MZHOF - Mizuho Financial Group: Good Operational Performance And Undemanding Valuation

2023-03-25 06:36:53 ET

Summary

• Revenue grew 2.9% Y/Y in Q1-Q3, after 2.4% growth in fiscal 2021. ROE of 8.6% in Q1-Q3.
• Basel III Finalization CET1 of 9.7%, in line with 9-10% target range. Currently reported CET1 of 11.71%.
• Losses on held to maturity investments just 1.9% of tangible book.
• Diversified business model with loan to deposit ratio of just 56%.
• Net interest income only 41.5% of Q1-Q3 revenues, followed by net fee and commission income at 29.5%.

Company Overview

Mizuho Financial Group ( MFG ) has a fiscal year ending on March 31. I will highlight the company's results for the period ending December 31 2022 which is Q3 of fiscal year 2022. The latest results are available here .

Mizuho runs a diversified business model, covering traditional banking and investment services to deploy its surplus deposits (loan to deposit ratio of just 56%).

As a result of its heavy reliance on investment activity to generate income, Net Interest Income accounts for just 41.5% of Q1-Q3 consolidated gross profits (revenue), Net Fee and Commission Income is at 29.5%, Net Other Operating Income is at 14.3%, Net Trading Income is at 12.2% and Fiduciary Income is at 2.5% of Q1-Q3 consolidated gross profits:

Operational Overview

Consolidated gross profits grew 2.9% Y/Y for the first 9 months of the fiscal 2022. This represents a slight acceleration to the 2.4% revenue growth rate achieved in fiscal 2021. Net Income Attributable to Mizuho grew 13.5% Y/Y, with Return on Equity at 8.6%. Tangible book per share was 3 338 JPY. Net income per share was 213.06 JPY on a cumulative basis in Q3.

Progress on Fiscal 2022 Plan

The first three quarters of the year were stronger than expected, which led Mizuho to reach its net income target one quarter earlier than expected:

In all likelihood Mizuho will outperform its forecast on Ordinary Profits (85.5% progress as of Q3) and Credit-related costs (only 65.3% booked as of Q3).

On February 16 Mizuho announced expanded cooperation with Swiss private bank Lombard Odier.

On March 3 MFG announced it would restructure the group starting on April 1, taking investment banking out of the Global Products unit. In essence, the old Global Products unit will be renamed Global Transaction banking.

Another thing mentioned in the press release is that Mizuho will end the current 5-year plan one year early, and present a new 3-year plan in May 2023, which may prove to be a catalyst for the shares.

Unrealized Gains/Losses on Securities

Following recent turmoil in financial markets, temporary differences arising from held to maturity accounting have become a point of interest for investors. Mizuho diligently disclosed its exposure on page 15 here .

On a consolidated basis, MFG has 157 billion JPY in unrealized losses on bonds held to maturity as of December 31, down 11.8% from 177.9 billion JPY on a quarterly basis. For reference, tangible book value is 8 476 billion at the end of the year.

The bank even discloses the impact (-0.34%) unrealized gains/losses on other securities would have on its CET1 capital:

The decrease in capital is due to the fact that at the end of December 2022, Mizuho was actually sitting on a 622 billion JPY unrealized gain, mainly the result of 1 401 billion JPY gain on Japanese stocks, offset by 916 billion JPY loss on foreign bonds, and 209 billion JPY loss on Japanese bonds/Other:

Capital Position

Aside from the CET1 ratio of 11.71% reported above, Mizuho targets a CET1 capital ratio on a Basel III finalization basis of between 9-10%. The ratio stood at 9.7% in Q3, or 9.5% adjusted for unrealized gains/losses.

Conclusion

With an undemanding valuation of 0.55 times tangible book and a ROE in the high single digits, Mizuho represents an excellent diversification opportunity should current financial turmoil persist. I think companies may shun U.S. and European financial institutions after recent events, especially in the Asia-Pacific region.

Mizuho already has extensive disclosure with regards to unrealized losses on securities, even presenting an adjusted CET1 ratio. Given the increased attention paid to the issue, other financial institution may well adopt Mizuho's approach.

What's more, an eventual exit from negative rates and yield curve control may provide an earnings boost currently not priced into the shares. Japanese banks have the luxury of observing adverse effects experienced by European or U.S. institutions from a rapid rise in interest rates and prepare accordingly. The boost to net interest income is straightforward:

And while the last 10 years have not been favorable for Mizuho (waiting for Japanese yields to rise was infamously described as the window-maker trade), odds are the next 10 years will see a shift in the company's fortunes:

Thank you for reading.

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