Report: Consumer Loan Rebates May Be Slowing in Japan

Among the more noteworthy news items seen today is this Bloomberg story. It reports signs that Aiful (AIFLY/OTC) and other Japanese consumer lenders may be weathering the impact of interest rate repayments:

"There was a report last week that the pace of interest rebate claims may be slowing,'' said Minoru Hattori, an analyst at Okasan Securities Co. in Tokyo. "People thought claims would keep growing rapidly so that's made a big difference.'' Bad-loan costs mounted in Japan's consumer finance industry after courts ruled borrowers can claim refunds for excessive interest charges. Japan passed legislation in 2006 that within three years will cut their maximum interest charge to 20 percent, matching the highest rate for banks, from 29 percent.

My two holdings in the sector have done well this month. This month. But I'm still underwater in them because (I like to think) I bought too early.

Hopefully, one day I'll be able to bore the heck out of youngsters at picnics and other gatherings with the story of how I bought Aiful and Takefuji, and weathered frightening stock price drops only to hold on and eventually see their value realized because of my true grit and conviction.

Yet that day isn't here now and won't be for a while.
           

Comments

[Anon]

Today's FT LEX has this...

Japan’s consumer finance problems

Published: October 10 2007 09:05 | Last updated: October 10 2007 09:05

Whether out of skill or sheer luck, Japan has so far appeared blissfully isolated from the credit turmoil that has embroiled western markets, with plenty of money sloshing around its capital markets and banks desperate to lend.

But amid the ample liquidity, one pool has all but dried up. Japanese consumer finance companies are finding it difficult to raise funds on the capital markets. In particular, issuance of asset-backed securities by consumer lenders has ground to a halt, depriving some lenders of an important source of funds.

Investors have become skittish ever since a government-mandated interest rate cut from 29.2 per cent to 20 per cent and a court ruling allowing borrowers to claim they overpaid interest, forcing lenders to repay billions. The consequences were highlighted by the default of Credia, whose banks pulled the plug even though the mid-sized lender was solvent, with an investment grade rating. This spooked investors not least because of fears Credia’s collapse could expose ABS holders to interest repayment claims. No wonder the ABS market has been virtually closed to the sector since June.

That is bad news for the likes of Aiful, Japan’s second largest consumer lender, which depends on ABS issuance for 17 per cent of its funding, and Takefuji, with 46 per cent of funds coming through securitisation.

Worse, banks are also getting edgy and rushing to take cover. Sumitomo Trust, a major lender to the sector and Aiful’s main bank, has classified some consumer finance loans as “problematic” and is reducing its exposure. Aozora, also a big Aiful lender, has hedged 75 per cent of its consumer finance exposure by buying credit default swaps. Amid growing nervousness, the cost of buying CDS protection has shot up, with the price of Aiful CDSs almost quadrupling since April. The price differential between buying short and long-term protection on Aiful credit has all but disappeared, reflecting market fears of near-term default.

Just as credit turmoil elsehwere in the world seem to be stabilising, it looks like Japan’s very own version of the sub-prime problem may be brewing.

[John]

Anon: Thanks for providing the Lex article. How much the troubles of Japanese consumer lenders are a matter of perception or reality, or the tip of some financial iceberg, is the question we'll see settled in the months to come.