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Mitsubishi UFJ's (MTU) H1 Earnings Fall on Low Gross Profits

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Mitsubishi UFJ Financial Group Inc. (MTU - Free Report) reported profits attributable to owners of parent of ¥490.5 billion ($4.67 billion) for the six months (ended Sep 30) of the fiscal year ended Mar 31, 2017, down 18.2% year over year.

For the period under review, decreased gross profits, high credit costs and fall in net interest income negatively impacted the results, while fall in general & administrative expenses served as a tailwind.

Gross Profits Declines; General & Administrative Expenses Fall

Gross profits for the period being reported were ¥1.97 trillion ($0.02 trillion), down 6.6% year over year. The decline was mainly due to decreased net interest income from domestic loan and deposit due to the persistent low interest rates in domestic market, along with fall in fee income from sale of investment products.

The period under review reflected a fall of around 9.4% in net interest income, which came in at ¥975 billion ($9.29 billion). For Mitsubishi UFJ, trust fees, along with net fees and commissions totaled ¥682.6 billion ($6.5 billion), down 2.5% year over year. Further, net business profits were ¥725.4 billion ($6.9 billion), down 11.6% year over year.

Mitsubishi UFJ’s total credit costs at Sep-end came in at ¥57.6 billion ($0.55 billion), up 85.8% year over year. Net gains on equity securities increased 7.6% year over year to ¥44 billion ($0.42 billion). Gains increased primarily owing to higher sales of equity holdings.

Other non-recurring losses were ¥30.8 billion ($0.29 billion) compared with ¥4.9 billion in the prior-year period. G&A expenses decreased 1.5% year over year to ¥1.24 trillion ($0.01 trillion), mainly on the account of appreciation of the Japanese yen against the other currencies.

Strong Capital Position

As of Sep 30, 2016, Mitsubishi UFJ reported total loans of ¥105.0 trillion ($1.04 trillion), decreased from ¥113.9 trillion ($1.01 trillion) as of Mar 31, 2016. The decrease was chiefly due to decline in demand of governmental institutions loans and decreased translated Japanese yen value of overseas loans, as it appreciated against the other currencies.

Further, deposits climbed to ¥161.6 trillion ($1.59 trillion) from ¥161.0 trillion ($1.43 trillion) as of Mar 31, 2016, as demand for domestic deposits increased, while overseas deposits decreased on the back of the appreciation of Japanese yen against other currencies.

Total assets stood at ¥293.7 trillion ($2.90 trillion), down from ¥298.3 trillion ($2.65 trillion) as of Mar 31, 2016. Net unrealized gains on securities available for sale decreased to ¥3.4 trillion ($0.034 trillion) from ¥3.5 trillion ($0.031 trillion) as of Mar 31, 2016. The fall stemmed from decreases in unrealized gains on domestic equity securities, while those of foreign currency bonds increased.

Moreover, total net assets were ¥16.5 trillion ($0.16 trillion), down from ¥17.4 trillion ($0.17 trillion) as of Mar 31, 2016. Non-performing loan ratio has remained unchanged from Mar 2016 at 1.18%.

Common Equity Tier 1 capital ratio, Tier 1 capital ratio and Total capital ratio came in at 12.20%, 13.50% and 16.56% as compared with 11.63%, 13.24% and 16.01%, respectively, as of Mar 31, 2016.

Outlook

Mitsubishi UFJ Financial reiterated its target of ¥850 billion of consolidated net income for the fiscal year ending Mar 31, 2017.

Our Viewpoint

Though Mitsubishi UFJ’s strong business model and diversified product mix is encouraging, a lower gross profit poses concern. Moreover, we are wary about the heightening competition and volatility in the Japanese economy. Mitsubishi UFJ currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Competitive Landscape

Barclays PLC (BCS - Free Report) reported third-quarter 2016 net income from continuing operations of £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) grew 35% year over year. Rebound in bond trading and encouraging investment banking performance were the primary reasons for improved earnings.

Further, a rise in net interest income acted as a tailwind. However, these were not enough to support revenues, which continued to be hurt by disposal of assets. Also, a rise in credit impairment charges and higher operating expenses were the undermining factors.

Deutsche Bank AG (DB - Free Report) reported net income of €278 million ($310.2 million) in third-quarter 2016, compared to a loss of €6 billion ($6.70 billion) in the prior-year period. Income before income taxes came in at €619 million ($690.6 million), as against a loss of €6.1 billion ($6.80 billion) in the year-ago quarter. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.

UBS Group AG (UBS - Free Report) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter. While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management.

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