* Banks' earnings momentum rises in June, Topix falls
* Banking sector offers lower 12-month forward P/B
* But shares still vulnerable to Europe event risks
By Dominic Lau
TOKYO, June 25 Japanese banking shares, hit by
worries about the impact of Europe's woes despite the lenders'
limited exposure to the region's troubled debt, offer a good
investment opportunity as the sector's earnings momentum
improves further, analysts said.
Japan's big banks - Mitsubishi UFJ Financial Group,
Mizuho Financial Group and Sumitomo Mitsui Financial
Group - are also expected to benefit from their
overseas expansion, though they still face sluggish loan demand
in their home market.
The sector's one-month earnings momentum -
analysts' earnings upgrades minus downgrades as a total of
estimates - has risen to 19.7 percent from last month's 7.8
percent, Thomson Reuters Datastream data showed.
In contrast, the broad Topix index's earnings
momentum has turned negative, to minus 2.3 percent from 0.1
percent in May.
"The argument is pretty clear. Banks around the western
world have a lack of capital, are loaded down with subprime,
with exposure to the European bond market and so on," said
Nicholas Smith, a Japan equity strategist at CLSA.
"The Japanese banks (shares) are pretty much moving in
lockstep with those western banks and yet they don't have those
problems. They are actually overcapitalised ... Their earnings
line is much cleaner because it is coming from utility earnings
rather than casino earnings."
Japan's banking sector also offers cheaper valuations, with
a 12-month forward price-to-book ratio of 0.53, versus the
Topix's 0.83, although its return on equity of 7.1 percent is
lower than the index's 7.7 percent, Datastream data showed.
Japanese bank shares have advanced 7 percent so far this
year, outpacing a 3.1 percent rise in the Topix.
Bank of America Merrill Lynch said in a report last week
that credit risk on Japanese banks' balance sheets was
"While the stock prices should continue to be affected by
euro zone factors, we believe the Japanese banks fundamentally
offer good value and should be less affected by such global
concerns, with assets risks quite low and solid growth
possibilities supported by business expansion in the U.S. and
Asia," Merrill Lynch said.
Its top pick among banks was Sumitomo Mitsui Financial,
while Mitsubishi UFJ Financial, which has a stake in Morgan
Stanley, was the most sensitive to overseas conditions,
Still, the sector remains vulnerable to any event risks in
Europe, and should Spain's financial position and the health of
its banks continue to deteriorate, Japanese lenders
would again come under selling pressure.
"(Last week bank) share prices simply advanced on a change
in investor expectations," Barclays Capital said in a research
"On the other hand, the market actually remains cautious, as
seen in sustained high yields for Spanish debt, and we think
bank stocks that recovered over the past two weeks might slip
At home, Japanese lenders are also plagued by weak loan
demand as businesses and households stay reluctant to spend in
Japan's fragile economy, putting the banks under further
pressure to expand overseas.
The top three banks enjoyed strong profits in the financial
year that ended in March, but much of the boost was due to hefty
gains from trading in Japanese government bonds.
(Editing by Chris Gallagher)