三菱日联金融集团

Mitsubishi UFJ Financial Group's first-quarter fiscal 2026 (ending March 2027) net income rose 48% year on year. Growth was broad-based, as interest rate tailwind and loan growth drove net interest income, while fee income, trading income, and Morgan Stanley contribution were also robust.

Why it matters: MUFG kept fiscal 2026 net income guidance of JPY 2.7 trillion unchanged, as that already factored in the June Bank of Japan rate hike and a mid-3% federal-funds rate. But we fine-tuned our net trading income assumptions, given strong first-quarter results, bringing our forecasts 4% above guidance. Domestic interest rate spread widened by 25 basis points year on year, as asset yields rose more than liability yields. We now expect the Fed to delay rate cuts until 2027 but expect repricing of higher-yielding overseas assets to partly offset stronger domestic net interest margins. The robust results took first-quarter reported annualized return on equity to 14% from 11% last year, ahead of its full-year 12% target. We believe MUFG's strong capital generation capabilities give room for it to conduct further buybacks in the second half of fiscal 2026.

The bottom line: We maintain our fair value estimate of JPY 2,840 ($18 per ADR) for no-moat MUFG, given immaterial changes to our earnings forecasts. We think shares look expensive at current levels, and benefits of Japan policy rate normalization appear largely priced in. We forecast total fiscal 2026 buybacks of JPY 200 billion, including the JPY 100 billion buyback program completed on June 26. This is supported by further security sales, which could improve capital efficiency. We believe further buybacks in the second half could provide support to shares.

Key stats: Annualized credit costs were benign at 21 basis points, and nonperforming loan ratio declined to 0.80% from 0.96% as of the end of March. Our full-year credit cost forecast is unchanged at 25 basis points, in line with MUFG's guidance of JPY 350 billion.

Our fair value estimate is $18 per share. This is 1.35 times our March 2027 book value per share and represents a 3.4% yield based on MUFG’s plan to pay a JPY 96 dividend for the fiscal year ending March 2026.

Our base-case scenario assumes that group net interest margin widens by around 4 basis points per year through fiscal 2028 and 2-3 basis points thereafter, that fee income grows at 10% in fiscal 2026 before slowing to around 3% in fiscal 2029, that expenses rise at a 4% CAGR, and that credit costs remain at 25 basis points.

Our forecasts lead to an average return on equity of 11.4% over the next five years, compared with a historical average of 6.1% over the past decade. We use an 8.7% cost of equity to derive our fair value.

We do not believe MUFG has an economic moat. It has some degree of market power owing to its position as the largest bank in Japan, with an 8.4% share of loans and 11.8% of deposits as of March 2025, roughly 30% larger than its domestic rivals SMFG and Mizuho, but its status as the country’s top bank also requires it to be especially mindful of its obligations to the broader Japanese society, and we believe it needs to be especially prudent and wary of aggressive pursuit of profits if other stakeholders could be negatively affected by its actions.

Outside of Japan, MUFG has managed to gain control of the third- and sixth-largest banks in Thailand and Indonesia, respectively, something that has proved difficult for foreign acquirers (Singapore’s DBS failed to acquire Bank Danamon before MUFG finally succeeded), but both of these banks have lower average ROEs than the top banks in their countries, perhaps reflecting their histories of frequent ownership changes.

In Japan, MUFG may have narrow moats in certain of its businesses, such as its 40%-owned Acom consumer finance subsidiary and asset management/investor services, which we estimate earn ROEs of around 15% and 20%, respectively, but we do not see any advantage for MUFG in the larger retail banking business, where regional banks in dominant in their home regions and customers are price-sensitive.

MUFG has improved its capital allocation, selling its underperforming US business, adjusting bond risks and increasing dividends and buybacks.

MUFG has a strong presence in multiple banking markets in Southeast Asia that are underbanked and offer long-term secular growth.

MUFG's status as Japan's largest bank stock makes it a recipient of favor for overseas investors who expect interest rates in Japan to rise.

Despite significant improvement, MUFG’s ROE is still lower than that of many large global banks.

Integration of acquired banks in Southeast Asia could lead to unexpected risks.

MUFG's dependence on equity-method income from Morgan Stanley for a large chunk of its earnings leaves it vulnerable to any deterioration in the affiliate's performance.