Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

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

Concordia Financial Group, Ltd / Equity Bottom-Up

Interim results for <a href="https://www.smartkarma.com/entities/concordia-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:22704:1" rel="noopener">Concordia Financial Group, Ltd (7186 JP)</a>, or CFG, were coloured by significantly lower net interest and fee income from domestic business reported by Bank of Yokohama, and a reduced consolidated net loss of just ¥125 million reported by Higashi-Nippon Bank (HNPB) as a result of much lower credit costs than 1H FY3/2020. HNPB remains the drag on group profitability.Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Moreover, CFG offers a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, conducts frequent share buybacks, and regularly cancels part of its Treasury Stock to boost overall shareholder returns.  However, lingering investor memories of past management scandals have caused CFG to significantly underperform the Topix Banks Index since 2018, with its share price still down 16% YoY even after a 21% recovery in the last six months.The Topix Banks Index has notably underperformed Topix all year, but may be in for its perennial ‘run’ between now and mid-February next year, buoyed by the outcome of the US election and with global market hopes high for a successful COVID-19 vaccine. Even so, within the regional banking sector, we much prefer <a href="https://www.smartkarma.com/entities/chiba-bank-ltd" target="_blank" data-smartkarma-citation="entities:1048:1" rel="noopener">Chiba Bank (8331 JP)</a> and <a href="https://www.smartkarma.com/entities/iyo-bank-ltd" target="_blank" data-smartkarma-citation="entities:6869:1" rel="noopener">Iyo Bank (8385 JP)</a> on fundamentals, or <a href="https://www.smartkarma.com/entities/bank-of-kyoto-ltd" target="_blank" data-smartkarma-citation="entities:5248:1" rel="noopener">Bank Of Kyoto (8369 JP)</a> as a strong thematic play on the rising fortunes of its largest stock investment, namely <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a>.

Interim results for Concordia Financial Group, Ltd (7186 JP), or CFG, were coloured by significantly lower net interest and fee income from domestic business reported by Bank of Yokohama, and a reduced consolidated net loss of just ¥125 million reported by Higashi-Nippon Bank (HNPB) as a result of much lower credit costs than 1H FY3/2020. HNPB remains the drag on group profitability.Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Moreover, CFG offers a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, conducts frequent share buybacks, and regularly cancels part of its Treasury Stock to boost overall shareholder returns.  However, lingering investor memories of past management scandals have caused CFG to significantly underperform the Topix Banks Index since 2018, with its share price still down 16% YoY even after a 21% recovery in the last six months.The Topix Banks Index has notably underperformed Topix all year, but may be in for its perennial ‘run’ between now and mid-February next year, buoyed by the outcome of the US election and with global market hopes high for a successful COVID-19 vaccine. Even so, within the regional banking sector, we much prefer Chiba Bank (8331 JP) and Iyo Bank (8385 JP) on fundamentals, or Bank Of Kyoto (8369 JP) as a strong thematic play on the rising fortunes of its largest stock investment, namely Nintendo Co Ltd (7974 JP).

Concordia Financial Group (7186 JP):  Unequal Partners

Thematic (Sector/Industry)

A curious thing happened on Friday.  The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector rose almost 1%; several small Japanese regional banks went limit-up.  What was going on?  Step forward Chief Cabinet Secretary and Japanese Prime Minister-presumptive Yoshihide Suga who, in a press interview the previous day, commented that there were “too many regional banks” and that “It will be up to each bank’s business decision, but reorganization could also be an option”.
Consolidation in the Japanese banking industry is a hoary old chestnut.  The theme rears its head every 2-3 years, and the stock market has a short-lived flurry of excitement until investors realise that nothing much is going to happen after all.  The problem is that simply allowing Japanese regional banks to merge will not solve their problems. They are not short of capital.  What they need are more business opportunities, more reliance on fee income, and less reliance on interest rate-sensitive business.  They also need a proper spread between their borrowing costs and their loan rates to allow them to generate profits and invest in cost-saving technology; the Bank of Japan’s unorthodox monetary policies have made this almost impossible for some banks. In the meantime, regional populations are declining rapidly, loan margins remain under pressure, the banks are hyper-liquid and struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising sharply .
While several Japanese regional bank stocks have risen by double-digits in the last couple of weeks, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  Based on past experience, ‘banking sector consolidation’ as a stock market theme is likely to be very short-lived.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese regional bank stocks.

A curious thing happened on Friday.  The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector rose almost 1%; several small Japanese regional banks went limit-up.  What was going on?  Step forward Chief Cabinet Secretary and Japanese Prime Minister-presumptive Yoshihide Suga who, in a press interview the previous day, commented that there were “too many regional banks” and that “It will be up to each bank’s business decision, but reorganization could also be an option”.
Consolidation in the Japanese banking industry is a hoary old chestnut.  The theme rears its head every 2-3 years, and the stock market has a short-lived flurry of excitement until investors realise that nothing much is going to happen after all.  The problem is that simply allowing Japanese regional banks to merge will not solve their problems. They are not short of capital.  What they need are more business opportunities, more reliance on fee income, and less reliance on interest rate-sensitive business.  They also need a proper spread between their borrowing costs and their loan rates to allow them to generate profits and invest in cost-saving technology; the Bank of Japan’s unorthodox monetary policies have made this almost impossible for some banks. In the meantime, regional populations are declining rapidly, loan margins remain under pressure, the banks are hyper-liquid and struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising sharply .
While several Japanese regional bank stocks have risen by double-digits in the last couple of weeks, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  Based on past experience, ‘banking sector consolidation’ as a stock market theme is likely to be very short-lived.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese regional bank stocks.

Japanese Regional Banks:  An Old Chestnut Reappears

<a href="https://www.smartkarma.com/entities/concordia-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:22704:1" rel="noopener">Concordia Financial Group, Ltd (7186 JP)</a>, or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small Tokyo-based secondary regional bank, Higashi-Nippon Bank (HNPB).  Two years on from a lending scandal at HNPB that forced the HNPB president to step down, growth at CFG continues to be dogged by ongoing problems with the group’s junior partner.  HNPB reported a consolidated net loss in FY3/2020 and is now expected to record a further net loss in FY3/2021.
Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  However, CFG continues to significantly underperform the Topix Banks Index, with its share price down over 21% in the last six months. CFG is by far the worst-performing of the 4 remaining regional banks with market capitalisations greater than US$3bn.  This is despite a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, frequent share buybacks, and regular share cancellations.
Except for a brief rally in early March, the Topix Banks Index has notably underperformed Topix all year.  Within the regional banking sector, we much prefer Chiba Bank (8331 JP) to CFG for its strong, scandal-free management and long-standing profits ‘track record’.

Concordia Financial Group, Ltd (7186 JP), or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small Tokyo-based secondary regional bank, Higashi-Nippon Bank (HNPB).  Two years on from a lending scandal at HNPB that forced the HNPB president to step down, growth at CFG continues to be dogged by ongoing problems with the group’s junior partner.  HNPB reported a consolidated net loss in FY3/2020 and is now expected to record a further net loss in FY3/2021.
Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  However, CFG continues to significantly underperform the Topix Banks Index, with its share price down over 21% in the last six months. CFG is by far the worst-performing of the 4 remaining regional banks with market capitalisations greater than US$3bn.  This is despite a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, frequent share buybacks, and regular share cancellations.
Except for a brief rally in early March, the Topix Banks Index has notably underperformed Topix all year.  Within the regional banking sector, we much prefer Chiba Bank (8331 JP) to CFG for its strong, scandal-free management and long-standing profits ‘track record’.

Concordia Financial Group (7186 JP):  Blame It on the Junior

CY2020 has not been a good year for embattled <a href="https://www.smartkarma.com/entities/aozora-bank-ltd" target="_blank" data-smartkarma-citation="entities:6483:1" rel="noopener">Aozora Bank Ltd (8304 JP)</a>.  FY3/2020 actual results were well short of guidance, with falling net interest and fee income, rising General Administrative Expenses (GAE) and an 11-fold increase in credit costs all contributing to the disappointing performance.  FY3/2021 management guidance bravely calls for a modest improvement over FY3/2020 actual results, which we think represents a very challenging target in the current operating environment.  To add fuel to the flames, management has slashed the forecast dividend from ¥155/share to ¥122/share, the effect of which has been to send the share price tumbling.  The stock price has fallen 38.7% in the last three months alone, and is by far the worst-performing of the major bank stocks to date.  There are ominous signs scattered throughout the balance-sheet and financial statements that FY3/2021 will be a challenging year for the bank, yet foreign investors still own in aggregate a significant proportion of Aozora Bank’s outstanding shares.
Caveat Emptor!  (May the Buyer Beware!)

CY2020 has not been a good year for embattled Aozora Bank Ltd (8304 JP).  FY3/2020 actual results were well short of guidance, with falling net interest and fee income, rising General Administrative Expenses (GAE) and an 11-fold increase in credit costs all contributing to the disappointing performance.  FY3/2021 management guidance bravely calls for a modest improvement over FY3/2020 actual results, which we think represents a very challenging target in the current operating environment.  To add fuel to the flames, management has slashed the forecast dividend from ¥155/share to ¥122/share, the effect of which has been to send the share price tumbling.  The stock price has fallen 38.7% in the last three months alone, and is by far the worst-performing of the major bank stocks to date.  There are ominous signs scattered throughout the balance-sheet and financial statements that FY3/2021 will be a challenging year for the bank, yet foreign investors still own in aggregate a significant proportion of Aozora Bank’s outstanding shares.
Caveat Emptor!  (May the Buyer Beware!)

Aozora Bank  (8304 JP):  When Blue Skies Turn to Grey

Japan

Tokyo Kiraboshi Financial Group, Inc. operates banks. The Company mainly offers financial services. Tokyo Kiraboshi Financial Group provides services in Japan.

Tokyo Kiraboshi Financial Group (7173 JP)

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Tokyo Kiraboshi Financial Group (7173 JP)

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

Concordia Financial Group (7186 JP): Unequal Partners

Interim results for Concordia Financial Group (7186 JP) show that partner bank HNPB remains the drag on group profitability. The stock is down 16%...

J. Brian Waterhouse

Japanese Regional Banks: An Old Chestnut Reappears

A curious thing happened on Friday. The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector...

J. Brian Waterhouse

Concordia Financial Group (7186 JP): Blame It on the Junior

Concordia Financial Group, Ltd (7186 JP), or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and...

J. Brian Waterhouse

Aozora Bank (8304 JP): When Blue Skies Turn to Grey

CY2020 has not been a good year for embattled Aozora Bank Ltd (8304 JP). FY3/2020 actual results were well short of guidance, with falling net...

J. Brian Waterhouse

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