EUR 850.00 For Business Accounts Only

Morningstar | SMFG's 1Q Earnings in Line, Showing Signs of Improved Efficiency

No-moat Sumitomo Mitsui Financial Group, or SMFG, reported solid first-quarter earnings for fiscal 2018 that were in line with expectations, and revealed early signs of success from their cost-cutting efforts. Net profit was JPY 227.084 billion, which is down 6% compared with last year's strong first quarter, but still well-ahead of management's guidance and 32% of their full-year target. We maintain our fair value estimate of JPY 5,000, and believe the stock is undervalued.

Earnings were supported by falling overhead costs, which fell 1% (after excluding impact from deconsolidation of regional banks) to 59.6%, and suggests good progress on their efforts to lower costs. Additionally, management highlighted strong performance in the international and wholesale business units. While the group's loan book had a healthy increase of 2% compared with three months ago, net interest income fell by 1.7% as the company's domestic loan/deposit spread continued to fall. Earnings from fees and commissions continued to grow, although this was offset by decreases in trading income.

Going forward, we look for the group to continue to keep overhead costs as low as this quarter's, and increase their revenue from fees and commissions. Finally, credit costs were JPY 8.4 billion this quarter, which seems well below management's full-year guidance of JPY 200  billion. We continue to believe that this is too conservative given the benign economic environment, and may look to reduce our own estimate of JPY 150 billion if credit losses remained contained.