Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In May of this year, <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> made an <a href="https://www.release.tdnet.info/inbs/ek/140120200430403171.pdf" target="_blank" rel="noopener">announcement</a> that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/shinsei-bank-offering-flowers-in-the-wind" target="_blank" data-smartkarma-citation="insights:31638" rel="noopener">Shinsei Bank Offering: Flowers in the Wind</a>, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/654/original/Screenshot%202020-12-21%20at%207.48.00%20PM.png?1608551293" class="editor-image img-responsive" data-smartkarma-image-id="179654"></figure></section>Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1608551363459&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=8303&amp;oth=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100ITI7" target="_blank" rel="noopener">received</a> 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID <a href="https://pdf.irpocket.com/C8303/yCGV/B6S9/bQ8o.pdf" target="_blank" rel="noopener">announce</a> a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had <a href="https://pdf.irpocket.com/C8303/mxGt/rDGI/qr73.pdf" target="_blank" rel="noopener">purchased</a> 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  </section>Discussion ensues below.

In May of this year, Shinsei Bank (8303 JP) made an announcement that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by Mio Kato in Shinsei Bank Offering: Flowers in the Wind, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director received 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID announce a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had purchased 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  Discussion ensues below.

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

On Friday 18 December, <a href="https://www.smartkarma.com/entities/fubon-financial-holding-co" target="_blank" data-smartkarma-citation="entities:11869:1" rel="noopener">Fubon Financial Holding Co (2881 TT)</a> announced a board decision to conduct a Tender Offer to take control of <a href="https://www.smartkarma.com/entities/jih-sun-financial-holdings" target="_blank" data-smartkarma-citation="entities:17971:1" rel="noopener">Jih Sun Financial (5820 TT)</a> at NT$13/share. The offer will be contingent on gaining 50.01% of the shares and Fubon will buy any and all shares tendered if it clears that hurdle. This is not a huge premium, and comes to only a small premium to book value (1.05x) but is most likely to be successful because of the two owners who currently own 60%. This deal comes pre-blessed by the Financial Supervisory Commission which approved on Thursday apparently. It is interesting because last month a 24% stake acquisition by a foreign corporate (non-financial) was nixed by the FSC, and this would represent the first time that a domestic financial holding company has been taken over by another domestic financial holding company. And there is, crucially, another leg to this trade.More below the fold.

On Friday 18 December, Fubon Financial Holding Co (2881 TT) announced a board decision to conduct a Tender Offer to take control of Jih Sun Financial (5820 TT) at NT$13/share. The offer will be contingent on gaining 50.01% of the shares and Fubon will buy any and all shares tendered if it clears that hurdle. This is not a huge premium, and comes to only a small premium to book value (1.05x) but is most likely to be successful because of the two owners who currently own 60%. This deal comes pre-blessed by the Financial Supervisory Commission which approved on Thursday apparently. It is interesting because last month a 24% stake acquisition by a foreign corporate (non-financial) was nixed by the FSC, and this would represent the first time that a domestic financial holding company has been taken over by another domestic financial holding company. And there is, crucially, another leg to this trade.More below the fold. 

Fubon Financial Tender Offer for Jih Sun Financial

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

Japan

SBI Shinsei Bank, Ltd. provides banking services including deposits, loans, and foreign exchange transaction, as well as investment trust service and issuance of long-term bonds.

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SBI Shinsei Bank (8303 JP)

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J. Brian Waterhouse

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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

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