Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/fidea-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:17012:1" rel="noopener">Fidea Holdings (8713 JP) </a>from Miyagi Prefecture in Japan’s northern Tohoku Region has announced that Iwate-based <a href="https://www.smartkarma.com/entities/tohoku-bank-ltd" target="_blank" data-smartkarma-citation="entities:8169:1" rel="noopener">Tohoku Bank (8349 JP)</a> will become a wholly-owned subsidiary in October 2022, in an all-share deal.   The announcement, which was reported during market trading hours, sent both stock prices up almost 10% on Friday 2 July.  However, rather than presaging a new paradigm for these banks, the spike in the stock prices was simply a reminder of how essentially illiquid these stocks are. The shares retreated to their pre-announcement levels in the following week.Fidea Holdings is the holding company for the smallest of three banks from Yamagata Prefecture, Shonai Bank, and the smallest of two banks from Akita Prefecture, Hokuto Bank.  Tohoku Bank, from Iwate Prefecture, is the smallest of three banks based there, and roughly one-third the size of Fidea Holdings.  Far from being a ‘Band of Brothers’, the enlarged Fidea Holdings will, in effect, be little more than a school of minnows whose combined branch network of 149 branches, while nominally  covering the whole of the Tohoku Region, has little overlap; thus little opportunity to cut costs through closing competing branches or reducing the headcount significantly.  Significant inherent weaknesses in all three banks remain largely unaddressed.  It is difficult to see how simply integrating operations under a holding company structure will resolve them.While the announcement no doubt comes with the advance approval of the financial authorities, who are keen for regional banks to merge to strengthen their operations, it creates something of a dilemma for the Financial Services Authority (FSA) in that both institutions still owe taxpayers a combined total of ¥20 billion (US$181.8 million) in public funds.  Neither seems in a position to repay that capital any time soon, as we explain in this Insight.The Bank of Japan’s own ‘bad bank’, the Resolution &amp; Collection Corporation (RCC), is effectively the largest shareholder in both Fidea Holdings and Tohoku Bank through convertible preferred stock.  Will their debts be forgiven as part of the integration, or will the due date for the public funds repayment simply be extended for a further decade or so?  Will the RCC force conversion of its preferred stock into ordinary shares because of the merger, becoming overtly by far the largest shareholder?  What will be the impact of such a decision on investor sentiment for existing shareholders?  These are all important (and, for the time being, unanswerable) questions for investors.Foreign institutional investors own 12% of Fidea Holdings, and 4% of Tohoku Bank.  We fail to understand the attraction, given all the underlying weaknesses, as we detail in this Insight.  We view Friday’s ‘bounce’ in the stock prices of both Fidea Holdings and Tohoku Bank, on an unusual surge in trading volume, as a narrow ‘opportunity window’ for frustrated shareholders to exit both stocks and stay away thereafter.  That surge is over.  To those who were tempted to pile in we say:   Caveat Emptor! (May the Buyer Beware!).

Fidea Holdings (8713 JP) from Miyagi Prefecture in Japan’s northern Tohoku Region has announced that Iwate-based Tohoku Bank (8349 JP) will become a wholly-owned subsidiary in October 2022, in an all-share deal.   The announcement, which was reported during market trading hours, sent both stock prices up almost 10% on Friday 2 July.  However, rather than presaging a new paradigm for these banks, the spike in the stock prices was simply a reminder of how essentially illiquid these stocks are. The shares retreated to their pre-announcement levels in the following week.Fidea Holdings is the holding company for the smallest of three banks from Yamagata Prefecture, Shonai Bank, and the smallest of two banks from Akita Prefecture, Hokuto Bank.  Tohoku Bank, from Iwate Prefecture, is the smallest of three banks based there, and roughly one-third the size of Fidea Holdings.  Far from being a ‘Band of Brothers’, the enlarged Fidea Holdings will, in effect, be little more than a school of minnows whose combined branch network of 149 branches, while nominally  covering the whole of the Tohoku Region, has little overlap; thus little opportunity to cut costs through closing competing branches or reducing the headcount significantly.  Significant inherent weaknesses in all three banks remain largely unaddressed.  It is difficult to see how simply integrating operations under a holding company structure will resolve them.While the announcement no doubt comes with the advance approval of the financial authorities, who are keen for regional banks to merge to strengthen their operations, it creates something of a dilemma for the Financial Services Authority (FSA) in that both institutions still owe taxpayers a combined total of ¥20 billion (US$181.8 million) in public funds.  Neither seems in a position to repay that capital any time soon, as we explain in this Insight.The Bank of Japan’s own ‘bad bank’, the Resolution &amp; Collection Corporation (RCC), is effectively the largest shareholder in both Fidea Holdings and Tohoku Bank through convertible preferred stock.  Will their debts be forgiven as part of the integration, or will the due date for the public funds repayment simply be extended for a further decade or so?  Will the RCC force conversion of its preferred stock into ordinary shares because of the merger, becoming overtly by far the largest shareholder?  What will be the impact of such a decision on investor sentiment for existing shareholders?  These are all important (and, for the time being, unanswerable) questions for investors.Foreign institutional investors own 12% of Fidea Holdings, and 4% of Tohoku Bank.  We fail to understand the attraction, given all the underlying weaknesses, as we detail in this Insight.  We view Friday’s ‘bounce’ in the stock prices of both Fidea Holdings and Tohoku Bank, on an unusual surge in trading volume, as a narrow ‘opportunity window’ for frustrated shareholders to exit both stocks and stay away thereafter.  That surge is over.  To those who were tempted to pile in we say:   Caveat Emptor! (May the Buyer Beware!).

Fidea Holdings (9713 JP):  A School of Minnows

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.

Thematic (Sector/Industry)

Often, Japan’s banks do not follow global or regional themes. This is not so at present, where quarterly profit is strong. Mainstream banks have not yet reported, but we may expect similarly strong numbers.

Often, Japan’s banks do not follow global or regional themes. This is not so at present, where quarterly profit is strong. Mainstream banks have not yet reported, but we may expect similarly strong numbers. 

<a href="https://www.smartkarma.com/entities/fidea-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:17012:1" rel="noopener">Fidea Holdings (8713 JP)</a>, a bank holding company based in Miyagi Prefecture in Japan’s northern Tohoku Region, has a load of problems.  Its performance ratios are poor, its deposit base is declining, its loan portfolio is shrinking and its share price has fallen below ¥100.  Now it has slashed its earnings guidance for FY3/2020 by 64%, citing trading losses incurred by its Treasury Division in reducing group exposure to equities and REITs. Yet foreign institutional investors continue to own 16% of outstanding shares.  We fail to understand why.  Caveat Emptor!  (May the Buyer Beware!)

Fidea Holdings (8713 JP), a bank holding company based in Miyagi Prefecture in Japan’s northern Tohoku Region, has a load of problems.  Its performance ratios are poor, its deposit base is declining, its loan portfolio is shrinking and its share price has fallen below ¥100.  Now it has slashed its earnings guidance for FY3/2020 by 64%, citing trading losses incurred by its Treasury Division in reducing group exposure to equities and REITs. Yet foreign institutional investors continue to own 16% of outstanding shares.  We fail to understand why.  Caveat Emptor!  (May the Buyer Beware!)

Fidea Holdings (8713 JP): Shrinking, Sinking

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative performance.  Some regional bank stocks rose as much as 35% for the week, while even the mighty megabank <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-gro" target="_blank" rel="noopener" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> rose an eyebrow-raising 17%.  Regrettably, this is not evidence of a paradigm shift in the Japanese banking sector’s fundamental outlook, but more like a knee-jerk reaction to the Bank of Japan’s efforts to restore order to the somewhat chaotic financial markets through buying ETFs, perhaps aided – if financial media are to be believed  –  by government-owned pension funds such as the GPIF.The Yen has not weakened against the US Dollar, as one might have expected if international investors had been adopting a ‘risk on’ approach, but has failed several times to break though the Y112 level (as noted recently by Smartkarma contributor <a href="https://www.smartkarma.com/profiles/campbell-gunn" target="_blank" rel="noopener" data-smartkarma-citation="accounts:2531">Campbell Gunn</a>) and is now in sharp retreat: a ‘risk off’ reaction.  This is not good news for Japanese financial stocks.The fundamental outlook for Japan’s banks has not improved: if anything, the outlook for FY3/2021 and beyond is now even more challenging than FY3/2020 has been.  As we have frequently pointed out in past Insights, margins remain under downward pressure generally, many regional banks remain underwater on their core domestic businesses, credit costs are rising across the board for all banks and many may face substantial losses on their investment portfolios as they close their accounts for FY3/2020.  Under the circumstances, the recent strength in Japanese bank stock prices is logically unsustainable without further massive intervention by the Japanese financial authorities and the further disruption of price discovery.Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative performance.  Some regional bank stocks rose as much as 35% for the week, while even the mighty megabank Mitsubishi UFJ Financial (MUFG) (8306 JP) rose an eyebrow-raising 17%.  Regrettably, this is not evidence of a paradigm shift in the Japanese banking sector’s fundamental outlook, but more like a knee-jerk reaction to the Bank of Japan’s efforts to restore order to the somewhat chaotic financial markets through buying ETFs, perhaps aided – if financial media are to be believed  –  by government-owned pension funds such as the GPIF.The Yen has not weakened against the US Dollar, as one might have expected if international investors had been adopting a ‘risk on’ approach, but has failed several times to break though the Y112 level (as noted recently by Smartkarma contributor Campbell Gunn) and is now in sharp retreat: a ‘risk off’ reaction.  This is not good news for Japanese financial stocks.The fundamental outlook for Japan’s banks has not improved: if anything, the outlook for FY3/2021 and beyond is now even more challenging than FY3/2020 has been.  As we have frequently pointed out in past Insights, margins remain under downward pressure generally, many regional banks remain underwater on their core domestic businesses, credit costs are rising across the board for all banks and many may face substantial losses on their investment portfolios as they close their accounts for FY3/2020.  Under the circumstances, the recent strength in Japanese bank stock prices is logically unsustainable without further massive intervention by the Japanese financial authorities and the further disruption of price discovery.Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

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• RELATIVE PRICE SCORE - COMPANIES •
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/110/839/original/2019-12-17_10-16-56.png?1576545466" class="editor-image img-responsive" data-smartkarma-image-id="110839"></figure><div class="content-caption">Source: Japan Analytics</div>
COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can reveal attractive trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. 
</div><div><div>Following on from our previous Insight <a href="https://www.smartkarma.com/insights/japan-december-sector-peer-group-relative-price-scores-from-defensives-to-cylicals" target="_blank" data-smartkarma-citation="insights:35266" rel="noopener">December Sector &amp; Peer Group Relative Price Scores - From Defensives to Cylicals</a> which covered Sectors and Peer Groups, in the DETAIL section below, we update our list of Overbought and Oversold large-cap companies (market capitalisation over ¥100b) with the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4.5) and Oversold (RPS &lt;-2) companies, as well as the largest positive and negative 3-month Changes in RPS adding some stock-specific comments in each category.</div></div>


• RELATIVE PRICE SCORE - COMPANIES •
Source: Japan Analytics
COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can reveal attractive trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. 
Following on from our previous Insight December Sector &amp; Peer Group Relative Price Scores - From Defensives to Cylicals which covered Sectors and Peer Groups, in the DETAIL section below, we update our list of Overbought and Oversold large-cap companies (market capitalisation over ¥100b) with the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4.5) and Oversold (RPS &lt;-2) companies, as well as the largest positive and negative 3-month Changes in RPS adding some stock-specific comments in each category.

🇯🇵 JAPAN • December Company Relative Price Scores - Opportunities in the Outliers

Japan

The 77 Bank, Ltd. is a regional bank in Tohoku area.  The Bank provides general banking services including deposits, loans, and exchange transactions. The Bank also provides others financial services such as securities brokerage, trust banking, letter of credit, leasing, credit cards, and computer services.

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77 Bank Ltd/The (8341 JP)

Fidea Holdings (9713 JP): A School of Minnows

Fidea Holdings (8713 JP) has announced that Iwate-based Tohoku Bank (8349 JP) will become a wholly-owned subsidiary in October 2022, in an all...

J. Brian Waterhouse

Japan – Surge In December Profit

Mainstream Japan banks have not yet reported quarterly profit, but we may expect similarly strong numbers as indicated by those that have released...

Daniel Tabbush

Fidea Holdings (8713 JP): Shrinking, Sinking

Fidea Holdings (8713 JP), a bank holding company based in Miyagi Prefecture in Japan’s northern Tohoku Region, has a load of problems. Its...

J. Brian Waterhouse

Japanese Banks: End of March Blues

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative...

J. Brian Waterhouse

🇯🇵 JAPAN • December Company Relative Price Scores - Opportunities in the Outliers

• RELATIVE PRICE SCORE - COMPANIES • COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance...

Campbell Gunn

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