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Analyst Blog

On Aug 22, 2013, we downgraded our long-term recommendation on Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) to Neutral from Outperform based on the company’s undisciplined expense management, which led to elevated G&A expenses and higher credit costs.

Why the Downgrade?

Escalating G&A expenses remain a major cause of concern for Mitsubishi UFJ. Since the last few quarters, the company has been continuously witnessing a rise in these expenses related to the overseas business. Notably, G&A expenses surged 9.4% year over year in the reported quarter.

Mitsubishi UFJ is a geographically diversified company with presence in almost all the major markets of the world. Its dependence on overseas revenue has gradually increased over the last couple of years. In fiscal 2013, the overseas revenue was nearly 33% of the total revenue compared with 27% in 2012 and 30% in 2011. Although this is a positive, a plethora of risks stemming from the regulatory and political environment, foreign exchange fluctuations and performance of the regional economy can negatively affect its top line.

However, Mitsubishi UFJ 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. 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.

Following fiscal first-quarter 2014 results, the Zacks Consensus Estimate for fiscal 2014 has gone up 23.5% to 63 cents per share. For fiscal 2015, the Zacks Consensus Estimate surged 12.7% to 62 cents per share. Currently, the company carries a Zacks Rank #2 (Buy).

Other Major Foreign Banks to Consider

Foreign banks that are currently performing well include Sumitomo Mitsui Financial Group Inc. (SMFG - Snapshot Report) with a Zacks Rank #1 (Strong Buy), while Barclays PLC (BCS - Analyst Report) and The Bank of Nova Scotia (BNS - Snapshot Report) carry a Zacks Rank #2 (Buy).

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