Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mizuho Financial Group / Equity Bottom-Up

A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for <a href="https://www.smartkarma.com/entities/mizuho-financial-group-inc" target="_blank" data-smartkarma-citation="entities:219:1" rel="noopener">Mizuho Financial Group (8411 JP)</a>  (MHFG) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).
The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>  and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.  Investor patience has been sorely tested.
Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

A 15% improvement in net interest and fee income (NIFI), tremendous loan growth (+8.6% YoY), widening loan margins and a ten-fold improvement in core earnings were not enough to prevent interim FY3/2021 results for Mizuho Financial Group (8411 JP)  (MHFG) from falling 25% YoY.  A 7-fold surge in credit costs to ¥81.22 billion and impairment losses on cross-shareholdings of ¥55.2 billion put paid to that.  Even so, consolidated net profits of ¥215.52 billion represented two-thirds of full-year guidance, which has now been raised from ¥320.0 billion to ¥350.0 billion (down 22% YoY).
The shares have risen 17% in the last six months but are still 18% below where they were this time last year.  Curiously, this means that, on a 12-month basis, MHFG has managed to outperform not only arch-rivals Mitsubishi UFJ Financial (MUFG) (8306 JP)  and Sumitomo Mitsui Financial Group (8316 JP) but the other four major banks as well.  Even so, MHFG’s lack of consistency, either in profit generation or management execution, makes this a difficult stock to recommend on fundamentals.  MHFG has time and again promised much but then either failed to deliver or has surprised the market with sudden sweeping changes in strategy, requiring long time-horizons for implementation and creating value.  Investor patience has been sorely tested.
Caveat Emptor! (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.

Mizuho Financial Group (8411 JP):  Anything But Consistent

Sumitomo Mitsui Financial Group / Equity Bottom-Up

Interim FY3/2021 results for <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>, on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.

Interim FY3/2021 results for Sumitomo Mitsui Financial Group (8316 JP)  showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, although margins remained under pressure and credit costs leaped to around 48bps.  Consolidated net profits of ¥270.13 billion represented 68% of SMFG’s FY3/2021 net profit target of ¥400.0 billion.  Although SMBC registered a decline in net income, there were good performances from other group members such as SMBC Nikko and consumer finance arm SMBCCF.SMFG has kept its very conservative full-year guidance for consolidated net profits unchanged at ¥400.0 billion, representing a 43.2% YoY decline and is maintaining its full-year dividend at ¥190/share, suggesting a 65% dividend payout ratio.  An upward revision to profits later in the year cannot be entirely ruled out, initially lowballing earnings capability being almost standard SMFG management procedure, judging from previous years.While buying megabank shares is always a crowded trade at the best of times and there often seems to be little difference in share price performance between SMFG and mega-rival Mitsubishi UFJ Financial (MUFG) (8306 JP), on balance we prefer SMFG for the group’s tighter discipline and more stable profits, regular share buy-backs and dividend growth ‘track record’, having almost doubled the per-share dividend over the last eight years.

SMFG (8316 JP):  Rising to the Challenge

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

Interim results for <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from <a href="https://www.smartkarma.com/entities/morgan-stanley" target="_blank" data-smartkarma-citation="entities:1122:1" rel="noopener">Morgan Stanley (MS US)</a> to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>, on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.

Interim results for Mitsubishi UFJ Financial (MUFG) (8306 JP)highlighted the fragility of the profit contribution from several of the group’s recent overseas acquisitions, and the increasing reliance on equity-accounted profits from Morgan Stanley (MS US) to keep group earnings up.  Rising credit costs were by far the largest headwinds to group profitability, with 1H FY3/2021 credit costs rising to an annualized 48bps: far exceeding the group’s 21bps in credit costs for the whole of FY3/2020.Buying megabank shares is always a 'crowded trade' at the best of times.  While there often seems to be little difference in share price performance between MUFG and mega-rival Sumitomo Mitsui Financial Group (8316 JP), on balance we prefer the latter for the group’s tighter discipline and more stable profits ‘track record’.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Kansai Mirai Financial Group I / Event-Driven

That was quick.The Nikkei article turned into an announced deal within the day. My insight <a href="https://www.smartkarma.com/insights/resona-to-take-kansai-mirai-private" target="_blank" data-smartkarma-citation="insights:45126" rel="noopener">Resona To Take Kansai Mirai Private?</a> suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of <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>. That is worth ¥524 per share of <a href="https://www.smartkarma.com/entities/kansai-mirai-financial-group" target="_blank" data-smartkarma-citation="entities:26953:1" rel="noopener">Kansai Mirai Financial (7321 JP)</a>, which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.

That was quick.The Nikkei article turned into an announced deal within the day. My insight Resona To Take Kansai Mirai Private? suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. It is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of Resona Holdings (8308 JP). That is worth ¥524 per share of Kansai Mirai Financial (7321 JP), which is a bit better. I can imagine that minority investors would be upset by this, but there appears not much they can do. More about the deal below the fold.  

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

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

U.S. Equity Strategy: Markets Bouncing off Key Support

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)

Mizuho Financial Group (8411 JP): Anything But Consistent

Despite outperforming all of the major banks this year, MHFG’s lack of consistency, either in profit generation or management execution, makes this...

J. Brian Waterhouse

SMFG (8316 JP): Rising to the Challenge

Interim FY3/2021 results for SMFG (8316 JP) showed a strong recovery in 2Q after a disappointing and COVID-19-affected 1Q, despite margins under...

J. Brian Waterhouse

MUFG (8306 JP): Wavering in the Ranks

Interim results for MUFG (8306 JP) highlighted the fragility of the profit contribution from some of its recent overseas acquisitions, with credit...

J. Brian Waterhouse

Resona To Take Kansai Mirai Private!

Now we have an announced deal. The Resona Deal for its Kansai Mirai sub is not friendly to minorities, but it could have been worse. It could have...

Travis Lundy

U.S. Equity Strategy: Markets Bouncing off Key Support

In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican banks, Banks, Southwest, and Investment...

Vermilion Research

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