Equity – Asia Research
Pan Asia Research www.equities.htisec.com Target Price ¥670.0 Current Price ¥560.9 Mitsubishi UFJ Financial Group (8306 JP) % Upside 19% Japan’s Largest and Most Global Bank at 0.51x PBR
Banks More Positives than Negatives Japan Summary: We initiate coverage on Mitsubishi UFJ Financial Group (MUFG) with a BUY 26 Apr 2016 rating. It has the largest overseas presence of the Japanese mega-banks, and is ahead of its Japanese rivals particularly in the US, where the top-20 player Union Bank is a wholly owned unit. MUFG holds a 22% stake in Morgan Stanley (MS US) and majority control of BUY Thailand’s fifth-largest lender, Bank of Ayudhya (BAY TB, popularly known as Krungsri). Its global importance also makes it subject to global regulation. Although already
Target: ¥670.0 meeting fully loaded Basel III capital requirements, discussions about the standardized % Upside: 19% approaches and internal models to calculate risk-weighted assets (RWA) pose a risk given MUFG’s below-average RWA density. However, valuations of around 0.5x PBR seem to 52wk Low ¥560.9 52wk High discount a higher-than-warranted degree of pessimism on domestic profitability. ¥446.2 (-20%) 26 Apr 2016 ¥935.0 (67%)
Initiation Target Price and Catalyst: Our target price of ¥670 is based on a 10% discount to the five-year average PBR, and implies 19% upside from the last close. We take the view that more of the Bank of Japan’s (BOJ) actions should be beneficial for bank stocks than Basic Share Information detrimental. Market cap ¥7,947b / US$71.69b Daily volume (3mth) US$485.6m Shares outstanding 14,169018m Free float 84.5%
1 yr high ¥935.0 Earnings: We expect EPS to decline 7% in FY3/17 compared with FY3/15, while 1 yr low ¥446.2 consensus expectations (which we think are likely to be lowered in coming months) are Foreign shareholding 39.9% for a 4% rise. The main factor behind our expected lower profit in FY3/17 is a Last HTI contact w/ Co 26 Apr 16 normalization of credit costs. Further narrowing of NIM is a secondary driver.
Valuation: MUFG’s PBR of 0.51x (December 2015) compares with a five-year average of 0.67x. The weighting of bank stocks in TOPIX has recently been at its lowest since late 2002/early 2003, the absolute bottom of the country’s decade-long financial crisis when several major banks were thought to be at risk of failure. It is not clear that the present Price/Volume situation is nearly as dire. MUFG’s dividend yields 3.3% in a currency whose risk-free
Price Close Rel. to Japan Nikkei 225 (rhs) rates are near zero, and our forecasts assume it also continues to repurchase around 990 111.0 890 104.3 1.5% of its shares annually. Risks to our bullish view include a sharper-than-expected 790 97.7 690 91.0 impact from the BOJ’s negative interest rate policy (NIRP) on domestic bank profitability, 590 84.3 490 77.7 harsher-than-expected tightening of global regulations that could prompt the bank to 390 71.0 300 reduce shareholder distributions or even raise new equity, or a global or Asia-specific 200
100 economic downturn that could increase credit costs and introduce additional Volume m Volume Apr-15 Jul-15 Oct-15 Jan-16 macroeconomic volatility.
Source: Bloomberg
1mth 3mth 12mth Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Trend Absolute 4.7% -7.1% -34.5% Net interest income (¥b) 1,879 2,181 2,104 2,091 2,089 Absolute USD 6.7% -0.7% -29.4% Operating profit (¥b) 1,477 1,483 1,498 1,319 1,369 Relative to NKY 2.1% -11.5% -21.6% Pre-tax profit (¥b) 1,544 1,614 1,649 1,429 1,489 Net income to ord equity (¥b) 968 1,033 1,079 931 970 Net profit growth 15.9% 6.8% 4.4% (13.7%) 4.2% P/E (x) 8.21 7.65 7.23 8.25 7.80 Adjusted P/B (x) 0.63 0.51 0.49 0.47 0.45 Michael Makdad ROE 8.8% 9.1% 9.3% 7.6% 7.5% Haitong International Research Ltd Dividend yield 2.9% 3.2% 3.3% 3.3% 3.3% [email protected] EPS HTI New (¥) 68.33 73.33 77.59 68.02 71.93 Local Knowledge, Global Reach Consensus EPS (¥) 66.74 74.12 75.05 76.92 78.34 Tokyo Office (81) 3 6402 7620 HTI EPS vs Consensus 2.4% (1.1%) 3.4% (11.6%) (8.2%) London Office (44) 20 7397 2700 Source: Company data, Bloomberg, HTI estimates Click here to download the working model Hong Kong Office (852) 2899 7090
This research is the product of Haitong International Research Limited (“HTIRL”), which is authorized and regulated by the Securities and Futures Commission (“SFC”) of Hong Kong. It is issued and distributed by Haitong International or its affiliates in their respective jurisdictions. See Appendix at the end of this document for the HTIRL analyst certification and Important Disclosures and Disclaimers regarding Haitong International and the non-US analyst who prepared this research. Powered by EFA Platform Mitsubishi UFJ Financial Group (8306 JP) Buy
Valuation
P/E (x) vs EPS Growth 14.0 20.0% 12.0 15.7% Investment Thesis 10.0 11.4% 8.0 7.1% 6.0 2.9% 4.0 -1.4% We initiate coverage on MUFG with a BUY rating and target price of ¥670, based 2.0 -5.7%
0.0 -10.0% on 0.58x PBR.
Jul-13 Jul-14 Jul-15 Jul-16
Jan-15 Jan-14 Jan-16 Jan-13 MUFG is one of 30 banks designated as global systemically important banks (G- Rolling P/E (x) (lhs) EPS growth (rhs) Source: Company data, Bloomberg, HTI estimates SIBs) by the Basel-based Financial Stability Board (FSB). We estimate that it has
Earnings Trends sufficient capital to meet the fully loaded Basel requirements effective in 2019, but there is still some risk from ongoing discussions about the standardized 20.0% 15.0% approaches and internal models used to calculated risk-weighted assets (RWA), 10.0% given MUFG’s lower-than-average RWA density. Because Japanese banks hold a 5.0% 0.0% lot of Japanese government bonds (JGBs), with zero risk weights, their leverage
ratios are also lower than average, independent of RWA calculation.
Mar-16E
Mar-14A Mar-15A
Net profit growth EPS growth MUFG’s PBR of 0.51x is a 24% discount to its five-year average of 0.67x, while we
Source: Company data, Bloomberg, HTI estimates forecast ROE to drop to around 7.5% (6% if unrealized gains on securities are included) in FY3/17 and FY3/18, down from 9% and 7%, respectively, at present. Earnings: HTI vs Consensus The dividend yield is 3.2% in a currency whose risk-free rates are near zero. 0% 1% 2% 3% 4% We take the view that more of the BOJ’s actions should be beneficial for MUFG’s HTI EPS HTI vs Consensus stock price than detrimental. The NIRP announced in January only applies to a (top) small fraction of banks’ deposits at the BOJ, and the BOJ has other tools in its Consensus EPS toolbox that can be positive for banks, perhaps even significantly so. 73 74 75 76 77 78 -4% -3% -3% -2% -2% -1% -1% 0% Risks to our view include a sharper-than-expected impact from the NIRP on domestic bank profitability, harsher-than-expected tightening of global HTI P/E regulations that could prompt the bank to reduce shareholder distributions or HTI P/E at Target even raise new equity, or a global or Asia-specific economic downturn that could HTI vs Consensus Consensus P/E (top) increase credit costs and introduce additional macroeconomic volatility.
0 2 4 6 8 10 Source: Company data, Bloomberg, HTI estimates
Net Revenue Breakdown (FY3/15) Overseas fees etc., Domestic 13% NII, 26% Title: Source:
Overseas NII, 25% Domestic Japan fees, Please fill in the values above to have them entered in your report other, 24% 11% Company Snapshot
Note: Excludes equity-method affiliates MUFG is the largest bank in Japan by market capitalization and assets, with a 14% share of Source: Company data, HTI estimates domestic loans as of end-2015. It is one of the largest non-Chinese bank groups globally, with a balance sheet similar in size to HSBC Holdings (HSBA LN) and JPMorgan Chase (JPM US). However, unlike those two, which the FSB puts in the fourth bucket of G-SIBs, MUFG is only in the second bucket, reflecting its greater focus on its home country and somewhat less significant global linkages. Since 2012, MUFG’s international exposure has increased, with overseas business contributing 39% of total gross profit in FY3/15 (up from 25% in FY3/12) and overseas loans growing to 38% from 24% over the same period. Major overseas units include wholly owned MUFG Union Bank (the 19th largest in the US by deposits) and 76.88%-owned Bank of Ayudhya, the fifth-largest Thai lender. MUFG also has two securities joint ventures with Morgan Stanley and a 22% stake in a US investment bank.
26 Apr 2016 2 Mitsubishi UFJ Financial Group (8306 JP) Buy
Key Investment Metrics Revenue Growth For the next three fiscal years we see zero top-line growth from the FY3/15 level, as declining revenues from domestic business (down around 2%) offset continued expansion overseas (up by about 5%). Profit Margins Domestic margins should contract given compression in the JPY yield curve and barriers in passing on negative interest rates to depositors. However, increasing contribution from higher-margin overseas lending should limit the decline in blended NIM to 95bps in FY3/17 from 101bps in FY3/15, on our forecasts. Shareholder Returns After increasing its dividend in each year between FY3/12 and FY3/15, MUFG now pays ¥18 (23% of our FY3/16 EPS estimate). It bought back ¥300bn worth of shares (2.7% of outstanding) in 2014–15. However, we think room for increases in shareholder returns has narrowed given a worse environment for domestic profitability and the need to conserve capital to meet capital and leverage requirements while expanding internationally. Balance Sheet Risks Banks carry higher balance-sheet risks than many other sectors. The credit default swaps of Bank of Tokyo-Mitsubishi UFJ (BTMU) have recently traded around average for global systemically important financial institutions (SIFIs), implying its riskiness is neither higher nor lower than the global average. MUFG’s NPL ratio has declined to a historically low 1.25%. We expect a modest increase to 1.4% at March 2017 and 1.5% at March 2018.
Barriers to Entry The number of major and regional banks in Japan declined to 141 in 2014 from 176 in 1996 before the Japanese financial crisis of the late 1990s, while the number of smaller banks and credit unions has almost halved. New entrants during that period, such as Seven Bank (8410 JP) and Sony Bank, have had success gathering deposits but still originate few loans even after more than a decade of operations. Domestic competition may increase modestly owing to the privatization of Japan Post Bank (7182 JP). We do not see a serious threat to Japanese banks from fintech business models in the next few years. International Exposure/Breakdown Many of MUFG’s large corporate borrowers export from Japan. Conversely, some SMEs and other borrowers are net importers that can be negatively affected by a weak JPY. FX Exposure At March 2015, 38% of MUFG’s loans were overseas, as were 28% of its deposits. The group uses hedging to limit the net forex position of its on-balance-sheet assets and liabilities, but many borrowers, especially those in emerging markets, are themselves unhedged. Hence, any sharp depreciation in the currencies of emerging markets where MUFG has operations would likely result in an increase in overseas credit costs. Corporate Governance Seven of MUFG’s 17 board members are either outside directors or non-executive directors with a high degree of independence, an increase from five in the first half of 2015.
26 Apr 2016 3 Mitsubishi UFJ Financial Group (8306 JP) Buy
Our Model Assumptions Profit & Loss (¥b) Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Interest income 2,371 2,806 2,738 2,692 2,653 Interest expense (492) (625) (634) (601) (564) We expect domestic NII to shrink 5% YoY in FY3/17, Net interest income 1,879 2,181 2,104 2,091 2,089 Net fees and commission 1,269 1,420 1,454 1,500 1,548 mostly offset by a similar rate Net trading income 362 353 372 404 408 of growth abroad Net other operating income 244 274 254 247 222 Non interest income 1,875 2,047 2,080 2,150 2,179 We see fee income expanding Total operating income 3,754 4,229 4,184 4,241 4,268 more slowly over our forecast Total operating costs (2,289) (2,584) (2,602) (2,672) (2,689) period than it did in FY3/14–15 Pre-provisional operating profit 1,464 1,645 1,582 1,569 1,579 Net credit costs 12 (162) (84) (250) (210) Operating profit 1,477 1,483 1,498 1,319 1,369 We look for a modest increase Income from associates 112 160 190 150 160 in credit costs, to still-low Other gains/losses (45) (28) (39) (40) (40) levels of 21bp of loans in Pre-tax profit 1,544 1,614 1,649 1,429 1,489 FY3/17 and 17bp in FY3/18 Taxation (440) (468) (453) (400) (417) Profit after tax 1,104 1,146 1,196 1,029 1,072 Minority interests (118) (113) (117) (98) (102) Profit after tax & minorities 985 1,033 1,079 931 970 Preferred dividends (18) - - - - Net income to ord equity 968 1,033 1,079 931 970 Source: Company, HTI estimates
Low Medium High
We expect domestic NII to shrink by more than 5% YoY in FY3/17 and a further 3% in Key P/L Takeaway FY3/18 as the BOJ’s aggressive monetary easing continues to depress the JPY yield curve The drop in the bottom line and as MUFG starts to incur costs on some of its balances with the BOJ under the NIRP. that we forecast for FY3/17 is However, the negative effect on total NII should be mostly offset by 5% growth in overseas mostly attributable to our NII in FY3/17 and 4% growth in FY3/18. We think fee income should expand more slowly expectation of a normalization over our forecast horizon than it did in FY3/14–15, when growth was boosted by the in credit costs, although consolidation of Bank of Ayudhya, and also to reflect more-subdued sales of investment reduced domestic lending trusts than when the tax-free Nippon Individual Saving Accounts (NISA) were first margins (exacerbated by NIRP) introduced, at the start of 2014. could also have some impact The major factor driving our expectation of a decrease in the bottom line in FY3/17 is the likelihood of a modest upward normalization of credit costs, which have been near zero (with even some net reversals) in the past few years. That said, total credit costs of 21bp of loans in FY3/17 and 17bp in FY3/18 would still be low in a historical context, as we are not expecting a major deterioration in loan performance, especially domestically.
26 Apr 2016 4 Mitsubishi UFJ Financial Group (8306 JP) Buy
Balance Sheet (¥b) Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Our Model Assumptions Cash and balances with central banks 23,970 40,488 52,190 60,420 68,490 Balances with the BOJ should Interbank loans 827 605 100 700 700 continue to grow due to a Other short-term financial assets 35,030 38,057 40,000 40,400 40,800 Gross loans 103,979 111,556 117,400 122,100 127,100 dearth of JPY-denominated Less: Loan impairment allowances (938) (996) (870) (1,020) (1,130) investment alternatives Net loans 103,041 110,560 116,530 121,080 125,970 Securities - domestic equities 4,998 6,324 5,500 5,300 5,100 We expect annual loan Securities - JGBs 40,650 35,211 23,500 15,500 7,500 growth of 1.2% in Japan and Securities - others 28,867 32,004 34,200 37,000 39,800 12% overseas in FY3/17–18, Securities - total 74,516 73,538 63,200 57,800 52,400 Other current assets 8,809 10,120 10,000 10,000 10,000 the same assumptions as for Intangible assets 1,483 1,297 1,300 1,300 1,300 SMFG Deferred tax assets 131 115 100 100 100 Customers' liabilities for acceptances 8,325 9,512 9,900 10,300 10,700 We see holdings of JGBs Other assets 2,001 1,857 2,000 2,000 2,000 continuing to decline as the Total assets 258,132 286,150 295,320 304,100 312,460 BOJ continues to purchase the Due to customer 144,760 153,357 160,200 165,300 170,800 Certificates of deposit 15,548 16,074 15,800 16,300 16,900 instruments Due to banks & financial institutions 3,465 3,600 500 3,600 3,600 Bonds 7,601 8,931 9,200 9,200 9,200 We expect the JPY LDR to Other short-term financial liabilities 62,448 75,883 80,300 79,450 80,700 remain flat at 56% and a Deferred tax 475 1,127 1,140 1,140 1,140 foreign-currency LDR of 92% Acceptances and guarantees 8,325 9,512 9,900 10,300 10,700 Other liabilities 396 378 320 320 320 Total liabilities 243,019 268,862 277,360 285,610 293,360 Short-term financial liabilities Shareholders' equity 11,346 11,329 11,958 12,541 13,166 include borrowings for asset Minority interests 2,048 1,961 2,078 2,176 2,278 liability management (ALM) Stock warrants/rights 9 8 9 9 9 matching and for securities Valuation/translation adjustment 1,710 3,989 3,915 3,764 3,646 transactions with customers Total equity 15,113 17,288 17,960 18,490 19,100 Source: Company, HTI estimates
Our forecasts assume that MUFG’s domestic balance sheet remains broadly reflective of a Key B/S Takeaway deflationary, rather than a reflationary, environment. We assume growth in domestic In our base case, MUFG’s loans of 1.2% annually throughout the forecast period, and the domestic loan-to-deposit domestic balance sheet ratio (LDR) remaining at 56%. However, we do assume that MUFG is able to grow overseas remains broadly reflective of a loans at 12% while still gathering sufficient overseas deposits to maintain an overseas LDR deflationary macro of 92%. environment, but overseas growth continues The most significant balance-sheet change that we model is a further reduction in holdings of JGBs, with some being replaced with foreign bonds, but most being replaced by increased deposits with the BOJ—an asset that would be penalized by the NIRP—due to a lack of sufficient alternative JPY-denominated investment opportunities.
26 Apr 2016 5 Mitsubishi UFJ Financial Group (8306 JP) Buy
Our Model Assumptions Capitalisation (¥b) Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Common equity tier-1 capital 11,153 12,467 12,800 13,300 14,000
RWAs are less than 40% of Tier 1 capital 12,342 14,130 14,600 15,100 15,800 total assets, reflecting large Total risk-based capital 15,394 17,552 18,000 18,500 19,200 holdings of zero-weight JGBs Risk weighted assets 99,754 112,315 115,901 121,647 128,123 RWAs/total assets 38.6% 39.3% 39.2% 40.0% 41.0% and deposits with the BOJ CET1 ratio (Basel III) 11.2% 11.1% 11.0% 10.9% 10.9% Tier 1 ratio (Basel III) 12.4% 12.6% 12.6% 12.4% 12.3% CET1 meets fully loaded Basel Total capital ratio (Basel III) 15.4% 15.6% 15.5% 15.2% 15.0% requirements Leverage ratio 4.7% 4.7% 4.7% 4.8% Source: Company, HTI estimates Considering the low RWA density, the leverage ratio requirement is more likely to be a constraint than the risk- based capital ratios
At end-2015, CET1 ratio was 11.2%, Tier 1 ratio 12.8%, and total capital ratio 15.7%, Key Capitalization Takeaway meeting 2019 Basel requirements. Even if ROE declines below 6% and shareholder We expect internal capital distributions continue, internally generated capital should be sufficient to maintain these generation to be sufficient to ratios on our assumed 3% balance-sheet growth. Hence, we do not expect risk-based maintain regulatory capital capital ratios to constrain growth unless the Basel Committee calculates risk-weighted ratios, even as the balance assets in a way that penalizes banks with low RWA densities. However, if MUFG moves sheet grows at around 3%, away from zero-weight assets and into risky loans in a reflationary scenario, this could allowing continued dividends change. Low RWA density also means leverage ratio requirements (based on total leverage and buybacks rather than RWAs) are a more likely constraint than risk-based requirements. Japanese banks’ capital ratios are subject to added volatility because they hold “policy” shares. Increasing penalization of these holdings under Basel regulations and Japan’s recently adopted Corporate Governance Code should result in a further reduction of these over time, but MUFG also needs to persuade corporate borrowers to acquiesce to sales.
26 Apr 2016 6 Mitsubishi UFJ Financial Group (8306 JP) Buy
Our Model Assumptions Per Share Data Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E EPS (¥) 68.33 73.33 77.59 68.02 71.93 FDEPS (¥) 68.33 73.33 77.59 68.02 71.93 Adjusted BVPS (¥) 894 1,093 1,149 1,201 1,258 These per-share figures DPS (¥) 16.00 18.10 18.30 18.26 18.27 assume that MUFG buys back Shares in issue (million) 14,164 14,169 14,169 14,169 14,169 200mn shares per year Year end adjusted shares in issue (m) 14,161 14,018 13,789 13,589 13,389 Key Ratios Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Growth Most of the loan growth that Gross loans growth 12.0% 7.3% 5.2% 4.0% 4.1% we are modelling is overseas; Total deposits growth 9.4% 5.7% 3.9% 3.2% 3.4% we have domestic annual loan Total asset growth 10.1% 10.9% 3.2% 3.0% 2.7% growth at 1.2% over the Total liabilities growth 10.0% 10.6% 3.2% 3.0% 2.7% forecast period Total shareholders' equity growth 7.3% (0.2%) 5.6% 4.9% 5.0% Net interest income growth 3.4% 16.1% (3.6%) (0.6%) (0.1%) Non interest income growth 3.2% 9.2% 1.6% 3.4% 1.3% We expect domestic NII to Operating income growth 3.3% 12.7% (1.1%) 1.4% 0.6% shrink at 5%, but the high Operating expenses growth 9.3% 12.9% 0.7% 2.7% 0.6% overseas contribution to NII Pre-provision profit growth (4.9%) 12.3% (3.8%) (0.8%) 0.6% Net profit growth 15.9% 6.8% 4.4% (13.7%) 4.2% should support the total EPS growth 15.9% 7.3% 5.8% (12.3%) 5.7% FD EPS growth 15.9% 7.3% 5.8% (12.3%) 5.7% We are not modeling any Adjusted BVPS growth 11.6% 22.2% 5.1% 4.6% 4.8% further dividend growth DPS (¥) 16.00 18.10 18.30 18.26 18.27 DPS growth 23.1% 13.1% 1.1% (0.2%) 0.0% considering the worsening Key performance indicators environment for domestic Net interest income / total income 50.0% 51.6% 50.3% 49.3% 49.0% profitability Non interest income / total income 50.0% 48.4% 49.7% 50.7% 51.0% Interest expenses / interest income 20.8% 22.3% 23.2% 22.3% 21.3% Cost-income ratio 61.0% 61.1% 62.2% 63.0% 63.0% Leverage (x) 22.75 25.26 24.70 24.25 23.73 Loan-to-deposit ratio 64.9% 65.8% 66.7% 67.2% 67.7% Impaired loan ratio 1.6% 1.4% 1.2% 1.4% 1.5% Provision coverage for impaired loans 55.0% 64.7% 59.7% 60.2% 59.8% Provision-to-loan ratio 0.9% 0.9% 0.7% 0.8% 0.9% ROA 0.4% 0.4% 0.4% 0.3% 0.3% ROE 8.8% 9.1% 9.3% 7.6% 7.5% Dividend payout ratio 23.4% 24.6% 23.4% 26.7% 25.2% Tax rate 28.5% 29.0% 27.5% 28.0% 28.0% Valuation Measures P/E (x) 8.21 7.65 7.23 8.25 7.80 Adjusted P/B (x) 0.63 0.51 0.49 0.47 0.45 Dividend yield 2.9% 3.2% 3.3% 3.3% 3.3% Source: Company, HTI estimates
Our forecasts for EPS and book value per share assume that MUFG buys back 200mn Key Driver Takeaway shares per year. We are not modeling any further dividend hikes after the latest increase, Our forecasts for EPS and BVPS to ¥18, in FY3/15. This implies a dividend payout ratio of 26.7% in FY3/17 and 25.2% in assume that MUFG continues FY3/18, slightly higher than in recent years. its share repurchases at a pace similar to that of the past 18 months
26 Apr 2016 7 Mitsubishi UFJ Financial Group (8306 JP) Buy
Company Outline and Operational Review
Tightening Global Regulation (page 8)—NEGATIVE Low Valuations (page 10)—POSITIVE BOJ’s Unorthodox Policy (page 11)—More POSITIVES than NEGATIVES MUFG’s Japanese and Global Exposure (page 13) Breakdown by Business Line (page 14) Valuation and Risks to the Attainment of Our Target Price and Rating (page 18)
Tightening Global Regulation All three Japanese mega-banks are The three Japanese mega-banks have been included in the G-SIBs that are subject to included in the 30 G-SIBs subject to stricter regulation than other banks since the Basel-based FSB first promulgated a G-SIB list stricter regulation in November 2011. At first, they were the only Asian banks on the list, except for Bank of China (3988 HK), but other Chinese lenders have since replaced some Western institutions on the 30-bank list. Since the FSB began assigning individual banks to one of five buckets of increasing regulatory strictness in November 2012, MUFG has been assigned to the second bucket while Sumitomo Mitsui Financial Group (8316 JP) and Mizuho Financial Group (8411 JP) have been in the first (i.e., lowest-strictness) bucket. Historically, Japanese banks were inadequately capitalized to deal with the problem loans resulting from the 1980s credit boom and subsequent bust, but by the late 2000s a combination of government-led recapitalization and slow accumulation of retained earnings had improved their capital positions, relative to risk-weighted assets, to near the average for global banks. A key caveat here is that capital improved relative to risk- weighted assets; relative to total balance-sheet exposure, Japanese banks—particularly Mizuho—continue to have high leverage ratios, and the density of their RWAs to total assets is lower than US banks and other banks in Asia (see figures below).
G-SIBs’ leverage ratios (%) RWA density (RWAs/total assets)
BofA (BAC US) BofA (BAC US) Title: Title: JPM (JPM US) Wells Fargo (WFC US) Morgan Stanley (MS US) Citigroup (C US) Source: Source: Wells Fargo (WFC US) ABC (1288 HK) Relatively low RWA densities mean Citigroup (C US) Goldman Sachs (GS US) ICBC (1398 HK) BOC (3988 HK) CCB (939 HK) ICBC (1398 HK) Japanese banks’ ability to increase State Street (STT US) JPM (JPM US) CCB (939 HK) BOC (3988 HK) Morgan Stanley (MS US) shareholder distributions (or expand ABC (1288 HK) StanChart (STAN LN) BNY Mellon (BK US) HSBC (HSBA LN) overseas) could be limited in future, RBS (RBS LN) Unicredit (UCG IM) StanChart (STAN LN) Santander (SAN SM) Please fill in the values above to have them enteredPlease in your fill report in the values above to have them entered in your report UBS (UBSG VX) BNY Mellon (BK US) depending on regulatory HSBC (HSBA LN) State Street (STT US) SMFG (8316 JP) MUFG (8306 JP) Unicredit (UCG IM) ING (INGA NA) developments MUFG (8306 JP) Credit Suisse (CSGN VX) Credit Agricole (ACA FP) SMFG (8316 JP) Nordea (NDA SS) Mizuho (8411 JP) Barclays (BARC LN) Barclays (BARC LN) Credit Suisse (CSGN VX) BNP Paribas (BNP FP) ING (INGA NA) RBS (RBS LN) Santander (SAN SM) SocGen (GLE FP) SocGen (GLE FP) Deutsche Bank (DBK GR) BNP Paribas (BNP FP) UBS (UBSG VX) Mizuho (8411 JP) Nordea (NDA SS) Deutsche Bank (DBK GR) Credit Agricole (ACA FP) - 2.0 4.0 6.0 8.0 10.0 0 0.2 0.4 0.6 0.8
Source: Company data, Bloomberg Source: Company data, Bloomberg
26 Apr 2016 8
Mitsubishi UFJ Financial Group (8306 JP) Buy
Revisions to standardized The table below shows the key regulatory changes that remain to be decided. We see some approaches and internal models, risk to Japanese mega-banks if the minimum leverage ratio (Tier-1 capital to total leverage expected from Basel by year-end, exposure) is set higher than the expected 3%, but this seems relatively unlikely. More could force Japanese banks’ RWA significant are the revisions to the standardized approaches for calculating credit risk and densities higher operational risk, and to the internal models that banks use to calculate their RWAs. If such changes, expected during 2016, result in a significant increase in Japanese banks’ RWAs, it would, at minimum, limit their ability to increase shareholder distributions. We are modelling a 1ppt increase per year in RWA density as our base case.
Key Regulatory Changes and Our View of the Risks to Japanese Mega-Banks Risks to Japan Regulation area Specific regulations Rules finalized? Phase-in mega-banks Minimum CET1 (4.5% of RWAs) Minimum T1 (CET1+AT1=6.0%) Minimum total (T1+T2=8.0%) CCB (additional CET1 of 2.5%) Yes 2013-19 Relatively low Conversely, we expect Japanese Numerators Countercyclical buffer (0-2.5%) banks to be relatively well Risk- New deductions from capital based positioned to meet tightening Phaseout of old instruments minimum liquidity requirements given their G-SIBs: CET1 surcharge (1%-3%) Yes* 2016 Relatively low large holdings of liquid assets and capital ratios G-SIBs: TLAC (18%) Yes 2019-22** Relatively low massive retail deposits Standardized Approaches CVA risk framework Not yet -- Denominator IRRBB expected by year- TBD Significant Internal models end Capital floors Non-risk-based minimum Leverage ratio (3%) Mostly*** 2018 Some risk capital ratios G-SIBs: TLAC (6.75%) Yes 2019-22** Relatively low LCR (HQLA 100% of 30d outflows) Yes 2015-19 Relatively low Liquidity requirements NSFR (ASF/RSF >100%) Yes 2018 Relatively low Source: Basel Committee on Banking Supervision (BCBS), HTI estimates
Definitions of Regulatory Terms
Term: Stands for: What it is: CET1 Common Equity Tier 1 Equity of common stockholders etc. after adjustments for intangibles etc. The takeaway from this alphabet AT1 Additional Tier 1 Other instruments qualifying as T1 capital, such as eligible preferred shares. soup is that global banks are being T2 Tier 2 Instruments eligible as T2 capital include loss-absorbing subordinated debt . capital conservation subjected to more and more CCB additional requirement of 2.5% CET1/RWAs, on top of the 4.5% requirement. internationally coordinated rule- buffer RWAs Risk-weighted assets total assets adjusted for assumed credit, market, and operational risks. making Global systemically G-SIB 30 banks determined by the Financial Stability Board as globally important. important banks total loss-absorbing regulatory capital, eligible debt instruments, and pre-funded recapitalization TLAC capacity commitments (up to 3.5% of RWAs). Credit Valuation CVA adjusts the value of derivative positions for potential counterparty risk. Adjustment Interest-rate risk in the IRRBB Basel is looking at standardized capital requirements for interest-rate risk. banking book LCR Liquidity Coverage Ratio HQLA to projected net outflows in a 30-day liquidity stress scenario. High Quality Liquid HQLA cash, deposits with BOJ, government bonds, highly rated corporate bonds, etc. Assets NSFR Net Stable Funding Ratio the ratio of available stable funding to required stable funding. ASF Available stable funding liabilities weighted 100%, 95%, 90%, 50%, or 0% per their (assumed) stability. RSF Required stable funding assets are weighted 0% to 100% depending on their assumed liquidity. Source: BCBS
26 Apr 2016 9
Mitsubishi UFJ Financial Group (8306 JP) Buy
Low Valuations MUFG’s PBR is 24% below the five- MUFG is now trading at 0.51x PBR (December 2015), compared with a five-year average of year average 0.67x. Its dividend yields 3.3%, less than SMFG’s and Mizuho’s (4.1% and 4.2%, respectively), but is still among the highest yields among Japanese large-cap stocks.
PBR (x) Dividend Yield
1.2 4.5% Title: Title: 4.0% Source: Source: 1.0 3.5%
0.8 3.0%
2.5% 0.6 Please fill in the values above to have them enteredPlease in your fill report in the values above to have them entered in your report 2.0%
0.4 1.5%
1.0% 0.2 0.5%
- 0.0%
Source: Bloomberg Source: Company data, Bloomberg
As a percentage of the Tokyo Stock Exchange’s market capitalization, banks as a whole now As a proportion of TOPIX market comprise only 7.2%. Recently this ratio dipped below 7%, but the only time when banks capitalization, banks have only been were previously such a small part of the overall market, in late 2002 and early 2003, was at as small they were a few weeks ago a time when several major banks were suffering from severe undercapitalization and were once before—at the absolute thought to be at risk of failure. In our view, it is not clear that present concerns about low depths of their asset-quality and profitability and unconventional monetary policy justify as large of a discount now as banks capital crisis in late 2002–03 traded at then, the absolute bottom of a decade-long financial crisis in Japan.
Banks as a Percentage of Total TOPIX Market Mega-Banks and Their Predecessors as a Capitalization Percentage of TOPIX Market Capitalization
18% 18% Title: Title: 16% 16% Source: Source: 14% 14% 12% 12% 10% 10% 8% Please fill in the values above to have them enteredPlease in your fill report in the values above to have them entered in your report 8% 6%
6% 4% 2% 4% 0%
2%
Mar-09 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
0% Mar-97
Mar-01 Mar-16 Mar-98 Mar-99 Mar-00 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-97 MUFG SMFG Mizuho other banks
Source: Bloomberg Source: Bloomberg
26 Apr 2016 10
Mitsubishi UFJ Financial Group (8306 JP) Buy
We acknowledge that Japanese banks need to be compared not only with their home We acknowledge that some market, but also with their peers globally, and that on such a basis, MUFG’s discount seems European and Korean banks are also less pronounced. Bank valuations around the world have been under pressure compared on low PBRs—but they face other with other sectors, in part because of tightening regulation, as discussed previously in this issues that Japanese banks do not report. A number of major European banks trade around 0.4–0.5x PBR at present (also reflecting such idiosyncratic issues as problem loans in Italy and leverage concerns for Deutsche Bank (DBK GR)), and, closer to Japan, the major Korean banks also trade in a similarly low range, reflecting low profitability in the Korean banking market resulting from ongoing high credit costs (as the government requires significant lending to risky SMEs), competition with government lenders, and pro-consumer regulations that inhibit fee income. That said, the median PBR for banks in developed countries appears to be around 0.7x, indicating that Japanese banks are currently trading at a discount. In our view, a re- rating to that level would not be unwarranted.
PBRs of Selected Global Banks (As of 22 April 2016)
Japan MUFG, 0.52 SMFG, 0.56 Mizuho, 0.56 US JPM US, 1.04 C US, 0.68 BAC US, 0.65 WFC US, 1.48 Europe HSBA LN, 0.70 BARC LN, 0.53 RBS LN, 0.55 STAN LN, 0.54 LLOY LN, 1.18 BNP FP, 0.67 GLE FP, 0.48 ACA FP, 0.53 DBK GR, 0.37 INGA NA, 0.93 NDA SS, 1.14 UCG IM, 0.43 ISP IM, 0.86 SAN SM, 0.73 BBVA SM, 0.88 Canada / Australia RY CN, 1.83 Title: TD CN, 1.56 BNS CN, 1.54 Source: BMO CN, 1.38 CBA AU, 2.16 WBC AU, 1.89 NAB AU, 1.36 ANZ AU, 1.23 mainland China 1398 HK, 0.75 939 HK, 0.75 3988 HK, 0.66 1288 HK, 0.69 Taiwan 2891 TT, 1.06 Korea 086790 KS, 0.35 055550 KS, 0.66 105560 KS, 0.48 000030 KS, 0.45 024110 KS, 0.47 ASEAN Please fill in the values above to have them entered in your report DBS SP, 0.99 OCBC SP, 1.15 UOB SP, 1.10 MAY MK, 1.43 PBK MK, 2.38 CIMB MK, 1.02 SCB TB, 1.36 KBANK TB, 1.34 BBCA IJ, 3.62 BBRI IJ, 2.36 BMRI IJ, 1.99 India SBIN IN, 0.85 ICICIBC IN, 1.72
Source: Company data, Bloomberg, HTI estimates
BOJ’s Unorthodox Policy—More Positives than Negatives So why have Japanese banks de-rated so much (TOPIX Banks Index is down close to 30% year-to-date)? The answer, we believe, lies clearly in monetary policy, particularly the BOJ announcement on 29 January of “QQE with a Negative Interest Rate.” The interpretation of the markets seems to be that this policy threatens to turn banks’ profitability into collateral damage of efforts to reflate the economy, and furthermore signals that the BOJ is either running out of options or has lost the plot entirely.
26 Apr 2016 11
Mitsubishi UFJ Financial Group (8306 JP) Buy
First, regarding banks narrowly, the BOJ has since clarified that the negative rates apply The NIRP only applies to a small only to a portion of banks’ deposits with the BOJ. Indeed, even if the mega-banks’ deposits fraction of banks’ deposits at the with the BOJ continue to balloon, as we are modelling, we estimate that a maximum of BOJ 30% of the total in March 2018 would be subject to negative rates. The BOJ has also said it would review the size of the “Macro Add-on Balance” (see figure below) to minimize the burden on banks. In all likelihood, most of the NIRP could be just be more of the ZIRP (zero interest rate policy).
NIRP Initially Applies Directly to around 10% of Banks’ Deposits with the BOJ
JPY10-30 trillion (-0.1%)
Policy-Rate Balance Macro Add-on Balance JPY30-50 trillion (0%)
Basic Balance JPY210 trillion (+0.1%)
Source: Bank of Japan, Nikkei NIRP is not the only tool in the BOJ’s Further, the NIRP is not the only tool in the BOJ’s toolbox. Other unconventional policies, toolbox—others could be more such as QQE, have, on balance, been beneficial for banks, in our opinion. Admittedly, the positive for the banks central bank’s massive asset purchases have reduced gains on bond trading as a source of bank profits and have most probably contributed to the persistent pressure on loan yields, but surely these negative effects on banks have been more than offset by the benefits from the boost to JPY-denominated asset prices, particularly considering Japanese banks’ large equity holdings.
The BOJ has not run out of ammo— More broadly, it is our opinion that the BOJ has not lost the plot, and by no means are debt monetization is beneficial even macro conditions spinning out of policy makers’ control. If anything, one could argue that if real economic growth remains the Japanese authorities seem to be pulling off a potentially difficult maneuver by unchanged effectively monetizing Japan’s large public debt without having reduced confidence in the yen as a currency. Although aggressive monetary policy since 2013 has not resulted in any appreciable increase in Japan’s real economic growth rate, importantly, nominal GDP growth has increased at the same time that government bond yields have been compressed. Observers who find fault with “Abenomics” for failing to improve Japan’s real growth prospects may be giving short shrift to the potential dangers for stretched public finances if debt-service costs had remained above the rate of economic growth.
Real GDP Growth and Nominal GDP Growth Nominal GDP Growth and JGB Yields
8.0% 6.0% Title: Title: 6.0% 4.0% Source: Source: Real GDP growth has not improved, 4.0% 2.0% but nominal growth is now above 2.0% 0.0% -2.0% JGB yields 0.0% -2.0% -4.0% Please fill in the values above to have them enteredPlease in your fill report in the values above to have them entered in your report -4.0% -6.0% -6.0% -8.0% -8.0% -10.0% Mar-95 Mar-00 Mar-05 Mar-10 Mar-15 -10.0% -12.0% Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 5-year JGB yield 7-year JGB yield real GDP growth (y-y) nominal GDP growth (y-y) nominal GDP growth (y-y)
Source: Cabinet Office of Japan Source: Cabinet Office of Japan
26 Apr 2016 12
Mitsubishi UFJ Financial Group (8306 JP) Buy
MUFG ’s Japanese and Global Exposure MUFG has increased its overseas exposure substantially in the past five years. In FY3/15, Top-line contribution from overseas overseas business contributed 36.4% of total net interest income and 31.9% of total gross business has almost doubled in the profit (i.e., total net revenues), up from 22.9% and 20.3%, respectively, in FY3/11 (see past few years; we project a further figures below; all percentages are adjusted for eliminations between MUFG’s domestic and increase overseas units). We expect the contribution from overseas to continue to grow over our forecast horizon (see right-hand figure below), as MUFG is targeting further growth in the US and Asia.
Total NII Contribution from Overseas Total Net Revenue Contribution from Overseas
40% 45% Title: Title: 35% 40% Source: Source: 30% 35% 30% 25% 25% 20% 20% 15% Please fill in the values above to have them enteredPlease in your fill report in the values above to have them entered in your report 15% 10% 10% 5% 5% 0% 0%
MUFG SMFG Mizuho MUFG SMFG Mizuho
Source: Company data, Bloomberg Source: Company data, Bloomberg, HTI estimates
We estimate that MUFG’s Asian and European exposure is broadly similar in size to the MUAH (MUFG Americas Holdings, other two Japanese mega-banks, but it clearly has the most exposure to the US (the figure including both Union Bank and in the pie chart below includes both Union Bank and other BTMU loans that were BTMU operations in the US) is a integrated into MUAH in mid-2014). At present, Union Bank is the 19th-largest bank in the bigger driver of overall results than US and is mainly focused on West Coast markets, but MUFG is pursuing acquisitions of Krungsri regional banks with the goal of MUAH reaching top-10 status nationwide. MUFG treats its 76.8%-owned Krungsri unit, Thailand’s fifth-largest bank, as one of its core businesses, but at present Krungsri only contributes about 3% of loans and 4% of MUFG’s total profit, and remains less of a driver of overall results than the US operations.
Loan Breakdown by Region (March 2015, BTMU + MUTB + MUAH + Krungsri) Thailand other Asia 3% 4% Title: Greater China Source: 4% Latam & Caribbean 4% Please fill in the values above to have them entered in your report Western Europe 5%
U.S. Japan 14% 62%
Source: Company data
26 Apr 2016 13
Mitsubishi UFJ Financial Group (8306 JP) Buy
Breakdown by Business Line Of the three mega-banks, MUFG has MUFG has more peripheral businesses outside of its core banking franchise—Bank of the largest and most global Tokyo-Mitsubishi UFJ (BTMU) and Mitsubishi UFJ Trust & Banking (MUTB)—than Mizuho securities-business exposure does, but it does not have as much exposure to leasing or the consumer-finance business in because of its 22% stake in Morgan Japan as SMFG. It is unique among the three mega-banks in that much of its exposure to Stanley the securities business is through Morgan Stanley, in which MUFG owns 22%.
MUFG SMFG Mizuho
COMMERCIAL & RETAIL BANKING – BTMU (100%) – SMBC (100%) – MHBK (100%) – MUAH (U.S., 100%) – BTPN (Indonesia, 40%) – Vietcombank (15%) – Krungsri (Thailand, 76.8%) – Bank of East Asia (HK, 17.4%) – Dah Sing Financial (HK, 15.1%) – Eximbank (Vietnam, 15%) – Security Bank (Philippines, 20%) – VietinBank (Vietnam, 19.7%)
TRUST BANKING & ASSET ADMINISTRATION – MUTB (100%) – SMBC Trust (100%) – MHTB (100%) – Master Trust Bank of Japan (46.5%) (includes former Citibank Japan) – Trust & Custody Svcs (54%)
INVESTMENT FUNDS (ASSET MANAGEMENT) – MU Kokusai AM (100%) – Daiwa SB Investments (~44%) – Asset Management One (51%) – MU Investments (100%) – SMAM (40%) (=MHAM + Shinko AM + DIAM) – Aberdeen AM (UK, ~20%) – AMP Capital (Australia, ~20%)
SECURITIES – Morgan Stanley (~22%) – SMBC Nikko (100%) – MHSC (95.8%) – MUMMS (60%) – SMBC Friend (100%) – MSMS (49%) – kabu.com (~57%)
LEASING – MUFL (13.4%) – SMFL (60%) – small stakes in: – BOT Lease (22.5%) – SMBC Aviation Capital (90%) IBJL (~5.7%) – Sumitomo Mitsui Auto Svc (~34%) Fuyo General (~3.0%) – NEC Capital Solutions (~25%) Century Tokyo (~4.4%)
CREDIT CARD / SHOPPING CREDIT – NICOS (~85%) – SMBC Card (~66%) – UC Card (51%) – JALCARD (~49%) – Cedyna (100%) – Orico (~49%) – JACCS (~22%) – Sakura Card (100%) – Credit Saison (~5%) – MOBIT (100%) – Pocket Card (~35%)
CONSUMER FINANCE (CASH LOANS) – ACOM (~40%) – SMBC Consumer Finance (100%)
DIRECT (INTERNET) BANKING – Jibun Bank (50%) – Japan Net Bank (~41%)
JAPANESE REGIONAL BANKS – Chukyo Bank (Nagoya, 39.7%) – Kansai Urban (Osaka, ~60%) – Chiba Kogyo Bank (20.8%) – Minato Bank (Kobe, ~46%) Source: Company data; Note: percentages shown reflect each bank’s ownership stake as of 22 April 2016
26 Apr 2016 14
Mitsubishi UFJ Financial Group (8306 JP) Buy
Banking in Japan Of the three mega-banks, MUFG’s Compared with SMFG and, especially, Mizuho, MUFG’s physical presence in Japan is more branch network in Japan is more focused on the three major urban areas (Tokyo, Nagoya, and Osaka). More than half of focused on major urban areas BTMU’s manned branches are either in Tokyo or the three prefectures adjacent to Tokyo (Kanagawa, Saitama, or Chiba), and it is also more weighted toward the manufacturing hub of Nagoya (16% of BTMU branches are in Aichi Prefecture), reflecting the heritage of UFJ predecessor Tokai Bank. In contrast, there are only two BTMU branches and one MUTB branch in the entire Tohoku region (in Sendai), compared, for example, with Mizuho, which has at least one branch in each prefecture. Breaking down BTMU’s and MUTB’s domestic banking loans by customer type, almost a quarter are housing loans, while other consumer loans are a relatively small proportion (most of MUFG’s consumer business is in its NICOS and ACOM units (described later), rather than in the core banking units). Unlike demand for large corporate loans, demand for housing loans in Japan has been growing, but MUFG faces competition in this segment not only from the other two mega-banks but also from regional banks (some of which extend a large portion of their housing loans outside their home prefectures) and other players such as nonbank financial companies and direct (internet) banks.
Breakdown of Loans in Japan by Customer Type (March 2015, BTMU + MUTB)
Title: Source: Large corporate & Housing loans other 23% 44% Other consumer loans Please fill in the values above to have them entered in your report 1% Loans to SMEs 32%
Source: Company data
Loans at Japan’s major banks are The aggregate size of loans on the balance sheets of Japan’s major banks is essentially flat with a decade ago and down unchanged from a decade ago and 40% smaller than two decades ago. After deleveraging 40% from two decades ago from the credit boom of the 1980s (first, in the late 1990s, with insufficient recapitalization, and finally in the early 2000s more systemically and with bigger injections of public capital), the banks’ core corporate customers have had limited demand to borrow for new projects in Japan and many are now relatively cash-rich. In this environment, Japan’s regional banks have seen slow growth (in areas such as housing loans) while the mega-banks have just maintained their existing loan balances in Japan and grown their assets overseas. Until 2012, the imbalance between the mega-banks’ positive deposit growth and lack of The lack of domestic loan growth domestic loan growth resulted in an increase in their holdings of JGBs. Since the BOJ began resulted in increased holdings of purchasing JGBs in early 2013, the banks have reduced their bond holdings and instead JGBs, until the BOJ began increased their deposits at the central bank—despite earning only a 10bp yield until now purchasing them in 2013 on such excess reserves. We believe they were willing to do this because JGB yields have themselves been falling, and also because banks are cognizant of the possibility of increased regulation around IRRBB (interest-rate risk in the banking book).
26 Apr 2016 15
Mitsubishi UFJ Financial Group (8306 JP) Buy
We are expecting a continuation of these trends in FY3/17 and FY3/18—little domestic loan We think the direct impact of the growth (we assume 1.2% in our model), continued expansion of overseas loans (we assume NIRP—more downward pressure on 12% growth), continued reductions in JGB holdings and continued growth in deposits at the loan yields—may be larger than the BOJ. The NIRP announced by the BOJ in late January penalizes the banks for holding direct penalization of deposits at the deposits at the BOJ, but the mega-banks do not have alternatives for JPY-denominated BOJ assets and thus have little choice but to bear this cost. In our view, the main negative impact from the NIRP would be continued downward pressure on loan yields (see figure below).
Average Contracted Interest Rates on Loans and Discounts at Domestically Licensed Banks
3.5% Title:
3.0% Source:
2.5%
2.0% Please fill in the values above to have them entered in your report 1.5%
1.0%
0.5%
0.0% Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
New loans Outstanding ST loans Outstanding LT loans
Source: Bank of Japan
Banking in the US The performances of loans to the oil In mid-2014, MUFG integrated BTMU’s operations in the Americas with the operations of & gas industry are likely to Union Bank, the fourth-largest bank in California (a 10% share of deposits in the Los negatively impact Union Bank’s Angeles area and 14% in San Diego) and the 19th-largest in the US. As of end-2015, 36% of profitability in 2016 Union Bank’s loan portfolio was residential mortgages, 18% was commercial mortgages, and 38% was commercial & industrial loans. Although Union Bank’s net charge-offs have historically been relatively low (the bank only posted moderate losses in 2009 after the US housing crisis before returning to profitability in 2010), the performance of loans to the oil & gas industry should negatively impact profitability in 2016. Following the integration of Union Bank with BTMU’s other US operations, the group is aiming to increase its national footprint through M&A to reach top-10 status in the US. In addition to commercial banking, MUFG has said that it sees the asset management business—which is less balance-sheet intensive—as a core profit driver. It already owns 20% stakes in Aberdeen Asset Management (ADN LN) in the UK and AMP’s (AMP AU) AMP Capital in Australia, and we believe acquisitions of asset managers in the US are also likely within the next few years. Banking in Thailand Krungsri (an abbreviation of Bank of Ayudhya’s Thai name and the name by which the bank Krungsri’s heavy consumer focus is popularly known) is Thailand’s fifth-largest bank, with a market share of commercial could put it at risk of higher credit banking assets of close to 8%, after the Big Four that together control about 70%. It is costs given high levels of household weighted toward the retail segment (43% of loans at end-2015, compared with 42% for debt in Thailand large corporates and 15% for SMEs), with a 27% national market share in personal loans, 15% in credit cards, and 22% in auto hire purchase. We believe this consumer-heavy portfolio puts Krungsri at risk of increased credit costs in coming years, as household debt in Thailand has increased to more than 70% of GDP, a high level for a middle-income country, while economic growth has been slow. However, at end-2015 Krungsri’s loan-loss coverage ratio was 140.6%, indicating that NPLs (2.24% of total loans at end-2015, down from 2.79% at end-2014) are well covered by reserves at present. Krungsri’s mid-term
26 Apr 2016 16
Mitsubishi UFJ Financial Group (8306 JP) Buy
business plan targets three areas: 1) asset growth; 2) fee income expansion; and 3) reduction in cost of funds. It is aiming to increase penetration among large corporates and is in the process of increasing low-cost CASA deposits. Securities Business Based on MUFG’s 22% stake, the earnings of Morgan Stanley contributed more than 7% of MUFG’s collaboration with Morgan total net profit in FY3/15. In addition, MUFG has a unit called Mitsubishi UFJ Securities Stanley seems to be working well Holdings (MUSHD) to hold two joint ventures with Morgan Stanley focused on Japan- for it, perhaps surprisingly so, related business: Mitsubishi UFJ Morgan Stanley Securities (MUMMS) is 40% owned by considering the existence of two Morgan Stanley and houses the US firm’s former investment banking operations in Japan, parallel joint ventures in Japan with while MUSHD owns 49% of the voting rights (a 60% economic interest) in Morgan Stanley potentially overlapping remits and MUFG Securities (MSMS), a joint venture that runs the US firm’s former sales and trading different corporate cultures and capital markets businesses in Japan. MUSHD also holds MUFG’s stake in Kabu.com Securities (8703 JP), an online broker with market share in Japan of about 10% retail trading volume. The three (MUMMS, MSMS, and Kabu.com) together had net operating revenue of ¥234bn in the first half of FY3/16, second (when combined) only to Nomura Securities (8604 JP) in the domestic securities business. After MUMMS and MSMS were set up in 2010, there were some concerns about the parallel structure of the two joint ventures, with their different workplace cultures, but the securities partnership with Morgan Stanley appears to be functioning effectively for MUFG, with MUMMS topping the Japan-related M&A league tables by a significant margin in 2014, for example. Leasing Business The leasing business is a smaller About 0.5% of MUFG’s total net profit in each of the past five fiscal years has come from contributor to MUFG than it is for 13.44% owned Mitsubishi UFJ Lease & Finance (MUFL, 8593 JP), one of the largest lessors SMFG, as Mitsubishi UFJ Lease & in Japan. It is 20% owned by trading company Mitsubishi Corp. (8058 JP) and has a number Finance is only 13.44% owned by of other Mitsubishi Group firms on its shareholder roster. MUFG also owns 22.5% of BOT the bank and BOT Lease is also only Lease, the leasing arm of the former Bank of Tokyo prior to its merger with Mitsubishi Bank an affiliate in 1995. The leasing business in Japan shrank about 40% around the time of the global financial crisis as a change in accounting treatment made leases less attractive for some lessees, but it has returned to modest growth more recently, which we expect to continue. Consumer Finance Business Revision of the Money Lending MUFG’s NICOS unit issues credit cards under the MUFG, NICOS, UFJ and DC brands. Business Act in Japan has reduced Including BTMU’s 49%-owned JALCARD and 20% owned JACCS, MUFG has market share of profitability for consumer units domestic card transaction volumes of close to 15%, one of the leaders of the relatively Nicos and ACOM, but the worst fragmented card industry in Japan, where retail-related issuers such as Credit Saison (8253 appears to be over JP), Aeon (8267 JP), and Rakuten (4755 JP) have significant presences. ACOM, which focuses on unsecured consumer lending, became a consolidated subsidiary of MUFG in 2008 when the Group increased its stake to around 40%, similar to the stake held by the consumer finance firm’s founding Kinoshita family. The consumer finance business has historically been high-margin in Japan, but amendments to the Money Lending Business Act in 2010 that reduced the maximum permissible interest rate to 15–20% (depending on principal amount) have significantly affected profitability, in particular because interest charged in previous years at higher rates has been required to be refunded to borrowers, even after an interval of many years. We expect the contribution to MUFG’s overall profits from NICOS and ACOM to increase from their currently low levels as the burden from such refunds lessens.
26 Apr 2016 17
Mitsubishi UFJ Financial Group (8306 JP) Buy
Valuation and Risks to the Attainment of Our Target Price and Rating Our target price of ¥670 is based on 0.61x book value per share of ¥1,107 as of year-end 2015. Our target PBR multiple of 0.605x is based on a 10% discount to MUFG’s five-year average PBR of around 0.67x; we see a modest discount to the recent average as appropriate at present given our expectations for declining profitability in FY3/17 as well as regulatory and macroeconomic headwinds. If our target price is attained, MUFG’s dividend of ¥18 would yield 2.7%, slightly below MUFG’s five-year average dividend yield of 2.9%. Risks to our bullish view include a sharper-than-expected impact from the NIRP on domestic bank profitability, harsher-than-expected tightening of global regulations that could prompt the bank to reduce shareholder distributions or even raise new equity, or a global or Asia-specific economic downturn that could increase credit costs and introduce additional macroeconomic volatility.
26 Apr 2016 18
Mitsubishi UFJ Financial Group (8306 JP) Buy
P/E (x) vs EPS Growth (%) P/B (x) vs ROE Dividend Payout and Yield - (¥) 14.0 20.0% 1.20 10.00% 20.0 3.50% 18.0 3.15% 12.0 15.0% 1.00 8.33% 16.0 2.80% 10.0 10.0% 0.80 6.67% 14.0 2.45% 8.0 5.0% 12.0 2.10% 0.60 5.00% 10.0 1.75% 6.0 0.0% 8.0 1.40% 0.40 3.33% 4.0 -5.0% 6.0 1.05% 4.0 0.70% 2.0 -10.0% 0.20 1.67% 2.0 0.35%
0.0 -15.0% 0.00 0.00% 0.0 0.00%
Jul-15 Jul-15
Jan-13 Jan-18 Jan-18 Jan-13
Jun-13 Jun-18 Jun-13 Jun-18
Oct-16 Oct-16
Apr-14 Apr-14
Sep-14 Feb-15 Sep-14 Feb-15
Dec-15 Dec-15
Aug-17 Aug-17
Nov-18 Nov-13 Nov-13 Nov-18
Mar-17 Mar-17
May-16 May-16 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Rolling P/E (x) (lhs) EPS growth (rhs) Rolling PBV (lhs) ROE (rhs) DPS (lhs) Dividend yield (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates
Net Interest Income and Growth - (¥b) Fees Income and Growth - (¥b) Total Operating Income and Growth - (¥b) 2,500 20.0% 1,800 14.0% 1,600 12.4% 4,300 12.5% 2,000 15.0% 1,400 10.9% 4,100 9.6% 1,200 9.3% 1,500 10.0% 1,000 7.8% 3,900 6.7% 800 6.2% 1,000 5.0% 600 4.7% 3,700 3.8% 500 0.0% 400 3.1% 3,500 0.9% 200 1.6%
0 -5.0% 0 0.0% 3,300 -2.0%
Mar-16E Mar-17E Mar-18E Mar-16E Mar-17E Mar-18E Mar-16E Mar-17E Mar-18E
Mar-13A Mar-14A Mar-15A Mar-13A Mar-14A Mar-15A Mar-13A Mar-14A Mar-15A Net interest income (lhs) Net fees and commission (lhs) Total operating income (lhs) Net interest income growth (rhs) Net fees and commission growth (rhs) Operating income growth (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates
Net Loans vs Securities - (¥b) Net Credit Costs vs Impaired Loan Ratio - Net Income To Ord Equity and Growth - (¥b) 140,000 50 (¥b) 2.50% 1,200 20.0%
120,000 0 2.14% 1,000 13.3% 100,000 -50 1.79% 800 6.7% 80,000 -100 1.43% 600 0.0% 60,000 -150 1.07% 400 -6.7% 40,000 -200 0.71% 20,000 -250 0.36% 200 -13.3%
0 -300 0.00% 0 -20.0%
Mar-16E Mar-17E Mar-18E Mar-16E Mar-17E Mar-18E
Mar-14A Mar-13A Mar-14A Mar-15A Mar-13A Mar-15A
Mar-18E Mar-16E Mar-17E
Mar-14A Mar-15A Mar-13A Net income to ord equity (lhs) Net credit costs (lhs) Impaired loan ratio (rhs) Net loans Securities - total Net profit growth (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates
Cost-income ratio CET1 Ratio vs RWAs/total assets (%) Securities - domestic equities, JGBs and 64.0% 42.0 11.80% 60,000 others - (¥b) 63.0% 41.0 11.60% 50,000 62.0% 40.0 11.40% 61.0% 39.0 11.20% 40,000 60.0% 38.0 11.00% 30,000 59.0% 37.0 10.80% 58.0% 20,000 36.0 10.60% 57.0% 35.0 10.40% 10,000 56.0% 0
55.0%
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 54.0% Mar-13
RWAs/total assets (%) (lhs)
Mar-17E Mar-16E Mar-18E
Mar-13A Mar-14A Mar-15A Securities - domestic equities
CET1 ratio (Basel III) (rhs)
Mar-16E Mar-17E Mar-18E
Mar-13A Mar-14A Mar-15A Securities - JGBs Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates
26 Apr 2016 19 Mitsubishi UFJ Financial Group (8306 JP) Buy
Revenue Growth For the next three fiscal years we see zero top-line growth from the FY3/15 level, as declining revenues from domestic business (down around 2%) offset continued expansion overseas (up by about 5%).
Profit Margins Domestic margins should contract given compression in the JPY yield curve and barriers in passing on negative interest rates to depositors. However, increasing contrib ution from higher-margin overseas lending should limit the decline in blended NIM to 95bps in FY3/17 from 101bps in FY3/15, on our forecasts.
Shareholder Returns After increasing its dividend in each year between FY3/12 and FY3/15, MUFG now pays ¥18 (23% of our FY3/16 EPS estimate). It bought back ¥300bn worth of shares (2.7% of outstanding) in 2014–15. However, we think room for increases in shareholder returns has narrowed given a worse environment for domestic profitability and the need to conserve capital to meet capital and leverage requirements while expanding internationally.
Balance Sheet Risks Banks carry higher balance-sheet risks than many other sectors. The credit default swaps of BTMU have recently traded around average for global SIFIs, implying its riskiness is neither higher nor lower than the global average. MUFG’s NPL ratio has declined to a historically low 1.25%. We expect a modest increase to 1.4% at March 2017 and 1.5% at March 2018.
Investment Thesis – Target Price – Share Price Catalysts Key Takeaway MUFG has the largest overseas presence among the Japanese mega-banks, and is ahead of We expect more positive its Japanese rivals particularly in the US, where the top-20 player Union Bank is a wholly than negative changes in owned unit. It holds a 22% stake in Morgan Stanley and majority control of Thailand’s monetary policy fifth-largest lender Krungsri. Its large global importance also makes it subject to stricter global regulation, but we believe current valuations discount a higher degree of pessimism about the profitability outlook in Japan than warranted. Our target price of ¥670 is based on 0.58x PBR. We believe the main catalysts for the share price are likely to lie in changes to the BOJ’s monetary policy that are more positive than negative for banks.
26 Apr 2016 20 Mitsubishi UFJ Financial Group (8306 JP) Buy
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26 Apr 2016 21 Mitsubishi UFJ Financial Group (8306 JP) Buy
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26 Apr 2016 22 Mitsubishi UFJ Financial Group (8306 JP) Buy
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26 Apr 2016 23 Mitsubishi UFJ Financial Group (8306 JP) Buy
Recommendation Chart Price Close Definitions for Key Investment Metrics 1,050 950 Business Growth 850 This is the metric which matches the top line in 750 our report. Business profit 650 This is the metric which best represents 550 operating profit in our report 450 Shareholder Returns 350 Return on Equity 250 Balance Sheet Risk Apr-11 Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 Net Debt to Equity Date Recommendation Target (JPY) Price (JPY)
2016-04-26 Source: Company data Bloomberg, HTI estimates
26 Apr 2016 24 Mitsubishi UFJ Financial Group (8306 JP) Buy
Haitong International Coverage as of 1 Apr 2016
Pan Asia Resources Pan Asia Autos, Machinery & Industrial Core Coverage Universe Non-Coverage Universe Core Coverage Universe Non-Coverage Universe Sam Thawley (Team Leader) CGN New Energy Holdings (1811 HK) Ole Hui (Team Leader) BeijingWest Industries International (2339 HK) Angang Steel (347 HK) Dowa Holdings (5714 JP) China Communications Construction (1800 HK) Calsonic Kansei (7248 JP) China Petroleum & Chemical (386 HK) GCL New Energy Holdings (451 HK) China Railway Construction (1186 HK) China Harmony New Energy Auto (3836 HK) China Shenhua Energy (1088 HK) Iino Kaiun Kaisha (9119 JP) China Railway Group (390 HK) China Yongda Automobiles Services (2558 HK) CNOOC (883 HK) Maruichi Steel Tube (5463 JP) China Railway Signal & Communication (3969 HK) DMG Mori (6141 JP) Daido Steel (5471 JP) Mie Holdings (1555 HK) China State Construction Engineering (601688 CH) Eagle Industry (6486 JP) Daikin Industries (6367 JP) Nippon Coke & Engineering (3315 JP) CRRC (1766 HK) Frontier Services Group (500 HK) Fuji Seal International (7864 JP) NS United Kaiun Kaisha (9110 JP) Dongfeng Motor (489 HK) Kato Works (6390 JP) Fujitsu General (6755 JP) Osaka Steel (5449 JP) Guangzhou Automobile (2238 HK) Keihin (7251 JP) Hanwa (8078 JP) Sino Oil and Gas Holdings (702 HK) Shenzhen International (152 HK) Makino Milling Maching (6135 JP) Hitachi Construction Machinery (6305 JP) Zhuzhou CRRC Times Electric (3898 HK) Mitsui Engineering & Shipbuilding (7003 JP) IHI (7013 JP) Tony Moyer Nachi-Fujikoshi (6474 JP) Kawasaki Heavy Industries (7012 JP) Amada (6113 JP) Nishio Rent All (9699 JP) Kawasaki Kisen (9107 JP) Azbil (6845 JP) Press Kogyo (7246 JP) Komatsu (6301 JP) Chiyoda (6366 JP) Shanghai Prime Machinery (2345 HK) Kubota (6326 JP) Daifuku (6383 JP) Takeuchi Mfg. (6432 JP) KYB (7242 JP) Fanuc (6954 JP) TPR (6463 JP) Kyoei Steel (5440 JP) JGC (1963 JP) TS Tech (7313 JP) Makita (6586 JP) Nabtesco (6268 JP) West China Cement (2233 HK) Mitsubishi Heavy Industries (7011 JP) Tsugami (6101 JP) Xingda International Holdings (1899 HK) Mitsui O.S.K. Lines (9104 JP) Yaskawa Electric (6506 JP) Nippon Steel & Sumikin Bussan (9810 JP) Yokogawa Electric (6841 JP) PetroChina (857 HK) Steve Usher Riso Kagaku (6413 JP) Brilliance China (1114 HK) Sanyo Special Steel (5481 JP) BYD (1211 HK) SMC (6273 JP) Geely Automobile (175 HK) THK (6481 JP) Great Wall Motor (2333 HK) Tokyo Steel Mfg. (5423 JP) Honda Motor (7267 JP) Fook Tat Cho Hyundai Mobis (012330 KS) Anton Oilfield Services (3337 HK) Hyundai Motor (005380 KS) China Datang (1798 HK) Kia Motors (000270 KS) China Longyuan Power (916 HK) Nissan Motor (7201 JP) China Singyes (750 HK) Toyota Motor (7203 JP) China Suntien (956 HK) Yamaha Motor (7272 JP) CIMC Enric (3899 HK) Gary Cheung CLP Holdings (2 HK) Advantech (2395 TT) GCL-Poly (3800 HK) Airtac International Group (1590 TT) Hilong (1623 HK) Delta Electronics (2308 TT) Honghua Group (196 HK) First Tractor (38 HK) Hong Kong and China Gas (3 HK) Giant Manufacturing (9921 TT) Huadian Fuxin Energy (816 HK) Hiwin Technologies (2049 TT) Huaneng Renewables (958 HK) Merida (9914 TT) Xinjiang Goldwind (2208 HK) Techtronic Industries (669 HK) Teco Electric and Machinery (1504 TT) Weichai Power (2338 HK) Pan Asia TMT Kosuke Matsuda Core Coverage Universe Non-Coverage Universe Aisin Seiki (7259 JP) Neil Juggins (Team Leader) China Fiber Optic Network System (3777 HK) Bridgestrone (5108 JP) Alibaba Group Holdings (BABA US) ChipMOS Technologies (8150 TT) Denso (6902 JP) — Kosuke Matsuda China Mobile (941 HK) DTS (9682 JP) Fuji Heavy Industries (7270 HK) China Telecom (728 HK) Eva Precision Industrial Holdings (838 HK) Isuzu Motors (7202 JP) China Unicom Hong Kong (762 HK) Ferrotec (6890 JP) Mazda (7261 JP) Chunghwa Telecom (2412 TT) GMO Internet (9449 JP) Mitsubishi Motors (7211 JP) Ctrip.com International (CTRP US) Hikari Tsushin (9435 JP) Nexteer (1316 HK) Far EasTone Telecommunications (4904 TT) Internet Initiative Japan (3774 JP) Suzuki Motor (7269 JP) KDDI (9433 JP) Itochu Techno-Solutions (4739 JP) Lily Li NetEase (NTES US) Megachips (6875 JP) Minth (425 HK) Nippon Telegraph & Telephone (9432 JP) Micro-Star International (2377 TT) NTT DoCoMo (9437 JP) Shindengen Electric Mfg. (6844 JP) Softbank (9984 JP) Taiwan Chelic (4555 TT) Japan Real Estate Taiwan Mobile (3045 TT) Trigiant Group (1300 HK) Core Coverage Universe Non-Coverage Universe Tencent Holdings (700 HK) Truly International Holdings (732 HK) Mark Brown (Team Leader) Daibiru (8806 JP) Yahoo Japan (4689 JP) Unity Opto Technology (2499 TT) Daito Trust Construction (1878 JP) Daikyo (8840 JP) Steve Myers Yangtze Optical Fibre & Cable (6869 HK) Daiwa House Industry (1925 JP) Haseko (1808 JP) Canon (7751 JP) Lixil Group (5938 JP) Hulic (3003 JP) Fujitsu (6702 JP) Mitsubishi Estate (8802 JP) Kenedix (4321 JP) Hon Hai Precision Industry (2317 TT) Mitsui Fudosan (8801 JP) Leopapace21 (8848 JP) Keyence (6861 JP) Noritz (5943 JP) Sanwa Holdings (5929 JP) Konica Minolta Holdings (4902 JP) Obayashi (1802 JP) Sumitomo Real Estate Sales (8870 JP) LG Electronics (066570 KS) Sekisui House (1928 JP) Mediatek (2454 TT) Sumitomo Realty & Development (8830 JP) Nikon (7731 JP) Taisei (1801 JP) Samsung Electronics (005930 KS) Tokyo Tatemono (8804 JP) Taiwan Semiconductor Mfg. Co. (2330 TT) Toshiba (6502 JP) Jones Ku China Real Estate AAC Technologies (2018 HK) Core Coverage Universe Non-Coverage Universe BYD Electronic (285 HK) Andy So (Team Leader) Times Property Holdings (1233 HK) China Communications (552 HK) Agile Property (3383 HK) Yuzhou Properties (1628 HK) Coolpad Group (2369 HK) China Overseas Land & Investment (688 HK) Kingsoft (3888 HK) China Resources Land (1109 HK) Sunny Optical (2382 HK) China Vanke (2202 HK) TCL Communication (2618 HK) CIFI Holdings Group (884 HK) Tongda Group (698 HK) Country Garden Holdings (2007 HK) ZTE (763 HK) Dalian Wanda Commercial Properties (3699 HK) Jean-Louis Lafayeedney Greentown China Holdings (3900 HK) Advanced Semiconductor Engineering (2311 TT) Guangzhou R&F Properties (2777 HK) ASM Pacific Technology (522 HK) KWG Property Holding (1813 HK) Asustek Computer (2357 TT) Nanjing Gaoke (600064 CH) Casetek Holdings (5264 TT) Shimao Property Holdings (813 HK) Largan Precision (3008 TT) Longfor Properties (960 HK) Lenovo (992 HK) Peter Yang Nidec (6594 JP) Greenland Hong Kong Holdings (337 HK) Siliconware Precision Industries (2325 TT) Shenzhen Investment (604 HK) Skyworth Digital Holdings (751 HK) Yushi Kawamoto Cookpad (2193 JP Monotaro (3064 JP)
26 Apr 2016 25 Mitsubishi UFJ Financial Group (8306 JP) Buy
Haitong International Coverage as of 1 Apr 2016
China Consumer Asia ex Small Cap Core Coverage Universe Non-Coverage Universe Core Coverage Universe Non-Coverage Universe Nicolas Wang (Team Leader) China Huiyuan Juice Group (1886 HK) Yuanyuan Ji (Team Leader) Bonjour Holdings (653 HK) China Medical System (867 HK) China LotSynergy Holdings (1371 HK) Best Pacific International (2111 HK) C.banner International Holdings (1028 HK) China Mengniu Dairy (2319 HK) China Shineway Pharmaceutical Group (2877 HK) China Aircraft Leasing Group (1848 HK) China Maple Leaf Educational Sys. (1317 HK) China Resources Enterprise (291 HK) Dynam Japan Holdings (6889 HK) Pacific Textiles Holdings (1382 HK) Cuchen (225650 KS) China Traditional Chinese Medicine (570 HK) Shanghai Fudan-Zhangjiang Bio-Pharm (1349 HK) Pax Global Technology (327 HK) Goldpac Group (3315 HK) CSPC Pharmaceutical Group (1093 HK) Tenwow International (1219 HK) Sa Sa International Holdings (178 HK) Hotel Shilla (008770 KS) Hengan International (1044 HK) Shanghai Fudan Microelectronics (1385 HK) Maoye International Holdings (848 HK) Kweichouw Moutai (600519 CH) Shenzhou International Group (2313 HK) Modetour Network (080160 KS) Luye Pharma Group (2186 HK) SITC International Holdings (1308 HK) Orange Sky Golden Harvest (1132 HK) Shanghai Pharmaceuticals (2607 HK) TAL Education Group (XRS US) Orbitech (046120 KS) Sinopharm Group (1099 HK) Travelsky Technology (696 HK) Tingyi Cayman Islands Holding (322 HK) Virscend Education (1565 HK) Tsingtao Brewery (168 HK) Wasion Group Holdings (3393 HK) Pou Sheng International Holdings (3813 HK) Uni-President China (220 HK) Walden Shing PS TEC (002230 KS) Want Want China Holdings (151 HK) APT Satellite (1045 HK) Samchuly Bicycle (024950 KS) Zhejiang Huahai Pharmaceutical (600521 CH) Fu Shou Yuan International (1448 HK) Sinosoft Technology Group (1297 HK) Jessica Hong Man Wah Holdings (1999 HK) Texhong Textile Group (2678 HK) L'Occitane International (973 HK) Vitasoy International Holdings (345 HK) TK Grouup Holdings (2283 HK) Prada SpA (1913 HK) Xinyi Glass Holdings (868 HK) Tsui Wah Holdings (1314 HK) Samsonite International (1910 HK) Justin Kim Value Added Technologies (043150 KS) Donald Cheng Aerospace Technology of Korea (067390 KS) VST Holdings (856 HK) Galaxy Entertainment (27 HK) Cuckoo Electronics (192400 KS) Xia Nan Guo Restaurants Holdings (3666 HK) MGM China (2282 HK) Dexter (206560 KS) Sands China (1928 HK) Duzonbizon (012510 KS) — Justin Kim SJM Holdings (880 HK) Fila Korea (081660 KS) Wynn Macau (1128 HK) Kepco Plant Service (051600 KS) Vieworks (100120 KS) Jaesong Woo Japan Consumer Hansae (105630 KS) Core Coverage Universe Non-Coverage Universe Hy-Lok (013030 KS) James Moon (Team Leader) Aeon Mall (8905 JP) Inbody 041830 KS) Aoyama Trading (8219 JP) Avex Group Holdings (7860 JP) Korea Kolmar (161890 KS) Asics (7936 JP) DCM Holdings (3050 JP) Osstem Implant (048260 KS) FamilyMart (8028 JP) H2O Retailing (8242 JP) Yonwoo (115960 KS) Fast Retailing (9983 JP) Honeys (2792 JP) Youngone (111770 KS) Japan Tobacco (2914 JP) Parco (8251 JP) Jessica Ye Laox (8202 JP) Anta Sports Products (2020 HK) Oriental Land (4661 JP) Li Ning (2331 HK) Rakuten (4755 JP) Seven & I Holdings (3382 JP) Start Today (3092 JP) Japan Small Cap Unicharm (8113 JP) Core Coverage Universe Non-Coverage Universe Hiroyuki Terada (Team Leader) Autobacs Seven (9832 JP) Accordia Golf (2131 JP) China Financial International Invest. (721 HK) Accretive (8423 JP) Fancl (4921 JP) Dentsu (4324 JP) HIS (9603 JP Gulliver International (7599 JP) Istyle (3660 JP) Kameda Seika (2220 JP) Luzheng Futures (1461 HK) Mandom (4917 JP) Meitec (9744 JP) Pigeon (7956 JP) Nichii Gakkan (9792 JP) Pola Orbis (4927 JP) Tohokushinsha Film (2329 JP) Recruit Holdings (6098 JP) VT Holdings (7593 JP) Sanrio (8136 JP) Shiseido (4911 JP) Sohgo Security Services (2331 JP) Technopro Holdings (6028 JP) Yamato Holdings (9064 JP) Yumeshin Holdings (2362 JP) Yusuke Suzuki Ain Pharmaciez (9627 JP) Doutor Nichires Holdings (3087 JP) FP (7947 JP) Nihon Nohyaku (4997 JP) Latest Additions to Coverage Nihon Parkerizing (4095 JP) Aisin Seiki (7259 JP)—Kosuke Matsuda Optex (6914 JP) China State Construction Engineering (601688 CH)—Ole Hui Sky Perfect JSAT Holdings (9412 JP) China Vanke (2202 HK)—Andy So Sun Frontier Fudousan (8934 JP) Cookpad (2193 JP)—Yushi Kawamoto Takara Leben (8897 JP) Dexter (206560 KS)—Justin Kim Tosei (8923 JP) Fuyo General Lease (8424 JP)—Tony Tanaka Wowow (4839 JP) Monotaro (3064 JP)—Yushi Kawamoto Tony Tanaka Travelsky Technology (696 HK)—Yuanyuan Ji China Galaxy Securities (6881 HK) Virscend Education (1565 HK)—Yuanyuan Ji Digital Garage (4819 JP) Yonwoo (115960 KS)—Jaesong Woo Fuyo General Lease (8424 JP) GCA Savvian (2174 JP) GF Securities (1776 HK) Latest Drops from Coverage Glory (6457 JP) Century Sage Scientific Holdings (1450 HK) GMO Payment Gateway (3769 JP) Hong Kong Exchanges and Clearing (388 HK) Huatai Securities (6886 HK) Latest Transfers of Coverage Nihon M&A Center (2127 JP) Glory 6457 JP from Sam Thawley to Tony Tanaka Zenkoku Hosho (7164 JP)
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