Japan’s most expensive bank hides in a 7-Eleven

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People stand outside a 7-Eleven convenience store outside the headquarters of Seven & I Holdings in Tokyo January 9, 2015. REUTERS/Yuya Shino/File Photo - S1BETFUGTKAB

HONG KONG, May 14(Reuters Breakingviews) - U.S. gas stations and 7-Eleven stores may dominate ValueAct’s reasoning for taking a tilt at Seven & i (3382.T). The Japanese company, though, also owns more than 40% of the country’s most highly valued lender. Shares in $2.5 billion Seven Bank (8410.T) have underperformed, but it’s a curiously counterintuitive play on financial and immigration reform.

Years of negative benchmark interest rates have battered net loan margins at most Japanese financial institutions. The average Topix bank-index member trades at a parlous 30% of book value. Wandering overseas seeking better yields has proven dangerous. Nomura and Mitsubishi UFJ, for example, took massive hits from the collapse of U.S. fund Archegos.

Seven Bank is blessedly insulated from monetary policy because it is literally a cash machine. Nearly all its income comes from fees generated by 25,676 domestic ATMs, most located inside 7-Elevens, which accounted for roughly 90% of its 137 billion yen ($1.25 bln) in revenue last year. It also has a smaller U.S. ATM subsidiary. Its return on equity last year was an inspiring 11.3%, and it trades at an envy-inducing 1.2 times trailing book value.

Yet its return to shareholders over the past 12 months, including dividends, is negative 13%, and its EBITDA margin has been shrinking from 2015 to a ho-hum 36.2%. One issue is Prime Minister Yoshihide Suga’s digitisation push, part of which aims to reduce consumers’ notorious addiction to cash. Stressed lenders are already consolidating automatic teller footprints to save on costs. But Seven Bank, whose ATM transactions contracted in 2020, lives on paper money.

Yet investor pessimism might be excessive. The digitisation push is proceeding at a crawl. And as conventional banks shrink ATM footprints, those who prefer cash – particularly millions of elderly Japanese - could migrate to 7-Eleven machines.

At the same time Seven Bank is targeting the country’s rapidly growing population of immigrants, currently around 3 million, who local lenders are reluctant to bank. If management can entice enough foreigners to use its deposit and remittance services, fees from imported restaurant workers and elderly care providers could offset slowing cash withdrawals. It may even bolster its lending arm, which already produces a whopping 3% net interest margin, triple the national average per Refinitiv. With a little attention, Seven Bank might start looking like the best package on 7-Eleven’s shelf.

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- ValueAct Capital said on May 13 that it had bought some 39 million shares in Japanese convenience store operator Seven & i. It followed an exclusive Reuters report that the activist investor had taken a 4.4% stake, lobbying for the 7-Eleven owner to consider changes including a breakup.

- Seven Bank, a financial affiliate of the Seven & i group that runs ATMs in 7-Eleven convenience stores, on May 7 reported net income attributable to owners of the parent fell 0.8% to 26 billion yen for the fiscal year ending March 31.

- Major Japanese banks with investment arms, including Nomura and Mitsubishi UFJ, have reported big losses this year related to their relationship with U.S. investment fund Archegos. Nomura will book around $2.9 billion in losses, it said.

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