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Credit Suisse (Japan), published new price targets on many banking and insurance stocks yesterday, while maintaining prior ratings, most at "neutral" with a few "outperform."

Of particular interest are the mega banks, which unfortunately for investors, were given lower targets, and all traded lower today, despite another positive close for the broader market.

Japan's 3 mega banks Wednesday trading:

  • Mitsubishi UFJ Fin. Group (NYSE:MTU) (Tokyo: 8306) lost 0.68%, to close at ¥1.47 million ($12.52 ADR equiv. at ¥117.4/$1).
  • Mizuho Financial Group (NYSE:MFG) (Tokyo: 8411) fell 0.95% to close at ¥838 thousand ($14.28).
  • The third mega bank, Mitsui Sumitomo Financial Group (Tokyo: 8316), lost 0.81% to close at ¥1.22 million.

Credit Suisse's new ratings:

  • Mitsubishi UFJ: "neutral" rating maintained, ¥1.588m ($13.53) --> ¥1.554m ($13.24)
  • Mizuho FG: "outperform" rating maintained, ¥1.069m ($18.21) --> ¥947 thousand ($16.13)
  • Mitsui Sumitomo FG: "outperform" rating maintained, ¥1.409m -->¥1.398m

Regarding Mitsubishi UFJ, Credit Suisse lowered its fiscal forecast after reviewing the firm's interim earnings. It said the bank seems pretty even in terms of valuation, not being overly expensive, or cheap. CS sees more costs related to the Tokyo-UFJ merger impacting earnings, with expectations of a complete integration and realization of synergies by 2008.

As for Mizuho, CS said it revised its financial forecast, resulting in a lower target share price. However, CS says the bank has a cheap valuation and deserves an "outperform" rating based on the strength of its investment banking results and competitive position.

Daiwa also chimed in on Mizuho, saying it sees the bank facing higher costs due to its NYSE listing and its plans to pay a higher dividend. Earnings from core operations, however, are seen growing. Daiwa sees good prospects in '07 for an improving interest rate environment which will help the bank's lending margins.

Various metrics on a trailing 12-month basis:

  • MUFG: Yield 0.48%, P/E 15.76, PBR 2.04, ROA 0.52%
  • Mizuho FG: Yield 0.48%, P/E 15.19, PBR 2.90, ROA 0.44%
  • Mitsui Sumitomo FG: Yield 0.25%, P/E 12.88, PBR 3.09, ROA 0.66%

According to Pascal Jeannenot, of Japan Investments -- who is a long-time Japan analyst, seeking value plays in mid and smaller cap stocks -- the best value among financial stocks and in Japan in general, is in regional bank stocks with price-to-book ratios less than 1. He says this is "due to lingering doubts on domestic consumption recovery trend." These banks also tend to have a higher ratio of non-performing loans. Nonetheless, they could be the most sought after in future industry consolidation.

I am not too excited about Mitsubishi UFJ and Mizuho FG (the easiest bank stocks for American investors to access since they have ADRs) at this point. Sure, there's excellent potential over the longer-term, but I see better near-term plays (as I wrote about yesterday), that also have long-term prospects.

I would look at buying shares of either bank if they sell-off following the Bank of Japan's next rate decision meeting the 19th. Whether the BoJ will raise rates depends mostly on the results of its quarterly tankan (short-term economic survey) due out this Friday. Weaker-than-expected results could send bank shares lower, as would a decision not to raise rates. At any rate, the BoJ is expected to hike by spring '07 and likely again by year-end '07.

Also, Credit Suisse rated shares of Millea Holdings (MLEA), an insurance firm, keeping it at "neutral," but raising its target slightly to ¥4,500, from ¥4,420.

Related: Mitsubishi UFJ's H1 Earnings Miss; Boosts Guidance and Dividend, Mizuho Reports 16% H1 Earnings Growth, Raises Interim Dividend 75%, Mizuho's Quiet NYSE Debut; Japan's Mega Banks' Stocks Slump

1-year comparison chart of Mitsubishi UFJ (Tokyo: 8306), Mizuho (Tokyo: 8411) and Mitsui Sumitomo (8316):


Disclosure: The author does not own shares of any companies mentioned in this article.

Source: Credit Suisse Maintains Rating on Japan's Mega Banks, Lowers Targets