Japan Bank Industry Outlook Raised by Morgan Stanley on Lower Credit Costs

Morgan Stanley raised its investment rating on the Japanese banking industry to “attractive” from “in-line,” citing the outlook for lower credit costs as the global economy recovers.

The current trend of credit costs is in line with the brokerage’s bull-case forecast, according to a report dated yesterday. If credit costs continue to drop in line with its bull-case assumptions, a 10 percent return on equity should be possible for banks, Morgan Stanley said in the report. Sustainable recovery in the economy should accelerate a drop in credit costs, according to the statement.

Graeme Knowd, an equity analyst at Morgan Stanley, boosted a 12-month share price estimate of Sumitomo Mitsui Financial Group Inc., Japan’s second-largest publicly traded bank, to 4,340 yen from 3,650 yen and that of Sumitomo Trust and Banking Co. to 788 yen from 700 yen, as their credit costs are declining faster than the brokerage’s base case assumptions.

Sumitomo Mitsui gained 1.1 percent to 3,210 yen as of 10:54 a.m. on the Tokyo Stock Exchange, while Sumitomo Trust advanced 1.6 percent to 580 yen.

To contact the reporter on the story: Akiko Ikeda in Tokyo at iakiko@bloomberg.net.

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