Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Japanese bank stocks performed so poorly in 2018, with the Topix Bank Index falling 25.7% while the overall market declined by a lesser 16.4%, that some may be tempted to speculate that Japanese banks might be a key sector in leading a market recovery in 2019. We don’t think so. The fundamental outlook for banks’ profits remains clouded by a strengthening Yen against the US$, declining revenue growth, anaemic manufacturing sector loan demand, relentless downward pressure on net interest margins, weak fee business, rising valuation losses on both stocks and bonds, and ‘normalising’ credit costs. Simply put, there are no growth catalysts to drive the Japanese banking sector forward on a sustainable basis in terms of stock price appreciation. This all adds up to uninspiring valuations, even at current levels.  ‘Caveat emptor! (May the buyer beware!)’ remains our key recommendation to would-be investors in Japanese bank stocks for 2019.

Japanese bank stocks performed so poorly in 2018, with the Topix Bank Index falling 25.7% while the overall market declined by a lesser 16.4%, that some may be tempted to speculate that Japanese banks might be a key sector in leading a market recovery in 2019. We don’t think so. The fundamental outlook for banks’ profits remains clouded by a strengthening Yen against the US$, declining revenue growth, anaemic manufacturing sector loan demand, relentless downward pressure on net interest margins, weak fee business, rising valuation losses on both stocks and bonds, and ‘normalising’ credit costs. Simply put, there are no growth catalysts to drive the Japanese banking sector forward on a sustainable basis in terms of stock price appreciation. This all adds up to uninspiring valuations, even at current levels.  ‘Caveat emptor! (May the buyer beware!)’ remains our key recommendation to would-be investors in Japanese bank stocks for 2019.

Japanese Banks:  These Lifeless Things (The Ozymandias Syndrome)

Equity Bottom-Up

Tottori Prefecture, in the Chugoku Region of western Japan, is famous for its extensive sand dunes that attract tens of thousands of visitors every year. Tottori is also home to one of Japan’s smallest regional banks, the rather obscure <a href="https://www.smartkarma.com/entities/tottori-bank-ltd" target="_blank" data-smartkarma-citation="entities:13337:1" rel="noopener">Tottori Bank (8383 JP)</a> which celebrates the centenary of its founding later this year.From an investment viewpoint, it appears to be trading on a ‘give away’ price-to-book ratio of just 0.23x.  Dig a little deeper, however, and the bank’s many weaknesses are soon revealed: evident lack of scale, geographically trapped in a shrinking local economy, margins under relentless pressure, a chronically high overhead ratio, little ability to absorb ‘normal’ levels of credit losses and risible RoE and RoA ratios.  This is a bank in need of serious restructuring of its business.  While some domestic entrepreneurs such as <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> might be tempted to take a look at such a bank as an investment opportunity, foreign investors would be well advised to steer clear.  Caveat emptor!  (May the buyer beware!)

Tottori Prefecture, in the Chugoku Region of western Japan, is famous for its extensive sand dunes that attract tens of thousands of visitors every year. Tottori is also home to one of Japan’s smallest regional banks, the rather obscure Tottori Bank (8383 JP) which celebrates the centenary of its founding later this year.From an investment viewpoint, it appears to be trading on a ‘give away’ price-to-book ratio of just 0.23x.  Dig a little deeper, however, and the bank’s many weaknesses are soon revealed: evident lack of scale, geographically trapped in a shrinking local economy, margins under relentless pressure, a chronically high overhead ratio, little ability to absorb ‘normal’ levels of credit losses and risible RoE and RoA ratios.  This is a bank in need of serious restructuring of its business.  While some domestic entrepreneurs such as SBI Holdings (8473 JP) might be tempted to take a look at such a bank as an investment opportunity, foreign investors would be well advised to steer clear.  Caveat emptor!  (May the buyer beware!)

Tottori Bank (8383 JP):  Trapped in the Sands

Financial entrepreneur Yoshitaka Kitao and his flagship company <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a> have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.On Friday 20 November 2020, the holding company for these two banks, tiny <a href="https://www.smartkarma.com/entities/jimoto-holdings-inc" target="_blank" data-smartkarma-citation="entities:5763:1" rel="noopener">Jimoto Holdings (7161 JP)</a>, finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Financial entrepreneur Yoshitaka Kitao and his flagship company Sbi Holdings (8473 JP) have just netted their sixth and seventh regional banks, namely secondary regional banks Kirayaka Bank and Sendai Bank from the Tohoku Region of northern Japan.On Friday 20 November 2020, the holding company for these two banks, tiny Jimoto Holdings (7161 JP), finally announced its interim results for FY3/2021.  Interim net profits collapsed 91% YoY to just ¥64 million (US$615,000), and the group’s revised full-year guidance now warns of a full-year consolidated net loss of around ¥3 billion: largely the result of accumulated valuation losses in the securities portfolio of principal subsidiary Kirayaka Bank.  To rub salt into investors’ wounds, Jimoto Holdings simultaneously announced that it was issuing 3.65 million new shares to a subsidiary of Sbi Holdings (8473 JP)  for a consideration of around ¥3.4 billion (US$33.6 million).  The SBI Group will control just over 18% of Jimoto Holdings’ outstanding shares when the transactions are completed.Jimoto Holdings is the latest investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector, and another ‘stepping-stone’ for the SBI Group’s president towards his goal of creating a “fourth megabank”.Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Jimoto Holdings (7161 JP):  Kirayaka Cracks

The stock price of the tiny, embattled <a href="https://www.smartkarma.com/entities/towa-bank-ltd" target="_blank" data-smartkarma-citation="entities:18283:1" rel="noopener">Towa Bank (8558 JP)</a>, a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a>.Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

The stock price of the tiny, embattled Towa Bank (8558 JP), a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist Sbi Holdings (8473 JP).Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Towa Bank (8558 JP):  Another Notch in the Bedpost

<a href="https://www.smartkarma.com/entities/bank-of-toyama-ltd" target="_blank" data-smartkarma-citation="entities:3496:1" rel="noopener">Bank Of Toyama /Ltd (8365 JP)</a>’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing +135% in the last six months.  What is going on, and why do foreign investors still own under 1% of outstanding shares if this bank is such an outstanding performer?
Although the stock prices of major Japanese banks have barely moved over the last month, some regional bank stocks have seen a surge in trading volume and double-digit improvements in their share prices.  This surge is attributable to comments made in early September by newly-elected Japanese prime minister Yoshihide Suga that there were “too many regional banks”, prompting speculation that mergers of regional and secondary regional banks might be actively encouraged under the incoming Suga Government.
However, we think the sudden rise in Bank of Toyama’s stock price has less to do with PM Suga’s comments on overbanking in Japan and more to do with stock ‘cornering’ by a group or groups of domestic speculators.  This has all the signs of a classic domestic ‘ramp’, designed to quickly push up the share price of a target stock and then offload the accumulated shares for a quick profit close to the top of the price range onto unsuspecting punters drawn by the action.  The bank’s fundamentals simply do not support current valuations.  Foreign investors should steer well clear.   Caveat emptor!  (May the buyer beware!)

Bank Of Toyama /Ltd (8365 JP)’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing +135% in the last six months.  What is going on, and why do foreign investors still own under 1% of outstanding shares if this bank is such an outstanding performer?
Although the stock prices of major Japanese banks have barely moved over the last month, some regional bank stocks have seen a surge in trading volume and double-digit improvements in their share prices.  This surge is attributable to comments made in early September by newly-elected Japanese prime minister Yoshihide Suga that there were “too many regional banks”, prompting speculation that mergers of regional and secondary regional banks might be actively encouraged under the incoming Suga Government.
However, we think the sudden rise in Bank of Toyama’s stock price has less to do with PM Suga’s comments on overbanking in Japan and more to do with stock ‘cornering’ by a group or groups of domestic speculators.  This has all the signs of a classic domestic ‘ramp’, designed to quickly push up the share price of a target stock and then offload the accumulated shares for a quick profit close to the top of the price range onto unsuspecting punters drawn by the action.  The bank’s fundamentals simply do not support current valuations.  Foreign investors should steer well clear.   Caveat emptor!  (May the buyer beware!)

Bank of Toyama (8365 JP):  Irrational Exuberance

Japan

The Shimane Bank, Ltd. is a regional bank that mainly operates in Shimane prefecture. The Bank provides general banking services such as deposits, loans, and exchange transactions. The Shimane Bank also offers securities brokerage, leasing, and credit card services.

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Shimane Bank Ltd/ The (7150 JP)

Japanese Banks: These Lifeless Things (The Ozymandias Syndrome)

Japanese bank stocks performed so poorly in 2018, with the Topix Bank Index falling 25.7% while the overall market declined by a lesser 16.4%, that...

J. Brian Waterhouse

Tottori Bank (8383 JP): Trapped in the Sands

On a PBR of 0.23x, Tottori Bank looks to be trading on a 'give away' price. Dig a little deeper into the financials, however, and its weaknesses...

J. Brian Waterhouse

Jimoto Holdings (7161 JP): Kirayaka Cracks

Financial entrepreneur Yoshitaka Kitao and his flagship company SBI Holdings (8473 JP) have just netted their sixth and seventh regional banks,...

J. Brian Waterhouse

Towa Bank (8558 JP): Another Notch in the Bedpost

The evidence suggests that this is not a 'white knight' riding to the rescue, but another opportunity for Yoshitaka Kitao to gain access to a...

J. Brian Waterhouse

Bank of Toyama (8365 JP): Irrational Exuberance

Bank Of Toyama /Ltd (8365 JP)’s share price has risen over 36% in the last 30 days on 4x normal daily trading volume and has shot up an astonishing...

J. Brian Waterhouse

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