2023-09-26 07:39:48 ET
Summary
- Mitsubishi UFJ Financial Group aims to improve its ROE from 6.5% in FY 2022 to 9%-10% in the mid-term.
- Mitsubishi UFJ is currently trading at a -14% discount to book value, and I see the company's shares eventually trading above book as its ROE expands.
- I have a Buy rating for MUFG, as I have a favorable view of the stock's re-rating potential.
Elevator Pitch
I assign a Buy investment rating to Mitsubishi UFJ Financial Group, Inc. ( MUFG ) (8306:JP) stock. MUFG has a number of drivers to improve the company's Return On Equity or ROE, such as increased capital return, non-core business divestment, and the reduction of cross-shareholdings. Mitsubishi UFJ is still trading below book value, so I think that there is significant valuation re-rating potential for MUFG which warrants a Buy rating.
Company Description
Mitsubishi UFJ Financial Group referred to itself as "one of the world's leading financial groups" that is "headquartered in Tokyo" with "2,000 locations in more than 50 countries" in its media releases . On its website , the company noted that its banking arm, known as MUFG Bank, is "Japan's largest bank."
Mitsubishi UFJ Financial Group's Holding Company Structure
In its most recent 20-F filing , Mitsubishi UFJ highlighted that it "had the largest overseas network among Japanese banks", and it earned 58% of its FY 2022 (April 1, 2022 to March 31, 2023) revenue from foreign markets.
MUFG's Key Business Segments
The JCIB, GCIB, and GCB segments contributed 27%, 21%, and 17% of Mitsubishi UFJ's FY 2022 operating income, respectively. MUFG derived the remaining 12%, 9%, 8%, and 6% of the company's operating profit from the DS, R&C, Global Markets, and AM/IS businesses, respectively in the recent fiscal year.
Positive Correlation Between P/B And ROE
MUFG was trading at a P/B ratio of between 1 and 2 times for most of 2007 and 2008. The company's ROEs for FY 2006, FY 2007 and FY 2008 were 13.6%, 11.8%, and 8.0%, respectively.
In contrast, Mitsubishi UFJ traded at below 0.5 times P/B in the 2019-2020 period. MUFG's ROEs were as low as 3.3% and 4.7% for FY 2019 and FY 2022, respectively. These figures are sourced from S&P Capital IQ .
It is safe to assume that the stock's P/B valuations are positively correlated with the company's ROEs.
Mitsubishi UFJ is now valued by the market at a historical trailing twelve months Price-to-Book or P/B valuation multiple of 0.86 times . MUFG reported a Return On Equity or ROE of 6.5% in the most recent fiscal year as highlighted in its FY 2022 results presentation .
At the company's 2023 Investor Day , MUFG emphasized that the company "as a whole is aiming at 9-10% ROE for the medium- to long-term." Assuming that Mitsubishi UFJ's ROEs can improve to the high single-digit and double-digit levels that were last seen in the FY 2006-2008 time frame, MUFG could potentially trade at above 1 times P/B as it did in the past.
Specifically, I am of the opinion that Mitsubishi UFJ can achieve higher ROEs in many ways.
ROE Enhancement Initiatives
MUFG has the ability to drive an improvement in the company's ROE.
Firstly, MUFG can divest low-margin and underperforming businesses, and re-allocate capital to other parts of the company or new business areas that have superior potential.
In December last year, Mitsubishi UFJ disclosed that the company "completed the sale of MUFG Union Bank's core regional banking franchise to U.S. Bancorp ( USB )." In the disclosure regarding this transaction, MUFG stressed that the purpose of this deal is to "increase our focus and direct our resources on accelerating growth in our Americas wholesale businesses."
Following the divestiture of MUFG Union Bank, the company has been making good use of the divestment proceeds. Mitsubishi UFJ shared at its 2023 Investor Day that its Global Commercial Banking Business Group or GCB business division acquired five companies between December 2022 and July 2023 to expand its presence in Asia. MUFG shared that the GCB unit still has another three M&A deals due to be completed by the first quarter of the next fiscal year.
The MUFG Union Bank transaction serves as a good case study of how Mitsubishi UFJ is enhancing its future financial returns by restructuring the portfolio. In the US market, MUFG has shrunk its operations to focus on the wholesale segment. On the other hand, the company is seeking inorganic growth opportunities in the Asian market, which is closer to home (Japan).
Secondly, Mitsubishi UFJ can choose to dispose of its financial investments.
Japanese companies, especially the larger ones, are known to have substantial cross-shareholdings. A January 2021 Financial Times article defined cross-shareholdings as "interconnected portfolios of ownership by listed Japanese companies" to "protect underperforming managements with a cushion of automatic investor support." Therefore, it is realistic to assume that these cross-shareholdings weren't initiated with ROE maximization as the key consideration.
MUFG's current financial target is to cut the company's cross-shareholdings by -JPY500 billion between March 31, 2021 and the end of March 2024.
At the company's 2023 investor day, Mitsubishi UFJ stressed that "the (cross-shareholdings reduction) target for the next MTBP (Medium Term Business Plan) is currently being prepared", which implies that MUFG is expected to continue with the unwinding of its cross-shareholdings which will boost its future ROE. At the end of March this year, the company still had JPY1.5 trillion of strategic equity investments.
Lastly, MUFG can shrink the company's equity capital base by distributing a bigger part of its excess capital.
As indicated in its FY 2022 results presentation, Mitsubishi UFJ guided for an FY 2023 dividend per share of JPY41. This will represent a +28% dividend hike as compared to its dividend payment of JPY32 per share in FY 2022. It also means that MUFG's dividend payout ratio is projected to improve from 35.3% in FY 2022 to 37.9% in FY 2023. The company's goal is to eventually increase its dividend payout ratio to as high as 40%.
Closing Thoughts
MUFG shares are awarded a Buy rating. I think the company has a good chance of realizing its intermediate-term ROE goal of 9%-10%, which should trigger a meaningful valuation re-rating.
For further details see:
Mitsubishi UFJ Financial Group: Bullish On Valuation Re-Rating Potential