Lenders say grey zone ruling will hit results

Japan’s leading consumer finance companies have highlighted the severe impact of two damaging decisions passed against the sector by forecasting worse results than expected in the year just ended.

Aiful, one of the top four consumer lenders, on Wednesday said its net loss for the past year would be more than double previously forecast, at Y411.2bn ($3.4bn).

Takefuji also said on Wednesday its net loss would increase from a previously expected Y333.8bn to Y481.3bn.

The grim news came after Promise, which is 20 per cent owned by Mitsui Sumitomo Financial Group, on Tuesday unveiled a Y378.3bn net loss in the last fiscal year, more than double its earlier estimate.

Promise is cutting 1,000 jobs or about 20 per cent of its workforce, closing branches and reorganising group companies to shave Y40bn off costs.

Late last month, Acom, which is 15 per cent owned by the Mitsubishi UFJ group, said its net loss would balloon to Y437.9bn from a previously forecast Y257.3bn.

The worse results stem from reserves the consumer lenders have been forced to set aside due to claims of overpayment by borrowers and restructuring charges. Last year Japan’s Supreme Court ruled against a consumer lender, which had charged a borrower at the highest interest-rate band, known as the grey zone.

The ruling has led to mounting claims from borrowers demanding repayment of grey zone interest.

Furthermore, consumer lenders face legislation forcing a reduction in the maximum lending rate from 29.2 per cent to 20 per cent.

The market on Wednesday reacted positively to the news, mainly due to Promise’s forecast that it would return to profitability in the current year.

Aiful and Promise were both up nearly 5 per cent, at Y3,200 and Y3,840 respectively, while Takefuji and Acom were up 2 per cent at Y4,170 and Y4,360 respectively. Standard & Poor’s and Fitch both kept their investment grade ratings on the consumer lenders unchanged.

However, some analysts warned that there could be worse to come.

The contract rate at lenders has fallen substantially, leaving more borrowers short of funds and giving them an incentive to claim over-payment, said one analyst.

Jason Rogers, analyst at Barclays Capital, said in a note: “The losses underscore the magnitude of challenges facing the entire consumer finance industry over the next few years.”

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