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Bets Against Japan Megabanks Soar as Investors Polarized

  • Short positions surged to a six-year high earlier this month
  • Retail investors skeptical as foreigners pile in: Tokai Tokyo

Bearish bets on Japan’s largest banks have swelled to a six-year high as their recent surge fuels speculation that the shares have risen too far, too fast.

Margin-account holdings that profit when shares of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. fall reached 109 million shares on Dec. 2, the most since July 2010, according to weekly data from the Tokyo Stock Exchange. The lenders rallied over the past month as Donald Trump’s election victory drove up bond yields in the U.S. and Japan, attracting overseas buying while failing to impress individual investors who see the rebound as overdone, according to Tokai Tokyo Financial Holdings Inc.

“It’s not foreigners or hedge funds who are shorting, it’s likely retail investors who are thinking these banks can’t be rising this much,” said Toshio Sumitani, a strategist at Tokai Tokyo. “Foreigners think Japanese banks are relatively cheap,” and the jump in yields is stoking optimism that interest income will rebound, he said.

Banks spent much of this year as Japan’s worst-performing stocks as concerns mounted that the central bank’s introduction of negative interest rates will erode profit. The three so-called megabanks had slumped at least 40 percent through July 8, double the losses by the Topix index.

MUFG rose 0.6 percent as of 10:17 a.m. local time. Sumitomo Mitsui fell 0.3 percent and Mizuho slipped 0.1 percent. The Topix climbed 0.2 percent as the yen weakened after the Federal Reserve raised interest rates for the first time this year and forecast a steeper path for borrowing costs in 2017.

While bearish bets eased to 78 million shares last week, that’s still more than double the five-year average, the exchange data show. After the shares jumped about 20 percent in the past month, the 14-day relative-strength index for the three lenders exceeded the threshold that signals gains may be overdone. Since posting first-half earnings that beat analysts’ estimates, the banks have sounded a cautious tone on the outlook.

Cautious Executives

Mizuho Chief Executive Officer Yasuhiro Sato said in November that he can’t promise the company will exceed its net income forecast for the year ending March, while Sumitomo Mitsui cut its pretax profit target. “We can’t be as optimistic as markets might suggest,” MUFG President Nobuyuki Hirano said on Dec. 9 of the global equity rally since Trump’s election.

The market value of bets against MUFG rose to 34.6 billion yen ($294 million) in the week ended Dec. 2, the highest since December 2009. The amount of bearish wagers through standardized margin contracts on Sumitomo Mitsui were at 17.8 billion yen and those for Mizuho stood at 12.1 billion yen during the period.

Trump Prospects

While individuals have fixated on chart patterns, foreign investors are focusing more on the prospects for the banks under Trump, according to Sumitani. U.S. Treasuries tumbled in anticipation of fiscal stimulus and faster inflation, and Japan’s benchmark 10-year bond yields climbed, boosting speculation the lenders’ razor-thin interest margins will improve. Banks with a U.S. presence including MUFG are likely to benefit from loosening of financial regulations, which President-elect Trump promised in his campaign, and may prompt them to expand in the nation, according to Bloomberg Intelligence.

The divergence among investors probably reflects uncertainty over whether Trump will follow through with his policy pledges, according to Masahiko Sato, a Tokyo-based analyst at SMBC Nikko Securities Inc. “Some investors think Japanese banks will profit from Trump’s policies, but others think they won’t,” Sato said.

Even after their rally, the Tokyo-based lenders look like a bargain. They trade at an average 0.69 times book value, almost half the Topix and 35 percent less than the MSCI World Bank Index, according to data compiled by Bloomberg.

“There must be a lot of unrealized losses" for retail investors, said Sumitani, noting that short sellers may start to buy back shares to cut their losses. While U.S. and Japanese stocks may weaken in January and February, that’s likely to be temporary, he said. “Shares should continue to climb.”

— With assistance by Gareth Allan

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