We maintain our Neutral recommendation on Mitsubishi UFJ Financial Group Inc. (MTU) based on the company’s recent results. Mitsubishi UFJ provides a broad range of domestic and international financial operations to individual and corporate customers. Moreover, the company is successful in expanding amidst the improving global economy, which is susceptible to economic and political developments.
Mitsubishi UFJ’s net income for the nine months ended December 31, 2011 was ¥815.8 billion ($10.4 billion) versus ¥551.8 billion ($6.3 billion) in the year-ago period. Net income per share came in at ¥56.92 (72 cents) as against ¥38.30 (44 cents) in the prior-year period.
Results reflected decreases in general and administration expenses and a significant decline in consolidated credit costs buoyed by a drop in credit costs from other subsidiaries. Moreover, loans and deposits growth were the positives for the period. Yet the fall in gross profits and net interest income was on the downside. Mitsubishi UFJ is targeting for ¥900 billion ($11.7 billion) of consolidated net income for the fiscal year ending March 31, 2012.
Mitsubishi UFJ is performing dynamically through a network of branches and subsidiaries in the emerging markets, particularly in countries like Asia, Latin America, Central and Eastern Europe and the Middle East. Therefore, we believe that the advancement of emerging economies will help Mitsubishi UFJ to expand further.
The company continues to pursue global growth opportunities and expand its Union Bank business through acquisitions of community banks. Mitsubishi UFJ further plans to continue selectively reviewing and considering growth opportunities that will enhance global competitiveness.
In December 2010, Mitsubishi UFJ entered into an agreement with The Royal Bank of Scotland Group plc (RBS) to acquire around £3.3 billion of project finance-related assets consisting of loans for natural resource, power and other infrastructure projects in Europe, the Middle-East and Africa. The transaction is being completed on an asset-by-asset basis, and the company has acquired more than 90% of the assets as of September 30, 2011.
Additionally, the company entered into a strategic alliance with Morgan Stanley (MS) in October 2008 for a long-term cooperation with the investment firm. Mitsubishi UFJ currently plans to strengthen its strategic alliance, which is expected to broaden its scope in new geographies and businesses.
On the flip side, though there are some signs of recovery, the global economy remains vulnerable to political and economic improvements. The United States and some European nations continue to experience lack of employment and large financial deficits, and hence are struggling to stimulate their economies.
Also, the Japanese economy began to deteriorate in the later part of calendar year 2010 and the country is yet to recover from this situation. Moreover, the Great East Japan Earthquake, which occurred on March 11, 2011, significantly affected the Japanese economy. Therefore, it is quite difficult for Mitsubishi UFJ to offset the negative effects of Japan’s weak economic conditions.
Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and lower credit costs to support its bottom line. However, we are concerned about increasing competition and volatility of the Japanese economy.
Mitsubishi UFJ currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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