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

Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge

Michinoku Bank  (8350 JP):  Of Swallows and Summers

Michinoku Bank  (8350 JP):  A Distant Sound of Shoes Dropping

Windamee Research

Japanese Banks

Equity Bottom-Up

2020 was a bad year for <a href="https://www.smartkarma.com/entities/michinoku-bank-ltd" target="_blank" data-smartkarma-citation="entities:6599:1" rel="noopener">Michinoku Bank (8350 JP)</a>, a small embattled regional bank from Aomori Prefecture at the very top of Japan’s main island of Honshu.  The bank recorded a heavy consolidated net loss of ¥4.59 billion in FY3/2020 because of rising credit costs and a synthetic hedge that went disastrously wrong.  2021 is not shaping up to be much better.  True, FY3/2021 started promisingly enough, with 1Q FY3/2021 net profits of ¥694 million beating management’s guidance for the whole of FY3/2021.  However, subsequent quarterly performance has deteriorated rapidly: net profits halved to ¥367 million in 2Q compared with 1Q and have halved again in 3Q to ¥172 million.  The bank is no longer making net losses, but any improvement in core earnings  -  almost entirely because of a huge investment in foreign assets that appear to yield over 4%pa  -  is being offset by rising losses on hedge positions as well as stock valuation losses.  Loan growth has slumped to just +1%pa.  Worryingly, management has kept full-year guidance at ¥500 million even though consolidated net profits for the 9 months to end-December 2020 came to ¥1.23 billion, citing the potential for the economic uncertainty to cause credit costs to rise as well as deferred tax assets to become irrecoverable. Fair warning.From an investment perspective, the only possible interest in Michinoku Bank might be as a merger candidate.  Michinoku Bank is widely expected to come to an agreement on a capital tie-up with larger Aomori rival <a href="https://www.smartkarma.com/entities/aomori-bank-ltd" target="_blank" data-smartkarma-citation="entities:18478:1" rel="noopener">Aomori Bank (8342 JP)</a> Aomori Bank (8342 JP) during CY2021 following the enactment of legislation in November 2020 to allow regional banks in the same prefecture to merge without falling foul of anti-trust laws.  The two banks have high combined market shares both for loans (&gt;73%) and deposits (&gt;56%) in Aomori Prefecture.Our view remains that potential merger activity is insufficient incentive to justify owning this stock.  On a valuation basis, Michinoku Bank remains by far the most demanding stock of all the regional banks from the Tohoku Region.  There are plenty of ‘red flags’ in the balance-sheet and other financial statements that should have warned off potential investors.  Yet foreign institutional investors in aggregate continue to hold 7.4% of outstanding shares.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

2020 was a bad year for Michinoku Bank (8350 JP), a small embattled regional bank from Aomori Prefecture at the very top of Japan’s main island of Honshu.  The bank recorded a heavy consolidated net loss of ¥4.59 billion in FY3/2020 because of rising credit costs and a synthetic hedge that went disastrously wrong.  2021 is not shaping up to be much better.  True, FY3/2021 started promisingly enough, with 1Q FY3/2021 net profits of ¥694 million beating management’s guidance for the whole of FY3/2021.  However, subsequent quarterly performance has deteriorated rapidly: net profits halved to ¥367 million in 2Q compared with 1Q and have halved again in 3Q to ¥172 million.  The bank is no longer making net losses, but any improvement in core earnings  -  almost entirely because of a huge investment in foreign assets that appear to yield over 4%pa  -  is being offset by rising losses on hedge positions as well as stock valuation losses.  Loan growth has slumped to just +1%pa.  Worryingly, management has kept full-year guidance at ¥500 million even though consolidated net profits for the 9 months to end-December 2020 came to ¥1.23 billion, citing the potential for the economic uncertainty to cause credit costs to rise as well as deferred tax assets to become irrecoverable. Fair warning.From an investment perspective, the only possible interest in Michinoku Bank might be as a merger candidate.  Michinoku Bank is widely expected to come to an agreement on a capital tie-up with larger Aomori rival Aomori Bank (8342 JP) Aomori Bank (8342 JP) during CY2021 following the enactment of legislation in November 2020 to allow regional banks in the same prefecture to merge without falling foul of anti-trust laws.  The two banks have high combined market shares both for loans (&gt;73%) and deposits (&gt;56%) in Aomori Prefecture.Our view remains that potential merger activity is insufficient incentive to justify owning this stock.  On a valuation basis, Michinoku Bank remains by far the most demanding stock of all the regional banks from the Tohoku Region.  There are plenty of ‘red flags’ in the balance-sheet and other financial statements that should have warned off potential investors.  Yet foreign institutional investors in aggregate continue to hold 7.4% of outstanding shares.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

Michinoku Bank (8350 JP):  Stuck in a Hedge