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Morningstar | SMFG Outperforms Other Japanese Banks in Latest Quarter and Remains Our Top Pick

Sumitomo Mitsui Financial Group reported the strongest results for the July-September quarter of Japan's six major banking groups, being the only one to show an increase in net interest income year on year, notwithstanding the pressure on domestic lending rates from the Bank of Japan’s negative-interest-rate policy.

Besides higher lending income and net fees, SMFG’s expense ratio also improved sequentially from 59.6% to 57.2%, the lowest among Japan’s major banks, driving a 9% year-on-year increase in preprovision operating income. With credit costs near zero, net profit for the quarter rose 37% year on year, and SMFG has already achieved 68% of its full-year guidance with two quarters to go.

We maintain our JPY 5,960 fair value estimate, which represents 35% upside from the current share price, and continue to see SMFG as the most attractive investment among Japanese banks, considering that it has the lowest earnings multiple relative to consensus forecasts, the highest dividend yield, one of the most ample capital cushions (allowing for future dividend increases), and generally better earnings growth in recent years thanks to its higher weighting of consumer finance and small-business lending and lower weighting of low-margin corporate lending. At our fair value estimate, SMFG would trade at 0.78 times book value and 11 times consensus earnings for next fiscal year and would yield 3%.