Aozora Bank sells 15% stake to Daiwa Securities, strengthens capital position
Daiwa Securities Group and Aozora Bank will form a capital and business alliance to achieve sustainable growth in their corporate value through creating new added value by combining Daiwa Securities Group’s “Wealth Management Business Model” and Aozora Bank Group’s “Strategic Investments Business”.
As a refresher, in the Japan FinTech Observer #45 for the week ending February 4, 2024, we reported on Aozora Bank’s earnings adjustments:
- Aozora Bank delivered a swing of JPY 80bn to its FY2023 forecast on the back of US non-recourse office loans, and the restructuring of its security portfolio
- The bank has reevaluated all U.S. non-recourse office loans and reviewed property valuations from a forward-looking perspective, taking into account the risk of price declines over the next two years, in addition to the appraisal of properties based on current conditions; as a result of this process, credit-related expenses of 32.4 billion yen were recorded in the third quarter which included the maximum possible provision expected at this time; with this, the loan loss reserve ratio for U.S. non-recourse office loans increased to 18.8% as of December 31, 2023, which the bank believes provides an adequate reserve level and minimize the risk of future losses
- However, if one takes the Loan-to-Value (LTV) of the non-performing loans (NPL), registered at 177%, and normalizes to 100% (not leaving any buffer), one arrives at an estimated real estate value of USD 406m, covered by only USD 320m of reserves, leaving room for further earnings disappointments
- In its security portfolio, the bank sold foreign currency ETFs in the third quarter and plans to sell a further portion of the remaining foreign currency ETFs and mortgage bonds; as a result, a loss of 11.1 billion yen was recorded in the third quarter and an additional loss of 29.8 billion yen is expected in the fourth quarter resulting in an expected loss of 41.0 billion yen in the second half
- Since unrealized losses on securities were reduced from a net loss of 92.6 billion yen as of September 30, 2023 to a net loss of 81.5 billion yen as of December 31, 2023, and are expected to further improve to a net loss of 56.0 billion yen as of March 31, 2024, these measures also leave room for further earnings disappointments
- Please note that the bank states its bond durations as of December 31, 2023 as 5 years for U.S. government bonds and 6 years for MBS (the higher the duration, the higher the sensitivity to interest rate moves)
Coming back to the business alliance announcement:
Purpose and reason for the Capital and Business Alliance
Daiwa Securities Group has made steady progress in “Transition to a Wealth Management Business Model” and “Enhancement of the Business Portfolio through the Expansion of Hybrid Business” to establish a solid earnings foundation resistant to impacts from the external environment. In Daiwa Securities Group’s Medium-term Management Plan, “Passion for the Best” 2026, which starts from this fiscal year and sets “maximizing the value of customer assets” as the basic management policy for the group, Daiwa Securities Group, in all its group business activities, aims to increase clients’ asset value over the medium to long term by providing high-quality consulting services and solutions driven by accurate analysis of market environments and in-depth understanding of client needs.
Aozora Bank Group prioritizes resource allocation on “Aozora’s Strategic Investments Business” which focuses on long-term engagement with clients through investment and financing activities, ranging from debt to equity with a view to growing together with clients, and aims to support clients in their three phases, “fostering”, “change” and “recovery” through sincere dialogue and proposals and also “contribute to the development of society through the creation of new value-added financial services”. In order to accelerate the growth of this business model, along with the structural reform of the retail business, Aozora Bank Group has been continuously exploring the possibility of alliances with several external partners.
The Japanese economy is currently at a historic turning point. In the stock market, the Nikkei Stock Average reached an all-time high for the first time in 34 years against a backdrop of solid corporate performance, requests by the TSE to take action to cause management to be conscious of the cost of capital and stock prices, and purchases of Japanese stocks by foreign investors. In terms of monetary policy, an interest rate hike was implemented for the first time in 17 years, ending negative interest rates, on the grounds that the achievement of the 2% price stability target with wage increases was now in sight. The Japanese economy has overcome the prolonged stagnation following the collapse of the bubble economy and the turmoil caused by the COVID-19 pandemic, with the environment becoming conducive to a virtuous cycle originating from investment in a wide range of sectors, and is now taking steady steps toward a long-term growth path.
Individuals are increasingly shifting funds from savings to investments, backed by the entrenched inflation, the era of the 100-year life and policy encouragement, including the introduction of the new NISA. Meanwhile, it is urgently necessary for companies to formulate and implement management strategies to increase corporate value through improving capital efficiency, and under such themes as business portfolio restructuring, supply chain optimization or top-line growth through growth investments, such corporate activities as equity and debt financing and M&A are steadily increasing.
In this environment, Daiwa Securities Group and Aozora Bank Group held discussions and came to the conclusion that, by the collaboration between Daiwa Securities Group and Aozora Bank Group, both of which have different strengths and management resources, it would be possible to dramatically improve our consulting and solution capabilities for issues faced by our individual and corporate clients, and agreed to enter into the Capital and Business Alliance.
Initially, the specific areas of the collaboration will be
- wealth management,
- real estate related business,
- M&A, and
- growth company support.
Daiwa Securities Group and Aozora Bank Group will continue to discuss and aim to increase the added value provided to our clients through expanding the collaboration in a wide range of areas.
Details of the Business Alliance
The two parties have agreed to collaborate in each business area, including their group companies, and will work together to establish a cooperative structure. The details are as follows:
(i) Comprehensive partnership in wealth management area ⁃ Providing more valued-added consulting services to Aozora Bank Group’s wide range of individual and corporate clients by utilizing Daiwa Securities Group’s know-how, financial instruments/services and systems for the Wealth Management Business Model. ⁃ Jointly developing new financial instruments/services for Daiwa Securities Co. Ltd. (“Daiwa Securities”)’s individual and corporate clients utilizing Aozora Bank’s loan and trust functions and providing such financial instruments/services to their respective clients.
(ii) Partnership in real estate related business ⁃ Deepening real estate related business of both groups by combining Daiwa Securities Group’s real estate asset management business and real estate finance, one of the Aozora Bank Group’s strengths.
(iii) Partnership in M&A area ⁃ Responding to customer needs through the partnership of the two groups, including joint proposals leveraging their respective strengths in Daiwa Securities Group’s M&A business and Aozora Bank’s M&A business and LBO financing.
(iv) Joint support for growing companies from startups to emerging listed companies by both groups ⁃ Creating a new platform by combining equity investment from a venture capital fund as well as support for fundraising and exits through IPOs etc., in which Daiwa Securities Group has a strong presence, and a wide range of solutions centered on the finance side, including venture debt and other operations, in which Aozora Bank Group has demonstrated strength.
Details of the Capital Alliance
Daiwa Securities Group will underwrite a third party allotment of new shares to be implemented by Aozora Bank, and will acquire 21,500,000 common shares of Aozora Bank, equivalent to 15.38% of the total of outstanding shares as of March 31, 2024 and newly issued shares through the Third Party Allotment. The total amount of capital contributed is JPY 51.9bn.
The two parties have agreed in the Capital and Business Alliance Agreement that Daiwa Securities Group is to nominate one person as a candidate for outside director of Aozora Bank. Subject to the completion of the payment under the Third Party Allotment, Aozora Bank will submit a proposal for the appointment of one person nominated by Daiwa Securities Group to be a director of Aozora Bank at the 91st Ordinary General Meeting of Shareholders to be held in June 2024.
In the separate document on the Third Party Allotment, Aozora Bank comments as follows:
The Bank took drastic measures to address the issues with its balance sheet for the fiscal year ended March 31, 2024, including
- real estate non-recourse loans for U.S. offices and
- restructuring of the securities portfolio,
and the Bank greatly reduced future risks. With respect to the capital adequacy ratio as of March 31, 2024, the Bank ensured sufficient levels, i.e., the domestic standard of 9.23% and the CET1 ratio of 7.1%. However, the Bank considers it important to ensure a higher capital level from the perspective of ensuring capital for the growth of “Aozora’s Strategic Investments Business” in the future and further enhancing its financial soundness. The Capital and Business Alliance will be effective in further strengthening its capital adequacy.
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