One to Watch: Bank that stands out

Suruga Bank¥821-¥6Scotsman says HOLD

JAPANESE banks have a habit of following the crowd and Suruga Bank, a regional bank based in Shizuka, was no exception until 1985. In the bubble economy, facing tough competition, it steered away from corporate banking and turned to retail banking. Fast-forward to the late Nineties, and Suruga completed its move to retail, opening an impressive 13 branches online.

Whilst Suruga Bank's share price halved after the Lehman shock, the business itself remains healthy. It didn't have exposure to Lehman Brothers or subprime loans and didn't have loans to Japanese developers, leading to any negative impact being mainly indirect.

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The Japanese market has three major concerns over the banking sector: tighter regulation by the Basel Committee; financial services minister Shizuka Kamei calling for a moratorium on smaller firm's loan repayments; and public offerings. In our opinion, tighter regulation is unlikely to be applied to purely domestic banks. Regarding the so-called moratorium, since the bank has already eased conditions to small businesses, we believe there will be no additional negative impact as a result of this. Finally, with regard to public offerings, while mega banks offer new shares and dilute existing shareholders' stakes, Suruga Bank has been buying back its own shares.

Even if the domestic economy doesn't recover, the company will continue growing through increased mortgage lending. Instead of following the crowd, Suruga Bank certainly stands out from it and remains a compelling one to watch.

• Kaori Ishii is investment director, Japanese equities, at Scottish Widows Investment Partnership. Investment markets and conditions can change rapidly and, as such, the views expressed should not be taken as statements of fact, nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.


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