Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>So far, 10 regional banks have upgraded guidance since Q1 results. One of them (Iyogin) twice. The average gain is +71.7% vs original H1 guidance (if we count Iyogin once).</li>
<li>This week will be the big push for new guidance ahead of a flood earnings reports the following week. Election results will cause concern, and the BOJ meets Thursday.</li>
<li>I expect a move in December (positive for banks), but it may be US Fed and $/¥-dependent. In the meantime banks enjoy tailwinds.</li>
</ul>


So far, 10 regional banks have upgraded guidance since Q1 results. One of them (Iyogin) twice. The average gain is +71.7% vs original H1 guidance (if we count Iyogin once).
This week will be the big push for new guidance ahead of a flood earnings reports the following week. Election results will cause concern, and the BOJ meets Thursday.
I expect a move in December (positive for banks), but it may be US Fed and $/¥-dependent. In the meantime banks enjoy tailwinds.


Japan 2024 H1 Bank Guidance: Interest/Fees ⬆︎, Expenses/Credit Costs⬇︎ - Opportunity Good Still

<ul>
<li>40% of Banks outside the Top 7 (none of which offered H1 guidance) in the TOPIX Banks Index have now changed H1 guidance or reported H1. 2 reported both up.</li>
<li>92% of the others have revised up H1 net income guidance a weighted average of 47%. Net Interest Income, Corporate fees/comms are up, expenses and credit costs are down.</li>
<li>Big tables with data, reasons for guidance changes, and buyback history of each presented below.</li>
</ul>


40% of Banks outside the Top 7 (none of which offered H1 guidance) in the TOPIX Banks Index have now changed H1 guidance or reported H1. 2 reported both up.
92% of the others have revised up H1 net income guidance a weighted average of 47%. Net Interest Income, Corporate fees/comms are up, expenses and credit costs are down.
Big tables with data, reasons for guidance changes, and buyback history of each presented below.


Japan H1 Bank Earnings: Interest/Fees Up, Expenses/Credit Costs Down - Opportunity Abounds, Still

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

In our previous Smartkarma Insight featuring <a href="https://www.smartkarma.com/insights/nanto-bank-8367-jp-gravity-defying" target="_blank" data-smartkarma-citation="insights:34370" rel="noopener">Nanto Bank  (8367 JP):  Gravity Defying</a>, Nara Prefecture’s sole remaining local bank, we noted the sharp rise in the bank’s share price and expressed concern that such investor enthusiasm for the stock could not be justified by the fundamentals.  The shares closed on Friday 30 October 2020 at ¥1,848, down 32.1% since that Insight.  While valuations have improved as result of that price decline, we think it is still too early to buy.Nanto Bank is a classic example of bank management ‘kicking the can down the road’ and ignoring serious structural issues until almost past the point of salvation.  Nanto Bank’s problems are not simply the result of past unwise investments in highly volatile foreign securities derivatives as a means of shoring up dwindling income from ‘traditional’ business.  Nanto Bank is overstaffed, has too many branches relative to available business, and its operations are inefficient.  Loan growth had effectively ground to a halt prior to the COVID-19-influenced April-June 2020 quarter, while the bank has lost money on its core operations for 12 years straight without effective remedial action being taken by management or any acceptance of accountability for successive shortcomings.The bank faces significant challenges.  Management is clearly aware of this, and is finally taking action, but the path to recovery is going to be a long one: arguably longer than most foreign investors’ usual investment time-horizon.Caveat emptor! (May the buyer beware!) remains our advice to those investors who might be tempted to buy in at current levels.

In our previous Smartkarma Insight featuring Nanto Bank  (8367 JP):  Gravity Defying, Nara Prefecture’s sole remaining local bank, we noted the sharp rise in the bank’s share price and expressed concern that such investor enthusiasm for the stock could not be justified by the fundamentals.  The shares closed on Friday 30 October 2020 at ¥1,848, down 32.1% since that Insight.  While valuations have improved as result of that price decline, we think it is still too early to buy.Nanto Bank is a classic example of bank management ‘kicking the can down the road’ and ignoring serious structural issues until almost past the point of salvation.  Nanto Bank’s problems are not simply the result of past unwise investments in highly volatile foreign securities derivatives as a means of shoring up dwindling income from ‘traditional’ business.  Nanto Bank is overstaffed, has too many branches relative to available business, and its operations are inefficient.  Loan growth had effectively ground to a halt prior to the COVID-19-influenced April-June 2020 quarter, while the bank has lost money on its core operations for 12 years straight without effective remedial action being taken by management or any acceptance of accountability for successive shortcomings.The bank faces significant challenges.  Management is clearly aware of this, and is finally taking action, but the path to recovery is going to be a long one: arguably longer than most foreign investors’ usual investment time-horizon.Caveat emptor! (May the buyer beware!) remains our advice to those investors who might be tempted to buy in at current levels.

An obscure little secondary regional bank from Shikoku with notably low performance ratios, <a href="https://www.smartkarma.com/entities/bank-of-kochi-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:18952:1">Bank Of Kochi (8416 JP)</a> should be on nobody’s ‘must have’ shopping-list for Japanese bank stocks.  For proof of this, one need look no further than its list of major shareholders: the Resolution &amp; Collection Corporation, a subsidiary of the Deposit Insurance Corporation and thus the Bank of Japan’s ‘bad bank’ 2nd-tier subsidiary, is by far its largest shareholder with 42.4% of outstanding shares and the sole holder of the bank’s No.1 series of preference shares. ‘Red flags’ rarely come any bigger.Bank of Kochi may be useful to investors, however, as a harbinger of things to come for other Japanese banks that have ‘form’ when it comes to straying into “other investments” such as foreign currency derivatives, REITs and investment trusts, such as Michinoku Bank (8350 JP), First Bank of Toyama (7184 JP), Nanto Bank (8367 JP), Tochigi Bank (8550 JP) and Senshu Ikeda Holdings (8714 JP).  Bank of Kochi released a statement earlier this month that its securities losses for FY3/2020 have now risen an astonishing 20-fold from the position at the end of December 2019 to ¥709 million (US$6.5 million).  Curiously, the bank does not have a lot of domestic corporate equities, but it does hold a considerable number of shares in other small Japanese banks, as well as a growing exposure to “alternative investments” in foreign currencies.  Oh dear.

An obscure little secondary regional bank from Shikoku with notably low performance ratios, Bank Of Kochi (8416 JP) should be on nobody’s ‘must have’ shopping-list for Japanese bank stocks.  For proof of this, one need look no further than its list of major shareholders: the Resolution &amp; Collection Corporation, a subsidiary of the Deposit Insurance Corporation and thus the Bank of Japan’s ‘bad bank’ 2nd-tier subsidiary, is by far its largest shareholder with 42.4% of outstanding shares and the sole holder of the bank’s No.1 series of preference shares. ‘Red flags’ rarely come any bigger.Bank of Kochi may be useful to investors, however, as a harbinger of things to come for other Japanese banks that have ‘form’ when it comes to straying into “other investments” such as foreign currency derivatives, REITs and investment trusts, such as Michinoku Bank (8350 JP), First Bank of Toyama (7184 JP), Nanto Bank (8367 JP), Tochigi Bank (8550 JP) and Senshu Ikeda Holdings (8714 JP).  Bank of Kochi released a statement earlier this month that its securities losses for FY3/2020 have now risen an astonishing 20-fold from the position at the end of December 2019 to ¥709 million (US$6.5 million).  Curiously, the bank does not have a lot of domestic corporate equities, but it does hold a considerable number of shares in other small Japanese banks, as well as a growing exposure to “alternative investments” in foreign currencies.  Oh dear.

<a href="https://www.smartkarma.com/entities/nanto-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:13217:1">Nanto Bank (8367 JP)</a>’s recent share price performance has been nothing short of remarkable, rising 38.5% in the last six months thanks, in part, to buying by foreign investors.  Gravity may be about to re-exert itself on the share price, however: FY3/2019 consolidated net profits were down over 15% YoY, results for 1H FY3/2020 were down 23% YoY and management has now slashed full-year guidance for consolidated net profits by 52% from ¥9.0 billion to ¥5.3 billion.  This not only suggests a 53% YoY decline but also implies that any 2H profits may be offset almost entirely by heavy write-downs and other expenses.  Management now has no hope of coming anywhere close to achieving the key operating targets contained in the bank’s 3-Year Business Plan that ends in FY3/2020.  Moreover, with its dividend guidance suggesting a pay-out ratio of as high as 50%, the year-end dividend may be at some risk.Nanto Bank is plagued by serious structural issues that may take years to resolve.  It is overstaffed, has too many branches relative to available business, and its operations are inefficient.  The bank has lost money on its core operations for 11 years straight.  Net loan growth has effectively ground to a halt, and credit costs are on the rise.  To cap it all, Nanto Bank has an unhealthy appetite for investments in ‘exotic’ foreign securities whose valuation is highly volatile and eyebrow-raising.  Caveat emptor!  (May the buyer beware!)

Nanto Bank (8367 JP)’s recent share price performance has been nothing short of remarkable, rising 38.5% in the last six months thanks, in part, to buying by foreign investors.  Gravity may be about to re-exert itself on the share price, however: FY3/2019 consolidated net profits were down over 15% YoY, results for 1H FY3/2020 were down 23% YoY and management has now slashed full-year guidance for consolidated net profits by 52% from ¥9.0 billion to ¥5.3 billion.  This not only suggests a 53% YoY decline but also implies that any 2H profits may be offset almost entirely by heavy write-downs and other expenses.  Management now has no hope of coming anywhere close to achieving the key operating targets contained in the bank’s 3-Year Business Plan that ends in FY3/2020.  Moreover, with its dividend guidance suggesting a pay-out ratio of as high as 50%, the year-end dividend may be at some risk.Nanto Bank is plagued by serious structural issues that may take years to resolve.  It is overstaffed, has too many branches relative to available business, and its operations are inefficient.  The bank has lost money on its core operations for 11 years straight.  Net loan growth has effectively ground to a halt, and credit costs are on the rise.  To cap it all, Nanto Bank has an unhealthy appetite for investments in ‘exotic’ foreign securities whose valuation is highly volatile and eyebrow-raising.  Caveat emptor!  (May the buyer beware!)

Nanto Bank  (8367 JP):  Gravity Defying

Japan

The Nanto Bank, Ltd. is a regional bank that mainly operates in Nara prefecture. The Bank provides general banking services such as deposits, loans, and exchange transactions.  The Nanto Bank also provides other financial services including securities brokerage, letter of credit, credit cards, leasing, and software development.

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Nanto Bank (8367 JP)

Japan 2024 H1 Bank Guidance: Interest/Fees ⬆︎, Expenses/Credit Costs⬇︎ - Opportunity Good Still

10 of about 70 Japanese regional banks have revised guidance for the H1 to end-Sep 2024. The average gain is near 70% vs previous guidance. That's...

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Japan H1 Bank Earnings: Interest/Fees Up, Expenses/Credit Costs Down - Opportunity Abounds, Still

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