MUFG - Mitsubishi UFJ Financial: Good Progress On ROE Improvement Initiatives

2023-12-21 15:40:13 ET

Summary

• Mitsubishi UFJ initiated a substantial JPY 400 billion ($2.8 billion) share buyback plan in the middle of last month.
• MUFG has engaged in M&A deals and made a few new hires as part of the company's efforts to expand its presence in investment services and the US market.
• I continue to rate Mitsubishi UFJ as a Buy considering that MUFG has achieved good progress with its ROE improvement plans and it is still trading below net asset value.

Elevator Pitch

Mitsubishi UFJ Financial Group, Inc. ( MUFG ) [8306:JP] shares are still rated as a Buy. Previously, I mentioned in my September 26, 2023 initiation article that there is room for Mitsubishi UFJ's P/B multiple to expand going forward as the company's ROE rises over time.

In this latest update, I touch on the key developments associated with the actions that MUFG has taken to improve its ROE. My analysis suggests that Mitsubishi UFJ has made decent progress with its initiatives to improve the company's ROE. But MUFG is still trading at 0.82 times P/B , or an 18% discount to net asset value. This explains why I have stuck to my existing Buy rating for Mitsubishi UFJ.

Share Buybacks

At the start of this month, Mitsubishi UFJ disclosed that the company has already spent JPY51 billion on share buybacks thus far, since it announced its new share repurchase plan on November 14, 2023. MUFG has a new JPY400 billion share buyback program that is in effect between November 15, 2023, and March 31, 2024, which could potentially result in more than 3% of its shares being repurchased by the company.

Mitsubishi UFJ noted at its most recent Q2 FY 2023 (July 1, 2023, to September 30, 2023) earnings call that it decided to introduce this new share repurchase program considering "the resilience of financial systems has been confirmed and that there is only a limited risk of anxiety spreading further." In other words, MUFG holds the view that market conditions have stabilized, which gives the company the confidence to return more excess capital to the company's shareholders.

MUFG's share price rose by +6.7% on November 14, 2023, and this suggests that investors have a favorable view of the company's significant share buyback plan. It is easy to understand why the market views share buybacks in a positive manner. In my late-September write-up, I indicated that "MUFG can shrink the company's equity capital base by distributing a bigger part of its excess capital" which will boost its ROE.

Looking forward, Mitsubishi UFJ is likely to continue with share repurchases, even if its P/B ratio improves from the current 0.82 times (source: S&P Capital IQ ) to above 1 times, assuming that share buybacks are deemed to offer better returns than other alternative uses of capital. At its Q2 FY 2023 earnings briefing, MUFG stressed that "we will not change our capital management policy only based on PBR exceeding 1x", but it will continue to "compare investments with share repurchases" as part of its existing capital allocation approach.

M&A And New Hires

Mitsubishi UFJ highlighted at the company's most recent quarterly results briefing that ROE enhancement involves the "building of base income and the capturing of growth" by focusing on "drivers" like "Asia, the U.S., asset management, and investment services."

MUFG's latest moves send a clear message that it is working hard to improve its future business performance by engaging in acquisitions and recruiting talent.

In a recent media release issued on December 18, 2023, Mitsubishi UFJ shared that it is proposing to buy out a company known as Link Administration Holdings Limited. In this press release, Link is described as the "largest Australian pension administration company, providing services to approximately 41% (10 million accounts) of Australian private pension members."

MUFG also indicated in this latest December 18 announcement that the M&A deal involving Link will help its "Global IS (Investment Services) Business" to provide "a broad range of solutions" and "strengthen its global reach." In a nutshell, Mitsubishi UFJ has identified investment services as an area with excellent top line expansion and ROE improvement potential for the company, and it has turned to inorganic strategies such as M&A to grow its presence in this space.

Separately, Mitsubishi UFJ's North American business known as MUFG Americas added to its ranks in recent months.

In the early part of the current month, MUFG Americas recruited Geoff Paul to become its Head of Equity Capital, who has had investment banking experience at Deutsche Bank ( DB ) and JPMorgan ( JPM ). Earlier in October this year, MUFG Americas disclosed that it attracted "three seasoned relationship professionals" to join its "Growth & Middle Market Technology (investment banking) team."

The US is a key market for Mitsubishi UFJ, accounting for close to a quarter of its FY 2023 top line, as indicated in its 20-F filing . On the other hand, the company's Asset Management & Investor Services segment is a growing business for MUFG with room for further expansion, considering that this business segment only contributed less than 10% (source: 20-F filing) of Mitsubishi UFJ's recent fiscal year revenue. Therefore, it is good to know that MUFG is putting in a great deal of effort to grow its US and investment services businesses via new hires and M&As.

Concluding Thoughts

The market still values Mitsubishi UFJ at a meaningful discount to its book value, even though the company has made a couple of good moves (e.g. buybacks, acquisitions) that could potentially boost its ROE in the future. As such, I choose to retain my Buy rating for MUFG.

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