Cash Rich Banks
Is Japan Post Bank the odd man out?
The first chart below is the stock price of Japan Post Bank (7182). The bank has a significant amount of US collateralized loan obligations (CLOs), which may explain the sharp rise in market capitalization in the past two months. What may be a concern though is how market capitalization of many cash-rich banks - like Japan Post Bank - have reversed dramatically. Fifth Third Bancorp (FTB) and Signature Bank of New York (SBNY), both stand out. These smaller US banks are of particular interest, where cash levels compared with loans or compared with shareholders’ equity, have risen dramatically. This is of course a key theme across banking globally and especially in the US, where a shift from cash assets to loan assets, can result in a dramatically higher ROA or ROE. It is though not immediate.
Japan Post Bank - Stock price
FITB now reports cash and equivalent at 32% of gross loans; the figure was 5% in FY19. There are few banks in our global sample that have seen this sort of delta. At the same time, its cash and near cash is now 169% of capital compared with 25% in FY19. The scope for yield improvement is tremendous. And indeed, this may have been the driver of market capitalization for some months. SBNY is similar, with cash moving from 2% of loans to 45% over the same period; its cash to capital rose from 17% to 378%. ROE expansion can be exceptional for these banks.
Fifth Third Bancorp - Stock price
These banks arguably have some of the best scope for margin and return improvement anywhere, simply from the delta. There are though over-riding market concerns that appear to be questioning this. Perhaps it has more to do with timing than anything or magnitude? Perhaps there is a greater concern now with funding costs, where these are not likely to remain flat? But what matters to us here, is that Japan Post Bank appears - as of yet - unaffected with the change in sentiment. We would also argue that this government-owned financial company has greater operational risk, a greater propensity to ‘get it wrong’ than many other banks globally, or in Japan.
Signature Bank of New York - Stock price
There are certainly other banks with far more cash compared with loans and compared with equity - the two US regionals above have some of the greatest delta’s in these ratios. It may surprise that HSBC’s cash/loans ratio is ‘only’ 39% in the latest figures compared with 23% in FY19. JPM is essentially off the charts, with cash/loans at 112% which is nearly double what is was in FY19. The giant US money center bank can switch from cash assets to loan assets very easily, affecting more loan growth, than most any other bank, anywhere. And still, its market capitalization tumble is spectacular. It makes us even more concerned, or rather curious, about Japan Post Bank. Admittedly Japan is a very different banking market than the US, but this quasi-government financial company is more closely aligned to US assets than most other listed banks in Japan, through its US CLO exposure.
JPM - Stock price
Texas-based Cullen/Frost Bankers (CFR) may though be the most interesting. This bank’s cash levels are now up from 26% to 103% of loans, over this same period, from FY19 to current YTD. The delta is high, the absolute level is high. Low-yield cash assets rose to 372% of equity as at YTD compared with 97% of equity in FY19. There is significant scope for ROE pick-up as the bank deploys loans into businesses, consumers; away from cash holdings. Maybe this is why its market capitalization is only down about 8%, unlike some of the more magnificent declines from others. And then there is Japan Post Bank, with essentially no decline…for now at least.
Cullen/Frost Bankers - Stock price
For all of our data we use S&P CIQ. Contact us on firstname.lastname@example.org for consulting or bespoke research. Our publications on Substack are gratis and we offer far more with analyst access, spreadsheets, regional bank research, or simply a number of Asian bank ideas per year, per quarter. See www.tabbushreport.com for more information.