Japan makes better hangar for RBS air unit

January 18, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Royal Bank of Scotland’s aircraft leasing arm has flown to a better place: Japan. The UK bank’s $7.3 billion deal to sell the division, which includes 206 planes, to Japan’s Sumitomo Mitsui Financial Group will free up vital capital at a good price. For the buyer, which now becomes the world’s number three leaser of planes, it should provide a much needed lift to returns.

Forced sellers like RBS, which was effectively taken over by the UK government in 2008, don’t often get good prices. Yet Sumitomo paid 4 percent above book value for the leasing business. By comparison, leasing giant ILFC sold a bundle of 53 aircraft to Australia’s Macquarie for just less than book in 2010. The fact that RBS’s fleet is relatively modern – mostly under five years old – will have added some gloss. RBS’s desire to shrink, meanwhile, oiled the wheels of this deal.

Sumitomo’s largesse rests on two factors. First, Asia is expected to take delivery of more than 8,000 aircraft in the next 20 years – 15 times what Airbus supplied globally in 2011. Aircraft finance is a good way into that trend, since planes make dependable, portable collateral. Even when airlines get into trouble, leasing losses tend to be small.

Secondly there’s the divergence in funding costs. Sumitomo is flush, with a loan-to-deposit ratio of just 78 percent at the end of September, compared with RBS’s 112 percent. Japan’s rich pool of savings, its lack of bank crises and undemanding investor base mean banks can borrow cheaply. Aircraft leasing is all about spread – and compared to Sumitomo’s 1.2 percent net interest margin, an aircraft leasing yield of around 5 percent sounds positively supersonic.

More such deals from corporate Japan would be a good thing and a strong yen puts Japanese buyers in a position to pounce. Just as importantly, diversification is long overdue. Over the last three years Japan’s megabanks have stuffed themselves with low-yielding government bonds, dooming investors to lackluster returns. Sumitomo, for example, holds JGBs equivalent to 22 percent of its total assets. In aviation terms that’s what’s known as a real drag.

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