Alpha-Centric ESG Research

Kyle Rudden

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in <a href="https://www.smartkarma.com/insights/bitcoin-on-balance-sheets-indirect-crypto-exposure-considerations-for-crypto-leery-esg-investors" target="_blank" data-smartkarma-citation="insights:52207" rel="noopener">Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors</a>. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates <a href="https://www.smartkarma.com/entities/bitcoin-usd" target="_blank" data-smartkarma-citation="entities:25895:1" rel="noopener">Bitcoin (XBT)</a>'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates Bitcoin (XBT)'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Ever more, ever higher: deposits in Japan keep flooding into the banks as each month passes, reaching an all-time high at the end of April 2021 of ¥859.952 trillion (US$7.88 trillion), according to data provided by the Japanese Bankers Association (JBA).  It was the 175th continuous month of increase, according to the JBA, although the rate of increase on both a MoM (+0.6%) and YoY (+8.2%) basis did not set a new record, reflecting a barely perceptible slowdown in the inflow.According to the Bank of Japan (BoJ), average deposit balances in April 2021 rose +1.5% MoM, or by ¥15.772 trillion (US$144.7 billion), to ¥1,083.032 trillion (US$9.936 trillion); this was also an all-time high level.  On a YoY basis, according to the BoJ data, average deposit balances rose by a remarkable +8.4%, or by ¥83.991 trillion (US$770.56 billion), so well short of last month’s record +8.7% YoY growth rate.What to do with all that cash?  Despite the bankers’ best efforts to lend out those funds to help support an economic recovery, the rate of inflow far surpasses the rate of outflow.  So much so that major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 48.8%, with lending margins remaining under constant downward pressure.  Japanese banks’ investments in Japanese government bonds (JGBs) are currently at their highest level in 5 years, according to Bank of Japan data, even though yields are minimal at best, and negative-yielding in many cases.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/232/original/8300-WR-JBanks-2021-0531-Evermore-JBAData-LDR-MajorvsReg-2017-2021.jpg?1622461040" class="editor-image img-responsive" data-smartkarma-image-id="210232"></figure></section>“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Ever more, ever higher: deposits in Japan keep flooding into the banks as each month passes, reaching an all-time high at the end of April 2021 of ¥859.952 trillion (US$7.88 trillion), according to data provided by the Japanese Bankers Association (JBA).  It was the 175th continuous month of increase, according to the JBA, although the rate of increase on both a MoM (+0.6%) and YoY (+8.2%) basis did not set a new record, reflecting a barely perceptible slowdown in the inflow.According to the Bank of Japan (BoJ), average deposit balances in April 2021 rose +1.5% MoM, or by ¥15.772 trillion (US$144.7 billion), to ¥1,083.032 trillion (US$9.936 trillion); this was also an all-time high level.  On a YoY basis, according to the BoJ data, average deposit balances rose by a remarkable +8.4%, or by ¥83.991 trillion (US$770.56 billion), so well short of last month’s record +8.7% YoY growth rate.What to do with all that cash?  Despite the bankers’ best efforts to lend out those funds to help support an economic recovery, the rate of inflow far surpasses the rate of outflow.  So much so that major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 48.8%, with lending margins remaining under constant downward pressure.  Japanese banks’ investments in Japanese government bonds (JGBs) are currently at their highest level in 5 years, according to Bank of Japan data, even though yields are minimal at best, and negative-yielding in many cases.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Bank Deposits:  In the Land of Evermore

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/200/original/JBanks-2021-0531-TPNBNKvsTPX-2021.jpg?1622450797" class="editor-image img-responsive" data-smartkarma-image-id="210200"></figure></section>

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

While most banks globally are seeing sharply lower credit costs in the March 2021 quarter, this is not the case in India. There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial weakness and limited central bank relief.

While most banks globally are seeing sharply lower credit costs in the March 2021 quarter, this is not the case in India. There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial weakness and limited central bank relief. 

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Last year, 55 Japanese listed companies received shareholder proposals in the June AGM season. Of course, some of the shareholder proposals made are spurious and made for a laugh, but last year <a href="https://www.nikkei.com/article/DGXMZO60929010Z20C20A6EA1000/?s=5" target="_blank" rel="noopener">23 companies received proposals from activist investors</a>, up from 16 in June 2019.  Data collated by <a href="https://www.whitecase.com/publications/alert/japans-2020-proxy-season-results-announced" target="_blank" rel="noopener">White &amp; Case</a> in summer 2020 showed that of the 22 companies which received activist proposals (their number is different than IR Japan's), 30 proposals to those 22 companies received more than 20% of votes, and just under half (14) received 30%. Various commentators noted that for the 2020 AGM season, the impact of COVID-19 and the fact that many meetings became virtual meetings, along with the fact that the lockdowns were of unknown effect but revenue and profit impact in the year ahead was deemed to be severe, many activist shareholders which would have proposed large buybacks as a use of excess cash may have decided to temper their request. Where they did not, often the response from management was that because of the significant potential impact of covid-19 mitigation/safety/response measures, large buybacks using up significant cash (just when Japanese corporates had pulled all available cash out of credit lines) was perhaps not wise. Importantly, no measure among the activists shareholder measures last year gained 50% of the vote on that agenda item let alone two-thirds needed to achieve a change in the Articles of Incorporation. Such wins remain rare. However, as White &amp; Case points out, an item which <a href="https://www.smartkarma.com/entities/mizuho-financial-group-inc" target="_blank" data-smartkarma-citation="entities:219:1" rel="noopener">Mizuho Financial Group (8411 JP)</a> management had objected to in 2015, 2016, 2017 and was rejected (shareholder input on income allocation) but with significant support of 41%, 48%, and 43% respectively in those years was re-suggested last year by management itself where the measure received 98% approval.Sometimes these messages get through. But importantly, they are a message because shareholders send them (see <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a> for more thoughts on the matter). The measure proposed by the activist to Mizuho was actually an individual activist named Mitsutaka YAMAGUCHI and he held 30,000 shares, giving him the right to make the proposal.*<div class="content-remarks">*The minimum criteria are that a shareholder hold 300 voting rights or 1.0% of shares outstanding for at least six months to be able to put a proposal to shareholders at an AGM. And based on a change in the Companies Act which should have gone into effect on March 1, the content for such shareholder proposals is restricted now to one of ten areas. </div>The deadline for such shareholder proposals is usually 8 weeks prior to the AGM which means in most cases for June-end AGMs, they had to be submitted by the end of April. I expect we will see a flurry of company reports of new shareholder proposals in the days ahead.This insight serves as an anchor for selected insights to follow which discuss shareholder proposals on specific companies, how to get information, and follow-up where notable, from shareholder proxy services, etc.

Last year, 55 Japanese listed companies received shareholder proposals in the June AGM season. Of course, some of the shareholder proposals made are spurious and made for a laugh, but last year 23 companies received proposals from activist investors, up from 16 in June 2019.  Data collated by White &amp; Case in summer 2020 showed that of the 22 companies which received activist proposals (their number is different than IR Japan's), 30 proposals to those 22 companies received more than 20% of votes, and just under half (14) received 30%. Various commentators noted that for the 2020 AGM season, the impact of COVID-19 and the fact that many meetings became virtual meetings, along with the fact that the lockdowns were of unknown effect but revenue and profit impact in the year ahead was deemed to be severe, many activist shareholders which would have proposed large buybacks as a use of excess cash may have decided to temper their request. Where they did not, often the response from management was that because of the significant potential impact of covid-19 mitigation/safety/response measures, large buybacks using up significant cash (just when Japanese corporates had pulled all available cash out of credit lines) was perhaps not wise. Importantly, no measure among the activists shareholder measures last year gained 50% of the vote on that agenda item let alone two-thirds needed to achieve a change in the Articles of Incorporation. Such wins remain rare. However, as White &amp; Case points out, an item which Mizuho Financial Group (8411 JP) management had objected to in 2015, 2016, 2017 and was rejected (shareholder input on income allocation) but with significant support of 41%, 48%, and 43% respectively in those years was re-suggested last year by management itself where the measure received 98% approval.Sometimes these messages get through. But importantly, they are a message because shareholders send them (see Japan Needs More Cowbell for more thoughts on the matter). The measure proposed by the activist to Mizuho was actually an individual activist named Mitsutaka YAMAGUCHI and he held 30,000 shares, giving him the right to make the proposal.**The minimum criteria are that a shareholder hold 300 voting rights or 1.0% of shares outstanding for at least six months to be able to put a proposal to shareholders at an AGM. And based on a change in the Companies Act which should have gone into effect on March 1, the content for such shareholder proposals is restricted now to one of ten areas. The deadline for such shareholder proposals is usually 8 weeks prior to the AGM which means in most cases for June-end AGMs, they had to be submitted by the end of April. I expect we will see a flurry of company reports of new shareholder proposals in the days ahead.This insight serves as an anchor for selected insights to follow which discuss shareholder proposals on specific companies, how to get information, and follow-up where notable, from shareholder proxy services, etc. 

Japan Activism:  Shareholder Proposals for the Q2 AGM Season Start Trickling In

Japan

Mizuho Financial Group, Inc. provides comprehensive financial services through its subsidiaries. The Group provides variety of financial services such as general banking, securities brokerage, trust banking, and assets management.

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Mizuho Financial Group (8411 JP)

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Bitcoin holdings by issuers and investors is driving crypto custody demand. Big banks are stepping. A big opportunity, but some ESG investors might...

Kyle Rudden

Japanese Bank Deposits: In the Land of Evermore

Ever more, ever higher: deposits in Japan keep flooding into the banks. Despite the bankers’ best efforts to lend out those funds, the rate of...

J. Brian Waterhouse

Japanese Bank Lending: Mean Reversion

The lending ‘boom’, triggered by companies rushing to secure bank funding in anticipation of extended nationwide ‘lock-downs’ to counteract the...

J. Brian Waterhouse

India – Not Time

There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial...

Daniel Tabbush

Japan Activism: Shareholder Proposals for the Q2 AGM Season Start Trickling In

Japan AGM season starts in earnest in mid-June but the deadline for shareholder proposals is 8 weeks prior. 8 June AGM Companies so far received...

Travis Lundy

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