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Japans big banks expand into global aircraft financing, leasing

* Expanding into aircraft finance, leasing amid weak domestic lending* Banks see aircraft financing as more profitable, safer vs corporate lending* Industry veterans warn real challenges yet to come for new entrantsBy Taiga UranakaTOKYO, Nov 9 Cash-rich Japanese banks are rushing into aircraft finance in the hope of getting fatter profit margins than straight corporate loans. Banks including Sumitomo Mitsui Financial Group Inc (SMFG) and Mitsubishi UFJ Financial Group Inc are also venturing into aircraft leasing as more airlines opt out of owning fleets in favour of leaner balance sheets."We see opportunities to earn spreads we cannot ever charge on corporate loans," said Takeshi Sasaki, senior manager of structured finance at Sumitomo Mitsui Trust Bank Ltd, which set up an aircraft financing team last month. Japanese banks are playing a bigger role in global finance - from trade credit to syndicated loans - as they diversify from a lacklustre home market. Japan's lenders, as entrants to aircraft financing, also stand a good chance of making their mark with their European rivals in retreat, Sasaki said. Banks are also drawn to aircraft financing because it is perceived to be safer than general corporate loans. In the event of a default, lenders recover a bigger share of the loans by selling the jet.

"Aircraft are gaining popularity as hard assets," said Masao Masuda, director of state-run Development Bank of Japan's global aviation team."It is relatively easy to forecast future asset value. Also, unlike real estate, aircraft can be moved around, from weak markets to the strong."DBJ told Reuters recently its global aircraft financing business was likely to more than double from an initially forecast 120 billion yen ($1.5 billion) in the three years through 2013. Boeing Co says airlines worldwide will need 34,000 new jets valued at $4.5 trillion through 2031, including replacement aircraft. Bank loans accounted for 28 percent of financing of total Boeing deliveries valued at $30 billion last year, the aircraft manufacturer's data shows.

INSULATED FROM SWINGS Others are betting on the growth of aircraft leasing. Last year, leased planes accounted for 36.5 percent of the worldwide fleet, according to Boeing data, up from less than 15 percent 20 years earlier. Earlier this year, SMFG bought RBS Aviation Capital, the world's fourth-largest aircraft lessor, for $7.3 billion.

In an interview with Reuters, Peter Barrett, CEO of the now renamed SMBC Aviation Capital, said he expects this year's revenue to exceed $500 million and profits to top $100 million. Asked about next year's outlook, Barrett said, "I would say, profit growth in low teens is my expectation for our company, while our industry will grow by single digit."While the airline industry can be highly volatile, subject to economic downturns and shocks like terrorism and epidemics, leasing operations are relatively insulated from such swings."Even in times of difficulties, airlines make it an utmost priority to make good on lease payments to continue their business," said Naoki Sato, managing executive officer at Mitsubishi UFJ Lease & Finance Co Ltd. The firm agreed in October to buy U.S. aircraft leasing firm Jackson Square Aviation from Oaktree Capital Group LLC for about $1.3 billion. Still, the true test for new entrants hoping to reap profits is yet to come, industry veterans say. Mitsui & Co Ltd, which began rebuilding its aircraft leasing operations last year, had to shrink its business drastically when airplane prices plunged after the Sept. 11, 2001 attacks."Experience matters in aircraft leasing. It needs experience to successfully repossess airplanes from bankrupt airlines and find the next lessees," said Kiyotaka Tanaka, managing director at Orix Corp, one of Japan's oldest aircraft leasing players. ($1 = 80.5300 Japanese yen)

Money markets ecb repayments point to more use of emergency funds

* ECB repayments indicate increased emergency funding* Reliance on some national central bank cash growingBy Kirsten DonovanLONDON, May 28 European Central Bank accounts for the last week are set to show banks made further early repayments of cash obtained through longer-term liquidity operations, highlighting the trouble some institutions are having funding themselves. More than 21 billion euros of longer-term refinancing operation (LTRO) cash was repaid last week, including around 9 billion euros of funds from December's three-year funding bonanza. That is on top of an almost 11 billion euro repayment earlier in May. But that fall in the outstanding amount corresponded with a rise in the ECB's balance sheet item that accounts for the Emergency Liquidity Assistance (ELA) funding provided by national central banks. The weekly balance sheet, published on Tuesday for the previous week, is expected to show a similar shift in funds.

Commerzbank rate strategist Benjamin Schroeder suggests this may be linked to credit rating agency Fitch's downgrade of Greek covered bonds to "junk" that made such paper ineligible as collateral at the ECB. Technically, banks are not permitted to repay LTRO funds early. There are exceptions for the December and February three-year funding operations, but even those officially cannot be repaid before one year has passed unless a bank runs out of eligible collateral or loses status as a ECB counterparty."You're getting this Balkanisation, where you're dividing up the risk and apportioning it through the national central banks," said RBS rate strategist Simon Peck.

"At the end of the day banks are getting the liquidity that they need, be it from the ECB or the ELA....but it just depicts the ongoing fragmentation that we have seen for some time now."National Central Banks are able to accept, at their own discretion, lower quality collateral than the ECB, allowing banks to acquire the funds necessary to keep operating. But that is not without its risks should the borrowers be unable to repay the cash.

"The concern is that...if the central bank has to mark this collateral to market (prices) it could be sitting on quite sizeable losses if the recipients of this funding can't repay it," said Rabobank rate strategist Richard McGuire."It gives the lie to the notion that the ELA lending is ringfenced and not a euro system the euro system would probably have to backstop those losses."The 11 billion euros of LTRO repayments earlier in the month were believed to be linked to the ECB's move to stop providing liquidity to Greek banks left temporarily undercapitalised after the Greek debt swap. The exact amount of funding taking place through regional ELAs is not definitively clear, but the ECB's balance sheet item reflecting it - other claims on euro area credit institutions - has risen by over 150 billion euros since the beginning of April alone, highlighting the increasing reliance on such funding."It becomes more of an issue if the rules regarding what is considered as acceptable collateral were to change," RBS' Peck said."But ELA facilities are emergency facilities, so you would expect by nature of their design that the collateral rules would remain sufficiently soft".