Owning Up to Sub-Prime Losses May Spur Rally in Bank Stocks

"The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas."

John Maynard Keynes
Economist (1936-1973)

Is the worst over for Japanese banks? Recent data out of Japan suggests that may be the case. According to data for the financial year ending March 31, 2008 Mizuho Financial Group reported losses in the U.S. subprime sector of US$6.14 billion (Yen 645 billion). It also reported an 80% increase in profits to US$5.31 billion (Yen 560 billion) including a share buyback program amounting to US$1.42 billion. Mizuho had been one of the worst afflicted by the Subprime Syndrome so the latest news is welcome.

Other banks may also be signalling that tough times may be over. Sumitomo Bank, one of the biggest, reported that net profits rose over 20% to US$95 million due to a fall incredit costs while Aozora Bank forecast that its profit would increase to US$42 million as it recovers too from subprime exposure.

Implications? First, expect a short term rally in the equity markets. Aside from the fact that subprime had been weighing down balance sheet growth recent growth numbers out of Japan point to a still bouyant economy, helped in large part by export-driven business out of the BRICs. Second, with greater clarity and transparency now in place one might expect big foreign investors to be lured back into the beaten up Japanese stock market. This should lift the second quarter performance of a number of Japan long/short equity hedge funds. Mahalo.