Resona Holding Faces Further Pressure After Corrective Bounce Terminates

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Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/6841" target="_blank" data-smartkarma-citation="entities:6841:1">Resona Holdings Inc (8308 JP)</a> is one of Japan’s best comeback stories after the bank fell into a massive capital deficit that required a government bailout involving JPY 3.1 trillion almost 15 years ago. Late chairman Eiji Hosoya, who was headhunted from East Japan Railway company, spent over a decade successfully transforming the group into the country’s best-ranked service-oriented retail banking group with a solid client franchise in the Greater Osaka metropolitan area and the Greater Tokyo metropolitan area. The two areas are the most populous regions in Japan, with 17 million and 37 million people, respectively. Servicing more than 13 million retail customers and 400,000 smaller corporate customers, Resona maintains dominant regional market leadership in select locations, with the largest deposit and loan market shares in the Saitama and Osaka prefecture, tracking above 44% and 19%, respectively. Saitama and Osaka maintains equivalent scale to Vietnam and Denmark in terms of GDP, according to the latest statistics.<div class="content-highlight">We are initiating coverage of Resona Holdings with a fair value estimate of JPY 590, equivalent to 8.7 times our forward earnings estimate and 0.7 times our forward book value estimate. The stock price has underperformed the Topix bank sector by 8% in the year to date, and shares are currently trading close to our fair value estimate. We think some upside would emerge if the group were to deploy its excess cash position, representing as much as 25% of total assets, to higher-yield assets.</div>The market's focus going forward centers around the impact of acquiring two regional banks from <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial Group (8316 JP)</a>. On April 1, 2018, Resona is scheduled to integrate three regional banks by acquiring stakes in <a href="https://www.smartkarma.com/entities/9407" target="_blank" data-smartkarma-citation="entities:9407:1">Kansai Urban Banking Corp (8545 JP)</a> and <a href="https://www.smartkarma.com/entities/1735" target="_blank" data-smartkarma-citation="entities:1735:1">Minato Bank Ltd/The (8543 JP)</a> from Sumitomo Mitsui Financial Group via a tender offer for the reported sum of JPY 7.4 billion. We have factored in the share issuance in our forecasts. Under Kansai Mirai Financial Group, current services will be provided through two regional banking brands for the Osaka and Hyogo region, all sharing the same nationwide operating platform. Resona will own 51% of the new Kansai Mirai Financial Group, while between 22% and 26% will be held by passive investor Sumitomo Mitsui Financial Group, with the remainder to be floated through the Tokyo Stock Exchange.Analyst: Mari Kumagai

Resona Holdings Inc (8308 JP) is one of Japan’s best comeback stories after the bank fell into a massive capital deficit that required a government bailout involving JPY 3.1 trillion almost 15 years ago. Late chairman Eiji Hosoya, who was headhunted from East Japan Railway company, spent over a decade successfully transforming the group into the country’s best-ranked service-oriented retail banking group with a solid client franchise in the Greater Osaka metropolitan area and the Greater Tokyo metropolitan area. The two areas are the most populous regions in Japan, with 17 million and 37 million people, respectively. Servicing more than 13 million retail customers and 400,000 smaller corporate customers, Resona maintains dominant regional market leadership in select locations, with the largest deposit and loan market shares in the Saitama and Osaka prefecture, tracking above 44% and 19%, respectively. Saitama and Osaka maintains equivalent scale to Vietnam and Denmark in terms of GDP, according to the latest statistics.We are initiating coverage of Resona Holdings with a fair value estimate of JPY 590, equivalent to 8.7 times our forward earnings estimate and 0.7 times our forward book value estimate. The stock price has underperformed the Topix bank sector by 8% in the year to date, and shares are currently trading close to our fair value estimate. We think some upside would emerge if the group were to deploy its excess cash position, representing as much as 25% of total assets, to higher-yield assets.The market's focus going forward centers around the impact of acquiring two regional banks from Sumitomo Mitsui Financial Group (8316 JP). On April 1, 2018, Resona is scheduled to integrate three regional banks by acquiring stakes in Kansai Urban Banking Corp (8545 JP) and Minato Bank Ltd/The (8543 JP) from Sumitomo Mitsui Financial Group via a tender offer for the reported sum of JPY 7.4 billion. We have factored in the share issuance in our forecasts. Under Kansai Mirai Financial Group, current services will be provided through two regional banking brands for the Osaka and Hyogo region, all sharing the same nationwide operating platform. Resona will own 51% of the new Kansai Mirai Financial Group, while between 22% and 26% will be held by passive investor Sumitomo Mitsui Financial Group, with the remainder to be floated through the Tokyo Stock Exchange.Analyst: Mari Kumagai

Sumitomo Mitsui Financial Group (8316 JP)

Initiating Coverage of Resona Holdings With FVE of JPY 590; Shares Slightly Undervalued