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Mitsubishi UFJ (MUFG) Records Y/Y Earnings Decline in 1H

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Mitsubishi UFJ Financial (MUFG - Free Report) reported profits attributable to owners of parent for the first half of fiscal 2020 (ended Sep 30) of ¥400.8 billion ($3.7 billion), down 34% year over year.

For the reported period, elevated general & administrative (G&A) expenses and credit costs acted as headwinds. Also, decline in loans balance was a negative factor. However, increased gross profits, higher net trading profits and a strong capital drove the upside. Also, high net interest income acted as a positive.

Gross Profits Up, G&A Expenses Escalate

Gross profits for the period being reported were ¥2.09 trillion ($0.02 trillion), up 6% year over year. The upsurge was mainly due to increase in market related gains along with higher net interest income reflecting consolidation of overseas subsidiaries.

The fiscal first half reflected a 3.5% increase in net interest income, which came in at ¥966.5 billion ($9.1 billion). Net trading profits were ¥195.2 billion ($1.8 billion), surging 63.5% year over year. Also, for Mitsubishi UFJ, trust fees, along with net fees and commissions, totaled ¥690.4 billion ($6.5 billion), up nearly 1%.

Mitsubishi UFJ’s total credit costs, at the period end, were ¥258.4 billion ($2.4 billion) compared with ¥18 billion witnessed a year ago. This was on account of rise in credit cost globally due to the pandemic and adoption of new accounting methodology in overseas subsidiaries.

Net gains on equity securities increased 36.7% year over year to ¥24.2 billion ($0.23 billion). Other non-recurring losses totaled  ¥69.2 billion ($0.65 billion) against gains of ¥14.7 billion ($0.14 billion) recorded in the prior-year period.

G&A expenses increased slightly year over year to ¥1.35 trillion ($0.01 trillion). The rise was primarily due to consolidation of Bank Danamon and FSI, partly offset by a decrease in domestic expense.

Expense ratio came in at 64.6%, down from 68.1% in the prior-year quarter. A decrease in ratio indicates an increase in profitability.

Strong Capital Position

As of Sep 30, 2020, Mitsubishi UFJ reported total loans of ¥108.8 trillion ($1.03 trillion), down from ¥109.5 trillion ($1.02 trillion) as of Mar 31, 2020. This decline can be chiefly attributed to fall in overseas loans.

Deposits escalated to ¥201.7 trillion ($1.91 trillion) from ¥187.6 trillion ($1.74 trillion) as of Mar 31, 2020, as demand for domestic individuals, corporate and overseas deposits increased.

Total assets summed ¥348.4 trillion ($3.3 trillion), up from ¥336.6 trillion ($3.13 trillion) as of Mar 31, 2020. Net unrealized gains on securities available for sale increased to ¥3.55 trillion ($0.03 trillion) from ¥2.9 trillion ($0.03 trillion) as of Mar 31, 2020.

Moreover, total net assets were ¥17.3 trillion ($0.16 trillion), up from ¥16.9 trillion ($0.16 trillion) as of Mar 31, 2020. Non-performing loan ratio expanded 11 basis points from March 2020 to 0.76%, on rise in non-performing loans.

Outlook

Mitsubishi UFJ Financial targets ¥600 billion of consolidated profits attributable to owners of parent for fiscal 2020 (ending Mar 31, 2021).

The company expects to deliver net operating profits (before credit costs for trust accounts and provision for general allowance for credit losses) and ordinary profits of ¥1,150 billion and ¥920 billion, respectively, for this fiscal year.

Total credit costs are estimated to be ¥500 billion as of Mar 31, 2021.

Our Viewpoint

Though we are wary about the heightening competition, high credit costs and volatility in the Japanese economy, along with escalating expenses, Mitsubishi UFJ’s robust business model and diversified product mix look encouraging. Furthermore, increase in profits is a tailwind.

Mitsubishi UFJ currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

HSBC Holdings’ (HSBC - Free Report) third-quarter 2020 pre-tax profit of $3.1 billion represents a decline of 36.4% from the prior-year quarter’s reported number.

Deutsche Bank (DB - Free Report) reported third-quarter 2020 net income of €309 million ($361.1 million) against the year-ago quarter’s net loss of €832 million. Also, the German lender reported adjusted profit before taxes of €826 million ($965.3 million) against a loss of $84 million in the year-ago quarter.

ItauUnibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$5 billion ($0.93 billion) in third-quarter 2020, significantly down 30.6% year over year. Including non-recurring items, net income came in at R$4.5 billion ($0.84 billion), declining 19.6% year over year.

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