Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

With just three weeks to go before the formal announcement of their FY3/2019 results, it is high time that some of the smaller Japanese regional banks started owning up to the fact that they have no hope of making their full-year earnings guidance.  First in the line for confession is <a href="https://www.smartkarma.com/entities/6599" target="_blank" data-smartkarma-citation="entities:6599:1">Michinoku Bank (8350 JP)</a> which on Wednesday of this week slashed its full-year earnings guidance after losing some ¥1.25 billion (US$11.2 million) on the burgeoning costs of maintaining a synthetic hedge against its Japanese government portfolio.  These hedging losses come on top of rapidly rising credit costs.  Luckily, few foreign investors own the stock of this small, struggling bank, although there are some.  We expect further announcements of full-year earnings downgrades from other Japanese regional banks over the next fortnight or so; market reaction to such announcements may be severe.  Caveat emptor!  (May the buyer beware!)

With just three weeks to go before the formal announcement of their FY3/2019 results, it is high time that some of the smaller Japanese regional banks started owning up to the fact that they have no hope of making their full-year earnings guidance.  First in the line for confession is Michinoku Bank (8350 JP) which on Wednesday of this week slashed its full-year earnings guidance after losing some ¥1.25 billion (US$11.2 million) on the burgeoning costs of maintaining a synthetic hedge against its Japanese government portfolio.  These hedging losses come on top of rapidly rising credit costs.  Luckily, few foreign investors own the stock of this small, struggling bank, although there are some.  We expect further announcements of full-year earnings downgrades from other Japanese regional banks over the next fortnight or so; market reaction to such announcements may be severe.  Caveat emptor!  (May the buyer beware!)

Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge

The slow-motion ‘train wreck’ that is the once-proud <a href="https://www.smartkarma.com/entities/6267" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank Ltd (8358 JP)</a> ploughs on along its path of self-destruction.  Interim results were awful: a consolidated net loss of ¥98.5 billion (US$866 million), mostly incurred in 2Q FY3/2019 through loan-loss reserving and write-offs totalling ¥121.79 billion in respect of the bank’s “share house” debacle and other property investment lending disasters.  The stock remains highly volatile and remains vulnerable to further market reflection on the bank’s longer-term future despite a strong ‘bounce’ in the share price immediately following the results announcement. Full-year guidance implies that further reserving may yet be necessary later in the fiscal year, and there is still no word of a ‘white knight’ buyer for the Okano family’s 15% shareholdings.  It is tempting to believe that, if the credit losses on the bank’s dreadful misadventure have now been fully absorbed, Suruga Bank has achieved some sort of catharsis and can now start to recover.  Based on current evidence, however, the bank still seems a long way from redemption.  Caveat emptor (May the buyer beware!).

The slow-motion ‘train wreck’ that is the once-proud Suruga Bank Ltd (8358 JP) ploughs on along its path of self-destruction.  Interim results were awful: a consolidated net loss of ¥98.5 billion (US$866 million), mostly incurred in 2Q FY3/2019 through loan-loss reserving and write-offs totalling ¥121.79 billion in respect of the bank’s “share house” debacle and other property investment lending disasters.  The stock remains highly volatile and remains vulnerable to further market reflection on the bank’s longer-term future despite a strong ‘bounce’ in the share price immediately following the results announcement. Full-year guidance implies that further reserving may yet be necessary later in the fiscal year, and there is still no word of a ‘white knight’ buyer for the Okano family’s 15% shareholdings.  It is tempting to believe that, if the credit losses on the bank’s dreadful misadventure have now been fully absorbed, Suruga Bank has achieved some sort of catharsis and can now start to recover.  Based on current evidence, however, the bank still seems a long way from redemption.  Caveat emptor (May the buyer beware!).

Suruga Bank (8358 JP): Purging the Augean Stables 2018 - Part 6: Catharsis?

Japan

The MICHINOKU BANK, LTD. is a regional bank based in Aomori.  The Bank provides general banking services including deposits, loans, and foreign exchange transactions.  The Michinoku Bank also provides letter of credit, credit cards, and clerical works for banks' daily operations as well as operates real estate and mortgage securitization businesses.

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Michinoku Bank (8350 JP)