Mitsubishi UFJ Financial Earnings: MUFG’s Large Buyback Is Only a Mild Positive Surprise

We maintain our JPY 1,270 fair value estimate for Mitsubishi UFJ Financial Group, or MUFG; this is almost equal to the current share price and represents 0.82 times book value as of September. MUFG shares have risen 75% since this time last year, when they still traded around 0.5 times book, as investors have grown hopeful that Japan’s negative-interest-rate policy, or NIRP, may end soon and Japanese banks’ returns on equity, or ROEs, will come closer to their cost of equity, which we estimate to be around 8%-9%. MUFG’s current valuation of around 0.8 times book is the first time it has traded at this level since before the Bank of Japan announced the NIRP at the beginning of 2016. We think that Japan’s path toward higher interest rates will be only gradual and think MUFG’s current valuation of around 0.8 times book value is appropriate. This is because we do not project MUFG’s ROE will exceed its cost of equity within our forecast horizon.