Mitsubishi UFJ Financial Group, Inc. — FY2017 Form 20-F
Reporting period: Fiscal year ended March 31, 2017; filed July 14, 2017. This is an annual report, not a standalone 2016 fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP; amounts are Japanese yen unless noted.
Business context and financial performance
MUFG is a diversified Japanese financial group spanning commercial and trust banking, securities, asset management, consumer finance and other services. Japan represented 64.4% of assets at year-end. The group reported weaker results amid market volatility, low domestic rates and adverse trading and foreign-exchange movements.
| Metric | FY ended Mar. 31, 2017 | Prior year | Change |
|---|---|---|---|
| Total revenue (interest and non-interest income) | ¥4,187.5bn | ¥5,413.4bn | −22.6% |
| Net interest income | ¥2,221.1bn | ¥2,261.4bn | −1.8% |
| Provision for credit losses | ¥253.7bn | ¥231.9bn | +9.4% |
| Non-interest income | ¥1,196.7bn | ¥2,407.7bn | −50.3% |
| Non-interest expense | ¥2,891.6bn | ¥3,274.5bn | −11.7% |
| Income before tax | ¥272.5bn | ¥1,162.7bn | −76.6% |
| Net income attributable to MUFG | ¥202.7bn | ¥802.3bn | −74.7% |
| Diluted earnings per common share | ¥14.68 | ¥57.51 | −74.5% |
The average net interest margin was 0.93%, up from 0.89%; the average interest-rate spread was 0.91%, up from 0.85%. Return on average assets was 0.07% (0.27% prior year) and return on average equity was 1.35% (5.25%).
Balance sheet, cash flow and capital
- Total assets were ¥297.19tn, up from ¥292.56tn. Net loans fell to ¥117.03tn from ¥121.68tn; deposits rose to ¥190.40tn from ¥181.44tn.
- Long-term debt increased to ¥27.74tn from ¥21.96tn, primarily due to TLAC-related bond issuance and funding diversification. Total equity declined to ¥14.76tn from ¥14.85tn.
- Cash and due from banks rose to ¥25.68tn from ¥8.66tn. Cash and cash equivalents increased ¥17.03tn during the year. Operating cash flow was ¥685.2bn, versus ¥4,181.0bn; investing cash flow was ¥7,248.3bn, versus an outflow of ¥12,995.0bn; financing cash flow was ¥9,145.3bn, versus ¥14,168.7bn.
- MUFG’s Basel III ratios were CET1 11.76% (11.63%), Tier 1 13.36% (13.24%) and total capital 15.85% (16.01%). The leverage ratio was 4.81% (4.79%); LCR was 137.9% (130.0%). Management said the group met applicable capital requirements.
- The allowance for credit losses was ¥1.18tn, or 1.00% of loans, versus ¥1.11tn and 0.90%. Impaired loans were ¥1.72tn, equal to 1.45% of loans, versus ¥1.73tn and 1.40%. Nonaccrual loans declined to ¥976.9bn from ¥1,187.0bn, while TDRs increased to ¥927.8bn from ¥722.4bn.
Material changes and unusual items
- The sharp earnings decline primarily reflected trading-account losses of ¥639.2bn, versus profits of ¥276.7bn, and net foreign-exchange losses of ¥134.9bn, versus gains of ¥192.1bn. Trading losses included losses on interest-rate and other derivatives and fair-value-option securities.
- Credit-loss provision rose to ¥253.7bn, driven principally by deterioration at a large domestic electronics manufacturer and a large foreign trading borrower. The group also recorded ¥106.6bn of provision for off-balance-sheet credit instruments, mainly related to commitments and guarantees for a domestic electronics borrower.
- FY2016 included ¥333.7bn of goodwill impairment and ¥117.7bn of intangible-asset impairment; these fell to ¥6.6bn and ¥5.8bn, respectively, in FY2017.
- Currency translation reduced FY2017 revenue by ¥305.1bn, net interest income by ¥195.7bn and pre-tax income by ¥97.6bn, according to management. MUFG also recorded ¥407.4bn of foreign-exchange losses related to the fair value option.
- Common dividends remained ¥18 per share for the year. MUFG repurchased ¥200bn of shares during FY2017 and announced a further ¥100bn repurchase completed in June 2017, with cancellation planned for July.
Outlook, commentary and risks
The filing provides no specific quantified earnings guidance for the next fiscal year. MUFG’s medium-term plan covers FY2016–FY2018 and emphasizes customer focus, group-wide coordination and productivity improvements, alongside global business expansion and maintaining a strong capital base. Planned changes include transferring certain MUTB corporate lending and finance operations to BTMU around April 2018, subject to approval.
- Management cited Japan’s near-zero or negative interest-rate environment as pressure on domestic spreads; further rate declines or a sudden increase could affect income and bond values.
- Other principal exposures include Japanese and global economic weakness, borrower credit deterioration, concentration in energy and real estate, market and foreign-exchange volatility, and competition. The group’s domestic loan portfolio and substantial Japanese government bond holdings increase sensitivity to Japanese conditions.
- MUFG is a G-SIB and faces phased-in Basel III and TLAC requirements. The filing says TLAC rules for Japanese institutions were not finalized and does not assure that issued senior debt will qualify.
- The filing describes U.S. sanctions-related regulatory settlements by BTMU ($315m in 2014 and $250m in 2013, plus an approximately $8.6m OFAC settlement in 2012), as well as continuing regulatory inquiries and civil litigation concerning benchmark rates and foreign-exchange practices. Management says outcomes are uncertain; it also states current litigation is not expected to materially affect results or financial position based on available information.
- MUFG disclosed Iran-related activity that it said was conducted in compliance with applicable rules and was not material, while noting ongoing compliance obligations. Cybersecurity, data protection, natural disasters and operational continuity are also identified risks.
- Deloitte reported SEC independence-rule violations involving certain audit personnel and family members’ accounts at MUFG affiliates. The audit committee, after its review, concluded the auditor’s objectivity and independence for the MUFG audit were not impaired.
Investor verification points
- Review the audited statements and cash-flow details to understand the unusually large year-over-year earnings decline and the difference between net income and cash generation.
- Assess whether trading and foreign-exchange results, including fair-value-option effects, are recurring or unusually volatile.
- Verify credit trends and reserve adequacy, particularly the increase in TDRs, off-balance-sheet allowances and exposures to large borrowers and Thailand.
- Check capital and liquidity headroom against phased-in buffers and TLAC requirements, and the effect of higher long-term debt and share repurchases.
- Follow the status and financial exposure of regulatory and litigation matters, the auditor-independence remediation, and the proposed subsidiary reorganization.