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Morningstar | SMFG Remains Our Top Pick Among Japanese Banks as Cost Efficiency Will Drive Outperformance. See Updated Analyst Note from 17 May 2019

Sumitomo Mitsui Financial Group on May 17 held a briefing for analysts and investors to discuss its results for the year ended March. It was Jun Ohta’s first appearance as chief executive of the group since he succeeded chairman Takeshi Kunibe as CEO in April. We came away with a positive impression based on Ohta’s message that SMFG will continue to press its cost-efficiency advantage against its two megabank rivals and has ample room to reduce expenses further. For example, we see potential for significant cost reduction in the SMCC and Cedyna credit card businesses, similar to the efficiencies SMFG achieved when it merged Nikko and Friend Securities but on a larger scale. In the just-ended fiscal year, all three megabank groups saw their top lines shrink by 3%-5%, but only SMFG was able to remove even more in costs to reduce its expense ratio, which declined by 67 basis points to 60.3%, compared with increases at MUFG and Mizuho to 71.1% and 78.9%, respectively.

SMFG remains our top pick in an industry that is facing severe pressure from extremely low domestic interest rates and changes in consumer behavior with the proliferation of smartphones. The shares are up 5% year to date compared with declines of 5%-12% for all the other major Japanese banks but still trade at only 0.50 times book value and yield 4.7% based on SMFG’s JPY 180 annual dividend. SMFG was the only one of the three megabanks to announce a share buyback this week. It plans to buy up to JPY 100 billion, or 1.9% of shares outstanding at current prices.

We retain our no-moat rating and fair value estimate of JPY 5,775 per share, which is 51% above the last closing price. At this price, SMFG would trade at 0.75 times book value and yield 3.1% (for a 5% total shareholder return including buybacks), so we hardly view our estimate as an aggressive valuation despite the large upside to the current market price.