Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

<p>Financial entrepreneur Yoshitaka Kitao and his flagship company <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a> have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.</p><p>On Friday 20 November 2020, the holding company for these two banks, tiny <a href="https://www.smartkarma.com/entities/jimoto-holdings-inc" target="_blank" data-smartkarma-citation="entities:5763:1" rel="noopener">Jimoto Holdings (7161 JP)</a><strong><em>,</em></strong> finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.</p><p>Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.</p><p>Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  <em>Caveat Emptor!</em> (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.</p>

Financial entrepreneur Yoshitaka Kitao and his flagship company Sbi Holdings (8473 JP) have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.On Friday 20 November 2020, the holding company for these two banks, tiny Jimoto Holdings (7161 JP), finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of Sbi Holdings (8473 JP)  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Jimoto Holdings (7161 JP):  Kirayaka Cracks

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>) had determined to launch a Tender Offer to acquire common stock in <a href="https://www.smartkarma.com/entities/kenedix-inc" target="_blank" data-smartkarma-citation="entities:11321:1" rel="noopener">Kenedix Inc (4321 JP)</a>.</p><p>It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/079/original/Screenshot%202020-11-22%20at%2010.36.21%20AM.png?1606012603" class="editor-image img-responsive" data-smartkarma-image-id="173079"></figure></section><p></p><p>This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.</p><div class="content-highlight">
<p>The bid is not terribly impressive.</p>
<p>It is a three-year high, but it matches that high, and does not exceed it.</p>
<p>The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. </p>
</div><section class="figure"><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/083/original/Screenshot%202020-11-22%20at%2010.56.32%20AM.png?1606013805" class="editor-image img-responsive" data-smartkarma-image-id="173083"></figure></section><p>Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. </p>
<p><strong>This bid does not look optimal. </strong></p>
<div>
<hr>
<p>I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's <em>Reminiscences of a Stock Operator</em> after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... </p>
</div>
<div><blockquote>
<p>"I couldn’t think of selling that stock.” </p>
<p>“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.</p>
<p>“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.</p>
<p>“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”</p>
<p>“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”</p>
</blockquote></div>
<p>It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. </p>
<p>Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. </p>
<p>That did not happen here. </p>
<div><p>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</p></div>
<div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/084/original/image?1606014973" class="editor-image img-responsive" data-smartkarma-image-id="173084"></figure></div>
<div><div>
<p>Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.</p>
<p>As always, much more below the fold.</p>
</div></div>
<p></p></section><p></p></section>

Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of Sumitomo Mitsui Financial Group (8316 JP)) had determined to launch a Tender Offer to acquire common stock in Kenedix Inc (4321 JP).It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.
The bid is not terribly impressive.
It is a three-year high, but it matches that high, and does not exceed it.
The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. 
Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. 
This bid does not look optimal. 


I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's Reminiscences of a Stock Operator after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... 


"I couldn’t think of selling that stock.” 
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. 
Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. 
That did not happen here. 
As I suggested in Japan Needs More Cowbell...


Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.
As always, much more below the fold.



A Curiously Unsatisfying Takeover Bid For Kenedix

Mizuho Financial Group / Equity Bottom-Up

<p>A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for <a href="https://www.smartkarma.com/entities/mizuho-financial-group-inc" target="_blank" data-smartkarma-citation="entities:219:1" rel="noopener">Mizuho Financial Group (8411 JP)</a>  (MHFG) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).</p>
<p>The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>  and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.  Investor patience has been sorely tested.</p>
<p><em>Caveat Emptor!</em> (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.</p>

A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for Mizuho Financial Group (8411 JP)  (MHFG) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).
The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals Mitsubishi UFJ Financial (MUFG) (8306 JP)  and Sumitomo Mitsui Financial Group (8316 JP) but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.  Investor patience has been sorely tested.
Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Mizuho Financial Group (8411 JP):  Anything But Consistent

Sumitomo Mitsui Financial Group / Equity Bottom-Up

<p>Interim FY3/2021 results for <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.</p><p>SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.</p><p>While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>, on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.</p>

Interim FY3/2021 results for Sumitomo Mitsui Financial Group (8316 JP)  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival Mitsubishi UFJ Financial (MUFG) (8306 JP), on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.

SMFG (8316 JP):  Rising to the Challenge

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

<p>Interim results for <strong><em><a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a></em></strong>highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from <a href="https://www.smartkarma.com/entities/morgan-stanley" target="_blank" data-smartkarma-citation="entities:1122:1" rel="noopener">Morgan Stanley (MS US)</a> to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.</p><p>Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>, on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.</p>

Interim results for Mitsubishi UFJ Financial (MUFG) (8306 JP)highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from Morgan Stanley (MS US) to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival Sumitomo Mitsui Financial Group (8316 JP), on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.

Japan

Sumitomo Mitsui Financial Group, Inc. manages financial operations for its subsidiaries. The Company provides commercial banking and a variety of financial services.

Sumitomo Mitsui Financial Group (8316 JP)

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Sumitomo Mitsui Financial Group (8316 JP)

Jimoto Holdings (7161 JP): Kirayaka Cracks

Financial entrepreneur Yoshitaka Kitao and his flagship company SBI Holdings (8473 JP) have just netted their sixth and seventh regional banks,...

J. Brian Waterhouse

A Curiously Unsatisfying Takeover Bid For Kenedix

Sumitomo Mitsui Finance & Lease and lead shareholder ARA Asset Mgmt are launching a bid to take over property manager Kenedix ahead of a large jump...

Travis Lundy

Mizuho Financial Group (8411 JP): Anything But Consistent

Despite outperforming all of the major banks this year, MHFG’s lack of consistency, either in profit generation or management execution, makes this...

J. Brian Waterhouse

SMFG (8316 JP): Rising to the Challenge

Interim FY3/2021 results for SMFG (8316 JP) showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, despite margins under...

J. Brian Waterhouse

MUFG (8306 JP): Wavering in the Ranks

Interim results for MUFG (8306 JP) highlighted the fragility of the profit contribution from some of its recent overseas acquisitions, with credit...

J. Brian Waterhouse

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