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Morningstar | Mizuho Earnings In Line, Show Progress on Cost Control

No-moat Mizuho Financial Group announced first-quarter results that were in line with our estimates and management’s guidance. Our fair value estimate is unchanged at JPY 190.

Performance was fairly even across major business lines. Net interest income is tracking last year’s pace, although margins have compressed slightly. Mizuho highlights the performance of its customer groups as particularly strong, having improved by JPY 43.4 billion year over year. Fee income is weak, just like last year’s first quarter, although these businesses have traditionally had significant quarter-to-quarter volatility for the company, so it could potentially recover as the year progresses. As with last year, this quarter’s bottom-line net income relies heavily on realizing gains from unwinding cross-shareholdings.

Mizuho has the most bloated cost structure of all the Japanese megabanks, and improving its expense ratio is critical for its future. It made some progress this quarter with a consolidated expense ratio of 75% versus last year’s 79%. However, the group still has more work to do to get costs under control, especially as depreciation costs will increase over the next few years as it upgrades its IT infrastructure.

Finally, credit costs for this quarter amount to JPY 22.5 billion, which is in line with our view that credit performance across Japanese banks will be fairly good this year, given the benign economic environment.