Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Tottori Prefecture, in the Chugoku Region of western Japan, is famous for its extensive sand dunes that attract tens of thousands of visitors every year. Tottori is also home to one of Japan’s smallest regional banks, the rather obscure <a href="https://www.smartkarma.com/entities/tottori-bank-ltd" target="_blank" data-smartkarma-citation="entities:13337:1" rel="noopener">Tottori Bank (8383 JP)</a> which celebrates the centenary of its founding later this year.From an investment viewpoint, it appears to be trading on a ‘give away’ price-to-book ratio of just 0.23x.  Dig a little deeper, however, and the bank’s many weaknesses are soon revealed: evident lack of scale, geographically trapped in a shrinking local economy, margins under relentless pressure, a chronically high overhead ratio, little ability to absorb ‘normal’ levels of credit losses and risible RoE and RoA ratios.  This is a bank in need of serious restructuring of its business.  While some domestic entrepreneurs such as <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> might be tempted to take a look at such a bank as an investment opportunity, foreign investors would be well advised to steer clear.  Caveat emptor!  (May the buyer beware!)

Tottori Prefecture, in the Chugoku Region of western Japan, is famous for its extensive sand dunes that attract tens of thousands of visitors every year. Tottori is also home to one of Japan’s smallest regional banks, the rather obscure Tottori Bank (8383 JP) which celebrates the centenary of its founding later this year.From an investment viewpoint, it appears to be trading on a ‘give away’ price-to-book ratio of just 0.23x.  Dig a little deeper, however, and the bank’s many weaknesses are soon revealed: evident lack of scale, geographically trapped in a shrinking local economy, margins under relentless pressure, a chronically high overhead ratio, little ability to absorb ‘normal’ levels of credit losses and risible RoE and RoA ratios.  This is a bank in need of serious restructuring of its business.  While some domestic entrepreneurs such as SBI Holdings (8473 JP) might be tempted to take a look at such a bank as an investment opportunity, foreign investors would be well advised to steer clear.  Caveat emptor!  (May the buyer beware!)

Tottori Bank (8383 JP):  Trapped in the Sands

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

11 weeks ago yesterday, for the end of 2020, I published my report <a href="https://www.smartkarma.com/insights/2021-high-conviction-shinsei-bank" target="_blank" data-smartkarma-citation="insights:46544" rel="noopener">2021 High Conviction - Shinsei Bank</a> idea. Since the close of the next day, the shares are up 46.7%. A large part of that performance has been due to the rise in the TOPIX Bank Index - up 26.7% in the same period. Much of that move has occurred in the past five weeks as The Great Rotation, driven by higher rates, a steeper curve, and inflationary expectations, has propelled last year's losers to this year's winners, and <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a>, SaaS stocks, junk stocks, and others have underperformed. But there were a couple of other bits in the story too. A buyback, an asset sale, and understanding of the float dynamics given the over-arching goal of <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> and its shareholders is to be able to get the government out of its shares (and accompanying oversight) it purchased in March 2000. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/195/original/Screenshot+2021-03-10+at+1.09.10+AM.png?1615309764" class="editor-image img-responsive" data-smartkarma-image-id="193195"></figure></section>This insight provides a brief update to those inputs.

11 weeks ago yesterday, for the end of 2020, I published my report 2021 High Conviction - Shinsei Bank idea. Since the close of the next day, the shares are up 46.7%. A large part of that performance has been due to the rise in the TOPIX Bank Index - up 26.7% in the same period. Much of that move has occurred in the past five weeks as The Great Rotation, driven by higher rates, a steeper curve, and inflationary expectations, has propelled last year's losers to this year's winners, and Tesla Motors (TSLA US), SaaS stocks, junk stocks, and others have underperformed. But there were a couple of other bits in the story too. A buyback, an asset sale, and understanding of the float dynamics given the over-arching goal of Shinsei Bank (8303 JP) and its shareholders is to be able to get the government out of its shares (and accompanying oversight) it purchased in March 2000. This insight provides a brief update to those inputs.

2021 High Conviction Update - Shinsei Bank Float Squeeze to Mitigate Near-Term

Event-Driven

Then-JASDAQ-listed online financial information provider <a href="https://www.smartkarma.com/entities/morningstar-japan-kk" target="_blank" data-smartkarma-citation="entities:10386:1" rel="noopener">Morningstar Japan Kk (4765 JP)</a> announced (<a href="https://www.morningstar.co.jp/company/release/pdf/prs200929_02.pdf" target="_blank" rel="noopener">J-only</a>) on 29 September they had received approval to move to the Tokyo Stock Exchange as of 19th October 2020 and they expected the move to take them to the TSE First Section which meant a TOPIX inclusion. At the same time, they announced a combination equity offering which raised some new equity capital for the company, and allowed Morningstar Inc and SBI Global Asset Management to sell down their stakes somewhat. The shares fell which meant that it appears that neither the domestic additional tranche of 1.081mm shares or the overallotment were executed. However, that means that the net overhang from the offering is somewhat reduced because those who sold shares early to the stabilization syndicate effectively filled the orders of those who bought the greenshoe as presented. That Offering was priced at a ¥20 discount against the close of ¥482 and investors bought at ¥462/share.  <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/733/original/Screenshot%202020-11-24%20at%209.54.14%20PM.png?1606226722" class="editor-image img-responsive" data-smartkarma-image-id="173733"></figure></section>Tuesday 24 November was the only the fifth day in the past 32 trading days where the shares traded above the pre-offering price of ¥482/share. Volume was heavy. This sets up an interesting/odd TOPIX inclusion on Friday.

Then-JASDAQ-listed online financial information provider Morningstar Japan Kk (4765 JP) announced (J-only) on 29 September they had received approval to move to the Tokyo Stock Exchange as of 19th October 2020 and they expected the move to take them to the TSE First Section which meant a TOPIX inclusion. At the same time, they announced a combination equity offering which raised some new equity capital for the company, and allowed Morningstar Inc and SBI Global Asset Management to sell down their stakes somewhat. The shares fell which meant that it appears that neither the domestic additional tranche of 1.081mm shares or the overallotment were executed. However, that means that the net overhang from the offering is somewhat reduced because those who sold shares early to the stabilization syndicate effectively filled the orders of those who bought the greenshoe as presented. That Offering was priced at a ¥20 discount against the close of ¥482 and investors bought at ¥462/share.  Tuesday 24 November was the only the fifth day in the past 32 trading days where the shares traded above the pre-offering price of ¥482/share. Volume was heavy. This sets up an interesting/odd TOPIX inclusion on Friday.

Morningstar Japan (4765) TOPIX Inclusion - A Big Buy Against a Big Overhang

Financial entrepreneur Yoshitaka Kitao and his flagship company <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a> have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.On Friday 20 November 2020, the holding company for these two banks, tiny <a href="https://www.smartkarma.com/entities/jimoto-holdings-inc" target="_blank" data-smartkarma-citation="entities:5763:1" rel="noopener">Jimoto Holdings (7161 JP)</a>, finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Financial entrepreneur Yoshitaka Kitao and his flagship company Sbi Holdings (8473 JP) have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.On Friday 20 November 2020, the holding company for these two banks, tiny Jimoto Holdings (7161 JP), finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of Sbi Holdings (8473 JP)  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Jimoto Holdings (7161 JP):  Kirayaka Cracks

The stock price of the tiny, embattled <a href="https://www.smartkarma.com/entities/towa-bank-ltd" target="_blank" data-smartkarma-citation="entities:18283:1" rel="noopener">Towa Bank (8558 JP)</a>, a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>.Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

The stock price of the tiny, embattled Towa Bank (8558 JP), a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist Sbi Holdings (8473 JP).Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Towa Bank (8558 JP):  Another Notch in the Bedpost

Japan

SBI Holdings, Inc. manages venture capital fund which mainly invest in Internet related venture companies.  The Company also provides brokerage, investment banking, and financial services.

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SBI Holdings (8473 JP)

Tottori Bank (8383 JP): Trapped in the Sands

On a PBR of 0.23x, Tottori Bank looks to be trading on a 'give away' price. Dig a little deeper into the financials, however, and its weaknesses...

J. Brian Waterhouse

2021 High Conviction Update - Shinsei Bank Float Squeeze to Mitigate Near-Term

Shinsei Bank has performed dramatically well in the last 11 weeks since the High Conviction Idea. A lot of that has been float compression. Some of...

Travis Lundy

Morningstar Japan (4765) TOPIX Inclusion - A Big Buy Against a Big Overhang

Morningstar Japan (4765) will be included in TOPIX on Friday 27 Nov. It is a big inclusion, but there is a big overhang. Looks interesting in a...

Travis Lundy

Jimoto Holdings (7161 JP): Kirayaka Cracks

Financial entrepreneur Yoshitaka Kitao and his flagship company SBI Holdings (8473 JP) have just netted their sixth and seventh regional banks,...

J. Brian Waterhouse

Towa Bank (8558 JP): Another Notch in the Bedpost

The evidence suggests that this is not a 'white knight' riding to the rescue, but another opportunity for Yoshitaka Kitao to gain access to a...

J. Brian Waterhouse

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