Japanese Banks: Silver Lining in Digital Banking Lies in Cost Savings

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

Sumitomo Mitsui Financial Group (8316 JP)

We are transferring coverage of Japan's six largest banking groups, all of which we rate as having no moat and a stable moat trend. This includes the three so-called "megabanks" that together account for 25% of banking-system loans and 29% of deposits: <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial (8306 JP)</a>, or MUFG, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, or SMFG, and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a>. It also includes three second-tier banks: <a href="https://www.smartkarma.com/entities/19450" target="_blank" data-smartkarma-citation="entities:19450:1">Sumitomo Mitsui Trust (8309 JP)</a>, <a href="https://www.smartkarma.com/entities/6841" target="_blank" data-smartkarma-citation="entities:6841:1">Resona Holdings (8308 JP)</a>, and <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>. Our top pick is SMFG, with 33% upside from the current share price to our fair value estimate of JPY 5,960, based on our expectations for solid returns from its consumer finance and credit card businesses. Japan Post Bank has the most downside, with our fair value estimate of JPY 952 being 29% below the current share price.The environment for banks has been tough for years in Japan, and we expect it to remain so. Long-running deflation, which started in earnest in the late 1990s and has yet to end conclusively, has led to persistently low demand for credit. The loan/deposit ratio is only around 55% at present, down from 74% in 2000. Japanese corporates, which in aggregate had a liabilities/net assets ratio of 4 times in the mid-1990s, have reduced this to a healthy 129% as of June, but companies continue to prioritize using cash flow to pay down debt rather than aggressively making new investments. Individuals similarly are generally loath to borrow, given stagnant nominal incomes. With low demand for credit and a surfeit of liquid deposits, competition among banks has pushed the average interest rate on new bank loans down by 100 basis points over the past decade to below 0.7% at present. While there are reasons to hope this has started to bottom out, a catalyst for a material rise in lending rates is not apparent, especially with the Bank of Japan committed to keeping policy rates extremely low "for an extended period."Analyst: Michael Makdad

We are transferring coverage of Japan's six largest banking groups, all of which we rate as having no moat and a stable moat trend. This includes the three so-called "megabanks" that together account for 25% of banking-system loans and 29% of deposits: Mitsubishi UFJ Financial (8306 JP), or MUFG, Sumitomo Mitsui Financial (8316 JP), or SMFG, and Mizuho Financial Group (8411 JP). It also includes three second-tier banks: Sumitomo Mitsui Trust (8309 JP), Resona Holdings (8308 JP), and Japan Post Bank (7182 JP). Our top pick is SMFG, with 33% upside from the current share price to our fair value estimate of JPY 5,960, based on our expectations for solid returns from its consumer finance and credit card businesses. Japan Post Bank has the most downside, with our fair value estimate of JPY 952 being 29% below the current share price.The environment for banks has been tough for years in Japan, and we expect it to remain so. Long-running deflation, which started in earnest in the late 1990s and has yet to end conclusively, has led to persistently low demand for credit. The loan/deposit ratio is only around 55% at present, down from 74% in 2000. Japanese corporates, which in aggregate had a liabilities/net assets ratio of 4 times in the mid-1990s, have reduced this to a healthy 129% as of June, but companies continue to prioritize using cash flow to pay down debt rather than aggressively making new investments. Individuals similarly are generally loath to borrow, given stagnant nominal incomes. With low demand for credit and a surfeit of liquid deposits, competition among banks has pushed the average interest rate on new bank loans down by 100 basis points over the past decade to below 0.7% at present. While there are reasons to hope this has started to bottom out, a catalyst for a material rise in lending rates is not apparent, especially with the Bank of Japan committed to keeping policy rates extremely low "for an extended period."Analyst: Michael Makdad

Mitsubishi UFJ Financial (MUFG) (8306 JP)

In Tough Japanese Banking Market, SMFG Looks Like the Best Bet for Future Returns