Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

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).
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.
Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

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

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Kansai Mirai Financial Group I / Event-Driven

That was quick.The Nikkei article turned into an announced deal within the day. My insight <a href="https://www.smartkarma.com/insights/resona-to-take-kansai-mirai-private" target="_blank" data-smartkarma-citation="insights:45126" rel="noopener">Resona To Take Kansai Mirai Private?</a> suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a>. That is worth ¥524 per share of <a href="https://www.smartkarma.com/entities/kansai-mirai-financial-group" target="_blank" data-smartkarma-citation="entities:26953:1" rel="noopener">Kansai Mirai Financial (7321 JP)</a>, which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.

That was quick.The Nikkei article turned into an announced deal within the day. My insight Resona To Take Kansai Mirai Private? suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of Resona Holdings (8308 JP). That is worth ¥524 per share of Kansai Mirai Financial (7321 JP), which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.  

The Nikkei carried an article last night suggesting that <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a> would seek to take private <a href="https://www.smartkarma.com/entities/kansai-mirai-financial-group" target="_blank" data-smartkarma-citation="entities:26953:1" rel="noopener">Kansai Mirai Financial (7321 JP)</a> which was formed from the merger of <a href="https://www.smartkarma.com/entities/minato-bank-ltd-the" target="_blank" data-smartkarma-citation="entities:1735:1" rel="noopener">Minato Bank (8543 JP)</a>, SMFG-subsidiary <a href="https://www.smartkarma.com/entities/kansai-urban-banking-corp" target="_blank" data-smartkarma-citation="entities:9407:1" rel="noopener">Kansai Urban Banking (8545 JP)</a>, Resona wholly-owned sub Kinki Osaka Bank, back in 2018, listing as Kansai Mirai in April 2018. A year later, under the holdco umbrella, Kansai Urban and Kinki Osaka were merged.  It was always planned that the integration would take years. This was discussed at length in the insights related to <a href="https://www.smartkarma.com/insights/kansai-mirai-the-most-interesting-arb-in-the-world" target="_blank" data-smartkarma-citation="insights:14429" rel="noopener">Kansai Mirai: The Most Interesting Arb In The World</a>. Now it appears that the fact that it remains listed is problematic for governance purposes (highlighted back then, I assure you). The idea now appears to be that the bank needs to be taken in hand to hasten restructuring to lower costs and keep capital in-house rather than paying it out as dividends (to Resona and SMFG as 70% owners). The report suggests that Resona will launch a Tender Offer to take Kansai Mirai private within the month and the stock will be delisted by March where the squeezeout will be a share exchange with Resona Bank shares rather than a cash-out. The <a href="https://www.nikkei.com/article/DGXMZO65998760Z01C20A1EE9000/" target="_blank" rel="noopener">article</a> contains considerable detail.  Resona currently owns 51.2% of the shares outstanding of Kansai Mirai. SMFG has about 21.3% (and group company Cedyna owns 0.95%). Corporates own another 9%. Float is therefore tiny and as long as SMFG tenders into it, the takeover will be successful and minorities can be squeezed out through a merger, quickly approved by Resona. The article suggests that if Resona pays cash for all the shares, that to buy the 49% they don't own of this ¥150bn market cap it would take more than ¥10bn. I expect the article is missing a zero. The last trade before this report was at ¥405 vs Tangible Book Value Per Share of ¥1216. For some investors, this should provide food for thought. The previous deal was done at the wrong price for Minato Bank shareholders. We still do not know the terms here,  but there is a possibility investors will see the terms and say to themselves...<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/170/505/original/MIMITW%20Shake%20Head.gif?1604984190" class="editor-image img-responsive" data-smartkarma-image-id="170505"></figure></section>And there is every possibility this will not be the most interesting arb in the world.But it might still be interesting.More detail below the fold.

The Nikkei carried an article last night suggesting that Resona Holdings (8308 JP) would seek to take private Kansai Mirai Financial (7321 JP) which was formed from the merger of Minato Bank (8543 JP), SMFG-subsidiary Kansai Urban Banking (8545 JP), Resona wholly-owned sub Kinki Osaka Bank, back in 2018, listing as Kansai Mirai in April 2018. A year later, under the holdco umbrella, Kansai Urban and Kinki Osaka were merged.  It was always planned that the integration would take years. This was discussed at length in the insights related to Kansai Mirai: The Most Interesting Arb In The World. Now it appears that the fact that it remains listed is problematic for governance purposes (highlighted back then, I assure you). The idea now appears to be that the bank needs to be taken in hand to hasten restructuring to lower costs and keep capital in-house rather than paying it out as dividends (to Resona and SMFG as 70% owners). The report suggests that Resona will launch a Tender Offer to take Kansai Mirai private within the month and the stock will be delisted by March where the squeezeout will be a share exchange with Resona Bank shares rather than a cash-out. The article contains considerable detail.  Resona currently owns 51.2% of the shares outstanding of Kansai Mirai. SMFG has about 21.3% (and group company Cedyna owns 0.95%). Corporates own another 9%. Float is therefore tiny and as long as SMFG tenders into it, the takeover will be successful and minorities can be squeezed out through a merger, quickly approved by Resona. The article suggests that if Resona pays cash for all the shares, that to buy the 49% they don't own of this ¥150bn market cap it would take more than ¥10bn. I expect the article is missing a zero. The last trade before this report was at ¥405 vs Tangible Book Value Per Share of ¥1216. For some investors, this should provide food for thought. The previous deal was done at the wrong price for Minato Bank shareholders. We still do not know the terms here,  but there is a possibility investors will see the terms and say to themselves...And there is every possibility this will not be the most interesting arb in the world.But it might still be interesting.More detail below the fold. 

Thematic (Sector/Industry)

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.

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.

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.

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.

Japan

Resona Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, provides financial services, including banking, trust operations, and credit card services. Resona Holdings also offers consulting services related to personal loans, asset management, and asset succession.

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Resona Holdings (8308 JP)

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

Resona To Take Kansai Mirai Private!

Now we have an announced deal. The Resona Deal for its Kansai Mirai sub is not friendly to minorities, but it could have been worse. It could have...

Travis Lundy

Resona To Take Kansai Mirai Private?

It appears as if Resona may take Kansai Mirai private through a TOB and share exchange for those who do not tender. That suggests, despite a cheap...

Travis Lundy

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

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