Company Reports

We transfer five Japanese banks to a new coverage analyst with minor tweaks to our earnings forecasts that do not change our fair value estimates for the Tokyo-listed shares. Our fair value estimates for Mitsubishi UFJ Financial Group's, or MUFG, and Mizuho Financial Group's ADRs rise by 9% each to $12.25 and $4.61, respectively, due to 9% appreciation in the Japanese yen against the US dollar.

Like State Street and Bank of New York Mellon in the US, which compete with custodian businesses inside larger US banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

Since Aug. 31, share prices of the Japanese banks we cover have fallen by 24% to 29%, making them appear undervalued. Just a week earlier, these banks seemed fairly valued or even overvalued according to our intrinsic value estimates. If the Federal Reserve aggressively cuts US dollar interest rates, it could diminish expectations for future increases in Japanese yen interest rates—despite recent hawkish comments by Bank of Japan Gov. Kazuo Ueda. This shift might prompt a reassessment of Japanese banks' earnings trajectory. We will review our forecasts after meeting with the banks in Tokyo and observing the Fed’s stance in the coming weeks.

We raised our fair value estimate for Sumitomo Mitsui Trust Holdings to JPY 4,290 from JPY 3,420 following revisions in our earnings forecast after the bank’s profit guidance surprised us positively. SMTH is guiding for a net profit of JPY 240 billion in the fiscal year ending March 2025, which is 11.7% above our original estimate. The bank is targeting to reach a return on equity of 8% in March 2026, close to our projected 7.6%. Our forecast assumes a slower loan growth than peers, given SMTH’s focus on expanding assets under management and more product-specific lending but stronger securities growth. We raise our original net profit forecast by 11% and 15% for its March 2025-26 fiscal years. Our March 2025 net profit of JPY 240 billion matches the bank’s guidance of JPY 240 billion. Our midterm forecast should also align with SMTH’s aspiration a net profit of over JPY 300 billion in fiscal 2030 (March 2031).

Like State Street and Bank of New York Mellon in the US, which compete with custodian businesses inside larger US banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

Sumitomo Mitsui Trust Holdings, or SMTH, saw December-quarter net income of JPY 49.2 billion, which appears to be coming in short of our full-year expectation of JPY 86 billion and the company's guidance. However, we keep our earnings forecasts unchanged, and our fair value estimate remains at JPY 3,420 as we do not think the gap is insurmountable nor does it impact our longer-term assumptions. SMTH is seeing losses on sales of its bear funds due to the rising values in the Japanese stock market. This is not surprising, but it does eat into the bottom-line performance for the quarter. The company is aiming to complete sales of these funds, and we do not expect it to be an issue in future years. We think SMTH is slightly undervalued but note that its business mix means that it doesn't benefit from growing net interest margins relative to pure banks like Sumitomo Mitsui Financial Group while the current financial year's dip in profit is keeping investors sidelined. However, we think SMTH's expanding net assets per share is a better gauge of its business fundamentals.

Sumitomo Mitsui Trust Holdings', or SMTH's, shares have gone ex-stock split today, leading to an adjustment to our fair value estimate per share to JPY 3,420 from JPY 6,840. There is no other change to our views on SMTH. The stock is trading at around a 21% discount to our fair value estimate and is relatively attractive. We think the group is a beneficiary of an inflationary environment, given its exposure to real estate and asset management activities. A more diverse operational base also means that it is less sensitive to interest margins, which has resulted in underperformance versus traditional banking peers in 2023.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

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.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

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.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

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.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

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.

Like State Street and Bank of New York Mellon in the U.S., which compete with custodian businesses inside larger U.S. banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.