Daily BriefsJapan

Japan: Toshiba Corp, Suruga Bank Ltd, Gunma Bank and more

In today’s briefing:

  • TOPIX Inclusion Trade Summary: April 2021
  • Suruga Bank (8358 JP):  Doubling Up Rather Than Doubling Down
  • Gunma Bank  (8334 JP):  Compressed Guidance

TOPIX Inclusion Trade Summary: April 2021

By Janaghan Jeyakumar, CFA

In January and February 2021 we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented (application deadline November 1, 2020). In contrast, not a single TSE1 Section Transfer was announced in the months of March and April 2021. 

However, during the month of April, we witnessed TSE’s Annual Liquidity Factor Review which caused dozens of stocks to enjoy Index Upweights during the April-end Inclusion Event collectively amount to an estimated upweight size of approximately US$1bn. 

Below is a look at the performance of the TOPIX-related event trades covered by Quiddity in the Pre-event, Live-event, and Post-event categories during the month of April 2021.  


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

By J. Brian Waterhouse

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.


Gunma Bank  (8334 JP):  Compressed Guidance

By J. Brian Waterhouse

The unexpected cut to FY3/2021 guidance announced by Gunma Bank (8334 JP), the dominant bank in Gunma Prefecture northwest of the Japanese capital Tokyo, is a reminder that the coronavirus pandemic continues to exact a heavy toll on Japanese industry, despite substantial efforts by the Japanese government and private commercial banks to support their clients wherever feasible.  Despite the likely dent in FY3/2021 earnings (to be formally announced in the next 2-3 weeks) caused by additional credit provisioning, we expect earnings to recover in FY3/2022.  The bank is maintaining its dividend unchanged at ¥13/share, suggesting a dividend payout ratio of around 45%.  On a prospective PER (using the bank’s revised guidance) of 12.5x and a low PBR of 0.31x, the stock remains attractive against peers.  We maintain our positive view on this stock.


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