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Mitsubishi UFJ (MUFG) Q1 Earnings Disappoint, Expenses Up

Zacks Equity Research

Mitsubishi UFJ Financial MUFG reported profits attributable to owners of parent for first-quarter fiscal 2020 (ended Jun 30), of ¥183.4 billion ($1.7 billion), significantly down 52.9% year over year.

For the reported period, elevated general & administrative expenses and credit costs acted as headwinds. Further, reduced net fees and commissions, along with net periodic cost of retirement benefits, were major drags. However, increased gross profits, higher net trading profits and a strong capital drove the upside. Also, high net interest income acted as a positive.

Gross Profits Up, General & Administrative Expenses Escalate

Gross profits for the quarter being reported were ¥1.08 trillion ($0.01 trillion), up 12.8% year over year. The upsurge was mainly owing to higher net gains on debt securities and higher net interest income on consolidation of Bank Danamon.

The fiscal first quarter reflected a 5.6% increase in net interest income, which came in at ¥469 billion ($4.4 billion). Net trading profits came in at ¥279 billion ($2.6 billion), surging 58.4% year over year. Yet, for Mitsubishi UFJ, trust fees, along with net fees and commissions, totaled ¥329.7 billion ($3.1 billion), marginally down 1.6% year over year.

Mitsubishi UFJ’s total credit costs, at the quarter end, came in at ¥145 billion ($1.4 billion) compared with a positive ¥34.1 billion ($0.3 billion) witnessed in the prior-year quarter, on rise in credit cost globally due to the pandemic and adoption of new accounting methodology in overseas subsidiaries.

Net gains on equity securities declined significantly year over year to ¥6 billion ($0.06 billion). Other non-recurring losses came in at ¥38.9 billion ($0.36 billion), as against the gains of ¥27.8 billion ($0.25 billion) recorded in the prior-year period.

G&A expenses flared up 1.3% year over year to ¥678.7 billion ($6.3 billion). Rise in expenses was mainly due to the consolidation of Bank Danamon. Expense ratio came in at 62.9%, down from 70.1% in the prior-year quarter. A decrease in ratio indicates an increase in profitability.

Strong Capital Position

As of Jun 30, 2020, Mitsubishi UFJ reported total loans of ¥112.5 trillion ($1.04 trillion), up from ¥109.5 trillion ($1.02 trillion) as of Mar 31, 2020. This upswing can be chiefly attributed to rise in domestic corporate and government loans.

Deposits escalated to ¥198.4 trillion ($1.84 trillion) from ¥187.6 trillion ($1.74 trillion) as of Mar 31, 2020, as demand for domestic individuals, corporate and overseas deposits increased.

Total assets summed ¥341.9 trillion ($3.17 trillion), up from ¥336.6 trillion ($3.13 trillion) as of Mar 31, 2020. Net unrealized gains on securities available for sale increased to ¥3.3 trillion ($0.03 trillion) from ¥2.9 trillion ($0.03 trillion) as of Mar 31, 2020.

Moreover, total net assets were ¥16.9 trillion ($0.16 trillion), in line with the figure as of Mar 31, 2020. Non-performing loan ratio expanded 3 basis points from March 2020 to 0.68%, on rise in non-performing loans.

Outlook

Mitsubishi UFJ Financial targets ¥550 billion of consolidated profits attributable to owners of parent for fiscal 2020 (ending Mar 31, 2021).

The company expects to deliver net operating profits (before credit costs for trust accounts and provision for general allowance for credit losses) and ordinary profits of ¥1,050 billion and ¥850 billion, respectively, for this fiscal year.

Total credit costs are estimated to be ¥450 billion as of Mar 31, 2021.

Our Viewpoint

Though we are wary about the heightening competition, high credit costs and volatility in the Japanese economy, along with escalating expenses, Mitsubishi UFJ’s robust business model and diversified product mix look encouraging. Furthermore, increase in profits is a tailwind.

Mitsubishi UFJ Financial Group, Inc. Price, Consensus and EPS Surprise

Mitsubishi UFJ Financial Group, Inc. Price, Consensus and EPS Surprise
Mitsubishi UFJ Financial Group, Inc. Price, Consensus and EPS Surprise

Mitsubishi UFJ Financial Group, Inc. price-consensus-eps-surprise-chart | Mitsubishi UFJ Financial Group, Inc. Quote

Mitsubishi UFJ currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

HSBC Holdings’ HSBC second-quarter 2020 pre-tax profit of $1.1 billion reflected a slump of 82.4% from the prior-year quarter’s reported number. This decline primarily underlined higher expected credit losses and other credit impairment charges resulting from the coronavirus outbreak. The company witnessed lower revenues in the quarter, along with a decline in expenses. Capital ratios were mixed.

Barclays PLC’s BCS second-quarter net income attributable to ordinary equity holders of £90 million ($111.6 million) marks a slump of 91.3% from the prior-year quarter number. Results were primarily hurt by a significant increase in credit impairment charges. Also, the company witnessed a decline in the top line. Nevertheless, lower operating expenses were a tailwind.

UBS Group AG UBS reported second-quarter 2020 net profit attributable to shareholders of $1.23 billion, down 11% from $1.39 billion in the prior-year quarter. The performance was unfavourably impacted by a decline in net fee and commission income (down 4% year over year), along with a rise in expenses. However, higher net interest income (up 36%) was a tailwind.

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