Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

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.

Market Intelligence, ORTEX

ORTEX Market Intel

Market Intelligence

Global Financial Data and Analytics Platform

ORTEX

ORTEX is a global financial data and analytics platform providing real-time securities lending and short interest data, index rebalance data, holdings and insider transactions, trading signals, corporate actions and news,  stock machine learning and factor scores and other analytics. The majority of the data are downloadable and accessible through APIs.

Equity Derivatives

Banco Bilbao Vizcaya Argentari / Equity Derivatives

<ul><li>Options markets flashed a split signal this week.</li><li>European financials drew the most persistent put-buying of the period, while select US names saw call buyers overwhelm hedgers.</li><li>Earnings-linked hedging dominated mid-week flows, with several 52-week PCR records broken in both directions.</li></ul>

Options markets flashed a split signal this week.European financials drew the most persistent put-buying of the period, while select US names saw call buyers overwhelm hedgers.Earnings-linked hedging dominated mid-week flows, with several 52-week PCR records broken in both directions.

Options Weekly: Bears Circle Banks, Bulls Chase Storage and Discretionary

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/761/original/TPNBNK+vs+TPX+in+CY2020.jpg?1608608493" class="editor-image img-responsive" data-smartkarma-image-id="179761"></figure></section>

Japanese people are renowned for their thrift.  Even when deposit interest rates are zero they continue to save.  Cash continues to pour into the banks at near-record levels, both from corporates and from individuals.  But that is not good news: there is little the banks can do with all those savings when loan rates are also zero (and less than zero in some circumstances!).  Unsurprisingly, Japanese banks are not looking forward to a particularly Merry Christmas this year.Deposit growth at the 112 banks that are members of the Japanese Bankers Association (JBA) touched +9.4% YoY in November 2020: the 2nd-highest YoY growth level ever recorded and just short of the record +9.5% YoY growth rate set back in August.  Most of the additional ¥8.251 trillion (US$79.34 billion) in funds deposited with the banks in November ended up with the major banks, pushing their loan-to-deposit ratios (LDRs) down to record lows of inefficiency as deposit inflows were over four times greater than new loan outflows.  Only the secondary regional banks registered a small decline in deposit balances: a curious development, as their loan balances grew by a record +7.0% YoY.As the world gets ready to celebrate the end of what has been a terrible year globally and to welcome in the start of 2021 in the fervent hope that it will prove to be better than 2020, there is seemingly no end to the financial pain for Japan’s embattled banks… or for their long-suffering shareholders.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Banks:  Remember, Remember, the Thrift of November

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 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

Options Weekly: Bears Circle Banks, Bulls Chase Storage and Discretionary

Options markets flashed a split signal this week. European financials drew the most persistent put-buying of the period, while select US names saw...

ORTEX Market Intel

Japanese Banks: Remember, Remember, the Thrift of November

Japanese people are renowned for their thrift. Even when deposit interest rates are zero they continue to save. But there is little the banks can...

J. Brian Waterhouse

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Market Cap (USDm)

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