Morningstar | Sumitomo Mitsui Trust Reports Weaker 3Q in Banking, but Fiduciary Services Continues to Drive Growth
Sumitomo Mitsui Trust Holdings reported a slightly weaker fiscal third quarter, with annualized return on equity of 6.5% for October-December 2018, compared with 7.1% in July-September and 6.8% in April-June. Preprovision operating profit declined 8% year on year in its retail banking segment and 9% in wholesale after having recorded double-digit growth in these segments in the first two quarters. On the other hand SMTH’s fiduciary services segment continued to enjoy double-digit growth, with preprovision operating profit up 13% in the latest quarter.SMTH continues to gradually de-emphasize commercial banking, where it lacks competitive differentiation versus the larger megabanks, in favor of increased specialization in asset management and administration where it is a market leader in Japan. Although we do not believe SMTH possesses a competitive moat, given its overall business mix at present, we like the shift toward moatier businesses in fiduciary services such as pensions and wish it would be faster. SMTH differs from most other Japanese banks in that we expect secular revenue growth over the next decade and beyond, without a need to rely on cost cuts to drive profits.
SMTH’s balance sheet shrank 18% in the latest quarter as it deconsolidated JPY 13 trillion in cash and deposits of Japan Trustee Services Bank. SMTH had owned two thirds of JTSB, but its stake declined to 33% now that JTSB merged with Mizuho’s Trust & Custody Services Bank to form JTC Holdings. With JTC Holdings now being an equity-method affiliate, we expect a roughly JPY 25 billion annual reduction in both revenue and expenses for SMTH, but JTSB generated less than JPY 1 billion per year at the bottom line so the profit impact is minor.
We maintain our FVE of JPY 4,844 (0.70 times book value and 16% above today’s closing price) and our no-moat rating on SMTH.
Sumitomo Mitsui Trust Holdings is a holding company engaged in the management of Sumitomo Mitsui Trust Group Companies. Co.'s main business activities are banking, asset management and administration, and real estate. Co.'s banking business offers retail banking services throughout Japan; wholesale banking services to corporate clients; and marketable financial products for investment and risk management needs Co.'s asset management and administration business provides various products including pension plan for institutional investors and investment trusts primarily for individual clients. Co.'s real estate business offers a full line of real estate related transaction services.
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