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Fundamental View
AS OF 15 Dec 2022Japanese 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. Revenue growth has been challenging in FY22.
Mizuho’s CET1 ratio buffer is thin; asset quality though has come through well in a COVID-19 environment.
As one of the three megabanks, Mizuho’s credit standing benefits from a strong expectation of government support, if needed.
Business Description
AS OF 15 Dec 2022- 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.
- 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 15 Dec 2022Asset quality has been benign and not much affected by COVID-19 up to and throughout FY21; FY22 credit costs have largely been due to a single bankruptcy.
Its Global Markets business continued to be affected by MTM effects on its own investment book as a result of rising interest rates.
Its CET1 ratio (fully Basel III compliant and ex-security gains) was 1.2% above the regulatory minimums at 1H22, a low level for a group of its size.
The income side looks challenging this year with far fewer initiatives to grow the business than SMFG and MUFG – its FY22 net income target is modest at JPY 540 bn, which is just JPY 10 bn above its FY21 result. Business growth will depend on structural factors such as the easing of regulation that allows more internal collaboration and market factors such as capital markets coming back.
Key Metrics
AS OF 15 Dec 2022| ¥ bn | 1H22 | FY21 | FY20 | FY19 | FY18 |
|---|---|---|---|---|---|
| Net Interest Revenue/Ave Assets | 0.43% | 0.44% | 0.42% | 0.36% | 0.39% |
| Operating Income/Average Assets | 0.97% | 1.01% | 1.03% | 1.02% | 0.92% |
| Operating Expense/Operating Income | 61% | 62% | 64% | 67% | 79% |
| Pre-Impairment Operating Profit / Average Assets | 0.37% | 0.38% | 0.37% | 0.33% | 0.20% |
| Loan impairment (charge) or reversal/ave. loans | (0.11%) | (0.28%) | (0.25%) | (0.21%) | (0.02%) |
| ROAA | 0.28% | 0.24% | 0.22% | 0.22% | 0.05% |
| ROAE | 7.4% | 5.8% | 5.3% | 5.2% | 1.1% |
| CET1 Ratio excl. unrealised securities gains in AOCI | 11.0% | 11.5% | 10.5% | 11.0% | 10.8% |
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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