Backed by Carlyle, Tiny Firm Vows to Dwarf Giant Japan Banks

(Bloomberg) -- A little-known mortgage lender is taking on Japan’s giant banks, betting it will overtake them in home loans.

Aruhi Corp. vows to increase annual originations to more than $11 billion over the next five years to become the top company in the industry, even though the megabanks are at least 90 times its size, according to Hiroshi Hamada, Aruhi’s chairman and chief executive officer. Its secret? Cheap rates, less red tape, and securitization -- but not, it says, the kind that’s often blamed for causing the global financial crisis.

The target is far from a pipe dream, according to Hamada. The data support his view: Aruhi -- which means “one day” in Japanese -- has already passed one of the top banks, Mizuho Financial Group Inc., in value of home loans issued annually, according to figures provided by the companies. By Aruhi’s calculations, it’s already the fifth-largest mortgage issuer in Japan.

Aruhi’s shares surged as much as 9.5 percent in early Tokyo trading Thursday, heading for a record close.

This is no ordinary tale of David overcoming Goliath. Although the company is small -- with a market value of about $500 million -- it has a powerful backer: Carlyle Group LP.

The private equity giant bought Aruhi, previously called SBI Mortgage Co., in 2014. Hamada, who has known Carlyle executives for almost a decade, became president the following year after serving as an adviser, even though he had no industry experience. Under his guidance, Aruhi broadened its lineup from one main product, started selling home loans from internet banks, and automated some application processes. Annual originations surged 43 percent year-on-year in the fiscal year ended March 2017, the most recent year for which annual data is available.

“We’re the Seven-Eleven of mortgages,” Hamada, 58, said in an interview in Tokyo. And “we have the lowest interest rates.”

Aruhi is gaining ground as home owners refinance to take advantage of cheaper lending terms after the Bank of Japan moved to a negative interest rate policy in 2016. Those same minus rates are squeezing profit margins at big commercial lenders, such as the banking units of Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., because they fund the loans with customer deposits and hold them themselves. Mortgage originations at Japanese banks were down 10 percent in the three months ended December from a year earlier.

Aruhi’s loans are securitized and sold to investors. The company gets fees for originating the loans, but doesn’t carry the risk of the borrowers defaulting once they’re sold. Hamada says the model is different from the securitization of subprime loans that triggered the global financial crisis. “We provide loans to appropriate borrowers,” he says.

Bad Loans

Indeed, there are very few problems with bad loans in Japan these days. The ratio of non-performing loans at the country’s banks has tumbled over the past two decades, to 1.2 percent in September 2017 from 8.4 percent in March 2002, according to data from the Financial Services Agency.

Aruhi is taking on the giant lenders on price. For example, one of its fixed-rate mortgages, which has terms of as long as 35 years and requires a 20 percent downpayment, offers a 0.72 percent interest rate for the first 10 years and 0.97 percent thereafter. That’s the most popular product in the category of loans with a fixed rate for the entire term, according to price-comparison site Kakaku.com.

The company also has an unconventional leader. Before he joined Hoya, Hamada worked at companies including computer-maker Dell Inc., where he served as president of the Japan unit and vice president of the U.S. headquarters. He’s known people at Carlyle since they worked together on a joint investment when he was Hoya’s chief operating officer.

‘Rough Diamond’

“I’m not a specialist or professional in the financial industry,” he said. “But I became interested because this company is a rough diamond.”

The outstanding balance of housing loans originated by Aruhi stood at 2.7 trillion yen ($25 billion) as of March 2017, up 42 percent from March 2014. Home loans at MUFG, the country’s largest lender, rose 0.4 percent to 13.6 trillion yen in the same period. Aruhi forecasts 4.6 billion yen in net income for the year ended March, up 43 percent from the previous 12 months.

“We’re aiming to increase profit by 15 percent a year” over the next five years, Hamada said.

Carlyle reduced its stake to 35 percent from 85 percent in December when Aruhi listed shares on the Tokyo Stock Exchange. It remains the largest shareholder. Aruhi has climbed 18 percent since its debut, while the Topix Banks Index lost 9.1 percent.

“Overtaking the megabanks isn’t that unrealistic,” said Nana Otsuki, chief analyst at Monex Inc. in Tokyo. “But the company needs a strategy to make individual customers choose its home loans.”

Less Interested

Otsuki says the megabanks have become less interested in mortgages because of the thin margins. “They want to do other business instead,” she says. But if interest rates rise, that might change, which would be a threat to Aruhi, Otsuki says.

MUFG will continue to actively provide mortgages as one of its major products, spokesman Ryuta Shimada said.

Another issue is that low inflation rates can also weigh on mortgage demand, says Naoki Fujiwara, chief fund manager of Shinkin Asset Management Co. in Tokyo. “The value of things doesn’t increase,” he said. “Interest rates remain low, so people don’t need to push themselves to buy houses.”

But Hamada is unperturbed. He plans to increase Aruhi’s loan outlets to about 240 over the next five years from about 130 now. He’ll also consider acquisitions. As for Carlyle, he doesn’t expect the private equity firm to be still around by then. (Carlyle declined to comment about its exit plan.)

It’s up to them, Hamada said. But “they may not be with us in five years.”

©2018 Bloomberg L.P.