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Mitsubishi UFJ (MUFG) Stock Down 1.3% as FY18 Earnings Fall

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Shares of Mitsubishi UFJ Financial Group (MUFG - Free Report) declined 1.3% on the NYSE following the release of fiscal 2018 (ended Mar 31) results. The company reported profits attributable to owners of parent of ¥872.7 billion ($7.9 billion), down 11.8% year over year. Also, results failed to exceed the company’s target of ¥950 billion.

During the fiscal, decline in net trading profits and net other operating profits acted as headwinds. Further, lower net fees and commissions and elevated general & administrative expenses were undermining factors. However, higher net interest income and lower credit costs partially offset the negatives.

Gross Profits Down, General & Administrative Expenses Rise

Gross profit for the fiscal was ¥3.73 trillion ($0.03 trillion), down 3.3% year over year. The decline was mainly due to reduced net trading profit and net other operating profits, partly offset by increased net interest income from overseas loans and deposits.

Fiscal 2018 reflected nearly 1% rise in net interest income, which came in at ¥1.92 trillion ($0.02 trillion). However, for Mitsubishi UFJ, net trading profits came in at ¥216.2 billion ($1.9 billion), falling 26.1% year over year. Also, trust fees, along with net fees and commissions, totaled ¥1.43 trillion ($0.01 trillion), down 1.4% year over year.

Mitsubishi UFJ’s total credit costs were ¥5.8 billion ($0.1 billion) compared with credit cost of ¥46.1 billion a year ago.

Net gains on equity securities plunged 15.4% year over year to ¥112.6 billion ($1 billion). Gains declined primarily due to lower gain on sale of equity holdings and higher write-downs.

Other non-recurring losses were ¥121.7 billion ($1.1 billion) compared with ¥100.3 billion incurred in fiscal 2017. G&A expenses rose around 1% year over year to ¥2.65 trillion ($0.02 trillion). Overseas operation costs escalated due to the expansion of overseas business and global financial regulatory compliance costs.

Strong Balance Sheet Position

As of Mar 31, 2019, Mitsubishi UFJ reported total loans of ¥107.8 trillion ($1 trillion), down nearly 1% from Dec 31, 2018. The decrease can be chiefly attributed to fall in domestic loans, along with loans to government and overseas loans.

However, deposits increased 1.9% to ¥180.2 trillion ($1.6 trillion) sequentially, due to rise in domestic corporate and overseas deposits.

Total assets summed ¥311.1 trillion ($2.8 trillion), up 1.3% from the previous quarter-end. Net unrealized gains on securities available for sale increased 28.3% to ¥3.3 trillion ($0.03 trillion).

Moreover, total net assets were ¥17.3 trillion ($0.2 trillion), up 1% from Dec 31, 2018. Non-performing loan ratio contracted 26 basis points to 0.62% year over year, due to reduction in non-performing loans.

Capital Ratios Deteriorate

Common equity Tier 1 capital ratio as of Mar 31, 2019, was 12.23%, down from 12.58% as of Mar 31, 2018. Further, leverage ratio was 4.94%, down from 5.01% as of Mar 31, 2018.

Outlook

Mitsubishi UFJ Financial disclosed its target of ¥900 billion of consolidated profits attributable to owners of parent for fiscal 2019 (ending Mar 31, 2020). Also, it aims to deliver profits of ¥450 billion at the end of first half six months of fiscal 2019 (ended Sep 30, 2019).

The company expects to deliver net operating profits, before credit costs for trust accounts and provision for general allowance for credit losses, of ¥530 million for the first six months and ¥1.08 billion for fiscal 2019.

Total credit costs are estimated to be ¥80 million and ¥230 million as of Sep 30 and Mar 31, respectively.

Our Viewpoint

Mitsubishi UFJ’s robust business model and diversified product mix look encouraging. However, we are wary about the heightening competition and volatility in Japan’s economy. Furthermore, rise in expenses and credit costs are key concerns.

Mitsubishi UFJ Financial Group, Inc. Price and Consensus

Mitsubishi UFJ currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank (DB - Free Report) reported net income of €201 million ($228.3 million) in first-quarter 2019, up 67% from €120 million in the year-ago quarter. The bank reported profit before taxes of €292 million ($331.6 million).

Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.7 billion ($1.78 billion) in first-quarter 2019, up 6.3% year over year. Including non-recurring items, net income came in at R$6.9 billion ($1.83 billion), up 7.8% year over year.

The Royal Bank of Scotland (RBS - Free Report) reported first-quarter 2019 net income attributable to its shareholders of £707 million ($919 million), down 12.5% from £808 million ($1.1 billion) witnessed in the prior-year quarter. Operating income totaled £1 billion ($1.3 billion) compared with £1.2 billion ($1.6 billion) in the year-ago quarter.

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