Goldman Sachs is bullish on Japan right now and says banks in particular are seeing a “high level of interest” following rallies of around 30%. “Japan is a bright spot and within Japan, it’s the banking sector that stands to benefit from the two biggest themes,” analyst Makoto Karuda told CNBC’s “Squawk Box Asia” on Thursday, identifying the themes as the Bank of Japan’s interest rate normalization and the Tokyo Stock Exchange’s corporate governance reforms . There have also been “fundamental earning power improvements at the banks that have gone under-appreciated by the market,” she added. The Bank of Japan maintained its ultra-loose monetary policy and left rates unchanged in September. The central bank kept short-term interest rates at -0.1% and said it would cap the 10-year Japanese government bond yield at around zero, as was widely expected. Meanwhile, the corporate governance reforms came as part of the Tokyo Stock Exchange’s slew of restructuring rules including one directing companies to “comply or explain” if they are trading below a price-to-book ratio of one — a measure that is indicative of whether a company is using its capital efficiently. It means Japan’s stock markets are seeing a major shake-up for the first time in over three decades, sending the country’s major stock indices to highs not seen since 1990 . When quizzed if Japanese banks are “almost dirt cheap right now,” Kaurda replied: “Yes, in terms of valuations, [banks] are still trading at 0.6, with the highest trading at 0.8 times price-to-book now.” “We certainly think there is more upside from the current valuation,” she added, compared to the 0.9 to 1 times price-to-book levels that Japanese banks were trading at in 2015 before the Bank of Japan’s negative interest rate policy. A price-to-book ratio captures a firm’s market capitalization levels against its book value. A ratio below one is generally viewed as a good investment by investors looking for value. Japanese bank stock picks Goldman Sachs’ picks from the Japanese banking sector include conviction list and “value in action” stock Mitsubishi UFJ Financial Group (MUFG) , as well as Mizuho . Both stocks are also traded on the New York Stock Exchange. Goldman’s conviction list comprises its top buy-rated stocks that it expects to outperform. 8411.T-JP YTD mountain Year-to-date share movement in Mizuho bank The bank has buy calls on both stocks and increased their price targets in a Sept. 18 note. It now has a target of 1,500 yen ($10.06) for MUFG — giving it around 19.5% potential upside from its Oct. 6 close — and 3,050 yen for Mizuho, or around 21.9% upside. “What the market is going to favor when selecting bank stocks from here is: banks that have high sensitivity to long-term yield rises, many levers for return-on-investment improvement because of the corporate governance theme, as well as better earning power,” Karuda explained when asked how Goldman selects stocks. She said MUFG and Mizuho fulfill all of these factors. “I think those are very good potential stocks,” she added. — CNBC’s Naman Tandon contributed to this report.
