TYO:8308 - Resona Holdings

[muscleman]

I saw this name in Greenlight's Q1 letter. This is a Japanese bank bailed out in 2003 and they kept paying back the government public funds (Similar to US TARP) every year.

David Einhorne said this bank is cheap on a 0.8 book and 8 PE, and analysts seem to have ignored the paying back into their models.

I looked at this name but didn't find anything particularly interesting. I can't seem to figure out how they made money every year but somehow their stock price dropped a lot in 2008 and they issues some common stocks that year and had to do a reverse merger.

 

Has anyone looked into this name? :)

[Fat Pitch]

Yeah I looked at the name and it looks interesting. They are aggressively buying back stock from the gov't at very attractive prices. Looks like good capital allocation and that's very unusual for companies in Japan.

 

What scares me is the leverage that these banks operate at.  ROA is very low and thus they need very high leverage to eek out decent ROEs. Using other people's money to make money is a terrific business model, especially if the leverage is regulated, but these level of leverage is just too dangerous. You can just look at the various times the bank had to be "bailed" out to get an appreciation of the dangers.

 

I threw this name in my "no" bucket.

 

[muscleman]

Yeah I looked at the name and it looks interesting. They are aggressively buying back stock from the gov't at very attractive prices. Looks like good capital allocation and that's very unusual for companies in Japan.

 

What scares me is the leverage that these banks operate at.  ROA is very low and thus they need very high leverage to eek out decent ROEs. Using other people's money to make money is a terrific business model, especially if the leverage is regulated, but these level of leverage is just too dangerous. You can just look at the various times the bank had to be "bailed" out to get an appreciation of the dangers.

 

I threw this name in my "no" bucket.

 

This is one of the buybacks they made, and I don't see a discount.

http://www.4-traders.com/RESONA-HOLDINGS-INC-6492267/news/Resona-Holdings-Inc--Announcement-Regarding-the-Results-of-the-Acquisition-of-Own-Shares-Ordinar-17112037/

 

They bought  back at about 525 yens per share. The stock was trading at that price around that time.

 

Are you saying no to all banks then? Banks usually operate at 10x leverage and municiple insurers at 100x leverage. I think it all depends on expected losses. This Japanese bank seems to operate at about 20x leverage though.

 

Do you know what happened in 2008? I see the stock price tank and a 100:1 reverse split, but they are still reporting earnings around that time, which is confusing to me. ::)

[constructive]

David Einhorn said this bank is cheap on a 0.8 book and 8 PE

 

That doesn't seem cheap enough. There are dozens of Japanese, Korean and French banks selling for less than half of book value.

[Fat Pitch]

This is one of the buybacks they made, and I don't see a discount.

 

Well if you are buying back your stock below book value and you are earning 15%+ then it should be quite accretive to shareholders over the long term.

 

Are you saying no to all banks then? Banks usually operate at 10x leverage and municiple insurers at 100x leverage. I think it all depends on expected losses. This Japanese bank seems to operate at about 20x leverage though.

 

Wells Fargo and Bank of America are the two largest positions in my portfolio (70% in total). I am comfortable with the leverage ratios with US Banks and I can sleep at night knowing the Federal Reserve will do everything to keep the top 4 banks afloat and treat equity fairly.  This confidence does not extend to banks outside the US.

[muscleman]

This is one of the buybacks they made, and I don't see a discount.

 

Well if you are buying back your stock below book value and you are earning 15%+ then it should be quite accretive to shareholders over the long term.

 

Are you saying no to all banks then? Banks usually operate at 10x leverage and municiple insurers at 100x leverage. I think it all depends on expected losses. This Japanese bank seems to operate at about 20x leverage though.

 

Wells Fargo and Bank of America are the two largest positions in my portfolio (70% in total). I am comfortable with the leverage ratios with US Banks and I can sleep at night knowing the Federal Reserve will do everything to keep the top 4 banks afloat and treat equity fairly.  This confidence does not extend to banks outside the US.

 

I thought when David Einhorne said they are buying back at a large discount, he meant that they could get an even bigger discount than book. :)

Right now I am not comfortable with banks outside of US either, but just curious.