- By Mark Yu
The $51 billion financial institution recently reported its full year fiscal 2016. The Japanese firm Sumitomo Mitsui Financial Group or Sumitomo delivered 0.58% gross profit increased to ?2.92 trillion and 9.25% rise in profits to ?706.5 (24.2% margin compared to 22.3% in fiscal 2015).
As observed, Sumitomo recorded higher credit cost, up 60% to ?164 billion, and higher extraordinary losses, up 422% to ?26.6 billion.
Despite these increase in costs, the firm recorded increase in equity gains from affiliated to ?24.6 billion from actual losses last year, and a 15% rise in net trading and other operating income to ?545 billion, therefore, improving the company's profitability in the fiscal year.
Meanwhile, the firm sees its profits in the following year decrease by 10.8% to ?630 billion.
Total return
Sumitomo ADR shares provided 4.7% total losses to its shareholders so far this year compared to S&P 500's 8.8% gains (Morningstar). In the past five years, the firm returned 7.6% gains compared to the index's 15.3%.
Valuations
Sumitomo is undervalued compared to its peers. According to GuruFocus data, the firm had trailing P/E ratio 7.8 times vs. industry median 14.3 times, P/B ratio 0.57 times vs. industry median 1.2 times, and P/S ratio 1.46 times vs. industry's 3.4 times.
The firm also had trailing dividend yield of 1.8% with 27% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 1.4 times and 8.15 times.
Sumitomo Mitsui Financial Group
Sumitomo Mitsui Financial Group (???????????????????) or Sumitomo was founded in 2002. The firm is the fourth-largesthttp://www.relbanks.com/asia/japan bank in terms of assets. Sumitomo is a holding company for Sumitomo Mitsui Banking Corporation (the Bank) and its subsidiaries.
Sumitomo and its subsidiaries offer a range of financial services, including commercial banking, leasing, securities, consumer finance and other services.
The company operates through four segments: Commercial Banking, Leasing, Securities and Consumer Finance.
Commercial Banking
Sumitomo offers commercial banking services to a range of customers, including corporations, mid-sized companies, small-sized companies, individuals, governments and governmental entities mainly through the Bank.
The Commercial Banking segment covers the Bank, which accounts for the major portion of Sumitomo's total assets and revenue, other domestic banking subsidiaries SMBCTrust Bank Ltd. ("SMBCTrust Bank"), KansaiUrban Banking Corporation ("KUBC"), THE MINATOBANK, LTD. ("The Minato Bank"), Sumitomo Mitsui Banking Corporation Europe Limited ("SMBCEurope"), and Sumitomo Mitsui Banking Corporation (China) Limited ("SMBC(China)").
In fiscal 2016, gross profit in commercial banking climbed 6.7% to ?2 trillion (61.5% of total unadjusted sales--having also excluded the segment 'others'). Commercial banking also delivered profit margin of 45.7% compared to 44.2% in fiscal 2015.
Leasing
The Bank has an equity interest in Sumitomo Mitsui Finance and Leasing, which provides a range of leasing services, including equipment lease, operating lease, leveraged lease and aircraft operating lease.
Gross profit in the leasing business grew 20.8% to ?196.4 billion (6.2% of total unadjusted sales) and delivered a profit margin of 54.5% (most profitable segment) compared to 58.7% in the previous year.
Securities
SMBCNikko Securities Inc. ("SMBCNikko Securities") and SMBC Friend Securities Co., Ltd. ("SMBCFriend Securities") operates in Sumitomo's Securities segment.
Securities gross profit climbed 8.9% to ?389 billion (12.2% of total unadjusted sales) and reported 18.7% margin compared to 14% the previous year.
Consumer Finance
Sumitomo Mitsui Card Company, Limited ("Sumitomo Mitsui Card"), Cedyna and SMBCConsumer Finance operates in the firm's Consumer Finance segment.
Gross profit in consumer finance climbed 4.7% to ?640.5 billion (20% of total unadjusted sales) and reported a margin of 35.1% compared to 35% in fiscal 2015.
Financial metrics
Net interest margin
Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities (Investopedia).
In fiscal years 2013, 2014, and 2015, Sumitomo recorded average rate of interest income over average balance percentages of 1.21%, 1.17%, and 1.15% (2).
Return on assets
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets (Investopedia).
In fiscal 2016, Sumitomo's consolidated ROA was at 0.36% compared to 0.35% in fiscal 2015.
Return on equity
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia).
In fiscal 2016, Sumitomo's ROE was at 8.7%, which was same the previous fiscal year.
NPL Ratio
NPL ratio is the ratio of a number of nonperforming loans in a bank's loan portfolio to the total amount of outstanding loans the bank holds (eHow).
A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default (Investopedia).
NPL ratio was 1% in the recent fiscal year compared to 1.15% in fiscal 2015.
Capital adequacy in Tier 1 and Tier 2 under Basel III
Tier 1 Capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations (Investopedia).
Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.
In fiscal 2016, Tier 1 Capital ratio was 14.07% compared to 13.68% in fiscal 2015.
Common Equity Tier 1
Basel III requires banks to have the minimum Common Equity Tier 1 capital ratio of 4.5%.
In the recent fiscal year, the bank had 12.17% ratio compared to 11.81% it had the previous year.
Gross profits and profits
In the past three years, Sumitomo had gross profit growth average of 0.3%, profit decline average 4.9%, and profit margin average of 23.9%.
Cash, debt and book value
As of March, Sumitomo had ?46.9 trillion in cash and due from banks, and ?22.4 trillion borrowings (1) resulting in debt-equity ratio of 2.75 times compared to 2.67 times in the previous fiscal year. As observed, total shareholder equity rose by ?665 billion while borrowings rose by ?2.5 trillion.
Intangible assets were negligible in proportion to the firm's ?197.8 trillion in assets. Further, Sumitomo increased its book value by 7.5% to ?11.2 trillion.
Cash flow
In fiscal 2016, Sumitomo generated ?4.51 trillion in cash flow from operations compared to ?1.12 trillion cash outflows in fiscal 2015. In addition to higher overall profits, the firm generated higher cash flow in its trading assets, borrowed money, call money and bills sold, payables under securities lending transactions, and issuance and redemption of bonds.
Capital expenditures were ?641 billion leaving Sumitomo with ?3.87 trillion in free cash flow compared to ?1.8 trillion in outflows last year. 4.6% of this free cash flow was provided as payouts to shareholders, net any proceeds raised.
In addition, the firm took in ?11.9 billion in borrowings, net repayments.
Conclusion
Sumitomo registered good overall business growth figures in fiscal 2016. In addition, profitability improved in both of its commercial banking and securities business, which together generated 73.7% of the firm's business. Nonetheless, Sumitomo expects lower profits in the coming fiscal year.
Although heavy leveraged, the firm has plenty of cash and appeared to exhibited good quality in capital efficiency basing on Basel requirements.
One analyst that covers the firm indicated a price target of $9.24 per ADR share--26.9% upside from today's share price of $7.28 (at the time of writing). Asking a 25% discount from Sumitomo's book value indicated a value of ?8.4 trillion--48% upside from today's market capitalization of ?5.7 trillion. This would also indicate a 51% upside in today's ADR market share price.
In summary, Sumitomo is a buy with $10 per share value
Notes
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Me: I added Sumitomo's commercial paper, borrowed money, short-term bonds, and bonds found on its consolidated balance sheet information to derive borrowings.
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Me: I was not able to derive any net interest margin from recent filings as I was only able to retrieve this information from 20-F, which was not available at the time of writing.
Disclosure: I have shares in Sumitomo ADRs.
This article first appeared on GuruFocus.
