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Consumer finance

The reputation of computer finance is relatively low, because in the past money lending for individual people was done by organization not having a high status in the society or the people had a high status, but then the interest rate to pay back could be sometime more than 50%. In some rural areas this is still the case and accepted that a wealthy family lends the money to a local merchant at that rate. With the new curbing rule for consumer finance loans at around 30% this would be history. Nevertheless the methods for collecting overdue payments are known as quite rude in Japan.

This is one of the main reasons why city banks have refrained from being to much in this business, but it was also impossible to ignore this huge market. Besides that the government and the bureaucrats wants to have some sources for people who are desperate for money in case of a difficult financial situations. Therefore all the city banks have some ties to the consumer finance companies.

Promise: SMBC has a 20% stake in this company and a distribution agreement. Spreads issued on promise are quite high with around 800 basis point. Main reason to stick or buy those papers even with a triple B rating by S&P could be that SMBC would 'bail out' the company in case things really get worse. Rating: Yellow

Orix: Orix is a more or less independent consumer finance company and was founded in the sixties by a trading house. This companies bonds should be seen more risky than Promise and it is probably better to refrain from those even the yield could be quite attractive. Orix is also more involved in business leasing to SME companies. Rating: Red

Acom: Bank of Tokyo-Mitsubishi has a sizable share in equity in this company and a distribution partnership. Having the strongest city bank in Japan as a partner should make this company as safe investment. Nevertheless the ties between the bank and Acom should be monitored closely. Rating: Green

Aiful: Company is close to bankruptcy. Reclaiming of customers because of too high interest rates paid is exceeding the financial capacity of the company. Even with a support from stakeholder banks it could be not sufficient and a support from the government especially under DPJ seems highly unlikely. Rating: Red


Update 22.08.2009: Spreads for consumer for above mentioned companies keep widening. Underlying economics did not change much. Main driver seems to be the uncertainty of the view of DPJ on this sector. Nevertheless the impact will be probably less severe, because the consumer finance companies have tightened their approval processes and reduced their business (like 10% or more). Rejection rate for new loan approval is around 70% nowadays (compared to 50% in the last years).