Company Reports

The Bank of Japan, or BoJ, officially ended its net zero interest rate policy March 19 in a move that was well anticipated. The BoJ now guides the overnight call rate at 0% to 0.1% and will also no longer cap the 10-year Japanese government bond rate at 1%. Rather successfully for the BoJ, the announcement resulted in little reaction from the markets. What the move means is that the Japanese banks are earning a positive return on their reserves. We think this shift is already baked into the share prices of the banks we cover. For investors holding for the longer term, our preference would be for Sumitomo Mitsui Financial Group, or SMFG, and Resona, but we would prefer to wait for more attractive entry points. We think Mitsubishi UFJ and Mizuho are slightly overvalued and may not benefit as much as their expanding domestic net interest margins, or NIM, may be partly offset by margin pressure on their relatively significant international operations.

Mizuho Financial Group's December-quarter cumulative net profit of JPY 642.3 billion is tracking ahead of our financial year March 2024 expectations due to higher trading income and a continued weak JPY. Following tweaks to our assumptions, we raise our full-year net profit estimate to JPY 745 billion from JPY 615 billion. Our fair value estimate rises to JPY 2,550 from JPY 2,490, but our ADR fair value estimate is lowered to $3.43 from $3.56, given the weaker JPY versus the USD since our last update. A weak yen will amplify Mizuho's earnings, given its overseas income. Mizuho's shares are currently fairly valued.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.7% share of domestic loans and 8.5% share of deposits as of March 2023. Mizuho lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management for future returns. Its securities business has been performing well, in our view, including overseas. However, the dependence on banking means the need for expense reductions is even more important for Mizuho’s future profitability than it is for its two megabank rivals.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.7% share of domestic loans and 8.5% share of deposits as of March 2023. Mizuho lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management for future returns. Its securities business has been performing well, in our view, including overseas. However, the dependence on banking means the need for expense reductions is even more important for Mizuho’s future profitability than it is for its two megabank rivals.

We’re maintaining our fair value estimates for Japanese banks following the central bank's decision not to adjust monetary policy in its final 2023 meeting.

We maintain our JPY 2,490 fair value estimate for no-moat Mizuho Financial Group; this is almost equal to the current share price and represents 0.66 times book value as of September. It is lower than the range of 0.8-0.9 times book where we estimate fair value for the other Japanese megabanks, reflecting Mizuho’s less ample capital cushion that limits its ability to conduct share buybacks. Mizuho’s plan to pay a JPY 100 dividend this fiscal year—raised Nov. 13 from its previous guidance of JPY 95 dividend—represents a 4.0% yield, higher than the fair dividend yields of 3.2% that we assign to Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Sumitomo Mitsui Trust. The difference is that we forecast the other banks will conduct annual share buybacks of around 1% of shares outstanding.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.7% share of domestic loans and 8.5% share of deposits as of March 2023. Mizuho lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management for future returns. Its securities business has been performing well, in our view, including overseas. However, the dependence on banking means the need for expense reductions is even more important for Mizuho’s future profitability than it is for its two megabank rivals.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.7% share of domestic loans and 8.5% share of deposits as of March 2023. Mizuho lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management for future returns. In the securities business, it has been performing well, in our view, including overseas. However, the dependence on banking means the need for expense reductions is even more important for Mizuho’s future profitability than it is for its two megabank rivals.

We increase our fair value estimates for Japanese banks after the Bank of Japan's decision last week to make the operation of its yield curve control policy more flexible. The yield on 10-year Japanese government bonds, or JGBs, has risen as far as 0.625% today after the central bank redesignated its previous 0.5% hard upper limit as a mere reference value and said it will now conduct purchase operations to maintain the level at its discretion rather than automatically in unlimited size. This affects our fair value calculations for Japanese banks, as we believe it changes the outlook for yen interest rates and credit costs in future years, though we do not expect much impact on earnings in the fiscal year ending March 2024.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

The recent December-quarter announcements by major Japanese banks failed to surprise us. Our forecasts and fair value estimates are unchanged: JPY 920 for Mitsubishi UFJ Financial Group, or MUFG; JPY 6,050 for Sumitomo Mitsui Financial Group, or SMFG; JPY 1,870 for Mizuho Financial Group; JPY 5,250 for Sumitomo Mitsui Trust Holdings, or SMTH; and JPY 680 for Resona Holdings. We consider all these stocks fairly valued, following a 28% rise in the TOPIX Banks Index over the past three months.

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.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and we expect it to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms' business models.

We update our forecasts for Japanese banks following their interim audited financials (yuho filings), which have information breaking down domestic and overseas interest income and loan amounts not included in quarterly earnings.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and we expect it to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms' business models.

We maintain our fair value estimates for Sumitomo Mitsui Financial Group, or SMFG, Mizuho Financial Group, Sumitomo Mitsui Trust Holdings, or SMTH, and Resona Holdings after they reported results for the April-June quarter. We also maintain our fair value estimate for Mitsubishi UFJ Financial Group, or MUFG, which won’t report its results until Tuesday, but its bottom-line figure was previewed ahead of the company announcement by Japan’s Nikkei newspaper on Saturday. There is: 24% upside from Friday’s closing price for SMFG based on our fair value estimate of 0.57 times book; 18% upside for SMTH based on our fair value estimate of 0.70 times book; 15% upside for MUFG based on our fair value estimate of 0.64 times book; 11% upside for Mizuho based on our fair value estimate of 0.50 times book; and just 3% upside for Resona based on our fair value estimate of 0.53 times book, making SMFG and SMTH our top picks, followed by MUFG.

With the bad-loan problems for which they were once infamous now two decades in the past, Japanese bank shares have lagged at low valuations for many years due mainly to a single problem: the country's superlow and seemingly ever-declining interest rates. We think hopes for a future V-shaped reflationary rebound have long dissipated.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and we expect it to remain so. The long-running deflationary environment in the country has led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 57% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms' business models.

We raise our fair value estimates for four major Japanese banks by 3%-4% as we update our models following October-December results. Our fair value estimate for Mitsubishi UFJ Financial Group, or MUFG, rises to JPY 710, which is 1% below the current price and 0.51 times book value. Our fair value estimate for Sumitomo Mitsui Financial Group, or SMFG, rises to JPY 4,750, 13% upside and 0.53 times book value. Our fair value estimate for Mizuho rises to JPY 1,600, 2% upside and 0.44 times book value. Our fair value estimate for Resona rises to JPY 490, 5% downside and 0.47 times book value.

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 7.2% share of domestic loans and 8.6% share of deposits as of March 2021. In Japan, the environment for banks has been tough for years and we expect it to remain so. The long-running deflationary environment in the country has led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 57% at present. The liabilities/net assets ratio for Japan’s approximately 1 million business corporations declined from a highly leveraged 4 times in the mid-1990s to a reasonably healthy 126% in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but we are concerned that credit costs may increase in the early 2020s after many corporations increased their borrowing in 2020 and as the aftermath of the pandemic affects some firms' business models.