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Mitsubishi UFJ plans further push in US

Japan’s largest lender Mitsubishi UFJ Group (MUFG) already has a substantial offshore presence in broader Asia and the United States, but is planning to extend that footprint further according to Bloomberg. The bank is looking to bulk up its investment banking unit to compete with big US lenders such as Wells Fargo and JPMorgan Chase.

In an interview with Bloomberg, Jon Lindenberg, the bank’s deputy head of investment banking in the Americas said, “We’re evolving,” and “There are a lot of growth areas. We’re just tapping right now where many people already exist.”

The Bloomberg article said MUFG’s goal was to expand from traditional strengths such as financing energy projects – where MUFG is a leader, especially in clean energy – and become a bigger player in areas such as asset-based finance and receivables finance. MUFG’s strategy will also include underwriting and selling more debt in the US to investors (rather than holding as loans on its books) and more high-yield bonds and leveraged loan activity.

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MUFG is pushing into aviation finance as well, with some recent hires in the area. The outlook for global aviation is robust, especially in Asia. This is something we have highlighted as part of our investment case for the Macau casino operators, such as Wynn Macau, MGM China and Sands China, whom we expect to benefit from increased outbound Mainland China tourism in the years ahead.

MUFG and other Japanese peers have increasingly been looking for growth opportunities outside their domestic market in recent years as a function of the crimping of net interest margins and well-documented demographic challenges.

Overseas operations (i.e. MUAH, KS & Morgan Stanley in the below chart) have become meaningful contributors to operating profit:

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The Bloomberg article also referred to Sumitomo Mitsui Financial Group’s recent announcement it is planning on adding about 250 new positions in its overseas securities business over the next few years. We are overweight the Japanese megabanks (MUFG, Sumitomo and Mizuho) along with regional player Bank of Kyoto, and hold these positions in the Fat Prophets Global Contrarian Fund, and the Global and Asian Managed Account Portfolios.

All are highly leveraged to an eventual uptick in the interest rate environment at home that we anticipate occurring as bumper profits at corporates and an extremely tight employment market place eventually vanquish deflationary spirits. Recent macroeconomic data is supportive of this thesis playing out, although inflation has been stubbornly low (but more positive) to date.

As a group, the Japanese banking names we are exposed to are priced at attractive levels of below 0.7 times book value, with strong balance sheets, so we can afford to be patient and see more upside potential than downside risk, particularly with our view that the Japanese yield curve will steepen over time.

Disclosure: The Fat Prophets Contrarian Fund declares a holding in Mitsubishi UFJ, Sumitomo Mitsui Financial, Bank of Kyoto, Mizuho, Wynn Macau, MGM China and Sands China.

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