EUR 850.00 For Business Accounts Only

Morningstar | While improving ROE in Japan remains key, we see Asia as a better opportunity for MUFG than the U.S.

Mitsubishi UFJ Financial Group, or MUFG, is Japan’s largest bank, with a 9.4% share of domestic loans and 11.6% of deposits as of March 2018. In Japan, the environment for banks has been tough for years and we expect it to remain so. The long-running deflationary environment in the country has led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 55% at present. The liabilities/net assets ratio for Japan’s approximately 1 million business corporations has declined from a highly leveraged 4 times in the mid-1990s to a healthy 129% as of June 2018, but corporate borrowers prioritize cash flow for paying down existing debt, rather than taking out new loans for investment. This comes even as the average interest rate on new bank loans has declined by 100 basis points over the past decade to below 0.7%. Facing such a tough environment in its home market, MUFG has expanded its overseas business significantly since 2010, with overseas loans comprising 40% of total loans as of March 2018, compared with 21% in March 2011. Mitsubishi UFJ Americas Holdings, the holding company for California-based Union Bank, contributed 11% of total profit in the year ended March 2018, while Krungsri (the fifth-largest bank in Thailand, 77% owned by MUFG) contributed 7% and equity-method earnings of affiliate Morgan Stanley contributed 17%. MUFG is also in the process of making Indonesia’s Bank Danamon a consolidated subsidiary and owns roughly 20% stakes in banks in the Philippines and Vietnam.In our view, MUFG should be able to achieve returns commensurate with the cost of equity in the growing markets of Southeast Asia where it has scale and can import some expertise from more developed markets, but it will struggle to earn good returns in North America where the market is competitive and its costs are high. The key to MUFG’s overall profitability remains its domestic franchise, which is mostly dependent upon the macroeconomic environment (level of interest rates, and intensity of loan demand) but also MUFG’s ability to trim costs as it reconfigures operations for a more digitalized banking era.