Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“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/000/179/761/original/TPNBNK+vs+TPX+in+CY2020.jpg?1608608493" class="editor-image img-responsive" data-smartkarma-image-id="179761"></figure></section>

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Banks:  Remember, Remember, the Thrift of November

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.
Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.
“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) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.
Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for <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) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).
The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>  and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  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.  Investor patience has been sorely tested.
Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for Mizuho Financial Group (8411 JP)  (MHFG) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).
The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals Mitsubishi UFJ Financial (MUFG) (8306 JP)  and Sumitomo Mitsui Financial Group (8316 JP) but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  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.  Investor patience has been sorely tested.
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):  Anything But Consistent

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Kansai Mirai Financial Group I / Event-Driven

That was quick.The Nikkei article turned into an announced deal within the day. My insight <a href="https://www.smartkarma.com/insights/resona-to-take-kansai-mirai-private" target="_blank" data-smartkarma-citation="insights:45126" rel="noopener">Resona To Take Kansai Mirai Private?</a> suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of <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>. That is worth ¥524 per share of <a href="https://www.smartkarma.com/entities/kansai-mirai-financial-group" target="_blank" data-smartkarma-citation="entities:26953:1" rel="noopener">Kansai Mirai Financial (7321 JP)</a>, which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.

That was quick.The Nikkei article turned into an announced deal within the day. My insight Resona To Take Kansai Mirai Private? suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of Resona Holdings (8308 JP). That is worth ¥524 per share of Kansai Mirai Financial (7321 JP), which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.  

The Nikkei carried an article last night suggesting that <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> would seek to take private <a href="https://www.smartkarma.com/entities/kansai-mirai-financial-group" target="_blank" data-smartkarma-citation="entities:26953:1" rel="noopener">Kansai Mirai Financial (7321 JP)</a> which was formed from the merger of <a href="https://www.smartkarma.com/entities/minato-bank-ltd-the" target="_blank" data-smartkarma-citation="entities:1735:1" rel="noopener">Minato Bank (8543 JP)</a>, SMFG-subsidiary <a href="https://www.smartkarma.com/entities/kansai-urban-banking-corp" target="_blank" data-smartkarma-citation="entities:9407:1" rel="noopener">Kansai Urban Banking (8545 JP)</a>, Resona wholly-owned sub Kinki Osaka Bank, back in 2018, listing as Kansai Mirai in April 2018. A year later, under the holdco umbrella, Kansai Urban and Kinki Osaka were merged.  It was always planned that the integration would take years. This was discussed at length in the insights related to <a href="https://www.smartkarma.com/insights/kansai-mirai-the-most-interesting-arb-in-the-world" target="_blank" data-smartkarma-citation="insights:14429" rel="noopener">Kansai Mirai: The Most Interesting Arb In The World</a>. Now it appears that the fact that it remains listed is problematic for governance purposes (highlighted back then, I assure you). The idea now appears to be that the bank needs to be taken in hand to hasten restructuring to lower costs and keep capital in-house rather than paying it out as dividends (to Resona and SMFG as 70% owners). The report suggests that Resona will launch a Tender Offer to take Kansai Mirai private within the month and the stock will be delisted by March where the squeezeout will be a share exchange with Resona Bank shares rather than a cash-out. The <a href="https://www.nikkei.com/article/DGXMZO65998760Z01C20A1EE9000/" target="_blank" rel="noopener">article</a> contains considerable detail.  Resona currently owns 51.2% of the shares outstanding of Kansai Mirai. SMFG has about 21.3% (and group company Cedyna owns 0.95%). Corporates own another 9%. Float is therefore tiny and as long as SMFG tenders into it, the takeover will be successful and minorities can be squeezed out through a merger, quickly approved by Resona. The article suggests that if Resona pays cash for all the shares, that to buy the 49% they don't own of this ¥150bn market cap it would take more than ¥10bn. I expect the article is missing a zero. The last trade before this report was at ¥405 vs Tangible Book Value Per Share of ¥1216. For some investors, this should provide food for thought. The previous deal was done at the wrong price for Minato Bank shareholders. We still do not know the terms here,  but there is a possibility investors will see the terms and say to themselves...<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/170/505/original/MIMITW%20Shake%20Head.gif?1604984190" class="editor-image img-responsive" data-smartkarma-image-id="170505"></figure></section>And there is every possibility this will not be the most interesting arb in the world.But it might still be interesting.More detail below the fold.

The Nikkei carried an article last night suggesting that Resona Holdings (8308 JP) would seek to take private Kansai Mirai Financial (7321 JP) which was formed from the merger of Minato Bank (8543 JP), SMFG-subsidiary Kansai Urban Banking (8545 JP), Resona wholly-owned sub Kinki Osaka Bank, back in 2018, listing as Kansai Mirai in April 2018. A year later, under the holdco umbrella, Kansai Urban and Kinki Osaka were merged.  It was always planned that the integration would take years. This was discussed at length in the insights related to Kansai Mirai: The Most Interesting Arb In The World. Now it appears that the fact that it remains listed is problematic for governance purposes (highlighted back then, I assure you). The idea now appears to be that the bank needs to be taken in hand to hasten restructuring to lower costs and keep capital in-house rather than paying it out as dividends (to Resona and SMFG as 70% owners). The report suggests that Resona will launch a Tender Offer to take Kansai Mirai private within the month and the stock will be delisted by March where the squeezeout will be a share exchange with Resona Bank shares rather than a cash-out. The article contains considerable detail.  Resona currently owns 51.2% of the shares outstanding of Kansai Mirai. SMFG has about 21.3% (and group company Cedyna owns 0.95%). Corporates own another 9%. Float is therefore tiny and as long as SMFG tenders into it, the takeover will be successful and minorities can be squeezed out through a merger, quickly approved by Resona. The article suggests that if Resona pays cash for all the shares, that to buy the 49% they don't own of this ¥150bn market cap it would take more than ¥10bn. I expect the article is missing a zero. The last trade before this report was at ¥405 vs Tangible Book Value Per Share of ¥1216. For some investors, this should provide food for thought. The previous deal was done at the wrong price for Minato Bank shareholders. We still do not know the terms here,  but there is a possibility investors will see the terms and say to themselves...And there is every possibility this will not be the most interesting arb in the world.But it might still be interesting.More detail below the fold. 

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 Banks: Remember, Remember, the Thrift of November

Japanese people are renowned for their thrift. Even when deposit interest rates are zero they continue to save. But there is little the banks can...

J. Brian Waterhouse

Japanese Bank Lending: Losing Momentum

Loan balances have eased back to May levels, with much of the increase in lending by the major banks in March-June reversing between July and...

J. Brian Waterhouse

Mizuho Financial Group (8411 JP): Anything But Consistent

Despite outperforming all of the major banks this year, MHFG’s lack of consistency, either in profit generation or management execution, makes this...

J. Brian Waterhouse

Resona To Take Kansai Mirai Private!

Now we have an announced deal. The Resona Deal for its Kansai Mirai sub is not friendly to minorities, but it could have been worse. It could have...

Travis Lundy

Resona To Take Kansai Mirai Private?

It appears as if Resona may take Kansai Mirai private through a TOB and share exchange for those who do not tender. That suggests, despite a cheap...

Travis Lundy

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