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Japanese Megabanks FY22: Better Int'l Margins
Pramod Shenoi – Co-Head of Asia-Pacific Research
Lim Ze Hao, CFA – Analyst - Asia-Pacific Banks
EXECUTIVE SUMMARY
- SMFG and Mizuho showed better results YoY while MUFG was down marginally, thanks to improved net interest income in the case of MUFG and SMFG, and lower credit costs for all three megabanks during the year.
- On an operational basis, Mizuho had a more challenging year, with a 5% drop in operating income, compared with an 11% increase at SMFG and a 31% increase at MUFG.
- Overall loans increased by mid to high single digits; domestic loan margins did not change much while international loan margins have continued to improve at MUFG and SMFG, with the former (1.24%) almost having caught up with the latter (1.26%); Mizuho though saw a drop in its international margins over the year and was flat in the last quarter (1.00%), likely as a result of higher non-JPY funding costs.
- The better international margins and FX related fees meant that the global corporate divisions performed strongly at the megabanks, accompanied by a better performance at the Japanese corporate banking level (thanks to the absence of losses taken on an auto component manufacturer in the previous financial year); global markets had a mixed performance and Japan retail showed net income drops at SMFG and Mizuho.
- As is normally the case in Q4, the megabanks booked large losses on their bond portfolios (for the year – MUFG: JPY 886 bn, SMFG: JPY 87 bn, Mizuho: JPY 100 bn) to reposition their portfolios for the current financial year.
- MUFG’s financials were somewhat complicated this year by the sale of MUFG Union Bank in the US, and the large losses on the bond portfolio repositioning was partially offset by gains booked (in interest income) by collapsing investment trusts, which made money when yields rose.
- The CET1 ratios on a headline basis have stabilised after falling sharply in 1H22 and recovering a little thereafter; on a fully Basel 3 compliant basis ex-securities gains they are between 9.5% to 10.3%.
RELATIVE VALUE
All three megabanks have issued TLAC bonds in 5Y or 6NC5 format this year, the SUMIBK 01/28 is trading at G+153 bp, the Apr-23 issued MUFG 6NC5 is at G+166 bp, while the MIZUHO long 6NC5 issued in Feb-23 is at G+178. Adjusting for callability (5-10 bp) and higher supply from MUFG (5 bp), SUMIBK and MUFG trade flat to each other, which we think is fair. MIZUHO is trading 10 bp behind MUFG; we see that at the tight end of a 10-15 bp range that we would expect to see between the two.
We compare the Japanese banks with the Korean banks, and spot the recently issued SHNHAN 04/28 at G+96 bp. We would expect to see a ~20 bp spread differential between SUMIBK and the leading Korean banks given the better capitalization and profitability of the Korean majors, and higher issuance volumes from the Japanese banks. We can add in another 5 bp of additional support for Korean names as a result of having a natural buyer base in AEJ fixed income investors, which the Japanese megabanks do not have.
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