2023-06-09 11:55:01 ET
Summary
- Mizuho kicked off Q1 with a beat-and-raise and outlined ambitious new mid-term targets.
- Also boosting the outlook are a pending BoJ shift away from ultra-loose monetary policy and ongoing governance reforms.
- The YTD de-rating following the US/EU banking fallout means the stock now trades at an unjustifiably wide book value discount.
Mizuho Financial Group ( MFG ), one of Japan's three megabanks, has outperformed since I last covered the stock, and I expect more of the same in the coming quarters. The macro backdrop for Japanese financials screens favorably as higher growth and wage pressures clear the path for a monetary policy regime shift, led by a likely revision of the BoJ's 'yield curve control' policy in the coming months. Fundamentally, Mizuho also seems to be doing well. Its latest quarterly earnings came in well ahead of prior guidance, while the post-Q1 guidance raise and dividend hike offers welcome support for the stock price. In the mid to long-term, Mizuho president Kihara's commitment to fundamental improvements, most notably on cost efficiency, to strengthen the company's ROE was a clear step in the right direction as well. Like other Japanese corporates trading below book, Mizuho hasn't been spared from the Tokyo Stock Exchange's ((TSE)) push for shareholder value creation, so expect measures to address the valuation gap in the coming months (likely buybacks). Net, the stock presents attractive value at 0.6x P/B and has ample room to re-rate.
Investor Briefing Outlines Mid-Term Path to Higher ROEs
Coming off a beat-and-raise quarter, Mizuho also announced an updated mid-term business plan . Beyond the positive commentary ("proactively innovate together with our clients" and "be a catalyst for change"), the bank set out ambitious new financial targets through 2025. Of note, the return on equity (net of unrealized gains/losses on its securities' portfolio) is targeted to hit >8% (vs. <7% in FY22) based on consolidated net business profits (including ETF-related net gains/losses) of JPY1-1.1trn. The ultimate goal is shareholder value, with management specifically citing improvements in its P/Book (>1x target) via profit stability and financial/non-financial value enhancement initiatives.
Digging deeper, the largest contributors to the P&L bridge include JPY50bn from asset formation and asset management, JPY70bn from Japanese corporates, and JPY60bn from global corporate & investment banking ((CIB)). The latter entails reinvestments, however, with JPY12-13trn earmarked for global CIB ("risk asset allocation") against JPY6-7tn of proceeds from streamlining the portfolio exposure to home loans and low-margin assets ("risk asset reduction"). Also notable was the planned sale of strategic cross-shareholdings by JPY300bn over the mid-term to <20% of net assets (mark-to-market), highlighting positive intent toward improving governance. The needle mover across all business lines is likely expense cuts – while the company cited cost discipline and process reforms to boost efficiency, unlocking ~5% of the expense ratio requires significant headcount reductions (no targets provided yet). From here, execution will be key, and I would keep a close eye on progress over the next few quarters before underwriting the mid-term ROE target.
Positive Macro and BoJ Policy Shifts on the Horizon
In the meantime, all eyes will be on a potential regime shift under new BOJ governor Kazuo Ueda, who has already signaled plans to revise the legacy 'yield curve control' policy ((YCC)) should inflation stay above its 2% target. An eventual reversal of the ultra-loose monetary policy in Japan implemented through the 'Abenomics' years bodes well for bank margins and should catalyze a sustained profit recovery at the megabanks in FY23 and beyond. A normalized 'higher for longer' rate regime likely entails a more stable earnings stream for the banks as well, paving the way for a valuation re-rating from their current wide P/B discounts.
While initial expectations for a change in interest rate policy have been tempered down somewhat (note the decline in JGB yields this year), recent wage increases (up to +13% in food & beverage), catalyzed by the spring wage negotiations, should continue to pressure inflation. Alongside the positive GDP growth surprise in Q1 (+2.7% on higher spending), the economy appears to be accelerating; hence, any YCC adjustments could even be supplemented by an interest rate hike, presenting further upside to banking sector interest margins.
Unfairly Punished; TSE-Driven Corporate Reform Catalysts in the Pipeline
Along with the rest of the Japanese megabanks, Mizuho stock suffered a steep sell-down in March (even more than the major US banks) amid concerns about its exposure to contagion from the US/EU banking troubles. A closer look at the bank's balance sheet, however, shows that these concerns are unfounded. While Mizuho has, like the other major banks, ventured overseas to earn a yield on their assets, the likelihood of further portfolio losses is low. For one, deposit flight has been limited in Japan. Foreign inflows have also accelerated on TSE-driven corporate governance reform hopes, boosting Mizuho's mark-to-market profits on its domestic equities book. In turn, gains here have more than offset mark-to-market overseas bond losses, driving improved unrealized gains/losses on its overall securities book in Q1.
Beyond the boost to its securities portfolio, the TSE reforms also bode well for improved governance (e.g., Mizuho unwinding its cross-shareholdings) and higher shareholder returns. Given the TSE's push for listed companies trading below book value to implement effective measures to raise their P/B ratios, this should entail a new wave of share buybacks ahead.
Still Cheap with the Wind in Its Sails
Mizuho, along with the rest of the major Japanese banking names, was punished after a strong start to the year amid concerns about contagion from the US/EU. As its latest quarterly earnings showed, however, there are ample reasons for optimism. Not only are asset quality issues well-contained, but the ambitious guidance post-Q1 and dividend hike indicate a brighter near-term outlook. Also, bullish is the company's mid-term ROE target, largely due to cost-saving efforts to strengthen the underlying earnings power going forward. With the BoJ also primed for a monetary policy shift and the TSE pushing for improved governance for stocks trading below their book value (note Mizuho trades at an ~40% discount to book), there remain ample upside catalysts on the horizon as well.
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Mizuho Financial Group: Still Cheap With The Wind In Its Sails