Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/200/original/JBanks-2021-0531-TPNBNKvsTPX-2021.jpg?1622450797" class="editor-image img-responsive" data-smartkarma-image-id="210200"></figure></section>

The lending ‘boom’, caused by Japanese corporates rushing to secure lines of credit in anticipation of extended nationwide ‘lock-downs’ to counteract the spread of the coronavirus in Japan, is largely over.  Data for April 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for Japanese commercial banks is falling sharply back to previous mean levels of 2%-3% after peaking at +6.9% YoY in July 2020.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  As often happens once mid-March is reached, the bank sector then sharply underperformed for the next six weeks, only to rally once again through May.  However, trees do not grow to Heaven, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Although the Japanese bank sector is still up some +16% over Topix for CY2021, we note that the sector has once again started to underperform Topix over the past week. Reverting to the mean is an uninspiring development when it comes to Japanese bank stock performance, as the graph at the end of this Insight clearly shows.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/203/578/original/image_7378929621619743178079.png?1619743180" class="editor-image img-responsive" data-smartkarma-image-id="203578"></figure>

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“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 Deposits:  Mountain High, Value Low

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/202/916/original/JBanks-2021-0428-TPNBNK+in+2021.jpg?1619500060" class="editor-image img-responsive" data-smartkarma-image-id="202916"></figure></section>

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“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 Banks:  When Spades Become Shovels

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight <a href="https://www.smartkarma.com/insights/mizuho-financial-group-8411-jp-deja-vu-all-over-again" target="_blank" data-smartkarma-citation="insights:48688" rel="noopener">Mizuho Financial Group (8411 JP):  Deja Vu All Over Again</a> for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight Mizuho Financial Group (8411 JP):  Deja Vu All Over Again for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Overall lending, in terms of loans outstanding, is now relatively static, even though YoY growth rates remain comparatively high at around +5.7%pa.  End-February 2021 loan outstandings have drifted back to June 2020 levels, that is to around to the time of the surge in new lending as Japan came out of its first COVID-induced nationwide lock-down.While the Japanese bank sector has enjoyed a rally since the beginning of the year on the back of a weakening Yen, the start of the roll-out of COVID-19 vaccines and a steepening of the long-bond yield curve (albeit from negative territory to closer to zero), the fundamental outlook for the banks remains clouded.  Technically, having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), we expect the sector to weaken on reducing volume as we approach the fiscal year-end in Japan.The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock prices do not rise for ever  –  especially Japanese bank stocks.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/196/406/original/JBanks-2021-0323-TPXvsTPNBNK-2015-2021.jpg?1616476627" class="editor-image img-responsive" data-smartkarma-image-id="196406"></figure></section>

Overall lending, in terms of loans outstanding, is now relatively static, even though YoY growth rates remain comparatively high at around +5.7%pa.  End-February 2021 loan outstandings have drifted back to June 2020 levels, that is to around to the time of the surge in new lending as Japan came out of its first COVID-induced nationwide lock-down.While the Japanese bank sector has enjoyed a rally since the beginning of the year on the back of a weakening Yen, the start of the roll-out of COVID-19 vaccines and a steepening of the long-bond yield curve (albeit from negative territory to closer to zero), the fundamental outlook for the banks remains clouded.  Technically, having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), we expect the sector to weaken on reducing volume as we approach the fiscal year-end in Japan.The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock prices do not rise for ever  –  especially Japanese bank stocks.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japan

Aozora Bank, Ltd. provides banking services including deposits, savings, loans, foreign exchange transactions, and securities investments. Aozora Bank also provides services such as trust account, resolution and collection, and venture capital.

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Aozora Bank Ltd (8304 JP)

Japanese Bank Lending: Mean Reversion

The lending ‘boom’, triggered by companies rushing to secure bank funding in anticipation of extended nationwide ‘lock-downs’ to counteract the...

J. Brian Waterhouse

Japanese Bank Deposits: Mountain High, Value Low

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021. For Japanese bankers, however, such impressive...

J. Brian Waterhouse

Japanese Banks: When Spades Become Shovels

As Japan faces yet another coronavirus outbreak, it is increasingly apparent that some borrowers need not just cash but capital to survive. Short...

J. Brian Waterhouse

Japanese Banks: Oodles of the Stuff

Banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan...

J. Brian Waterhouse

Japanese Bank Lending: A Lot of Static

The first quarter of CY2021 has been a fun ride for holders of the more liquid Japanese bank stocks, but trees do not grow to Heaven and stock...

J. Brian Waterhouse

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