Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Was the rise over the last two decades of <a href="https://www.smartkarma.com/entities/6267" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank Ltd (8358 JP)</a> to be the darling of the foreign investment community until this year – when it all came crashing down - simply based on illusion, a dream with no substance?  How could a bank with one of the lowest overhead ratios (OHR) in the industry, margins that were three times as wide as the industry average, and the only bank in Japan to have consistently reported rising loan yields and profit margins, fall so far into disrepute in such a short time?  In this note we shall examine how the bank rose from obscurity to greatness, only to lose its way disastrously as both external and internal pressures built on management and staff.With the bank’s reputation in shreds, we expect that it may take years – if ever - for the stock price to recover to anything close to even its November 2017 levels.  In the short-term, we expect share price volatility to continue in reaction to the FSA’s findings, to the probable issue of a Business Improvement Order by the FSA against the bank, to the bank’s interim results (due out in mid-November) and probable downward revision to full-year guidance, and to the likelihood of further losses and provisioning in respect of the bank’s extensive and now highly-problematic investment-related property lending.  While we believe that further downside may be limited, this stock is truly for players of the Long Game only; those investors with shorter investment time-horizons should probably avoid the stock altogether.

Was the rise over the last two decades of Suruga Bank Ltd (8358 JP) to be the darling of the foreign investment community until this year – when it all came crashing down - simply based on illusion, a dream with no substance?  How could a bank with one of the lowest overhead ratios (OHR) in the industry, margins that were three times as wide as the industry average, and the only bank in Japan to have consistently reported rising loan yields and profit margins, fall so far into disrepute in such a short time?  In this note we shall examine how the bank rose from obscurity to greatness, only to lose its way disastrously as both external and internal pressures built on management and staff.With the bank’s reputation in shreds, we expect that it may take years – if ever - for the stock price to recover to anything close to even its November 2017 levels.  In the short-term, we expect share price volatility to continue in reaction to the FSA’s findings, to the probable issue of a Business Improvement Order by the FSA against the bank, to the bank’s interim results (due out in mid-November) and probable downward revision to full-year guidance, and to the likelihood of further losses and provisioning in respect of the bank’s extensive and now highly-problematic investment-related property lending.  While we believe that further downside may be limited, this stock is truly for players of the Long Game only; those investors with shorter investment time-horizons should probably avoid the stock altogether.

Suruga Bank (8358 JP): Purging the Augean Stables 2018 - Part 3

Fukuoka Financial Group / Equity Bottom-Up

It has taken some 30 months of waiting, two postponements, the threat of a ‘cease and desist order’ (which would have been the first such order issued by the financial authorities since the end of World War II) and endless negotiations with the Japan Fair Trade Commission (FTC) over anti-monopoly issues, but the merger between <a href="https://www.smartkarma.com/entities/3712" target="_blank" data-smartkarma-citation="entities:3712:1">Fukuoka Financial Group (8354 JP)</a> and <a href="https://www.smartkarma.com/entities/11060" target="_blank" data-smartkarma-citation="entities:11060:1">Eighteenth Bank (8396 JP)</a> has finally been given the green light by the FTC, creating a formidable banking powerhouse in Kyushu, the southernmost of Japan’s four main islands, with combined assets in excess of ¥23.57 trillion (US$214.3 billion) and thus firmly cementing FFG’s position as the largest regional banking group in Japan.  The banks hope to consummate the merger in April 2019, with Eighteenth Bank ultimately being merged into FFG member Shinwa Bank in April 2020.

It has taken some 30 months of waiting, two postponements, the threat of a ‘cease and desist order’ (which would have been the first such order issued by the financial authorities since the end of World War II) and endless negotiations with the Japan Fair Trade Commission (FTC) over anti-monopoly issues, but the merger between Fukuoka Financial Group (8354 JP) and Eighteenth Bank (8396 JP) has finally been given the green light by the FTC, creating a formidable banking powerhouse in Kyushu, the southernmost of Japan’s four main islands, with combined assets in excess of ¥23.57 trillion (US$214.3 billion) and thus firmly cementing FFG’s position as the largest regional banking group in Japan.  The banks hope to consummate the merger in April 2019, with Eighteenth Bank ultimately being merged into FFG member Shinwa Bank in April 2020.

Fukuoka Financial Group (8354 JP): Southern Comfort

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Last week was a week of earnings releases for Japan analysts in this Smartkarma community. I have picked up several earnings insights from the Japan side, which I strongly feel you should check out if you already haven't read yet. But my headline insight of the week from Japan side is <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a>'s another thought-provoking piece on his Japan Passive theme: <a href="https://www.smartkarma.com/insights/japan-passive-dovish-meeting-boj-to-buy-less-nikkei-225" target="_blank">JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225</a>. As for our Korean insights, we didn't have as many earnings insights as Japan…

Last week was a week of earnings releases for Japan analysts in this Smartkarma community. I have picked up several earnings insights from the Japan side, which I strongly feel you should check out if you already haven't read yet. But my headline insight of the week from Japan side is Travis Lundy's another thought-provoking piece on his Japan Passive theme: JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225. As for our Korean insights, we didn't have as many earnings insights as Japan…

Smartkarma's Week That Was in JP/KR: BOJ Again, JP/KR Earnings! & SK Telecom

Concordia Financial Group, Ltd / Equity Bottom-Up

Most foreign institutional investors will likely be unfamiliar with the name Higashi-Nippon Bank (HNPB), a small Tokyo-based secondary regional bank and one of the two commercial banks at the core of <a href="https://www.smartkarma.com/entities/22704" target="_blank" data-smartkarma-citation="entities:22704:1">Concordia Financial Group, Ltd (7186 JP)</a>, but they will almost certainly be familiar with HNPB’s other group partner and Japan’s largest regional bank, the Bank of Yokohama.However, it is the little Higashi-Nippon Bank, rather than its more famous and vastly larger partner, that has been much in the…

Most foreign institutional investors will likely be unfamiliar with the name Higashi-Nippon Bank (HNPB), a small Tokyo-based secondary regional bank and one of the two commercial banks at the core of Concordia Financial Group, Ltd (7186 JP), but they will almost certainly be familiar with HNPB’s other group partner and Japan’s largest regional bank, the Bank of Yokohama.However, it is the little Higashi-Nippon Bank, rather than its more famous and vastly larger partner, that has been much in the…

Concordia FG (7186.JP): An Embarrassment of Riches

Japan

Concordia Financial Group, Ltd. is a holding company established through the merger of Bank of Yokohama and Higashi-Nippon Bank. The Company provides banking services and other financial services.

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Concordia Financial Group, Ltd (7186 JP)

Suruga Bank (8358 JP): Purging the Augean Stables 2018 - Part 3

Was the rise over the last two decades of Suruga Bank Ltd (8358 JP) to be the darling of the foreign investment community until this year – when it...

J. Brian Waterhouse

Fukuoka Financial Group (8354 JP): Southern Comfort

It has taken some 30 months of waiting, two postponements, the threat of a ‘cease and desist order’ (which would have been the first such order...

J. Brian Waterhouse

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in...

Campbell Gunn

Smartkarma's Week That Was in JP/KR: BOJ Again, JP/KR Earnings! & SK Telecom

Last week was a week of earnings releases for Japan analysts in this Smartkarma community. I have picked up several earnings insights from the...

Sanghyun Park

Concordia FG (7186.JP): An Embarrassment of Riches

Most foreign institutional investors will likely be unfamiliar with the name Higashi-Nippon Bank (HNPB), a small Tokyo-based secondary regional...

J. Brian Waterhouse

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