weighted-average return on assets (ROA) of - 0.45 percent for the year. In contrast, California banks as a whole posted an average ROA of 0.58 percent despite facing similar market conditions. What next? japanese banks have been hit hard by economic conditions. At home, real estate woes and a sluggish economy put pressure on parent banks. Similar problems in California, and in the nation as a whole, took a further toll. The difficulties have been particularly pronounced at Japanese agencies and branches, the group that recorded the most rapid increases in commercial real estate lending after 1985. They faced high levels of problem loans, reduced property and collateral values, and commercial real estate markets with clouded prospects for near-term recovery. Japanese banks have taken significant steps to recover from these recent difficulties, through write-offs, loan loss provisions, and additions to capital; they currently meet relevant international capital standards. The most recently available data also suggest the beginning of a shrinkage by Japanese agencies and branches in California. In view of the prominent role they have played in California lending in recent years, a sustained cutback would be a significant change of the banking tides. Gary C. Zimmerman Economist REGIONAL BANK DATA oIUNE3O,' .... (NOT SEASONALLY ADJUSTED, PRELIMINARY DATA) DISTRICT FOREIGN DOMESTIC ALASKA ARIZ CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH. 0 10,426 0 16,636 0 25,739 61 14,344 20 40,380 7,206 0 781 0 9,610 0 9,610 2,374 793 8,259 13 0 17,917 0 17,917 7,612 4,569 3,680 431 0 8,464 0 9,464 3,886 1,833 2,414 156 0 30,136 18 30,118 13,026 8,004 8,855 1,108 1 5,206 2,740 1,954 514 1,902 447 762 873 4,320 1,673 2,160 488 4,335 1,377 2,138 820 3,437 787 1,849 1,001 4,218 1,418 1,354 1,444 296,692 286,942 20,477 18.301 9,646 8,646 14,286 14,286 23,458 23,458 13,134 13,073 36,837 36,816 29,447 0 29,447 6,5n 3,297 10,8n 7,259 1,436 266,472 25,486 240,987 65,490 23,971 92,927 37,657 20,749 14,260 1,893 12,387 2,434 1,462 4,967 2,039 1,481 7,847 0 7,847 1,493 1,004 2,609 2,166 575 9,796 0 9,796 2,683 1,330 3,953 1,006 839 20,567 0 20,567 4,375 3,265 6,679 5,371 889 10,814 81 10,753 2,484 1,488 3,512 2,567 701 33,260 88 33,192 8,280 4,452 11,889 8,761 1,652 753 645 42 2,533 3,514 555 12,465 27,302 7,365 5,325 1,698 238 1,599 n8 110 3,398 2,352 483 2,201 2,281 448 1,976 1,270 200 2,470 3,764 613 194,960 17,651 605 32 29,553 144 107,803 16,759 7,001 139 3,203 24 12,656 100 11,257 223 6,657 83 16,224 170 0.098 0.127 0.079 0.211 0.223 0.129 0.137 0.152 0.084 0.089 0.124 0.075 0.103 0.123 0.071 0.097 0.113 0.072 0.169 0.183 0.130 0.102 0.120 0.081 0.130 0.147 0.090 0.093 0.116 0.082 11,000 8,324 754 68 6 568 57 5,276 501 365 12 '66 15 430 17 456 48 243 22 711 75 8,839 2,631 2,293 797 3,118 75 24 25 3 23 594 183 156 12 244 5,729 1,683 1,573 562 1,911 327 145 87 18 77 162 89 31 6 56 570 100 51 130 268 476 138 137 18 '83 234 84 54 6 90 670 223 179 23 245 TAXES NET INCOME 686 1,308 10 22 57 96 529 640 37 67 20 39 67 125 55 100 26 49 65 171 ROA (% ANNUALIZED) ROE (% ANNUALIZED) NET INTEREST MARGIN (% ANNUALIZED) 1.07 12.00 4.88 1.76 13.46 5.18 1.08 10.93 4.34 0.80 9.37 4.50 1.20 15.72 3.96 1.51 20.16 4.50 3.18 21.23 8.39 1.57 17,56 4.98 1.40 15.39 4.53 1.71 18.14 4.89 NETCHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURAL 1.07 0.94 0.72 2.81 -0.05 0.08 -0.09 -0.02 0.29 0.00 0.31 0.17 -3.15 1.91 0.98 1.24 1.26 1.11 3.11 -0.55 0.58 0.10 1.64 0.81 2.28 0.20 0.09 -0.07 0.51 0.32 4.91 1.04 -1.11 6.90 -0.04 0.42 0.13 -0.02 1.55 0.78 -0.29 0.00 -1.66 0.72 0.09 0.33 0.08 0.11 1.10 0.40 PAST DUE & NON·ACCRUAL, TOTAL REAL ESTATE CONSTRUCTION COMMERCIAL FARM HOME EQUITY LINES MORTGAGES MULTI-FAMILY COMMERCIAL CONSUMER AGRICULTURAL 4.69 6.58 18.34 7.00 7.71 1.11 3.19 7.59 4.56 2.97 3.93 2.59 2.69 1.10 4.10 0.00 1.30 1.38 0.60 2.47 2.34 0.00 3.83 6.05 17.31 10.94 17.68 0.56 2.26 10.36 5.71 2.44 5.35 5.n 7.68 21.05 8.30 8.38 1.15 3.62 9.26 5.14 3.23 4.30 2.62 2.89 10.55 1.68 9.04 1.01 2.65 1.34 3.65 2.39 19.05 1.76 2.25 5.64 3.37 1.82 0.45 1.13 0.00 1.49 1.39 2.15 6.65 8.19 22.96 6.11 0.00 0.77 3.72 26.32 10.29 5.97 1.73 2.18 2.60 6.87 3.54 5.21 1.37 0.97 0.16 1.60 1.37 4.90 2.24 2.99 5.83 4.23 14.05 0.54 1.07 0.81 2.30 1.30 2.42 2.69 3.65 13.18 2.11 2.44 2.00 1.18 1.32 2.89 1.56 2.76 728 243,000 8 2,759 38 19,228 440 156,953 17 8,788 20 4,667 19 6,290 47 16,284 49 7,414 90 20,617 30,008 464,785 1 5,017 0 36,000 27,751 296,244 2,176 19,998 TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURAL INTERNATIONAL 327,592 26,756 298,838 157,525 61,556 53,674 5,830 125 2,544 5 2,538 1,232 793 372 4 0 20.242 0 20,242 7,462 2,886 8,453 314 8 217,625 27,315 190,310 112,475 38,402 24,382 2,979 "8 13,646 ',418 12,4.30 7,373 3,117 1,070 41 0 SECURITIES TOTAL U.S. TREASURIES U.S. AGENCIES OTHER SEC. n,372 24,367 40,172 12,634 '.914 8n 567 470 9,314 2,838 5,394 1,084 42,725 12,212 24,174 8,340 LIABILITIES TOTAL DOMESTIC 451,189 42',181 4,372 4,372 32,486 32,486 DEPOSITS TOTAL FOREIGN DOMESTIC DEMAND NOW MMDA & SAVINGS SMALL TIME LARGE TIME 396,085 27,508 368.577 94,889 40,598 138,727 65,259 28,798 3,562 1 3,562 ',094 329 1,213 434 476 OTHER BORROWINGS EaUITY CAPITAL LOAN LOSS RESERVE 32,741 43,602 10,054 LOAN COMMITTMENTS LOANS SOLD TlERl CAPITAL RATIO TOTAL CAPITAL RATIO LEVERAGE RATIO LOANS INCOME INTEREST FEES & CHARGES EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER NUMBER OF BANKS NUMBER OF EMPLOYEES 7,208 2,267 1,562 2,181 Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor or to the author.•.. Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974-2246, Fax (415) 974-3341. ~ 1%\ V \!1 ·S}jU! UBSqfi.OS 41!M Jaded papA08J uo PSIU!Jd Oi':L1:'6 V::> 'OJSpUl'.l:l Ul'S lOLL X09 "O"d O)SI)UOJ:J UOS JO ~U08 aAJaSa~ IOJapa:J ~Uf)W~JOdf)a 4)JOf)Sf)~ DEPOSITORY INSTIfUTIONS REQUIRED TO HOtD RESERVES WITH THE FEDERAL RESERVE ON A WEEKlV BASIS PERCENT OF COMBINED MARKEr TOTAL FOR AUGUST 1993. BY REGION DISTRICT DEPOSITTVPE CB TOTAL OEPosrrs 5538 7 90 6 64 28 8 61 30 9 31 65 4346 10 Sl CU • DEMAND NOW SAVINGS & MMDAS SMALLTIME LARGE TIME • CB Sl CU CB 72 • 2. 92 1 96 35 40 17 3 89 90 95 91 99 0 6 60 56 75 8 96 1 • CB", COMMERCIAL BANKS; CALIF ARIZONA ALASKA SL CU 7 • " •• 10 CB Sl CU 4846 6 89 7 5836 7 5736 7 22 7. 3 3652 '2 • ~ CB Sl CU 65 91 65 59 53 7. 29 • 31 34 45 19 ~ SL CU CB 91 5 n 96 0 97 79 79 46 86 92 92 88 90 • • "6 SL '" SAVINGS & LOANS AND SAVING BANKS; CU _ CReDIT UNIONS; TYPE OF RETAIL DEPOSIT ACCOUNT OR LOAN ~ CB Sl CU 20 3 15 16 51 Sl CU 81 10 9 95 1 84 8 9 77 10 n 17 6 72 • ,. ,. ,. ,. UTAH OREGON CB CB ~ Sl CU 79 6 89 5 83 2 73 3 80 12 67 12 16 6 16 2. 8 21 CB Sl CU 5634 9 85 13 2 6623 56 27 17 3956 5 4354 2 " MAY NOT SUM TO lc()% cuero ROUNDING AUG 1991 NOV 1991 FEB 1992 MAY 1992 AUG 1992 NOV 1992 FEB 1993 MAY 1993 AUG 1993 SAVINGS AC.COUNTS AND MMDAS U.S DISTRICT 5.12 5.25 4.64 4.68 3.78 3.81 3.57 3.67 3.14 3.29 2.90 3.06 2.80 2.96 2.65 2.78. 2.55 2.67 9210182 DAYSCERIIFICATES U.S DISTRICT 5.61 5.57 4.89 4.76 4.00 3.85 3.82 3.76 3.36 3.34 3.14 3.14 3.08 3.01 2.98 2.88 2.96 2.85 2-1/2 YEARS AND OVER CERTIFICATES U.S DISTRICT 6.79 6.53 6.02 5.71 5.36 5.03 5.45 5.17 4.87 4.75 4.70 4.49 4.59 4.41 4.45 4.27 4.40 4.19 COMMERCIAL SHORT TERM FIXED U.S DISTRICT 7.13 7.33 6.09 7.01 5.18 6.50 4.87 6.26 4.42 4.86 4.17 5.35 4.16 5.21 3.91 4.84 4.02 4.78 COMMERCIAL SHORT TERM FLOAliNG U.S DISTRICT 8.62 8.03 7.83 9.08 6.47 7.66 6.56 7.34 5.95 8.37 5.91 7.23 5.85 8.26 5.58 8.09 5.53 8.54 COMMERCIAL LONG TERM FIXED U.S DISTRiCT 8.53 10.20 7.82 10.10 6.33 7.70 7.27 8.58 6.28 8.28 5.97 6.44 6.43 9.19 6.02 10.86 6.21 8.05 COMMERCIAL LONG TERM FlOA liNG U.S DISTRICT 9.47 9.50 8.14 8.89 6.95 8.10 7.06 7.38 6.50 7.63 6.53 B.ll 6.38 8.43 6.47 8.55 6.05 8.77 CONSUMER. AUTOMOBILE U.S DISTRICT 11.06 N/A 10.61 10.80 9.89 9.90 9.52 9.67 9.15 9.39 8.60 8.76 8.57 8.98 8.17 8.23 7.98 8.09 CONSUMER. PERSONAL U.S DISTRICT 15.24 N/A 14.88 13.59 14.39 13.64 14.28 13.80 13.94 13.58 13.55 12.83 13.57 12.67 12.00 13.87 13.45 12.69 U.S DiSTRICT 18.24 N/A 18.19 18.41 18.09 18.51 17.97 18.52 17.66 18.46 17.38 18.29 17.26 17.76 17.15 17.60 16.59 17.58 CONSUMER. CREDIT CARD SOURCES: MONTHLY SURVEY OF SELECTED DEPOSITS. SURVEY OF TERMS OF BANK LENDING. AND TERMS OF CONSUMER CREDIT MOST COMMON INTEREST RATES ON RETAIL DEPOSITS. WEIGHTED AVERAGE INTEREST RATE ON LOANS. ANNUAL RATES.