Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

J. Brian Waterhouse has been covering the Japanese financial sector as an analyst continuously since 1976, working for CLSA, Japaninvest, Rabobank, HSBC Securities, James Capel, Marine Midland Bank of New York and National & Grindlays Bank.  He has been ranked No.1 overall in Japanese banks research in Japan by Asiamoney for 6 of the past 9 years and was runner-up in 2015.  He was awarded the coveted Starmine prize as top Japanese bank stock picker in 2012 and 2014 and was runner-up in 2013.  He frequently appears on TV, radio and in international print media as a commentator on Japanese banking.

Senior Bank Analyst - Japanese Banks

Japanese Bank Deposits:  The Torrent Becomes a Stream

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

According to loan data for the six months to the end of September 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ), growth has in essence ground to a halt.Within the last few days, a flurry of regional banks have issued amendments to earnings guidance for the 1st Half of FY3/2022.  Close to 60% of the 77 TSE-listed regional banking entities have raised their forecasts for 1H FY3/2022.  Few have been tempted to raise their full-year guidance so far even though some of the 1H earnings upgrades have been a multiple of initial guidance. In almost all cases, the banks have cited lower than expected credit costs combined with better than expected returns on securities investments as the reasons for the improvement in guidance. Only one regional bank has so far issued a 1H FY3/2022 earnings downgrade.  Interestingly, none of the major banks has so far issued any amendment to earnings guidance.Based on the earnings upgrades so far, we expect few banks to raise their full-year guidance significantly when they announce interim results between 10-12 November, even though bottom-line profits for 1H FY3/2022 are likely to exceed most banks’ cautious initial earnings guidance.  The reason for this is that uncertainty remains: net margins remain under severe downward pressure, even though domestic funding rates are essentially at rock-bottom, and competition for what new lending business there is post-pandemic is likely to remain intense.  Moreover, there is no guarantee that credit costs will remain low once the Japanese financial authorities start to withdraw the loan guarantees and other substantial financial support provided to local businesses as the country begins the arduous process of getting back to normal.  With the strong possibility that many banks will opt to postpone any amendments to current full-year earnings guidance until well after the fiscal year-end in March 2022, there is a good chance that investors may find FY3/2022 bank earnings guidance to be of little practical help and opt instead to reduce their exposure to the sector.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/238/715/original/Banks-Loans-2021-1031-Back2Square1-TPXvsTPNBNK+2021.jpg?1635664975" class="editor-image img-responsive" data-smartkarma-image-id="238715"></figure></section>The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$.  However, much of that earlier outperformance against Topix has already been given back, as the graph above demonstrates.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

According to loan data for the six months to the end of September 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ), growth has in essence ground to a halt.Within the last few days, a flurry of regional banks have issued amendments to earnings guidance for the 1st Half of FY3/2022.  Close to 60% of the 77 TSE-listed regional banking entities have raised their forecasts for 1H FY3/2022.  Few have been tempted to raise their full-year guidance so far even though some of the 1H earnings upgrades have been a multiple of initial guidance. In almost all cases, the banks have cited lower than expected credit costs combined with better than expected returns on securities investments as the reasons for the improvement in guidance. Only one regional bank has so far issued a 1H FY3/2022 earnings downgrade.  Interestingly, none of the major banks has so far issued any amendment to earnings guidance.Based on the earnings upgrades so far, we expect few banks to raise their full-year guidance significantly when they announce interim results between 10-12 November, even though bottom-line profits for 1H FY3/2022 are likely to exceed most banks’ cautious initial earnings guidance.  The reason for this is that uncertainty remains: net margins remain under severe downward pressure, even though domestic funding rates are essentially at rock-bottom, and competition for what new lending business there is post-pandemic is likely to remain intense.  Moreover, there is no guarantee that credit costs will remain low once the Japanese financial authorities start to withdraw the loan guarantees and other substantial financial support provided to local businesses as the country begins the arduous process of getting back to normal.  With the strong possibility that many banks will opt to postpone any amendments to current full-year earnings guidance until well after the fiscal year-end in March 2022, there is a good chance that investors may find FY3/2022 bank earnings guidance to be of little practical help and opt instead to reduce their exposure to the sector.The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$.  However, much of that earlier outperformance against Topix has already been given back, as the graph above demonstrates.“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 Lending:  Back to Square One