Steep declines in the stock prices of Japan's Mitsubishi UFJ Financial Group Inc. (MUFG) and Sumitomo Mitsui Financial Group Inc. (SMFG) pushed their implied upside to the highest level in at least three quarters, potentially making them attractive for investors.

The two Japanese megabanks had the highest implied upside to share price targets among a sample of the 20 largest lenders in Asia-Pacific by market capitalization, an S&P Global Market Intelligence analysis showed. The potential upside to MUFG's share price — the percentage difference between the current stock price and analysts' consensus targets — was 30.3% as of Sept. 30, compared with negative 3.0% as of July 4 and positive 10.6% as of April 19. SMFG showed an implied upside of 25.8%, compared with negative 5.6% and positive 6.7% for the same periods.

Japanese banks faced sharp declines in their stock prices in August as part of a broader market downturn driven by growing concerns over the US economy and potentially higher interest rates in Japan. The benchmark Nikkei 225 index fell 4.2% in the quarter ended Sept. 30, dragged by a decrease of more than 12% on Aug. 5. MUFG's share price fell 16% in the quarter, while SMFG saw a 15.2% decline in its stock price.

In separate reports published Oct. 5, CFRA Equity Research maintained its "buy" recommendation for both MUFG and SMFG, with a 12-month price target for MUFG at ¥1,900, and ¥4,000 for SMFG. MUFG shares closed at ¥1,480 on Oct. 4, while SMFG closed at ¥3,089.

A higher upside means that analysts estimate the stock to have more value than what is reflected in the current market price. There is no certainty the stocks will reach the price targets set by analysts.

MUFG's buy strength, representing the proportion of buy and overweight analyst recommendations to total recommendations, remained unchanged at 91.7% from the previous quarter, compared to a median of 74.8% for the region's biggest banks. SMFG's buy strength improved to 83.3% as of Sept. 30, from 63.6% as of July 4, Market Intelligence data showed.

Chinese, Indian banks

State Bank of India and six Chinese lenders had implied upsides above the group's median of 10.2% as of Sept. 30, showing the stocks' appeal for investors. State Bank of India, the biggest lender in South Asia by assets, ranked third on the list with an implied upside of 18.6% and buy strength of 73.2% as of Sept. 30, compared with 8.5% and 74.4% as of July 4, Market Intelligence data showed.

China Construction Bank Corp. ranked fourth among the region's largest banks in the most recent quarter, with an implied upside of 16% and buy strength of 94.4%, after staying at the top of the list in the prior two quarters. One-year total return at the Chinese lender, meanwhile, improved to 43.6% as of Sept. 30, from 28.6% as of July 4 and negative 0.7% as of April 19.

Other Chinese lenders in the ranking were Agricultural Bank of China Ltd., Bank of China Ltd., Postal Savings Bank of China Co. Ltd., China Merchants Bank Co. Ltd., Industrial and Commercial Bank of China Ltd., Bank of Communications Co. Ltd. and Industrial Bank Co. Ltd. Implied upside at all the Chinese lenders beat the group median, except for Bank of Communications and Industrial Bank.

Meanwhile, Australia's five largest lenders continued to show implied downsides to share price targets as of Sept. 30, indicating the stocks might be overpriced.

Commonwealth Bank of Australia's implied downside of 27.2% was the steepest in the sample, followed by Westpac Banking Corp.'s 15.8% and National Australia Bank Ltd.'s 13.3%. Macquarie Group Ltd. had an implied downside of 12.3% and ANZ Group Holdings Ltd. had 6.3%. In addition, buy strengths at the banks trailed the group's median of 74.8% as of Sept. 30.