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Mitsubishi UFJ (MTU) FY15 Earnings Fall, to Buy Back Shares

Mitsubishi UFJ Financial Group, Inc.’s MTU net income for the fiscal year ended Mar 31, 2016, came in at  ¥951.4 billion ($8.2 billion), declining 8% year over year.

However, it gained 1.56% in NYSE after the company reported results on Monday. The price movement perhaps reflects investors’ optimism around its share buyback program. Concurrently with the earnings release, Mitsubishi UFJ Financial announced its plan to repurchase up to 230 million shares for an aggregate repurchase price of up to ¥100.0 billion. The buyback period extends from May 17, 2016 to Jun 30, 2016.

For the period under review, the Japanese banking giant recorded reduced net interest income, substantial rise in credit costs and a slight increase in general and administrative (G&A) expenses. However, rise in fee revenues and continued loan and deposit growth were the positives.

Performance in Detail

Gross profits for the period ended were ¥4.14 trillion ($35.9 billion), down 2% year over year. The decline was mainly due to lower net interest income that was driven by appreciation of the Japanese yen against the other currencies. The period under review reflected a decline of 3.1% in net interest income, which came in at ¥2.11 trillion ($18.3 billion).

 Mitsubishi UFJ’s trust fees along with net fees and commissions totaled ¥1.44 trillion ($12.5 billion), up 1.2% year over year. Net business profits stood at ¥1.56 trillion ($13.5 billion), down 5.3% year over year.

G&A expenses increased slightly year over year to ¥2.59 trillion ($22.4 billion), mainly due to higher regulatory costs in overseas businesses.

Mitsubishi UFJ’s total credit costs increased a whopping 57.9% from the previous year to ¥255.1 billion ($2.2 billion). The rise in credit costs was mainly attributed to an increase in provision for specific allowance for credit losses.

Net gains on equity securities were ¥88.3 billion ($0.8 billion), down 5.2% year over year. Gains decreased mainly due to increased losses on write-down of equity securities. Other non-recurring losses were ¥82 billion ($0.7 billion) compared with losses of ¥23 billion ($0.2 billion) in the prior-year period.

The balance of investment securities as of Mar 31, 2016 was ¥69.99 trillion ($0.62 trillion), reflecting a decrease 4.8% from the prior year. The decline was mainly due to a fall in Japanese government bonds.

As of Mar 31, 2016, Mitsubishi UFJ reported total loans of ¥113.76 trillion ($1.01 trillion), up 4% year over year. As of same date, deposits climbed 5% to ¥160.97 trillion ($1.43 trillion).

Total assets stood at ¥298.3 trillion ($2.65 trillion), up 4.2% year over year. Net unrealized gains on securities available for sale was ¥3.49 trillion ($31.0 billion) compared with gains of from ¥4.13 trillion ($34.0 billion) as of Mar 31, 2015. Total net assets were ¥17.39 trillion ($0.15 trillion), increasing nearly 1% year over year.

Non-performing loan ratio edged up 3 basis points from Mar 2015 to 1.19%.

Outlook

Mitsubishi UFJ Financial has set a target of ¥850 billion of consolidated net income for the fiscal year ending Mar 31, 2017, reflecting a decline of 10.7% year over year. Total credit costs are expected to be ¥210 billion.

For the six months ending Sep 30, 2016, the company aims to achieve ¥360 billion of consolidated net income and expects total credit costs of ¥110 billion.  

Our Viewpoint

Results of Mitsubishi UFJ do not reflect a decent performance.  Negative interest rates in Japan will continue to hurt the bank’s interest income. Further, credit costs are likely to be impacted by the stressed energy sector.

However, Mitsubishi UFJ’s focus on several strategies under its medium-term business plan (2015 to 2017) that includes upgrading and reforming its business model and exploring new business areas should lend support to its growth prospects. Additionally, the company is set to benefit from its expansion moves. We also remain encouraged by the company’s steady capital deployment activities.

Mitsubishi UFJ currently carries a Zacks Rank #3 (Hold).

Performance of Other Foreign Banks

The Royal Bank of Scotland Group plc RBS reported first-quarter 2016 loss attributable to shareholders of £968 million ($1.4 billion) compared with a loss of £459 million in the prior-year quarter. Results included payment of the final Dividend Access Share dividend of £1,193 million to the U.K. Government.  

Deutsche Bank AG DB reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. Income before taxes came in at €579 million ($638.6 million), down 60.9% year over year. The quarterly results were impacted by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive.

Barclays PLC’s BCS first-quarter 2016 pre-tax earnings of £793 million ($1.14 billion) declined 25% year over year. A challenging industry backdrop had adverse impact on the company’s investment banking income and trading revenue. Further, a rise in credit impairment charges was an undermining factor. However, decline in operating expenses and a stable net interest income acted as tailwinds.

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