Mitsubishi UFJ's Earnings Dip in 1Q

Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥182.9 billion ($2.3 billion) for fiscal first quarter 2013 ended June 30, 2012 versus net income of ¥500.6 billion ($6.2 billion) in the year-ago period. Net income per common stock was ¥12.89 (16 cents) versus ¥35.33 (43 cents) in the prior-year period.

Results reflect a rise in G&A expenses and decline in net interest income. Moreover, lower loans were a negative for the quarter. Yet the key positives for the quarter were a significant decline in credit costs along with growth in deposits. Increased gross profits remained a tailwind.

Performance in Detail

Gross profits for the quarter were ¥932.3 billion ($11.7 billion), up ¥77.3 billion ($1.0 billion) or 9.1% from ¥854.9 billion ($10.5 billion) reported in the prior-year quarter. Gross profits improved due to significant increase in net gains on security portfolio.

Moreover, the period reflected a ¥141.8 billion ($1.8 billion) increase in trading income and other business profits, while ¥52.1 billion ($0.7 billion) decrease in net interest income. The year-over-year decline in net interest income reflects tighter domestic deposit-loan margin, reduced interest income in Global Markets segment and smaller consumer-finance income. These declines were partially offset by an upsurge in loan income in overseas business.

For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥235.6 billion ($2.9 billion) compared with ¥247.9 billion ($3.0 billion) as of June 30, 2011. Net business profits were ¥414.2 billion ($5.2 billion), compared with ¥349.4 billion ($4.3 billion) in the prior-year quarter.

The balance of securitized products and related investments at the end of June 2012 increased to ¥1.72 trillion ($0.02 trillion) in total, an increase of ¥0.06 trillion ($0.75 billion) compared with the balance of ¥1.66 trillion ($0.02 trillion) as of March 2012. 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 ¥14.8 billion ($0.2 billion), down 22%, from ¥18.9 billion ($0.23 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 ¥54.5 billion ($0.7 billion), up from ¥22.4 billion ($0.3 billion) in the prior-year period, mainly due to higher costs on write-down of equity securities.

For the quarter, other non-recurring losses were ¥4.1 billion ($0.1 billion), down from gains of ¥293.2 billion ($3.6 billion) recorded in the prior-year quarter. G&A expenses climbed ¥12.5 billion ($0.2 billion), or 2.5% year over year to ¥518.0 billion ($6.5 billion), due to elevated costs in overseas business.

Capital Position

As of June 30, 2012, Mitsubishi UFJ reported total loans of ¥84.2 trillion ($1.1 trillion), down from ¥84.6 trillion ($1.0 trillion) as of March 31, 2012, primarily due to lower demand in domestic corporate loans and housing loans. However, deposits climbed to ¥125.4 trillion ($1.6 trillion) from ¥124.8 trillion ($1.5 trillion) as of March 31, 2012, mainly due to an increase in individual deposits in domestic branches.

Total net assets were ¥11.8 trillion ($0.15 trillion), up from ¥11.7 trillion ($0.14 trillion) as of March 31, 2012. The rise was principally driven by increased retained earnings and foreign currency translation changes.

Net unrealized gains on securities available for sale declined to ¥637.0 billion ($8.0 billion) for the quarter reported, from ¥832.0 billion ($10.2 billion) as of March 31, 2012, aided by reduced unrealized gains on domestic and foreign equity securities followed by fragile equity markets globally.

Outlook

Mitsubishi UFJ Financial is targeting ¥670 billion ($8.4 billion) of consolidated net income for the fiscal year ending March 31, 2013.

Our Viewpoint

Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and lower credit costs 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 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.

Shares of Mitsubishi UFJ currently retain a Zacks #1 Rank, which translates into a short-term Strong Buy rating. Considering the fundamentals, we also maintain an Outperform recommendation on the stock.