Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) came to +9.7% YoY in December 2020: the highest YoY growth level ever recorded, surpassing the previous record of +9.5% YoY growth rate set back in August and far exceeding the banks’ aggregate loan growth which declined in December 2020 to just +5.3% YoY.  This represented the 171st consecutive month of YoY deposit growth for all JBA member banks.  Banks have more money than they know what to do with, and not nearly enough borrowers to lend to.Taking a closer look at the data, major bank deposit balances have actually fallen in five of the last six months (November being the exception). In contrast to the major banks, deposit balances at both the regional and secondary regional banks continue to grow markedly, +8.9% YoY (a new all-time record) and +8.6% YoY (2nd-highest YoY growth rate ever), respectively.  Unsurprisingly, their loan-to-deposit ratios (LDRs) continue to deteriorate rapidly, although nowhere near the average LDR of the major banks which is now down to 51.4%.‘Profitless prosperity’ remains an ongoing reality for Japan’s banks: awash in cash, margins under relentless pressure and struggling to avoid yet another year of shareholder disappointment through further profits decline.  Some small local banks are already forecasting consolidated net losses for FY3/2021 that have little to do with the adverse economic impact of COVID-19 per se but reflect the difficult operating conditions for all Japanese banks in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/185/011/original/8300-WR-JBanks-2021-0126-EbbTide+TPNBNKvsTPX+in+2020.jpg?1611797731" class="editor-image img-responsive" data-smartkarma-image-id="185011"></figure></section>

Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) came to +9.7% YoY in December 2020: the highest YoY growth level ever recorded, surpassing the previous record of +9.5% YoY growth rate set back in August and far exceeding the banks’ aggregate loan growth which declined in December 2020 to just +5.3% YoY.  This represented the 171st consecutive month of YoY deposit growth for all JBA member banks.  Banks have more money than they know what to do with, and not nearly enough borrowers to lend to.Taking a closer look at the data, major bank deposit balances have actually fallen in five of the last six months (November being the exception). In contrast to the major banks, deposit balances at both the regional and secondary regional banks continue to grow markedly, +8.9% YoY (a new all-time record) and +8.6% YoY (2nd-highest YoY growth rate ever), respectively.  Unsurprisingly, their loan-to-deposit ratios (LDRs) continue to deteriorate rapidly, although nowhere near the average LDR of the major banks which is now down to 51.4%.‘Profitless prosperity’ remains an ongoing reality for Japan’s banks: awash in cash, margins under relentless pressure and struggling to avoid yet another year of shareholder disappointment through further profits decline.  Some small local banks are already forecasting consolidated net losses for FY3/2021 that have little to do with the adverse economic impact of COVID-19 per se but reflect the difficult operating conditions for all Japanese banks in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Banks:  Buddy, Can We Spare You a Dime !

Equity Bottom-Up

Concordia Financial Group, Ltd / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/concordia-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:22704:1" rel="noopener">Concordia Financial Group, Ltd (7186 JP)</a>, or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small Tokyo-based secondary regional bank, Higashi-Nippon Bank (HNPB).  Two years on from a lending scandal at HNPB that forced the HNPB president to step down, growth at CFG continues to be dogged by ongoing problems with the group’s junior partner.  HNPB reported a consolidated net loss in FY3/2020 and is now expected to record a further net loss in FY3/2021.
Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  However, CFG continues to significantly underperform the Topix Banks Index, with its share price down over 21% in the last six months. CFG is by far the worst-performing of the 4 remaining regional banks with market capitalisations greater than US$3bn.  This is despite a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, frequent share buybacks, and regular share cancellations.
Except for a brief rally in early March, the Topix Banks Index has notably underperformed Topix all year.  Within the regional banking sector, we much prefer Chiba Bank (8331 JP) to CFG for its strong, scandal-free management and long-standing profits ‘track record’.

Concordia Financial Group, Ltd (7186 JP), or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small Tokyo-based secondary regional bank, Higashi-Nippon Bank (HNPB).  Two years on from a lending scandal at HNPB that forced the HNPB president to step down, growth at CFG continues to be dogged by ongoing problems with the group’s junior partner.  HNPB reported a consolidated net loss in FY3/2020 and is now expected to record a further net loss in FY3/2021.
Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  However, CFG continues to significantly underperform the Topix Banks Index, with its share price down over 21% in the last six months. CFG is by far the worst-performing of the 4 remaining regional banks with market capitalisations greater than US$3bn.  This is despite a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, frequent share buybacks, and regular share cancellations.
Except for a brief rally in early March, the Topix Banks Index has notably underperformed Topix all year.  Within the regional banking sector, we much prefer Chiba Bank (8331 JP) to CFG for its strong, scandal-free management and long-standing profits ‘track record’.

Concordia Financial Group (7186 JP):  Blame It on the Junior

Fukuoka Financial Group / Equity Bottom-Up

When approaching icebergs, a rear-view mirror is not much use in avoiding the danger.<a href="https://www.smartkarma.com/entities/fukuoka-financial-group-inc" target="_blank" data-smartkarma-citation="entities:3712:1" rel="noopener">Fukuoka Financial Group (8354 JP)</a> has announced a significant accounting policy affecting the way the group’s four subsidiary banks provision for potential credit costs, moving to ‘forward-looking’ provisioning.  As a result of this accounting policy change, loan-loss reserves have been increased by ¥41.8 billion in FY3/2020, roughly equivalent to 40bps in additional annual credit costs.  Combined with an additional ¥8.7 billion in COVID-19 precautionary provisioning, as well as unbudgeted extra costs of some ¥1.2 billion relating to business integration expenses, the impact on FY3/2020 earnings has been to reduce the group’s forecast for consolidated recurring profits from a profit of ¥52.5 billion to a recurring loss of ¥5.0 billion, while net profits have now been reduced from a forecast ¥148.5 billion to ¥111.0 billion.  This suggests that 4Q FY3/2020 results may have turned into a consolidated net loss of around ¥38.5 billion.  Nevertheless, the ¥85/share annual dividend will not be affected by this announcement.Whether other regional banks will be encouraged to follow FFG’s lead and move to ‘forward-looking’ credit provisioning remains to be seen.  We remain skeptical, given the current state of many regional banks’ balance-sheets.  FFG has adopted a pragmatic approach to credit provisioning among the coronavirus pandemic, and has been able to absorb these additional costs thanks to a ¥117.43 billion ‘windfall profit’ in FY3/2020.  Other banks do not have this luxury. Moreover, while the policy change is to be welcomed, it raises questions as to what the true state of Eighteenth Bank’s asset quality might be that could have prompted such a drastic accounting policy move.Caveat Emptor!  (May the Buyer Beware!)

When approaching icebergs, a rear-view mirror is not much use in avoiding the danger.Fukuoka Financial Group (8354 JP) has announced a significant accounting policy affecting the way the group’s four subsidiary banks provision for potential credit costs, moving to ‘forward-looking’ provisioning.  As a result of this accounting policy change, loan-loss reserves have been increased by ¥41.8 billion in FY3/2020, roughly equivalent to 40bps in additional annual credit costs.  Combined with an additional ¥8.7 billion in COVID-19 precautionary provisioning, as well as unbudgeted extra costs of some ¥1.2 billion relating to business integration expenses, the impact on FY3/2020 earnings has been to reduce the group’s forecast for consolidated recurring profits from a profit of ¥52.5 billion to a recurring loss of ¥5.0 billion, while net profits have now been reduced from a forecast ¥148.5 billion to ¥111.0 billion.  This suggests that 4Q FY3/2020 results may have turned into a consolidated net loss of around ¥38.5 billion.  Nevertheless, the ¥85/share annual dividend will not be affected by this announcement.Whether other regional banks will be encouraged to follow FFG’s lead and move to ‘forward-looking’ credit provisioning remains to be seen.  We remain skeptical, given the current state of many regional banks’ balance-sheets.  FFG has adopted a pragmatic approach to credit provisioning among the coronavirus pandemic, and has been able to absorb these additional costs thanks to a ¥117.43 billion ‘windfall profit’ in FY3/2020.  Other banks do not have this luxury. Moreover, while the policy change is to be welcomed, it raises questions as to what the true state of Eighteenth Bank’s asset quality might be that could have prompted such a drastic accounting policy move.Caveat Emptor!  (May the Buyer Beware!)

Fukuoka Financial Group  (8354 JP):  When Approaching Icebergs ...

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

Japanese Banks:  Beyond the Ides of March

The 1:1.12 share exchange ratio for <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> announced on 30 October was extremely tight and left virtually nothing on the table for Eighteenth Bank shareholders, prompting a sell-off in both stocks after a remarkable run-up.  Meanwhile, although Eighteenth Bank will become part of the Fukuoka Financial Group (FFG) on 1 April 2019, as previously announced, there are further delays to full integration between Eighteenth Bank and FFG member Shinwa Bank: this time caused by the Imperial succession in May 2019.  Despite the recent profit-taking in FFG amid general weakness in Japanese bank stocks, we remain positive over the longer-term on FFG which will become – by some considerable way – the largest regional bank group in Japan as a result of this merger.

The 1:1.12 share exchange ratio for Fukuoka Financial Group (8354 JP) and Eighteenth Bank (8396 JP) announced on 30 October was extremely tight and left virtually nothing on the table for Eighteenth Bank shareholders, prompting a sell-off in both stocks after a remarkable run-up.  Meanwhile, although Eighteenth Bank will become part of the Fukuoka Financial Group (FFG) on 1 April 2019, as previously announced, there are further delays to full integration between Eighteenth Bank and FFG member Shinwa Bank: this time caused by the Imperial succession in May 2019.  Despite the recent profit-taking in FFG amid general weakness in Japanese bank stocks, we remain positive over the longer-term on FFG which will become – by some considerable way – the largest regional bank group in Japan as a result of this merger.

Fukuoka Financial Group (8354 JP): Imperial Waits & Measures

Japan

The Eighteenth Bank, Limited. is a regional bank based in Nagasaki.  The Bank provides general banking services including deposits, loans, and foreign exchange transactions.  The Eighteenth Bank also develops software and provides building maintenance and financial services such as leasing, letter of credit, credit cards, and clerical work for banks.

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Eighteenth Bank (8396 JP)

Japanese Banks: Buddy, Can We Spare You a Dime !

Cash continues to flow into bank deposits in Japan faster than the banks appear able to channel those funds into loans or investments that might...

J. Brian Waterhouse

Concordia Financial Group (7186 JP): Blame It on the Junior

Concordia Financial Group, Ltd (7186 JP), or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and...

J. Brian Waterhouse

Fukuoka Financial Group (8354 JP): When Approaching Icebergs ...

When approaching icebergs, a rear-view mirror is not much use in avoiding the danger.Fukuoka Financial Group (8354 JP) has announced a significant...

J. Brian Waterhouse

Japanese Banks: Beyond the Ides of March

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. ...

J. Brian Waterhouse

Fukuoka Financial Group (8354 JP): Imperial Waits & Measures

The 1:1.12 share exchange ratio for Fukuoka Financial Group (8354 JP) and Eighteenth Bank (8396 JP) announced on 30 October was extremely tight and...

J. Brian Waterhouse

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