2023-07-18 17:01:13 ET
Summary
- We compare MUFG's performance to other banks such as JPMorgan, HSBC, and UBS.
- ROE is too low at MUFG at only 7%.
- Other fundamentals, such as P/E and P/Book, are attractive.
- The board is also focusing more on returning capital to shareholders.
Investment Thesis
We were too cautious by giving Mitsubishi UFJ Financial Group ( MBFJF ) ( MUFG ) a Hold when we started to cover it nearly a year ago. We will refer to the bank as just MUFG in this analysis.
In February, we kept the stance on Hold, even though we acknowledged the 32% rise in the share price because we did not see enough improvements in fundamentals.
The main issue we had with MUFG was its rather low ROE. It had gone from 9.9% at the end of December 2021 to just 2.9% at the end of December 2022.
Let us examine if there are any improvements.
Financial Results FY 2022 Ending 31st March 2023
E PS for FY 2022 was up just 2.6% to ¥90.73 on a Y-o-Y basis. We did expect higher growth in earnings, more in line with the earning growth from other financial companies.
But let us get back to the ROE for FY 2022 which was 7.03%
MUFG is a large bank with an international presence. It owns 21% of Morgan Stanley ( MS ) and controls the Indonesian bank PT Bank Danamon and the Thailand-based bank Kungsri, both held as subsidiaries.
Hence, we would like to benchmark it against other similar banks. We chose JPMorgan ( JPM ) in the USA, HSBC ( HSBC ) as another Asian bank, despite its head office being in London, and UBS ( UBS ) as a bank from the EU.
We can see that JPM and UBS are in a different class compared to MUFG and HSBC.
While HSBC had a return on tangible equity of 9.9%, they have set an ambitious target of reaching a ROTE of 12% from this year onwards. MUFG is in our opinion not aggressive enough as they are targeting a small improvement in the ROE to just 7.5% for 2023 FY.
There is not much difference between the four mega banks in terms of P/E and dividend yield. On the topic of the dividend, MUFG declared a dividend of ¥32 for FY 2022, a small increase of ¥4, and communicated during the conference call that they forecast another increase of ¥9 this year putting the dividend at ¥41.
MUFG also made its largest share buyback ever in FY 2022, buying back shares valued at ¥450 billion.
When it comes to valuation, there is a gap in how the market value these banks in relation to their book value.
The main source of income for a bank is the net income it gains from the spread between deposits and loans. This is referred to as NIM or Net Interest-rate Margin. MUFG just calls it a spread. Japan has had a zero-interest rate environment for a long time, and the BoJ has so far decided to keep it that way. With that in mind, it is very difficult for banks to deliver a strong NIM. It is the increase in interest rates that has been the main contributor to other banks' stellar financial performance lately.
Fortunately, MUFG does also have lending activities and deposit-taking outside of Japan. Their oversea lending stood at ¥41.2 trillion, while domestic lending stood at ¥66.6 trillion.
Here is the interest rate spread from their different markets.
Their NIM in the domestic market is lower than what some of their oversea banks enjoy.
JPM topped the list for FY 2022 with a NIM as high as 2.83%. HSBC had a strong 1.48% and UBS has a different business model as their income from fees is 3 x that of their interest income.
MUFG's NPL ratio, defined as the total non-performing loans divided by total loans, was 1.26%, slightly up from 1.18% Y-o-Y.
MUFG's 1st Quarter results will be published on 1st August 2023
FX When Investing in a Different Currency
We have learned, the hard way, that when you are investing in more than one currency, your performance as measured in one currency will often be greatly affected. Sometimes in a positive way and other times in a negative way too.
The range within one year was between 128 and 150. The difference is a drop of 14.7%, which is not negligible. We cannot project where the exchange will be one year down the road. Our opinion, or lack of it, is as poor as anybody else.
This is a risk one should carefully consider before investing in any currency.
Conclusion
As SA Editor Jason Capul pointed out in his article on 13th July, titled " Ahead of bank earnings , these names have seen the highest 2023 returns so fa r ", MBFJ/MUFG came in at sixth place amongst the top ten.
There is no doubt that MUFG's share price has done well, and it is arguably not expensive when we consider that it is trading at an attractive price to a book value of just 0.61.
That is the lowest we have seen from a large bank.
They are also showing clear signs of becoming more shareholder-friendly.
However, ROE should matter. To us, it says how efficiently they allocate the equity and how much they can earn on shareholders' funds. We will monitor to see if it does get improved.
It is a solid bank, and its share price could continue to go up. As such, we are prepared to upgrade our stance to a Buy.
For further details see:
Mitsubishi UFJ Financial Gets An Upgrade To Buy