|TEV||-290,089||TEV/EBIT||-8||TTM 2019-03-31, in MM, except price, ratios|
|Item 17 ¨ Item 18 ¨|
|Item 1. Identity of Directors, Senior Management and Advisers.|
|Item 2. Offer Statistics and Expected Timetable.|
|Item 3. Key Information.|
|Item 4. Information on The Company.|
|Item 4A. Unresolved Staff Comments.|
|Item 5. Operating and Financial Review and Prospects.|
|Item 6. Directors, Senior Management and Employees.|
|Item 7. Major Shareholders and Related Party Transactions.|
|Item 8. Financial Information.|
|Item 9. The Offer and Listing.|
|Item 10. Additional Information.|
|Item 11. Quantitative and Qualitative Disclosures About Credit, Market and Other Risk.|
|Item 12. Description of Securities Other Than Equity Securities.|
|Item 13. Defaults, Dividend Arrearages and Delinquencies.|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds.|
|Item 15. Controls and Procedures.|
|Item 16A. Audit Committee Financial Expert.|
|Item 16B. Code of Ethics.|
|Item 16C. Principal Accountant Fees and Services.|
|Item 16D. Exemptions From The Listing Standards for Audit Committees.|
|Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.|
|Item 16F. Change in Registrant's Certifying Accountant.|
|Item 16G. Corporate Governance.|
|Item 17. Financial Statements.|
|Item 18. Financial Statements.|
|Item 19. Exhibits.|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
As filed with the Securities and Exchange Commission on July 28, 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2011
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number 1-10277
KABUSHIKI KAISHA MITSUBISHI UFJ FINANCIAL GROUP
(Exact name of Registrant as specified in its charter)
MITSUBISHI UFJ FINANCIAL GROUP, INC.
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
7-1, Marunouchi 2-chome
Chiyoda-ku, Tokyo 100-8330
(Address of principal executive offices)
Naoki Muramatsu, +81-3-3240-8111, +81-3-3240-7073, address is same as above
(Name, Telephone, Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
|Name of each exchange on which registered|
Common stock, without par value
|New York Stock Exchange(1)|
American depositary shares, each of which represents one share of common stock
|New York Stock Exchange|
|(1)||The listing of the registrants common stock on the New York Stock Exchange is for technical purposes only and without trading privileges.|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
$2,300,000,000 Fixed/Floating Rate Non-Cumulative Preferred Securities of MUFG Capital Finance 1 Limited, and Mitsubishi UFJ Financial Group, Inc.s Guarantee thereof
750,000,000 Fixed/Floating Rate Non-Cumulative Preferred Securities of MUFG Capital Finance 2 Limited, and Mitsubishi UFJ Financial Group, Inc.s Guarantee thereof
Restricted Share Units granting rights to common stock pursuant to the UnionBanCal Corporation Stock Bonus Plan
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
At March 31, 2011, (1) 14,150,894,620 shares of common stock (including 16,723,747 shares of common stock held by the registrant and its consolidated subsidiaries as treasury stock), (2) 156,000,000 shares of first series of class 5 preferred stock, and (3) 1,000 shares of class 11 preferred stock.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
|Accelerated filer ¨||Non-accelerated filer ¨|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting Standards as issued
by the International Accounting Standards Board ¨
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
|Identity of Directors, Senior Management and Advisers||4|
|Offer Statistics and Expected Timetable||4|
|Information on the Company||20|
|Unresolved Staff Comments||46|
|Operating and Financial Review and Prospects||47|
|Directors, Senior Management and Employees||108|
|Major Shareholders and Related Party Transactions||121|
|The Offer and Listing||124|
|Quantitative and Qualitative Disclosures about Credit, Market and Other Risk||147|
|Description of Securities Other than Equity Securities||166|
|Defaults, Dividend Arrearages and Delinquencies||168|
|Material Modifications to the Rights of Security Holders and Use of Proceeds||168|
|Controls and Procedures||168|
|Audit Committee Financial Expert||171|
|Code of Ethics||171|
|Principal Accountant Fees and Services||171|
|Exemptions from the Listing Standards for Audit Committees||172|
|Purchases of Equity Securities by the Issuer and Affiliated Purchasers||173|
|Change in Registrants Certifying Accountant||173|
For purposes of this Annual Report, we have presented our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or US GAAP, except for risk-adjusted capital ratios, business segment financial information and some other specifically identified information. Unless otherwise stated or the context otherwise requires, all amounts in our financial statements are expressed in Japanese yen.
When we refer in this Annual Report to MUFG, we, us, our and the Group, we generally mean Mitsubishi UFJ Financial Group, Inc. and its consolidated subsidiaries, but from time to time as the context requires, we mean Mitsubishi UFJ Financial Group, Inc. as an individual legal entity. Similarly, references to MTFG and UFJ Holdings are to Mitsubishi Tokyo Financial Group, Inc. and to UFJ Holdings, Inc., respectively, as well as to MTFG and UFJ Holdings and their respective consolidated subsidiaries, as the context requires. Unless the context otherwise requires, references in this Annual Report to the financial results or business of the MTFG group and the UFJ group refer to those of MTFG and UFJ Holdings and their respective consolidated subsidiaries. In addition, our banking subsidiaries refers to The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi UFJ Trust and Banking Corporation and, as the context requires, their respective consolidated subsidiaries engaged in the banking business. References in this Annual Report to yen or ¥ are to Japanese yen and references to US dollars, US dollar, dollars, US$ or $ are to United States dollars. Unless the context otherwise requires, references to the Great East Japan Earthquake generally mean the earthquake and the ensuing tsunami in the northeastern region of Japan that occurred on March 11, 2011, as well as the subsequent accidents at the Fukushima Daiichi Nuclear Power Plant. Our fiscal year ends on March 31 of each year. References to years not specified as being fiscal years are to calendar years.
We usually hold the ordinary general meeting of shareholders of Mitsubishi UFJ Financial Group, Inc. in June of each year in Tokyo.
We may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with or submitted to the US Securities and Exchange Commission, or SEC, including this Annual Report, and other reports to shareholders and other communications.
The US Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking information to encourage companies to provide prospective information about themselves. We rely on this safe harbor in making these forward-looking statements.
Forward-looking statements appear in a number of places in this Annual Report and include statements regarding our intent, business plan, targets, belief or current expectations or the current belief or current expectations of our management with respect to our results of operations and financial condition, including, among other matters, our problem loans and loan losses. In many, but not all cases, we use words such as anticipate, aim, believe, estimate, expect, intend, plan, probability, risk, will, may and similar expressions, as they relate to us or our management, to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those which are aimed, anticipated, believed, estimated, expected, intended or planned, or otherwise stated.
Our forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ from those in the forward-looking statements as a result of various factors. We identify in this Annual Report in Item 3.D. Key InformationRisk Factors, Item 4.B. Information on the CompanyBusiness Overview, Item 5. Operating and Financial Review and Prospects and elsewhere, some, but not necessarily all, of the important factors that could cause these differences.
We do not intend to update our forward-looking statements. We are under no obligation, and disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
|Item 1.||Identity of Directors, Senior Management and Advisers.|
|Item 2.||Offer Statistics and Expected Timetable.|
|Item 3.||Key Information.|
|A.||Selected Financial Data|
The selected statement of operations data and selected balance sheet data set forth below have been derived from our audited consolidated financial statements.
Except for risk-adjusted capital ratios, which are calculated in accordance with Japanese banking regulations based on information derived from our consolidated financial statements prepared in accordance with accounting principles generally accepted in Japan, or Japanese GAAP, and the average balance information, the selected financial data set forth below are derived from our consolidated financial statements prepared in accordance with US GAAP.
You should read the selected financial data set forth below in conjunction with Item 5. Operating and Financial Review and Prospects and our consolidated financial statements and other financial data included elsewhere in this Annual Report on Form 20-F. These data are qualified in their entirety by reference to all of that information.
|Fiscal years ended March 31,|
|(in millions, except per share data and number of shares)|
Statement of operations data:
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
Loss from discontinued operationsnet
Net income (loss) before attribution of noncontrolling interests
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Mitsubishi UFJ Financial Group
Net income (loss) available to common shareholders of Mitsubishi UFJ Financial Group
Amounts per share:
Basic earnings (loss) per common shareincome (loss) from continuing operations available to common shareholders of Mitsubishi UFJ Financial Group
Basic earnings (loss) per common sharenet income (loss) available to common shareholders of Mitsubishi UFJ Financial Group
Diluted earnings (loss) per common shareincome (loss) from continuing operations available to common shareholders of Mitsubishi UFJ Financial Group
Diluted earnings (loss) per common sharenet income (loss) available to common shareholders of Mitsubishi UFJ Financial Group
Number of shares used to calculate basic earnings (loss) per common share (in thousands)
Number of shares used to calculate diluted earnings (loss) per common share (in thousands)
Cash dividends per share declared during the fiscal year:
Preferred stock (Class 3)
Preferred stock (Class 5)
Preferred stock (Class 8)
Preferred stock (Class 9)
Preferred stock (Class 10)
Preferred stock (Class 11)
Preferred stock (Class 12)
|At March 31,|
Balance sheet data:
Loans, net of allowance for credit losses
|Fiscal years ended March 31,|
|(in millions, except percentages)|
Other financial data:
Return on equity and assets:
Net income (loss) available to common shareholders as a percentage of total average assets
Net income (loss) available to common shareholders as a percentage of total average equity(2)
Dividends per common share as a percentage of basic earnings per common share
Total average equity as a percentage of total average assets(2)
Net interest income as a percentage of total average interest-earning assets
Credit quality data:
Allowance for credit losses
Allowance for credit losses as a percentage of loans
Nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more
Nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more as a percentage of loans
Allowance for credit losses as a percentage of nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more
Net loan charge-offs
Net loan charge-offs as a percentage of average loans
Average interest rate spread
Risk-adjusted capital ratio calculated under Japanese GAAP(5)
|(1)||Includes the common shares potentially issuable by conversion of the Class 11 Preferred Stock.|
|(2)||Effective April 1, 2009, we adopted new accounting guidance regarding noncontrolling interests in subsidiaries. See Noncontrolling Interests under Accounting Changes in Note 1 to our consolidated financial statements included elsewhere in this Annual Report for details. As a result, we have reclassified average balances, as well as year end balances, of Total liabilities and Total equity in the fiscal years ended March 31, 2007 to 2009. Accordingly Net income (loss) available to common shareholders as a percentage of total average equity and Total average equity as a percentage of total average assets have been reclassified.|
|(3)||Amounts include common shares. Redeemable Class 3 and 5 Preferred Stock are excluded.|
|(4)||Percentages of basic loss per common share have not been presented because such information is not meaningful.|
|(5)||Risk-adjusted capital ratios have been calculated in accordance with Japanese banking regulations, based on information derived from our consolidated financial statements prepared in accordance with Japanese GAAP.|
Exchange Rate Information
The tables below set forth, for each period indicated, the noon buying rate in New York City for cable transfers in Japanese yen as certified for customs purposes by the Federal Reserve Bank of New York, expressed in Japanese yen per US$1.00. On July 8, 2011, the noon buying rate was ¥80.64 to US$1.00 and the inverse noon buying rate was US$1.24 to ¥100.00.
|(1)||Period from July 1, 2011 to July 8, 2011.|
|Fiscal years ended March 31,|
Average (of month-end rates)
|B.||Capitalization and Indebtedness|
|C.||Reasons for the Offer and Use of Proceeds|
Investing in our securities involves a high degree of risk. You should carefully consider the risks described in this section, which is intended to disclose all of the risks that we consider material based on the information currently available to us, as well as all the other information in this Annual Report, including our consolidated financial statements and related notes, Item 5. Operating and Financial Review and Prospects, Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk and Selected Statistical Data.
Our business, operating results and financial condition could be materially and adversely affected by any of the factors discussed below. The trading price of our securities could decline due to any of these factors. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us described in this section and elsewhere in this Annual Report. See Forward-Looking Statements.
Risks Related to Our Business
Because a large portion of our assets are located in Japan and our business operations are conducted primarily in Japan, we may incur further losses if economic conditions in Japan worsen.
Our performance is particularly affected by the general economic conditions of Japan where we are headquartered and conduct a significant amount of our business. As of March 31, 2009, 2010 and 2011, 73.9%, 74.5% and 71.9% of our total assets were related to Japanese domestic assets, respectively, including Japanese national government and Japanese government agency bonds which accounted for 69.8%, 75.8% and 79.6% of our total investment securities portfolio. Moreover, approximately three quarters of our total interest and non-interest income related to such income generated in Japan. Furthermore, as of March 31, 2011, our domestic loans in Japan accounted for approximately 80% of our total loans outstanding.
During the fiscal year ended March 31, 2011, although there were signs of recovery in economic conditions in Japan, the Japanese economy began to weaken in the second half of the fiscal year ended March 31, 2011 after the government ended many aspects of its economic stimulus package and as the Japanese yen continued to appreciate against major foreign currencies thereby weakening the competitive strength of Japanese exports. The Japanese yen appreciated from ¥93.04 to US$1 as of March 31, 2010 to ¥83.15 to US$1 as of March 31, 2011. As of July 15, 2011, the exchange rate was ¥79.20 to US$1. Furthermore, the Japanese economy has experienced a significant downturn since the Great East Japan Earthquake that occurred on March 11, 2011. The Nikkei Stock Average, which is an average of 255 blue chip stocks listed on the Tokyo Stock Exchange, declined from ¥10,434.38 on March 10, 2011 to ¥8,605.15 on March 15, 2011. The Nikkei Stock Average gradually recovered to ¥9,974.47 on July 15, 2011. In addition, Japans seasonally adjusted real gross domestic product for the quarter ended March 31, 2011 decreased 1.0%, or 3.7% on an annualized basis, compared to the same period of the previous year. The Japanese economy could further deteriorate due to the Great East Japan Earthquake, particularly the disruptions in the supply chain and infrastructure for Japans major manufacturing industries as well as the nuclear crisis and electricity supply shortages. While significant funds will be required to address these issues, there is significant uncertainty regarding the Japanese political leadership to timely formulate effective solutions to provide the necessary financial support and compensation and to develop other policies in response to the Great East Japan Earthquake. In particular, since the Japanese Cabinet submitted a bill to the Diet of Japan in June 2011, there has been a significant political debate regarding a compensation scheme for damages related to the nuclear accidents as well as a scheme to financially support electric utilities that are subject to the damage claims. Many aspects of the legislative solution, including the actual implementation of such schemes, are uncertain at this time. Depending on the timing and approach of any policy or scheme, significant costs may be incurred by the Japanese government, specific electric utilities or a broad range of participants in the Japanese economy, which in turn may significantly affect the Japanese economy.
Since, as described above, our domestic loans in Japan accounted for a significant portion of our loan portfolio, the Great East Japan Earthquake has resulted in, and will likely further cause, indirect adverse effects on our financial results such as increases in credit costs as the credit quality of some borrowers could deteriorate. For a further discussion, see Risks Related to Our BusinessWe may suffer additional credit-related losses in the future if our borrowers are unable to repay their loans as expected or if the measures we take in reaction to, or in anticipation of, our borrowers deteriorating repayment abilities prove inappropriate or insufficient.
In addition, our Japanese domestic marketable equity securities portfolio and Japanese government bond portfolio may be adversely affected, depending on how the Japanese economy reacts after the Great East Japan Earthquake and what governmental policies may be adopted for reconstruction, compensation and recovery. Deteriorating or stagnant economic conditions in Japan may also result in a decrease in the volume of financial transactions in general, which in turn may reduce our domestic income from fees and commissions.
For a further discussion of our results of operations on a geographic basis, see Item 5.A. Operating and Financial Review and ProspectsOperating ResultsGeographic Segment Analysis.
If the global economy deteriorates again, our credit-related losses may increase, and the value of the financial instruments we hold may decrease, resulting in losses.
Despite some signs of a recovery from the recent global financial downturn, the global economy remains susceptible to economic and political developments. For example, the United States and some European nations continue to experience weak employment and large financial deficits while struggling to stimulate their economies. As of March 31, 2011, based principally on the domicile of obligors, assets related to the United States and Europe accounted for approximately 12% and 8%, respectively, of our total assets. If the global economy deteriorates or the global economic recovery slows down again, the availability of credit may become limited, and some of our borrowers may default on their loan obligations to us, increasing our credit losses. In addition, the growing concern over the sovereign debt problem in some European countries may limit liquidity in the global financial market. Some of our credit derivative transactions may also be negatively affected, including the protection we sold through single name credit default swaps, index and basket credit default swaps, and credit
linked notes. The notional amounts of these protections sold as of March 31, 2011 were ¥2.9 trillion, ¥0.7 trillion and ¥0.2 trillion, respectively. In addition, if credit market conditions worsen, our capital funding structure may need to be adjusted or our funding costs may increase, which could have a material adverse impact on our financial condition and results of operations.
Furthermore, we have incurred losses, and may incur further losses, as a result of changes in the fair value of our financial instruments resulting from weakening market conditions. For example, declines in fair value of our investment securities, particularly equity investment securities, resulted in our recording impairment losses of ¥858.9 billion, ¥117.5 billion and ¥139.0 billion for each of the three fiscal years ended March 31, 2009, 2010 and 2011. As of March 31, 2011, approximately 40% of our total assets were financial instruments for which we measure fair value on a recurring basis, and less than 1% of our total assets were financial instruments for which we measure fair value on a nonrecurring basis. Generally, in order to establish the fair value of these instruments, we rely on quoted market prices. If the value of these financial instruments declines, a corresponding write-down may be recognized in our consolidated statement of operations. In addition, because we hold a large amount of investment securities, short-term fluctuations in the value of our securities may trigger losses or exit costs for us to manage our risk. For more information on our valuation method for financial instruments, see Item 5. Operating and Financial Review and ProspectsCritical Accounting Estimates.
We may suffer additional credit-related losses in the future if our borrowers are unable to repay their loans as expected or if the measures we take in reaction to, or in anticipation of, our borrowers deteriorating repayment abilities prove inappropriate or insufficient.
When we lend money or commit to lend money, we incur credit risk, or the risk of losses if our borrowers do not repay their loans. We may incur significant credit losses or have to provide for a significant amount of additional allowance for credit losses if:
large borrowers become insolvent or must be restructured;
domestic or global economic conditions, either generally or in particular industries in which large borrowers operate, deteriorate;
the value of the collateral we hold, such as real estate or securities, declines; or
we are adversely affected by corporate credibility issues among our borrowers, to an extent that is worse than anticipated.
As a percentage of total loans, nonaccrual and restructured loans and accruing loans contractually past due 90 days or more ranged from 1.78% to 2.36% as of the five recent fiscal year-ends, reaching its highest level of 2.36% as of March 31, 2011 as total loans decreased to ¥87.5 trillion while nonaccrual and restructured loans and accruing loans contractually past due 90 days or more increased to ¥2.1 trillion. In particular, restructured loans increased by ¥0.23 trillion compared to the prior fiscal year-end, mainly due to increased restructurings of domestic loans to small and medium enterprises and domestic residential mortgage loans to individuals. If the recession in Japan worsens, our problem loans and credit-related expenses may increase. An increase in problem loans and credit-related expenses would adversely affect our results of operations, weaken our financial condition and erode our capital base. For a discussion of our problem loans, see Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancial Condition and Selected Statistical DataLoan Portfolio.
Due to the nuclear power plant accidents in Fukushima Prefecture following the Great East Japan Earthquake in March 2011, certain areas were affected by radiation contamination, and the Kanto region of Japan experienced electricity supply shortages in the spring of 2011. Electricity supply remains in short supply, affecting not only the Kanto region but also the rest of Japan. Electricity supply shortages are expected to have a significant negative impact on the recovery efforts in the northeastern region of Japan and could also disrupt the economic and industrial activities in other regions of Japan and across a wide range of industry sectors in Japan. In addition, the recovery efforts may require significant costs incurred to repair the damaged facilities, to secure alternative sources of electricity, parts and other materials, and to provide financial support or compensation for
affected individuals and companies. As a result, our borrowers financial condition and creditworthiness could deteriorate, and our credit-related expenses with respect to our domestic credit portfolio could increase.
We may provide additional loans, equity capital or other forms of support to troubled borrowers in order to facilitate their restructuring and revitalization efforts. We may also forbear from exercising some or all of our rights as a creditor against them, and we may forgive loans to them in conjunction with their debt restructuring. We may take these steps even when such steps might not be warranted from the perspective of our short-term or narrow economic interests or a technical analysis of our legal rights against those borrowers, in light of other factors such as our longer-term economic interests, and our commitment to support the Japanese economy. These practices may substantially increase our exposure to troubled borrowers and increase our losses. Credit losses may also increase if we elect, or are forced by economic or other considerations, to sell or write off our problem loans at a larger discount, in a larger amount or in a different time or manner, than we may otherwise want.
Although we, from time to time, enter into credit derivative transactions, including credit default swap contracts, to manage our credit risk exposure, such transactions may not provide the protection against credit defaults that we intended due to counterparty defaults or otherwise. The credit default swap contracts could also result in significant losses. As of March 31, 2011, the total notional amount of the credit default swaps we sold and credit-linked notes was ¥3.8 trillion. In addition, negative changes in financial market conditions may restrict the availability and liquidity of credit default swaps. For more information on our credit derivative transactions, see Note 21 to our consolidated financial statements included elsewhere in this Annual Report.
Our loan losses could prove to be materially different from our estimates and could materially exceed our current allowance for credit losses, in which case we may need to provide for additional allowance for credit losses and may also record credit losses beyond our allowance. Our allowance for credit losses in our loan portfolio is based on evaluations about customers creditworthiness and the value of collateral we hold. Negative changes in economic conditions or our borrowers repayment abilities could require us to provide for additional allowance. For example, borrowers in wider regions in Japan may be adversely affected due to the compensation issues for affected individuals and companies, electricity power supply shortages, supply chain disruptions and other indirect consequences of the Great East Japan Earthquake beyond our expectations, and as a result, our borrowers may incur greater financial and/or nonfinancial losses than our estimations. In such case, we may need to provide for additional allowance for credit losses. Also, the regulatory standards or guidance on establishing allowances may also change, causing us to change some of the evaluations used in determining the allowances. As a result, we may need to provide for additional allowance for credit losses. For a discussion of our allowance policy, see Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancial Condition.
If the Japanese stock market or other global markets decline in the future, we may incur losses on our securities portfolio and our capital ratios will be adversely affected.
A decline in Japanese stock prices could reduce the value of the Japanese domestic marketable equity securities that we hold, which accounted for 6.2% of our total investment securities portfolio, or 1.8% of our total assets, as of March 31, 2011. The Nikkei Stock Average declined from ¥11,089.94 at March 31, 2010 to ¥9,755.10 at March 31, 2011, mainly reflecting investor sentiment that remains cautious in light of uncertainties surrounding the global financial and capital markets and the adverse impact of the Great East Japan Earthquake. If stock market prices further decline or do not improve, we may incur additional losses on our securities portfolio. Because we hold a large amount of Japanese domestic marketable equity securities, even short-term fluctuations in the value of our securities may trigger losses or exist costs for us to manage our risk. Further declines in the Japanese stock market or other global markets may also materially and adversely affect our capital ratios and financial condition. For a detailed discussion of our holdings of marketable equity securities and the effect of market declines on our capital ratios, see Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesCapital Adequacy and Selected Statistical DataInvestment Portfolio.
If our strategic alliance with Morgan Stanley fails, we could suffer financial or reputational loss.
We have entered into a global strategic alliance with Morgan Stanley, under which we operate two joint venture securities companies in Japan, engage in joint corporate finance operations in the United States and pursue other cooperative opportunities. As a result of our voluntary conversion on June 30, 2011 of the convertible preferred stock previously issued to us by Morgan Stanley, we currently hold approximately 22.4% of the voting rights in Morgan Stanley and continue to hold approximately $520 million of perpetual non-cumulative non-convertible preferred stock with a 10% dividend. In addition, we have appointed a second representative to Morgan Stanleys board of directors.
We initially entered into this strategic alliance in October 2008 with a view towards long-term cooperation with Morgan Stanley, and currently plan to deepen the strategic alliance, given that the voluntary conversion of the convertible preferred stock to the common stock was completed as described above. However, due to any unexpected changes in social, economic or financial conditions, or any failure to integrate or share staff, products or services, or to operate, manage or implement the business strategy of the securities joint venture companies or other cooperative opportunities as planned, we may be unable to achieve the expected synergies from this alliance.
If our strategic alliance with Morgan Stanley is terminated, it could have a material negative impact on our business strategy, financial condition, and results of operations. For example, because we conduct our securities operations in Japan through the joint venture companies we have with Morgan Stanley, such termination may result in our inability to attain the planned growth in this line of business.
In addition, with our current investment in Morgan Stanley, we have neither a controlling interest in, nor control over the business operations of Morgan Stanley. If Morgan Stanley makes any business decisions that are inconsistent with our interests, we may be unable to achieve the goals initially set out for the strategic alliance. Furthermore, although we do not control Morgan Stanley, given the magnitude of our investment, if Morgan Stanley encounters financial or other business difficulties, we may suffer a financial loss on our investment or damage to our reputation.
Following the conversion of the preferred stock into common stock as described above, Morgan Stanley is expected to be treated as an equity-method affiliate of MUFG in the future consolidated financial statements prepared by MUFG. Accordingly, Morgan Stanleys performance will have a more significant impact on our results of operations as a result of equity method accounting.
For a detailed discussion of our strategic alliance with Morgan Stanley, see Item 5. Operating and Financial Review and ProspectsRecent Developments.
Because of our loans to consumers and our shareholdings in companies engaged in consumer lending, changes in the business or regulatory environment for consumer finance companies in Japan may further adversely affect our financial results.
We have a large loan portfolio in the consumer lending industry as well as large shareholdings in subsidiaries and equity method investees in the consumer finance industry. Our domestic loans to consumers amount to approximately one-fifth of our total outstanding loans. Of this amount, the consumer loans provided by Mitsubishi UFJ NICOS, Co., Ltd., which is our primary consumer financing subsidiary, was ¥872.0 billion as of March 31, 2011, compared to ¥1,032.6 billion as of March 31, 2010. Mitsubishi UFJ NICOSs consumer loan portfolio has been adversely affected by a series of regulatory reforms recently implemented in Japan.
The Japanese government has been implementing regulatory reforms affecting the consumer lending industry in recent years. In December 2006, the Diet passed legislation to reform the regulations relating to the consumer lending business, including amendments to the Law Concerning Acceptance of Investment, Cash Deposit and Interest Rate, etc., which, effective June 18, 2010, reduced the maximum permissible interest rate from 29.2% per annum to 20% per annum. The regulatory reforms also included amendments to the Law Concerning Lending Business, which, effective June 18, 2010, abolished the so-called gray-zone interest.
Gray-zone interest refers to interest rates exceeding the limits stipulated by the Interest Rate Restriction Law (between 15% per annum to 20% per annum depending on the amount of principal). Prior to June 18, 2010, gray-zone interest was permitted under certain conditions set forth in the Law Concerning Lending Business. As a result of the regulatory reforms, all interest rates are now subject to the lower limits imposed by the Interest Rate Restriction Law, compelling lending institutions, including our consumer finance subsidiaries and equity method investees, to lower the interest rates they charge borrowers. The new regulations that became effective on June 18, 2010 also have had a further negative impact on the business of consumer finance companies as one of those new regulations requires, among other things, consumer finance companies to limit their lending to a single customer to a maximum of one third of the customers annual income regardless of the customers repayment capability, significantly reducing business opportunities for the affected consumer financing companies.
In addition, as a result of decisions by the Supreme Court of Japan prior to June 18, 2010 imposing stringent requirements under the Law Concerning Lending Business for charging gray-zone interest rates, consumer finance companies have experienced a significant increase in borrowers claims for reimbursement of previously collected interest payments in excess of the limits stipulated by the Interest Rate Restriction Law.
Following the various legal developments in June 2010 and other industry developments, Mitsubishi UFJ NICOS revised its estimate by updating managements future forecast to reflect new reimbursement claims information and other data. As of March 31, 2010 and 2011, we had ¥84.2 billion and ¥136.9 billion of allowance for repayment of excess interest, respectively. For the fiscal years ended March 31, 2010 and 2011, we recorded provisions for repayment of excess interest of ¥44.8 billion and ¥85.7 billion, respectively. For the same periods, one of our equity method investees engaged in consumer lending had a negative impact of ¥23.1 billion and ¥96.4 billion, respectively, on equity in losses of equity method investees in our consolidated statement of operations. We intend to carefully monitor future developments and trends.
These developments have adversely affected, and these and any future developments may further adversely affect, the operations and financial condition of our subsidiaries and borrowers which are engaged in consumer lending, which in turn may affect the value of our related shareholdings and loan portfolio. In particular, to further strengthen our consumer finance business as a core business of our group, in August 2008, we increased our interest in our consolidated subsidiary, Mitsubishi UFJ NICOS, and separately, in October 2008, increased our interest in ACOM CO., LTD., an equity method investee. In March 2011, we made an additional capital injection of approximately ¥85.0 billion in Mitsubishi UFJ NICOS. As a result of these investments, any negative developments in the consumer finance industry may have a greater impact on our consolidated results of operations and financial condition.
Increases in interest rates could adversely affect the value of our bond portfolio.
The aggregate estimated fair value of the Japanese government and corporate bonds and foreign bonds, including US Treasury bonds, that we hold has increased in recent fiscal years to 24.9% of our total assets as of March 31, 2011. In particular, the Japanese government and Japanese government agency bonds accounted for 22.6% of our total assets as of March 31, 2011. For a detailed discussion of our bond portfolio, see Selected Statistical DataInvestment Portfolio.
The Bank of Japan has been maintaining a very low policy rate (uncollateralized overnight call rate) of 0.10% in an effort to lift the economy out of deflation. Short-term interest rates continue to decline because of the Bank of Japans so-called monetary easing policy. Interest rates in other major global financial markets, including the United States and the European Union, have remained at historic low levels in recent years. An increase in relevant interest rates, particularly if such increase is unexpected or sudden, may have a significant negative effect on the value of our bond portfolio. See Item 5. Operating and Financial Review and ProspectsBusiness Environment.
Fluctuations in foreign currency exchange rates may result in transaction losses on translation of monetary assets and liabilities denominated in foreign currencies as well as foreign currency translation losses with respect to our foreign subsidiaries and equity method investees.
Fluctuations in foreign currency exchange rates against the Japanese yen create transaction gains or losses on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies. To the extent that our foreign currency-denominated assets and liabilities are not matched in the same currency or appropriately hedged, we could incur losses due to future foreign exchange rate fluctuations. During the fiscal year ended March 31, 2011, the average balance of our foreign interest-earning assets was ¥49.5 trillion and the average balance of our foreign interest-bearing liabilities was ¥34.4 trillion, representing 27.4% of our average total interest-earning assets and 21.3% of our average total interest-bearing liabilities during the same period. For the fiscal year ended March 31, 2011, net foreign exchange gains, which primarily include transaction gains on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies and net gains on currency derivatives instruments entered into for trading purposes, were ¥260.7 billion, compared to net foreign exchange gains of ¥216.7 billion for the previous fiscal year. In addition, we may incur foreign currency translation losses with respect to our foreign subsidiaries and equity method investees due to fluctuations in foreign currency exchange rates. The average exchange rate for the fiscal year ended March 31, 2011 was ¥85.72 per US$1.00, compared to the average exchange rate for the fiscal year ended March 31, 2010 of ¥92.85 per US$1.00. The average exchange rate for the conversion of the US dollar financial statements of some of our foreign subsidiaries for the fiscal year ended December 31, 2010 was ¥87.81 per US$1.00, compared to the average exchange rate for the fiscal year ended December 31, 2009 of ¥93.57 per US$1.00. The change in the average exchange rate of the Japanese yen against the US dollar and other foreign currencies had the effect of decreasing total revenue by ¥135.6 billion, net interest income by ¥47.1 billion and income before income tax expense by ¥91.2 billion, respectively, for the fiscal year ended March 31, 2011. For more information on foreign exchange gains and losses and foreign currency translation gains and losses, see Item 5.A. Operating and Financial Review and ProspectsOperating ResultsResults of Operations.
Any adverse changes in the business of Union Bank, an indirect wholly-owned subsidiary in the United States, could significantly affect our results of operations.
Union Bank, N.A., or Union Bank, is the primary subsidiary of UnionBanCal Corporation, or UNBC, which is an indirect wholly-owned subsidiary in the United States. Union Bank has historically contributed to a significant portion of our net income. UNBC reported net income of $269 million for the fiscal year ended December 31, 2008, net loss of $65 million for the fiscal year ended December 31, 2009, and net income of $573 million for the fiscal year ended December 31, 2010. Any adverse developments which could arise at Union Bank have a great negative impact on our results of operation and financial condition. The risks relating to Union Bank have increased as Union Bank has been expanding its business through acquisitions of community banks. In April 2010, Union Bank acquired approximately $600 million in total assets and assumed more than $400 million in deposits of Tamalpais Bank, a California-based bank, and acquired approximately $3.2 billion in total assets and assumed approximately $2.5 billion in deposits of Frontier Bank, a Washington-based bank, pursuant to its respective purchase and assumption agreements with the US Federal Deposit Insurance Corporation. If Union Bank is unable to achieve the benefits expected from its business strategies, including its business expansion strategy through acquisitions of failing community banks, we will suffer an adverse financial impact. Other factors that have negatively affected, and could continue to negatively affect, Union Banks results of operations include adverse economic conditions, such as a downturn in the real estate and housing industries in California and other states within the United States, substantial competition in the banking markets in California and other states within the United States and uncertainty over the US economy, as well as the threat of terrorist attacks, fluctuating oil prices, rising interest rates, negative trends in debt ratings, additional costs which may arise from enterprise-wide compliance, or failure to comply, with applicable laws and regulations, such as the US Bank Secrecy Act and related amendments under the USA PATRIOT Act, and any adverse impact of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
We may incur further losses as a result of financial difficulties relating to other financial institutions, both directly and through the effect they may have on the overall banking environment and on their borrowers.
Some domestic and foreign financial institutions, including banks, non-bank lending and credit institutions, securities companies and insurance companies, have experienced declining asset quality and capital adequacy and other financial problems. This may lead to severe liquidity and solvency problems, which have in the past resulted in the liquidation, government control or restructuring of affected institutions. In addition, allegations or governmental prosecution of improper trading activities or inappropriate business conduct of a specific financial institution could also negatively affect the public perception of other global financial institutions individually and the global financial industry as a whole. These developments may adversely affect our financial results.
Financial difficulties relating to financial institutions could adversely affect us because we have extended loans, some of which may need to be classified as nonaccrual and restructured loans, to banks, securities companies, insurance companies and other financial institutions that are not our consolidated subsidiaries. Our loans to banks and other financial institutions have been more than 5% of our total loans as of each year-end in the three fiscal years ended March 31, 2011, with the percentage increasing from 7.7% to 8.0% between March 31, 2010 and March 31, 2011. We may also be adversely affected because we are a shareholder of some other banks and financial institutions that are not our consolidated subsidiaries, including Japanese regional banks as part of our strategic equity investment securities portfolio. In addition, we currently hold an approximately 22.4% of the voting rights in Morgan Stanley. We may also be adversely affected because we enter into transactions, such as derivative transactions, in the ordinary course of business, with other banks and financial institutions as counterparties. For example, we enter into credit derivatives with banks, broker-dealers, insurance and other financial institutions for managing credit risk exposures, for facilitating client transactions, and for proprietary trading purpose. The notional amount of the protection we sold through these instruments was ¥3.8 trillion as of March 31, 2011.
In addition, financial difficulties relating to financial institutions could indirectly have an adverse effect on us because:
we may be requested to participate in providing assistance to support distressed financial institutions that are not our consolidated subsidiaries;
the government may elect to provide regulatory, tax, funding or other benefits to those financial institutions to strengthen their capital, facilitate their sale or otherwise, which in turn may increase their competitiveness against us;
deposit insurance premiums could rise if deposit insurance funds prove to be inadequate;
bankruptcies or government support or control of financial institutions could generally undermine confidence in financial institutions or adversely affect the overall banking environment;
failures or financial difficulties experienced by other financial institutions could result in additional regulations or requirements that increase the cost of business for us; and
negative media coverage of the financial industry, regardless of its accuracy and applicability to us, could affect customer or investor sentiment, harm our reputation and have a materially adverse effect on our business or the price of our securities.
Our strategy to expand the range of our financial products and services and the geographic scope of our business globally may fail if we are unable to anticipate or manage new or expanded risks that entail such expansion.
We continue to seek opportunities to expand the range of our products and services beyond our traditional banking and trust businesses, through development and introduction of new products and services or through acquisitions of or investments in financial institutions with products and services that complement our business. For example, taking advantage of our financial holding company status which enables us to underwrite securities,
we are currently seeking to expand our corporate banking operations in the United States. In addition, the sophistication of financial products and management systems has been growing significantly in recent years. As a result, we are exposed to new and increasingly complex risks. Some of the activities that our subsidiaries are expected to engage in, such as derivatives and foreign currency trading, present substantial risks. In some cases, we have only limited experience with the risks related to the expanded range of these products and services. In addition, we may not be able to successfully develop or operate the necessary information systems. As a result, we may not be able to foresee the risks relating to new products and services. As we expand the geographic scope of our business, we will also be exposed to risks that are unique to particular jurisdictions or markets. Our risk management systems may prove to be inadequate and may not work in all cases or to the degree required. The substantial market, credit, compliance and regulatory risks in relation to the expanding scope of our products, services and trading activities or expanding our business beyond our traditional markets, could result in us incurring substantial losses. In addition, our efforts to offer new services and products or penetrate new markets may not succeed if product or market opportunities develop more slowly than expected, if our new services or products are not well accepted among customers, or if the profitability of opportunities is undermined by competitive pressures. For a detailed discussion of our risk management systems, see Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk.
Unanticipated economic changes in, and measures taken in response to such changes by, emerging market countries could result in additional losses.
We are increasingly active, through a network of branches and subsidiaries, in emerging market countries, particularly countries in Asia, Latin America, Central and Eastern Europe, and the Middle East. For example, based principally on the domicile of obligors, assets related to Asia and Oceania, excluding Japan, increased 29.6% from ¥8.42 trillion as of March 31, 2010 to ¥10.91 trillion as of March 31, 2011, accounting for 5.4% of our total assets as of March 31, 2011. The economies of emerging market countries can be volatile and susceptible to adverse changes and trends in the global financial markets. For example, a decline in the value of local currencies of these countries could negatively affect the creditworthiness of some of our borrowers in these countries. The loans we have made to borrowers and banks in these countries are often denominated in US dollars, Euro or other foreign currencies. These borrowers often do not hedge the loans to protect against fluctuations in the values of local currencies. A devaluation of the local currency would make it more difficult for a borrower earning income in that currency to pay its debts to us and other foreign lenders. In addition, some countries in which we operate may attempt to support the value of their currencies by raising domestic interest rates. If this happens, the borrowers in these countries would have to devote more of their resources to repaying their domestic obligations, which may adversely affect their ability to repay their debts to us and other foreign lenders. The limited credit availability resulting from these conditions may adversely affect economic conditions in some countries. This could cause a further deterioration of the credit quality of borrowers and banks in those countries and cause us to incur further losses. In addition, should there be excessively rapid economic growth and increasing inflationary pressure in some of the emerging market countries, such developments could adversely affect the wider regional and global economies. Some emerging market countries may also change their monetary or other economic policies in response to economic and political instabilities or pressures, which are difficult to predict. As of March 31, 2011, based on the domicile of obligors, our assets in Europe, Asia and Oceania (excluding Japan), and other areas (excluding Japan and the United States) were ¥17.04 trillion, ¥10.91 trillion and ¥5.65 trillion, representing 8.4%, 5.4% and 2.8% of our total assets, respectively. See Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancial Condition.
Our business may be adversely affected by competitive pressures, which have partly increased due to regulatory changes and recent market changes in the financial industry domestically and globally.
In recent years, the Japanese financial system has been undergoing significant changes and regulatory barriers to competition have been reduced. In particular, any further reform of the Japanese postal savings system, under which the Japan Post Group companies, including Japan Post Bank Co., Ltd., were established in October 2007, could substantially increase competition within the financial services industry as Japan Post Bank, with the largest deposit base and branch network in Japan, may begin to offer financial services in competition
with our business operations generating fee income. In addition, there has been significant consolidation and convergence among financial institutions domestically and globally, and this trend may continue in the future and further increase competition in the market. A number of large commercial banks and other broad-based financial services firms have merged or formed strategic alliances with, or have acquired, other financial institutions both in Japan and overseas. As a result of the strategic alliance and the joint venture companies that we formed with Morgan Stanley, we may be newly perceived as a competitor by some of the financial institutions with which we had a more cooperative relationship in the past. If we are unable to compete effectively in this more competitive and deregulated business environment, our business, results of operations and financial condition will be adversely affected. For a more detailed discussion of our competition in Japan, see Item 4.B. Information on the CompanyBusiness OverviewCompetitionJapan.
Future changes in accounting standards and regulatory requirements could have a negative impact on our business and results of operations.
Future developments or changes in laws, regulations, policies, standards, voluntary codes of practice and their effects are unpredictable and beyond our control. For example, Japanese and other international organizations that set accounting standards have released proposals to revise accounting standards applicable to retirement benefit obligations. The Accounting Standards Board of Japan has published proposals that, if adopted, would require companies preparing their financial statements in accordance with Japanese GAAP to record as liabilities on balance sheets actuarial losses and unrecognized past service cost, which are currently not recorded as liabilities on balance sheets. The proposed changes, if adopted, could have a significant negative impact on our capital ratios since we calculate our capital ratios in accordance with Japanese banking regulations based on information derived from our financial statements prepared in accordance with Japanese GAAP. For more information, see Risks Related to Our BusinessWe may not be able to maintain our capital ratios above minimum required levels, which could result in the suspension of some or all of our operations.
In addition, in response to the recent instabilities in financial markets, several international organizations which set accounting standards have released proposals to revise standards on accounting for financial instruments. Accounting standards applicable to financial instruments remain subject to debate and revision by international organizations which set accounting standards. If the current accounting standards change in the future, the reported values of some of our financial instruments may need to be modified, and such modification could have a significant impact on our financial results or financial condition. For more information, see Item 5. Operating and Financial Review and ProspectsCritical Accounting Estimates.
We could also be required to incur significant expenses to comply with new standards and regulations. For example, if we adopt a new accounting system in the future, we may be required to incur significant additional costs for establishing and implementing effective internal controls, which may materially and adversely affect our financial condition and results of operations.
In addition, additional regulatory requirements could have an adverse impact on our future business and results of operations. For example, regulations relating to the consumer lending business which became effective in June 2010 impose, among other things, a limit on the amount of borrowing available to individual borrowers, which in turn have negatively affected our profitability. For more information on regulatory changes in the consumer finance industry, see Risks Related to Our BusinessBecause of our loans to consumers and our shareholdings in companies engaged in consumer lending, changes in the business or regulatory environment for consumer finance companies in Japan may further adversely affect our financial results.
Transactions with counterparties in countries designated by the US Department of State as state sponsors of terrorism may lead some potential customers and investors in the United States and other countries to avoid doing business with us or investing in our shares.
We, through our banking subsidiaries, engage in business activities with entities in or affiliated with Iran, including transactions with counterparties owned or controlled by the Iranian government, and the banking
subsidiary has a representative office in Iran. The US Department of State has designated Iran and other countries as state sponsors of terrorism, and US law generally prohibits US persons from doing business with such countries. We currently have business activities with entities in or affiliated with Iran in accordance with our policies and procedures designed to ensure compliance with regulations applicable in the jurisdictions in which we operate.
Our transactions with counterparties in or affiliated with Iran consist primarily of loans, the outstanding balance of which was approximately $17.3 million, representing less than 0.001% of our total assets, as of March 31, 2011. We do not have any loans outstanding to the financial institutions specifically listed by the US government. We do not believe our business activities relating to Iran are material to our business or financial condition. In addition to the loans, we also receive deposits or hold assets on behalf of several individuals resident in Japan who are citizens of countries designated as state sponsors of terrorism.
We are aware of initiatives by US governmental entities and non-government entities, including institutional investors such as pension funds, to adopt or consider adopting laws, regulations or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with Iran and other countries identified as state sponsors of terrorism. It is possible that such initiatives may result in our being unable to gain or retain entities subject to such prohibitions as customers, counter-parties or investors in our shares. In addition, depending on socio-political developments, our reputation may suffer due to our association with these countries. The above circumstances could have an adverse effect on our business and financial condition.
During the fiscal year ended March 31, 2011, US federal and state governments enacted new legislation designed to limit economic and financial transactions with Iran by limiting the ability of financial institutions that may have engaged in any one of a broad range of activities related to Iran to conduct various transactions in the relevant jurisdictions. Furthermore, since September 2010, the Japanese government has implemented a series of measures under the Foreign Exchange and Foreign Trade Act, such as freezing the assets of designated financial institutions and others that could contribute to Irans nuclear activities, and our most recently modified policies and procedures take into account the new Japanese regulatory requirements. There remains a risk of potential US regulatory action against us, however, if US regulators perceive the modified policies and procedures not to be in compliance with applicable regulations.
We may not be able to maintain our capital ratios above minimum required levels, which could result in the suspension of some or all of our operations.
We, as a holding company, and our Japanese banking subsidiaries are required to maintain risk-weighted capital ratios above the levels specified in the capital adequacy guidelines of the Financial Services Agency of Japan. As of March 31, 2011, our total risk-adjusted capital ratio was 14.89% compared to the minimum risk-adjusted capital ratio required of 8.00%, and our Tier I capital ratio was 11.33% compared to the minimum Tier I capital ratio required of 4.00%. Our capital ratios are calculated in accordance with Japanese banking regulations based on information derived from our financial statements prepared in accordance with Japanese GAAP. In addition, some of our subsidiaries are also subject to the capital adequacy rules of various foreign countries, including the United States where each of MUFG, BTMU, MUTB and UNBC is a financial holding company under the US Bank Holding Company Act. We or our banking subsidiaries may be unable to continue to satisfy the capital adequacy requirements because of:
increases in credit risk assets and expected losses we or our subsidiaries may incur due to fluctuations in our or our subsidiaries loan and securities portfolios as a result of deteriorations in the credit of our borrowers and the issuers of equity and debt securities;
increases in credit costs we or our subsidiaries may incur as we or our subsidiaries dispose of problem loans or as a result of deteriorations in the credit of our borrowers;
declines in the value of our or our subsidiaries securities portfolio;
changes in the capital ratio requirements or in the guidelines regarding the calculation of bank holding companies or banks capital ratios or changes in the regulatory capital requirements for securities firms;
a reduction in the value of our or our subsidiaries deferred tax assets;
adverse changes in foreign currency exchange rates; or
other adverse developments discussed in these risk factors.
The Group of Central Bank Governors and Heads of Supervision has made a series of announcements regarding the new global regulatory framework, which has been referred to as Basel III, to strengthen the regulation, supervision and risk management of the banking sector. Various Basel III measures are expected to be introduced in phases starting in calendar 2013, including those designed to raise the level of minimum capital requirements and to establish an internationally harmonized leverage ratio and a global minimum liquidity standard. In addition, in July 2011, the Basel Committee on Banking Supervision proposed additional loss absorbency requirements to supplement the common equity Tier I capital requirement ranging from 1% to 2.5% for global systemically important banks, depending on the banks systemic importance. Based on the Basel III framework, the Japanese capital ratio framework, which is currently based on Basel II, is likely to be revised to implement the more stringent requirements. Likewise, local banking regulators outside of Japan such as those in the United States are likely to revise the capital and liquidity requirements imposed on our subsidiaries and operations in those countries to implement the more stringent requirements of Basel III as adopted in those countries.
If our capital ratios fall below required levels, the Financial Services Agency of Japan could require us to take a variety of corrective actions, including withdrawal from all international operations or suspension of all or part of our business operations. In addition, if the capital ratios of our subsidiaries subject to capital adequacy rules of foreign jurisdictions fall below the required levels, the local regulators could also take action against them that may result in reputational damage or financial losses to us. For a discussion of our capital ratios and the related regulatory guidelines, see Item 4.B. Information on the CompanyBusiness OverviewSupervision and Regulation and Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesCapital Adequacy.
If the goodwill recorded in connection with our acquisitions becomes impaired, we may be required to record impairment losses, which may adversely affect our financial results and the price of our securities.
In accordance with US GAAP, we account for our business combinations using the acquisition method of accounting. We recorded the excess of the purchase price over the fair value of the assets and liabilities of the acquired companies as goodwill. US GAAP requires us to test goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
For the fiscal year ended March 31, 2009, the global financial crisis and recession led to a decline in our market capitalization and negatively affected the fair value of our reporting units for purposes of our periodic testing of goodwill for impairment. As a result, we recorded ¥845.8 billion of goodwill impairment losses for the fiscal year ended March 31, 2009. For the fiscal years ended March 31, 2010 and 2011, we recorded ¥0.5 billion and nil of goodwill impairment losses, respectively. As of March 31, 2011, the balance of goodwill was ¥363.4 billion.
We may be required to record additional impairment losses relating to goodwill in future periods if the fair value of any of our reporting units declines below the fair value of related assets net of liabilities. Any additional impairment losses will negatively affect our financial results, and the price of our securities could be adversely affected. For a detailed discussion of our periodic testing of goodwill for impairment and the goodwill recorded, see Item 5. Operating and Financial Review and ProspectsCritical Accounting EstimatesAccounting for Goodwill and Intangible Assets and Item 5.B. Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancial ConditionGoodwill.
Risks Related to Owning Our Shares
It may not be possible for investors to effect service of process within the United States upon us or our directors, corporate auditors or other management members, or to enforce against us or those persons judgments obtained in US courts predicated upon the civil liability provisions of the US federal or state securities laws.
We are a joint stock company incorporated under the laws of Japan. Almost all of our directors, corporate auditors or other management members reside outside the United States. Many of our assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for US investors to effect service of process within the United States upon us or these persons or to enforce, against us or these persons, judgments obtained in the US courts predicated upon the civil liability provisions of the US federal or state securities laws.
We believe there is doubt as to the enforceability in Japan, in original actions or in actions brought in Japanese courts to enforce judgments of US courts, of claims predicated solely upon the US federal or state securities laws mainly because the Civil Execution Act of Japan requires Japanese courts to deny requests for the enforcement of judgments of foreign courts if foreign judgments fail to satisfy the requirements prescribed by the Civil Execution Act, including:
the jurisdiction of the foreign court be recognized under laws, regulations, treaties or conventions;
proper service of process be made on relevant defendants, or relevant defendants be given appropriate protection if such service is not received;
the judgment and proceedings of the foreign court not be repugnant to public policy as applied in Japan; and
there exist reciprocity as to the recognition by a court of the relevant foreign jurisdiction of a final judgment of a Japanese court.
Judgments obtained in the US courts predicated upon the civil liability provisions of the US federal or state securities laws may not satisfy these requirements.
Risks Related to Owning Our ADSs
As a holder of ADSs, you have fewer rights than a shareholder of record in our shareholder register since you must act through the depositary to exercise these rights.
The rights of our shareholders under Japanese law to take actions such as voting, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to shareholders of record. Because the depositary, through its custodian, is the record holder of the shares underlying the American Depositary Shares, or ADSs, only the depositary can exercise shareholder rights relating to the deposited shares. ADS holders, in their capacity, will not be able to directly bring a derivative action, examine our accounting books and records and exercise appraisal rights. We have appointed The Bank of New York Mellon as depositary, and we have the authority to replace the depositary.
Pursuant to the deposit agreement among us, the depositary and a holder of ADSs, the depositary will make efforts to exercise voting or any other rights associated with shares underlying ADSs in accordance with the instructions given by ADS holders, and to pay to ADS holders dividends and distributions collected from us. However, the depositary can exercise reasonable discretion in carrying out the instructions or making distributions, and is not liable for failure to do so as long as it has acted in good faith. Therefore, ADS holders may not be able to exercise voting or any other rights in the manner that they had intended, or may lose some or all of the value of the dividends or the distributions. Moreover, the depositary agreement that governs the obligations of the depositary may be amended or terminated by us and the depositary without your consent, notice, or any reason. As a result, you may be prevented from having the rights in connection with the deposited shares exercised in the way you had wished or at all.
ADS holders are dependent on the depositary to receive our communications. We send to the depositary all of our communications to ADS holders, including annual reports, notices and voting materials, in Japanese. ADS holders may not receive all of our communications with shareholders of record in our shareholder register in the same manner or on an equal basis. In addition, ADS holders may not be able to exercise their rights as ADS holders due to delays in the depositary transmitting our shareholder communications to ADS holders. For a detailed discussion of the rights of ADS holders and the terms of the deposit agreement, see Item 10.B. Additional InformationMemorandum and Articles of Association.
|Item 4.||Information on the Company.|
|A.||History and Development of the Company.|
Mitsubishi UFJ Financial Group, Inc.
MUFG is a bank holding company incorporated as a joint stock company (kabushiki kaisha) under the Company Law of Japan. We are the holding company for The Bank of Tokyo-Mitsubishi UFJ, Ltd., or BTMU, Mitsubishi UFJ Trust and Banking Corporation, or MUTB, Mitsubishi UFJ Securities Holdings Co., Ltd., or MUSHD, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., or MUMSS, Mitsubishi UFJ NICOS Co., Ltd., or Mitsubishi UFJ NICOS, and other companies engaged in a wide range of financial businesses.
On April 2, 2001, The Bank of Tokyo-Mitsubishi, Ltd., Mitsubishi Trust and Banking Corporation, or Mitsubishi Trust Bank, and Nippon Trust Bank Limited established Mitsubishi Tokyo Financial Group, Inc., or MTFG, to be a holding company for the three entities. Before that, each of the banks had been a publicly held company. On April 2, 2001, through a stock-for-stock exchange, they became wholly owned subsidiaries of MTFG, and the former shareholders of the three banks became shareholders of MTFG. Nippon Trust Bank Limited was later merged into Mitsubishi Trust Bank.
On June 29, 2005, the merger agreement between MTFG and UFJ Holdings was approved at the general shareholders meetings of MTFG and UFJ Holdings. As the surviving entity, Mitsubishi Tokyo Financial Group, Inc. was renamed Mitsubishi UFJ Financial Group, Inc. The merger of the two bank holding companies was completed on October 1, 2005.
On September 30, 2007, MUSHD, which was then called Mitsubishi UFJ Securities Co., Ltd., or MUS, became our wholly owned subsidiary through a share exchange transaction.
On October 13, 2008, we made an investment in Morgan Stanley as part of a global strategic alliance. On June 30, 2011, we converted the convertible preferred stock previously issued to us by Morgan Stanley into shares of common stock, resulting in our holding approximately 22.4% of the voting rights in Morgan Stanley. Morgan Stanley is expected to be treated as an equity-method affiliate of MUFG in the future consolidated financial statements prepared by MUFG. We and Morgan Stanley continue to pursue a variety of business opportunities in Japan and abroad in accordance with the global strategic alliance.
On October 21, 2008, we completed a tender offer for outstanding shares of ACOM CO., LTD. common stock, raising our ownership in ACOM to approximately 40%.
On November 4, 2008, BTMU completed the acquisition of all of the shares of common stock of UnionBanCal Corporation, or UNBC, not owned by BTMU and, as a result, UNBC became a wholly owned indirect subsidiary of MUFG.
On May 1, 2010, we and Morgan Stanley integrated our securities and investment banking businesses in Japan into two joint venture securities companies, one of which is MUMSS created by spinning off the wholesale and retail securities businesses conducted in Japan from MUSHD and subsequently assuming certain operations in Japan from a subsidiary of Morgan Stanley.
Our registered address is 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8330, Japan, and our telephone number is 81-3-3240-8111.
For a discussion of recent developments, see Item 5. Operating and Financial Review and ProspectsRecent Developments.
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
BTMU is a major commercial banking organization in Japan that provides a broad range of domestic and international banking services from its offices in Japan and around the world. BTMUs registered head office is located at 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8388, Japan, and its telephone number is 81-3-3240-1111. BTMU is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law.
BTMU was formed through the merger, on January 1, 2006, of Bank of Tokyo-Mitsubishi and UFJ Bank Limited after their respective parent companies, MTFG and UFJ Holdings, merged to form MUFG on October 1, 2005.
Bank of Tokyo-Mitsubishi was formed through the merger, on April 1, 1996, of The Mitsubishi Bank, Limited and The Bank of Tokyo, Ltd.
The origins of Mitsubishi Bank can be traced to the Mitsubishi Exchange Office, a money exchange house established in 1880 by Yataro Iwasaki, the founder of the Mitsubishi industrial, commercial and financial group. In 1895, the Mitsubishi Exchange Office was succeeded by the Banking Division of the Mitsubishi Goshi Kaisha, the holding company of the Mitsubishi group of companies. Mitsubishi Bank had been a principal bank to many of the Mitsubishi group companies but broadened its relationships to cover a wide range of Japanese industries, small and medium-sized companies and individuals.
Bank of Tokyo was established in 1946 as a successor to The Yokohama Specie Bank, Ltd., a special foreign exchange bank established in 1880. When the government of Japan promulgated the Foreign Exchange Bank Law in 1954, Bank of Tokyo became the only bank licensed under that law. Because of its license, Bank of Tokyo received special consideration from the Ministry of Finance in establishing its offices abroad and in many other aspects relating to foreign exchange and international finance.
UFJ Bank was formed through the merger, on January 15, 2002, of The Sanwa Bank, Limited and The Tokai Bank, Limited.
Sanwa Bank was established in 1933 when the three Osaka-based banks, the Konoike Bank, the Yamaguchi Bank, and the Sanjyushi Bank merged. Sanwa Bank was known as a city bank having the longest history in Japan, since the foundation of Konoike Bank can be traced back to the Konoike Exchange Office established in 1656. The origin of Yamaguchi Bank was also a money exchange house, established in 1863. Sanjyushi Bank was founded by influential fiber wholesalers in 1878. The corporate philosophy of Sanwa Bank had been the creation of the premier banking services especially for small and medium-sized companies and individuals.
Tokai Bank was established in 1941 when the three Nagoya-based banks, the Aichi Bank, the Ito Bank, and the Nagoya Bank merged. In 1896, Aichi Bank took over businesses of the Jyuichi Bank established by wholesalers in 1877 and the Hyakusanjyushi Bank established in 1878. Ito Bank and Nagoya Bank were established in 1881 and 1882, respectively. Tokai Bank had expanded the commercial banking business to contribute to economic growth mainly of the Chubu area in Japan, which is known for the manufacturing industry, especially automobiles.
Mitsubishi UFJ Trust and Banking Corporation
MUTB is a major trust bank in Japan, providing trust and banking services to meet the financing and investment needs of clients in Japan and the rest of Asia, as well as in the United States and Europe. MUTBs registered head office is located at 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan, and its telephone number is 81-3-3212-1211. MUTB is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law.
MUTB was formed on October 1, 2005 through the merger of Mitsubishi Trust and Banking Corporation, or Mitsubishi Trust Bank, and UFJ Trust Bank Limited. As the surviving entity, Mitsubishi Trust Bank was renamed Mitsubishi UFJ Trust and Banking Corporation.
Mitsubishi Trust Bank traces its history to The Mitsubishi Trust Company, Limited, which was founded by the leading members of the Mitsubishi group companies in 1927. The Japanese banking and financial industry was reconstructed after World War II and, in 1948, Mitsubishi Trust Bank was authorized to engage in the commercial banking business, in addition to its trust business, under the new name Asahi Trust & Banking Corporation. In 1952, the bank changed its name again, to The Mitsubishi Trust and Banking Corporation.
Nippon Trust Bank and The Tokyo Trust Bank, Ltd., which were previously subsidiaries of Bank of Tokyo-Mitsubishi, were merged into Mitsubishi Trust Bank on October 1, 2001.
UFJ Trust Bank was founded in 1959 as The Toyo Trust & Banking Company, Limited, or Toyo Trust Bank. The Sanwa Trust & Banking Company, Limited, which was a subsidiary of Sanwa Bank, was merged into Toyo Trust Bank on October 1, 1999. The Tokai Trust & Banking Company, Limited, which was a subsidiary of Tokai Bank, was merged into Toyo Trust Bank on July 1, 2001. Toyo Trust Bank was renamed UFJ Trust Bank Limited on January 15, 2002.
Mitsubishi UFJ Securities Holdings Co., Ltd.
MUSHD is a wholly owned subsidiary of MUFG. MUSHD functions as an intermediate holding company of MUFGs global securities business. MUSHDs registered head office is located at 5-2, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-6317, Japan, and its telephone number is 81-3-6213-2550. MUSHD is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law. MUSHD has major overseas subsidiaries in London, New York, Hong Kong, Singapore, Shanghai and Geneva.
In April 2010, MUSHD, which was previously called Mitsubishi UFJ Securities Co., Ltd., or MUS, became an intermediate holding company by spinning off its securities and investment banking business operations to a wholly owned operating subsidiary established in December 2009, currently MUMSS. Upon the consummation of the corporate spin-off transaction, the intermediate holding company was renamed Mitsubishi UFJ Securities Holdings Co., Ltd. and the operating subsidiary was renamed Mitsubishi UFJ Securities Co., Ltd. The operating subsidiary was subsequently renamed MUMSS in May 2010 upon integration of our securities operations in Japan with those of Morgan Stanley.
MUS was formed through the merger between Mitsubishi Securities Co., Ltd. and UFJ Tsubasa Securities Co., Ltd. on October 1, 2005, with Mitsubishi Securities Co., Ltd. being the surviving entity. The surviving entity was renamed Mitsubishi UFJ Securities Co., Ltd. and, in September 2007, became our wholly-owned subsidiary through a share exchange transaction.
Mitsubishi Securities was formed in September 2002 through a merger of Bank of Tokyo-Mitsubishis securities subsidiaries and affiliate, KOKUSAI Securities Co., Ltd., Tokyo-Mitsubishi Securities Co., Ltd. and Tokyo-Mitsubishi Personal Securities Co., Ltd., and Mitsubishi Trust Banks securities affiliate, Issei Securities Co., Ltd. In July 2005, MTFG made Mitsubishi Securities a directly-held subsidiary by acquiring all of the shares of Mitsubishi Securities common stock held by Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank.
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
MUMSS is our core securities and investment banking subsidiary. MUMSS was created as one of the two Japanese joint venture securities companies in May 2010 between Morgan Stanley and us as part of our global strategic alliance. MUMSS succeeded to the investment banking operations conducted in Japan by a subsidiary of Morgan Stanley and the wholesale and retail securities businesses conducted in Japan by MUS. MUFG, through MUSHD, holds 60% voting and economic interests in MUMSS. MUMSSs registered head office is located at 5-2 Marunouchi 2-chome, Chiyoda-ku, Tokyo Japan, and its telephone number is 81-3-6213-8500.
MUMSS is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law. For more information on our strategic alliance with Morgan Stanley, see B. Business OverviewGlobal Strategic Alliance with Morgan Stanley and Item 5. Operating and Financial Review and ProspectsRecent Developments.
Mitsubishi UFJ NICOS Co., Ltd.
Mitsubishi UFJ NICOS is a major credit card company in Japan that issues credit cards, including those issued under the MUFG, NICOS, UFJ and DC brands, and provides a broad range of credit card and other related services for its card members in Japan. Mitsubishi UFJ NICOS is a consolidated subsidiary of MUFG. Mitsubishi UFJ NICOSs registered head office is located at 33-5, Hongo 3-chome, Bunkyo-ku, Tokyo 113-8411, Japan, and its telephone number is 81-3-3811-3111. Mitsubishi UFJ NICOS is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law.
On August 1, 2008, Mitsubishi UFJ NICOS became a wholly owned subsidiary of MUFG through a share exchange transaction. On the same day, we entered into a share transfer agreement with The Norinchukin Bank, or Norinchukin, under which we sold some of our shares of Mitsubishi UFJ NICOS common stock to Norinchukin. Currently, Mitsubishi UFJ NICOS is a consolidated subsidiary of MUFG. In March 2011, we and Norinchukin made additional equity investments in Mitsubishi UFJ NICOS in proportion to our and Norinchukins respective beneficial ownership of approximately 85% and 15%.
Mitsubishi UFJ NICOS was formed through the merger, on April 1, 2007, of UFJ NICOS Co., Ltd. and DC Card Co., Ltd. As the surviving entity, UFJ NICOS Co., Ltd. was renamed Mitsubishi UFJ NICOS Co., Ltd.
UFJ NICOS was formed through the merger, on October 1, 2005, of Nippon Shinpan Co., Ltd. and UFJ Card Co., Ltd. Originally founded in 1951 and listed on the Tokyo Stock Exchange in 1961, Nippon Shinpan was a leading company in the consumer credit business in Japan. Nippon Shinpan became a subsidiary of MUFG at the time of the merger with UFJ Card.
Prior to the merger between MTFG and UFJ Holdings in October 2005, DC Card was a subsidiary of MTFG while UFJ Card was a subsidiary of UFJ Holdings.
We are one of the worlds largest and most diversified financial groups with total assets of ¥203 trillion as of March 31, 2011. The Group is comprised of BTMU, MUTB, MUMSS (through MUSHD), Mitsubishi UFJ NICOS and other subsidiaries and affiliates, for which we are the holding company. As a bank holding company, we are regulated under the Banking Law of Japan. Our services include commercial banking, trust banking, securities, credit cards, consumer finance, asset management, leasing and many more fields of financial services. The Group has the largest overseas network among the Japanese banks, comprised of offices and subsidiaries, including Union Bank, N.A., or Union Bank, in more than 40 countries.
While maintaining the corporate cultures and core competencies of BTMU, MUTB, MUMSS (through MUSHD) and Mitsubishi UFJ NICOS, we, as the holding company, seek to work with them to find ways to:
establish a more diversified financial services group operating across business sectors;
leverage the flexibility afforded by our organizational structure to expand our business;
benefit from the collective expertise of BTMU, MUTB, MUMSS (through MUSHD) and Mitsubishi UFJ NICOS;
achieve operational efficiencies and economies of scale; and
enhance the sophistication and comprehensiveness of the Groups risk management expertise.
In order to further enhance our operations and increase profits, in April 2004 we introduced an integrated business group system comprising three core business areas: Retail, Corporate, and Trust Assets. These three businesses serve as the Groups core sources of net operating profit. In March 2011, the sales and trading business of MUMSS was transferred from the Integrated Corporate Banking Business Group to the Global Markets group, as described below. In July 2011, we added the Integrated Global Business Group (MUFG Global) as a fourth area by shifting some of our global operations mainly from the Integrated Corporate Banking Business Group. This change in our business segment was implemented to more effectively coordinate and enhance our group-wide efforts to strengthen and expand overseas operations. Our remaining business areas are grouped into Global Markets and Other. In addition, MUFGs role as the holding company has expanded from strategic coordination to integrated strategic management. Group-wide strategies are determined by the holding company and executed by the banking subsidiaries and other subsidiaries.
In October 2008, as part of our medium-term strategy to expand our operations in the United States, each of MUFG, BTMU, MUTB and UNBC became a financial holding company under the US Bank Holding Company Act. For more information, see Item 3.D. Key InformationRisk FactorsRisks Related to Our BusinessWe may not be able to maintain our capital ratios above minimum required levels, which could result in the suspension of some or all of our operations and Item 4.B. Information on the CompanyBusiness OverviewSupervision and RegulationUnited States.
MUFG Management Philosophy
MUFGs management philosophy serves as the basic policy in conducting its business activities, and provides guidelines for all group activities. It is also the foundation for management decisions, including the formulation of management strategies and management plans, and serves as the core value for all employees. BTMU, MUTB, MUMSS (through MUSHD) and Mitsubishi UFJ NICOS adopted the MUFGs management philosophy as their own respective management philosophy, and the entire group strives to comply with this philosophy. The details of the MUFGs management philosophy are set forth below:
We will respond promptly and accurately to the diverse needs of our customers around the world and seek to inspire their trust and confidence;
We will offer innovative and high-quality financial services by actively pursuing the cultivation of new business areas and developing new technologies;
We will comply strictly with all laws and regulations and conduct our business in a fair and transparent manner to gain the publics trust and confidence;
We will seek to inspire the trust of our shareholders by enhancing corporate value through continuous business development and appropriate risk management, and by disclosing corporate information in a timely and appropriate manner;
We will contribute to progress toward a sustainable society by assisting with development in the areas in which we operate and conducting our business activities with consideration for the environment; and
We will provide the opportunities and work environment necessary for all employees to enhance their expertise and make full use of their abilities.
We have declared our message to the world as Quality for You, with managements emphasis on quality. Quality for You means that by providing high-quality services, we aspire to help improve the quality of the lives of individual customers, and the quality of each corporate customer. The You expresses the basic stance of MUFG that we seek to contribute not only to the development of our individual customers but also communities and society. We believe that delivering superior quality services, reliability, and global coverage will result in more profound and enduring contributions to society.
Integrated Retail Banking Business Group
The Integrated Retail Banking Business Group covers all domestic retail businesses, including commercial banking, trust banking and securities businesses, and enables us to offer a full range of banking products and services, including financial consulting services, to retail customers in Japan. This business group integrates the retail business of BTMU, MUTB and MUMSS as well as retail product development, promotion and marketing in a single management structure. Some of our retail services are offered through our network of MUFG Plazas providing individual customers with one-stop access to our comprehensive financial product offerings of integrated commercial banking, trust banking and securities services.
Deposits and retail asset management services. We offer a full range of bank deposit products including a non-interest-bearing deposit account that is redeemable on demand and intended primarily for payment and settlement functions, and is fully insured by the Deposit Insurance Corporation of Japan without a maximum amount limitation.
We offer a variety of asset management and asset administration services to individuals, including savings instruments such as current accounts, ordinary deposits, time deposits, deposits at notice and other deposit facilities. We also offer trust products, such as money trusts, and other investment products, such as investment trusts and foreign currency deposits.
We create portfolios tailored to customer needs by combining savings instruments and investment products. We also provide a range of asset management and asset administration products as well as customized trust products for high net worth individuals, as well as advisory services relating to, among other things, the purchase and disposal of real estate and effective land utilization, and testamentary trusts.
Investment trusts. We provide a diverse lineup of investment trust products allowing our customers to choose products according to their investment needs through BTMU, MUTB and MUMSS as well as kabu.com Securities, which specializes in online financial services. In the fiscal year ended March 31, 2011, BTMU offered a total of 10 new investment trusts. As of March 31, 2011, BTMU offered our clients a total of 76 investment trusts. Moreover, BTMU has placed significant importance on ensuring providing after-sales advice to all of our customers who have purchased our investment trust products.
Insurance. We offer insurance products to meet the needs of our customers as a sales agent of third party insurance companies. Our current lineup of insurance products consists of investment-type individual annuities, foreign currency-denominated insurance annuities and yen-denominated fixed-amount annuity insurance. We also offer single premium term insurance. BTMU has been offering life, medical and cancer insurance since December 2007, nursing-care insurance since April 2008 and car insurance since July 2009. As of March 31, 2011, BTMU offers 38 varieties of life insurance products (28 life insurance, seven medical and nursing-care insurance and three cancer insurance products) at 452 BTMU branches. Professional insurance sales representatives, called Insurance Planners, have been assigned to each branch where these insurance products are sold in order to ensure that the branch responds to our customers needs. MUTB also offers whole term life insurance and medical insurance at all of its branches.
Financial products intermediation services. We offer financial products intermediation services through BTMU acting as an agent with three MUFG securities companies (MUMSS, Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd., and kabu.com Securities Co., Ltd.) and through MUTB acting as an agent with MUMSS. We offer securities, including publicly offered stocks, foreign and domestic investment trusts, Japanese government bonds, foreign bonds and various other products. As of March 31, 2011, BTMU employed approximately 425 employees seconded from MUMSS. We seek to optimize the deployment of the securities service personnel within our group in accordance with our initiatives where approximately 155 of the 425 were assigned to branches in Japan as sales representatives, approximately 214 employees were employed in the capacity of Retail Money Desk, or RMD, representatives to assist the branch sales force, and the remaining 56 employees were assigned to the headquarters of BTMU (Financial Instruments Intermediary Service Office).
Loans. We offer housing loans, card loans, and other loans to individuals. With respect to housing loans, in addition to housing loans incorporating health insurance for seven major illnesses, which are underwritten by third party insurance companies, BTMU began offering in June 2009 preferential interest rates under its Environmentally Friendly Support program to customers who purchase environment-conscious houses (e.g., houses with solar electric systems) which meet specific criteria in response to increasing public interest in environmental issues. In September 2009, BTMU launched housing loans with home mortgage insurance, which BTMU jointly developed with the Japan Housing Finance Agency, a governmental agency under the Japanese governments economic stimulus measures, under which the agency indemnifies BTMU for losses from housing loans. BTMU also offers a card loan service called BANQUIC, for which applications can be accepted through the internet, telephone, TV telephone and mobile phone. A customer who has an account with BTMU can obtain loans through the BANQUIC service by having the loan proceeds directly remitted to the customers BTMU account. The service is available at BTMU branches and BTMU-affiliated ATMs at convenience stores with no ATM transaction fees. BTMU continues to strive to meet a wide variety of customer needs by enhancing our product offerings and increasing customers ease of access to our services.
In response to the Great East Japan Earthquake in March 2011, which devastated the northeastern region of Japan, BTMU and MUTB are offering eased conditions and preferential interest rates for the loans to the affected individuals who wish to apply for loans.
Credit cards. Among our group companies, Mitsubishi UFJ NICOS and BTMU issue credit cards and also offer some preferential services provided by other MUFG group companies (including preferential rates for BTMU housing loans) to holders of MUFG card issued by Mitsubishi UFJ NICOS and gold cards issued by BTMU. BTMU has expanded value-added services and benefits for bank-issued credit card holders, including a point program where credit card holders can earn points by using their credit cards and exchange the points earned for cash or other preferential treatment for banking transactions through BTMU.
Retail securities business. We conduct our retail securities business in Japan through MUMSS which was formed in May 2010 through the integration of the domestic wholesale and retail securities business previously conducted by MUS and the investment banking business conducted by Morgan Stanley Japan Securities Co., Ltd., or Morgan Stanley Japan. See Global Strategic Alliance with Morgan Stanley.
Domestic Network. We offer products and services through a wide range of channels, including branches, ATMs (including convenience store ATMs shared by multiple banks), Mitsubishi-Tokyo UFJ Direct (telephone, internet and mobile phone banking), the Video Counter and postal mail.
We offer integrated financial services combining our banking, trust banking and securities services at MUFG Plazas. These Plazas provide retail customers with integrated and flexible suite of services at one-stop outlets. As of March 31 2011, we provided those services through 35 MUFG Plazas.
To provide exclusive membership services to high net worth individual customers, we have private banking offices featuring lounges and private rooms where customers can receive wealth management advice and other services in a relaxing and comfortable setting. As of March 31, 2011, we had 29 private banking offices in the Tokyo metropolitan area, Nagoya and Osaka.
To improve customer convenience, BTMU has enhanced its ATM network and ATM related services. BTMU has also ceased to charge ATM transaction fees from customers of BTMU and MUTB for certain transactions. In addition, BTMU has reduced commissions for transactions conducted through ATMs located in convenience stores. Furthermore, BTMU currently shares its ATM network with eight Japanese local banks, AEON Bank, Ltd. and the banks belonging to the Japan Agricultural Cooperatives bank group. BTMU has also ceased to charge ATM transaction fees from customers who use these banks ATMs for certain transactions.
Jibun Bank Corporation is a partnership between BTMU and KDDI Corporation, a major telecommunications company in Japan. Jibun Bank provides banking services primarily through mobile phone networks. Since the launch of its banking services in July 2008, Jibun Bank has reached 1.2 million accounts and ¥223 billion in deposit balance as of March 31, 2011.
Trust agency operations. We offer MUTBs trust related products and advisory services through our trust agency system not only for MUTB customers but also for BTMU and MUMSS customers. As of March 31, 2011, BTMU engaged in eight businesses as the trust banking agent for MUTB: testamentary trusts, inheritance management, asset succession planning, inheritance management agency operations, business management financial consulting, lifetime gift trusts, share disposal trusts, and marketable securities administration trusts. MUMSS engaged in three businesses as the trust banking agent for MUTB: testamentary trusts, inheritance management and asset succession planning. Financial consultants (sales managers specializing in inheritance business) have been sent from MUTB to BTMU. Because of Japans aging society, customer demand for inheritance-related advice is increasing and we aim to significantly strengthen our ability to cross-sell the inheritance products to our existing customers.
Integrated Corporate Banking Business Group
The Integrated Corporate Banking Business Group covers all domestic and overseas corporate businesses, including commercial banking, investment banking, trust banking and securities businesses. Through the integration of these business lines, diverse financial products and services are provided to our corporate clients, from large corporations to medium-sized and small businesses. The business group has clarified strategic domains, sales channels and methods to match the different growth stages and financial needs of our corporate customers.
We provide various financial solutions, such as loans and fund management, remittance and foreign exchange services, to meet the requirements of small and medium-sized enterprise, or SME, customers. We also help our customers develop business strategies, such as inheritance-related business transfers and stock listings.
CIB (Corporate and Investment Banking)
We offer advanced financial solutions mainly to large corporations through corporate and investment banking services. Product specialists globally provide derivatives, securitization, syndicated loans, structured finance, and other services. We also provide investment banking services, such as M&A advisory, bond and equity underwriting, to meet our customers needs.
A large part of our investment banking business in Japan is provided by MUMSS which was formed in May 2010 through the integration of the domestic wholesale and retail securities business previously conducted by MUS and the investment banking business conducted by Morgan Stanley Japan. See Global Strategic Alliance with Morgan Stanley.
We provide online banking services that allow customers to make domestic and overseas remittances electronically. We also provide a global cash pooling/netting service, and the Treasury Station, a fund management system for a multi-company group. These services are designed particularly for customers who have global business activities.
MUTBs experience and know-how in the asset management business, real estate brokerage and appraisal services, and stock transfer agency service also enable us to offer services tailored to the financial strategies of each client, including securitization of real estate, receivables and other assets.
Integrated Trust Assets Business Group
The Integrated Trust Assets Business Group covers asset management and administration services for products such as pension trusts and security trusts by integrating the trust banking expertise of MUTB and the international strengths of BTMU. The business group provides a full range of services to corporate and pension
funds, including stable and secure pension fund management and administration, advice on pension schemes, and payment of benefits to scheme members. Our Integrated Trust Assets Business Group combines MUTBs trust assets business, comprising trust assets management services, asset administration and custodial services, and the businesses of Mitsubishi UFJ Global Custody S.A., Mitsubishi UFJ Asset Management Co., Ltd. and KOKUSAI Asset Management Co., Ltd.
Mitsubishi UFJ Global Custody S.A., which was established on April 11, 1974 and was formerly named Bank of Tokyo-Mitsubishi UFJ (Luxembourg) S.A., provides global custody services, administration services for investment funds and fiduciary and trust accounts, and other related services to institutional investors.
Mitsubishi UFJ Asset Management and KOKUSAI Asset Management provide asset management and trust products and services mainly to high net worth individuals, branch customers and corporate clients in Japan.
Integrated Global Business Group (MUFG Global)
The Integrated Global Business Group (MUFG Global) was established on July 1, 2011, to effectively coordinate and enhance our group-wide efforts to strengthen and expand overseas operations. MUFG Global is designed to clarify the leadership in, and enhance the coordination for, our overseas strategies on a group-wide basis.
Overseas business development has been an important pillar of our growth strategy. Aiming to further raise our presence in the global financial market, we are shifting our current approach where each of our group companies individually promotes its overseas business to a more group-wide approach. The new approach is designed to enable us to exercise our comprehensive expertise to more effectively provide our overseas customers with value-added services.
As global financial regulations have become increasingly stringent following the recent global financial crisis, the realignment in the global financial industry has accelerated with financial institutions merging and entering into alliances particularly in Europe and the United States. Moreover, the importance of emerging markets in Asia and other regions has been rapidly growing, and the business environment surrounding the international financial industry is becoming more complex. In addition, customers financing needs are becoming more diverse and sophisticated as their activities are becoming more globalized.
Against this background, MUFG Global covers overseas businesses, including commercial banking services such as loans, deposits and cash management services, retail banking, trust assets and securities businesses (with the retail banking and trust assets businesses being conducted through Union Bank), through a global network of more than 500 offices outside Japan to provide customers with financial products and services that meet their increasingly diverse and sophisticated financing needs.
CIB (Corporate and Investment Banking)
Our CIB business primarily serves large corporations, financial institutions, and sovereign and multinational organizations with a comprehensive set of solutions for their financing needs. Through our global network of offices and branches, we provide a full range of services, including corporate banking services such as providing credit commitments and arranging the issuance of asset-backed commercial paper, investment banking services such as debt/equity issuance, and M&A advisory services, to help clients develop financial strategies. To meet clients expectations for their various financing needs, we have established a client-oriented coverage business model and coordinate our product experts who can offer innovative finance services all around the world. With our acquisition from The Royal Bank of Scotland Group plc of project finance assets consisting of loans for natural resource, power and other infrastructure projects in Europe, the Middle-East and Africa, and related assets in December 2010, we continue to seek to strengthen our project finance business, which is one of the core businesses of CIB. For more information on our transaction with The Royal Bank of Scotland Group, see Item 5. Operating and Financial Review and ProspectsRecent Developments.
We have Transaction Banking Offices around the world through which we provide commercial banking products and services for corporations and financial institutions in managing and processing domestic and cross-border payments, mitigating professional risk for international trade, and performing asset and liability management. We provide customers with support for their domestic, regional and global trade finance and cash management programs through our extensive global network.
UNBC is a wholly owned indirect subsidiary of MUFG. UNBC is a US bank holding company with Union Bank being its primary subsidiary. Union Bank is a leading regional bank headquartered in California, ranked by the Federal Deposit Insurance Corporation, or FDIC, as the 21st largest in the United States in terms of total deposits as of March 2011. Union Bank provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, and Texas as well as nationally and internationally. In April 2010, Union Bank acquired loans and other assets and assumed deposits and other liabilities of Tamalpais Bank, a California-based bank, and Frontier Bank, a Washington-based bank, from the FDIC in separate FDIC-assisted transactions.
Global Markets covers asset and liability management and strategic investment of BTMU and MUTB, and sales and trading of financial products of BTMU and MUTB. In March 2011, the sale and trading business of MUMSS was transferred from the Integrated Corporate Banking Business Group to the Global Markets.
Other mainly consists of the corporate centers of the holding company, BTMU, MUTB and MUMSS.
Global Strategic Alliance with Morgan Stanley
As of March 31, 2011, we held a total of approximately 47 million shares of Morgan Stanley common stock, Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock (Series B Preferred Stock) with a face value of approximately $7,839 million and a 10% dividend, and Perpetual Non-Cumulative Non-Convertible Preferred Stock (Series C Preferred Stock) with a face value of approximately $520 million and a 10% dividend.
On June 30, 2011, we converted all of the Series B Preferred Stock for approximately 385 million shares of the common stock. As a result, we hold a total of approximately 432 million shares of Morgan Stanley common stock, which represent approximately 22.4% of the voting rights in Morgan Stanley based on the number of shares of common stock of Morgan Stanley outstanding as of June 30, 2011. We also have a right to designate two directors of Morgan Stanley. Morgan Stanley is expected to be treated as an equity-method affiliate of MUFG in the future consolidated financial statements prepared by MUFG. For more information, see Item 5. Operating and Financial Review and ProspectsRecent Developments.
In May 2010, we and Morgan Stanley integrated our respective Japanese securities companies by forming two securities joint venture companies. We converted the wholesale and retail securities businesses conducted in Japan by MUS into MUMSS. Morgan Stanley contributed the investment banking operations conducted in Japan by its former wholly-owned subsidiary, Morgan Stanley Japan, to MUMSS, and converted the sales and trading and capital markets businesses conducted in Japan by Morgan Stanley Japan into an entity called Morgan Stanley MUFG Securities, Co., Ltd., or MSMS. We hold a 60% economic interest in MUMSS and MSMS, and Morgan Stanley holds a 40% economic interest in MUMSS and MSMS. We hold a 60% voting interest and Morgan Stanley holds a 40% voting interest in MUMSS, and we hold a 49% voting interest and Morgan Stanley holds a 51% voting interest in MSMS. Morgan Stanleys and our economic and voting interests in the securities joint venture companies are held through intermediate holding companies. We have retained control of MUMSS and
we account for our interest in MSMS under the equity method due to our significant influence over MSMS. The board of directors of MUMSS has fifteen members, nine of whom are designated by us and six of whom are designated by Morgan Stanley. The board of directors of MSMS has ten members, six of whom are designated by Morgan Stanley and four of whom are designated by us. The CEO of MUMSS is designated by us and the CEO of MSMS is designated by Morgan Stanley.
We have also expanded the scope of our global strategic alliance with Morgan Stanley into new geographies and businesses, including (1) a loan marketing joint venture that will provide clients in the United States with access to expand the world-class lending and capital markets services from both companies, (2) an agreement to establish business referral arrangements in Asia, Europe, the Middle East and Africa, covering capital markets, loans, fixed income sales and other businesses, (3) a global commodities referral agreement whereby BTMU and its affiliates will refer clients in need of commodities-related hedging solutions to certain affiliates of Morgan Stanley, and (4) an employee secondment program to share best practices and expertise in a wide range of business areas.
See Item 3.D. Key InformationRisk FactorsRisks Related to Our BusinessIf our strategic alliance with Morgan Stanley fails, we could suffer financial or reputational loss.
We face strong competition in all of our principal areas of operations. The structural reforms in the regulation of the financial industry has resulted in some significant changes in the Japanese financial system and prompted banks to merge or reorganize their operations, thus changing the nature of the competition from other financial institutions as well as from other types of businesses.
The Banking Law of Japan currently permits banks to engage in certain types of securities business, including retail sales of investment funds and government and municipal bonds, and, through a domestic and overseas securities subsidiary, all types of securities business, with appropriate registration with or approval of the Financial Services Agency, an agency of the Cabinet Office. In addition, the Banking Law was amended in December 2008 to expand the scope of permissible activities of banks, permitting banks to engage in emissions trading and, through their subsidiaries and certain affiliates, Islamic financing. Further increases in competition among financial institutions are expected in these new areas of permissible activities.
The current regulatory environment and market factors have facilitated the entry of various Japanese non-bank financial institutions, non-financial companies as well as foreign financial institutions into the Japanese domestic market. For example, Orix Corporation, a non-bank financial institution, and the Seven & i Holdings group and Sony Corporation, which were both non-financial companies, began to offer various banking services, often through non-traditional distribution channels. Citigroup Inc. conducts its banking business in Japan through a locally incorporated banking subsidiary.
In addition, as foreign exchange controls have been generally eliminated, customers can now have direct access to foreign financial institutions, with which we must also compete.
In recent years, the Japanese government has identified several governmental financial institutions as candidates to privatize. In particular, the privatization of Japan Post Group companies could substantially increase competition within the financial services industry as Japan Post Bank Co., Ltd. is the worlds largest holder of deposits. Since December 2009, however, the Japanese governments privatization plan for the Japan Post Group companies has been suspended. See The Japanese Financial SystemGovernment Financial Institutions.
In the retail banking sector, customers often seek a broad range of financial products and services, such as investment trusts and insurance products. Recently, competition has increased due to the development of new
products and distribution channels. For example, Japanese banks have started competing with one another by developing innovative proprietary computer technologies that allow them to deliver basic banking services in a more efficient manner, such as internet banking services, and to create sophisticated new products in response to customer demand.
The trust assets business is a growth area that is becoming increasingly competitive because of regulatory changes in the industry that have expanded the products and services that can be offered since the mid-2000s. In addition, there is growing corporate demand for changes in the trust regulatory environment, such as reforms of the pension system and related accounting regulations under Japanese GAAP. Competition may increase in the future as changes are made to respond to such corporate demand and regulatory barriers to entry are lowered.
Integration. Since their formation in 2000 and 2001, the so-called Japanese mega bank groups, including us, the Mizuho Financial Group, and the Sumitomo Mitsui Financial Group have continued to expand their businesses and financial group capabilities. Heightened competition among the mega bank groups is currently expected in the securities sector as they have recently announced plans to expand, or have expanded, their respective securities businesses. In May 2010, we and Morgan Stanley created two securities joint venture companies in Japan, MUMSS and MSMS, by integrating the operations of MUS and Morgan Stanley Japan. In May 2009, Mizuho Securities Co., Ltd. acquired Shinko Securities Co., Ltd., and announced in March 2011 that the Mizuho Financial Group would consider integrating Mizuho Securities and Mizuho Investors Co., Ltd. In October 2009, the Sumitomo Mitsui Financial Group acquired the former Nikko Cordial Securities Inc. and other businesses from Citigroup Inc. In October 2009, The Sumitomo Trust and Banking Co., Ltd. acquired Nikko Asset Management Co., Ltd. from Citigroup Inc., and, in April 2011, Sumitomo Trust and Banking and Chuo Mitsui Trust Holdings Inc. established Sumitomo Mitsui Trust Holdings, Inc. to integrate their businesses. As a result, competition is expected to intensify in the asset management and trust assets businesses. For a discussion of the two securities joint venture companies created by us and Morgan Stanley, see Business OverviewGlobal Strategic Alliance with Morgan Stanley.
The mega bank groups are also expected to face heightened competition with other financial groups. For example, the Nomura Group acquired Lehman Brothers Holdings Inc.s franchise in the Asia-Pacific region and investment banking businesses in Europe and the Middle East in October 2008.
In the United States, we face substantial competition in all aspects of our business. We face competition from other large US and foreign-owned money-center banks, as well as from similar institutions that provide financial services. Through Union Bank, we currently compete principally with US and foreign-owned money-center and regional banks, thrift institutions, insurance companies, asset management companies, investment advisory companies, consumer finance companies, credit unions and other financial institutions.
In other international markets, we face competition from commercial banks and similar financial institutions, particularly major international banks and the leading domestic banks in the local financial markets in which we conduct business. In addition, we may face further competition as a result of recent investments, mergers and other business tie-ups among global financial institutions.
The Japanese Financial System
Japanese financial institutions may be categorized into three types:
the central bank, namely the Bank of Japan;
private banking institutions; and
government financial institutions.
The Bank of Japan
The Bank of Japans role is to maintain price stability and the stability of the financial system to ensure a solid foundation for sound economic development.
Private Banking Institutions
Private banking institutions in Japan are commonly classified into two categories (the following numbers are based on information published by the Financial Services Agency of Japan available as of June 29, 2011:
ordinary banks (128 ordinary banks and 57 foreign commercial banks with ordinary banking operations); and
trust banks (18 trust banks, including four Japanese subsidiaries of foreign financial institutions).
Ordinary banks in turn are classified as city banks, of which there are five, including BTMU, and regional banks, of which there are 105 and other banks, of which there are 18. In general, the operations of ordinary banks correspond to commercial banking operations in the United States. City banks and regional banks are distinguished based on head office location as well as the size and scope of their operations.
The city banks are generally considered to constitute the largest and most influential group of banks in Japan. Generally, these banks are based in large cities, such as Tokyo, Osaka and Nagoya, and operate nationally through networks of branch offices. City banks have traditionally emphasized their business with large corporate clients, including the major industrial companies in Japan. However, many of these banks, including BTMU, in recent years have increased their emphasis on other markets, such as small and medium-sized companies and retail banking.
With some exceptions, the regional banks tend to be much smaller in terms of total assets than the city banks. Each of the regional banks is based in one of the Japanese prefectures and extends its operations into neighboring prefectures. Their clients are mostly regional enterprises and local public utilities. The regional banks also lend to large corporations. In line with the recent trend among financial institutions toward mergers or business tie-ups, various regional banks have announced or are currently negotiating or pursuing integration transactions.
Trust banks, including MUTB, provide various trust services relating to money trusts, pension trusts and investment trusts and offer other services relating to real estate, stock transfer agency and testamentary services as well as banking services.
In recent years, almost all of the city banks have consolidated with other city banks and in some cases, with trust banks. Integration among these banks was achieved, in most cases, through the use of a bank holding company.
In addition to ordinary banks and trust banks, other private financial institutions in Japan, including shinkin banks or credit associations, and credit cooperatives, are engaged primarily in making loans to small businesses and individuals.
Government Financial Institutions
Since World War II, a number of government financial institutions have been established. These corporations are wholly owned by the government and operate under its supervision. Their funds are provided mainly from government sources. Certain types of operations undertaken by these institutions have been or are planned to be assumed by, or integrated with the operations of, private corporations, through privatization and other measures.
Among them are the following:
The Development Bank of Japan, which was established for the purpose of contributing to the economic development of Japan by extending long-term loans, mainly to primary and secondary sector industries, and which was reorganized as a joint stock company in October 2008 as part of its ongoing privatization process, the target completion date for which has been postponed until some time between April 2020 and March 2022;
Japan Finance Corporation, which was formed in October 2008, through the merger of the International Financial Operations of the former Japan Bank for International Cooperation, National Life Finance Corporation, Agriculture, Forestry and Fisheries Finance Corporation, and Japan Finance Corporation for Small and Medium Enterprise, the primary purposes of which are to supplement and encourage the private financing of exports, imports, overseas investments and overseas economic cooperation, and to supplement private financing to the general public, small and medium enterprises and those engaged in agriculture, forestry and fishery (with Japan Bank for International Cooperation expected to be split from Japan Finance Corporation and become a separate government-owned entity in April 2012);
Japan Housing Finance Agency, which was originally established in June 1950 as the Government Housing Loan Corporation for the purpose of providing housing loans to the general public, was reorganized as an incorporated administrative agency and became specialized in securitization of housing loans in April 2007; and
The Japan Post Group companies, a group of joint stock companies including Japan Post Bank, which were formed in October 2007 as part of the Japanese governments privatization plan for the former Japan Post, a government-run public services corporation, which had been the Postal Service Agency until March 2003. Since December 2009, the Japanese governments privatization plan for the Japan Post Group companies has been suspended.
Supervision and Regulation
Supervision. The Financial Services Agency of Japan, an agency of the Cabinet Office, or FSA, is responsible for supervising and overseeing financial institutions, making policy for the overall Japanese financial system and conducting insolvency proceedings with respect to financial institutions. The Bank of Japan, as the central bank for financial institutions, also has supervisory authority over banks in Japan, based primarily on its contractual agreements and transactions with the banks.
The Banking Law. Among the various laws that regulate financial institutions, the Banking Law and its subordinated orders and ordinances are regarded as the fundamental law for ordinary banks and other private financial institutions. The Banking Law addresses capital adequacy, inspections and reporting to banks and bank holding companies, as well as the scope of business activities, disclosure, accounting, limitation on granting credit and standards for arms length transactions for them. As a result of the amendment to the Banking Law and the Financial Instruments and Exchange Law, effective as of June 2009, firewall regulations that separate bank holding companies or banks from affiliated securities companies have become less stringent. On the other hand, bank holding companies, banks and other financial institutions are required to establish an appropriate system to better cope with conflicts of interest that may arise from their business operations.
Bank holding company regulations. A bank holding company is prohibited from carrying on any business other than the management of its subsidiaries and other incidental businesses. A bank holding company may have any of the following as a subsidiary: a bank, a securities company, an insurance company and a foreign subsidiary that is engaged in the banking, securities or insurance business. In addition, a bank holding company may have as a subsidiary, any company that is engaged in a finance-related business, such as a credit card company, a leasing company or an investment advisory company. Certain companies that are designated by a ministerial ordinance as those that cultivate new business fields may also become the subsidiary of a bank holding company.
Capital adequacy. The capital adequacy guidelines adopted by the FSA that are applicable to Japanese bank holding companies and banks with international operations closely follow the risk-weighted approach introduced by the Basel Committee on Banking Supervision of the Bank for International Settlements, or BIS. Since March 2007, Japanese banks have been subject to standards reflecting the Basel Committee standards called International Convergence of Capital Measurement and Capital Standards: A Revised Framework, or Basel II.
Under the FSA guidelines reflecting Basel II, we and our banking subsidiaries currently use the Advanced Internal Ratings-Based Approach, or the AIRB approach, to calculate capital requirements for credit risk. The Standardized Approach is used for some subsidiaries that are considered to be immaterial to the overall MUFG capital requirements and a few subsidiaries adopted a phased rollout of the internal ratings-based approach. We and our banking subsidiaries adopted the Standardized Approach to calculate capital requirements for operational risk. As for market risk, we and our banking subsidiaries adopted the Internal Models Approach mainly to calculate general market risk and adopted the Standardized Methodology to calculate specific risk.
The capital adequacy guidelines are in accordance with the Basel II standards for a target minimum standard ratio of capital to modified risk-weighted assets of 8.0% on both consolidated and non-consolidated bases for banks with international operations, including BTMU and MUTB, or on a consolidated basis for bank holding companies with international operations, such as MUFG. Modified risk-weighted assets is the sum of risk-weighted assets compiled for credit risk purposes, market risk equivalent amount divided by 8% and operational risk equivalent amount divided by 8%.
Capital is classified into three tiers, referred to as Tier I, Tier II and Tier III. Tier I capital generally consists of shareholders equity items, including common stock, preferred stock, capital surplus, noncontrolling interests and retained earnings (which includes deferred tax assets). However, recorded goodwill and other items, such as treasury stock, and unrealized losses on investment securities classified as securities available for sale under Japanese GAAP, net of taxes, if any, are deducted from Tier I capital. Tier II capital generally consists of:
the amount (up to a maximum of 0.6% of credit risk-weighted assets) by which eligible reserves for credit losses exceed expected losses in the internal ratings-based approach, and general reserves for credit losses, subject to a limit of 1.25% of modified risk-weighted assets determined by the partial use of the Standardized Approach (including a phased rollout of the internal ratings-based approach);
45% of the unrealized gains on investment securities classified as securities available for sale under Japanese GAAP;
45% of the land revaluation excess;
the balance of perpetual subordinated debt; and
the balance of subordinated term debt with an original maturity of over five years and preferred stock with a maturity up to 50% of Tier I capital.
Tier III capital generally consists of short-term subordinated debt with an original maturity of at least two years and which is subject to a lock-in provision, which stipulates that neither interest nor principal may be paid if such payment would cause the banks overall capital amount to be less than its minimum capital requirement. At least 50% of the minimum total capital requirements must be maintained in the form of Tier I capital.
Amendments to the capital adequacy guidelines limiting the portion of Tier I capital consisting of deferred tax assets became effective on March 31, 2006. The restrictions are targeted at major Japanese banks and their holding companies, which include MUFG and its banking subsidiaries. The banks subject to the restrictions will not be able to reflect in their capital adequacy ratios any deferred tax assets that exceed the limit of 20% of their Tier I capital.
In September 2009, the Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a comprehensive set of measures to modify the existing three pillars of the Basel II framework. In December 2009, the Basel Committee announced a package of proposals to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The proposals cover the following four key areas;
raising the quality, consistency and transparency of the capital base;
strengthening the risk coverage of the capital framework;
introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a minimum capital requirement treatment based on appropriate review and calibration;
introducing a series of measures to promote the build-up of capital buffers in good times that can be drawn upon in periods of stress; and
introducing a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio.
These measures have not been adopted. However, if adopted, the Japanese capital ratio framework, which is currently based on Basel II, is expected to be revised to implement these measures, thereby imposing possibly more stringent requirements.
In regards to the proposals, the Group of Central Bank Governors and Heads of Supervision reached an agreement on the new global regulatory framework, which has been referred to as Basel III, in July and September 2010. In December 2010, the Basel Committee agreed on the details of the Basel III rules. The agreement on Basel III includes the following:
raising the quality of capital to ensure banks are able to better absorb losses on both a going concern and a gone concern basis;
increasing the risk coverage of the capital framework, in particular for trading activities, securitizations, exposures to off-balance sheet vehicles and counterparty credit exposures arising from derivatives;
raising the level of minimum capital requirements, including an increase in the minimum common equity requirement from 2% to 4.5%, which is planned to be phased in between January 1, 2013 and January 1, 2015, and a capital conservation buffer of 2.5%, which is planned to be phased in between January 1, 2016 and year end 2018, bringing the total common equity requirement to 7%;
introducing an internationally harmonized leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system;
raising standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3), together with additional guidance in the areas of sound valuation practices, stress testing, liquidity risk management, corporate governance and compensation;
introducing minimum global liquidity standards consisting of both a short term liquidity coverage ratio and a longer term, structural net stable funding ratio; and
promoting the build up of capital buffers that can be drawn down in periods of stress, including both a capital conservation buffer and a countercyclical buffer to protect the banking sector from periods of excess credit growth.
In January 2011, the Basel Committee issued its final minimum requirements to ensure loss absorbency at the point of non-viability. The requirements are designed to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss, and require, among other things, that all non-common Tier I and Tier II instruments, such as non-cumulative perpetual preferred stock and subordinated debt, issued by an internationally active bank, be either written-off or converted into common equity upon the occurrence of certain trigger events. Instruments issued on or after January 1, 2013, must meet
the new requirements to be included in regulatory capital. Instruments issued prior to January 1, 2013, that do not meet the requirements, but that meet all of the entry criteria for additional Tier I or Tier II capital, will be considered as instruments that no longer qualify as additional Tier I or Tier II capital and will be phased out from January 1, 2013 in accordance with the above Basel III framework.
In July 2011, the Basel Committee on Banking Supervision proposed additional loss absorbency requirements to supplement the common equity Tier I capital requirement ranging from 1% to 2.5% for global systemically important banks, depending on the banks systemic importance. The additional loss absorbency requirements are expected to be phased in between January 1, 2016 and December 31, 2018, and will become fully effective on January 1, 2019.
Based on the Basel III framework, the Japanese capital ratio framework, which is currently based on Basel II, is likely to be revised to implement the more stringent requirements. Likewise, local banking regulators outside of Japan such as those in the United States are likely to revise the capital and liquidity requirements imposed on our subsidiaries and operations in those countries to implement the more stringent requirements of Basel III as adopted in those countries. The new risk-weighted asset structure expected to be proposed under Basel III may also encourage us to modify our business model to focus more on flow-based client market businesses, such as transactional banking and asset management. We will continue to assess the potential impact of Basel III and other regulatory standards related thereto.
Inspection and reporting. By evaluating banks systems of self-assessment, auditing their accounts and reviewing their compliance with laws and regulations, the FSA monitors the financial soundness of banks, including the status and performance of their control systems for business activities. The FSA implemented the Financial Inspection Rating System, or FIRST, for deposit-taking financial institutions which has become applicable to major banks since April 1, 2007. By providing inspection results in the form of graded evaluations (i.e., ratings), the FSA expects this rating system to motivate financial institutions to voluntarily improve their management and operations. Additionally, the FSA currently takes the better regulation approach in its financial regulation and supervision. This consists of four pillars: (1) optimal combination of rules-based and principles-based supervisory approaches; (2) timely recognition of priority issues and effective response; (3) encouraging voluntary efforts by financial firms and placing greater emphasis on providing them with incentives; and (4) improving the transparency and predictability of regulatory actions, in pursuit of improvement of the quality of financial regulation and supervision.
The FSA, if necessary to secure the sound and appropriate operation of a banks business, may request the submission of reports or materials from, or conduct an on-site inspection of, the bank or the bank holding company. If a banks capital adequacy ratio falls below a specified level, the FSA may request the bank to submit an improvement plan and may restrict or suspend the banks operations when it determines that action is necessary.
In addition, the Securities and Exchange Surveillance Commission of Japan inspects banks in connection with their securities business as well as financial instruments business operators, such as securities firms.
The Bank of Japan also conducts inspections of banks similar to those undertaken by the FSA. The Bank of Japan Law provides that the Bank of Japan and financial institutions may agree as to the form of inspection to be conducted by the Bank of Japan.
Laws limiting shareholdings of banks. The provisions of the Anti-Monopoly Law that prohibit a bank from holding more than 5% of another companys voting rights do not apply to a bank holding company. However, the Banking Law prohibits a bank holding company and its subsidiaries from holding, on an aggregated basis, more than 15% of the voting rights of companies other than those which can legally become subsidiaries of bank holding companies.
Banks are also prohibited from holding shares in other companies exceeding their Tier I capital.
Financial Instruments and Exchange Law. The Financial Instruments and Exchange Law not only preserves the basic concepts of the former Securities and Exchange Law, but is also intended to provide additional protection for investors. The law also regulates sales of a wide range of financial instruments and services, requiring financial institutions to improve their sales rules and strengthen compliance frameworks and procedures. Among the instruments that the Japanese banks deal in, derivatives, foreign currency-denominated deposits, and variable insurance and annuity products are subject to regulations covered by the sales-related rules of conduct under the law.
Article 33 of the Financial Instruments and Exchange Law generally prohibits banks from engaging in securities transactions. However, bank holding companies and banks may, through a domestic or overseas securities subsidiary, conduct all types of securities business, with appropriate approval from the FSA. Similarly, registered banks are permitted to provide securities intermediation services and engage in certain other similar types of securities related transactions, including retail sales of investment funds and government and municipal bonds.
Anti-money laundering laws. Under the Law for Prevention of Transfer of Criminal Proceeds, banks and other financial institutions are required to report to the responsible ministersin the case of banks, the Commissioner of the FSAany assets which they receive while conducting their businesses that are suspected of being illicit profits from criminal activities.
Law concerning trust business conducted by financial institutions. Under the Trust Business Law, joint stock companies that are licensed by the Prime Minister as trust companies, including non-financial companies, are allowed to conduct trust business. In addition, under the Law Concerning Concurrent Operation for Trust Business by Financial Institutions, banks and other financial institutions, as permitted by the Prime Minister, are able to conduct trust business. The Trust Business Law provides for a separate type of registration for trustees who conduct only administration type trust business. The Trust Business Law also provides for various duties imposed on the trustee in accordance with and in addition to the Trust Law.
Deposit insurance system and government measures for troubled financial institutions. The Deposit Insurance Law is intended to protect depositors if a financial institution fails to meet its obligations. The Deposit Insurance Corporation was established in accordance with that law.
City banks (including BTMU), regional banks, trust banks (including MUTB), and various other credit institutions participate in the deposit insurance system on a compulsory basis.
Under the Deposit Insurance Law, the maximum amount of protection is ¥10 million per customer within one bank. All deposits are subject to the ¥10 million maximum, except for non-interest bearing deposits that are redeemable on demand and used by the depositor primarily for payment and settlement functions (the settlement accounts). Deposits in settlement accounts are fully protected without a maximum amount limitation. Certain types of deposits are not covered by the deposit insurance system, such as foreign currency deposits and negotiable certificates of deposit. As of April 1, 2011, the Deposit Insurance Corporation charges insurance premiums equal to 0.107% on the deposits in the settlement accounts, which are fully protected as mentioned above, and premiums equal to 0.082% on the deposits in other accounts.
Since 1998, the failure of a number of large-scale financial institutions has led to the introduction of various measures with a view to stabilizing Japans financial system, including financial support from the national budget.
Under the Deposit Insurance Law, a Financial Reorganization Administrator can be appointed by the Prime Minister if a bank is unable to fully perform its obligations with its assets or may suspend or has suspended repayment of deposits. The Financial Reorganization Administrator will take control of the assets of the troubled bank, dispose of the assets and search for another institution willing to take over its business. The troubled banks business may also be transferred to a bridge bank established by the Deposit Insurance Corporation for the purpose of the temporary maintenance and continuation of operations of the troubled bank, and the bridge bank will seek to transfer the troubled banks assets to another financial institution or dissolve the troubled bank. The Deposit Insurance Corporation protects deposits, as described above, either by providing financial aid for costs
incurred by the financial institution succeeding the insolvent bank or by paying insurance money directly to depositors. The financial aid, provided by the Deposit Insurance Corporation, may take the form of a monetary grant, loan or deposit of funds, purchase of assets, guarantee or assumption of debts, subscription of preferred stock, or loss sharing. The Deposit Insurance Law also provides for exceptional measures to cope with systemic risk in the financial industry.
Further, against the background of the global financial crisis, in December 2008 the Law Concerning Special Measures for Strengthening of Financial Function was amended in order to enable the Japanese government to take special measures in order to strengthen the capital of financial institutions. Under the law, banks and other financial institutions may apply to receive capital injections from the Deposit Insurance Corporation, subject to government approval, which will be granted subject to the fulfillment of certain requirements, including, among other things, the improvement of profitability and efficiency, facilitation of financing to small and medium-sized business enterprises in the local communities, and that the financial institution is not insolvent. The application deadline is March 31, 2012.
Law Concerning the Temporary Measures for the Facilitation of Finance to Small and Medium-sized Firms and Others. In December 2009, the Law Concerning the Temporary Measures for the Facilitation of Finance to Small and Medium-sized Firms and Others became effective, requiring financial institutions, among other things, to make an effort to reduce their customers burden of loan payment by employing methods such as modifying the term of loans at the request of eligible borrowers, including small and medium-sized firms and individual home loan borrowers. The new legislation also requires financial institutions to internally establish a system to implement the requirements of the legislation and periodically make public disclosure of and report to the relevant authority on the status of implementation. The legislation has been extended to March 31, 2012.
Personal Information Protection Law. With regards to protection of personal information, the Personal Information Protection Law requires, among other things, Japanese banking institutions to limit the use of personal information to the stated purpose and to properly manage the personal information in their possession, and forbids them from providing personal information to third parties without consent. If a bank violates certain provisions of the law, the FSA may advise or order the bank to take proper action. In addition, the Banking Law and the Financial Instruments and Exchange Law provide certain provisions with respect to appropriate handling of customer information.
Law Concerning Protection of Depositors from Illegal Withdrawals Made by Counterfeit or Stolen Cards. This law requires financial institutions to establish internal systems to prevent illegal withdrawals of deposits made using counterfeit or stolen bank cards. The law also requires financial institutions to compensate depositors for any amount illegally withdrawn using counterfeit bank cards, unless the financial institution can verify that it acted in good faith without negligence, and there is gross negligence on the part of the relevant account holder.
Government Reforms to Restrict Maximum Interest Rates on Consumer Lending Business. In December 2006, the Diet passed legislation to reform the regulations relating to the consumer lending business, including amendments to the Law Concerning Acceptance of Investment, Cash Deposit and Interest Rate, etc., which, effective June 18, 2010, reduced the maximum permissible interest rate from 29.2% per annum to 20% per annum. The regulatory reforms also included amendments to the Law Concerning Lending Business which, effective June 18, 2010, abolished the so-called gray-zone interest. Gray-zone interest refers to interest rates exceeding the limits stipulated by the Interest Rate Restriction Law (between 15% per annum to 20% per annum depending on the amount of principal). Prior to June 18, 2010, gray-zone interests were permitted under certain conditions set forth in the Law Concerning Lending Business. As a result of the regulatory reforms, all interest rates are now subject to the lower limits imposed by the Interest Rate Restriction Law, compelling lending institutions, including our consumer finance subsidiaries and equity method investees, to lower the interest rates they charge borrowers. Furthermore, the new regulations, which became effective on June 18, 2010, require, among other things, consumer finance companies to review the repayment capability of borrowers before lending, thereby limiting the amount of borrowing available to individual borrowers.
In addition, as a result of decisions made by the Supreme Court of Japan prior to June 18, 2010, imposing stringent requirements for charging such gray-zone interest rates, consumer finance companies have experienced a significant increase in borrowers claims for reimbursement of previously collected interest payments in excess of the limits stipulated by the Interest Rate Restriction Law. We continue to carefully monitor future developments and trends of the claims. See Item 3.D. Key InformationRisk FactorsRisks Related to Our BusinessBecause of our loans to consumers and our shareholdings in companies engaged in consumer lending, changes in the business or regulatory environment for consumer finance companies in Japan may further adversely affect our financial results.
As a result of our operations in the United States, we are subject to extensive US federal and state supervision and regulation.
Overall supervision and regulation. We are subject to supervision, regulation and examination with respect to our US operations by the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, pursuant to the US Bank Holding Company Act of 1956, as amended, or the BHCA, and the International Banking Act of 1978, as amended, or the IBA, because we are a bank holding company and a foreign banking organization, respectively, as defined pursuant to those statutes. The Federal Reserve Board functions as our umbrella supervisor under amendments to the BHCA effected by the Gramm-Leach-Bliley Act of 1999, which among other things:
prohibited further expansion of the types of activities in which bank holding companies, acting directly or through nonbank subsidiaries, may engage;
authorized qualifying bank holding companies to opt to become financial holding companies, and thereby acquire the authority to engage in an expanded list of activities; and
modified the role of the Federal Reserve Board by specifying new relationships between the Federal Reserve Board and the functional regulators of nonbank subsidiaries of both bank holding companies and financial holding companies.
The BHCA generally prohibits each of a bank holding company and a foreign banking organization that maintains branches or agencies in the United States from, directly or indirectly, acquiring more than 5% of the voting shares of any company engaged in nonbanking activities in the United States unless the bank holding company or foreign banking organization has elected to become a financial holding company, as discussed above, or the Federal Reserve Board has determined, by order or regulation, that such activities are so closely related to banking as to be a proper incident thereto and has granted its approval to the bank holding company or foreign banking organization for such an acquisition. The BHCA also requires a bank holding company or foreign banking organization that maintains branches or agencies in the United States to obtain the prior approval of an appropriate federal banking authority before acquiring, directly or indirectly, the ownership of more than 5% of the voting shares or control of any US bank or bank holding company. In addition, under the BHCA, a US bank or a US branch or agency of a foreign bank is prohibited from engaging in various tying arrangements involving it or its affiliates in connection with any extension of credit, sale or lease of any property or provision of any services.
On October 6, 2008, we became a financial holding company. At the same time, BTMU, MUTB, and UNBC, which are also bank holding companies, elected to become financial holding companies. As noted above, as a financial holding company we are authorized to engage in an expanded list of activities. These activities include those deemed to be financial in nature or incidental to such financial activity, including among other things merchant banking, insurance underwriting, and a full range of securities activities. In addition, we are permitted to engage in certain specified nonbanking activities deemed to be closely related to banking, without prior notice to or approval from the Federal Reserve Board. To date, we have utilized this expanded authority by electing to engage in certain securities activities, including securities underwriting, indirectly through certain of our securities subsidiaries. In order to maintain our status as a financial holding company that allows us to expand our activities, we must continue to meet certain standards established by the Federal Reserve Board.
Those standards require that we exceed the minimum standards applicable to bank holding companies that have not elected to become financial holding companies. These higher standards include meeting the well capitalized and well managed standards for financial holding companies as defined in the regulations of the Federal Reserve Board. In addition, as a financial holding company, we must ensure that our US banking subsidiaries identified below meet certain minimum standards under the Community Reinvestment Act of 1977. At this time, we continue to comply with these standards.
US branches and agencies of subsidiary Japanese banks. Under the authority of the IBA, our banking subsidiaries, BTMU and MUTB, operate six branches, two agencies and five representative offices in the United States. BTMU operates branches in Los Angeles and San Francisco, California; Chicago, Illinois; New York, New York; and Seattle, Washington; agencies in Atlanta, Georgia and Houston, Texas; and representative offices in Washington, D.C; Minneapolis, Minnesota; Dallas, Texas; Jersey City, New Jersey; and Florence, Kentucky. MUTB operates a branch in New York, New York.
The IBA provides, among other things, that the Federal Reserve Board may examine US branches and agencies of foreign banks, and each branch and agency shall be subject to on-site examination by the appropriate federal or state bank supervisor as frequently as would a US bank. The IBA also provides that if the Federal Reserve Board determines that a foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, or if there is reasonable cause to believe that the foreign bank or its affiliate has committed a violation of law or engaged in an unsafe or unsound banking practice in the United States, the Federal Reserve Board may order the foreign bank to terminate activities conducted at a branch or agency in the United States.
US branches and agencies of foreign banks must be licensed, and are also supervised and regulated, by a state or by the Office of the Comptroller of the Currency, or the OCC, the federal regulator of national banks. All of the branches and agencies of BTMU and MUTB in the United States are state-licensed. Under US federal banking laws, state-licensed branches and agencies of foreign banks may engage only in activities that would be permissible for their federally-licensed counterparts, unless the Federal Reserve Board determines that the additional activity is consistent with sound practices. US federal banking laws also subject state-licensed branches and agencies to the single-borrower lending limits that apply to federal branches and agencies, which generally are the same as the lending limits applicable to national banks, but are based on the capital of the entire foreign bank.
As an example of state supervision, the branches of BTMU and MUTB in New York are licensed by the New York State Superintendent of Banks, or the Superintendent, pursuant to the New York Banking Law. Under the New York Banking Law and the Superintendents Regulations, each of BTMU and MUTB must maintain with banks in the State of New York eligible assets as defined and in amounts determined by the Superintendent. These New York branches must also submit written reports concerning their assets and liabilities and other matters, to the extent required by the Superintendent, and are examined at periodic intervals by the New York State Banking Department. In addition, the Superintendent is authorized to take possession of the business and property of BTMU and MUTB located in New York whenever events specified in the New York Banking Law occur.
US banking subsidiaries. We indirectly own and control three US banks:
Bank of Tokyo-Mitsubishi UFJ Trust Company, New York, New York (through BTMU, a registered bank holding company),
Mitsubishi UFJ Trust & Banking Corporation (U.S.A.), New York, New York (through MUTB, a registered bank holding company), and
Union Bank (through BTMU and its subsidiary, UNBC, a registered bank holding company).
Bank of Tokyo-Mitsubishi UFJ Trust Company and Mitsubishi UFJ Trust & Banking Corporation (U.S.A.) are chartered by the State of New York and are subject to the supervision, examination and regulatory authority of the Superintendent pursuant to the New York Banking Law. Union Bank is a national bank subject to the supervision, examination and regulatory authority of the OCC pursuant to the National Bank Act.
The Federal Deposit Insurance Corporation, or the FDIC, is the primary federal agency responsible for the supervision, examination and regulation of the two New York-chartered banks referred to above. The FDIC may take enforcement action, including the issuance of prohibitive and affirmative orders, if it determines that a financial institution under its supervision has engaged in unsafe or unsound banking practices, or has committed violations of applicable laws and regulations. The FDIC insures the deposits of all three US banking subsidiaries up to legally specified maximum amounts. In the event of the failure of an FDIC-insured bank, the FDIC is virtually certain to be appointed as receiver, and would resolve the failure under provisions of the Federal Deposit Insurance Act. An FDIC-insured institution that is affiliated with a failed or failing FDIC-insured institution can be required to indemnify the FDIC for losses resulting from the insolvency of the failed institution, even if this causes the affiliated institution also to become insolvent. In the liquidation or other resolution of a failed FDIC-insured depository institution, deposits in its US offices and other claims for administrative expenses and employee compensation are afforded priority over other general unsecured claims, including deposits in offices outside the United States, non-deposit claims in all offices and claims of a parent company. Moreover, under longstanding Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength for its banking subsidiaries and to commit resources to support such banks.
Bank capital requirements and capital distributions. Our US banking subsidiaries are subject to applicable risk-based and leverage capital guidelines issued by US regulators for banks and bank holding companies. In addition, BTMU and MUTB, as foreign banking organizations that have US branches and agencies and that are controlled by us as a financial holding company, are subject to the Federal Reserves requirements that they be well-capitalized based on Japans risk based capital standards, as well as well managed. All of our US banking subsidiaries and BTMU, MUTB, and UNBC are well capitalized as defined under, and otherwise comply with, all US regulatory capital requirements applicable to them. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, provides, among other things, for expanded regulation of insured depository institutions, including banks, and their parent holding companies. As required by FDICIA, the federal banking agencies have established five capital tiers ranging from well capitalized to critically undercapitalized for insured depository institutions. As an institutions capital position deteriorates, the federal banking regulators may take progressively stronger actions, such as further restricting affiliate transactions, activities, asset growth or interest payments. In addition, FDICIA generally prohibits an insured depository institution from making capital distributions, including the payment of dividends, or the payment of any management fee to its holding company, if the insured depository institution would subsequently become undercapitalized.
The availability of dividends from insured depository institutions in the United States is limited by various other statutes and regulations. The National Bank Act and other federal laws prohibit the payment of dividends by a national bank under various circumstances and limit the amount a national bank can pay without the prior approval of the OCC. In addition, state-chartered banking institutions are subject to dividend limitations imposed by applicable federal and state laws.
Other regulated US subsidiaries. Our nonbank subsidiaries that engage in securities-related activities in the United States are regulated by appropriate functional regulators, such as the SEC, any self-regulatory organizations of which they are members, and the appropriate state regulatory agencies. These nonbank subsidiaries are required to meet separate minimum capital standards as imposed by those regulatory authorities.
Anti-Money Laundering Initiatives and the USA PATRIOT Act. A major focus of US governmental policy relating to financial institutions in recent years has been aimed at preventing money laundering and terrorist financing. The USA PATRIOT Act of 2001 substantially broadened the scope of US anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The US Department of the Treasury has issued a number of implementing regulations that impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the identity of their customers. In addition, the bank regulatory agencies carefully scrutinize the adequacy of an institutions policies, procedures and controls. As a result, there has been an increased number of regulatory sanctions and law enforcement authorities have been taking a more active role.
Failure of a financial institution to maintain and implement adequate policies, procedures and controls to prevent money laundering and terrorist financing could in some cases have serious legal and reputational consequences for the institution, including the incurring of expenses to enhance the relevant programs, the imposition of limitations on the scope of their operations and the imposition of fines and other monetary penalties.
Foreign Corrupt Practices Act. In recent years, US regulatory and enforcement agencies including the US Securities and Exchange Commission and the US Department of Justice have significantly increased their enforcement efforts of the Foreign Corrupt Practices Act, or the FCPA. The FCPA prohibits US securities issuers, US domestic entities, and parties doing substantial business within the United States (including their shareholders, directors, agents, officers, and employees) from making improper payments to non-US government officials in order to obtain or retain business. The FCPA also requires US securities issuers to keep their books and records in detail, accurately, and in such a way that they fairly reflect all transactions and dispositions of assets. Those enforcement efforts have targeted a wide range of US and foreign-based entities and have been based on a broad variety of alleged fact patterns, and in a number of cases have resulted in the imposition of substantial criminal and civil penalties or in agreed payments in settlement of alleged violations. Failure of a financial institution doing business in the United States to maintain adequate policies, procedures, internal controls, and books and records on a global basis that address compliance with FCPA requirements could in some cases have serious legal and reputational consequences for the institution, including the incurring of expenses to enhance the relevant programs and the imposition of fines and other monetary penalties.
Regulatory Reform Legislation. In response to the global financial crisis and the perception that lax supervision of the financial industry in the United States may have been a contributing cause, new legislation designed to reform the system for supervision and regulation of financial firms doing business in the United States called the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was signed into law on July 21, 2010. The Dodd-Frank Act is complex and extensive in its coverage and contains a wide range of provisions that would affect financial institutions operating in the United States, including our US operations. Included among these provisions, among other things, are sweeping reforms designed to reduce systemic risk presented by very large financial firms, promote enhanced supervision, regulation, and prudential standards for financial firms, establish comprehensive supervision of financial markets, impose new limitations on permissible financial institution activities and investments, expand regulation of the derivatives markets, protect consumers and investors from financial abuse, and provide the government with the tools needed to manage a financial crisis. Many aspects of the legislation require subsequent regulatory action by supervisory agencies for full implementation and to date a number of proposals for regulatory rule-making have been issued by those supervisory agencies that, if finally adopted, would have an impact on our operations. Since those rules are, for the most part, not yet adopted in final form, at this time we are unable to assess with certainty the potential impact of the Dodd-Frank Act on our operations. Certain aspects of the Dodd-Frank Act may not have a material impact on our operations. For example, those provisions of the Dodd-Frank Act which are commonly referred to as the Volcker Rule would require that we cease conducting proprietary trading activities (i.e., trading in securities and financial instruments for our own account) except for such trading activities that are conducted solely outside of the United States. Most of our proprietary trading activities are generally executed in Japan, and, therefore, we have only a limited number of proprietary trading activities in the US subsidiaries. Accordingly, assuming that there will be no significant increase in revenues attributable to proprietary trading activities in proportion to our total revenues at the time of implementation of the Volcker Rule, the loss of a portion of our proprietary trading revenues due to the implementation of the rule would not be material to our operations. However, based on the current status of the pending proposals, it is likely that certain other aspects of the Dodd-Frank Act could have a material impact on the structure and activities of, and prudential standards applicable to, our operations. We continue to carefully monitor future developments and trends of the Volcker Rule.
Foreign Account Tax Compliance Act. On March 28, 2010, the Foreign Account Tax Compliance Act, or the FATCA, was enacted into law. The FATCA is designed to curb offshore tax abuses by US persons by imposing a 30% withholding tax on certain non-US entities that refuse to disclose the identities of those US persons to the US government. The US Department of the Treasury, or the US Treasury, acting through the Internal Revenue Service, is responsible for issuing implementing regulations. Although the US Treasury has
issued some preliminary guidance for implementation, final comprehensive rules and regulations governing implementation of the FATCA have not yet been proposed. The FATCA is likely to require non-US financial institutions to develop extensive systems capabilities and internal processes to identify and report US persons who are subject to FATCA requirements. The FATCA will also require US and non-US financial institutions that make US withholdable payments to non-US entities to identify and make withholdings from those payments if those non-US entities refuse to disclose the identities of US persons to the US government. Developing and implementing those capabilities and processes is likely to be a complex and costly process and failure to do so in an adequate manner may subject any such institution to serious legal and reputational consequences, including the impositions of fines and other monetary policies. The FATCA becomes effective on January 1, 2013, and at this time we are unable to assess with certainty the potential impact of the FATCA on our operations.
The following chart presents our corporate structure summary as of March 31, 2011:
|(1)||Consumer finance subsidiaries.|
|(2)||On April 1, 2011, MUFG transferred the shares it held in Mitsubishi UFJ Asset Management Co., Ltd. to MUTB and BTMU. As a result, from the same date, Mitsubishi UFJ Asset Management Co., Ltd. became a consolidated subsidiary of MUTB.|
Set forth below is a list of our principal consolidated subsidiaries at March 31, 2011:
|Country of |
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
kabu.com Securities Co., Ltd.
Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd.
MU Frontier Servicer Co., Ltd.
NBL Co., Ltd.
Mitsubishi UFJ Factors Limited
Mitsubishi UFJ Research and Consulting Ltd.
Mitsubishi UFJ Capital Co., Ltd
BOT Lease Co., Ltd.
Tokyo Credit Services, Ltd.
Tokyo Associates Finance Corp.
Mitsubishi UFJ Personal Financial Advisers Co., Ltd.
MU Business Engineering, Ltd.
Defined Contribution Plan Consulting of Japan Co., Ltd.
Mitsubishi UFJ Trust and Banking Corporation
The Master Trust Bank of Japan, Ltd.
MU Investments Co., Ltd.
Mitsubishi UFJ Real Estate Services Co., Ltd.
Ryoshin DC Card Company, Ltd.
Mitsubishi UFJ Securities Holdings Co., Ltd.
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
KOKUSAI Asset Management Co., Ltd.
MU Hands-on Capital Co., Ltd.
Mitsubishi UFJ NICOS Co., Ltd.
Mitsubishi UFJ Asset Management Co., Ltd.
BTMU Capital Corporation
BTMU Leasing & Finance, Inc.
PT U Finance Indonesia
PT. BTMU-BRI Finance
BTMU Participation (Thailand) Co., Ltd.
Mitsubishi UFJ Trust & Banking Corporation (U.S.A.)
Mitsubishi UFJ Trust International Limited
Mitsubishi UFJ Baillie Gifford Asset Management Limited
Mitsubishi UFJ Global Custody S.A.
MU Trust Consulting (Shanghai) Co., Ltd.
|Peoples Republic |
Mitsubishi UFJ Securities (USA), Inc.
Mitsubishi UFJ Securities International plc
Mitsubishi UFJ Securities (HK) Holdings, Limited
|Peoples Republic |
Mitsubishi UFJ Securities (Singapore), Limited.
Mitsubishi UFJ Wealth Management Bank (Switzerland), Ltd.
BTMU Lease (Deutschland) GmbH
|(1)||Includes shares held in trading accounts, custody accounts and others.|
|D.||Property, Plant and Equipment|
Premises and equipment at March 31, 2010 and 2011 consisted of the following:
|At March 31,|
Equipment and furniture
Construction in progress
Less accumulated depreciation
Premises and equipmentnet
Our registered address is 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8330, Japan. At March 31, 2011, we and our subsidiaries conducted our operations either in premises we owned or in properties we leased.
The following table presents the book values of our material offices and other properties at March 31, 2011:
The buildings and land we own are primarily used by us and our subsidiaries as offices and branches. Most of the buildings and land we own are free from material encumbrances.
During the fiscal year ended March 31, 2011, we invested approximately ¥98.3 billion, primarily for office renovations and relocation.
|Item 4A.||Unresolved Staff Comments.|
|Item 5.||Operating and Financial Review and Prospects.|
The following discussion and analysis should be read in conjunction with Item 3.A. Key InformationSelected Financial Data, Selected Statistical Data and our consolidated financial statements and related notes included elsewhere in this Annual Report.
|Liquidity and Capital Resources||86|
|Research and Development, Patents and Licenses, etc.||105|
|Off-balance Sheet Arrangements||106|
|Tabular Disclosure of Contractual Obligations||107|
We are a holding company for The Bank of Tokyo-Mitsubishi UFJ, Ltd., or BTMU, Mitsubishi UFJ Trust and Banking Corporation, or MUTB, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., or MUMSS (through Mitsubishi UFJ Securities Holdings Co., Ltd., or MUSHD, an intermediate holding company), Mitsubishi UFJ NICOS Co., Ltd., or Mitsubishi UFJ NICOS, and other subsidiaries. Through our subsidiaries and affiliated companies, we engage in a broad range of financial businesses and services, including commercial banking, investment banking, trust banking and asset management services, securities businesses, and credit card businesses, and provide related services to individual and corporate customers.
Key Income and Expense Figures
The following are some key figures prepared in accordance with US GAAP relating to our business:
|Fiscal years ended March 31,|
Net interest income
Provision for credit losses
Net income (loss) before attribution of noncontrolling interests
Net income (loss) attributable to Mitsubishi UFJ Financial Group
Diluted earnings (loss) per common sharenet income (loss) available to common shareholders of Mitsubishi UFJ Financial Group
Total assets (at end of period)
Our revenues consist of net interest income and non-interest income.
Net interest income. Net interest income is a function of:
the amount of interest-earning assets,
the amount of interest-bearing liabilities,
the general level of interest rates,
the so-called spread, or the difference between the rate of interest earned on interest-earning assets and the rate of interest paid on interest-bearing liabilities, and
the proportion of interest-earning assets financed by non-interest-bearing liabilities and equity.
Our net interest income for the fiscal year ended March 31, 2011 decreased compared to that for the prior fiscal year mainly as a result of decreases in interest rates as well as decreases in our lending volume. The following table shows changes in our net interest income by changes in volume and by changes in rates for the fiscal year ended March 31, 2010 compared to the fiscal year ended March 31, 2009 and the fiscal year ended March 31, 2011 compared to the fiscal year ended March 31, 2010:
|Fiscal year ended March 31, 2009 |
fiscal year ended March 31, 2010
|Fiscal year ended March 31, 2010 |
fiscal year ended March 31, 2011
|Increase (decrease) |
due to changes in
|Increase (decrease) |
due to changes in
|Volume(1)||Rate(1)||Net change||Volume(1)||Rate(1)||Net |
|(1)||Volume/rate variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total net change.|
The continuing low interest rate environment in Japan had a negative effect on our overall interest spread during the period. The following is a summary of the amount of interest-earning assets and interest-bearing liabilities average interest rates, the interest rate spread and non-interest-bearing liabilities for the fiscal years ended March 31, 2009, 2010 and 2011:
|Fiscal years ended March 31,|
|(in billions, except percentages)|
Interest rate spread
Net interest income as a percentage of total interest-earning assets
Provision for credit losses. Provision for credit losses is charged to operations to maintain the allowance for credit losses at a level deemed appropriate by management.
Non-interest income. Non-interest income consists of:
fees and commissions, including
fees on funds transfer and service charges for collections,
fees and commissions on international business,
fees and commissions on credit card business,
service charges on deposits,
fees and commissions on securities business,
fees on real estate business,
fees and commissions on stock transfer agency services,
fees on investment funds business, and
other fees and commissions;
foreign exchange gains (losses)net, which primarily include net gains (losses) on currency derivative instruments entered into for trading purposes and transaction gains (losses) on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies;
trading account profits (losses)net, which primarily include net profits (losses) on trading account securities and interest rate derivative contracts entered into for trading purposes, including assets relating to the following activities:
Trading purpose activities, which are conducted mainly for the purpose of generating profits either through transaction fees or arbitrage gains and involve frequent and short-term selling and buying of securities, commodities or others; and
Trading account assets relating to application of certain accounting rules, which are generally not related to trading purpose activities, but simply classified as trading accounts due to application of certain accounting rules, such as assets that are subject to fair value option accounting treatment or investment securities held by variable interest entities that are classified as trading account securities;
Of the two categories, trading purpose activities represent a smaller portion of our trading accounts profits;
investment securities gains (losses)net, which primarily include net gains (losses) on sales and impairment losses on securities available for sale;
equity in losses of equity method investees;
gains on sales of loans; and
other non-interest income.
The following table is a summary of our non-interest income for the fiscal years ended March 31, 2009, 2010 and 2011:
|Fiscal years ended March 31,|
Fees and commissions income
Foreign exchange gains (losses)net
Trading account profits (losses)net
Investment securities gains (losses)net
Equity in losses of equity method investees
Gains on sales of loans
Other non-interest income
Total non-interest income
Core Business Areas
During the fiscal year ended March 31, 2011, we operated our main businesses under an integrated business group system, which integrates the operations of BTMU, MUTB, MUMSS (through MUSHD), Mitsubishi UFJ NICOS and other subsidiaries in the following three areasRetail, Corporate and Trust Assets. These three businesses serve as the core sources of our revenue. For the fiscal year ended March 31, 2011, operations that were not covered under the integrated business group system were classified under Global Markets and Other. For further information, see Business Segment Analysis.
Our business segment information is based on financial information prepared in accordance with Japanese GAAP, as adjusted in accordance with internal management accounting rules and practice and is not consistent with our consolidated financial statements included elsewhere in this Annual Report, which have been prepared
in accordance with US GAAP. For information on reconciliation of operating profit under the internal management reporting system to income before income tax expense shown on the consolidated statements of income, see Note 27 to our consolidated financial statements included elsewhere in this Annual Report. The following table sets forth the relative contributions to operating profit for the fiscal year ended March 31, 2011 of the three core business areas and the other business areas based on our business segment information:
|Integrated Corporate Banking Business Group||Integrated |
|Other than |
Operating profit (loss)
In July 2011, we added the Integrated Global Business Group as a fourth area by shifting some of our global operations mainly from the Integrated Corporate Banking Business Group. This change in our business segment was implemented to more effectively coordinate and enhance our group-wide efforts to strengthen and expand overseas operations.
Summary of Our Recent Financial Results and Financial Condition
We reported net income attributable to Mitsubishi UFJ Financial Group of ¥461.8 billion for the fiscal year ended March 31, 2011, compared to net income attributable to Mitsubishi UFJ Financial Group of ¥859.8 billion for the fiscal year ended March 31, 2010. Our diluted earnings per share of common stock (net income available to common shareholders of Mitsubishi UFJ Financial Group) for the fiscal year ended March 31, 2011 was ¥31.08, compared to diluted earnings per share of common stock of ¥67.87 for the fiscal year ended March 31, 2010. Income before income tax expense for the fiscal year ended March 31, 2011 was ¥837.2 billion, compared to income before income tax expense of ¥1,282.1 billion for the fiscal year ended March 31, 2010.
Our business and results of operations as well as our assets are heavily influenced by economic conditions particularly in Japan. In the first half of fiscal year ended March 31, 2011, there were signs of recovery in the Japanese economy, compared to the negative trends that continued throughout the previous fiscal year, backed by growth in exports due to strong demand in Asian countries and due to government stimulus package to boost the economy. However, the Japanese economy began to weaken in the second half of the fiscal year ended March 31, 2011 when many elements of the government stimulus package ended and the Japanese yen continued to appreciate against major foreign currencies, which in turn weakened the competitive strength of Japanese exports. The slowdown in the Japanese economy furthered in March 2011 when the Great East Japan Earthquake hit the northeastern region of Japan, which caused a drastic decrease in production volume, and negatively impacted export levels and private consumption trends. See IntroductionBusiness Environment.
For the fiscal year ended March 31, 2011, domestic revenue, which consists of interest income and non-interest income, was ¥2,969.0 billion, while total foreign revenue was ¥1,291.4 billion, with the United States contributing ¥446.5 billion, Asia and Oceania (excluding Japan) contributing ¥470.9 billion and Europe contributing ¥238.7 billion. As a percentage of total revenue, for the three fiscal years ended March 31, 2011, domestic revenue declined to 69.7% for the fiscal year ended March 31, 2011.
For the fiscal year ended March 31, 2011, domestic net loss attributable to Mitsubishi UFJ Financial Group was ¥103.0 billion, while the corresponding total foreign net income was ¥564.8 billion. In particular, Asia and Oceania (excluding Japan) contributed ¥193.4 billion to our net income, more than half of which was derived from net interest income from China, whereas the United States and Europe contributed ¥171.8 billion and ¥90.0 billion, respectively, reflecting trading gains and net interest income. In light of these trends, we plan to seek growth opportunities particularly in Asia and the United States.
More specifically, our net income attributable to Mitsubishi UFJ Financial Group for the fiscal year ended March 31, 2011 mainly reflected the following:
Net interest income was ¥1,880.3 billion, a decrease of ¥103.8 billion from ¥1,984.1 billion for the previous fiscal year mainly due to the lower interest rate environment in Japan, which negatively affected our interest spread;
Provision for credit losses was ¥292.0 billion, a decrease of ¥355.8 billion from ¥647.8 billion for the previous fiscal year, reflecting the decrease in provision for credit losses in both domestic and foreign loan portfolio. While the decrease in domestic portfolio was mainly due to the absence of a large amount of provisions for a few borrowers with large exposure observed in previous year, decrease in foreign portfolio was mainly attributable to decrease in Union Bank and other overseas offices as a result of the slight recovery in the world economy, particularly in the United States;
Fees and commissions income was ¥1,128.4 billion, a decrease of ¥11.1 billion from ¥1,139.5 billion for the previous fiscal year primarily due to a general decrease in the volume of businesses generating other fees and commissions, trust fees and guarantee fees. The decrease in fees and commissions income was partially offset by an increase of ¥9.2 billion in fees and commissions on credit card business from member stores as the use of credit cards increased and an increase of ¥9.1 billion in fees on securities businesses as the trading volume of securities recovered from the previous year;
Net foreign exchange gains were ¥260.7 billion, compared to net foreign exchange gains of ¥216.7 billion for the previous fiscal year, mainly due to an improvement in gains other than derivative contracts such as gains in foreign currency exchange, partially offset by the losses associated with the appreciation of Japanese yen against the US dollar and other currencies;
Net trading account profits were ¥133.9 billion, compared to net trading account profits of ¥761.5 billion for the previous fiscal year, largely due to a decrease of evaluation of securities because of the decline of stock prices and an increase in interest rates in foreign markets at the end of March 2011. On the other hand, net losses on interest rate and other derivative contracts were ¥3.1 billion, compared to ¥88.5 billion in the previous fiscal year, mainly due to an increase in gains on equity contracts and credit derivatives, which were partially offset by a decrease in gains (losses) on interest rate contracts; and
Net investment securities gains were ¥121.8 billion, compared to net gains of ¥223.0 billion for the previous fiscal year, mainly reflecting losses on sales of marketable equity securities because of the decline of the stock markets in Japan, partially offset by increasing profit of sales on securities available for sale as conditions in the debt securities market improved.
Our total loans outstanding at March 31, 2011 were ¥87.50 trillion, a decrease of ¥4.69 trillion from ¥92.19 trillion at March 31, 2010. Before unearned income, net unamortized premiums and net deferred loan fees, our loan balance at March 31, 2011 consisted of ¥67.55 trillion of domestic loans and ¥20.05 trillion of foreign loans. Due to a general decrease in the demand for loans, domestic loans decreased ¥4.47 trillion and foreign loans decreased ¥0.22 trillion between March 31, 2010 and March 31, 2011. The total allowance for credit losses at March 31, 2011 was ¥1,240.5 billion, a decrease of ¥75.1 billion from ¥1,315.6 billion at March 31, 2010 as a result of a decrease in the amount of formula allowance.
Total investment securities increased ¥4.11 trillion to ¥59.16 trillion at March 31, 2011 from ¥55.05 trillion at March 31, 2010, primarily due to an increase of ¥5.29 trillion in Japanese national government bonds and Japanese government agency bonds, partially offset by a ¥0.79 trillion decrease in marketable equity securities, a ¥0.34 trillion decrease in corporate bonds and a ¥0.36 trillion decrease in foreign government and official institutions bonds. Our investments in Japanese national government and government agency bonds increased as part of our asset and liability management policy with respect to investing the amount of yen-denominated deposited funds exceeding our net loans. As a result, our holdings of Japanese national and government and Japanese government agency bonds as a percentage of our assets increased to relatively high levels as of March 31, 2011, accounting for 22.0% of our total assets. Regarding marketable equity securities, the decline in overall stock prices of Japanese equity securities resulted in a decrease in our marketable equity securities by ¥0.8 trillion between March 31, 2010 and March 31, 2011.
Our financial results for the fiscal year ending March 31, 2012, as well as our financial condition at the end of that period, will be heavily dependent on how our borrowers and the Japanese economy respond to the effects of the Great East Japan Earthquake that struck the northeastern region of Japan in March 2011. The operations of many Japanese companies and individuals have been adversely affected by the earthquake and the electricity power supply shortages following the accidents at the Fukushima Daiichi Nuclear Power Plant. As a result, the credit quality of some of our borrowers may deteriorate further than we currently expect, which could affect our credit costs and loan portfolio. In addition, the value of our portfolio of Japanese equity securities as well as Japanese government bonds will be affected by how the Japanese economy reacts after the earthquake and what governmental policies may be adopted for compensation, reconstruction and recovery. See Item 3.D. Key InformationRisk FactorsBecause a large portion of our assets are located in Japan and our business operations are conducted primarily in Japan, we may incur further losses if economic conditions in Japan worsen. and Business Environment below.
We engage, through our subsidiaries and affiliated companies, in a broad range of financial businesses and services, including commercial banking, investment banking, trust banking and asset management services, securities businesses and credit card businesses, and provide related services to individuals primarily in Japan and the United States and to corporate customers around the world. Our results of operations and financial condition are exposed to changes in various external economic factors, including:
general economic conditions;
currency exchange rates; and
stock and real estate prices.
Economic Environment in Japan
The Japanese economy showed signs of recovery in the first half of the fiscal year ended March 31, 2011 with increasing exports, especially to other parts of Asia, and as governmental economic stimulus measures continued to produce positive effects. Japans real GDP grew at an annualized 3.8% quarter on quarter for the July-September 2010 period, marking the fourth straight quarter of positive growth, with exports, private consumptions and private business investments showing 6.6%, 3.3% and 4.4% of annualized quarter on quarter growth, respectively. However, the Japanese economy began to weaken in the second half of the fiscal year ended March 31, 2011 after the government ended many aspects of its economic stimulus package and as the Japanese yen continued to appreciate against major foreign currencies thereby weakening the competitive strength of Japanese exports. Private consumption and exports decreased annualized 3.9% and 3.3%, respectively, quarter on quarter for the October-December 2010 period, leading to a decline in annualized real GDP growth rate to a negative 3.0% quarter on quarter in the same period. The slowdown in the Japanese
economy furthered when the Great East Japan Earthquake hit the Tohoku region in Japan in March 2011. The earthquake and the subsequent accidents at the Fukushima Daiichi Nuclear Power Plant have affected the Japanese economy on a nationwide basis, negatively impacting private consumption levels, export volume and corporate production levels. Annualized GDP growth rate for the January-March 2011 period dropped 3.7% quarter on quarter, reflecting the weakness in the Japanese economy that continued from the previous quarter as well as the impact of the earthquake that occurred in early March 2011.
Selected indicators for the Japanese economy are discussed below:
Corporate Production: Industrial production plunged by 15.5% in March 2011 following the earthquake especially led by the huge drop in transportation machinery (such as automobiles) by approximately 50%. Although manufacturing production recovered slightly in subsequent months (April +1.6% and May +5.7% according to the Ministry of Economy, Trade and Industry), the supply chain and networks for plants and other supplies may not be fully restored, and production levels for transportation machinery remain below pre-earthquake levels as of May 2011. Electricity supply shortages, which are expected to continue throughout the summer of 2011, may also adversely impact the recovery of corporate production.
Exports: Although nominal exports rose by 14.8% year on year in early March 2011, exports experienced a significant decrease starting mid- to late March 2011 dropping by 5.9% and 13.3% year on year, respectively. Export levels declined due to supply capacity issues caused by both physical damage of facilities as well as the domestic supply chain in Japan becoming disfunctional after the earthquake.
Employment Conditions: The employment situation, which had been improving gradually until early March 2011, deteriorated significantly following the earthquake with new job openings dropped by 7.1% month over month in March 2011 and unemployment rate slightly increased by 0.2 percentage points to 4.8% month over month in March 2011. The deteriorating employment situation mainly reflects the adjustments in employment being implemented in the private industry sectors that were affected by the downturn in the economy.
Private Consumption: Real private consumption decreased by an annualized rate of 2.2% in the January-March 2011 period mainly due to a decline in the consumption of durable goods, such as automobiles. Services spending also dropped notably after the earthquake as consumers have been voluntarily withdrawing from participating in events and purchasing discretionary items.
The Bank of Japan has maintained a monetary easing policy during the fiscal year ended March 31, 2011 to stimulate the economy that has been persistently weak since the financial crisis. In October 2010, the Bank of Japan lowered its target interest rate to between 0% and 0.1% from 0.1% to support the economy and stimulate sustainable growth. Since the Great East Japan Earthquake, the Bank of Japan has focused on limiting the adverse effects on the economy. To date, the central banks main measures have been (1) to increase financial supply to the short-term financial markets through the central banks buying operations, (2) to increase funds for asset purchases to purchase risk assets, and (3) to supply capital to financial institutions located in areas affected by the earthquake. Further monetary easing may be possible as the Japanese government revises the second supplementary budget proposal for the fiscal year ending March 31, 2012. The proposal is expected to be submitted to the Diet during the summer of 2011, if the Japanese yen continues to appreciate against other currencies. Along with the monetary easing policy, the central bank has maintained a very low policy rate (uncollateralized overnight call rate) of 0.10% or lower in an effort to lift the economy.
Euro-yen 3-month TIBOR fell to approximately 0.33% as of July 1, 2011, the lowest level since 2006. Long-term interest rates have also remained at the historical low level, due to uncertainty in the global economy, weakness in stock prices and low expectations for a near-term rate hike in the United States, as the US government maintained a monetary easing policy until June 2011. The yield on newly-issued ten-year Japanese government bonds fell to around 1.1% as of early July 2011.
The following chart shows the interest rate trends in Japan since April 2009:
Regarding the Japanese stock market, the closing price of the Nikkei Stock Average, which is an average of 225 blue chip stocks listed on the Tokyo Stock Exchange, decreased from ¥11,089.94 at March 31, 2010 to ¥8,824.06 at the end of August 2010, then moved upward to nearly ¥11,000 just before the earthquake hit the northeastern part of Japan, which led to precipitous drop in stock price to ¥8,605.15 on March 15, 2011, just four days after the earthquake. The downward trend in Japanese stock price in the first half of fiscal year ended March 31, 2011 and upward trend in the later half were generally consistent with those of global stocks. The downward trend in stock prices in the first half reflected the impact of the sovereign debt crisis in some of the European countries, the effect of the cessation of QE1 in the United States that resulted in money flowing from stocks to safer securities, and weak corporate activities and operating results in most of the developed countries. The stock price started to move upward then, reflecting gradual improvement in the global economy, lower possibility of further decline in base interest rates and improved investor sentiment.
The Japanese stock prices then suddenly dropped precipitously after the earthquake, especially due to the nuclear disaster at Fukushima Daiichi Nuclear Power Plant, all of which created negative sentiment among investors on Japanese economy outlook. The Nikkei Stock Average then gradually recovered to ¥9,755.10 at March 31, 2011, along with the gradual recovery in other global stock indices. The closing price of the Tokyo Stock Price Index, or TOPIX, a composite index of all stocks listed on the First Section of the Tokyo Stock Exchange, also decreased from 978.81 at March 31, 2010 to 869.38 at March 31, 2011, the trend of which during the fiscal year ended March 31, 2011 was more or less the same with that of the Nikkei Stock Average.
Despite the Bank of Japans policy to increase monetary supply, investor sentiment in the Japanese stock market remains cautious due in part to uncertainty regarding the Japanese political leadership, the continuing strength of the Japanese yen, weak employment conditions, and the continuing uncertainties on how the earthquake and its after-effects, such as the electricity power shortages expected during the summer of 2011, will impact the Japanese economy going forward. As of July 15, 2011, the closing price of the Nikkei Stock Average was ¥9,974.47 and the TOPIX closed at 859.36. The following chart shows the daily closing price of the Nikkei Stock Average since April 2009: