Mitsubishi UJF--it's not a bank but a portfolio of stocks that will rise with a falling yen

03/26/2013 6:07 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s more accurate to think of Mitsubishi UFJ Financial Group (MTU in New York) as a securities portfolio rather than as a bank right now. And from that perspective, Mitsubishi UFJ is likely to be one of the biggest beneficiaries of the downward trend in the yen that I expect to resume as soon as the financial markets move past the chaos that is Cyprus.

For an indication of what the weak yen does to the income statement at Japan’s biggest bank just take a look at the February 1 report of third quarter earnings. Third quarter profit doubled as the rally in the Tokyo stock market based on a falling yen led to higher fee income and smaller stock portfolio losses. That doubling in earnings came even though as a bank Mitsubishi’s business continued to lag. Income from lending—a core bank business, no?—fell by 7.8%, for example.  Making up for that weakness was a big reduction in impairment charges on the bank’s equity portfolio—Japanese banks typically take big equity positions in the companies they lend to—and an increase in earnings from the bank’s brokerage unit.

Impairment charges from the bank’s shareholdings dropped to 90.9 billion yen in the nine months that ended on December 3. That was a 41% drop from the same period a year earlier and was down from 174 billion yen in the first six months of 2012.

Earnings at the company’s brokerage business, Mitsubishi UFJ Securities Holdings, rebounded to a 10 billion yen profit from a loss of 12 billion yen in the year-earlier quarter.

With the Bank of Japan signaling that it will announce aggressive moves to weaken the yen at its April 3 to 4 meeting, I think we’re likely to see a resumption of the rally in Japanese stocks that has stalled as turmoil in the EuroZone has led to a flight to safety in the yen that stopped the decline of that currency.

Japan’s big banks give you broad-based exposure to any upward move in Japanese equities. Any of Japan’s Big 3 banks can do the job in your portfolio. I prefer Mitsubishi UFJ because the ADRs trade with a 1.2 million unit average daily volume in New York. That gives them better liquidity—easier entrances and exists—than ADRs of Sumitomo Mitsui (SMFG in New York with 670,000 unit volume) or Mizuhi (MFG in New York with 530,000 unit volume.)

I’m not looking to hold Mitsubishi UFJ for any longer than the yen decline continues. I’m adding the ADRs to my Jubak’s Picks portfolio http://jubakpicks.com/ today with an initial target price of $7.10, about 22% above the $5.92 New York close today, March 26, on the ADRs. I’d re-evaluate policy at the Bank of Japan if the ADRs get to that level—or if it looks like the yen’s downward trend has stalled to see how much life there is left in a falling yen.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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