Our Japanese Bank FVEs Rise as We Assume Gradually Rising Loan Rates in Japan; SMFG Remains Top Pick

We now forecast Japanese banks’ domestic loan interest rates to rise by 1 basis point per year, versus our prior forecast of flat loan interest rates, based on the greater probability of higher policy rates from the Bank of Japan. As a result of slightly higher future forecast earnings from this assumption change, we have raised our fair value estimates for the three Japanese megabanks by 6%-7%: to JPY 920 for Mitsubishi UFJ Financial Group, to JPY 6,050 for Sumitomo Mitsui Financial Group, and to JPY 1,870 for Mizuho Financial Group. Our fair value estimate for Resona, which has greater exposure to domestic net interest income than the megabanks, rises 15% to JPY 680, and our fair value estimate for Sumitomo Mitsui Trust Holdings, which has less exposure to net interest income, rises 2% to JPY 5,250. Our fair value estimate for Japan Post Bank, which hardly makes loans, is unchanged at JPY 900. Based on an exchange-rate assumption of JPY 130/$1, our fair value estimates rise 7% to $7.08 for MUFG’s ADRs and to $2.88 for Mizuho’s ADRs.