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Last week, Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported net income of ¥532.5 billion ($6.7 billion) for nine months ended fiscal 2013 (Dec 31, 2012) versus net income of ¥815.8 billion ($10.4 billion) in the year-ago period. Net income per common stock was ¥36.94 (46 cents) versus ¥56.92 (72 cents) in the prior-year period.

Notably, prior-year results include the one-time effect of negative goodwill related to the application of equity method accounting on investments in Morgan Stanley (MS - Analyst Report).

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 nine months were ¥2,678.1 billion ($33.5 billion), up ¥31.4 billion ($0.4 billion), or 1.2% from ¥2,646.6 billion ($33.6 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 ¥68.2 billion ($0.9 billion) in net interest income, which came in at ¥1,309.8 billion ($16.4 billion). The year-over-year decline in net interest income reflects tighter domestic deposit-loan margin, reduced interest income in Global Markets segment and low consumer-finance income. These declines were partially offset by an upsurge in loan income from overseas business.

For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥784.2 billion ($9.8 billion) compared with ¥769.9 billion ($9.8 billion) as of Dec 31, 2011. Net business profits stood at ¥1,154.1 billion ($14.4 billion), down ¥19.2 billion ($0.24 billion) or 1.6% from ¥1,173.3 billion ($14.9 billion) in the prior-year period.

The balance of securitized products and related investments as of Dec 2012 increased to ¥2.13 trillion ($0.02 trillion) in total, an escalation of ¥0.48 trillion ($0.01 trillion) compared with the balance of ¥1.66 trillion ($0.02 trillion) as of Mar 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 ¥103.5 billion ($1.3 billion), which increased 14.1% from ¥90.7 billion ($1.2 billion) in the year-ago period. The upsurge was mainly due to a lower reversal of provision for general allowance for credit losses, partially mitigated by a decline in losses on loans written-off.

Net losses on equity securities were ¥90.9 billion ($1.1 billion), down from ¥155.0 billion ($2.0 billion) in the prior-year period, mainly due to decline in the losses on write-down of equity securities.

For the quarter, other non-recurring losses were ¥23.2 billion ($0.3 billion) compared with gains of ¥303.9 billion ($3.9 billion) recorded in the comparable prior-year period. G&A expenses climbed ¥50.6 billion ($0.6 billion), or 3.4% year over year to ¥1,154.1 billion ($14.4 billion), due to elevated costs in overseas business.

Capital Position

As of Dec 31, 2012, Mitsubishi UFJ reported total loans of ¥87.1 trillion ($1.0 trillion), up from ¥84.6 trillion ($1.0 trillion) as of Mar 31, 2012 and from ¥84.8 trillion ($1.1 trillion) as of Sep 30, 2012. These increases were primarily due to higher demand in domestic corporate loans and overseas loans.

Moreover, deposits climbed to ¥126.9 trillion ($1.5 trillion) from ¥124.8 trillion ($1.5 trillion) as of Mar 31, 2012 and from ¥125.1 trillion ($1.6 trillion) as of Sep 30, 2012, mainly due to an increase in individual, overseas and others deposits.
 
Total net assets were ¥12.3 trillion ($0.14 trillion), up from ¥11.7 trillion ($0.14 trillion) as of Mar 31, 2012 and from ¥11.9 trillion ($0.15 trillion) as of Sep 30, 2012.

Net unrealized gains on securities available for sale surged to ¥1.0 trillion ($0.01 trillion), from ¥832.0 billion ($10.1 billion) as of Mar 31, 2012 and from ¥699.6 billion ($9.0 billion) as of Sep 30, 2012. These increases were aided by higher unrealized gains on domestic equity securities.

Outlook

Mitsubishi UFJ Financial is targeting ¥670 billion ($7.5 billion) of consolidated net income for the fiscal year ending Mar 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 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). Among other foreign banks, UBS AG (UBS - Analyst Report) and Credit Suisse Group (CS - Snapshot Report) carry a Zacks Rank #2 (Buy).

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