Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/203/578/original/image_7378929621619743178079.png?1619743180" class="editor-image img-responsive" data-smartkarma-image-id="203578"></figure>

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Bank Deposits:  Mountain High, Value Low

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/202/916/original/JBanks-2021-0428-TPNBNK+in+2021.jpg?1619500060" class="editor-image img-responsive" data-smartkarma-image-id="202916"></figure></section>

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Banks:  When Spades Become Shovels

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

<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> was my "High Conviction" idea for 2021 as presented 22 December 2020 in <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> (the first green dot in the chart below).The stock rose ~50% in just under 3 months, outperforming other banks by 20+%. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/202/636/original/Screenshot+2021-04-26+at+10.41.25+AM.png?1619404897" class="editor-image img-responsive" data-smartkarma-image-id="202636"></figure>I warned of a pause on the squeeze in March in <a href="https://www.smartkarma.com/insights/2021-high-conviction-update-shinsei-bank-float-squeeze-to-mitigate-near-term" target="_blank" data-smartkarma-citation="insights:48989" rel="noopener">2021 High Conviction Update - Shinsei Bank Float Squeeze to Mitigate Near-Term</a>, and since then the shares are down more than 13% (and ~20% from intraday highs in March) as huge buying flow from the buyback programme ended and SBI appears to have bought what they wanted to buy before end-March. The stock has underperformed a basket of 9 bank peers by 13% from the top and about 10% since I wrote (the second green dot below).
That pause refreshed. Event catalysts may come in May. </section>

Shinsei Bank (8303 JP) was my "High Conviction" idea for 2021 as presented 22 December 2020 in 2021 High Conviction - Shinsei Bank (the first green dot in the chart below).The stock rose ~50% in just under 3 months, outperforming other banks by 20+%. I warned of a pause on the squeeze in March in 2021 High Conviction Update - Shinsei Bank Float Squeeze to Mitigate Near-Term, and since then the shares are down more than 13% (and ~20% from intraday highs in March) as huge buying flow from the buyback programme ended and SBI appears to have bought what they wanted to buy before end-March. The stock has underperformed a basket of 9 bank peers by 13% from the top and about 10% since I wrote (the second green dot below).
That pause refreshed. Event catalysts may come in May. 

Shinsei Bank (8303 JP) Update - The Pause That Refreshed May End Soon

Event-Driven

On 23 March, <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> reported that its Tender Offer for 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> was successful. 
This was, apparently, possibly a surprise, as local media suggested last week that <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> had received an approach to buy their stake in <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> for NT$15/share - well above the NT$13/share that Fubon had bid.  A day before the close of the Tender Offer, internal directors at Jih Sun were apparently of the opinion Shinsei would not tender, however it appears the NT$13/share in hand was better than the $15/share which was still only indicative, so they sold. 
That leaves the squeezeout. 
As always, DETAILS MATTER.
If you intend to play the risk arb on the squeezeout of Jih Sun, beware the modalities and the timing.

On 23 March, Fubon Financial Holding Co (2881 TT) reported that its Tender Offer for control of Jih Sun Financial (5820 TT) was successful. 
This was, apparently, possibly a surprise, as local media suggested last week that Shinsei Bank (8303 JP) had received an approach to buy their stake in Jih Sun Financial (5820 TT) for NT$15/share - well above the NT$13/share that Fubon had bid.   A day before the close of the Tender Offer, internal directors at Jih Sun were apparently of the opinion Shinsei would not tender, however it appears the NT$13/share in hand was better than the $15/share which was still only indicative, so they sold. 
That leaves the squeezeout. 
As always, DETAILS MATTER.
If you intend to play the risk arb on the squeezeout of Jih Sun, beware the modalities and the timing.

The Squeezeout of the Remaining 46% of Jih Sun Financial

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight <a href="https://www.smartkarma.com/insights/mizuho-financial-group-8411-jp-deja-vu-all-over-again" target="_blank" data-smartkarma-citation="insights:48688" rel="noopener">Mizuho Financial Group (8411 JP):  Deja Vu All Over Again</a> for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight Mizuho Financial Group (8411 JP):  Deja Vu All Over Again for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 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)

Japanese Bank Deposits: Mountain High, Value Low

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021. For Japanese bankers, however, such impressive...

J. Brian Waterhouse

Japanese Banks: When Spades Become Shovels

As Japan faces yet another coronavirus outbreak, it is increasingly apparent that some borrowers need not just cash but capital to survive. Short...

J. Brian Waterhouse

Shinsei Bank (8303 JP) Update - The Pause That Refreshed May End Soon

Shinsei Bank is a high conviction long.Cheap on a PBR and PER basis (may be <6x TTM in Mar21 on the XO gain, maybe 7.3x for Mar22. I expect another...

Travis Lundy

The Squeezeout of the Remaining 46% of Jih Sun Financial

Fubon Financial won the deal on a last minute tender by Shinsei. Now it is procedure requiring shareholder votes which are a done deal and FSC...

Travis Lundy

Japanese Banks: Oodles of the Stuff

Banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan...

J. Brian Waterhouse

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