Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Loan data for August 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for all Japanese commercial banks is now in negative territory, driven by a sharp YoY decline in lending by the major banks over the last four months.  Even on a month-on-month basis, total lending by Japanese banks has been falling for four out of the last five months.  Credit lines that were drawn down in 2020 as Japan went into nationwide COVID-induced lockdown, but were ultimately largely unneeded, are now being repaid.Interest rates remain at rock bottom, a fact that helps minimize funding costs, while the recovery in the stock market has given the banks some valuable ‘breathing space’ to offset rising credit costs with gains on selling some of the investment portfolio.  Nevertheless, margins remain under intense pressure, pushing core earnings down.  The quality of bank profits therefore continues to deteriorate, even though bottom-line profits for 1H FY3/2022 are likely to exceed most banks’ cautious initial earnings guidance.  That said, we expect few banks to opt to raise their full-year guidance significantly, regardless of 1H FY3/2022 results (due out mid-November).The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$.  Yet, as we head into the third quarter of FY3/2022, much of the earlier outperformance by the banking sector against Topix has already been given back.“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/000/232/501/original/8300-WR-JBanks-2021-0719-TooLow4Zero-TPNBNKvsTPX+2015-2021.jpg?1632884040" class="editor-image img-responsive" data-smartkarma-image-id="232501"></figure></section>

Loan data for August 2021 from both the Japanese Bankers Association (JBA) and the Bank of Japan (BoJ) confirm that YoY loan growth for all Japanese commercial banks is now in negative territory, driven by a sharp YoY decline in lending by the major banks over the last four months.  Even on a month-on-month basis, total lending by Japanese banks has been falling for four out of the last five months.  Credit lines that were drawn down in 2020 as Japan went into nationwide COVID-induced lockdown, but were ultimately largely unneeded, are now being repaid.Interest rates remain at rock bottom, a fact that helps minimize funding costs, while the recovery in the stock market has given the banks some valuable ‘breathing space’ to offset rising credit costs with gains on selling some of the investment portfolio.  Nevertheless, margins remain under intense pressure, pushing core earnings down.  The quality of bank profits therefore continues to deteriorate, even though bottom-line profits for 1H FY3/2022 are likely to exceed most banks’ cautious initial earnings guidance.  That said, we expect few banks to opt to raise their full-year guidance significantly, regardless of 1H FY3/2022 results (due out mid-November).The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$.  Yet, as we head into the third quarter of FY3/2022, much of the earlier outperformance by the banking sector against Topix has already been given back.“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 Lending:  Too Low For Zero

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

In Japanese lore, 7 is a lucky number.  But not if you are a member of the embattled management team of <a href="https://www.smartkarma.com/entities/mizuho-financial-group-inc" target="_blank" data-smartkarma-citation="entities:219:1" rel="noopener">Mizuho Financial Group (8411 JP)</a>.  Mizuho Bank has now had seven systems failures so far this year, prompting an unprecedented response from the FSA.  The FSA has not only issued Mizuho Bank with yet another Business Correction Order (BCO) but has also taken the highly unusual step of announcing that it will be closely monitoring the forthcoming detailed inspection of the group’s seemingly troubled ‘MINORI’ core computer system, while stopping short of directing operations itself.While management searches for solutions, and the inevitable finger-pointing continues, the bank’s reputation erodes.  Foreign investors still own in aggregate over 22% of MHFG’s stock (as of 31 March 2021), although this ratio may have changed significantly within the last six months.  While the Topix and Nikkei 225 indices have risen to levels not seen in over three decades, with banks initially outperforming the broader Topix index for the first time since 2015, the banking sector is now losing momentum as credit concerns build.  In short, there are far better investment opportunities to be found elsewhere in the Japanese stock market.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

In Japanese lore, 7 is a lucky number.  But not if you are a member of the embattled management team of Mizuho Financial Group (8411 JP).  Mizuho Bank has now had seven systems failures so far this year, prompting an unprecedented response from the FSA.  The FSA has not only issued Mizuho Bank with yet another Business Correction Order (BCO) but has also taken the highly unusual step of announcing that it will be closely monitoring the forthcoming detailed inspection of the group’s seemingly troubled ‘MINORI’ core computer system, while stopping short of directing operations itself.While management searches for solutions, and the inevitable finger-pointing continues, the bank’s reputation erodes.  Foreign investors still own in aggregate over 22% of MHFG’s stock (as of 31 March 2021), although this ratio may have changed significantly within the last six months.  While the Topix and Nikkei 225 indices have risen to levels not seen in over three decades, with banks initially outperforming the broader Topix index for the first time since 2015, the banking sector is now losing momentum as credit concerns build.  In short, there are far better investment opportunities to be found elsewhere in the Japanese stock market.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Mizuho Financial Group (8411 JP):  Not So Lucky 7

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

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*USB Pounces Quickly: US Bancorp (USB.US) announced the acquisition of MUFG’s West Coast regional bank (Union Bank) for USD 8.0 bn in a 70/30 cash/stock transaction. Admittedly, this transaction is smaller than we had anticipated – only being Union Bank, the largest portion of MUFG Americas, MUFG’s US bank holding company; and  *Headache Relieved: MUFG recently received a regulatory C&amp;D for "unsafe and unsound practices" with respect to operational risk management and non-compliance with security standards. USB is now the responsible party. MUFG receives USD 5.5 bn in cash and a 2.9% stake in USB, and likely will record a gain of JPY 150 bn. At MUFG Americas, approximately USD 22.6 bn in assets remains at the CIB.

*USB Pounces Quickly: US Bancorp (USB.US) announced the acquisition of MUFG’s West Coast regional bank (Union Bank) for USD 8.0 bn in a 70/30 cash/stock transaction. Admittedly, this transaction is smaller than we had anticipated – only being Union Bank, the largest portion of MUFG Americas, MUFG’s US bank holding company; and  *Headache Relieved: MUFG recently received a regulatory C&amp;D for "unsafe and unsound practices" with respect to operational risk management and non-compliance with security standards. USB is now the responsible party. MUFG receives USD 5.5 bn in cash and a 2.9% stake in USB, and likely will record a gain of JPY 150 bn. At MUFG Americas, approximately USD 22.6 bn in assets remains at the CIB. 

*For Sale: According to press reports, Mitsubishi UFJ Financial Group (8306.JP) [MUFG] is contemplating a sale of its US banking subsidiary, MUFG Americas – the 22nd largest bank in the US by assets, in a significant strategy shift;  and  *Don’t Expect A Big Premium: Bloomberg suggests that the median sale price for large US banks was approximately 1.4x P/BV last year – implying a deal price of over USD 22 bn. In addition to the price tag limiting the number of potential suitors, any acquirer will have to contend with breaching the national deposit cap. As such, pricing likely would below last year’s US average – particularly considering MUFG America’s fundamental challenges.

*For Sale: According to press reports, Mitsubishi UFJ Financial Group (8306.JP) [MUFG] is contemplating a sale of its US banking subsidiary, MUFG Americas – the 22nd largest bank in the US by assets, in a significant strategy shift;  and  *Don’t Expect A Big Premium: Bloomberg suggests that the median sale price for large US banks was approximately 1.4x P/BV last year – implying a deal price of over USD 22 bn. In addition to the price tag limiting the number of potential suitors, any acquirer will have to contend with breaching the national deposit cap. As such, pricing likely would below last year’s US average – particularly considering MUFG America’s fundamental challenges.

Mitsubishi UFJ Financial Group – US Exit

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Simplex Holdings / Equity Capital Markets

Simplex Holding’s shareholders aim to raise around US$300m via selling some of their stake in the company. Simplex has consistently been ranked among the top companies in IDC Fintech rankings over the past nine years.Simplex provides consulting, system development, maintenance and operations to banks, asset managers and insurance companies in Asia. Simplex was established in Sep 97. It was listed on JASDAQ in Feb 2002 and progressed to the First Section in Sep 2005. The company undertook an MBO, in Apr 2013 and was delisted in Oct 2013.Since delisting, Simplex has expanded its product offering further to cover life insurance and non-life insurance companies as well, along with crypto exchanges. It has been reporting steady revenue growth over the past few years, although its margins have been volatile. Its performance prior to delisting wasn’t great, as it missed its medium term targets, and it now appears to be at peak margins.We have looked at the company’s past performance in our earlier note, <a href="https://www.smartkarma.com/insights/simplex-holdings-pre-ipo-steady-topline-growth-but-appears-to-be-at-peak-margins" target="_blank" rel="noopener">Simplex Holdings Pre-IPO - Steady topline growth but appears to be at peak margins</a>.In this note we will undertake a peer comparison and talk about valuations.

Simplex Holding’s shareholders aim to raise around US$300m via selling some of their stake in the company. Simplex has consistently been ranked among the top companies in IDC Fintech rankings over the past nine years.Simplex provides consulting, system development, maintenance and operations to banks, asset managers and insurance companies in Asia. Simplex was established in Sep 97. It was listed on JASDAQ in Feb 2002 and progressed to the First Section in Sep 2005. The company undertook an MBO, in Apr 2013 and was delisted in Oct 2013.Since delisting, Simplex has expanded its product offering further to cover life insurance and non-life insurance companies as well, along with crypto exchanges. It has been reporting steady revenue growth over the past few years, although its margins have been volatile. Its performance prior to delisting wasn’t great, as it missed its medium term targets, and it now appears to be at peak margins.We have looked at the company’s past performance in our earlier note, Simplex Holdings Pre-IPO - Steady topline growth but appears to be at peak margins.In this note we will undertake a peer comparison and talk about valuations.

Simplex Holdings Pre-IPO - Peer Comp, Valuation - Lagging in Size but Leading in Growth and Margins

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Mitsubishi UFJ Financial (MUFG) (8306 JP)

Japanese Bank Lending: Too Low For Zero

Data for August 2021 from both the JBA and the BoJ confirm that YoY loan growth for all Japanese commercial banks has turned negative, driven by a...

J. Brian Waterhouse

Mizuho Financial Group (8411 JP): Not So Lucky 7

In Japanese lore, 7 is a lucky number. But not if you are the management team of Mizuho Financial Group (8411 JP). Mizuho Bank has now had seven...

J. Brian Waterhouse

Mitsubishi UFJ Financial – Sayonara

MUFG: US Bancorp announced the acquisition of MUFG’s West Coast Union Bank for USD 8.0 bn. MUFG recently received a regulatory C&D for "unsafe and...

Thomas J. Monaco

Mitsubishi UFJ Financial Group – US Exit

MUFG: MUFG is contemplating the sale of its US banking subsidiary. In addition to the price tag limiting the number of suitors, so will breaching a...

Thomas J. Monaco

Simplex Holdings Pre-IPO - Peer Comp, Valuation - Lagging in Size but Leading in Growth and Margins

Simplex Holding’s shareholders aim to raise around US$300m via selling some of their stake in the company. Simplex has consistently been ranked...

Sumeet Singh

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