Mitsubishi UFJ Financial Group (8306) Strategic Note | Will bank stocks continue to be reevaluated amid rising interest rates?

[Summary]

Mitsubishi UFJ Financial Group (8306, hereinafter MUFG) posted a net profit of 2,427.2 billion yen for parent company shareholders in the fiscal year ending March 2026, marking the highest profit since MUFG's inception. The company has set a net profit target of 2.7 trillion yen and an ROE target of around 12% for the fiscal year ending March 2027, and the profit level has clearly risen a notch.

The central investment theme is the extent to which rising domestic interest rates will be reflected in earnings and valuations. In May 2026, the yield on newly issued 10-year government bonds briefly rose to 2.8%, providing a tailwind for bank stocks. However, rising interest rates not only improve interest margins, but also bring concerns about credit costs, bond valuations, and overseas economies.

While MUFG in the second half of 2026 is likely to be seen as a "large bank stock that will benefit from rising interest rates," its stock price has already risen to the 3,000 yen level. From now on, we will enter a phase where we will not only be looking at whether interest rates will rise, but also the progress of profits, shareholder returns, credit costs, and the stability of overseas financial markets.

First, the conclusion

MUFG is likely to continue to be a key bank stock in the Japanese stock market in the second half of 2026.

The reason is simple: they not only benefit from rising domestic interest rates, but also have a wide range of sources of income, including domestic banks, trusts, securities, asset management, overseas partner banks, and Morgan Stanley-related businesses. They accumulated fee income and overseas profits in an era when there were no interest rates, and on top of that, the normalization of interest rates in Japan.

However, the current stock price is not at a position where it can simply be said that ``bank stocks are still cheap.'' The stock price as of May 22, 2026 is 3,091 yen. Based on actual EPS of 213.16 yen, the PER is approximately 14.5 times, and the PBR has risen to around 1.6 times. The way it is viewed has changed from the previous PBR correction market that was below 1x.

The focus from here on is whether the bank will be evaluated as a bank that can sustain an ROE of around 12%, rather than revising its undervaluation.

What has changed?

The biggest change is in Japan's interest rate environment.

On May 18, 2026, the yield on newly issued 10-year government bonds temporarily rose to 2.8%. A rise in long-term interest rates will boost banks' interest profits through improvements in loan yields and investment yields on securities. When medium- and long-term interest rates rise more than short-term interest rates, expectations for deposit and loan yields and investment income tend to rise.

In MUFG's financial results briefing materials, in its performance targets for the fiscal year ending March 2027, the company expects the increase in yen interest rates to boost profits by approximately 170 billion yen after tax. This is a fairly large number when looking at bank stocks. It's not just a mood; interest rate benefits are also factored into the company's plans.

On the other hand, rising interest rates are not a panacea.

If interest rates suddenly rise, the repayment burden will become heavier for businesses and households, potentially leading to an increase in credit costs. It also affects the price of bonds held by banks. In other words, while rising interest rates are a tailwind for bank stocks, too rapid a rise in interest rates creates other risks.

How to read the financial results

MUFG for the fiscal year ending March 2026 is extremely strong if you look at the numbers alone.

The key point is that the company has set an even higher profit target than the record-high profit itself.

Bank stocks are affected by economic conditions, interest rates, and the credit cycle. Therefore, it is difficult to sustain stock valuations based on temporary peak profits. What the market is looking at is whether profit levels in the mid-2 trillion yen range are temporary, or whether they are at a new cruising speed.

For now, MUFG is giving an explanation closer to the latter. This is because there are multiple pillars of profit due to the combination of rising domestic interest rates, expanding customer revenue, Morgan Stanley-related business, and overseas business including Asia.

Shareholder returns are a supporting factor

Shareholder returns will also be an important support for the second half of 2026.

MUFG expects the annual dividend for the fiscal year ending March 2026 to be 86 yen, and for the fiscal year ending March 2027 to be 96 yen. Calculating the stock price at 3,091 yen, the expected dividend yield is approximately 3.1%.

Regarding share buybacks, we have already implemented 500 billion yen in fiscal 2025. For the first half of 2026, it has been decided to acquire up to 100 billion yen.

I want to look at this a little more carefully.

If you write, "We have announced a new 500 billion yen share buyback," the timing will be off. What should be seen in the second half of 2026 is whether additional returns will be made in the second half in addition to the 100 billion yen acquisition in the first half of FY2026. If profit progress is strong and capital surplus remains, the market is likely to expect additional returns.

Strength of business model

MUFG's strength lies in the fact that it is not just a domestic bank.

In the era of negative interest rates, it was difficult for banks to grow based on domestic interest margins alone. As a result, MUFG has been increasing non-interest income and global income, including asset management, corporate transactions, overseas business, and collaboration with Morgan Stanley.

In that sense, the current MUFG is not a bank that suddenly became better because interest rates rose. It would be more likely to see the tailwind of rising domestic interest rates as having created a structure to earn money even when interest rates were low.

Interpretation in the stock market

Based on the stock price of 3,091 yen as of May 22, 2026, MUFG is already highly valued.

The PER is approximately 14.5 times the actual EPS of 213.16 yen. If the company's target of 2.7 trillion yen for the fiscal year ending March 2027 is simply reflected, the expected PER will drop slightly, but it is still difficult to call it a low PBR/low PER stock like previous bank stocks.

However, how you view the level of PBR of around 1.6 times will depend on ROE.

If ROE only temporarily rises to the 11% range, the weight of the top price will likely be felt on the stock price. On the other hand, if the market sees it as being able to maintain an ROE of around 12% over the medium term, there is a possibility that its evaluation range as a bank stock will rise even further.

In the end, the focus will be on whether the view of MUFG in the second half of 2026 changes from a "stock with rising interest rates" to a "comprehensive financial group that can maintain high ROE."

Bullish scenario

In the bullish scenario, domestic interest rates remain high and there remains speculation that the Bank of Japan will raise interest rates further.

In this case, expectations for improvement in loan yields and investment yields will continue, making it easy for funds to flow into bank stocks as a whole. For MUFG, the stock price will be based on progress towards the 2.7 trillion yen net income target for the fiscal year ending March 2027, approaching ROE of around 12%, and expectations for additional returns in the second half.

In particular, once it becomes a reality that rising yen interest rates will boost profits by approximately 170 billion yen after tax, investors will once again reconsider the earning power of the ``world with interest rates.''

In this scenario, stock prices would likely be based around the 3,000 yen level, testing the reappraisal of the banking sector as a whole.

Bearish scenario

In a bearish scenario, the focus is on credit costs and the deterioration of overseas economies rather than the positive aspects of rising interest rates.

MUFG expects total credit-related costs to be 350 billion yen for the fiscal year ending March 2027. When factors such as the slowdown in the US economy, commercial real estate, the credit cycle in Asia, and the protracted situation in the Middle East come together, it will be difficult to offset market concerns with the benefits of higher interest rates alone.

Another risk is an unwinding of interest rate expectations.

While bank stocks tend to be bought on expectations of rising interest rates, short-term funds tend to be outsourced when expectations for the Bank of Japan's interest rate hikes recede or when long-term interest rates drop sharply. After the stock price rises to the 3,000 yen level, even a slight decline in expectations can lead to profit-taking selling.

Featured KPIs

If you're looking at MUFG in the second half of 2026, you'll want to check the following KPIs rather than just chasing the stock price.

Personally, I think the most important thing is the combination of ROE and credit costs. Even if profits increase due to rising interest rates, if credit costs rise more than expected, the outlook on bank stocks will suddenly change.

Summary

MUFG is likely to continue to be a bank stock that represents Japan's interest rate normalization market into the second half of 2026.

The ingredients are in place: rising domestic interest rates, record profits, increased dividends, share buybacks, collaboration with Morgan Stanley, and business in Asia. Its business model is not just a domestic deposit-lending business, but also a deep global universal bank.

However, the stock price has already risen to the 3,000 yen level, and the PBR has exceeded the point of correction below 1:1. From this point on, it is not enough to view stocks as being cheap because they are bank stocks. Will it be able to maintain an ROE of around 12%, will it be able to manage credit costs, and to what extent will shareholder returns be able to continue? The market will confirm this.

The second half of 2026 for MUFG will be a phase in which there is both room for upside and a sense of short-term overheating. While it is a favorite to benefit from rising interest rates, it is also important to take a calm look at the side effects if interest rates rise too much.

Source

• Mitsubishi UFJ Financial Group “FY2025 Financial Results”
• Mitsubishi UFJ Financial Group “FY2025 Financial Results Investor Presentation Materials”
• TBS NEWS DIG / Bloomberg "Japan's long-term interest rate is temporarily 2.8%"
• Traders Web "Mitsubishi UFJ Financial Group Stock Price Time Series"
• Confirmation date: 2026-05-23