Japanese banks: The performance has been a horror story so what lurks in the vaults?
Comment of the Day

May 22 2012

Commentary by David Fuller

Japanese banks: The performance has been a horror story so what lurks in the vaults?

David Fuller's view Well, I have a recent report which will cast some light on recent events but it has been a problematical journey, to put it mildly, for the Topix Banks Index as you can see from these price charts (historic, weekly & daily).

On seeing these charts one could be forgiven for thinking that we were looking at a peripheral Euroland country banking sector. However most Japanese banks appear to be making money; they pay respectable dividends, and have exceptionally low book values. Here is Bloomberg's list of the top Japanese banks by weighting. I will only review the first 5 because they are quite similar, as you will see: Mitsubishi Tokyo Financial (weekly & daily) Estimated PER 7.44, Yield 3.51%, Price to Book 0.50; Sumitomo Mitsui Financial (weekly & daily) E/PER 7.16, Y 4.28%, P/B 0.61; Mizuho Financial (weekly & daily) E/PER 7/21, Y 5.13, P/B0.62; Sumitomo Mitsui Trust (weekly & daily) E/PER 7.44, Y 4.03, P/B 0.51 (recent new low for price); Resona Holdings (weekly & daily) E/PER 6.17, Y3.93, P/B 0.84 (recent new low). The others can be found in the Chart Library.

My conclusion is that valuations for Japanese banks look attractive although interest income is likely to be down as estimated PERs are a little higher than the current PERs. Nevertheless, they are currently oversold having retraced the 1Q 2012 rally. One catalyst for a decent rally in Japan is likely to be a weaker yen, as we have said on many occasions. JPY/USD is down sharply today and some follow through would break its uptrend since mid-March. For a tradable rally in Japanese bank shares I would like to see upward dynamics on the daily price charts above, similar to what occurred in January. We should see at least a loss of downward momentum in the near term.

My thanks to a subscriber for this report on Japanese banks which contains a considerable amount of additional information.

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