Business context and reporting period
MUFG’s Form 20-F, filed July 28, 2011, reports its fiscal year ended March 31, 2011, with comparisons to fiscal 2010. Although the request metadata says “2010 Q4,” the supplied filing is an annual report and does not provide a separate Q4 results summary. Financial statements are prepared under US GAAP and reported in yen unless noted otherwise.
MUFG is a diversified Japanese financial holding company with commercial and trust banking, securities, credit card, consumer finance and other operations. Japan accounted for about 72% of assets at year-end; the group also has substantial overseas operations.
Key financial metrics
Amounts below are yen unless otherwise specified; financial statement amounts are in billions or trillions as indicated.
| Metric | FY2011 / March 31, 2011 | Comparable FY2010 / March 31, 2010 |
|---|---|---|
| Total revenue | ¥4.260 trillion | ¥5.212 trillion |
| Net interest income | ¥1,880.3 billion | ¥1,984.1 billion |
| Provision for credit losses | ¥292.0 billion | ¥647.8 billion |
| Non-interest income | ¥1,709.4 billion | ¥2,453.9 billion |
| Non-interest expense | ¥2,460.5 billion | ¥2,508.1 billion |
| Income before tax | ¥837.2 billion | ¥1,282.1 billion |
| Net income attributable to MUFG | ¥461.8 billion | ¥859.8 billion |
| Diluted EPS | ¥31.08 | ¥67.87 |
| Net interest margin (net interest income / average interest-earning assets) | 1.04% | 1.13% |
| Total assets | ¥202.86 trillion | ¥200.08 trillion |
| Total equity | ¥8.67 trillion | ¥9.10 trillion |
| Deposits | ¥136.63 trillion | ¥135.47 trillion |
| Long-term debt | ¥13.36 trillion | ¥14.16 trillion |
| Loans, net of allowance | ¥86.26 trillion | ¥90.87 trillion |
| Operating cash flow | ¥4.24 trillion | ¥2.31 trillion |
| Investing cash flow | (¥8.29 trillion) | (¥10.81 trillion) |
| Financing cash flow | ¥4.46 trillion | ¥8.30 trillion |
| Cash and cash equivalents, year-end | ¥3.23 trillion | ¥2.86 trillion |
Year-end total risk-adjusted capital ratio was 14.89% and Tier I ratio was 11.33%, calculated under Japanese banking rules; the respective minimums cited were 8.00% and 4.00%. These measures are not US GAAP ratios. Common-shareholder return on average assets was 0.22% and return on average equity was 4.90%, versus 0.43% and 10.66% in FY2010.
Material changes versus the prior comparable period
- MUFG’s net income attributable to the group fell about 46%, as non-interest income declined ¥744.5 billion and net interest income fell ¥103.8 billion. Lower trading and investment-securities gains were major contributors; FY2010 had unusually high trading profits.
- The provision for credit losses fell ¥355.8 billion, reflecting the absence of large borrower-specific provisions from the prior year and lower overseas provisions. Net charge-offs also declined to ¥342.1 billion from ¥468.4 billion.
- Gross loans decreased ¥4.68 trillion to ¥87.50 trillion, chiefly because loan demand weakened. Deposits increased ¥1.16 trillion. Investment securities rose ¥4.11 trillion, primarily from increased Japanese government and government-agency bonds.
- Total equity declined ¥431.8 billion; accumulated other changes in equity worsened, mainly due to lower unrealized investment gains and foreign-currency translation adjustments.
- Problem-loan measures moved in mixed directions: nonaccrual loans fell, but restructured loans rose ¥227.4 billion to ¥839.6 billion. Nonaccrual, restructured and accruing loans 90 days past due together increased to ¥2.06 trillion, or 2.36% of total loans, from 2.18%.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific numerical earnings guidance. Management says FY2012 results will depend heavily on the earthquake’s effects on borrowers and the Japanese economy, electricity supply, supply chains, markets and government reconstruction and compensation policies. MUFG said it would pursue growth opportunities, particularly in Asia and the United States.
- Earthquake and Japan exposure: The March 11, 2011 earthquake and Fukushima nuclear accidents had limited direct physical impact on MUFG’s operations, but could indirectly raise credit costs, impair securities and reduce fees through disruption to borrowers and economic activity. Tohoku loans were less than 1% of total loans; broader indirect effects remained uncertain.
- Consumer finance: Regulatory changes and claims for repayment of excess interest continued to pressure the sector. MUFG’s allowance for repayment of excess interest increased to ¥136.9 billion from ¥84.2 billion; FY2011 provision expense was ¥85.7 billion. The estimate was revised for updated claims information and industry developments.
- Unusual securities loss: MUMSS recorded an approximately ¥80 billion loss in fixed-income position trading, including costs of exiting the business. It scaled back the activity and said it was revising risk protocols. In April 2011, MUSHD subscribed to additional MUMSS shares to strengthen its capital position.
- Morgan Stanley: After year-end, MUFG converted its Series B preferred investment into common shares on June 30, 2011, reaching approximately 22.4% of Morgan Stanley voting rights. MUFG expected equity-method accounting to affect future results; the conversion’s accounting impact depended on valuation and share prices.
- Other transactions: MUFG acquired assets and assumed deposits and other liabilities of two failed US banks through Union Bank in April 2010. It also agreed to acquire approximately £3.3 billion of RBS project-finance assets, subject to approvals and consents, with completion expected in fall 2011. The July 2011 redemption of ¥120 billion of preferred securities occurred after year-end.
- Principal risks: Credit deterioration in Japan and overseas, market and interest-rate movements, yen appreciation, funding and liquidity stress, regulatory changes including Basel III and Dodd-Frank, consumer-finance reimbursement claims, and execution risks in strategic alliances and acquisitions. MUFG also disclosed sold credit protection and counterparty exposure; contingent commitments and guarantees can be drawn, although stated notional amounts do not necessarily equal future cash needs.
- Contingencies and controls: MUFG reported ongoing litigation but said, based on current knowledge and legal consultation, it did not expect current matters to materially affect results or financial position. The auditor issued an unqualified opinion on the financial statements and internal controls; the report also describes specified restatements of prior disclosures and accounting changes.
Important facts for investors to verify
- Review the audited statements and notes for cash-flow drivers, changes in equity, and the reported restatements and accounting changes.
- Assess whether the rise in restructured loans and the 2.36% problem-loan ratio signal further credit deterioration, especially after the earthquake, and whether the ¥1.24 trillion allowance remains adequate.
- Check the sustainability of earnings excluding volatile trading and securities gains, and the effect of low rates, shrinking loans and yen translation on net interest income.
- Verify the scale and accounting treatment of excess-interest claims, the MUMSS trading loss and capital support, and the Morgan Stanley conversion’s subsequent-period impact.
- Monitor regulatory capital and liquidity against future requirements, as well as the status and risk terms of the RBS asset acquisition and Union Bank acquisitions.