Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

Gotōbi (or 五十日 in Japanese) is any date with a ‘5’ or a ‘0’ in it.  In Japan, traditionally, it is a day when money owed is collected and accounts due are settled.  Fridays are always busy days commercially, but when Friday is also a gotōbi things get particularly hectic.  It is a busy day for the banks, too, with a noticeable rise in customer visits to branches and a surge in across-counter transactions, especially in cash and securities.Last Friday, 20th August 2021, was a gotōbi. Imagine, then, the horror that seized bank staff at all 450+ branches of Mizuho Bank (not to mention at its sister organisation Mizuho Trust Bank, where the same thing happened), as 09:00am bank opening time approached, customers were queuing up, and they realised that none of the computer terminals at their counters were working.  None of them; nationwide.Curiously, all the ATMs (source of two previous systems failures) were working normally, as was Mizuho Bank’s Internet banking platform, ‘Mizuho Direct’.  By 10:00am on Friday, most operations were back up and running (except for some foreign currency remittances) and by midday all systems appear to have returned to normal operation.  Management is still trying to establish the cause of the glitch.This now makes the 5th time in 2021 that Mizuho Bank, the principal commercial banking subsidiary of megabank holding company <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> (MHFG), has had a systems failure.  That it happened on a gotōbi was embarrassing enough in view of the inconvenience to the many customers visiting the bank’s branches at the time.  Doubly embarrassing for management, inspectors from the Financial Services Agency (FSA) were in the process of winding-up their detailed and long inspection of the bank over the four previous systems malfunctions, with a view to deciding whether the bank should be disciplined for the successive failures through the issuance of a Business Correction Order.  That issuance would now seem to be an inevitability.  A formal demand for a detailed report into the incident (報告微求命令 or hōkoku bikyū meirei in Japanese) has already been issued by the FSA to Mizuho Trust Bank as well as to the parent MHFG.Senior management clearly has much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation.  MHFG has time and again promised much but then has either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and where ultimately delivering value remains frustratingly elusive.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Gotōbi (or 五十日 in Japanese) is any date with a ‘5’ or a ‘0’ in it.  In Japan, traditionally, it is a day when money owed is collected and accounts due are settled.  Fridays are always busy days commercially, but when Friday is also a gotōbi things get particularly hectic.  It is a busy day for the banks, too, with a noticeable rise in customer visits to branches and a surge in across-counter transactions, especially in cash and securities.Last Friday, 20th August 2021, was a gotōbi. Imagine, then, the horror that seized bank staff at all 450+ branches of Mizuho Bank (not to mention at its sister organisation Mizuho Trust Bank, where the same thing happened), as 09:00am bank opening time approached, customers were queuing up, and they realised that none of the computer terminals at their counters were working.  None of them; nationwide.Curiously, all the ATMs (source of two previous systems failures) were working normally, as was Mizuho Bank’s Internet banking platform, ‘Mizuho Direct’.  By 10:00am on Friday, most operations were back up and running (except for some foreign currency remittances) and by midday all systems appear to have returned to normal operation.  Management is still trying to establish the cause of the glitch.This now makes the 5th time in 2021 that Mizuho Bank, the principal commercial banking subsidiary of megabank holding company Mizuho Financial Group (8411 JP) (MHFG), has had a systems failure.  That it happened on a gotōbi was embarrassing enough in view of the inconvenience to the many customers visiting the bank’s branches at the time.  Doubly embarrassing for management, inspectors from the Financial Services Agency (FSA) were in the process of winding-up their detailed and long inspection of the bank over the four previous systems malfunctions, with a view to deciding whether the bank should be disciplined for the successive failures through the issuance of a Business Correction Order.  That issuance would now seem to be an inevitability.  A formal demand for a detailed report into the incident (報告微求命令 or hōkoku bikyū meirei in Japanese) has already been issued by the FSA to Mizuho Trust Bank as well as to the parent MHFG.Senior management clearly has much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation.  MHFG has time and again promised much but then has either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and where ultimately delivering value remains frustratingly elusive.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Mizuho Financial Group (8411 JP):  Gotohbi Gremlins

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

*Solid Result, But Challenges Ahead: Bank Central Asia (BBCA.IJ) [BCA] reported 2Q21 results of IDR 7.4 tn, improving IDR 376 mn (5.3%) on a linked quarter basis. BCA’s positive operating results were highlighted by non-interest income growth and a decline in operating expenses; and*Credit Challenges Persist, As Credit Break Re-Accelerates: By our calculation, we find that 2Q21 net new NPLs amounted to IDR 2.4 tn for an annualized rate of increase of 92.4%, comparing very unfavorably with 1Q21’s IDR 742 bn and 28.7%, respectively. Despite the recent acceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio. Although, we worry the softness in current macro conditions.

*Solid Result, But Challenges Ahead: Bank Central Asia (BBCA.IJ) [BCA] reported 2Q21 results of IDR 7.4 tn, improving IDR 376 mn (5.3%) on a linked quarter basis. BCA’s positive operating results were highlighted by non-interest income growth and a decline in operating expenses; and*Credit Challenges Persist, As Credit Break Re-Accelerates: By our calculation, we find that 2Q21 net new NPLs amounted to IDR 2.4 tn for an annualized rate of increase of 92.4%, comparing very unfavorably with 1Q21’s IDR 742 bn and 28.7%, respectively. Despite the recent acceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio. Although, we worry the softness in current macro conditions.

Bank Central Asia – Good, But New Credit Challenges Ahead

*Weak Numerics: Bangkok Bank (BBL.TB) [BBL] reported 2Q21 bottom-line results of THB 6.4 bn, declining THB 566 mn (8.2%) on a linked quarter basis. Core operating results were far worse, however, coming in at THB 553 mn or down 86.2% over the same period; and*Credit Risk Remains Elevated: We find that BBL’s annualized net new NPLs during the period are THB 4.2 bn or 8.3% annualized. Given the increase in net new NPLs, moratorium credits are unknown and remain a wild card, and that COVID-19 continues to wreak havoc, we find that while loss reserves are hefty, the aggressive push to build reserves and de minimis NCOs despite the consistently high NPLs may suggest a big clean-up is coming.

*Weak Numerics: Bangkok Bank (BBL.TB) [BBL] reported 2Q21 bottom-line results of THB 6.4 bn, declining THB 566 mn (8.2%) on a linked quarter basis. Core operating results were far worse, however, coming in at THB 553 mn or down 86.2% over the same period; and*Credit Risk Remains Elevated: We find that BBL’s annualized net new NPLs during the period are THB 4.2 bn or 8.3% annualized. Given the increase in net new NPLs, moratorium credits are unknown and remain a wild card, and that COVID-19 continues to wreak havoc, we find that while loss reserves are hefty, the aggressive push to build reserves and de minimis NCOs despite the consistently high NPLs may suggest a big clean-up is coming.

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.  

<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

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) ADR (MUFG US)

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Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

Mizuho Financial Group (8411 JP): Gotohbi Gremlins

Mizuho Bank has suffered its 5th systems failure so far this year, and the FSA is not amused. Neither should shareholders be. Caveat Emptor! (May...

J. Brian Waterhouse

Bank Central Asia – Good, But New Credit Challenges Ahead

BANK CENTRAL ASIA: BCA reported a 5.3% QOQ 2Q21 results increase. Despite the 92.4% net new NPLs increase, we calculate that loss reserves are...

Thomas J. Monaco

Bangkok Bank – Rotten To The Core

BANGKOK BANK: BBL reported a 2Q21 QOQ core operating results decline of 86.2%. The increase in net new NPLs, unknown moratorium credits, and COVID...

Thomas J. Monaco

Bank of America - Brian’s Song

Bank of America: USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 results exceeded 1Q21. Net new NPLs decelerated from...

Thomas J. Monaco

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

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