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Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥530.2 billion ($5.4 billion) for the first-half of fiscal 2014 (ended Sep 30, 2013), up from net income of ¥290.4 billion ($3.7 billion) in the year-ago period.

The key positives for the period under review were growth in deposits and loans along with a rise in net interest income and fee revenues. Further, increased gross profits were a tailwind. Yet, results reflect a rise in G&A expenses depicting undisciplined expense management.

Performance in Detail

Gross profits for the quarter ended were ¥1,845.2 billion ($18.6 billion), up 0.7% year over year. Gross profits improved mainly due to higher net fees and commissions, rise in income from sales and trading, as well as elevated overseas net interest income. These increases were partially offset by reduced net gains on debt securities.

The period under review reflected a rise of 3.7% in net interest income, which came in at ¥908.6 billion ($9.2 billion). For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥618.1 billion ($6.2 billion), up 19.2% year over year. However, net business profits stood at ¥725.0 billion ($7.3 billion), down 11.3% year over year.

The balance of securitized products and related investments as of Sep 30, 2013 increased to ¥2.61 trillion ($0.027 trillion) in total, an escalation of ¥0.17 trillion compared with the balance of ¥2.44 trillion ($0.026 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’s total credit costs amounted to a net reversal of ¥25.7 billion ($0.3 billion) by recording reversal of provision for general allowance for credit losses. The company recorded costs of $62.2 billion ($0.8 billion) in the prior-year period.

Net gains on equity securities were ¥43.4 billion ($0.4 billion) compared with losses of ¥173.5 billion ($2.2 billion) in the prior-year period. Gains were mainly due to an increase in gains on sales of equity securities and reduced losses on write-down of equity securities.

Other non-recurring losses were ¥12.4 billion ($0.13 billion) compared with ¥38.7 billion ($0.49 billion) recorded in the prior-year period.  G&A expenses climbed 10.4% year over year to ¥1,120.2 billion ($11.3 billion), mainly due to higher costs in overseas businesses.

Capital Position

As of Sep 30, 2013, Mitsubishi UFJ reported total loans of ¥95.3 trillion ($0.97 trillion), up from ¥91.4 trillion ($0.97 trillion) as of Mar 31, 2013. The increases were primarily due to higher demand in overseas and domestic corporate loans, partially offset by lower demand in housing loans.

Moreover, deposits climbed to ¥136.1 trillion ($1.38 trillion), up from ¥131.7 trillion ($1.40 trillion) as of Mar 31, 2013, mainly driven by higher individual and overseas deposits.

Total assets stood at ¥242.2 trillion ($2.46 trillion), up from ¥234.5 trillion ($2.49 trillion) as of Mar 31, 2013. Total net assets were ¥14.3 trillion ($0.15 trillion), up from ¥13.5 trillion ($0.14 trillion) as of Mar 31, 2013. Net unrealized gains on other securities declined to ¥1.8 trillion ($0.018 billion), down from ¥1.9 trillion ($0.02 trillion) as of Mar 31, 2013.

As of Sep 30, 2013, Common Equity Tier 1 capital ratio stood at 11.77%, slightly up from 11.70% as of Mar 31, 2013. Tier 1 Capital ratio was 13.12%, as compared with 12.74% as of Mar 31, 2013.  Total Capital ratio was 16.84% compared with 16.68% as of Mar 31, 2013.

Outlook

Mitsubishi UFJ Financial revised the target upward to ¥910 billion ($9.37billion) of consolidated net income for the fiscal year ending Mar 31, 2014, reflecting strong performance of the interim results of the company’s subsidiaries.

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 #3 (Hold). Some better performing foreign banks include Westpac Banking Corporation (WBK) with a Zacks Rank #1 (Strong Buy) and Itau Unibanco Holding S.A. (ITUB - Analyst Report) with a Zacks Rank #2 (Buy).

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