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Investment thesis: Mizuho Financial Group may see a rebound higher once market conditions become less volatile due to rising net interest income, an attractive price-to-book ratio, as well as exposure to a strong real estate market.
Mizuho Financial Group, Inc. (NYSE: MFG) has come under price pressure in recent years – and more recently due to growing macroeconomic concerns about inflation.
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The purpose of this article is to assess whether Mizuho Financial Group could potentially see an upward rebound from here.
Performance
To determine the main sources of risk exposure for Mizuho Financial Group in the current market, I decided to compare the company’s loans by sector for the periods March 2017 and March 2022.
When analyzing lending by sector in March 2017 and March 2022, we can see that finance and insurance as well as real estate accounted for a larger portion of overall lending exposure in 2022 (figures provided in billions of yen expect percentages).
| Industry | March 2017 | Percentage (%) | March 2022 | Percentage (%) |
| Manufacturing | 8619.4 | 15.31% | 9770.8 | 16.23% |
| Agriculture | 37.7 | 0.07% | 47.5 | 0.08% |
| Fishery | 1.3 | 0.00% | 2.9 | 0.00% |
| Mining, quarrying and gravel extraction industry | 224.8 | 0.40% | 220.7 | 0.37% |
| Construction | 643 | 1.14% | 857.4 | 1.42% |
| Utilities | 2212.1 | 3.93% | 3043.3 | 5.06% |
| Communication | 1429.2 | 2.54% | 1206.4 | 2.00% |
| Transport and post industry | 2032.5 | 3.61% | 2581.5 | 4.29% |
| Wholesale and retail | 4737.2 | 8.42% | 5214.7 | 8.66% |
| Finance & Insurance | 7126.9 | 12.66% | 9032.1 | 15.01% |
| Immovable | 7142.2 | 12.69% | 10160.4 | 16.88% |
| Merchandise Lease | 2104.6 | 3.74% | 2891.9 | 4.80% |
| Service Industries | 2648.8 | 4.71% | 3082 | 5.12% |
| Local governments | 873.4 | 1.55% | 589 | 0.98% |
| Governments | 3191.1 | 5.67% | 836.5 | 1.39% |
| Other | 13263.5 | 23.56% | 10650 | 17.69% |
Source: Figures from Mizuho Group – Historical data. Percentages calculated by the author.
The performance of these sectors is expected to be heavily influenced by inflation trends going forward.
Right now, a cheaper yen is making Japanese real estate more attractive to overseas investors – especially from Hong Kong. Moreover, the Bank of Japan has not taken the same approach as the Federal Reserve when it comes to raising rates, opting instead to maintain an accommodative monetary policy. As such, we can expect the Japanese real estate market to still have significant room for growth in the current environment.
That being said, the Bank of Japan’s accommodative monetary policy could end up being a double-edged sword for the financial sector. If interest rates were to remain low in the face of inflationary pressures, this could potentially limit the extent to which the bank can increase net interest income.
Mizuho Financial Group Historical Data
We can see that domestic net interest income in fiscal year 2021 was still higher than other years for Mizuho Financial Group. Although we have seen conversely that income net of fees and commissions also increases significantly – inflationary pressures could put pressure on demand due to higher fees – even if interest rates themselves themselves remain low.
This remains a risk both for Mizuho Financial Group as such, as well as for its lending exposure to other financial companies which may come under pressure on domestic net interest income in the future.
With regard to the insurance industry – the degree to which the industry will perform in the future – and therefore the ability of insurance companies to repay loans – will largely depend on the performance of the life insurance industry , which would represent 80% of the overall Japanese market. As the sector has come under pressure in the wake of COVID-19, the market outlook has recently been revised from negative to stable – due to these companies reportedly maintaining strong capital positions as well as interest rate hikes. global interests allowing these companies to better manage reinvestment risk.
Looking forward
Going forward, an important consideration in Mizuho Financial Group’s performance from here will be driven by the broader macroeconomic environment and in part by the monetary policy of the Bank of Japan.
Although interest rates currently remain low, investors expect stronger net interest income growth in the future. Mizuho Financial Group could potentially benefit from lower rates, as relatively cheaper loan repayments could make Mizuho more attractive compared to its international counterparts.
However, if we don’t see evidence of an increase in net interest income, I believe this could be a concern for investors going forward. This could be especially the case if inflation leads to higher fees and commissions, which in turn reduces the demand for loans.
That being said, we can see that the stock appears to be attractively valued on a price-to-book basis, with the book value per share rising steadily over the past ten years, and a close price-to-book ratio. over a period of 10 years. down.
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In this regard, although the stock may experience a decline given the volatile macroeconomic situation, I believe that Mizuho Financial Group has significant rebound potential if the company can continue to manage its lending risk effectively and to increase its overall gross profits.
Conclusion
In conclusion, Mizuho Financial Group appears to be trading at an attractive valuation and given the company’s exposure to an attractive real estate market as well as rising net interest income. I believe the stock could have significant upside once market conditions become less volatile.
Additional Disclosure: This article is written “as is” and without warranty. The content represents my opinion only and does not constitute professional investment advice. It is the reader’s responsibility to exercise due diligence and seek investment advice from a licensed professional before making any investment decision. The author assumes no responsibility for any action taken based on the information in this article.
