Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Most of Japan’s 77 TSE-listed regional banking entities are expected to announce their interim results from 10-12 November this year, but <a href="https://www.smartkarma.com/entities/hachijuni-bank-ltd" target="_blank" data-smartkarma-citation="entities:20244:1" rel="noopener">Hachijuni Bank (8359 JP)</a> has once again announced its interim results well ahead of the rest.  While results comfortably beat initial guidance, there were no surprises thanks to an upward revision to guidance a week ago. Moreover, an examination of those ‘much improved’ numbers shows that the bank was once again heavily reliant on loan-loss reserve write-backs and ‘selling the family silver’ to keep profits up.The stock is currently just +3.0% higher than it was six months ago; most peers are up around +9% over the same period.  Indeed, Hachijuni Bank has been a conspicuous underperformer against the Topix Banks Index for much of CY2021.  Currently trading on a FY3/2022  PER of 8.3x and PBR of 0.21x, the stock is not especially compelling.  The bank’s woefully low RoE and RoA remain serial disincentives for investors, although some 17% of total shares outstanding continue to be held by die-hard foreigners.There are other regional bank stocks (such as <a href="https://www.smartkarma.com/entities/chiba-bank-ltd" target="_blank" data-smartkarma-citation="entities:1048:1" rel="noopener">Chiba Bank (8331 JP)</a>, <a href="https://www.smartkarma.com/entities/shizuoka-bank-ltd" target="_blank" data-smartkarma-citation="entities:4437:1" rel="noopener">Shizuoka Bank (8355 JP)</a> and <a href="https://www.smartkarma.com/entities/fukuoka-financial-group-inc" target="_blank" data-smartkarma-citation="entities:3712:1" rel="noopener">Fukuoka Financial Group (8354 JP)</a> more deserving of investor interest than this one.  For those who are not yet holders of Hachijuni Bank stock, our position is clear: Caveat emptor!  (May the buyer beware!)<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/238/644/original/8359-Hachijuni-2021-1029+8359RelvsTPNBNK.jpg?1635648829" class="editor-image img-responsive" data-smartkarma-image-id="238644"></figure></section>

Most of Japan’s 77 TSE-listed regional banking entities are expected to announce their interim results from 10-12 November this year, but Hachijuni Bank (8359 JP) has once again announced its interim results well ahead of the rest.  While results comfortably beat initial guidance, there were no surprises thanks to an upward revision to guidance a week ago. Moreover, an examination of those ‘much improved’ numbers shows that the bank was once again heavily reliant on loan-loss reserve write-backs and ‘selling the family silver’ to keep profits up.The stock is currently just +3.0% higher than it was six months ago; most peers are up around +9% over the same period.  Indeed, Hachijuni Bank has been a conspicuous underperformer against the Topix Banks Index for much of CY2021.  Currently trading on a FY3/2022  PER of 8.3x and PBR of 0.21x, the stock is not especially compelling.  The bank’s woefully low RoE and RoA remain serial disincentives for investors, although some 17% of total shares outstanding continue to be held by die-hard foreigners.There are other regional bank stocks (such as Chiba Bank (8331 JP), Shizuoka Bank (8355 JP) and Fukuoka Financial Group (8354 JP) more deserving of investor interest than this one.  For those who are not yet holders of Hachijuni Bank stock, our position is clear: Caveat emptor!  (May the buyer beware!)

Hachijuni Bank (8359 JP):  Ahead of the Peloton

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for <a href="https://www.smartkarma.com/entities/hachijuni-bank-ltd" target="_blank" data-smartkarma-citation="entities:20244:1" rel="noopener">Hachijuni Bank (8359 JP)</a> are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for Hachijuni Bank (8359 JP) are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)  

Hachijuni Bank (8359 JP):  A Case of Prestidigitation?

'<a href="https://www.youtube.com/watch?v=KeaaRIeuYf0" target="_blank" rel="noopener">Never Mind the Quality, Feel the Width</a>' was a highly successful British TV sitcom starring John Bluthal and Joe Lynch that ran between 1967 and 1971.  The comedy show’s title was a reference to the two main characters: tailors with highly questionable skills when it came to fashioning cloth and who were always quarreling with each other.  The title is brought to mind when one considers the rationale behind foreigner investors owning <a href="https://www.smartkarma.com/entities/hachijuni-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20244:1">Hachijuni Bank (8359 JP)</a> stock: while the numbers look good on the surface, the quality of those profits is open to considerable question. There are far better investments in the Japanese banking sector than this. Caveat emptor!  (May the buyer beware!)

'Never Mind the Quality, Feel the Width' was a highly successful British TV sitcom starring John Bluthal and Joe Lynch that ran between 1967 and 1971.  The comedy show’s title was a reference to the two main characters: tailors with highly questionable skills when it came to fashioning cloth and who were always quarreling with each other.  The title is brought to mind when one considers the rationale behind foreigner investors owning Hachijuni Bank (8359 JP) stock: while the numbers look good on the surface, the quality of those profits is open to considerable question. There are far better investments in the Japanese banking sector than this. Caveat emptor!  (May the buyer beware!)

Hachijuni Bank  (8359 JP):  Never Mind the Quality, Feel the Width

The first Japanese bank out of the blocks to report its financial performance for the FY3/2019 season, <a href="https://www.smartkarma.com/entities/20244" target="_blank" data-smartkarma-citation="entities:20244:1">Hachijuni Bank (8359 JP)</a> produced numbers that were right in line with its November 2018 revised guidance.  Consolidated net profits fell 13% YoY to ¥22.49 billion: the third straight year of profit decline.  Foreign investors have a curious fascination with the bank, owning in aggregate a remarkably-high 23.8% of the outstanding stock.  The foreigners appear to be attracted by the bank’s high capital ratio (18.6% as of end-December 2018), relatively high liquidity (daily trading volume = US$6mn/day) and seemingly low valuation (PBR of 0.30x), but seem blithely unconcerned by the bank’s appallingly low RoA of 0.23% (a reflection of management’s preference for low-risk, fine-margin lending to large corporates); by its poor RoE of 2.92% (the consequence of an inefficiently high CAR); by its minimal return on total funds deployed (a mere 7 basis points); or by its deceptively low NPL ratio of 1.45% (which actually suggests a high level of bad SME credits at home, given the bank’s penchant for relatively ‘risk-free’ lending, including mortgages, local and central government lending and large-lot corporate loans in the Tokyo market).  The business model needs a serious rethink, while the share price performance over the last year tells its own story.  Caveat emptor!  (May the buyer beware!)

The first Japanese bank out of the blocks to report its financial performance for the FY3/2019 season, Hachijuni Bank (8359 JP) produced numbers that were right in line with its November 2018 revised guidance.  Consolidated net profits fell 13% YoY to ¥22.49 billion: the third straight year of profit decline.  Foreign investors have a curious fascination with the bank, owning in aggregate a remarkably-high 23.8% of the outstanding stock.  The foreigners appear to be attracted by the bank’s high capital ratio (18.6% as of end-December 2018), relatively high liquidity (daily trading volume = US$6mn/day) and seemingly low valuation (PBR of 0.30x), but seem blithely unconcerned by the bank’s appallingly low RoA of 0.23% (a reflection of management’s preference for low-risk, fine-margin lending to large corporates); by its poor RoE of 2.92% (the consequence of an inefficiently high CAR); by its minimal return on total funds deployed (a mere 7 basis points); or by its deceptively low NPL ratio of 1.45% (which actually suggests a high level of bad SME credits at home, given the bank’s penchant for relatively ‘risk-free’ lending, including mortgages, local and central government lending and large-lot corporate loans in the Tokyo market).  The business model needs a serious rethink, while the share price performance over the last year tells its own story.  Caveat emptor!  (May the buyer beware!)

Hachijuni Bank (8359 JP): No Reason To Get Excited

Interim results announced on Friday by <a href="https://www.smartkarma.com/entities/20244" target="_blank" data-smartkarma-citation="entities:20244:1">Hachijuni Bank (8359 JP)</a> beat the bank’s own guidance, but still represented a significant year-on-year decline.  The bank has lifted marginally its full-year guidance for consolidated net profits from ¥21.0 billion to ¥22.5 billion, or ¥45/share, and has raised its dividend by ¥1/share to ¥14, suggesting an improved dividend payout ratio of 31%.  On a prospective PER (using the bank’s revised guidance) of 10.2x and a remarkably low PBR of 0.30x, the stock appears inexpensive at first glance, having fallen 21.1% over the last 6 months and by 34.4% over the last 12 months.  Nevertheless, investors remain wary of the stock for the bank’s poor returns on funds deployed (RoA of 0.23% and RoE of 2.78%).  Our view is there are much better investment opportunities elsewhere in the sector, such as <a href="https://www.smartkarma.com/entities/1048" target="_blank" data-smartkarma-citation="entities:1048:1">Chiba Bank (8331 JP)</a>, <a href="https://www.smartkarma.com/entities/5248" target="_blank" data-smartkarma-citation="entities:5248:1">Bank Of Kyoto (8369 JP)</a> or <a href="https://www.smartkarma.com/entities/15836" target="_blank" data-smartkarma-citation="entities:15836:1">Yamaguchi Financial Group In (8418 JP)</a>.

Interim results announced on Friday by Hachijuni Bank (8359 JP) beat the bank’s own guidance, but still represented a significant year-on-year decline.  The bank has lifted marginally its full-year guidance for consolidated net profits from ¥21.0 billion to ¥22.5 billion, or ¥45/share, and has raised its dividend by ¥1/share to ¥14, suggesting an improved dividend payout ratio of 31%.  On a prospective PER (using the bank’s revised guidance) of 10.2x and a remarkably low PBR of 0.30x, the stock appears inexpensive at first glance, having fallen 21.1% over the last 6 months and by 34.4% over the last 12 months.  Nevertheless, investors remain wary of the stock for the bank’s poor returns on funds deployed (RoA of 0.23% and RoE of 2.78%).  Our view is there are much better investment opportunities elsewhere in the sector, such as Chiba Bank (8331 JP), Bank Of Kyoto (8369 JP) or Yamaguchi Financial Group In (8418 JP).

Hachijuni Bank (8359 JP): Cheap with Good Reason

Japan

The Nagano Bank, LTD. is a regional bank based in Nagano.  The Bank offers general banking services including deposits, loans, and foreign exchange transactions.  The Nagano Bank also provides leasing, letter of credit, credit cards, and clerical works offered to banks for their daily operations.

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Nagano Bank (8521 JP)

Hachijuni Bank (8359 JP): Ahead of the Peloton

Hachijuni Bank's interim results comfortably beat initial guidance, but there were no surprises thanks to an upward revision to earnings guidance a...

J. Brian Waterhouse

Hachijuni Bank (8359 JP): A Case of Prestidigitation?

Prestidigitation, or sleight of hand, is what magicians use to create their illusions. Onlookers are beguiled into looking elsewhere at a crucial...

J. Brian Waterhouse

Hachijuni Bank (8359 JP): Never Mind the Quality, Feel the Width

'Never Mind the Quality, Feel the Width' was a highly successful British TV sitcom starring John Bluthal and Joe Lynch that ran between 1967 and...

J. Brian Waterhouse

Hachijuni Bank (8359 JP): No Reason To Get Excited

The first Japanese bank out of the blocks to report its financial performance for the FY3/2019 season, Hachijuni Bank (8359 JP) produced numbers...

J. Brian Waterhouse

Hachijuni Bank (8359 JP): Cheap with Good Reason

Interim results announced on Friday by Hachijuni Bank (8359 JP) beat the bank’s own guidance, but still represented a significant year-on-year...

J. Brian Waterhouse

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