Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Sumitomo Mitsui Financial Group / Equity Bottom-Up

Interim FY3/2021 results for <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>, on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.

Interim FY3/2021 results for Sumitomo Mitsui Financial Group (8316 JP)  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival Mitsubishi UFJ Financial (MUFG) (8306 JP), on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.

SMFG (8316 JP):  Rising to the Challenge

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

Interim results for <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from <a href="https://www.smartkarma.com/entities/morgan-stanley" target="_blank" data-smartkarma-citation="entities:1122:1" rel="noopener">Morgan Stanley (MS US)</a> to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>, on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.

Interim results for Mitsubishi UFJ Financial (MUFG) (8306 JP)highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from Morgan Stanley (MS US) to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival Sumitomo Mitsui Financial Group (8316 JP), on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.

Thematic (Sector/Industry)

The COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans, but it is suspected that the vast majority of these emergency loans have been made at virtually no profit margin for the banks.  Moreover, most of this money appears to have been redeposited with the banks for safe-keeping until really needed.  Meanwhile, the rise in workers working from home and restrictions on international travel has resulted in substantially lower discretionary spending (such as on holiday travel) and higher levels of saving.
The cash piles are turning into cash mountains at the banks, prompting some banks to withdraw some deposit products and suspend branch counter operations for cash deposits, cash withdrawals and currency exchange.
It’s a whole new world of pain for Japan’s embattled banks.

The COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans, but it is suspected that the vast majority of these emergency loans have been made at virtually no profit margin for the banks.  Moreover, most of this money appears to have been redeposited with the banks for safe-keeping until really needed.  Meanwhile, the rise in workers working from home and restrictions on international travel has resulted in substantially lower discretionary spending (such as on holiday travel) and higher levels of saving.
The cash piles are turning into cash mountains at the banks, prompting some banks to withdraw some deposit products and suspend branch counter operations for cash deposits, cash withdrawals and currency exchange.
It’s a whole new world of pain for Japan’s embattled banks.

After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.

After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.

The stock price of the tiny, embattled <a href="https://www.smartkarma.com/entities/towa-bank-ltd" target="_blank" data-smartkarma-citation="entities:18283:1" rel="noopener">Towa Bank (8558 JP)</a>, a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>.Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

The stock price of the tiny, embattled Towa Bank (8558 JP), a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist Sbi Holdings (8473 JP).Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Towa Bank (8558 JP):  Another Notch in the Bedpost

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Mitsubishi UFJ Financial (MUFG) (8306 JP)

SMFG (8316 JP): Rising to the Challenge

Interim FY3/2021 results for SMFG (8316 JP) showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, despite margins under...

J. Brian Waterhouse

MUFG (8306 JP): Wavering in the Ranks

Interim results for MUFG (8306 JP) highlighted the fragility of the profit contribution from some of its recent overseas acquisitions, with credit...

J. Brian Waterhouse

Japanese Banks: Mountains of Money

The cash piles at the banks are turning into cash mountains, prompting some to withdraw some deposit products and suspend counter operations for...

J. Brian Waterhouse

Japanese Bank Lending: Flatlining

Loan and deposit data for Japanese banks released by both the BoJ and the JBA for September 2020 confirm that the ‘dash for cash’ by major...

J. Brian Waterhouse

Towa Bank (8558 JP): Another Notch in the Bedpost

The evidence suggests that this is not a 'white knight' riding to the rescue, but another opportunity for Yoshitaka Kitao to gain access to a...

J. Brian Waterhouse

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