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

Thematic (Sector/Industry)

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave of ‘Value over Momentum’ buying, we expect the market to return sharply to reality in October, leaving Japanese bank stocks in danger of sinking back to those mid-August lows, if not lower.
Share price performance in the April-September 2019 1st Half of the FY3/2020 fiscal year showed negative returns across the Japanese banking sector for all but a handful of largely-illiquid small banks. October starts with an increase in Japanese consumption tax to 10%, and may end with Britain crashing out of the EU with no deal whatsoever. If investors move to ‘risk off’, with global markets overshadowed by concerns that the global economy may be teetering on recession as the US-China ‘trade war’ continues, we expect the Yen to strengthen as part of a ‘flight to safety’: not good for Japanese bank stocks generally.
The rise in consumption tax is a risky move for Japanese Prime Minister Shinzo Abe, as past increases have been followed by a collapse in consumer spending. Any attempts by the Bank of Japan to head off an economic slowdown by resorting to more quantitative easing spells bad news for the embattled Japanese banks, especially the regionals and secondary regionals which remain overly-reliant on interest income. It is all looking rather unpleasant. Caveat Emptor! (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks in 2019.

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave of ‘Value over Momentum’ buying, we expect the market to return sharply to reality in October, leaving Japanese bank stocks in danger of sinking back to those mid-August lows, if not lower.
Share price performance in the April-September 2019 1st Half of the FY3/2020 fiscal year showed negative returns across the Japanese banking sector for all but a handful of largely-illiquid small banks. October starts with an increase in Japanese consumption tax to 10%, and may end with Britain crashing out of the EU with no deal whatsoever. If investors move to ‘risk off’, with global markets overshadowed by concerns that the global economy may be teetering on recession as the US-China ‘trade war’ continues, we expect the Yen to strengthen as part of a ‘flight to safety’: not good for Japanese bank stocks generally.
The rise in consumption tax is a risky move for Japanese Prime Minister Shinzo Abe, as past increases have been followed by a collapse in consumer spending. Any attempts by the Bank of Japan to head off an economic slowdown by resorting to more quantitative easing spells bad news for the embattled Japanese banks, especially the regionals and secondary regionals which remain overly-reliant on interest income. It is all looking rather unpleasant. Caveat Emptor! (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks in 2019.

Tokyo Kiraboshi Financial Group / Equity Bottom-Up

Since our bearish Insight on <a href="https://www.smartkarma.com/entities/5369" target="_blank" data-smartkarma-citation="entities:5369:1">Tokyo Kiraboshi Financial Group (7173 JP)</a> issued in November 2018, <a href="https://www.smartkarma.com/insights/tokyo-kiraboshi-fg-7173-jp-shooting-star" target="_blank" data-smartkarma-citation="insights:25657">Tokyo Kiraboshi FG (7173 JP): Shooting Star</a>, the stock’s subsequent performance has fully justified our pessimism, with the share price finishing CY2018 down 47.7% year-on-year (YoY).  Having touched a low of ¥1,504 on Christmas Day, the shares have recovered 10.1% to ¥1,656 as of Friday’s close: slightly better than the Topix Bank Index, which closed on Friday at 154.44, up 9.0% over the same period.  Trading on a forward-looking price/earnings multiple of 12.5x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.21x, TKFG looks cheap. This is deceptive. Adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues pushes the PER to over 18x: hardly a bargain.  Meanwhile, the group’s RoA and RoE ratios are woefully low, loan growth has collapsed since end-March 2018, deposits have fallen alarmingly, and main bank subsidiary Kiraboshi Bank is struggling to keep its net return on funds deployed (NRFD) in positive territory.  A stock best avoided.

Since our bearish Insight on Tokyo Kiraboshi Financial Group (7173 JP) issued in November 2018, Tokyo Kiraboshi FG (7173 JP): Shooting Star, the stock’s subsequent performance has fully justified our pessimism, with the share price finishing CY2018 down 47.7% year-on-year (YoY).  Having touched a low of ¥1,504 on Christmas Day, the shares have recovered 10.1% to ¥1,656 as of Friday’s close: slightly better than the Topix Bank Index, which closed on Friday at 154.44, up 9.0% over the same period.  Trading on a forward-looking price/earnings multiple of 12.5x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.21x, TKFG looks cheap. This is deceptive. Adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues pushes the PER to over 18x: hardly a bargain.  Meanwhile, the group’s RoA and RoE ratios are woefully low, loan growth has collapsed since end-March 2018, deposits have fallen alarmingly, and main bank subsidiary Kiraboshi Bank is struggling to keep its net return on funds deployed (NRFD) in positive territory.  A stock best avoided.

Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend and putting an end to the YTD pattern of lower highs. Both the TOPIX and Nikkei 225 have continued to improve, and now the TOPIX Small index is also bullishly inflecting. We provide a technical appraisal of major global markets, and highlight a number of actionable stocks within Japan, and across international markets.

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend and putting an end to the YTD pattern of lower highs. Both the TOPIX and Nikkei 225 have continued to improve, and now the TOPIX Small index is also bullishly inflecting. We provide a technical appraisal of major global markets, and highlight a number of actionable stocks within Japan, and across international markets.

MSCI EAFE Inflecting, Aided by Strength in Japan

'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. 

GOOD RESULTS/WEAK MARKET - It may just be because the ‘Obon’ holidays start next week, but the Japanese equity market has greeted the seventh straight quarter of improved earnings results with a ‘raspberry’. Almost all of the previous two week's gains have been unwound; the 50-day moving average has been breached on the downside and volumes have continued to grind lower. The Market Composite trailing-twelve-month (TTM) PE is now just 14.2x and the lowest level of the soon-to-be-extended ‘era’ of…

GOOD RESULTS/WEAK MARKET - It may just be because the ‘Obon’ holidays start next week, but the Japanese equity market has greeted the seventh straight quarter of improved earnings results with a ‘raspberry’. Almost all of the previous two week's gains have been unwound; the 50-day moving average has been breached on the downside and volumes have continued to grind lower. The Market Composite trailing-twelve-month (TTM) PE is now just 14.2x and the lowest level of the soon-to-be-extended ‘era’ of…

Japan Fortnightly Update: Market PE at ‘Abe-Era’ Low

Japan

The Bank of Iwate, Ltd. is a regional bank that mainly operates in Iwate prefecture and its surrounding area.  The Bank provides banking services such as deposits, loans, and exchange transactions.  The Bank of Iwate also provides other financial services including credit cards, leasing, and data processing.

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Bank Of Iwate (8345 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

Japanese Banks: A Chill Wind in October

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave...

J. Brian Waterhouse

Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality

Since our bearish Insight on Tokyo Kiraboshi Financial Group (7173 JP) issued in November 2018, Tokyo Kiraboshi FG (7173 JP): Shooting Star, the...

J. Brian Waterhouse

MSCI EAFE Inflecting, Aided by Strength in Japan

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend...

Vermilion Research

Japan Fortnightly Update: Market PE at ‘Abe-Era’ Low

GOOD RESULTS/WEAK MARKET - It may just be because the ‘Obon’ holidays start next week, but the Japanese equity market has greeted the seventh...

Campbell Gunn

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