Japanese megabanks Mitsubishi UFJ Financial Group
On an asset basis, few banks in the world can stack up with Mitsubishi UFJ and Mizuho, which have $1.3 trillion and $1.6 trillion in total assets, respectively. Banks with total assets in the same ballpark include Citigroup
Unfortunately for Mitsubishi UFJ and Mizuho, sheer size didn't translate into increased profits through the first nine months of the year. Revenues increased for both banks, but earnings per share were 68,333.70 yen, or $564.27, for Mitsubishi UFJ vs. 79,982.85 yen ($660.47) a year ago, and Mizuho experienced a decline to 49,662.96 yen ($410.10) from 52,690.46 yen ($435.10). Based on my calculations, it also appears that both banks came in with net income margins of below 1%, with Mitsubishi UFJ at 0.96% and Mizuho at 0.69%, which aren't out of line with the banks' historical performances.
On the brighter side, non-performing assets are becoming less of a problem for each bank, as non-performing loans were down to 1.43% of assets for Mizuho and 1.33% for Mitsubishi UFJ. This is largely a result of the economic recovery, but the banks' charge-offs of bad loans over the past few years has played a part as well. But the bad news returns when we look at deposit growth. Without deposit growth, both banks are forced to take on higher-cost debt to grow, and when you're already a massive institution, driving meaningful deposit growth is difficult. Compared with last year, Mizuho upped its deposit balances by 1.5%, and at Mitsubishi UFJ, deposits actually declined by about 0.9%.
Big banks may have more stability and be less likely to fail, but I have a hard time believing that they will outperform, because more assets also require more management, more business diversity, and often more bureaucracy and less focus. The burden of success can be very heavy, and I think that's what we see here. For this reason, I'm inclined to avoid these two big banks and large banks in general unless they're tremendously undervalued. Right now, I don't believe these two are attractively valued. There are smaller, more nimble banks in Japan with a reasonable opportunity to take some market share from these giants while enjoying an economic recovery that looks likely to continue.
Interested in learning more about companies that do the bulk of their business outside the U.S.? Take a free trial of our new international investing service, Global Gains.
At the time of publication, Nathan Parmelee had no financial interest in any of the other companies mentioned. Bank of America is a Motley Fool Income Investor selection. The Motley Fool has an ironclad disclosure policy.