Sumitomo Mitsui Trust Earnings: Low Profit Guidance Doesn’t Change Our Bullish View

We maintain our JPY 6,840 fair value estimate for Sumitomo Mitsui Trust Holdings, or SMTH; this is 29% above the current share price and represents 0.84 times book value as of September. SMTH shares have not risen as much over the past year as those of other Japanese banks, up about 27% from a year ago versus a 60% average for the sector. Some of the relative underperformance may be simply attributable to SMTH’s earnings depending less on net interest income and thus benefiting to a smaller extent from expectations for future rises in interest rates, but we think at least some underperformance is due to poor financial hedging that makes SMTH’s reported earnings look worse than underlying economics.