Mizuho Reports Limited Subprime Losses, Liquidates Positions

The Jiji Press reports Mizuho Financial Group (MFG), parent of Japan's second largest bank, said it has approximately ¥600 million ($5M) of U.S. subprime loan related losses. Mizuho said it has disposed of most of its ¥50 billion ($420M) balance of subprime loan investments.

Additional details carried in the brief report by Jiji include mention that the ¥50B yen balance was as of the end of June and mostly disposed of by the end of July.

Furthermore, Mizuho's subprime investments were reportedly concentrated among AAA-rated loans, thus explaining the relatively small loss compared to its overall position.

Shares of Mizuho and other Japanese banks have taken a beating in 2007, following a mostly weak 2006. It's difficult to say how much subprime concerns have impacted share prices, but I would argue direct impact has been limited, as seen from the loss reported above; however, the impact on investor sentiment, which in turn has resulted in broad selling of Japanese equities, has obviously exacerbated weakness in financial stocks.

Ordinary shares of Mizuho (JP: 8411) fell 0.3% to ¥705,000 ($11.91 ADR equiv. at ¥118.4/$1) on Monday. Mizuho's ADRs closed Friday up 0.5% to $11.96 and have traded between $11.55 - $15.35 since listing on the NYSE last November.

Rival Mitsubishi UFJ (JP: 8306) lost 1.7% to ¥1.16 million ($9.80 ADR equiv. at ¥118.4/$1). ADRs of Mitsubishi UFJ (MTU) fell 0.7% to $9.95 and have a 52-week trading range of $9.52 - $14.28.

In short, Japanese bank stocks are not very attractive short-term investments because of their thin lending margins, limited borrowing needs among Japanese firms and fierce competition. Therefore, even if the Bank of Japan hikes another quarter percent this month and to 1.0% by year's end, bank stocks still face a tough operating environment.

Mizuho FG (MFG) and Mitsubishi UFJ FG (MTU) chart:

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