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Morningstar | Mizuho Still Supported by Credit Cost Reversals and Equity Sales, but Quality of Earnings Improves

Mizuho Financial Group reported better-than-expected results for the July-September quarter, achieving 63% of its full-year profit guidance with half the year still to go. Although net reversals of credit costs and gains on sales of equity securities once again bolstered Mizuho’s bottom line, we think the quality of earnings was better this time than in many recent quarters, with a sequential reduction in Mizuho’s high expense ratio from 74.6% to 67.6% and solid growth in fee income offsetting a still-negative trend in net interest income.

We maintain our no-moat rating and fair value estimate of JPY 202.40, which is 4% above the current share price. Mizuho’s valuation is undemanding at 0.54 times book value and 9.3 times consensus earnings for next fiscal year, but we think Mizuho will have a harder time growing earnings than other major Japanese banks and its smaller capital cushion leaves it with less flexibility to increase dividends.