Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

The stock price of <a href="https://www.smartkarma.com/entities/20254" target="_blank" data-smartkarma-citation="entities:20254:1">Senshu Ikeda Holdings (8714 JP)</a> , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after announcing FY3/2019 results that beat guidance but nevertheless represented a 27% YoY decline.  What irked investors, however, was not the underwhelming results per se but management’s decision to ‘take away the punchbowl from the partygoers’ by halving the dividend for FY3/2020 to just ¥7.5/share.  Investors have clearly enjoyed the unrealistic returns on offer over the last few years in the form of a fixed dividend of ¥15/share, even though reported profits have been falling steadily.  As of FY3/2019, the effective dividend payout ratio had reached a remarkable 81.5% and threatened to reach over 128% in FY3/2020 if management failed to act to preserve capital.  Reality has finally caught up with management; disgruntled investors appear to be bailing out in droves as a result, and it hurts.  Caveat emptor!  (May the buyer beware!)

The stock price of Senshu Ikeda Holdings (8714 JP) , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after announcing FY3/2019 results that beat guidance but nevertheless represented a 27% YoY decline.  What irked investors, however, was not the underwhelming results per se but management’s decision to ‘take away the punchbowl from the partygoers’ by halving the dividend for FY3/2020 to just ¥7.5/share.  Investors have clearly enjoyed the unrealistic returns on offer over the last few years in the form of a fixed dividend of ¥15/share, even though reported profits have been falling steadily.  As of FY3/2019, the effective dividend payout ratio had reached a remarkable 81.5% and threatened to reach over 128% in FY3/2020 if management failed to act to preserve capital.  Reality has finally caught up with management; disgruntled investors appear to be bailing out in droves as a result, and it hurts.  Caveat emptor!  (May the buyer beware!)

Senshu Ikeda Holdings  (8714 JP):  Reality Hurts

<a href="https://www.smartkarma.com/entities/1048" target="_blank" data-smartkarma-citation="entities:1048:1">Chiba Bank (8331 JP)</a> , Japan’s 4th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for the nine months to end-December 2018 (3Q FY3/2019) of ¥59.66 billion (down 10.6% YoY) and net profits of ¥41.44 billion (down 10.8% YoY) on marginally higher revenues of ¥180.20 billion (+1.3% YoY).  Results were influenced by higher funding costs and a sharp rise in credit costs that offset the benefits of strong growth in loan demand.  There was also some improvement in net interest income and securities trading profits, and a reduction in administrative expenses.  The Japanese banking sector is currently unloved by foreign investors. However, trading on a forward-looking PE ratio of 9.1x (using the bank’s own FY3/2019 guidance), a PBR of 0.52x and boasting the highest current market capitalisation of any Japanese regional bank of ¥553.9 billion (US$5.04 billion), Chiba Bank continues to offer good prospects of long-term growth and a strong profits ‘track record’ supported by the underlying strength of the Chiba prefectural economy.

Chiba Bank (8331 JP) , Japan’s 4th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for the nine months to end-December 2018 (3Q FY3/2019) of ¥59.66 billion (down 10.6% YoY) and net profits of ¥41.44 billion (down 10.8% YoY) on marginally higher revenues of ¥180.20 billion (+1.3% YoY).  Results were influenced by higher funding costs and a sharp rise in credit costs that offset the benefits of strong growth in loan demand.  There was also some improvement in net interest income and securities trading profits, and a reduction in administrative expenses.  The Japanese banking sector is currently unloved by foreign investors. However, trading on a forward-looking PE ratio of 9.1x (using the bank’s own FY3/2019 guidance), a PBR of 0.52x and boasting the highest current market capitalisation of any Japanese regional bank of ¥553.9 billion (US$5.04 billion), Chiba Bank continues to offer good prospects of long-term growth and a strong profits ‘track record’ supported by the underlying strength of the Chiba prefectural economy.

Sumitomo Mitsui Financial Group / Equity Bottom-Up

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.
The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.
The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

SMFG (8316 JP): On Target But Drifting Off Radar

'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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/686/original/2019-02-02_09-34-42.png?1549067763" class="editor-image img-responsive" data-smartkarma-image-id="77686"></figure><div class="content-caption">Source: Japan Analytics</div><div style="text-align: left;" class="content-caption">
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.</div>DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/701/original/2019-02-02_14-11-25.png?1549084295" class="editor-image img-responsive" data-smartkarma-image-id="77701"></figure>Source: Japan Analytics
</div>PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/746/original/2019-02-03_07-23-31.png?1549146223" class="editor-image img-responsive" data-smartkarma-image-id="77746"></figure><div class="content-caption">Source: Japan Analytics</div>THE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/722/original/2019-02-02_18-25-46.png?1549099572" class="editor-image img-responsive" data-smartkarma-image-id="77722"></figure><div class="content-caption">Source: Japan Analytics</div>INTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/724/original/2019-02-02_18-41-12.png?1549100508" class="editor-image img-responsive" data-smartkarma-image-id="77724"></figure><div class="content-caption">Source: Japan Analytics</div>TORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. <div class="content-highlight">
OUTLOOK &amp; RECOMMENDATIONS
<ul>
<li>We continue to recommend an underweight position in Japan in global portfolios.</li>
<li>The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  </li>
<li>Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.</li>
<li>In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.</li>
</ul>
</div>In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/3700" target="_blank" data-smartkarma-citation="entities:3700:1">Anritsu (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Alpine (6770 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a> (yes, again), <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a> , and <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent (4751 JP)</a>.

Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.
Source: Japan Analytics
PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. Source: Japan AnalyticsTHE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  Source: Japan AnalyticsINTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.Source: Japan AnalyticsTORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. 
OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios.
The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  
Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.
In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Anritsu (6754 JP), Alps Alpine (6770 JP), SanBio (4592 JP), Lixil (5938 JP) (yes, again), Fanuc (6954 JP), Mizuho Financial Group (8411 JP) , and Cyberagent (4751 JP).

Japan Fortnightly Update: Drip, Drip, Drip...

Based in Shimane Prefecture, in the Chugoku region of western Honshu, <a href="https://www.smartkarma.com/entities/6515" target="_blank" data-smartkarma-citation="entities:6515:1">San In Godo Bank (8381 JP)</a>  is unique among Japan’s 64 regional banks in being the Designated Financial Institution (DFI) for not just one but two prefectures: Shimane and neighbouring Tottori.  Long-considered a sleepy, conservatively-run bank from a backwater prefecture, San’In Godo Bank has quietly expanded its franchise over the last 20 years and now operates in seven prefectures including Hiroshima, Okayama and Hyogo prefectures in addition to its home market of Shimane and Tottori prefectures.
Trading on a PER of 10.6x (using the bank’s FY3/2019 guidance) and a PBR of 0.39x, the stock is inexpensive against the rest of the market but mid-priced against peers in a sub-sector that has for long seemed suspiciously underpriced. The stock is down just over 11% within the last six months, so has marginally outperformed against most other Japanese bank stocks in an otherwise difficult market, and may be forming a base at current levels.  For small-cap funds looking for exposure to the Japanese financial sector at a reasonable price, we believe this stock is worth considering.

Based in Shimane Prefecture, in the Chugoku region of western Honshu, San In Godo Bank (8381 JP)  is unique among Japan’s 64 regional banks in being the Designated Financial Institution (DFI) for not just one but two prefectures: Shimane and neighbouring Tottori.  Long-considered a sleepy, conservatively-run bank from a backwater prefecture, San’In Godo Bank has quietly expanded its franchise over the last 20 years and now operates in seven prefectures including Hiroshima, Okayama and Hyogo prefectures in addition to its home market of Shimane and Tottori prefectures.
Trading on a PER of 10.6x (using the bank’s FY3/2019 guidance) and a PBR of 0.39x, the stock is inexpensive against the rest of the market but mid-priced against peers in a sub-sector that has for long seemed suspiciously underpriced. The stock is down just over 11% within the last six months, so has marginally outperformed against most other Japanese bank stocks in an otherwise difficult market, and may be forming a base at current levels.  For small-cap funds looking for exposure to the Japanese financial sector at a reasonable price, we believe this stock is worth considering.

San'In Godo Bank (8381 JP): From Out of the Shadows

Japan

Kansai Mirai Financial Group, Inc. operates as an investment company. The Company provides commercial banking and securities investments services. Kansai Mirai Financial Group serves customers in Japan.

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Kansai Mirai Financial Group I (7321 JP)

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The stock price of Senshu Ikeda Holdings (8714 JP) , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after...

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Chiba Bank (8331 JP) , Japan’s 4th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for...

J. Brian Waterhouse

SMFG (8316 JP): On Target But Drifting Off Radar

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s...

J. Brian Waterhouse

Japan Fortnightly Update: Drip, Drip, Drip...

DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results & Revision Score. Calculated daily, the score is a...

Campbell Gunn

San'In Godo Bank (8381 JP): From Out of the Shadows

Based in Shimane Prefecture, in the Chugoku region of western Honshu, San In Godo Bank (8381 JP) is unique among Japan’s 64 regional banks in...

J. Brian Waterhouse

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