Japan’s new PM a positive for banks’ earnings outlook: Jefferies

Banks’ credit costs are expected to undershoot their guidance.

Whoever emerges victorious, Japan’s upcoming new prime minister will boost the country’s top three banks—MUFG, Mizuho Bank, and SMFG—and by extension the performance of their bank stocks, reports Jefferies.

“We think that whoever wins, the imminent job of the new PM will be to support Japan’s economy as it normalizes and catches up with the other markets, to include more fiscal spending. We think that leads to a steeper yield curve bias (even though still range-bound) and the bank stocks at the lower end of the trading range,” Jefferies Equity Analyst Hideyasu Ban and Equity Associate Hiro Nakakura said in a report.

Jefferies has raised its earnings estimates for banks as it foresees lenders to lodge credit costs that are lower than expected.

“We raised our earnings estimates mainly due to our expectation that banks' credit costs will undershoot their guidance,” Ban and Nakakura wrote, noting that during the release of Q1 results (April to June), the banks' credit costs came in lower than their expectations. Banks had kept their cautious stance then given uncertainties around the COVID-19 situation. 

Whilst Jefferies believes that credit costs will go up after Q2 (around July to September) as lenders reclassify loans, it notes that the annual credit cost outlook would likely be lowered—and the earnings guidance will be raised—after Q2, thanks to better than expected overall credit quality supported by the government programs.

Expect more capital return activities beginning the third quarter of the fiscal year and onwards, or around after September. Investors can also expect to see more buyback announcements and DPS increases in the second half of the fiscal year, from late 2021 to early 2022.