Mitsubishi UFJ Financial Group, Inc. — FY2018 Form 20-F
Reporting period: Fiscal year ended March 31, 2018; filed July 12, 2018. Although the request metadata says “2017 Q4,” this filing is an annual report for FY2018, not a quarterly filing. Financial statements use U.S. GAAP and Japanese yen unless noted; regulatory capital figures use Japanese regulatory calculations.
Business context and reporting period
MUFG is a Japan-based global financial group spanning commercial and trust banking, securities, credit cards, asset management and related services. At year-end it reported ¥300.6 trillion in assets, with 65.2% related to Japan. Its network included about 1,100 domestic branches and 1,200 overseas offices in approximately 50 countries.
Key financial metrics
| Metric | FY2018 / March 31, 2018 | Prior comparable period |
|---|---|---|
| Total revenue (interest and non-interest income) | ¥5,194.1 billion | ¥4,187.5 billion |
| Net interest income | ¥2,230.3 billion | ¥2,221.1 billion |
| Provision for (reversal of) credit losses | ¥240.8 billion reversal | ¥253.7 billion provision |
| Non-interest income | ¥1,935.1 billion | ¥1,196.7 billion |
| Non-interest expense | ¥2,744.4 billion | ¥2,891.6 billion |
| Income before tax | ¥1,661.8 billion | ¥272.5 billion |
| Net income attributable to MUFG | ¥1,228.2 billion | ¥202.7 billion |
| Diluted earnings per common share | ¥92.10 | ¥14.68 |
| Operating cash flow | ¥(563.8) billion | ¥690.4 billion |
Net interest income was 0.93% of average interest-earning assets, unchanged from FY2017. Total assets rose to ¥300.6 trillion from ¥297.2 trillion; net loans declined to ¥116.3 trillion from ¥117.0 trillion. Deposits increased to ¥195.7 trillion from ¥190.4 trillion. Long-term debt was ¥27.1 trillion, compared with ¥26.1 trillion. Total equity increased to ¥15.6 trillion from ¥14.8 trillion; total equity was 5.21% of assets.
Cash and cash equivalents ended the year at ¥75.9 trillion, up from ¥64.0 trillion. Investing cash flow was ¥3.2 trillion and financing cash flow was ¥9.4 trillion; cash flows reflected substantial movements in trading assets and liabilities. Regulatory capital ratios were 12.58% Common Equity Tier 1, 14.32% Tier 1 and 16.56% total capital, above reported required levels of 7.51%, 9.01% and 11.01%, respectively. The consolidated leverage ratio was 5.01%, and the liquidity coverage ratio was 144.8%.
Impaired loans declined to ¥1.33 trillion, or 1.14% of loans, from ¥1.72 trillion, or 1.45%. The allowance for credit losses fell to ¥764.1 billion, or 0.65% of loans, from ¥1,182.2 billion, or 1.00%. Net loan charge-offs increased to ¥181.0 billion from ¥169.8 billion.
Material changes versus FY2017
- Net income rose by ¥1,025.5 billion, primarily reflecting a substantial improvement in trading results and a reversal of credit-loss provisions instead of the prior year’s provision.
- Non-interest income increased ¥738.4 billion. Net trading losses narrowed to ¥73.1 billion from ¥639.2 billion, including improved results on trading securities and derivatives. Fee and commission income rose to ¥1,462.8 billion from ¥1,414.9 billion.
- Net interest income increased modestly as higher foreign interest income, particularly in the United States, was partly offset by higher deposit and U.S. dollar funding costs. The average domestic interest-rate spread declined to 0.48% from 0.51%; foreign spread was 1.30% in both years.
- Operating cash flow turned negative, to ¥563.8 billion, while cash and cash equivalents still increased by ¥11.9 trillion, supported principally by financing cash flow and balance-sheet movements.
- Japan domestic loan balances declined, while foreign lending was broadly stable. Domestic deposits increased, and cash deposited with the Bank of Japan rose.
- The reversal of credit losses was concentrated in Commercial, Residential and MUFG Americas Holdings portfolios; Card and Krungsri recorded provisions.
Outlook, management commentary, risks and unusual items
- Outlook: No quantified earnings guidance is provided in the supplied filing text. The medium-term plan for FY2019–FY2021 emphasizes group integration, digitalization, cost and process improvements, fee-based businesses, global corporate banking and overseas growth. Management aims to establish a future-oriented growth model by FY2024.
- Portfolio and strategy: MUFG acquired 19.9% of Bank Danamon in December 2017 and described further staged purchases, subject to regulatory and other approvals, with a stated eventual ownership goal above 73.8%. In April 2018, trust-bank corporate loan-related businesses were transferred to MUFG Bank.
- Credit and market risks: Japan remains the largest geographic exposure; prolonged low or negative rates may pressure domestic spreads. Rapid interest-rate, equity-price or currency changes could affect securities values, earnings and capital. Management reported that yen appreciation reduced translated foreign assets and that FX fair-value-option positions generated ¥267.5 billion of losses.
- Legal and regulatory matters: MUFG Bank entered an OCC consent order in November 2017 concerning sanctions-compliance controls and is litigating with New York DFS over branch-license conversion and alleged earlier violations. The filing also describes ongoing benchmark-rate and foreign-exchange investigations and civil suits; outcomes and potential losses are uncertain. Earlier DFS settlements included payments of $315 million and $250 million.
- Other unusual items: FY2018 included ¥96.1 billion of reversal of off-balance-sheet credit provisions and a lower effective tax rate of 24.5%, partly due to a ¥33.3 billion valuation-allowance reduction and nontaxable dividends. Investment-security impairment losses fell to ¥8.2 billion. No goodwill impairment was recorded in FY2018.
- Capital and shareholder returns: MUFG issued senior debt intended to qualify as TLAC and said it planned further issuance; Japanese TLAC requirements were not yet finalized. It repurchased and cancelled shares under FY2018 programs totaling about ¥200 billion. The fiscal-year common dividend paid was ¥18 per share; shareholders approved a ¥10 per-share year-end dividend after year-end, making the FY2018 annual dividend ¥19 per share.
- Audit: Deloitte issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on internal control over financial reporting. Management concluded disclosure controls and internal financial-reporting controls were effective at March 31, 2018.
Most important facts for investors to verify
- Whether the sharp earnings recovery is sustainable without the favorable reversal of credit-loss provisions and the large year-over-year improvement in trading results.
- How operating cash-flow volatility, funding needs and balance-sheet movements reconcile to the increase in cash and cash equivalents.
- Whether loan-loss reserves remain adequate as Card and Krungsri credit costs rise, and whether the unusually large FY2018 reserve reversal recurs.
- Progress toward fully phased-in capital and TLAC requirements, including the impact of additional debt issuance and the planned Danamon investment.
- Developments in U.S. sanctions-compliance remediation, the DFS litigation and other regulatory investigations, including any financial penalties or operating restrictions.
- How the post-year-end business-group reorganization and transfer of corporate lending affect segment comparability and profitability.