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Mitsubishi UFJ (MTU) Q1 Earnings Impressive, Costs Flare Up

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Mitsubishi UFJ Financial Group Inc. (MTU - Free Report) reported profits attributable to owners of parent of ¥289 billion ($2.6 billion) for the first quarter of fiscal year ended Mar 31, 2018, up 53% year over year.

For the period under review, increased gross profits and low credit costs drove the results, while elevated general & administrative expenses and decline in net interest income acted as headwinds.

Gross Profits Escalate, General & Administrative Expenses Up

Gross profits for the period being reported were ¥1.0 trillion ($0.009 trillion), up around 1% year over year. The upswing was mainly due to increase in net trading profits and net other operating profits, mostly offset by decreased net interest income from domestic loans and deposits, along with bond portfolio.

The period under review reflected a decline of around 7.9% in net interest income, which came in at ¥462.5 billion ($4.2 billion). For Mitsubishi UFJ, trust fees, along with net fees and commissions, totaled ¥327.6 billion ($2.9 billion), almost stable year over year. However, net trading profits came in at ¥214.1 billion ($1.9 billion), up 27.8% year over year.

Mitsubishi UFJ’s total credit costs, at quarter end, came in at ¥20 billion ($0.18 billion), plunging 64% year over year. The credit costs declined on a consolidated basis, while reported net reversal on a non-consolidated basis.

Net gains on equity securities jumped 52.5% year over year to ¥27.6 billion ($0.25 billion). Gains increased primarily owing to increase in sale of equity holdings, along with decline in losses on write-down of equity securities.

Other non-recurring losses were ¥23.8 billion ($0.21 billion) compared with ¥20.7 billion incurred in the prior-year period. G&A expenses escalated 1.8% year over year to ¥655.2 billion ($5.89 billion), mainly on the account of depreciation of the Japanese yen against other currencies, along with elevated expenses in overseas.

Strong Capital Position

As of Jun 30, 2017, Mitsubishi UFJ reported total loans of ¥108.7 trillion ($0.97 trillion), down from ¥109.2 trillion ($0.98 trillion) as of Mar 31, 2017. The decrease was chiefly attributed to decline in loans to domestic corporate and governmental institutions.

In addition, deposits climbed to ¥171.5 trillion ($1.53 trillion) from ¥170.7 trillion ($1.53 trillion) as of Mar 31, 2017, as demand for individual and overseas deposits increased.

Total assets summed ¥304.2 trillion ($2.71 trillion), up from ¥303.3 trillion ($2.73 trillion) as of Mar 31, 2017. Net unrealized gains on securities available for sale increased to ¥3.4 trillion ($0.03 trillion) from ¥3.2 trillion ($0.029 trillion) as of Mar 31, 2017. The rise stemmed from increases in domestic equities, partially offset by decreases in Japanese government bonds.

Moreover, total net assets were ¥16.7 trillion ($0.15 trillion), up from ¥16.6 trillion ($0.15 trillion) as of Mar 31, 2017. Non-performing loan ratio contracted 3 basis points from Mar 2017 to 1.07%, on account of reduction in non-performing loans.

Outlook

Mitsubishi UFJ Financial announced its target of ¥950 billion of consolidated net income for the fiscal year ending Mar 31, 2018. Total credit costs are estimated at ¥160 billion.

Our Viewpoint

Though we are wary about the heightening competition and volatility in the Japanese economy, along with escalating expenses, Mitsubishi UFJ’s robust business model and diversified product mix look encouraging. Further, increase in gross profits and low credit costs are tailwinds.

Mitsubishi UFJ currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank AG (DB - Free Report) reported net income of €466 million ($512.4 million) in second-quarter 2017, significantly up on a year-over-year basis. Income before income taxes more than doubled to €822 million ($903.9 million) on a year-over-year basis. Cost management and reduction in provisions were positive factors. However, lower revenues due to trading slump were an undermining factor. Notably, net new money inflows were recorded during the quarter.

UBS Group AG (UBS - Free Report) reported second-quarter 2017 pre-tax operating profit of CHF 1.68 billion ($1.71 billion) on an adjusted basis, up around 1% from the prior-year quarter. Results displayed increase in net interest income (up 22% year over year), along with net fee and commission income (up 5% year over year), partially offset by lower trading income (down 23% year over year). Notably, the quarter benefited from the company’s consistent focus on expense management.

Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.2 billion ($1.9 billion) in second-quarter 2017, up 10.7% year over year. Including non-recurring items, net income came in at R$6.0 billion ($1.87 billion), up 9.1% year over year.

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