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

Equity Bottom-Up

*KTB Better Results On Improving Credit Deltas: Krung Thai Bank (KTB.TB)[KTB] reported 4Q20 net profit of THB 3.5 bn, increasing THB 396 mn (13.0%) linked quarter. Despite the THB 3.2 bn (25.5%) linked quarter reduction in loss provisions, operating results actually exhibited a decline of THB 262 mn (9.0%); and*Credit Should Continue To Drive Performance: KTB’s hard work controlling credit risk is paying off, as net new NPLs increased just THB 707 mn for an annualized rate of growth of 2.6% - the lowest of the Thai banks under coverage. Provided there are no major “unknown unknowns” in the moratorium portfolio from here, we would envision KTB to at least cutting its loss provision in half from here.

*KTB Better Results On Improving Credit Deltas: Krung Thai Bank (KTB.TB)[KTB] reported 4Q20 net profit of THB 3.5 bn, increasing THB 396 mn (13.0%) linked quarter. Despite the THB 3.2 bn (25.5%) linked quarter reduction in loss provisions, operating results actually exhibited a decline of THB 262 mn (9.0%); and*Credit Should Continue To Drive Performance: KTB’s hard work controlling credit risk is paying off, as net new NPLs increased just THB 707 mn for an annualized rate of growth of 2.6% - the lowest of the Thai banks under coverage. Provided there are no major “unknown unknowns” in the moratorium portfolio from here, we would envision KTB to at least cutting its loss provision in half from here. 

Krung Thai Bank – Lower Credit Tail Risk

*Negative Jaws &amp; Operating Losses: Bangkok Bank (BBL.TB) [BBL] reported 4Q20 results of THB 2.4 bn, declining THB 1.6 bn (40.3%) on a linked quarter basis. Core operating results were even worse, coming in at a negative THB 2.4 bn and declining THB 3.8 bn (2.7x) on a linked quarter basis. Results were poor across the board with negative operating jaws and poor credit being the quarter’s themes; and *Credit Still Heading In Wrong Direction: We find that BBL’s annualized net new NPLs during the period remained at an accelerated level of 22.5%. Given the elevated increase in net new NPLs, that moratorium credits are unknown and remain a wild card, and that COVID-19 continues to wreak havoc, we find that loss reserves are short by nearly THB 50.0 bn or just under two years of 4Q20 PBT.

*Negative Jaws &amp; Operating Losses: Bangkok Bank (BBL.TB) [BBL] reported 4Q20 results of THB 2.4 bn, declining THB 1.6 bn (40.3%) on a linked quarter basis. Core operating results were even worse, coming in at a negative THB 2.4 bn and declining THB 3.8 bn (2.7x) on a linked quarter basis. Results were poor across the board with negative operating jaws and poor credit being the quarter’s themes; and *Credit Still Heading In Wrong Direction: We find that BBL’s annualized net new NPLs during the period remained at an accelerated level of 22.5%. Given the elevated increase in net new NPLs, that moratorium credits are unknown and remain a wild card, and that COVID-19 continues to wreak havoc, we find that loss reserves are short by nearly THB 50.0 bn or just under two years of 4Q20 PBT.

*Low Quality Beat: Siam Commercial Bank (SCB.TB) [SCB] reported an unimpressive 4Q20 result of THB 4.6 bn – up just THB 54 mn (1.2%) linked quarter. Were it not for strong linked quarter fee and commission growth of THB 2.8 bn (33.3%) which was primarily driven by the recognition of performance-linked compensation on bancassurance and wealth management bonus, 4Q20 results would have been an unmitigated disaster at SCB; and 
*Poor Credit and Consistently Higher Provisions To Persist: Credit trends at SCB are in complete contravention to Kasikornbank (KBANK.TB), as provisions actually increased THB 1.3 bn (9.9%) on weakened credit.SCB’s annualized net new NPLs during the period remained at an accelerated level of 63.2%. By our calculation, we find that SCB’s loss reserves are light in the neighborhood of THB 28 bn or 18 months of bottom-line results.

*Low Quality Beat: Siam Commercial Bank (SCB.TB) [SCB] reported an unimpressive 4Q20 result of THB 4.6 bn – up just THB 54 mn (1.2%) linked quarter. Were it not for strong linked quarter fee and commission growth of THB 2.8 bn (33.3%) which was primarily driven by the recognition of performance-linked compensation on bancassurance and wealth management bonus, 4Q20 results would have been an unmitigated disaster at SCB; and 
*Poor Credit and Consistently Higher Provisions To Persist: Credit trends at SCB are in complete contravention to Kasikornbank (KBANK.TB), as provisions actually increased THB 1.3 bn (9.9%) on weakened credit.SCB’s annualized net new NPLs during the period remained at an accelerated level of 63.2%. By our calculation, we find that SCB’s loss reserves are light in the neighborhood of THB 28 bn or 18 months of bottom-line results.

Siam Commercial Bank – B'assurance Masks Troubles

*Stress Continues: A competitor hosted a conference call with the management of Kasikornbank PCL (KBANK-R.TB) [KBANK] which suggests nothing positive is occurring. Credit risk remains elevated, yet half of current and projected loan growth will be used for current customer relief measures; and
*Weak Guidance: KBANK also reiterated guidance, although we weren’t left with a high degree of confidence that KBANK wouldn’t fall short in 2021.Coupled with the aforementioned credit challenges, we anticipate the roll forward of lower lending rates to continue to impact NIMs, as will the rising loan default rates.

*Stress Continues: A competitor hosted a conference call with the management of Kasikornbank PCL (KBANK-R.TB) [KBANK] which suggests nothing positive is occurring. Credit risk remains elevated, yet half of current and projected loan growth will be used for current customer relief measures; and
*Weak Guidance: KBANK also reiterated guidance, although we weren’t left with a high degree of confidence that KBANK wouldn’t fall short in 2021.Coupled with the aforementioned credit challenges, we anticipate the roll forward of lower lending rates to continue to impact NIMs, as will the rising loan default rates. 

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.
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2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the <a href="https://www.smartkarma.com/entities/daishi-hokuetsu-financial-group" target="_blank" data-smartkarma-citation="entities:27533:1" rel="noopener">Daishi Hokuetsu Financial Group (7327 JP)</a> ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.




2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the Daishi Hokuetsu Financial Group (7327 JP) ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 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)

Krung Thai Bank – Lower Credit Tail Risk

KRUNG THAI BANK: KTB reported a 4Q20 net profit increase of 13.0% linked quarter. KTB’s hard work controlling credit risk is paying off, as net new...

Thomas J. Monaco

Bangkok Bank – Going Backward

BANGKOK BANK: BBL reported weak 4Q20 results - declining 40.3% linked quarter. Results were poor across the board with negative operating jaws and...

Thomas J. Monaco

Siam Commercial Bank – B'assurance Masks Troubles

SIAM COMMERCIAL BANK: SCB reported an unimpressive 4Q20 result – up just 1.2% linked quarter. Were it not for strong bancassurance growth, 4Q20...

Thomas J. Monaco

Kasikornan – Unconvincing Call

KASIKORNBANK: KBANK 's credit risk remains elevated, yet half of current and projected loan growth will be used for current customer relief loans....

Thomas J. Monaco

Japanese Banks: Ever Lower

For investors in Japanese bank stocks, 2020 was another year of pain. The sector fell almost 22% YoY; only 5 bank stocks out of 92 registered YoY...

J. Brian Waterhouse

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