Some banks may draw attention for
historical low valuations, lack of high-risk
assets, relative immunity to downturn
􀀗 But potential risks remain for H2
onward: Credit costs, equity losses, and
loan spread shrinkage due to rate cuts
􀀗 Raise Yokohama to N(V); maintain
ratings on Chiba, Fukuoka, Shizuoka,
Suruga and Kyoto
The pace of corporate bankruptcies is unlikely to slow
substantially in the near term, and we see banks as likely to
report larger than expected equity valuation losses. BoJ rate
cuts will also put pressure on core earnings from FY Mar-10.
On aggregate, our FY Mar-09 net profit estimate for the six
major regional banks is 14% below guidance. Earnings at the
majors look likely to repeat the past pattern of undershooting
guidance in times of recession. Given the worsening
operating environment, due for example to an uptrend in
bankruptcies, we maintain a cautious stance on the sector.
However, some regional banks are relatively well positioned
given their historical-low share prices, limited exposure to
high-risk assets and relative immunity to a direct hit from the
global economic slowdown. A process of elimination
suggests Shizuoka Bank as a possible safe haven.
Conversely, we see potential downside risk for Bank of
Kyoto’s manufacturing-centric equity portfolio. Chiba
Bank and Bank of Yokohama’s share price performance
has recently shown a strong correlation, suggesting a pairtrade
opportunity.

Investment summary
􀀗 Some regional bank stocks look relatively attractive at current
historical lows given their limited exposure to risk assets and the
global economic slowdown
􀀗 However, we remain cautious on the sector due to the ongoing
pressure on earnings from higher credit costs and mark-to-market
equity losses, and loan spread shrinkage due to rate cuts
􀀗 We raise Bank of Yokohama to N(V), while remaining N(V) on
Chiba Bank, Fukuoka Financial Group, Shizuoka Bank and
Suruga Bank and UW(V) on Bank of Kyoto

A triple blow for earnings
All the major regional banks posted sharp profit
declines in H1 FY Mar-09, mainly due to higher
credit costs. This forced them to substantially cut
full-year guidance. However, we do not think the
market and banks’ new targets adequately factor
in all the negatives. Credit costs remain high in
H2, equity portfolio risk is coming to the fore, and
core earnings are set to begin declining due to rate
cuts. Major regional banks tend to miss guidance

A triple blow for earnings
All the major regional banks posted sharp profit
declines in H1 FY Mar-09, mainly due to higher
credit costs. This forced them to substantially cut
full-year guidance. However, we do not think the
market and banks’ new targets adequately factor
in all the negatives. Credit costs remain high in
H2, equity portfolio risk is coming to the fore, and
core earnings are set to begin declining due to rate
cuts. Major regional banks tend to miss guidance