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Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥255.2 billion ($2.6 billion) for fiscal first-quarter 2014 (ended Jun 30, 2013), up from net income of ¥182.9 billion ($2.3 billion) in the year-ago period.

Results reflect a rise in G&A expenses and elevated credit costs. Yet, the key positives for the quarter were growth in deposits and loans along with a rise in net interest income and fee revenues. Further, increased gross profits were a tailwind.

Performance in Detail

Gross profits for the quarter ended were ¥948.9 billion ($9.6 billion), up 1.8% year over year. Gross profits improved mainly due to net fees and commissions, rise in income from sales and trading, as well as elevated net interest income. These increases were partially offset by reduced net gains on debt securities.

The period under review reflected a rise of 5.4% in net interest income, which came in at ¥441.3 billion ($4.5 billion). The year-over-year upsurge in net interest income reflects increased loan income from the overseas business.

For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥295.7 billion ($3.0 billion), up 25.5% year over year. However, net business profits stood at ¥382.3 billion ($3.9 billion), down 7.7% year over year.

The balance of securitized products and related investments as of Jun 30, 2013 increased to ¥2.62 trillion ($0.03 trillion) in total, an escalation of ¥0.18 trillion compared with the balance of ¥2.44 trillion ($0.02 trillion) as of Mar 31, 2013. The increase was mainly due to a rise in highly rated collateralized debt obligations (CLOs) and commercial mortgages asset-backed securities (CMBS).

Mitsubishi UFJ reported total credit costs of ¥15.4 billion ($0.2 billion), which increased 4.1% year over year and includes losses on loans written-off. The rise was mainly due to provision for specific allowance for credit losses, partially offset by a dip in losses on loan write-offs.

Net losses on equity securities were ¥12.8 billion ($0.1 billion) compared with losses of ¥54.5 billion ($0.7 billion) in the prior-year period. Gains were mainly due to a decline in the losses on write-down of equity securities.

Other non-recurring gains were ¥1.2 billion ($0.01 billion) compared with losses of ¥14.2 billion ($0.2 billion) recorded in the prior-year period.  G&A expenses climbed 9.4% year over year to ¥566.5 billion ($5.7 billion), mainly due to higher costs in overseas businesses.

Capital Position

As of Jun 30, 2013, Mitsubishi UFJ reported total loans of ¥92.9 trillion ($0.94 trillion), up from ¥91.3 trillion ($0.97 trillion) as of Mar 31, 2013. The increases were primarily due to higher demand in overseas loans, partially offset by lower demand in housing and domestic corporate loans. Moreover, deposits climbed to ¥134.0 trillion ($1.4 trillion), up 1.7% sequentially, mainly driven by higher individual and overseas and others deposits, partially offset by lower corporate deposits.
 
Total assets stood at ¥234.1 trillion ($2.4 trillion), down slightly on a year-over-year basis. Total net assets were ¥13.7 trillion ($0.1 trillion), up 1.5% sequentially. Net unrealized gains on other securities declined to ¥990.2 billion ($9.98 billion), down 18% sequentially.

Outlook

Mitsubishi UFJ Financial is targeting ¥760 billion ($7.9 billion) of consolidated net income for the fiscal year ending Mar 31, 2014.

Our Viewpoint

Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and higher gross profits to boost its bottom line. Additionally, the company expanded its scope of engaging in a global strategic alliance with Morgan Stanley (MS - Analyst Report) into new geographies and businesses. This includes a loan marketing joint venture that will provide clients in the United States an opportunity to expand the world-class lending and capital market services of both companies.

However, we are concerned about the heightening competition and volatility in the Japanese economy.

Shares of Mitsubishi UFJ currently carry a Zacks Rank #2 (Buy). Some other foreign banks that are worth considering include BBVA Banco Franc (BFR - Snapshot Report) and Sumitomo Mitsui Financial Group Inc. (SMFG - Snapshot Report) with a Zacks Rank #1 (Strong Buy).

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