Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

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.

Equity Bottom-Up

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

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results.

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Mizuho Financial Group (8411 JP)

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

Citigroup – Watch The Negative Jaws

CITIGROUP: Investors Shouldn't Be Fooled By The EPS Beat Led By A Massive Pre-emptive Provision Cut. Bank Has Negative Operating Jaws, Worsening...

Thomas J. Monaco

JP Morgan & Co. – Good Credit Omen For US and Global Banks

JPM Results, A Good Credit Omen For US and Global Banks. Reserve Reversals Likely To Be A Trend For 4Q20 Results Season -Although Issues Persist

Thomas J. Monaco

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

MUFG Receives Additional Dilution From Morgan Stanley In Another Overpriced US Transaction. Eaton Vance Was The Fourth In a Series of Wealth...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)