Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

“It’s déjà vu all over again” -  Attributed to Yogi Berra (1925-2015), legendary baseball Hall of FamerGetting money from a banker is sometimes likened to trying to squeeze blood out of a stone. Customers of Mizuho Bank, the principal commercial banking subsidiary of megabank holding company <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> (MHFG), could be forgiven for agreeing with this derogatory epithet after over half of the bank’s 5,395 ATMs stopped working suddenly on Sunday 28 February.  Many customers were unable to draw cash out from the ATMs and some had their cash cards and savings passbooks ‘swallowed’ by the recalcitrant machines.  Internet banking was also apparently affected.This is not the first time that Mizuho has had major problems as a result of computer system crashes: there were similar issues in April 2002 and again in March 2011.  On both occasions, the Financial Services Agency (FSA) subsequently issued Business Correction Orders against the bank.  This time it appears that problems arose during a fixed deposit data update, causing the system to crash.Reputational damage is extremely difficult for any company to recover from easily, and perhaps more so for a bank where not only are issues of trust and public responsibility as a financial institution involved but also large sums of money.  What takes a generation to build can be lost in a moment when it comes to reputation and trust.  Smartkarma readers may well remember the public excoriation in 2010 on TV of a clutch of bank presidents both in the USA and the UK in the wake of the Global Financial Crisis. In Japan, where the megabanks emerged largely unscathed from the worst excesses of the GFC (although their investment portfolios took a severe hit in FY3/2009), incoming Mizuho Financial Group president &amp; CEO Yasuhiro Sato seemed to spend much of his first six months in office from June 2011 appearing on TV to repeatedly publicly apologize for Mizuho’s past systems errors and for the ongoing inconvenience to customers.Senior management clearly have much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.Market reaction has been typically perverse, with Mizuho’s share price rising gently as part of the recovery from Friday’s Wall Street sell-off.  The stock is up close to +13% over the last 3 months (against an average +17% for peers) but is only +1.5% YoY (versus an average +2.5% for peers).  In short, the stock is underperforming even as the banking sector outperforms the Topix Index for the first time in several years.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation for reliability.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

“It’s déjà vu all over again” -  Attributed to Yogi Berra (1925-2015),  legendary baseball Hall of FamerGetting money from a banker is sometimes likened to trying to squeeze blood out of a stone. Customers of Mizuho Bank, the principal commercial banking subsidiary of megabank holding company Mizuho Financial Group (8411 JP) (MHFG), could be forgiven for agreeing with this derogatory epithet after over half of the bank’s 5,395 ATMs stopped working suddenly on Sunday 28 February.  Many customers were unable to draw cash out from the ATMs and some had their cash cards and savings passbooks ‘swallowed’ by the recalcitrant machines.  Internet banking was also apparently affected.This is not the first time that Mizuho has had major problems as a result of computer system crashes: there were similar issues in April 2002 and again in March 2011.  On both occasions, the Financial Services Agency (FSA) subsequently issued Business Correction Orders against the bank.  This time it appears that problems arose during a fixed deposit data update, causing the system to crash.Reputational damage is extremely difficult for any company to recover from easily, and perhaps more so for a bank where not only are issues of trust and public responsibility as a financial institution involved but also large sums of money.  What takes a generation to build can be lost in a moment when it comes to reputation and trust.  Smartkarma readers may well remember the public excoriation in 2010 on TV of a clutch of bank presidents both in the USA and the UK in the wake of the Global Financial Crisis. In Japan, where the megabanks emerged largely unscathed from the worst excesses of the GFC (although their investment portfolios took a severe hit in FY3/2009), incoming Mizuho Financial Group president &amp; CEO Yasuhiro Sato seemed to spend much of his first six months in office from June 2011 appearing on TV to repeatedly publicly apologize for Mizuho’s past systems errors and for the ongoing inconvenience to customers.Senior management clearly have much to do in the wake of this latest incident to restore Mizuho’s reputation among customers as a brand that is synonymous with reliability.Market reaction has been typically perverse, with Mizuho’s share price rising gently as part of the recovery from Friday’s Wall Street sell-off.  The stock is up close to +13% over the last 3 months (against an average +17% for peers) but is only +1.5% YoY (versus an average +2.5% for peers).  In short, the stock is underperforming even as the banking sector outperforms the Topix Index for the first time in several years.As we have said in past Smartkarma Insights, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  This latest systems débâcle will not improve its already battered reputation for reliability.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.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):  Deja Vu All Over Again

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

Thematic (Sector/Industry)

The Japanese financial markets are now so liquid, thanks to the efforts of the BoJ as well as the commercial banks to minimize the impact of the coronavirus pandemic, that bankruptcies in January 2021 fell to their lowest level in 31 years.  Meanwhile, overall lending continues to edge down in terms of loans outstanding, even though YoY growth rates remain relatively high.While the Japanese bank sector has enjoyed a rally since the beginning of the year as the Nikkei-225 Index rises to its highest level in 31 years on high hopes for the successful roll-out of an effective COVID-19 vaccine, the fundamental outlook for the banks is clouded.   “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The Japanese financial markets are now so liquid, thanks to the efforts of the BoJ as well as the commercial banks to minimize the impact of the coronavirus pandemic, that bankruptcies in January 2021 fell to their lowest level in 31 years.  Meanwhile, overall lending continues to edge down in terms of loans outstanding, even though YoY growth rates remain relatively high.While the Japanese bank sector has enjoyed a rally since the beginning of the year as the Nikkei-225 Index rises to its highest level in 31 years on high hopes for the successful roll-out of an effective COVID-19 vaccine, the fundamental outlook for the banks is clouded.   “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Bank Lending:  The Good, The Bad & The Terminally Indebted

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Sumitomo Mitsui Financial Group (Sponsored Adr) / Equity Bottom-Up

Sumitomo Mitsui Financial Group (Sponsored Adr)

We all know that credit costs are down, and we believe this can continue. What may surprise though is how much provision expenses SMFG has taken compared with its far lower increase in reported loan loss reserves.

We all know that credit costs are down, and we believe this can continue. What may surprise though is how much provision expenses SMFG has taken compared with its far lower increase in reported loan loss reserves. 

Of Japan’s mega banks, Mizuho is the first to report its earnings, and the delta in the quarter is exceptional. With anemic ROA, returns can be substantially higher in the coming year, largely driven by lower credit costs.

Of Japan’s mega banks, Mizuho is the first to report its earnings, and the delta in the quarter is exceptional. With anemic ROA, returns can be substantially higher in the coming year, largely driven by lower credit costs. 

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)