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Analyst Blog

Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥981.3 billion (US$12.5 billion) for fiscal year ended March 31, 2012 versus net income of ¥583.1 billion (US$6.8 billion) in the year-ago period. Diluted net income per common stock was ¥67.94 (86 cents) versus ¥39.89 (47 cents) in the prior-year period.

Results reflected a fall in G&A expenses and a significant decline in consolidated credit costs driven by a drop in credit costs. Moreover, loans and deposits growth were the positives for the period. Yet, the dip in gross profits and net interest income was on the downside.

Performance in Detail

Gross profits for the fiscal year ended were ¥3,502.0 billion (US$44.5 billion), down ¥20.4 billion (US$0.3 billion), or 0.6% from ¥3,522.5 billion (US$41.2 billion) reported in the prior year. Gross profits declined primarily due to lower consumer-finance income and dividend on preferred stock, partially offset by an increase in net gains on sales of debt securities and declined trading losses from securities subsidiary.

However, the period reflected ¥177.6 billion (US$2.26 billion) increase in trading income and other business profits, while ¥179.4 billion (US$2.28 billion) decrease in net interest income. For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥1,061.1 billion (US$13.5 billion) compared with ¥1,079.8 billion (US$12.6 billion) as of March 31, 2011.

The balance of securitized products and related investments at the end of March 2012 increased to ¥1.66 trillion (US$0.02 trillion) in total, an increase of ¥0.20 trillion (US$2.54 billion) compared with the balance of ¥1.46 trillion (US$0.02 trillion) as of March 2011. 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 ¥193.4 billion (US$2.5 billion), down 45%, from ¥354.1 billion (US$4.1 billion) in the year-ago period. The decline was mainly due to accounting of reversal of general allowance for credit losses and reduced losses on loan write-offs.

Net losses on equity securities were ¥88.6 billion (US$1.1 billion), up from ¥57.1 billion (US$0.7 billion) in the prior-year period, mainly due to higher losses on write-down of equity securities and net losses on sales of equity securities. In fiscal year 2011, the stock market showed a weak performance based on negative sentiments, though it improved towards the end of the year.

For the fiscal year ended 2011, other non-recurring gains and losses were ¥310.7 billion (US$3.9 billion), up ¥684.4 billion (US$8.7 billion) year over year. The increase was attributed to the use of equity method accounting for investment in Morgan Stanley (MS - Analyst Report) by completion of conversion of the convertible preferred stock into their common stock and decreased provision for losses on interest repayment.

G&A expenses fell ¥26.3 billion (US$0.3 billion), or 1.3% year over year to ¥1,994.5 billion (US$25.3 billion), due to the ongoing intensive corporate-wide cost reduction. Therefore, net business profits remained stable at ¥1,507.4 billion (US$19.1 billion), compared to the prior year.

Capital Position

As of March 31, 2012, Mitsubishi UFJ reported total loans of ¥84.6 trillion ($1.03 trillion), up from ¥80.1 trillion (US$0.97 trillion) as of March 31, 2011, primarily due to an increase in overseas loans along with higher domestic corporate loans. Deposits climbed to ¥124.8 trillion (US$1.52 trillion) from ¥124.1 trillion (US$1.50 trillion) as of March 31, 2011, mainly due to an increase in corporate deposits.

For the fiscal year ended March 31, 2012, total net assets were ¥11.7 trillion (US$0.14 trillion), up from ¥10.8 trillion (US$0.13 trillion) as of March 31, 2011. The rise was principally driven by increased retained earnings and net unrealized gains on other securities.

Net unrealized gains on securities available for sale improved to ¥832.0 billion (US$10.10 billion) for the fiscal year 2011, from ¥327.6 billion (US$3.95 billion) as of March 31, 2011, aided by higher unrealized gains on bonds.

As of March 31, 2012, Mitsubishi UFJ recorded Tier 1 capital of ¥10.5 trillion (US$0.13 trillion), up from ¥10.0 trillion (US$0.12 trillion) as of March 31, 2011. Total Capital stood at ¥12.7 trillion (US$0.15 trillion), down from ¥13.1 trillion (US$0.16 trillion) as of March 31, 2011.

For the fiscal year 2011, Mitsubishi UFJ recorded Tier 1 capital ratio of 12.31% compared to 11.33% in the year-ago period. Moreover, capital ratio was 14.91% compared to 14.89% in the prior year.

Outlook

Mitsubishi UFJ Financial is targeting ¥670 billion (US$8.3 billion) of consolidated net income for the fiscal year ending March 31, 2013.

Our Take

Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and lower credit costs to boost its bottom line. The company expanded its scope of global strategic alliance with Morgan Stanley into new geographies and businesses. This includes a loan marketing joint venture that will provide the clients in the United States an opportunity to expand the world-class lending and capital markets services of both companies.

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

Mitsubishi UFJ currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain a “Neutral” recommendation on the stock.

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