Sumitomo Mitsui FinancialNYSE: SMFG

Does Sumitomo Mitsui (SMFG) have what it takes to be a top stock pick for momentum investors? Let's find out.

Sumitomo Mitsui (SMFG) considers further widening its alliance with Jefferies into Asia to compete with its rivals. Also, the bank aims for three successive years of record net profit.

Japan's asset management industry has favorable growth prospects, and this puts a leading financial services player like Sumitomo Mitsui Financial in a good position to increase its future fee income. SMFG's net interest income growth outlook is positive, considering the reasonably high probability of Japan initiating a rate hike in the near term. My investment rating for SMFG is upgraded to a Buy, as I think that the stock doesn't deserve to trade at a significant discount to book value.

Sumitomo Mitsui Financial Group, a Japanese bank with over $2 trillion in assets, offers potential diversification due to its high exposure to Japan, but its lower than average dividend yield and fair valuation make it less attractive for investment. The bank has a conservative lending approach and a low-risk balance sheet, with a sizable equity portfolio of Japanese equities that it plans to reduce to decrease earnings volatility. Despite its stable profile and conservative risk culture, Sumitomo's financial performance has been relatively stable over the past few years due to low growth prospects. Its return on equity ratio is only 6.5%, a relatively low level of profitability.

Sumitomo Mitsui Financial Group has reported a 39.51% YoY increase in Q1 revenues, reaching $13.66bn, despite a 57.25% decline in net income. The bank's strategy focuses on becoming a leaner, streamlined business with a focus on digitalization and geographic expansion across Asia and the US. The bank is currently undervalued, with a net present value of $9.28 compared to its current price of $8.40, according to a discounted cash flow valuation. This undervaluation is also supported by Alpha Spread's intrinsic valuation, which calculates a base case fair value of $17.14. However, SMFG faces potential risks including shifts in domestic monetary policy, global economic slowdown, and recessionary pressures. Despite these challenges, the bank's transformation into a leaner business and geographic expansion strategy are expected to enable long-term margin expansion and scale accretion.

Sumitomo Mitsui (SMFG) might move higher on growing optimism about its earnings prospects, which is reflected by its upgrade to a Zacks Rank #2 (Buy).