Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Interim results for <a href="https://www.smartkarma.com/entities/gunma-bank-ltd" target="_blank" data-smartkarma-citation="entities:15777:1" rel="noopener">Gunma Bank (8334 JP)</a>, the dominant bank in Gunma Prefecture northwest of the Japanese capital Tokyo, comfortably beat the bank’s own guidance despite hefty COVID-19-related loan loss provisioning taken in 1Q.  The bank has left its full-year guidance unchanged, expecting consolidated net profits of ¥20.5 billion, or ¥49/share, with dividends for the year of ¥13/share, suggesting a dividend payout ratio of around 27%.  On a prospective PER (using the bank’s revised guidance) of 7.0x and a low PBR of 0.30x, the stock remains inexpensive against peers despite having risen some 30% since touching a 2020 low in mid-March.  Surprisingly, foreign investors own in aggregate less than 18% of this undervalued Japanese regional bank.  Worth considering.

Interim results for Gunma Bank (8334 JP), the dominant bank in Gunma Prefecture northwest of the Japanese capital Tokyo, comfortably beat the bank’s own guidance despite hefty COVID-19-related loan loss provisioning taken in 1Q.  The bank has left its full-year guidance unchanged, expecting consolidated net profits of ¥20.5 billion, or ¥49/share, with dividends for the year of ¥13/share, suggesting a dividend payout ratio of around 27%.  On a prospective PER (using the bank’s revised guidance) of 7.0x and a low PBR of 0.30x, the stock remains inexpensive against peers despite having risen some 30% since touching a 2020 low in mid-March.  Surprisingly, foreign investors own in aggregate less than 18% of this undervalued Japanese regional bank.  Worth considering.

Gunma Bank (8334 JP):  Hiding in Plain Sight

The stock price of the tiny, embattled <a href="https://www.smartkarma.com/entities/towa-bank-ltd" target="_blank" data-smartkarma-citation="entities:18283:1" rel="noopener">Towa Bank (8558 JP)</a>, a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist <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>.Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

The stock price of the tiny, embattled Towa Bank (8558 JP), a small Japanese secondary regional bank from Gunma Prefecture just north of Tokyo, at one point jumped 13.5% on Friday on 17x normal trading volume after the bank confirmed it was in “co-operative discussions” with online financial specialist Sbi Holdings (8473 JP).Financial media have suggested the bank is considering a tie-up with SBI through a small mutual shareholding (1% of Towa Bank stock  -  worth roughly ¥275 million  -  for up to ¥200 million in SBI shares) and the establishment of  a jointly-managed fund to support local businesses.  Towa Bank has stated that nothing has been decided as yet.  If media reports are correct, this would be the fifth such investment by financial entrepreneur Yoshitaka Kitao in Japan’s struggling regional banking sector.  However, there are some important differences with this tie-up.Towa Bank has a long and unenviable history of poor credit decisions and consequent hefty losses, prompting a taxpayer-funded bail-out in FY3/2010.  The current president has been working hard to turn the bank’s fortunes around, managing to repay ¥20.0 billion in public funds in FY3/2019.  Even so, Towa Bank still has ¥15.0 billion (US$143 million) in public funds to repay, and profits have been shrinking rapidly.While this may be seen as another ‘stepping-stone’ for SBI Group’s president and financial entrepreneur Yoshitaka Kitao in his bid to create a “fourth megabank”, investors should bear in mind that the net risk investment amount is little more than chump change for an enterprise like SBI.  Moreover, the apparent emphasis on support for local industry, rather than support for Towa Bank itself, suggests that this tie-up is not a ‘rescue’ of Towa Bank by a ‘white knight’, but an opportunity for a financial entrepreneur to gain valuable access to Towa Bank’s retail client base for a very modest cash outlay.  As such, foreign investors would be well advised to steer clear of Towa Bank stock, as valuations are already demanding.  Caveat Emptor! (May the Buyer Beware!) remains our advice to foreign investors considering investing in the Japanese banking sector in CY2020.

Towa Bank (8558 JP):  Another Notch in the Bedpost

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Sumitomo Mitsui Financial Group / Equity Bottom-Up

Sumitomo Mitsui Financial Group (8316 JP)

Japan's banks are just too "bombed out" to ignore.This has been so for awhile now, you may say. And you'd be right. But we see selective light at the end of the tunnel.On a simple Franchise Value assessment (Mkt Cap./Deposits), they rank as the cheapest in the world.We use our tested PH Score™ , a value-quality model, to pinpoint potential "winners" and "losers" for the 12 months following release of Q318 data. The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. The scores lie between 0 and 10, with higher scores representing more positive signs.

Japan's banks are just too "bombed out" to ignore.This has been so for awhile now, you may say. And you'd be right. But we see selective light at the end of the tunnel.On a simple Franchise Value assessment (Mkt Cap./Deposits), they rank as the cheapest in the world.We use our tested PH Score™ , a value-quality model, to pinpoint potential "winners" and "losers" for the 12 months following release of Q318 data. The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. The scores lie between 0 and 10, with higher scores representing more positive signs.

Japan

The Towa Bank Ltd is a regional bank that mainly operates in Saitama, Gunma, and Tochigi prefectures.  The Bank provides banking services such as deposits, loans, and exchange transactions.  Towa Bank also provides other financial services including leasing and credit cards.

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Towa Bank (8558 JP)

Gunma Bank (8334 JP): Hiding in Plain Sight

On a PER of 7.0x and a PBR of 0.30x, the stock remains inexpensive against peers despite being up some 30% since touching a low in mid-March. This...

J. Brian Waterhouse

Towa Bank (8558 JP): Another Notch in the Bedpost

The evidence suggests that this is not a 'white knight' riding to the rescue, but another opportunity for Yoshitaka Kitao to gain access to a...

J. Brian Waterhouse

Japan's Banks: A Value-Quality Heat Map

Japan's banks are just too "bombed out" to ignore.This has been so for awhile now, you may say. And you'd be right. But we see selective light at...

Paul Hollingworth

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