Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/bank-of-toyama-ltd" target="_blank" data-smartkarma-citation="entities:3496:1" rel="noopener">Bank Of Toyama /Ltd (8365 JP)</a>’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing +135% in the last six months.  What is going on, and why do foreign investors still own under 1% of outstanding shares if this bank is such an outstanding performer?
Although the stock prices of major Japanese banks have barely moved over the last month, some regional bank stocks have seen a surge in trading volume and double-digit improvements in their share prices.  This surge is attributable to comments made in early September by newly-elected Japanese prime minister Yoshihide Suga that there were “too many regional banks”, prompting speculation that mergers of regional and secondary regional banks might be actively encouraged under the incoming Suga Government.
However, we think the sudden rise in Bank of Toyama’s stock price has less to do with PM Suga’s comments on overbanking in Japan and more to do with stock ‘cornering’ by a group or groups of domestic speculators.  This has all the signs of a classic domestic ‘ramp’, designed to quickly push up the share price of a target stock and then offload the accumulated shares for a quick profit close to the top of the price range onto unsuspecting punters drawn by the action.  The bank’s fundamentals simply do not support current valuations.  Foreign investors should steer well clear.   Caveat emptor!  (May the buyer beware!)

Bank Of Toyama /Ltd (8365 JP)’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing +135% in the last six months.  What is going on, and why do foreign investors still own under 1% of outstanding shares if this bank is such an outstanding performer?
Although the stock prices of major Japanese banks have barely moved over the last month, some regional bank stocks have seen a surge in trading volume and double-digit improvements in their share prices.  This surge is attributable to comments made in early September by newly-elected Japanese prime minister Yoshihide Suga that there were “too many regional banks”, prompting speculation that mergers of regional and secondary regional banks might be actively encouraged under the incoming Suga Government.
However, we think the sudden rise in Bank of Toyama’s stock price has less to do with PM Suga’s comments on overbanking in Japan and more to do with stock ‘cornering’ by a group or groups of domestic speculators.  This has all the signs of a classic domestic ‘ramp’, designed to quickly push up the share price of a target stock and then offload the accumulated shares for a quick profit close to the top of the price range onto unsuspecting punters drawn by the action.  The bank’s fundamentals simply do not support current valuations.  Foreign investors should steer well clear.   Caveat emptor!  (May the buyer beware!)

Bank of Toyama (8365 JP):  Irrational Exuberance

'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. 

Quantitative Analysis

<div>
• RELATIVE PRICE SCORE - COMPANIES •
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/110/839/original/2019-12-17_10-16-56.png?1576545466" class="editor-image img-responsive" data-smartkarma-image-id="110839"></figure><div class="content-caption">Source: Japan Analytics</div>
COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can reveal attractive trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. 
</div><div><div>Following on from our previous Insight <a href="https://www.smartkarma.com/insights/japan-december-sector-peer-group-relative-price-scores-from-defensives-to-cylicals" target="_blank" data-smartkarma-citation="insights:35266" rel="noopener">December Sector &amp; Peer Group Relative Price Scores - From Defensives to Cylicals</a> which covered Sectors and Peer Groups, in the DETAIL section below, we update our list of Overbought and Oversold large-cap companies (market capitalisation over ¥100b) with the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4.5) and Oversold (RPS &lt;-2) companies, as well as the largest positive and negative 3-month Changes in RPS adding some stock-specific comments in each category.</div></div>


• RELATIVE PRICE SCORE - COMPANIES •
Source: Japan Analytics
COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can reveal attractive trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. 
Following on from our previous Insight December Sector &amp; Peer Group Relative Price Scores - From Defensives to Cylicals which covered Sectors and Peer Groups, in the DETAIL section below, we update our list of Overbought and Oversold large-cap companies (market capitalisation over ¥100b) with the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4.5) and Oversold (RPS &lt;-2) companies, as well as the largest positive and negative 3-month Changes in RPS adding some stock-specific comments in each category.

🇯🇵 JAPAN • December Company Relative Price Scores - Opportunities in the Outliers

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)

Concordia Financial Group, Ltd / Equity Bottom-Up

CY2018 was not a good year for <a href="https://www.smartkarma.com/entities/22704" target="_blank" data-smartkarma-citation="entities:22704:1">Concordia Financial Group, Ltd (7186 JP)</a>  (CFG), the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small secondary regional bank, Higashi-Nippon Bank (HNPB).  Beset by a lending scandal at HNPB, which forced the bank's president to step down, CFG’s share price remains some 30% below February 2018 levels, and has essentially traded sideways so far this year. 
CFG management's attempts to placate disgruntled shareholders with stock buybacks and dividend payout increases have largely failed to impress.  3Q FY3/2019 profits declined by 8% year-on-year but relied heavily on non-core profit items: true core earnings collapsed 35.9%.  The Japanese banking sector remains unloved at present.  That said, currently trading on similar valuations to our much-preferred <a href="https://www.smartkarma.com/entities/1048" target="_blank" data-smartkarma-citation="entities:1048:1">Chiba Bank (8331 JP)</a> , CFG remains a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Patience, however, is the key word for investors here.  No harm in waiting to buy at a better entry price.

CY2018 was not a good year for Concordia Financial Group, Ltd (7186 JP)  (CFG), the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small secondary regional bank, Higashi-Nippon Bank (HNPB).  Beset by a lending scandal at HNPB, which forced the bank's president to step down, CFG’s share price remains some 30% below February 2018 levels, and has essentially traded sideways so far this year. 
CFG management's attempts to placate disgruntled shareholders with stock buybacks and dividend payout increases have largely failed to impress.  3Q FY3/2019 profits declined by 8% year-on-year but relied heavily on non-core profit items: true core earnings collapsed 35.9%.  The Japanese banking sector remains unloved at present.  That said, currently trading on similar valuations to our much-preferred Chiba Bank (8331 JP) , CFG remains a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Patience, however, is the key word for investors here.  No harm in waiting to buy at a better entry price.

Concordia Financial Group (7186 JP): Out of Focus

Hokuhoku Financial Group / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/19006" target="_blank" data-smartkarma-citation="entities:19006:1">Hokuhoku Financial Group (8377 JP)</a>, or HHFG for short, is the holding company for two regional banks that have no geographical connection whatsoever: Hokuriku Bank from Toyama Prefecture and Hokkaido Bank from Hokkaido Prefecture. HHFG is Japan’s 5th-largest regional bank group by total assets and deposits, 7th-largest by loans and total revenues, but only 15th in terms of market capitalization of ¥191.4 billion (US$1.61 billion). Trading on a PER of 9.8x (using HHFG’s FY3/2019 guidance) and a PBR of 0.31x, HHFG may look temptingly cheap but the stock price reflects management’s lack of ambition, the low level of growth in the two banks’ home prefectures, a history of earnings volatility, and the uninspiring dividend payout ratio of just under 30%.  The shares have been on a gentle slide all year in the absence of any compelling incentives to own the stock, and we see little reason to get excited about HHFG at this stage.  We much prefer peers such as <a href="https://www.smartkarma.com/entities/1048" target="_blank" data-smartkarma-citation="entities:1048:1">Chiba Bank (8331 JP)</a>, <a href="https://www.smartkarma.com/entities/5248" target="_blank" data-smartkarma-citation="entities:5248:1">Bank Of Kyoto (8369 JP)</a> and <a href="https://www.smartkarma.com/entities/15836" target="_blank" data-smartkarma-citation="entities:15836:1">Yamaguchi Financial Group In (8418 JP)</a> in the regional bank sub-sector for their growth potential and superior market shares in their core franchises.

Hokuhoku Financial Group (8377 JP), or HHFG for short, is the holding company for two regional banks that have no geographical connection whatsoever: Hokuriku Bank from Toyama Prefecture and Hokkaido Bank from Hokkaido Prefecture. HHFG is Japan’s 5th-largest regional bank group by total assets and deposits, 7th-largest by loans and total revenues, but only 15th in terms of market capitalization of ¥191.4 billion (US$1.61 billion). Trading on a PER of 9.8x (using HHFG’s FY3/2019 guidance) and a PBR of 0.31x, HHFG may look temptingly cheap but the stock price reflects management’s lack of ambition, the low level of growth in the two banks’ home prefectures, a history of earnings volatility, and the uninspiring dividend payout ratio of just under 30%.  The shares have been on a gentle slide all year in the absence of any compelling incentives to own the stock, and we see little reason to get excited about HHFG at this stage.  We much prefer peers such as Chiba Bank (8331 JP), Bank Of Kyoto (8369 JP) and Yamaguchi Financial Group In (8418 JP) in the regional bank sub-sector for their growth potential and superior market shares in their core franchises.

Hokuhoku Financial Group (8377 JP): Hands Across the Water

Japan

Hokuhoku Financial Group, Inc. is a holding company, which manages financial operations for its subsidiaries.  As a financial group, the Company provides general banking services including deposits, loans, and foreign exchange transactions.  The Group also provides other financial services such as leasing and credit cards.

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Hokuhoku Financial Group (8377 JP)

Bank of Toyama (8365 JP): Irrational Exuberance

Bank Of Toyama /Ltd (8365 JP)’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing...

J. Brian Waterhouse

🇯🇵 JAPAN • December Company Relative Price Scores - Opportunities in the Outliers

• RELATIVE PRICE SCORE - COMPANIES • COMPANY RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance...

Campbell Gunn

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

Concordia Financial Group (7186 JP): Out of Focus

CY2018 was not a good year for Concordia Financial Group, Ltd (7186 JP) (CFG), the holding company for one of Japan’s largest regional banks, the...

J. Brian Waterhouse

Hokuhoku Financial Group (8377 JP): Hands Across the Water

Hokuhoku Financial Group (8377 JP), or HHFG for short, is the holding company for two regional banks that have no geographical connection...

J. Brian Waterhouse

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