MUFG: Banking on Japan’s rate hikes for more upside

• Record earnings momentum: MUFG’s 1QFY2026 net profit surged 48% YoY to JPY809.4 billion, with net interest income, fee income and trading income all delivering double-digit growth.
  
  
• BOJ rate hikes remain the key catalyst: Higher lending rates have risen faster than deposit costs, widening MUFG’s domestic deposit-lending spread from 0.95% to 1.16%. Higher demand for hedging and investment products is supporting fee income.
  
  
• NIM tailwinds could persist through FY2027: Further BOJ hikes, coupled with slow deposit repricing, could continue widening spreads before NIMs eventually plateau in late FY2027 to FY2028 under the base-case scenario.
  
  
• Asset quality remains resilient: MUFG’s NPL ratio improved to 0.80%, although rising interest rates and weaker external conditions could push credit costs higher in the coming quarters.
  
  
• Shareholder returns add to the investment case: Cross-shareholding unwinding can free up capital for buybacks, while six consecutive years of dividend growth and a target payout ratio of around 40% should support rising shareholder returns. We expect the NYSE-listed ADR to reach USD28.0 by FY2028, implying 23.1% upside and 2.1% dividend yield.

As Japan continues to raise interest rates, the country’s megabanks are emerging as clear beneficiaries. Mitsubishi UFJ Financial Group (MUFG), Japan’s largest bank holding company, delivered a stellar quarter for the three months ended 30 June 2026, with net profit attributable to owners of the parent surging 48% year-on-year (YoY) to a record JPY809.4 billion.

Following the strong first-quarter results published in early August, MUFG’s US-listed shares (NYSE: MUFG) climbed to an all-time high of above USD23 on 13 August, representing a roughly 44% gain year-to-date. Despite the strong rally, we believe the shares have further room to run.

Broad based earnings growth, lifted by BOJ’s hiking cycle

MUFG’s earnings growth was broad-based, with all three core revenue engines — net interest income, fee income, and trading and other income — delivering double-digit growth in 1QFY2026. While each benefited through a different channel, they share a common catalyst: the BOJ’s shift away from near-zero interest rates, with its policy rate reaching 1.0% in June 2026.

Net interest income (NII) rose 28% YoY to JPY882.3 billion. Domestic loan balances remained strong at JPY76.7 trillion, while the domestic deposit-lending spread widened from 0.95% a year earlier to 1.16%. As lending rates have repriced faster than deposit rates following the BOJ’s rate hikes, the wider spread has translated directly into higher NII (Figure 1).

Overseas lending provided an additional volume tailwind, with the overseas loan balance increasing by JPY11.0 trillion to JPY57.3 trillion. A weaker yen also boosted the reported contribution from overseas NII when translated back into yen.

Figure 1: BOJ rate hikes have widened MUFG’s domestic deposit-lending spread

Fee income was another strong contributor, rising 21% YoY with growth across all customer segments. Higher interest rates are creating greater demand for hedging and derivatives products among corporate and investment-banking clients, while wealth-management customers are rotating towards yield-generating fixed-income and structured products. Rising asset values are also supporting AUM-linked fees.

Trading income and net other operating profits delivered the strongest growth, surging 49% YoY. Treasury income more than doubled from JPY72.2 billion to JPY170 billion. MUFG’s treasury desk, which operates the group’s largest JGB and rates book, was well positioned to benefit from rising short-term rates and curve movements, with its duration shortened to just 1.2 years.

Taken together, the three revenue segments drove net operating profits up 49% YoY to JPY809.0 billion. The breadth of the increase is particularly encouraging: MUFG is benefiting from the changing rate environment across all core banking businesses.

Table 1: BOJ rate hikes lifted MUFG’s gross profit through three channels

	1QFY2025 (JPY Bn)	1QFY2026 (JPY Bn)	YoY Increase	Transmission Mechanism
Net interest income	690.7	882.3	28%	Direct repricing of loan yields faster than deposit costs
Trust fees + net fees & commissions	499.4	603.7	21%	Greater demand for hedging products, wealth rotation into higher-yielding assets and higher AUM-linked fees
Net trading profits + net other operating profits	168.1	249.8	49%	Treasury / rate desk monetising rate volatility and curve moves
Total gross profit	1,358.40	1,736.00	28%
Net operating profits	542.9	809.0	49%
Source: MUFG 1QFY2026 earnings report. Data as of 30 June 2026.

Outside its core businesses, MUFG’s stake in Morgan Stanley also made a meaningful contribution. Morgan Stanley’s second-quarter net income rose nearly 60% YoY, supported by record revenue from strong deal activity and record trading revenue. Morgan Stanley contributed JPY222.2 billion to MUFG’s net income during the quarter, equivalent to roughly 27% of the group total.

BOJ rate hikes still have ample room to support core earnings ahead

The prospect of further BOJ rate hikes remains very much alive. In its 2026 Outlook Report released on 30-31 July, the central bank indicated that core CPI could accelerate to a level clearly above 2% from the second half of fiscal 2026, potentially paving the way for further monetary tightening. The latest BOJ minutes, released on 10 August, also showed two members explicitly favouring faster rate hikes. More importantly, wage growth — a key precondition for sustained policy normalisation — remains supportive. The 2026 Shunto wage negotiations delivered a third consecutive average pay increase of more than 5%, while real wages remained positive in 1H2026.

Against this backdrop, Japan’s three megabanks jointly announced increases in ordinary deposit rates from 0.3% to 0.4%, alongside a 25-basis-point increase in short-term prime lending rates to 2.375%, effective 3 August 2026.

The transmission remains favourable for banks. Loan rates have broadly passed through BOJ rate hikes at close to one-for-one, while deposit rates have risen more slowly. This lag continues to support the widening of net interest margins (NIMs). Given MUFG’s substantial domestic loan book of JPY76.7 trillion, even a small increase in the lending-deposit spread can translate into a meaningful increase in absolute NII.

We believe this NIM tailwind still has considerable room to run, potentially through FY2026 and FY2027. NIMs typically plateau around two to three quarters after the final central-bank rate hike, suggesting that the point at which deposit costs begin to catch up could arrive only in late FY2027 to FY2028, based on estimations using 1.5% terminal rate.

Table 2: NIM plateau windows are likely to occur in late FY2027 to FY2028

Terminal policy rate	Additional spread widening	Est. terminal rate reached	Est. plateau window	Rationale
Low: 1.25%	13 bp	~mid-2027 (1 more hike)	~Mid-to-late FY2027 (~12 months out)	Fewer hikes to absorb; loan-side repricing, with a roughly 1–2 quarter lag, completes relatively quickly while the deposit-side catch-up is shorter.
Base: 1.5%	26 bp	~Jun-2027 (2 more hikes: Dec-26, Jun-27)	~Late FY2027-FY2028 (~18-24 months out)	The spread continues widening with each hike before plateauing roughly 2–3 quarters after the final hike, once deposit repricing catches up.
High: 2.0%	52 bp	~end-2027 (4 more hikes)	~FY2028 (~24+ months out), later if hikes continue beyond 2.0%	The widening persists for longer, although a larger cumulative rate increase could encourage deposit migration into JGBs and money-market funds sooner.

The wealth-management business should also benefit from the higher-rate environment. As Japanese households move away from cash and deposits towards higher-yielding assets, demand for investment products should continue to rise.

Government policy provides an additional structural tailwind. Under the Takaichi administration, Japan aims to increase the proportion of household financial assets held in stocks, investment trusts and bonds to 40% by 2040, from 23% at the end of 2025. The shift is already underway: more than 7 million new NISA accounts were opened over the past year, taking the total above 28 million by end-2025, while net inflows into mutual funds more than doubled to JPY15 trillion in 2025. As NISA participation continues to expand, alongside the planned launch of new features such as children’s NISA account in 2027, MUFG’s fee income should have a multi-year runway for growth.

The steepening JGB yield curve also provides another potential source of treasury income. The 10-year JGB yield climbed to around 2.93% by mid-August 2026, its highest level since 1996, while 2-year yield stood at around 1.67%, leaving a 10Y-2Y spread roughly 126 basis points – its widest level in more than a decade. This could create opportunities for MUFG’s treasury operations to benefit from improved carry and curve dynamics.

Overall, we remain optimistic about the strength of MUFG’s core earnings through FY2026 and FY2027.

Asset quality remains healthy, but credit costs may rise

MUFG’s headline asset-quality indicators remain healthy. The group’s NPL ratio fell to 0.80% as of June 2026, from 0.96% in March 2026 and well below the cyclical peak of 1.51% recorded in March 2024 (Figure 2). Bankrupt, doubtful and restructured loans all fell from the previous quarter. Improving corporate profitability has made debt servicing easier, while the maturity and repayment of COVID-era “zero-zero” interest-free, unsecured SME loans have also reduced the restructured-loan component.

Figure 2: NPL declined as asset quality improved significantly in Japan

The overseas picture is more mixed. NPLs associated with US commercial real estate loans have declined, but credit quality in parts of Asia has weakened. MUFG’s majority-owned Krungsri in Thailand and Bank Danamon in Indonesia are both exposed to consumer and SME lending in economies facing slower growth, elevated household debt — particularly in Thailand — and tighter financial conditions.

Total credit costs increased to JPY72.0 billion from JPY46.9 billion a year earlier, with the deterioration coming entirely from specific credit costs. A smaller reversal of previously booked provisions related to Thailand and Indonesia contributed to JPY12.1 billion of the increase. A small general allowance release of JPY5.9 billion also contributed modestly to the increase, partly offset by higher gains on loans written-off.

With interest rates continuing to rise, we expect provisions for credit losses to increase gradually as debt-servicing costs rise. Middle East tensions and the resulting inflationary pressures could also weigh on borrowers’ financial conditions, particularly among SMEs.

That said, management’s FY2026 credit-cost guidance of JPY350 billion remains manageable by MUFG’s historical standards (Figure 3).

Figure 3: Total credit costs are likely to rise amid higher rates and uncertain external conditions

Another area that falls under our radar is MUFG’s bond portfolio. Held-to-maturity bond unrealised losses widened to JPY1.3 trillion as of 30 June 2026, with most of the losses coming from domestic bonds as JGB yields continued to rise. This could invite comparisons with the US regional banking crisis in 2023, when rapid Fed rate hikes forced banks such as Silicon Valley Bank and Signature Bank to sell securities at significant losses to meet deposit withdrawals. However, the two situations are materially different.

MUFG had JPY80.6 trillion in cash and a broad, stable deposit funding base, making a forced-sale scenario unlikely. More importantly, since September 2025, the bank has actively shortened the duration of its bond portfolio from 3.1 years to 1.2 years, limiting its exposure to further mark-to-market losses.

Available-for-sale securities recorded bond losses of JPY287.9 billion, but the overall AFS portfolio remained in a net unrealised gain position of JPY3.1 trillion. MUFG’s substantial embedded gains on domestic equity holdings more than offset the bond losses. With Japanese equities continuing to perform strongly, these equity gains provide an additional cushion to book value.

Cross-shareholding unwinding, buybacks and dividends strengthen shareholder returns

MUFG’s continued unwinding of cross-shareholdings is another important source of shareholder value. The initiative goes beyond compliance with Japan’s Corporate Governance Code. Cross-shareholdings consume risk-weighted capital without generating recurring core banking income, so reducing these positions allows MUFG to release capital and redeploy it towards more productive uses.

From FY2024 through June 2026, MUFG had sold JPY460 billion of equity holdings against its JPY700 billion target under its Mid-Term Business Plan. This leaves around JPY240 billion still to be unwound over the next three quarters.

The process can directly support CET1 capital and, in turn, provide greater capacity for share buybacks. MUFG has been conducting buybacks since late 2021, typically in tranches of around JPY100–400 billion every four to six months. The latest JPY100 billion buyback was completed in June 2026. MUFG’s CET1 capital ratio stood at 9.2% as of March 2026, against a target range of 9.5–10.5%. With capital still below target, buyback sizes are likely to remain calibrated to capital generation on a quarter-by-quarter basis in the near term.

If CET1 capital rises back above the target range, potentially helped by further cross-shareholding unwinding, we believe MUFG could resume larger buybacks, providing additional support to EPS growth.

Dividends provide another increasingly important component of total shareholder returns. MUFG has increased its dividend for six consecutive fiscal years, with the pace of growth accelerating from low double-digit percentages before 2023 to a peak increase of 56% in FY2024. In FY2024 and FY2025, when earnings exceeded expectations, the bank raised its second-half dividend relative to the interim payout. This suggests that management’s initial dividend guidance may function more as a floor than a ceiling when earnings outperform.

With a target payout ratio of around 40% of net income, continued earnings growth should translate into higher dividends of JPY107 and JPY111 per share in FY2027 and FY2028 respectively. We expect MUFG’s dividend yield to average around 2.1% through FY2028 after 30% withholding tax (Figure 4).

Figure 4: MUFG’s dividend is expected to grow alongside continued earnings strength

MUFG offers 23.1% upside, with 2.1% dividend yield

MUFG is well positioned to benefit from Japan’s rising-rate environment, with the BOJ's policy normalisation providing a supportive earnings backdrop.

The benefit is also broad-based, extending from higher NII to stronger fee income, treasury gains and wealth-management revenue. At the same time, healthy asset quality, capital recycling, share buybacks and progressive dividend growth provide additional support for total shareholder returns.

We believe the market has yet to fully price in the duration of the current earnings cycle. MUFG’s NYSE-listed ADR (NYSE: MUFG) is expected to reach USD28.0 by FY2028 based on a fair P/B ratio of 1.75X, representing 23.1% upside from current levels, while the dividend provides an additional source of return. We therefore recommend investors to tap on the growth potential of Japan’s rising interest rate environment via banking stocks such as MUFG.

Table 3: Earnings table

NYSE: MUFG	FY2025	FY2026E	FY2027E	FY2028E
EPS (JPY)	213	241	267	278
EPS Growth	33.3%	13.2%	10.7%	3.9%
P/E Ratio (X)	16.5	14.6	13.2	12.7
Book value per share (JPY)	2097	2227	2373	2526
P/B Ratio (X)	1.7	1.6	1.5	1.4
Dividend Yield (after 30% withholding tax)	1.7%	1.9%	2.1%	2.2%
Target Price NYSE ADR (USD)				28.0
Upside Potential				23.1%
Source: Bloomberg Finance L.P., iFAST Estimates Data as of 18 August 2026.

Figure 5: Price vs EPS

Declaration

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.