Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

On Friday 1 October 2020, three new regional bank holding companies will be created and listed the same day on the Tokyo Stock Exchange.  The establishment of a regional bank holding company in Japan is not new news, but these three will in future set up entirely non-financial subsidiaries as a means of broadening group revenues and profitability.  This is a notable change in bank thinking.Japanese financial authorities have been keen to encourage regional banks to merge in the belief that a reduction in the number of banks will lead to greater efficiencies and a greater willingness to lend, but this has had very mixed results.  What the financial authorities have so far failed to do has been to encourage the banks to adopt a radically differentiated business model, or seriously address the issue of proper risk asset pricing, or improve operating margins, or enhance shareholder returns.  This may be about to change. The kiki-kan  危機感 or ‘sense of crisis’ that appears to be the necessary catalyst to get Japanese banks to abandon their habitual ‘business as usual’ approach and take decisive action, may be finally emerging among the Japanese regional banking fraternity.It’s about time.

On Friday 1 October 2020, three new regional bank holding companies will be created and listed the same day on the Tokyo Stock Exchange.  The establishment of a regional bank holding company in Japan is not new news, but these three will in future set up entirely non-financial subsidiaries as a means of broadening group revenues and profitability.  This is a notable change in bank thinking.Japanese financial authorities have been keen to encourage regional banks to merge in the belief that a reduction in the number of banks will lead to greater efficiencies and a greater willingness to lend, but this has had very mixed results.  What the financial authorities have so far failed to do has been to encourage the banks to adopt a radically differentiated business model, or seriously address the issue of proper risk asset pricing, or improve operating margins, or enhance shareholder returns.  This may be about to change. The kiki-kan  危機感 or ‘sense of crisis’ that appears to be the necessary catalyst to get Japanese banks to abandon their habitual ‘business as usual’ approach and take decisive action, may be finally emerging among the Japanese regional banking fraternity.It’s about time.

Japanese Regional Banks:  Dancing On Their Own

Equity Bottom-Up

Tourism is one of the most important industries in the Ryukyu Islands, home to regional bank <a href="https://www.smartkarma.com/entities/bank-of-the-ryukyus-ltd" target="_blank" data-smartkarma-citation="entities:20702:1" rel="noopener">Bank Of The Ryukyus (8399 JP)</a>.  When the tourist industry is effectively shut down, as it has under the ongoing coronavirus pandemic, the local economy suffers immensely.   The bank has recently issued a profit warning, citing rising credit costs as it moves to support an increasing number of small businesses struggling to keep up their loan and interest repayments.  We expect the prefecture’s two other local banks, namely <a href="https://www.smartkarma.com/entities/bank-of-okinawa-ltd" target="_blank" data-smartkarma-citation="entities:6111:1" rel="noopener">Bank Of Okinawa (8397 JP)</a> and the unlisted Okinawa Kaiho Bank, to announce similar measures in the next few weeks prior to the announcement of FY3/2020 results after the end of Golden Week in early May.  Foreign institutional investors hold just under 18% of outstanding shares.  Caveat Emptor!  (May the Buyer Beware!)

Tourism is one of the most important industries in the Ryukyu Islands, home to regional bank Bank Of The Ryukyus (8399 JP).  When the tourist industry is effectively shut down, as it has under the ongoing coronavirus pandemic, the local economy suffers immensely.   The bank has recently issued a profit warning, citing rising credit costs as it moves to support an increasing number of small businesses struggling to keep up their loan and interest repayments.  We expect the prefecture’s two other local banks, namely Bank Of Okinawa (8397 JP) and the unlisted Okinawa Kaiho Bank, to announce similar measures in the next few weeks prior to the announcement of FY3/2020 results after the end of Golden Week in early May.  Foreign institutional investors hold just under 18% of outstanding shares.  Caveat Emptor!  (May the Buyer Beware!)

Bank of the Ryukyus (8399 JP): Tourist Trapped

Specialist in Japanese equities, Kheiron Group

Nathan Ramler, CFA

Specialist in Japanese equities

Kheiron Group

Tokyo-based with experience in global equity markets and M&A. Striving to add value and insight. 

Specialists in Japan

Okinawa Cellular Telephone / Equity Bottom-Up

As the colder winter weather is felt and the icy blast of industry tariff cuts continues to chill sentiment, we seek some respite (at least mentally) in the warmer climes of Okinawa. Okinawa Cellular is a unique company. It's a small cap telecom network operator in Japan with a focus on the sub-tropical islands of Okinawa Prefecture. As part of the KDDI group, the company benefits from its parent's economies of scale, but with its local presence, it also benefits from being the hometown hero. Because the stock is relatively small, from an investment perspective it runs into liquidity constraints that the other telcos do not have, so it's a different type of investment but one that we think is worth looking at. Over the past 12 months Okinawa Cellular's stock has fallen by 12.3%, but over the past year the stock has delivered a return in the middle of its peer group and has outperformed the broad TOPIX by about 5.5%. Like most telcos, Okinawa Cellular is also ramping its dividend payments, and the current yield is about 3.5%.

As the colder winter weather is felt and the icy blast of industry tariff cuts continues to chill sentiment, we seek some respite (at least mentally) in the warmer climes of Okinawa. Okinawa Cellular is a unique company. It's a small cap telecom network operator in Japan with a focus on the sub-tropical islands of Okinawa Prefecture. As part of the KDDI group, the company benefits from its parent's economies of scale, but with its local presence, it also benefits from being the hometown hero. Because the stock is relatively small, from an investment perspective it runs into liquidity constraints that the other telcos do not have, so it's a different type of investment but one that we think is worth looking at. Over the past 12 months Okinawa Cellular's stock has fallen by 12.3%, but over the past year the stock has delivered a return in the middle of its peer group and has outperformed the broad TOPIX by about 5.5%. Like most telcos, Okinawa Cellular is also ramping its dividend payments, and the current yield is about 3.5%.

Okinawa Cellular (9436 JP): Warm Tropical Breezes with KDDI

Having reached a high of ¥1,852 on July 31 2018, <a href="https://www.smartkarma.com/entities/20702" target="_blank" data-smartkarma-citation="entities:20702:1">Bank Of The Ryukyus (8399 JP)</a>’ share price nosedived 15% on Monday of last week to a low of ¥1,272 before recovering to ¥1,320 at the close of business on Friday August 31.  Turnover on Friday was 1.34 million shares: over 11x normal daily trading volume.  Surely not caused by rumours of yet another “inappropriate” regional bank lending scandal?  Fortunately, no: just a very badly-timed announcement of an attempt to raise an additional ¥6 billion (approx. US$55 million) in new capital to support lending operations in the scuba-diving and snorkeling paradise that is Okinawa Prefecture. While the stock may look inexpensive, trading on a PER of 8.4x (using the bank’s own FY3/2019 guidance) and on an historic PBR of just 0.43x, there are good reasons for this low valuation.  The current surge in volume is likely to be only temporary: a value trap for the unwary.  Caveat emptor (may the buyer beware!).

Having reached a high of ¥1,852 on July 31 2018, Bank Of The Ryukyus (8399 JP)’ share price nosedived 15% on Monday of last week to a low of ¥1,272 before recovering to ¥1,320 at the close of business on Friday August 31.  Turnover on Friday was 1.34 million shares: over 11x normal daily trading volume.  Surely not caused by rumours of yet another “inappropriate” regional bank lending scandal?  Fortunately, no: just a very badly-timed announcement of an attempt to raise an additional ¥6 billion (approx. US$55 million) in new capital to support lending operations in the scuba-diving and snorkeling paradise that is Okinawa Prefecture. While the stock may look inexpensive, trading on a PER of 8.4x (using the bank’s own FY3/2019 guidance) and on an historic PBR of just 0.43x, there are good reasons for this low valuation.  The current surge in volume is likely to be only temporary: a value trap for the unwary.  Caveat emptor (may the buyer beware!).

Bank of the Ryukyus (8399 JP): Taking a Dive

Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

Global Gaming and Casinos Industry Specialist

<ul><li>Offerings of equities and convertible bonds totaled 720 billion yen over the first nine months of '16 and the trend continues unabated. Its the lowest level of new offerings in four years.</li><li>Meanwhile, stock buybacks have soared to a record 4.35 trillion yen (USD$41.8 bn)--the most in history presumably to shore up capital efficiency.</li><li>Opponents in principle claim buybacks inhibit growth, and investment and also impede wage growth which in turn, keeps spending sluggish.</li><li>Do Japan's persistent low GDP numbers reflect some of this corporate policy strategies? Does the same phenomenon apply to the US? </li></ul>

Offerings of equities and convertible bonds totaled 720 billion yen over the first nine months of '16 and the trend continues unabated. Its the lowest level of new offerings in four years.Meanwhile, stock buybacks have soared to a record 4.35 trillion yen (USD$41.8 bn)--the most in history presumably to shore up capital efficiency.Opponents in principle claim buybacks inhibit growth, and investment and also impede wage growth which in turn, keeps spending sluggish.Do Japan's persistent low GDP numbers reflect some of this corporate policy strategies? Does the same phenomenon apply to the US? 

Could Japan's Aggressive Stock Buyback Spree Slow an Economic Rebound?

Japan

The Bank of Okinawa, Ltd. is a regional bank based in Okinawa.  The Bank provides banking services such as deposits, loans, and foreign exchange transactions.  The Bank of Okinawa also provides financial services such as leasing, credit cards, and letter of credit.

Okinawa Financial Group (7350 JP)

Japanese Regional Banks: Dancing On Their Own

The ‘sense of crisis’ that Japanese banks need to abandon their habitual ‘business as usual’ approach and take decisive action may be finally...

J. Brian Waterhouse

Bank of the Ryukyus (8399 JP): Tourist Trapped

Tourism is one of the most important industries in the Ryukyu Islands, home to regional bank Bank Of The Ryukyus (8399 JP). When the tourist...

J. Brian Waterhouse

Okinawa Cellular (9436 JP): Warm Tropical Breezes with KDDI

As the colder winter weather is felt and the icy blast of industry tariff cuts continues to chill sentiment, we seek some respite (at least...

Nathan Ramler, CFA

Bank of the Ryukyus (8399 JP): Taking a Dive

Having reached a high of ¥1,852 on July 31 2018, Bank Of The Ryukyus (8399 JP)’ share price nosedived 15% on Monday of last week to a low of ¥1,272...

J. Brian Waterhouse

Could Japan's Aggressive Stock Buyback Spree Slow an Economic Rebound?

Offerings of equities and convertible bonds totaled 720 billion yen over the first nine months of '16 and the trend continues unabated. Its the...

Howard J Klein