Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

<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> yesterday announced after market hours that it would be recording goodwill amortization losses in its J-GAAP consolidated results for FY3/2020 (ended 31 March 2020) of around ¥343.3 billion (US$3.19 billion).  These impairment losses have been incurred principally in respect of the group’s investments in two Asian banks made within the last six years, namely Indonesian commercial bank <a href="https://www.smartkarma.com/entities/bank-danamon-indonesia-tbk-pt" target="_blank" rel="noopener" data-smartkarma-citation="entities:135:1">Bank Danamon Indonesia (BDMN IJ)</a> and the <a href="https://www.smartkarma.com/entities/bank-of-ayudhya-pcl" target="_blank" rel="noopener" data-smartkarma-citation="entities:136:1">Bank Of Ayudhya (BAY TB)</a> (aka Krungsri) in Thailand.  MUFG’s principal commercial banking subsidiary, MUFG Bank, owns 94.1% of outstanding shares in PT Bank Danamon and 76.9% of outstanding shares in Krungsri.In the statement (<a href="https://www.mufg.jp/dam/pressrelease/2020/pdf/news-20200331-001_en.pdf" target="_blank" rel="noopener">link to MUFG statement here: https://www.mufg.jp/dam/pressrelease/2020/pdf/news-20200331-001_en.pdf</a>) published on MUFG’s website, management expects to record a loss of ¥212.8 billion in respect of PT Bank Danamon and ¥130.5 billion in respect of Krungsri.  Financial media report that MUFG is also likely to incur a write-down of around ¥20 billion in respect of the group’s approx. 20% investment in Philippines-based <a href="https://www.smartkarma.com/entities/security-bank-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3929:1">Security Bank (SECB PM)</a> made in 2016, although this was not specifically mentioned in MUFG’s management statement.The PT Bank Danamon write-down was provisioned for and included in MUFG’s 3Q FY3/2020 financial statements released on 4 February 2020, at which time management reduced the FY3/2020 profit target from ¥900.0 billion to ¥750.0 billion.  The Bank of Ayudhya (Krungsri) write-down is new but should not come as any surprise to followers of Asian bank stocks .The statement makes no mention of any further downgrade in management’s full-year performance target or of any intention to cut the ¥12.5/share final dividend other than to state that the potential impact “is currently being examined”.Our view is that the cumulative effect of these write-downs is likely to reduce the group’s 4Q FY3/2020 earnings to just over break-even (3Q net results for the October-December quarter were a small ¥25.68 billion net loss), suggesting that the group may struggle to achieve full-year consolidated net profits of ¥600 billion, let alone its revised performance target of ¥750 billion.Nevertheless, the announcement removes a measure of uncertainty on MUFG’s overall performance, which had been weighing heavily on the stock price in recent weeks.  While the ongoing coronavirus pandemic is likely to keep markets volatile for some considerable time to come, as Japan’s leading megabank we expect some cautious accumulation of the shares to take place by institutional investors at current levels.

Mitsubishi UFJ Financial (MUFG) (8306 JP) yesterday announced after market hours that it would be recording goodwill amortization losses in its J-GAAP consolidated results for FY3/2020 (ended 31 March 2020) of around ¥343.3 billion (US$3.19 billion).  These impairment losses have been incurred principally in respect of the group’s investments in two Asian banks made within the last six years, namely Indonesian commercial bank Bank Danamon Indonesia (BDMN IJ) and the Bank Of Ayudhya (BAY TB) (aka Krungsri) in Thailand.  MUFG’s principal commercial banking subsidiary, MUFG Bank, owns 94.1% of outstanding shares in PT Bank Danamon and 76.9% of outstanding shares in Krungsri.In the statement (link to MUFG statement here: https://www.mufg.jp/dam/pressrelease/2020/pdf/news-20200331-001_en.pdf) published on MUFG’s website, management expects to record a loss of ¥212.8 billion in respect of PT Bank Danamon and ¥130.5 billion in respect of Krungsri.  Financial media report that MUFG is also likely to incur a write-down of around ¥20 billion in respect of the group’s approx. 20% investment in Philippines-based Security Bank (SECB PM) made in 2016, although this was not specifically mentioned in MUFG’s management statement.The PT Bank Danamon write-down was provisioned for and included in MUFG’s 3Q FY3/2020 financial statements released on 4 February 2020, at which time management reduced the FY3/2020 profit target from ¥900.0 billion to ¥750.0 billion.  The Bank of Ayudhya (Krungsri) write-down is new but should not come as any surprise to followers of Asian bank stocks .The statement makes no mention of any further downgrade in management’s full-year performance target or of any intention to cut the ¥12.5/share final dividend other than to state that the potential impact “is currently being examined”.Our view is that the cumulative effect of these write-downs is likely to reduce the group’s 4Q FY3/2020 earnings to just over break-even (3Q net results for the October-December quarter were a small ¥25.68 billion net loss), suggesting that the group may struggle to achieve full-year consolidated net profits of ¥600 billion, let alone its revised performance target of ¥750 billion.Nevertheless, the announcement removes a measure of uncertainty on MUFG’s overall performance, which had been weighing heavily on the stock price in recent weeks.  While the ongoing coronavirus pandemic is likely to keep markets volatile for some considerable time to come, as Japan’s leading megabank we expect some cautious accumulation of the shares to take place by institutional investors at current levels.

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

Genworth Financial Inc Cl A / Equity Bottom-Up

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Deal Update: Genworth Financial (GNW.US) [Genworth] announced that it and merger partner, China Oceanwide (715.HK), have entered into an extension of the merger deadline for the deal from March 31 to June 30 - the 14th waiver. There now appears to be some uncertainty in the disclosure that the required loan extension had not yet been secured by China Oceanwide is a bit disconcerting after all of this time and especially during the current environment;</li>
<li>
Virginia Approval: In addition, Genworth also announced that the Commonwealth of Virginia’s insurance regulator had re-approved the merger - a requirement by the state that arose after Genworth infused USD 100 mn into Genworth Life Insurance Company of New York (GLICNY); and</li>
<li>
Material Adverse Condition?: Mortgage firms are bracing for a wave of missed payments as many mortgage holders have lost their jobs. Genworth mortgage insurance in the US essentially guarantees mortgage payments for those mortgagees who cannot come up with a 20% downpayment. If homeowners miss payments, Genworth is contractually obligated to continue forwarding on monies to the mortgage owners. As such, Genworth (and its Canadian and Australian subsidiaries) will have to come up of billions of USD on short notice to cover their financial obligations without access to Federal Reserve emergency lending facilities. China Oceanwide may finally walk away from this deal once and for all by invoking the material adverse condition clause.   </li>
</ul>



Deal Update: Genworth Financial (GNW.US) [Genworth] announced that it and merger partner, China Oceanwide (715.HK), have entered into an extension of the merger deadline for the deal from March 31 to June 30 - the 14th waiver. There now appears to be some uncertainty in the disclosure that the required loan extension had not yet been secured by China Oceanwide is a bit disconcerting after all of this time and especially during the current environment;

Virginia Approval: In addition, Genworth also announced that the Commonwealth of Virginia’s insurance regulator had re-approved the merger - a requirement by the state that arose after Genworth infused USD 100 mn into Genworth Life Insurance Company of New York (GLICNY); and

Material Adverse Condition?: Mortgage firms are bracing for a wave of missed payments as many mortgage holders have lost their jobs. Genworth mortgage insurance in the US essentially guarantees mortgage payments for those mortgagees who cannot come up with a 20% downpayment. If homeowners miss payments, Genworth is contractually obligated to continue forwarding on monies to the mortgage owners. As such, Genworth (and its Canadian and Australian subsidiaries) will have to come up of billions of USD on short notice to cover their financial obligations without access to Federal Reserve emergency lending facilities. China Oceanwide may finally walk away from this deal once and for all by invoking the material adverse condition clause.   


Genworth Financial – MAC Clause Could Be Invoked

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/809/original/2020-04-01_05-33-05.png?1585686825" class="editor-image img-responsive" data-smartkarma-image-id="125809"></figure><div class="content-caption">Source • Japan Analytics</div>TUESDAY 31st MARCH - Shareholder returns are now being sacrificed to shore up corporate cash flows in Japan. Yesterday saw<a href="https://www.smartkarma.com/entities/nippon-sheet-glass-co-ltd" target="_blank" data-smartkarma-citation="entities:9013:1" rel="noopener">Nippon Sheet Glass (5202 JP)</a> and <a href="https://www.smartkarma.com/entities/nextgen-inc" target="_blank" data-smartkarma-citation="entities:20914:1" rel="noopener">Nextgen (3842 JP)</a> cancel their payouts, and reductions from <a href="https://www.smartkarma.com/entities/shinsho-corp" target="_blank" data-smartkarma-citation="entities:6333:1" rel="noopener">Shinsho (8075 JP)</a>, <a href="https://www.smartkarma.com/entities/hakuto-co-ltd" target="_blank" data-smartkarma-citation="entities:6207:1" rel="noopener">Hakuto (7433 JP)</a>, and <a href="https://www.smartkarma.com/entities/nipro-corp" target="_blank" data-smartkarma-citation="entities:18346:1" rel="noopener">Nipro (8086 JP)</a>. Nipro has 'form' in this regard, but it is interesting to note that 2020's payout will be less than the ¥16 paid in 2009. We shall be covering the topic of "Dividends at Risk" in a forthcoming Insight. There were no large-cap results or revisions yesterday, but our scoring was five positive to six negative for results and eight positive to eleven negative for revisions.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/811/original/2020-04-01_05-56-47.png?1585688222" class="editor-image img-responsive" data-smartkarma-image-id="125811"></figure><div class="content-caption">Source • Japan Analytics</div><a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-gro" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (8306 JP)</a> - MUFG chooses not to make forecasts, so we are reliant on Nikkei 'previews' for 'updates'. A ¥360b (US$3.34b) writedown of MUFG's stake in banks in Indonesia, Thailand, and the Philippines is to be booked for the fiscal year that ended yesterday. MUFG shares fell 5.4%, and Banks was the worst-performing Sector on the day. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/814/original/File%202020-04-01%206%2010%2027.jpeg?1585689079" class="editor-image img-responsive" data-smartkarma-image-id="125814"></figure><div class="content-caption">Source • covid19japan.com</div>LOCKDOWN CORNER - By emphatically denying rumours of an impending 'lockdown' for Tokyo from tomorrow, the Government has limited their options for doing so without loss of credibility with the public. A rumour that Google Japan was suppressing searches about the rumour only helped to fan the flames and anxiety. Panic-buying re-emerged in grocery stores.  COVID-19 cases in Tokyo are now growing at an exponential rate, eclipsing the rest of Japan, with the majority of new cases are not conforming to Japan's pre-ordained epidemiological tracing protocols. Governor Koike held an emergency meeting with Prime Minister Abe last night. While the Tokyo Metropolitan Government is encouraging social distancing, only the national government can invoke stricter measures under the recently-enacted emergency laws. The current uncertainty over the Tokyo lockdown is not market-positive. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/820/original/2020-04-01_05-07-12.png?1585690885" class="editor-image img-responsive" data-smartkarma-image-id="125820"></figure><div class="content-caption">Source • Deutsche Bank</div>HISTORIC - Deutsche Bank has estimated that COVID-19 will result in a year-on-year economic contraction of 3.9%, lower than that of 2009. Were Tokyo to lockdown for a month, the 2009 decline would probably be exceeded.

Source • Japan AnalyticsTUESDAY 31st MARCH - Shareholder returns are now being sacrificed to shore up corporate cash flows in Japan. Yesterday sawNippon Sheet Glass (5202 JP) and Nextgen (3842 JP) cancel their payouts, and reductions from Shinsho (8075 JP), Hakuto (7433 JP), and Nipro (8086 JP). Nipro has 'form' in this regard, but it is interesting to note that 2020's payout will be less than the ¥16 paid in 2009. We shall be covering the topic of "Dividends at Risk" in a forthcoming Insight. There were no large-cap results or revisions yesterday, but our scoring was five positive to six negative for results and eight positive to eleven negative for revisions.Source • Japan AnalyticsMitsubishi UFJ Financial (8306 JP) - MUFG chooses not to make forecasts, so we are reliant on Nikkei 'previews' for 'updates'. A ¥360b (US$3.34b) writedown of MUFG's stake in banks in Indonesia, Thailand, and the Philippines is to be booked for the fiscal year that ended yesterday. MUFG shares fell 5.4%, and Banks was the worst-performing Sector on the day. Source • covid19japan.comLOCKDOWN CORNER - By emphatically denying rumours of an impending 'lockdown' for Tokyo from tomorrow, the Government has limited their options for doing so without loss of credibility with the public. A rumour that Google Japan was suppressing searches about the rumour only helped to fan the flames and anxiety. Panic-buying re-emerged in grocery stores.  COVID-19 cases in Tokyo are now growing at an exponential rate, eclipsing the rest of Japan, with the majority of new cases are not conforming to Japan's pre-ordained epidemiological tracing protocols. Governor Koike held an emergency meeting with Prime Minister Abe last night. While the Tokyo Metropolitan Government is encouraging social distancing, only the national government can invoke stricter measures under the recently-enacted emergency laws. The current uncertainty over the Tokyo lockdown is not market-positive. Source • Deutsche BankHISTORIC - Deutsche Bank has estimated that COVID-19 will result in a year-on-year economic contraction of 3.9%, lower than that of 2009. Were Tokyo to lockdown for a month, the 2009 decline would probably be exceeded.

🇯🇵 JAPAN • Revisions & Results Update 31st March > Dividends at Risk

* Large Debt Levels: SoftBank Group (SoftBank) is a Death Star for credit markets, having greater than USD 250 bn in debt, commitments, and lease obligations, and Japan’s three largest banks already hold about USD 13 bn in SoftBank debt on balance sheet at FY 3/19;  * Credit Downgrade to Junk Inevitable: A credit downgrade will require higher capital charges.  Manageable in isolation; however, given the herd mentality risks, the worst case scenario (SoftBank filing) is certainly a plausible outcome. Softbank is just another example of top-of-the-cycle activism which was all about replacing one form of financial engineering with another without creating real value; and   * WeWorks Bankruptcy On The Table: The April 1 USD 3bn financing round from Softbank is now in danger of falling apart, as Softbank appears to be using the US investigation as an out clause. WeWorks board already weighing litigation. Softbank has guided to already having provided USD $13.4 bn to WeWorks, including USD 5 bn in working capital since October 2019. In our view, WeWorks is likely to file bankruptcy sometime in 1H20 as tenants simply will not/cannot  pay rent.

* Large Debt Levels: SoftBank Group (SoftBank) is a Death Star for credit markets, having greater than USD 250 bn in debt, commitments, and lease obligations, and Japan’s three largest banks already hold about USD 13 bn in SoftBank debt on balance sheet at FY 3/19;  * Credit Downgrade to Junk Inevitable: A credit downgrade will require higher capital charges.  Manageable in isolation; however, given the herd mentality risks, the worst case scenario (SoftBank filing) is certainly a plausible outcome. Softbank is just another example of top-of-the-cycle activism which was all about replacing one form of financial engineering with another without creating real value; and   * WeWorks Bankruptcy On The Table: The April 1 USD 3bn financing round from Softbank is now in danger of falling apart, as Softbank appears to be using the US investigation as an out clause. WeWorks board already weighing litigation. Softbank has guided to already having provided USD $13.4 bn to WeWorks, including USD 5 bn in working capital since October 2019. In our view, WeWorks is likely to file bankruptcy sometime in 1H20 as tenants simply will not/cannot  pay rent. 

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.

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)

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