Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

<p>The COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans, but it is suspected that the vast majority of these emergency loans have been made at virtually no profit margin for the banks.  Moreover, most of this money appears to have been redeposited with the banks for safe-keeping until really needed.  Meanwhile, the rise in workers working from home and restrictions on international travel has resulted in substantially lower discretionary spending (such as on holiday travel) and higher levels of saving.</p>
<p>The cash piles are turning into cash mountains at the banks, prompting some banks to withdraw some deposit products and suspend branch counter operations for cash deposits, cash withdrawals and currency exchange.</p>
<p style="text-align: justify;">It’s a whole new world of pain for Japan’s embattled banks.</p>

The COVID-19 pandemic has created unprecedented demand from corporate borrowers for loans, but it is suspected that the vast majority of these emergency loans have been made at virtually no profit margin for the banks.  Moreover, most of this money appears to have been redeposited with the banks for safe-keeping until really needed.  Meanwhile, the rise in workers working from home and restrictions on international travel has resulted in substantially lower discretionary spending (such as on holiday travel) and higher levels of saving.
The cash piles are turning into cash mountains at the banks, prompting some banks to withdraw some deposit products and suspend branch counter operations for cash deposits, cash withdrawals and currency exchange.
It’s a whole new world of pain for Japan’s embattled banks.

<p>After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.</p>

After hitting a peak of ¥535.407 trillion (US$5.10 trillion) in June, overall loan outstandings have started to edge down over the last three months to ¥534.206 trillion (US$5.08 trillion) as of the end of September, albeit by a mere 0.1% month-on-month (MoM).  The major banks have registered the biggest declines of around 0.5% MoM, but they still represent 40% of total bank lending in Japan.  By contrast, both the Japanese Bankers Association and the Bank of Japan reported that lending by the regional and secondary regional banks continues to increase, with YoY growth rates of +5.6% and +7.1%, respectively.  Aggregate lending by the 64 regional banks now represents 42% of total bank lending in Japan, while aggregate lending by the 38 secondary regional banks is around 9.6% of total bank lending.

<p>A curious thing happened on Friday.  The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector rose almost 1%; several small Japanese regional banks went limit-up.  What was going on?  Step forward Chief Cabinet Secretary and Japanese Prime Minister-presumptive Yoshihide Suga who, in a press interview the previous day, commented that there were “too many regional banks” and that “It will be up to each bank’s business decision, but reorganization could also be an option”.</p>
<p>Consolidation in the Japanese banking industry is a hoary old chestnut.  The theme rears its head every 2-3 years, and the stock market has a short-lived flurry of excitement until investors realise that nothing much is going to happen after all.  The problem is that simply allowing Japanese regional banks to merge will not solve their problems. They are not short of capital.  What they need are more business opportunities, more reliance on fee income, and less reliance on interest rate-sensitive business.  They also need a proper spread between their borrowing costs and their loan rates to allow them to generate profits and invest in cost-saving technology; the Bank of Japan’s unorthodox monetary policies have made this almost impossible for some banks. In the meantime, regional populations are declining rapidly, loan margins remain under pressure, the banks are hyper-liquid and struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising sharply .</p>
<p>While several Japanese regional bank stocks have risen by double-digits in the last couple of weeks, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  Based on past experience, ‘banking sector consolidation’ as a stock market theme is likely to be very short-lived.  “<em>Caveat Emptor!”</em> (May the Buyer Beware) remains our advice to would-be investors in Japanese regional bank stocks.</p>

A curious thing happened on Friday.  The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector rose almost 1%; several small Japanese regional banks went limit-up.  What was going on?  Step forward Chief Cabinet Secretary and Japanese Prime Minister-presumptive Yoshihide Suga who, in a press interview the previous day, commented that there were “too many regional banks” and that “It will be up to each bank’s business decision, but reorganization could also be an option”.
Consolidation in the Japanese banking industry is a hoary old chestnut.  The theme rears its head every 2-3 years, and the stock market has a short-lived flurry of excitement until investors realise that nothing much is going to happen after all.  The problem is that simply allowing Japanese regional banks to merge will not solve their problems. They are not short of capital.  What they need are more business opportunities, more reliance on fee income, and less reliance on interest rate-sensitive business.  They also need a proper spread between their borrowing costs and their loan rates to allow them to generate profits and invest in cost-saving technology; the Bank of Japan’s unorthodox monetary policies have made this almost impossible for some banks. In the meantime, regional populations are declining rapidly, loan margins remain under pressure, the banks are hyper-liquid and struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising sharply .
While several Japanese regional bank stocks have risen by double-digits in the last couple of weeks, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  Based on past experience, ‘banking sector consolidation’ as a stock market theme is likely to be very short-lived.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese regional bank stocks.

Japanese Regional Banks:  An Old Chestnut Reappears

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

<p>It is rare for Japan’s banks to shine. We wonder if this is now their time and even if only fleetingly so? Credit costs are down substantially for almost every reporting bank in the June quarter, at least so far. Most will recognize by now that this crisis is not like past crises, and that as we turn economies back on, together with unprecedented stimulus, low interest rates, the recovery profile can also be very different. We are seeing this within many economies and Japan’s banks stand out, globally. Their credit cost delta is generally higher than others and what matters more is that some have seen their previous six months’ credit costs still far higher than recent years. This can mean substantially lower provisions in coming quarters, leading to substantially higher profit.</p>

It is rare for Japan’s banks to shine. We wonder if this is now their time and even if only fleetingly so? Credit costs are down substantially for almost every reporting bank in the June quarter, at least so far. Most will recognize by now that this crisis is not like past crises, and that as we turn economies back on, together with unprecedented stimulus, low interest rates, the recovery profile can also be very different. We are seeing this within many economies and Japan’s banks stand out, globally. Their credit cost delta is generally higher than others and what matters more is that some have seen their previous six months’ credit costs still far higher than recent years. This can mean substantially lower provisions in coming quarters, leading to substantially higher profit.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/784/original/2020-07-30_08-23-32.png?1596065031" class="editor-image img-responsive" data-smartkarma-image-id="148784"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/785/original/2020-07-30_08-24-39.png?1596065092" class="editor-image img-responsive" data-smartkarma-image-id="148785"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/786/original/2020-07-30_08-25-16.png?1596065140" class="editor-image img-responsive" data-smartkarma-image-id="148786"></figure><div class="content-caption">Source • Japan Analytics</div>
<p><strong>29th JULY</strong> - As the pace of announcements picks up, <a href="https://www.smartkarma.com/entities/ana-holdings-inc" target="_blank" data-smartkarma-citation="entities:5308:1" rel="noopener">ANA (9202 JP)</a>, <a href="https://www.smartkarma.com/entities/showa-corp" target="_blank" data-smartkarma-citation="entities:15079:1" rel="noopener">Showa (7274 JP)</a>, and <a href="https://www.smartkarma.com/entities/isetan-mitsukoshi-holdings-ltd" target="_blank" data-smartkarma-citation="entities:18871:1" rel="noopener">Isetan Mitsukoshi (3099 JP)</a> were the three 'worst' large-cap results yesterday in terms of our scoring methodology. In the<strong> DETAIL</strong> below, we cover all the results and forecasts for companies with a market cap of over ¥100 billion and make some trading suggestions.</p>
<hr>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
</div><hr><div><p style="text-align: center;"><strong>85 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score</strong>: 30 Positive / 5 Neutral / 50 Negative</li>
<li>
<strong>Average Results Score Change:</strong> -2.4</li>
<li>
<strong>Average % Change in Revenue:</strong> -9.7% Quarter YoY / -2.7% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -1.0ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 24%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>35 Annual • 15 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 6 Positive / 1 Neutral / 28 Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change: 4 </strong>Positive / 0 Neutral / 11 Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -12.8</li>
</ul></div>


Source • Japan Analytics
29th JULY - As the pace of announcements picks up, ANA (9202 JP), Showa (7274 JP), and Isetan Mitsukoshi (3099 JP) were the three 'worst' large-cap results yesterday in terms of our scoring methodology. In the DETAIL below, we cover all the results and forecasts for companies with a market cap of over ¥100 billion and make some trading suggestions.

DAILY STATS
85 Quarterly Results

Results Score: 30 Positive / 5 Neutral / 50 Negative

Average Results Score Change: -2.4

Average % Change in Revenue: -9.7% Quarter YoY / -2.7% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.0ppt

Percentage Making Quarterly Losses: 24%
 35 Annual • 15 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 6 Positive / 1 Neutral / 28 Negative

Interim Forecast/Revision Score Change: 4 Positive / 0 Neutral / 11 Negative

Average Forecast/Revision Score Change: -12.8


🇯🇵 JAPAN • Results & Revisions 29th July - Kao, SMFG, Nomura, NRI, Asahi Holdings, NRE

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Mitsubishi UFJ Financial (MUFG) (8306 JP)

Japanese Banks: Mountains of Money

The cash piles at the banks are turning into cash mountains, prompting some to withdraw some deposit products and suspend counter operations for...

J. Brian Waterhouse

Japanese Bank Lending: Flatlining

Loan and deposit data for Japanese banks released by both the BoJ and the JBA for September 2020 confirm that the ‘dash for cash’ by major...

J. Brian Waterhouse

Japanese Regional Banks: An Old Chestnut Reappears

A curious thing happened on Friday. The Japanese Topix Index fell almost 1%, reflecting overnight weakness on Wall Street, but the banking sector...

J. Brian Waterhouse

Japan Banks – Rare Time to Shine?

It is rare for Japan’s banks to shine. We wonder if this is now their time and even if only fleetingly so? Credit costs are down substantially for...

Daniel Tabbush

🇯🇵 JAPAN • Results & Revisions 29th July - Kao, SMFG, Nomura, NRI, Asahi Holdings, NRE

29th JULY - As the pace of announcements picks up, ANA (9202 JP), Showa (7274 JP), and Isetan Mitsukoshi (3099 JP) were the three 'worst'...

Campbell Gunn

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52-week Range

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