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 Singapore, Australia 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:
Losses
Loan losses2 are slightly favourable compared to other Japanese large banks:
Leverage
As a domestic Japanese bank, their required CET1 CAR is only 4.5%.
Returns
As they increase their capital in future years, ROE will go down.
ROA is comparable to the other large Japanese banks:
Others
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%.
At 620 Yen, Resona yields 2.7%. Withholding tax for Singapore residents is 15.315%.
Summary
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.
Risks:
- 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:
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