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Mitsubishi UFJ sinks even as bank posts better than expected profits

posted on February 3, 2014 at 8:17 pm
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Shares of Mitsubishi UFJ Financial Group (8306.JP in Tokyo or MTU in New York) kept on tumbling today despite unexpectedly positive earnings for the third quarter. Net income climbed to 255 billion yen ($2.5 billion) in the three months ended on December 31. That was a 5.4% increase from the December quarter of 2012 and beat the average estimate of 200 billion yen by analysts surveyed by Bloomberg. The bank is now 86% of the way to its profit target for fiscal year that ends on March 31 2014.

So why is the stock down 12% from December 31 to the close on February 3? And why does it look poised to fall some more in the short term? (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ At the $5.88 February 3 close the ADRs traded less than 1% below my original March 26, 2013 purchase price of $5.92. I’m leaving my target price at $7.10.)

The problem is worry about the bank’s exposure to the sinking Japanese stock market and brutally low loan margins. Much of Mitsubishi’s higher than expected profit was a result of gains in its own stock holdings in a soaring Tokyo market and in higher fee income. Net interest margins slipped 3 basis points in the quarter to 1.15 percentage points, a record low. (On the other hand, about 80% of the bank’s loans are at floating rates so if margins do increase with a return of inflation, the bank will be in good shape.)

If Japan’s economic recovery were to lead to a pick up in loan demand—especially higher margin loan demand from smaller Japanese companies—a deposit-rich bank such Mitsubishi would be a major beneficiary. But with the April increase in the national sales tax to 8% from 5% raising worries about the Japanese economy, profit growth that beats estimates again isn’t exactly certain.

The bank hasn’t been standing still waiting for loan demand to pick up. It recently completed a purchase of a majority stake in Bank of Ayudhya, Thailand’s fifth largest lender. (Whatever the long term upside of that move, buying a Thai bank during a political crisis in Bangkok doesn’t exactly boost your stock price in the short term.) The deal is Mitsubishi’s biggest outside of Japan.

The bank has also announced that in April it will buy back 390 billion yen in preferred shares that it sold in 2008 to domestic Japanese insurance companies in order to add capital during the global financial crisis.

It’s probably early to buy these shares—worries about the April tax increase and its effects will continue to weigh on the Tokyo market through the spring or at least until the Bank of Japan pours more yen into the economy in order to offset the effects of the tax increase.

If you’re daring, you might try to dollar-cost average into the shares. Or you can just wait until you see a turn in the current correction in the Tokyo market or in the yen/dollar exchange rate. The yen closed today at 101.02 to the dollar, breaking the 102 mark that had held for the past week.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Mitsubishi UFJ as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

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