Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) reported profits attributable to owners of parent of ¥852.3 billion ($7.0 billion) for the first nine months (ended Dec 31) of fiscal year ended Mar 31, 2016, down 8.1% year over year.

For the period under review, an increase in general and administrative (G&A) expenses and decreased gross profits negatively impacted the results. However, a rise in net interest income and fee revenues served as tailwinds.

Performance in Detail

Gross profits for the period ended were ¥3.1 trillion ($0.03 trillion), down slightly year over year. The decline was mainly due to decreased net gains on debt securities, mostly offset by elevated overseas loan business net interest income and increased net fees and commissions from overseas business.

The period under review reflected a rise of around 1% in net interest income, which came in at ¥1.6 trillion ($0.01 trillion). For Mitsubishi UFJ, trust fees along with net fees and commissions totaled ¥1.04 trillion ($0.009 trillion), up 3% year over year. Further, net business profits came in at ¥1.17 trillion ($0.001 trillion), down 4% year over year.

The balance of securitized products and related investments as of Dec 31, 2015 increased to ¥3.17 trillion ($0.026 trillion) in total, reflecting a fall of ¥0.22 trillion from the balance as of Mar 31, 2015. The decrease was mainly due to reduced highly rated collateralized debt obligations (CLOs).

Mitsubishi UFJ’s total credit costs at December-end came in at ¥59.1 billion ($0.48 billion) as compared with a benefit of ¥30.9 billion ($0.29 billion) in the prior-year comparable period. The credit costs resulted from increased specific allowance for credit losses and a fall in reversal of credit costs.

Net gains on equity securities decreased 19.4% year over year to ¥63.6 billion ($0.52 billion). Gains decreased mainly due to lower gains on sale of equity securities.

Other non-recurring losses were ¥24 billion ($0.20 billion) compared with ¥5.4 billion ($0.05 billion) in the prior-year period.G&A expenses climbed 2.1% year over year to ¥1.93 trillion ($0.016 trillion), mainly due to higher costs in the overseas businesses, which was attributed to the depreciation of the Japanese yen.

Capital Position

As of Dec 31, 2015, Mitsubishi UFJ reported total loans of ¥113.5 trillion ($0.94 trillion), wider than ¥112.0 trillion ($0.94 trillion) as of Sep 30, 2015. The increase was primarily due to higher demand in overseas loans and domestic corporate loans.

Further, deposits climbed to ¥156.1 trillion ($1.30 trillion) from ¥154.5 trillion ($1.29 trillion) as of Sep 30, 2015, mainly driven by higher domestic individual and overseas deposits.

Total assets stood at ¥295.8 trillion ($2.46 trillion), up from ¥289.2 trillion ($2.41 trillion) as of Sep 30, 2015. Net unrealized gains on securities available for sale increased to ¥3.5 trillion ($0.029 trillion) from ¥3.1 trillion ($0.026 trillion) as of Sep 30, 2015. The rise stemmed from increases in unrealized gains on domestic equity securities.

Moreover, total net assets were ¥17.2 trillion ($0.14 trillion), up from ¥17.1 trillion ($0.14 trillion) as of Sep 30, 2015. Non-performing loan ratio declined 6 basis points from Sep 2015 to 1.01%, primarily due to a reduction in non-performing loan balances and rise in total loan exposure.

Outlook

Mitsubishi UFJ Financial reiterated its target of ¥950 billion of consolidated net income for the fiscal year ending Mar 31, 2016. Total credit costs are expected to be ¥120 billion for fiscal 2016.

Our Viewpoint

Though Mitsubishi UFJ’s strong business model and diversified product mix is encouraging, a lower gross profit poses concern. Moreover, we are wary about the heightening competition, increasing expenses and volatility in the Japanese economy. Mitsubishi UFJ currently carries a Zacks Rank #4 (Sell).

Competitive Landscape

Including certain one-time expenses, Deutsche Bank AG (DB - Analyst Report) reported net loss of €2.1 billion ($2.3 billion) in the fourth quarter of 2015 that compared unfavorably with net income of €441 million ($550.5 million) in the prior-year quarter. Loss before income taxes came in at €2.7 billion ($3.0 billion), which compared unfavorably with an income of €253 million ($315.8 million) in the prior-year quarter.

Other foreign banks that are expected to release results soon include The Royal Bank of Scotland Group plc (RBS - Snapshot Report) and UBS Group AG (UBS - Analyst Report). Royal Bank of Scotland and UBS will report fourth-quarter 2015 results on Feb 26 and Feb 2, respectively.