EUR 850.00 For Business Accounts Only

Morningstar | New Scheme for Post-Office Fees Could Help Japan Post Bank Cut Costs. See Updated Analyst Note from 27 May 2019

We maintain our no-moat rating on Japan Post Bank and raise our fair value estimate to JPY 957 from JPY 952, 15% below the current share price, as we incorporate information from its results meeting last week. Whereas we view most Japanese bank shares as undervalued, we expect Japan Post Bank to generate an average ROE of only 2.5%, compared with an average of around 6% for other major Japanese banks, yet its price/book ratio of 0.37 times is not much lower. Japan Post Bank’s dividend yield of 4.4% is also slightly below the yields of other major banks, with very little chance of a hike in the next few years.

We had two main takeaways from Japan Post Bank’s results meeting on May 21. The first was mild surprise CEO Norito Ikeda suggested the bank could move to Basel III. Japan Post Bank’s capital ratio is currently 15.8% under the domestic standard while zero-risk-weight sovereign exposures account for close to two thirds of its total assets. A simple calculation would put the capital ratio below the 8% Basel III minimum if Japan Post Bank were to shift another third of its assets from sovereign bonds to risk assets. We interpret the suggestion as an indication Japan Post Bank aims to shrink its asset size in future. We think it maintains its deposit size mainly out of political considerations but shrinking makes sense.

Our second takeaway is positive appraisal of a new fee structure paid to support the post-office network. From April, only some of the fees (which amount to JPY 600 billion annually) will be paid directly to Japan Post while a portion will instead be paid through the Organization for Postal Savings, Postal Life Insurance and Post Office Network. This is positive not mainly because it saves consumption tax on the part paid through this government entity (tax savings of about JPY 13 billion a year) but because we believe it will give Japan Post Bank more room to in future reduce the part paid directly to Japan Post by achieving cost efficiencies.