J. Brian Waterhouse

Windamee Research

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/fidea-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:17012:1" rel="noopener">Fidea Holdings (8713 JP) </a>from Miyagi Prefecture in Japan’s northern Tohoku Region has announced that Iwate-based <a href="https://www.smartkarma.com/entities/tohoku-bank-ltd" target="_blank" data-smartkarma-citation="entities:8169:1" rel="noopener">Tohoku Bank (8349 JP)</a> will become a wholly-owned subsidiary in October 2022, in an all-share deal.   The announcement, which was reported during market trading hours, sent both stock prices up almost 10% on Friday 2 July.  However, rather than presaging a new paradigm for these banks, the spike in the stock prices was simply a reminder of how essentially illiquid these stocks are. The shares retreated to their pre-announcement levels in the following week.Fidea Holdings is the holding company for the smallest of three banks from Yamagata Prefecture, Shonai Bank, and the smallest of two banks from Akita Prefecture, Hokuto Bank.  Tohoku Bank, from Iwate Prefecture, is the smallest of three banks based there, and roughly one-third the size of Fidea Holdings.  Far from being a ‘Band of Brothers’, the enlarged Fidea Holdings will, in effect, be little more than a school of minnows whose combined branch network of 149 branches, while nominally  covering the whole of the Tohoku Region, has little overlap; thus little opportunity to cut costs through closing competing branches or reducing the headcount significantly.  Significant inherent weaknesses in all three banks remain largely unaddressed.  It is difficult to see how simply integrating operations under a holding company structure will resolve them.While the announcement no doubt comes with the advance approval of the financial authorities, who are keen for regional banks to merge to strengthen their operations, it creates something of a dilemma for the Financial Services Authority (FSA) in that both institutions still owe taxpayers a combined total of ¥20 billion (US$181.8 million) in public funds.  Neither seems in a position to repay that capital any time soon, as we explain in this Insight.The Bank of Japan’s own ‘bad bank’, the Resolution &amp; Collection Corporation (RCC), is effectively the largest shareholder in both Fidea Holdings and Tohoku Bank through convertible preferred stock.  Will their debts be forgiven as part of the integration, or will the due date for the public funds repayment simply be extended for a further decade or so?  Will the RCC force conversion of its preferred stock into ordinary shares because of the merger, becoming overtly by far the largest shareholder?  What will be the impact of such a decision on investor sentiment for existing shareholders?  These are all important (and, for the time being, unanswerable) questions for investors.Foreign institutional investors own 12% of Fidea Holdings, and 4% of Tohoku Bank.  We fail to understand the attraction, given all the underlying weaknesses, as we detail in this Insight.  We view Friday’s ‘bounce’ in the stock prices of both Fidea Holdings and Tohoku Bank, on an unusual surge in trading volume, as a narrow ‘opportunity window’ for frustrated shareholders to exit both stocks and stay away thereafter.  That surge is over.  To those who were tempted to pile in we say:   Caveat Emptor! (May the Buyer Beware!).

FY3/2021 has not started well for <a href="https://www.smartkarma.com/entities/hyakujushi-bank-ltd" target="_blank" data-smartkarma-citation="entities:20502:1" rel="noopener">Hyakujushi Bank (8386 JP)</a>, the largest regional bank based in Kagawa Prefecture and the 2nd- largest regional bank after <a href="https://www.smartkarma.com/entities/iyo-bank-ltd" target="_blank" data-smartkarma-citation="entities:6869:1" rel="noopener">Iyo Bank (8385 JP)</a> in Shikoku, one of the four main islands that make up the Japanese archipelago.  1Q (April-June) FY3/2021 results were a hefty consolidated net loss of ¥3.39 billion (US$32.0 million), largely the result of stock valuation losses of ¥6.62 billion.  Unsurprisingly, share price performance has been disappointing recently, but we feel there is further downside risk with the bank’s FY3/2021 guidance now in considerable doubt.  Foreign investors own in aggregate around 11% of outstanding shares.  Given the bank’s long-standing structural issues and low efficiency, we struggle to understand why.  Caveat emptor!  (May the Buyer Beware!)

Howard J Klein

Thematic (Sector/Industry)

<ul><li>Offerings of equities and convertible bonds totaled 720 billion yen over the first nine months of '16 and the trend continues unabated. Its the lowest level of new offerings in four years.</li><li>Meanwhile, stock buybacks have soared to a record 4.35 trillion yen (USD$41.8 bn)--the most in history presumably to shore up capital efficiency.</li><li>Opponents in principle claim buybacks inhibit growth, and investment and also impede wage growth which in turn, keeps spending sluggish.</li><li>Do Japan's persistent low GDP numbers reflect some of this corporate policy strategies? Does the same phenomenon apply to the US? </li></ul>

Morningstar

Morningstar, Inc.

On Jan. 19, <a href="https://www.smartkarma.com/entities/637" target="_blank" data-smartkarma-citation="entities:637:1">Toshiba Corp (6502 JP)</a> reported that it will likely book a combined noncash charge of up to JPY 700 billion, mainly for goodwill impairments on the U.S. nuclear business acquisition through its U.S. subsidiary, Westinghouse. The scale of impairment significantly exceeded the market expectation at the end of last year, as it is likely to push Toshiba’s thin net equity position of JPY 360 billion into a deficit, with potential delisting from the Tokyo Stock Exchange in sight.As the second-largest diversified industry group after Hitachi, Toshiba maintains a membership status within the Mitsui “zaibatsu” group, a cross-industry alliance of leading domestic companies dating back to the 16th century. According to a press report, as of the end of September 2016, Toshiba maintains a total of JPY 798.7 billion in loans outstanding, consisting of: (1) JPY 110 billion for Sumitomo Mitsui Banking Corporation (<a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial Group (8316 JP)</a>); (2) JPY 110 billion for Mizuho Bank (<a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group Inc (8411 JP)</a>); (3) JPY 102 billion for Bank of Tokyo Mitsubishi UFJ and Mitsubishi UFJ Trust (<a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial Gro (8306 JP)</a>); and (4) JPY 75 billion for Sumitomo Mitsui Trust Bank (<a href="https://www.smartkarma.com/entities/19450" target="_blank" data-smartkarma-citation="entities:19450:1">Sumitomo Mitsui Trust Holdings (8309 JP)</a>).Anlayst: Mari Kumagai

Four major banks under our coverage reported better-than-expected results, indicating an inflection point in their earning structure. In aggregate, of four major banks under our coverage, the numbers are similarly down across most metrics. On average, net income fell 11% from the year-ago period with operating income decreasing 19% from the year ago period. Momentum in trading and commission, both tracking the midcycle average, failed to offset lower net interest income, down 13% from the year-ago period to JPY 2,072 billion for the three major banks. Management for three major banks did not object to market consensus of JPY 300 billion negative earning impacts since the implementation of Bank of Japan's negative interest rate policy earlier this year. Management also maintained their full-year net profit forecast unchanged, citing their cautious stance after the election results. However, they also mentioned that further downside from the policy implementation is likely to be limited after the BoJ is transitioning its policy to control the yield curve instead.Our top pick will be <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi Ufj Financial Gro (8306 JP)</a> as it is best-positioned to benefit from its underappreciated global business exposure with about a quarter of its earning assets tied to U.S. markets. This excludes a 23% lucrative equity investment in Morgan Stanley. We will revise our fair value estimates with a detailed earnings note on each respective bank in coming weeks.Analyst: Mari Kumagai

Japan

Tomony Holdings, Inc. is a holding company established through the merger of Tokushima Bank and Kagawa Bank. As a financial group, the Company provides banking services including deposits, loans, foreign currency transactions. The Company also provides other financial services such as credit card and leasing services.

Tomony Holdings - 8600 JP

Description