Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave of ‘Value over Momentum’ buying, we expect the market to return sharply to reality in October, leaving Japanese bank stocks in danger of sinking back to those mid-August lows, if not lower.
Share price performance in the April-September 2019 1st Half of the FY3/2020 fiscal year showed negative returns across the Japanese banking sector for all but a handful of largely-illiquid small banks. October starts with an increase in Japanese consumption tax to 10%, and may end with Britain crashing out of the EU with no deal whatsoever. If investors move to ‘risk off’, with global markets overshadowed by concerns that the global economy may be teetering on recession as the US-China ‘trade war’ continues, we expect the Yen to strengthen as part of a ‘flight to safety’: not good for Japanese bank stocks generally.
The rise in consumption tax is a risky move for Japanese Prime Minister Shinzo Abe, as past increases have been followed by a collapse in consumer spending. Any attempts by the Bank of Japan to head off an economic slowdown by resorting to more quantitative easing spells bad news for the embattled Japanese banks, especially the regionals and secondary regionals which remain overly-reliant on interest income. It is all looking rather unpleasant. Caveat Emptor! (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks in 2019.

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave of ‘Value over Momentum’ buying, we expect the market to return sharply to reality in October, leaving Japanese bank stocks in danger of sinking back to those mid-August lows, if not lower.
Share price performance in the April-September 2019 1st Half of the FY3/2020 fiscal year showed negative returns across the Japanese banking sector for all but a handful of largely-illiquid small banks. October starts with an increase in Japanese consumption tax to 10%, and may end with Britain crashing out of the EU with no deal whatsoever. If investors move to ‘risk off’, with global markets overshadowed by concerns that the global economy may be teetering on recession as the US-China ‘trade war’ continues, we expect the Yen to strengthen as part of a ‘flight to safety’: not good for Japanese bank stocks generally.
The rise in consumption tax is a risky move for Japanese Prime Minister Shinzo Abe, as past increases have been followed by a collapse in consumer spending. Any attempts by the Bank of Japan to head off an economic slowdown by resorting to more quantitative easing spells bad news for the embattled Japanese banks, especially the regionals and secondary regionals which remain overly-reliant on interest income. It is all looking rather unpleasant. Caveat Emptor! (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks in 2019.

Equity Bottom-Up

Next in line to confess their sins after <a href="https://www.smartkarma.com/entities/6599" target="_blank" data-smartkarma-citation="entities:6599:1">Michinoku Bank (8350 JP)</a> (see our Insight <a href="https://www.smartkarma.com/insights/michinoku-bank-8350-jp-clipped-by-a-synthetic-hedge" target="_blank" data-smartkarma-citation="insights:29415">Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge</a> ) and admit that their earnings guidance was way too optimistic are the directors of <a href="https://www.smartkarma.com/entities/26193" target="_blank" data-smartkarma-citation="entities:26193:1">First Bank Of Toyama (7184 JP)</a> .  This small secondary regional bank from Toyama Prefecture in the Hokuriku Region of central Japan has cut its full-year earnings forecast for consolidated recurring profits by 33% and net profits by 25%, citing greater than expected losses on sales of equities and rising credit costs.  But this only tells part of the story: the new profit figures suggest heavy net losses may have been incurred in 4Q (January-March 2019) of up to ¥490 million related to the bank’s large securities portfolio.  Two recurring features of this wholly-domestic bank’s past financial results have been losses on its share portfolio and a relentless rise in the level of foreign securities as management has struggled to find alternative sources of revenue to offset declining loan interest and fee income.  The bank’s unrealised gains in its securities portfolio fell ¥11 billion (US$98 million) in 3Q FY3/2019 to just ¥636 million.  Something is terribly wrong here.  Caveat emptor!  (May the buyer beware!)

Next in line to confess their sins after Michinoku Bank (8350 JP) (see our Insight Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge ) and admit that their earnings guidance was way too optimistic are the directors of First Bank Of Toyama (7184 JP) .  This small secondary regional bank from Toyama Prefecture in the Hokuriku Region of central Japan has cut its full-year earnings forecast for consolidated recurring profits by 33% and net profits by 25%, citing greater than expected losses on sales of equities and rising credit costs.  But this only tells part of the story: the new profit figures suggest heavy net losses may have been incurred in 4Q (January-March 2019) of up to ¥490 million related to the bank’s large securities portfolio.  Two recurring features of this wholly-domestic bank’s past financial results have been losses on its share portfolio and a relentless rise in the level of foreign securities as management has struggled to find alternative sources of revenue to offset declining loan interest and fee income.  The bank’s unrealised gains in its securities portfolio fell ¥11 billion (US$98 million) in 3Q FY3/2019 to just ¥636 million.  Something is terribly wrong here.  Caveat emptor!  (May the buyer beware!)

First Bank of Toyama (7184 JP):  Never Say Never (Again)

Japan

THE TOYAMA BANK, LTD. is a regional bank based in Toyama.  The Bank provides banking services such as deposits, foreign exchange transactions, and loans to local customers.

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Bank Of Toyama /Ltd (8365 JP)

Japanese Banks: A Chill Wind in October

After a somewhat euphoric start to September, with some Japanese bank stocks recovering as much as 20% from their mid-August lows on a global wave...

J. Brian Waterhouse

First Bank of Toyama (7184 JP): Never Say Never (Again)

Next in line to confess their sins after Michinoku Bank (8350 JP) (see our Insight Michinoku Bank (8350 JP): Clipped by a Synthetic Hedge ) and...

J. Brian Waterhouse

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