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Fundamental View
AS OF 08 Jun 2023Japanese banks are challenged to achieve stable and adequate returns and the problem is especially acute for Mizuho whose underlying profitability is low. In FY18 it undertook large restructuring charges to improve its weak returns. Its performance improved in FY20 and FY21, though a series of IT failures in its Japan IT system was a distraction. FY22 was a mixed year as revenue growth was challenged.
Mizuho’s CET1 ratio buffer is low, but acceptable given comfortable asset quality metrics.
As one of the three megabanks, Mizuho’s credit standing benefits from a strong expectation of government support, if needed.
Business Description
AS OF 08 Jun 2023- Mizuho is just about the third largest by asset size among Japan's three megabanks. It was formed in 2000 through the merger of the former "City" banks, Fuji and Dai-Ichi Kangyo and the Industrial Bank of Japan, a provider of long-term industrial credit financed by bond issues.
- Its main units are Mizuho Bank and Mizuho Trust & Banking (focusing on asset management and related services). The group's other main business is Mizuho Securities, a leading player in debt capital markets in Japan and the US.
- It expanded in North America in 2015 by acquiring assets and staff from RBS and has successfully captured more investment as well as commercial banking business in conjunction with its securities arm. It also acquired Greenhill, a boutique M&A firm, in 2023.
- Mizuho is less diversified than its peers geographically and by business line; It has a more corporate focus and a weaker retail/consumer franchise.
- To tackle its worsening cost/income ratio as well as Japan's poor demographics, it has been shrinking its domestic branch network and staff numbers over a multi-year plan.
Risk & Catalysts
AS OF 08 Jun 2023Asset quality has been benign and not much affected by COVID-19 up to and throughout FY21; credit costs in FY22 decreased to a low 8 bp of loans.
The CET1 ratio (fully Basel III compliant and ex-security gains) was 1.5% above the 8% regulatory minimum at FY22, which is fairly low level but acceptable for now given benign asset quality.
FY22 was a mixed year for Mizuho as the bottomline was propped up by reduced credit costs, while revenue growth continued to be anaemic as was the case over the past few years. It is finally showing some ambition for FY23, aiming for net business profit, credit cost, and net income growth of 10%, to set the group on a path towards a P/B ratio >1x from its 0.5-0.6x range currently.
Key Metrics
AS OF 08 Jun 2023| ¥ bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Net Interest Revenue/Ave Assets | 0.39% | 0.36% | 0.42% | 0.44% | 0.41% |
| Operating Income/Average Assets | 0.92% | 1.02% | 1.03% | 1.01% | 0.96% |
| Operating Expense/Operating Income | 79% | 67% | 64% | 62% | 63% |
| Pre-Impairment Operating Profit / Average Assets | 0.20% | 0.33% | 0.37% | 0.38% | 0.34% |
| Loan impairment (charge) or reversal/ave. loans | (0.02%) | (0.21%) | (0.25%) | (0.28%) | (0.10%) |
| ROAA | 0.05% | 0.22% | 0.22% | 0.24% | 0.23% |
| ROAE | 1.1% | 5.2% | 5.3% | 5.8% | 6.1% |
| CET1 Ratio excl. unrealised securities gains in AOCI | 10.8% | 11.0% | 10.5% | 11.5% | 11.3% |
CreditSights View
AS OF 23 May 2023Mizuho has historically trailed its peers on profitability and capital, as the merger that formed it included the former IBJ, a large wholesale bank with thin profit margins. Lower profitability and capital prevented investments in new business opportunities. FY20-21 saw good improvements in net interest income and mostly lower credit costs vs. peers. Credit costs related to Russia in 4Q21 and Japan corporates in 1Q22 affected results but this took a better turn in Q2. Previous issues with its Japan IT system have not resurfaced recently. CET1 capital has a ~1.5% buffer which is low but acceptable. Mizuho is the weakest of the megabanks, but also had improved most over FY20-21. FY22 net income declined with low credit costs. It trades ~20 bp behind MUFG which we see as fair.
Recommendation Reviewed: May 23, 2023
Recommendation Changed: December 05, 2022
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