Photographer: Kiyoshi Ota/Bloomberg

Unloved Japanese Bank Shares Could See a Fourth-Quarter Bounce

  • Appetite for Japanese lenders is bottom of global list: MUFG
  • U.S., Europe banks have beaten Japan returns so far in 2017

As earnings results at some of the biggest U.S. banks steal the limelight on Thursday, it may be worth keeping an eye on lenders on the other side of the world.

Japanese bank stocks, this year’s laggards, are due a decent run into the end of the year, if history is any guide. While they’ve made little headway so far in 2017 compared with rallies in U.S. and European lenders, they tend to put in a solid run in the final quarter.

“Seasonality may be a trading opportunity,” said Katsuhito Sasajima, a Tokyo-based senior analyst at Mitsubishi UFJ Morgan Stanley. Investors may realize “that a sharp decline in full-year earnings is unlikely once the second half is underway.” Japan’s financial year runs from the start of April, so the second half started this month.

Sasajima’s team analysed the monthly performance of banks in Japan over the past five years, which shows the best returns are found in the final three months of the calendar year. Here’s the average percentage appreciation during those three months:

October November December 
Mitsubishi UFJ2.89.36.2
Sumitomo Mitsui FG2.75.95.2
Mizuho Financial2.85.35.4
Resona 5.52.64.4
Sumitomo Mitsui TH3.37.24.7
Topix Banks Index 35.74.4

Japan’s largest lenders, the so called megabanks, have seen domestic-loan spreads squeezed in the past two fiscal years as loan pricing kept falling thanks to the Bank of Japan’s efforts to pull down longer-term borrowing costs -- including through a near-zero percent target for 10-year bond yields. With little likelihood of a change in BOJ policy on the horizon, that’s still likely to keep weighing on the country’s financial institutions, according to Richard Lacaille at State Street Global Advisors.

"There’s a consensus out there on U.S. and European banks amongst a number of investors that they’ll benefit from this rising yield curve,” Lacaille, global chief investment officer at State Street Global Advisors, told Bloomberg earlier this month. “That really isn’t on the cards in Japan.”

Prices might already incorporate that outlook -- valuations don’t look stretched. While the estimated price-to-earnings ratio on the Topix banks index has come off the lows of early 2016, it’s still less than 10, in line with the five-year average. By comparison, the ratio for the MSCI World Banks Index is 12.3, almost 10 percent above its average of last five years.

Among those agreeing that a turnaround is due is Deutsche Asset Management’s Asia-Pacific arm. While the firm is "underweight" Japanese stocks, Sean Taylor, chief investment officer for Asia-Pacific emerging markets, sees gains in cyclical Japanese equities, including financial companies. 

“It’s still a little bit of a mystery” why such stocks have lagged behind in Japan, Taylor said in a Bloomberg Television interview Thursday. “We’re expecting a pick-up over the next six months.”

— With assistance by Haidi Lun

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