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Japanese megabank stocks falter amid negative rate woes


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Investment Banking Essentials Newsletter April Edition - 2022


Banking Essentials Newsletter April Edition - 2022

Japanese megabank stocks falter amid negative rate woes

Sharesin the three biggest banks in Japan are reeling from the surprise policydecision to adoptnegative interest rates, as the move amplifies concerns about their profitprospects.

OnFeb. 12, following the Jan. 29 decision by the Bank ofJapanto impose a 0.1% fee on somedeposits, shares in the three Japanese megabanksMitsubishi UFJ Financial GroupInc., Sumitomo MitsuiFinancial Group Inc. andMizuho Financial GroupInc.reached thelowest levels since December 2012. At the close of trading that day, they were at the widestdiscounts to book value in five years.

Thestocks have since rebounded, but their prices were nearly, ifnot less than, half book value as of March 31.

Evenbefore the BOJ resorted to the dramaticmeasure to give a shot in the arm to thecountry's feeble economy, Japanese banks had already been struggling to battle anemic loan demand and ultralow rates. Thelatest policy effort will only make it harderfor lenders to generate profit. That isparticularly so, as they are not fully passing the central bank deposit cost tocustomers, even though interest margins are being squeezed.

"Theirshare prices have recovered somewhat, but the market is struggling to find whatis appropriate share prices or [price-to-book ratios] for Japanese banks,"said Toyoki Sameshima, ananalyst at BNPParibas Securities (Japan) Ltd.

Ifthe central bank cuts its deposit rate to minus 0.5%, a possibility that hasbeen entertained by BOJ Governor Haruhiko Kuroda,the megabanks could lose 10% to 15% in pretax profit, with smaller regionallenders to bear a bigger brunt, said Hideyasu Ban, an analyst at Morgan StanleyMUFG Securities Co. Ltd.

Shouldthe monetaryauthority cutrates that deep into negative territory in the next two fiscal years, themegabank stocks could fallanother 2% to3%, while regional bank shares may drop a further 8%, according to an estimateby Takashi Miura, an analyst at Credit Suisse Securities (Japan) Ltd.

Byglobal industry standards, Japanese bank shares have long been cheap relativeto book value, as a lack of growth opportunities for the sector turns stock buyers away.

Moreover,the megabank shares are among the first stocks overseas investors sell in adown market, according to Brian Waterhouse, a Japanese banking analyst at CLSAAustralia Pty. Ltd.

"Everyoneowns MUFG or SMFG, so it is fine when times are good and share prices go up.When everyone needs to raise money, those Japanese banks shares are sold,"he said at a media briefing.

Someanalysts say any actual impact of the negative rate policy would not justifycurrent prices for Japanese bank stocks. Among them is Miura, who says therecent selloffs are "overdone."

Sharesin Japanese banks are almost as discounted as they were in 2003, when Japan'sbanking sector was hit by bad debt formed in the years following an asset price collapse.

"Thecurrent valuations of banks are close to the levels during the financial crisisof 2003, though the Financial Services Agency and banks say there is nosystemic risk," Ban said.

Regardless,uncertainty about monetary policy, especially after theBOJ made unexpected moves, keeps many investors away from Japanesebank stocks.

"TheBOJ launched the new negative interest policy out of the blue," Miurasaid. "That is why investors find it hard to buy Japanese bank shares."

Click here for the 2015 Japanese Banking Report.

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