Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) came to +9.7% YoY in December 2020: the highest YoY growth level ever recorded, surpassing the previous record of +9.5% YoY growth rate set back in August and far exceeding the banks’ aggregate loan growth which declined in December 2020 to just +5.3% YoY.  This represented the 171st consecutive month of YoY deposit growth for all JBA member banks.  Banks have more money than they know what to do with, and not nearly enough borrowers to lend to.Taking a closer look at the data, major bank deposit balances have actually fallen in five of the last six months (November being the exception). In contrast to the major banks, deposit balances at both the regional and secondary regional banks continue to grow markedly, +8.9% YoY (a new all-time record) and +8.6% YoY (2nd-highest YoY growth rate ever), respectively.  Unsurprisingly, their loan-to-deposit ratios (LDRs) continue to deteriorate rapidly, although nowhere near the average LDR of the major banks which is now down to 51.4%.‘Profitless prosperity’ remains an ongoing reality for Japan’s banks: awash in cash, margins under relentless pressure and struggling to avoid yet another year of shareholder disappointment through further profits decline.  Some small local banks are already forecasting consolidated net losses for FY3/2021 that have little to do with the adverse economic impact of COVID-19 per se but reflect the difficult operating conditions for all Japanese banks in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/185/011/original/8300-WR-JBanks-2021-0126-EbbTide+TPNBNKvsTPX+in+2020.jpg?1611797731" class="editor-image img-responsive" data-smartkarma-image-id="185011"></figure></section>

Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) came to +9.7% YoY in December 2020: the highest YoY growth level ever recorded, surpassing the previous record of +9.5% YoY growth rate set back in August and far exceeding the banks’ aggregate loan growth which declined in December 2020 to just +5.3% YoY.  This represented the 171st consecutive month of YoY deposit growth for all JBA member banks.  Banks have more money than they know what to do with, and not nearly enough borrowers to lend to.Taking a closer look at the data, major bank deposit balances have actually fallen in five of the last six months (November being the exception). In contrast to the major banks, deposit balances at both the regional and secondary regional banks continue to grow markedly, +8.9% YoY (a new all-time record) and +8.6% YoY (2nd-highest YoY growth rate ever), respectively.  Unsurprisingly, their loan-to-deposit ratios (LDRs) continue to deteriorate rapidly, although nowhere near the average LDR of the major banks which is now down to 51.4%.‘Profitless prosperity’ remains an ongoing reality for Japan’s banks: awash in cash, margins under relentless pressure and struggling to avoid yet another year of shareholder disappointment through further profits decline.  Some small local banks are already forecasting consolidated net losses for FY3/2021 that have little to do with the adverse economic impact of COVID-19 per se but reflect the difficult operating conditions for all Japanese banks in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Banks:  Buddy, Can We Spare You a Dime !

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Bank Lending: An Ebb Tide in 2021?

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.
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2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the <a href="https://www.smartkarma.com/entities/daishi-hokuetsu-financial-group" target="_blank" data-smartkarma-citation="entities:27533:1" rel="noopener">Daishi Hokuetsu Financial Group (7327 JP)</a> ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.




2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the Daishi Hokuetsu Financial Group (7327 JP) ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Equity Bottom-Up

Late on Christmas Day, news leaked out into the financial media that regional bank <a href="https://www.smartkarma.com/entities/fukui-bank-ltd" target="_blank" data-smartkarma-citation="entities:9011:1" rel="noopener">Fukui Bank (8362 JP)</a> may be in advanced negotiations with unlisted secondary regional bank Fukuho Bank to take it over, initially as a majority-owned subsidiary.  Both banks are from Fukui Prefecture in the Hokuriku Region facing the Sea of Japan.  With a combined market share in Fukui Prefecture of around 36% for deposits and 49% for loans, the banks would likely need to invoke the exemptions under the recently approved law permitting banks from the same prefecture to merge without falling afoul of Japan’s anti-monopoly laws.While Fukui Bank’s share price has outperformed the Topix Banks Index in CY2020, this is damning the stock with faint praise.  Foreign investors would be well advised to steer clear.  This is not a run-of-the-mill case of a strong local bank absorbing a smaller, weaker rival.  Far from it.  Both banks have a long history of credit problems, erratic profitability and weakening performance ratios.While the takeover would no doubt have the blessing of the Suga Administration which has been actively promoting a reduction in the number of regional banks, it is difficult to see the economic rationale for the takeover.  Skeptics might suggest this is little more than an opportunity for the banks  -  should they eventually decide to go for a full merger  -  to revalue their head offices, generate one-time ‘windfall profits’ to artificially boost capital and thereby allow Fukuho Bank to repay the ¥6 billion in public funds that it still owes.  And then?  The risk for investors is a reversion by both banks to sub-par operational performance.Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2021.

Late on Christmas Day, news leaked out into the financial media that regional bank Fukui Bank (8362 JP) may be in advanced negotiations with unlisted secondary regional bank Fukuho Bank to take it over, initially as a majority-owned subsidiary.  Both banks are from Fukui Prefecture in the Hokuriku Region facing the Sea of Japan.  With a combined market share in Fukui Prefecture of around 36% for deposits and 49% for loans, the banks would likely need to invoke the exemptions under the recently approved law permitting banks from the same prefecture to merge without falling afoul of Japan’s anti-monopoly laws.While Fukui Bank’s share price has outperformed the Topix Banks Index in CY2020, this is damning the stock with faint praise.  Foreign investors would be well advised to steer clear.  This is not a run-of-the-mill case of a strong local bank absorbing a smaller, weaker rival.  Far from it.  Both banks have a long history of credit problems, erratic profitability and weakening performance ratios.While the takeover would no doubt have the blessing of the Suga Administration which has been actively promoting a reduction in the number of regional banks, it is difficult to see the economic rationale for the takeover.  Skeptics might suggest this is little more than an opportunity for the banks  -  should they eventually decide to go for a full merger  -  to revalue their head offices, generate one-time ‘windfall profits’ to artificially boost capital and thereby allow Fukuho Bank to repay the ¥6 billion in public funds that it still owes.  And then?  The risk for investors is a reversion by both banks to sub-par operational performance.Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2021.

Fukui Bank (8362 JP):  On Santa's List: Fukuho-Ho-Ho !

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

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

Japan

Mizuho Financial Group, Inc. provides comprehensive financial services through its subsidiaries. The Group provides variety of financial services such as general banking, securities brokerage, trust banking, and assets management.

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Mizuho Financial Group (8411 JP)

Japanese Banks: Buddy, Can We Spare You a Dime !

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J. Brian Waterhouse

Japanese Bank Lending: An Ebb Tide in 2021?

The ‘dash for cash’ by large corporates appears to be over, at least in terms of lending by the major banks. Only the small secondary regionals...

J. Brian Waterhouse

Japanese Banks: Ever Lower

For investors in Japanese bank stocks, 2020 was another year of pain. The sector fell almost 22% YoY; only 5 bank stocks out of 92 registered YoY...

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Fukui Bank (8362 JP): On Santa's List: Fukuho-Ho-Ho !

On Christmas Day, it was reported that Fukui Bank (8362 JP) may be in negotiations with Fukuho Bank to take it over as a majority-owned...

J. Brian Waterhouse

US Banks – Capital Unchained

US BANKS: The new FRB rule suggests that the CCAR) bank total capital distribution will be capped at 100% over the previous four quarters beginning...

Thomas J. Monaco

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