Sumitomo Mitsui Financial Group (SMFG) Analysis and Investment

Sumitomo Mitsui Financial Group, Inc. (SMFG) has demonstrated strong performance in its fiscal year 2023, leading to a favorable outlook for 2024. The company’s recent financial results and forward guidance indicate robust growth, supported by strategic capital return initiatives and positive macroeconomic factors, making it an attractive investment.

Key Financial Highlights

1. Fiscal Year 2023 Performance:
   • Net profit attributable to shareholders rose by 19% year-over-year (YoY) to JPY963 billion, exceeding both the consensus forecast and the company’s own guidance.
   • Significant contributors to this performance included the recovery in the securities brokering business (SMBC Nikko Securities) and strong performance in the credit cards business (Sumitomo Mitsui Card Company).
   • Net fees and commissions increased by 44% and 13% for SMBC Nikko Securities and Sumitomo Mitsui Card Company, respectively.
   • Net interest income grew by 10% to JPY1,881 billion.
2. Fiscal Year 2024 Guidance:
   • SMFG projects a net income of JPY1,060 billion, indicating a 10% YoY increase.
   • This guidance surpasses analysts’ consensus estimates by 7%.
   • The company expects a “favorable business environment,” partly due to the recent Bank of Japan interest rate hike, the first in 17 years.

Valuation and Re-Rating Potential

• Current Valuation:
  • SMFG is currently valued at 0.88 times trailing price-to-book (P/B) ratio.
• Revised Valuation Target:
  • Using a revised ROE assumption of 9% (up from 8.5%), the perpetuity growth rate of 2%, and the cost of equity at 8%, the new target P/B multiple is 1.17 times. This implies a 33% upside from the current valuation.
  • The upward revision in ROE is based on the company’s long-term goal of achieving a 9% ROE.

Capital Return Initiatives

1. Dividend Increase:
   • SMFG plans to increase its dividend per share by 22% to JPY330 for fiscal year 2024, resulting in a forward dividend yield of approximately 3.5%.
2. Share Buybacks:
   • The company announced a JPY100 billion share buyback program running from May 16 to July 31, 2024, representing about 1% of its current market cap.
   • SMFG also indicated potential for additional buybacks throughout the fiscal year.
3. Stock Split:
   • A proposed 3-for-1 stock split effective October 1, 2024, aims to lower the minimum investment amount for individual investors, thereby broadening the investor base.

Risks and Considerations

• Economic Dependency:
  • SMFG’s performance is closely tied to economic conditions in Japan and other markets. Economic slowdowns could negatively impact the company’s financial results despite a favorable interest rate environment.
• Capital Return Execution:
  • The stock could suffer if SMFG fails to meet its dividend and buyback guidance, leading to investor disappointment.

Conclusion

Sumitomo Mitsui Financial Group’s strong fiscal year 2023 performance, positive 2024 guidance, and strategic capital return plans position it well for continued growth. The company’s efforts to attract new investors and reward existing shareholders through dividends, buybacks, and a stock split further enhance its appeal. With a potential re-rating in valuation, SMFG presents a compelling buy opportunity for investors seeking exposure to the Japanese financial sector.