Mitsubishi UFJ Financial Group, Inc. — FY2012 Form 20-F
Reporting period: Fiscal year ended March 31, 2012; filed July 23, 2012. This is an annual report, not a standalone 2011 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in Japanese yen unless noted; regulatory capital ratios use Japanese GAAP.
Business context
MUFG is a diversified financial holding company with commercial and trust banking, securities, consumer finance, credit card and asset-management businesses. Japan remained its largest market, accounting for 72.8% of FY2012 revenue and approximately 73.8% of loans. The group reported total assets of ¥215.2 trillion and operated in more than 40 countries.
Financial performance and condition
| Metric | FY2012 / March 31, 2012 | Prior comparable period |
|---|---|---|
| Total revenue | ¥4,036.5 billion | ¥4,245.0 billion |
| Net interest income | ¥1,955.8 billion | ¥1,879.5 billion |
| Provision for credit losses | ¥223.8 billion | ¥292.0 billion |
| Non-interest income | ¥1,440.6 billion | ¥1,694.8 billion |
| Non-interest expense | ¥2,322.6 billion | ¥2,460.4 billion |
| Income before tax | ¥849.9 billion | ¥821.8 billion |
| Net income attributable to MUFG | ¥416.2 billion | ¥452.6 billion |
| Diluted earnings per common share | ¥28.09 | ¥30.43 |
| Total assets | ¥215.2 trillion | ¥202.9 trillion |
| Loans, net of allowance | ¥91.0 trillion | ¥86.3 trillion |
| Deposits | ¥139.5 trillion | ¥136.6 trillion |
| Long-term debt | ¥12.6 trillion | ¥13.4 trillion |
- Cash flow: Operating activities provided ¥592.9 billion, compared with ¥4,237.8 billion in FY2011. Investing activities used ¥10,364.3 billion; financing activities provided ¥9,787.9 billion. Cash and cash equivalents declined by ¥0.4 billion to ¥3,230.4 billion. Investment-security purchases and trading-account movements were significant cash-flow drivers.
- Margins and returns: Net interest income was 1.06% of average interest-earning assets, up from 1.04%; average interest-rate spread was 1.02% versus 0.99%. Excluding the Morgan Stanley conversion gain and prior-year preferred dividends, management said spread declined to 0.95% from 0.96%. Return on average equity attributable to common shareholders was 4.63%, versus 4.80%.
- Credit quality: Nonaccrual, restructured and 90-days-past-due loans were ¥2.18 trillion, or 2.36% of loans, unchanged as a percentage from a year earlier. Allowance for credit losses was ¥1.29 trillion, 1.39% of loans; allowance coverage of these problem loans declined to 59.01% from 60.09%. Net loan charge-offs fell to ¥173.4 billion from ¥342.1 billion.
- Liquidity and capital: Deposits exceeded net loans by ¥48.5 trillion. Total equity was ¥8.86 trillion, but equity as a share of assets fell to 4.12% from 4.27%. Japanese-regulatory total risk-adjusted capital and Tier 1 ratios were 14.91% and 12.31%, respectively, above stated minimums of 8% and 4%.
Material changes versus FY2011
- Net income attributable to MUFG fell ¥36.4 billion despite higher pretax income. Revenue declined, chiefly reflecting lower non-interest income.
- Net interest income rose ¥76.3 billion, but included a one-time ¥139.3 billion gain from adjusting the conversion rate when MUFG exchanged Morgan Stanley preferred stock for common stock. On management’s adjusted comparison, net interest income increased only ¥3.0 billion after accounting for the prior-year ¥66.0 billion preferred dividends.
- Non-interest income decreased ¥254.2 billion. Net trading profits rebounded to ¥667.3 billion from ¥133.9 billion, while foreign-exchange gains fell to ¥34.3 billion from ¥260.7 billion and investment-securities gains fell to ¥19.4 billion from ¥121.8 billion.
- MUFG recorded a ¥579.5 billion other-than-temporary impairment on its Morgan Stanley common-stock investment. Morgan Stanley became an equity-method affiliate after the June 2011 conversion; MUFG held about 21.8% of its voting rights at year-end.
- Credit-loss provision declined, but the allowance rose ¥45.0 billion. Management cited weaker credit quality among some Japanese manufacturing and wholesale/retail borrowers, partially offset by improved UNBC and card portfolios.
- Assets rose ¥12.35 trillion, including increases in loans, trading securities and investment securities. Japanese government and agency bonds reached 23.0% of total assets.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical earnings guidance. Management said FY2013 results and financial condition would depend substantially on borrower performance, Japan’s recovery after the Great East Japan Earthquake, and global economic conditions. It described the Japanese economy as incompletely recovered and vulnerable to external weakness and yen appreciation.
- Strategy and transactions: MUFG said it would pursue selective global growth and strengthen overseas operations. UNBC’s proposed acquisition of Pacific Capital Bancorp for approximately $1.5 billion was expected to close in the quarter ending December 31, 2012, subject to approvals. Union Bank’s Smartstreet acquisition was expected in fall 2012, also subject to approvals. These were pending at filing date.
- TEPCO exposure: TEPCO requested continued credit lines, possible relending and additional debt financing of up to approximately ¥1 trillion in aggregate. MUFG was considering support subject to TEPCO’s operations and financial position remaining consistent with its approved plan; the filing does not state that the full requested financing had been committed.
- Principal risks: Japan-focused credit exposure and economic weakness; sovereign-debt and market volatility; yen, interest-rate and equity-price movements; securities impairment; Morgan Stanley investment and alliance risks; consumer-lending regulation and excess-interest reimbursement claims; acquisition execution; and more stringent Basel III and other regulatory requirements. MUFG was tentatively identified as a global systemically important financial institution.
- Contingencies and legal matters: MUFG disclosed government investigations and civil lawsuits concerning past submissions to interbank offered-rate setting bodies and said it was cooperating. It also described regulatory inquiries, including a business-improvement order received by equity-method investee JACCS in December 2011. Management said, based on current knowledge and legal advice, existing proceedings were not expected to materially affect results or financial position, while acknowledging outcomes could affect a particular reporting period.
- Other unusual items: The FY2012 effective tax rate was 50.5%, including the effect of Japanese tax-law changes; the related change increased tax expense by ¥78.0 billion. The filing also reported an early-retirement program at MUMSS, with ¥20 billion of termination expense in the second half of FY2012, and no FY2012 provision for excess-interest repayment.
Most important facts for investors to verify
- Normalize earnings for the ¥139.3 billion Morgan Stanley conversion gain, the ¥579.5 billion impairment, and the different prior-year preferred-dividend treatment.
- Review the Morgan Stanley investment’s carrying value, equity-method earnings exposure, and sensitivity to further share-price declines.
- Track problem-loan migration, allowance coverage, Japanese borrower conditions and the continuing effect of consumer-finance rules.
- Confirm the status, financing and integration outcomes of the Pacific Capital Bancorp and Smartstreet acquisitions, and any actual TEPCO credit support.
- Assess capital and liquidity under Basel III and potential rating downgrades; verify the implications of off-balance-sheet commitments and derivative collateral requirements.
- Review the complete audited cash-flow statements and notes for the large security and trading-related cash movements. The filing reports effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions.