2023-04-19 00:44:50 ET
Summary
- The Oracle of Omaha has taken large stakes in Japan's largest trading-houses.
- Why did he pass on one of his favorite sectors, the financials?
- We look at some of Buffett's investment criteria.
MUFG logo (MUFG)
Investment thesis
We have had a line of Hold stance on Mitsubishi UFJ Financial Group ( MUFG ) for some time now.
The main reason for not buying into their business has so far been their rather low ROE. As we stated in our previous analysis, the ROE for the last quarter that ended 31st December last year was only 2.9%, down from 9.9% for the period July through September 2022.
Investors pay attention when Warren Buffett has something to say, and they should as there is often great wisdom that comes with it.
Berkshire Hathaway ( BRK.A ) ( BRK.B ) has put billions of dollars to work in Japan through equal stakes in the 5 largest trading houses.
Knowing he likes banks, we wondered why he has not invested in MUFG.
The Oracle of Omaha’s investments in Japan
Warren Buffett had for a long time not taken much interest in buying shares in Japan as he thought that they were not particularly profitable.
That changed back in 2020 when Berkshire Hathaway started to take a position in the five largest trading houses, namely Mitsubishi Corp., Mitsui & Co., Itochu Corp., Marubeni Corp., and Sumitomo Corp.
On Buffett’s recent trip to Japan, he said in an interview with CNBC that he thought these companies were "ridiculously cheap", especially in terms of price in relation to interest rates.
With his long-standing track record of investing in financials, one would think that he would be investing in their largest bank MUFG instead of trading houses.
The 5 largest Japanese trading houses
Why the sudden interest in these companies?
From the interview he made with CNBC, we understand that he was particularly looking at the big spread between Japan’s ultra-low interest rate and these five companies’ earnings yields.
Earning yields and ROE comparison (Data from Yahoo Finance. Compilation by TIH)
We can see that their earnings yield is indeed quite good. They are certainly in a totally different league than what MUFG is in. Since we know that Buffett often uses ROE as a good gauge of how well management allocates capital, we also looked at this.
On both accounts, MUFG just doesn't match the five trading houses.
The land of “free money”
Buffett’s argument was that while the interest rates Japanese can get on their savings is close to zero, these five companies' earnings yields are in the mid to upper teens in percentages.
From the Bank of Japan’s latest statement on monetary policy, dated 10th of March, they set the short-term interest rate at – 0.1%.
For their 10-year Japanese Government Bond, they will continue to allow the yield to fluctuate in the range of plus and minus 0.5%.
The five major Japanese banks raised their fixed housing loan rates in January 2023 in light of a rise in long-term government bond yields following a policy revision by the Bank of Japan . Based on the standard rate, the prime 10-year loan rate became 1.05% at MUFG.
Conclusion
Should banks, like MUFG, be able to increase their NIM, it will result in higher earnings. However, we are not sure this will be the case.
Japan is experiencing barely any economic growth. Their population has been in decline for over a decade and continues to age, reducing the size of the workforce.
On top of that, their demographic challenges are not favorable. Last year’s GDP was around the same as it was in 2017, 2018, and 2019—and barely above the levels , they achieved back in the late 1990s.
We are still only lukewarm on MUFG and we believe it did not excite the Oracle of Omaha either because it did not meet his investment criteria of attractive earnings yield and ROE. He surely had other reasons too for not investing in Japan’s largest bank.
As such, we continue our stance of a Hold on MUFG stock.
For further details see:
Mitsubishi UFJ: Probably Why Buffett Passed On Investing In Japan's Largest Bank