Business context and reporting period
Mitsubishi UFJ Financial Group, Inc. (MUFG) filed this Form 20-F on July 15, 2016. It is an annual report for the fiscal year ended March 31, 2016, not a standalone 2015 Q4 filing. Financial statements are prepared under U.S. GAAP and reported in Japanese yen unless noted.
MUFG is a diversified Japanese financial group spanning commercial and trust banking, securities, asset management, credit cards and other financial services. Japan accounted for 55.3% of FY2016 revenue; the group also has substantial operations in the United States and Asia.
Key financial metrics
Amounts below are yen unless otherwise stated; income-statement amounts are for fiscal years and balance-sheet amounts are as of March 31.
| Metric | FY2016 / March 31, 2016 | Prior comparable period |
|---|---|---|
| Total revenue (interest income plus non-interest income) | ¥5,413.4 billion | ¥5,739.7 billion |
| Net interest income | ¥2,261.4 billion | ¥2,231.5 billion |
| Provision for credit losses | ¥231.9 billion | ¥87.0 billion |
| Non-interest income | ¥2,407.7 billion | ¥2,845.1 billion |
| Non-interest expense | ¥3,274.5 billion | ¥2,726.9 billion |
| Income before tax | ¥1,162.7 billion | ¥2,262.7 billion |
| Net income attributable to MUFG | ¥802.3 billion | ¥1,531.1 billion |
| Diluted earnings per common share | ¥57.51 | ¥107.50 |
| Net interest margin; average interest-rate spread | 0.89%; 0.85% | 0.94%; 0.90% |
| Total assets; net loans | ¥292.57 trillion; ¥121.68 trillion | ¥280.89 trillion; ¥117.21 trillion |
| Deposits; long-term debt | ¥181.44 trillion; ¥21.97 trillion | ¥171.99 trillion; ¥19.97 trillion |
| Total equity; equity-to-assets ratio | ¥14.85 trillion; 5.08% | ¥15.28 trillion; 5.44% |
| Common dividend per share paid | ¥18 | ¥18 |
Reported cash flows were ¥4.18 trillion provided by operating activities, ¥12.99 trillion used in investing activities, and ¥14.17 trillion provided by financing activities. Cash and cash equivalents rose ¥5.30 trillion to ¥8.66 trillion. These figures reflect bank balance-sheet and funding flows, not operating cash generation in the sense used for a nonfinancial company.
Regulatory capital ratios at March 31, 2016 were 11.63% Common Equity Tier 1, 13.24% Tier 1 and 16.01% total capital. MUFG’s liquidity coverage ratio was 130.0% against a 70% minimum then in force; its Basel III leverage ratio was 4.79%. These ratios use Japanese regulatory calculations and are not U.S. GAAP measures.
Credit quality indicators included impaired loans of ¥1.73 trillion, or 1.40% of loans, and an allowance for credit losses of ¥1.11 trillion, or 0.90% of loans. Nonaccrual loans rose to ¥1.19 trillion from ¥886.8 billion.
Material changes versus the prior comparable period
- Net income attributable to MUFG fell ¥728.8 billion, about 47.6%. Total revenue declined about 5.7%, while non-interest expense rose about 20.1%.
- Net interest income edged up ¥29.9 billion, as growth in foreign lending was partly offset by lower domestic loan yields and a narrower interest-rate spread.
- Non-interest income declined ¥437.4 billion, primarily because trading-account profits fell to ¥276.7 billion from ¥1,148.7 billion. Fees and commissions increased to ¥1,475.9 billion.
- Credit-loss provisions increased to ¥231.9 billion. Management cited deterioration in a large Japanese electronics borrower and weaker energy-sector credit, including oil and gas exposures in the United States; Thailand’s slower economy also affected Krungsri borrowers.
- Non-interest expense included ¥333.7 billion of goodwill impairment and ¥117.7 billion of intangible-asset impairment, compared with ¥3.4 billion and ¥0.7 billion, respectively, in FY2015. The goodwill charges included ¥177.8 billion related to Krungsri and ¥151.7 billion in the Global Business Group excluding MUAH and Krungsri.
- Total investment securities declined ¥6.56 trillion to ¥45.65 trillion, mainly as MUFG reduced Japanese government bond holdings. Total assets nevertheless increased ¥11.68 trillion, while total equity declined ¥433.1 billion.
Outlook, management commentary, risks and unusual items
- Management’s medium-term business plan covers FY2016–FY2018 and emphasizes customer-focused services, group-wide coordination and productivity improvements. Priorities include expanding global corporate and investment banking, transaction banking, asset management and U.S. and Asian platforms. The filing provides no numerical FY2017 earnings guidance.
- Management described a challenging environment of negative and historically low Japanese interest rates, pressure on domestic lending spreads, volatile equity and currency markets, and slowing growth in China and parts of Southeast Asia. The filing also discusses uncertainty after the June 2016 U.K. referendum.
- Currency movements materially affected results. The stronger yen reduced the translated value of foreign assets and earnings; net losses related to securities under the fair value option were ¥1,058.0 billion, compared with gains of ¥966.6 billion the year before. Total reported foreign-exchange gains were nevertheless ¥192.1 billion.
- Material risks include credit deterioration, interest-rate and securities-market exposure, foreign-exchange movements, natural disasters, cyber and information-security events, competition, acquisition and integration risks, and evolving capital, liquidity and compliance rules. Energy and real estate were identified as significant credit exposures.
- MUFG disclosed prior U.S. sanctions-compliance settlements involving BTMU, including payments of $315 million to New York DFS in 2014 and $250 million in 2013, and ongoing cooperation with authorities on benchmark-rate, foreign-exchange and other inquiries. Management stated that the ultimate outcome of legal and regulatory matters is uncertain; it did not expect current matters, when resolved, to materially affect results or financial position.
- Auditor-independence issues were disclosed: Deloitte reported violations involving personnel financial relationships with MUFG entities. The audit committee, after review, concluded the auditor’s objectivity was not impaired and allowed the audited statements to be included. Deloitte issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
- After year-end, MUFG announced redemption of $2.3 billion and €750 million of preferred securities on July 25, 2016, estimating a 0.1 percentage-point capital-ratio decline. It issued $5 billion of intended TLAC notes in March 2016 and another $2 billion in April. A ¥300 billion Additional Tier 1 issue was completed in March.
- Post-year-end, MUFG repurchased 190.6 million shares for approximately ¥100 billion in May–June 2016. The company also reported a 20% investment in Security Bank in the Philippines and a planned investment in Hitachi Capital, subject to conditions. FY2016’s annual common dividend was ¥18 per share; shareholders approved a ¥9-per-share year-end dividend in June 2016.
Important facts an investor should verify
- Review the audited U.S. GAAP statements and notes, particularly the ¥333.7 billion goodwill and ¥117.7 billion intangible impairments and their segment and tax effects.
- Track subsequent nonaccrual loans, provisions, and exposure to the large electronics borrower, energy borrowers, and Krungsri’s Thai portfolios.
- Confirm the trajectory of domestic net interest margin and the impact of Japan’s negative-rate policy on earnings and the value of bonds and deposits.
- Check capital and liquidity after the preferred-security redemptions, share repurchases, TLAC issuance, and phased-in regulatory requirements.
- Follow the status and financial consequences of regulatory investigations and the auditor-independence remediation, and verify whether any subsequent developments alter management’s assessment.