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We have upgraded our recommendation on Mitsubishi UFJ Financial Group, Inc. (MTU - Analyst Report) to 'Outperform' from 'Neutral'. The upgrade is based on the company’s impressive earnings results for the fiscal year ended March 31, 2012.  Moreover, Mitsubishi UFJ’s strategic alliance with Morgan Stanley (MS - Analyst Report) gives it scope for expansion in new geographies and businesses.

Mitsubishi UFJ provides a broad range of domestic and international financial operations to individual and corporate customers. Moreover, the company is successful in expanding amidst the unsettled global economy.

Mitsubishi UFJ’s net income for the fiscal year ended March 31, 2012 was ¥981.3 billion ($12.5 billion) versus ¥583.1 billion ($6.8 billion) in the year-ago period. Net income per share came in at ¥67.94 (86 cents) as against ¥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. Moreover, loans and deposits growth were the positives for the period. Yet, the dip in gross profits and net interest income were the offsets. Mitsubishi UFJ is targeting ¥670 billion ($8.3 billion) of consolidated net income for the fiscal year ending March 31, 2013.

The company is performing dynamically through a network of branches and subsidiaries in the emerging markets, particularly in countries like Asia, Latin America, Central and Eastern Europe and the Middle East. Therefore, we believe that the advancement of emerging economies will help Mitsubishi UFJ expand further.

On the flip side, though there are some signs of recovery, the global economy remains vulnerable to political and economic changes. The Japanese economy marked negative growth toward the end of 2011, as overseas economies deteriorated and the JPY appreciated. The stock market also struggled due to a number of negative factors but started stabilizing towards the end of the fiscal year 2012, as the JPY pressure eased.

In such an economic scenario, Mitsubishi UFJ’s consolidated gross profits for the fiscal year ended March 31, 2012 decreased by ¥20.4 billion ($0.3 billion). Therefore, weak volume of financial transactions may lead to lower revenue generation in the coming quarters.

Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and lower credit costs to support its bottom line. However, we are concerned about increasing competition and volatility of the Japanese economy.

Mitsubishi UFJ currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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