Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

<ul>
<li>Interim results for <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> were little short of stellar: 92% of full-year guidance achieved in 1H FY3/2022.</li>
<li>NP rose ¥380.6 billion to ¥781.4 billion (+95.0% YoY) due to a ¥17.9 billion writeback, equity-related gains of ¥126.0 billion and ¥65.1 billion from investments, primarily <a href="https://www.smartkarma.com/entities/morgan-stanley" target="_blank" data-smartkarma-citation="entities:1122:1" rel="noopener">Morgan Stanley (MS US)</a>.</li>
<li>MUFG has raised its dividend to ¥28/share, raised full-year guidance by ¥200 billion to ¥1.050 trillion, announced a ¥150 billion buyback and the cancellation this month of 300 million shares.</li>
</ul>


Interim results for Mitsubishi UFJ Financial (MUFG) (8306 JP) were little short of stellar: 92% of full-year guidance achieved in 1H FY3/2022.
NP rose ¥380.6 billion to ¥781.4 billion (+95.0% YoY) due to a ¥17.9 billion writeback, equity-related gains of ¥126.0 billion and ¥65.1 billion from investments, primarily Morgan Stanley (MS US).
MUFG has raised its dividend to ¥28/share, raised full-year guidance by ¥200 billion to ¥1.050 trillion, announced a ¥150 billion buyback and the cancellation this month of 300 million shares.


Mizuho Financial Group / Equity Bottom-Up

Mizuho Financial Group, Inc. provides comprehensive financial services through its subsidiaries. The Group provides variety of financial services such as general banking, securities brokerage, trust banking, and assets management.

<ul>
<li>1H FY3/2022 consolidated net profits of ¥385.65 billion were not only +78.9% YoY but were also the highest 1st half consolidated net profits produced by the group in 7 years.</li>
<li>Key drivers of the much-improved results included better net interest and fee income, lower GAE expenses and much-reduced credit costs.</li>
<li>MHFG trails all six of its peers in terms of YoY price performance; MHFG remains mired in computer systems-related issues that do nothing to enhance its reputation for operational reliability.</li>
</ul>


1H FY3/2022 consolidated net profits of ¥385.65 billion were not only +78.9% YoY but were also the highest 1st half consolidated net profits produced by the group in 7 years.
Key drivers of the much-improved results included better net interest and fee income, lower GAE expenses and much-reduced credit costs.
MHFG trails all six of its peers in terms of YoY price performance; MHFG remains mired in computer systems-related issues that do nothing to enhance its reputation for operational reliability.


Mizuho Financial Group (8411 JP):  Defying the Skeptics

Sumitomo Mitsui Financial Group / Equity Bottom-Up

Sumitomo Mitsui Financial Group, Inc. manages financial operations for its subsidiaries. The Company provides commercial banking and a variety of financial services.

Sumitomo Mitsui Financial Group (8316 JP)

<ul>
<li>Interim FY3/2022 results for SMFG (8316 JP) were good, with improvement in core earnings in both 1Q and 2Q, together with a sharp reduction in credit costs, driving the results.</li>
<li>Consolidated net profits of ¥456.06 billion were not only up +68.8% over 1H FY3/2021 but represented 76% of SMFG’s original full-year guidance.</li>
<li>FY guidance is raised from ¥600 billion to ¥670 billion.  The dividend has been raised from ¥190ps to ¥210ps.  SMFG has announced a ¥100bn share buyback.</li>
</ul>


Interim FY3/2022 results for SMFG (8316 JP) were good, with improvement in core earnings in both 1Q and 2Q, together with a sharp reduction in credit costs, driving the results.
Consolidated net profits of ¥456.06 billion were not only up +68.8% over 1H FY3/2021 but represented 76% of SMFG’s original full-year guidance.
FY guidance is raised from ¥600 billion to ¥670 billion.  The dividend has been raised from ¥190ps to ¥210ps.  SMFG has announced a ¥100bn share buyback.


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.

<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>has raised its interim guidance for 1H FY3/2022 consolidated net profits for the second time in three months: this time by +78% to ¥17.8 billion, or ¥76.86/share.  Credit costs, initially estimated at ¥2 billion for 1H FY3/2022, are now likely to be negative: a write-back to profits of ‘surplus’ loan loss reserves of as much as ¥6.6 billion, suggesting further progress in cleaning up the balance-sheet after the catastrophic ‘share house’ scandal.  This is significant: back in May this year, Suruga was forecasting an interim net loss of ¥2.3 billion because of further precautionary provisioning expenses.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 4.1x (assuming 2H FY3/2022 consolidated net profits are at least ¥8 billion, producing a FY3/2022 EPS of ¥122.2/share or better) and an undemanding PBR of 0.37x.Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The intended disposal of the 18.5% stake in Suruga held by its largest shareholder, <a href="https://www.smartkarma.com/entities/nojima-corp" target="_blank" data-smartkarma-citation="entities:9655:1" rel="noopener">Nojima Corp (7419 JP)</a>, remains an unresolved issue. Nevertheless, the positives continue to increase while the negatives continue to diminish, and the shares are significantly outperforming the Topix Banks Index for the first time in many months.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/240/048/original/8358-Suruga-2021-1105-8358vsTPNBNK-CY2021.jpg?1636249764" class="editor-image img-responsive" data-smartkarma-image-id="240048"></figure></section>

Suruga Bank Ltd (8358 JP)has raised its interim guidance for 1H FY3/2022 consolidated net profits for the second time in three months: this time by +78% to ¥17.8 billion, or ¥76.86/share.  Credit costs, initially estimated at ¥2 billion for 1H FY3/2022, are now likely to be negative: a write-back to profits of ‘surplus’ loan loss reserves of as much as ¥6.6 billion, suggesting further progress in cleaning up the balance-sheet after the catastrophic ‘share house’ scandal.  This is significant: back in May this year, Suruga was forecasting an interim net loss of ¥2.3 billion because of further precautionary provisioning expenses.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 4.1x (assuming 2H FY3/2022 consolidated net profits are at least ¥8 billion, producing a FY3/2022 EPS of ¥122.2/share or better) and an undemanding PBR of 0.37x.Risks remain, of course, and we continue to warn that this is a stock for players of the Long Game only.  The intended disposal of the 18.5% stake in Suruga held by its largest shareholder, Nojima Corp (7419 JP), remains an unresolved issue. Nevertheless, the positives continue to increase while the negatives continue to diminish, and the shares are significantly outperforming the Topix Banks Index for the first time in many months.

Suruga Bank (8358 JP):  The Sun Also Rises

Thematic (Sector/Industry)

On a year-on-year basis (YoY), Japanese bank deposits have grown in aggregate every month for the last 15 years without a pause, swelling to ¥854.578 trillion (US$7.56 trillion) as of the end of September 2021, according to the latest data released by the Japanese Bankers Association (JBA).  Between May 2020 and April 2021, as lending surged and corporates redeposited their drawn credit lines with the banks for safekeeping until needed while the pandemic raged globally, the major banks’ YoY deposit growth rates soared into double-digits.  The banks’ already overflowing coffers were hit by a tsunami  of additional cash that they struggled to cope with profitably.With the gradual return to normality as Japan slowly emerges from nationwide lockdown and business activity recommences, much of that emergency borrowing is now being repaid using surplus bank deposits.  The torrent of cash has reverted to a steady stream.  But that is still not good news.The overriding problem for the banks is that net inflows of cash (via deposits) continue to exceed net outflows (via loans and securities investments).  Major banks’ loan to deposit (LDR) ratios have been declining for years and have now fallen to historic lows of under 49%.  Many banks are struggling to achieve little more than a few basis points on their overall business, while even some large banks are operating in the red on their domestic business.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/238/753/original/2021-1031-Deposits-LDR-MajorvsAll+2002-2021.jpg?1635673223" class="editor-image img-responsive" data-smartkarma-image-id="238753"></figure></section>The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$ and hopes for a steepening yield curve in the US.  Yet, as we approach interim results announcements within the next few days, much of that earlier outperformance by the banking sector against Topix has already been given back.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

On a year-on-year basis (YoY), Japanese bank deposits have grown in aggregate every month for the last 15 years without a pause, swelling to ¥854.578 trillion (US$7.56 trillion) as of the end of September 2021, according to the latest data released by the Japanese Bankers Association (JBA).  Between May 2020 and April 2021, as lending surged and corporates redeposited their drawn credit lines with the banks for safekeeping until needed while the pandemic raged globally, the major banks’ YoY deposit growth rates soared into double-digits.  The banks’ already overflowing coffers were hit by a tsunami  of additional cash that they struggled to cope with profitably.With the gradual return to normality as Japan slowly emerges from nationwide lockdown and business activity recommences, much of that emergency borrowing is now being repaid using surplus bank deposits.  The torrent of cash has reverted to a steady stream.  But that is still not good news.The overriding problem for the banks is that net inflows of cash (via deposits) continue to exceed net outflows (via loans and securities investments).  Major banks’ loan to deposit (LDR) ratios have been declining for years and have now fallen to historic lows of under 49%.  Many banks are struggling to achieve little more than a few basis points on their overall business, while even some large banks are operating in the red on their domestic business.The Japanese banking sector in 2021 has outperformed Topix for the first time in several years, aided by a weakening Yen against the US$ and hopes for a steepening yield curve in the US.  Yet, as we approach interim results announcements within the next few days, much of that earlier outperformance by the banking sector against Topix has already been given back.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for the remainder of 2021 and beyond.

Japanese Bank Deposits:  The Torrent Becomes a Stream

J. Brian Waterhouse has been covering the Japanese financial sector as an analyst continuously since 1976, working for CLSA, Japaninvest, Rabobank, HSBC Securities, James Capel, Marine Midland Bank of New York and National & Grindlays Bank.  He has been ranked No.1 overall in Japanese banks research in Japan by Asiamoney for 6 of the past 9 years and was runner-up in 2015.  He was awarded the coveted Starmine prize as top Japanese bank stock picker in 2012 and 2014 and was runner-up in 2013.  He frequently appears on TV, radio and in international print media as a commentator on Japanese banking.