2023-10-10 17:33:01 ET
Summary
- MUFG's focus on improving returns for shareholders is paying off, with a 13% return in the past three months.
- The bank's net operating profit improved by 27.6% in Q1, but net interest income dropped almost in half.
- MUFG's ownership stake in Morgan Stanley contributes significantly to its profit, and there is potential for further improvement in the future.
- A potential catalyst would be a positive interest rate from Bank of Japan next year.
Investment Thesis
We have lately been upgrading some banks that we cover here on SA from a Hold stance to that of a Buy, and Japan’s largest bank Mitsubishi UFJ Financial Group ( MUFG ) was no exception.
In our last article of 18th July, we justified the upgrade with management’s focus on improving returns for shareholders.
It is starting to pay off.
Since our upgrade, the return has been 13% in the short time of three months.
The bank has come out with their latest quarterly report which gives us a chance to follow up to see if the thesis is still valid.
Latest Financial Results
As MUFG fiscal year accounts end on 31st March of each year, the latest quarterly financial result we have is from Q1 ending 30th of June 2023.
The bank’s net operating profit improved in Q1 by 27.6% to ¥ 557 billion on a Y-o-Y basis.
If we compare it sequentially with the previous quarter, the difference is big. In Q4 of the last accounting year, the net operating profit was only ¥ 209.7 billion.
For all banks, the net interest income is the largest component of their revenues. This is dependent upon the NIM, the Net Interest rate Margin, and the volume of the interest income.
Most large international banks now enjoy an NIM of around 1.5%. That is not the case in the land of zero interest rates, namely Japan. MUFG’s latest NIM as of Q1 2023 was only 0.79%, slightly up from 0.75% Y-o-Y.
MUFG’s net interest income dropped almost in half to ¥ 584 billion in Q1 as compared to ¥ 987 billion the year before.
The main reason for the large drop was an absence of gains from the cancellations of investment trusts. Offsetting this drop was higher income from fees and trading. Lower expenses also contributed to the improved net profit of ¥ 557 billion.
A significant part of the profit comes from their 22.5% ownership of Morgan Stanley. Their quarterly contribution to the net profit was ¥ 154 billion in Q1.
MUFG’s non-performing loans stood at ¥ 1,578 billion at the end of Q1, which is an NPL ratio of 1.24%. This is in line with other banks.
Japan’s Economy
Japan’s central bank has for a long time stated that they want to wait until the country reaches its targeted inflation level of 2% per year before they raise the interest rate.
Well, it has been above that level for 16 months now. So, Mr. Kazuo Ueda, what are you waiting for? On Friday 22nd September in his statement , after the central bank’s meeting was over, he stated that they needed to compile and analyze more data before doing anything.
This gave currency traders another reason to sell the Yen.
It is now down 11.7% YTD.
A low currency helps exporters gain a competitive edge, but Japan’s import and export is quite balanced. In August of 2023, data showed that total imports accounted for ¥ 8.9 trillion versus exports of ¥ 7.8 trillion. Half of what they import is energy-related. Much of that is passed on to the consumers.
The unemployment rate in Japan is low at 2.7% and has been quite stable at that level for some time.
Risks and Conclusion
One risk is a further deterioration in the Japanese Yen, although at some point we expect that the central bank will intervene if the ¥ continue to slide.
Management’s focus on improving ROE and shareholder distribution is positive. So far, they have progressed well with their plans.
We think there is more good news to come. NIM could improve providing interest rates do turn positive next year.
Therefore, we maintain our Buy stance on MUFG here.
For further details see:
Mitsubishi UFJ Financial Group Continues To Deliver