Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

<p>The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.</p>
<p>Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.</p>
<p>“<em>Caveat Emptor!”</em> (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.</p>

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) indicate that, while loan growth remains strong in annual terms, loan outstandings have eased back to where they were in May.  In essence, much of the increase in lending by the major banks seen between March and June was then reversed between July and October.
Peak lending occurred in June, when outstanding loans reached ¥535.407 trillion (US$5.10 trillion).  Since then, the rate of year-on-year (YoY) growth has remained just above +6%, thanks to exceptionally strong loan demand in the March-June period which pushed overall loan balances by as much as ¥34.4 trillion (US$331.0 billion) YoY.  However, total loan outstandings thereafter fell every month between July and October, bottoming out in November when the major banks finally registered an increase in lending for the first time in five months.  Month-on-month (MoM) growth in regional bank lending has slowed to a comparative trickle, with loan outstandings falling 0.2% MoM in November.  This does not bode well for 2H FY3/2021 banking sector profits generally, especially as credit costs are continuing to ‘normalise’ even as revenues and margins  -  not to mention shareholder returns  -  remain under pressure.
“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

<p>New economic growth data in Japan was a surprise to the government. As a result of stronger household consumption, government consumption and exports, the latest quarter GDP was revised upward slightly. Recovery and better than expectations continues to driver our global bank view. Banks with the highest credit costs or delta in credit costs during the current year, may have the most to gain. And with economic relief packages still firmly in place, the impact can be even more profound on bank profit. </p>

New economic growth data in Japan was a surprise to the government. As a result of stronger household consumption, government consumption and exports, the latest quarter GDP was revised upward slightly. Recovery and better than expectations continues to driver our global bank view. Banks with the highest credit costs or delta in credit costs during the current year, may have the most to gain. And with economic relief packages still firmly in place, the impact can be even more profound on bank profit. 

Equity Bottom-Up

<p>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.</p><p>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><strong><em>,</em></strong> 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.</p><p>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”.</p><p>Foreign investors would be well advised to steer clear.  The future for Jimoto Holdings is far from certain, despite the capital injection.  <em>Caveat Emptor!</em> (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.</p>

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

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of <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>) had determined to launch a Tender Offer to acquire common stock in <a href="https://www.smartkarma.com/entities/kenedix-inc" target="_blank" data-smartkarma-citation="entities:11321:1" rel="noopener">Kenedix Inc (4321 JP)</a>.</p><p>It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/079/original/Screenshot%202020-11-22%20at%2010.36.21%20AM.png?1606012603" class="editor-image img-responsive" data-smartkarma-image-id="173079"></figure></section><p></p><p>This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.</p><div class="content-highlight">
<p>The bid is not terribly impressive.</p>
<p>It is a three-year high, but it matches that high, and does not exceed it.</p>
<p>The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. </p>
</div><section class="figure"><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/083/original/Screenshot%202020-11-22%20at%2010.56.32%20AM.png?1606013805" class="editor-image img-responsive" data-smartkarma-image-id="173083"></figure></section><p>Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. </p>
<p><strong>This bid does not look optimal. </strong></p>
<div>
<hr>
<p>I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's <em>Reminiscences of a Stock Operator</em> after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... </p>
</div>
<div><blockquote>
<p>"I couldn’t think of selling that stock.” </p>
<p>“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.</p>
<p>“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.</p>
<p>“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”</p>
<p>“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”</p>
</blockquote></div>
<p>It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. </p>
<p>Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. </p>
<p>That did not happen here. </p>
<div><p>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</p></div>
<div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/084/original/image?1606014973" class="editor-image img-responsive" data-smartkarma-image-id="173084"></figure></div>
<div><div>
<p>Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.</p>
<p>As always, much more below the fold.</p>
</div></div>
<p></p></section><p></p></section>

Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of Sumitomo Mitsui Financial Group (8316 JP)) had determined to launch a Tender Offer to acquire common stock in Kenedix Inc (4321 JP).It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.
The bid is not terribly impressive.
It is a three-year high, but it matches that high, and does not exceed it.
The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. 
Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. 
This bid does not look optimal. 


I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's Reminiscences of a Stock Operator after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... 


"I couldn’t think of selling that stock.” 
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. 
Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. 
That did not happen here. 
As I suggested in Japan Needs More Cowbell...


Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.
As always, much more below the fold.



A Curiously Unsatisfying Takeover Bid For Kenedix

Mizuho Financial Group / Equity Bottom-Up

<p>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).</p>
<p>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.</p>
<p><em>Caveat Emptor!</em> (May the Buyer Beware!) remains our advice to would-be investors in this enormous but highly volatile banking group.</p>

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

Japan

Sumitomo Mitsui Financial Group, Inc. is a holding company established by Sumitomo Mitsui Banking Corporation.  Sumitomo Mitsui Card Co., SMBC Leasing Co., and The Japanese Research Institute, Ltd. joined the Group in Feb., 2003. The Company manages financial operations for its subsidiaries.  The Group provides commercial banking and a variety of financial services.

Sumitomo Mitsui Financial Group (Sponsored Adr) (SMFG US)

Sumitomo Mitsui Financial Group (Sponsored Adr)

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Sumitomo Mitsui Financial Group (Sponsored Adr) (SMFG US)

Japanese Bank Lending: Losing Momentum

Loan balances have eased back to May levels, with much of the increase in lending by the major banks in March-June reversing between July and...

J. Brian Waterhouse

Japan – Economic Strength, Bank Relief

The latest quarter GDP was revised upward slightly. Banks with the highest credit costs or delta in credit costs during the current year, may have...

Daniel Tabbush

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

A Curiously Unsatisfying Takeover Bid For Kenedix

Sumitomo Mitsui Finance & Lease and lead shareholder ARA Asset Mgmt are launching a bid to take over property manager Kenedix ahead of a large jump...

Travis Lundy

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

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