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Banks: 2Q results review
Sharp profit drop due to one-off
factors; results vary by bank
Shin Tamura, CMA
Research Analyst
(+81) 03 5156-6754
shinichi.tamura@db.com
Thanh Ha Pham
Research Associate
(+81) 3 5156-6674
thanhha.pham@db.com
Deutsche Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Results
Global Markets Research Company
Profits fall well short of guidance at both megabanks and regional banks
Major banks and regional banks all reported sharply lower profits in 1H FY3/09.
Specifically, consolidated NP missed company guidance by 65.1% at major banks
and by 60.3% at regional banks, and second tier regional banks swung to losses.
Of the 97 listed banks, 29 reported losses in 1H and 16 forecast losses in FY3/09.
Higher credit costs, securities losses are main reasons, but substantial
differences by bank
A sharp increase in credit costs is the main reason for lower profits. Credit costs
rose by 55bps at major banks and 48bps at regional banks, versus average initial
guidance of 20-30bps. At many banks, we estimate the real estate and
construction sectors accounted for the majority of credit costs. An increase in
securities write-downs also had a negative impact. Bond and equity-related losses
totaled ¥132.4bn at major banks, ¥135.6bn at regional banks, and ¥4.46bn at
second tier regional banks; equating to 8% of core net business profits at major
banks, 19% at regional banks, and 32% at second tier regional banks. This shows
that losses were greatest at lower-ranked banks. Additionally, there was a fairly
wide spread in credit costs, from -26bps (profits) to 281bps, and when including
securities gains/losses, the wide disparity in negative Figures was perhaps a key
feature of 1H results.
Sharp downturn in unrealized securities gains/losses; risk of greater
unrealized losses and additional write-downs in 2H
More so than earnings, we are focusing on the downturn in unrealized securities
gains/losses, which have fallen sharply at major banks from ¥8.9trn in FY3/07 to
¥2.7trn in FY3/08 and ¥0.8trn in 1H FY3/09, and at regional banks from ¥3.8trn to
¥1.6trn and ¥0.5trn. Half of the decline is due to a decrease in stock prices, but
declines for other securities, including foreign bonds, overseas financial institution
bonds, J-REITs, and equity investment trusts, accounted for 45% of the overall
decline at major banks and 24% at regional banks. Given that prices for stocks and
foreign currency-denominated securitized products have continued to fall since
October, a further increase in unrealized losses and additional write-downs are
likely in 3Q. As the absolute value of downwardly-revised profit estimates show a
low NP Figure, there is a risk of banks revising down guidance again.
However, net business profits unexpectedly do not decline at many banks
However, core net business profits, excluding bond trading gains/losses,
decreased by 14.9% YoY at major banks and by 5.2% at regional banks, showing
small declines compared with net profits. Core net business profits increased at
20 banks, including Bank of Kyoto and Shizuoka Bank. Commission income and
trust fees decreased in double digits, but growth in net interest income, on
average annualized growth of 3-4% in loans outstanding, had a major impact.
(Continued from cover page)
Focus on December share prices, real estate sector trends in 2H; still prospects for
FY3/10
We believe FY3/09 earnings could be significantly affected by additional write-downs and
greater unrealized losses on shareholdings, depending on share prices in December. We
believe we should brace for further downward revisions of 3Q guidance, but with a sufficient
Tier 1 ratio in domestic operations of 6%, we think only a limited number of banks will need
to raise additional capital, even if share prices continue to decline. Additionally, in terms of
credit costs, we believe a key point is whether real estate bankruptcies ease off in 2H. We do
not yet believe either of these factors will have a lingering impact through FY3/10.
Risk factors
Risks include a continuation of US financial market turmoil, Japanese stock market weakness,
continuance of domestic real estate company bankruptcies, and a sharper slowdown by the
Japanese economy with a subsequent worsening in sentiment.
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