Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.

After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results.

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

After the records set in June when overall lending rose +6.8% YoY  –  at the time, the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by a new all-time record average of +9.4% YoY  –  it was time for a pause for breath.  After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to decline very slightly in July and August.  The major banks have registered the biggest declines of around 0.7% month-on-month.  This has been largely offset by continuing increases in lending by both the regional and secondary regional banks, with YoY growth rates of +5.6% and +7.1%, respectively.That said, we remain concerned that much of this lending is being done essentially ‘at cost’ to support local and national government initiatives in stabilising businesses during the ongoing COVID-19 pandemic. As we have said in previous Insights, ‘profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.As Japanese banks brace for a potential new wave of corporate failures in the wake of the coronavirus pandemic, “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

After the records set in June when overall lending rose +6.8% YoY  –  at the time, the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by a new all-time record average of +9.4% YoY  –  it was time for a pause for breath.  After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to decline very slightly in July and August.  The major banks have registered the biggest declines of around 0.7% month-on-month.  This has been largely offset by continuing increases in lending by both the regional and secondary regional banks, with YoY growth rates of +5.6% and +7.1%, respectively.That said, we remain concerned that much of this lending is being done essentially ‘at cost’ to support local and national government initiatives in stabilising businesses during the ongoing COVID-19 pandemic. As we have said in previous Insights, ‘profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.As Japanese banks brace for a potential new wave of corporate failures in the wake of the coronavirus pandemic, “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

Japanese Bank Lending: A Pause For Breath

The megabankers are awash in cash: their loans to deposits ratios (LDR)  -  an important measure of overall efficiency  -  have collapsed to below 52%, whereas back in 2001 they were close to 98%.  In the meantime, margins remain under pressure amidst this hyper-liquidity, banks are struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, credit costs are rising exponentially, while the COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans but made at virtually no profit margin.  Return on asset (RoA) and return on equity (RoE) ratios can only deteriorate further in such an environment.While many Japanese bank stocks have risen by double-digits over the last three months, rising on a tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We see no signs of this trend reversing.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

The megabankers are awash in cash: their loans to deposits ratios (LDR)  -  an important measure of overall efficiency  -  have collapsed to below 52%, whereas back in 2001 they were close to 98%.  In the meantime, margins remain under pressure amidst this hyper-liquidity, banks are struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, credit costs are rising exponentially, while the COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans but made at virtually no profit margin.  Return on asset (RoA) and return on equity (RoE) ratios can only deteriorate further in such an environment.While many Japanese bank stocks have risen by double-digits over the last three months, rising on a tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We see no signs of this trend reversing.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

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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