Upside potential for major banks’ retail finance business

􀂄 Business environment entering cyclical recovery phase.
Business model at SMFG, Shinsei etc. systemically superior
Although we find few areas of Japanese banks’ lending business where clear
recovery can be expected, unsecured lending to individuals is one business
where we see such a possibility. Loans to consumers have continued to decline,
to a proportion of domestic consumer spending last seen around 22 years ago,
but we think this could signal a turnaround once the impact of expansion in
excess-interest refunds and severely stringent regulations is fully reflected.
Regulation also may be entering a phase of winding back from the tightening
seen in the past (Table 1).
Banks, credit card/installment payment companies, and consumer finance firms
are constrained by rules that differ from each other in relation to regulatory
controls, information centers, and self-regulation (Table 2). Further, funding costs
for banks, which hold deposits and access to the interbank market, are far lower
than for the other business categories. As long as there is no change in these
systems overall, we see strong growth potential for retail finance under a business
model of a bank’s own lending guaranteed by its wholly-owned consumer finance
subsidiary. In the US (though the business environment is different), independent
major nonbanks have been consolidated into banks and major company groups.
Strong growth potential for major banks’ retail financing,
particularly for SMFG’s business model
We believe risk factors include the establishment of the new class action law,
which is currently under discussion by the Consumer Affairs Agency, and overall
credit erosion among the younger generation. In particular, the class action law
currently poses a major uncertainty. However, many uncertainties should linger in
the political environment before it is finalized – and because of complicated
procedures, the coverage of the law should be limited, and with substantial
amounts in refund claims already settled to date, any system implemented would
likely only lead to possible earlier emergence of overpayments.
If market contraction ceases, and bank groups account for the majority of the
consumer credit business, we think there should be scope for perhaps earnings
expansion of several hundreds of billions yen (Table 4). We believe that SMFG’s
business model in consumer loans is superior, and we reiterate our top pick of the
bank group, based on the comprehensive evaluation of various factors such as
earnings, room to raise dividends in future, and lower risks on its balance sheet.