Japanese banks' low price-to-book value ratios make it challenging for them to raise their valuations in line with a directive given to all listed companies by the Tokyo bourse.
The price-to-book value (P/B) ratios of Japan's three megabanks — Mitsubishi UFJ Financial Group Inc. Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — are around half the threshold level even after a recent stocks rally, according to S&P Global Market Intelligence data. Just four of a sample of 79 Japanese banks, including the megabanks and regional lenders, had a P/B ratio above 1, the data shows.
Most banks need to boost their share price twofold, amid ultralow-interest rates and strict capital regulations, to meet the target.
"Banks will need to develop inorganic strategies, including pursuing M&As and digitization," to improve their profit and P/B ratios, said Takahide Kiuchi, executive economist at Nomura Research Institute. "Increasing expectations about higher profit could lead to higher P/B ratios."
Market perception
The P/B ratio measures the market's valuation of a company relative to its book value. A low P/B ratio could mean the stock is undervalued. If the ratio is below 1.0, it indicates a perception of inefficient use of capital, as investors consider the worth of the company to be below its book value. The Japanese lenders' current P/B ratios indicate that the market believes that the banks would be worth more liquidated than operating.
The Tokyo Stock Exchange in March asked companies with P/B ratios below 1.0 to disclose specific policies and initiatives to lift their value as it sought to raise management awareness of capital costs and stock prices. The directive, although not binding, is also seen as a message to draw more interest from overseas investors.
Despite years of ultraloose monetary policy, economic growth in Japan's mature economy is tepid, making Japanese companies less attractive to international investors. Authorities have focused on improving the appeal of Japanese stocks, and the benchmark 225-share Nikkei Stock Average index has gained about 26% since the start of the year, making it one of the top-performing markets in the world. Still, the valuation gap remains wide.
Enormous problem
"The P/B ratio below 1.0 times is an enormous problem to tackle," Hironori Kamezawa, Mitsubishi UFJ Financial's chief executive, said at a May 15 press conference. "It's significantly important to give the ROE [return on equity] a boost to improve the P/B ratio."
A quick turnaround is unlikely, as banks need sufficient capital reserves to comply with international regulations, and they are under pressure from the central bank's persistent loose monetary policy that drags on domestic lending performance.
The options for banks include an improvement in their return on equity, profits and share buybacks. All three megabanks have set medium-term targets for higher ROEs.
No easy paths
MUFG aims to increase its ROE to 7.5% in the current fiscal year, which ends March 2024, from 7.03% at March 31, 2023. To reach this, Japan's largest bank by assets is targeting a net profit increase of 16.4%, or ￥1.30 trillion. MUFG plans to further raise its ROE to between 9% and 10% in the mid or long term, according to a company statement.
Achieving ROEs of about 8% will not be easy for banks, "as they could struggle to draw up a growth strategy amid negative interest rates and strict capital regulations," said Hiromi Ishihara, the head of equity investment at Amundi Japan.
The Tokyo Stock Exchange has rallied, and the benchmark stock index topped 33,000 on June 13, the highest in more than 33 years. That helped some companies improve their P/B ratios. Among them was Toyota Motor Corp., Japan's biggest automaker, which reached a P/B ratio of 1.0x.
Nearly 60% of more than 1,800 companies listed on the Tokyo Stock Exchange were undervalued as of July 2022, according to stock exchange data. That compared with only 5% of the S&P 500 index and 24% of Europe's STOXX 600 being undervalued, the data showed.