Japans big banks expand into global aircraft financing, leasing

← Homepage

* 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)