Japanese banks in the United States are paying a heavy price for their recent deep involvement in real estate lending, according to the Federal Reserve Bank of San Francisco.

The deterioration in loan portfolios has affected the profitability of Japanese operations in California, where the California State Banking Department tracks income for state-licensed agencies and branches, the Fed stated in a recent report.

"Although income figures for individual offices should be interpreted with caution, the state data show that many Japanese offices lost money in 1992," the Fed report stated.

According to data compiled by the California banking department, the 23 state-licensed Japanese agencies and branches had a weighted average return on assets of 0.45% for the year.

In contrast, California banks as a whole posted an average return on assets of 0.58% despite facing similar market conditions.

Large Presence

Japanese banks have built a major presence in the United States and in California in particular over the past decade. Growth reached dramatic proportions in the late 1980s.

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% to 11.8%, according to the San Francisco Fed.

The change in market share was even more striking in California, where Japanese institutions went from 16% of the market in 1985 to 27.5% at the end of 1990.

At yearend 1992, Japanese-owned banks operated 121 agencies and branches in the U.S. with combined assets of over $344 billion, or about 85% of the U.S. total for Japanese banking institutions.

Of these, 32 branches and agencies were in California with combined assets of $59 billion.

New to Real Estate

Most of these offices were oriented toward wholesale banking, including trade finance and money market services, and were relative newcomers to real estate lending.

Most of their subsequent real estate lending was for commercial real estate or construction, rather then residential real estate lending.

Meanwhile, the 21 subsidiaries of Japanese banks, or U.S. chartered and regulated banks, had $63 billion of assets at the end of 1992.

Jump in Lending

Between 1985 and 1991, real estate lending by Japanese owned subsidiaries skyrocketed.

According to Fed data, real estate lending by Japanese owned banks in the United States surged fourfold and peaked at $18.4 billion in 1991.

That compares with a twofold increase at U.S. banks.

Poor Timing

Real estate related lending by Japanese bank agencies and branches increased even more dramatically, from $250 million to $40.5 billion, or around one-ninth of their total assets.

Whereas Japanese-owned banking institutions held only 1% of outstanding bank real estate loans in the United States in 1985, they held 6.7% of such loans six years later.

The move into real estate lending by Japanese banks could not have come at a worse time.

"As Japanese banking institutions added to their real estate portfolios, many U.S. real estate markets began to show signs of stress," the Fed noted.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.