Yesterday’s sell-off in Japanese equities, along with the subsequent rebound, has made Japanese bank valuations “attractive again”, says Morningstar Equity Research analyst Lorraine Tan.
In an Aug 5 note, Tan assigned a four-star rating on Sumitomo Mitsui Trust Holdings (SMTH) against a five-star rating system, indicating that the stock is trading below Tan’s fair value of JPY4,290 ($39.30).
SMTH’s last close price on Aug 5 was JPY2,893.
Since Aug 31, share prices of the Japanese banks we cover have fallen by between 24% and 29%, making them appear undervalued, says Tan.
Just a week earlier, these banks seemed fairly valued, or even overvalued, according to Morningstar’s intrinsic value estimates.
If the US Federal Reserve aggressively cuts US dollar interest rates, it could diminish expectations for future increases in Japanese yen interest rates — despite recent hawkish comments by Bank of Japan Governor Kazuo Ueda, according to Tan.
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“This shift might prompt a reassessment of Japanese banks' earnings trajectory. We will review our forecasts after meeting with the banks in Tokyo and observing the Fed’s stance in the coming weeks,” she adds.
For the June quarter, the banks’ results matched the bullish expectations that had been prevalent until recently, says Tan.
The three megabanks in Japan — Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group — reported annualised returns on equity in the double digits and achieved 35% to 39% of their fiscal-year guidance for the year ending March 2025 within the first three months.
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The other two Japanese banks that Morningstar covers — SMTH and Resona — also reported returns on equity (ROEs) above 8% and achieved “well more than a fourth” of their full-year guidance.
SMTH has resolved the hedging issues that affected its earnings last fiscal year, says Tan. “We continue to favour SMTH, particularly because its decision to hedge its long-held equities is proving prudent amid current market turbulence. This strategy protects the value of its divestments from falling stock prices.”
If expectations for Japanese bank earnings become more cautious, SMTH’s relative attractiveness should increase, says Tan.
As at 9.42am Singapore time, shares in SMTH are trading JPY408 higher, or 14.1% up, at JPY3,302.
