Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Overall lending, in terms of loans outstanding, is now relatively static, even though YoY growth rates remain comparatively high at around +5.7%pa.  End-February 2021 loan outstandings have drifted back to June 2020 levels, that is to around to the time of the surge in new lending as Japan came out of its first COVID-induced nationwide lock-down.While the Japanese bank sector has enjoyed a rally since the beginning of the year on the back of a weakening Yen, the start of the roll-out of COVID-19 vaccines and a steepening of the long-bond yield curve (albeit from negative territory to closer to zero), the fundamental outlook for the banks remains clouded.  Technically, having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), we expect the sector to weaken on reducing volume as we approach the fiscal year-end in Japan.The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock prices do not rise for ever  –  especially Japanese bank stocks.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/196/406/original/JBanks-2021-0323-TPXvsTPNBNK-2015-2021.jpg?1616476627" class="editor-image img-responsive" data-smartkarma-image-id="196406"></figure></section>

Overall lending, in terms of loans outstanding, is now relatively static, even though YoY growth rates remain comparatively high at around +5.7%pa.  End-February 2021 loan outstandings have drifted back to June 2020 levels, that is to around to the time of the surge in new lending as Japan came out of its first COVID-induced nationwide lock-down.While the Japanese bank sector has enjoyed a rally since the beginning of the year on the back of a weakening Yen, the start of the roll-out of COVID-19 vaccines and a steepening of the long-bond yield curve (albeit from negative territory to closer to zero), the fundamental outlook for the banks remains clouded.  Technically, having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), we expect the sector to weaken on reducing volume as we approach the fiscal year-end in Japan.The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock prices do not rise for ever  –  especially Japanese bank stocks.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

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

Equity Bottom-Up

*DOJ Going Overboard:The US Department of Justice (DOJ) has begun investigating Visa (V.US) [Visa] over anticompetitive practices again. This time for alleged restrictions of merchants from routing in-store and online debit-card transactions through less expensive card networks, which is in contravention to the 2010 Durbin Amendment; and*Here Is Where We Think The DOJ Is Wrong: With Visa’s termination of its upstart Plaid acquisition, Visa’s alleged attempt to monopolize the online debit business has already been thwarted. Further, the combination of mix shift toward covered transactions coupled with declining yields has acted as a headwind for Visa's debit interchange fees. That Mastercard (MA.US) has convinced numerous US banks to switch their debit-card portfolios away from Visa evidences competitive pricing pressures. Lastly, there may actually be precedence for Visa’s stance given the recent outcome of the Federal Trade Commission (FTC) v. Qualcomm (QCOM.US) case.

*DOJ Going Overboard:The US Department of Justice (DOJ) has begun investigating Visa (V.US) [Visa] over anticompetitive practices again. This time for alleged restrictions of merchants from routing in-store and online debit-card transactions through less expensive card networks, which is in contravention to the 2010 Durbin Amendment; and*Here Is Where We Think The DOJ Is Wrong: With Visa’s termination of its upstart Plaid acquisition, Visa’s alleged attempt to monopolize the online debit business has already been thwarted. Further, the combination of mix shift toward covered transactions coupled with declining yields has acted as a headwind for Visa's debit interchange fees. That Mastercard (MA.US) has convinced numerous US banks to switch their debit-card portfolios away from Visa evidences competitive pricing pressures. Lastly, there may actually be precedence for Visa’s stance given the recent outcome of the Federal Trade Commission (FTC) v. Qualcomm (QCOM.US) case.

Visa Inc – Noise Creates Buying Opportunity

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) continue to hold above critical support levels and market dynamics remain largely positive. Until this changes, we believe global equities are headed higher in the coming weeks and months. Additionally, we are reiterating our overweight recommendations on small-caps and value as we believe outperformance from these areas is likely to continue.

Major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) continue to hold above critical support levels and market dynamics remain largely positive. Until this changes, we believe global equities are headed higher in the coming weeks and months. Additionally, we are reiterating our overweight recommendations on small-caps and value as we believe outperformance from these areas is likely to continue.

Global Equity Strategy: Small-Caps and Value Stocks Remain in Focus

Bank Negara Indonesia Persero / Equity Bottom-Up

*Capital Raise Coming:Without any detail whatsoever, on March 10, 2021, the Ministry of State-Owned Enterprises (MOSOE) announced that Bank Negara Indonesia (BBNI.IJ) [BBNI] will seek a rights offering sometime in 2022; and*Big Dilution Expected Given Awful Credit Metrics:BBNI’s stated capital levels are low by sector comparison at a 16.8% CAR. Net new NPLs have increased 206.0% on an annualized basis – the absolute worst we have witnessed regionally this quarter. We calculate a minimum loss reserve shortfall of IDR 29.7 tn which represents 28% of stated capital – intimating a significant capital is on the horizon.

*Capital Raise Coming:Without any detail whatsoever, on March 10, 2021, the Ministry of State-Owned Enterprises (MOSOE) announced that Bank Negara Indonesia (BBNI.IJ) [BBNI] will seek a rights offering sometime in 2022; and*Big Dilution Expected Given Awful Credit Metrics:BBNI’s stated capital levels are low by sector comparison at a 16.8% CAR. Net new NPLs have increased 206.0% on an annualized basis – the absolute worst we have witnessed regionally this quarter. We calculate a minimum loss reserve shortfall of IDR 29.7 tn which represents 28% of stated capital – intimating a significant capital is on the horizon. 

Bank Negara Indonesia – MOSOE Tosses A Grenade

Mizuho Financial Group / Equity Bottom-Up

“It’s déjà vu all over again” -  Attributed to Yogi Berra (1925-2015), legendary baseball Hall of FamerGetting money from a banker is sometimes likened to trying to squeeze blood out of a stone. Customers of Mizuho Bank, the principal commercial banking subsidiary of megabank holding company <a href="https://www.smartkarma.com/entities/mizuho-financial-group-inc" target="_blank" data-smartkarma-citation="entities:219:1" rel="noopener">Mizuho Financial Group (8411 JP)</a> (MHFG), could be forgiven for agreeing with this derogatory epithet after over half of the bank’s 5,395 ATMs stopped working suddenly on Sunday 28 February.  Many customers were unable to draw cash out from the ATMs and some had their cash cards and savings passbooks ‘swallowed’ by the recalcitrant machines.  Internet banking was also apparently affected.This is not the first time that Mizuho has had major problems as a result of computer system crashes: there were similar issues in April 2002 and again in March 2011.  On both occasions, the Financial Services Agency (FSA) subsequently issued Business Correction Orders against the bank.  This time it appears that problems arose during a fixed deposit data update, causing the system to crash.Reputational damage is extremely difficult for any company to recover from easily, and perhaps more so for a bank where not only are issues of trust and public responsibility as a financial institution involved but also large sums of money.  What takes a generation to build can be lost in a moment when it comes to reputation and trust.  Smartkarma readers may well remember the public excoriation in 2010 on TV of a clutch of bank presidents both in the USA and the UK in the wake of the Global Financial Crisis. In Japan, where the megabanks emerged largely unscathed from the worst excesses of the GFC (although their investment portfolios took a severe hit in FY3/2009), incoming Mizuho Financial Group president &amp; CEO Yasuhiro Sato seemed to spend much of his first six months in office from June 2011 appearing on TV to repeatedly publicly apologize for Mizuho’s past systems errors and for the ongoing inconvenience to customers.Senior management clearly have much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.Market reaction has been typically perverse, with Mizuho’s share price rising gently as part of the recovery from Friday’s Wall Street sell-off.  The stock is up close to +13% over the last 3 months (against an average +17% for peers) but is only +1.5% YoY (versus an average +2.5% for peers).  In short, the stock is underperforming even as the banking sector outperforms the Topix Index for the first time in several years.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation for reliability.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

“It’s déjà vu all over again” -  Attributed to Yogi Berra (1925-2015),  legendary baseball Hall of FamerGetting money from a banker is sometimes likened to trying to squeeze blood out of a stone. Customers of Mizuho Bank, the principal commercial banking subsidiary of megabank holding company Mizuho Financial Group (8411 JP) (MHFG), could be forgiven for agreeing with this derogatory epithet after over half of the bank’s 5,395 ATMs stopped working suddenly on Sunday 28 February.  Many customers were unable to draw cash out from the ATMs and some had their cash cards and savings passbooks ‘swallowed’ by the recalcitrant machines.  Internet banking was also apparently affected.This is not the first time that Mizuho has had major problems as a result of computer system crashes: there were similar issues in April 2002 and again in March 2011.  On both occasions, the Financial Services Agency (FSA) subsequently issued Business Correction Orders against the bank.  This time it appears that problems arose during a fixed deposit data update, causing the system to crash.Reputational damage is extremely difficult for any company to recover from easily, and perhaps more so for a bank where not only are issues of trust and public responsibility as a financial institution involved but also large sums of money.  What takes a generation to build can be lost in a moment when it comes to reputation and trust.  Smartkarma readers may well remember the public excoriation in 2010 on TV of a clutch of bank presidents both in the USA and the UK in the wake of the Global Financial Crisis. In Japan, where the megabanks emerged largely unscathed from the worst excesses of the GFC (although their investment portfolios took a severe hit in FY3/2009), incoming Mizuho Financial Group president &amp; CEO Yasuhiro Sato seemed to spend much of his first six months in office from June 2011 appearing on TV to repeatedly publicly apologize for Mizuho’s past systems errors and for the ongoing inconvenience to customers.Senior management clearly have much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.Market reaction has been typically perverse, with Mizuho’s share price rising gently as part of the recovery from Friday’s Wall Street sell-off.  The stock is up close to +13% over the last 3 months (against an average +17% for peers) but is only +1.5% YoY (versus an average +2.5% for peers).  In short, the stock is underperforming even as the banking sector outperforms the Topix Index for the first time in several years.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation for reliability.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Mizuho Financial Group (8411 JP):  Deja Vu All Over Again

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)

Japanese Bank Lending: A Lot of Static

The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock...

J. Brian Waterhouse

Visa Inc – Noise Creates Buying Opportunity

VISA: The DOJ has again begun investigating Visa over anticompetitive practices due to alleged merchant restrictions to rout online debit-card...

Thomas J. Monaco

Global Equity Strategy: Small-Caps and Value Stocks Remain in Focus

We are reiterating our overweight recommendations on small-caps and value as we believe outperformance from these areas is likely to continue.

Vermilion Research

Bank Negara Indonesia – MOSOE Tosses A Grenade

Bank Negara Indonesia: Without any detail the MOSOE announced that BBNI will seek a rights offering in 2022. We calculate a minimum loss reserve...

Thomas J. Monaco

Mizuho Financial Group (8411 JP): Deja Vu All Over Again

Getting money from a banker is sometimes likened to trying to squeeze blood out of a stone. Customers of Mizuho Bank experienced this first-hand...

J. Brian Waterhouse

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