Aozora Bank Ltd.

The negative outlook reflects our view that we believe there is a more than a one-in-three chance that Aozora Bank's financial flexibility could weaken further. This is because of its reduced capacity to generate profit, intention to resume shareholder returns, and a potential deterioration in its operating environment. We may consider downgrading Aozora Bank if any of the following cases emerge in the next one to two years: The bank's financial health deteriorates, which we would see through factors such as a projected RAC ratio falling and remaining below 7% on an ongoing basis; Its asset quality deteriorates, for example through a further weakening of U.S. office-related commercial real estate markets; or We come to believe the bank's ability to

...We expect profitability of Aozora Bank Ltd. will remain under pressure. Pressure stems from factors including the bank's limited domestic business base, unrealized losses remaining on securities, and additional allowance burden for U.S. offices-related commercial real estate loans. The bank will maintain its projected risk-adjusted capital (RAC) ratio at around 7% over the next two years, in our view. Aozora Bank has said it will keep dividend payouts at a certain level as profitability remains low. This may necessitate risk controls along with the accumulation of retained earnings. Exposure to areas that are highly susceptible to economic and market conditions will remain a risk factor. The bank's domestic and overseas non-recourse real estate loans and corporate loans in North America account for a sizeable percentage of its total lending. This increases business volatility since the bank's foreign currency funding base weaker...

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