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Morningstar | MUFG Also Reports Modest Uptick in Credit Costs in 3Q; We Prefer SMFG

Mitsubishi UFJ Financial Group (MUFG) reported October-December results similar to those reported by Sumitomo Mitsui Financial Group (SMFG) last week. Similar to SMFG achieving 24% of full-year net profit guidance of JPY 700 billion after 32% and 35% in the fiscal first and second quarters (cumulative progression of 91%), MUFG achieved 23% of its full-year net profit guidance of JPY 950 billion after 33% and 35% in the same period (cumulative progression of 92%). MUFG’s annualized MUFG's ROE declined sequentially from 8.4% in the previous quarter to 5.5% for October-December, similar to SMFG’s decline from 9.3% to 6.2%.

Like SMFG, MUFG saw a modest reappearance of credit costs this quarter after net write-backs in previous quarters, at 18 basis points of loans on an annualized basis, versus SMFG’s 24 basis points. We think these credit costs are mainly attributable to overseas loans, as rising USD interest rates and factors such as lower oil prices affected some borrowers. In terms of details where MUFG’s results differed from SMFG’s, MUFG reported a stronger top line, likely reflecting its larger overseas exposure, with net interest income up 4.3% year on year and total net revenue up 3%, but unlike SMFG that reduced expenses 7%, MUFG’s expenses in yen terms increased slightly, up 1% year over year.

By segment, MUFG’s preprovision operating profit grew in Japanese corporate & investment banking (up 9%), global corporate & investment banking (up 12%), and at its large overseas subsidiaries that include Union Bank in California and Krungsri in Thailand (up 11%). Asset management grew 1% and domestic retail and small-business banking declined 20%.

We maintain our no-moat rating and fair value estimate of JPY 797 and USD 7.12 for MUFG. Although there is 38% upside to our valuation from today’s close, we continue to prefer SMFG slightly. There is 45% upside to our valuation for SMFG, and it has a stronger outlook for dividend growth than MUFG, in our view.