77 Bank has a very large market share (near 50%) in
Here is its balance sheet:
(click for a more detailed view).
Note that it has USD42.6 billion in deposits. This compares to $35.8 billion for Zions Bancorp – as close to an American equivalent as I can find. [Disclosure - I had been short Zions Bank at various times - but not for the great collapse in its local commercial property market. I lost money. I thought Zions modestly risky - but it wound up very risky.]
77 only has USD26.4 billion in loans though. If you take out the low margin quasi-government loans it probably has only USD20 billion in loans.
This bank seems to be very good at taking deposits – but can’t seem to lend money.
This is typical in regional
So – guess what. It sits there – just sits – with huge yen securities (yields of about 50bps) doing nothing much.
It’s a big bank. It has next to no loan losses because it has no lending.Here is an income statement:
(click for a more detailed view)
Profits were USD87 million on shareholder equity of 3251 million. You don’t need a calculator – that is a lousy return on equity for a bank without credit losses.
You might think that given that they have no profitability and no lending potential they might be returning cash to shareholders. Obviously you are new to
In a world where banks everywhere are short of capital 77 bank is swimming in it. Here is the graph of capital ratios over time:
This bank has an embarrassment of riches – and nothing to do with them.
Welcome to regional
An American Mirror
The title of this post was “An American Mirror”. And so far I have not mentioned
There are also mirror image lands – 77 is our mirror image.
Macroeconomic investing calls
We live in a world with considerable excess (mostly Asian) savings. Banks with access to borrowers made good margins because the borrowers were in short supply. Savers (or banks with access to savers) were willing to fund aggressive Western lenders on low spreads.
77 Bank has been the recipient of those low spreads. It has not been a fun place for shareholders as the sub 3% return on equity attests.
The economics of 77 Bank (and many like it) will change if the world becomes short on savings. There is NO evidence that that is happening now – and so 77 Bank will probably remain a lousy place for shareholders.
The market produces what the market wants
This is an aside really. We live in a world with an excess of savings. This is equivalent to saying that we live in a world with a shortage of (credit) worthy borrowers. So we started lending to unworthy borrowers – what Charlie Munger described as the “unworthy poor [whoever they might be] and the overstretched rich”. We know how that ended.
Unfortunately the financial system cannot make worthy borrowers. It can only lend to them when it can identify them.
This Subprime meltdown heralds the death (for now) of lending to the unworthy. The shortage of the worthy however is as acute as ever – and money for the worthy is still very cheap. [Money for the worthy is now difficult to obtain (at least outside Fannie/Freddie space), but still relatively cheap once obtained.]
The subprime meltdown does not solve 77’s problems.
One year later postscript:
The basic call that the global savings glut was not going away was right. The global glut of savings - which found its way into endless dodgy subprime mortgages and other problem loans - still exists. Chinese people still save to excess. Americans are saving more. The fundamental imbalance that drove the world financial crisis is still there. It is not obvious how that is fixed.
Japanese banks however have found that low margins are particularly dangerous - as there is little profitability to offset losses (even small losses). And Japanese banks are now having losses.
Insightful. Thanks for your perspective.
I wonder, what did net interest margins look like in Japan as their bust took hold in the late 80s/early 90s? Did they initially experience the same type of wide margins currently enjoyed by American banks, or were margins already thin?
As you allude to, Americans are retrenching. It seems to me that we could be looking at a long period of increased savings and reduced borrowings.
If the trend continues, won't American banks be subject to the same shrinking margins that have now long affected the Japanese?
It's intriguing how everyone is so fixated on the banking problem here in America and in Japan. I agree with you that the banks in Japan are different than the banks in America, but that is primarily due to the fact that our consumers are so different.
That's what bothers me most about this whole mess. It's actually a consumer problem, but everyone thinks it's a banking problem. In Japan, the credit crisis actually only lasted about 18 months. What persisted was consumer weakness and a lack of borrowing. That's what really has dragged Japan's economy down for 20 years.
But here we are bailing out bankers and trying fix the banks while the consumer continues to struggle. Are our consumers different from Japans? Yes, we are entering this crisis with far less savings. Can we continue to borrow in perpetuity? No.
"77 Bank is a regional bank in Sendai (the capital of Miyagi prefecture). The Japanese guys I know think of Sendai as a backwater – a place where the “cool guys” hang out on motorcycles wearing purple clothes. Economically it is just another rapidly aging backwater where the young (other than those that hang out on motor cycles wearing purple clothes) are moving to Tokyo."
The guys you know can't be connected with the electronics industry, the advanced technology end of which is gravitating to Sendai, due to cheap land and housing, an urban lifestyle (culture, not agriculture) and a plentiful supply of graduates from one of Japan's leading universities - Tohoku University.
The general point is a good one, though, as the electronics industry won't be financing R&D investment through Bank 77.
Actually the Japanese guys I got that from ARE in the electronics industry (Kyoto - which I guess is Japanese Silicon Valley).
And they just saw Sendai as a cheap place to get things done and most importantly at the end of a bullet train line and hence having great transport.
John, isn't it true that the recapitalization of american banks (BAC and WFC as example)is currently being driven by the very low (essentially 0) short term interest rates. We now have a steep yield curve and therefore margins are gross and expanding. If this is the case then how can it be that a very low interest rates the deposit franchise is worth less....shouldn't it be worth more if I can grow deposits are essentially '0' rates.
2nldy, with respect to 77 bank. could they not improve their earnings by investing in higher rate investment vehicles globally with a currency hedge to take advantage of their very low fuding/deposit costs?
I have a couple of questions about the savings glut.....
Doesn't the deleveraging that is going on in the world make the savings glut less of an issue?
The deleveraging means less credit to buy assets, right? Less credit to buy goods and services too.
Wasn't it the savings glut on top of the leverage that caused the problems?
And with the decrease in asset prices, the ability to borrow against those assets is diminished, making the savings glut less of a problem, no?
1. Quote "And they just saw Sendai as a cheap place to get things done and most importantly at the end of a bullet train line and hence having great transport."
Years ago, the extended bullet train line put Sendai mid-way on the super express line heading north.
2. Sendai is said to attract an above average non-Japanese population compared to other Japan urban centers.
3. Non-confirmed information is that 77 Bank has a link with Bank of America and personal finances are easily managed between the two banks.
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