Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Bank Lending: An Ebb Tide in 2021?

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

Global Commodity-Related Equity Sectors In Secular Bull

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.
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2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the <a href="https://www.smartkarma.com/entities/daishi-hokuetsu-financial-group" target="_blank" data-smartkarma-citation="entities:27533:1" rel="noopener">Daishi Hokuetsu Financial Group (7327 JP)</a> ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Stock markets around the world have been reaching record levels, thanks to the unprecedented amounts of money being pumped into the financial markets by the advanced nations’ central banks in a bid to offset the economic damage caused by COVID-19.  In Japan, too, the Topix Index finished 2020 at 1804.68, just off its high-point for the year and up a very modest 4.8% YoY after plummeting around 500 points in March.
For investors in Japanese bank stocks, however, it was another year of pain: the Topix Bank Index closed 2020 down 21.7% YoY.  Moreover, just 5 bank stocks out of the total of 92 showed positive gains YoY.  All 7 major Japanese banks showed YoY declines: the ‘best-performer’ was down 21.1% YoY, with the average major bank YoY decline exceeding 25%.  By the end of 2020, 13 Japanese bank stocks had lost over one-third of their value, although they had been considerably lower earlier in the year.




2021 commences with bank lending at near record-high levels after a record surge in lending, a mountain of cash on deposit that the banks are struggling to deploy profitably, exceptionally low loan to deposit (LDR) ratios, margins under pressure, profits under pressure and, for many banks, dividends under pressure as well.  None of this is likely to boost investor confidence in Japanese bank stocks.
Business models need to be reinvented to properly incorporate the new digital era, branches amalgamated or closed, and staff reduced.  This will take time and be costly.
Meanwhile, two banks have already suggested that they will likely make consolidated net losses in FY3/3021, with others perhaps to follow as we approach the end of the fiscal year in March.
2021 will also see a handful of regional bank mergers; indeed, this has already started with the first on 1 January 2021, creating the Daishi Hokuetsu Bank (part of the Daishi Hokuetsu Financial Group (7327 JP) ).  While these will be welcomed by the Suga Administration, which is actively encouraging a reduction in the number of regional banks, especially in the more rural parts of the country, there is no guarantee that the surviving entities will be any more profitable or efficient than their predecessors.
Then there is the coronavirus pandemic, which continues to cause social lockdowns, economic disruption, and financial uncertainty aside from its devastating impact on the health and wellbeing of humankind.  All of this still needs to be properly discounted in Japanese bank share prices.  We anticipate further share price weakness in many Japanese banks in 2021.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

This is the first in a series of reports on Infrastructure Asset-Backed Securities (IABS) in Asia Pacific. The purpose of this report is to provide an overview of the IABS asset class, which remains relatively new to Asia. An IABS transaction involves a sponsor and/or manager sourcing project and infrastructure loans from originators (i.e. banks), underwriting them and issuing securitized notes backed by these assets to investors. This helps originators recycle their balance sheets, while offering investors exposure to these projects and infrastructure loans in a credit-enhanced format, enabling them to originate more project and infrastructure loans.  For the Asia Pacific region, IABS can help bridge a funding gap for infrastructure financing, which according to the Asian Development Bank (ADB) in 2017, amounts to USD 467bn per annum.
IABS is typically backed by a diversified portfolio of project and infrastructure loans. Long-term investors such as life insurers and pension funds can benefit from matching their long-dated liabilities with longer-dated IABS. An investment-grade credit rating for IABS would also fit into the investment mandates of life insurers, pension funds and asset managers. In addition, investors benefit from instant diversification across projects, sectors and geographies/regions, compared to investing directly in individual loans or projects. Furthermore, the elevated credit profile of a senior tranche minimizes the capital cushion that an institutional investor may need to put up against its investments. Last but not least, IABS offers institutional investors access to an asset class with significant barriers to entry, managed by an experienced collateral manager.
As with any credit product, IABS is not risk-free and, depending on how each IABS is structured, IABS could be exposed to loans without public ratings, concentration risk (in certain sectors, countries, guarantors, offtakers and projects), political risk, operational risk of a collateral manager, counterparty risk from loan participation exposures, and prolonged recovery periods in case of loan defaults. It should be noted that such risks are generally taken into consideration in the ratings process of IABS, either through the credit estimate (i.e. private ratings) assigned to the underlying loans or the stress testing of the loan portfolio and IABS structure.

This is the first in a series of reports on Infrastructure Asset-Backed Securities (IABS) in Asia Pacific. The purpose of this report is to provide an overview of the IABS asset class, which remains relatively new to Asia. An IABS transaction involves a sponsor and/or manager sourcing project and infrastructure loans from originators (i.e. banks), underwriting them and issuing securitized notes backed by these assets to investors. This helps originators recycle their balance sheets, while offering investors exposure to these projects and infrastructure loans in a credit-enhanced format, enabling them to originate more project and infrastructure loans.  For the Asia Pacific region, IABS can help bridge a funding gap for infrastructure financing, which according to the Asian Development Bank (ADB) in 2017, amounts to USD 467bn per annum.
IABS is typically backed by a diversified portfolio of project and infrastructure loans. Long-term investors such as life insurers and pension funds can benefit from matching their long-dated liabilities with longer-dated IABS. An investment-grade credit rating for IABS would also fit into the investment mandates of life insurers, pension funds and asset managers. In addition, investors benefit from instant diversification across projects, sectors and geographies/regions, compared to investing directly in individual loans or projects. Furthermore, the elevated credit profile of a senior tranche minimizes the capital cushion that an institutional investor may need to put up against its investments. Last but not least, IABS offers institutional investors access to an asset class with significant barriers to entry, managed by an experienced collateral manager.
As with any credit product, IABS is not risk-free and, depending on how each IABS is structured, IABS could be exposed to loans without public ratings, concentration risk (in certain sectors, countries, guarantors, offtakers and projects), political risk, operational risk of a collateral manager, counterparty risk from loan participation exposures, and prolonged recovery periods in case of loan defaults. It should be noted that such risks are generally taken into consideration in the ratings process of IABS, either through the credit estimate (i.e. private ratings) assigned to the underlying loans or the stress testing of the loan portfolio and IABS structure.

Infrastructure Asset-Backed Securities: New Asset Class for Asia

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

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

*FRB Allowing Buyback Resumption: The new Federal Reserve Board (FRB) rule suggests that the Comprehensive Capital Analysis and Review (CCAR) bank total capital distribution (buybacks plus dividends) will be capped at 100% of average quarterly net income generated over the previous four quarters. In other words, capital distribution allowed during 1Q21; and *CECL To Fuel Buybacks In 2Q21:  At the June 2021 CCAR results, we would anticipate the FRB to remove the current ceiling on capital distributions under CECL, which should prove to be an additional positive for US bank shares. Many of the large US banks appear to be over capitalized with substantial levels of excess capital, which should translate to outsized capital distributions.

Japan

Sumitomo Mitsui Financial Group, Inc. manages financial operations for its subsidiaries. The Company provides commercial banking and a variety of financial services.

Sumitomo Mitsui Financial Group (8316 JP)

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Sumitomo Mitsui Financial Group (8316 JP)

Japanese Bank Lending: An Ebb Tide in 2021?

The ‘dash for cash’ by large corporates appears to be over, at least in terms of lending by the major banks. Only the small secondary regionals...

J. Brian Waterhouse

Japanese Banks: Ever Lower

For investors in Japanese bank stocks, 2020 was another year of pain. The sector fell almost 22% YoY; only 5 bank stocks out of 92 registered YoY...

J. Brian Waterhouse

Infrastructure Asset-Backed Securities: New Asset Class for Asia

This is our first report on Infrastructure Asset-Backed Securities (IABS) in Asia Pacific which provides an overview of the asset class, new to Asia.

Bondcritic

US Banks – Capital Unchained

US BANKS: The new FRB rule suggests that the CCAR) bank total capital distribution will be capped at 100% over the previous four quarters beginning...

Thomas J. Monaco

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52-week Range

Market Cap (USDm)

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Japanese Bank Lending: An Ebb Tide in 2021?

The ‘dash for cash’ by large corporates appears to be over, at least in terms of lending by the major banks. Only the small secondary regionals...

J. Brian Waterhouse

Global Commodity-Related Equity Sectors In Secular Bull

We believe commodities are in the early stages of a new secular bull market. Global Materials & Energy remain our favorite Sector overweights - add...

Vermilion Research

Japanese Banks: Ever Lower

For investors in Japanese bank stocks, 2020 was another year of pain. The sector fell almost 22% YoY; only 5 bank stocks out of 92 registered YoY...

J. Brian Waterhouse

Infrastructure Asset-Backed Securities: New Asset Class for Asia

This is our first report on Infrastructure Asset-Backed Securities (IABS) in Asia Pacific which provides an overview of the asset class, new to Asia.

Bondcritic

US Banks – Capital Unchained

US BANKS: The new FRB rule suggests that the CCAR) bank total capital distribution will be capped at 100% over the previous four quarters beginning...

Thomas J. Monaco