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On Wednesday, Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥290.5 billion ($3.7 billion) for six months ended fiscal 2013 (ending on September 30, 2012) versus net income of ¥696.1 billion ($9.0 billion) in the year-ago period. Net income per common stock was ¥19.84 (25 cents) versus ¥48.51 (63 cents) in the prior-year period.

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

Performance in Detail

Gross profits for the six months were ¥1,831.6 billion ($23.3 billion), up ¥41.7 billion ($0.5 billion), or 2.3% from ¥1,789.8 billion ($23.1 billion) reported in the comparable prior-year period. Gross profits improved mainly due to rise in income from sales and trading coupled with net gains on debt securities.

The period under review reflected a decline of ¥31.5 billion ($0.4 billion) in net interest income which came in at ¥876.2 billion ($11.1 billion). 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 ¥518.4 billion ($6.6 billion) compared with ¥523.3 billion ($6.8 billion) as of September 30, 2011. Net business profits stood at ¥817.1 billion ($10.4 billion), up ¥41.7 billion ($0.53 billion) or 2.2% from ¥799.7 billion ($10.3 billion) in the prior-year period.

The balance of securitized products and related investments at the end of September 2012 increased to ¥1.83 trillion ($0.02 trillion) in total, an escalation of ¥0.17 trillion ($2.2 million) 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 ¥62.2 billion ($0.8 billion), which more than doubled from ¥28.6 billion ($0.37 billion) in the year-ago period. The upsurge was mainly due to non-consolidated credit costs aided by a change of debtor credit ratings, reflecting downturn in businesses of big borrowers.

Net losses on equity securities were ¥173.5 billion ($2.2 billion), up from ¥96.7 billion ($1.2 billion) in the prior-year period, mainly due to higher costs on write-down of equity securities due to reduced share prices.

For the quarter, other non-recurring losses were ¥11.2 billion ($0.1 billion), down from gains of ¥284.4 billion ($3.7 billion) recorded in the comparable prior-year period. G&A expenses climbed ¥24.2 billion ($0.3 billion), or 2.5% year over year to ¥1,014.4 billion ($12.9 billion), due to elevated costs in overseas business.

Capital Position

As of September 30, 2012, Mitsubishi UFJ reported total loans of ¥84.8 trillion ($1.1 trillion), up from ¥84.6 trillion ($1.0 trillion) as of March 31, 2012, primarily due to higher demand in domestic corporate loans and overseas loans. Moreover, deposits climbed to ¥125.1 trillion ($1.6 trillion) from ¥124.8 trillion ($1.5 trillion) as of March 31, 2012, mainly due to an increase in individual deposits.
 
Total net assets were ¥11.9 trillion ($0.15 trillion), up from ¥11.7 trillion ($0.14 trillion) as of March 31, 2012. Net unrealized gains on securities available for sale declined to ¥699.6 billion ($9.0 billion), from ¥832.0 billion ($10.1 billion) as of March 31, 2012, aided by reduced unrealized gains on equity securities, partially offset by a rise in unrealized gains on Japanese government bonds and foreign bonds.

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 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 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 heightening competition and volatility in the Japanese economy.

Shares of Mitsubishi UFJ currently retain 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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