Bank sector outlook 2010

Bank sector outlook 2010
Year of normalization on all fronts

Investment theme:

Normalization — For the banking sector, we believe 2010
will be a year of corrections to excessive share price movements, a return to
normal banking operations, and capital strengthening. In this report we outline
investment strategies we think are suitable for the theme of normalization.

Clamping down — Tightening regulations, centering on capital adequacy
requirements, was a central theme of the discussions of national and
international regulatory authorities in 2009. Japanese bank stocks, in
particular, were sensitive to related developments. Even allowing for the
commitment to tighter controls, we expect to see more measured proposals in
2010 as conditions return to normal.
Competition for capital — Banks responded to moves to tighten regulations by
issuing shares in 2009, and we expect more public offerings at the start of
2010. However, we think the competition for capital is likely to ease in the
second half of the year.
Credit expenses — Credit expenses have remained high for the last 18 months,
with a string of real estate bankruptcies followed by applications for alternate
dispute resolutions (ADRs). As a result, actual loan-loss ratios have risen,
leading to increases in loan-loss reserves. Reserve ratios for normal borrowers,
etc., are at historical highs. But we believe reserve ratios will gradually return
to normal levels as bankruptcies subside.
Interest rates — Exit strategies for major central banks is becoming a hot topic,
and interest rate normalization is a theme for Japan. The normalization of
short-term rates and yield-curve steepening are indispensable for an
improvement in bank earnings over the medium term. This theme will take time
to develop.
Route to reasonableness — Capital requirements will be raised to maintain the
soundness of balance sheets and put a brake on leverage. This is likely to
cause RoE to fall. We expect appropriate leverage levels to result in reasonable
RoE and PBR levels
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