Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

Japanese Banks:  Beyond the Ides of March

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/163/original/2019-03-17_07-32-23.png?1552775594" class="editor-image img-responsive" data-smartkarma-image-id="82163"></figure>Source: Japan Analytics
</div>SIDEWAYS - Japanese equities have gove up half of their late-February gains in US dollar terms over the last two weeks. Poised just 1.7% above the fifty-day moving average, last breached to the downside six months ago, the market needs fresh catalysts. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/164/original/2019-03-17_07-54-56.png?1552777022" class="editor-image img-responsive" data-smartkarma-image-id="82164"></figure><div class="content-caption">Source: Japan Analytics</div>BOJ IS BACK - After almost a one-month hiatus, the Bank of Japan resumed purchases of exchange-traded funds, intervening four times in the last nine trading days. Further intervention is to be expected as the market adjusts to the continuing stream of weak macro data.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/165/original/2019-03-17_08-15-44.png?1552778203" class="editor-image img-responsive" data-smartkarma-image-id="82165"></figure><div class="content-caption">Source: Japan Analytics</div>THANK YOU, MIZUHO - <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho' s (8411 JP)</a> ¥680b retail branch, software and foreign bond write down, and net profit forecast of ¥80b for FY 2018 has resulted in the market composite forecast for net income falling to ¥43.6t, 5.6% below the November peak. Forecast net income is now 1.2% below the level of one year ago, and seven sectors' forecasts are more than 10% lower than a year ago.   MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Machinery, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on the Auto sector,  <a href="https://www.smartkarma.com/entities/1411" target="_blank" data-smartkarma-citation="entities:1411:1">Sumitomo Realty (8830 JP)</a>, <a href="https://www.smartkarma.com/entities/4508" target="_blank" data-smartkarma-citation="entities:4508:1">Sekisui House (1928 JP)</a>, <a href="https://www.smartkarma.com/entities/3294" target="_blank" data-smartkarma-citation="entities:3294:1">Pigeon (7956 JP)</a>, <a href="https://www.smartkarma.com/entities/8723" target="_blank" data-smartkarma-citation="entities:8723:1">Fuji Seal (7864 JP)</a>, and <a href="https://www.smartkarma.com/entities/3548" target="_blank" data-smartkarma-citation="entities:3548:1">Kawasaki Kisen (9107 JP)</a>


Source: Japan Analytics
SIDEWAYS - Japanese equities have gove up half of their late-February gains in US dollar terms over the last two weeks. Poised just 1.7% above the fifty-day moving average, last breached to the downside six months ago, the market needs fresh catalysts. Source: Japan AnalyticsBOJ IS BACK - After almost a one-month hiatus, the Bank of Japan resumed purchases of exchange-traded funds, intervening four times in the last nine trading days. Further intervention is to be expected as the market adjusts to the continuing stream of weak macro data.  Source: Japan AnalyticsTHANK YOU, MIZUHO - Mizuho' s (8411 JP) ¥680b retail branch, software and foreign bond write down, and net profit forecast of ¥80b for FY 2018 has resulted in the market composite forecast for net income falling to ¥43.6t, 5.6% below the November peak. Forecast net income is now 1.2% below the level of one year ago, and seven sectors' forecasts are more than 10% lower than a year ago.   MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Machinery, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on the Auto sector,  Sumitomo Realty (8830 JP), Sekisui House (1928 JP), Pigeon (7956 JP), Fuji Seal (7864 JP), and Kawasaki Kisen (9107 JP)

🇯🇵 Japan • Fortnightly Update - Reverse Gear

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a> (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  -  a legacy from its 20th century role as a branch-based deposit taker and lender  -   and is now positioning itself for 21st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi Ufj Financial Group (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial Group (8316 JP)</a>  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  -  a legacy from its 20th century role as a branch-based deposit taker and lender  -   and is now positioning itself for 21st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

Mizuho Financial Group (8411 JP): Writing Off the Past

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/341/original/2019-02-10_05-07-57.png?1549742898" class="editor-image img-responsive" data-smartkarma-image-id="78341"></figure><div class="content-caption">Source: Japan Analytics</div>BOTTOM LINE BREAKDOWN - 1,277 earnings results and/or revisions announcements were released last week in Japan covering 36% of listed market capitalisation. The good news is that aggregate trailing-twelve-month (TTM) Operating Income only declined by ¥300b. Less welcome is the ¥1.7t decline in TTM Net Income to which <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/154" target="_blank" data-smartkarma-citation="entities:154:1">Honda Motor (7267 JP)</a>, <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi (6501 JP)</a> were the most significant contributors, each declining by more than ¥200b. Three 'financials', <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura Holdings (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a>, and <a href="https://www.smartkarma.com/entities/6267" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank (8358 JP)</a> subtracted ¥400b between them. Only <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a> and <a href="https://www.smartkarma.com/entities/637" target="_blank" data-smartkarma-citation="entities:637:1">Toshiba (6502 JP)</a> added more than ¥100b for the quarter. The substantial 'gap' between forecast and TTM Net Income has been reduced to just ¥600b, again confirming the reliability of corporate forecasting in Japan. The All-Market PER is now 13.5 times but will likely rise as aggregate Net Income falls further in the next two weeks.<div class="content-highlight">In the DETAIL section below, we review this year's results of all listed companies in aggregate, update our All-Market and Sector Results &amp; Revision Scores and look at the twenty-five best and worst large-cap company results over the last week, with short comments on <a href="https://www.smartkarma.com/entities/13176" target="_blank" data-smartkarma-citation="entities:13176:1">Nabtesco Corp (6268 JP)</a>, <a href="https://www.smartkarma.com/entities/8467" target="_blank" data-smartkarma-citation="entities:8467:1">Workman (7564 JP)</a>, <a href="https://www.smartkarma.com/entities/20823" target="_blank" data-smartkarma-citation="entities:20823:1">Nakanishi (7716 JP)</a>, and <a href="https://www.smartkarma.com/entities/747" target="_blank" data-smartkarma-citation="entities:747:1">DeNA (2432 JP)</a></div>

Source: Japan AnalyticsBOTTOM LINE BREAKDOWN - 1,277 earnings results and/or revisions announcements were released last week in Japan covering 36% of listed market capitalisation. The good news is that aggregate trailing-twelve-month (TTM) Operating Income only declined by ¥300b. Less welcome is the ¥1.7t decline in TTM Net Income to which Toyota Motor (7203 JP), Honda Motor (7267 JP), Softbank Group (9984 JP), Hitachi (6501 JP) were the most significant contributors, each declining by more than ¥200b. Three 'financials', Nomura Holdings (8604 JP), Mizuho Financial Group (8411 JP), and Suruga Bank (8358 JP) subtracted ¥400b between them. Only Sony (6758 JP) and Toshiba (6502 JP) added more than ¥100b for the quarter. The substantial 'gap' between forecast and TTM Net Income has been reduced to just ¥600b, again confirming the reliability of corporate forecasting in Japan. The All-Market PER is now 13.5 times but will likely rise as aggregate Net Income falls further in the next two weeks.In the DETAIL section below, we review this year's results of all listed companies in aggregate, update our All-Market and Sector Results &amp; Revision Scores and look at the twenty-five best and worst large-cap company results over the last week, with short comments on Nabtesco Corp (6268 JP), Workman (7564 JP), Nakanishi (7716 JP), and DeNA (2432 JP)

Japan: Results & Revisions Second Cut - Bottom Line Breakdown

Results for the nine months to end-December 2018, reported on 31 January 2019 by <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a>, or MHFG for short, reveal the continuing pressure on management to stabilize revenues and profitability.  MHFG reported consolidated recurring profits for the nine months to end-December 2018 of ¥547.56 billion (down 15.0% YoY) and net profits of ¥409.92 billion (down 13.8% YoY) on higher revenues of ¥2.858 trillion (+6.9% YoY).  Core earnings dropped into the red as net interest and fee income is now insufficient to cover overhead expenses, while the group is running out of surplus loan-loss reserves to write back to profit to keep the megabank in the black.  On a quarterly basis, results were much worse: 3QFY3/2019 was the worst quarterly performance reported by the megabank group since 2Q FY3/2014, with recurring profits falling 62.2% YoY to ¥80.64 billion while net profits fell 68.2% to just ¥50.56 billion.  
Mizuho, which significantly outperformed both of its rival megabanks <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi Ufj Financial Group (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial Group (8316 JP)</a> in share price performance terms throughout CY2018 (largely through having lower foreign ownership than the other two), is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

Results for the nine months to end-December 2018, reported on 31 January 2019 by Mizuho Financial Group (8411 JP), or MHFG for short, reveal the continuing pressure on management to stabilize revenues and profitability.  MHFG reported consolidated recurring profits for the nine months to end-December 2018 of ¥547.56 billion (down 15.0% YoY) and net profits of ¥409.92 billion (down 13.8% YoY) on higher revenues of ¥2.858 trillion (+6.9% YoY).  Core earnings dropped into the red as net interest and fee income is now insufficient to cover overhead expenses, while the group is running out of surplus loan-loss reserves to write back to profit to keep the megabank in the black.  On a quarterly basis, results were much worse: 3QFY3/2019 was the worst quarterly performance reported by the megabank group since 2Q FY3/2014, with recurring profits falling 62.2% YoY to ¥80.64 billion while net profits fell 68.2% to just ¥50.56 billion.  
Mizuho, which significantly outperformed both of its rival megabanks Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) in share price performance terms throughout CY2018 (largely through having lower foreign ownership than the other two), is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

Mizuho Financial Group (8411 JP):  Under Pressure

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 Banks: Beyond the Ides of March

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. ...

J. Brian Waterhouse

🇯🇵 Japan • Fortnightly Update - Reverse Gear

SIDEWAYS - Japanese equities have gove up half of their late-February gains in US dollar terms over the last two weeks. Poised just 1.7% above the...

Campbell Gunn