Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1" rel="noopener">Suruga Bank Ltd (8358 JP)</a>.  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank <a href="https://www.smartkarma.com/insights/suruga-bank-8358-jp-one-step-back-but-several-steps-forward" target="_blank" data-smartkarma-citation="insights:40677" rel="noopener">Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward</a> in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and <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>. It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Among the recent flurry of Japanese regional bank upward revisions to FY3/2021 earnings guidance, one of the most interesting was released by Suruga Bank Ltd (8358 JP).  Initial FY3/2021 guidance back in May 2020 suggested consolidated net profits might fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 due to further precautionary provisioning.  Since then, the bank has issued no less than three amendments to guidance, all of them upward revisions.  The latest guidance suggests that FY3/2021 consolidated net profits may now come in around ¥21.0 billion: more than three times initial forecasts thanks to lower credit costs and further progress in cleaning up after the catastrophic ‘share house’ scandal.The new management team is focusing on a business model that includes more corporate business, aiming to stabilise and diversify revenues.  Revenues are indeed growing, profits have recovered to FY3/2013 levels, and yet the stock price is currently at the same level as when we wrote our previous Smartkarma Insight on Suruga Bank Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward in late June 2020.  The market remains unconvinced.Suruga Bank remains one of the most heavily traded Japanese bank stocks and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP). It is currently trading on a remarkably low PER versus peers of 4.3x (using the bank’s revised FY3/2021 guidance) and an undemanding PBR of 0.34x.We continue to believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes.  Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The stock remains a pariah for many foreign investors, regardless of its current low valuations.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Suruga Bank (8358 JP):  Doubling Up Rather Than Doubling Down

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.

Not all banks report major recoveries of previously written off loans. But two banks stand out, <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1" rel="noopener">Suruga Bank Ltd (8358 JP)</a> and <a href="https://www.smartkarma.com/entities/tsukuba-bank-ltd" target="_blank" data-smartkarma-citation="entities:16705:1" rel="noopener">Tsukuba Bank (8338 JP)</a>. Where we often focus on margins or loan growth or credit costs, in some cases the pace of recoveries can be an unnoticed positive.

Not all banks report major recoveries of previously written off loans. But two banks stand out, Suruga Bank Ltd (8358 JP) and Tsukuba Bank (8338 JP). Where we often focus on margins or loan growth or credit costs, in some cases the pace of recoveries can be an unnoticed positive.

The Bank of Japan (BOJ) is trying to incentive mergers amongst the countries many regional banks. To do this, it will exempt some banks from receiving the currently negative interest rate on deposits with the BOJ. With significant liquidity, exceptionally low margins, and ROA, a move from -0.1% interest rates to +0.1% interest rates even on a small pool of assets, can be meaningful for Japan’s regional banks.

The Bank of Japan (BOJ) is trying to incentive mergers amongst the countries many regional banks. To do this, it will exempt some banks from receiving the currently negative interest rate on deposits with the BOJ. With significant liquidity, exceptionally low margins, and ROA, a move from -0.1% interest rates to +0.1% interest rates even on a small pool of assets, can be meaningful for Japan’s regional banks.

Japan Banks – Surplus Money, Higher Rates

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 as a result of further precautionary provisioning.  That said, <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1" rel="noopener">Suruga Bank Ltd (8358 JP)</a> reached some important milestones in FY3/2020 on the long, slow road to recovery after the catastrophic ‘share house’ scandal.Management is now focusing on a new business model that includes more corporate business in a bid to stabilise and diversify revenues.  Market reaction has remained mixed to date, as shown in the high volatility of the share price from one day to the next.  Nevertheless, the stock has risen over 20% since our last Insight <a href="https://www.smartkarma.com/insights/suruga-bank-8358-jp-swimming-against-the-tide" target="_blank" data-smartkarma-citation="insights:38141" rel="noopener">Suruga Bank (8358 JP):  Swimming Against the Tide</a> in early April 2020: a considerably better performance than that of several much larger regional banks that are also widely held by foreign investors.  Suruga Bank remains one of the most heavily-traded Japanese bank stocks, and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and <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>.Risks remain, and we continue to warn that this is a stock for players of the Long Game only.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 as a result of further precautionary provisioning.  That said, Suruga Bank Ltd (8358 JP) reached some important milestones in FY3/2020 on the long, slow road to recovery after the catastrophic ‘share house’ scandal.Management is now focusing on a new business model that includes more corporate business in a bid to stabilise and diversify revenues.  Market reaction has remained mixed to date, as shown in the high volatility of the share price from one day to the next.  Nevertheless, the stock has risen over 20% since our last Insight Suruga Bank (8358 JP):  Swimming Against the Tide in early April 2020: a considerably better performance than that of several much larger regional banks that are also widely held by foreign investors.  Suruga Bank remains one of the most heavily-traded Japanese bank stocks, and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP).Risks remain, and we continue to warn that this is a stock for players of the Long Game only.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward

While investors brace themselves for a tidal wave of downward revisions to FY3/2020 Japanese bank earnings estimates as a result of heavy valuation losses on their (largely domestic) securities portfolios, one bank has been quietly raising its forecasts throughout the financial year, and has now reinstated its previously-suspended dividend, albeit at the humble level of ¥5/share.  That bank is <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:6267:1">Suruga Bank Ltd (8358 JP)</a> but, amid rising market concerns over the long-term economic impact globally of the ongoing coronavirus pandemic and the continuing underperformance of the Japanese banking sector against Topix, few if any investors appear to have noticed.

While investors brace themselves for a tidal wave of downward revisions to FY3/2020 Japanese bank earnings estimates as a result of heavy valuation losses on their (largely domestic) securities portfolios, one bank has been quietly raising its forecasts throughout the financial year, and has now reinstated its previously-suspended dividend, albeit at the humble level of ¥5/share.  That bank is Suruga Bank Ltd (8358 JP) but, amid rising market concerns over the long-term economic impact globally of the ongoing coronavirus pandemic and the continuing underperformance of the Japanese banking sector against Topix, few if any investors appear to have noticed. 

Suruga Bank (8358 JP):  Swimming Against the Tide

Japan

Suruga Bank Ltd. is a Shizuoka based regional bank mainly operating in the Kanto area (central eastern part of Japan) including Tokyo.  The Bank provides deposits, loans, and foreign exchange transactions.  The Suruga Bank also provides financial services such as leasing, letter of credit, and credit cards services.

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Suruga Bank Ltd (8358 JP)

Suruga Bank (8358 JP): Doubling Up Rather Than Doubling Down

We believe that Suruga Bank’s stock price remains mispriced to the already-evident improvement in its fortunes. Nevertheless, we warn that this is...

J. Brian Waterhouse

Japan Banks – Recoveries

Not all banks report major recoveries of previously written off loans. But two banks stand out, Suruga Bank and Tsukuba Bank. Recoveries can be an...

Daniel Tabbush

Japan Banks – Surplus Money, Higher Rates

The Bank of Japan (BOJ) is trying to incentive mergers amongst the countries many regional banks. It will exempt some banks from receiving its...

Daniel Tabbush

Suruga Bank (8358 JP): One Step Back, but Several Steps Forward

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to...

J. Brian Waterhouse

Suruga Bank (8358 JP): Swimming Against the Tide

While investors brace themselves for a tidal wave of downward revisions to FY3/2020 Japanese bank earnings estimates as a result of heavy valuation...

J. Brian Waterhouse

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