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Morningstar | Sumitomo Mitsui Trust’s Improved Leverage Ratio Allows Higher Shareholder Returns

We maintain our no-moat rating on Sumitomo Mitsui Trust Holdings, or SMTH, and raise our fair value estimate to JPY 5,000 from JPY 4,844. SMTH is the only major banking group in Japan that reported record profit for the year ended March 2019, and it’s guiding for 4% growth this year versus declines at most other banks. Net interest income, which is falling industrywide amid extremely low interest rates, only contributes around 20% of SMTH’s revenue, versus half revenue for the mega-banks and three-fourths or more for Japan’s regional banks, while fees are more than half of SMTH’s revenue, the highest proportion among Japanese banks excluding Seven Bank.

We think the relatively resilient profits are little surprise to the market, but we see SMTH’s plan to pay out around 40% of profits to shareholders in fiscal 2019 as positive. Previously, SMTH promised to gradually raise the payout ratio to around 40% over the medium term, but had not committed to do so as early as 2019. In addition to its plan to lift its dividend to JPY 150 from JPY 140, 31% of its earnings guidance, SMTH announced a JPY 16 billion buyback to be completed by August, 9% of guidance and 1.1% of shares outstanding at current prices. This doubles the pace of the past four years, in which SMTH bought back 0.5% of shares annually. We think SMTH has become more comfortable boosting shareholder returns quickly because the deconsolidation of Japan Trustee Services Bank in October improved its leverage ratio from below 4%, lower than other major banks, up to 4.68% as of March.

Despite the positive profit trend relative to other Japan banks, SMTH in 4-star territory is not our favorite stock in the sector, as even its raised dividend only represents a 3.8% yield, versus yields of 4.7% to 4.9% at the three mega-banks. Its price/book ratio of 0.56 times is slightly higher than the 0.4 to 0.5 range of the three mega-banks. Our top pick, Sumitomo Mitsui Financial Group, is in 5-star territory.