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Morningstar | MUFG's Level of Urgency on Cost Reductions Leaves Something to Be Desired

Mitsubishi UFJ Financial Group held a briefing for analysts and investors on May 20 to discuss its results for the year ended March. It was Kanetsugu Mike’s first appearance as chief executive of the group since he succeeded chairman Nobuyuki Hirano as CEO in April. We came away with a slightly negative impression as the group seems to lack sufficient urgency about cost reductions, in our view, despite the fact that its consolidated expense ratio rose more than 3 percentage points in the just-ended year to 71.1%. It did expand its March 2024 target for domestic branch reductions from 20% to 35% (that is, around 100 additional closures) and said that it expects attrition to remove around 6,000 employees from its domestic workforce by the same time, which is roughly equivalent to its entire head office staff. However, no specific plans to improve efficiency at operations outside Japan were revealed, although Union Bank in California has long had high costs relative to its revenue and saw its expense ratio rise 1.6 percentage point to 78.0% in 2018. Among the three megabanks, we prefer MUFG’s smaller rival Sumitomo Mitsui Financial Group, which is already making visible progress in lowering its expense ratio and which on May 17 stressed its intention to achieve further efficiencies in the near term.

We believe the market is also still trying to gauge whether MUFG’s stance toward shareholder returns will be any different under the new CEO. MUFG disappointed the market by not announcing a share buyback last week like SMFG did, but it raised its dividend to JPY 25 from JPY 22, eliminating the gap in yields between it and the other two megabanks but potentially implying less room for further dividend increases.

We retain our no-moat rating on MUFG and lower our fair value estimate from JPY 797 ($7.12) to JPY 745 ($6.77), which is 0.6 times book value, versus our expectation for MUFG to generate an average return on equity of 5.6% over the next five years.