Shares of Mitsubishi UFJ Financial Group Inc. (MTU) have recorded a year-to-date return of 19.8%. A strong business model, diversified product mix and higher gross profits acted as the positives behind this growth story. However, we are not very optimistic about these positives translating to further price appreciation down the road as there will be significant pressure due to rising expenses.
After analyzing its fundamentals following the fiscal first-half 2014 (ended Sep 30, 2013) earnings release, we would suggest to stay invested in it but not to further add it to your portfolio.
Why this Stance?
Mitsubishi UFJ reported net income of ¥530.2 billion ($5.4 billion) for the first-half of fiscal 2014, up from net income of ¥290.4 billion ($3.7 billion) in the year-ago period. The key positives for the quarter were growth in deposits and loans along with a rise in net interest income and fee revenues. Further, increased gross profits were a tailwind.
The primary source of liquidity for Mitsubishi UFJ is its large balance of deposits. Due to its broad customer base in Japan and the depositors’ preference to seek the safety of deposits at large financial institutions, the balance of deposits stands at ¥136.1 trillion ($1.38 trillion) as of Sep 30, 2013, improving from ¥131.7 trillion ($1.4 trillion) as of Mar 31, 2013.
MUFG is in a relatively good shape from the capital perspective. The company remains focused on managing capital levels efficiently and therefore maintained a sturdy capital position and this could prove to be a major differentiator compared with its peers. Notably, total assets stood at ¥242.2 trillion ($2.46 trillion) as of Sep 30, 2013, up from ¥234.5 trillion ($2.49 trillion) as of Mar 31, 2013.
However, escalating G&A expenses remain a major cause of concern for Mitsubishi UFJ. Since the last few quarters, the company has been continuously witnessing a rise in these expenses related to the overseas business. Notably, G&A expenses surged 10.4% for the six months ended fiscal 2014.
Over the last 30 days, the Zacks Consensus Estimate for both fiscal 2014 and fiscal 2015 remained stable at 62 cents per share. As a result, it carries a Zacks Rank #3 (Hold).
Other Major Foreign Banks to Consider
Some better-ranked foreign stocks in the same sector include Westpac Banking Corporation (WBK), Banco Santander, S.A. (SAN) and Itau Unibanco Holding S.A. (ITUB). All these stocks hold a Zacks Rank #2 (Buy).