Conditions are ripe for Japanese megabanks to further boost shareholder returns, as an expected end to negative interest rates will allow lenders to build on an already strong stock performance so far in 2023.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. have rewarded investors with close to 50% gains in total returns this year, according to data from S&P Global Market Intelligence, largely as the big lenders' share prices have climbed through most of the year.
Now, as most economists expect the Bank of Japan (BOJ) to raise its benchmark interest rate in the new year, analysts say this share price rally may yet have longer legs.
"The prospects for higher interest rates have been factored into their [megabanks'] share prices, but not at 100%," said Toyoki Sameshima, a senior analyst at SBI Securities. "So, there is room for their stocks to increase more."
Yield curve control
The BOJ has tweaked its yield curve control policy three times since December 2022, increasing its tolerance of higher yields on long-term government bonds in what are considered de facto tightening moves. When making its latest move Oct. 31, the central bank said it would allow yields to rise above 1.0%, a hard ceiling it set in July. Analysts see the tweaks as a precursor to an end to negative interest rates.
The BOJ has held its benchmark lending rate at negative 0.1% since 2016 in an effort to support the economy. Most global central banks, led by the US Federal Reserve, have raised rates since early 2022 to dampen inflationary pressures.
"I think we can assume that higher interest rates will mean wider net interest margins for banks as I don't expect banks will need to increase their deposit rates as much as their loan rates would rise," said Michael Makdad, an analyst at Morningstar.
Even before announcing an end of negative interest rates, the central bank could signal further tightening by giving up the yield curve control policy altogether, said Shinichi Tamura, a senior analyst at Okasan Securities Co. The benchmark 10-year Japanese government bond yielded 0.872% on Nov. 6 after hitting as high as 0.975% on Nov. 1. That compares with a yield of 0.458% at the start of the year.
"Factors supporting bank shares won't be gone," Tamura said, adding that "expectations for higher interest rates will continue."
Seeking new peaks
Share prices of all three megabanks peaked in September, though they have eased somewhat in recent weeks. Despite the dip, all three have logged gains far higher than the benchmark Nikkei 225 index.
When investors become confident about the central bank's monetary policy normalization, "the share prices of the megabanks should rise far above the year-to-date highest prices" recorded in September, said Koichi Niwa, an analyst at Citigroup Global Markets Japan.
Analysts also expect the megabanks to announce share buybacks, as their price-to-book ratios have stayed below 1.0 even with rising share prices. The share buyback announcements could come as soon as the fiscal first-half earnings announcements next week, which could further support positive share price moves.
The Tokyo Stock Exchange in April asked Japanese companies to target price-to-book ratios of at least 1.0. Those below that level were advised to embrace measures to reach the target.
The megabanks, benefiting partly from higher interest margins outside Japan on the back of higher interest rates, could revise upward their earnings estimates for the fiscal full year ending in March 2024 due out in early May, together with a release of earnings forecast for the next fiscal year, another potential boost for stocks.