Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

Mebuki Financial Group / Equity Bottom-Up

Yesterday, <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a> announced a buyback of 2+% of shares out, in what looked like a buyback from existing cross-holders who wished to sell a large block without friction. Having offered to buy 70mm shares as discussed in <a href="https://www.smartkarma.com/insights/resona-8308-jp-buyback-respectably-large-but-looks-like-a-one-off" target="_blank" data-smartkarma-citation="insights:51331" rel="noopener">Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off</a>, they bought back 62.5mm shares this AM, and they have another 25.5mm shares to buy back - roughly 2.5 days of ADV - in the next 4.5 months. That was a one-off by Resona which was "known" since last November as a mitigant against EPS dilution which would come as a result of share issuance to absorb Kansai Mirai Financial. The NEW News today is that <a href="https://www.smartkarma.com/entities/mebuki-financial-group-inc" target="_blank" data-smartkarma-citation="entities:10048:1" rel="noopener">Mebuki Financial Group (7167 JP)</a> which was formed after Joyo Bank absorbed Ashikaga Bank today announced <a href="https://www.mebuki-fg.co.jp/eng/pdf/release/20210512.pdf" target="_blank" rel="noopener">earnings</a> which were about 3% better than consensus, and forecasts for 2022 which appear about 2% lower than consensus expects for March 2022, but they also <a href="https://www.mebuki-fg.co.jp/eng/pdf/release/20210512_02.pdf" target="_blank" rel="noopener">announced a buyback</a> of up to 60 million shares spending up to ¥16bn. That is 5.17% of shares out. That is non-negligible and will bring the EPS forecast back above consensus even if pre-tax is just below. They get that started by launching a ToSTNeT-3 buyback tomorrow morning pre-open for the same 60 million shares. THAT is "implied news." It is something investors should understand, and use as a signal. There will be more of this and as a trend it is unmitigated good news for investors in Japan Inc.

Yesterday, Resona Holdings (8308 JP) announced a buyback of 2+% of shares out, in what looked like a buyback from existing cross-holders who wished to sell a large block without friction. Having offered to buy 70mm shares as discussed in Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off, they bought back 62.5mm shares this AM, and they have another 25.5mm shares to buy back - roughly 2.5 days of ADV - in the next 4.5 months. That was a one-off by Resona which was "known" since last November as a mitigant against EPS dilution which would come as a result of share issuance to absorb Kansai Mirai Financial. The NEW News today is that Mebuki Financial Group (7167 JP) which was formed after Joyo Bank absorbed Ashikaga Bank today announced earnings which were about 3% better than consensus, and forecasts for 2022 which appear about 2% lower than consensus expects for March 2022, but they also announced a buyback of up to 60 million shares spending up to ¥16bn. That is 5.17% of shares out. That is non-negligible and will bring the EPS forecast back above consensus even if pre-tax is just below. They get that started by launching a ToSTNeT-3 buyback tomorrow morning pre-open for the same 60 million shares. THAT is "implied news." It is something investors should understand, and use as a signal. There will be more of this and as a trend it is unmitigated good news for investors in Japan Inc.

Mebuki Follows Resona - Bank Buyback Season Starts Strong And This Is A Good Sign

Event-Driven

After the close on 11 May 2021, <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a> announced its results for FY2020 to 31 March 2021. The 90-page English translation of the Japanese tanshin is <a href="https://www.resona-gr.co.jp/holdings/english/investors/financial/results_c/download_c/files/20210511_3a.pdf" target="_blank" rel="noopener">here</a>. A 20-page deck in English is <a href="https://www.resona-gr.co.jp/holdings/english/investors/financial/results_c/download_c/files/20210511_4a.pdf" target="_blank" rel="noopener">here</a>. The bank today also <a href="https://www.resona-gr.co.jp/holdings/english/newsrelease_c/detail/20210511_2029.html" target="_blank" rel="noopener">announced</a> a buyback of up to 88,000,000 shares (3.51% of shares out) for up to JPY 50bn. This was known, and effectively pre-announced. Resona absorbed a subsidiary (Kansai Mirai Financial Group) through a share exchange at the end of the last fiscal year, in a transaction announced 10 November 2020. In that announcement, it was announced there would be an acquisition of treasury shares in case of a dilution of EPS according to the transaction. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/454/original/Screenshot+2021-05-11+at+5.09.45+PM.png?1620724240" class="editor-image img-responsive" data-smartkarma-image-id="205454"></figure></section>Fulfilling its promise meant a buyback. I cannot suggest that the full 88mm shares are required to avoid dilution. If so, that is a lot, but it should be clear that the goal is to get those shares bought so that EPS is not diluted. That starts with a ToSTNeT-3 transaction tomorrow morning at 8:00am local time for up to 70,000,000 shares to be bought back at today's close of JPY 463.1/share (link <a href="https://www.resona-gr.co.jp/holdings/english/newsrelease_c/detail/20210511_2031.html" target="_blank" rel="noopener">here</a>).More discussion below.

After the close on 11 May 2021, Resona Holdings (8308 JP) announced its results for FY2020 to 31 March 2021. The 90-page English translation of the Japanese tanshin is here. A 20-page deck in English is here. The bank today also announced a buyback of up to 88,000,000 shares (3.51% of shares out) for up to JPY 50bn. This was known, and effectively pre-announced. Resona absorbed a subsidiary (Kansai Mirai Financial Group) through a share exchange at the end of the last fiscal year, in a transaction announced 10 November 2020. In that announcement, it was announced there would be an acquisition of treasury shares in case of a dilution of EPS according to the transaction. Fulfilling its promise meant a buyback. I cannot suggest that the full 88mm shares are required to avoid dilution. If so, that is a lot, but it should be clear that the goal is to get those shares bought so that EPS is not diluted. That starts with a ToSTNeT-3 transaction tomorrow morning at 8:00am local time for up to 70,000,000 shares to be bought back at today's close of JPY 463.1/share (link here).More discussion below. 

Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1" rel="noopener">Suruga Bank Ltd (8358 JP)</a>.  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank <a href="https://www.smartkarma.com/insights/suruga-bank-8358-jp-one-step-back-but-several-steps-forward" target="_blank" data-smartkarma-citation="insights:40677" rel="noopener">Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward</a> in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and <a href="https://www.smartkarma.com/entities/resona-holdings-inc" target="_blank" data-smartkarma-citation="entities:6841:1" rel="noopener">Resona Holdings (8308 JP)</a>. It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by Suruga Bank Ltd (8358 JP).  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP). It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Suruga Bank (8358 JP):  Doubling Up Rather Than Doubling Down

Thematic (Sector/Industry)

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/203/578/original/image_7378929621619743178079.png?1619743180" class="editor-image img-responsive" data-smartkarma-image-id="203578"></figure>

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021, according to the Japanese Bankers Association (JBA), rising +2.0% MoM and a remarkable +9.7% YoY.  According to the Bank of Japan (BoJ), average deposit balances in March 2021 were ¥1,067.259 trillion (US$9.79 trillion); this was also an all-time high level.For Japanese bankers, however, such impressive statistics are anything but good news.  Already awash in surplus cash, adding another ¥6.0 trillion (US$55.15 billion) to the banks’ collective coffers in a single month is of almost no value to them whatsoever. The metaphorical equivalent of such an event would be something like turning a fire hose onto an already-flooded river.  It just makes an already bad situation far worse.  Major banks’ loan to deposit (LDR) ratios have now fallen to historic lows of 49%, underlining the fact that customer funds continue to flow into Japanese banks far faster than they are able to process that inflow and reinvest the proceeds as loans to help support an economic recovery. Banks simply do not need those mountains of money that pile higher and higher as each month passes.January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Bank Deposits:  Mountain High, Value Low

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/202/916/original/JBanks-2021-0428-TPNBNK+in+2021.jpg?1619500060" class="editor-image img-responsive" data-smartkarma-image-id="202916"></figure></section>

An old investment industry joke has it that long-term investments in equities are usually short-term investments that went wrong.  In the Japanese banking industry, short-term loans are euphemistically called “working capital finance” but, in many instances, act as a substitute for equity capital by being rolled-over or renewed every three to six months on an indefinite basis, as long as the interest continues to be paid on time.  Unlike Western banking practice, there is little to no effort ever made by Japanese banks to have these ‘short-term‘ loans cleaned-up and repaid, thereby minimizing the strain on corporate cash-flow over the longer-term while maximizing the banks’ interest income.The arrival of the global COVID-19 pandemic at the beginning of 2020 created heavy demand for bank finance as companies rushed to secure sufficient cash and lines of credit.  The purpose of this ‘dash for cash’ was to ensure corporate survival and to tide them over what was hoped would be a short period of financial uncertainty. This additional lending was intended to be short-term in nature.  As Japan faces yet another wave of the coronavirus, with emergency declarations in several of her principal cities and more lockdowns just as the postponed 2020 Olympics is scheduled to begin, it is becoming increasingly apparent that some borrowers need not just cash but capital to survive.Some banks are reportedly now considering whether to convert some of these ‘short-term’ emergency loans into long-term subordinated loans, thereby marginally improving the interest rate on the loan.  The clear advantage for the borrower would be the removal of any financial pressure to repay the loan any time soon.  For the banks, there might be other less obvious advantages than simply a better interest rate, including an opportunity to maintain potentially future non-performing loans in ongoing performing-loan status, which would obviate the need to set aside additional loan-loss provisions and preserve the banks’ own precious capital.Why call a spade a spade when it could also be referred to as a shovel?January through mid-March saw an unusually strong rally in bank shares, in line with trends in other global stock markets.  Trees do not grow to Heaven, however, and stock prices do not rise for ever  –  especially Japanese bank stocks, as has once again been proven.  Having passed the ‘marker point’ for the end of perennial bank rallies, namely 15 March (“The Ides of March”), the sector has weakened noticeably over the last month (after peaking on 19 March 2021 at 162.08) with the mega-banks falling close to 10% while other major banks and large regional banks have seen their share prices falling by 15% or more.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Banks:  When Spades Become Shovels

Japan

Resona Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, provides financial services, including banking, trust operations, and credit card services. Resona Holdings also offers consulting services related to personal loans, asset management, and asset succession.

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Resona Holdings (8308 JP)

Mebuki Follows Resona - Bank Buyback Season Starts Strong And This Is A Good Sign

A day after Resona's ToSTNeT-3 buyback to buy crossholder shares, Mebuki announces one twice as large. Could be coincidence. Could be a theme....

Travis Lundy

Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off

Resona Bank (8308) announced results, and a large buyback. If you want to sell a big block, here's your chance. The buyback is technical, not...

Travis Lundy

Suruga Bank (8358 JP): Doubling Up Rather Than Doubling Down

We believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes. Nevertheless, we warn that this is...

J. Brian Waterhouse

Japanese Bank Deposits: Mountain High, Value Low

Bank deposits hit an all-time high of ¥854.608 trillion (US$7.84 trillion) on 31 March 2021. For Japanese bankers, however, such impressive...

J. Brian Waterhouse

Japanese Banks: When Spades Become Shovels

As Japan faces yet another coronavirus outbreak, it is increasingly apparent that some borrowers need not just cash but capital to survive. Short...

J. Brian Waterhouse

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