Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Interim results announced on Tuesday by <a href="https://www.smartkarma.com/entities/15777" target="_blank" data-smartkarma-citation="entities:15777:1">Gunma Bank (8334 JP)</a> beat the bank’s own guidance and suggest that an upward revision to guidance later in the year is a strong possibility.  The bank has left its full-year guidance unchanged, expecting consolidated net profits of ¥28.5 billion, or ¥66/share.  Having declared an interim dividend of ¥6/share, the bank is once again guiding for a slightly increased final dividend of ¥7/share, suggesting a dividend payout ratio of around 20%.  On a prospective PER (using the bank’s revised guidance) of 8.3x and a low PBR of 0.45x, the stock is attractive against peers.  Market reaction to the interim results was clearly positive, with the stock finishing today on ¥546, up 3.4%: the best-performing bank stock on a day of otherwise mixed bank stock performances, with all of the largest-cap bank stocks in negative territory.  Having fallen over 25% in the last 12 months and 9% in the last 3 months, the stock looks oversold at current levels and is evidently attracting investor attention.

Interim results announced on Tuesday by Gunma Bank (8334 JP) beat the bank’s own guidance and suggest that an upward revision to guidance later in the year is a strong possibility.  The bank has left its full-year guidance unchanged, expecting consolidated net profits of ¥28.5 billion, or ¥66/share.  Having declared an interim dividend of ¥6/share, the bank is once again guiding for a slightly increased final dividend of ¥7/share, suggesting a dividend payout ratio of around 20%.  On a prospective PER (using the bank’s revised guidance) of 8.3x and a low PBR of 0.45x, the stock is attractive against peers.  Market reaction to the interim results was clearly positive, with the stock finishing today on ¥546, up 3.4%: the best-performing bank stock on a day of otherwise mixed bank stock performances, with all of the largest-cap bank stocks in negative territory.  Having fallen over 25% in the last 12 months and 9% in the last 3 months, the stock looks oversold at current levels and is evidently attracting investor attention.

'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/507/original/2018-11-02_10-20-29.png?1541121653" class="editor-image img-responsive" data-smartkarma-image-id="68507"></figure>Source: Japan Analytics
NB: companies are colour-coded by sector
</div>28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-<ul>
<li>In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/6483" target="_blank" data-smartkarma-citation="entities:6483:1">Aozora (8304 JP)</a> and <a href="https://www.smartkarma.com/entities/16897" target="_blank" data-smartkarma-citation="entities:16897:1">Shinsei (8303 JP)</a> have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ (8306 JP)</a>, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>, <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post Holdings (6178 JP)</a> and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial (8411 JP)</a> from the present day.</li>
<li>Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. </li>
<li>Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as <a href="https://www.smartkarma.com/entities/458" target="_blank" data-smartkarma-citation="entities:458:1">Seibu Holdings (9024 JP)</a> and <a href="https://www.smartkarma.com/entities/1184" target="_blank" data-smartkarma-citation="entities:1184:1">Japan Airlines (9201 JP)</a>, they are no longer highly-ranked.</li>
<li>Seven current Top 20 companies - (<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a>, <a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI (9433 JP)</a>, <a href="https://www.smartkarma.com/entities/13498" target="_blank" data-smartkarma-citation="entities:13498:1">Japan Tobacco (2914 JP)</a>, <a href="https://www.smartkarma.com/entities/13520" target="_blank" data-smartkarma-citation="entities:13520:1">Central Japan Railway (9022 JP)</a>, <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> and <a href="https://www.smartkarma.com/entities/15070" target="_blank" data-smartkarma-citation="entities:15070:1">Recruit (6098 JP)</a>)  - have listed during the last 28 years. </li>
</ul>THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a>.


Source: Japan Analytics
NB: companies are colour-coded by sector
28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-
In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only Nomura (8604 JP), Aozora (8304 JP) and Shinsei (8303 JP) have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are Mitsubishi UFJ (8306 JP), Sumitomo Mitsui Financial (8316 JP), Japan Post Bank (7182 JP), Japan Post Holdings (6178 JP) and Mizuho Financial (8411 JP) from the present day.
Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. 
Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as Seibu Holdings (9024 JP) and Japan Airlines (9201 JP), they are no longer highly-ranked.
Seven current Top 20 companies - (Softbank (9984 JP), NTT Docomo (9437 JP), KDDI (9433 JP), Japan Tobacco (2914 JP), Central Japan Railway (9022 JP), Fast Retailing (9983 JP) and Recruit (6098 JP))  - have listed during the last 28 years. 
THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - Keyence (6861 JP), Toyota Motor (7203 JP) and Sony (6758 JP). 

Japan: The Evolution Of (Non-Financial) Market Leadership

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

We are transferring coverage of Japan's six largest banking groups, all of which we rate as having no moat and a stable moat trend. This includes the three so-called "megabanks" that together account for 25% of banking-system loans and 29% of deposits: <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial (8306 JP)</a>, or MUFG, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, or SMFG, and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a>. It also includes three second-tier banks: <a href="https://www.smartkarma.com/entities/19450" target="_blank" data-smartkarma-citation="entities:19450:1">Sumitomo Mitsui Trust (8309 JP)</a>, <a href="https://www.smartkarma.com/entities/6841" target="_blank" data-smartkarma-citation="entities:6841:1">Resona Holdings (8308 JP)</a>, and <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>. Our top pick is SMFG, with 33% upside from the current share price to our fair value estimate of JPY 5,960, based on our expectations for solid returns from its consumer finance and credit card businesses. Japan Post Bank has the most downside, with our fair value estimate of JPY 952 being 29% below the current share price.The environment for banks has been tough for years in Japan, and we expect it to remain so. Long-running deflation, which started in earnest in the late 1990s and has yet to end conclusively, has led to persistently low demand for credit. The loan/deposit ratio is only around 55% at present, down from 74% in 2000. Japanese corporates, which in aggregate had a liabilities/net assets ratio of 4 times in the mid-1990s, have reduced this to a healthy 129% as of June, but companies continue to prioritize using cash flow to pay down debt rather than aggressively making new investments. Individuals similarly are generally loath to borrow, given stagnant nominal incomes. With low demand for credit and a surfeit of liquid deposits, competition among banks has pushed the average interest rate on new bank loans down by 100 basis points over the past decade to below 0.7% at present. While there are reasons to hope this has started to bottom out, a catalyst for a material rise in lending rates is not apparent, especially with the Bank of Japan committed to keeping policy rates extremely low "for an extended period."Analyst: Michael Makdad

We are transferring coverage of Japan's six largest banking groups, all of which we rate as having no moat and a stable moat trend. This includes the three so-called "megabanks" that together account for 25% of banking-system loans and 29% of deposits: Mitsubishi UFJ Financial (8306 JP), or MUFG, Sumitomo Mitsui Financial (8316 JP), or SMFG, and Mizuho Financial Group (8411 JP). It also includes three second-tier banks: Sumitomo Mitsui Trust (8309 JP), Resona Holdings (8308 JP), and Japan Post Bank (7182 JP). Our top pick is SMFG, with 33% upside from the current share price to our fair value estimate of JPY 5,960, based on our expectations for solid returns from its consumer finance and credit card businesses. Japan Post Bank has the most downside, with our fair value estimate of JPY 952 being 29% below the current share price.The environment for banks has been tough for years in Japan, and we expect it to remain so. Long-running deflation, which started in earnest in the late 1990s and has yet to end conclusively, has led to persistently low demand for credit. The loan/deposit ratio is only around 55% at present, down from 74% in 2000. Japanese corporates, which in aggregate had a liabilities/net assets ratio of 4 times in the mid-1990s, have reduced this to a healthy 129% as of June, but companies continue to prioritize using cash flow to pay down debt rather than aggressively making new investments. Individuals similarly are generally loath to borrow, given stagnant nominal incomes. With low demand for credit and a surfeit of liquid deposits, competition among banks has pushed the average interest rate on new bank loans down by 100 basis points over the past decade to below 0.7% at present. While there are reasons to hope this has started to bottom out, a catalyst for a material rise in lending rates is not apparent, especially with the Bank of Japan committed to keeping policy rates extremely low "for an extended period."Analyst: Michael Makdad

In Tough Japanese Banking Market, SMFG Looks Like the Best Bet for Future Returns

Specialist in Japanese equities, Kheiron Group

Nathan Ramler, CFA

Specialist in Japanese equities

Kheiron Group

Tokyo-based with experience in global equity markets and M&A. Striving to add value and insight. 

Specialists in Japan

In this note, we consider the issues around key man risk and discuss to what extent <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>  exists with or without the leadership and vision from its founder and CEO Masayoshi Son (“Masa”).
There is no question that key man risk is a consideration for SoftBank. The company has acknowledged this issue for many years. Masa created the company from scratch and has built it into a domestic giant and a global powerhouse with annual sales &gt;¥9 trillion (&gt;US$80bn) and a market cap &gt;¥10 trillion (&gt;US$90bn).
But what value does the company have without the charisma of the CEO?
As discussed in <a href="https://www.smartkarma.com/insights/softbank-9984-jp-a-valuation-framework-and-preparation-for-the-domestic-telco-ipo-in-december" target="_blank" data-smartkarma-citation="insights:24916">SoftBank (9984 JP) - A Valuation Framework And Preparation for the Domestic Telco IPO in December</a> a discount or premium could be baked into a company's share price because of a strong leader.
As SEC chairman Jay Clayton noted a few days ago in regards to Elon Musk of Tesla, “…the skills and support of certain individuals may be important to the future success of a company”. Obviously, styles will be different and mileage may vary, but some leaders become so closely associated with the firms they have created that the firm would not exist without them. 
Masa is a charismatic and visionary leader. There is no question that he has forged a successful company and created value. It’s hard to imagine SoftBank without him, but while it would entail a major change in how we see the business, we can imagine that SoftBank without Masa could still be a successful company. There are recent precedents, such as Tim Cook’s impressive running of Apple after Steve Jobs’ passing, despite initial concerns that no one would be able to maintain the founder’s spirit and momentum.
Masa has brought several strong leaders into the company and is actively working to cultivate the next generation, but as of today, there is no clear successor. 
We hope that Masa has many healthy and successful years ahead of him, but we recognize that some investors are thinking about the longer-term risk of “what next?”.

In this note, we consider the issues around key man risk and discuss to what extent Softbank Group (9984 JP)  exists with or without the leadership and vision from its founder and CEO Masayoshi Son (“Masa”).
There is no question that key man risk is a consideration for SoftBank. The company has acknowledged this issue for many years. Masa created the company from scratch and has built it into a domestic giant and a global powerhouse with annual sales &gt;¥9 trillion (&gt;US$80bn) and a market cap &gt;¥10 trillion (&gt;US$90bn).
But what value does the company have without the charisma of the CEO?
As discussed in SoftBank (9984 JP) - A Valuation Framework And Preparation for the Domestic Telco IPO in December a discount or premium could be baked into a company's share price because of a strong leader.
As SEC chairman Jay Clayton noted a few days ago in regards to Elon Musk of Tesla, “…the skills and support of certain individuals may be important to the future success of a company”. Obviously, styles will be different and mileage may vary, but some leaders become so closely associated with the firms they have created that the firm would not exist without them. 
Masa is a charismatic and visionary leader. There is no question that he has forged a successful company and created value. It’s hard to imagine SoftBank without him, but while it would entail a major change in how we see the business, we can imagine that SoftBank without Masa could still be a successful company. There are recent precedents, such as Tim Cook’s impressive running of Apple after Steve Jobs’ passing, despite initial concerns that no one would be able to maintain the founder’s spirit and momentum.
Masa has brought several strong leaders into the company and is actively working to cultivate the next generation, but as of today, there is no clear successor. 
We hope that Masa has many healthy and successful years ahead of him, but we recognize that some investors are thinking about the longer-term risk of “what next?”.

Strategically located in the heart of Japan’s wealthiest region, namely the Kanto Region that surrounds the nation’s capital Tokyo, with an asset base in excess of ¥14.57 trillion (US$129.8 billion), <a href="https://www.smartkarma.com/entities/1048" target="_blank" data-smartkarma-citation="entities:1048:1">Chiba Bank (8331 JP)</a> is Japan’s 4th-largest regional bank whether measured by assets, deposits or loans.  The bank’s home base is in Chiba Prefecture: one of the few prefectures to see an annual net increase in population thanks to its geographic location next to Tokyo, combined with continuous investment in infrastructure and housing by the prefectural government, and an abundance of job opportunities.  On a forward-looking PER of 10.8x, an historic PBR of 0.61x, a market capitalisation of ¥586.01 billion (US$5.22 billion), and with a daily average turnover of around 3.8 million shares over the last 3 months, Chiba Bank continues to attract investors seeking reasonably-priced alternatives to the ‘crowded trade’ of simply buying the megabanks for Japanese bank sector exposure.

Strategically located in the heart of Japan’s wealthiest region, namely the Kanto Region that surrounds the nation’s capital Tokyo, with an asset base in excess of ¥14.57 trillion (US$129.8 billion), Chiba Bank (8331 JP) is Japan’s 4th-largest regional bank whether measured by assets, deposits or loans.  The bank’s home base is in Chiba Prefecture: one of the few prefectures to see an annual net increase in population thanks to its geographic location next to Tokyo, combined with continuous investment in infrastructure and housing by the prefectural government, and an abundance of job opportunities.  On a forward-looking PER of 10.8x, an historic PBR of 0.61x, a market capitalisation of ¥586.01 billion (US$5.22 billion), and with a daily average turnover of around 3.8 million shares over the last 3 months, Chiba Bank continues to attract investors seeking reasonably-priced alternatives to the ‘crowded trade’ of simply buying the megabanks for Japanese bank sector exposure.

Chiba Bank (8331 JP):  Chiba 'n Cheerful

Japan

Japan Post Bank Co. Ltd. provides general banking services. The Company offers deposits, savings, loans, currency exchange transactions, investment trusts, national bonds, and other related banking services to individuals and businesses. Japan Post Bank also provides other financial services such as insurance agency and financing service.

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Japan Post Bank (7182 JP)

Gunma Bank (8334 JP): On the Right Track

Interim results announced on Tuesday by Gunma Bank (8334 JP) beat the bank’s own guidance and suggest that an upward revision to guidance later in...

J. Brian Waterhouse

Japan: The Evolution Of (Non-Financial) Market Leadership

28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the...

Campbell Gunn

In Tough Japanese Banking Market, SMFG Looks Like the Best Bet for Future Returns

We are transferring coverage of Japan's six largest banking groups, all of which we rate as having no moat and a stable moat trend. This includes...

Morningstar, Inc.

Does SoftBank (9984 JP) = Masayoshi Son?

In this note, we consider the issues around key man risk and discuss to what extent Softbank Group (9984 JP) exists with or without the leadership...

Nathan Ramler, CFA

Chiba Bank (8331 JP): Chiba 'n Cheerful

Strategically located in the heart of Japan’s wealthiest region, namely the Kanto Region that surrounds the nation’s capital Tokyo, with an asset...

J. Brian Waterhouse

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