EUR 850.00 For Business Accounts Only

Morningstar | SMFG's strengths in consumer finance and credit cards help drive higher-than-peers level of returns.

Sumitomo Mitsui Financial Group, or SMFG, with a 7.2% share of domestic loans and 8.2% of deposits as of March 2018, is one of Japan’s big three banking groups, along with Mitsubishi UFJ Financial Group, or MUFG, and Mizuho. In Japan, the environment for banks has been tough for years and we expect it to remain so. The long-running deflationary environment in the country has led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 55% at present. The liabilities/net assets ratio for Japan’s approximately 1 million business corporations has declined from a highly leveraged 4 times in the mid-1990s to a healthy 129% as of June 2018, but corporate borrowers prioritize cash flow for paying down existing debt, rather than taking out new loans for investment. This comes even as the average interest rate on new bank loans has declined by 100 basis points over the past decade to below 0.7%. SMFG has somewhat more resilience to these negative trends than its two megabank rivals, owing to its greater focus on retail customers and SMEs rather than large corporate clients, and particularly to its relative strength in consumer finance (which we expect to contribute more than 5% of total earnings, given SMFG’s 100% ownership of the Promise business) and credit cards (where SMBC Card is the market leader and which we expect to contribute 2%-3% of total earnings over our forecast horizon.) Like the other two Japanese megabanks, SMFG has expanded its overseas business significantly since 2010, with overseas loans comprising 32% of total loans as of March 2018, compared with 15% in March 2011. SMFG also owns 18% of Hong Kong-based Bank of East Asia, 18% of Cambodian lender Acleda, 15% of number-10 Vietnamese lender Eximbank, and 40% of number-14 Indonesian bank BTPN. Compared with the other two megabanks, SMFG is closer to achieving sustainable returns commensurate with its cost of equity, but this will depend on the macroeconomic environment (level of interest rates, and intensity of loan demand) and also SMFG’s ability to control costs as it reconfigures operations for a more digitalized banking era.