Form 6-K
Table of Contents

 

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 under

the Securities Exchange Act of 1934

For the month of January 2016

Commission File Number 000-54189

 

 

MITSUBISHI UFJ FINANCIAL GROUP, INC.

(Translation of registrant’s name into English)

 

 

7-1, Marunouchi 2-chome, Chiyoda-ku

Tokyo 100-8330, Japan

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or

will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F      X                Form 40-F                  

Indicate by check mark if the registrant is submitting the Form 6-K

in paper as permitted by Regulation S-T Rule 101(b)(1):

Indicate by check mark if the registrant is submitting the Form 6-K

in paper as permitted by Regulation S-T Rule 101(b)(7):

 

 

 

 

 

 

 

 

 


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EXHIBITS TO FORM 6-K

 

Exhibit
Number

  

Description

101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.DEF    XBRL Definition Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: January 29, 2016

 

Mitsubishi UFJ Financial Group, Inc.
By:  

/s/ Yasuo Matsumoto

Name:   Yasuo Matsumoto
Title:   Chief Manager
  Documentation & Corporate Secretary Department Corporate Administration Division


Table of Contents

TABLE OF CONTENTS

 

     Page  

Financial Review

     1   

Introduction

     1   

Business Environment

     11   

Recent Developments

     18   

Critical Accounting Estimates

     22   

Accounting Changes and Recently Issued Accounting Pronouncements

     22   

Results of Operations

     23   

Business Segment Analysis

     32   

Financial Condition

     36   

Sources of Funding and Liquidity

     55   

Total Equity

     57   

Capital Adequacy

     58   

Off-Balance Sheet Arrangements

     63   

Market Risk

     63   

Unaudited Condensed Consolidated Financial Statements

     F-1   


Table of Contents

FINANCIAL REVIEW

 

Introduction

 

We, Mitsubishi UFJ Financial Group, Inc., or MUFG, 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., 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 individuals and corporate customers in Japan and abroad.

 

For the purposes of this Report, we have prepared our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, except for otherwise specifically identified information, including business segment information and risk-adjusted capital ratios. Unless otherwise stated or the context otherwise requires, all amounts in our unaudited condensed consolidated financial statements are expressed in Japanese yen.

 

Summary of Our Recent Financial Results

 

We reported net income attributable to Mitsubishi UFJ Financial Group of ¥381.3 billion for the six months ended September 30, 2015, a decrease of ¥457.0 billion from ¥838.3 billion for the six months ended September 30, 2014. Our diluted earnings per common share (earnings applicable to common shareholders of Mitsubishi UFJ Financial Group) for the six months ended September 30, 2015 was ¥27.19, a decrease of ¥31.16 from ¥58.35 for the six months ended September 30, 2014. Income before income tax expense for the six months ended September 30, 2015 was ¥510.2 billion, a decrease of ¥763.8 billion from ¥1,274.0 billion for the six months ended September 30, 2014. Our business and results of operations, as well as our assets and liabilities, are heavily influenced by trends in economic conditions particularly in Japan. During the six months ended September 30, 2015, Japan’s gross domestic product, or GDP, grew. This was due to a rebound in private spending after the sharp decline caused by the increase in the consumption tax rate in April 2014. Interest rates remained low under the Bank of Japan’s monetary policy during the six months ended September 30, 2015, while the Japanese stock market experienced volatility and stock prices declined towards the end of the six-month period, as concerns over the strength of the Chinese economy arose following the devaluation of the Chinese yuan, and as oil prices decreased. Our results of operations for the six months ended September 30, 2015 were also affected by higher long-term interest rates, and fluctuations in foreign currency exchange rates. Long-term interest rates increased mainly due to weaker demand for European sovereign bonds. While the Japanese yen depreciated significantly against the U.S. dollar in the six months ended September 30, 2014, the Japanese yen traded at a similar level for the U.S. dollar at the beginning of the six-month period ended September 30, 2015 and at the end of the same period. While the Japanese yen appreciated against the Euro in the six months ended September 30, 2014, the Japanese yen depreciated against the Euro in the six months ended September 30, 2015.

 

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The following table presents some key figures relating to our financial results:

 

     Six months ended September 30,  
             2014                      2015          
     (in billions, except per share data)  

Net interest income

   ¥ 1,101.4       ¥ 1,130.6   

Credit for credit losses

     68.1         7.2   

Non-interest income

     1,432.8         756.1   

Non-interest expense

     1,328.3         1,383.7   

Income before income tax expense

     1,274.0         510.2   

Net income before attribution of noncontrolling interests

     864.0         413.1   

Net income attributable to Mitsubishi UFJ Financial Group

     838.3         381.3   

Diluted earnings per common share—Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

     58.35         27.19   

 

Our net income attributable to Mitsubishi UFJ Financial Group mainly reflects the following:

 

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.

 

Net interest income for the six months ended September 30, 2015 was ¥1,130.6 billion, an increase of ¥29.2 billion from ¥1,101.4 billion for the six months ended September 30, 2014. The increase in net interest income was primarily attributable to an increase in interest income from foreign loans reflecting the larger average volume, despite a decrease in the average loan interest rate, as well as an increase in interest income from foreign investment securities reflecting an increase in the average volume of such securities. Interest income from domestic loans, however, decreased reflecting the lower average interest rate despite an increase in the average balance. The increase in interest income was partially offset by an increase in interest expense. Interest expense increased mainly due to an increase in interest expense on foreign interest-bearing deposits. This was due to an increase in the average volume in foreign branches of our banking subsidiaries as well as an increase in interest expense on domestic long-term debt due to an increase in the average volume, despite the lower average interest rate. The average interest rate spread decreased 0.09 percentage points to 0.84% for the six months ended September 30, 2015 from 0.93% for the six months ended September 30, 2014. The average interest rate on foreign interest-earning assets decreased 0.19 percentage points, reflecting the lower average interest rates on foreign loans and trading account assets. The average interest rate on foreign interest-bearing liabilities decreased 0.08 percentage points, mainly reflecting a decrease in the average interest rate on long-term debt as well as decreases in the average interest rates on short-term borrowings and trading account liabilities. The average interest rate spread on domestic activities also declined since the average interest rate on interest-earning assets declined as interest rates continued to decline in Japan and competition further intensified in the domestic loan market, while the average interest rate on interest-bearing liabilities remained at near-zero levels.

 

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The following table is a summary of the amount of interest-earning assets and interest-bearing liabilities, the average interest rates, the interest rate spread and non-interest-bearing liabilities for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014     2015  
     Average
balance
     Average rate
(Annualized)
    Average
balance
     Average rate
(Annualized)
 
     (in billions, except percentages)  

Interest-earning assets:

          

Domestic

   ¥ 142,428.9         0.82   ¥ 153,157.0         0.73

Foreign

     84,150.0         2.01        101,114.1         1.82   
  

 

 

      

 

 

    

Total

   ¥ 226,578.9         1.26   ¥ 254,271.1         1.16
  

 

 

      

 

 

    

Financed by:

          

Interest-bearing liabilities:

          

Domestic

   ¥ 146,635.7         0.17   ¥ 157,941.6         0.18

Foreign

     54,943.5         0.74        64,757.4         0.66   
  

 

 

      

 

 

    

Total

     201,579.2         0.33        222,699.0         0.32   

Non-interest-bearing liabilities

     24,999.7         —         31,572.1         —    
  

 

 

      

 

 

    

Total

   ¥ 226,578.9         0.29   ¥ 254,271.1         0.28
  

 

 

      

 

 

    

Interest rate spread

        0.93        0.84

Net interest income as a percentage of total interest-earning assets

        0.97        0.89

 

Provision (credit) 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. When there is an improvement in asset quality, credit for credit losses is recorded to reduce the allowance for credit losses to an appropriate level. For the six months ended September 30, 2015, we recorded credit for credit losses of ¥7.2 billion, compared to credit for credit losses of ¥68.1 billion for the same period of the previous fiscal year. For details of the provision (credit) for credit losses and a description of the approach and methodology used to establish the allowance for credit losses, see “Financial Condition—Loan Portfolio.”

 

Non-interest income.    Non-interest income consists of:

 

   

fees and commissions income, including:

 

   

fees and commissions on deposits,

 

   

fees and commissions on remittances and transfers,

 

   

fees and commissions on foreign trading business,

 

   

fees and commissions on credit card business,

 

   

fees and commissions on security-related services,

 

   

fees and commissions on administration and management services for investment funds,

 

   

trust fees,

 

   

guarantee fees,

 

   

insurance commissions,

 

   

fees and commissions on real estate business, and

 

   

other fees and commissions,

 

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foreign exchange gains (losses)—net, which include gains (losses) on foreign exchange derivative contracts (for example, foreign exchange gains (losses) on currency derivatives), foreign exchange gains (losses) on other than derivative contracts (for example, gains (losses) on foreign exchange transactions), and foreign exchange gains (losses) related to the fair value option (for example, foreign exchange gains (losses) on securities under the fair value option),

 

   

trading account profits (losses)—net, which primarily include net profits (losses) on trading account securities and 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 other financial instruments, and

 

   

trading account assets relating to the application of certain accounting rules, which are generally not related to trading purpose activities but are classified as trading accounts due to the 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 account assets relating to the application of certain accounting rules represented a larger portion of our trading account losses for the six months ended September 30, 2015;

 

   

investment securities gains (losses)—net, which primarily include net gains (losses) on sales and impairment losses on available-for-sale securities,

 

   

equity in earnings (losses) of equity method investees—net, which includes our equity interest in the earnings of our equity method investees and impairment losses on our investments in equity method investees,

 

   

gains (losses) on sales of loans—net, and

 

   

other non-interest income.

 

The following table is a summary of our non-interest income for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
             2014                    2015         
     (in billions)  

Fees and commissions income

   ¥ 672.1      ¥ 729.9   

Foreign exchange gains (losses)—net

     (43.0     41.6   

Trading account profits (losses)—net

     562.5        (284.8

Investment securities gains—net

     63.2        119.8   

Equity in earnings of equity method investees—net

     121.5        114.3   

Other non-interest income

     56.5        35.3   
  

 

 

   

 

 

 

Total non-interest income

   ¥ 1,432.8      ¥ 756.1   
  

 

 

   

 

 

 

 

Fees and commissions income for the six months ended September 30, 2015 was ¥729.9 billion, an increase of ¥57.8 billion from ¥672.1 billion for the six months ended September 30, 2014. This was mainly due to fees and commissions on administration and management services for investment funds reflecting higher assets under administration and higher assets under management in Japan and higher fees from foreign asset administration services due to the expansion of our foreign asset administration subsidiaries’ businesses, and fees and commissions on security-related services reflecting increases in fees related to underwriting and sales of equity products and investment funds.

 

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Net foreign exchange gains for the six months ended September 30, 2015 were ¥41.6 billion, compared to net losses of ¥43.0 billion for the six months ended September 30, 2014. The improvement of net foreign exchange gains was due to an improvement of ¥259.3 billion on net foreign exchange gains on derivative contracts reflecting an increase in currency swap related profits in our banking subsidiaries, and an improvement of ¥225.5 billion on net foreign exchange losses on other than derivative contracts reflecting the smaller negative impact of foreign exchange rate fluctuations between the Japanese yen and the U.S. dollar on our costs of Japanese yen funding for purchases of U.S. dollar-denominated securities. While the Japanese yen depreciated significantly against the U.S. dollar in the six months ended September 30, 2014, the Japanese yen traded at a similar level for the U.S. dollar at the beginning of the six-month period ended September 30, 2015 and at the end of the same period. However, the same foreign exchange rate fluctuations adversely affected net foreign exchanges gains related to the fair value option, resulting in a ¥400.2 billion decrease.

 

Net trading account losses for the six months ended September 30, 2015 were ¥284.8 billion, compared to net trading account profits of ¥562.5 billion for the six months ended September 30, 2014. This decrease was mainly due to a ¥965.6 billion decrease in net profits on trading account securities mainly due to a decrease in realized gains related to the foreign securities under the fair value option. The decrease in realized gains was mainly due to a decrease in the fair value of foreign bonds in our banking subsidiaries reflecting increases in long-term market interest rates in the Eurozone. A reduction in our holdings of foreign bonds under the fair value option also contributed to the decrease in the fair value of the foreign bonds. In addition, profits and losses on trading account securities were negatively impacted by lower gains on sales of trading account securities in our securities subsidiaries due to unfavorable movements in bond markets. These decreases were partially offset by an improvement of ¥118.3 billion in net profits from derivative contracts, including equity-related derivative products, in our banking subsidiaries, which we use to manage the risk of equity price fluctuations.

 

Net investment securities gains for the six months ended September 30, 2015 were ¥119.8 billion, an increase of ¥56.6 billion from ¥63.2 billion for the six months ended September 30, 2014. This was mainly due to an increase in net gains on sales of available-for-sale marketable equity securities, particularly exchange traded funds, or ETFs, as well as an increase in net gains on sales of available-for-sale debt securities reflecting higher volumes of sales of Japanese government bonds to reduce the holdings of such debt securities in our banking subsidiaries. These increases were partially offset by larger impairment losses on available-for-sale equity securities reflecting decreases in the prices of the stocks held by our commercial banking subsidiaries, including the stock of a large-scale domestic electronics manufacturer.

 

Non-interest expense.    Non-interest expense consists of:

 

   

salaries and employee benefits, which include the amount of money paid as salaries and bonuses as well as the cost of fringe-benefits,

 

   

occupancy expenses—net, which include the amount of money paid as rents for offices and other facilities,

 

   

fees and commission expenses, which include the amount of money paid as fees and commissions on services received,

 

   

outsourcing expenses, including data processing, which include the amount of money paid for the outsourcing services, including IT-related services,

 

   

depreciation of premise and equipment, which includes the depreciation of the value of buildings, equipment and furniture through the passage of time,

 

   

amortization of intangible assets, which includes the amount of deductions of the cost of investments in software and other intangible assets over their estimated useful lives,

 

   

impairment of intangible assets, which includes the amount of reductions in the carrying amounts of intangible assets with indefinite useful lives in excess of their fair values,

 

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insurance premiums, including deposits insurance, which include the amount of money paid as the insurance premiums including the deposit insurance premiums paid to the Deposit Insurance Corporation of Japan,

 

   

communications, which include the amount of money paid for communications such as postal services and telecommunications,

 

   

taxes and public charges, which include the amount of tax payments and other public charges,

 

   

provision for repayment of excess interest, which includes the amount of money reserved for the estimated amount of repayment of excess interest payments received in our consumer finance and credit card subsidiaries,

 

   

impairment of goodwill, which includes the amount of reductions in the carrying amount of goodwill recorded in connection with the acquisition of companies in excess of their fair values, and

 

   

other non-interest expenses.

 

The following table is a summary of our non-interest expense for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
            2014                   2015         
     (in billions)  

Salaries and employee benefits

   ¥ 534.9       ¥ 574.2   

Occupancy expenses—net

     82.6         87.8   

Fees and commission expenses

     118.5         139.5   

Outsourcing expenses, including data processing

     121.6         121.0   

Depreciation of premises and equipment

     54.5         46.2   

Amortization of intangible assets

     107.3         116.2   

Impairment of intangible assets

     0.1         0.2   

Insurance premiums, including deposit insurance

     57.2         45.8   

Communications

     26.7         29.0   

Taxes and public charges

     47.6         43.8   

Other non-interest expenses

     177.3         180.0   
  

 

 

    

 

 

 

Total non-interest expense

   ¥ 1,328.3       ¥ 1,383.7   
  

 

 

    

 

 

 

 

Non-interest expense for the six months ended September 30, 2015 was ¥1,383.7 billion, an increase of ¥55.4 billion from ¥1,328.3 billion for the six months ended September 30, 2014. This increase was mainly attributable to an increase in salaries and employee benefits, particularly at MUFG Americas Holding Corporation, or MUAH, and an increase in fees and commission expenses in our commercial banking and securities subsidiaries. These increases were partially offset by a decrease in insurance premiums, including deposit insurance, reflecting lower deposit insurance premiums that became effective on April 1, 2015.

 

Core Business Groups

 

We operate our main businesses under an integrated business group system. This integrates the operations of BTMU, MUTB, MUMSS (through MUSHD), Mitsubishi UFJ NICOS and other subsidiaries in the following five business groups—Retail Banking, Corporate Banking, Trust Assets, Global, and Global Markets, each of which is treated as a business segment. These five businesses serve as the core sources of our revenue. From April 1, 2015, Bank of Ayudhya Public Company Limited, or Krungsri, which did not belong to any of the five business groups, started to be included as part of the Global Business Group. Operations that were not covered under these five business groups, which mainly consists of the corporate center of MUFG, BTMU, MUTB and MUMSS and the elimination of net revenues among business segments, were classified under Other.

 

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Our business segment information is based on financial information prepared in accordance with accounting principles generally accepted in Japan, or Japanese GAAP, as adjusted in accordance with internal management accounting rules and practices. Accordingly, the format and information are not consistent with our unaudited condensed consolidated financial statements included elsewhere in this Report, which have been prepared in accordance with U.S. GAAP. For a reconciliation of operating profit under our internal management reporting system to income before income tax expense shown on the unaudited condensed consolidated statements of income, see Note 18 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

The following table sets forth the relative contributions to operating profit for the six months ended September 30, 2015 of the five core business groups and Other based on our business segment information:

 

    Retail
Banking
Business
Group
    Corporate
Banking
Business
Group
    Trust
Assets
Business
Group
    Global Business Group     Global
Markets
Business
Group
    Other     Total  
        Other than
MUAH/
Krungsri
    MUAH     Krungsri     Total        
    (in billions)  

Net revenue

  ¥ 646.6      ¥ 444.4      ¥ 87.9      ¥ 295.9      ¥ 218.3      ¥ 138.0      ¥ 652.2      ¥ 330.9      ¥ 14.1      ¥ 2,176.1   

Operating expenses

    488.9        223.4        50.9        190.5        158.1        68.5        417.1        106.5        75.9        1,362.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

  ¥ 157.7      ¥ 221.0      ¥ 37.0      ¥ 105.4      ¥ 60.2      ¥ 69.5      ¥ 235.1      ¥ 224.4      ¥ (61.8   ¥ 813.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Summary of Our Recent Financial Condition

 

The following table presents some key asset figures:

 

     March 31,
2015
    September 30,
2015
 
     (in trillions)  

Total assets

   ¥ 280.89      ¥ 283.98   

Net loans

     117.21        119.72   

Loans, net of unearned income, unamortized premiums and deferred loan fees

     118.27        120.67   

Allowance for credit losses

     (1.06     (0.95

Investment securities

     52.21        46.84   

Available-for-sale securities

     47.49        42.27   

Held-to-maturity securities

     4.13        4.00   

Trading account assets

     46.90        44.00   

Trading securities

     30.18        27.52   

Trading derivative assets

     16.72        16.48   

Interest-earning deposits in other banks

     37.36        44.24   

 

Total assets as of September 30, 2015 were ¥283.98 trillion, an increase of ¥3.09 trillion from ¥280.89 trillion as of March 31, 2015.

 

Total loans outstanding as of September 30, 2015 were ¥120.67 trillion, an increase of ¥2.40 trillion from ¥118.27 trillion as of March 31, 2015. The average total balance of loans increased ¥11.63 trillion to ¥121.91 trillion for the six months ended September 30, 2015 from ¥110.28 trillion for the same period of the previous fiscal year. Before unearned income, net unamortized premiums and net deferred loan fees, our loan balance as of September 30, 2015 consisted of ¥71.25 trillion of domestic loans and ¥49.71 trillion of foreign loans. Between March 31, 2015 and September 30, 2015, domestic loans increased ¥1.38 trillion, while foreign loans increased ¥1.03 trillion. The increase in domestic loans was primarily due to an increase in our loans outstanding to national government institutions. The increase in foreign loans was mainly due to increased lending to U.S. nonbank finance subsidiaries of Japanese manufacturing companies, securities and insurance companies in the United States, and borrowers in the banking industry in Thailand.

 

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The total allowance for credit losses as of September 30, 2015 was ¥947.3 billion, compared to ¥1,055.5 billion as of March 31, 2015. The total allowance for credit losses represented 0.79% of our total loan portfolio as of September 30, 2015, a decrease of 0.10 percentage points from 0.89% as of March 31, 2015. This improvement was primarily due to a decrease in allowance for credit losses provided for loans individually and collectively evaluated for impairment in the Commercial segment, which reflected an overall improvement in the credit quality of the portfolio in recent periods.

 

Total investment securities decreased to ¥46.84 trillion as of September 30, 2015 from ¥52.21 trillion as of March 31, 2015, primarily due to a decrease of ¥5.22 trillion in available-for-sale securities. The decrease in available-for-sale securities was mainly due to the sales of Japanese government bonds in response to the Bank of Japan’s repurchase program and as part of our measures to manage the risk of a possible sudden increase in interest rates, as well as a decrease in unrealized gains on marketable equity securities.

 

Trading account assets as of September 30, 2015 were ¥44.00 trillion, a decrease of ¥2.90 trillion from ¥46.90 trillion as of March 31, 2015. This decrease reflected a decrease of ¥2.66 trillion in trading securities, particularly Euro-denominated bonds, as interest rates in the Eurozone rapidly increased in late April 2015 through early May 2015 and in early June 2015, reflecting the weaker demand for Euro-denominated bonds.

 

Interest-earning deposits in other banks as of September 30, 2015 were ¥44.24 trillion, an increase of ¥6.88 trillion from ¥37.36 trillion as of March 31, 2015 mainly due to increased interest-earning deposits with the Bank of Japan by our banking subsidiaries.

 

The following table presents some key liability figures:

 

     March 31,
2015
     September 30,
2015
 
     (in trillions)  

Total liabilities

   ¥ 265.61       ¥ 268.95   

Total deposits

     171.99         172.37   

Domestic

     125.80         126.99   

Overseas

     46.19         45.38   

Short-term borrowings

     45.76         48.09   

Trading account liabilities

     17.03         16.31   

Long-term debt

     19.97         20.75   

 

Total liabilities as of September 30, 2015 were ¥268.95 trillion, an increase of ¥3.34 trillion from ¥265.61 trillion as of March 31, 2015.

 

Total deposits as of September 30, 2015 were ¥172.37 trillion, an increase of ¥0.38 trillion from ¥171.99 trillion as of March 31, 2015. The increase was due to an increase of ¥1.19 trillion in domestic deposits, which was partially offset by a decrease of ¥0.88 trillion in overseas interest-bearing deposits.

 

Trading account liabilities as of September 30, 2015 were ¥16.31 trillion, a decrease of ¥0.72 trillion from ¥17.03 trillion as of March 31, 2015. This decrease was mainly due to lower unrealized losses on foreign exchange forward contracts in our commercial banking subsidiaries, resulting from the reductions in the balances of such contracts.

 

Short-term borrowings increased ¥2.33 trillion to ¥48.09 trillion as of September 30, 2015 from ¥45.76 trillion as of March 31, 2015. This increase was mainly due to a ¥0.88 trillion increase in securities lending transactions as a result of increased trade volume of cross-currency securities lending transactions entered into as a means to raise foreign currency funds at relatively low costs and a ¥0.56 trillion increase in other short-term borrowings as a result of increased borrowings through issuances of commercial paper by our banking subsidiaries and short-term corporate bonds by our securities subsidiaries. These increases were partially offset by a decrease in borrowings from the Bank of Japan by our commercial banking subsidiaries.

 

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Long-term debt as of September 30, 2015 was ¥20.75 trillion, an increase of ¥0.78 trillion from ¥19.97 trillion as of March 31, 2015, primarily due to increased borrowings by our commercial banking subsidiaries as well as the issuance of subordinated bonds by MUFG.

 

Shareholders’ Equity

 

The following table presents some key shareholders’ equity figures:

 

                           
     March 31,
2015
     September 30,
2015
 
     (in trillions)  

Total Mitsubishi UFJ Financial Group shareholders’ equity

   ¥ 14.68       ¥ 14.39   

Capital Surplus

     5.96         5.96   

Retained earnings

     3.66         3.92   

Accumulated other comprehensive income, net of taxes

     3.07         2.62   

 

Shareholders’ equity as of September 30, 2015 was ¥14.39 trillion, a decrease of ¥0.29 trillion from ¥14.68 trillion as of March 31, 2015.

 

Retained earnings as of September 30, 2015 were ¥3.92 trillion, an increase of ¥0.26 trillion from ¥3.66 trillion as of March 31, 2015, reflecting the net income of our banking and securities subsidiaries for the six months ended September 30, 2015. We decided to pay semi-annual interim dividend of ¥9.0 per share of common stock for the six months ended September 30, 2015, and are currently planning to pay a year-end dividend of ¥9.0 per share of common stock for the six months ending March 31, 2016.

 

Accumulated other comprehensive income, net of taxes, as of September 30, 2015 was ¥2.62 trillion, a decrease of ¥0.45 trillion from ¥3.07 trillion as of March 31, 2015. The decrease was mainly due to a decrease of ¥0.40 trillion in unrealized gains on investment securities, reflecting sales of available-for-sale debt securities and unfavorable price movements in the equity market in Japan towards the end of the six months ended September 30, 2015.

 

Capital Ratios

 

The following tables present our risk-adjusted capital ratios in accordance with Basel III as of March 31, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from our consolidated and non-consolidated financial statements prepared in accordance with Japanese GAAP, as required by the Japanese Financial Service Agency, or FSA. The figures in the tables below are rounded down.

 

Common Equity Tier 1 capital ratios (minimum capital ratio required: 4.50%)

 

                           
     March 31,
2015(1)(4)
    September 30,
2015
 

MUFG (consolidated)

       11.09       11.23

BTMU (consolidated)

     10.77        10.70   

BTMU (stand-alone)

     11.76        11.67   

MUTB (consolidated)

     14.70        15.08   

MUTB (stand-alone)

     14.31        14.53   

 

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Tier 1 capital ratios (minimum capital ratio required: 6.00%)   
     March  31,
2015(2)(4)
    September 30,
2015
 

MUFG (consolidated)

       12.58       12.73

BTMU (consolidated)

     12.21        12.15   

BTMU (stand-alone)

     13.38        13.28   

MUTB (consolidated)

     15.26        15.59   

MUTB (stand-alone)

     14.86        15.03   
Total capital ratios (minimum capital ratio required: 8.00%)   
     March  31,
2015(3)(4)
    September 30,
2015
 

MUFG (consolidated)

       15.62       15.69

BTMU (consolidated)

     15.45        15.30   

BTMU (stand-alone)

     17.03        16.79   

MUTB (consolidated)

     19.15        18.99   

MUTB (stand-alone)

     19.11        18.90   

 

Notes:

(1)   Common Equity Tier 1 capital ratio for MUFG as of March 31, 2015 has been revised from 11.14% to 11.09% on a consolidated basis. Common Equity Tier 1 capital ratio for BTMU as of March 31, 2015 has been revised from 10.88% to 10.77% on a consolidated basis and 11.90% to 11.76% on a stand-alone basis. Common Equity Tier 1 capital ratio for MUTB as of March 31, 2015 has been revised from 14.35% to 14.31% on a stand-alone basis.
(2)   Tier 1 capital ratio for MUFG as of March 31, 2015 has been revised from 12.62% to 12.58% on a consolidated basis. Tier 1 capital ratio for BTMU as of March 31, 2015 has been revised from 12.33% to 12.21% on a consolidated basis and 13.54% to 13.38% on a stand-alone basis. Tier 1 capital ratio for MUTB as of March 31, 2015 has been revised from 14.90% to 14.86% on a stand-alone basis.
(3)   Total capital ratio for MUFG as of March 31, 2015 has been revised from 15.68% to 15.62% on a consolidated basis. Total capital ratio for BTMU as of March 31, 2015 has been revised from 15.61% to 15.45% on a consolidated basis and 17.23% to 17.03% on a stand-alone basis. Total capital ratio for MUTB as of March 31, 2015 has been revised from 19.16% to 19.11% on a stand-alone basis.
(4)   The revisions reflect corrections of errors in the risk weighting applied to certain assets, mostly residential mortgage loans, and certain other adjustments made under Basel I standards to obtain amounts that were used for floor adjustments in determining the amounts of risk-weighted assets of MUFG, BTMU and MUTB under Basel III standards.

 

As of September 30, 2015, our management believed that we were in compliance with all capital adequacy requirements to which we were subject.

 

Leverage Ratios

 

The following table presents our leverage ratios in accordance with Basel III as of March 31, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from our consolidated and non-consolidated financial statements prepared in accordance with Japanese GAAP, as required by the FSA. The figures in the table below are rounded down. The minimum ratio required as of these dates was 3%.

 

                           
     March 31,
2015
    September 30,
2015
 

MUFG (consolidated)

         4.72         4.67

BTMU (consolidated)

     4.64        4.57   

MUTB (consolidated)

     4.72        4.78   

 

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Liquidity Coverage Ratios

 

The following table presents our liquidity coverage ratios in accordance with Basel III as of June 30, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from our consolidated and non-consolidated financial statements prepared in accordance with Japanese GAAP, as required by the FSA. The percentages in the table below are rounded down. The minimum ratio required as of these dates was 60%.

 

                   
     June  30,
2015(1)
    September  30,
2015(2)
 

MUFG (consolidated)

     128.3     130.4

BTMU (consolidated)

     128.8        130.8   

BTMU (stand-alone)

     139.0        141.3   

MUTB (consolidated)

     144.1        154.6   

MUTB (stand-alone)

     165.4        182.3   

 

Notes:

(1)   Each of the ratios is calculated by dividing the month-end average balance of High-Quality Liquid Assets as of the end of April, May and June 2015 by the monthly average amount of total net cash outflows for the same three months.
(2)   Each of the ratios is calculated by dividing the month-end average balance of High-Quality Liquid Assets as of the end of July, August and September 2015 by the monthly average amount of total net cash outflows for the same three months.

 

Business Environment

 

Our results of operations and financial condition are exposed to changes in various external economic factors, including:

 

   

general economic conditions,

 

   

interest rates,

 

   

foreign currency exchange rates, and

 

   

stock and real estate prices.

 

Economic Environment in Japan

 

During the six months ended September 30, 2015, Japan’s economy gradually recovered, particularly as compared to the same period of the previous fiscal year when private consumption significantly declined following the increase in the consumption tax rate from 5% to 8% in April 2014. Long-term interest rates remained low under the “quantitative and qualitative monetary easing” policy of the Bank of Japan. The stock market experienced significant volatility during the period, although it was on an upward trend for most of the six months ended September 30, 2015 and the Nikkei Stock Average rose above 20,000 for the first time in 15 years as the Japanese yen depreciated against the U.S. dollar. However, stock prices declined towards the end of August 2015 due to concerns over the slowdown in the Chinese economy. Japan’s economic recovery has been weak, and there still remains significant uncertainty surrounding the future of Japan’s economy.

 

In December 2015, the Bank of Japan announced the following guidelines for money market operations in addition to maintaining its previous monetary policy:

 

   

the average remaining maturity of the Bank of Japan’s Japanese government bond holdings will be extended to about seven to twelve years from seven to ten years beginning in the calendar year 2016; and

 

   

a new program will be established to purchase ETFs at an annual rate of approximately ¥300 billion, in addition to the prior ETF purchase program pursuant to which the Bank of Japan has been purchasing about ¥3 trillion of ETFs per year.

 

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On January 29, 2016, the Bank of Japan decided to introduce a negative interest rate of minus 0.1% to certain current account amounts that financial institutions hold at the Bank of Japan.

 

The following table sets forth the growth rates of Japan’s real GDP and its components on a quarter-on-quarter basis for the periods indicated:

 

    Calendar Year     (Unit: %)  
 

 

 

 
    2012     2013     2014     2015  
    4Q     1Q     2Q     3Q     4Q     1Q     2Q     3Q     4Q     1Q     2Q     3Q  

Gross Domestic Product

    (0.1     1.0        0.8        0.5        (0.2     1.2        (1.9     (0.7     0.5        1.1        (0.1     0.3   

Private Consumption

    0.1        0.7        1.0        0.3        (0.1     2.3        (4.8     0.0        0.4        0.3        (0.5     0.4   

Private Residential Investment

    1.4        0.9        1.4        4.2        2.9        2.1        (10.5     (6.9     (0.7     2.0        2.5        2.0   

Private Non-Residential Investment

    (0.3     (2.4     3.0        0.3        1.1        4.4        (4.1     (0.4     0.2        2.7        (1.3     0.6   

Government Consumption

    0.7        0.7        0.7        0.1        0.0        (0.1     (0.2     0.2        0.4        0.2        0.4        0.3   

Public Investment

    (0.9     4.8        4.1        5.1        (0.2     (1.8     (2.5     1.6        (0.5     (2.0     3.3        (1.5

Exports

    (3.8     3.9        3.3        (0.3     (0.2     5.8        0.4        1.6        2.9        1.9        (4.3     2.7   

Imports

    (2.5     0.8        3.1        1.8        2.7        6.0        (4.3     1.1        0.8        1.7        (2.6     1.7   

 

Source: Cabinet Office, Government of Japan

 

Japan’s GDP grew by 0.3% in the quarter ended September 30, 2015, reflecting stronger private investment, after contracting by 0.1% in the immediately preceding quarter. Increases in private residential investment and private non-residential investment reflected the Abe administration’s efforts to encourage companies to increase investment and raise wages to increase spending, stimulate the economy and end deflation. Private consumption rose 0.4%, reflecting the resulting growth in household income, following a 0.5% decline in the immediately preceding quarter. Exports showed an increase of 2.7%, reflecting a recovery in exports of electronic devices and machinery. However, government investment decreased 1.5% inversely with stronger private investment.

 

The following table sets forth the growth rates of Japan’s nationwide consumer price indices on a year-on-year basis for the periods indicated:

 

    Calendar Year                                                                          (Unit: %)  
    2014     2015  
    Oct.     Nov.     Dec.     Jan.     Feb.     Mar.     Apr.     May     Jun.     Jul.     Aug.     Sep.     Oct.     Nov.  

Consumer Price Index

    2.9        2.4        2.4        2.4        2.2        2.3        0.6        0.5        0.4        0.2        0.2        0.0        0.3        0.3   

 

Source: Ministry of Internal Affairs and Communications of Japan

 

Japan’s Consumer Price Index, or CPI, maintained positive growth, supported by the anti-deflation monetary measures of the Bank of Japan, which are designed to achieve a price stability target of 2% in terms of the year-on-year rate of growth in the CPI, although the rate of growth has slowed in recent months.

 

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The following table sets forth Japan’s nationwide unemployment rates for the periods indicated:

 

    Calendar Year                                                                      (Unit: %)  
    2014     2015  
    Oct.     Nov.     Dec.     Jan.     Feb.     Mar.     Apr.     May     Jun.     Jul.     Aug.     Sep.     Oct.     Nov.  

Unemployment Rate

    3.5        3.5        3.4        3.6        3.5        3.4        3.3        3.3        3.4        3.3        3.4        3.4        3.1        3.3   

 

Source: Ministry of Internal Affairs and Communications of Japan

 

Japan’s unemployment rate remained low during the six months ended September 30, 2015, dropping to 3.1% for October 2015, the lowest in 20 years.

 

The Bank of Japan has sought to keep short-term interest rates low by maintaining its “quantitative and qualitative monetary easing” policy. In January 2016, the Bank of Japan commenced a program pursuant to which it purchases ¥8 trillion to ¥12 trillion in Japanese government bonds through auctions held approximately eight to ten times each month. Between March 31, 2015 and September 30, 2015, interest rates on 10-year Japanese government bonds declined from 0.405% to 0.356%. After rising to above 0.55% in June 2015 with heightened expectations for an increase in U.S. policy interest rates, interest rates on 10-year Japanese government bonds gradually declined to around 0.35% in September 2015 as concerns over the strength of the Chinese economy arose following the devaluation of the Chinese yuan. Interest rates on 10-year Japanese government bonds declined to below 0.30% in December 2015, with concerns over the Chinese economy growing again and the reduction in oil prices, and have since further fallen to around 0.22%.

 

The following chart shows the interest rate trends in Japan since April 2014:

 

LOGO

 

Source: Bank of Japan

 

The closing price of Nikkei Stock Average, which is the average of 225 blue chip stocks listed on the Tokyo Stock Exchange, decreased ¥1,818.84, or 9.47%, from ¥19,206.99 on March 31, 2015 to ¥17,388.15 on September 30, 2015. The index was on a generally upward trend until mid-August 2015, as the Japanese yen depreciated against other major currencies such as the U.S. dollar and the Euro. However, stock prices declined

 

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globally in mid-August 2015 as concerns over the strength of the Chinese economy arose following the devaluation of the Chinese yuan and oil prices decreased. After declining to ¥17,000 in late September 2015, the Nikkei Stock Average gradually increased to ¥20,000 around the end of November 2015 as the risk appetite of market participants recovered. However, since December 2015, with concerns over the Chinese economy growing again and the reduction in oil prices, stock prices have declined globally, and the Nikkei Stock Average has since fallen to around ¥17,150.

 

The following chart shows the daily closing price of the Nikkei Stock Average since April 2014:

 

LOGO

 

The exchange rate between the Japanese yen and the U.S. dollar was ¥120.13 to the U.S. dollar as of March 31, 2015 and ¥119.88 to the U.S. dollar as of September 30, 2015. The exchange rate fluctuated between ¥119 to the U.S. dollar and ¥121 to the U.S. dollar from April to mid-May 2015, and reached an intra-day high of ¥125.86 to the U.S. dollar on June 5, 2015, as expectations heightened for an increase in U.S. policy interest rates. The exchange rate subsequently remained below this intra-day high and above ¥120 to the U.S. dollar until mid-August 2015. In September 2015, the exchange rate fluctuated around ¥120 to the U.S. dollar. After October 2015, the Japanese yen was again on a depreciating trend against the U.S. dollar, reaching ¥123.64 to the U.S. dollar in November 2015. However, reflecting the risk-averse movement in financial markets, the Japanese yen appreciated to below ¥120 to the U.S. dollar in December 2015, and has since fluctuated around ¥117 to the U.S. dollar.

 

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The following chart shows the foreign exchange rates expressed in Japanese yen per U.S. dollar since April 2014:

 

LOGO

 

Source: Bank of Japan

 

The exchange rate between the Japanese yen and the Euro was ¥128.91 to the Euro as of March 31, 2015 and ¥133.99 to the Euro as of September 30, 2015. The Japanese yen traded under ¥134 to the Euro in April 2015. Subsequently, as concerns over the Greek sovereign debt lessened, the Euro appreciated against other major currencies. The exchange rate reached an intra-day high of ¥141.06 to the Euro on June 4, 2015, and subsequently fluctuated between ¥134 to the Euro and ¥140 to the Euro until mid-August 2015. The Japanese yen appreciated against the Euro to ¥132.68 to the Euro on September 4, 2015 as concerns over the strength of the Chinese economy arose following the devaluation of the Chinese yuan and investors shifted to comparatively safer currencies, including the Japanese yen. Since October 2015, the Euro has generally been on a depreciating trend against the Japanese yen under the ECB’s monetary policy, and the exchange rate was around ¥128 to the Euro in mid-January 2016.

 

According to a land price survey conducted by the Japanese government, the average residential land price in Japan declined 1.0% between July 1, 2014 and July 1, 2015. The average commercial land price in Japan also declined 0.5% during the same period. In the three major metropolitan areas of Tokyo, Osaka and Nagoya, the average residential land price increased 0.4% between July 1, 2014 and July 1, 2015, while the average commercial land price in those areas increased 2.3% during the same period. In the local regions of Japan, which consist of regions other than the three major metropolitan areas, the average residential land price declined 1.5% between July 1, 2014 and July 1, 2015, and the average commercial land price also declined 1.6% during the same period.

 

According to Teikoku Databank, a Japanese research institution, the number of companies that filed for legal bankruptcy in Japan in the six months ended September 30, 2015 was 4,217, a decrease of 11.2% from the same period of the previous year, and the fewest since 2008. The number of bankruptcies decreased in all the major sectors in Japan, especially in the transportation and telecommunications industries mainly due to lower oil prices, and in the construction industry where increased demand in private sector projects offset stagnant or decreased demand in public sector projects. The number of bankruptcies associated with the negative impact of

 

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the slowdown in the Chinese economy increased by 36.7% compared to the same period in the previous fiscal year. Teikoku Databank further found that, of the more than 13,000 Japanese companies expanding their business in China, including small and medium enterprises, many currently face difficulties in collecting receivables from Chinese companies. The number of companies that filed for legal bankruptcy with debt exceeding ¥10 billion in Japan in the six months ended September 30, 2015 was six, and the number has since remained low. As a percentage of the total number of legal bankruptcy filings made in the six months ended September 30, 2015, the number of such filings made by businesses with less than ¥50 million of debt was 57.1%, which was the highest in the last 15 years. The aggregate amount of liabilities subject to bankruptcy filings, excluding financial institutions’ bankruptcy filings, in the six months ended September 30, 2015 was approximately ¥848.6 billion, a decrease of ¥65.9 billion, or 7.2%, compared to the same period of the previous year.

 

International Financial Markets

 

During the six months ended September 30, 2015, the U.S. economy generally continued its recovery with improved labor and income statistics and increased personal consumption, although the rate of recovery slowed in the quarter ended September 30, 2015, compared to the immediately preceding quarter. The Eurozone economy generally continued to experience a low growth rate with continuing economic difficulties in some European peripheral countries and relatively low inflation rates. Asian economies also faced a slowdown, especially in China where GDP growth fell to below 7.0%.

 

U.S. Economy

 

The U.S. economy continued to improve during the six months ended September 30, 2015, with positive GDP growth mainly driven by stronger personal consumption, which reflected higher stock prices. The FRB raised the target range for the federal funds rate to between 0.25% and 0.5% in December 2015, marking the first interest rate increase in nearly a decade. In addition to the central bank’s monetary policy, there still remain various factors that could adversely affect the U.S. economy, including fluctuations in commodity prices and geopolitical conflicts.

 

The following table sets forth the growth rates of U.S. real GDP and its components on a quarter-on-quarter basis for the periods indicated:

 

    Calendar Year                                                                  (Unit: %)  
    2012     2013     2014     2015  
    4Q     1Q     2Q     3Q     4Q     1Q     2Q     3Q     4Q     1Q     2Q     3Q  

Gross Domestic Product

    0.1        1.9        1.1        3.0        3.8        (0.9     4.6        4.3        2.1        0.6        3.9        2.0   

Personal Consumption Expenditures

    1.1        2.5        1.4        1.7        3.5        1.3        3.8        3.5        4.3        1.8        3.6        3.0   

Gross Private Domestic Investment

    (3.2     7.1        5.2        13.7        4.2        (2.5     12.6        7.4        2.1        8.6        5.0        (0.7

Fixed Investment

    6.9        4.9        2.6        3.8        5.1        6.0        5.6        7.9        2.5        3.3        5.2        3.7   

Non-residential

    3.7        4.0        1.0        3.5        8.7        8.3        4.4        9.0        0.7        1.6        4.1        2.6   

Residential

    22.3        9.1        9.1        4.9        (8.1     (2.8     10.4        3.4        10.0        10.1        9.3        8.2   

Government Consumption Expenditures and Gross Investment

    (3.8     (4.5     (2.0     (2.2     (2.7     0.0        1.2        1.8        (1.4     (0.1     2.6        1.8   

Exports

    (0.5     1.0        4.9        4.2        10.9        (6.7     9.8        1.8        5.4        (6.0     5.1        0.7   

Imports

    (3.8     0.8        5.5        2.4        1.0        2.8        9.6        (0.8     10.3        7.1        3.0        2.3   

 

Source: U.S. Department of Commerce Bureau of Economic Analysis

 

The Consumer Price Index for All Urban Consumers, or CPI-U, before seasonal adjustment showed almost no change over the 12 months ended September 30, 2015. CPI-U on a seasonally adjusted month-on-month basis increased 0.2% in October 2015, and remained unchanged in November 2015.

 

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The Dow Jones Industrial Average decreased $1,491.42, or 8.39%, from $17,776.12 on March 31, 2015 to $16,284.70 on September 30, 2015. The index fluctuated around $18,000 between April 2015 and mid-August 2015, and declined to an intra-day low of $15,370.33 on August 24, 2015 as concerns over the strength of the Chinese economy arose following the devaluation of the Chinese yuan, resulting in risk-adverse behavior by market participants. The index rose to nearly $18,000 in October 2015 as investor demand gradually recovered, and fluctuated around $17,500 for the remainder of the calendar year 2015. However, reflecting the risk-averse behavior in reaction to concerns about the Chinese economy and decreasing of oil prices, the index declined to approximately $16,000 in January 2016.

 

Interest rates on U.S. Treasury bonds were on a generally upward trend in the six months ended September 30, 2015 with heightened expectations for an increase in U.S. policy interest rates. The yield on 10-year U.S. Treasury bonds increased from 1.92% on March 31, 2015 to 2.04% on September 30, 2015. With interest rates globally on an upward trend, influenced by trends in European bond markets, the yield on 10-year U.S. Treasury bonds reached an intra-day high of 2.49% on June 10, 2015. However, as concerns over the strength of the Chinese economy arose in August 2015, the yield on 10-year U.S. Treasury bonds decreased to 2.0% as investors sought comparatively safer assets. After October 2015, the yield on 10-year U.S. Treasury bonds reflected the anticipated 0.25% policy interest rate increase by the FRB, and fluctuated around 2.25% for the remainder of the calendar year 2015. However, reflecting the renewed risk-averse trends, the yield on 10-year U.S. Treasury bonds again moved down to 2.0% in January 2016.

 

Housing prices showed some signs of improvement during the six months ended September 30, 2015. As of September 30, 2015, the Federal Housing Finance Agency’s U.S. house price index exhibited a seventeenth consecutive quarterly price increase in the purchase-only, seasonally adjusted index. This also marked the fifteenth consecutive quarter where the house price index showed an increase compared to the same quarter of the previous year.

 

The following table sets forth U.S. unemployment rates on a month-on-month basis for the periods indicated:

 

    Calendar Year     (Unit: %)  
 

 

 

 
    2014     2015  
    Oct.     Nov.     Dec.     Jan.     Feb.     Mar.     Apr.     May     Jun.     Jul.     Aug.     Sep.     Oct.     Nov.     Dec.  

Unemployment Rate

    5.7        5.8        5.6        5.7        5.5        5.5        5.4        5.5        5.3        5.3        5.1        5.1        5.0        5.0        5.0   

 

Source: United States Department of Labor, Bureau of Labor Statistics, BLS Information

 

Eurozone Economy

 

The following table sets forth the growth rates of the Eurozone real GDP and its main expenditure components on a quarter-on-quarter basis for the periods indicated:

 

     Calendar Year      (Unit: %)  
  

 

 

 
     2012     2013      2014      2015  
     4Q     1Q     2Q      3Q      4Q      1Q      2Q     3Q      4Q      1Q      2Q      3Q  

Gross Domestic Product

     (0.4     (0.2     0.4         0.2         0.2         0.2         0.1        0.3         0.4         0.5         0.4         0.3   

Private Final Consumption

     (0.6     (0.3     0.2         0.3         0.1         0.0         0.2        0.4         0.5         0.5         0.3         0.4   

Gross Fixed Capital Formation

     (1.1     (1.9     0.8         0.9         0.4         0.4         (0.5     0.4         0.6         1.5         0.1         0.0   

Government Final Consumption

     0.0        0.0        0.1         0.2         0.2         0.2         0.2        0.3         0.2         0.5         0.3         0.6   

Exports

     (0.2     0.3        1.2         0.5         1.1         0.8         1.0        1.6         1.2         1.3         1.6         0.2   

Imports

     (0.5     0.1        1.1         1.3         0.5         1.2         1.1        1.5         1.2         1.9         0.9         0.9   

 

Source: European Central Bank—Eurosystem

 

The Eurozone’s economic growth remained weak during the six months ended September 30, 2015, with low GDP growth, mainly reflecting a slowdown in fixed capital investments.

 

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During the six months ended September 30, 2015, the ECB maintained low interest rates and a quantitative easing policy, which included a program to purchase €60 billion in bonds each month to revitalize the Eurozone economy and counter deflation. In December 2015, the ECB adjusted the interest rate on the deposit facility by 10 basis points to negative 0.30% and extended the bond purchase program by six months until at least March 2017. The interest rate on the main refinancing operations and the interest rate on the marginal lending facility remained unchanged at 0.05% and 0.30%, respectively.

 

Long-term interest rates in the Eurozone, including German Bunds and French Obligations Assimilables du Trésor, or OATs, fluctuated significantly during the six months ended September 30, 2015. The yield on 10-year German Bunds traded at historic low levels of around 0.075% in April 2015 as the ECB continued to purchase such bonds. Low yields adversely affected the market demand for such bonds, and the yield on 10-year German Bunds rose to nearly 1.0% in mid-June 2015 and remained volatile as investors sold down their holdings of such bonds for risk reduction purposes. The yield on 10-year German Bunds was on a declining trend after June 2015 as the risk tolerance of investors gradually recovered, and decreased to and remained around 0.50%, while the yields on German Bunds with shorter maturities fell into the negative range as the ECB adjusted the interest rate on its deposit facility down to negative 0.30%. The yield on 10-year French OATs similarly declined to 0.352% in April 2015, rose to around 1.3% in June 2015, and subsequently fluctuated between approximately 0.8% and 1.2%.

 

The following table sets for the Eurozone unemployment rates on a month-on-month basis for the periods indicated:

 

    Calendar Year     (Unit: %)  
 

 

 

 
    2014     2015  
    Oct.     Nov.     Dec.     Jan.     Feb.     Mar.     Apr.     May     Jun.     Jul.     Aug.     Sep.     Oct.     Nov.  

Unemployment Rate

    11.5        11.5        11.4        11.2        11.2        11.2        11.1        11.0        11.0        10.8        10.8        10.7        10.6        10.5   

 

Source: European Central Bank—Eurosystem

 

Recent Developments

 

During the six months ended September 30, 2015, international financial supervisory organizations issued regulatory standards and proposals that could significantly affect the capital structures of global banks, including us. We will monitor regulatory developments and pursue prudent transactions that will create a strong capital structure to enable us to contribute to the real economy, both domestically and globally, as a provider of a stable source of funds and high quality financial services. In order to respond to the increasingly complex market and legal risks, we continue to endeavor to enhance our compliance and internal control frameworks. We also plan to continue to selectively review and consider growth opportunities that will enhance our global competitiveness.

 

Recent Financial Regulatory Developments

 

In November 2015, the Financial Stability Board, or FSB, issued the final Total Loss-Absorbing Capacity, or TLAC, standard for global systematically important banks, or G-SIBs, including us. The FSB’s TLAC standard is designed to ensure that if a G-SIB fails, it has sufficient loss-absorbing and recapitalization capacity available in resolution to implement an orderly resolution that minimizes impacts on financial stability, ensures the continuity of critical functions, and avoids exposing public funds to loss. The FSB’s TLAC standard defines a minimum requirement for the instruments and liabilities that should be readily available to absorb losses in resolution but allows each resolution authority’s power under the applicable resolution law to expose other liabilities to loss through bail-in or the application of other resolution tools. The FSB’s TLAC standard requires a G-SIB to hold TLAC in an amount not less than 16% of its risk-weighted assets and six percent of the applicable Basel III leverage ratio denominator by January 1, 2019, and not less than 18% of its risk-weighted

 

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assets and 6.75% of the applicable Basel III leverage ratio denominator by January 1, 2022. The FSB’s TLAC standard is subject to regulatory rule-making in each jurisdiction, including Japan. Under the TLAC standard, we may need to adjust our capital funding structure and our funding costs may increase. For more information on the relevant capital requirements, see “Financial Condition—Capital Adequacy—Capital Requirements for Banking Institutions in Japan.”

 

In December 2015, the Basel Committee on Banking Supervision published a second consultation paper on revisions to the standardized approach for credit risk. The proposed revisions are designed to establish a capital framework that better balances simplicity and risk sensitivity, promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions, and ensure that the standardized approach constitutes a suitable alternative to and complement the Internal Ratings-Based approach. The consultation paper includes, among other things, reintroduction of external ratings, a lower risk weight for small and medium-sized enterprises, and higher credit conversion factors, which are percentages used to convert off-balance sheet items to credit-equivalent risk assets, to be applied to unconditionally cancellable commitments for corporate customers. In July 2015, the Basel Committee on Banking Supervision published a consultation paper “Review of the Credit Valuation Adjustment Risk (CVA) Framework.” CVA is an adjustment to the fair value of derivative instruments to account for counterparty credit risk. The proposals are designed to ensure that all important factors of CVA risk and CVA hedges are covered in the Basel regulatory capital standard, align the capital standard with the fair value measurement of CVA employed under various accounting standards, and ensure consistency with the Basel Committee on Banking Supervision’s proposed revisions to the market risk framework. The consultation paper proposed three approaches for CVA risk measurement—Internal Model Approach, Standardized Approach and Basic Approach. Depending on the final designs and calibrations, these revisions and reforms could significantly change the regulatory capital calculation and the level of capital requirement for each of the banks subject to the relevant standards, including us.

 

In January 2016, the Basel Committee on Banking Supervision announced a revised capital standard for market risk. The revised market risk framework, which will become effective January 1, 2019, revises the boundary between the trading book and banking book, the internal models approach for market risk and the standardized approach for market risk, shifts from value-at-risk to an expected shortfall measure of risk under stress, allows for supervisory approval and removal of internal models at the trading desk level, and incorporates the risk of market illiquidity. We are continuously working to enhance our market risk framework both to respond to the revised framework as well as changes in the markets where we operate. Changes that we make in this process could have an adverse effect on the amount of market risk and on our financial results.

 

In January 2016, the Group of Central Bank Governors and Heads of Supervision, or GHOS, agreed on the use of a Tier 1 definition of capital for the calculation of the leverage ratio and a minimum level of 3%, and discussed additional leverage ratio requirements for G-SIBs. The GHOS is expected to finalize the leverage ratio calibration within the calendar year 2016, and the final minimum leverage ratio requirement is expected to be implemented in 2018. Additional leverage ratio requirements for G-SIBs may, depending on the final calibration, have a significant impact on our capital structure and funding strategy. We will continue to closely monitor future discussions and developments relating to the leverage ratio requirements. For more information on the leverage requirements in Japan, see “Financial Condition—Capital Adequacy—Leverage Requirements for Banking Institutions in Japan.”

 

In addition, we continue to be affected by recently implemented or proposed regulatory reforms and other regulatory or legal actions. For example, in the United States, we expect that significant resources and management attention will be required to establish an appropriate governance structure with an effective internal control system for our U.S. bank and non-bank subsidiaries to ensure compliance with applicable regulatory requirements, including rules that will become effective in July 2016 requiring large foreign banking organizations to restructure their U.S. operations under a single U.S. intermediate holding company with enhanced capital and other prudential standards. We also remain subject to other regulatory and legal matters, including those relating to various interbank benchmark rates and foreign exchange related practices.

 

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Issuances of Basel III-Compliant Domestic Subordinated Bonds

 

In October 2015, we issued ¥150.0 billion aggregate principal amount of unsecured perpetual subordinated Additional Tier 1 notes in a public offering in Japan. It was our first offering of Basel III-compliant subordinated bonds to the public. These notes are subject to our discretion to cease interest payments and a write-down of the principal upon the occurrence of certain events, including when our Common Equity Tier 1 ratio declines below 5.125%, when we are deemed to be at risk of becoming non-viable or when we become subject to bankruptcy proceedings. Following any write-down, the principal may be reinstated to the extent permitted by the Japanese banking regulator. In March 2015, we issued to institutional investors in Japan ¥50.0 billion aggregate principal amount of unsecured perpetual subordinated Additional Tier 1 notes with similar terms except that the terms do not allow for the reinstatement of the principal. The notes issued in March 2015 were our first Additional Tier 1 notes issued under the Basel III requirements. We expect to issue additional Basel III-compliant subordinated bonds to enhance our regulatory capital.

 

Implementation of Share Repurchase Programs

 

During November and December 2015, we repurchased 121,703,700 shares of our common stock for ¥99,999,982,169 under a share repurchase program that was adopted in November 2015 and completed in December 2015. Under the program, we were authorized by the Board of Directors to repurchase up to the lesser of an aggregate of 140,000,000 shares of our common stock and an aggregate of ¥100.0 billion between November 16, 2015 and December 31, 2015.

 

During May and June 2015, we repurchased 111,151,800 shares of our common stock for ¥99,999,972,728 under a share repurchase program that was adopted in May 2015 and completed in June 2015. Under the program, we were authorized by the Board of Directors to repurchase up to the lesser of an aggregate of 160,000,000 shares of our common stock and an aggregate of ¥100.0 billion between May 18, 2015 and July 31, 2015.

 

The purposes of the above two programs were to enhance shareholder value, to improve our capital efficiency and to allow the implementation of flexible capital policies in response to changes in the business environment. Based on the Japanese GAAP information used to calculate our capital ratios as of September 30, 2015, we estimate that the November 2015 program would result in a decline in our capital ratios by approximately 0.1 percentage point. Based on the Japanese GAAP information used to calculate our capital ratios as of March 31, 2015, the May 2015 program resulted in a decline in our capital ratios by approximately 0.1 percentage point.

 

Capital and Business Alliance with Security Bank Corporation

 

On January 14, 2016, BTMU entered into a Subscription Agreement with Security Bank Corporation, a leading commercial bank in the Philippines, and agreed to establish a capital and business alliance with the bank. Security Bank is listed on the Philippines Stock Exchange and is not part of any local conglomerate in the Philippines. As part of the transaction, BTMU will acquire a 20.0% equity interest in the bank on a fully diluted basis through a private placement of newly issued common shares and preferred shares with voting rights for 245 Philippine peso per common share and 0.1 Philippine peso per preferred share, or 36.9 billion Philippine peso, or ¥97.1 billion, in the aggregate. The transaction is expected to close during the first half of the calendar year 2016, subject to regulatory approvals and other conditions precedent. Following the completion of the transaction, BTMU will appoint two directors to Security Bank’s board of directors. Security Bank is expected to be treated as an equity method investee of BTMU. BTMU and Security Bank will collaborate to offer enhanced services by leveraging their expertise and customer bases.

 

Mitsubishi UFJ Fund Services’ Acquisition of UBS Global Asset Management’s Alternative Fund Services Business

 

In December 2015, Mitsubishi UFJ Fund Services Holdings Limited, a global asset servicing subsidiary of MUTB, acquired the alternative fund services business of UBS Global Asset Management, a global fund

 

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administrator providing professional services for hedge funds, funds of hedge funds, private equity funds and real estate structures. We provide a full suite of global asset administration services, including fund administration, custody, securities lending and foreign exchange as a one stop shop under the “MUFG Investor Services” brand, and through acquisitions completed in recent periods, have enhanced our competitiveness and scale of operations in the global fund administration market with the aim to be a global industry-leading fund administrator. As a result of the acquisition in December 2015, we became the seventh largest fund service provider in the world in terms of assets under administration with total assets under administration of $266 billion across 2,300 funds. We intend to continue to seek opportunities to strengthen our operational abilities, to further improve the quality of our services, and to expand our global network through acquisitions and investments.

 

Exposures to Selected European Countries

 

Several European countries, including Italy, Spain, Portugal, Ireland and Greece, have recently been experiencing weaknesses in their economic and fiscal situations in varying degrees of severity. We are closely monitoring our exposures in these countries.

 

The following table sets forth information about our aggregate exposure to selected European countries of BTMU, MUTB and MUSHD, which were the subsidiaries holding the exposure, as of September 30, 2015. The information in the table is categorized by counterparties, consisting of sovereign, non-sovereign financial institutions and non-sovereign non-financial institutions, and by type of financial instruments, which include loans, securities, derivatives and credit default swap, or CDS, protection (sold and bought). The securities exposure includes available-for-sale, held-to-maturity and trading securities. The information included in the table below is based on information compiled for internal risk management purposes only, and not for financial accounting purposes. The exposures are determined based on the country in which the borrower’s head office is located. However, in the case of a subsidiary located in a country different from that in which its parent company is located, the country exposure is determined based on the country in which the subsidiary is located.

 

    September 30, 2015  
    Loans
(funded  and
unfunded)
    Securities(1)     Derivatives(2)     CDS
protection
sold(3)
    Gross
exposure
(funded and
unfunded)
    CDS
protection
bought(3)
    Net
exposure(4)
 
    (in billions)  

Italy

  $ 4.8      $ 0.6      $ 0.6      $ 0.0      $ 6.0      $ 0.4      $ 5.6   

Sovereign

    —          0.2        —          —          0.2        —          0.2   

Financial Institutions

    0.0        0.1        0.0        0.0        0.1        0.0        0.1   

Others

    4.8        0.3        0.6        0.0        5.7        0.4        5.3   

Spain

    3.0        0.3        0.0        0.0        3.3        0.1        3.2   

Sovereign

    —          0.1        —          —          0.1        —          0.1   

Financial Institutions

    0.0        0.0        —          0.0        0.0        0.0        0.0   

Others

    3.0        0.2        0.0        0.0        3.2        0.1        3.1   

Portugal

    0.3        (0.0     0.0        —          0.3        0.1        0.2   

Sovereign

    —          —          —          —          —          —          —     

Financial Institutions

    —          (0.0     —          —          (0.0     —          (0.0

Others

    0.3        —          0.0        —          0.3        0.1        0.2   

Ireland

    0.4        0.0        0.0        —          0.4        —          0.4   

Sovereign

    —          —          —          —          —          —          —     

Financial Institutions

    —          0.0        —          —          0.0        —          0.0   

Others

    0.4        0.0        0.0        —          0.4        —          0.4   

Greece

    —          —          —          —          —          —          —     

Sovereign

    —          —          —          —          —          —          —     

Financial Institutions

    —          —          —          —          —          —          —     

Others

    —          —          —          —          —          —          —     

Total

  $ 8.5      $ 0.9      $ 0.6      $ 0.0      $ 10.0      $ 0.6      $ 9.4   

Sovereign

    —          0.3        —          —          0.3        —          0.3   

Financial Institutions

    0.0        0.1        0.0        0.0        0.1        0.0        0.1   

Others

    8.5        0.5        0.6        0.0        9.6        0.6        9.0   

 

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Notes:

(1)   Securities include held-to-maturity securities, available-for-sale securities, and trading securities. Held-to-maturity securities are shown at amortized cost, and available-for-sale securities and trading securities are shown at fair value.
(2)   Derivatives amounts represent current exposures, taking into consideration legally enforceable master netting agreements.
(3)   CDS protection amounts represent notional amounts.
(4)   Net exposure represents gross exposure (funded and unfunded), net of CDS protection bought.
(5)   To the extent financial instruments are originally denominated in currencies other than U.S. dollars, the exposure amounts have been translated into U.S. dollars at an internal exchange rate used for our internal risk management purposes as of September 30, 2015.
(6)   Negative amounts represent short positions.

 

Based on information collected for internal risk management purposes as of September 30, 2015, the consolidated exposure of BTMU, MUTB and MUSHD listed above to Italy, Spain, Portugal, Ireland and Greece, represented less than 1.0% of our total assets.

 

As of September 30, 2015, other than BTMU, MUFG group companies had limited exposures to those European countries, except such other group companies’ exposures to sovereign bonds issued by those countries as discussed below. As of the same date, BTMU held no sovereign bonds issued by those European countries.

 

As of September 30, 2015, we had a total balance of $0.3 billion of sovereign bonds of the European peripheral countries identified in the table above on a consolidated basis. Among these countries, we had no Portuguese, Irish or Greek government bonds as of September 30, 2015. All of our Italian and Spanish government bonds were held in our trading accounts as of September 30, 2015.

 

As of September 30, 2015, excluding sovereign bonds, we had net exposures totaling $9.1 billion relating to the European peripheral countries identified in the table above. These exposures mainly consisted of commercial loan exposures to corporations and structured finance transactions. Our exposures to Italy and Spain mainly related to the infrastructure sector, such as electricity, gas and telecommunications. Our loan-related exposures to financial institutions in those countries were limited and not material.

 

In addition to these exposures, we also have indirect exposures. Examples of indirect exposures include country risk exposures related to the collateral received on secured financing transactions. These indirect exposures are managed in the normal course of business through our credit, market and operational risk management framework.

 

Critical Accounting Estimates

 

Our unaudited condensed consolidated financial statements included elsewhere in this Report are prepared in accordance with U.S. GAAP. Many of the accounting policies require management to make difficult, complex or subjective judgments regarding the valuation of assets and liabilities. The accounting policies are fundamental to understanding our operating and financial review and prospects. Critical accounting estimates include the allowance for credit losses, impairment of investment securities, the allowance for repayment of excess interest, the valuation of deferred tax assets, accruals for uncertain tax positions, the accounting for goodwill and intangible assets, accrued severance indemnities and pension liabilities, and the valuation of financial instruments. For a further discussion of our critical accounting estimates, see our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

Accounting Changes and Recently Issued Accounting Pronouncements

 

See “Accounting Changes” and “Recently Issued Accounting Pronouncements” in Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

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Results of Operations

 

The following table sets forth a summary of our results of operations for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014      2015  
     (in billions)  

Interest income

   ¥ 1,433.2       ¥ 1,484.3   

Interest expense

     331.8         353.7   
  

 

 

    

 

 

 

Net interest income

     1,101.4         1,130.6   
  

 

 

    

 

 

 

Credit for credit losses

     68.1         7.2   

Non-interest income

     1,432.8         756.1   

Non-interest expense

     1,328.3         1,383.7   
  

 

 

    

 

 

 

Income before income tax expense

     1,274.0         510.2   

Income tax expense

     410.0         97.1   
  

 

 

    

 

 

 

Net income before attribution of noncontrolling interests

   ¥ 864.0       ¥ 413.1   

Net income attributable to noncontrolling interests

     25.7         31.8   
  

 

 

    

 

 

 

Net income attributable to Mitsubishi UFJ Financial Group

   ¥ 838.3       ¥ 381.3   
  

 

 

    

 

 

 

 

Major components of our net income for the six months ended September 30, 2015 are discussed in further detail below.

 

Net Interest Income

 

The following table is a summary of the interest rate spread for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014     2015  
     Average
balance
     Average rate
(Annualized)
    Average
balance
     Average rate
(Annualized)
 
     (in billions, except percentages)  

Interest-earning assets:

          

Domestic

   ¥ 142,428.9         0.82   ¥ 153,157.0         0.73

Foreign

     84,150.0         2.01        101,114.1         1.82   
  

 

 

      

 

 

    

Total

   ¥ 226,578.9         1.26   ¥ 254,271.1         1.16
  

 

 

      

 

 

    

Financed by:

          

Interest-bearing liabilities:

          

Domestic

   ¥ 146,635.7         0.17   ¥ 157,941.6         0.18

Foreign

     54,943.5         0.74        64,757.4         0.66   
  

 

 

      

 

 

    

Total

     201,579.2         0.33        222,699.0         0.32   

Non-interest-bearing liabilities

     24,999.7         —         31,572.1         —    
  

 

 

      

 

 

    

Total

   ¥ 226,578.9         0.29   ¥ 254,271.1         0.28
  

 

 

      

 

 

    

Interest rate spread

        0.93        0.84

Net interest income as a percentage of total interest-earning assets

        0.97        0.89

 

Net interest income for the six months ended September 30, 2015 was ¥1,130.6 billion, an increase of ¥29.2 billion from ¥1,101.4 billion for the six months ended September 30, 2014. Both interest income and

 

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interest expense increased, with the increase in interest income exceeding the increase in interest expense, mainly reflecting higher interest income from foreign loans. Foreign interest income increased ¥78.4 billion, while domestic interest income decreased ¥27.3 billion. Foreign interest expense increased ¥10.3 billion, and domestic interest expense increased ¥11.6 billion. The average interest rate spread (which is the average interest rate on interest-earning assets less the average interest rate on interest-bearing liabilities) decreased, reflecting tighter interest rate spreads on both domestic and foreign activities. The average balance of interest-earning assets increased mainly due to increases in domestic interest-earning deposits in other banks and foreign loans.

 

Interest income increased ¥51.1 billion to ¥1,484.3 billion for the six months ended September 30, 2015 from ¥1,433.2 billion for the same period of the previous fiscal year. This was mainly attributable to increased interest income from the loan business, reflecting the higher average balance of loans despite the lower average interest rate on loans. The average loan balance increased ¥11.63 trillion from ¥110.28 trillion to ¥121.91 trillion, while the average loan interest rate decreased 0.09 percentage points from 1.76% to 1.67%. The higher average loan balance was attributable to a ¥10.82 trillion increase in foreign loans and a 0.80 trillion increase in domestic loans. The lower average loan interest rate was attributable to a 0.27 percentage point decrease for foreign loans and a 0.10 percentage point decrease for domestic loans. These decreases were mainly due to improvements in internal borrower ratings assigned to customers and intensified competition in Japan and other major markets in Europe and Asia. The growth in interest income was also attributable to increased interest payments received on debt securities, reflecting the higher average interest rate on debt securities held in our investment securities portfolio, as well as increased interest payments received on our deposits with the Bank of Japan, reflecting the higher average balance of such deposits. However, interest income on trading account assets decreased, reflecting the lower average interest rate on such assets. Interest income on short-term assets also decreased, reflecting the lower average interest rate on such assets.

 

Interest expense increased ¥21.9 billion to ¥353.7 billion for the six months ended September 30, 2015 from ¥331.8 billion for the same period of the previous fiscal year. This was mainly due to increases in interest expense on interest-bearing deposits and long-term debt. Interest expense on deposits increased ¥19.5 billion from ¥151.1 billion to ¥170.6 billion mainly due to a ¥16.2 billion increase in interest expense on foreign interest-bearing deposits, reflecting a ¥6.72 trillion increase in the average balance despite a 0.03 percentage point decrease in the average interest rate. The higher average balance of foreign deposits was mainly due to a ¥5.90 trillion increase in deposits booked at foreign branches and subsidiaries. Interest expense on long-term debt increased ¥14.7 billion from ¥121.9 billion to ¥136.6 billion mainly due to a ¥9.0 billion increase in interest expense on domestic long-term debt, despite a 0.21 percentage point decrease in the average interest rate on such debt. The higher average balance of domestic long-term debt was mainly due to increased long-term borrowings by our commercial banking subsidiaries and issuances of subordinated bonds by MUFG.

 

The average interest rate spread decreased 0.09 percentage points to 0.84% for the six months ended September 30, 2015 from 0.93% for the six months ended September 30, 2014. The average interest rate on interest-earning assets decreased 0.10 percentage points, reflecting decreases in the average interest rates on loans, interest-earning deposits in other banks, trading account assets and short-term assets. The average interest rate on interest-bearing liabilities decreased 0.01 percentage point, reflecting a 0.31 percentage point decrease in the average interest rate on long-term debt and a 0.08 percentage point decrease in the average interest rate on borrowings from the Bank of Japan and other borrowings included in other short-term borrowings and trading account liabilities, partially offset by a 0.01 percentage point increase in the average interest rate on deposits. The average interest rate spread on domestic activities decreased 0.10 percentage points to 0.55% from 0.65%, and the average interest rate spread on foreign activities decreased 0.11 percentage points to 1.16% from 1.27%.

 

In Japan, the Bank of Japan sought to keep short-term interest rates low by maintaining its “quantitative and qualitative monetary easing” policy throughout the reporting period. As a result, the average interest rate on domestic interest-earning assets continued to decline, while the average interest rate on domestic interest-bearing liabilities remained at historic low levels. If the Bank of Japan continues to maintain its current short-term

 

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interest rate policy and other monetary easing policies, and the yields on long-term Japanese government bonds decline further, our interest rate spread on domestic activities will likely continue to be under severe pressure. Moreover, monetary easing policies adopted in foreign markets in Europe, Asia and other regions have negatively affected our interest rate spread on foreign activities in recent periods. On the other hand, in the United States, the FRB raised the target range for the federal funds rate to between 0.25% and 0.50% in December 2015, and may decide to raise it further in the coming months, which may provide an opportunity to improve our interest rate spread. For further information on the Bank of Japan’s monetary policy and recent interest rate fluctuations in Japan, see “Business Environment.”

 

The average balance of interest-earning assets for the six months ended September 30, 2015 was ¥254.27 trillion, an increase of ¥27.69 trillion from ¥226.58 trillion for the six months ended September 30, 2014. The average balance of domestic interest-earning assets increased ¥10.73 trillion mainly due to increases in interest-earning deposits in other banks, particularly the Bank of Japan. This was partially offset by a decrease in the balance of Japanese government bonds held as available-for-sale securities as a result of sales of such bonds to reduce the risk of a sudden and drastic increase in interest rates. The average balance of foreign interest-earning assets increased ¥16.96 trillion mainly due to larger volumes of loans booked at foreign branches of our commercial banking subsidiaries and increased interest-earning deposits in other banks, particularly in the United Kingdom and Hong Kong.

 

The average balance of interest-bearing liabilities for the six months ended September 30, 2015 was ¥222.70 trillion, an increase of ¥21.12 trillion from ¥201.58 trillion for the six months ended September 30, 2014. The average balance of domestic interest-bearing liabilities increased ¥11.31 trillion mainly due to increases in interest-bearing deposits and long-term debt. These increases were partially offset by decreases in borrowings from the Bank of Japan and other borrowings included in other short-term borrowings and trading account liabilities due to a decrease in the fair values of foreign exchange related derivative liabilities in our commercial banking subsidiaries. The average balance of foreign interest-bearing liabilities increased ¥9.81 trillion mainly due to an increase in interest-bearing deposits as foreign branches of our commercial banking subsidiaries began to offer deposit products with higher interest rates with an aim to increase the balance of our foreign currency funds, as well as an increase in long-term debt.

 

Provision (credit) for credit losses

 

Provision (credit) for credit losses is charged to operations to maintain the allowance for credit losses at a level deemed appropriate by management. For more information on our provision (credit) for credit losses and a description of the approach and methodology used to establish the allowance for credit losses, see “Financial Condition—Loan Portfolio.”

 

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Non-Interest Income

 

The following table is a summary of our non-interest income for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
               2014                          2015             
     (in billions)  

Fees and commissions income(1):

    

Fees and commissions on deposits

   ¥ 28.4      ¥ 29.9   

Fees and commissions on remittances and transfers

     83.5        84.5   

Fees and commissions on foreign trading business

     32.3        39.0   

Fees and commissions on credit card business

     86.7        92.8   

Fees and commissions on security-related services

     141.2        155.3   

Fees and commissions on administration and management services for investment funds

     61.9        77.4   

Trust fees

     52.6        56.4   

Guarantee fees

     26.3        26.3   

Insurance commissions

     31.3        35.4   

Fees and commissions on real estate business

     16.4        20.2   

Other fees and commission

     111.5        112.7   
  

 

 

   

 

 

 

Total

     672.1        729.9   

Foreign exchange gains (losses)—net

     (43.0     41.6   

Trading account profits (losses)—net:

    

Net profits on derivative contracts

     61.8        180.1   

Net profits (losses) on trading account securities, excluding derivatives

     500.7        (464.9
  

 

 

   

 

 

 

Total

     562.5        (284.8

Investment securities gains—net:

    

Net gains on sales of available-for-sale securities:

    

Debt securities

     49.2        62.0   

Marketable equity securities

     8.0        59.5   

Impairment losses on available-for-sale securities:

    

Debt securities

     (1.0     (1.2

Marketable equity securities

     (0.4     (3.3

Other

     7.4        2.8   
  

 

 

   

 

 

 

Total

     63.2        119.8   

Equity in earnings of equity method investees—net

     121.5        114.3   

Other non-interest income

     56.5        35.3   
  

 

 

   

 

 

 

Total non-interest income

   ¥ 1,432.8      ¥ 756.1   
  

 

 

   

 

 

 

 

Note:

(1)   Reflects the changes made to the components of fees and commissions in the fiscal year ended March 31, 2015. The following components have been redefined in 2015 and certain reclassifications were made between the components: Fees and commissions on deposits, Fees and commissions on remittances and transfers, Fees and commissions on security-related services, Fees and commissions on administration and management services for investment funds and Other fees and commissions. The amounts for the six months ended September 30, 2014 have been reclassified to conform to the presentation for the six months ended September 30, 2015.

 

Non-interest income for the six months ended September 30, 2015 was ¥756.1 billion, a decrease of ¥676.7 billion from ¥1,432.8 billion for the six months ended September 30, 2014. This decrease was mainly attributable to a decrease of ¥965.6 billion in net profits on trading account securities excluding derivatives, which reflected decreases in the fair values of European debt securities accounted for under the fair value option. This decrease was partially offset by an increase in net foreign exchange gains, reflecting larger gains on

 

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currency swap contracts and the smaller negative impact of foreign exchange rate fluctuations between the Japanese yen and the U.S. dollar on our costs of Japanese yen funding for purchases of U.S. dollar-denominated securities compared to the same period of the previous fiscal year, an increase in fees and commissions income, particularly fees and commissions on administration and management services for investment funds and on security-related services, and an increase in investment securities gains reflecting larger profits from sales of marketable equity securities, including ETFs.

 

Fees and commissions income

 

Fees and commissions income consist of the following:

 

   

Fees and commissions on deposits consist of fees and commissions charged for ATM transactions and other deposit and withdrawal services.

 

   

Fees and commissions on remittances and transfers consist of fees and commissions charged for settlement services such as domestic fund remittances, including those made through electronic banking.

 

   

Fees and commissions on foreign trading business consist of fees and commissions charged for fund collection and financing services related to foreign trading business activities.

 

   

Fees and commissions on credit card business consist of fees and commissions related to the credit card business such as interchange income, annual fees, royalty and other service charges from franchisees.

 

   

Fees and commissions on security-related services primarily consist of fees and commissions for sales and transfers of securities, including investment funds, underwriting, brokerage and advisory services, securitization arrangement services, and agency services for the calculation and payment of dividends.

 

   

Fees and commissions on administration and management services for investment funds primarily consist of fees and commissions earned on managing investment funds on behalf of clients.

 

   

Trust fees consist primarily of fees earned on fiduciary asset management and administration services for corporate pension plans and investment funds.

 

   

Guarantee fees consist of fees related to the guarantee business, including those charged for providing guarantees on residential mortgage loans and other loans.

 

   

Insurance commissions consist of commissions earned by acting as agent for insurance companies for the sale of insurance products.

 

   

Fees and commissions on real estate business primarily consist of fees from real estate agent services.

 

   

Other fees and commissions include various fees and commissions, such as arrangement fees and agent fees, other than the fees mentioned above.

 

Fees and commissions income for the six months ended September 30, 2015 was ¥729.9 billion, an increase of ¥57.8 billion from ¥672.1 billion for the six months ended September 30, 2014. This was primarily due to an increase of ¥15.5 billion in fees and commissions on administration and management services for investment funds, reflecting larger assets under management at our asset management subsidiaries and larger assets under administration at our foreign fund services subsidiaries as well as an increase of ¥14.1 billion in fees and commissions on security-related services, reflecting higher volumes of investment fund sales at our securities subsidiaries and underwriting and sales transactions at our securities subsidiaries in the United States. The improvement in fees and commissions income was also attributable to an increase of ¥6.7 billion in fees and commissions on foreign trading business reflecting a higher volume of foreign trades in and out of Japan, an increase of ¥6.1 billion in fees and commissions on credit card business reflecting increased credit card

 

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purchases, an increase of ¥4.1 billion in insurance commissions reflecting a higher volume of insurance sales at our banking subsidiaries, an increase of ¥3.8 billion in trust fees reflecting an expanded investment fund and pension fund client base particularly in Japan and the United States, and an increase of ¥3.8 billion in fees and commissions on real estate business reflecting a higher volume of real estate brokerage transactions at our trust banking subsidiaries.

 

Net foreign exchange gains (losses)

 

The following table sets forth the details of our foreign exchange gains and losses for the six months ended September 30, 2014 and 2015:

 

     Six months
ended September 30,
 
     2014     2015  
     (in billions)  

Foreign exchange gains (losses)—net:

    

Net foreign exchange gains (losses) on derivative contracts

   ¥ (190.2   ¥ 69.1   

Net foreign exchange losses on other than derivative contracts

     (364.5     (139.0

Net foreign exchange gains related to the fair value option

     511.7        111.5   
  

 

 

   

 

 

 

Total

   ¥ (43.0   ¥ 41.6   
  

 

 

   

 

 

 

 

Net foreign exchange gains (losses) consist of the following:

 

   

Net foreign exchange gains (losses) on derivative contracts are net gains (losses) primarily on currency derivative instruments entered into for trading purposes. For more information on our derivative contracts, see Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

   

Net foreign exchange gains (losses) on other than derivative contracts include foreign exchange trading gains (losses) as well as transaction gains (losses) on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies. The transaction gains (losses) on the translation into Japanese yen fluctuate from period to period depending upon the spot rates at the end of each fiscal year. In principle, all transaction gains (losses) on translation of monetary assets and liabilities denominated in foreign currencies are included in current earnings.

 

   

Net foreign exchange gains (losses) related to the fair value option include transaction gains (losses) on the translation into Japanese yen of securities under the fair value option. For more information on the fair value option, see Note 19 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

Net foreign exchange gains for the six months ended September 30, 2015 were ¥41.6 billion, compared to net losses of ¥43.0 billion for the six months ended September 30, 2014. The Japanese yen depreciated ¥6.42 against the U.S. dollar from ¥103.23 to the U.S. dollar on March 31, 2014 to ¥109.65 to the U.S. dollar on September 30, 2014, while the Japanese yen appreciated ¥0.25 against the U.S. dollar from ¥120.13 to the U.S. dollar on March 31, 2015 to ¥119.88 to the U.S. dollar on September 30, 2015. The Japanese yen appreciated ¥3.64 against the Euro from ¥142.13 to the Euro on March 31, 2014 to ¥138.49 to the Euro on September 30, 2014, while the Japanese yen depreciated ¥5.08 against the Euro from ¥128.91 to the Euro on March 31, 2015 to ¥133.99 to the Euro on September 30, 2015. Net foreign exchange gains on derivative contracts improved, mainly reflecting larger gains on currency swap contracts in our banking subsidiaries, particularly in Japan. Net foreign exchange losses on other than derivative contracts also improved primarily because of the smaller negative impact of foreign exchange rate fluctuations between the Japanese yen and the U.S. dollar on our costs of Japanese yen funding for purchases of U.S. dollar-denominated securities as the Japanese yen depreciated significantly against the U.S. dollar in the six months ended September 30, 2014,

 

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while the Japanese yen traded at a similar level for the U.S. dollar at the beginning of the six-month period ended September 30, 2015 and at the end of the same period. However, the same foreign exchange rate fluctuations adversely affected net foreign exchanges gains related to the fair value option.

 

Net trading account profits (losses)

 

The following table sets forth details of our trading account profits and losses for the six months ended September 30, 2014 and 2015:

 

     Six months
ended September 30,
 
     2014     2015  
     (in billions)  

Trading account profits (losses)—net:

    

Net profits (losses) on derivative contracts

    

Interest rate contracts

   ¥ 170.5      ¥ 45.2   

Equity contracts

     (82.3     93.0   

Commodity contracts

     (0.0     0.1   

Credit derivatives

     0.6        7.0   

Other

     (27.0     34.8   
  

 

 

   

 

 

 

Total

     61.8        180.1   
  

 

 

   

 

 

 

Net profits (losses) on trading account securities, excluding derivatives

    

Trading account securities

     223.8        (68.4

Trading account securities under the fair value option

     276.9        (396.5
  

 

 

   

 

 

 

Total

     500.7        (464.9
  

 

 

   

 

 

 

Total

   ¥ 562.5      ¥ (284.8
  

 

 

   

 

 

 

 

Trading account assets and liabilities are carried at fair value and changes in the value of trading account assets and liabilities are recorded in net trading account profits (losses). Activities reported in our net trading account profits (losses) can generally be classified into two categories:

 

   

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 the application of certain accounting rules, which are generally not related to trading purpose activities, but simply classified as trading accounts due to the application of certain accounting rules.

 

Of the two categories, trading account assets relating to the application of certain accounting rules represent a larger portion of our trading account losses for the six months ended September 30, 2015.

 

We generally do not separate for financial reporting purposes customer originated trading activities from non-customer related, proprietary trading activities. When an order for a financial product is placed by a customer, a dealer offers a price which includes certain transaction fees, often referred to as the “margin” to the market price. The margin is determined by considering factors such as administrative costs, transaction amount and liquidity of the applicable financial product. Once the customer agrees to the offered price, the deal is completed and the position is recorded in our ledger as a single entry without any separation of components. To manage the risk relating to the customer side position, we often enter into an offsetting transaction with the market. Unrealized gains and losses as of the period-end for both the customer side position and the market side position are recorded within the same trading account profits and losses.

 

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Net trading account profits (losses) consist of net profits (losses) on derivative contracts and net profits (losses) on trading account securities, excluding derivatives.

 

Net profits (losses) on derivative contracts are reported for net profits (losses) on derivative instruments which primarily relate to trading purpose activities and include:

 

   

Interest rate contracts: Interest rate contracts are mainly utilized to manage interest rate risks which could arise from mismatches between assets and liabilities resulting from customer originated trading activities;

 

   

Equity contracts: Equity contracts are mainly utilized to manage the risk that would arise from price fluctuations of stocks held in connection with customer transactions;

 

   

Commodity contracts: Commodity contracts are mainly utilized to meet customers’ demand for hedging the risks relating to their commodity transactions, and to diversify our portfolio.

 

   

Credit derivatives: Credit derivatives are mainly utilized as a part of our credit portfolio risk management; and

 

Derivative instruments for trading purposes also include those used as hedges of net exposures rather than for specifically identified assets or liabilities, which do not meet the specific criteria for hedge accounting.

 

Net profits (losses) on trading account securities, excluding derivatives, consist of:

 

   

Net profits (losses) on trading account securities, which primarily consist of gains and losses on trading and valuation of trading securities which relate to trading purpose activities. Net profits (losses) on investment securities held by certain consolidated variable interest entities are included in accordance with the applicable accounting rules.

 

   

Net profits (losses) on trading account securities under the fair value option, which are classified into trading accounts profits (losses) in accordance with certain accounting rules. For more information on the fair value option, see Note 19 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

Net trading account losses for the six months ended September 30, 2015 were ¥284.8 billion, compared to net profits of ¥562.5 billion for the six months ended September 30, 2014. This primarily reflected decreases in the values of German, French and other European sovereign debt securities under the fair value option, despite a slight improvement in net profits on derivative instruments in our banking subsidiaries.

 

Net profits on derivative contracts were ¥180.1 billion for the six months ended September 30, 2015, compared to ¥61.8 billion for the same period of the previous fiscal year. This increase was mainly due to a ¥175.3 billion improvement in net profits on equity contracts, reflecting increases in the fair values of equity swap and equity future contracts.

 

Net losses on trading account securities, excluding derivatives, were ¥464.9 billion for the six months ended September 30, 2015, compared to net profits of ¥500.7 billion for the same period of the previous fiscal year. This was mainly attributable to ¥396.5 billion of net losses on trading account securities under the fair value option for the six months ended September 30, 2015, compared to net profits of ¥276.9 billion for the same period of the previous fiscal year. This mainly resulted from decreases in the fair values of European debt securities in our banking subsidiaries as long-term interest rates in the European markets, including Germany and France, suddenly increased in April 2015 and remained at increased levels in the six months ended September 30, 2015. In addition, we reduced the balance of our trading account foreign debt securities, which also negatively impacted the fair value of our trading account securities portfolio, although our banking subsidiaries recorded gains on sales of such foreign debt securities in the six months ended September 30, 2015. However, profits and losses on trading account securities were negatively impacted by lower gains on sales of trading account securities in our securities subsidiaries due to unfavorable movements in bond markets.

 

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Net investment securities gains (losses)

 

Net investment securities gains (losses) primarily include net gains (losses) on sales of marketable securities, particularly debt securities and marketable equity securities that are classified as available-for-sale securities. In addition, impairment losses are recognized and offset net investment securities gains when management concludes that declines in the fair value of investment securities are other than temporary.

 

Net investment securities gains of ¥119.8 billion were recorded for the six months ended September 30, 2015, compared to ¥63.2 billion for the same period of the previous fiscal year. This was primarily due to an increase of ¥51.5 billion in net gains on sales of available-for-sale marketable equity securities, particularly ETFs, and an increase of ¥12.8 billion in net gains on sales of available-for-sale debt securities, reflecting the higher volume of sales of Japanese government bonds to reduce the holdings of such bonds by our banking subsidiaries as part of our asset and liability management and interest rate risk management measures. These increases were partially offset by larger impairment losses on available-for-sale equity securities, reflecting impairment losses on the shares of some of our commercial banking subsidiaries’ customers, including those of a large customer in the domestic electronics manufacturing industry.

 

Non-Interest Expense

 

The following table shows a summary of our non-interest expense for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014      2015  
     (in billions)  

Salaries and employee benefits

   ¥ 534.9       ¥ 574.2   

Occupancy expenses—net

     82.6         87.8   

Fees and commission expenses

     118.5         139.5   

Outsourcing expenses, including data processing

     121.6         121.0   

Depreciation of premises and equipment

     54.5         46.2   

Amortization of intangible assets

     107.3         116.2   

Impairment of intangible assets

     0.1         0.2   

Insurance premiums, including deposit insurance

     57.2         45.8   

Communications

     26.7         29.0   

Taxes and public charges

     47.6         43.8   

Other non-interest expenses

     177.3         180.0   
  

 

 

    

 

 

 

Total non-interest expense

   ¥ 1,328.3       ¥ 1,383.7   
  

 

 

    

 

 

 

 

Non-interest expense for the six months ended September 30, 2015 was ¥1,383.7 billion, an increase of ¥55.4 billion from ¥1,328.3 billion for the six months ended September 30, 2014. This increase was mainly attributable to increases in salaries and employee benefits and fees and commission expenses, partially offset by lower deposit insurance premiums.

 

Salaries and employee benefits

 

Salaries and employee benefits for the six months ended September 30, 2015 were ¥574.2 billion, an increase of ¥39.3 billion from ¥534.9 billion for the six months ended September 30, 2014. This was mainly due to an increase in salaries and employee benefits particularly in MUAH, reflecting the growth in our workforce.

 

Fees and commission expenses

 

Fees and commission expenses for the six months ended September 30, 2015 were ¥139.5 billion, an increase of ¥21.0 billion from ¥118.5 billion for the same period of the previous fiscal year. This was primarily due to increases in fees and commission expenses in our commercial banking and securities subsidiaries, reflecting higher transaction volumes.

 

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Insurance premiums, including deposit insurance

 

Insurance premiums, including deposit insurance, for the six months ended September 30, 2015 were ¥45.8 billion, a decrease of ¥11.4 billion from ¥57.2 billion for the same period of the previous fiscal year. This was primarily due to reductions in deposit insurance premium rates in Japan.

 

Income Tax Expense

 

The following table shows a summary of our income tax expense for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014     2015  
     (in billions, except percentages)  

Income before income tax expense

   ¥ 1,274.0      ¥ 510.2   

Income tax expense

     410.0        97.1   

Effective income tax rate

     32.2     19.0

Combined normal effective statutory tax rate

     35.6     33.9

 

Income taxes applicable to us in Japan are imposed by the national, prefectural and municipal governments, and the aggregate of these taxes resulted in a combined normal effective statutory tax rate of 35.6% and 33.9% for each of the six months ended September 30, 2014 and 2015. Foreign subsidiaries are subject to income taxes of the jurisdictions in which they operate. These taxes are reflected in the effective income tax rate.

 

For the six months ended September 30, 2015, the effective income tax rate was 19.0%, which was 14.9 percentage points lower than the combined normal effective statutory tax rate of 33.9%. This primarily reflected the revisions of domestic tax laws. In July 2015, the Tokyo Metropolitan Government Bureau of Taxation promulgated revisions to the local tax law. The revisions will reduce the combined normal effective statutory tax rate from approximately 33.9% as of March 31, 2015 to approximately 32.3% starting in a corporation’s fiscal year that begins on or after April 1, 2016. The revisions resulted in a reduction of ¥36.6 billion, or 7.2%, in income tax expense for the six months ended September 30, 2015, compared to the same period of the previous fiscal year. Another factor contributing to the lower effective income tax rate was our receipt of nontaxable dividends, which resulted in a decrease of ¥17.9 billion, or 3.5%, in income tax expense for the six months ended September 30, 2015. Under Japanese tax law, a certain percentage of dividends received is regarded as nontaxable and excluded from gross revenue in computing taxable income. This creates a permanent difference between our taxable income for Japanese tax purposes and our income before income tax expense reported under U.S. GAAP.

 

For the six months ended September 30, 2014, the effective income tax rate was 32.2%, which was 3.4 percentage points lower than the combined normal effective statutory tax rate of 35.6%. This primarily reflected receipt of nontaxable dividends.

 

Business Segment Analysis

 

We measure the performance of each of our business segments primarily in terms of “operating profit.” Operating profit and other segment information in this Report are based on the financial information prepared in accordance with Japanese GAAP as adjusted in accordance with internal management accounting rules and practices. Accordingly, the format and information are not consistent with our unaudited condensed consolidated financial statements prepared on the basis of U.S. GAAP. For example, operating profit does not reflect items such as a part of the provision (credit) for credit losses (primarily equivalent to the formula allowance under U.S. GAAP), foreign exchange gains (losses) and investment securities gains (losses). For a reconciliation of operating profit under the internal management reporting system to income before income tax expense shown on the unaudited condensed consolidated statements of income, see Note 18 to our unaudited condensed

 

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consolidated financial statements included elsewhere in this Report. We do not use information on the segments’ total assets to allocate our resources and assess performance. Accordingly, business segment information on total assets is not presented.

 

We operate 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 five business groups—Retail Banking, Corporate Banking, Trust Assets, Global, and Global Markets, each of which is treated as a business segment. These five businesses serve as the core sources of our revenue. Operations that are not covered under these five business groups, as well as the elimination of duplicated amounts of net revenues among business segments, are classified under “Other” as further described below.

 

The following is a brief explanation of our business segments:

 

Retail Banking Business Group—Covers all domestic retail businesses, including commercial banking, trust banking and securities businesses. This business group integrates the retail businesses of BTMU, MUTB, MUMSS, Mitsubishi UFJ NICOS and other subsidiaries as well as retail product development, promotion and marketing in a single management structure. At the same time, this business group has developed and implemented MUFG Plaza, a one-stop, comprehensive financial services concept that provides integrated banking, trust and securities services.

 

Corporate Banking Business Group—Covers all domestic 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. This business group has clarified strategic domains, sales channels and methods to match the different growth stages and financial needs of our corporate clients.

 

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 global network of BTMU. This business group provides a full range of services to corporate and other pension funds, including stable and secure pension fund management and administration, advice on pension schemes and payment of benefits to scheme members.

 

Global Business Group—Covers businesses outside Japan, including commercial banking such as loans, deposits and cash management services, investment banking, retail banking, trust banking and securities businesses (with the retail banking and trust assets businesses being conducted through MUFG Union Bank, or MUB, and Krungsri), through a global network of nearly 1,200 offices outside Japan to provide customers with financial products and services that meet their increasingly diverse and sophisticated financing needs.

 

MUB is one of the largest commercial banks in California by both total assets and total deposits. MUB provides a wide range of financial services to consumers, small businesses, middle market companies and major corporations, primarily in California, Oregon and Washington but also nationally and internationally. MUB’s parent company is MUAH, which is a bank holding company in the United States.

 

Krungsri is one of the major commercial banks in Thailand and provides a comprehensive range of banking, consumer finance, investment, asset management, and other financial products and services to individual consumers, small and medium enterprises, and large corporations mainly in Thailand. Krungsri’s consolidated subsidiaries include a major credit card issuer, a major automobile financing service provider, an asset management company, and a microfinance service provider in Thailand. MUFG holds a 76.88% ownership interest in Krungsri through BTMU as of September 30, 2015. The amounts for this segment in the table below represent the respective amounts before taking into account the noncontrolling interest.

 

Global Markets Business Group—Covers asset and liability management and strategic investments of BTMU and MUTB, and sales and trading of financial products of BTMU, MUTB and MUSHD.

 

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Other—Consists mainly of the corporate centers of MUFG, BTMU, MUTB and MUMSS. The elimination of duplicated amounts of net revenues among business segments is also reflected in Other.

 

Effective April 1, 2015, we began to include Krungsri as part of the Global Business Group, as shown in the table below.

 

In addition, effective April 1, 2015, we made modifications to our management accounting rules and practices to clarify the responsibility for profits of each business segment. The modifications had the impact of reducing the operating profits of the Retail Banking Business Group, the Corporate Banking Business Group and the Trust Assets Business Group by ¥3.3 billion, ¥10.1 billion and ¥0.8 billion, respectively, for the six months ended September 30, 2014. The changes also had the impact of increasing the operating profits of the Global Business Group, the Global Markets Business Group and Other by ¥4.1 billion, ¥17.3 billion and ¥33.4 billion, respectively, for the same period. Prior period business segment information has been restated to enable comparisons between the relevant amounts for the six months ended September 30, 2014 and 2015.

 

Effective April 1, 2015, the Integrated Retail Banking Business Group, the Integrated Corporate Banking Business Group, the Integrated Trust Assets Business Group, the Integrated Global Business Group and the Integrated Global Markets Business Group were renamed the Retail Banking Business Group, the Corporate Banking Business Group, the Trust Assets Business Group, the Global Business Group and the Global Markets Business Group, respectively.

 

For further information, see Note 18 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

The following table set forth our business segment information for the six months ended September 30, 2014 and 2015:

 

    Retail
Banking
Business
Group
    Corporate
Banking
Business
Group
    Trust
Assets
Business
Group
    Global Business Group     Global
Markets
Business
Group
    Other     Total  
          Other
than
MUAH/
Krungsri
    MUAH     Krungsri     Total        
          (in billions)  

Six months ended September 30, 2014

                   

Net revenue

  ¥ 630.5      ¥ 455.8      ¥ 81.3      ¥ 274.7      ¥ 184.9      ¥ 98.9      ¥ 558.5      ¥ 343.6      ¥ 3.9      ¥ 2,073.6   

Operating expenses

    475.7        223.8        49.4        179.6        126.8        51.6        358.0        98.7        87.7        1,293.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

  ¥ 154.8      ¥ 232.0      ¥ 31.9      ¥ 95.1      ¥ 58.1      ¥ 47.3      ¥ 200.5      ¥ 244.9      ¥ (83.8   ¥ 780.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2015

               

Net revenue

  ¥ 646.6      ¥ 444.4      ¥ 87.9      ¥ 295.9      ¥ 218.3      ¥ 138.0      ¥ 652.2      ¥ 330.9      ¥ 14.1      ¥ 2,176.1   

Operating expenses

    488.9        223.4        50.9        190.5        158.1        68.5        417.1        106.5        75.9        1,362.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

  ¥ 157.7      ¥ 221.0      ¥ 37.0      ¥ 105.4      ¥ 60.2      ¥ 69.5      ¥ 235.1      ¥ 224.4      ¥ (61.8   ¥ 813.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

In January 2015, we integrated the former BTMU Bangkok branch with Krungsri. In the above table, the net revenue, operating expenses and operating profit of the former BTMU Bangkok branch for the six months ended September 30, 2014 are included in the Global Business Group, but not in Krungsri. The net revenue, operating expenses and operating profit of the former BTMU Bangkok branch for the six months ended September 30, 2014 were ¥13.6 billion, ¥4.3 billion and ¥9.3 billion, respectively.

 

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Retail Banking Business Group

 

Net revenue of the Retail Banking Business Group increased ¥16.1 billion to ¥646.6 billion for the six months ended September 30, 2015 from ¥630.5 billion for the six months ended September 30, 2014. Retail Banking Business Group net revenue mainly consists of domestic revenues from commercial banking operations, such as deposit and lending operations, and fees related to sales of investment products to retail customers, as well as fees received by subsidiaries within the Retail Banking Business Group. The increase in net revenue was mainly due to an increase in fees and commissions related to sales of equity, REIT and foreign bond funds in securities subsidiaries as well as sales of mutual funds, particularly wrap-style funds, in our banking subsidiaries, reflecting increased sales volumes. The increase in net revenue was also attributable to an increase in fees and commissions related to the consumer finance business as growing private consumption in Japan contributed to higher volumes of loans and loan guarantees, partially offset by lower net interest income from the housing loan business in the continued zero-interest rate and competitive housing loan market environment in Japan.

 

Operating expenses of the Retail Banking Business Group increased ¥13.2 billion to ¥488.9 billion for the six months ended September 30, 2015 from ¥475.7 billion for the six months ended September 30, 2014.

 

As a result, operating profit of the Retail Banking Business Group increased ¥2.9 billion to ¥157.7 billion for the six months ended September 30, 2015 from ¥154.8 billion for the six months ended September 30, 2014.

 

Corporate Banking Business Group

 

Net revenue of the Corporate Banking Business Group decreased ¥11.4 billion to ¥444.4 billion for the six months ended September 30, 2015 from ¥455.8 billion for the six months ended September 30, 2014. Corporate Banking Business Group net revenue mainly consists of domestic revenues from corporate lending and other commercial banking operations, investment banking and trust banking businesses in relation to corporate clients, as well as fees received by subsidiaries within the Corporate Banking Business Group. The decrease in net revenue was mainly due to a decrease in net revenue related to corporate lending due to lower interest rate spread reflecting lower market interest rates, as well as a decrease in non-interest income from the solutions business such as M&A finance compared to the same period of the previous fiscal year when the demand for our solutions services was particularly strong compared to usual periods. Effective April 1, 2015, we changed our internal evaluation methodology for derivative products used in connection with our lending business under Japanese GAAP. As a result, we began to recognize smaller upfront profits and correspondingly larger interest accrual for the remaining terms of relevant loans.

 

Operating expenses of the Corporate Banking Business Group were ¥223.4 billion for the six months ended September 30, 2015, a decrease of ¥0.4 billion from ¥223.8 billion for the six months ended September 30, 2014.

 

As a result, operating profit of the Corporate Banking Business Group decreased ¥11.0 billion to ¥221.0 billion for the six months ended September 30, 2015 from ¥232.0 billion for the six months ended September 30, 2014.

 

Trust Assets Business Group

 

Net revenue of the Trust Assets Business Group increased ¥6.6 billion to ¥87.9 billion for the six months ended September 30, 2015 from ¥81.3 billion for the six months ended September 30, 2014. Trust Assets Business Group net revenue mainly consists of fees from asset management and administration services for products, such as pension trusts and mutual funds. The increase in net revenue was mainly due to larger domestic pension assets under management and larger domestic mutual fund assets under administration, despite the continued contraction of the Japanese welfare pension fund market. Fees and commissions from the foreign asset administration business also increased mainly due to the expansion of the asset administration business in foreign markets by our asset administration subsidiaries, contributing to the growth in net revenue of the business group.

 

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Operating expenses of the Trust Assets Business Group increased ¥1.5 billion to ¥50.9 billion for the six months ended September 30, 2015 from ¥49.4 billion for the six months ended September 30, 2014.

 

As a result, operating profit of the Trust Assets Business Group increased ¥5.1 billion to ¥37.0 billion for the six months ended September 30, 2015 from ¥31.9 billion for the six months ended September 30, 2014.

 

Global Business Group

 

Net revenue of the Global Business Group increased ¥93.7 billion to ¥652.2 billion for the six months ended September 30, 2015 from ¥558.5 billion for the six months ended September 30, 2014. Net revenue of the Global Business Group mainly consists of commercial banking businesses outside of Japan, including loan, deposit and cash management, investment banking, retail banking, trust banking and securities businesses. The increase in net revenue was mainly due to increases in fees and commissions on project finance and large-scale acquisition finance transactions in the pharmaceutical industry in the United States as well as the settlement of large derivative transactions with non-Japanese counterparties in the United States. In addition, Krungsri contributed to the growth in the business group’s net revenue, taking advantage of its integration with BTMU’s Bangkok branch through the expansion of the scope and volume of its business, and lower market interest rates that enabled Krungsri to reduce its funding costs. Increased fees and commissions income from the consumer finance business and increased realized gains on the sale of investment securities also contributed to the improvement in net revenue of Krungsri. However, our commercial banking subsidiaries’ business activity declined in Hong Kong, where loan demand weakened, and in Jakarta as Indonesia’s economy began to deteriorate in recent months. In addition, our commercial banking subsidiaries’ business with commodity trading companies was adversely affected by declining commodity prices.

 

Operating expenses of the Global Business Group increased ¥59.1 billion to ¥417.1 billion for the six months ended September 30, 2015 from ¥358.0 billion for the six months ended September 30, 2014.

 

As a result, operating profit of the Global Business Group increased ¥34.6 billion to ¥235.1 billion for the six months ended September 30, 2015 from ¥200.5 billion for the six months ended September 30, 2014.

 

Global Markets Business Group

 

Net revenue of the Global Markets Business Group decreased ¥12.7 billion to ¥330.9 billion for the six months ended September 30, 2015 from ¥343.6 billion for the six months ended September 30, 2014. This was mainly due to a decrease in revenue from the asset and liability management operations by our banking subsidiaries, primarily reflecting a decrease in realized gains on sales of foreign government bonds, including German and French sovereign bonds, which were partially offset by an increase in realized gains on sales of Japanese government bonds. An increase in realized gains on sales of marketable equity securities, including ETFs and equity securities held for strategic purposes, also contributed to the growth in net revenue.

 

Operating expenses of the Global Markets Business Group increased ¥7.8 billion to ¥106.5 billion for the six months ended September 30, 2015 from ¥98.7 billion for the six months ended September 30, 2014.

 

As a result, operating profit of the Global Markets Business Group decreased ¥20.5 billion to ¥224.4 billion for the six months ended September 30, 2015 from ¥244.9 billion for the six months ended September 30, 2014.

 

Financial Condition

 

Total Assets

 

Our total assets as of September 30, 2015 were ¥283.98 trillion, an increase of ¥3.09 trillion from ¥280.89 trillion as of March 31, 2015, mainly due to a ¥6.88 trillion increase in interest-earning deposits in other banks, a ¥2.51 trillion increase in net loans and a ¥2.08 trillion increase in receivables under securities borrowing transactions. These increases were partially offset by a ¥5.37 trillion decrease in total investment securities and a ¥2.90 trillion decrease in trading account assets.

 

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Loan Portfolio

 

The following table sets forth our loans outstanding, before deduction of allowance for credit losses, as of March 31, 2015 and September 30, 2015, based on the industry segment loan classifications as defined by the Bank of Japan for regulatory reporting purposes, which is not necessarily based on the use of proceeds:

 

     March 31,
2015
    September 30,
2015
 
     (in billions)  

Domestic:

    

Manufacturing

   ¥ 11,703.4      ¥ 11,634.2   

Construction

     977.9        872.5   

Real estate

     10,911.2        10,884.1   

Services

     2,684.4        2,459.0   

Wholesale and retail

     8,345.5        8,325.7   

Banks and other financial institutions(1)

     4,330.0        4,607.6   

Communication and information services

     1,527.8        1,476.4   

Other industries

     12,674.0        14,464.2   

Consumer

     16,720.6        16,526.1   
  

 

 

   

 

 

 

Total domestic

     69,874.8        71,249.8   
  

 

 

   

 

 

 

Foreign:

    

Governments and official institutions

     1,052.1        1,025.1   

Banks and other financial institutions(1)

     11,973.0        13,017.8   

Commercial and industrial

     29,593.2        29,516.1   

Other

     6,065.8        6,148.0   
  

 

 

   

 

 

 

Total foreign

     48,684.1        49,707.0   
  

 

 

   

 

 

 

Unearned income, unamortized premium—net and deferred loan fees—net

     (293.7     (291.4
  

 

 

   

 

 

 

Total(2)

   ¥ 118,265.2      ¥ 120,665.4   
  

 

 

   

 

 

 

 

Notes:

(1)   Loans to so-called “non-bank finance companies” are generally included in the “Banks and other financial institutions” category. Non-bank finance companies are primarily engaged in consumer lending, factoring and credit card businesses.
(2)   The above table includes loans held for sale of ¥88.9 billion and ¥51.4 billion as of March 31, 2015 and September 30, 2015, respectively, which are carried at the lower of cost or fair value.

 

Loans are one of our main uses of funds. For the six months ended September 30, 2015, the average balance of loans was ¥121.91 trillion, accounting for 47.9% of the average total interest-earning assets, compared to ¥110.28 trillion, representing 48.7% of the average total interest-earning assets, for the same period in the previous fiscal year. As of September 30, 2015, our total loans were ¥120.67 trillion, accounting for 42.5% of total assets, compared to ¥118.27 trillion, accounting for 42.1% of total assets as of March 31, 2015. As a percentage of total loans before unearned income, net unamortized premiums and net deferred loan fees, domestic loans accounted for 58.9% and foreign loans accounted for 41.1% as of March 31, 2015 and September 30, 2015.

 

Our domestic loan balance increased ¥1.38 trillion, or 2.0%, between March 31, 2015 and September 30, 2015. This was mainly due to an increase in loans to national government institutions, which are included in the other industries category, whose funding needs grew as government spending increased.

 

Our foreign loan balance increased ¥1.02 trillion, or 2.1%, between March 31, 2015 and September 30, 2015. This was mainly due to increased lending to U.S. non-bank finance subsidiaries of Japanese manufacturing companies, securities and insurance companies in the United States, and borrowers in the banking industry in Thailand.

 

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Changes in the allowance for credit losses and provision (credit) for credit losses

 

The following table shows a summary of the changes in the allowance for credit losses by portfolio segment for the six months ended September 30, 2014 and 2015:

 

Six months ended September 30, 2014:

   Commercial     Residential     Card      MUAH     Krungsri(2)     Total  
     (in billions)  

Allowance for credit losses:

             

Balance at beginning of period

   ¥ 876.9      ¥ 116.9      ¥ 40.6       ¥ 60.0      ¥ —       ¥ 1,094.4   

Provision (credit) for credit losses

     (102.3     (15.5     1.6         (0.9     49.0        (68.1

Charge-offs

     67.8        10.8        6.2         2.1        9.9        96.8   

Recoveries

     6.6        0.1        1.7         2.0        —         10.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     61.2        10.7        4.5         0.1        9.9        86.4   

Others(1)

     3.7        —         —          (2.3     (0.4     1.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   ¥ 717.1      ¥ 90.7      ¥ 37.7       ¥ 56.7      ¥ 38.7      ¥ 940.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2015:

   Commercial     Residential     Card      MUAH     Krungsri     Total  
     (in billions)  

Allowance for credit losses:

             

Balance at beginning of period

   ¥ 807.7      ¥ 72.4      ¥ 35.7       ¥ 64.8      ¥ 74.9      ¥ 1,055.5   

Provision (credit) for credit losses

     (41.3     (4.5     0.7         6.1        31.8        (7.2

Charge-offs

     75.9        4.2        4.4         3.7        28.3        116.5   

Recoveries

     7.7        1.2        1.5         1.0        6.4        17.8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     68.2        3.0        2.9         2.7        21.9        98.7   

Others(1)

     (4.4                    0.9        1.2        (2.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   ¥ 693.8      ¥ 64.9      ¥ 33.5       ¥ 69.1      ¥ 86.0      ¥ 947.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

Notes:

(1)   Others are principally comprised of gains or losses from foreign exchange translation.
(2)   For the Krungsri segment, acquired loans were recorded at their fair values as of the acquisition date, and there were no indications that an allowance for credit losses was necessary for these loans for the fiscal year ended March 31, 2014. Therefore, no allowance for credit losses was stated at the beginning of the six-month period ended September 30, 2014 in the above table.

 

We recorded ¥7.2 billion of credit for credit losses for the six months ended September 30, 2015, compared to ¥68.1 billion of credit for credit losses for the same period in the previous fiscal year. Significant trends in each portfolio segment are discussed below.

 

Commercial segment—The financial performance and repayment ability of a substantial portion of borrowers in the segment continued to improve, resulting in improvements in factors that were considered in determining the appropriate level of allowance for credit losses, including the probability of default. Primarily in light of this trend, we continued to record credit for credit losses.

 

Residential segment—The stable corporate environment in recent periods has contributed to higher income for borrowers in the segment. This trend resulted in an overall improvement in the credit quality of our residential loan portfolio. Primarily in light of this improvement, we continued to record credit for credit losses.

 

Card segment—We continued to apply refined borrower screening, which we had originally implemented in June 2010 under regulatory reforms in the consumer finance industry. In addition, the stable corporate environment in recent periods has contributed to higher income for borrowers in the segment. These factors resulted in an overall improvement in the credit quality of our card loan portfolio. Primarily in light of this improvement, we recorded a smaller provision for credit losses.

 

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MUAH segment—Declines in prices of natural resources adversely affected the oil and gas industry in the United States, resulting in our decision to record additional provisions for credit losses for borrowers in this industry.

 

Krungsri segment—Stagnant economic conditions in Thailand negatively impacted the credit quality of the small and medium-sized enterprise portfolio and the retail and consumer finance portfolio. In addition, a large borrower with a subsidiary in Thailand experienced significant financial difficulty. In light of these factors, we recorded an additional provision for credit losses.

 

Charge-offs for the six months ended September 30, 2015 were ¥116.5 billion, an increase of ¥19.7 billion from ¥96.8 billion for the same period of the previous fiscal year. The increase primarily reflected charge-off of a portion of the loans to a large borrower in the domestic electronics manufacturing industry, charge-off of loans to a large borrower in MUB’s commercial and industrial portfolio, charge-offs of loans to some borrowers in MUB’s purchased credit-impaired loan portfolio, and charge-offs of loans in Krungsri’s small and medium-sized enterprise portfolio and retail and consumer finance portfolio.

 

Our total allowance for credit losses as of September 30, 2015 was ¥947.3 billion, an improvement of ¥108.2 billion from ¥1,055.5 billion as of March 31, 2015, as we recorded credit for credit losses of ¥7.2 billion while we had net charge-offs of ¥98.7 billion for the six months ended September 30, 2015. For further information on our allowance for credit losses, see “—Allowance for credit losses” below.

 

Allowance policy

 

We maintain an allowance for credit losses to absorb probable losses inherent in the loan portfolio. We have divided our allowance for loan losses into five portfolio segments—Commercial, Residential, Card, MUAH and Krungsri.

 

Effective April 1, 2015, the Krungsri segment includes BTMU’s Bangkok branch, which was previously included in the foreign excluding MUAH and Krungsri category in the Commercial segment. Accordingly, the methodologies used to estimate the allowance for losses with respect to BTMU’s Bangkok branch was changed from those applied to the Commercial segment to those applied to the Krungsri segment. The allowance for credit losses with respect to BTMU’s Bangkok branch was not material as of March 31, 2015.

 

For all portfolio segments, key elements relating to the policies and discipline used in determining the allowance for credit losses are our credit classification and related borrower categorization process, which are closely linked to the risk grading standards set by the Japanese regulatory authorities for asset evaluation and assessment, and are used as a basis for establishing the allowance for credit losses and charge-offs. The categorization is based on conditions that may affect the ability of borrowers to service their debt, such as current financial condition and results of operations, historical payment experience, credit documentation, other public information and current trends.

 

For more information on our credit and borrower ratings, see “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk—Credit Risk Management” of our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

For the Commercial, MUAH and Krungsri segments, our allowance for credit losses primarily consists of allocated allowances. The allocated allowances consist of (1) an allowance for loans individually evaluated for impairment, (2) an allowance for large groups of smaller-balance homogeneous loans, and (3) a formula allowance. The allocated allowance within the Commercial segment also includes an allowance for country risk exposure. The allowance for country risk exposure within the Commercial segment covers transfer risk which is not specifically covered by other types of allowances. Both the allowance for country risk exposure and the formula allowance are provided for performing loans that are not subject to either the allowance for loans individually evaluated for impairment or the allowance for large groups of smaller-balance homogeneous loans. The allowance for credit losses within the MUAH segment also includes an unallocated allowance which

 

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captures losses that are attributable to economic events in various industry or geographic sectors whose impact on our loan portfolios in these segments have occurred but have yet to be recognized in the allocated allowance. For the Residential and Card segments, the loans are smaller-balance homogeneous loans that are pooled by the risk ratings based on the number of delinquencies.

 

For more information on our methodologies used to estimate the allowance for each portfolio segment, see “Summary of Significant Accounting Policies” in Note 1 to our consolidated financial statements included in our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

During the six months ended September 30, 2015, we did not make any significant changes to the methodologies and policies used to determine our allowance for credit losses.

 

Allowance for credit losses

 

Allowance for credit losses and recorded investment in loans by portfolio segment as of March 31, 2015 and September 30, 2015 are shown below:

 

As of March 31, 2015:

   Commercial      Residential      Card      MUAH      Krungsri      Total  
     (in billions)  

Allowance for credit losses:

                 

Individually evaluated for impairment

   ¥ 516.1       ¥ 49.3       ¥ 25.7       ¥ 4.2       ¥ 7.5       ¥ 602.8   

Collectively evaluated for impairment

     269.3         21.3         9.9         60.2         66.9         427.6   

Loans acquired with deteriorated credit quality

     22.3         1.8         0.1         0.4         0.5         25.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 807.7       ¥ 72.4       ¥ 35.7       ¥ 64.8       ¥ 74.9       ¥ 1,055.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   ¥ 1,317.5       ¥ 167.1       ¥ 90.1       ¥ 60.7       ¥ 31.9       ¥ 1,667.3   

Collectively evaluated for impairment

     88,833.2         14,366.0         462.5         9,171.9         3,788.9         116,622.5   

Loans acquired with deteriorated credit quality

     56.0         13.4         12.0         62.2         36.5         180.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(1)

   ¥ 90,206.7       ¥ 14,546.5       ¥ 564.6       ¥ 9,294.8       ¥ 3,857.3       ¥ 118,469.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2015:

   Commercial      Residential      Card      MUAH      Krungsri      Total  
     (in billions)  

Allowance for credit losses:

                 

Individually evaluated for impairment

   ¥ 463.0       ¥ 42.9       ¥ 23.8       ¥ 3.9       ¥ 12.4       ¥ 546.0   

Collectively evaluated for impairment

     215.3         19.9         9.7         64.7         73.3         382.9   

Loans acquired with deteriorated credit quality

     15.5         2.1                 0.5         0.3         18.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 693.8       ¥ 64.9       ¥ 33.5       ¥ 69.1       ¥ 86.0       ¥ 947.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   ¥ 1,207.3       ¥ 150.6       ¥ 84.1       ¥ 66.7       ¥ 37.3       ¥ 1,546.0   

Collectively evaluated for impairment

     90,507.1         14,185.9         452.5         9,270.5         4,792.3         119,208.3   

Loans acquired with deteriorated credit quality

     44.5         12.5         11.8         53.9         28.5         151.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(1)

   ¥ 91,758.9       ¥ 14,349.0       ¥ 548.4       ¥ 9,391.1       ¥ 4,858.1       ¥ 120,905.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note:

(1)   Total loans in the above table do not include loans held for sale and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.

 

Our total allowance for credit losses as of September 30, 2015 was ¥947.3 billion, a decrease of ¥108.2 billion from ¥1,055.5 billion as of March 31, 2015. This was attributable to a decrease of ¥56.8 billion in allowance for credit losses provided for loans individually evaluated for impairment and a decrease of ¥44.7 billion in allowance for credit losses provided for loans collectively evaluated for impairment. The total allowance for credit losses represented 0.79% of our total loan portfolio as of September 30, 2015, a decrease of 0.10 percentage points from 0.89% as of March 31, 2015. Significant trends in each portfolio segment are discussed below.

 

Commercial segment—The allowance for credit losses for loans individually evaluated for impairment decreased ¥53.1 billion between March 31, 2015 and September 30, 2015 primarily because the financial performance and repayment ability of a substantial portion of borrowers in the segment improved, which resulted in upgrades of the borrower ratings assigned to these borrowers to the Normal category and reductions in loans individually evaluated for impairment. Sales of impaired loans also contributed to the decrease in the allowance for credit losses in the segment. The allowance for credit losses for loans collectively evaluated for impairment decreased ¥54.0 billion. This decrease mainly reflected the overall improvement in the credit quality of the portfolio in recent periods, resulting in improvements in factors that were considered in determining the appropriate level of allowance for credit losses, including the probability of default. The ratio of total allowance for credit losses to the total loan balance in this segment as of September 30, 2015 was 0.76%, compared to 0.90% as of March 31, 2015.

 

Residential segment—The total allowance for this segment decreased ¥7.5 billion between March 31, 2015 and September 30, 2015. The stable corporate environment in recent periods has contributed to higher income for borrowers in the segment. As a substantial number of borrowers became current with their payments, nonaccrual loans decreased ¥9.8 billion, or 10.3%, between March 31, 2015 and September 30, 2015. This had a positive effect on the credit quality of our residential loan portfolio, resulting in ¥4.5 billion of credit for credit losses. The ratio of total allowance for credit losses to the total loan balance in this segment as of September 30, 2015 was 0.45%, compared to 0.50% as of March 31, 2015.

 

Card segment—The total allowance for this segment decreased ¥2.2 billion between March 31, 2015 and September 30, 2015. As a substantial number of borrowers became current with their payments, nonaccrual loans decreased ¥2.4 billion, or 3.5%, between March 31, 2015 and September 30, 2015. The continued application of our refined borrower screening and higher income for borrowers in the stable corporate environment had a positive effect on the credit quality of our card loan portfolio. The ratio of total allowance for credit losses to the total loan balance in this segment as of September 30, 2015 was 6.11%, compared to 6.32% as of March 31, 2015.

 

MUAH segment—The total allowance for this segment increased ¥4.3 billion between March 31, 2015 and September 30, 2015. Declines in prices of natural resources adversely affected the oil and gas industry in the United States, resulting in our decision to record additional provisions for credit losses for borrowers in this industry. The ratio of total allowance for credit losses to the total loan balance in this segment as of September 30, 2015 was 0.74%, compared to 0.70% as of March 31, 2015.

 

Krungsri segment—The total allowance for this segment increased ¥11.1 billion between March 31, 2015 and September 30, 2015. Stagnant economic conditions in Thailand negatively impacted the credit quality of the small and medium-sized enterprise portfolio and the retail and consumer finance portfolio. In addition, a large borrower with a subsidiary in Thailand experienced significant financial difficulty. The ratio of total allowance for credit losses to the total loan balance in this segment as of September 30, 2015 was 1.77%,

 

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compared to 1.94% as of March 31, 2015. The decline in the ratio primarily reflected the impact of the integration of BTMU’s Bangkok branch with Krungsri as BTMU’s Bangkok branch had a larger portion of corporate borrowers in Thailand.

 

Nonaccrual loans and troubled debt restructurings

 

We consider a loan to be a nonaccrual loan when substantial doubt exists as to the full and timely payment of interest on, or repayment of, the principal of the loan, which is a borrower condition that generally corresponds to borrowers in categories 13 and below in our internal rating system (which corresponds to “Likely to become Bankrupt,” “Virtually Bankrupt” and “Bankrupt or de facto Bankrupt” status under Japanese banking regulations). Substantially all nonaccrual loans are also impaired loans. Loans are also placed in nonaccrual status when principal or interest is contractually past due one month or more with respect to loans within all classes of the Commercial segment, three months or more with respect to loans within the Card, MUAH and Krungsri segments, and six months or more with respect to loans within the Residential segment.

 

We modify certain loans in conjunction with our loss-mitigation activities. Through these modifications, concessions are granted to a borrower who is experiencing financial difficulty, generally in order to minimize economic loss, to avoid foreclosure or repossession of collateral, and to ultimately maximize payments received from the borrower. The concessions granted vary by portfolio segment, by program, and by borrower-specific characteristics, and may include interest rate reductions, term extensions, payment deferrals, and partial principal forgiveness. Loan modifications that represent concessions made to borrowers who are experiencing financial difficulties are identified as troubled debt restructurings, or TDRs. TDRs are also considered impaired loans, and an allowance for credit losses is separately established for each loan.

 

Generally, accruing loans that are modified in a TDR remain as accruing loans subsequent to the modification, and nonaccrual loans remain as nonaccrual. However, if a nonaccrual loan has been restructured as a TDR and the borrower is not delinquent under the restructured terms, and demonstrates that its financial condition has improved, we may reclassify the loan to accrual status. This determination is generally performed at least once a year through a detailed internal credit rating review process. Although we have not defined any minimum period to qualify for an upgrade, it is not common for a borrower to be able to demonstrate that its business problems have been resolved or can soon be resolved within a short period of time following a restructuring. If the borrower is upgraded to category 12 or higher in our internal rating system (which corresponds to “Normal” and “Close Watch” status under the Japanese banking regulations), a TDR would be reclassified to accrual status. Once a nonaccrual loan is deemed to be a TDR, we will continue to designate the loan as a TDR even if the loan is reclassified to accrual status.

 

A loan that has been modified into a TDR is considered to be impaired until it matures, is repaid, or is otherwise liquidated, regardless of whether the borrower performs under the modified terms.

 

For more information on our credit and borrower ratings, see “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk—Credit Risk Management” of our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

For more information on our TDRs, see Note 4 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

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The following table shows information about the nonaccrual status of loans by class as of March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in billions)  

Commercial

     

Domestic

   ¥ 514.0       ¥ 466.9   

Manufacturing

     118.9         121.5   

Construction

     20.1         17.5   

Real estate

     77.0         66.8   

Services

     54.2         44.9   

Wholesale and retail

     158.0         142.0   

Banks and other financial institutions

     5.7         4.8   

Communication and information services

     23.2         20.4   

Other industries

     18.6         13.7   

Consumer

     38.3         35.3   

Foreign-excluding MUAH and Krungsri

     96.9         112.8   

Residential

     95.6         85.8   

Card

     67.0         64.6   

MUAH

     45.2         44.4   

Krungsri

     68.1         79.6   
  

 

 

    

 

 

 

Total(1)

   ¥ 886.8       ¥ 854.1   
  

 

 

    

 

 

 

 

Note:

(1)   The above table does not include loans held for sale of ¥0.6 billion and nil as of March 31, 2015 and September 30, 2015, respectively, and loans acquired with deteriorated credit quality of ¥26.2 billion and ¥20.2 billion as of March 31, 2015 and September 30, 2015, respectively.

 

Total nonaccrual loans decreased ¥32.7 billion between March 31, 2015 and September 30, 2015. Significant trends in each portfolio segment are discussed below.

 

Commercial segment—Nonaccrual loans in the domestic commercial category decreased ¥47.1 billion. In the wholesale and retail category, the decrease of ¥16.0 billion in nonaccrual loans was partly attributable to the improved repayment ability of three large borrowers, resulting in the transfer of the loans to those borrowers from nonaccrual status to accrual status. In the real estate category, the decrease of ¥10.2 billion was primarily due to the improved repayment ability of a substantial portion of small and medium-sized borrowers, resulting in the transfer of the loans to those borrowers from nonaccrual status to accrual status. In the foreign excluding MUAH and Krungsri category, nonaccrual loans increased ¥15.9 billion mainly due to a large borrower being downgraded under our internal borrower grading system.

 

Residential segment—Nonaccrual loans in the segment decreased ¥9.8 billion primarily due to the transfer from nonaccrual status to accrual status of loans to borrowers who became current with their payments as the stable corporate environment in recent periods contributed to higher income for borrowers in the segment.

 

Card segment—Nonaccrual loans in the segment decreased ¥2.4 billion, as improvement in household income enabled a substantial number of borrowers to become current with their repayments. The continued application of our refined borrower screening and higher income for borrowers in the stable corporate environment had a positive effect on the credit quality of our card loan portfolio.

 

MUAH segment—Nonaccrual loans in the segment decreased ¥0.8 billion, reflecting the improved repayment ability of a substantial portion of small and medium-sized borrowers, resulting in the transfer of the loans to those borrowers from nonaccrual status to accrual status.

 

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Krungsri segment—Nonaccrual loans in the segment increased ¥11.5 billion primarily because the credit quality of the consumer and small and medium-sized enterprise loan portfolios deteriorated as the economic growth slowed in Thailand.

 

The following table shows information about outstanding recorded investment balances of TDRs by class as of March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in billions)  

Commercial(1)

     

Domestic

   ¥ 611.4       ¥ 540.3   

Manufacturing

     348.9         296.9   

Construction

     12.9         12.7   

Real estate

     63.5         55.7   

Services

     45.2         44.5   

Wholesale and retail

     108.5         103.1   

Banks and other financial institutions

     0.7         0.0   

Communication and information services

     9.6         8.3   

Other industries

     9.5         8.3   

Consumer

     12.6         10.8   

Foreign-excluding MUAH and Krungsri

     97.0         89.8   

Residential(1)

     71.5         64.8   

Card(2)

     90.7         84.8   

MUAH(2)

     56.3         63.5   

Krungsri(2)

     19.9         26.8   
  

 

 

    

 

 

 

Total

   ¥ 946.8       ¥ 870.0   
  

 

 

    

 

 

 

 

Notes:

(1)   TDRs for the Commercial and Residential segments include accruing loans with concessions granted, and do not include nonaccrual loans with concessions granted.
(2)   TDRs for the Card, MUAH and Krungsri segments include accrual and nonaccrual loans. Included in the outstanding recorded investment balances as of March 31, 2015 and September 30, 2015 are nonaccrual TDRs as follows: ¥46.0 billion and ¥43.5 billion—Card; ¥22.2 billion and ¥23.4 billion—MUAH; and ¥7.1 billion and ¥11.9 billion—Krungsri, respectively.

 

Total TDRs decreased ¥76.8 billion between March 31, 2015 and September 30, 2015. Significant trends in each portfolio segment are discussed below.

 

Commercial segment—TDRs in the domestic commercial category decreased ¥71.1 billion between March 31, 2015 and September 30, 2015. This was mainly due to a ¥52.0 billion decrease in the domestic manufacturing category, which primarily reflected a concession made in favor of a large borrower in the domestic electronics manufacturing industry reducing the outstanding loans to the borrower classified as TDRs.

 

Residential segment—TDRs in the segment decreased ¥6.7 billion between March 31, 2015 and September 30, 2015 primarily as a result of repayments of loans classified as TDRs. The stable corporate environment contributed to higher income for borrowers in the segment.

 

Card segment—TDRs in the segment decreased ¥5.9 billion between March 31, 2015 and September 30, 2015 mainly due to repayments of loans classified as TDRs pursuant to their respective restructured terms.

 

MUAH segment—TDRs in the segment increased ¥7.2 billion between March 31, 2015 and September 30, 2015. The increase was primarily because we provided concessions to some borrowers in the oil and gas industry that began to experience significant deterioration in their financial performance.

 

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Krungsri segment— TDRs in the segment increased ¥6.9 billion between March 31, 2015 and September 30, 2015. The increase primarily resulted from the stagnation of Thailand’s economic recovery negatively impacting the credit quality of the small and medium-sized enterprise portfolio and the retail and consumer finance portfolio.

 

In the above table, TDRs for the Commercial and Residential segments include accruing loans with concessions granted, and do not include nonaccrual loans with concessions granted, whereas TDRs for the Card, MUAH and Krungsri segments include accrual and nonaccrual loans.

 

The primary type of concessions we granted to loans in the Commercial, Residential and Krungsri segments during the six months ended September 30, 2015 were extensions of the stated maturity dates. During the same six months, reductions in the stated rates were the primary type of concessions we granted to loans in the Card segment, and payment deferrals were the primary type of concessions we granted to loans in the MUAH segment.

 

Impaired loans and impairment allowance

 

Impaired loans primarily include nonaccrual loans and TDRs. We consider a loan to be impaired when, based on current information and events, it is probable that we will be unable to collect all of the scheduled payments of interest on, and repayment of, the principal of the loan when due according to the contractual terms of the loan agreement.

 

The following tables show information about impaired loans by class as of March 31, 2015 and September 30, 2015:

 

    As of March 31, 2015  
    Recorded Loan Balance     Unpaid
Principal
Balance
    Related
Allowance for
Credit Losses
 
    Requiring
an Allowance  for
Credit Losses
    Not Requiring
an  Allowance for
Credit Losses(1)
    Total(2)      
                (in billions)              

Commercial

         

Domestic

  ¥ 890.9      ¥ 234.2      ¥ 1,125.1      ¥ 1,174.9      ¥ 424.5   

Manufacturing

    420.9        46.9        467.8        478.4        178.9   

Construction

    21.0        12.0        33.0        33.9        11.5   

Real estate

    90.7        49.7        140.4        150.0        32.3   

Services

    74.5        24.7        99.2        105.4        38.1   

Wholesale and retail

    205.4        61.1        266.5        277.1        120.9   

Banks and other financial institutions

    5.9        0.5        6.4        6.8        5.1   

Communication and information services

    21.4        11.4        32.8        34.1        13.9   

Other industries

    20.5        7.6        28.1        30.0        12.6   

Consumer

    30.6        20.3        50.9        59.2        11.2   

Foreign-excluding MUAH and Krungsri

    192.3        0.1        192.4        192.4        91.6   

Loans acquired with deteriorated credit quality

    12.1        —          12.1        23.8        3.3   

Residential

    160.3        9.5        169.8        209.0        50.0   

Card

    90.1        0.6        90.7        102.1        25.7   

MUAH

    39.5        21.2        60.7        70.5        4.2   

Krungsri

    24.1        11.9        36.0        43.2        8.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(3)

  ¥ 1,409.3      ¥ 277.5      ¥ 1,686.8      ¥ 1,815.9      ¥ 607.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    As of September 30, 2015  
    Recorded Loan Balance     Unpaid
Principal
Balance
    Related
Allowance for
Credit Losses
 
    Requiring
an Allowance  for
Credit Losses
    Not Requiring
an  Allowance for
Credit Losses(1)
    Total(2)      
                (in billions)              

Commercial

         

Domestic

  ¥ 790.9      ¥ 216.2      ¥ 1,007.1      ¥ 1,052.0      ¥ 372.6   

Manufacturing

    373.5        44.8        418.3        427.7        157.7   

Construction

    20.0        10.1        30.1        31.1        10.4   

Real estate

    76.9        45.6        122.5        131.0        29.1   

Services

    65.2        24.1        89.3        95.4        31.6   

Wholesale and retail

    188.9        56.2        245.1        254.0        108.9   

Banks and other financial institutions

    4.7        0.1        4.8        4.8        4.6   

Communication and information services

    18.8        9.9        28.7        29.8        12.1   

Other industries

    15.1        7.0        22.1        24.0        8.3   

Consumer

    27.8        18.4        46.2        54.2        9.9   

Foreign-excluding MUAH and Krungsri

    190.5        9.7        200.2        212.2        90.4   

Loans acquired with deteriorated credit quality

    11.6               11.6        22.1        3.6   

Residential

    142.7        9.8        152.5        189.0        43.5   

Card

    84.0        0.7        84.7        95.2        23.7   

MUAH

    40.2        26.5        66.7        75.3        4.0   

Krungsri

    26.5        12.8        39.3        46.5        12.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(3)

  ¥ 1,286.4      ¥ 275.7      ¥ 1,562.1      ¥ 1,692.3      ¥ 550.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)   These loans do not require an allowance for credit losses because the fair values of the impaired loans equal or exceed the recorded investments in the loans.
(2)   Included in impaired loans as of March 31, 2015 and September 30, 2015 are accrual TDRs as follows: ¥708.4 billion and ¥630.1 billion—Commercial; ¥71.5 billion and ¥64.8 billion—Residential; ¥44.7 billion and ¥41.2 billion—Card; ¥34.1 billion and ¥40.2 billion—MUAH; and ¥8.5 billion and ¥8.5 billion—Krungsri, respectively.
(3)   In addition to impaired loans presented in the above table, there were loans held for sale that were impaired of ¥0.6 billion and nil as of March 31, 2015 and September 30, 2015, respectively.

 

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The following table shows information regarding the average recorded loan balance and recognized interest income on impaired loans for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014      2015  
     Average
Recorded  Loan
Balance
     Recognized
Interest
Income
     Average
Recorded  Loan
Balance
     Recognized
Interest
Income
 
     (in billions)  

Commercial

           

Domestic

   ¥ 1,210.3       ¥ 11.0       ¥ 1,066.1       ¥ 10.4   

Manufacturing

     426.5         3.7         443.0         4.2   

Construction

     41.8         0.4         31.5         0.4   

Real estate

     185.6         1.6         131.5         1.2   

Services

     123.5         1.3         94.3         1.1   

Wholesale and retail

     291.6         2.5         255.8         2.4   

Banks and other financial institutions

     7.6         0.1         5.6         0.0   

Communication and information services

     36.5         0.4         30.8         0.4   

Other industries

     38.7         0.4         25.1         0.3   

Consumer

     58.5         0.6         48.5         0.4   

Foreign-excluding MUAH and Krungsri

     181.2         1.5         196.3         1.3   

Loans acquired with deteriorated credit quality

     16.2         0.7         11.8         0.5   

Residential

     196.6         2.3         161.1         1.6   

Card

     99.9         2.2         87.7         1.7   

MUAH

     61.0         1.3         63.6         1.1   

Krungsri

     11.7         0.3         37.7         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,776.9       ¥ 19.3       ¥ 1,624.3       ¥ 18.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Credit quality indicator

 

The following table sets forth credit quality indicators of loans by class as of March 31, 2015 and September 30, 2015:

 

As of March 31, 2015:

   Normal      Close
Watch
     Likely to become
Bankrupt or
Legally/Virtually
Bankrupt
     Total(1)  
     (in billions)  

Commercial

           

Domestic

   ¥ 51,408.6       ¥ 2,782.4       ¥ 514.0       ¥ 54,705.0   

Manufacturing

     10,523.0         1,049.4         118.9         11,691.3   

Construction

     887.0         70.0         20.1         977.1   

Real estate

     10,101.7         559.1         76.9         10,737.7   

Services

     2,383.1         235.5         54.2         2,672.8   

Wholesale and retail

     7,583.0         583.0         157.9         8,323.9   

Banks and other financial institutions

     4,313.4         10.6         5.7         4,329.7   

Communication and information services

     1,449.7         54.5         23.2         1,527.4   

Other industries

     12,504.6         147.5         18.7         12,670.8   

Consumer

     1,663.1         72.8         38.4         1,774.3   

Foreign-excluding MUAH and Krungsri

     34,355.6         990.5         99.6         35,445.7   

Loans acquired with deteriorated credit quality

     20.9         28.4         6.7         56.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 85,785.1       ¥ 3,801.3       ¥ 620.3       ¥ 90,206.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Accrual      Nonaccrual      Total(1)  
     (in billions)  

Residential

   ¥ 14,449.1       ¥ 97.4       ¥ 14,546.5   

Card

   ¥ 497.0       ¥ 67.6       ¥ 564.6   

 

     Credit Quality Based  on
the Number of Delinquencies
     Credit Quality Based  on
Internal Credit Ratings
     Total(1)(2)  
     Accrual      Nonaccrual      Pass      Special
Mention
     Classified     
     (in billions)  

MUAH

   ¥ 3,820.9       ¥ 32.7       ¥ 5,229.7       ¥ 76.7       ¥ 80.9       ¥ 9,240.9   

 

     Normal      Special
Mention
     Substandard or Doubtful
or Doubtful of Loss
     Total(1)  
     (in billions)  

Krungsri

   ¥ 3,653.9       ¥ 118.2       ¥ 85.2       ¥ 3,857.3   

 

As of September 30, 2015:

   Normal      Close
Watch
     Likely to become
Bankrupt  or
Legally/Virtually
Bankrupt
     Total(1)  
     (in billions)  

Commercial

           

Domestic

   ¥ 53,433.8       ¥ 2,437.7       ¥ 467.0       ¥ 56,338.5   

Manufacturing

     10,620.6         884.7         121.6         11,626.9   

Construction

     794.3         59.9         17.5         871.7   

Real estate

     10,180.3         508.4         66.7         10,755.4   

Services

     2,194.9         208.6         44.9         2,448.4   

Wholesale and retail

     7,637.3         535.9         142.1         8,315.3   

Banks and other financial institutions

     4,590.6         9.9         4.8         4,605.3   

Communication and information services

     1,405.9         49.7         20.3         1,475.9   

Other industries

     14,329.7         117.7         13.8         14,461.2   

Consumer

     1,680.2         62.9         35.3         1,778.4   

Foreign-excluding MUAH and Krungsri

     34,325.7         935.3         114.9         35,375.9   

Loans acquired with deteriorated credit quality

     20.8         17.7         6.0         44.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 87,780.3       ¥ 3,390.7       ¥ 587.9       ¥ 91,758.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Accrual      Nonaccrual      Total(1)  
     (in billions)  

Residential

   ¥ 14,262.0       ¥ 87.0       ¥ 14,349.0   

Card

   ¥ 483.2       ¥ 65.3       ¥ 548.5   

 

     Credit Quality Based  on
the Number of Delinquencies
     Credit Quality Based  on
Internal Credit Ratings
     Total(1)(2)  
     Accrual      Nonaccrual      Pass      Special
Mention
     Classified     
     (in billions)  

MUAH

   ¥ 3,806.1       ¥ 30.0       ¥ 5,316.8       ¥ 99.4       ¥ 87.8       ¥ 9,340.1   

 

     Normal      Special
Mention
     Substandard or Doubtful
or Doubtful of Loss
     Total(1)  
     (in billions)  

Krungsri

   ¥ 4,597.2       ¥ 168.9       ¥ 92.0       ¥ 4,858.1   

 

Notes:

(1)   Total loans in the above table do not include loans held for sale, and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.
(2)   Total loans of MUAH do not include FDIC covered loans and small business loans which are not individually rated totaling ¥53.9 billion and ¥50.9 billion as of March 31, 2015 and September 30, 2015, respectively. We will be reimbursed for a substantial portion of any future losses on FDIC covered loans under the terms of the FDIC loss share agreements.

 

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We classify loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, historical and current financial information, historical and current payment experience, credit documentation, public and non-public information about borrowers and current economic trends as deemed appropriate to each segment.

 

The primary credit quality indicator for loans within all classes of the Commercial segment is the internal credit rating assigned to each borrower based on our internal borrower ratings of 1 through 15 with the rating of 1 assigned to a borrower with the highest quality of credit. When assigning a credit rating to a borrower, we evaluate the borrower’s expected debt-service capability based on various information, including financial and operating information of the borrower as well as information on the industry in which the borrower operates, and the borrower’s business profile, management and compliance system. In evaluating a borrower’s debt-service capability, we also conduct an assessment of the level of earnings and an analysis of the borrower’s net worth. Based on the internal borrower rating, loans within the Commercial segment are categorized as Normal (internal borrower ratings of 1 through 9), Close Watch (internal borrower ratings of 10 through 12), and Likely to become Bankrupt or Legally/Virtually Bankrupt (internal borrower ratings of 13 through 15).

 

Loans to borrowers categorized as Normal represent those that are not deemed to have collectability issues. Loans to borrowers categorized as Close Watch represent those that require close monitoring as the borrower has begun to exhibit elements of potential concern with respect to its business performance and financial condition, the borrower has begun to exhibit elements of serious concern with respect to its business performance and financial condition, including business problems requiring long-term solutions, or the borrower’s loans are TDRs or loans contractually past due 90 days or more for special reasons. Loans to borrowers categorized as Likely to become Bankrupt or Legally/Virtually Bankrupt represent those that have a higher probability of default than those categorized as Close Watch due to serious debt repayment problems with poor progress in achieving restructuring plans, the borrower being considered virtually bankrupt with no prospects for an improvement in business operations, or the borrower being legally bankrupt with no prospects for continued business operations because of non-payment, suspension of business, voluntary liquidation or filing for legal liquidation.

 

For more information on our credit and borrower ratings, see “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk—Credit Risk Management” of our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

The accrual status is a primary credit quality indicator for loans within the Residential segment, the Card segment, and consumer loans within the MUAH segment. The accrual status of these loans is determined based on the number of delinquent payments.

 

Commercial loans within the MUAH segment are categorized as either pass or criticized based on the internal credit rating assigned to each borrower. Criticized credits are those that are internally risk graded as Special Mention, Substandard or Doubtful. Special Mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, may jeopardize repayment of the loan and result in further downgrade. Classified credits are those that are internally risk graded as Substandard or Doubtful. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.

 

Loans within the Krungsri segment are categorized as Normal, Special Mention, and Substandard, which is further divided into Substandard, Doubtful and Doubtful of Loss, primarily based on their delinquency status. Loans categorized as Special Mention generally represent those that have overdue principal or interest payments for a cumulative period exceeding one month commencing from the contractual due date. Loans categorized as Substandard, Doubtful or Doubtful of Loss generally represent those that have overdue principal or interest payments for a cumulative period exceeding three months, commencing from the contractual due date.

 

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For the Commercial, Residential and Card segments, credit quality indicators as of March 31, 2015 and September 30, 2015 are based on information as of March 31, 2015 and September 30, 2015, respectively. For the MUAH and Krungsri segments, credit quality indicators as of March 31, 2015 and September 30, 2015 are generally based on information as of December 31, 2014 and June 30, 2015, respectively.

 

Significant trends in each portfolio segment are discussed below.

 

Commercial segment—The ratio of loans classified as Close Watch or below to total loans in the segment decreased 0.6 percentage points to 4.3% as of September 30, 2015 from 4.9% as of March 31, 2015. The decrease reflected a decrease in loans rated Close Watch or below and an increase in total loans in the segment. Loans classified as Close Watch or below decreased for all categories in the segment, particularly for the domestic manufacturing, real estate, and wholesale and retail categories. The decrease in the domestic manufacturing category was primarily due to an improvement in the financial performance and prospects of two large borrowers, whose borrower ratings were upgraded to Normal, as well as the concession made to reduce a substantial portion of the loans outstanding to a large borrower in the domestic electronics manufacturing industry. The decrease in the domestic real estate category was primarily due to the improved repayment ability of a substantial portion of small and medium-sized borrowers. The decrease in the domestic wholesale and retail category was mainly attributable to the improved repayment ability of a number of large borrowers. The increase in loans to borrowers rated as Likely to Become Bankrupt or Legally/Virtually Bankrupt in each of the domestic manufacturing category and the foreign excluding MUAH and Krungsri category was attributable to one large borrower being downgraded.

 

Residential segment—The ratio of loans classified as Nonaccrual to total loans in the segment decreased 0.1 percentage points to 0.6% as of September 31, 2015 from 0.7% as of March 31, 2015. This was mainly due to a decrease of ¥10.4 billion in nonaccrual loans in the segment primarily as a result of the transfer to accrual status of loans to borrowers who became current with their repayments.

 

Card segment—The ratio of loans classified as Nonaccrual to total loans in the segment decreased 0.1 percentage points to 11.9% as of September 31, 2015 from 12.0% as of March 31, 2015. This was mainly due to repayments of nonaccrual loans classified as Close Watch or below pursuant to their respective restructured terms.

 

MUAH segment—The ratio of loans classified as Special Mention or below and Nonaccrual to total loans in the segment increased 0.2 percentage points to 2.3% as of September 30, 2015 from 2.1% as of March 31, 2015. The increase primarily resulted from some borrowers in the oil and gas industry beginning to experience significant deterioration in their financial performance, although nonaccrual consumer loans decreased ¥2.7 billion primarily due to an overall improvement in the credit quality of the consumer loan portfolio.

 

Krungsri segment—The ratio of loans classified as Special Mention or below to total loans in the segment increased 0.1 percentage points to 5.4% as of September 30, 2015 from 5.3% as of March 31, 2015. The increase was primarily due to increases in loans classified as Doubtful or Doubtful of Loss mainly because the credit quality of the retail consumer finance portfolio and the small and medium-sized enterprise portfolio deteriorated as Thailand’s economic growth slowed.

 

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Past due analysis

 

Aging of past due loans by class as of March 31, 2015 and September 30, 2015 are shown below:

 

As of March 31, 2015:

  1-3 months
Past Due
    Greater
Than
3 months
    Total
Past Due
    Current     Total
Loans(1)(2)
    Recorded
Investment>
90 Days and
Accruing
 
    (in billions)  

Commercial

           

Domestic

  ¥ 14.1      ¥ 22.8      ¥ 36.9      ¥ 54,668.1      ¥ 54,705.0      ¥ 5.6   

Manufacturing

    1.6        2.5        4.1        11,687.2        11,691.3        0.2   

Construction

    0.2        0.5        0.7        976.4        977.1        —     

Real estate

    3.1        5.8        8.9        10,728.8        10,737.7        0.9   

Services

    1.1        1.3        2.4        2,670.4        2,672.8        0.1   

Wholesale and retail

    2.7        4.2        6.9        8,317.0        8,323.9        0.1   

Banks and other financial institutions

    0.0        0.5        0.5        4,329.2        4,329.7        —     

Communication and information services

    0.5        0.4        0.9        1,526.5        1,527.4        —     

Other industries

    0.3        0.3        0.6        12,670.2        12,670.8        0.0   

Consumer

    4.6        7.3        11.9        1,762.4        1,774.3        4.3   

Foreign-excluding MUAH and Krungsri

    9.4        2.1        11.5        35,434.2        35,445.7        —     

Residential

    82.9        53.7        136.6        14,396.6        14,533.2        41.8   

Card

    18.7        32.1        50.8        501.7        552.5        —     

MUAH

    21.0        11.1        32.1        9,199.4        9,231.5        0.3   

Krungsri

    88.1        57.9        146.0        3,674.8        3,820.8        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 234.2      ¥ 179.7      ¥ 413.9      ¥ 117,874.8      ¥ 118,288.7      ¥ 47.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2015:

  1-3 months
Past Due
    Greater
Than
3 months
    Total
Past Due
    Current     Total
Loans(1)(2)
    Recorded
Investment>
90 Days and
Accruing
 
    (in billions)  

Commercial

           

Domestic

  ¥ 17.8      ¥ 26.7      ¥ 44.5      ¥ 56,294.0      ¥ 56,338.5      ¥ 6.6   

Manufacturing

    0.9        5.0        5.9        11,621.0        11,626.9          

Construction

    1.0        0.6        1.6        870.1        871.7        0.0   

Real estate

    2.7        6.3        9.0        10,746.4        10,755.4        2.2   

Services

    2.1        1.7        3.8        2,444.6        2,448.4        0.0   

Wholesale and retail

    5.1        5.2        10.3        8,305.0        8,315.3        0.1   

Banks and other financial institutions

           0.0        0.0        4,605.3        4,605.3          

Communication and information services

    0.8        0.3        1.1        1,474.8        1,475.9          

Other industries

    0.2        0.3        0.5        14,460.7        14,461.2        0.0   

Consumer

    5.0        7.3        12.3        1,766.1        1,778.4        4.3   

Foreign-excluding MUAH and Krungsri

    3.6        6.8        10.4        35,365.5        35,375.9          

Residential

    82.7        54.6        137.3        14,199.1        14,336.4        43.4   

Card

    18.1        32.3        50.4        486.2        536.6          

MUAH

    16.2        12.4        28.6        9,308.2        9,336.8        0.3   

Krungsri

    92.1        67.2        159.3        4,670.4        4,829.7          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 230.5      ¥ 200.0      ¥ 430.5      ¥ 120,323.4      ¥ 120,753.9      ¥ 50.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)   Total loans in the above table do not include loans held for sale or loans acquired with deteriorated credit quality and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.
(2)   Total loans of MUAH do not include ¥1.1 billion and ¥0.4 billion of FDIC covered loans as of March 31, 2015 and September 30, 2015, respectively, which are not subject to the guidance on loans and debt securities acquired with deteriorated credit quality.

 

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Total past due loans as of September 30, 2015 were ¥430.5 billion, an increase of ¥16.6 billion from ¥413.9 billion as of March 31, 2015. This was primarily attributable to increases of past due loans in the Commercial segment, particularly in the domestic manufacturing and wholesale and retail categories, and the Krungsri segment. The increase in the domestic manufacturing category was primarily due to the loans to one large borrower becoming overdue. The increase in the domestic wholesale and retail category was mainly attributable to the loans to two large borrowers becoming overdue. The increase in the Krungsri segment primarily reflected the negative impact of the stagnant Thai economy on the retail and consumer finance portfolio, where the number of delinquent borrowers increased 23.1%.

 

Investment Portfolio

 

Our investment securities primarily consist of Japanese government bonds, corporate bonds and marketable equity securities. Japanese government bonds are mostly classified as available-for-sale securities. Our investment in Japanese government bonds is a part of our asset and liability management policy with respect to investing the amount of yen-denominated funds exceeding our net loans. The percentage of our holding of available-for-sale Japanese government bonds to the total investment securities decreased to 65.1% as of September 30, 2015 from 67.8% as of March 31, 2015. We also hold Japanese government bonds that are classified as held-to-maturity securities, which accounted for 2.4% of the total investment securities as of September 30, 2015.

 

Historically, we have held equity securities of some of our customers primarily for strategic purposes, in particular, to maintain long-term relationships with these customers. We continue to focus on reducing our investment in equity securities for such purposes in order to reduce the price fluctuation risk in our equity portfolio from a risk management perspective and to respond to applicable regulatory requirements as well as increasing market expectation for us to reduce our equity portfolio. As of March 31, 2015 and September 30, 2015, the aggregate book value of our marketable equity securities under Japanese GAAP satisfied the requirements of the legislation prohibiting banks from holding equity securities in excess of their Tier 1 capital. In November 2015, we announced that we are aiming to reduce the balance of equity securities held for strategic purposes to approximately 10% of our Tier 1 capital over the next five years. We estimated as of March 31, 2015, that we would need to reduce our total equity holdings by approximately ¥800.0 billion, or 30% of our total equity portfolio based on the book value under Japanese GAAP, to achieve this target. However, various factors, including market conditions and changes in our Tier 1 capital ratio, may affect the amount of equity securities we should sell and may adversely affect our ability to achieve the target as planned. In the six months ended September 30, 2015, our investment in marketable equity securities decreased mainly due to decreases in their fair values as well as sales of ETFs and equity securities held for strategic purposes.

 

Investment securities decreased to ¥46.84 trillion as of September 30, 2015 from ¥52.21 trillion as of March 31, 2015, mainly due to a decrease in our holding of Japanese government bonds primarily in response to the Bank of Japan’s monetary policy and measure to purchase such bonds in the market to stimulate the economy by increasing liquidity and also as part of our asset and liability management and interest rate risk management measures. The decrease in our investment securities portfolio was also attributable to lower net unrealized gains on domestic marketable equity securities.

 

Investment securities other than available-for-sale or held-to-maturity securities, which are nonmarketable equity securities presented on our consolidated balance sheets as other investment securities, were primarily carried at cost of ¥0.57 trillion as of September 30, 2015 and ¥0.59 trillion as of March 31, 2015, respectively, because their fair values were not readily determinable.

 

For the six months ended September 30, 2015, losses resulting from impairment of available-for-sale securities were ¥4.5 billion, an increase of ¥3.0 billion compared to the six months ended September 30, 2014. The increase was mainly due to decreases in the prices of equity securities held by our commercial banking subsidiaries, including the stock of a large customer in the domestic electronics manufacturing industry.

 

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The following table shows information regarding the amortized cost, net unrealized gains (losses), and fair value of our available-for-sale and held-to-maturity securities as of March 31, 2015 and September 30, 2015:

 

     As of March 31, 2015     As of September 30, 2015  
     Amortized
cost
     Fair value      Net
unrealized
gains (losses)
    Amortized
cost
     Fair value      Net
unrealized
gains (losses)
 
     (in billions)  

Available-for-sale securities:

                

Debt securities:

                

Japanese government and Japanese government agency bonds

   ¥ 35,079.9       ¥ 35,405.6       ¥ 325.7      ¥ 30,187.5       ¥ 30,493.5       ¥ 306.0   

Japanese prefectural and municipal bonds

     186.9         194.4         7.5        190.7         197.5         6.8   

Foreign governments and official institutions bonds

     1,661.3         1,682.5         21.2        1,866.1         1,889.1         23.0   

Corporate bonds

     1,226.3         1,255.6         29.3        1,098.5         1,125.9         27.4   

Mortgage-backed securities

     1,149.8         1,139.4         (10.4     1,159.5         1,149.3         (10.2

Asset-backed securities(1)

     1,255.9         1,246.0         (9.9     1,425.8         1,417.0         (8.8

Other debt securities

     179.9         182.3         2.4        176.5         178.9         2.4   

Marketable equity securities

     2,568.3         6,384.6         3,816.3        2,589.1         5,823.5         3,234.4   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   ¥ 43,308.3       ¥ 47,490.4       ¥ 4,182.1      ¥ 38,693.7       ¥ 42,274.7       ¥ 3,581.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity debt securities(2)

   ¥ 4,130.5       ¥ 4,184.1       ¥ 53.6      ¥ 3,998.3       ¥ 4,045.0       ¥ 46.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

Notes:

(1)   AAA and AA-rated products account for approximately two-thirds of our asset-backed securities.
(2)   See Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Report for more details.

 

Net unrealized gains on available-for-sale securities decreased ¥601.1 billion to ¥3,581.0 billion as of September 30, 2015, from ¥4,182.1 billion as of March 31, 2015. This decrease was mainly due to a decrease of ¥581.9 billion in net unrealized gains on marketable equity securities, which reflected the general decrease in Japanese stock prices towards the end of September 2015.

 

The amortized cost of held-to-maturity securities as of September 30, 2015 decreased ¥132.2 billion compared to the balance as of March 31, 2015. This decrease was because the amount of held-to-maturity asset-backed securities that matured in the six months ended September 30, 2015 exceeded the amount of held-to-maturity residential mortgage-backed securities newly purchased in the same period.

 

The following table shows information relating to our investment securities other than available-for-sale or held-to-maturity securities as of March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in billions)  

Other investment securities:

     

Nonmarketable equity securities:

     

Unlisted preferred securities(1)

   ¥ 446.0         ¥405.0   

Others(2)

     118.6         137.4   

Investment securities held by investment companies and brokers and dealers(3)

     22.5         24.4   
  

 

 

    

 

 

 

Total

   ¥ 587.1         ¥566.8   
  

 

 

    

 

 

 

 

Notes:

(1)   These securities are mainly issued by public companies, including preferred stocks issued by Morgan Stanley, preferred securities issued by our non-consolidated funding vehicles, and other unlisted preferred securities issued by several Japanese public companies. Those securities are primarily carried at cost.

 

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(2)   These securities are equity securities issued by unlisted companies other than unlisted preferred securities. Those securities are primarily carried at cost.
(3)   These investment securities are held by certain subsidiaries subject to specialized industry accounting principles for investment companies and brokers and dealers, and are measured at fair value.

 

Interest-earning Deposits in Other Banks

 

Interest-earning deposits in other banks have been increasing since the introduction of the quantitative and qualitative monetary easing policy by the Bank of Japan in 2014. Between March 31, 2015 and September 30, 2015, interest-earning deposits in other banks increased ¥6.88 trillion to ¥44.24 trillion from ¥37.36 trillion. This increase was mainly due to an increase in deposits with the Bank of Japan by our banking subsidiaries. The average interest-earning deposits in other banks for the six months ended September 30, 2015 were ¥39.95 trillion, an increase of ¥14.28 trillion from ¥25.67 trillion for the same period of the previous fiscal year.

 

Receivables under Securities Borrowing Transactions

 

Receivables under securities borrowing transactions increased ¥2.08 trillion to ¥6.74 trillion as of September 30, 2015 from ¥4.66 trillion as of March 31, 2015. This increase was mainly due to an increase in the volume of repurchase agreement transactions in our securities subsidiaries as the trading volume of bonds, including Japanese government bonds, increased towards the end of the six months ended September 30, 2015, when stock prices generally decreased in Japan.

 

Trading Account Assets

 

Trading account assets decreased ¥2.90 trillion to ¥44.00 trillion as of September 30, 2015 from ¥46.90 trillion as of March 31, 2015. This decrease reflected a decrease of ¥2.66 trillion in trading account securities and a decrease of ¥0.24 trillion in trading derivative assets. The decrease in trading account securities was mainly due to decreases in the fair values of European debt securities in our banking subsidiaries as long-term interest rates in the European markets, including Germany and France, rapidly increased in late April 2015 through early May 2015 and in early June 2015 and remained at increased levels in the six months ended September 30, 2015. In addition, we reduced the balance of our trading account foreign debt securities, which also negatively impacted the fair value of our trading account securities portfolio.

 

Deferred Tax Assets

 

Deferred tax assets were ¥0.09 trillion as of March 31, 2015 and September 30, 2015. While deferred tax assets decreased primarily due to the decrease in the allowance for credit losses as a result of an overall improvement in the credit quality of our loan portfolio, the impact was offset by a decrease in deferred tax liabilities within the same tax jurisdiction. Deferred tax liabilities decreased primarily due to decreases in the fair values of trading account assets and investment securities. In addition, the reduction in the combined normal effective statutory tax rate resulting from changes in tax laws contributed to the decrease in deferred tax liabilities.

 

Total Liabilities

 

As of September 30, 2015, total liabilities were ¥268.95 trillion, an increase of ¥3.35 trillion from ¥265.60 trillion as of March 31, 2015. This was primarily due to an increase of ¥2.33 trillion in short-term borrowings, an increase of ¥0.78 trillion in long-term debt and an increase of ¥0.38 trillion in deposits, partially offset by a decrease of ¥0.72 trillion in trading account liabilities.

 

Deposits

 

Deposits are our primary source of funds. The total balance of deposits increased ¥0.38 trillion to ¥172.37 trillion as of September 30, 2015 from ¥171.99 trillion as of March 31, 2015. The total average balance of deposits increased ¥14.25 trillion to ¥174.24 trillion for the six months ended September 30, 2015 from ¥159.99 trillion for the same period of the previous fiscal year.

 

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The balance of domestic deposits increased ¥1.19 trillion to ¥126.99 trillion as of September 30, 2015 from ¥125.80 trillion as of March 31, 2015, while the balance of foreign deposits decreased ¥0.81 trillion to ¥45.38 trillion as of September 30, 2015 from ¥46.19 trillion as of March 31, 2015. The increase in domestic deposits was mainly due to an increase in domestic interest-bearing deposits, particularly certificate of deposits, in our trust banking subsidiaries, where the balance decreased towards the end of March 2015 due to intensified competition and recovered towards the end of September 2015. The decrease in foreign deposits was mainly due to a decrease in interest-bearing deposits in our commercial banking subsidiaries in the Cayman Islands, resulting from the cancellation of a large customer account, partially offset by an increase in interest-bearing deposits in foreign branches of our trust banking subsidiaries.

 

Short-term Borrowings

 

We use short-term borrowings as a funding source and in our management of interest rate risk. For management of interest rate risk, short-term borrowings are used in asset and liability management operations to match interest rate risk exposure resulting from loans and other interest-earning assets and to manage funding costs of various financial instruments at an appropriate level, based on our forecast of future interest rate levels. Short-term borrowings consist of call money, funds purchased, payables under repurchase agreements, payables under securities lending transactions, due to trust accounts, and other short-term borrowings.

 

Short-term borrowings increased ¥2.33 trillion to ¥48.09 trillion as of September 30, 2015 from ¥45.76 trillion as of March 31, 2015. This increase was mainly due to a ¥0.88 trillion increase in securities lending transactions as a result of increased trade volume of cross-currency securities lending transactions entered into as a means to raise foreign currency funds at relatively low costs and a ¥0.56 trillion increase in other short-term borrowings as a result of increased borrowings through issuances of commercial paper by our banking subsidiaries and short-term corporate bonds by our securities subsidiaries. These increases were partially offset by a decrease in borrowings from the Bank of Japan by our commercial banking subsidiaries.

 

Trading Account Liabilities

 

Trading account liabilities decreased ¥0.72 trillion to ¥16.31 trillion as of September 30, 2015 from ¥17.03 trillion as of March 31, 2015. This decrease was mainly due to lower unrealized losses on foreign exchange forward contracts in our commercial banking subsidiaries, resulting from the reductions in the balances of such contracts.

 

Long-term Debt

 

Long-term debt increased ¥0.78 trillion to ¥20.75 trillion as of September 30, 2015 from ¥19.97 trillion as of March 31, 2015. This increase was mainly due to an increase in loans from the Bank of Japan to our banking subsidiaries and the issuances of bonds by our banking and securities subsidiaries. The average balance of long-term debt for the six months ended September 30, 2015 was ¥21.24 trillion, an increase of ¥5.93 trillion from ¥15.31 trillion for the same period of the previous fiscal year.

 

The Basel III-compliant bonds that MUFG issued are included in long-term debt. The terms and conditions of these bonds contain a clause that requires the bonds to be written off upon the occurrence of certain events, including when the Japanese banking regulator deems us to be at risk of becoming non-viable. For more information on the Basel III-compliant bonds, see “Recent Developments.”

 

Sources of Funding and Liquidity

 

Our primary source of liquidity is from a large balance of deposits, mainly ordinary deposits, certificates of deposit and time deposits. Time deposits have historically shown a high rollover rate among our corporate customers and individual depositors. The average deposit balance increased from ¥159.99 trillion for the six months ended September 30, 2014 to ¥174.24 trillion for the six months ended September 30, 2015. These deposits provide us with a sizable source of stable and low-cost funds. Our average deposits, combined with

 

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average total equity of ¥14.98 trillion, funded 63.1% of our average total assets of ¥299.98 trillion during the six months ended September 30, 2015. Our deposits exceeded our loans, net of allowance for credit losses, by ¥52.65 trillion as of September 30, 2015, compared to ¥54.78 trillion as of March 31, 2015. As part of our asset and liability management policy, a significant portion of the amount of yen-denominated funds exceeding our net loans has been deposited with the Bank of Japan or invested in Japanese government bonds in recent periods.

 

The remaining funding was primarily provided by short-term borrowings and long-term senior and subordinated debt. Short-term borrowings consist of call money and funds purchased, payables under repurchase agreements, payables under securities lending transactions, due to trust account, and other short-term borrowings. From time to time, we have issued long-term instruments such as straight bonds with maturities between three to ten years. The balance of our short-term borrowings as of September 30, 2015 was ¥48.09 trillion, and the average balance of short-term borrowings for the six months ended September 30, 2015 was ¥46.97 trillion. The balance of our long-term debt as of September 30, 2015 was ¥20.75 trillion, and the average balance of long-term debt for the six months ended September 30, 2015 was ¥21.24 trillion. Liquidity may also be provided by the sale of financial assets, including available-for-sale securities, trading account securities and loans. Additional liquidity may be provided by the maturity of loans.

 

We manage liquidity separately at certain of our foreign and domestic non-bank and banking subsidiaries because they are subject to separate regulatory requirements, pursue different business models and have distinctive liquidity risk profiles. We manage our group-wide liquidity on a consolidated basis based on the tests and analyses conducted at the subsidiary level. We collect and evaluate the results of the stress tests individually performed by our major subsidiaries to ensure our ability to meet our liquidity requirements on a consolidated basis in stress scenarios. For a description of liquidity risk management measures at the subsidiary level, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition—Sources of Funding and Liquidity” in our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

We manage our funding sources using buffer assets, primarily Japanese government bonds, for cash funding. As of September 30, 2015, we held ¥30.49 trillion of available-for-sale Japanese government and government agency bonds. We also use deposits with the Bank of Japan as buffer assets. Our commercial banking subsidiaries use liquidity-supplying assets, primarily commitment lines for minor currencies funding. In addition, our commercial banking subsidiaries use a liquidity gap, or the excess of cash inflows over cash outflows, for cash funding.

 

In December 2014, Moody’s announced that it downgraded the long-term credit ratings of BTMU and MUTB by one-notch from Aa3 to A1, the long-term credit rating of MUSHD by one-notch from A2 to A3, and the short-term credit rating of MUSHD by one-notch from P-1 to P-2. These downgrades followed the downgrade of the rating assigned to the Government of Japan from Aa3 to A1. Subsequently, Fitch announced that it changed the Government of Japan’s credit rating outlook from stable to negative. In November 2015, Standard and Poor’s announced that it changed the credit rating outlook for MUFG, BTMU and MUTB from stable to negative. This announcement followed S&P’s revision of its view of the economic risk trend in Japan’s banking sector from stable to negative. Although these credit rating and outlook changes have not resulted, and are not currently expected to result in, a material adverse impact on us, a further downgrade of the credit ratings assigned to us or our major subsidiaries could result in higher funding costs and other adverse consequences. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business—A further downgrade of our credit ratings could trigger additional collateral obligations under our derivative contracts and increase our funding costs” in our annual report on Form 20-F for the fiscal year ended March 31, 2015.

 

In January 2013, the Basel Committee on Banking Supervision introduced supplemental measurements to support its Principles for Sound Liquidity Risk Management and Supervision. These measurements include liquidity coverage ratio, or LCR, and net stable funding ratio, or NSFR, and are designed to promote the short-term resilience of the liquidity risk profile of banks. The Committee announced final LCR rules in January 2014 and final NSFR rules in October 2014.

 

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The LCR is a measure to determine whether a bank has a sufficient amount of high-quality liquid assets to survive in a 30-day financial stress scenario, including sizable deposit outflows, inability to issue new bonds or access the interbank market, stoppage of the collateralized funding market, need for additional collateral in connection with derivative transactions, and significant outflows of cash under commitment lines to customers. In Japan, once a bank or bank holding company fails to meet the minimum LCR of 100%, it is required to report immediately to the FSA. If the FSA deems the financial condition of the bank or bank holding company to be serious, the FSA may issue a business improvement order. The LCR requirements began to apply to banks and bank holding companies in Japan in March 2015, with the minimum ratio applicable in 2015 set at 60% and increasing annually by 10 percentage points to 100% by 2019. Banks and bank holding companies are also required to disclose their LCR ratios starting in June 2015.

 

The NSFR is a measure to determine whether a bank has sustainable and long-term liabilities and capital for its assets and activities. The Basel Committee on Banking Supervision issued the final standard of NSFR in October 2014. In Japan, details of the NSFR requirements are currently under discussion.

 

Total Equity

 

The following table presents a summary of our total equity as of March 31, 2015 and September 30, 2015:

 

     March 31, 2015     September 30, 2015  
     (in billions, except percentages)  

Capital stock

   ¥ 2,090.3      ¥ 2,090.3   

Capital surplus

     5,959.6        5,955.1   

Retained earnings

     3,664.4        3,918.4   

Retained earnings appropriated for legal reserve

     239.6        239.6   

Unappropriated retained earnings

     3,424.8        3,678.8   

Net unrealized gains on investment securities, net of taxes

     2,304.6        1,907.7   

Accumulated other comprehensive income, net of taxes, other than net unrealized gains on investment securities

     762.7        713.6   

Treasury stock, at cost

     (102.5     (199.9
  

 

 

   

 

 

 

Total Mitsubishi UFJ Financial Group shareholders’ equity

   ¥ 14,679.1      ¥ 14,385.2   

Noncontrolling interests

     602.2        645.9   
  

 

 

   

 

 

 

Total equity

   ¥ 15,281.3      ¥ 15,031.1   
  

 

 

   

 

 

 

Ratio of total equity to total assets

     5.44     5.29

 

Shareholders’ equity as of September 30, 2015 was ¥14,385.2 billion, a decrease of ¥293.9 billion from ¥14,679.1 billion as of March 31, 2015.

 

Retained earnings as of September 30, 2015 were ¥3,918.4 billion, an increase of ¥254.0 billion from ¥3,664.4 billion as of March 31, 2015, reflecting the net income of our banking and securities subsidiaries for the six months ended September 30, 2015. We decided to pay semi-annual interim dividend of ¥9.0 per share of common stock for the six months ended September 30, 2015, and are currently planning to pay a year-end dividend of ¥9.0 per share of common stock for the six months ending March 31, 2016.

 

Net unrealized gains on investment securities, net of taxes, as of September 30, 2015 were ¥1,907.7 billion, a decrease of ¥396.9 billion from ¥2,304.6 billion as of March 31, 2015. The decrease was mainly due to sales of available-for-sale debt securities and unfavorable stock price movements in Japan towards the end of the six months ended September 30, 2015.

 

Total equity decreased ¥250.2 billion to ¥15,031.1 billion as of September 30, 2015 from ¥15,281.3 billion as of March 31, 2015. The decrease in total equity as of September 30, 2015 was principally attributable to a ¥396.9 billion decrease in net unrealized gains on investment securities, which was partially

 

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offset by a ¥254.0 billion increase in unappropriated retained earnings, reflecting ¥381.3 billion of net income attributable to Mitsubishi UFJ Financial Group. Total equity was further reduced by dividends of ¥126.2 billion. The ratio of total equity to total assets decreased 0.15 percentage points to 5.29% as of September 30, 2015 from 5.44% as of March 31, 2015.

 

Due to our holdings of a large amount of marketable equity securities and the volatility of the equity markets in Japan, changes in the fair value of marketable equity securities have significantly affected our total equity in recent years. The following table presents information relating to the accumulated net unrealized gains, net of taxes, in respect of available-for-sale investment securities as of March 31, 2015 and September 30, 2015:

 

     March 31, 2015     September 30, 2015  
     (in billions, except percentages)  

Accumulated net unrealized gains on investment securities

   ¥ 2,304.6      ¥ 1,907.7   

Accumulated net unrealized gains to total equity

     15.08     12.69

 

Capital Adequacy

 

We are subject to various regulatory capital requirements promulgated by the regulatory authorities of the countries in which we operate. Failure to meet minimum capital requirements can result in mandatory actions being taken by regulators that could have a direct material effect on our results of operations and financial condition. Moreover, if our capital ratios are perceived to be low, our counterparties may avoid entering into transactions with us, which in turn could negatively affect our business and operations.

 

We continually monitor our risk-adjusted capital ratio and leverage ratio closely, and manage our operations in consideration of the capital requirements. These ratios are affected not only by fluctuations in the value of our assets, including our credit risk assets such as loans and equity securities, the risk weights of which depend on the borrowers’ or issuers’ internal ratings, marketable securities and deferred tax assets, but also by fluctuations in the value of the Japanese yen against the U.S. dollar and other foreign currencies and by general price levels of Japanese equity securities.

 

Capital Requirements for Banking Institutions in Japan

 

Under Japanese regulatory capital requirements, our consolidated capital components, including Common Equity Tier 1, Tier 1, and Tier 2 capital and risk-weighted assets, are calculated based on our consolidated financial statements prepared under Japanese GAAP. Each of the consolidated and stand-alone capital components and risk-weighted assets of our banking subsidiaries in Japan is also calculated based on consolidated and non-consolidated financial statements prepared under Japanese GAAP.

 

Certain Basel III provisions were adopted by the FSA with transitional measures and became effective March 31, 2013. Various Basel III measures are being phased in from the calendar year 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, the Basel Committee on Banking Supervision has proposed additional loss absorbency requirements to supplement the Common Equity Tier 1 capital requirement ranging from 1% to 3.5% for G-SIBs, depending on the bank’s systemic importance. The FSB identified us as a G-SIB in its annual report published in November 2015, and indicated that, as a G-SIB, we are required to hold an additional 1.5% of Tier 1 common equity. The group of banks identified as G-SIBs is expected to be updated annually, and the stricter capital requirements are being implemented in annual one-quarter increments between January 1, 2016 and December 31, 2018 and will become fully effective on January 1, 2019. Accordingly, as of January 1, 2016, we are required to hold an additional 0.375% of Tier 1 common equity.

 

We have been granted approval by the FSA to exclude the majority of our investment in Morgan Stanley from being subject to double gearing adjustments. The approval was granted for a 10-year period, but the

 

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approval amount will be phased out by 20% each year starting from March 31, 2019. As of September 30, 2015, a full application of double gearing adjustments with respect to our investment in Morgan Stanley would have reduced our Common Equity Tier 1 capital ratio by approximately 0.7%.

 

For a more detailed discussion of the applicable capital ratio requirements, see “Item 4.B. Information on the Company—Business Overview—Supervision and Regulation—Japan” in our annual report on Form 20-F for the fiscal year ended March 31, 2015. For updates on regulatory capital standards, see “Recent Developments—Recent Financial Regulatory Developments.” For information on the issuance of Additional Tier 1 securities, see also “Recent Developments—Issuances of Basel III-Compliant Domestic Subordinated Bonds.”

 

Leverage Requirements for Banking Institutions in Japan

 

We are required to disclose our consolidated regulatory leverage ratio calculated in accordance with the methodology prescribed in the FSA guidance that has been adopted to implement the relevant Basel III standard. The leverage ratio is designed for monitoring and preventing the build-up of excessive leverage in the banking sector and is expressed as the ratio of Tier 1 capital to total balance sheet assets adjusted in accordance with the FSA guidance. The Basel Committee on Banking Supervision’s currently proposed minimum leverage ratio is 3%. The Committee is expected to make any adjustments to the minimum leverage ratio by the end of the calendar year 2017 and implement the final minimum leverage ratio requirement that reflects any such adjustments in 2018.

 

Capital Ratios and Leverage Ratios of MUFG

 

The table below presents our consolidated total capital components, risk-weighted assets, risk-adjusted capital ratios and leverage ratios in accordance with Basel III as of March 31, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from our consolidated financial statements prepared in accordance with Japanese GAAP, as required by the FSA. The percentages in the table below are rounded down. For further information, see Note 21 to our consolidated financial statements included in our Annual Report on Form 20-F for the fiscal year ended March 31, 2015.

 

     March 31, 2015     September 30, 2015     Minimum capital
ratios required
 
     (in billions, except percentages)     (in billions, except percentages)        

Capital components:

      

Common Equity Tier 1

   ¥ 12,466.6      ¥ 12,571.9     

Additional Tier 1

     1,663.7        1,682.2     

Tier 1 capital

     14,130.3        14,254.2     

Tier 2 capital

     3,422.0        3,308.7     

Total capital

   ¥ 17,552.3      ¥ 17,562.9     

Risk-weighted assets(1)(3)

   ¥ 112,315.3      ¥ 111,925.3     

Capital ratios(2)(3):

      

Common Equity Tier 1 capital ratio

     11.09     11.23     4.50

Tier 1 capital ratio

     12.58        12.73        6.00   

Total capital ratio

     15.62        15.69        8.00   

Leverage ratio

     4.72        4.67        —     

 

Notes:

(1)   Risk-weighted assets as of March 31, 2015 have been revised from ¥111,901.6 billion to ¥112,315.3 billion.
(2)   Common Equity Tier 1 capital ratio as of March 31, 2015 has been revised from 11.14% to 11.09%, Tier 1 capital ratio as of March 31, 2015 has been revised from 12.62% to 12.58%, and Total capital ratio as of March 31, 2015 has been revised from 15.68% to 15.62%.
(3)   The revisions reflect corrections of errors in the risk weighting applied to certain assets, mostly residential mortgage loans, and certain other adjustments made under Basel I standards to obtain amounts that were used for floor adjustments in determining the amounts of our risk-weighted assets under Basel III standards.

 

As of September 30, 2015, management believed that we were in compliance with all capital adequacy requirements to which we were subject.

 

Our capital ratios as of September 30, 2015 increased as compared to March 31, 2015. Our risk-weighted assets also increased between March 31, 2015 and September 30, 2015, mainly as a result of larger

 

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floor adjustments, which are adjustments made in accordance with the formulae prescribed under applicable regulatory capital standards, including those reflecting improvements in parameters for the calculation of credit risks and improvements in the quality of our credit portfolio. Our consolidated regulatory capital amounts, including our Common Equity Tier 1 capital, increased between March 31, 2015 and September 30, 2015, due to an increase in retained earnings, reflecting higher net income.

 

Capital Ratios and Leverage Ratios of Major Banking Subsidiaries in Japan

 

The table below presents the risk-adjusted capital ratios and leverage ratios of BTMU and MUTB in accordance with Basel III as of March 31, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from each bank’s consolidated and non-consolidated financial statements prepared in accordance with Japanese GAAP, as required by the FSA. The percentages in the table below are rounded down. For further information, see Note 21 to our consolidated financial statements included in our Annual Report on Form 20-F for the fiscal year ended March 31, 2015.

 

     As of
March 31,
2015
    Minimum capital
ratios required
    As of
September 30,
2015
    Minimum capital
ratios required
 

Consolidated:

        

BTMU(1)

        

Common Equity Tier 1 capital ratio

     10.77     4.50     10.70     4.50

Tier 1 capital ratio

     12.21        6.00        12.15        6.00   

Total capital ratio

     15.45        8.00        15.30        8.00   

Leverage ratio

     4.64        —          4.57        —     

MUTB

        

Common Equity Tier 1 capital ratio

     14.70        4.50        15.08        4.50   

Tier 1 capital ratio

     15.26        6.00        15.59        6.00   

Total capital ratio

     19.15        8.00        18.99        8.00   

Leverage ratio

     4.72        —          4.78        —     

Stand-alone:

        

BTMU(1)

        

Common Equity Tier 1 capital ratio

     11.76        4.50        11.67        4.50   

Tier 1 capital ratio

     13.38        6.00        13.28        6.00   

Total capital ratio

     17.03        8.00        16.79        8.00   

MUTB(2)

        

Common Equity Tier 1 capital ratio

     14.31        4.50        14.53        4.50   

Tier 1 capital ratio

     14.86        6.00        15.03        6.00   

Total capital ratio

     19.11        8.00        18.90        8.00   

 

Notes:

(1)   Common Equity Tier 1 ratio for BTMU as of March 31, 2015 has been revised from 10.88% to 10.77% on a consolidated basis and 11.90% to 11.76% on a stand-alone basis. Tier 1 capital ratio for BTMU as of March 31, 2015 has been revised from 12.33% to 12.21% on a consolidated basis and 13.54% to 13.38% on a stand-alone basis. Total capital ratio for BTMU as of March 31, 2015 has been revised from 15.61% to 15.45% on a consolidated basis and 17.23% to 17.03% on a stand-alone basis. The revisions reflect corrections of errors in the risk weighting applied to certain assets, mostly residential mortgage loans, and certain other adjustments made under Basel I standards to obtain amounts that were used for floor adjustments in determining the amounts of BTMU’s risk-weighted assets under Basel III standards.
(2)   Common Equity Tier 1 ratio for MUTB as of March 31, 2015 has been revised from 14.35% to 14.31% on a stand-alone basis. Tier 1 capital ratio for MUTB as of March 31, 2015 has been revised from 14.90% to 14.86% on a stand-alone basis. Total capital ratio for MUTB as of March 31, 2015 has been revised from 19.16% to 19.11% on a stand-alone basis. The revisions reflect corrections of errors in the risk weighting applied to certain assets, mostly residential mortgage loans, and certain other adjustments made under Basel I standards to obtain amounts that were used for floor adjustments in determining the amounts of MUTB’s risk-weighted assets under Basel III standards.

 

As of September 30, 2015, management believes that our banking subsidiaries were in compliance with all capital adequacy requirements to which they were subject.

 

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Liquidity Requirements for Banking Institutions in Japan

 

Starting in June 2015, banks and bank holding companies in Japan are required to disclose their LCRs calculated in accordance with the methodology prescribed in the FSA guidance that has been adopted to implement the relevant Basel III standard. The LCR is a measure to determine whether a bank has a sufficient amount of high-quality liquid assets to survive in a 30-day financial stress scenario, including sizable deposit outflows, inability to issue new bonds or access the interbank market, stoppage of the collateralized funding market, need for additional collateral in connection with derivative transactions, and significant outflows of cash under commitment lines to customers. Once a bank or bank holding company fails to meet the minimum LCR of 100%, it is required to immediately report to the FSA. If the FSA deems the financial condition of the bank or bank holding company to be serious, the FSA may issue a business improvement order. A minimum LCR of 60% is required in 2015, and the required minimum ratio is expected to be raised annually by 10 percentage points to 100% by 2019.

 

Liquidity Coverage Ratios of MUFG and Major Banking Subsidiaries in Japan

 

The following table presents the LCRs of MUFG, BTMU and MUTB in accordance with Basel III as of June 30, 2015 and September 30, 2015. Underlying figures are calculated in accordance with Japanese banking regulations based on information derived from our consolidated and non-consolidated financial statements prepared in accordance with Japanese GAAP, as required by the FSA. The percentages in the table below are rounded down.

 

     June  30,
2015(1)
    September  30,
2015(2)
 

MUFG (consolidated)

     128.3     130.4

BTMU (consolidated)

     128.8        130.8   

BTMU (stand-alone)

     139.0        141.3   

MUTB (consolidated)

     144.1        154.6   

MUTB (stand-alone)

     165.4        182.3   

 

Notes:

(1)   Each of the ratios is calculated by dividing the month-end average balance of High-Quality Liquid Assets as of the end of April, May and June 2015 by the monthly average amount of total net cash outflows for the same three months.
(2)   Each of the ratios is calculated by dividing the month-end average balance of High-Quality Liquid Assets as of the end of July, August and September 2015 by the monthly average amount of total net cash outflows for the same three months.

 

Capital Requirements for Banking Institutions in the United States

 

In the United States, MUAH and MUB are subject to various regulatory capital requirements administered by the U. S. Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on MUAH’s consolidated financial statements. In addition, as foreign banking organizations that have U.S. branches and agencies and also as entities that are controlled by MUFG, which is a financial holding company, BTMU and MUTB are subject to the FRB’s requirements.

 

For a more detailed discussion of the applicable capital requirements, see “Item 4.B. Information on the Company—Business Overview—Supervision and Regulation—United States” in our annual report on Form 20-F for the fiscal year ended March 31, 2015. See also Note 21 to our consolidated financial statements included elsewhere in our Annual Report on Form 20-F for the fiscal year ended March 31, 2015.

 

In October 2015, the Federal Reserve Board proposed long-term debt and TLAC requirements for U.S. globally systemically important bank holding companies and U.S. intermediate holding companies of non-U.S. globally systemically important banks, or IHCs, which are expected to include MUAH. Under the

 

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proposed requirements, a covered IHC would be required to maintain a minimum amount of eligible long-term debt issued to a non-U.S. parent entity that could be cancelled or converted to equity in order to absorb losses and recapitalize the IHC’s operating subsidiaries in resolution. A covered IHC would also be required to maintain a minimum level of eligible TLAC issued to a non-U.S. parent entity consisting of regulatory capital and eligible long-term debt and maintain related buffers consisting of Common Equity Tier 1 capital. In addition, an IHC would be restricted from issuing short-term debt and certain other types of liabilities that are structurally senior to eligible long-term debt. If adopted as proposed, these requirements and restrictions would apply as of January 1, 2019, with certain stricter minimum requirements to be phased in on January 1, 2022.

 

Capital Ratios of Banking Subsidiaries in the United States

 

The table below presents the risk-adjusted capital ratios of MUAH and MUB, both subsidiaries of BTMU, calculated in accordance with applicable U.S. banking regulations as of December 31, 2014 and June 30, 2015:

 

     December 31,
2014
    June 30,
2015
    Minimum
capital ratios
required
as of
June 2015
    Ratio OCC
requires to be
“well capitalized”
as of June 2015
 

MUAH:

        

Tier I capital (to risk-weighted assets)

     12.79     13.56     6.00     —     

Tier I capital (to quarterly average assets)(1)

     11.25        11.46        4.00        —     

Total capital (to risk-weighted assets)

     14.74        15.30        8.00        —     

MUB:

        

Tier I capital (to risk-weighted assets)

     13.09     13.17     6.00     8.00

Tier I capital (to quarterly average assets)(1)

     11.09        11.17        4.00        5.00   

Total capital (to risk-weighted assets)

     14.78        14.71        8.00        10.00   

 

Note:

(1)   Excludes certain intangible assets.

 

Management believes that, as of December 31, 2015, MUAH and MUB were in compliance with all capital adequacy requirements to which they were subject.

 

As of December 31, 2014 and June 30, 2015, the OCC categorized MUB as “well-capitalized.” To be categorized as “well-capitalized,” MUB must maintain minimum ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to quarterly average assets (leverage ratio) as set forth in the table. There have been no conditions or events since June 30, 2015 that would cause management to believe that MUB’s category has changed.

 

Capital Requirements for Securities Firms in Japan and Overseas

 

We have securities subsidiaries in Japan and overseas, which are also subject to regulatory capital requirements. In Japan, the Financial Instruments and Exchange Law of Japan and related ordinances require financial instruments firms to maintain a minimum capital ratio of 120% calculated as a percentage of capital accounts less certain fixed assets, as determined in accordance with Japanese GAAP, against amounts equivalent to market, counterparty credit and operations risks. Specific guidelines are issued as a ministerial ordinance which details the definition of essential components of the capital ratios, including capital, deductible fixed asset items and risks, and related measures. Failure to maintain a minimum capital ratio will trigger mandatory regulatory actions. A capital ratio of less than 140% will call for additional regulatory reporting, a capital ratio of less than 120% may result in an order to change the method of business, and a capital ratio of less than 100% may lead to a suspension of all or part of the business for a period of time and cancellation of a registration. Overseas securities subsidiaries are subject to the relevant regulatory capital requirements of the countries or jurisdictions in which they operate.

 

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Capital Ratios of MUMSS

 

As of March 31, 2015 and September 30, 2015, MUMSS’ capital accounts less certain fixed assets of ¥398.2 billion and ¥405.7 billion on a stand-alone basis represented 299.9% and 315.2% of the total amounts equivalent to market, counterparty credit and operations risks, respectively, and MUMSS’ capital accounts less certain fixed assets of ¥426.1 billion and ¥431.9 billion on a consolidated basis represented 302.0% and 312.9% of the total amounts equivalent to market, counterparty credit and operations risks, respectively, as calculated pursuant to the Financial Instruments and Exchange Act of Japan.

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we engage in several types of off-balance sheet arrangements to meet the financing needs of customers, including various types of guarantees, credit commitments and commercial letters of credit. The contractual amounts of these guarantees and other off-balance sheet instruments represent the amounts at risk if the contracts were to be fully drawn upon as a result of a subsequent default by our customer and a decline in the value of the underlying collateral. Since many of these commitments expire without being drawn upon, the total contractual or notional amounts of these commitments do not necessarily represent our future cash requirements. See Note 15 to our unaudited condensed consolidated financial statements included elsewhere in this Report for the details of the contractual or notional amounts of such commitments.

 

Some of our off-balance sheet arrangements are related to activities of special purpose entities, most of which are VIEs. See Note 17 to our unaudited condensed consolidated financial statements included elsewhere in this Report for the details of the maximum exposures to non-consolidated VIEs.

 

Market Risk

 

VaR for Trading Activities.    The VaR for our total trading activities in the six months ended September 30, 2015 is presented in the table below. The total amount of VaR and the VaR of each risk category as of September 30, 2015 were lower than those as of March 31, 2015, except the equities-related VaR.

 

     VaR for Trading Activities
(April 1, 2015—September 30, 2015)
 

Risk category

   Average     Maximum(1)      Minimum(1)      September 30,
2015
    March 31,
2015
 
     (in billions)  

MUFG

   ¥ 15.76      ¥ 22.17       ¥ 12.03       ¥ 13.52      ¥ 21.86   

Interest rate

     14.23        20.3         11.16         13.97        17.63   

Yen

     8.55        14.97         5.99         8.04        9.50   

U.S. Dollars

     5.33        7.29         3.18         5.56        7.41   

Foreign exchange

     4.99        8.82         2.96         3.01        8.80   

Equities

     1.92        8.21         0.91         1.39        0.99   

Commodities

     0.04        0.19         0         0.01        0.05   

Less diversification effect

     (5.42     —           —           (4.86     (5.61

 

Note:

(1)   The maximum and minimum VaR overall and for various risk categories were taken from different days. A simple summation of VaR by risk category is not equal to total VaR due to the effect of diversification.

 

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The average daily VaR by quarter in the six months ended September 30, 2015 was as follows:

 

Quarter

   Average daily VaR  
     (in billions)  

April–June 2015

   ¥ 17.45   

July–September 2015

     14.10   

 

Quantitative market risks fluctuated throughout the April–September 2015 period, reflecting the reaction of trading activities to market volatility. Market conditions were often volatile during the six months ended September 30, 2015, with positive trading-related revenue recorded for 121 of 131 trading days during the period. The amount of trading-related revenue per day was kept within a stable range, with 60 days of positive revenue and no days of negative revenue exceeding ¥1 billion.

 

Backtesting.    We conduct backtesting in which a VaR is compared against hypothetical profits and losses on a daily basis to verify the accuracy of our VaR measurement model. In the 250 trading days ended September 30, 2015, there were no exceptions in which the measured losses exceeded VaR. We also conduct additional backtesting in which a VaR is compared with actual realized and unrealized losses and testing VaR by changing various parameters such as confidence intervals and observation periods used in the model.

 

Stress Testing.    We have adopted an HS-VaR model, which calculates potential changes in the market value of our portfolio as a statistically possible amount of losses that could be incurred due to market fluctuations within a certain period (or holding period, of 10 business days) based on historical market volatility for a certain period (or observation period, of 701 business days, or approximately three years). Actual losses may exceed the value at risk obtained by the application of the model in the event, for example, that the market fluctuates to a degree not accounted for in the observation period, or that the correlations among various risk factors, including interest rates and foreign currency exchange rates, deviate from those assumed in the model.

 

In order to complement these weaknesses of the HS-VaR model and measure potential losses that the model is not designed to capture, we conduct stress testing. For example, we measure on a quarterly basis potential losses that could be incurred in our portfolio by applying various stress scenarios, including the 10-year most extreme movement in each of the risk factors as well as actual past market movement observed beyond the 10 year historical observation period. Through daily stress testing, we estimate maximum potential losses in each market on the current trading portfolio based on the worst ten-day historical volatility recorded during the VaR observation period of 701 days. As of September 30, 2015, we held a total trading activity position of ¥11.6 billion of estimated maximum potential losses as compared to ¥16.6 billion as of March 31, 2015. In addition, MUFG and major subsidiaries conduct stress testing, as appropriate, by applying various stress scenarios, including those which take into account estimates regarding future market volatility, in order to better identify risks and manage our portfolio in a more stable and appropriate manner. Since October 2011, MUFG and major subsidiaries have also been measuring stressed VaR relating to their trading activities based on a one-year observation period with the highest VaR at least in the immediately preceding ten years.

 

VaR for Non-Trading Activities.    The aggregate VaR for our total non-trading activities as of September 30, 2015, excluding market risks related to our strategic equity portfolio and measured using the same standards as trading activities, was ¥384.5 billion, a ¥28.1 billion decrease from March 31, 2015. In the six months ended September 30, 2015, risk related to interest rate decreased ¥39.9 billion, and risk related to equities increased ¥4.5 billion.

 

Based on a simple summation of figures across market risk categories, interest rate risks accounted for approximately 69% of our total non-trading activity market risks, which consist of interest rate risk, foreign exchange rate risk, and equities risk. In the six months ended September 30, 2015, the average daily interest rate VaR totaled ¥378.2 billion, with the highest recorded VaR being ¥588.6 billion and the lowest being ¥336.6 billion.

 

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The average daily interest rate VaR by quarter in the six months ended September 30, 2015 was as follows:

 

Quarter

   Average daily VaR  
     (in billions)  

April–June 2015

   ¥ 423.94   

July–September 2015

     382.12   

 

Comparing the proportion of each currency’s interest rate VaR to the total interest rate VaR as of September 30, 2015 against that as of March 31, 2015, there were a two percentage point increase in Japanese yen from 49% to 51%, a 14 percentage point decrease in the euro from 27% to 13%, and a 12 percentage point increase in the U.S. dollar from 24% to 36%.

 

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UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX

 

     Page  

Condensed Consolidated Balance Sheets (Unaudited)

     F-2   

Condensed Consolidated Statements of Income (Unaudited)

     F-4   

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

     F-6   

Condensed Consolidated Statements of Equity (Unaudited)

     F-7   

Condensed Consolidated Statements of Cash Flows (Unaudited)

     F-9   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     F-11   

1.   BASIS OF SEMIANNUAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     F-11   

2.   BUSINESS DEVELOPMENTS

     F-16   

3.   INVESTMENT SECURITIES

     F-16   

4.   LOANS AND ALLOWANCE FOR CREDIT LOSSES

     F-24   

5.   GOODWILL AND OTHER INTANGIBLE ASSETS

     F-38   

6.   PLEDGED ASSETS AND COLLATERAL

     F-39   

7.   SEVERANCE INDEMNITIES AND PENSION PLANS

     F-40   

8.   OFFSETTING OF DERIVATIVES, REPURCHASE AGREEMENTS, AND SECURITIES LENDING TRANSACTIONS

     F-41   

9.    REPURCHASE AGREEMENTS, AND SECURITIES LENDING TRANSACTIONS ACCOUNTED FOR AS SECURED BORROWINGS

     F-42   

10. PREFERRED STOCK

     F-43   

11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     F-44   

12. NONCONTROLLING INTERESTS

     F-48   

13. EARNINGS PER COMMON SHARE APPLICABLE TO COMMON SHAREHOLDERS OF MUFG

     F-48   

14. DERIVATIVE FINANCIAL INSTRUMENTS

     F-49   

15. OBLIGATIONS UNDER GUARANTEES AND OTHER OFF-BALANCE SHEET INSTRUMENTS

     F-55   

16. CONTINGENT LIABILITIES

     F-56   

17. VARIABLE INTEREST ENTITIES

     F-57   

18. BUSINESS SEGMENTS

     F-60   

19. FAIR VALUE

     F-63   

20. INVESTMENTS IN EQUITY METHOD INVESTEES

     F-77   

21. SUBSEQUENT EVENTS

     F-77   

Average Balance Sheets, Interest and Average Rates (Unaudited)

     F-79   

 

F-1


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

(in millions)   

March 31,

2015

   

September 30,

2015

 

ASSETS

    

Cash and due from banks

   ¥ 3,353,236      ¥ 3,651,229   

Interest-earning deposits in other banks

     37,364,698        44,237,744   

Call loans, funds sold, and receivables under resale agreements

     7,933,424        7,317,410   

Receivables under securities borrowing transactions

     4,659,545        6,739,901   

Trading account assets (including assets pledged that secured parties are permitted to sell or repledge of ¥13,371,696 and ¥11,577,204 at March 31, 2015 and September 30, 2015) (including ¥19,911,092 and ¥18,595,769 at March 31, 2015 and September 30, 2015 measured at fair value under fair value option)

     46,904,903        44,004,179   

Investment securities:

    

Available-for-sale securities—carried at fair value (including assets pledged that secured parties are permitted to sell or repledge of ¥7,297,945 and ¥9,487,129 at March 31, 2015 and September 30, 2015)

     47,490,404        42,274,655   

Held-to-maturity securities—carried at amortized cost (including assets pledged that secured parties are permitted to sell or repledge of ¥210,106 and ¥134,943 at March 31, 2015 and September 30, 2015) (fair value of ¥4,184,139 and ¥4,045,027 at March 31, 2015 and September 30, 2015)

     4,130,451        3,998,298   

Other investment securities

     587,119        566,811   
  

 

 

   

 

 

 

Total investment securities

     52,207,974        46,839,764   
  

 

 

   

 

 

 

Loans, net of unearned income, unamortized premiums and deferred loan fees (including assets pledged that secured parties are permitted to sell or repledge of ¥1,418,642 and ¥1,264,768 at March 31, 2015 and September 30, 2015)

     118,265,202        120,665,437   

Allowance for credit losses

     (1,055,479     (947,346
  

 

 

   

 

 

 

Net loans

     117,209,723        119,718,091   
  

 

 

   

 

 

 

Premises and equipment—net

     982,205        1,012,868   

Accrued interest

     323,496        296,910   

Customers’ acceptance liability

     205,384        165,893   

Intangible assets—net

     1,160,164        1,151,000   

Goodwill

     807,610        810,565   

Deferred tax assets

     90,674        85,122   

Other assets (including ¥1,007 and ¥501 at March 31, 2015 and September 30, 2015 measured at fair value under fair value option)

     7,683,290        7,948,139   
  

 

 

   

 

 

 

Total assets

   ¥ 280,886,326      ¥ 283,978,815   
  

 

 

   

 

 

 

Assets of consolidated VIEs included in total assets above that can be used only to settle obligations of consolidated VIEs

    

Cash and due from banks

   ¥ 1,240      ¥ 86   

Interest-earning deposits in other banks

     51,136        39,771   

Trading account assets

     3,069,297        2,315,136   

Investment securities

     1,077,274        1,203,310   

Loans

     7,115,889        7,069,338   

All other assets

     326,307        355,015   
  

 

 

   

 

 

 

Total assets of consolidated VIEs

   ¥ 11,641,143      ¥ 10,982,656   
  

 

 

   

 

 

 

 

F-2


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)—(Continued)

 

(in millions, except shares)   

March 31,

2015

   

September 30,

2015

 

LIABILITIES AND EQUITY

    

Deposits:

    

Domestic offices:

    

Non-interest-bearing

   ¥ 17,829,620      ¥ 17,930,788   

Interest-bearing

     107,968,674        109,058,919   

Overseas offices, principally interest-bearing

     46,192,973        45,376,564   
  

 

 

   

 

 

 

Total deposits

     171,991,267        172,366,271   
  

 

 

   

 

 

 

Call money, funds purchased, and payables under repurchase agreements

     24,397,191        24,891,192   

Payables under securities lending transactions

     8,205,349        9,086,489   

Due to trust account and other short-term borrowings (including ¥156,703 and ¥210,452 at March 31, 2015 and September 30, 2015 measured at fair value under fair value option)

     13,156,799        14,113,350   

Trading account liabilities

     17,029,385        16,307,086   

Obligations to return securities received as collateral

     2,651,151        3,041,938   

Bank acceptances outstanding

     205,384        165,893   

Accrued interest

     132,330        131,611   

Long-term debt (including ¥584,630 and ¥535,402 at March 31, 2015 and September 30, 2015 measured at fair value under fair value option)

     19,968,735        20,751,691   

Other liabilities

     7,867,394        8,092,155   
  

 

 

   

 

 

 

Total liabilities

     265,604,985        268,947,676   
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Mitsubishi UFJ Financial Group shareholders’ equity:

    

Capital stock—common stock authorized, 33,000,000,000 shares; common stock issued, 14,168,853,820 shares at March 31, 2015 and September 30, 2015, with no stated value

     2,090,270        2,090,270   

Capital surplus

     5,959,626        5,955,148   

Retained earnings:

    

Appropriated for legal reserve

     239,571        239,571   

Unappropriated retained earnings

     3,424,864        3,678,834   

Accumulated other comprehensive income, net of taxes

     3,067,255        2,621,293   

Treasury stock, at cost—151,647,230 common shares and 259,193,202 common shares at March 31, 2015 and September 30, 2015

     (102,521     (199,880
  

 

 

   

 

 

 

Total Mitsubishi UFJ Financial Group shareholders’ equity

     14,679,065        14,385,236   

Noncontrolling interests

     602,276        645,903   
  

 

 

   

 

 

 

Total equity

     15,281,341        15,031,139   
  

 

 

   

 

 

 

Total liabilities and equity

   ¥ 280,886,326      ¥ 283,978,815   
  

 

 

   

 

 

 

Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Mitsubishi UFJ Financial Group

    

Other short-term borrowings

   ¥ 49,594      ¥ 41,908   

Long-term debt

     793,333        724,655   

All other liabilities

     402,858        165,185   
  

 

 

   

 

 

 

Total liabilities of consolidated VIEs

   ¥ 1,245,785      ¥ 931,748   
  

 

 

   

 

 

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

F-3


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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

 

     Six months ended
September 30,
 
(in millions)    2014     2015  

Interest income:

    

Loans, including fees

   ¥ 973,824      ¥ 1,020,156   

Deposits in other banks

     29,934        37,886   

Investment securities

     188,482        201,240   

Trading account assets

     206,135        196,241   

Call loans, funds sold, and receivables under resale agreements and securities borrowing transactions

     34,834        28,759   
  

 

 

   

 

 

 

Total

     1,433,209        1,484,282   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     151,105        170,578   

Call money, funds purchased, and payables under repurchase agreements and securities lending transactions

     27,284        20,632   

Due to trust account, other short-term borrowings, and trading account liabilities

     31,569        25,843   

Long-term debt

     121,866        136,630   
  

 

 

   

 

 

 

Total

     331,824        353,683   
  

 

 

   

 

 

 

Net interest income

     1,101,385        1,130,599   

Credit for credit losses

     68,138        7,204   
  

 

 

   

 

 

 

Net interest income after credit for credit losses

     1,169,523          1,137,803   
  

 

 

   

 

 

 

Non-interest income:

    

Fees and commissions income

     672,050        729,900   

Foreign exchange gains (losses)—net

     (42,982     41,615   

Trading account profits (losses)—net

     562,518        (284,774

Investment securities gains—net(1)

     63,232        119,808   

Equity in earnings of equity method investees—net

     121,538        114,252   

Other non-interest income

     56,426        35,274   
  

 

 

   

 

 

 

Total

     1,432,782        756,075   
  

 

 

   

 

 

 

Non-interest expense:

    

Salaries and employee benefits

     534,889        574,221   

Occupancy expenses—net

     82,643        87,773   

Fees and commission expenses

     118,546        139,501   

Outsourcing expenses, including data processing

     121,568        120,996   

Depreciation of premises and equipment

     54,525        46,237   

Amortization of intangible assets

     107,308        116,244   

Impairment of intangible assets

     108        213   

Insurance premiums, including deposit insurance

     57,200        45,774   

Communications

     26,721        28,955   

Taxes and public charges

     47,560        43,804   

Other non-interest expenses

     177,278        179,967   
  

 

 

   

 

 

 

Total

     1,328,346        1,383,685   
  

 

 

   

 

 

 

Income before income tax expense

     1,273,959        510,193   

Income tax expense

     409,999        97,073   
  

 

 

   

 

 

 

Net income before attribution of noncontrolling interests

     863,960        413,120   

Net income attributable to noncontrolling interests

     25,664        31,813   
  

 

 

   

 

 

 

Net income attributable to Mitsubishi UFJ Financial Group

   ¥ 838,296      ¥ 381,307   
  

 

 

   

 

 

 

Income allocated to preferred shareholders:

    

Cash dividends paid

   ¥ 8,970      ¥ —     
  

 

 

   

 

 

 

Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

   ¥ 829,326      ¥ 381,307   
  

 

 

   

 

 

 

 

F-4


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)—(Continued)

 

     Six months ended
September 30,
 
(in Yen, except shares)    2014      2015  

Earnings per common share applicable to common shareholders of Mitsubishi UFJ Financial Group

     

Basic earnings per common share—Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

   ¥ 58.55       ¥ 27.34   

Diluted earnings per common share—Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

     58.35         27.19   

Cash dividend per common share

     9.00         9.00   

Weighted average common shares outstanding (in millions)

     14,163         13,948   

Weighted average diluted common shares outstanding (in millions)

     14,182         13,965   

 

(1) The following credit losses are included in Investment securities gains—net:

 

     Six months ended
September 30,
 
(in millions)    2014      2015  

Decline in fair value

   ¥ 956       ¥ 1,211   

Other comprehensive income—net

     67         12   
  

 

 

    

 

 

 

Total credit losses

   ¥ 1,023       ¥ 1,223   
  

 

 

    

 

 

 

 

 

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

F-5


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

     Six months ended
September 30,
 
(in millions)    2014      2015  

Net income before attribution of noncontrolling interests

   ¥ 863,960       ¥ 413,120   

Other comprehensive income (loss), net of tax:

     

Net unrealized gains (losses) on investment securities(1)

     442,705         (360,855

Net unrealized gains on derivatives qualifying for cash flow hedges

     1,538         2,683   

Defined benefit plans

     15,146         (23,592

Foreign currency translation adjustments

     2,942         (33,057
  

 

 

    

 

 

 

Total

     462,331         (414,821
  

 

 

    

 

 

 

Comprehensive income (loss)

     1,326,291         (1,701

Net income attributable to noncontrolling interests

     25,664         31,813   

Other comprehensive income attributable to noncontrolling interests

     12,870         31,141   
  

 

 

    

 

 

 

Comprehensive income (loss) attributable to Mitsubishi UFJ Financial Group

   ¥ 1,287,757       ¥ (64,655
  

 

 

    

 

 

 

  

 

(1) Includes unrealized gains of ¥43 million and ¥8 million, net of tax, related to debt securities with credit component realized in earnings for the six months ended September 30, 2014 and 2015, respectively.

See the accompanying notes to Condensed Consolidated Financial Statements.

 

F-6


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity (Unaudited)

 

     Six months ended
September 30,
 
(in millions, except per share amount)    2014     2015  

Capital stock:

    

Balance at beginning of period

   ¥ 2,089,245      ¥ 2,090,270   

Issuance of new shares of common stock by way of exercise of stock acquisition rights

     961        —    
  

 

 

   

 

 

 

Balance at end of period

   ¥ 2,090,206      ¥ 2,090,270   
  

 

 

   

 

 

 

Capital surplus:

    

Balance at beginning of period

   ¥ 6,363,413      ¥ 5,959,626   

Stock-based compensation

     (1,045     (3,513

Issuance of new shares of common stock by way of exercise of the stock acquisition rights

     960        —    

Retirement of Class 5 and 11 Preferred stock (Note 10)

     (390,001     —    

Other—net

     539        (965
  

 

 

   

 

 

 

Balance at end of period

   ¥ 5,973,866      ¥ 5,955,148   
  

 

 

   

 

 

 

Retained earnings appropriated for legal reserve:

    

Balance at beginning of period

   ¥ 239,571      ¥ 239,571   
  

 

 

   

 

 

 

Balance at end of period

   ¥ 239,571      ¥ 239,571   
  

 

 

   

 

 

 

Unappropriated retained earnings:

    

Balance at beginning of period

   ¥ 2,157,639      ¥ 3,424,864   

Net income attributable to Mitsubishi UFJ Financial Group

     838,296        381,307   

Cash dividends:

    

Common stock—¥9.00 per share in 2014 and 2015

     (127,445     (126,155

Preferred stock (Class 5)—¥57.50 per share in 2014

     (8,970     —    

Losses on sales of shares of treasury stock

     —         (1,182
  

 

 

   

 

 

 

Balance at end of period

   ¥ 2,859,520      ¥ 3,678,834   
  

 

 

   

 

 

 

Accumulated other comprehensive income, net of taxes:

    

Balance at beginning of period

   ¥ 1,357,682      ¥ 3,067,255   

Net change during the period

     449,461        (445,962
  

 

 

   

 

 

 

Balance at end of period

   ¥ 1,807,143      ¥ 2,621,293   
  

 

 

   

 

 

 

 

F-7


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity (Unaudited)—(Continued)

 

     Six months ended
September 30,
 
(in millions)    2014     2015  

Treasury stock, at cost:

    

Balance at beginning of period

   ¥ (2,510   ¥ (102,521

Purchases of shares of treasury stock

     (390,017     (100,033

Sales of shares of treasury stock

     1        2,823   

Retirement of Class 5 and 11 Preferred stock

     390,001        —     

Net decrease (increase) resulting from changes in interests in consolidated subsidiaries, consolidated variable interest entities, and affiliated companies

     31        (149
  

 

 

   

 

 

 

Balance at end of period

   ¥ (2,494   ¥ (199,880
  

 

 

   

 

 

 

Total Mitsubishi UFJ Financial Group shareholders’ equity

   ¥ 12,967,812      ¥ 14,385,236   
  

 

 

   

 

 

 

Noncontrolling interests:

    

Balance at beginning of period

   ¥ 546,404      ¥ 602,276   

Initial subscriptions of noncontrolling interests

     15,089        21,454   

Transactions between the consolidated subsidiaries and the related noncontrolling interest shareholders

     (13,375     211   

Decrease in noncontrolling interests related to deconsolidation of subsidiaries

     (13,424     (19,269

Net income attributable to noncontrolling interests

     25,664        31,813   

Dividends paid to noncontrolling interests

     (30,465     (21,764

Other comprehensive income, net of taxes

     12,870        31,141   

Other—net

     (64     41   
  

 

 

   

 

 

 

Balance at end of period

   ¥ 542,699      ¥ 645,903   
  

 

 

   

 

 

 

Total equity

   ¥ 13,510,511      ¥ 15,031,139   
  

 

 

   

 

 

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

F-8


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Six months ended
September 30,
 
(in millions)    2014     2015  

Cash flows from operating activities:

    

Net income before attribution of noncontrolling interests

   ¥ 863,960      ¥ 413,120   

Adjustments to reconcile net income before attribution of noncontrolling interests to net cash provided by operating activities:

    

Depreciation and amortization

     161,833        162,481   

Impairment of intangible assets

     108        213   

Credit for credit losses

     (68,138     (7,204

Investment securities gains—net

     (63,232     (119,808

Foreign exchange losses (gains)—net

     516,072        (73,888

Equity in earnings of equity method investees—net

     (121,538     (114,252

Provision (benefit) for deferred income tax expense

     222,795        (91,958

Decrease in trading account assets, excluding foreign exchange contracts

     255,002        1,889,481   

Increase in trading account liabilities, excluding foreign exchange contracts

     27,504        163,291   

Decrease in accrued interest receivable and other receivables

     32,422        42,823   

Increase (decrease) in accrued interest payable and other payables

     (161,440     26,361   

Net decrease in accrued income taxes and increase in income tax receivables

     (72,647     (28,903

Net decrease (increase) in collateral for derivative transactions

     (508,262     463,971   

Other—net

     (214,860     (495,926
  

 

 

   

 

 

 

Net cash provided by operating activities

     869,579        2,229,802   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales and maturities of Available-for-sale securities (including proceeds from securities under fair value option)

     82,960,979        56,405,453   

Purchases of Available-for-sale securities (including purchases of securities under fair value option)

     (77,658,168     (50,634,749

Proceeds from maturities of Held-to-maturity securities

     339,164        588,084   

Purchases of Held-to-maturity securities

     (1,070,569     (459,861

Proceeds from sales and redemption of Other investment securities

     10,707        105,323   

Purchases of Other investment securities

     (3,750     (84,602

Net decrease (increase) in loans

     141,766        (2,807,804

Net increase in interest-earning deposits in other banks

     (7,663,837     (6,951,066

Net decrease (increase) in call loans, funds sold, and receivables under resale agreements and securities borrowing transactions

     1,006,132        (1,230,246

Capital expenditures for premises and equipment

     (79,027     (78,612

Purchases of intangible assets

     (106,687     (111,810

Proceeds from sales of consolidated VIEs and subsidiaries—net

     60,989        112,748   

Other—net

     7,363        9,965   
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,054,938     (5,137,177
  

 

 

   

 

 

 

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)—(Continued)

 

     Six months ended
September 30,
 
(in millions)    2014     2015  

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (123,450     506,352   

Net increase (decrease) in call money, funds purchased, and payables under repurchase agreements and securities lending transactions

     (1,585,837     1,234,946  

Net increase in due to trust account

     378,453        397,667   

Net increase (decrease) in other short-term borrowings

     (434,846     440,536   

Proceeds from issuance of long-term debt

     4,562,866        2,567,147   

Repayments of long-term debt

     (1,304,595     (1,700,692

Proceeds from sales of treasury stock

     1        10   

Dividends paid

     (136,410     (126,207

Payments for acquisition of treasury stock

     (17     (100,033

Payments for acquisition of preferred stock

     (390,000     —     

Payments for acquisition of shares of certain subsidiaries from noncontrolling interest shareholders

     (28,937     (2,188

Other—net

     (21,260     (17,684
  

 

 

   

 

 

 

Net cash provided by financing activities

     915,968        3,199,854   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (7,129     5,514   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (276,520     297,993   
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     3,689,228        3,353,236   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   ¥ 3,412,708      ¥ 3,651,229   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   ¥ 363,903      ¥ 365,108   

Income taxes, net of refunds

     259,851        211,292   

Non-cash investing and financing activities:

    

Assets acquired under capital lease arrangements

     1,493        2,151   

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.    BASIS OF SEMIANNUAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of Business

Mitsubishi UFJ Financial Group, Inc. (“MUFG”) is a holding company for The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), Mitsubishi UFJ Trust and Banking Corporation (“MUTB”), Mitsubishi UFJ Securities Holdings Co., Ltd. (“MUSHD”), Mitsubishi UFJ NICOS Co., Ltd. (“Mitsubishi UFJ NICOS”), and other subsidiaries. MUSHD is an intermediate holding company for Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Through its subsidiaries and affiliated companies, MUFG engages in a broad range of financial operations, including commercial banking, investment banking, trust banking and asset management services, securities businesses, and credit card businesses, and it provides related services to individual and corporate customers. See Note 18 for more information by business segment.

Basis of Financial Statements

The accompanying semiannual condensed consolidated financial statements are presented in Japanese yen, the currency of the country in which MUFG is incorporated and principally operates. The accompanying condensed consolidated financial statements include the accounts of MUFG, its subsidiaries and certain variable interest entities (“VIE”s) (together, the “MUFG Group”), and reflect all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended March 31, 2015. Certain information that would be included in annual financial statements but is not required for semiannual reporting purposes under U.S. GAAP has been omitted or condensed.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting Changes

Accounting for Investments in Qualified Affordable Housing Projects—In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The guidance permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost-method investment. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and should be applied retrospectively to all periods presented. The MUFG Group adopted this guidance on April 1, 2015, and there was no material impact on its financial position and results of operations.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure—In January 2014, the FASB issued guidance that clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosures of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption of this guidance is permitted. The MUFG Group adopted this guidance on April 1, 2015, and there was no material impact on its financial position and results of operations.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity—In April 2014, the FASB issued new guidance that changes the requirements for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component of an entity or group of components of an entity meets certain criteria to be classified as held for sale or is disposed of. This guidance requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position and additional disclosures about discontinued operations. Also, this guidance requires an entity to provide disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. This guidance is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years and all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The MUFG Group adopted this guidance on April 1, 2015, and there was no material impact on its financial position and results of operations.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures—In June 2014, the FASB issued new guidance which changes the accounting for both repurchase-to-maturity transactions and repurchase financing arrangements. The guidance also requires an entity to disclose information about certain transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty, and information about repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This guidance is effective for interim and annual periods beginning after December 15, 2014, except for the disclosure requirement about repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings, that is effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The MUFG Group adopted this guidance on April 1, 2015, and there was no material impact on its financial position and results of operations. See Note 9 for further details of the disclosures required by this guidance.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure—In August 2014, the FASB issued new guidance which requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

the ability to recover under that claim and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The MUFG Group adopted this guidance on April 1, 2015, and there was no material impact on its financial position and results of operations.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers—In May 2014, the FASB issued new guidance which supersedes the current revenue recognition requirements, including most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfers of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments, and assets recognized from the costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued new guidance which defers the effective date of the new guidance on revenue from contracts with customers by one year. Early adoption is permitted, but not before the original effective date. The MUFG Group is currently evaluating what effect these guidances will have on its financial position and results of operations.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity—In August 2014, the FASB issued new guidance that clarifies the measurement of the financial assets and financial liabilities of a consolidated collateralized financing entity. A reporting entity that consolidates a collateralized financing entity within the scope of this guidance may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this guidance or existing guidance on fair value measurement. When a reporting entity elects the measurement alternative included in this guidance for a collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption of this guidance is permitted as of the beginning of an annual period. The MUFG Group does not expect that the adoption of the guidance will have a material impact on its financial position and results of operations.

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity—In November 2014, the FASB issued new guidance which clarifies that an entity should consider all relevant terms and features including the embedded derivative feature being evaluated for bifurcation when evaluating the nature of a host contract in a hybrid financial instrument that is issued in the form of a share, and no single term or feature would necessarily determine the economic characteristics and risks of the host contract. The guidance also clarifies that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The MUFG Group does not expect that the adoption of the guidance will have a material impact on its financial position and results of operations.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Amendments to the Consolidation Analysis—In February 2015, the FASB issued new guidance which amends the consolidation analysis under the current consolidation guidance. The amendments change the VIE analysis for limited partnerships and similar legal entities, the criteria for evaluating whether fees paid to a decision maker or a service provider are a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination, and the consolidation evaluation for certain investment funds. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted. The MUFG Group is currently evaluating what effect this guidance will have on its financial position and results of operations.

Simplifying the Presentation of Debt Issuance Costs—In April 2015, the FASB issued new guidance which simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this guidance is permitted for financial statements that have not been previously issued. In August 2015, the FASB issued further guidance which permits an entity to defer and present debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The MUFG Group does not expect that the adoption of these guidances on the presentation and subsequent measurement of debt issuance costs will have a material impact on its financial position and results of operations.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement—In April 2015, the FASB issued new guidance which simplifies the accounting for cloud computing arrangements by requiring that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance does not change customer’s accounting for service contracts. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption of this guidance is permitted. The MUFG Group is currently evaluating what effect this guidance will have on its financial position and results of operations.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)—In May 2015, the FASB issued new guidance which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Instead, a reporting entity is required to provide the amount measured using that practical expedient to permit reconciliation of the fair value of investments included in the fair value hierarchy to the line items presented in the balance sheet. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This new guidance will only affect the MUFG Group’s fair value hierarchy disclosures, and will not affect the MUFG Group’s financial position and results of operations.

Simplifying the Accounting for Measurement-Period Adjustments—In September 2015, the FASB issued new guidance which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period, including the related prior period impact on depreciation, amortization, and other

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

income statement items, in the reporting period in which the adjustment amounts are determined. This guidance also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early application is permitted for financial statements that have not been issued. The MUFG Group is currently evaluating what effect this guidance will have on its financial position and results of operations.

Recognition and Measurement of Financial Assets and Financial Liabilities—In January 2016, the FASB issued new guidance which amends recognition and measurement of financial assets and financial liabilities under the current guidance. The amendments in this guidance make targeted improvements to the current guidance as follows:

 

   

Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

 

   

Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

 

   

Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

 

   

Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

 

   

Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

 

   

Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

 

   

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Regarding with the requirement to an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk, early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued are permitted as of the beginning of the fiscal year of adoption. Except for the early application guidance discussed above, early adoption of the amendments in this guidance is not permitted. The MUFG Group is currently evaluating what effect this guidance will have on its financial position and results of operations.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

2.    BUSINESS DEVELOPMENTS

Integration of Bank of Ayudhya Public Company Limited and BTMU Bangkok Branch

On January 5, 2015, BTMU integrated the former BTMU Bangkok Branch with Bank of Ayudhya Public Company Limited (“Krungsri”) through the contribution in kind of the former BTMU Bangkok Branch business to Krungsri, which was treated as a common control transaction. In exchange for the contribution in kind, Krungsri issued 1,281,618,026 common shares at Thai baht 40.49 per share to BTMU. After the integration, BTMU holds 5,655,332,146 common shares in Krungsri, and the percentage of Krungsri’s shares held by BTMU is 76.88%.

The change in noncontrolling ownership interests of Krungsri including the contribution in kind of the former BTMU Bangkok Branch was ¥15,269 million, resulting a corresponding increase in Noncontrolling interests and a decrease in Capital surplus.

3.    INVESTMENT SECURITIES

The following tables present the amortized cost, gross unrealized gains and losses, and fair value of Available-for-sale securities and Held-to-maturity securities at March 31, 2015 and September 30, 2015:

 

At March 31, 2015:

   Amortized
cost
     Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value  
     (in millions)  

Available-for-sale securities:

         

Debt securities:

         

Japanese national government and Japanese government agency bonds

   ¥ 35,079,893       ¥ 327,023      ¥ 1,284      ¥ 35,405,632   

Japanese prefectural and municipal bonds

     186,872         7,610        67        194,415   

Foreign governments and official institutions bonds

     1,661,286         23,590        2,372        1,682,504   

Corporate bonds

     1,226,314         30,438        1,128        1,255,624   

Residential mortgage-backed securities

     942,256         640        11,168        931,728   

Commercial mortgage-backed securities

     207,534         1,848        1,800        207,582   

Asset-backed securities

     1,255,920         559        10,439        1,246,040   

Other debt securities(1)

     179,915         5,537        3,149        182,303   

Marketable equity securities

     2,568,291         3,823,020        6,735        6,384,576   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 43,308,281       ¥ 4,220,265      ¥ 38,142      ¥ 47,490,404   
  

 

 

    

 

 

   

 

 

   

 

 

 

Held-to-maturity securities:

         

Debt securities:

         

Japanese national government and Japanese government agency bonds

   ¥ 1,126,212       ¥ 16,091      ¥ 1,535      ¥ 1,140,768   

Foreign governments and official institutions bonds

     77,487         1,556        —         79,043   

Corporate bonds

     300         —         —         300   

Residential mortgage-backed securities

     716,296         9,206 (2)      649 (3)      724,853   

Commercial mortgage-backed securities

     209,517         6,438        778 (3)      215,177   

Asset-backed securities

     2,000,639         25,746        2,387        2,023,998   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 4,130,451       ¥ 59,037      ¥ 5,349      ¥ 4,184,139   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

 

Notes:    (1)    Other debt securities in the table above include ¥182,303 million of private placement debt conduit bonds.
   (2)    The MUFG Group reclassified residential mortgage-backed securities from Available-for-sale securities to Held-to-maturity securities during the fiscal year ended March 31, 2013. As a result of the reclassification of residential mortgage-backed securities, the unrealized gains before taxes at the date of reclassification remaining in Accumulated other comprehensive income (loss) (“Accumulated OCI”) in the accompanying consolidated balance sheets were ¥320 million at March 31, 2015 and are not included in the table above.
   (3)    MUFG Americas Holdings Corporation (“MUAH”) reclassified residential mortgage-backed securities and commercial mortgage-backed securities from Available-for-sale securities to Held-to-maturity securities during the fiscal year ended March 31, 2014. As a result of the reclassification of residential mortgage-backed securities and commercial mortgage-backed securities, the unrealized losses before taxes at the date of reclassification remaining in Accumulated OCI in the accompanying consolidated balance sheets were ¥7,545 million and ¥9,909 million, respectively, at March 31, 2015 and are not included in the table above.

 

At September 30, 2015:

   Amortized
cost
     Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value  
     (in millions)  

Available-for-sale securities:

         

Debt securities:

         

Japanese national government and Japanese government agency bonds

   ¥ 30,187,524       ¥ 306,641      ¥ 690      ¥ 30,493,475   

Japanese prefectural and municipal bonds

     190,660         6,879        50        197,489   

Foreign governments and official institutions bonds

     1,866,095         24,462        1,481        1,889,076   

Corporate bonds

     1,098,517         28,000        571        1,125,946   

Residential mortgage-backed securities

     955,701         487        10,054        946,134   

Commercial mortgage-backed securities

     203,772         1,348        2,016        203,104   

Asset-backed securities

     1,425,804         2,297        11,085        1,417,016   

Other debt securities(1)

     176,524         4,836        2,414        178,946   

Marketable equity securities

     2,589,119         3,282,102        47,752        5,823,469   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 38,693,716       ¥ 3,657,052      ¥ 76,113      ¥ 42,274,655   
  

 

 

    

 

 

   

 

 

   

 

 

 

Held-to-maturity securities:

         

Debt securities:

         

Japanese national government and Japanese government agency bonds

   ¥ 1,101,171       ¥ 22,974      ¥ —        ¥ 1,124,145   

Foreign governments and official institutions bonds

     166,697         1,899        616        167,980   

Corporate bonds

     250         —          —          250   

Residential mortgage-backed securities

     854,004         8,850 (2)      2,664 (3)      860,190   

Commercial mortgage-backed securities

     207,877         6,529        435 (3)      213,971   

Asset-backed securities

     1,668,299         14,062        3,870        1,678,491   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,998,298       ¥ 54,314      ¥ 7,585      ¥ 4,045,027   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

Notes:    (1)    Other debt securities in the table above include ¥176,940 million of private placement debt conduit bonds.
   (2)    The MUFG Group reclassified residential mortgage-backed securities from Available-for-sale securities to Held-to-maturity securities during the fiscal year ended March 31, 2013. As a result of the reclassification of residential mortgage-backed securities, the unrealized gains before taxes at the date of reclassification remaining in Accumulated OCI in the accompanying condensed consolidated balance sheets were ¥277 million at September 30, 2015 and are not included in the table above.
   (3)    MUAH reclassified residential mortgage-backed securities and commercial mortgage-backed securities from Available-for-sale securities to Held-to-maturity securities during the fiscal year ended March 31, 2014. As a result of the reclassification of residential mortgage-backed securities and commercial mortgage-backed securities, the unrealized losses before taxes at the date of reclassification remaining in Accumulated OCI in the accompanying condensed consolidated balance sheets were ¥7,015 million and ¥9,482 million, respectively, at September 30, 2015 and are not included in the table above.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Other Securities

Investment securities other than Available-for-sale securities or Held-to-maturity securities (i.e., nonmarketable equity securities presented in Other investment securities) were primarily carried at cost of ¥564,582 million and ¥542,438 million, at March 31, 2015 and September 30, 2015, respectively, because their fair values were not readily determinable.

The remaining balances were investment securities held by certain subsidiaries subject to specialized industry accounting principles for investment companies and broker-dealers and carried at fair value of ¥22,537 million and ¥24,373 million at March 31, 2015 and September 30, 2015, respectively. See Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015 for the valuation techniques and inputs used to estimate the fair values.

With respect to cost-method investments of ¥152,350 million and ¥111,437 million at March 31, 2015 and September 30, 2015, respectively, the MUFG Group estimated a fair value using commonly accepted valuation techniques to determine whether the investments were impaired in each reporting period. See Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015 for the details of these commonly accepted valuation techniques. If the fair value of the investment is less than the cost of the investment, the MUFG Group proceeds to evaluate whether the impairment is other-than-temporary.

With respect to cost-method investments of ¥412,232 million and ¥431,001 million at March 31, 2015 and September 30, 2015, respectively, the MUFG Group performed a test to determine whether any impairment indicators existed for each investment in each reporting period. If an impairment indicator exists, the MUFG Group estimates the fair value of the cost-method investment. If the fair value of the investment is less than the cost of the investment, the MUFG Group performs an evaluation of whether the impairment is other-than-temporary. The primary method the MUFG Group uses to identify impairment indicators is a comparison of the MUFG Group’s share of an investee’s net assets to the cost of the MUFG Group’s investment in the investee. The MUFG Group also considers whether significant adverse changes in the regulatory, economic or technological environment have occurred with respect to the investee. The MUFG Group periodically monitors the status of each investee including the credit rating, which is generally updated once a year based on the annual financial statements of the issuer. In addition, if an event that could impact the credit rating of an investee occurs, the MUFG Group reassesses the appropriateness of the credit rating assigned to the issuer in order to maintain an updated credit rating. The MUFG Group did not estimate the fair value of cost-method investments, which had aggregated costs of ¥409,892 million and ¥429,728 million at March 31, 2015 and September 30, 2015, respectively, since it was not practical and the MUFG Group identified no impairment indicators.

Based on the procedures described above, the MUFG Group recognized other-than-temporary impairment losses on the cost-method investments of ¥1,716 million and ¥424 million for the six months ended September 30, 2014 and 2015, respectively. Each impairment loss was recognized based on the specific circumstances of each individual company. No impairment loss was individually material.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Contractual Maturities

The amortized cost and fair values of Held-to-maturity debt securities and the fair values of Available-for-sale debt securities at September 30, 2015 by contractual maturity are shown below. Expected maturities may be shorter than contractual maturities because issuers of debt securities may have the right to call or prepay obligations with or without penalties. Debt securities not due at a single maturity date and securities embedded with call or prepayment options, such as mortgage-backed securities, are included in the table below based on their contractual maturities.

 

    Held-to-maturity debt securities     Available-for-sale
debt securities
 
    Amortized
cost
    Fair value     Fair value  
    (in millions)  

Due in one year or less

  ¥ 228      ¥ 228      ¥ 12,545,849   

Due from one year to five years

    110,726        113,941        13,409,395   

Due from five years to ten years

    2,506,541        2,543,193        5,566,108   

Due after ten years

    1,380,803        1,387,665        4,929,834   
 

 

 

   

 

 

   

 

 

 

Total

  ¥ 3,998,298      ¥ 4,045,027      ¥ 36,451,186   
 

 

 

   

 

 

   

 

 

 

Realized Gains and Losses

For the six months ended September 30, 2014 and 2015, gross realized gains on sales of Available-for-sale securities were ¥69,706 million and ¥147,560 million, respectively, and gross realized losses on sales of Available-for-sale securities were ¥12,429 million and ¥26,068 million, respectively.

Other-than-temporary Impairments of Investment Securities

For the six months ended September 30, 2014 and 2015, losses resulting from impairment of investment securities to reflect the decline in value considered to be other-than-temporary were ¥3,184 million and ¥4,919 million, respectively, which were included in Investment securities gains—net in the accompanying condensed consolidated statements of income. The losses of ¥3,184 million for the six months ended September 30, 2014 included losses of ¥1,023 million from Available-for-sale debt securities which mainly comprised of corporate bonds, and ¥1,716 million from nonmarketable equity securities. The losses of ¥4,919 million for the six months ended September 30, 2015 included losses of ¥3,272 million from marketable equity securities and ¥1,223 million from debt securities which mainly comprised of corporate bonds, classified as Available-for-sale securities.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Gross Unrealized Losses and Fair Value

The following tables show the gross unrealized losses and fair value of Available-for-sale securities and Held-to-maturity securities at March 31, 2015 and September 30, 2015 by length of time that individual securities in each category have been in a continuous loss position:

 

    Less than 12 months     12 months or more     Total  

At March 31, 2015:

  Fair value     Gross
unrealized
losses
    Fair value     Gross
unrealized
losses
    Fair value     Gross
unrealized
losses
    Number of
securities
 
    (in millions, except number of securities)  

Available-for-sale securities:

             

Debt securities:

             

Japanese national government and Japanese government agency bonds

  ¥ 6,858,282      ¥ 1,284      ¥ —       ¥ —       ¥ 6,858,282      ¥ 1,284        35   

Japanese prefectural and municipal bonds

    12,943        67        —         —         12,943        67        8   

Foreign governments and official institutions bonds

    308,929        1,161        139,795        1,211        448,724        2,372        74   

Corporate bonds

    181,030        882        65,506        246        246,536        1,128        490   

Residential mortgage-backed securities

    74,782        213        760,354        10,955        835,136        11,168        329   

Commercial mortgage-backed securities

    17,290        50        104,223        1,750        121,513        1,800        128   

Asset-backed securities

    109,186        873        184,172        9,566        293,358        10,439        125   

Other debt securities

    9,086        318        112,972        2,831        122,058        3,149        50   

Marketable equity securities

    104,102        6,714        616        21        104,718        6,735        65   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 7,675,630      ¥ 11,562      ¥ 1,367,638      ¥ 26,580      ¥ 9,043,268      ¥ 38,142        1,304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity securities:

             

Debt securities:

             

Japanese national government and Japanese government agency bonds

  ¥ 198,580      ¥ 1,535      ¥ —       ¥ —       ¥ 198,580      ¥ 1,535        1   

Residential mortgage-backed securities

    48,068        189        282,193        460        330,261        649        151   

Commercial mortgage-backed securities

    16,155        35        187,059        743        203,214        778        31   

Asset-backed securities

    141,347        598        439,391        1,789        580,738        2,387        22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 404,150      ¥ 2,357      ¥ 908,643      ¥ 2,992      ¥ 1,312,793      ¥ 5,349        205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

    Less than 12 months     12 months or more     Total  

At September 30, 2015:

  Fair value     Gross
unrealized
losses
    Fair value     Gross
unrealized
losses
    Fair value     Gross
unrealized
losses
    Number of
securities
 
    (in millions, except number of securities)  

Available-for-sale securities:

             

Debt securities:

             

Japanese national government and Japanese government agency bonds

  ¥ 467,294      ¥ 690      ¥ —        ¥ —        ¥ 467,294      ¥ 690        24   

Japanese prefectural and municipal bonds

    8,560        50        —          —          8,560        50        6   

Foreign governments and official institutions bonds

    187,061        997        96,872        484        283,933        1,481        64   

Corporate bonds

    105,337        272        31,181        299        136,518        571        265   

Residential mortgage-backed securities

    570,862        5,213        311,687        4,841        882,549        10,054        370   

Commercial mortgage-backed securities

    131,306        1,873        10,891        143        142,197        2,016        129   

Asset-backed securities

    66,066        219        144,380        10,866        210,446        11,085        91   

Other debt securities

    2,389        66        100,443        2,348        102,832        2,414        40   

Marketable equity securities

    352,091        47,643        1,020        109        353,111        47,752        174   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 1,890,966      ¥ 57,023      ¥ 696,474      ¥ 19,090      ¥ 2,587,440      ¥ 76,113        1,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity securities:

             

Debt securities:

             

Foreign governments and official institutions bonds

  ¥ 75,604      ¥ 616      ¥ —        ¥ —        ¥ 75,604      ¥ 616        13   

Residential mortgage-backed securities

    232,750        2,545        228,547        119        461,297        2,664        184   

Commercial mortgage-backed securities

    26,074        40        177,419        395        203,493        435        31   

Asset-backed securities

    375,612        1,619        367,871        2,251        743,483        3,870        31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 710,040      ¥ 4,820      ¥ 773,837      ¥ 2,765      ¥ 1,483,877      ¥ 7,585        259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Evaluating Investment Securities for Other-than-temporary Impairments

The following describes the nature of the MUFG Group’s investments and the conclusions reached in determining whether the unrealized losses were temporary or other-than-temporary.

Japanese national government and Japanese government agency bonds, and Foreign governments and official institutions bonds

As of September 30, 2015, unrealized losses associated with these securities were deemed to be attributable to changes in market interest rates rather than a deterioration in the creditworthiness of the underlying obligor. Based on a consideration of factors, including cash flow analysis, the MUFG Group expects to recover the entire amortized cost basis of these securities. Accordingly, such changes are considered to be temporary and no impairment loss has been recorded.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Residential and commercial mortgage-backed securities

As of September 30, 2015, unrealized losses associated with these securities were deemed to be attributable to changes in market interest rates rather than a deterioration in the creditworthiness of the underlying obligor. Based on a consideration of factors, including cash flow analysis, the MUFG Group expects to recover the entire amortized cost basis of these securities. Accordingly, such changes are considered to be temporary and no impairment loss has been recorded.

Asset-backed securities

As of September 30, 2015, unrealized losses on these securities were primarily driven by certain collateralized loan obligations (“CLOs”), highly illiquid securities for which fair values are difficult to determine. Unrealized losses arise from widening credit spreads, deterioration of the credit quality of the underlying collateral, uncertainty regarding the valuation of such securities and the market’s view of the performance of the fund managers. When the fair value of a security is lower than its amortized cost or when any security is subject to a deterioration in credit rating, the MUFG Group undertakes a cash flow analysis of the underlying collateral to estimate the other-than-temporary impairment. Based on the analysis performed, no other-than-temporary impairment was identified as of September 30, 2015 and no impairment loss has been recorded.

Corporate bonds

As of September 30, 2015, unrealized losses associated with corporate bonds were primarily related to private placement bonds issued by Japanese non-public companies. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining terms of the bonds as estimated using the MUFG Group’s cash flow projections. The key assumptions include probability of default based on credit ratings of the bond issuers and loss given default.

The following table presents a roll-forward of the credit loss component recognized in earnings. The balance at the beginning of each period for the six months ended September 30 represents the credit loss component for which an other-than-temporary impairment occurred on debt securities in prior periods. The additions represent the first time a debt security was credit impaired or when subsequent credit impairment has occurred. The credit loss component is reduced when the corporate bonds mature or are sold.

 

     Six months ended
September 30,
 
     2014     2015  
     (in millions)  

Balance at beginning of period

   ¥ 12,556      ¥ 8,814   

Additions:

    

Initial credit impairments

     713        1,183   

Subsequent credit impairments

     310        40   

Reductions:

    

Securities sold or matured

     (4,538     (1,894
  

 

 

   

 

 

 

Balance at end of period

   ¥ 9,041      ¥ 8,143   
  

 

 

   

 

 

 

The cumulative declines in fair value of the credit impaired debt securities, which were mainly corporate bonds, held at September 30, 2014 and 2015 were ¥3,156 million and ¥4,788 million, respectively. Of which, the

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

credit loss components recognized in earnings were ¥9,041 million and ¥8,143 million, and the remaining amounts related to all other factors recognized in Accumulated OCI before taxes were ¥5,885 million and ¥3,355 million at September 30, 2014 and 2015, respectively.

Other debt securities

As of September 30, 2015, other debt securities primarily consist of private placement debt conduit bonds, which are not rated by external credit rating agencies. The unrealized losses on these bonds result from a higher return on capital expected by the secondary market compared with the return on capital required at the time of origination when the bonds were purchased. The MUFG Group estimates loss projections for each security by assessing the underlying collateral of each security. The MUFG Group estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as probability of default and loss severity. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed when the fair value of a security is lower than its amortized cost and potential impairment is identified. Based on the analysis, no other-than-temporary impairment losses were recorded in the accompanying condensed consolidated statements of income.

Marketable equity securities

The MUFG Group determines whether unrealized losses on marketable equity securities are temporary based on its ability and positive intent to hold the investments for a period of time sufficient to allow for any anticipated recovery and the results of its review conducted to identify and evaluate investments that have indications of possible impairment. Impairment is evaluated considering various factors, and their relative significance varies from case to case. The MUFG Group’s review includes, but is not limited to, consideration of the following factors:

The length of time that the fair value of the investment has been below cost—The MUFG Group generally deems a continued decline of fair value below cost for six months or more to be other-than-temporary.

The extent to which the fair value of investments has been below cost as of the end of the reporting period—The MUFG Group’s investment portfolio is exposed to volatile equity prices affected by many factors including investors’ perspectives as to future economic prospects and the issuers’ performance. The MUFG Group generally deems the decline in fair value below cost of 20% or more as an indicator of an other-than-temporary decline in fair value.

The financial condition and near-term prospects of the issuer—The MUFG Group considers the financial condition and near-term prospects of the issuer primarily based on the credit standing of the issuers as determined by its credit rating system.

At September 30, 2015, unrealized losses on marketable equity securities which have been in a continuous loss position are considered temporary based on the evaluation as described above.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

4.    LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans at March 31, 2015 and September 30, 2015 by domicile and industry of the borrower are summarized below. Classification of loans by industry is based on the industry segment loan classifications as defined by the Bank of Japan.

 

     March 31,
2015
    September 30,
2015
 
     (in millions)  

Domestic:

    

Manufacturing

   ¥ 11,703,428      ¥ 11,634,237   

Construction

     977,892        872,474   

Real estate

     10,911,240        10,884,058   

Services

     2,684,355        2,459,049   

Wholesale and retail

     8,345,481        8,325,735   

Banks and other financial institutions(1)

     4,329,964        4,607,576   

Communication and information services

     1,527,811        1,476,355   

Other industries

     12,674,004        14,464,213   

Consumer

     16,720,590        16,526,111   
  

 

 

   

 

 

 

Total domestic

     69,874,765        71,249,808   
  

 

 

   

 

 

 

Foreign:

    

Governments and official institutions

     1,052,051        1,025,135   

Banks and other financial institutions(1)

     11,973,021        13,017,787   

Commercial and industrial

     29,593,255        29,516,162   

Other

     6,065,782        6,147,964   
  

 

 

   

 

 

 

Total foreign

     48,684,109        49,707,048   
  

 

 

   

 

 

 

Unearned income, unamortized premiums—net and deferred loan fees—net

     (293,672     (291,419
  

 

 

   

 

 

 

Total(2)

   ¥ 118,265,202      ¥ 120,665,437   
  

 

 

   

 

 

 

 

Notes:    (1)    Loans to so-called non-bank finance companies are generally included in the “Banks and other financial institutions” category. Non-bank finance companies are primarily engaged in consumer lending, factoring and credit card businesses.
   (2)    The above table includes loans held for sale of ¥88,927 million at March 31, 2015 and ¥51,385 million at September 30, 2015, respectively, which are carried at the lower of cost or fair value.

The MUFG Group classifies its loan portfolio into the following portfolio segments—Commercial, Residential, Card, MUAH, and Krungsri based on the grouping used by the MUFG Group to determine the allowance for credit losses. The MUFG Group further classifies the Commercial segment into classes based on initial measurement attributes, risk characteristics, and its method of monitoring and assessing credit risk. See Note 1 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information.

Loans of ¥950,295 million, which were transferred from the former BTMU Bangkok Branch to Krungsri, were included in the Commercial segment as of March 31, 2015, since the methodologies used to estimate the allowance for credit losses related to the former BTMU Bangkok Branch were based on the Commercial segment. An allowance for credit losses relating to these loans was not material as of March 31, 2015. From the fiscal year starting from April 1, 2015, these loans were integrated into the Krungsri segment, since the methodologies used to estimate the allowance for credit losses on these loans were changed to those of the Krungsri segment.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Nonaccrual Loans

Originated loans are generally placed on nonaccrual status when substantial doubt exists as to the full and timely collection of either principal or interest, when principal or interest is contractually past due one month or more with respect to loans within all classes of the Commercial segment, three months or more with respect to loans within the Card, MUAH, and Krungsri segments, and six months or more with respect to loans within the Residential segment. See Note 1 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information.

The nonaccrual status of loans by class at March 31, 2015 and September 30, 2015 is shown below:

 

     March 31,
2015
     September 30,
2015
 
     (in millions)  

Commercial

     

Domestic

   ¥ 514,026       ¥ 466,918   

Manufacturing

     118,956         121,468   

Construction

     20,108         17,439   

Real estate

     76,969         66,777   

Services

     54,189         44,925   

Wholesale and retail

     157,964         142,038   

Banks and other financial institutions

     5,715         4,817   

Communication and information services

     23,204         20,396   

Other industries

     18,562         13,739   

Consumer

     38,359         35,319   

Foreign-excluding MUAH and Krungsri

     96,899         112,840   

Residential

     95,645         85,783   

Card

     66,979         64,603   

MUAH

     45,173         44,369   

Krungsri

     68,103         79,609   
  

 

 

    

 

 

 

Total(1)

   ¥ 886,825       ¥ 854,122   
  

 

 

    

 

 

 

 

Note:

(1)

The above table does not include loans held for sale of ¥624 million and nil at March 31, 2015 and September 30, 2015, respectively, and loans acquired with deteriorated credit quality of ¥26,248 million and ¥20,172 million, at March 31, 2015 and September 30, 2015, respectively.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Impaired Loans

The MUFG Group’s impaired loans primarily include nonaccrual loans and troubled debt restructurings (“TDRs”). The following table shows information about impaired loans by class at March 31, 2015 and September 30, 2015:

 

    Recorded Loan Balance              

At March 31, 2015:

  Requiring
an Allowance for
Credit Losses
    Not Requiring
an Allowance for
Credit Losses(1)
    Total(2)     Unpaid
Principal
Balance
    Related
Allowance for
Credit Losses
 
    (in millions)  

Commercial

         

Domestic

  ¥ 890,900      ¥ 234,171      ¥ 1,125,071      ¥ 1,174,925      ¥ 424,537   

Manufacturing

    420,860        46,876        467,736        478,453        178,867   

Construction

    20,997        12,018        33,015        33,900        11,515   

Real estate

    90,735        49,697        140,432        150,029        32,314   

Services

    74,459        24,766        99,225        105,429        38,107   

Wholesale and retail

    205,414        61,048        266,462        277,119        120,945   

Banks and other financial institutions

    5,935        472        6,407        6,773        5,052   

Communication and information services

    21,374        11,406        32,780        34,094        13,886   

Other industries

    20,482        7,621        28,103        29,962        12,626   

Consumer

    30,644        20,267        50,911        59,166        11,225   

Foreign-excluding MUAH and Krungsri

    192,263        173        192,436        192,436        91,579   

Loans acquired with deteriorated credit quality

    12,057        —         12,057        23,798        3,302   

Residential

    160,382        9,429        169,811        208,969        49,985   

Card

    90,101        604        90,705        102,142        25,726   

MUAH

    39,510        21,216        60,726        70,457        4,146   

Krungsri

    24,122        11,878        36,000        43,185        8,012   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(3)

  ¥ 1,409,335      ¥ 277,471      ¥ 1,686,806      ¥ 1,815,912      ¥ 607,287   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-26


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

    Recorded Loan Balance              

At September 30, 2015:

  Requiring
an Allowance for
Credit Losses
    Not Requiring
an Allowance for
Credit Losses(1)
    Total(2)     Unpaid
Principal
Balance
    Related
Allowance for
Credit Losses
 
    (in millions)  

Commercial

         

Domestic

  ¥ 790,856      ¥ 216,233      ¥ 1,007,089      ¥ 1,052,019      ¥ 372,657   

Manufacturing

    373,474        44,782        418,256        427,699        157,683   

Construction

    19,978        10,123        30,101        31,061        10,389   

Real estate

    76,924        45,569        122,493        130,978        29,078   

Services

    65,167        24,159        89,326        95,388        31,575   

Wholesale and retail

    188,862        56,273        245,135        254,032        108,921   

Banks and other financial institutions

    4,727        115        4,842        4,843        4,659   

Communication and information services

    18,852        9,874        28,726        29,843        12,099   

Other industries

    15,034        7,017        22,051        23,944        8,339   

Consumer

    27,838        18,321        46,159        54,231        9,914   

Foreign-excluding MUAH and Krungsri

    190,482        9,762        200,244        212,179        90,386   

Loans acquired with deteriorated credit quality

    11,629        —          11,629        22,104        3,569   

Residential

    142,664        9,852        152,516        188,952        43,482   

Card

    84,086        634        84,720        95,189        23,728   

MUAH

    40,175        26,497        66,672        75,316        3,965   

Krungsri

    26,493        12,757        39,250        46,552        12,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(3)

  ¥ 1,286,385      ¥ 275,735      ¥ 1,562,120      ¥ 1,692,311      ¥ 550,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

These loans do not require an allowance for credit losses because the fair values of the impaired loans equal or exceed the recorded investments in the loans.

  (2) Included in impaired loans at March 31, 2015 and September 30, 2015 are accrual TDRs as follows: ¥708,414 million and ¥630,146 million—Commercial; ¥71,454 million and ¥64,810 million—Residential; ¥44,661 million and ¥41,202 million—Card; ¥34,106 million and ¥40,150 million—MUAH; and ¥8,455 million and ¥8,540 million—Krungsri, respectively.
  (3) In addition to impaired loans presented in the above table, there were loans held for sale that were impaired of ¥624 million and nil at March 31, 2015 and September 30, 2015, respectively.

 

F-27


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table shows information regarding the average recorded loan balance and recognized interest income on impaired loans for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014      2015  
     Average
Recorded Loan
Balance
     Recognized
Interest
Income
     Average
Recorded Loan
Balance
     Recognized
Interest
Income
 
     (in millions)  

Commercial

           

Domestic

   ¥ 1,210,343       ¥ 10,951       ¥ 1,066,068       ¥ 10,409   

Manufacturing

     426,503         3,690         442,996         4,199   

Construction

     41,843         416         31,543         353   

Real estate

     185,578         1,624         131,463         1,236   

Services

     123,464         1,291         94,276         1,116   

Wholesale and retail

     291,589         2,559         255,798         2,402   

Banks and other financial institutions

     7,643         63         5,625         48   

Communication and information services

     36,483         374         30,753         366   

Other industries

     38,759         373         25,077         271   

Consumer

     58,481         561         48,537         418   

Foreign-excluding MUAH and Krungsri

     181,178         1,458         196,259         1,302   

Loans acquired with deteriorated credit quality

     16,214         737         11,795         505   

Residential

     196,557         2,308         161,162         1,572   

Card

     99,853         2,236         87,712         1,738   

MUAH

     60,989         1,361         63,602         1,105   

Krungsri

     11,746         266         37,689         1,412   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,776,880       ¥ 19,317       ¥ 1,624,287       ¥ 18,043   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income on nonaccrual loans for all classes was recognized on a cash basis when ultimate collectibility of principal was certain. Otherwise, cash receipts were applied as principal reductions. Interest income on accruing impaired loans, including TDRs, was recognized on an accrual basis to the extent that the collectibility of interest income was reasonably certain based on management’s assessment.

 

F-28


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table shows a roll-forward of accrual TDRs and other impaired loans (including nonaccrual TDRs) for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     2014     2015  
     (in millions)  

Accrual TDRs:

    

Balance at beginning of period

   ¥ 832,267      ¥ 867,090   

Additions (new accrual TDR status)(1)

     144,810        73,866   

Transfers to other impaired loans (including nonaccrual TDRs)

     (16,726     (16,958

Loans sold

     (11     (9

Principal payments and other

     (122,216     (139,141
  

 

 

   

 

 

 

Balance at end of period(1)

   ¥ 838,124      ¥ 784,848   
  

 

 

   

 

 

 

Other impaired loans (including nonaccrual TDRs):

    

Balance at beginning of period

   ¥ 1,028,760      ¥ 819,716   

Additions (new other impaired loans (including nonaccrual TDRs) status)(1)(2)

     121,851        132,119   

Charge-off

     (37,577     (31,157

Transfers to accrual TDRs

     (27,845     (16,608

Loans sold

     (8,416     (6,171

Principal payments and other

     (217,977     (120,627
  

 

 

   

 

 

 

Balance at end of period(1)

   ¥ 858,796      ¥ 777,272   
  

 

 

   

 

 

 

 

Notes:    (1)    For the six months ended September 30, 2014, lease receivables of ¥1,627 million and ¥7 million in the Krungsri segment, which were accrual TDRs and nonaccrual TDRs, respectively, are excluded from the additions of TDRs and other impaired loans, respectively, and the related ending balances of such TDRs amounting to ¥1,612 million and ¥7 million, are also excluded from the balance of accrual TDRs and other Impaired loans, respectively, as of September 30, 2014. For the six months ended September 30, 2015, lease receivables of ¥2,543 million and ¥248 million in the Krungsri segment, which were accrual TDRs and nonaccrual TDRs, respectively, are excluded from the additions of TDRs and other impaired loans, respectively, and the related ending balances of such TDRs amounting to ¥6,352 million and ¥1,755 million, are also excluded from the balance of accrual TDRs and other Impaired loans, respectively, as of September 30, 2015.
   (2)    Included in additions of other impaired loans for the six months ended September 30, 2014 and 2015 are nonaccrual TDRs as follows: ¥6,453 million and ¥5,760 million—Card; ¥9,545 million and ¥3,291 million—MUAH; and ¥1,466 million and ¥3,045 million—Krungsri, respectively.

 

F-29


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Troubled Debt Restructurings

The following tables summarize the MUFG Group’s TDRs by class during the six months ended September 30, 2014 and 2015:

 

    Six months ended September 30,  
    2014     2015  
    Troubled Debt
Restructurings
    Troubled Debt
Restructurings
That
Subsequently
Defaulted
    Troubled Debt
Restructurings
    Troubled Debt
Restructurings
That
Subsequently
Defaulted
 
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded
Investment
    Recorded
Investment
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded
Investment
    Recorded
Investment
 
    (in millions)  

Commercial(1)(3)

           

Domestic

  ¥ 126,396      ¥ 114,557      ¥ 2,780      ¥ 80,840      ¥ 41,062      ¥ 2,862   

Manufacturing

    77,675        65,836        1,271        51,128        11,350        1,235   

Construction

    3,824        3,824        14        1,700        1,700        6   

Real estate

    6,714        6,714        119        5,975        5,975        745   

Services

    9,881        9,881        263        6,175        6,175        486   

Wholesale and retail

    24,060        24,060        884        14,148        14,148        336   

Banks and other financial institutions

    —          —          —          —          —          —     

Communication and information services

    1,763        1,763        115        232        232        —     

Other industries

    1,277        1,277        —          666        666        40   

Consumer

    1,202        1,202        114        816        816        14   

Foreign-excluding MUAH and Krungsri

    1,664        1,664        —          4,272        4,272        —     

Loans acquired with deteriorated credit quality

    1,607        1,607        —          —          —          —     

Residential(1)(3)

    15,831        15,831        90        10,865        10,865        151   

Card(2)(3)

    9,689        9,559        1,848        8,715        8,541        2,385   

MUAH(2)(3)

    11,507        11,476        1,458        15,100        15,100        3,491   

Krungsri(2)(3)

    9,241        9,214        —          9,004        8,913        3,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 175,935      ¥ 163,908      ¥ 6,176      ¥ 128,796      ¥ 88,753      ¥ 12,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:    (1)    TDRs for the Commercial and Residential segments include accruing loans with concessions granted, and do not include nonaccrual loans with concessions granted.
   (2)    TDRs for the Card, MUAH and Krungsri segments include accrual and nonaccrual loans.
   (3)    For the six months ended September 30, 2014, extension of the stated maturity date of loans was the primary concession type in the Commercial and Residential segments, reduction in the stated rate was the primary concession type in the Card and Krungsri segments and payment deferrals was the primary concession type in the MUAH segment. For the six months ended September 30, 2015, extension of the stated maturity date of loans was the primary concession type in the Commercial, Residential and Krungsri segments, reduction in the stated rate was the primary concession type in the Card segment and payment deferrals was the primary concession type in the MUAH segment.

 

F-30


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table summarizes outstanding recorded investment balances of TDRs by class at March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in millions)  

Commercial(1)

     

Domestic

   ¥ 611,382       ¥ 540,396   

Manufacturing

     348,981         296,905   

Construction

     12,915         12,662   

Real estate

     63,462         55,716   

Services

     45,158         44,496   

Wholesale and retail

     108,504         103,105   

Banks and other financial institutions

     691         25   

Communication and information services

     9,576         8,330   

Other industries

     9,545         8,316   

Consumer

     12,550         10,841   

Foreign-excluding MUAH and Krungsri

     97,032         89,750   

Residential(1)

     71,454         64,810   

Card(2)

     90,705         84,720   

MUAH(2)

     56,299         63,519   

Krungsri(2)

     19,924         26,760   
  

 

 

    

 

 

 

Total

   ¥ 946,796       ¥ 869,955   
  

 

 

    

 

 

 

 

Notes:    (1)    TDRs for the Commercial and Residential segments include accruing loans with concessions granted, and do not include nonaccrual loans with concessions granted.
   (2)    TDRs for the Card, MUAH and Krungsri segments include accrual and nonaccrual loans. Included in the outstanding recorded investment balances as of March 31, 2015 and September 30, 2015 are nonaccrual TDRs as follows: ¥46,044 million and ¥43,518 million—Card; ¥22,193 million and ¥23,369 million—MUAH; and ¥7,136 million and ¥11,868 million—Krungsri, respectively.

A modification of terms of a loan under a TDR mainly involves: (i) a reduction in the stated interest rate applicable to the loan, (ii) an extension of the stated maturity date of the loan, (iii) a partial forgiveness of the principal of the loan, or (iv) a combination of all of these. Those loans are also considered impaired loans, and hence the allowance for credit losses is separately established for each loan. As a result, the amount of allowance for credit losses increases in many cases upon classification as a TDR loan. The amount of pre-modification outstanding recorded investment and post-modification outstanding recorded investment may differ due to write-offs made as part of the concession. The impact of write-offs associated with TDRs on the MUFG Group’s results of operations for the six months ended September 30, 2014 and 2015 was not material.

TDRs for the Commercial and Residential segments in the above tables include accruing loans with concessions granted, and do not include nonaccrual loans with concessions granted. Once a loan is classified as a nonaccrual loan, a modification would have little likelihood of resulting in the recovery of the loan in view of the severity of the financial difficulty of the borrower. Therefore even if a nonaccrual loan is modified, the loan continues to be classified as a nonaccrual loan. The vast majority of modifications to nonaccrual loans are temporary extensions of the maturity dates, typically for periods up to 90 days, and continually made as the borrower is unable to repay or refinance the loan at the extended maturity. Accordingly, the impact of such TDRs on the outstanding recorded investment is immaterial, and the vast majority of nonaccrual TDRs have subsequently defaulted.

 

F-31


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

TDRs that subsequently defaulted in the Commercial and Residential segments of the above tables includes those accruing loans that became past due one month or more within the Commercial segment and six months or more within the Residential segment, and those accruing loans reclassified to nonaccrual loans due to financial difficulties even without delinquencies. This is because classification as a nonaccrual loan is regarded as default under the MUFG Group’s credit policy. Also, the MUFG Group defines default as payment default for the purpose of the disclosure.

Regarding the Card, MUAH and Krungsri segments, the TDRs in the above tables represent modified nonaccrual and accruing loans, and the defaulted loans in the above table represent nonaccruing and accruing loans that became past due one month or more within the Card segment, 60 days or more within the MUAH segment, and six months or more within the Krungsri segment.

Historical payment defaults are one of the factors considered when projecting future cash flows in determining the allowance for credit losses for each segment.

Credit Quality Indicator

Credit quality indicators of loans by class at March 31, 2015 and September 30, 2015 are shown below:

 

At March 31, 2015:

  Normal      Close
Watch
    Likely to become
Bankrupt or
Legally/Virtually
Bankrupt
    Total(1)  
    (in millions)  

Commercial

        

Domestic

  ¥ 51,408,556       ¥ 2,782,394      ¥ 514,023      ¥ 54,704,973   

Manufacturing

    10,522,968         1,049,399        118,956        11,691,323   

Construction

    887,030         69,953        20,108        977,091   

Real estate

    10,101,657         559,144        76,852        10,737,653   

Services

    2,383,133         235,506        54,189        2,672,828   

Wholesale and retail

    7,582,985         582,992        157,964        8,323,941   

Banks and other financial institutions

    4,313,416         10,539        5,715        4,329,670   

Communication and information services

    1,449,687         54,515        23,204        1,527,406   

Other industries

    12,504,635         147,477        18,668        12,670,780   

Consumer

    1,663,045         72,869        38,367        1,774,281   

Foreign-excluding MUAH and Krungsri

    34,355,619         990,519        99,546        35,445,684   

Loans acquired with deteriorated credit quality

    20,939         28,398        6,694        56,031   
 

 

 

    

 

 

   

 

 

   

 

 

 

Total

  ¥ 85,785,114       ¥ 3,801,311      ¥ 620,263      ¥ 90,206,688   
 

 

 

    

 

 

   

 

 

   

 

 

 

 

     Accrual      Nonaccrual      Total(1)  
     (in millions)  

Residential

   ¥ 14,449,091       ¥ 97,471       ¥ 14,546,562   

Card

   ¥ 497,017       ¥ 67,589       ¥ 564,606   

 

     Credit Quality Based on
the Number of Delinquencies
     Credit Quality Based on
Internal Credit Ratings
        
     Accrual      Nonaccrual      Pass      Special
Mention
     Classified      Total(1)(2)  
     (in millions)  

MUAH

   ¥ 3,820,953       ¥ 32,669       ¥ 5,229,700       ¥ 76,670       ¥ 80,889       ¥ 9,240,881   

 

F-32


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

     Normal      Special
Mention
     Substandard or
Doubtful or
Doubtful
of Loss
     Total(1)  
     (in millions)  

Krungsri

   ¥ 3,653,931       ¥ 118,164       ¥ 85,231       ¥ 3,857,326   

 

At September 30, 2015:

  Normal     Close Watch     Likely to become
Bankrupt or
Legally/Virtually
Bankrupt
    Total(1)  
    (in millions)  

Commercial

       

Domestic

  ¥ 53,433,754      ¥ 2,437,703      ¥ 467,031      ¥ 56,338,488   

Manufacturing

    10,620,574        884,702        121,589        11,626,865   

Construction

    794,332        59,925        17,439        871,696   

Real estate

    10,180,319        508,425        66,664        10,755,408   

Services

    2,194,910        208,519        44,925        2,448,354   

Wholesale and retail

    7,637,291        535,936        142,038        8,315,265   

Banks and other financial institutions

    4,590,580        9,934        4,817        4,605,331   

Communication and information services

    1,405,826        49,746        20,396        1,475,968   

Other industries

    14,329,670        117,672        13,836        14,461,178   

Consumer

    1,680,252        62,844        35,327        1,778,423   

Foreign-excluding MUAH and Krungsri

    34,325,709        935,324        114,851        35,375,884   

Loans acquired with deteriorated credit quality

    20,826        17,657        6,026        44,509   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 87,780,289      ¥ 3,390,684      ¥ 587,908      ¥ 91,758,881   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

     Accrual      Nonaccrual      Total(1)  
     (in millions)  

Residential

   ¥ 14,262,039       ¥ 86,954       ¥ 14,348,993   

Card

   ¥ 483,201       ¥ 65,264       ¥ 548,465   

 

     Credit Quality Based on
the Number of Delinquencies
     Credit Quality Based on
Internal Credit Ratings
        
     Accrual      Nonaccrual      Pass      Special
Mention
     Classified      Total(1)(2)  
     (in millions)  

MUAH

   ¥ 3,806,113       ¥ 30,000       ¥ 5,316,788       ¥ 99,429       ¥ 87,797       ¥ 9,340,127   

 

     Normal      Special
Mention
     Substandard or
Doubtful or
Doubtful
of Loss
     Total(1)  
     (in millions)  

Krungsri

   ¥ 4,597,226       ¥ 168,907       ¥ 91,938       ¥ 4,858,071   

 

Notes:

     (1   Total loans in the above table do not include loans held for sale, and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.
     (2   Total loans of MUAH do not include Federal Deposit Insurance Corporation (“FDIC”) covered loans and small business loans which are not individually rated totaling ¥53,884 million and ¥50,934 million at March 31, 2015 and September 30, 2015, respectively. The MUFG Group will be reimbursed for a substantial portion of any future losses on FDIC covered loans under the terms of the FDIC loss share agreements.

 

F-33


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The MUFG Group classifies loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, historical and current financial information, historical and current payment experience, credit documentation, public and non-public information about borrowers and current economic trends as deemed appropriate to each segment.

The primary credit quality indicator for loans within all classes of the Commercial segment is the internal credit rating assigned to each borrower based on the MUFG Group’s internal borrower ratings of 1 through 15, with the rating of 1 assigned to a borrower with the highest quality of credit. When assigning a credit rating to a borrower, the MUFG Group evaluates the borrower’s expected debt-service capability based on various information, including financial and operating information of the borrower as well as information on the industry in which the borrower operates, and the borrower’s business profile, management and compliance system. In evaluating a borrower’s debt-service capability, the MUFG Group also conducts an assessment of the level of earnings and an analysis of the borrower’s net worth. Based on the internal borrower rating, loans within the Commercial segment are categorized as Normal (internal borrower ratings of 1 through 9), Close Watch (internal borrower ratings of 10 through 12), and Likely to become Bankrupt or Legally/Virtually Bankrupt (internal borrower ratings of 13 through 15).

Loans to borrowers categorized as Normal represent those that are not deemed to have collectibility issues.

Loans to borrowers categorized as Close Watch represent those that require close monitoring as the borrower has begun to exhibit elements of potential concern with respect to its business performance and financial condition, the borrower has begun to exhibit elements of serious concern with respect to its business performance and financial condition, including business problems requiring long-term solutions, or the borrower’s loans are TDRs or loans contractually past due 90 days or more for special reasons.

Loans to borrowers categorized as Likely to become Bankrupt or Legally/Virtually Bankrupt represent those that have a higher probability of default than those categorized as Close Watch due to serious debt repayment problems with poor progress in achieving restructuring plans, the borrower being considered virtually bankrupt with no prospects for an improvement in business operations, or the borrower being legally bankrupt with no prospects for continued business operations because of non-payment, suspension of business, voluntary liquidation or filing for legal liquidation.

The accrual status is a primary credit quality indicator for loans within the Residential segment, the Card segment and consumer loans within the MUAH segment. The accrual status of these loans is determined based on the number of delinquent payments.

Commercial loans within the MUAH segment are categorized as either pass or criticized based on the internal credit rating assigned to each borrower. Criticized credits are those that are internally risk graded as Special Mention, Substandard or Doubtful. Special Mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, may jeopardize repayment of the loan and result in further downgrade. Classified credits are those that are internally risk graded as Substandard or Doubtful. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as Doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.

Loans within the Krungsri segment are categorized as Normal, Special Mention, Substandard, Doubtful, and Doubtful of Loss primarily based on their delinquency status. Loans categorized as Special Mention generally represent those that have the overdue principal or interest payments for a cumulative period exceeding one month

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

commencing from the contractual due date. Loans categorized as Substandard, Doubtful or Doubtful of Loss generally represent those that have the overdue principal or interest payments for a cumulative period exceeding three months commencing from the contractual due date.

For the Commercial, Residential and Card segments, credit quality indicators at March 31, 2015 and September 30, 2015 are based on information as of March 31, 2015 and September 30, 2015, respectively. For the MUAH and Krungsri segments, credit quality indicators at March 31, 2015 and September 30, 2015 are generally based on December 31, 2014 and June 30, 2015 information, respectively.

Past Due Analysis

Ages of past due loans by class at March 31, 2015 and September 30, 2015 are shown below:

 

At March 31, 2015:

  1-3 months
Past Due
    Greater
Than
3 months
    Total
Past Due
    Current     Total
Loans(1)(2)
    Recorded
Investment >
90 Days and
Accruing
 
    (in millions)  

Commercial

           

Domestic

  ¥ 14,136      ¥ 22,786      ¥ 36,922      ¥ 54,668,051      ¥ 54,704,973      ¥ 5,574   

Manufacturing

    1,561        2,545        4,106        11,687,217        11,691,323        222   

Construction

    192        446        638        976,453        977,091        —    

Real estate

    3,142        5,707        8,849        10,728,804        10,737,653        922   

Services

    1,046        1,336        2,382        2,670,446        2,672,828        57   

Wholesale and retail

    2,741        4,237        6,978        8,316,963        8,323,941        47   

Banks and other financial institutions

    7        506        513        4,329,157        4,329,670        —    

Communication and information services

    520        414        934        1,526,472        1,527,406        —    

Other industries

    303        277        580        12,670,200        12,670,780        29   

Consumer

    4,624        7,318        11,942        1,762,339        1,774,281        4,297   

Foreign-excluding MUAH and Krungsri

    9,390        2,126        11,516        35,434,168        35,445,684        —    

Residential

    82,871        53,680        136,551        14,396,635        14,533,186        41,801   

Card

    18,694        32,097        50,791        501,758        552,549        —    

MUAH

    20,976        11,091        32,067        9,199,435        9,231,502        362   

Krungsri

    88,144        57,894        146,038        3,674,796        3,820,834        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 234,211      ¥ 179,674      ¥ 413,885      ¥ 117,874,843      ¥ 118,288,728      ¥ 47,737   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

At September 30, 2015:

  1-3 months
Past Due
    Greater
Than
3 months
    Total
Past Due
    Current     Total
Loans(1)(2)
    Recorded
Investment >
90 Days and
Accruing
 
    (in millions)  

Commercial

           

Domestic

  ¥ 17,797      ¥ 26,694      ¥ 44,491      ¥ 56,293,997      ¥ 56,338,488      ¥ 6,625   

Manufacturing

    997        4,948        5,945        11,620,920        11,626,865        —     

Construction

    983        576        1,559        870,137        871,696        5   

Real estate

    2,699        6,279        8,978        10,746,430        10,755,408        2,215   

Services

    2,118        1,635        3,753        2,444,601        2,448,354        14   

Wholesale and retail

    5,019        5,233        10,252        8,305,013        8,315,265        50   

Banks and other financial institutions

    —          40        40        4,605,291        4,605,331        —     

Communication and information services

    828        305        1,133        1,474,835        1,475,968        —     

Other industries

    248        284        532        14,460,646        14,461,178        29   

Consumer

    4,905        7,394        12,299        1,766,124        1,778,423        4,312   

Foreign-excluding MUAH and Krungsri

    3,608        6,856        10,464        35,365,420        35,375,884        —     

Residential

    82,726        54,608        137,334        14,199,142        14,336,476        43,413   

Card

    18,190        32,209        50,399        486,249        536,648        —     

MUAH

    16,163        12,367        28,530        9,308,256        9,336,786        245   

Krungsri

    92,052        67,278        159,330        4,670,309        4,829,639        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 230,536      ¥ 200,012      ¥ 430,548      ¥ 120,323,373      ¥ 120,753,921      ¥ 50,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:      (1   Total loans in the above table do not include loans held for sale, and loans acquired with deteriorated credit quality and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.
     (2   Total loans of MUAH do not include ¥1,116 million and ¥397 million of FDIC covered loans at March 31, 2015 and September 30, 2015, respectively, which are not subject to the guidance on loans and debt securities acquired with deteriorated credit quality.

Allowance for Credit Losses

Changes in the allowance for credit losses by portfolio segment for the six months ended September 30, 2014 and 2015 are shown below:

 

Six months ended September 30, 2014:

   Commercial     Residential     Card      MUAH     Krungsri(2)     Total  
     (in millions)  

Allowance for credit losses:

             

Balance at beginning of period

   ¥ 876,857      ¥ 116,913      ¥ 40,626       ¥ 60,024      ¥ —       ¥ 1,094,420   

Provision (credit) for credit losses

     (102,294     (15,481     1,621         (916     48,932        (68,138

Charge-offs

     67,799        10,806        6,177         2,140        9,908        96,830   

Recoveries

     6,646        109        1,641         2,027        —         10,423   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     61,153        10,697        4,536         113        9,908        86,407   

Others(1)

     3,689        —         —          (2,305     (371     1,013   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   ¥ 717,099      ¥ 90,735      ¥ 37,711       ¥ 56,690      ¥ 38,653      ¥ 940,888   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Six months ended September 30, 2015:

   Commercial     Residential     Card      MUAH      Krungsri      Total  
     (in millions)  

Allowance for credit losses:

               

Balance at beginning of period

   ¥ 807,716      ¥ 72,366      ¥ 35,670       ¥ 64,769       ¥ 74,958       ¥ 1,055,479   

Provision (credit) for credit losses

     (41,242     (4,464     689         6,090         31,723         (7,204

Charge-offs

     75,871        4,236        4,434         3,729         28,250         116,520   

Recoveries

     7,665        1,219        1,568         1,008         6,358         17,818   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     68,206        3,017        2,866         2,721         21,892         98,702   

Others(1)

     (4,404     —         —           948         1,229         (2,227
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   ¥ 693,864      ¥ 64,885      ¥ 33,493       ¥ 69,086       ¥ 86,018       ¥ 947,346   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

Notes:      (1   Others are principally comprised of gains or losses from foreign exchange translation.
     (2   For the Krungsri segment, the acquired loans were recorded at their fair values as of the acquisition date, and there were no indications that an allowance for credit losses was necessary for these loans for the fiscal year ended March 31, 2014. Therefore, no allowance for credit losses was stated at the beginning of the six-month period ended September 30, 2014 in the above table.

Allowance for credit losses and recorded investment in loans by portfolio segment at March 31, 2015 and September 30, 2015 are shown below:

 

At March 31, 2015:

  Commercial     Residential     Card     MUAH     Krungsri     Total  
    (in millions)  

Allowance for credit losses:

           

Individually evaluated for impairment

  ¥ 516,116      ¥ 49,317      ¥ 25,726      ¥ 4,146      ¥ 7,537      ¥ 602,842   

Collectively evaluated for impairment

    269,289        21,255        9,921        60,214        66,913        427,592   

Loans acquired with deteriorated credit quality

    22,311        1,794        23        409        508        25,045   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 807,716      ¥ 72,366      ¥ 35,670      ¥ 64,769      ¥ 74,958      ¥ 1,055,479   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Individually evaluated for impairment

  ¥ 1,317,507      ¥ 167,099      ¥ 90,069      ¥ 60,726      ¥ 31,936      ¥ 1,667,337   

Collectively evaluated for impairment

    88,833,150        14,366,087        462,480        9,171,892        3,788,898        116,622,507   

Loans acquired with deteriorated credit quality

    56,031        13,376        12,057        62,147        36,492        180,103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(1)

  ¥ 90,206,688      ¥ 14,546,562      ¥ 564,606      ¥ 9,294,765      ¥ 3,857,326      ¥ 118,469,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

At September 30, 2015:

  Commercial     Residential     Card     MUAH     Krungsri     Total  
    (in millions)  

Allowance for credit losses:

           

Individually evaluated for impairment

  ¥ 463,043      ¥ 42,909      ¥ 23,728      ¥ 3,965      ¥ 12,426      ¥ 546,071   

Collectively evaluated for impairment

    215,349        19,908        9,738        64,631        73,286        382,912   

Loans acquired with deteriorated credit quality

    15,472        2,068        27        490        306        18,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 693,864      ¥ 64,885      ¥ 33,493      ¥ 69,086      ¥ 86,018      ¥ 947,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Individually evaluated for impairment

  ¥ 1,207,333      ¥ 150,592      ¥ 84,123      ¥ 66,672      ¥ 37,258      ¥ 1,545,978   

Collectively evaluated for impairment

    90,507,039        14,185,884        452,525        9,270,511        4,792,381        119,208,340   

Loans acquired with deteriorated credit quality

    44,509        12,517        11,817        53,878        28,432        151,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(1)

  ¥ 91,758,881      ¥ 14,348,993      ¥ 548,465      ¥ 9,391,061      ¥ 4,858,071      ¥ 120,905,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

   (1)    Total loans in the above table do not include loans held for sale, and represent balances without adjustments in relation to unearned income, unamortized premiums and deferred loan fees.

5.    GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The table below presents the movement in the carrying amount of goodwill during the six months ended September 30, 2014 and 2015:

 

     Six months ended
September 30,
 
     2014     2015  
     (in millions)  

Balance at beginning of period

    

Goodwill

   ¥ 2,476,863      ¥ 2,559,390   

Accumulated impairment losses

     (1,748,348     (1,751,780
  

 

 

   

 

 

 
     728,515        807,610   

Foreign currency translation adjustments and other

     (19,255     2,955   
  

 

 

   

 

 

 

Balance at end of period

    

Goodwill

     2,457,608        2,562,345   

Accumulated impairment losses

     (1,748,348     (1,751,780
  

 

 

   

 

 

 
   ¥ 709,260      ¥ 810,565   
  

 

 

   

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Other Intangible Assets

The table below presents the net carrying amount by major class of intangible assets at March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in millions)  

Intangible assets subject to amortization:

     

Software

   ¥ 660,379       ¥ 680,768   

Core deposit intangibles

     193,291         178,582   

Customer relationships

     231,732         218,675   

Trade names

     56,482         57,621   

Other

     7,187         7,472   
  

 

 

    

 

 

 

Total

     1,149,071         1,143,118   

Intangible assets not subject to amortization:

     

Indefinite-lived trade names

     3,037         —     

Other

     8,056         7,882   
  

 

 

    

 

 

 

Total

     11,093         7,882   
  

 

 

    

 

 

 

Total

   ¥ 1,160,164       ¥ 1,151,000   
  

 

 

    

 

 

 

The impairment losses on other intangible assets for the six months ended September 30, 2014 and 2015 were ¥108 million and ¥213 million, respectively, which are included in Impairment of intangible assets in the accompanying condensed consolidated statements of income. The intangible assets were valued based on discounted expected future cash flows.

6.    PLEDGED ASSETS AND COLLATERAL

At September 30, 2015, assets mortgaged, pledged, or otherwise subject to lien were as follows:

 

     September 30,
2015
 
     (in millions)  

Trading account securities

   ¥ 12,488,503   

Investment securities

     11,412,411   

Loans

     10,775,877   

Other

     56,409   
  

 

 

 

Total

   ¥ 34,733,200   
  

 

 

 

The above pledged assets were classified by type of liabilities to which they related as follows:

 

     September 30,
2015
 
     (in millions)  

Deposits

   ¥ 258,846   

Call money and funds purchased

     730,990   

Payables under repurchase agreements and securities lending transactions

     18,995,223   

Other short-term borrowings and long-term debt

     14,419,600   

Other

     328,541   
  

 

 

 

Total

   ¥ 34,733,200   
  

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

In addition, at September 30, 2015, certain investment securities, principally Japanese national government and Japanese government agency bonds, loans and other assets aggregating to ¥19,094,374 million were pledged as collateral for acting as a collection agent of public funds, for settlement of exchange at the Bank of Japan and the Tokyo Bankers Association, for derivative transactions and for certain other purposes.

The MUFG Group engages in on-balance sheet securitizations. These securitizations of mortgage and apartment loans, which do not qualify for sales treatment, are accounted for as secured borrowings. The amount of loans in the table above represents the carrying amount of these transactions with the carrying amount of the associated liabilities included in Other short-term borrowings and Long-term debt.

At March 31, 2015 and September 30, 2015, the cash collateral pledged for derivative transactions, which is included in Other assets, was ¥1,716,302 million and ¥1,334,141 million, respectively, and the cash collateral received for derivative transactions, which is included in Other liabilities, was ¥906,456 million and ¥1,039,434 million, respectively.

7.    SEVERANCE INDEMNITIES AND PENSION PLANS

The following table summarizes the components of net periodic benefit costs of pension benefits, severance indemnities plans (“SIPs”) and other benefits for the six months ended September 30, 2014 and 2015:

 

     Six months ended September 30,  
     Domestic subsidiaries     Foreign offices and subsidiaries  
     2014     2015     2014     2015  
     Pension
benefits
and SIPs
    Pension
benefits
and SIPs
    Pension
benefits
    Other
benefits
    Pension
benefits
    Other
benefits
 
     (in millions)  

Service cost—benefits earned during the period

   ¥ 16,960      ¥ 23,245      ¥ 6,409      ¥ 603      ¥ 7,538      ¥ 590   

Interest cost on projected benefit obligation

     10,088        8,380        7,858        748        9,011        841   

Expected return on plan assets

     (27,514     (29,892     (11,854     (929     (15,145     (1,163

Amortization of net actuarial loss

     7,027        3,263        4,223        84        6,358        503   

Amortization of prior service cost

     (4,729     (3,822     (237     (142     (1,144     (459

Loss (gain) on settlements and curtailment

     (810     (644     23        —         —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   ¥ 1,022      ¥ 530      ¥ 6,422      ¥ 364      ¥ 6,618      ¥ 312   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The MUFG Group has contributed to the plan assets for the six months ended September 30, 2015 and expects to contribute for the remainder of the fiscal year ending March 31, 2016 as follows, based upon its current funded status and expected asset return assumptions:

 

     Domestic
subsidiaries
     Foreign offices
and subsidiaries
 
     Pension
benefits
and SIPs
     Pension
benefits
     Other
benefits
 
     (in billions)  

For the six months ended September 30, 2015

   ¥ 26.1       ¥ 23.4       ¥ 0.7   

For the remainder of the fiscal year ending March 31, 2016

   ¥ 26.2       ¥ 1.9       ¥ 0.7   

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

8.    OFFSETTING OF DERIVATIVES, REPURCHASE AGREEMENTS, AND SECURITIES LENDING TRANSACTIONS

The following tables present, as of March 31, 2015 and September 30, 2015, the gross and net of the derivatives, resale and repurchase agreements, and securities borrowing and lending transactions, including the related gross amount subject to an enforceable master netting arrangement or similar agreement not offset in the condensed consolidated balance sheets. The MUFG Group primarily enters into International Swaps and Derivatives Association master netting agreements, master repurchase agreements and master securities lending agreements or similar agreements for derivative contracts, resale and repurchase agreements, and securities borrowing and lending transactions. In the event of default on or termination of any one contract, these agreements provide the contracting parties with the right to net a counterparty’s rights and obligations and to liquidate and setoff collateral against any net amount owed by the counterparty. Generally, as the MUFG Group has elected to present such amounts on a gross basis, the amounts subject to these agreements are included in “Gross amounts not offset in the condensed consolidated balance sheet” column in the tabular disclosure below. For certain transactions where a legal opinion with respect to the enforceability of netting has not been sought or obtained, the related amounts are not subject to enforceable master netting agreements and not included in “Gross amounts not offset in the condensed consolidated balance sheet” column in the tabular disclosure below.

 

At March 31, 2015

  Gross amounts of
recognized
assets/liabilities
    Gross amounts
offset in the
condensed
consolidated
balance sheet
    Net amounts
presented in the
condensed
consolidated
balance sheet
    Gross amounts not offset
in the condensed
consolidated balance sheet
    Net amounts  
        Financial
instruments
    Cash collateral
received/pledged
   
    (in billions)  

Financial assets:

           

Derivative assets

  ¥ 16,723      ¥ —       ¥ 16,723      ¥ (13,145   ¥ (732   ¥ 2,846   

Receivables under resale agreements

    10,184        (2,911     7,273        (6,137     —         1,136   

Receivables under securities borrowing transactions

    4,660        —         4,660        (4,227     —         433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 31,567      ¥ (2,911   ¥ 28,656      ¥ (23,509   ¥ (732   ¥ 4,415   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

           

Derivative liabilities

  ¥ 16,924      ¥ —       ¥ 16,924      ¥ (12,930   ¥ (1,475   ¥ 2,519   

Payables under repurchase agreements(1)

    24,815        (2,911     21,904        (21,710     (3     191   

Payables under securities lending transactions

    8,205        —         8,205        (5,808     (16     2,381   

Obligations to return securities received as collateral

    2,651        —         2,651        (273     —         2,378   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 52,595      ¥ (2,911   ¥ 49,684      ¥ (40,721   ¥ (1,494   ¥ 7,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-41


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

At September 30, 2015

  Gross amounts of
recognized
assets/liabilities
    Gross amounts
offset in the
condensed
consolidated
balance sheet
    Net amounts
presented in the
condensed
consolidated
balance sheet
    Gross amounts not offset
in the condensed
consolidated balance sheet
    Net amounts  
        Financial
instruments
    Cash collateral
received/pledged
   
    (in billions)  

Financial assets:

           

Derivative assets

  ¥ 16,491      ¥ —        ¥ 16,491      ¥ (12,768   ¥ (815   ¥ 2,908   

Receivables under resale agreements

    8,777        (2,103     6,674        (6,127     —          547   

Receivables under securities borrowing transactions

    6,740        —          6,740        (6,649     —          91   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 32,008      ¥ (2,103   ¥ 29,905      ¥ (25,544   ¥ (815   ¥ 3,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

           

Derivative liabilities

  ¥ 16,149      ¥ —        ¥ 16,149      ¥ (12,440   ¥ (1,107   ¥ 2,602   

Payables under repurchase agreements(1)

    24,418        (2,103     22,315        (21,488     (1     826   

Payables under securities lending transactions

    9,086        —          9,086        (9,070     (1     15   

Obligations to return securities received as collateral

    3,042        —          3,042        (45     —          2,997   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 52,695      ¥ (2,103   ¥ 50,592      ¥ (43,043   ¥ (1,109   ¥ 6,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

     (1   Payables under repurchase agreements in the above table include those under long-term repurchase agreements of ¥1,175,858 million and ¥1,321,809 million at March 31, 2015 and September 30, 2015, respectively, which are included in Long-term debt in the accompanying condensed consolidated balance sheets.

9.    REPURCHASE AGREEMENTS, AND SECURITIES LENDING TRANSACTIONS ACCOUNTED FOR AS SECURED BORROWINGS

The following tables present gross obligations for payables under repurchase agreements, payables under securities lending transactions and obligations to return securities received as collateral by remaining contractual maturity and class of collateral pledged at September 30, 2015. Potential risks associated with these arrangements primarily relate to market and liquidity risks. To manage risks associated with market exposure, the MUFG Group generally revalues the collateral underlying its repurchase agreements and securities lending transactions on a daily basis and monitors the value of the underlying securities, consisting of primarily high-quality securities such as Japanese national government and Japanese government agency bonds, and foreign governments and official institutions bonds. In the event the market value of such securities falls below the related agreements at contract amounts plus accrued interest, the MUFG Group may be required to deposit additional collateral when appropriate. To address liquidity risks, the MUFG Group conducts stress tests to ensure the adequate level of liquidity is maintained in the event of a decline in the fair value of any collateral pledged.

 

      September 30, 2015  
      Remaining Contractual Maturity  
      Overnight
and open
     30 days
or less
     31-90
days
     Over
90 days
     Total  
     (in billions)  

Payables under repurchase agreements

   ¥ 5,458       ¥ 15,010       ¥ 1,599       ¥ 2,351       ¥ 24,418   

Payables under securities lending transactions

     6,310         2,752         24         —           9,086   

Obligations to return securities received as collateral

     2,991         45         —           6         3,042   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 14,759       ¥ 17,807       ¥ 1,623       ¥ 2,357       ¥ 36,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Secured borrowing by the class of collateral pledged at September 30, 2015 was as follows:

 

     September 30, 2015  
     Payables under
repurchase
agreements
     Payables under
securities lending
transactions
     Obligations
to return
securities received
as collateral
 
     (in billions)  

Japanese national government and Japanese government agency bonds

   ¥ 1,550       ¥ 8,689       ¥ 2,246   

Foreign governments and official institutions bonds

     17,494         1         638   

Corporate bonds

     946         2         52   

Residential mortgage-backed securities

     2,437         —           —     

Other debt securities

     1,068         —           —     

Marketable equity securities

     197         393         106   

Others

     726         1         —     
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 24,418       ¥ 9,086       ¥ 3,042   
  

 

 

    

 

 

    

 

 

 

10.    PREFERRED STOCK

The number of shares of preferred stock authorized and outstanding, and aggregate amount by liquidation preference at March 31, 2015 and September 30, 2015 were as follows:

 

     March 31, 2015      September 30, 2015  
     Number of
shares–
authorized
     Number of
shares–
outstanding
     Aggregate
amount by
liquidation
preference
     Number of
shares–
authorized
     Number of
shares–
outstanding
     Aggregate
amount by
liquidation
preference
 
     (in millions, except number of shares)  

Preferred stock

                 

Class 5

     400,000,000         —        ¥         —           400,000,000         —         ¥         —     

Class 6

     200,000,000         —          —          200,000,000         —           —    

Class 7

     200,000,000         —          —          200,000,000         —           —    

Class 11

     1,000         —          —          —          —           —    
        

 

 

          

 

 

 
         ¥ —              ¥ —    
        

 

 

          

 

 

 

On April 1, 2014, MUFG acquired all of the First Series of Class 5 Preferred Stock, and canceled all of the acquired shares. The acquisition price was ¥2,500 per share, totaling ¥390,000 million.

On August 1, 2014, 1,000 shares of Class 11 Preferred Stock were acquired in exchange for 1,245 shares of common stock, and those Preferred Stock had been recorded as Treasury stock.

On August 29, 2014, 1,000 shares of Class 11 Preferred Stock were retired.

These retirements of preferred stock were accounted for by decreasing Capital surplus by ¥390,001 million. As of March 31, 2015 and September 30, 2015, there was no preferred stock outstanding and the entire amount of Capital stock on the condensed consolidated balance sheets consisted of only common stock.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

On June 25, 2015, amendments to the Articles of Incorporation were made with respect to the First Series of Class 5 and Class 11 Preferred Stock. As a result, the total number of shares of preferred stock authorized to be issued by MUFG was decreased by 1,000 shares, and the total number of the First Series of Class 5 and Class 11 Preferred Stocks authorized to be issued was reduced to nil.

See Note 16 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information about preferred stock.

11.    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in Accumulated OCI, net of tax and net of noncontrolling interests, for the six months ended September 30, 2014 and 2015:

 

     Six months ended
September 30,
 
     2014     2015  
     (in millions)  

Accumulated other comprehensive income (loss), net of taxes:

    

Net unrealized gains (losses) on investment securities:

    

Balance at beginning of period

   ¥ 1,272,723      ¥ 2,304,555   

Net change during the period

     422,648        (396,849
  

 

 

   

 

 

 

Balance at end of period

   ¥ 1,695,371      ¥ 1,907,706   
  

 

 

   

 

 

 

Net unrealized gains on derivatives qualifying for cash flow hedges:

    

Balance at beginning of period

   ¥ 1,809      ¥ 2,708   

Net change during the period

     1,538        2,683   
  

 

 

   

 

 

 

Balance at end of period

   ¥ 3,347      ¥ 5,391   
  

 

 

   

 

 

 

Defined benefit plans:

    

Balance at beginning of period

   ¥ (206,336   ¥ (187,640

Net change during the period

     15,220        (23,566
  

 

 

   

 

 

 

Balance at end of period

   ¥ (191,116   ¥ (211,206
  

 

 

   

 

 

 

Foreign currency translation adjustments:

    

Balance at beginning of period

   ¥ 289,486      ¥ 947,632   

Net change during the period

     10,055        (28,230
  

 

 

   

 

 

 

Balance at end of period

   ¥ 299,541      ¥ 919,402   
  

 

 

   

 

 

 

Balance at end of period

   ¥ 1,807,143      ¥ 2,621,293   
  

 

 

   

 

 

 

 

F-44


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table presents the before tax and net of tax changes in each component of Accumulated OCI for the six months ended September 30, 2014 and 2015:

 

    Six months ended September 30,  
    2014     2015  
    Before tax     Tax (expense)
or benefit
    Net of tax     Before tax     Tax (expense)
or benefit
    Net of tax  
    (in millions)  

Net unrealized gains (losses) on investment securities:

           

Net unrealized gains (losses) on investment securities

  ¥ 735,633      ¥ (254,399   ¥ 481,234      ¥ (448,876   ¥ 165,039      ¥ (283,837

Reclassification adjustment for gains included in net income before attribution of noncontrolling interests

    (59,713     21,184        (38,529     (117,170     40,152        (77,018
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    675,920        (233,215     442,705        (566,046     205,191        (360,855

Net unrealized gains on investment securities attributable to noncontrolling interests

        20,057            35,994   
     

 

 

       

 

 

 

Net unrealized gains (losses) on investment securities attributable to Mitsubishi UFJ Financial Group

        422,648            (396,849
     

 

 

       

 

 

 

Net unrealized gains (losses) on derivatives qualifying for cash flow hedges:

           

Net unrealized gains on derivatives qualifying for cash flow hedges

    7,867        (3,118     4,749        13,443        (5,335     8,108   

Reclassification adjustment for gains included in net income before attribution of noncontrolling interests

    (5,290     2,079        (3,211     (8,937     3,512        (5,425
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    2,577        (1,039     1,538        4,506        (1,823     2,683   

Net unrealized gains on derivatives qualifying for cash flow hedges attributable to noncontrolling interests

        —              —     
     

 

 

       

 

 

 

Net unrealized gains on derivatives qualifying for cash flow hedges attributable to Mitsubishi UFJ Financial Group

        1,538            2,683   
     

 

 

       

 

 

 

Defined benefit plans:

           

Defined benefit plans

    18,407        (6,864     11,543        (39,786     13,804        (25,982

Reclassification adjustment for losses included in net income before attribution of noncontrolling interests

    5,511        (1,908     3,603        4,109        (1,719     2,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    23,918        (8,772     15,146        (35,677     12,085        (23,592

Defined benefit plans attributable to noncontrolling interests

        (74         (26
     

 

 

       

 

 

 

Defined benefit plans attributable to Mitsubishi UFJ Financial Group

        15,220            (23,566
     

 

 

       

 

 

 

Foreign currency translation adjustments:

           

Foreign currency translation adjustments

    33,273        (30,644     2,629        (31,738     1,543        (30,195

Reclassification adjustment for losses (gains) included in net income before attribution of noncontrolling interests

    512        (199     313        (3,778     916        (2,862
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    33,785        (30,843     2,942        (35,516     2,459        (33,057

Foreign currency translation adjustments attributable to noncontrolling interests

        (7,113         (4,827
     

 

 

       

 

 

 

Foreign currency translation adjustments attributable to Mitsubishi UFJ Financial Group

        10,055            (28,230
     

 

 

       

 

 

 

Other comprehensive income (loss) attributable to Mitsubishi UFJ Financial Group

      ¥ 449,461          ¥ (445,962
     

 

 

       

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table presents the effect of the reclassification of significant items out of Accumulated OCI on the respective line items of the accompanying condensed consolidated statements of income for the six months ended September 30, 2014 and 2015:

 

Six months ended September 30, 2014

Details of Accumulated OCI components

   Amount reclassified out of
Accumulated OCI
   

Line items in the condensed consolidated
statements of income

     (in millions)      

Net unrealized losses (gains) on investment securities

    

Net gains on sales and redemptions of Available-for-sale securities

   ¥ (60,903   Investment securities gains—net

Other

     1,190     
  

 

 

   
     (59,713   Total before tax
     21,184      Income tax expense
  

 

 

   
   ¥ (38,529   Net of tax
  

 

 

   

Net unrealized losses (gains) on derivatives qualifying for cash flow hedges

    

Interest rate contracts

   ¥ (5,069   Interest income on Loans, including fees

Other

     (221  
  

 

 

   
     (5,290   Total before tax
     2,079      Income tax expense
  

 

 

   
   ¥ (3,211   Net of tax
  

 

 

   

Defined benefit plans

    

Net actuarial loss

   ¥ 11,334 (1)   

Prior service cost

     (5,108 )(1)   

Loss (gain) on settlements and curtailment, and other

     (715 )(1)   
  

 

 

   
     5,511      Total before tax
     (1,908   Income tax expense
  

 

 

   
   ¥ 3,603      Net of tax
  

 

 

   

Foreign currency translation adjustments

   ¥ 512      Other non-interest expenses
  

 

 

   
     512      Total before tax
     (199   Income tax expense
  

 

 

   
   ¥ 313      Net of tax
  

 

 

   

Total reclassifications for the period

   ¥ (58,980   Total before tax
     21,156      Income tax expense
  

 

 

   
   ¥ (37,824   Net of tax
  

 

 

   

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Six months ended September 30, 2015

Details of Accumulated OCI components

   Amount reclassified out of
Accumulated OCI
   

Line items in the condensed consolidated
statements of income

     (in millions)      

Net unrealized losses (gains) on investment securities

    

Net gains on sales and redemptions of Available-for-sale securities

   ¥ (123,134   Investment securities gains—net

Other

     5,964     
  

 

 

   
     (117,170   Total before tax
     40,152      Income tax expense
  

 

 

   
   ¥ (77,018   Net of tax
  

 

 

   

Net unrealized losses (gains) on derivatives qualifying for cash flow hedges

    

Interest rate contracts

   ¥ (8,801   Interest income on Loans, including fees

Other

     (136 )  
  

 

 

   
     (8,937   Total before tax
     3,512      Income tax expense
  

 

 

   
   ¥ (5,425   Net of tax
  

 

 

   

Defined benefit plans

    

Net actuarial loss

   ¥ 10,124 (1)   

Prior service cost

     (5,425 )(1)   

Loss (gain) on settlements and curtailment, and other

     (590 )(1)   
  

 

 

   
     4,109      Total before tax
     (1,719   Income tax expense
  

 

 

   
   ¥ 2,390      Net of tax
  

 

 

   

Foreign currency translation adjustments

   ¥ (3,778   Other non-interest income
  

 

 

   
     (3,778   Total before tax
     916      Income tax expense
  

 

 

   
   ¥ (2,862   Net of tax
  

 

 

   

Total reclassifications for the period

   ¥ (125,776   Total before tax
     42,861      Income tax expense
  

 

 

   
   ¥ (82,915   Net of tax
  

 

 

   

 

Note:

     (1   These Accumulated OCI components are included in the computation of net periodic benefit cost. See Note 7 for more information.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

12.    NONCONTROLLING INTERESTS

Changes in MUFG’s Ownership Interests in Subsidiaries

The following table presents the effect on MUFG’s shareholders’ equity from changes in ownership of subsidiaries resulting from transactions with the noncontrolling interest shareholders during the six months ended September 30, 2014 and 2015:

 

     Six months ended
September 30,
 
         2014              2015      
     (in millions)  

Net income attributable to Mitsubishi UFJ Financial Group

   ¥ 838,296       ¥ 381,307   

Transactions between Mitsubishi UFJ Financial Group and the noncontrolling interest shareholders

     537         (896
  

 

 

    

 

 

 

Net transfers from (to) the noncontrolling interest shareholders

     537         (896
  

 

 

    

 

 

 

Change from net income attributable to Mitsubishi UFJ Financial Group and transactions between Mitsubishi UFJ Financial Group and the noncontrolling interest shareholders

   ¥ 838,833       ¥ 380,411   
  

 

 

    

 

 

 

13.    EARNINGS PER COMMON SHARE APPLICABLE TO COMMON SHAREHOLDERS OF MUFG

Reconciliations of net income and weighted average number of common shares outstanding used for the computation of basic earnings per common share (“EPS”) to the adjusted amounts for the computation of diluted EPS for the six months ended September 30, 2014 and 2015 are as follows:

 

     Six months ended
September 30,
 
         2014             2015      
     (in millions)  

Income (Numerator):

    

Net income attributable to Mitsubishi UFJ Financial Group

   ¥ 838,296      ¥ 381,307   

Income allocable to preferred shareholders:

    

Cash dividends paid

     (8,970     —     
  

 

 

   

 

 

 

Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

     829,326        381,307   
  

 

 

   

 

 

 

Effect of dilutive instruments:

    

Stock options and restricted stock units—Morgan Stanley

     (1,781     (1,573
  

 

 

   

 

 

 

Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group and assumed conversions

   ¥ 827,545      ¥ 379,734   
  

 

 

   

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

     Six months ended
September 30,
 
         2014              2015      
     (thousands of shares)  

Shares (Denominator):

     

Weighted average common shares outstanding

     14,163,257         13,947,620   

Effect of dilutive instruments:

     

Convertible preferred stock

     1         —     

Stock options

     19,129         17,644   
  

 

 

    

 

 

 

Weighted average common shares for diluted EPS computation

     14,182,387         13,965,264   
  

 

 

    

 

 

 
     Six months ended
September 30,
 
     2014      2015  
     (in yen)  

Earnings per common share applicable to common shareholders of Mitsubishi UFJ Financial Group:

     

Basic earnings per common share:

     

Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

   ¥ 58.55       ¥ 27.34   
  

 

 

    

 

 

 

Diluted earnings per common share:

     

Earnings applicable to common shareholders of Mitsubishi UFJ Financial Group

   ¥ 58.35       ¥ 27.19   
  

 

 

    

 

 

 

On August 1, 2014, all outstanding Class 11 Preferred Stock were mandatorily converted into shares of common stock at a conversion price of ¥802.6. The impact of the mandatory conversion of Class 11 Preferred Stock was reflected in computations of EPS and diluted EPS for the six months ended September 30, 2014.

14.    DERIVATIVE FINANCIAL INSTRUMENTS

The MUFG Group uses various derivative financial instruments both for trading purposes and for purposes other than trading (primarily risk management purposes) in the normal course of business to meet the financial needs of its customers, as a source of revenue and to manage its exposures to a variety of risks. See Note 23 to the consolidated financial statements for the fiscal year ended March 31, 2015 for a further discussion of the MUFG Group’s use of derivative instruments. During the six months ended September 30, 2015, there was no change in the MUFG Group’s use of derivative instruments that had a material impact on the MUFG Group’s financial position and results of operations.

Derivatives Designated as Hedges

The MUFG Group adopts hedging strategies and applies hedge accounting to certain derivative transactions entered by MUAH whose fiscal period ends on December 31.

Cash Flow Hedges

MUAH used interest rate swaps with a notional amount of ¥1,711.2 billion at June 30, 2015 to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on the London Interbank Offered Rate (“LIBOR”) indexed loans. To the extent effective, payments received (or paid) under the swap contract offset fluctuations in interest income on loans caused by changes in the relevant LIBOR index. At June 30, 2015, the weighted average remaining life of the active cash flow hedges was 3.5 years.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness are recognized in earnings in the period in which they arise. At June 30, 2015, MUAH expects to reclassify approximately ¥18.3 billion of income from Accumulated OCI to net interest income during the twelve months ending June 30, 2016. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations or the addition of other hedges subsequent to June 30, 2015.

Fair Value Hedges

MUAH engages in an interest rate hedging strategy in which one or more interest rate swaps are associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR.

For fair value hedges, any ineffectiveness is recognized in noninterest expense in the period in which it arises. The change in the fair value of the hedged item and the hedging instrument, to the extent completely effective, offsets with no impact on earnings. For the six months ended June 30, 2015, MUAH recorded gains on the hedging instruments and losses on the hedged liability, both of which were less than ¥1 billion.

Notional Amounts of Derivative Contracts

The following table summarizes the notional amounts of derivative contracts at March 31, 2015 and September 30, 2015:

 

     Notional  amounts(1)  
     March 31,
2015
     September 30,
2015
 
     (in trillions)  

Interest rate contracts

   ¥ 1,131.4       ¥ 1,168.4   

Foreign exchange contracts

     193.1         219.8   

Equity contracts

     4.1         5.9   

Commodity contracts

     1.0         0.8   

Credit derivatives

     6.8         6.4   

Others

     3.1         3.2   
  

 

 

    

 

 

 

Total

   ¥ 1,339.5       ¥ 1,404.5   
  

 

 

    

 

 

 

 

Note:

(1)

Includes both written and purchased positions.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Impact of Derivatives on the Condensed Consolidated Balance Sheets

The following table summarizes fair value information on derivative instruments that are recorded on the MUFG Group’s condensed consolidated balance sheets at March 31, 2015 and September 30, 2015:

 

    Fair value of derivative instruments  
    March 31, 2015(1)(5)     September 30, 2015(1)(5)  
    Not designated
as hedges(2)
    Designated
as  hedges(3)
    Total
derivatives(4)
    Not designated
as hedges(2)
    Designated
as  hedges(3)
    Total
derivatives(4)
 
    (in billions)  

Derivative assets:

           

Interest rate contracts

  ¥ 11,435      ¥ 4      ¥ 11,439      ¥ 11,280      ¥ 11      ¥ 11,291   

Foreign exchange contracts

    4,867        —         4,867        4,808        —          4,808   

Equity contracts

    250        —         250        263        —          263   

Commodity contracts

    94        —         94        67        —          67   

Credit derivatives

    70        —         70        59        —          59   

Others

    3        —         3        3        —          3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

  ¥ 16,719      ¥ 4      ¥ 16,723      ¥ 16,480      ¥ 11      ¥ 16,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

           

Interest rate contracts

  ¥ 11,341      ¥ —       ¥ 11,341      ¥ 11,120      ¥ 2      ¥ 11,122   

Foreign exchange contracts

    5,176        —         5,176        4,722        —          4,722   

Equity contracts

    245        —         245        232        —          232   

Commodity contracts

    96        —         96        67        —          67   

Credit derivatives

    72        —         72        55        —          55   

Others(6)

    (6     —         (6     (49     —          (49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

  ¥ 16,924      ¥ —       ¥ 16,924      ¥ 16,147      ¥ 2      ¥ 16,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

The fair value of derivative instruments is presented on a gross basis even when derivative instruments are subject to master netting agreements. Cash collateral payable and receivable associated with derivative instruments are not added to or netted against the fair value amounts.

  (2) The derivative instruments which are not designated as a hedging instrument are held for trading and risk management purposes, and are presented in Trading account assets/liabilities except for (6).
  (3) The MUFG Group adopts hedging strategies and applies hedge accounting to certain derivative transactions entered into by MUAH. The derivative instruments which are designated as hedging instruments are presented in Other assets or Other liabilities on the accompanying condensed consolidated balance sheets.
  (4) This table does not include contracts with embedded derivatives for which the fair value option has been elected.
  (5) For more information about fair value measurement and assumptions used to measure the fair value of derivatives, see Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015.
  (6) Others include mainly bifurcated embedded derivatives carried at fair value, which are presented in Deposits and Long-term debt.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Impact of Derivatives and Hedged Items on the Condensed Consolidated Statements of Income and Accumulated OCI

The following tables provide more detailed information regarding the derivative-related impact on the accompanying condensed consolidated statements of income and Accumulated OCI by accounting designation for the six months ended September 30, 2014 and 2015:

Gains and losses for trading and risk management derivatives (not designated as hedging instruments)

 

     Trading and risk management derivatives gains and  losses
(Not designated as hedging instruments)
 
      Foreign exchange
gains (losses)—net
    Trading account
profits (losses)—net
    Total  
     (in billions)  

Six months ended September 30, 2014:

      

Interest rate contracts

   ¥ —       ¥ 171      ¥ 171   

Foreign exchange contracts

     (189     —         (189

Equity contracts

     —         (82     (82

Credit derivatives

     —         1        1   

Others

     (2     (27     (29
  

 

 

   

 

 

   

 

 

 

Total

   ¥ (191   ¥ 63      ¥ (128
  

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2015:

      

Interest rate contracts

   ¥ —        ¥ 45      ¥ 45   

Foreign exchange contracts

     69        —          69   

Equity contracts

     —          93        93   

Credit derivatives

     —          7        7   

Others

     —          35        35   
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 69      ¥ 180      ¥ 249   
  

 

 

   

 

 

   

 

 

 

Gains and losses for derivatives designated as cash flow hedges

 

     Six months ended September 30,  
     2014      2015  
     (in billions)  

Gains recognized in Accumulated OCI on derivative instruments (Effective portion)

     

Interest rate contracts

   ¥ 8       ¥ 13   
  

 

 

    

 

 

 

Total

   ¥         8       ¥ 13   
  

 

 

    

 

 

 

Gains reclassified from Accumulated OCI into income (Effective portion)

     

Interest rate contracts(1)

   ¥ 5       ¥ 9   
  

 

 

    

 

 

 

Total

   ¥ 5       ¥         9   
  

 

 

    

 

 

 

 

Note:

    (1   Included in Interest income.

Embedded Derivatives

Features embedded in other non-derivative hybrid contracts are separated from the host contracts and measured at fair value when they are not clearly and closely related to the host contracts and meet the definition

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

of a derivative. The change in the fair value of such an embedded derivative is recognized currently in earnings, unless it qualifies as a hedge. The fair value of the embedded derivative is presented in the accompanying condensed consolidated balance sheets with the host contract.

Credit Derivatives

The MUFG Group enters into credit derivatives to manage its credit risk exposure, to facilitate client transactions, and for proprietary trading purposes, under which they provide the counterparty protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. See Note 23 to the consolidated financial statements for the fiscal year ended March 31, 2015 for a more detailed explanation and discussion of credit derivatives.

The table below summarizes certain information regarding protection sold through credit default swaps as of March 31, 2015 and September 30, 2015:

 

     Protection sold  
     Maximum potential/Notional amount
by expiration period
     Fair value  

At March 31, 2015:

   1 year
or less
     1-5 years      Over
5 years
     Total      (Asset)/
Liability(1)
 
     (in millions)  

Single name credit default swaps:

              

Investment grade(2)

   ¥ 488,541       ¥ 1,743,295       ¥ 63,291       ¥ 2,295,127       ¥ (34,573

Non-investment grade

     52,903         226,666         5,300         284,869         8,017   

Not rated

     2,731         439         —           3,170         (45
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     544,175         1,970,400         68,591         2,583,166         (26,601
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Index and basket credit default swaps held by BTMU:

              

Investment grade(2)

     —          195,481         109,409         304,890         (6,387

Non-investment grade

     —           2,880         —           2,880         (9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           198,361         109,409         307,770         (6,396

Index and basket credit default swaps held by MUSHD:

              

Investment grade(2)

     55,856         273,097         5,000         333,953         (5,225

Non-investment grade

     56,349         —           —           56,349         (180

Not rated

     16,383         76,682         —           93,065         (3,877
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     128,588         349,779         5,000         483,367         (9,282
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total index and basket credit default swaps sold

     128,588         548,140         114,409         791,137         (15,678
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps sold

   ¥ 672,763       ¥ 2,518,540       ¥ 183,000       ¥ 3,374,303       ¥ (42,279
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

     Protection sold  
     Maximum potential/Notional amount by
expiration period
     Fair value  

At September 30, 2015:

   1 year
or less
     1-5 years      Over
5 years
     Total      (Asset)/
Liability(1)
 
     (in millions)  

Single name credit default swaps:

              

Investment grade(2)

   ¥ 480,196       ¥ 1,544,657       ¥ 49,306       ¥ 2,074,159       ¥ (20,314

Non-investment grade

     71,245         247,888         8,250         327,383         5,289   

Not rated

     —          1,200         —          1,200         (10
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     551,441         1,793,745         57,556         2,402,742         (15,035
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Index and basket credit default swaps held by BTMU:

              

Investment grade(2)

     —          215,490         152,551         368,041         (3,316

Non-investment grade

     2,880         —          —          2,880         (6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,880         215,490         152,551         370,921         (3,322

Index and basket credit default swaps held by MUSHD:

              

Investment grade(2)

     56,108         203,213         11,000         270,321         (3,379

Non-investment grade

     —          —          —          —          —    

Not rated

     16,590         79,558         —          96,148         (3,922
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     72,698         282,771         11,000         366,469         (7,301
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total index and basket credit default swaps sold

     75,578         498,261         163,551         737,390         (10,623
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps sold

   ¥ 627,019       ¥ 2,292,006       ¥ 221,107       ¥ 3,140,132       ¥ (25,658
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Notes:

(1)

Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

  (2) The MUFG Group considers ratings of Baa3/BBB- or higher to meet the definition of investment grade.

The MUFG Group may economically hedge its exposure to credit derivatives by entering into offsetting derivative contracts. The carrying value and notional amounts of credit protection sold in which the MUFG Group held purchased protection with identical underlying referenced entities were approximately ¥35 billion and ¥2,928 billion, respectively, at March 31, 2015, and approximately ¥22 billion and ¥2,711 billion, respectively, at September 30, 2015.

Collateral is held by the MUFG Group in relation to these instruments. Collateral requirements are determined at the counterparty level and cover numerous transactions and products as opposed to individual contracts.

Credit Risk, Liquidity Risk and Credit-risk-related Contingent Features

Certain of the MUFG Group’s derivative instruments contain provisions that require the MUFG Group’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the MUFG Group’s debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request payments on early termination or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position at

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

March 31, 2015 and September 30, 2015 was approximately ¥2.2 trillion and ¥1.9 trillion, respectively, for which the MUFG Group has posted collateral of approximately ¥299 billion and ¥309 billion, respectively, in the normal course of business. The amount of additional collateral and early termination amount which could be requested if the MUFG Group’s debt falls below investment grade was ¥132 billion and ¥125 billion, respectively, as of March 31, 2015 and ¥128 billion and ¥92 billion, respectively, as of September 30, 2015.

15.    OBLIGATIONS UNDER GUARANTEES AND OTHER OFF-BALANCE SHEET INSTRUMENTS

Obligations under Guarantees

The MUFG Group provides customers with a variety of guarantees and similar arrangements as described in Note 24 to the consolidated financial statements for the fiscal year ended March 31, 2015. The table below presents the contractual or notional amounts of such guarantees at March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in billions)  

Standby letters of credit and financial guarantees

   ¥ 4,550       ¥ 4,424   

Performance guarantees

     2,891         2,889   

Derivative instruments(1)(2)

     60,935         61,406   

Liabilities of trust accounts

     8,291         8,154   
  

 

 

    

 

 

 

Total

   ¥ 76,667       ¥ 76,873   
  

 

 

    

 

 

 

 

Notes:

(1)

Credit derivatives sold by the MUFG Group are excluded from this presentation.

  (2) Derivative instruments that are deemed to be included within the definition of guarantees as prescribed in the guidance on guarantees include certain written options and credit default swaps.

Performance Risk

The MUFG Group monitors performance risk of its guarantees using the same credit rating system utilized for estimating probabilities of default with its loan portfolio. The MUFG Group’s credit rating system is consistent with both the method of evaluating credit risk under Basel III and those of third-party credit rating agencies. On certain underlying referenced credits or entities, ratings are not available. Such referenced credits are included in the “Not rated” category in the following tables.

Presented in the tables below is the maximum potential amount of future payments classified based upon internal credit ratings as of March 31, 2015 and September 30, 2015. The determination of the maximum potential future payments is based on the notional amount of the guarantees without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Such amounts do not represent the anticipated losses, if any, on these guarantees.

 

At March 31, 2015:

   Maximum
potential/
Contractual
or Notional
amount
     Amount by borrower grade  
      Normal      Close
Watch(1)
     Likely to
become
Bankrupt
or Legally/
Virtually
Bankrupt(2)
     Not rated  
     (in billions)  

Standby letters of credit and financial guarantees

   ¥ 4,550       ¥ 4,391       ¥ 146       ¥ 7       ¥ 6   

Performance guarantees

     2,891         2,816         46         7         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 7,441       ¥ 7,207       ¥ 192       ¥ 14       ¥ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

At September 30, 2015:

   Maximum
potential/
Contractual
or Notional
amount
     Amount by borrower grade  
      Normal      Close
Watch(1)
     Likely to
become
Bankrupt
or Legally/
Virtually
Bankrupt(2)
     Not rated  
     (in billions)  

Standby letters of credit and financial guarantees

   ¥ 4,424       ¥ 4,254       ¥ 157       ¥         7       ¥         6   

Performance guarantees

     2,889         2,811         47         8         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 7,313       ¥ 7,065       ¥ 204       ¥ 15       ¥ 29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Notes:

    (1   Borrowers classified as Close Watch represent those that require close monitoring as the borrower has begun to exhibit elements of potential concern with respect to its business performance and financial condition, the borrower has begun to exhibit elements of serious concern with respect to its business performance and financial condition, including business problems requiring long-term solutions, or the borrower’s loans are TDRs or loans contractually past due 90 days or more for special reasons.
    (2   Borrowers classified as Likely to become Bankrupt or Legally/Virtually Bankrupt represent those that have a higher probability of default than those categorized as Close Watch due to serious debt repayment problems with poor progress in achieving restructuring plans, the borrower being considered virtually bankrupt with no prospects for an improvement in business operations, or the borrower being legally bankrupt with no prospects for continued business operations because of non-payment, suspension of business, voluntary liquidation or filing for legal liquidation.

The guarantees the MUFG Group does not classify based upon internal credit ratings are described in Note 24 to the consolidated financial statements for the fiscal year ended March 31, 2015.

Other Off-balance Sheet Instruments

In addition to obligations under guarantees and similar arrangements set forth above, the MUFG Group issues other off-balance sheet instruments to meet the financial needs of its customers and for other purposes as described in Note 24 to the consolidated financial statements for the fiscal year ended March 31, 2015. The table below presents the contractual amounts with regard to such instruments at March 31, 2015 and September 30, 2015:

 

     March 31,
2015
     September 30,
2015
 
     (in billions)  

Commitments to extend credit

   ¥ 78,737       ¥ 82,927   

Commercial letters of credit

     995         1,093   

Commitments to make investments

     62         57   

Other

     21         20   

16.    CONTINGENT LIABILITIES

Repayment of Excess Interest

The Japanese government implemented regulatory reforms affecting the consumer lending industry. In December 2006, the Diet passed legislation to reduce the maximum permissible interest rate under the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates from 29.2% per annum to 20% per annum. The reduction in interest rates was implemented in June 2010. The regulatory reforms also included amendments to the Money Lending Business Act 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 Act (between 15% per annum to 20% per annum depending on the amount of principal).

 

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Under the regulatory reforms, all interest rates for loans originated after this reform are subject to the lower limits imposed by the Interest Rate Restriction Act. Furthermore, the new regulations require stringent review procedures for consumer finance companies before lending, and with the exception of certain provisions, one of those new regulations introduces a limit on aggregate credit extensions to one-third of the borrower’s annual income.

Formerly, consumer finance companies were able to charge interest rates exceeding the limits stipulated by the Interest Rate Restriction Act so long as the payment was made voluntarily by the borrowers, and the lender complied with various notice and other requirements. Accordingly, MUFG’s consumer finance subsidiaries and equity method investees offered loans at interest rates above the Interest Rate Restriction Act. Upon the implementation of the regulatory reforms in June 2010, they lowered the interest rates for loans originated after this reform to below the Interest Rate Restriction Act.

In 2006, the Supreme Court of Japan passed decisions in a manner more favorable to borrowers requiring reimbursement of previously paid interest exceeding the limits stipulated by the Interest Rate Restriction Act in certain circumstances. Borrowers’ claims for reimbursement of excess interest arose after such decisions and other regulatory changes. The MUFG Group maintains an allowance for repayment of excess interest based on an analysis of past experience of reimbursement of excess interest, borrowers’ profile, recent trend of borrowers’ claims for reimbursement, and management future forecasts. Management believes that the provision for repayment of excess interest is adequate and the allowance is at the appropriate amount to absorb probable losses, so that the impact of future claims for reimbursement of excess interest will not have a material adverse effect on the MUFG Group’s financial position and results of operations. The allowance for repayment of excess interest established by MUFG’s consumer finance subsidiaries, which was included in Other liabilities, was ¥36,292 million and ¥26,381 million as of March 31, 2015 and September 30, 2015, respectively. Provision (reversal) related to the allowance for the six months ended September 30, 2014 and 2015 were not material.

Litigation

The MUFG Group is subject to various litigation matters. Based upon the current knowledge and the results of consultation with counsel, liabilities for losses from litigation matters are recorded when they are determined to be both probable in their occurrences and can be reasonably estimated. Management believes that the eventual outcome of such litigation matters will not have a material adverse effect on the MUFG Group’s financial position, results of operations or cash flows.

17.    VARIABLE INTEREST ENTITIES

In the normal course of business, the MUFG Group has financial interests and other contractual obligations in various entities which may be deemed to be VIEs such as asset-backed conduits, various investment funds, special purpose entities created for structured financing, repackaged instruments, entities created for the securitization of the MUFG Group’s assets, and trust arrangements.

See Note 25 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information about the MUFG Group’s involvements with VIEs.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following tables present the assets and liabilities of consolidated VIEs recorded on the accompanying condensed consolidated balance sheets at March 31, 2015 and September 30, 2015:

 

Consolidated VIEs

  Consolidated assets  

At March 31, 2015:

  Total     Cash and
due from
banks
    Interest-earning
deposits in
other banks
    Trading
account
assets
    Investment
securities
    Loans     All other
assets
 
    (in millions)  

Asset-backed conduits

  ¥ 6,684,623      ¥ 42,049      ¥ 145,671      ¥ 7,524      ¥ 941,477      ¥ 5,537,704      ¥ 10,198   

Investment funds

    3,436,571        1,198        183,401        3,033,831        13,481        —         204,660   

Special purpose entities created for structured financing

    235,840        —         3,752        —         —         206,652        25,436   

Repackaged instruments

    52,664        —         —         37,664        —         —         15,000   

Securitization of the MUFG Group’s assets

    1,351,762        —         —         —         —         1,320,562        31,200   

Trust arrangements

    1,760,389        —         8,591        752        130,960        1,600,302        19,784   

Others

    58,924        260        692        —         62        31,801        26,109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated assets before elimination

    13,580,773        43,507        342,107        3,079,771        1,085,980        8,697,021        332,387   

The amounts eliminated in consolidation

    (1,939,630     (42,267     (290,971     (10,474     (8,706     (1,581,132     (6,080
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated assets

  ¥ 11,641,143      ¥ 1,240      ¥ 51,136      ¥ 3,069,297      ¥ 1,077,274      ¥ 7,115,889      ¥ 326,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Consolidated liabilities  
    Total     Deposits     Other
short-term
borrowings
    Long-term
debt
    All other
liabilities
 
    (in millions)  

Asset-backed conduits

  ¥ 6,742,899      ¥ —       ¥ 5,523,847      ¥ 698,500      ¥ 520,552   

Investment funds

    251,932        —         —         —         251,932   

Special purpose entities created for structured financing

    133,220        —         373        123,203        9,644   

Repackaged instruments

    52,561        —         —         51,246        1,315   

Securitization of the MUFG Group’s assets

    1,327,025        —         22,600        1,303,665        760   

Trust arrangements

    1,753,476        1,734,749        —         —         18,727   

Others

    58,162        —         29,791        28,316        55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated liabilities before elimination

    10,319,275        1,734,749        5,576,611        2,204,930        802,985   

The amounts eliminated in consolidation

    (4,118,306     —         (2,685,675     (1,411,562     (21,069

The amount of liabilities with recourse to the general credit of the MUFG Group

    (4,955,184     (1,734,749     (2,841,342     (35     (379,058
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of the MUFG Group

  ¥ 1,245,785      ¥ —       ¥ 49,594      ¥ 793,333      ¥ 402,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Consolidated VIEs

  Consolidated assets  

At September 30, 2015:

  Total     Cash and
due from
banks
    Interest-earning
deposits in
other banks
    Trading
account
assets
    Investment
securities
    Loans     All other
assets
 
    (in millions)  

Asset-backed conduits

  ¥ 6,909,986      ¥ 41,662      ¥ 131,256      ¥ 15,933      ¥ 1,092,191      ¥ 5,624,671      ¥ 4,273   

Investment funds

    2,733,757        41        179,808        2,275,926        13,369        —          264,613   

Special purpose entities created for structured financing

    250,411        —          2,839        —          —          192,580        54,992   

Repackaged instruments

    36,255        —          —          36,255        —          —          —     

Securitization of the MUFG Group’s assets

    1,230,138        —          —          —          —          1,205,235        24,903   

Trust arrangements

    1,997,682        —          2,528        2,002        135,154        1,836,837        21,161   

Others

    28,747        280        709        —          57        27,606        95   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated assets before elimination

    13,186,976        41,983        317,140        2,330,116        1,240,771        8,886,929        370,037   

The amounts eliminated in consolidation

    (2,204,320     (41,897     (277,369     (14,980     (37,461     (1,817,591     (15,022
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated assets

  ¥ 10,982,656      ¥ 86      ¥ 39,771      ¥ 2,315,136      ¥ 1,203,310      ¥ 7,069,338      ¥ 355,015   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Consolidated liabilities  
    Total     Deposits     Other
short-term
borrowings
    Long-term
debt
    All other
liabilities
 
    (in millions)  

Asset-backed conduits

  ¥ 6,922,976      ¥ —        ¥ 5,405,810      ¥ 868,723      ¥ 648,443   

Investment funds

    39,651        —          —          —          39,651   

Special purpose entities created for structured financing

    157,940        —          280        149,211        8,449   

Repackaged instruments

    36,482        —          —          34,954        1,528   

Securitization of the MUFG Group’s assets

    1,208,223        —          22,000        1,185,609        614   

Trust arrangements

    1,991,027        1,971,557        —          —          19,470   

Others

    27,971        —          25,737        2,191        43   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated liabilities before elimination

    10,384,270        1,971,557        5,453,827        2,240,688        718,198   

The amounts eliminated in consolidation

    (3,930,777     —          (2,397,142     (1,513,755     (19,880

The amount of liabilities with recourse to the general credit of the MUFG Group

    (5,521,745     (1,971,557     (3,014,777     (2,278     (533,133
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of the MUFG Group

  ¥ 931,748      ¥ —        ¥ 41,908      ¥ 724,655      ¥ 165,185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In general, the creditors or beneficial interest holders of consolidated VIEs have recourse only to the assets of those VIEs of which they are creditors or beneficial interest holders, and do not have recourse to other assets of the MUFG Group, except where the MUFG Group is also contractually required to provide credit enhancement or program-wide liquidity.

 

F-59


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following tables present the total assets of non-consolidated VIEs, the maximum exposure to loss resulting from the MUFG Group’s involvement with non-consolidated VIEs, and the assets and liabilities which relate to the MUFG’s variable interests in non-consolidated VIEs at March 31, 2015 and September 30, 2015:

 

Non-consolidated VIEs

    On-balance sheet assets     On-balance  sheet
liabilities
 

At March 31, 2015:

  Total assets     Maximum
exposure
    Total     Trading
account
assets
    Investment
securities
    Loans     All other
assets
    Total     All  other
liabilities
 
    (in millions)  

Asset-backed conduits

  ¥ 22,827,459      ¥ 4,459,028      ¥ 3,332,345      ¥ 2,942      ¥ 642,804      ¥ 2,686,599      ¥ —       ¥ 15      ¥ 15   

Investment funds

    49,772,806        1,353,062        1,216,788        174,845        513,659        517,094        11,190        —         —     

Special purpose entities created for structured financing

    39,438,674        4,528,826        3,337,220        343,966        100,428        2,867,265        25,561        13        13   

Repackaged instruments

    11,793,462        2,756,196        2,544,899        360,937        1,821,302        362,660        —         —         —     

Others

    48,391,273        3,415,733        2,549,718        140,185        114,720        2,294,813        —         269        269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 172,223,674      ¥ 16,512,845      ¥ 12,980,970      ¥ 1,022,875      ¥ 3,192,913      ¥ 8,728,431      ¥ 36,751      ¥ 297      ¥ 297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-consolidated VIEs

    On-balance sheet assets     On-balance  sheet
liabilities
 

At September 30, 2015:

  Total assets     Maximum
exposure
    Total     Trading
account
assets
    Investment
securities
    Loans     All other
assets
    Total     All  other
liabilities
 
    (in millions)  

Asset-backed conduits

  ¥ 24,290,934      ¥ 4,766,202      ¥ 3,514,169      ¥ 5,500      ¥ 810,680      ¥ 2,697,989      ¥ —        ¥ 224      ¥ 224   

Investment funds

    38,666,976        1,235,190        1,063,574        149,134        485,173        419,226        10,041        —          —     

Special purpose entities created for structured financing

    42,153,311        4,577,727        3,291,268        322,005        97,461        2,856,251        15,551        292        292   

Repackaged instruments

    10,661,113        2,608,253        2,388,067        435,899        1,494,456        457,712        —          —          —     

Others

    56,950,446        3,678,385        2,800,609        121,534        81,025        2,598,050        —          532        532   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 172,722,780      ¥ 16,865,757      ¥ 13,057,687      ¥ 1,034,072      ¥ 2,968,795      ¥ 9,029,228      ¥ 25,592      ¥ 1,048      ¥ 1,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Maximum exposure to loss on each type of entity is determined based on the carrying amount of any on-balance sheet assets and any off-balance sheet liabilities held, net of any recourse liabilities. Therefore, the maximum exposure to loss represents the maximum loss the MUFG Group could possibly incur at each balance sheet date and does not reflect the likelihood of such a loss being incurred. The difference between the amount of on-balance sheet assets and the maximum exposure to loss primarily comprises the remaining undrawn commitments.

18.    BUSINESS SEGMENTS

The business segment information, set forth below, is derived from the internal management reporting system used by management to measure the performance of the MUFG Group’s business segments. In addition, the business segment information is primarily based on the financial information prepared in accordance with accounting principles generally accepted in Japan as adjusted in accordance with internal management accounting rules and practices. Accordingly, the format and information are not consistent with the accompanying condensed consolidated financial statements prepared on the basis of U.S. GAAP. A reconciliation is provided for the total amounts of segments’ operating profit with income before income tax expense under U.S. GAAP.

Effective April 1, 2015, the Integrated Retail Banking Business Group, the Integrated Corporate Banking Business Group, the Integrated Trust Assets Business Group, the Integrated Global Business Group and the Integrated Global Markets Business Group were renamed the Retail Banking Business Group, the Corporate Banking Business Group, the Trust Assets Business Group, the Global Business Group and the Global Markets Business Group, respectively.

 

F-60


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following is a brief explanation of the MUFG Group’s business segments:

Retail Banking Business Group—Covers all domestic retail businesses, including commercial banking, trust banking and securities businesses. This business group integrates the retail business of BTMU, MUTB, MUMSS, Mitsubishi UFJ NICOS and other subsidiaries as well as retail product development, promotion and marketing in a single management structure. At the same time, the business group has developed and implemented MUFG Plaza, a one-stop, comprehensive financial services concept that provides integrated banking, trust and securities services.

Corporate Banking Business Group—Covers all domestic corporate businesses, including commercial banking, investment banking, trust banking and securities business. Through the integration of these business lines, diverse financial products and services are provided to the MUFG Group’s corporate clients. The business group has clarified strategic domains, sales channels and methods to match the different growth stages and financial needs of the MUFG Group’s corporate clients.

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 global network of BTMU. The business group provides a full range of services to corporate and other pension funds, including stable and secure pension fund management and administration, advice on pension schemes and payment of benefits to scheme members.

Global Business Group—Covers businesses outside Japan, including commercial banking such as loans, deposits and cash management services, investment banking, retail banking, trust banking and securities businesses (with the retail banking and trust assets businesses being conducted through MUFG Union Bank, N.A. (“MUB”), and Krunsgri), through a global network of nearly 1,200 offices outside Japan to provide customers with financial products and services that meet their increasingly diverse and sophisticated financing needs.

MUB is one of the largest commercial banks in California by both total assets and total deposits. MUB provides a wide range of financial services to consumers, small businesses, middle market companies and major corporations, primarily in California, Oregon and Washington and also nationally and internationally. MUB’s parent company is MUAH, which is a bank holding company in the United States.

Krungsri is one of the major commercial banks in Thailand and provides a comprehensive range of banking, consumer finance, investment, asset management, and other financial products and services to individual consumers, small and medium enterprises, and large corporations mainly in Thailand. Krungsri’s consolidated subsidiaries include a major credit card issuer, a major automobile financing service provider, an asset management company, and a microfinance service provider in Thailand. MUFG holds a 76.88% ownership interest in Krungsri through BTMU as of September 30, 2015. The amounts for this segment in the table below represent the respective amounts before taking into account the noncontrolling interest.

Global Markets Business Group—Covers asset and liability management and strategic investment of BTMU and MUTB, and sales and trading of financial products of BTMU, MUTB and MUSHD.

Other—Consists mainly of the corporate centers of MUFG, BTMU, MUTB, and MUMSS. The elimination of duplicated amounts of net revenue among business segments is also reflected in Other.

Management does not use information on segments’ total assets to allocate resources and assess performance. Accordingly, business segment information on total assets is not presented.

 

F-61


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

 

Effective April 1, 2015, the MUFG Group began to include Krungsri as part of the Global Business Group, as shown in the table below.

In addition, effective April 1, 2015, the MUFG Group made modifications to the MUFG Group’s management accounting rules and practices to clarify the responsibility for profits of each business segment. The modifications had the impact of reducing the operating profits of the Retail Banking Business Group, the Corporate Banking Business Group and the Trust Assets Business Group by ¥3.3 billion, ¥10.1 billion and ¥0.8 billion, respectively, for the six months ended September 30, 2014. The changes also had the impact of increasing the operating profits of the Global Business Group, the Global Markets Business Group and Other by ¥4.1 billion, ¥17.3 billion and ¥33.4 billion, respectively, for the same period. Prior period business segment information has been restated to enable comparisons between the relevant amounts for the six months ended September 30, 2014 and 2015.

The table set forth below has been reclassified to enable comparisons between the relevant amounts for the six months ended September 30, 2014 and 2015, respectively:

 

    Retail
Banking
Business
Group
    Corporate
Banking
Business
Group
    Trust
Assets
Business
Group
    Global Business Group     Global
Markets
Business
Group
    Other     Total  
          Other
than
MUAH
/Krungsri
    MUAH     Krungsri     Total        
    (in billions)  

Six months ended September 30, 2014:

                   

Net revenue:

  ¥ 630.5      ¥ 455.8      ¥ 81.3      ¥ 274.7      ¥ 184.9      ¥ 98.9      ¥ 558.5      ¥ 343.6      ¥ 3.9      ¥ 2,073.6   

BTMU and MUTB:

    288.2        397.2        34.1        222.9        —          —          222.9        271.3        41.8        1,255.5   

Net interest income

    191.3        172.5        —          113.5        —          —          113.5        132.4        95.0        704.7   

Net fees

    90.2        181.6        34.1        87.0        —          —          87.0        (15.7     (42.9     334.3   

Other

    6.7        43.1        —          22.4        —          —          22.4        154.6        (10.3     216.5   

Other than BTMU and MUTB(1)

    342.3        58.6        47.2        51.8        184.9        98.9        335.6        72.3        (37.9     818.1   

Operating expenses

    475.7        223.8        49.4        179.6        126.8        51.6        358.0        98.7        87.7        1,293.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

  ¥ 154.8      ¥ 232.0      ¥ 31.9      ¥ 95.1      ¥ 58.1      ¥ 47.3      ¥ 200.5      ¥ 244.9      ¥ (83.8   ¥ 780.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2015:

                   

Net revenue:

  ¥ 646.6      ¥ 444.4      ¥ 87.9      ¥ 295.9      ¥ 218.3      ¥ 138.0      ¥ 652.2      ¥ 330.9      ¥ 14.1      ¥ 2,176.1   

BTMU and MUTB:

    274.4        378.3        37.5        227.3        —          —          227.3        237.1        77.2        1,231.8   

Net interest income

    177.8        162.0        —          109.7        —          —          109.7        129.0        124.6        703.1   

Net fees

    92.5        178.4        37.5        88.2        —          —          88.2        (13.2     (44.0     339.4   

Other

    4.1        37.9        —          29.4        —          —          29.4        121.3        (3.4     189.3   

Other than BTMU and MUTB(1)

    372.2        66.1        50.4        68.6        218.3        138.0        424.9        93.8        (63.1     944.3   

Operating expenses

    488.9        223.4        50.9        190.5        158.1        68.5        417.1        106.5        75.9        1,362.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

  ¥ 157.7      ¥ 221.0      ¥ 37.0      ¥ 105.4      ¥ 60.2      ¥ 69.5      ¥ 235.1      ¥ 224.4      ¥ (61.8   ¥ 813.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1) Includes MUFG and its subsidiaries other than BTMU and MUTB.
(2) In January 2015, the MUFG Group integrated the former BTMU Bangkok branch with Krungsri. In the above table, the net revenue, operating expenses and operating profit of the former BTMU Bangkok branch for the six months ended September 30, 2014 are included in the Global Business Group, but not in Krungsri. The net revenue, operating expenses and operating profit of the former BTMU Bangkok branch for the six months ended September 30, 2014 were ¥13.6 billion, ¥4.3 billion and ¥9.3 billion, respectively.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Reconciliation

As set forth above, the measurement bases and the income and expense items of the internal management reporting system are different from the accompanying condensed consolidated statements of income. Therefore, it is impracticable to present reconciliations of all of the business segments’ information, other than operating profit, to corresponding items in the accompanying condensed consolidated statements of income.

A reconciliation of operating profit under the internal management reporting system for the six months ended September 30, 2014 and 2015 above to income before income tax expense shown in the accompanying condensed consolidated statements of income is as follows:

 

     Six months ended
September 30,
 
     2014     2015  
     (in billions)  

Operating profit

   ¥ 780      ¥ 813   

Credit for credit losses

     68        7   

Foreign exchange gains (losses)—net

     (46     14   

Trading account profits (losses)—net

     325        (401

Equity investment securities gains—net

     15        44   

Debt investment securities losses—net

     (39     (18

Equity in earnings of equity method investees—net

     122        114   

Other—net

     49        (63
  

 

 

   

 

 

 

Income before income tax expense

   ¥ 1,274      ¥ 510   
  

 

 

   

 

 

 

19.    FAIR VALUE

For a discussion and explanation of the MUFG Group’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015. During the six months ended September 30, 2015, there were no changes to the MUFG Group’s valuation methodologies that had a material impact on the MUFG Group’s financial position and results of operations.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value by level within the fair value hierarchy as of March 31, 2015 and September 30, 2015:

 

     March 31, 2015  
     Level 1      Level 2      Level 3      Fair Value  
     (in millions)  

Assets

           

Trading account assets:

           

Trading securities(1)

   ¥ 19,812,037       ¥ 9,513,664       ¥ 860,418       ¥ 30,186,119   

Debt securities

           

Japanese national government and Japanese government agency bonds

     3,801,877         235,175         —           4,037,052   

Japanese prefectural and municipal bonds

     —           141,390         —           141,390   

Foreign governments and official institutions bonds

     14,674,376         1,661,959         66,197         16,402,532   

Corporate bonds

     —           3,944,861         96,918         4,041,779   

Residential mortgage-backed securities

     —           1,679,135         38,730         1,717,865   

Asset-backed securities

     —           233,147         586,635         819,782   

Other debt securities

     —           13,369         37,812         51,181   

Commercial paper

     —           1,194,922         —           1,194,922   

Equity securities(2)

     1,335,784         409,706         34,126         1,779,616   

Trading derivative assets

     151,217         16,446,522         121,045         16,718,784   

Interest rate contracts

     50,492         11,342,398         42,373         11,435,263   

Foreign exchange contracts

     3,317         4,850,363         12,884         4,866,564   

Equity contracts

     97,408         101,212         51,830         250,450   

Commodity contracts

     —           82,464         13,819         96,283   

Credit derivatives

     —           70,085         139         70,224   

Investment securities:

           

Available-for-sale securities

     39,455,720         7,632,847         401,837         47,490,404   

Debt securities

           

Japanese national government and Japanese government agency bonds

     32,214,231         3,191,401         —           35,405,632   

Japanese prefectural and municipal bonds

     —           194,415         —           194,415   

Foreign governments and official institutions bonds

     1,126,729         526,126         29,649         1,682,504   

Corporate bonds

     —           1,236,340         19,284         1,255,624   

Residential mortgage-backed securities

     —           931,635         93         931,728   

Commercial mortgage-backed securities

     —           203,797         3,785         207,582   

Asset-backed securities

     —           1,079,317         166,723         1,246,040   

Other debt securities

     —           —           182,303         182,303   

Marketable equity securities

     6,114,760         269,816         —           6,384,576   

Other investment securities

     —           —           22,537         22,537   

Others(3)(4)

     327,360         14,036         4,540         345,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 59,746,334       ¥ 33,607,069       ¥ 1,410,377       ¥ 94,763,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Trading account liabilities:

           

Trading securities sold, not yet purchased

   ¥ 82,743       ¥ 15,720       ¥ —         ¥ 98,463   

Trading derivative liabilities

     154,767         16,694,360         81,795         16,930,922   

Interest rate contracts

     42,790         11,284,872         13,299         11,340,961   

Foreign exchange contracts

     2,930         5,168,200         4,483         5,175,613   

Equity contracts

     109,047         90,285         45,924         245,256   

Commodity contracts

     —           82,718         14,752         97,470   

Credit derivatives

     —           68,285         3,337         71,622   

Obligation to return securities received as collateral

     2,476,588         174,563         —           2,651,151   

Others(5)

     —           711,055         36,293         747,348   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 2,714,098       ¥ 17,595,698       ¥ 118,088       ¥ 20,427,884   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

    September 30, 2015  
    Level 1     Level 2     Level 3     Fair Value  
    (in millions)  

Assets

       

Trading account assets:

       

Trading securities(1)

  ¥ 17,828,640      ¥ 8,750,770     ¥ 944,677      ¥ 27,524,087   

Debt securities

       

Japanese national government and Japanese government agency bonds

    3,799,892        291,716       —          4,091,608   

Japanese prefectural and municipal bonds

    —          190,550       —          190,550   

Foreign governments and official institutions bonds

    13,203,253        1,384,349       61,690        14,649,292   

Corporate bonds

    —          3,840,108       119,524        3,959,632   

Residential mortgage-backed securities

    —          1,468,441       34,839        1,503,280   

Asset-backed securities

    —          169,405       653,135        822,540   

Other debt securities

    —          8,817       37,489        46,306   

Commercial paper

    —          1,040,875       —          1,040,875   

Equity securities(2)

    825,495        356,509       38,000        1,220,004   

Trading derivative assets

    151,366        16,222,865       105,861        16,480,092   

Interest rate contracts

    23,171        11,216,743       40,263        11,280,177   

Foreign exchange contracts

    3,136        4,800,750       4,455        4,808,341   

Equity contracts

    125,059        92,799       45,560        263,418   

Commodity contracts

    —          53,790       15,281        69,071   

Credit derivatives

    —          58,783       302        59,085   

Investment securities:

       

Available-for-sale securities

    34,515,645        7,372,551        386,459        42,274,655   

Debt securities

       

Japanese national government and Japanese government agency bonds

    27,797,004        2,696,471        —          30,493,475   

Japanese prefectural and municipal bonds

    —          197,489       —          197,489   

Foreign governments and official institutions bonds

    1,153,132        712,013       23,931        1,889,076   

Corporate bonds

    —          1,108,131       17,815        1,125,946   

Residential mortgage-backed securities

    —          946,115       19        946,134   

Commercial mortgage-backed securities

    —          199,133       3,971        203,104   

Asset-backed securities

    —          1,255,239        161,777        1,417,016   

Other debt securities

    —          —         178,946        178,946   

Marketable equity securities

    5,565,509        257,960       —          5,823,469   

Other investment securities

    —          —         24,373        24,373   

Others(3)(4)

    166,824        22,907        4,801        194,532   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 52,662,475      ¥ 32,369,093      ¥ 1,466,171      ¥ 86,497,739   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Trading account liabilities:

       

Trading securities sold, not yet purchased

  ¥ 92,345      ¥ 18,607      ¥ —        ¥ 110,952   

Trading derivative liabilities

    137,637        15,982,610       75,887        16,196,134   

Interest rate contracts

    21,843        11,086,022       11,867        11,119,732   

Foreign exchange contracts

    4,686        4,715,229       1,765        4,721,680   

Equity contracts

    111,108        74,310       46,939        232,357   

Commodity contracts

    —          52,490       15,221        67,711   

Credit derivatives

    —          54,559       95        54,654   

Obligation to return securities received as collateral

    2,978,330        63,608        —          3,041,938   

Others(5)

    —          721,308       (9,541     711,767   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 3,208,312      ¥ 16,786,133      ¥ 66,346     ¥ 20,060,791   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

  

(1)    

   Includes securities measured under the fair value option.
  

(2)    

   Includes investments valued at net asset value of ¥27,266 million and ¥25,389 million at March 31, 2015 and September 30, 2015, respectively. The unfunded commitments related to these investments at March 31, 2015 and September 30, 2015 were ¥7,206 million and ¥12,490 million, respectively. These investments were mainly in private equity funds.

 

F-65


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

   (3)    Mainly comprises securities received as collateral that may be sold or repledged under securities lending transactions, money in trust for segregating cash deposited by customers on security transactions and derivative assets designated as hedging instruments.
   (4)    Includes investments valued at net asset value of real estate funds, hedge funds and private equity funds, whose fair values at March 31, 2015 were ¥1,740 million, nil and ¥1,883 million, respectively, and those at September 30, 2015 were ¥1,849 million, nil and ¥2,085 million, respectively. The amounts of unfunded commitments related to these real estate funds, hedge funds and private equity funds at March 31, 2015 were nil, nil and ¥1,790 million, respectively, and those at September 30, 2015 were nil, nil and ¥111 million, respectively.
   (5)    Includes other short-term borrowings, long-term debt, bifurcated embedded derivatives carried at fair value and derivative liabilities designated as hedging instruments.

Transfers Between Level 1 and Level 2

During the six months ended September 30, 2014 and 2015, the transfers between Level 1 and Level 2 were as follows:

 

     Six months ended September 30,  
     2014      2015  
     Transfers out of
Level 1
into Level 2(1)
     Transfers out of
Level 2
into Level 1(1)
     Transfers out of
Level 1
into Level 2(1)
     Transfers out of
Level 2
into Level 1(1)
 
     (in millions)  

Assets

           

Trading account assets:

           

Trading securities

           

Debt securities

           

Foreign governments and official institutions bonds

   ¥ —        ¥ —        ¥ —         ¥ 26,388   

Equity securities

     —          3,492         —           —     

Investment securities:

           

Available-for-sale securities

           

Marketable equity securities

     5,156         5,370         18,190         4,076   

 

Note:

     (1  

All transfers between Level 1 and Level 2 were assumed to have occurred at the beginning of the period.

In general, the transfers from Level 1 into Level 2 represented securities whose fair values were measured at quoted prices in active markets at the beginning of the period but such quoted prices were not available at the end of the period. The transfers from Level 2 into Level 1 represented securities for which quoted prices in active markets became available at the end of the period even though such quoted prices were not available at the beginning of the period.

 

F-66


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

 

Changes in Level 3 Recurring Fair Value Measurements

The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended September 30, 2014 and 2015. The determination to classify a financial instrument within Level 3 is based upon the significance of the unobservable inputs to overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 input, observable inputs (that is, inputs that are actively quoted and can be validated to external sources). Accordingly, the gains and losses in the tables below include changes in fair value due in part to observable inputs used in the valuation techniques.

 

    March 31,
2014
    Total gains (losses)
for the period
    Purchases     Issues     Sales     Settlements     Transfers
into
Level 3(5)
    Transfers
out of Level 3(5)
    September 30,
2014
    Change in
unrealized
gains (losses)
included in
earnings for
assets and
liabilities
still held at
September 30,
2014
 
    Included
in
earnings
    Included
in other
comprehensive
income
                 
    (in millions)  

Assets

                     

Trading account assets:

                     

Trading securities(1)

  ¥ 658,917      ¥ 52,322 (2)    ¥ —       ¥ 469,733      ¥ —       ¥ (292,501   ¥ (64,398   ¥ 22,869      ¥ (11,212   ¥ 835,730      ¥ 47,981 (2) 

Debt securities

                     

Foreign governments and official institutions bonds

    15,450        2,784        —         43,693        —         (39,373     (8,204     —         (1,036     13,314        1,722   

Corporate bonds

    132,518        12,398        —         62,837        —         (1,468     (1,326     22,869 (6)      (10,176 )(6)      217,652        12,357   

Residential mortgage-backed securities

    11,601        4,027        —         192,004        —         (164,359     (3,855     —         —         39,418        2,377   

Asset-backed securities

    439,664        30,878        —         164,972        —         (83,915     (51,013     —         —         500,586        30,318   

Other debt securities

    32,565        1,207        —         —         —         —         —         —         —         33,772        1,207   

Equity securities

    27,119        1,028        —         6,227        —         (3,386     —         —         —         30,988        —    

Trading derivatives—net

    8,864        10,091 (2)      7        2,213        (2,535     —         (80     1,264        (5,230     14,594        11,795 (2) 

Interest rate contracts—net

    13,676        11,984        (70     —         —         —         1,808        770        (3,264     24,904        13,927   

Foreign exchange contracts—net

    (7,038     (6,400     14        1,018        (828     —         (1,007     494        (1,964     (15,711     (5,547

Equity contracts—net

    4,195        2,468        21        327        (327     —         (1,004     —         —         5,680        2,366   

Commodity contracts—net

    (622     1,156        25        868        (1,380     —         147        —         (2     192        1,029   

Credit derivatives—net

    (1,347     883        17        —         —         —         (24     —         —         (471     20   

Investment securities:

                     

Available-for-sale securities

    544,688        (40 )(3)      (10,598     113,193        —         (12,639     (129,859     1,007        (2,660     503,092        (485 )(3) 

Debt securities

                     

Foreign governments and official institutions bonds

    151,647        —         (327     800        —         —         (390     —         —         151,730        —    

Corporate bonds

    75,849        1,035        (86     16        —         (5,664     (3,955     1,007 (6)      (2,660 )(6)      65,542        (485

Residential mortgage-backed securities

    19,258        (1     179        —         —         (6,975     (1,152     —         —         11,309        —    

Commercial mortgage-backed securities

    3,112        —         70        —         —         —         (36     —         —         3,146        —    

Asset-backed securities

    109,876        (1,074     (4,258     99,080        —         —         (101,686     —         —         101,938        —    

Other debt securities

    184,946        —         (6,176     13,297        —         —         (22,640     —         —         169,427        —    

Other investment securities

    26,201        2,600 (4)      —         754        —         (1,414     —         —         —         28,141        2,041 (4) 

Others

    5,598        993 (4)      —         382        —         (373     —         —         —         6,600        906 (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 1,244,268      ¥ 65,966      ¥ (10,591   ¥ 586,275      ¥ (2,535   ¥ (306,927   ¥ (194,337   ¥ 25,140      ¥ (19,102   ¥ 1,388,157      ¥ 62,238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                     

Obligation to return securities received as collateral

  ¥ —       ¥ —       ¥ —       ¥ 305      ¥ —       ¥ —       ¥ —       ¥ —       ¥ —       ¥ 305      ¥ —    

Others

    92,867        (23,535 )(4)      691        —         51        —         (7,187     8,799        (82,641     34,733        (26,843 )(4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 92,867      ¥ (23,535   ¥ 691      ¥ 305      ¥ 51      ¥ —       ¥ (7,187   ¥ 8,799      ¥ (82,641   ¥ 35,038      ¥ (26,843
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-67


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

 

    March 31,
2015
    Total gains (losses)
for the period
    Purchases     Issues     Sales     Settlements     Transfer
into
Level 3(5)
    Transfer
out of Level 3(5)
    September 30,
2015
    Change in
unrealized
gains (losses)
included in
earnings for
assets and
liabilities
still held at
September 30,
2015
 
    Included
in
earnings
    Included in
other
comprehensive
income
                 
    (in millions)  

Assets

                     

Trading account assets:

                     

Trading securities(1)

  ¥ 860,418      ¥ (2,596 )(2)    ¥ —        ¥  278,396      ¥ —        ¥ (111,857   ¥ (110,658   ¥  46,277      ¥ (15,303   ¥ 944,677      ¥ (5,835 )(2) 

Debt securities

                     

Foreign governments and official institutions bonds

    66,197        (466 )      —          65,667        —          (16,394     (53,314     —          —          61,690        (490 ) 

Corporate bonds

    96,918        (523 )      —          78,538        —          (51,125 )       (8,530 )      19,549 (6)      (15,303 )(6)      119,524        (577 ) 

Residential mortgage-backed securities

    38,730        (17 )      —          —          —          —          (4,517 )      643        —          34,839        (62 ) 

Asset-backed securities

    586,635        (2,440 )      —          128,045        —          (42,410 )       (42,780 )      26,085        —          653,135        (4,383 ) 

Other debt securities

    37,812        (323 )      —          —          —          —          —          —          —          37,489        (323 ) 

Equity securities

    34,126        1,173        —          6,146        —          (1,928 )       (1,517 )      —          —          38,000        —     

Trading derivatives—net

    39,250        (5,081 )(2)      150        1,898        (1,281 )      —          (279 )      1,006        (5,689 )      29,974        2,849 (2) 

Interest rate contracts—net

    29,074        (1,288 )      35        8        (2 )       —          2,251        338        (2,020 )      28,396        (114 ) 

Foreign exchange contracts—net

    8,401        1,390        13        864        (802 )       —          (3,580 )      600        (4,196 )      2,690        1,300   

Equity contracts—net

    5,906        (5,915 )      75        131        (131 )       —          (1,445 )      —          —          (1,379 )      625   

Commodity contracts—net

    (933 )      522        (19 )      895        (346 )       —          (59 )      —          —          60        939   

Credit derivatives—net

    (3,198 )      210        46        —          —          —          2,554        68        527        207        99   

Investment securities:

                     

Available-for-sale securities

    401,837        (7,442 )(3)      5,056        158,726        —          (283 )       (170,040 )      97        (1,492 )      386,459        (59 )(3) 

Debt securities

                     

Foreign governments and official institutions bonds

    29,649        —          (436 )      529        —          —          (5,811 )      —          —          23,931        —     

Corporate bonds

    19,284        463        204        751        —          (283 )       (1,209 )      97 (6)      (1,492 )(6)      17,815        (52 ) 

Residential mortgage-backed securities

    93        —          —          —          —          —          (74 )      —          —          19        —     

Commercial mortgage-backed securities

    3,785        —          232        —          —          —          (46 )      —          —          3,971        —     

Asset-backed securities

    166,723        (7,986 )       2,467        155,994        —          —          (155,421 )      —          —          161,777        (7 ) 

Other debt securities

    182,303        81        2,589        1,452        —          —          (7,479 )      —          —          178,946        —     

Other investment securities

    22,537        425 (4)      —          2,435        —          (1,024 )       —          —          —          24,373        (143 )(4) 

Others

    4,540        754 (4)      —          105        —          (598 )       —          —          —          4,801        526 (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥  1,328,582      ¥  (13,940 )    ¥ 5,206      ¥ 441,560      ¥  (1,281 )    ¥  (113,762 )    ¥ (280,977 )    ¥ 47,380      ¥ (22,484 )    ¥  1,390,284      ¥ (2,662 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                     

Others

  ¥ 36,293      ¥ 32,922 (4)    ¥ (572 )    ¥ (2,271 )     ¥ —        ¥ —        ¥ (12,167 )    ¥ 5,652      ¥ (4,698 )    ¥ (9,541 )    ¥ 33,242 (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 36,293      ¥ 32,922      ¥ (572 )    ¥ (2,271 )    ¥ —        ¥ —        ¥ (12,167   ¥ 5,652      ¥ (4,698 )    ¥ (9,541 )    ¥ 33,242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

     (1   Includes Trading securities measured under the fair value option.
     (2   Included in Trading account profits (losses)—net and in Foreign exchange gains (losses)—net.
     (3   Included in Investment securities gains—net.
     (4   Included in Trading account profits (losses)—net.
     (5   All transfers out of Level 3 or into Level 3 were assumed to have occurred at the beginning of the period.
     (6   Transfers out of, and transfers into, Level 3 for corporate bonds were due principally to changes in the impact of unobservable creditworthiness inputs of the private placement bonds.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Quantitative Information about Level 3 Fair Value Measurements

The following tables present information on the valuation techniques, significant unobservable inputs and their ranges for each major category of assets and liabilities measured at fair value on a recurring basis and classified in Level 3:

 

March 31, 2015

  Fair  value(1)    

Valuation technique

 

Significant unobservable inputs

 

Range

  Weighted
Average(2)
 
    (in millions)                    

Assets

         

Trading securities and Investment securities:

         

Foreign governments and official institutions bonds

  ¥
5,290
  
 

Monte Carlo method

 

Correlation between interest rate and foreign exchange rate

  25.9%~52.9%     41.4
     

Correlation between interest rates

  37.5%~54.0%     51.6
    29,649      Return on equity method  

Probability of default

  0.0%~0.9%     0.2
     

Recovery rate

  60.0%~80.0%     72.0
     

Market-required return on capital

  8.0%~10.0%     9.8

Corporate bonds

    11,018      Discounted cash flow  

Probability of default

  5.0%~13.4%     7.0
     

Recovery rate

  17.4%~67.6%     51.6
    171      Monte Carlo method  

Correlation between interest rate and foreign exchange rate

  25.9%~52.9%     42.8
      Correlation between interest rates   45.9%~54.0%     52.7

Residential mortgage-backed securities, Commercial mortgage-backed securities and Asset-backed securities

    150,588      Discounted cash flow   Probability of default   2.8%~5.3%     4.4
      Recovery rate   60.0%~76.0%     64.8
    560,800      Internal model   Asset correlations   11.0%~15.0%     14.7
      Discount factor   1.5%~7.3%     1.8
      Prepayment rate   5.3%~25.9%     24.6
      Probability of default   0.0%~83.7%     —   (3) 
      Recovery rate   49.0%~69.5%     68.5

Other debt securities

    37,812      Discounted cash flow   Liquidity premium   0.6%~0.8%     0.8
    180,239      Return on equity method   Probability of default   0.0%~25.0%     0.5
      Recovery rate   40.0%~90.0%     68.9
      Market-required return on capital   8.0%~10.0%     10.0

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

March 31, 2015

  Fair  value(1)    

Valuation technique

 

Significant unobservable inputs

  Range  
    (in millions)                

Trading derivatives—net:

       

Interest rate contracts—net

    27,962      Option model  

Probability of default

    0.0%~13.4%   
     

Correlation between interest rates

    10.3%~99.0%   
     

Correlation between interest rate and foreign exchange rate

    25.9%~52.9%   
     

Recovery rate

    41.0%~46.0%   
     

Volatility

    38.2%~63.0%   

Foreign exchange contracts—net

    8,405      Option model  

Probability of default

    0.1%~13.4%   
     

Correlation between interest rates

    54.0%~80.7%   
     

Correlation between interest rate and foreign exchange rate

    32.9%~58.4%   
     

Correlation between underlying assets

    52.6%~73.2%   
     

Recovery rate

    41.0%~46.0%   

Equity contracts—net

    5,976      Option model  

Correlation between interest rate and equity

    5.7%~59.6%   
     

Volatility

    0.0%~70.0%   

Credit derivative contracts—net

    (3,198   Option model  

Recovery rate

    37.2%~37.2%   
     

Correlation between underlying assets

    6.4%~100.0%   

 

September 30, 2015

  Fair  value(1)    

Valuation technique

 

Significant unobservable inputs

  Range     Weighted
Average(2)
 
    (in millions)                      

Assets

         

Trading securities and Investment securities:

         

Foreign governments and official institutions bonds

  ¥ 1,108      Monte Carlo method  

Correlation between interest rate and foreign exchange rate

    22.4%~48.6%        30.2%   
     

Correlation between interest rates

    38.0%~55.0%        47.6%   
    23,931      Return on equity method  

Probability of default

    0.0%~0.9%        0.3%   
     

Recovery rate

    60.0%~80.0%        70.1%   
     

Market-required return on capital

    8.0%~10.0%        9.4%   

Corporate bonds

    8,829      Discounted cash flow  

Probability of default

    4.7%~13.1%        5.5%   
     

Recovery rate

    41.0%~66.9%        59.4%   
    46      Monte Carlo method  

Correlation between interest rate and foreign exchange rate

    22.4%~35.9%        29.1%   
     

Correlation between interest rates

    48.0%        48.0%   

Residential mortgage-backed securities, Commercial mortgage-backed securities and Asset-backed securities

    142,570      Discounted cash flow  

Probability of default

    2.8%~5.3%        4.5%   
     

Recovery rate

    60.0%~76.0%        64.9%   
    620,580      Internal model  

Asset correlations

    11.0%~15.0%        14.8%   
     

Discount factor

    1.6%~6.6%        1.8%   
     

Prepayment rate

    6.5%~20.5%        19.8%   
     

Probability of default

    0.0%~78.7%        —  (3)   
     

Recovery rate

    48.2%~59.0%        55.3%   

Other debt securities

    37,489      Discounted cash flow   Liquidity premium     0.5%~0.6%        0.5%   
    176,940      Return on equity method   Probability of default     0.0%~25.0%        0.5%   
      Recovery rate     40.0%~90.0%        69.1%   
     

Market-required return on capital

    8.0%~10.0%        10.0%   

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

September 30, 2015

  Fair  value(1)    

Valuation technique

 

Significant unobservable inputs

  Range  
    (in millions)                

Trading derivatives—net:

       

Interest rate contracts— net

    27,464      Option model   Probability of default     0.2%~13.1%   
     

Correlation between interest rates

    5.3%~99.6%   
     

Correlation between interest rate and foreign exchange rate

    22.4%~48.6%   
      Recovery rate     41.0%~47.0%   
      Volatility     39.6%~72.6%   

Foreign exchange contracts—net

    2,710      Option model   Probability of default     0.1%~13.1%   
     

Correlation between interest rates

    50.1%~74.0%   
     

Correlation between interest rate and foreign exchange rate

    20.0%~67.0%   
     

Correlation between underlying assets

    85.0%   
      Recovery rate     41.0%~47.0%   

Equity contracts—net

    (4,496   Option model  

Correlation between interest rate and equity

    33.3%~39.0%   
     

Correlation between foreign exchange rate and equity

    7.0%   
     

Correlation between equities

    31.2%~58.8%   
     

Volatility

    0.0%~100.6%   
    3,292      Discounted cash flow  

Term of litigation

    1 year   

Credit derivative contracts—net

    207      Option model   Recovery rate     37.4%~41.0%   
     

Correlation between underlying assets

    33.4%~70.1%   

 

Notes:

     (1   The fair value as of March 31, 2015 and September 30, 2015 excludes the fair value of investments valued using vendor prices.
     (2   Weighted averages are calculated by weighing each input by the relative fair value of the respective financial instruments.
     (3   See “Probability of default” in “Sensitivity to and range of unobservable inputs” in Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015.

Sensitivity to and range of unobservable inputs

Term of litigation—Term of litigation is the estimated period until the resolution of a certain litigation matter that relates to an issuer’s restricted shares (“Covered Litigation”) that the MUFG Group purchased, which is referenced in certain swap transactions.

These swaps are valued using a discounted cash flow methodology and are dependent upon the final resolution of the Covered Litigation. The settlement timing of the Covered Litigation is not observable in the market, therefore the estimated term is classified as a level 3 input.

The restricted shares which the MUFG Group purchased will be convertible to listed shares of the issuer at the end of the Covered Litigation. The restricted shares will be diluted dependent upon the settlement amount of the Covered Litigation and the dilution of the restricted shares is accomplished through an adjustment to the conversion rate of the restricted shares. In order to hedge the reduction of the conversion rate, the MUFG Group entered into certain swaps with the seller which references the conversion rate. The value generated by these trades is subject to the ultimate term of the issuer’s litigation, subject to a minimum term referenced within the trade contracts.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

For a discussion of the impact on fair value of changes in other unobservable inputs and the relationships between unobservable inputs as well as a description of attributes of the underlying instruments and external market factors that affect the range of inputs used in the valuation of the MUFG Group’s Level 3 financial instruments, see Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015.

Valuation Process for Level 3 Fair Value Measurements

The MUFG Group establishes valuation policies and procedures for measuring fair value, for which the risk management departments ensure that the valuation techniques used are logical, appropriate and consistent with market information. The financial accounting offices ensure that the valuation techniques are consistent with the accounting policies. See Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information on the MUFG Group’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities may be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. See Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015 for further information on assets and liabilities measured at fair value on a nonrecurring basis.

The following table presents the carrying value of assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of March 31, 2015 and September 30, 2015:

 

    March 31, 2015     September 30, 2015  
    Level 1     Level 2     Level 3     Total
carrying  value
    Level 1     Level 2     Level 3     Total
carrying  value
 
    (in millions)  

Assets

               

Investment securities(1)

  ¥ —       ¥ —        ¥ 2,489      ¥ 2,489      ¥ —        ¥ —        ¥ 1,049      ¥ 1,049   

Loans

    6,452        8,830        268,977        284,259        5,983        6,401        240,686        253,070   

Loans held for sale

    —          50        2,179        2,229        —          50        5,573        5,623   

Collateral dependent loans

    6,452        8,780        266,798        282,030        5,983        6,351        235,113        247,447   

Premises and equipment

    —          —          6,072        6,072        —          —          5,802        5,802   

Intangible assets

    —          —          200        200        —          —          169        169   

Goodwill

    —          —          14,032        14,032        —          —          —          —     

Other assets

    —          —          9,783        9,783        —          —          7,276        7,276   

Investments in equity method investees(1)

    —          —          1,379        1,379        —          —          1,546        1,546   

Other

    —          —          8,404        8,404        —          —          5,730        5,730   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 6,452      ¥ 8,830      ¥ 301,553      ¥ 316,835      ¥ 5,983      ¥ 6,401      ¥ 254,982      ¥ 267,366   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

     (1   Includes investments valued at net asset value of ¥2,130 million and ¥1,546 million at March 31, 2015 and September 30, 2015, respectively. The unfunded commitments related to these investments are ¥868 million and ¥146 million at March 31, 2015 and September 30, 2015, respectively. These investments are in private equity funds.

 

F-72


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table presents losses recorded as a result of nonrecurring changes in fair value for the six months ended September 30, 2014 and 2015:

 

     Losses for the
six  months ended
September 30,
 
     2014      2015  
     (in millions)  

Investment securities

   ¥ 1,714       ¥ 413   

Loans

     24,557         19,612   

Loans held for sale

     6         23   

Collateral dependent loans

     24,551         19,589   

Premises and equipment

     902         5,735   

Intangible assets

     108         213   

Other assets

     5,099         1,432   

Investments in equity method investees

     43         676   

Other

     5,056         756   
  

 

 

    

 

 

 

Total

   ¥ 32,380       ¥ 27,405   
  

 

 

    

 

 

 

Fair Value Option

For a discussion of the primary financial instruments for which the fair value option was previously elected, including the basis for those, see Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015.

The following table presents the gains or losses recorded for the six months ended September 30, 2014 and 2015 related to the eligible instruments for which the MUFG Group elected the fair value option:

 

     Six months ended September 30,  
     2014      2015  
     Trading
account
profits (losses)
     Foreign
exchange
gains (losses)
     Total
changes in
fair value
     Trading
account
profits (losses)
    Foreign
exchange
gains (losses)
     Total
changes in
fair value
 
     (in millions)  

Financial assets:

                

Trading account securities

   ¥ 276,935       ¥ 511,667       ¥ 788,602       ¥ (396,483   ¥ 111,508       ¥ (284,975

Other assets

     10         —           10         (9     —           (9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 276,945       ¥ 511,667       ¥ 788,612       ¥ (396,492   ¥ 111,508       ¥ (284,984
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

                

Other short-term borrowings(1)

   ¥ 450       ¥ —         ¥ 450       ¥ 9,687      ¥ —         ¥ 9,687   

Long-term debt(1)

     5,559         —           5,559         35,516        —           35,516   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 6,009       ¥ —         ¥ 6,009       ¥ 45,203      ¥ —         ¥ 45,203   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

Note:

     (1)       Change in value attributable to the instrument-specific credit risk related to those financial liabilities are not material.

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

The following table presents the differences between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2015 and September 30, 2015 for long-term receivables and debt instruments for which the fair value option has been elected:

 

     March 31, 2015     September 30, 2015  
     Remaining
aggregate
contractual
amounts
outstanding
     Fair value      Fair value
over  (under)
remaining
aggregate
contractual
amounts
outstanding
    Remaining
aggregate
contractual
amounts
outstanding
     Fair value      Fair value
over  (under)
remaining
aggregate
contractual
amounts
outstanding
 
     (in millions)  

Financial assets:

                

Other assets

   ¥ 1,000       ¥ 1,007       ¥ 7      ¥ 500       ¥ 501       ¥ 1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,000       ¥ 1,007       ¥ 7      ¥ 500      ¥ 501       ¥ 1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Financial liabilities:

                

Long-term debt

   ¥ 585,694       ¥ 584,630       ¥ (1,064   ¥ 557,473       ¥ 535,402       ¥ (22,071
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 585,694       ¥ 584,630       ¥ (1,064   ¥ 557,473       ¥ 535,402       ¥ (22,071
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest income and expense and dividend income related to the assets and liabilities for which the fair value option is elected are measured based on the contractual rates and reported in the accompanying condensed consolidated statements of income as either interest income or expense, depending on the nature of the related asset or liability.

 

F-74


Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Estimated Fair Value of Financial Instruments

The following is a summary of carrying amounts and estimated fair values by level within the fair value hierarchy of financial instruments which are not carried at fair value in the accompanying condensed consolidated balance sheets as of March 31, 2015 and September 30, 2015:

 

     March 31, 2015  
     Carrying
amount
     Estimated fair value  
        Total      Level 1      Level 2      Level 3  
     (in billions)  

Financial assets:

              

Cash and due from banks

   ¥ 3,353       ¥ 3,353       ¥ 3,353       ¥ —         ¥ —     

Interest-earning deposits in other banks

     37,365         37,365         —           37,365         —     

Call loans and funds sold

     660         660         —           660         —     

Receivables under resale agreements

     7,273         7,273         —           7,273         —     

Receivables under securities borrowing transactions

     4,660         4,660         —           4,660         —     

Investment securities(1)(2)

     4,285         4,369         1,145         1,034         2,190   

Loans, net of allowance for credit losses(3)

     117,210         118,720         6         290         118,424   

Other financial assets(4)

     5,272         5,272         —           5,272         —     

Financial liabilities:

              

Deposits

              

Non-interest-bearing

   ¥ 23,446       ¥ 23,446       ¥ —         ¥ 23,446       ¥ —     

Interest-bearing

     148,543         148,574         —           148,574         —     

Total deposits

     171,989         172,020         —           172,020         —     

Call money and funds purchased

     3,669         3,669         —           3,669         —     

Payables under repurchase agreements

     20,728         20,728         —           20,728         —     

Payables under securities lending transactions

     8,205         8,205         —           8,205         —     

Due to trust account

     1,611         1,611         —           1,611         —     

Other short-term borrowings

     11,389         11,389         —           11,389         —     

Long-term debt

     19,394         19,672         —           19,672         —     

Other financial liabilities

     7,682         7,682         —           7,682         —     

 

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Table of Contents

Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

     September 30, 2015  
     Carrying
amount
     Estimated fair value  
        Total      Level 1      Level 2      Level 3  
     (in billions)  

Financial assets:

              

Cash and due from banks

   ¥ 3,651       ¥ 3,651       ¥ 3,651       ¥ —         ¥ —     

Interest-earning deposits in other banks

     44,238         44,238         —           44,238         —     

Call loans and funds sold

     644         644         —           644         —     

Receivables under resale agreements

     6,674         6,674         —           6,674         —     

Receivables under securities borrowing transactions

     6,740         6,740         —           6,740         —     

Investment securities(1)(2)

     4,111         4,184         1,129         1,237         1,818   

Loans, net of allowance for credit losses(3)

     119,718         121,247         6         514         120,727   

Other financial assets(4)

     5,666         5,666         —           5,666         —     

Financial liabilities:

              

Deposits

              

Non-interest-bearing

   ¥ 23,615       ¥ 23,615       ¥ —         ¥ 23,615       ¥ —     

Interest-bearing

     148,756         148,792         —           148,792         —     

Total deposits

     172,371         172,407         —           172,407         —     

Call money and funds purchased

     3,898         3,898         —           3,898         —     

Payables under repurchase agreements

     20,993         20,993         —           20,993         —     

Payables under securities lending transactions

     9,086         9,086         —           9,086         —     

Due to trust account

     2,009         2,009         —           2,009         —     

Other short-term borrowings

     11,894         11,894         —           11,894         —     

Long-term debt

     20,261         20,479         —           20,479         —     

Other financial liabilities

     7,924         7,924         —           7,924         —     

 

Notes:

     (1   Includes impaired securities measured at fair value on a nonrecurring basis. Refer to “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” for the details of the level classification.
     (2   Excludes cost-method investments of ¥410 billion and ¥430 billion at March 31, 2015 and September 30, 2015, respectively, of which the MUFG Group did not estimate the fair value since it was not practical and no impairment indicators were identified. See Note 3 for the details of these cost-method investments.
     (3   Includes loans held for sale and collateral dependent loans measured at fair value on a nonrecurring basis. Refer to “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” for the details of the level classification.
     (4   Excludes investments in equity method investees of ¥2,049 billion and ¥1,992 billion at March 31, 2015 and September 30, 2015, respectively.

For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used by the MUFG Group to estimate their fair values of financial instruments that are not recorded at fair value in the accompanying condensed consolidated balance sheets, see Note 31 to the consolidated financial statements for the fiscal year ended March 31, 2015.

The fair values of certain off-balance sheet financial instruments held for purposes other than trading, including commitments to extend credit and commercial letters of credit, are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit quality. The aggregate fair value of such instruments at March 31, 2015 and September 30, 2015 was not material.

The fair value estimates presented herein are based on pertinent information available to management at March 31, 2015 and September 30, 2015. These amounts have not been comprehensively reevaluated since that date, and therefore, current estimates of fair values may have changed significantly from the amounts presented herein.

 

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Mitsubishi UFJ Financial Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

20.    INVESTMENTS IN EQUITY METHOD INVESTEES

Summarized Financial Information of the MUFG Group’s equity method investee

Summarized operating results of Morgan Stanley, the largest portion of the MUFG Group’s equity method investees, for the six months ended September 30, 2014 and 2015 are as follows:

 

     2014      2015  
     (in billions)  

Net revenues

   ¥ 1,805       ¥ 2,133   

Total non-interest expenses

     1,377         1,621   

Income from continuing operations before income taxes

     428         512   

Net income applicable to Morgan Stanley

     370         344   

21.    SUBSEQUENT EVENTS

Issuance of Unsecured Perpetual Subordinated Bonds with Optional-Redemption Clause and Write-down Clause

On October 23, 2015, MUFG determined the issuance of its second series of unsecured perpetual subordinated bonds totaling ¥150 billion with optional-redemption clause and write-down clause in order to enhance the regulatory capital of MUFG and its consolidated subsidiaries, and the payment was completed on October 29, 2015. The bonds rank, as to the payment of liabilities in MUFG’s liquidation proceedings excluding special liquidation proceedings, effectively, junior to the general creditors and dated subordinated creditors of MUFG, senior to MUFG’s common shares, and pari passu with MUFG’s preferred shares and its special purpose companies’ preferred securities. The bonds are qualified as MUFG’s Additional Tier 1 capital under the current applicable capital adequacy requirements.

Approval of Dividends

On November 13, 2015, the Board of Directors of MUFG approved the payment of semi-annual interim cash dividends of ¥9 per share of Common stock, totaling ¥125,212 million, that were payable on December 4, 2015 to the shareholders of record on September 30, 2015.

Repurchase of own shares

From November 16, 2015 to December 8, 2015, MUFG repurchased 121,703,700 shares of MUFG’s common stock. These purchases were made through Off-Auction Own Share Repurchase Trading (ToSTNeT-3) of the Tokyo Stock Exchange and by market purchases based on the discretionary dealing contract regarding repurchase of own shares for approximately ¥100 billion in aggregate in satisfaction of the resolution adopted at the meeting of the Board of Directors of MUFG held on November 13, 2015. The repurchase plan as authorized by the Board of Directors of MUFG allowed for the repurchase of an aggregate amount of up to 140,000,000 shares, which represents the equivalent of 1.01% of the total number of common shares outstanding, or of an aggregate repurchase amount of up to ¥100 billion. The purpose of repurchase is to enhance the return of earnings to shareholders, to improve capital efficiency, and to implement flexible capital policies.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

Capital and Business Alliance with Security Bank Corporation

On January 14, 2016, BTMU announced that it entered into a subscription agreement with Security Bank Corporation (“Security Bank”), a commercial bank in the Philippines, and agreed to establish a capital and business alliances with Security Bank. Security Bank is listed on the Philippines Stock Exchange and is not part of any local conglomerate in the Philippines. As part of the transaction, BTMU plans to acquire through a private placement newly issued common shares and preferred shares with voting rights, representing in the aggregate 20.0% of Security Bank’s equity interest on a fully diluted basis for Philippine peso 36,943 million, or approximately ¥97,160 million. Following the completion of the acquisition, BTMU will have the right to appoint two directors to Security Bank’s board of directors. The transaction is expected to close during the first half of the calendar year 2016, subject to regulatory approvals and satisfaction of other conditions precedent. Following the completion of the transaction, Security Bank is expected to be treated as an equity method investee of BTMU.

* * * * *

 

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Average Balance Sheets, Interest and Average Rates (Unaudited)

 

    Six months ended September 30,  
    2014     2015  
    Average
balance
    Interest     Average rate
(Annualized)
    Average
balance
    Interest     Average rate
(Annualized)
 
    (in millions, except percentages)  

Assets:

           

Interest-earning assets:

           

Interest-earning deposits in other banks

  ¥ 25,668,097      ¥ 29,934        0.23   ¥ 39,952,254      ¥ 37,886        0.19

Call loans, funds sold, and receivables under resale agreements and securities borrowing transactions

    11,958,394        34,834        0.58        14,628,048        28,759        0.39   

Trading account assets

    27,136,178        206,135        1.52        26,798,275        196,241        1.46   

Investment securities

    51,533,998        188,482        0.73        50,977,726        201,240        0.79   

Loans

    110,282,213        973,824        1.76        121,914,755        1,020,156        1.67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    226,578,880        1,433,209        1.26        254,271,058        1,484,282        1.16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest-earning assets:

           

Cash and due from banks

    3,391,272            3,599,136       

Other non-interest-earning assets

    35,119,945            43,163,637       

Allowance for credit losses

    (1,093,179         (1,054,821    
 

 

 

       

 

 

     

Total non-interest-earning assets

    37,418,038            45,707,952       
 

 

 

       

 

 

     

Total assets

  ¥ 263,996,918          ¥ 299,979,010       
 

 

 

       

 

 

     

Liabilities and equity:

           

Interest-bearing liabilities:

           

Deposits

  ¥ 140,246,672      ¥ 151,105        0.21   ¥ 151,845,644      ¥ 170,578        0.22

Call money, funds purchased, and payables under repurchase agreements and securities lending transactions

    30,698,151        27,284        0.18        33,896,890        20,632        0.12   

Due to trust account, other short-term borrowings, and trading account liabilities

    15,320,825        31,569        0.41        15,721,411        25,843        0.33   

Long-term debt

    15,313,522        121,866        1.59        21,235,045        136,630        1.28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    201,579,170        331,824        0.33        222,698,990        353,683        0.32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest-bearing liabilities

    49,953,394            62,300,990       
 

 

 

       

 

 

     

Total equity

    12,464,354            14,979,030       
 

 

 

       

 

 

     

Total liabilities and equity

  ¥ 263,996,918          ¥ 299,979,010       
 

 

 

       

 

 

     

Net interest income and interest rate spread

    ¥ 1,101,385        0.93     ¥ 1,130,599        0.84
   

 

 

   

 

 

     

 

 

   

 

 

 

Net interest income as a percentage of total interest-earning assets

        0.97         0.89
     

 

 

       

 

 

 

 

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