Japanese Banks In the Spotlight

In Barron's this week, which is free until Monday by the way, we've found some arguments in favor of the Japanese banks going forward.

Banks continue to have fans, including Michael Peterson and A. Rama Krishna of Pzena Investment Management. Notwithstanding their runup, "these are the classic value investments," says Peterson, Pzena's head of research. "They had cartoonish levels of credit losses. That forced banks to think about how to be profitable institutions." Over the next three-to-five years, he figures earnings will surge on wider lending margins, the resumption of loan growth and share gains in wholesale and consumer banking at his two holdings: Mitsubishi UFJ Financial (MTF) and Sumitomo Mitsui Financial (8316 JP).

Expect more earnings gains long term, as banks offset competition in corporate lending by boosting fee businesses such as loan syndication, asset securitization and wealth management -- now just a fifth of revenues, on average. About half of Japan's household assets sit in cash deposits with nonexistent yields. As Japan's well-educated boomers start retiring in '07, "they'll need to seek returns and look for financial products," says Kahori Ando, a bank fan and manager of Sparx Japan mutual fund (SPXJX

And some rough  valuations are given also:

[in the future] I can see 13% to 14% ROE," up from 10% to 11% today. ... Sumitomo trades at about 12 times earnings, about on par with Mitsubishi UFJ, whose returns on equity are lower.

12x earnings with about 10% ROE means they could be trading at about 1.2x book value. It sounds like there is a great opportunity in Japan to reap the rewards of banking sophistication. Still, we need to remind ourselvs that this japan banking story is old news to some. From Reuters:

Mitsubishi UFJ and other big Japanese banks have rebounded after a decade-long bad loan crisis, and their shares have surged more than 60 percent since August as investors bet that an improving economy will drive loan demand and fatten margins.

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