EUR 850.00 For Business Accounts Only

Morningstar | Mizuho Profit Crumbles Even With Moderate Macro Trouble in Q3, but Expense Reductions Offer Hope

After having achieved 63% of its full-year net profit guidance of JPY 570 billion in the first two quarters, Mizuho Financial Group reported a poor third fiscal quarter with annualized ROE of only 2.2% for the October-December period, bringing its guidance achievement rate to 72% with one quarter left to go. Mizuho's net interest income held up somewhat better than peers, down only 3.5% year over year, but fees slid 16% and credit costs reappeared to a modest degree (12 basis points of loans on an annnualized basis) after a number of recent quarters in which Mizuho had benefited from net writebacks given that the Bank of Japan's negative interest rate policy had essentially eliminated distress for corporate borrowers. That appears to be changing now amid higher dollar interest rates and the global slowdown, even though yen interest rates remain near zero.

Mizuho Securities had annualized ROE of just 1.0% for the quarter and contributed to the group's overall fee weakness. Expense control was a bright spot for the group (banking as well as securities), as Mizuho appears to be seriously tackling its persistent problem of costs that are too high for its revenue base. In our view, as the weakest of Japan's three megabank groups, Mizuho faces redoubled urgency now to reduce expenses and avoid business-model disruption from the Internet because unlike stronger peers, even a moderate degree of macro headwinds is sufficient to dent its bottom line.

We maintain our no-moat rating and tweak our fair value estimate from JPY 202.4 down to JPY 199.0 and from USD 3.61 up to USD 3.66, reflecting our updated forecasts, the time value of money, and changes in currency exchange rates.