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Pan Asia Research Equity – Asia Research Pan Asia Research www.equities.htisec.com Target Price ¥670.0 Current Price ¥560.9 Mitsubishi UFJ Financial Group (8306 JP) % Upside 19% Japan’s Largest and Most Global Bank at 0.51x PBR Banks More Positives than Negatives Japan Summary: We initiate coverage on Mitsubishi UFJ Financial Group (MUFG) with a BUY 26 Apr 2016 rating. It has the largest overseas presence of the Japanese mega-banks, and is ahead of its Japanese rivals particularly in the US, where the top-20 player Union Bank is a wholly owned unit. MUFG holds a 22% stake in Morgan Stanley (MS US) and majority control of BUY Thailand’s fifth-largest lender, Bank of Ayudhya (BAY TB, popularly known as Krungsri). Its global importance also makes it subject to global regulation. Although already Target: ¥670.0 meeting fully loaded Basel III capital requirements, discussions about the standardized % Upside: 19% approaches and internal models to calculate risk-weighted assets (RWA) pose a risk given MUFG’s below-average RWA density. However, valuations of around 0.5x PBR seem to 52wk Low ¥560.9 52wk High discount a higher-than-warranted degree of pessimism on domestic profitability. ¥446.2 (-20%) 26 Apr 2016 ¥935.0 (67%) Initiation Target Price and Catalyst: Our target price of ¥670 is based on a 10% discount to the five-year average PBR, and implies 19% upside from the last close. We take the view that more of the Bank of Japan’s (BOJ) actions should be beneficial for bank stocks than Basic Share Information detrimental. Market cap ¥7,947b / US$71.69b Daily volume (3mth) US$485.6m Shares outstanding 14,169018m Free float 84.5% 1 yr high ¥935.0 Earnings: We expect EPS to decline 7% in FY3/17 compared with FY3/15, while 1 yr low ¥446.2 consensus expectations (which we think are likely to be lowered in coming months) are Foreign shareholding 39.9% for a 4% rise. The main factor behind our expected lower profit in FY3/17 is a Last HTI contact w/ Co 26 Apr 16 normalization of credit costs. Further narrowing of NIM is a secondary driver. Valuation: MUFG’s PBR of 0.51x (December 2015) compares with a five-year average of 0.67x. The weighting of bank stocks in TOPIX has recently been at its lowest since late 2002/early 2003, the absolute bottom of the country’s decade-long financial crisis when several major banks were thought to be at risk of failure. It is not clear that the present Price/Volume situation is nearly as dire. MUFG’s dividend yields 3.3% in a currency whose risk-free Price Close Rel. to Japan Nikkei 225 (rhs) rates are near zero, and our forecasts assume it also continues to repurchase around 990 111.0 890 104.3 1.5% of its shares annually. Risks to our bullish view include a sharper-than-expected 790 97.7 690 91.0 impact from the BOJ’s negative interest rate policy (NIRP) on domestic bank profitability, 590 84.3 490 77.7 harsher-than-expected tightening of global regulations that could prompt the bank to 390 71.0 300 reduce shareholder distributions or even raise new equity, or a global or Asia-specific 200 100 economic downturn that could increase credit costs and introduce additional Volume m Volume Apr-15 Jul-15 Oct-15 Jan-16 macroeconomic volatility. Source: Bloomberg 1mth 3mth 12mth Mar-14A Mar-15A Mar-16E Mar-17E Mar-18E Trend Absolute 4.7% -7.1% -34.5% Net interest income (¥b) 1,879 2,181 2,104 2,091 2,089 Absolute USD 6.7% -0.7% -29.4% Operating profit (¥b) 1,477 1,483 1,498 1,319 1,369 Relative to NKY 2.1% -11.5% -21.6% Pre-tax profit (¥b) 1,544 1,614 1,649 1,429 1,489 Net income to ord equity (¥b) 968 1,033 1,079 931 970 Net profit growth 15.9% 6.8% 4.4% (13.7%) 4.2% P/E (x) 8.21 7.65 7.23 8.25 7.80 Adjusted P/B (x) 0.63 0.51 0.49 0.47 0.45 Michael Makdad ROE 8.8% 9.1% 9.3% 7.6% 7.5% Haitong International Research Ltd Dividend yield 2.9% 3.2% 3.3% 3.3% 3.3% [email protected] EPS HTI New (¥) 68.33 73.33 77.59 68.02 71.93 Local Knowledge, Global Reach Consensus EPS (¥) 66.74 74.12 75.05 76.92 78.34 Tokyo Office (81) 3 6402 7620 HTI EPS vs Consensus 2.4% (1.1%) 3.4% (11.6%) (8.2%) London Office (44) 20 7397 2700 Source: Company data, Bloomberg, HTI estimates Click here to download the working model Hong Kong Office (852) 2899 7090 This research is the product of Haitong International Research Limited (“HTIRL”), which is authorized and regulated by the Securities and Futures Commission (“SFC”) of Hong Kong. It is issued and distributed by Haitong International or its affiliates in their respective jurisdictions. See Appendix at the end of this document for the HTIRL analyst certification and Important Disclosures and Disclaimers regarding Haitong International and the non-US analyst who prepared this research. Powered by EFA Platform Mitsubishi UFJ Financial Group (8306 JP) Buy Valuation P/E (x) vs EPS Growth 14.0 20.0% 12.0 15.7% Investment Thesis 10.0 11.4% 8.0 7.1% 6.0 2.9% 4.0 -1.4% We initiate coverage on MUFG with a BUY rating and target price of ¥670, based 2.0 -5.7% 0.0 -10.0% on 0.58x PBR. Jul-13 Jul-14 Jul-15 Jul-16 Jan-15 Jan-14 Jan-16 Jan-13 MUFG is one of 30 banks designated as global systemically important banks (G- Rolling P/E (x) (lhs) EPS growth (rhs) Source: Company data, Bloomberg, HTI estimates SIBs) by the Basel-based Financial Stability Board (FSB). We estimate that it has Earnings Trends sufficient capital to meet the fully loaded Basel requirements effective in 2019, but there is still some risk from ongoing discussions about the standardized 20.0% 15.0% approaches and internal models used to calculated risk-weighted assets (RWA), 10.0% given MUFG’s lower-than-average RWA density. Because Japanese banks hold a 5.0% 0.0% lot of Japanese government bonds (JGBs), with zero risk weights, their leverage ratios are also lower than average, independent of RWA calculation. Mar-16E Mar-14A Mar-15A Net profit growth EPS growth MUFG’s PBR of 0.51x is a 24% discount to its five-year average of 0.67x, while we Source: Company data, Bloomberg, HTI estimates forecast ROE to drop to around 7.5% (6% if unrealized gains on securities are included) in FY3/17 and FY3/18, down from 9% and 7%, respectively, at present. Earnings: HTI vs Consensus The dividend yield is 3.2% in a currency whose risk-free rates are near zero. 0% 1% 2% 3% 4% We take the view that more of the BOJ’s actions should be beneficial for MUFG’s HTI EPS HTI vs Consensus stock price than detrimental. The NIRP announced in January only applies to a (top) small fraction of banks’ deposits at the BOJ, and the BOJ has other tools in its Consensus EPS toolbox that can be positive for banks, perhaps even significantly so. 73 74 75 76 77 78 -4% -3% -3% -2% -2% -1% -1% 0% Risks to our view include a sharper-than-expected impact from the NIRP on domestic bank profitability, harsher-than-expected tightening of global HTI P/E regulations that could prompt the bank to reduce shareholder distributions or HTI P/E at Target even raise new equity, or a global or Asia-specific economic downturn that could HTI vs Consensus Consensus P/E (top) increase credit costs and introduce additional macroeconomic volatility. 0 2 4 6 8 10 Source: Company data, Bloomberg, HTI estimates Net Revenue Breakdown (FY3/15) Overseas fees etc., Domestic 13% NII, 26% Title: Source: Overseas NII, 25% Domestic Japan fees, Please fill in the values above to have them entered in your report other, 24% 11% Company Snapshot Note: Excludes equity-method affiliates MUFG is the largest bank in Japan by market capitalization and assets, with a 14% share of Source: Company data, HTI estimates domestic loans as of end-2015. It is one of the largest non-Chinese bank groups globally, with a balance sheet similar in size to HSBC Holdings (HSBA LN) and JPMorgan Chase (JPM US). However, unlike those two, which the FSB puts in the fourth bucket of G-SIBs, MUFG is only in the second bucket, reflecting its greater focus on its home country and somewhat less significant global linkages. Since 2012, MUFG’s international exposure has increased, with overseas business contributing 39% of total gross profit in FY3/15 (up from 25% in FY3/12) and overseas loans growing to 38% from 24% over the same period. Major overseas units include wholly owned MUFG Union Bank (the 19th largest in the US by deposits) and 76.88%-owned Bank of Ayudhya, the fifth-largest Thai lender. MUFG also has two securities joint ventures with Morgan Stanley and a 22% stake in a US investment bank. 26 Apr 2016 2 Mitsubishi UFJ Financial Group (8306 JP) Buy Key Investment Metrics Revenue Growth For the next three fiscal years we see zero top-line growth from the FY3/15 level, as declining revenues from domestic business (down around 2%) offset continued expansion overseas (up by about 5%).
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