Different Funding Sources
Give More Latitude to
Operate With Weak Capital
Investment conclusion: The relatively weak capital
positions of Mizuho and SMFG are just one factor
behind our Underweight recommendations. We do not
believe that Mizuho will automatically follow SMFG in
announcing a capital increase. Despite relatively poor
quality capital, the absolute level of capital is in line with
the historical context in Japan. Lack of transparency
about whether domestic credit costs peaked in F3/09
remains the main driver behind our recommendation.
Where we differ: We believe that the pressure on
Japanese banks to strengthen capital through dilutive
capital issuance is low. Capital should not be considered
in isolation from liquidity, as the source of funds has a
very large bearing on the level of capital. Banks with
access to large pools of stable retail deposits can
operate with less capital than banks reliant on wholesale
funding.
What’s next: SMFG has already filed to raise capital,
while capital strategy at Mizuho remains unclear. We
believe that clarity around the capital strategy at Mizuho
would help reduce the downside facing the sector, and
could be the catalyst to move the banks higher.
The coming opportunity: Banks continue to trade
below fair value, but we believe it is still too early in the
economic cycle to be overweight. However, in our view
we are approaching a strong buying opportunity. The
signal we are looking for remains primarily improvement
in the job-offers-to-applicants ratio, which would give us
more confidence that credit cost did peak in F3/09.