Growth Is Tough for Godzilla-Sized Banks

Things don't appear to be getting any easier for Mizuho Financial Group (NYSE: MFG) and Mitsubishi UFJ Financial Group (NYSE: MTU). These massive banks, each with more than $1 trillion in assets, finally have respectable balance sheets, but they're finding that driving growth out of such a huge asset base isn't very easy.

The problem at both banks is that operating expenses are growing more quickly than the banks can increase interest income and fee income, although at least interest income and fee income are growing. In Mizuho's case, this means that return on assets dipped from an already anemic 0.6% last year to 0.4% this year.

Mizuho, however, expects next year to be an improvement, because it views a large portion of its increase in costs to be strategic and necessary for future growth. Mitsubishi UFJ also plans to see its recurring earnings increase next year, but net income will be down slightly, largely because one-time gains will be much smaller.

Both banks expect their core businesses to continue to strengthen and are increasing their dividend payments as a signal that business should continue to improve. Mizuho is also planning to buy back shares and retire those that are repurchased. Mizuho and many Japanese banks are benefiting from funds flowing into foreign investment funds, which help to increase fee revenue.

The bottom line and metrics for these banks still don't paint a pretty picture. Mizuho and Mitsubishi UFJ appear cheap on a book-value basis, with price-to-book value ratios of 2.1 and 1.8, respectively, but those low book values have correspondingly low returns on assets, making the stocks less cheap than they appear. The table below shows how Mizuho and Mitsubishi UFJ stack up against some other large banks around the globe.

Bank	Price/Book	Return on Assets
Mitsubishi UFJ	1.8	0.2%
Mizuho	2.1	0.4%
HSBC (NYSE: HBC)	2.9	0.9%
Citigroup (NYSE: C)	4.0	1.1%
Bank of America (NYSE: BAC)	4.2	1.5%

Source: Capital IQ, a division of Standard & Poor's.

Mizuho and Mitsubishi UFJ are in far better shape than they have been in quite a long time. Banks with large asset bases may have slight competitive advantages in scale, but they typically have trouble quickly responding in a very competitive industry. There are signs that two of the big Japanese banks are heading in the right direction, but if you're interested in Japanese banks that might be a bit more nimble, I'd consider checking out Bank of Yokohama or Tokyo Star Bank, too.

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Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.