Tuesday, May 9, 2017

Resona Bank (TYO:8308)

Japanese banks are trading at single digit PE ratios and below book value.  After 20 years of near-zero interest rates they are still profitable.

I'm looking at Resona, the fifth largest bank in Japan, because its purely a domestic play and makes most of its money from deposits and loans.

Market Share

Japan is 'over banked'.  The top four banks have around half the market share, and theres a 'long tail' of smaller banks due to each province historically having their own bank.  
     (Source: Credit Suisse, Midtier banks, Jan 2015)

The Japanese banking market is more competitive than SingaporeAustralia or the UK, where the top 3-5 banks have 60-75% of market share.  Consolidation has been occurring for years, but still has a long way to go.

To escape the competition and ever lowering interest rates, the larger banks (MUFJ, Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsumi Sumitomo Trust Holdings) have expanded overseas and have built up their investment banking.  For example, MUFJ owns 20% of Morgan Stanley, plus banks in the US and Thailand.  Resona is the largest Japanese bank that is still purely domestic.

Resona's market share in certain prefectures:

     (Source: Feb 2017 Company Investor Presentation)

Income Breakdown

The vast majority of their operating income is from interest:

Interest income seems to track interest rates, with a spike in 08/09, amidst a general downtrend (the time period in the red box below):

This 'single focus' on deposits and loans makes it easier to analyse than the other large Japanese banks:
  • They have no investment banking or overseas operations.
  • And very little trading.  Most of their trading profits are from derivatives.
  • Fee and commission income is the second largest contributor, and seems to track the economy1:


Loan losses2 are slightly favourable compared to other Japanese large banks:


Resona's CET1 CAR is 8%, far lower than the other 4 big banks which are in the low teens.  This is because of their low capital base.  In 2015 they finished paying off public funds which were injected in 2003.  They now expect to increase their capital and aim for a 9% CET1 CAR in 2019.

As a domestic Japanese bank, their required CET1 CAR is only 4.5%. 


Resona's ROE is artificially higher than its peers, due to its low capital base:

As they increase their capital in future years, ROE will go down.

ROA is comparable to the other large Japanese banks:

This is far less than other countries.  Singapore banks for example, have ROAs of between 0.5 and 3%.


David Eirnhorn bought a stake in 2014 at 547 yen, and probably still has it.

At 620 Yen, Resona yields 2.7%.  Withholding tax for Singapore residents is 15.315%.


Reasons to buy:

  • Pretty Cheap.  At 620 yen, its trading at 9X earnings and price/book of 0.87  (From year-ending March 2016).
  • It is still profitable, despite operating in a fiercely competitive environment with interest rate headwinds.


  • Japanese banking market is more competitive than other countries.
  • Japan's well know demographic problems.
  • Risk of a sudden Yen devaluation if Japan loses control of its bond and currency markets.  May not happen as Japan's debt is domestically funded (1) (2).
  • Cyclical risk.  Japan is now in a boom, with record corporate profits and full employment.  The boom may end if it was solely due to money printing.

Overall, I think its an OK company trading at a cheap price.  Not a 'Buffet buy-and-hold-forever' stock.  The risks are priced in.

[Edit: Bought 2900 shares at 612.4 Yen on Friday 12th May.  Total cost in SGD is 29,505]

I like their mascot too:


1 There is a breakdown of their fees on p16 here, but it doesn't say much

2 From JGAAP financial results. "Loan losses" calculated as: 
     (Provisions for loan losses - Reversals in provision for loan losses) + (Write off loans - Recovery of write-off loans)


TobiB said...

Hi, i find this interesting since I had shares of mufg last year. I sold after a short time 60 percent gain, but it was still less than half the book value. Still the question is why not one of the other banks that have more capital to grow if the economy does well in the future? For me it was a big plus that mufg operations in us and southeast Asia too, which also reduces the currency risk.

Or why not other Japanese companies that are undervalued? (For example I have a position in sawai pharmaceuticals, which looks more attractive and has a better industry tailwind)

BlackCat said...

Hi TobiB,

Congrats on your MUFG gain! I prefer Resona over the big 4 Japanese banks, because the 4 have significant revenue from Investment Banking and Trading, which I find unpredictable. It is easier to compare 'traditional banking' (deposits and lending) - if a bank was conservative and had small losses in past crisis, they probably will in the future too. It is also easier to compare loses and margins when banks don't have foreign operations.

I haven't looked at Sawai Pharmaceiticals, but as a Generic pharma producer, would they have any competitive advantage? Do you buy stocks with a Graham-and-Dodd approach (buy a large number of undervalued stocks, and sell when they reach fair value), or like a Buffet investor (buy a small number of good companies that have a competitive advantage, and hold long term)?

If you are interested in Japanese companies, you may like:
Kenkyo Investing (http://www.kenkyoinvesting.com/)
the interview with Jiro Yasu in Value Investor Insight (https://www.docdroid.net/kHE2eXS/value-investor-insight-april-2017.pdf.html#page=8).

TobiB said...

I am relatively concentrated in my investing approach, but this is also due to my limited time as I am no professional investor but also work full-time.

Usually I try to find companies (if possible in industries with favourable conditions like software) that do better than their competitors in the long term but are not to expensive. It is often not that easy to determine where the competitive advantage lies, but often successful companies have a strong corporate culture, cost advantages, customer relations or better products. One of my favourite examples in germany (where I live) is Sixt, a car rental company. There is no really competitive advantage as competition is fought mostly by price, but they have outperformed the competitors for several decades now, have way higher margins and growth and are market leader here now.

For Sawai it is difficult to, but they are market leader together with Nichi-Iko, but different from them did not have to raise capital to achieve astonishing growth and are much more profitable despite a higher percentage of R&D expenses. In my opinion they understand the concept of good capital allocation and choose the right products with good margins.

Also the market has state-controlled prices, which means the cost advantage is crucial to success. Sawai has good cost structure, the neccessary size and in my opinion also the brand is important for generics business, as it is a lot about trust.