Neutral on Mitsubishi UFJ

On Feb 14, 2013, we reiterated our long-term recommendation on Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) at Neutral. This reflects the company’s strong capital position backed by a solid deposits base. However, increasing expenses and credit costs remain matters of concern.

Why Neutral?

Mitsubishi UFJ’s deposits climbed to ¥126.9 trillion ($1.5 trillion) as of Dec 31, 2012, 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.

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. This depicts the company’s strong capital position and reflects organic growth.

However, Mitsubishi UFJ reported net income of ¥532.5 billion ($6.7 billion) for the 9 months ended fiscal 2013 (Dec 31, 2012), down from net income of ¥815.8 billion ($10.4 billion) in the year-ago 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.

Following fiscal third-quarter 2013 results, the Zacks Consensus Estimate for fiscal 2013 has gone down 3.6% to 54 cents per share. However, the Zacks Consensus Estimate for fiscal 2014 surged 3.7% to 56 cents per share. With the Zacks Consensus Estimates going down for fiscal 2013 and up for fiscal 2014, the company now has a Zacks Rank #4 (Sell).

Other Major Foreign Banks to Consider

Among foreign banks that are currently performing well include Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Snapshot Report), BBVA Banco Franc (BFR - Snapshot Report) and Shinhan Financial Group Company Limited (SHG). All these companies carry a Zacks Rank #1 (Strong Buy).