Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Bank Lending: An Ebb Tide in 2021?

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.

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

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/761/original/TPNBNK+vs+TPX+in+CY2020.jpg?1608608493" class="editor-image img-responsive" data-smartkarma-image-id="179761"></figure></section>

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Banks:  Remember, Remember, the Thrift of November

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.
Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.
Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japan

Mizuho Financial Group, Inc. provides comprehensive financial services through its subsidiaries. The Group provides variety of financial services such as general banking, securities brokerage, trust banking, and assets management.

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Mizuho Financial Group (8411 JP)

Japanese Bank Lending: An Ebb Tide in 2021?

The ‘dash for cash’ by large corporates appears to be over, at least in terms of lending by the major banks. Only the small secondary regionals...

J. Brian Waterhouse

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

US Banks – Capital Unchained

US BANKS: The new FRB rule suggests that the CCAR) bank total capital distribution will be capped at 100% over the previous four quarters beginning...

Thomas J. Monaco

Japanese Banks: Remember, Remember, the Thrift of November

Japanese people are renowned for their thrift. Even when deposit interest rates are zero they continue to save. But there is little the banks can...

J. Brian Waterhouse

Japanese Bank Lending: Losing Momentum

Loan balances have eased back to May levels, with much of the increase in lending by the major banks in March-June reversing between July and...

J. Brian Waterhouse

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