'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/454/original/2020-04-18_16-16-49.png?1587194226" class="editor-image img-responsive" data-smartkarma-image-id="128454"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>MARKING TIME</strong> - Japanse equities were becalmed last week, rising by 0.84%, while the Yen traded at 107 all week. The Bank of Japan bought ETFs on Wednesday and Thursday despite the relative calm and are on a path for April to equal the total purchases made in March. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/455/original/2020-04-18_17-43-44.png?1587199447" class="editor-image img-responsive" data-smartkarma-image-id="128455"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>MARKING MULTIPLES</strong> - As we have been covering in our daily Results &amp; Revisions updates, forward earnings continue to decline gradually. As previously noted, the market multiple will rise over the next month as full-year forecasts for FY2021 are announced to at least the early 2020 peak of 17.6 times. This adjustment process will be complicated by a lack of initial forecasts from many leading companies and by a delay in the publication of annual <em>yuho</em> audited financial statements until the late summer. 'Robust' analysis will be at a premium.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/651/original/File%202020-04-20%204%2023%2024.jpeg?1587324271" class="editor-image img-responsive" data-smartkarma-image-id="128651"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/652/original/File%202020-04-20%204%2024%2019.jpeg?1587324282" class="editor-image img-responsive" data-smartkarma-image-id="128652"></figure><p></p><div class="content-caption">Source • ourworldindata.org</div><p><strong>COVID CASE COUNT</strong> - Japan's COVID-19 daily case-count has trended down this week compared to the weel before and is now on a par with Sweden and Singapore. Daily fatalities are averaging double figures as this lagging statistics reflects the higher case count of two weeks ago and are still within the East Asian 'range' of 0-10 a day. New case counts of below 100 and a declining trend, as is the case in South Korea, Denmark and Austria will be required by the end of Golden Week on May 6th for Japan to consider any relaxation of its now nationwide 'state of emergency'. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/558/original/File%202020-04-19%2016%2028%2027.jpeg?1587281926" class="editor-image img-responsive" data-smartkarma-image-id="128558"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/559/original/File%202020-04-19%2016%2023%2014.jpeg?1587281952" class="editor-image img-responsive" data-smartkarma-image-id="128559"></figure><div class="content-caption">Source • ourworldindata.org</div><p><strong>JAPAN'S TESTING VACUUM</strong> - We have noted the lack of testing in Japan in an earlier <a href="https://www.smartkarma.com/insights/japan-market-update-hit-the-boj-bid-and-wait-for-the-absolute-value-opportunity" target="_blank" data-smartkarma-citation="insights:37670" rel="noopener">Insight</a> and the two charts above from Oxford's Global Change Data Lab highlights Japan's outlier status in this regard and the implications for confirmed case counts and confirmed deaths. This deficiency has led many data scientists to study excess mortality rates. At present, there is insufficient data from the Health Ministry in Japan to make any valid comparisons. Based on other countries, Japan's excess mortality will likely price to be slightly higher for the over 65s and lower for everyone else. In any case, a massive testing capability will form a key component of any viable exit strategy.     </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/479/original/File%202020-04-19%206%2024%2053.jpeg?1587245112" class="editor-image img-responsive" data-smartkarma-image-id="128479"></figure><div class="content-caption">Source • stopcovid19.jp</div><p><strong>OVERSHOOT</strong> - Unfortunately for patients and the government, hospitals are now full in many prefectures. Central Tokyo hospitals are turning away patients requiring ambulances to take patients to outlying parts of the prefecture - although this situation is not unusual in normal times. Despite ample time to prepare, the government has failed to provide for the 'overshoot' that they had been warning the public it was necessary to avoid. Japan also has a lower ratio of intensive care beds, (5) per 100,000 people, than many other developed countries. The previous policy of hospitalising every case, however mild, has been reversed and local governments have now requisitioned 210,000 hotel rooms to house those not in need of urgent medical intervention. While Japan's COVID-19 strategy has, so far, followed the less economically-damaging Swedish model (see below), a failure to address the hospital overshoot risks the country being forced to follow the UK's 'u-turn' into total lockdown from which exit strategies are much harder. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/650/original/2020-04-20_04-02-00.png?1587322973" class="editor-image img-responsive" data-smartkarma-image-id="128650"></figure><div class="content-caption">Source • Tokyo Metropolitan Government</div><p><strong>PEAKING OUT?</strong> On Sunday, Tokyo only 107 new cases, the lowest Sunday total for three weeks and the first decline. Tokyo now has over 3,000 cases out of a population of almost 14 million. The rate of doubling is now decelerating from one week to two weeks. Meanwhile, transit through major railway stations has declined by 70-80% across Japan. A lowering of new cases next week will be crucial to keep the hospitals from overflowing and the Prime Minister's reputation from falling further.</p><p><strong>FALLOUT</strong> - PM Abe's political capital is another casualty of this disease. It has emerged that his coalition partner the lay-Buddhist Komeito party threatened to walk out if the cash-for-all policy was not implemented requiring Abe to amend a previously-agreed budget bill much to the fury of the Ministry of Finance. The latter was able to require an application process as a means of limiting the amounts dispersed. However, in a bow to the changing circumstance, this process can be conducted online without, it seems, the need for in-person <em>hanko</em> certification. An additional complication is that Abe has 'fallen out' with his main bureaucratic 'fixer' and the main conduit with Komeito, Chief Cabinet Secretary Suga. Abe's poll ratings will probably never recover, and only his long-cherished desire to open the Tokyo Olympics in July 20121 will keep him in office. As will be true in many countries, the COVID-19 policy post mortems will be brutal and fatal for many previously Teflon-like political careers.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/486/original/File%202020-04-18%2013%2054%2022.jpeg?1587246944" class="editor-image img-responsive" data-smartkarma-image-id="128486"></figure><div class="content-caption">Source • Agoop</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/488/original/File%202020-04-18%2013%2053%2001.jpeg?1587247186" class="editor-image img-responsive" data-smartkarma-image-id="128488"></figure><div class="content-caption">Source • @shinagawajp &gt; Blue bars = COVID-19 cases by Tokyo Ward   Orange Line = Concentration of people at 11 pm</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/490/original/File%202020-04-18%2014%2000%2004.jpeg?1587247628" class="editor-image img-responsive" data-smartkarma-image-id="128490"></figure><div class="content-caption">Source • @shinagawajp &gt; Blue bars = COVID-19 cases by Tokyo Ward  Red Line = Population earning more than ¥15m a year</div><p><strong>HOTSPOTS &amp; FAT CATS</strong> - Some support for the government's policy of shutting down Tokyo's nightlife comes from data which correlates case count per Tokyo ward and population clusters in each area at 11 pm.  The correlation is much higher than both population levels and public transport transit through each ward. The second highest correlation was with income levels, suggesting that Tokyo' rich have a greater tendency to frequent bars, restaurants and other forms of evening entertainment, while no doubt considering themselves immune. This correlation has been anecdotally confirmed by the growing number of figures from the media and entertainment world who have contracted the disease and bears out the Tokyo Metropolitan Government's focus on avoiding the 3 'C's - <strong>C</strong>ongregations <strong>C</strong>onversing in <strong>C</strong>onfined spaces. The plug has been pulled on Tokyo's '<em>mizushobai'</em> or 'water trade'.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/663/original/File%202020-04-20%205%2020%2010.jpeg?1587327650" class="editor-image img-responsive" data-smartkarma-image-id="128663"></figure><div class="content-caption">Source • Johns Hopkins CSSE</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/478/original/2020-04-19_06-16-22.png?1587244624" class="editor-image img-responsive" data-smartkarma-image-id="128478"></figure><div class="content-caption">Source • LockdownTV</div><p><strong>PROF GIESECKE &amp; THE SWEDISH MODEL</strong> - Lastly, this <a href="https://youtu.be/bfN2JWifLCY" target="_blank" rel="noopener">video</a> of an interview with retired Swedish epidemiologist, Professor Johan Giesecke, provides an update on the policy options that governments have faced in their responses to COVID-19, the background to Sweden's policy and the difficulties of exiting from lockdown strategies. A summary of his talk is as follows:-</p><blockquote>
<p>Lockdown policies are not evidence-based</p>
<p>The correct policy is to protect the old and the frail only - this will eventually lead to herd immunity as a by-product - the initial UK response, which was similar to Sweden's was better  - before they made a 180 degree U-turn</p>
<p>The UK's Imperial College paper was not very good and he has never seen an unpublished paper have so much policy impact - the paper was  too pessimistic and any such models are a dubious basis for public policy</p>
<p>The flattening of the curve is due to the most vulnerable dying first as much as the lockdown policy</p>
<p>The outcomes will eventually be similar for all countries regardless of policy pursued</p>
<p>Covid-19 is a mild disease similar to the flu, and it was the novelty of the disease that scared people - the fatality rate of Covid-19 is the region of 0.1%</p>
<p>At least 50% of the population will be shown to have already had the disease when mass antibody testing becomes available - achieving 'herd immunity'</p>
</blockquote><p>In the <strong>DETAIL </strong>below, we shall explore some of the emerging themes for the post-COVID-19 world, review the results, revisions and initial forecast announcements made on Friday and, finally, look at our lists the Moving Average 'Outliers'.  The positive/neutral/negative balance for Friday's three results announcements was 1:0:2. For the 20 revisions/forecasts, the split was 7:1:12 - although two of the positive outcomes were securities brokers making initial 'forecasts' of a year-on-year return to profitability after the full-year results have been finalised. Peer Groups revising down included <strong>Advertising Services</strong>, <strong>Apparel &amp; Footwear</strong>, <strong>Retail-Apparel &amp; Footwear</strong>, <strong>Hotels &amp; Resorts</strong>, <strong>Employment &amp; Staffing</strong>, and<strong> Restaurants</strong>. Upward revisions were seen in<strong> Retail-Food &amp; Drink</strong>, <strong>Personal Products</strong>, and<strong> Public Relations</strong>.</p>

Source • Japan AnalyticsMARKING TIME - Japanse equities were becalmed last week, rising by 0.84%, while the Yen traded at 107 all week. The Bank of Japan bought ETFs on Wednesday and Thursday despite the relative calm and are on a path for April to equal the total purchases made in March. Source • Japan AnalyticsMARKING MULTIPLES - As we have been covering in our daily Results &amp; Revisions updates, forward earnings continue to decline gradually. As previously noted, the market multiple will rise over the next month as full-year forecasts for FY2021 are announced to at least the early 2020 peak of 17.6 times. This adjustment process will be complicated by a lack of initial forecasts from many leading companies and by a delay in the publication of annual yuho audited financial statements until the late summer. 'Robust' analysis will be at a premium.Source • ourworldindata.orgCOVID CASE COUNT - Japan's COVID-19 daily case-count has trended down this week compared to the weel before and is now on a par with Sweden and Singapore. Daily fatalities are averaging double figures as this lagging statistics reflects the higher case count of two weeks ago and are still within the East Asian 'range' of 0-10 a day. New case counts of below 100 and a declining trend, as is the case in South Korea, Denmark and Austria will be required by the end of Golden Week on May 6th for Japan to consider any relaxation of its now nationwide 'state of emergency'. Source • ourworldindata.orgJAPAN'S TESTING VACUUM - We have noted the lack of testing in Japan in an earlier Insight and the two charts above from Oxford's Global Change Data Lab highlights Japan's outlier status in this regard and the implications for confirmed case counts and confirmed deaths. This deficiency has led many data scientists to study excess mortality rates. At present, there is insufficient data from the Health Ministry in Japan to make any valid comparisons. Based on other countries, Japan's excess mortality will likely price to be slightly higher for the over 65s and lower for everyone else. In any case, a massive testing capability will form a key component of any viable exit strategy.     Source • stopcovid19.jpOVERSHOOT - Unfortunately for patients and the government, hospitals are now full in many prefectures. Central Tokyo hospitals are turning away patients requiring ambulances to take patients to outlying parts of the prefecture - although this situation is not unusual in normal times. Despite ample time to prepare, the government has failed to provide for the 'overshoot' that they had been warning the public it was necessary to avoid. Japan also has a lower ratio of intensive care beds, (5) per 100,000 people, than many other developed countries. The previous policy of hospitalising every case, however mild, has been reversed and local governments have now requisitioned 210,000 hotel rooms to house those not in need of urgent medical intervention. While Japan's COVID-19 strategy has, so far, followed the less economically-damaging Swedish model (see below), a failure to address the hospital overshoot risks the country being forced to follow the UK's 'u-turn' into total lockdown from which exit strategies are much harder. Source • Tokyo Metropolitan GovernmentPEAKING OUT? On Sunday, Tokyo only 107 new cases, the lowest Sunday total for three weeks and the first decline. Tokyo now has over 3,000 cases out of a population of almost 14 million. The rate of doubling is now decelerating from one week to two weeks. Meanwhile, transit through major railway stations has declined by 70-80% across Japan. A lowering of new cases next week will be crucial to keep the hospitals from overflowing and the Prime Minister's reputation from falling further.FALLOUT - PM Abe's political capital is another casualty of this disease. It has emerged that his coalition partner the lay-Buddhist Komeito party threatened to walk out if the cash-for-all policy was not implemented requiring Abe to amend a previously-agreed budget bill much to the fury of the Ministry of Finance. The latter was able to require an application process as a means of limiting the amounts dispersed. However, in a bow to the changing circumstance, this process can be conducted online without, it seems, the need for in-person hanko certification. An additional complication is that Abe has 'fallen out' with his main bureaucratic 'fixer' and the main conduit with Komeito, Chief Cabinet Secretary Suga. Abe's poll ratings will probably never recover, and only his long-cherished desire to open the Tokyo Olympics in July 20121 will keep him in office. As will be true in many countries, the COVID-19 policy post mortems will be brutal and fatal for many previously Teflon-like political careers.Source • AgoopSource • @shinagawajp &gt; Blue bars = COVID-19 cases by Tokyo Ward   Orange Line = Concentration of people at 11 pmSource • @shinagawajp &gt; Blue bars = COVID-19 cases by Tokyo Ward  Red Line = Population earning more than ¥15m a yearHOTSPOTS &amp; FAT CATS - Some support for the government's policy of shutting down Tokyo's nightlife comes from data which correlates case count per Tokyo ward and population clusters in each area at 11 pm.  The correlation is much higher than both population levels and public transport transit through each ward. The second highest correlation was with income levels, suggesting that Tokyo' rich have a greater tendency to frequent bars, restaurants and other forms of evening entertainment, while no doubt considering themselves immune. This correlation has been anecdotally confirmed by the growing number of figures from the media and entertainment world who have contracted the disease and bears out the Tokyo Metropolitan Government's focus on avoiding the 3 'C's - Congregations Conversing in Confined spaces. The plug has been pulled on Tokyo's 'mizushobai' or 'water trade'.Source • Johns Hopkins CSSESource • LockdownTVPROF GIESECKE &amp; THE SWEDISH MODEL - Lastly, this video of an interview with retired Swedish epidemiologist, Professor Johan Giesecke, provides an update on the policy options that governments have faced in their responses to COVID-19, the background to Sweden's policy and the difficulties of exiting from lockdown strategies. A summary of his talk is as follows:-
Lockdown policies are not evidence-based
The correct policy is to protect the old and the frail only - this will eventually lead to herd immunity as a by-product - the initial UK response, which was similar to Sweden's was better  - before they made a 180 degree U-turn
The UK's Imperial College paper was not very good and he has never seen an unpublished paper have so much policy impact - the paper was  too pessimistic and any such models are a dubious basis for public policy
The flattening of the curve is due to the most vulnerable dying first as much as the lockdown policy
The outcomes will eventually be similar for all countries regardless of policy pursued
Covid-19 is a mild disease similar to the flu, and it was the novelty of the disease that scared people - the fatality rate of Covid-19 is the region of 0.1%
At least 50% of the population will be shown to have already had the disease when mass antibody testing becomes available - achieving 'herd immunity'
In the DETAIL below, we shall explore some of the emerging themes for the post-COVID-19 world, review the results, revisions and initial forecast announcements made on Friday and, finally, look at our lists the Moving Average 'Outliers'.  The positive/neutral/negative balance for Friday's three results announcements was 1:0:2. For the 20 revisions/forecasts, the split was 7:1:12 - although two of the positive outcomes were securities brokers making initial 'forecasts' of a year-on-year return to profitability after the full-year results have been finalised. Peer Groups revising down included Advertising Services, Apparel &amp; Footwear, Retail-Apparel &amp; Footwear, Hotels &amp; Resorts, Employment &amp; Staffing, and Restaurants. Upward revisions were seen in Retail-Food &amp; Drink, Personal Products, and Public Relations.

🇯🇵 JAPAN MARKET (& COVID-19) UPDATE 19th April - Overshoot

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p>Uber has withdrawn FY2020 guidance, provided early numbers on Covid-19 spending and announced it would write-down the value of minority investments.  This has a direct read-across to Softbank as Uber represents one of the Vision Fund's largest investments and the largest in its public portfolio, and indirectly as the asset impairment is very likely driven by lower values for Vision Fund portfolio companies Didi Chuxing and Grab.  The write-downs at Uber explain about 25% of expected Q4 losses for Vision Fund although the scale of impairment barely reflects secondary market opinions on Didi's value from October before Covid-19. If that is the case, there could be more pain ahead. </p>

Uber has withdrawn FY2020 guidance, provided early numbers on Covid-19 spending and announced it would write-down the value of minority investments.  This has a direct read-across to Softbank as Uber represents one of the Vision Fund's largest investments and the largest in its public portfolio, and indirectly as the asset impairment is very likely driven by lower values for Vision Fund portfolio companies Didi Chuxing and Grab.  The write-downs at Uber explain about 25% of expected Q4 losses for Vision Fund although the scale of impairment barely reflects secondary market opinions on Didi's value from October before Covid-19. If that is the case, there could be more pain ahead. 

Softbank Group: Uber Impairment Provides Clues to Vision Fund's Anticipated $10bn Q4 Write-Down

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Mizuho Financial Group / Equity Bottom-Up

<p><em><strong>* Pre-COVID-19 Challenges:</strong></em>Mizuho Americas (8411.JP) had a number of challenges even prior to the impact of COVID-19, which included: being the most heavily geared toward capital markets, making earnings quite volatile; an exorbitant cost structure which pushed the efficiency ratio to 81%; a wholesale funded balance sheet; and its latest regulatory filing where there appear to be no NPLs (2.17% of total loans in 3Q19) nor loans past due 30-89 days;</p><div><p><em><strong>*  COVID-19 Earnings Impact:</strong></em>Our “burn down” results for Miziho Americas suggest that the 4Q19 CET1/Tier 1 capital ratios would decline from 18.2% to 13.2% - implying that it would remain “well-capitalized”. Nevertheless, Like SMBC Americas (8316.JP) [SMBCA] we believe that COVID-19 will be more of a significant earnings event which would amount to 4.6 years of Mizuho America’s operating results; and</p></div><div><p><strong><em>* Mizuho’s Challenges: </em></strong>Mizuho Financial has made rapid progress on reducing the amount of expenses, overhead levels still remain quite robust resulting in Mizuho lagging peer in terms of core ROA and core ROE. Mizuho has more recently hedged unrealized gains in its outsized securities portfolio, which positively impacted its CET1 ratio. This leads to questions of how much of its large securities portfolio remains unhedged, hedge effectiveness, and counterparty risk during this latest crisis. SoftBank also represents a particular challenge. Lastly, the USD 1.1 bn Mizuho Americas risk amounts to 1.1% of Mizuho’s FY 2019 bottom-line. </p></div>

* Pre-COVID-19 Challenges:Mizuho Americas (8411.JP) had a number of challenges even prior to the impact of COVID-19, which included: being the most heavily geared toward capital markets, making earnings quite volatile; an exorbitant cost structure which pushed the efficiency ratio to 81%; a wholesale funded balance sheet; and its latest regulatory filing where there appear to be no NPLs (2.17% of total loans in 3Q19) nor loans past due 30-89 days;*  COVID-19 Earnings Impact:Our “burn down” results for Miziho Americas suggest that the 4Q19 CET1/Tier 1 capital ratios would decline from 18.2% to 13.2% - implying that it would remain “well-capitalized”. Nevertheless, Like SMBC Americas (8316.JP) [SMBCA] we believe that COVID-19 will be more of a significant earnings event which would amount to 4.6 years of Mizuho America’s operating results; and* Mizuho’s Challenges: Mizuho Financial has made rapid progress on reducing the amount of expenses, overhead levels still remain quite robust resulting in Mizuho lagging peer in terms of core ROA and core ROE. Mizuho has more recently hedged unrealized gains in its outsized securities portfolio, which positively impacted its CET1 ratio. This leads to questions of how much of its large securities portfolio remains unhedged, hedge effectiveness, and counterparty risk during this latest crisis. SoftBank also represents a particular challenge. Lastly, the USD 1.1 bn Mizuho Americas risk amounts to 1.1% of Mizuho’s FY 2019 bottom-line. 

Mizuho Americas – Capital Markets Challenged

Sumitomo Mitsui Financial Group / Equity Bottom-Up

<p><em><strong>* Pre-COVID-19 Challenges:</strong></em>SMBC Americas Holdings (8316.JP) [SMBCA] had a number of challenges even prior to the impact of COVID-19, which included: remaining profitable after two consecutive quarters of losses due to volatile capital markets revenues; weak NIMs attributed to a wholesale funded balance sheet; and an elevated cost structure with an efficiency and overhead ratio of 70.6% and 4.63% at 4Q19, respectively;</p><div><p><em><strong>*  COVID-19 Earnings Impact:</strong></em>Our “burn down” results for SMBCA suggest that the 4Q19 Tier 1 capital ratio would decline from 15.9% to 12.4% - implying that it would remain “well-capitalized”. Nevertheless, we believe that COVID-19 will be more of a significant earnings event which would amount to close to 10 years of SMBCA’s operating results; and</p></div><div><p><em><strong>* SMFG’s Chronic Challenges:</strong></em> Sumitomo Mitsui Financial Group (8316.JP) [SMFG] relies quite heavily on lower quality volatile sources of trading revenue, has significant Softbank risk, and it expanded late to USD-based Asia. The current environment is likely to cause a bit of delay in partnership expansion as well. SMBCA’s earnings at risk of USD 1 bn should translate into 1.9% of SMFG’s bottom-line. </p></div>

* Pre-COVID-19 Challenges:SMBC Americas Holdings (8316.JP) [SMBCA] had a number of challenges even prior to the impact of COVID-19, which included: remaining profitable after two consecutive quarters of losses due to volatile capital markets revenues; weak NIMs attributed to a wholesale funded balance sheet; and an elevated cost structure with an efficiency and overhead ratio of 70.6% and 4.63% at 4Q19, respectively;*  COVID-19 Earnings Impact:Our “burn down” results for SMBCA suggest that the 4Q19 Tier 1 capital ratio would decline from 15.9% to 12.4% - implying that it would remain “well-capitalized”. Nevertheless, we believe that COVID-19 will be more of a significant earnings event which would amount to close to 10 years of SMBCA’s operating results; and* SMFG’s Chronic Challenges: Sumitomo Mitsui Financial Group (8316.JP) [SMFG] relies quite heavily on lower quality volatile sources of trading revenue, has significant Softbank risk, and it expanded late to USD-based Asia. The current environment is likely to cause a bit of delay in partnership expansion as well. SMBCA’s earnings at risk of USD 1 bn should translate into 1.9% of SMFG’s bottom-line. 

SMBC Americas Holdings – Expecting 19% NPLs in USA

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

<p><em><strong>* Pre-COVID-19 Challenges:</strong></em>MUFG Americas Holdings (8306.JP) [MUFGA] had a number of challenges even prior to the impact of COVID-19, which included: burdensome overhead levels, modest cracks in credit with concentrations in some challenged sectors, and limited NCO cover;</p><div><p><em><strong>*  COVID-19 Balance Sheet Impact:</strong></em>Our “burn down” results for MUFGA were a surprise. We calculate that MUFGA’s 4Q19 CET1/Tier 1 capital ratios would decline from 14.1% to 3.9% - implying a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFGA’s stated equity.</p></div><div><p><em><strong>* MUFG Had Enough to Worry About:</strong></em>Outside of MUFG’s high reliance on volatile sources of securities trading, impairment losses associated with its ownership stakes, the re-jigging of the systems integration at MUFG NICOS, exposure to the troubled SoftBank, and dilution from the  Morgan Stanley (MS.US) acquisition of E*Trade Financial (ETFC.US) for approximately USD 13 bn, MUFG must  now address MUFGA’s capital requirement which represents 13.1% of parent company market cap.  </p></div>

* Pre-COVID-19 Challenges:MUFG Americas Holdings (8306.JP) [MUFGA] had a number of challenges even prior to the impact of COVID-19, which included: burdensome overhead levels, modest cracks in credit with concentrations in some challenged sectors, and limited NCO cover;*  COVID-19 Balance Sheet Impact:Our “burn down” results for MUFGA were a surprise. We calculate that MUFGA’s 4Q19 CET1/Tier 1 capital ratios would decline from 14.1% to 3.9% - implying a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFGA’s stated equity.* MUFG Had Enough to Worry About:Outside of MUFG’s high reliance on volatile sources of securities trading, impairment losses associated with its ownership stakes, the re-jigging of the systems integration at MUFG NICOS, exposure to the troubled SoftBank, and dilution from the  Morgan Stanley (MS.US) acquisition of E*Trade Financial (ETFC.US) for approximately USD 13 bn, MUFG must  now address MUFGA’s capital requirement which represents 13.1% of parent company market cap.  

MUFG Americas Holdings – The Hits Just Keep On Coming

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Mitsubishi UFJ Financial (MUFG) (8306 JP)

🇯🇵 JAPAN MARKET (& COVID-19) UPDATE 19th April - Overshoot

MARKING TIME - Japanse equities were becalmed last week, rising by 0.84%, while the Yen traded at 107 all week. The Bank of Japan bought ETFs on...

Campbell Gunn

Softbank Group: Uber Impairment Provides Clues to Vision Fund's Anticipated $10bn Q4 Write-Down

Uber has withdrawn FY2020 guidance, provided early numbers on Covid-19 spending and announced it would write-down the value of minority...

Kirk Boodry

Mizuho Americas – Capital Markets Challenged

* Pre-COVID-19 Challenges:Mizuho Americas (8411.JP) had a number of challenges even prior to the impact of COVID-19, which included: being the most...

Thomas J. Monaco

SMBC Americas Holdings – Expecting 19% NPLs in USA

* Pre-COVID-19 Challenges:SMBC Americas Holdings (8316.JP) [SMBCA] had a number of challenges even prior to the impact of COVID-19, which included:...

Thomas J. Monaco

MUFG Americas Holdings – The Hits Just Keep On Coming

* Pre-COVID-19 Challenges:MUFG Americas Holdings (8306.JP) [MUFGA] had a number of challenges even prior to the impact of COVID-19, which included:...

Thomas J. Monaco

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