DAIWA Earnings Analysis of Major Banks–I

DAIWA DAIWA INSTITUTE OF RESEARCH LTD. 4 June 2007 (No of pages: 18) Earnings Analysis of Major Banks–I —FY06 Earnings Summary and Operating Environment— (Sumitomo Mitsui Banking Corp is affiliated with Daiwa Securities SMBC. See disclaimer below.) Equity Research Dept Akira Takai • Major banks’ aggregate FY06 real net business profit on a parent basis (total sum of their group banks) declined 9.5% y/y to Y3,451.8 billion. Mainstay lending operations fell short of the bank projections in terms of both volume and spread, while a rise in interest rates eroded treasury income in domestic and foreign operations. Additionally, non-personnel costs significantly lifted overhead above the year- earlier level, weighing on profit. • Aggregate credit costs net of recoveries reached only Y167.3 billion, as credit costs for newly-emerged non-performing assets tended to be low, except for those related to some non-banks, and banks continued to record loan-loss reserve releases and write-off recoveries. A number of banks also continued to see lower income tax payments, a benefit of deferred tax assets. As a result, aggregate consolidated net income hit Y2,824.8 billion, the second-highest level in history, despite dropping 9.5% below the year-earlier level. Establishment of solid profitability in recent years prompted the majority of major banks to raise common dividends in FY06. • At its 21 February monetary policy meeting, the BOJ lifted the unsecured overnight call rate to 0.50%, the second hike since 14 July, when the BOJ rescinded its zero interest-rate policy and lifted the call rate to 0.25%. Against this backdrop, the bond market retreated in 1Q but started recovering in 2Q. Meanwhile, the equity market underwent a pullback early in FY06 but reversed course from end-June and entered a clear uptrend at end-2006, reflecting expectations for favorable corporate earnings. However, Japanese equities plunged in line with the setback in global markets at end-FY06, bringing TOPIX close to the end-FY05 level by the close of the fiscal year. • For FY07, major banks envisage 5.2% growth in aggregate real net business profit on a parent basis. Credit costs are expected to normalize at low levels, supporting an estimated Y2,505 billion in aggregate consolidated net income. Some banks anticipate considerable profit declines, mainly on the absence of lower income tax payments. However, excluding this factor, net income should outpace the FY06 figure and hit lofty levels. The majority of major banks expect to continue raising dividends. The originator of this report, Daiwa Institute of Research (DIR), and the main users, Daiwa Securities and Daiwa Securities SMBC, are subsidiaries of Daiwa Securities Group. Daiwa Securities Group, DIR, Daiwa Securities, Daiwa Securities SMBC, and other group companies may hold, buy, and sell shares in companies mentioned in this report. Daiwa Securities and Daiwa Securities SMBC offer investment banking services and may make a market for stocks mentioned in this report. IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Japanese Equity Research 1. Summary of FY06 Results Real net business profit In FY06, major banks’ parent* aggregate net business profit declined 5.6% y/y to dropped 9.5% to Y3,451.8 Y3,427.4 billion (Chart 1). Aggregate real net business profit (net business profit billion before additions to/recoveries from general loan-loss reserves, as well as the posting of credit costs for trust bank accounts), which indicates core profit levels, slid 9.5% to Y3,451.8 billion. The majority of banks fell short of their projections announced along with 1H results. Sluggish lending, solid Looking at major negatives on core profit, lending operations could not stop loan- growth in non-interest deposit interest rate spreads from narrowing or meet their volume targets. Also, income, weak treasury treasury income took a dual hit from massive net bond-related losses at a number of income, and higher banks and narrower spreads due to higher interest rates in Japan and overseas. overhead However, non-interest income remained solid overall, gaining from higher commissions from the sale of financial products, including investment trusts, and an upturn in real estate and other wealth management operations at trust banks. A marked increase in loans outstanding suggested a recovery in overseas operations. Meanwhile, non-personnel and other costs rose across the subsector, weighing on profit. Net credit costs hit a low As for non-operating items, aggregate net credit costs were capped at Y167.3 billion. Y167.3 billion, net equity- A series of consumer finance firms and installment credit providers plunged deeply related gains dropped to into the red in FY06, and a number of major banks had to book higher provisions for Y84.6 billion losses from loans to non-banks, for which they play the role of a so-called main bank. Even so, gross credit costs remained low overall. Meanwhile, groups including Mitsubishi UFJ reported hefty loan-loss reserve releases and/or write-off recoveries. On the other hand, aggregate net equity-related gains slid to Y84.6 billion. Although the figure dropped well below the year-earlier Y451.6 billion, all banks logged net gains, except for Mizuho, which wrote down preferred shares of the closely affiliated Orient Corporation. Some banks reported gains on the sale of ETFs and preferred shares (purchased as financial support for ailing borrowers), while the unwinding of cross shareholdings played out. Consolidated net income Net income, along with ordinary profit, reached high levels at all banks. That was slid to Y2,824.8 billion, partially because of lower income tax payments, a benefit of deferred tax assets, at the second-highest level many banks, including Resona Bank, which increased deferred tax assets by as much on record as Y233.5 billion. On an aggregate basis, net income declined 16% y/y to Y2,577.7 billion on a parent basis and dropped 9.5% to Y2,824.8 billion on a consolidated basis. Still, net income hit its second-highest level on record. Also, the establishment of solid profitability since FY05 prompted the majority of major banks to raise common dividends. Total assets edged down, Turning to the balance sheet, aggregate total assets on a parent basis at end-March but net assets advanced 2006 dipped 2.4% y/y. Domestic operations saw sluggish growth in loans outstanding and a reduction in government-bond holdings and deposits held at the BOJ. In contrast, overseas assets, including loans outstanding, jumped significantly, and deposits generally posted stable growth. Additionally, shareholders’ equity expanded on a consolidated and parent basis at a majority of banks, which we attribute to higher retained earnings and statutory reserves resulting from solid profitability at the net level in FY06. Public fund repayments and equity financing by the three mega banking groups and Resona Holdings also affected shareholders’ equity. * In calculating aggregate major bank parent figures, we added group bank figures for banking groups under holding company structures. Thus, Mizuho Financial Group represents the sum of Mizuho Bank and Mizuho Corporate Bank. Likewise, Mitsubishi UFJ Financial Group is the sum of (1) Bank of Tokyo-Mitsubishi UFJ (formerly Bank of Tokyo Mitsubishi and UFJ Bank) and (2) Mitsubishi UFJ Trust & Banking (formerly Mitsubishi Trust & Banking and UFJ Trust Bank). Others are as follows: Sumitomo Mitsui Financial Group (Sumitomo Mitsui Banking), Resona Holdings (Resona Bank and Saitama Resona Bank), and Mitsui Trust Holdings (Chuo Mitsui Trust & Banking and Mitsui Asset Trust & Banking). 2 Earnings Analysis of Major Banks–I FY06 Parent Results (Y bil) Chart 1 Ordinary Real net Net Ordinary Net income Total credit DPS 4) Total Share- income 1) business business profit costs 3) (Y) assets holders' profit 2) profit equity, etc 5) Mizuho 7) FY05 1,168.8 365.7 366.0 206.6 132.5 -31.8 - 70,003.7 2,019.3 FY06 1,264.2 451.5431.1 179.1 206.3 -65.5 - 66,874.8 2,081.3 % chg 8.2 23.517.8 -13.3 55.6 - - -4.5 3.1 Mizuho Corporate 7) FY05 1,537.6 435.2 435.2 513.1 559.2 103.7 - 62,208.6 3,174.2 FY06 1,804.2 306.9 306.9 313.6 323.1 62.3 - 66,111.5 3,500.1 % chg 17.3 -29.5-29.5 -38.9 -42.2 - - 6.3 10.3 Sum of Mizuho FY05 2,706.4 800.9 801.2 719.8 691.7 71.8 - 132,212.4 5,193.5 2 banks FY06 3,068.4 758.5 738.0 492.7 529.4 -3.1 - 132,986.3 5,581.4 % chg 13.4 -5.3-7.9 -31.5 -23.5 - - 0.6 7.5 8411 Mizuho Financial FY05 129.0 - - 113.5 790.2 - 4,000.00 4,793.1 2,752.3 Group FY06 1,250.1 - - 1,218.5 1,239.7 - 7,000.00 4,764.0 3,176.4 % chg 869.1 - - 974.0 56.9 - - -0.615.4 Tokyo-Mitsubishi FY05 3,477.0 1,054.1 1,054.1 904.9 1,089.1 576.7 - 147,091.3 6,605.6 UFJ 6) 7) FY06 3,651.5 899.8 899.8 834.5 669.3 53.4 - 140,613.9 7,021.9 % chg 5.0 -14.6-14.6 -7.8 -38.5 - - -4.4 6.3 Mitsubishi UFJ FY05 675.2 252.8 251.9 243.9 169.4 55.4 - 18,687.9 1,535.2 Trust6) 7) FY06 709.1 274.3 272.4 278.4 211.6 8.1 - 19,243.5 1,687.4 % chg 5.0 8.5 8.2 14.1 24.9 - - 3.0 9.9 Sum of MUFG FY05 4,152.2 1,307.0 1,306.0 1,148.8 1,258.5 632.1 - 165,779.2 8,140.8 2 banks FY06 4,360.6 1,174.1 1,172.2 1,112.9 880.9 61.5 - 159,857.4 8,709.3 % chg 5.0 -10.2 -10.2 -3.1 -30.0 - - -3.6 7.0 8306 MUFG 6) FY05 1,036.7 - - 1,002.3 1,013.4 - 7,000.00 7,650.9 6,112.7 FY06 510.8 - - 478.0 473.9 - 11,000.00 7,494.6 6,254.1 % chg -50.7 - - -52.3 -53.2 - - -2.02.3 Sumitomo Mitsui FY05 2,287.9 965.6 810.6 720.9 519.5 -230.9 - 97,443.4 3,634.8 Banking FY06 2,451.4 740.6 782.3

Load more