The recent changes in the Japanese economic policy and the volatility in the yen/dollar exchange rate are altering local banks’ valuations. Japanese banks’ portfolios have a big proportion of Japanese bonds, which will would lose value in the event of rising rates.
As we know, Ben Bernanke’s indication to reduce the monetary stimulus in the U.S. raised concerns all around the world. Higher interest rates in America will drive funds from overseas — including Japan — back to the U.S., reducing the great amount of liquidity that the world was experiencing since 2008. This new context will impact many industries but Japanese banking is certainly one to pay special attention to.
I will analyze three Japanese financial institutions to assess their position in the current environment.
The company’s first-quarter presented mixed results. Gross profit reached $11.74 billion, 9% higher than the prior-year’s quarter. A huge increase in net gains on the security portfolio was the main factor behind this growth. Net interest income dropped 11% to $5.27 billion, driven by tighter domestic deposit-loan margin and lower interest income in global markets. Net income, without the one-time effect of negative goodwill, decreased 12.9% to $2.3 billion.
Mitsubishi UFJ Financial Group Inc (ADR) (NYSE:MTU)’s elevated level of gross profit and strong capital position helps it maintain a good position within the Japanese banking environment. The company still experiences a growth in deposits and loans, which adds profits and liquidity to the business.
The company recently entered in a global strategic alliance with
which will expand its business into new territories and businesses. I strongly support this agreement, since it will certainly reduce exposure.
This bank has a strong business model. Its diversified product mix, along with its high gross profits, will boost its bottom line. However, the Japanese economy presents a highly competitive environment where volatility still prevails. So, be prudent.
The company posted a good performance for its fourth quarter. Net revenue increased 18% YoY to $22 billion while income before taxes grew 180% to $3 billion.
Nomura Holdings, Inc. (ADR) (NYSE:NMR) used to be one of the world’s leading investment banks in the 80s, but since then, the bank has remained in limbo after a series of wrong steps. Its former CEO, Kenichi Watanabe, had to resign in mid-2012 following accusations of insider trading. Moreover, the bank’s international ambitions may not come to reality since many of its former Lehman executives have departed.