Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

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.

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Pre-Announcement Has Sector Implications: Fukuoka Financial Group (8354.JP)  [FFG] recently announced a revision to its FY 2019 consolidated net profit guidance from JPY 148.5 bn to JPY 111 bn, and recurring profit from JPY 52.5 bn to a loss of JPY 5 bn due primarily to two unexpected credit events;* Domestic Year-End Credit Events: The Financial Services Agency (FSA) published a discussion paper in December 2019 that discussed forward-looking method for loss provisioning, which was the impetus for the way FFG to calculated is loan loss reserve, just as precautionary reserves related to COVID-19 made their impact; and*Mizuho Domestic Results Could Be Ugly: By our analysis, Mizuho Financial Group (8411.JP) fares the worst, with a potential negative impact to FY 2019 consensus forecasts of between 10.1%-29.5%. Mitsubishi UFJ Financial Group (8306.JP) [MUFG] and Sumitomo Mitsui Financial Group (8316.JP) should see a consensus decline of between 1.9%-3.3% and 1.5%-2.3%, respectively, by our calculation.

*Pre-Announcement Has Sector Implications: Fukuoka Financial Group (8354.JP)  [FFG] recently announced a revision to its FY 2019 consolidated net profit guidance from JPY 148.5 bn to JPY 111 bn, and recurring profit from JPY 52.5 bn to a loss of JPY 5 bn due primarily to two unexpected credit events;* Domestic Year-End Credit Events: The Financial Services Agency (FSA) published a discussion paper in December 2019 that discussed forward-looking method for loss provisioning, which was the impetus for the way FFG to calculated is loan loss reserve, just as precautionary reserves related to COVID-19 made their impact; and*Mizuho Domestic Results Could Be Ugly: By our analysis, Mizuho Financial Group (8411.JP) fares the worst, with a potential negative impact to FY 2019 consensus forecasts of between 10.1%-29.5%. Mitsubishi UFJ Financial Group (8306.JP) [MUFG] and Sumitomo Mitsui Financial Group (8316.JP) should see a consensus decline of between 1.9%-3.3% and 1.5%-2.3%, respectively, by our calculation.

Japan Mega-Banks – Fukuoka Financial A Harbinger For Results Season

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative performance.  Some regional bank stocks rose as much as 35% for the week, while even the mighty megabank <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-gro" target="_blank" rel="noopener" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> rose an eyebrow-raising 17%.  Regrettably, this is not evidence of a paradigm shift in the Japanese banking sector’s fundamental outlook, but more like a knee-jerk reaction to the Bank of Japan’s efforts to restore order to the somewhat chaotic financial markets through buying ETFs, perhaps aided – if financial media are to be believed  –  by government-owned pension funds such as the GPIF.The Yen has not weakened against the US Dollar, as one might have expected if international investors had been adopting a ‘risk on’ approach, but has failed several times to break though the Y112 level (as noted recently by Smartkarma contributor <a href="https://www.smartkarma.com/profiles/campbell-gunn" target="_blank" rel="noopener" data-smartkarma-citation="accounts:2531">Campbell Gunn</a>) and is now in sharp retreat: a ‘risk off’ reaction.  This is not good news for Japanese financial stocks.The fundamental outlook for Japan’s banks has not improved: if anything, the outlook for FY3/2021 and beyond is now even more challenging than FY3/2020 has been.  As we have frequently pointed out in past Insights, margins remain under downward pressure generally, many regional banks remain underwater on their core domestic businesses, credit costs are rising across the board for all banks and many may face substantial losses on their investment portfolios as they close their accounts for FY3/2020.  Under the circumstances, the recent strength in Japanese bank stock prices is logically unsustainable without further massive intervention by the Japanese financial authorities and the further disruption of price discovery.Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative performance.  Some regional bank stocks rose as much as 35% for the week, while even the mighty megabank Mitsubishi UFJ Financial (MUFG) (8306 JP) rose an eyebrow-raising 17%.  Regrettably, this is not evidence of a paradigm shift in the Japanese banking sector’s fundamental outlook, but more like a knee-jerk reaction to the Bank of Japan’s efforts to restore order to the somewhat chaotic financial markets through buying ETFs, perhaps aided – if financial media are to be believed  –  by government-owned pension funds such as the GPIF.The Yen has not weakened against the US Dollar, as one might have expected if international investors had been adopting a ‘risk on’ approach, but has failed several times to break though the Y112 level (as noted recently by Smartkarma contributor Campbell Gunn) and is now in sharp retreat: a ‘risk off’ reaction.  This is not good news for Japanese financial stocks.The fundamental outlook for Japan’s banks has not improved: if anything, the outlook for FY3/2021 and beyond is now even more challenging than FY3/2020 has been.  As we have frequently pointed out in past Insights, margins remain under downward pressure generally, many regional banks remain underwater on their core domestic businesses, credit costs are rising across the board for all banks and many may face substantial losses on their investment portfolios as they close their accounts for FY3/2020.  Under the circumstances, the recent strength in Japanese bank stock prices is logically unsustainable without further massive intervention by the Japanese financial authorities and the further disruption of price discovery.Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/923/original/2020-02-08_18-15-45.png?1581196263" class="editor-image img-responsive" data-smartkarma-image-id="116923"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/924/original/2020-02-09_06-34-51.png?1581197706" class="editor-image img-responsive" data-smartkarma-image-id="116924"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div>OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> and <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a>.  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/925/original/2020-02-08_10-48-19.png?1581199859" class="editor-image img-responsive" data-smartkarma-image-id="116925"></figure><div class="content-caption">Source • Japan Analytics</div>18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/927/original/2020-02-08_10-55-21.png?1581200256" class="editor-image img-responsive" data-smartkarma-image-id="116927"></figure><div class="content-caption">Source • Japan Analytics</div>TTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/928/original/2020-02-08_10-59-00.png?1581200533" class="editor-image img-responsive" data-smartkarma-image-id="116928"></figure><div class="content-caption">Source • Japan Analytics</div>FORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP.

Source • Japan AnalyticsOOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from Softbank Corp (9434 JP) and Honda Motor (7267 JP).  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. Source • Japan Analytics18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.Source • Japan AnalyticsTTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.Source • Japan AnalyticsFORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP. 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

Japan

The Chiba Bank, Ltd. is a regional bank based in Chiba Prefecture. The Bank offers general banking services including deposits, loans, and foreign exchange transactions. The Chiba Bank also develops software and provides financial services such as leasing, securities brokerage, letter of credit, and credit cards.

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Chiba Bank (8331 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

Japan Mega-Banks – Fukuoka Financial A Harbinger For Results Season

*Pre-Announcement Has Sector Implications: Fukuoka Financial Group (8354.JP) [FFG] recently announced a revision to its FY 2019 consolidated net...

Thomas J. Monaco

Japanese Banks: End of March Blues

Last week was an extraordinarily volatile period for Japanese bank stocks, with the sector rising around 14% after a protracted period of negative...

J. Brian Waterhouse

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of...

Campbell Gunn

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