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.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.0% share of domestic loans and 11.6% of deposits as of March 2024. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

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.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

Mitsubishi UFJ’s March 2024 earnings were within our estimates, and we lifted our fair value estimate to JPY 1,760 from JPY 1,315 (USD 11.25 from USD 9.00 per ADR) as we lowered our weighted average cost of capital to 8.0% from 8.5%, to be in line with its Japanese peers. At our fair value estimate, MUFG would trade at 1.0 times the fiscal 2024 price/book, which we think is fair given that our expectation for return on equity is 8%-9%. With MUFG in 4-star territory, we think the shares are attractive. We expect improved domestic interest rates will help offset the impact of easing US interest rates on its overseas lending and see MUFG’s net interest margin rising to 94 basis points in fiscal 2028 from 84 basis points in fiscal 2023. Coupled with an assumed share buyback of up to JPY 400 billion per year, we see a three-year average earnings per share growth of 8.6%.

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.

We lift our fair value estimate on Mitsubishi UFJ Financial Group, or MUFG, to JPY 1,315 from JPY 1,270 following December-quarter results. However, our ADR fair value estimate is unchanged at $9, given the weaker JPY versus USD since our last update. We lift financial year March 2024 net profit by 16.6% to JPY 1,568 billion, mainly due to a favorable adjustment to our currency exchange rate and net interest margin, or NIM. We raise our NIM for financial years March 2024 and March 2025 each by 8 basis points to 0.85% and 0.87%, respectively. We assume NIM continues to improve, with return on equity, or ROE, rising to average 8.4% for the next five years, above its prepandemic long-term average of 6.7%. We think there should be some positives that will support MUFG's share price performance, but we would prefer to wait for a more attractive entry point.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

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.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

We maintain our JPY 1,270 fair value estimate for Mitsubishi UFJ Financial Group, or MUFG; this is almost equal to the current share price and represents 0.82 times book value as of September. MUFG shares have risen 75% since this time last year, when they still traded around 0.5 times book, as investors have grown hopeful that Japan’s negative-interest-rate policy, or NIRP, may end soon and Japanese banks’ returns on equity, or ROEs, will come closer to their cost of equity, which we estimate to be around 8%-9%. MUFG’s current valuation of around 0.8 times book is the first time it has traded at this level since before the Bank of Japan announced the NIRP at the beginning of 2016. We think that Japan’s path toward higher interest rates will be only gradual and think MUFG’s current valuation of around 0.8 times book value is appropriate. This is because we do not project MUFG’s ROE will exceed its cost of equity within our forecast horizon.

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.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

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.

Mitsubishi UFJ Financial Group is Japan’s largest banking group, with 8.3% share of domestic loans and 11.7% of deposits as of March 2022. The environment for banks has been tough in Japan for years and we expect it to remain so. A long-running deflationary environment led to persistently low demand for loans, with the loan/deposit ratio declining from 74% in 2000 to around 55% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times before 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.

Mitsubishi UFJ Financial Group is Japan’s largest banking group, with 8.3% share of domestic loans and 11.7% of deposits as of March 2022. The environment for banks has been tough in Japan for years and we expect it to remain so. A long-running deflationary environment led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 55% 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.