Golden Age For Japanese Financials Ahead - Barron's

Includes: BCS, GS, MER, MFG, MS, MTU, NMR, UB
by: Judy Weil

Major government recapitalization programs in 1997 and 2003 helped Japanese banks garner $4.77 trillion of assets. Risk aversion may have helped Japanese financials avoid the worst of subprime, but Barron’s says it’s also meant low return-on-equity [ROE]. Japan’s current economic woes preclude investments there, so banks like Mitsubishi UFJ (NYSE:MTU) and Mizuho Financial (NYSE:MFG), whose ROE are 0.56% and 0.33% respectively, are looking abroad for growth opportunities. 

Mitsubishi negotiated a sweetheart deal for their $9 billion Morgan Stanley (NYSE:MS) stake, including assurances that a bailout won’t dilute their stake. The deal gives Morgan Stanley access to Mitsubishi’s blue chip client base while providing in-house financing capabilities for new deals. 

Mitsubishi recently finished buying relatively unscathed, profitable Union Bank of California (UB) and may go after other regional banks now. Shares are down “only” 27% this year, and could double from the Morgan Stanley stake when the credit crisis subsides. 

Nomura Holdings’ (NYSE:NMR) hefty balance sheet will underpin the integration of the Lehman assets it purchased. As financial markets recover, Nomura’s market position should bounce ROE to 10+% from single digits currently. Mizuho invested $1.2 billion in a Merrill (MER) recapitalization, and Sumitomo Mitsui bought some Barclays (NYSE:BCS) debt. Not to mention Goldman Sachs’ (NYSE:GS) longtime relationship with Sumitomo. Even Japanese insurers are also looking overseas. 

Japan’s economy won’t recover so quickly, nor will Japanese financials likely hit earnings targets this year. But long term they are cheap, solidly capitalized and poised for profit.

With the major U.S. investment banks gone or turned into commercial banks, SA's Daniel Harrison says the Japanese banking connection may be the way for U.S. banks to obtain higher risk/rewards since all major U.S. banks are now constrained by conditions set under the U.S. government bailout.
Andrew Snyder says U.S. banks will take years to recover from the current credit crisis. U.S. banks are to be avoided, leaving Japanese banks as the only good banking investment opportunity around for a long time to come.