Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

It’s an ill wind that blows nobody any good, as the saying goes.  While Japanese industry is starting to count the economic cost of the coronavirus pandemic in terms of lost production and the global disruption to the supply chain, some Japanese banks have seen a remarkable surge in loan demand as major companies rush to secure lines of credit and draw down cash reserves in order to survive what is shaping up to be a prolonged economic recession.  Overall lending rose +6.8% YoY in June – the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by an average of +9.4% YoY: a new all-time record.  Whether this is the start of a trend or is simply a short-term phenomenon remains to be seen, as is the question of whether these new loans are economically rational, depending on the interest rate applied.  ‘Profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.Be that as it may, the fundamental outlook for Japan’s banks has not improved in CY2020: if anything, the outlook for FY3/2021 and beyond is even more uncertain than it was prior to the coronavirus pandemic.  As we have frequently pointed out in past Insights, margins remain under downward pressure, many banks (both big and small) remain underwater on their core domestic businesses, and credit costs are rising across the board as Japanese banks brace for a new wave of corporate failures in the wake of the coronavirus pandemic.While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

It’s an ill wind that blows nobody any good, as the saying goes.  While Japanese industry is starting to count the economic cost of the coronavirus pandemic in terms of lost production and the global disruption to the supply chain, some Japanese banks have seen a remarkable surge in loan demand as major companies rush to secure lines of credit and draw down cash reserves in order to survive what is shaping up to be a prolonged economic recession.  Overall lending rose +6.8% YoY in June – the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by an average of +9.4% YoY: a new all-time record.  Whether this is the start of a trend or is simply a short-term phenomenon remains to be seen, as is the question of whether these new loans are economically rational, depending on the interest rate applied.  ‘Profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.Be that as it may, the fundamental outlook for Japan’s banks has not improved in CY2020: if anything, the outlook for FY3/2021 and beyond is even more uncertain than it was prior to the coronavirus pandemic.  As we have frequently pointed out in past Insights, margins remain under downward pressure, many banks (both big and small) remain underwater on their core domestic businesses, and credit costs are rising across the board as Japanese banks brace for a new wave of corporate failures in the wake of the coronavirus pandemic.While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/891/original/2020-07-20_11-11-13.png?1595211104" class="editor-image img-responsive" data-smartkarma-image-id="146891"></figure><div class="content-caption">Source • Japan Analytics</div>THE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/894/original/2020-07-20_11-42-42.png?1595213322" class="editor-image img-responsive" data-smartkarma-image-id="146894"></figure><div class="content-caption">Source • Japan Analytics</div>RELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/895/original/2020-07-20_11-58-18.png?1595214235" class="editor-image img-responsive" data-smartkarma-image-id="146895"></figure><div class="content-caption">Source • Japan Analytics</div>RESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress.

Source • Japan AnalyticsTHE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.Source • Japan AnalyticsRELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.Source • Japan AnalyticsRESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. 

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

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

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Weak May 2020 Data: ACOM (8572.JP) released poor May 2020 monthly performance data on June 10th which exhibited negative consumer lending growth for the first time since 2014  - declining 0.6% YOY during the month. ACOM is chronically understates kaburai risk;* No Guidance Still: Senior management did not issue FY3/21 guidance, we remain in the dark regarding treatment of credit costs and its overseas operations; and  * MUFG Should Struggle Globally Too: The lack of provisioning is far from the only problem MUFG must manage. Post-COVID-19, we calculate that MUFG America’s will have a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFG America’s stated equity; continued impairments on subsidiaries; significant Softbank (9984.JP) exposure; and Morgan Stanley’s (MS.US) MUFG dilutive E*Trade (ETFC.US) transaction.

*Weak May 2020 Data: ACOM (8572.JP) released poor May 2020 monthly performance data on June 10th which exhibited negative consumer lending growth for the first time since 2014  - declining 0.6% YOY during the month. ACOM is chronically understates kaburai risk;* No Guidance Still: Senior management did not issue FY3/21 guidance, we remain in the dark regarding treatment of credit costs and its overseas operations; and  * MUFG Should Struggle Globally Too: The lack of provisioning is far from the only problem MUFG must manage. Post-COVID-19, we calculate that MUFG America’s will have a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFG America’s stated equity; continued impairments on subsidiaries; significant Softbank (9984.JP) exposure; and Morgan Stanley’s (MS.US) MUFG dilutive E*Trade (ETFC.US) transaction.

*Shinsei To Purchase UDC Finance: Australia and New Zealand Banking Corp (ANZ.AU) [ANZ] and Shinsei Bank (8303.JP) [Shinsei] announced a share purchase agreement of ANZ’s asset finance business in New Zealand, UDC Finance (UDC), for NZD 762 mn – following ANZ Bank New Zealand’s previously announced strategic review of UDC;*What Is The Real Price?: Shinsei’s “stated” purchase price for UDC amounts to a P/BV of 1.2x and P/E of 11.0x based on FY (September) 2019 net profit of NZD 70 mn.  The statement in the Shinsei press release is quite worrisome from both the standpoint of the actual cost of UDC for Shinsei and the impact to near-term earnings; and   *A Possible Fall Below 10% CAR: On its face, Shinsei states that the UDC deal will reduce its capital adequacy ratio by just 40 bp to above 10%. Given even Shinsei’s understanding of this transaction, we challenge that its CAR will remain of the 10% threshold.

*Shinsei To Purchase UDC Finance: Australia and New Zealand Banking Corp (ANZ.AU) [ANZ] and Shinsei Bank (8303.JP) [Shinsei] announced a share purchase agreement of ANZ’s asset finance business in New Zealand, UDC Finance (UDC), for NZD 762 mn – following ANZ Bank New Zealand’s previously announced strategic review of UDC;*What Is The Real Price?: Shinsei’s “stated” purchase price for UDC amounts to a P/BV of 1.2x and P/E of 11.0x based on FY (September) 2019 net profit of NZD 70 mn.  The statement in the Shinsei press release is quite worrisome from both the standpoint of the actual cost of UDC for Shinsei and the impact to near-term earnings; and   *A Possible Fall Below 10% CAR: On its face, Shinsei states that the UDC deal will reduce its capital adequacy ratio by just 40 bp to above 10%. Given even Shinsei’s understanding of this transaction, we challenge that its CAR will remain of the 10% threshold.  

Japan Specialist

Mark Chadwick

Shareholders are the owners, and owners have the power. I doubt that John Lennon would have written a song about shareholders, but if he had, that is what he would have said.  
Shareholders would have been eagerly anticipating this year’s proxy season in Japan. Over the past three years, momentum had been building, with more and more shareholders exercising their right to put proposals to the will of the majority. 
COVID-19 has probably taken some of the wind out of the activists’ sails, at least for this year. Still, we count fourteen proposals delivered so far and we dig a little deeper into the upcoming votes at <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> , <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> , <a href="https://www.smartkarma.com/entities/mitsubishi-logistics-corp" target="_blank" data-smartkarma-citation="entities:11909:1" rel="noopener">Mitsubishi Logistics (9301 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsui-mining-smelting-co" target="_blank" data-smartkarma-citation="entities:15998:1" rel="noopener">Mitsui Mining &amp; Smelting Co (5706 JP)</a>

Shareholders are the owners, and owners have the power. I doubt that John Lennon would have written a song about shareholders, but if he had, that is what he would have said.  
Shareholders would have been eagerly anticipating this year’s proxy season in Japan. Over the past three years, momentum had been building, with more and more shareholders exercising their right to put proposals to the will of the majority. 
COVID-19 has probably taken some of the wind out of the activists’ sails, at least for this year. Still, we count fourteen proposals delivered so far and we dig a little deeper into the upcoming votes at Takeda Pharmaceutical (4502 JP) , Shinsei Bank (8303 JP) , Mitsubishi Logistics (9301 JP) and Mitsui Mining &amp; Smelting Co (5706 JP) 

Japan

SBI Shinsei Bank, Ltd. provides banking services including deposits, loans, and foreign exchange transaction, as well as investment trust service and issuance of long-term bonds.

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SBI Shinsei Bank (8303 JP)

Japanese Banks: Ill Winds

It’s an ill wind that blows nobody any good, as the saying goes. While Japanese industry is starting to count the economic cost of the coronavirus...

J. Brian Waterhouse

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

THE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing...

Campbell Gunn

MUFG – ACOM Monthly Data Disappoints

*Weak May 2020 Data: ACOM (8572.JP) released poor May 2020 monthly performance data on June 10th which exhibited negative consumer lending growth...

Thomas J. Monaco

Shinsei Bank - Top O’ The Cycle To You

*Shinsei To Purchase UDC Finance: Australia and New Zealand Banking Corp (ANZ.AU) [ANZ] and Shinsei Bank (8303.JP) [Shinsei] announced a share...

Thomas J. Monaco

Japan Proxy Season - Power to the People

Shareholders are the owners, and owners have the power. I doubt that John Lennon would have written a song about shareholders, but if he had, that...

Mark Chadwick

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