Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

On Friday 1 October 2020, three new regional bank holding companies will be created and listed the same day on the Tokyo Stock Exchange.  The establishment of a regional bank holding company in Japan is not new news, but these three will in future set up entirely non-financial subsidiaries as a means of broadening group revenues and profitability.  This is a notable change in bank thinking.Japanese financial authorities have been keen to encourage regional banks to merge in the belief that a reduction in the number of banks will lead to greater efficiencies and a greater willingness to lend, but this has had very mixed results.  What the financial authorities have so far failed to do has been to encourage the banks to adopt a radically differentiated business model, or seriously address the issue of proper risk asset pricing, or improve operating margins, or enhance shareholder returns.  This may be about to change. The kiki-kan  危機感 or ‘sense of crisis’ that appears to be the necessary catalyst to get Japanese banks to abandon their habitual ‘business as usual’ approach and take decisive action, may be finally emerging among the Japanese regional banking fraternity.It’s about time.

On Friday 1 October 2020, three new regional bank holding companies will be created and listed the same day on the Tokyo Stock Exchange.  The establishment of a regional bank holding company in Japan is not new news, but these three will in future set up entirely non-financial subsidiaries as a means of broadening group revenues and profitability.  This is a notable change in bank thinking.Japanese financial authorities have been keen to encourage regional banks to merge in the belief that a reduction in the number of banks will lead to greater efficiencies and a greater willingness to lend, but this has had very mixed results.  What the financial authorities have so far failed to do has been to encourage the banks to adopt a radically differentiated business model, or seriously address the issue of proper risk asset pricing, or improve operating margins, or enhance shareholder returns.  This may be about to change. The kiki-kan  危機感 or ‘sense of crisis’ that appears to be the necessary catalyst to get Japanese banks to abandon their habitual ‘business as usual’ approach and take decisive action, may be finally emerging among the Japanese regional banking fraternity.It’s about time.

Japanese Regional Banks:  Dancing On Their Own

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/fidea-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:17012:1" rel="noopener">Fidea Holdings (8713 JP) </a>from Miyagi Prefecture in Japan’s northern Tohoku Region has announced that Iwate-based <a href="https://www.smartkarma.com/entities/tohoku-bank-ltd" target="_blank" data-smartkarma-citation="entities:8169:1" rel="noopener">Tohoku Bank (8349 JP)</a> will become a wholly-owned subsidiary in October 2022, in an all-share deal.   The announcement, which was reported during market trading hours, sent both stock prices up almost 10% on Friday 2 July.  However, rather than presaging a new paradigm for these banks, the spike in the stock prices was simply a reminder of how essentially illiquid these stocks are. The shares retreated to their pre-announcement levels in the following week.Fidea Holdings is the holding company for the smallest of three banks from Yamagata Prefecture, Shonai Bank, and the smallest of two banks from Akita Prefecture, Hokuto Bank.  Tohoku Bank, from Iwate Prefecture, is the smallest of three banks based there, and roughly one-third the size of Fidea Holdings.  Far from being a ‘Band of Brothers’, the enlarged Fidea Holdings will, in effect, be little more than a school of minnows whose combined branch network of 149 branches, while nominally  covering the whole of the Tohoku Region, has little overlap; thus little opportunity to cut costs through closing competing branches or reducing the headcount significantly.  Significant inherent weaknesses in all three banks remain largely unaddressed.  It is difficult to see how simply integrating operations under a holding company structure will resolve them.While the announcement no doubt comes with the advance approval of the financial authorities, who are keen for regional banks to merge to strengthen their operations, it creates something of a dilemma for the Financial Services Authority (FSA) in that both institutions still owe taxpayers a combined total of ¥20 billion (US$181.8 million) in public funds.  Neither seems in a position to repay that capital any time soon, as we explain in this Insight.The Bank of Japan’s own ‘bad bank’, the Resolution &amp; Collection Corporation (RCC), is effectively the largest shareholder in both Fidea Holdings and Tohoku Bank through convertible preferred stock.  Will their debts be forgiven as part of the integration, or will the due date for the public funds repayment simply be extended for a further decade or so?  Will the RCC force conversion of its preferred stock into ordinary shares because of the merger, becoming overtly by far the largest shareholder?  What will be the impact of such a decision on investor sentiment for existing shareholders?  These are all important (and, for the time being, unanswerable) questions for investors.Foreign institutional investors own 12% of Fidea Holdings, and 4% of Tohoku Bank.  We fail to understand the attraction, given all the underlying weaknesses, as we detail in this Insight.  We view Friday’s ‘bounce’ in the stock prices of both Fidea Holdings and Tohoku Bank, on an unusual surge in trading volume, as a narrow ‘opportunity window’ for frustrated shareholders to exit both stocks and stay away thereafter.  That surge is over.  To those who were tempted to pile in we say:   Caveat Emptor! (May the Buyer Beware!).

Fidea Holdings (8713 JP) from Miyagi Prefecture in Japan’s northern Tohoku Region has announced that Iwate-based Tohoku Bank (8349 JP) will become a wholly-owned subsidiary in October 2022, in an all-share deal.   The announcement, which was reported during market trading hours, sent both stock prices up almost 10% on Friday 2 July.  However, rather than presaging a new paradigm for these banks, the spike in the stock prices was simply a reminder of how essentially illiquid these stocks are. The shares retreated to their pre-announcement levels in the following week.Fidea Holdings is the holding company for the smallest of three banks from Yamagata Prefecture, Shonai Bank, and the smallest of two banks from Akita Prefecture, Hokuto Bank.  Tohoku Bank, from Iwate Prefecture, is the smallest of three banks based there, and roughly one-third the size of Fidea Holdings.  Far from being a ‘Band of Brothers’, the enlarged Fidea Holdings will, in effect, be little more than a school of minnows whose combined branch network of 149 branches, while nominally  covering the whole of the Tohoku Region, has little overlap; thus little opportunity to cut costs through closing competing branches or reducing the headcount significantly.  Significant inherent weaknesses in all three banks remain largely unaddressed.  It is difficult to see how simply integrating operations under a holding company structure will resolve them.While the announcement no doubt comes with the advance approval of the financial authorities, who are keen for regional banks to merge to strengthen their operations, it creates something of a dilemma for the Financial Services Authority (FSA) in that both institutions still owe taxpayers a combined total of ¥20 billion (US$181.8 million) in public funds.  Neither seems in a position to repay that capital any time soon, as we explain in this Insight.The Bank of Japan’s own ‘bad bank’, the Resolution &amp; Collection Corporation (RCC), is effectively the largest shareholder in both Fidea Holdings and Tohoku Bank through convertible preferred stock.  Will their debts be forgiven as part of the integration, or will the due date for the public funds repayment simply be extended for a further decade or so?  Will the RCC force conversion of its preferred stock into ordinary shares because of the merger, becoming overtly by far the largest shareholder?  What will be the impact of such a decision on investor sentiment for existing shareholders?  These are all important (and, for the time being, unanswerable) questions for investors.Foreign institutional investors own 12% of Fidea Holdings, and 4% of Tohoku Bank.  We fail to understand the attraction, given all the underlying weaknesses, as we detail in this Insight.  We view Friday’s ‘bounce’ in the stock prices of both Fidea Holdings and Tohoku Bank, on an unusual surge in trading volume, as a narrow ‘opportunity window’ for frustrated shareholders to exit both stocks and stay away thereafter.  That surge is over.  To those who were tempted to pile in we say:   Caveat Emptor! (May the Buyer Beware!).

Fidea Holdings (9713 JP):  A School of Minnows

Kansai Mirai Financial Group I / Equity Bottom-Up

On 2 April 2018, the newly-established <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>, a majority-owned subsidiary 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>, completed its first day of trading at ¥889.  By late 2018 the share price had risen as high as ¥1,008, buoyed by the regional bank group’s connections not only with Resona Holdings as its new and enthusiastic owner but also with its #2 shareholder, SMBC Bank, the principal banking subsidiary of megabank group <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial (8316 JP)</a>.  Fast-forward to late April 2020 and the share price is trading below the ¥350 level.  Now management has slashed the group’s FY3/2020 consolidated net profit by almost 70% to ¥10.73/share and – disastrously for any hope of share price recovery – has cut the dividend from ¥25/share to ¥10/share to preserve capital.  Unsurprisingly, KMFG’s share price has taken a deep dive on the last day of trading before the 5-day market halt that marks the Golden Week holiday period, ending the day down 9.6% at ¥331.How did this would-be ‘super-regional bank’ get into this predicament?Caveat Emptor!  (May the Buyer Beware!)

On 2 April 2018, the newly-established Kansai Mirai Financial (7321 JP), a majority-owned subsidiary of Resona Holdings (8308 JP), completed its first day of trading at ¥889.  By late 2018 the share price had risen as high as ¥1,008, buoyed by the regional bank group’s connections not only with Resona Holdings as its new and enthusiastic owner but also with its #2 shareholder, SMBC Bank, the principal banking subsidiary of megabank group Sumitomo Mitsui Financial (8316 JP).  Fast-forward to late April 2020 and the share price is trading below the ¥350 level.  Now management has slashed the group’s FY3/2020 consolidated net profit by almost 70% to ¥10.73/share and – disastrously for any hope of share price recovery – has cut the dividend from ¥25/share to ¥10/share to preserve capital.  Unsurprisingly, KMFG’s share price has taken a deep dive on the last day of trading before the 5-day market halt that marks the Golden Week holiday period, ending the day down 9.6% at ¥331.How did this would-be ‘super-regional bank’ get into this predicament?Caveat Emptor!  (May the Buyer Beware!) 

Kansai Mirai Financial Group  (7321 JP):  Paying for an Uncertain Future

An obscure little secondary regional bank from Shikoku with notably low performance ratios, <a href="https://www.smartkarma.com/entities/bank-of-kochi-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:18952:1">Bank Of Kochi (8416 JP)</a> should be on nobody’s ‘must have’ shopping-list for Japanese bank stocks.  For proof of this, one need look no further than its list of major shareholders: the Resolution &amp; Collection Corporation, a subsidiary of the Deposit Insurance Corporation and thus the Bank of Japan’s ‘bad bank’ 2nd-tier subsidiary, is by far its largest shareholder with 42.4% of outstanding shares and the sole holder of the bank’s No.1 series of preference shares. ‘Red flags’ rarely come any bigger.Bank of Kochi may be useful to investors, however, as a harbinger of things to come for other Japanese banks that have ‘form’ when it comes to straying into “other investments” such as foreign currency derivatives, REITs and investment trusts, such as Michinoku Bank (8350 JP), First Bank of Toyama (7184 JP), Nanto Bank (8367 JP), Tochigi Bank (8550 JP) and Senshu Ikeda Holdings (8714 JP).  Bank of Kochi released a statement earlier this month that its securities losses for FY3/2020 have now risen an astonishing 20-fold from the position at the end of December 2019 to ¥709 million (US$6.5 million).  Curiously, the bank does not have a lot of domestic corporate equities, but it does hold a considerable number of shares in other small Japanese banks, as well as a growing exposure to “alternative investments” in foreign currencies.  Oh dear.

An obscure little secondary regional bank from Shikoku with notably low performance ratios, Bank Of Kochi (8416 JP) should be on nobody’s ‘must have’ shopping-list for Japanese bank stocks.  For proof of this, one need look no further than its list of major shareholders: the Resolution &amp; Collection Corporation, a subsidiary of the Deposit Insurance Corporation and thus the Bank of Japan’s ‘bad bank’ 2nd-tier subsidiary, is by far its largest shareholder with 42.4% of outstanding shares and the sole holder of the bank’s No.1 series of preference shares. ‘Red flags’ rarely come any bigger.Bank of Kochi may be useful to investors, however, as a harbinger of things to come for other Japanese banks that have ‘form’ when it comes to straying into “other investments” such as foreign currency derivatives, REITs and investment trusts, such as Michinoku Bank (8350 JP), First Bank of Toyama (7184 JP), Nanto Bank (8367 JP), Tochigi Bank (8550 JP) and Senshu Ikeda Holdings (8714 JP).  Bank of Kochi released a statement earlier this month that its securities losses for FY3/2020 have now risen an astonishing 20-fold from the position at the end of December 2019 to ¥709 million (US$6.5 million).  Curiously, the bank does not have a lot of domestic corporate equities, but it does hold a considerable number of shares in other small Japanese banks, as well as a growing exposure to “alternative investments” in foreign currencies.  Oh dear.

The stock price of <a href="https://www.smartkarma.com/entities/20254" target="_blank" data-smartkarma-citation="entities:20254:1">Senshu Ikeda Holdings (8714 JP)</a> , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after announcing FY3/2019 results that beat guidance but nevertheless represented a 27% YoY decline.  What irked investors, however, was not the underwhelming results per se but management’s decision to ‘take away the punchbowl from the partygoers’ by halving the dividend for FY3/2020 to just ¥7.5/share.  Investors have clearly enjoyed the unrealistic returns on offer over the last few years in the form of a fixed dividend of ¥15/share, even though reported profits have been falling steadily.  As of FY3/2019, the effective dividend payout ratio had reached a remarkable 81.5% and threatened to reach over 128% in FY3/2020 if management failed to act to preserve capital.  Reality has finally caught up with management; disgruntled investors appear to be bailing out in droves as a result, and it hurts.  Caveat emptor!  (May the buyer beware!)

The stock price of Senshu Ikeda Holdings (8714 JP) , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after announcing FY3/2019 results that beat guidance but nevertheless represented a 27% YoY decline.  What irked investors, however, was not the underwhelming results per se but management’s decision to ‘take away the punchbowl from the partygoers’ by halving the dividend for FY3/2020 to just ¥7.5/share.  Investors have clearly enjoyed the unrealistic returns on offer over the last few years in the form of a fixed dividend of ¥15/share, even though reported profits have been falling steadily.  As of FY3/2019, the effective dividend payout ratio had reached a remarkable 81.5% and threatened to reach over 128% in FY3/2020 if management failed to act to preserve capital.  Reality has finally caught up with management; disgruntled investors appear to be bailing out in droves as a result, and it hurts.  Caveat emptor!  (May the buyer beware!)

Senshu Ikeda Holdings  (8714 JP):  Reality Hurts

Japan

Senshu Ikeda Holdings, Inc. is a holding company, manages business operations for its subsidiaries. The group company provides general banking, leasing, credit card, loan, and other financial services.

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Senshu Ikeda Holdings (8714 JP)

Japanese Regional Banks: Dancing On Their Own

The ‘sense of crisis’ that Japanese banks need to abandon their habitual ‘business as usual’ approach and take decisive action may be finally...

J. Brian Waterhouse

Fidea Holdings (9713 JP): A School of Minnows

Fidea Holdings (8713 JP) has announced that Iwate-based Tohoku Bank (8349 JP) will become a wholly-owned subsidiary in October 2022, in an all...

J. Brian Waterhouse

Kansai Mirai Financial Group (7321 JP): Paying for an Uncertain Future

On 2 April 2018, the newly-established Kansai Mirai Financial (7321 JP), a majority-owned subsidiary of Resona Holdings (8308 JP), completed its...

J. Brian Waterhouse

Bank of Kochi (8416 JP): Harbinger

An obscure little secondary regional bank from Shikoku with notably low performance ratios, Bank Of Kochi (8416 JP) should be on nobody’s ‘must...

J. Brian Waterhouse

Senshu Ikeda Holdings (8714 JP): Reality Hurts

The stock price of Senshu Ikeda Holdings (8714 JP) , a medium-sized bank holding company based in Osaka, fell just over 15% today, a day after...

J. Brian Waterhouse

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