Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Ever more, ever higher: deposits in Japan keep flooding into the banks as each month passes, reaching an all-time high at the end of April 2021 of ¥859.952 trillion (US$7.88 trillion), according to data provided by the Japanese Bankers Association (JBA).  It was the 175th continuous month of increase, according to the JBA, although the rate of increase on both a MoM (+0.6%) and YoY (+8.2%) basis did not set a new record, reflecting a barely perceptible slowdown in the inflow.According to the Bank of Japan (BoJ), average deposit balances in April 2021 rose +1.5% MoM, or by ¥15.772 trillion (US$144.7 billion), to ¥1,083.032 trillion (US$9.936 trillion); this was also an all-time high level.  On a YoY basis, according to the BoJ data, average deposit balances rose by a remarkable +8.4%, or by ¥83.991 trillion (US$770.56 billion), so well short of last month’s record +8.7% YoY growth rate.What to do with all that cash?  Despite the bankers’ best efforts to lend out those funds to help support an economic recovery, the rate of inflow far surpasses the rate of outflow.  So much so that major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 48.8%, with lending margins remaining under constant downward pressure.  Japanese banks’ investments in Japanese government bonds (JGBs) are currently at their highest level in 5 years, according to Bank of Japan data, even though yields are minimal at best, and negative-yielding in many cases.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/232/original/8300-WR-JBanks-2021-0531-Evermore-JBAData-LDR-MajorvsReg-2017-2021.jpg?1622461040" class="editor-image img-responsive" data-smartkarma-image-id="210232"></figure></section>“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Ever more, ever higher: deposits in Japan keep flooding into the banks as each month passes, reaching an all-time high at the end of April 2021 of ¥859.952 trillion (US$7.88 trillion), according to data provided by the Japanese Bankers Association (JBA).  It was the 175th continuous month of increase, according to the JBA, although the rate of increase on both a MoM (+0.6%) and YoY (+8.2%) basis did not set a new record, reflecting a barely perceptible slowdown in the inflow.According to the Bank of Japan (BoJ), average deposit balances in April 2021 rose +1.5% MoM, or by ¥15.772 trillion (US$144.7 billion), to ¥1,083.032 trillion (US$9.936 trillion); this was also an all-time high level.  On a YoY basis, according to the BoJ data, average deposit balances rose by a remarkable +8.4%, or by ¥83.991 trillion (US$770.56 billion), so well short of last month’s record +8.7% YoY growth rate.What to do with all that cash?  Despite the bankers’ best efforts to lend out those funds to help support an economic recovery, the rate of inflow far surpasses the rate of outflow.  So much so that major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 48.8%, with lending margins remaining under constant downward pressure.  Japanese banks’ investments in Japanese government bonds (JGBs) are currently at their highest level in 5 years, according to Bank of Japan data, even though yields are minimal at best, and negative-yielding in many cases.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Bank Deposits:  In the Land of Evermore

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“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/000/210/200/original/JBanks-2021-0531-TPNBNKvsTPX-2021.jpg?1622450797" class="editor-image img-responsive" data-smartkarma-image-id="210200"></figure></section>

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

Mebuki Financial Group / Equity Bottom-Up

Yesterday, <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a> announced a buyback of 2+% of shares out, in what looked like a buyback from existing cross-holders who wished to sell a large block without friction. Having offered to buy 70mm shares as discussed in <a href="https://www.smartkarma.com/insights/resona-8308-jp-buyback-respectably-large-but-looks-like-a-one-off" target="_blank" data-smartkarma-citation="insights:51331" rel="noopener">Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off</a>, they bought back 62.5mm shares this AM, and they have another 25.5mm shares to buy back - roughly 2.5 days of ADV - in the next 4.5 months. That was a one-off by Resona which was "known" since last November as a mitigant against EPS dilution which would come as a result of share issuance to absorb Kansai Mirai Financial. The NEW News today is that <a href="https://www.smartkarma.com/entities/mebuki-financial-group-inc" target="_blank" data-smartkarma-citation="entities:10048:1" rel="noopener">Mebuki Financial Group (7167 JP)</a> which was formed after Joyo Bank absorbed Ashikaga Bank today announced <a href="https://www.mebuki-fg.co.jp/eng/pdf/release/20210512.pdf" target="_blank" rel="noopener">earnings</a> which were about 3% better than consensus, and forecasts for 2022 which appear about 2% lower than consensus expects for March 2022, but they also <a href="https://www.mebuki-fg.co.jp/eng/pdf/release/20210512_02.pdf" target="_blank" rel="noopener">announced a buyback</a> of up to 60 million shares spending up to ¥16bn. That is 5.17% of shares out. That is non-negligible and will bring the EPS forecast back above consensus even if pre-tax is just below. They get that started by launching a ToSTNeT-3 buyback tomorrow morning pre-open for the same 60 million shares. THAT is "implied news." It is something investors should understand, and use as a signal. There will be more of this and as a trend it is unmitigated good news for investors in Japan Inc.

Yesterday, Resona Holdings (8308 JP) announced a buyback of 2+% of shares out, in what looked like a buyback from existing cross-holders who wished to sell a large block without friction. Having offered to buy 70mm shares as discussed in Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off, they bought back 62.5mm shares this AM, and they have another 25.5mm shares to buy back - roughly 2.5 days of ADV - in the next 4.5 months. That was a one-off by Resona which was "known" since last November as a mitigant against EPS dilution which would come as a result of share issuance to absorb Kansai Mirai Financial. The NEW News today is that Mebuki Financial Group (7167 JP) which was formed after Joyo Bank absorbed Ashikaga Bank today announced earnings which were about 3% better than consensus, and forecasts for 2022 which appear about 2% lower than consensus expects for March 2022, but they also announced a buyback of up to 60 million shares spending up to ¥16bn. That is 5.17% of shares out. That is non-negligible and will bring the EPS forecast back above consensus even if pre-tax is just below. They get that started by launching a ToSTNeT-3 buyback tomorrow morning pre-open for the same 60 million shares. THAT is "implied news." It is something investors should understand, and use as a signal. There will be more of this and as a trend it is unmitigated good news for investors in Japan Inc.

Mebuki Follows Resona - Bank Buyback Season Starts Strong And This Is A Good Sign

Event-Driven

After the close on 11 May 2021, <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a> announced its results for FY2020 to 31 March 2021. The 90-page English translation of the Japanese tanshin is <a href="https://www.resona-gr.co.jp/holdings/english/investors/financial/results_c/download_c/files/20210511_3a.pdf" target="_blank" rel="noopener">here</a>. A 20-page deck in English is <a href="https://www.resona-gr.co.jp/holdings/english/investors/financial/results_c/download_c/files/20210511_4a.pdf" target="_blank" rel="noopener">here</a>. The bank today also <a href="https://www.resona-gr.co.jp/holdings/english/newsrelease_c/detail/20210511_2029.html" target="_blank" rel="noopener">announced</a> a buyback of up to 88,000,000 shares (3.51% of shares out) for up to JPY 50bn. This was known, and effectively pre-announced. Resona absorbed a subsidiary (Kansai Mirai Financial Group) through a share exchange at the end of the last fiscal year, in a transaction announced 10 November 2020. In that announcement, it was announced there would be an acquisition of treasury shares in case of a dilution of EPS according to the transaction. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/454/original/Screenshot+2021-05-11+at+5.09.45+PM.png?1620724240" class="editor-image img-responsive" data-smartkarma-image-id="205454"></figure></section>Fulfilling its promise meant a buyback. I cannot suggest that the full 88mm shares are required to avoid dilution. If so, that is a lot, but it should be clear that the goal is to get those shares bought so that EPS is not diluted. That starts with a ToSTNeT-3 transaction tomorrow morning at 8:00am local time for up to 70,000,000 shares to be bought back at today's close of JPY 463.1/share (link <a href="https://www.resona-gr.co.jp/holdings/english/newsrelease_c/detail/20210511_2031.html" target="_blank" rel="noopener">here</a>).More discussion below.

After the close on 11 May 2021, Resona Holdings (8308 JP) announced its results for FY2020 to 31 March 2021. The 90-page English translation of the Japanese tanshin is here. A 20-page deck in English is here. The bank today also announced a buyback of up to 88,000,000 shares (3.51% of shares out) for up to JPY 50bn. This was known, and effectively pre-announced. Resona absorbed a subsidiary (Kansai Mirai Financial Group) through a share exchange at the end of the last fiscal year, in a transaction announced 10 November 2020. In that announcement, it was announced there would be an acquisition of treasury shares in case of a dilution of EPS according to the transaction. Fulfilling its promise meant a buyback. I cannot suggest that the full 88mm shares are required to avoid dilution. If so, that is a lot, but it should be clear that the goal is to get those shares bought so that EPS is not diluted. That starts with a ToSTNeT-3 transaction tomorrow morning at 8:00am local time for up to 70,000,000 shares to be bought back at today's close of JPY 463.1/share (link here).More discussion below. 

Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1" rel="noopener">Suruga Bank Ltd (8358 JP)</a>.  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank <a href="https://www.smartkarma.com/insights/suruga-bank-8358-jp-one-step-back-but-several-steps-forward" target="_blank" data-smartkarma-citation="insights:40677" rel="noopener">Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward</a> in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a>. It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by Suruga Bank Ltd (8358 JP).  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP). It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Suruga Bank (8358 JP):  Doubling Up Rather Than Doubling Down

Japan

Resona Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, provides financial services, including banking, trust operations, and credit card services. Resona Holdings also offers consulting services related to personal loans, asset management, and asset succession.

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Resona Holdings (8308 JP)

Japanese Bank Deposits: In the Land of Evermore

Ever more, ever higher: deposits in Japan keep flooding into the banks. Despite the bankers’ best efforts to lend out those funds, the rate of...

J. Brian Waterhouse

Japanese Bank Lending: Mean Reversion

The lending ‘boom’, triggered by companies rushing to secure bank funding in anticipation of extended nationwide ‘lock-downs’ to counteract the...

J. Brian Waterhouse

Mebuki Follows Resona - Bank Buyback Season Starts Strong And This Is A Good Sign

A day after Resona's ToSTNeT-3 buyback to buy crossholder shares, Mebuki announces one twice as large. Could be coincidence. Could be a theme....

Travis Lundy

Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off

Resona Bank (8308) announced results, and a large buyback. If you want to sell a big block, here's your chance. The buyback is technical, not...

Travis Lundy

Suruga Bank (8358 JP): Doubling Up Rather Than Doubling Down

We believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes. Nevertheless, we warn that this is...

J. Brian Waterhouse

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