(Bloomberg) -- Japanese lenders will report quarterly results that for the first time fully reflect the end of negative rates, with investors expecting solid earnings that will recharge a stock rally.
With the Bank of Japan seen raising rates this year, there are heightened expectations that banks’ profitability will improve. Those with larger holdings of domestic assets and cash sitting at the BOJ are expected to be more sensitive to the country’s rate increases, according to calculations by Bloomberg Intelligence.
The price-to-book ratio of Japanese banks has increased to 0.85 times at the end of June from 0.66 times in late December, with return on equity set to exceed 8% for more banks should the BOJ further increase rates, wrote BI analyst Hideyasu Ban in a note.
“When we think about earnings upgrades for the rest of the year, much of that will come from financials,” said David Chao, global market strategist at Invesco Asset Management Singapore Ltd., who expects the BOJ to hike rates at next week’s policy meeting. “Financials is the most apparent industry that’s likely to continue to outperform because as interest rates rise, that certainly gives a boost to banks, brokers, insurers — and we like them in that order.”
Megabanks including Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are due to report first-quarter earnings next week.
A measure of banks on the Topix index has soared more than 36% this year, double the gains in the broader gauge, as investors see them as major beneficiaries of rising rates. The BOJ in March scrapped the world’s last negative interest-rate regime that has crushed banks’ interest income for decades.
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Even after the rally, the sector still looks relatively cheap, trading at 15 times price to earnings, compared with 17 times for the Topix. Analysts’ 12-month earnings estimates for banks have jumped 25% from the end of last year, compared with the Topix’s 13%, according to data compiled by Bloomberg.
While the benefits from the BOJ’s rate hikes will be similar across the megabanks, there may be divergence among individual earnings due to company-specific factors. For example, MUFG shares fell last quarter after it announced a buyback plan in its full-year earnings guidance that was below analyst expectations. Meanwhile, SMFG shares gained after it posted better-than-expected results and guidance for the fiscal year ending March 2025.
This quarter, MUFG could see net profit decline by more than 25% and market participants may have to wait until the second quarter for any additional share buybacks, wrote BI’s Ban.
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Banks are also expected to get a windfall from unwinding cross-shareholdings as they follow the steps of property and casualty insurers that have come under pressure from regulators to cut holdings. Their brokerage units are also earning fees as other companies also sell such stocks.
“That’s a huge value-unlocking that’s happening.” said Sandeep Jadwani, head of investment advisory at Habib Investment Ltd. in the United Arab Emirates, adding that he sees financials as one of the best positive surprises in Japan for this quarter.
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