EUR 850.00 For Business Accounts Only

Morningstar | Weaker Q3 Doesn't Change Our Preference for Sumitomo Mitsui Financial Among Japanese Bank Stocks. See Updated Analyst Note from 31 Jan 2019

Most of the key factors driving Sumitomo Mitsui Financial Group's bottom line deteriorated in the October-December quarter, with net interest income dropping 11% year on year (perhaps influenced by ETF trading or other non-customer elements), fee income dropping 11% as wealth-management businesses were affected by the recent deterioration in market conditions, and credit costs normalizing to an annualized 24 basis points of loans after net write-backs had benefited the bottom line in the previous quarter. The bright point was expense control, which was better than we expected with a 7% year-on-year drop, a faster reduction than recent quarters.

Annualized ROE of 6.2% compares with 9.3% in the July-September quarter and 8.7% in April-June. The company's profitability was better than most of the other major Japanese banks that have reported their October-December quarters, and the group has already achieved 91% of its full-year net profit guidance of JPY 700 billion (32% in the fiscal first quarter, 35% in the second quarter, and 24% in the latest quarter). In our view, these results, when compared with those of peers, show the company's relative strength that allows it to limit the magnitude of profit deterioration in periods of market weakness such as the end of 2018.

While we modestly lower our fair value estimate from JPY 5,960 to JPY 5,775, our new valuation still represents 43% upside from today's closing price and would value the company at 0.77 times book value. We see the current valuation of 0.54 times book and dividend yield of 4.2% as too low in view of its ability to return capital to shareholders with steadily rising dividends.