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Japan Post Bank Navigates Tricky Rate Environment in Q3

There was only a mild hit to book value.

Securities In This Article
Japan Post Bank Co Ltd

We raise our fair value estimate of Japan Post Bank 7182 slightly to JPY 940 from JPY 900, equivalent to 0.38 times book value as of December 2022, after its latest quarterly report. Our fair value estimate is 11 times Japan Post Bank’s earnings guidance for the current fiscal year ending March 2023. The current share price is around 14 times PitchBook consensus earnings (14.2 times company guidance), higher than other major Japanese banks trading between 9 and 11 times consensus earnings, which may reflect the relative stability of Japan Post Bank’s annual profit level compared with other banks. However, unlike other major Japanese banks we don’t expect any dividend growth for Japan Post Bank over our forecast horizon. Indeed, Japan Post Bank is in our view stretched just to maintain its current annual dividend of JPY 50 per share. We note that Japan Post Bank temporarily cut its dividend guidance in May 2021 to JPY 40 per share, though it ultimately ended up reverting its payment to JPY 50 per share in May 2022 just before the record date.

Quarterly net profit of JPY 89 billion for October-December represents annualized return on equity of 3.8%, above Japan Post Bank’s average ROE since its 2015 IPO of 2.8%. We do not expect Japan Post Bank to generate an ROE above 4% over our forecast horizon.

Average three-month funding cost of U.S. dollars rose to 4.93% from below 1% in early 2022, leading to a likely negative spread on new investments, but 70%-80% of Japan Post Bank’s existing investments in foreign securities are hedged for interest-rate risk (with more than 90% hedged for foreign exchange risk). Unrealized gains on foreign securities declined by JPY 1.3 trillion in the quarter and unrealized gains on Japanese government bonds declined by JPY 0.9 trillion, though this was mostly offset by a JPY 1.7 trillion increase in unrealized gains on hedges, limiting the hit to book value during the quarter to 3.4% (2.5% net of quarterly addition to retained earnings).

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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