As filed with the Securities and Exchange Commission on September 29, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission file number 1-10277
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KABUSHIKI KAISHA MITSUBISHI TOKYO FINANCIAL GROUP
(Exact name of Registrant as specified in its charter)
MITSUBISHI TOKYO FINANCIAL GROUP, INC.
(Translation of Registrant's name into English)
Japan
(Jurisdiction of incorporation or organization)
4-1, Marunouchi 2-chome
Chiyoda-ku, Tokyo 100-6326
Japan
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, without par value............................................... New York Stock Exchange (1)
American Depositary Shares, each of which represents one one-thousandth of one
share of common stock....................................................... New York Stock Exchange
--------
(1) The listing of the registrant's common stock on the New York Stock Exchange
is for technical purposes only and without trading privileges.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
At March 31, 2003, (1) 6,232,161.72 shares of common stock (including 3,226
shares of common stock held by the registrant and its consolidated subsidiaries
as treasury stock), (2) 81,400 shares of class 1 preferred stock and (3)
100,000 shares of class 2 preferred stock were outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such short period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [_] Item 18 [X]
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TABLE OF CONTENTS
Page
----
Forward-Looking Statements.............................................................. 3
Item 1. Identity of Directors, Senior Management and Advisors........................ 4
Item 2. Offer Statistics and Expected Timetable...................................... 4
Item 3. Key Information.............................................................. 4
Item 4. Information on the Company................................................... 18
Item 5. Operating and Financial Review and Prospects................................. 42
Item 6. Directors, Senior Management and Employees................................... 100
Item 7. Major Shareholders and Related Party Transactions............................ 105
Item 8. Financial Information........................................................ 107
Item 9. The Offer and Listing........................................................ 108
Item 10. Additional Information....................................................... 109
Item 11. Quantitative and Qualitative Disclosures about Market Risk................... 128
Item 12. Description of Securities Other Than Equity Securities....................... 136
Item 13. Defaults, Dividend Arrearages and Delinquencies.............................. 137
Item 14. Material Modifications of the Rights of Security Holders and Use of Proceeds. 137
Item 15. Controls and Procedures...................................................... 137
Item 16.A. Audit Committee Financial Expert............................................. 137
Item 16.B. Code of Ethics............................................................... 137
Item 16.C. Principal Accountant Fees and Services....................................... 137
Item 16.D. Exemptions from the Listing Standards for Audit Committees................... 137
Item 17. Financial Statements......................................................... 138
Item 18. Financial Statements......................................................... 138
Item 19. Exhibits..................................................................... 138
Selected Statistical Data............................................................... A-1
Consolidated Financial Statements....................................................... F-1
For purposes of this Annual Report, we have presented our consolidated
financial statements in accordance with accounting principles generally
accepted in the United States of America, or US GAAP, except for the
risk-adjusted capital ratios, the business segment financial information and
some other specifically identified information, which are prepared in
accordance with accounting principles generally accepted in Japan, or Japanese
GAAP. Unless otherwise stated or the context otherwise requires, all amounts in
our financial statements are expressed in Japanese yen.
When we refer in this Annual Report to "MTFG," "we," "us," "our" and the
"Group," we mean Mitsubishi Tokyo Financial Group, Inc. and its consolidated
subsidiaries. References in this Annual Report to "yen" or "(Yen)" are to
Japanese yen and references to "US dollars," "US dollar," "dollars," "US$" or
"$" are to United States dollars. Our fiscal year ends on March 31 of each
year. From time to time, we may refer to the fiscal year ended March 31, 2003
throughout this Annual Report as fiscal 2002 or the 2002 fiscal year. We may
also refer to other fiscal years in a corresponding manner. References to years
not specified as being fiscal years are to calendar years.
We usually hold the ordinary general meeting of shareholders of Mitsubishi
Tokyo Financial Group, Inc. in June of each year in Chiyoda-ku, Tokyo.
2
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements.
Written forward-looking statements may appear in documents filed with the
Securities and Exchange Commission, or SEC, including this Annual Report, and
other reports to shareholders and other communications.
The U.S. Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking information to encourage companies to provide
prospective information about themselves without fear of litigation so long as
the information is identified as forward-looking and is accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the information. We
rely on this safe harbor in making these disclosures.
Forward-looking statements appear in a number of places in this Annual Report
and include statements regarding our intent, belief or current expectations
and/or the current belief or current expectations of our management with
respect to our results of operations and financial condition, including, among
other matters, our problem loans and loan losses. In many, but not all cases,
we use words such as "anticipate," "aim," "believe," "estimate," "expect,"
"intend," "plan," "probability," "risk" and similar expressions, as they relate
to us or our management, to identify forward-looking statements. These
statements reflect our current views with respect to future events and are
subject to risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those which are anticipated,
believed, estimated, expected, intended or planned. We do not intend to update
these forward-looking statements.
Our forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ from those in the
forward-looking statements as a result of various factors. We identify in this
Annual Report in "Item 3.D. Key Information--Risk Factors," "Item 4.B.
Information on the Company--Business Overview," "Item 5. Operating and
Financial Review and Prospects" and elsewhere, some, but not necessarily all,
of the important factors that could cause these differences.
We are under no obligation, and disclaim any obligation, to update or alter our
forward-looking statements, whether as a result of new information, future
events or otherwise.
3
PART I
Item 1. Identity of Directors, Senior Management and Advisors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
A. Selected Financial Data
On April 2, 2001, we were formed as a holding company for Bank of
Tokyo-Mitsubishi, Mitsubishi Trust Bank and Nippon Trust Bank. Nippon Trust
Bank was formerly a majority-owned subsidiary of Bank of Tokyo-Mitsubishi and
merged into Mitsubishi Trust Bank in October 2001. The business combination
between Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank was accounted for
under the pooling-of-interests method and, accordingly, the selected statement
of operations and balance sheet data shown below for the periods ended before
the combination set forth the combined results of Bank of Tokyo-Mitsubishi,
including Nippon Trust Bank, and Mitsubishi Trust Bank as if the combination
had been in effect for all the periods presented.
Selected statement of operations data for the fiscal years ended March 31,
1999, 2000, 2001, 2002 and 2003, and selected balance sheet data at March 31,
2000, 2001, 2002 and 2003 set forth below have been derived from our audited
consolidated financial statements. Selected balance sheet data at March 31,
1999 set forth below have been derived from the audited financial statements of
Bank of Tokyo-Mitsubishi and unaudited financial information derived from the
accounting records of Mitsubishi Trust Bank.
Except for risk-adjusted capital ratios, which are calculated in accordance
with Japanese banking regulations based on information derived from our
financial statements prepared in accordance with Japanese GAAP, and the average
balance information, the selected financial data set forth below are derived
from our financial statements prepared in accordance with US GAAP.
4
You should read the selected financial data set forth below in conjunction with
"Item 5. Operating and Financial Review and Prospects" and our consolidated
financial statements and other financial data included elsewhere in this Annual
Report. These data are qualified in their entirety by reference to all of that
information.
Years ended March 31,
----------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------- -------------- --------------- --------------- ---------------
(in millions, except per share data and number of shares)
Statement of operations data:
Interest income.............. (Yen) 2,811,638 (Yen)2,165,643 (Yen) 2,282,974 (Yen) 2,016,961 (Yen) 1,585,358
Interest expense............. 1,677,554 1,086,126 1,310,618 939,063 539,917
--------------- -------------- --------------- --------------- ---------------
Net interest income.......... 1,134,084 1,079,517 972,356 1,077,898 1,045,441
Provision for credit losses.. 1,239,000 372,449 797,081 601,689 455,630
--------------- -------------- --------------- --------------- ---------------
Net interest income (loss)
after provision for
credit losses............... (104,916) 707,068 175,275 476,209 589,811
Non-interest income/(1)/..... 612,309 376,827 851,207 367,707 846,646
Non-interest expense/(1)/.... 1,164,353 1,081,277 1,022,893 1,168,149 1,189,760
--------------- -------------- --------------- --------------- ---------------
Income (loss) before
income tax expense
(benefit) and cumulative
effect of a change in
accounting principle........ (656,960) 2,618 3,589 (324,233) 246,697
Income tax expense
(benefit)................... (174,537) 50,160 62,763 (101,832) 42,877
--------------- -------------- --------------- --------------- ---------------
Income (loss) before
cumulative effect of a
change in accounting
principle................... (482,423) (47,542) (59,174) (222,401) 203,820
--------------- -------------- --------------- --------------- ---------------
Cumulative effect of a
change in accounting
principle, net of tax/(2)/.. -- -- -- 5,867 (532)
--------------- -------------- --------------- --------------- ---------------
Net income (loss)............ (Yen) (482,423) (Yen) (47,542) (Yen) (59,174) (Yen) (216,534) (Yen) 203,288
=============== ============== =============== =============== ===============
Net income (loss)
available to common
shareholders................ (Yen) (482,423) (Yen) (53,006) (Yen) (67,510) (Yen) (220,702) (Yen) 190,784
=============== ============== =============== =============== ===============
Amounts per share/(3)/:
Basic earnings (loss) per
common share--income
(loss) available to
common shareholders
before cumulative effect
of a change in accounting
principle................... (Yen)(87,953.14) (Yen)(9,663.81) (Yen)(12,274.55) (Yen)(40,789.57) (Yen) 34,058.11
Basic earnings (loss) per
common share--net income
(loss) available to
common shareholders......... (87,953.14) (9,663.81) (12,274.55) (39,733.32) 33,963.40
Diluted earnings (loss)
per common share--income
(loss) available to
common shareholders
before cumulative effect
of a change in accounting
principle................... (87,953.14) (9,663.81) (12,274.55) (40,789.57) 31,228.45
Diluted earnings (loss)
per common share--net
income (loss) available
to common shareholders...... (87,953.14) (9,663.81) (12,274.55) (39,733.32) 31,137.71
Number of shares used to
calculate basic earnings
per common share (in
thousands).................. 5,485 5,485 5,500 5,555 5,617
Number of shares used to
calculate diluted
earnings per common share
(in thousands).............. 5,485 5,485 5,500 5,555 5,863/(4)/
Cash dividends per share
declared during the
year/(5)/:
--Common shares.............. (Yen) 8,418.42 (Yen) 8,255.25 (Yen) 8,255.25 (Yen) 4,127.63 (Yen) 6,000.00
$ 71.30 $ 69.92 $ 69.92 $ 34.96 $ 50.82
--Preferred shares (Class
1).......................... (Yen) -- (Yen)57,120.00 (Yen) 82,500.00 (Yen) 41,250.00 (Yen)123,750.00
$ -- $ 483.78 $ 698.74 $ 349.37 $ 1,048.11
--Preferred shares (Class
2).......................... (Yen) -- (Yen) 8,150.00 (Yen) 16,200.00 (Yen) 8,100.00 (Yen) 24,300.00
$ -- $ 69.03 $ 137.21 $ 68.60 $ 205.81
At March 31,
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------- --------------- --------------- --------------- ---------------
(in millions)
Balance sheet data: (unaudited)
Total assets................ (Yen)86,392,525 (Yen)84,996,000 (Yen)93,488,950 (Yen)94,365,114 (Yen)96,531,713
Loans, net of allowance
for credit losses.......... 53,215,070 48,563,172 47,953,919 48,494,545 47,105,433
Total liabilities........... 82,923,595 80,981,592 90,287,654 91,738,617 93,978,776
Deposits.................... 56,094,893 54,777,171 60,105,742 63,659,501 67,303,678
Long-term debt.............. 4,131,329 4,540,277 4,963,455 5,183,841 5,159,132
Shareholders' equity........ 3,468,930 4,014,408 3,201,296 2,626,497 2,552,937
Capital stock/(6)/.......... 956,664 956,664 956,664 973,156 1,084,708
5
Years ended March 31,
-----------------------------------------------------------------------------------
1999 2000 2001 2002
--------------- --------------- --------------- ---------------
(in millions, except percentages)
Other financial data:
Average balances: (unaudited) (unaudited) (unaudited) (unaudited)
Interest-earning assets...... (Yen)90,683,194 (Yen)83,166,023 (Yen)83,396,382 (Yen)85,192,376
Interest-bearing
liabilities................. 84,033,397 74,566,168 75,749,784 78,749,705
Total assets................. 96,090,045 86,620,645 89,341,483 92,376,000
Shareholders' equity......... 3,356,754 3,599,596 3,464,251 3,045,608
Return on equity and assets: (unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
available to common
shareholders as a
percentage of total
average assets.............. (0.50 )% (0.06)% (0.08)% (0.24)%
Net income (loss)
available to common
shareholders as a
percentage of average
shareholders' equity........ (14.37 )% (1.47)% (1.95)% (7.25)%
Dividends per common share
as a percentage of basic
earnings per common share... --/(7)/ --/(7)/ --/(7)/ --/(7)/
Average shareholders'
equity as a percentage of
total average assets........ 3.49 % 4.16 % 3.88 % 3.30 %
Net interest income as a
percentage of total
average interest-earning
assets...................... 1.25 % 1.30 % 1.17 % 1.27 %
Credit quality data: (unaudited)
Allowance for credit losses.. (Yen) 1,813,680 (Yen) 1,486,212 (Yen) 1,716,984 (Yen) 1,735,180
Allowance for credit
losses as a percentage of
loans....................... 3.30 % 2.97 % 3.46 % 3.45 %
Nonaccrual and
restructured loans, and
accruing loans
contractually past due 90
days or more................ (Yen) 3,477,768 (Yen) 2,844,915 (Yen) 4,272,794 (Yen) 4,164,982
Nonaccrual and
restructured loans, and
accruing loans
contractually past due 90
days or more as a
percentage of loans......... 6.32 % 5.68 % 8.60 % 8.29 %
Net loan charge-offs......... (Yen) 663,453 (Yen) 679,736 (Yen) 598,362 (Yen) 603,404
(unaudited) (unaudited) (unaudited) (unaudited)
Net loan charge-offs as a
percentage of average
loans....................... 1.15 % 1.30 % 1.21 % 1.23 %
Average interest rate
spread...................... 1.10 % 1.14 % 1.01 % 1.18 %
Risk-adjusted capital
ratio calculated under
Japanese GAAP/(8)/:......... -- 11.43 % 10.15 % 10.30 %
Years ended
March 31,
----------------
2003
---------------
(in millions, except
percentages)
Other financial data:
Average balances: (unaudited)
Interest-earning assets...... (Yen)86,352,412
Interest-bearing
liabilities................. 79,708,130
Total assets................. 95,478,227
Shareholders' equity......... 2,431,528
Return on equity and assets: (unaudited)
Net income (loss)
available to common
shareholders as a
percentage of total
average assets.............. 0.20%
Net income (loss)
available to common
shareholders as a
percentage of average
shareholders' equity........ 7.85%
Dividends per common share
as a percentage of basic
earnings per common share... 17.67%
Average shareholders'
equity as a percentage of
total average assets........ 2.55%
Net interest income as a
percentage of total
average interest-earning
assets...................... 1.21%
Credit quality data:
Allowance for credit losses.. (Yen) 1,360,136
Allowance for credit
losses as a percentage of
loans....................... 2.81 %
Nonaccrual and
restructured loans, and
accruing loans
contractually past due 90
days or more................ (Yen) 2,753,026
Nonaccrual and
restructured loans, and
accruing loans
contractually past due 90
days or more as a
percentage of loans......... 5.68%
Net loan charge-offs......... (Yen) 814,811
(unaudited)
Net loan charge-offs as a
percentage of average
loans....................... 1.64%
Average interest rate
spread...................... 1.16%
Risk-adjusted capital
ratio calculated under
Japanese GAAP/(8)/:......... 10.84%
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(1) For the fiscal year ended March 31, 2003, we determined it more appropriate
to include "foreign exchange losses--net," "investment securities
losses--net" and "trading account losses--net" in "Non-interest income."
Such amounts had previously been presented in "Non-interest expense."
Previously reported amounts have been reclassified to conform to this
presentation.
(2) Effective April 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. On April
1, 2002, we also adopted SFAS No. 142, "Goodwill and Other Intangible
Assets."
(3) Amounts have been adjusted to reflect the stock-for-stock exchanges
creating Mitsubishi Tokyo Financial Group, Inc. for the fiscal years ended
March 31, 1999, 2000 and 2001.
(4) Includes the common shares potentially issuable pursuant to the 3%
exchangeable guaranteed notes due 2002 and Class 2 preferred stock. The 3%
exchangeable guaranteed notes due 2002 were redeemed in November 2002.
(5) For the convenience of readers, the US dollar amounts are presented as
translations of Japanese yen amounts at the rate of (Yen)118.07 = US$1.00,
the noon buying rate on March 31, 2003 in New York City for cable transfers
in Japanese yen as certified for customs purposes by the Federal Reserve
Bank of New York.
(6) Amounts include common stock and non-redeemable Class 2 preferred stock.
Redeemable Class 1 preferred stock is excluded.
(7) Percentages against basic loss per common share have not been presented
because such information is not meaningful.
(8) Risk-adjusted capital ratios have been calculated in accordance with
Japanese banking regulations, based on information derived from our
consolidated financial statements prepared in accordance with Japanese
GAAP. Ratios for the fiscal years ended March 31, 2000 and 2001 represent
combined risk-adjusted capital ratios of Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank before any combination-related adjustments.
6
Exchange Rate Information
The tables below set forth, for each period indicated, the noon buying rate in
New York City for cable transfers in Japanese yen as certified for customs
purposes by the Federal Reserve Bank of New York, expressed in Japanese yen per
$1.00. On September 18, 2003, the noon buying rate was $1.00 equals (Yen)115.27
and the inverse noon buying rate was (Yen)100 equals $0.87.
Year 2003
------------------------------------------------------------------------------------
March April May June July August September(1)
----------- ----------- ----------- ----------- ----------- ----------- ------------
High (Yen)121.42 (Yen)120.55 (Yen)119.50 (Yen)119.87 (Yen)120.55 (Yen)120.47 (Yen)117.41
Low. 116.47 118.25 115.94 117.46 117.24 116.71 115.27
--------
(1) Period from September 1 to September 18.
Fiscal year ended March 31,
-----------------------------------------------------------
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
Average (of month-end rates) (Yen)128.10 (Yen)110.02 (Yen)111.65 (Yen)125.64 (Yen)121.10
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our securities involves a high degree of risk. You should
carefully consider the risks described below as well as all the other
information in this Annual Report, including our consolidated financial
statements and related notes, "Item 11. Quantitative and Qualitative
Disclosures about Market Risk" and "Selected Statistical Data."
Our business, operating results and financial condition could be materially
adversely affected by any of the factors discussed below. The trading price of
our securities could decline due to any of these factors. This Annual Report
also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
faced by us described below and elsewhere in this Annual Report. See
"Forward-Looking Statements."
Risks Related to Our Business
We may suffer additional losses in the future due to problem loans.
We have a substantial volume of problem loans and have suffered from worsening
asset quality problems since the early 1990s. A number of our borrowers are
facing increasingly challenging circumstances, and some others are rumored to
be in extremely difficult financial conditions. Our problem loans and
credit-related expenses could increase if:
.. economic conditions in Japan do not improve;
.. real estate prices or stock prices in Japan decline;
.. the rate of corporate bankruptcies in Japan or elsewhere in the world rises;
.. our large borrowers become insolvent or must be restructured;
7
.. additional economic problems arise elsewhere in the world; or
.. the global economic environment deteriorates generally.
An increase in problem loans and credit-related expenses would adversely affect
our results of operations, weaken our financial condition and erode our capital
base. For a discussion of our historical problem loans, see "Item 5.B.
Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Financial Condition--Allowance for Credit Losses, Nonperforming and
Past Due Loans" and "Selected Statistical Data--Loan Portfolio."
Our allowance for credit losses may be insufficient to cover future loan losses.
Our allowance for credit losses in our loan portfolio is based on assumptions
and estimates about our customers, the value of collateral we hold and the
economy as a whole. Our actual loan losses could prove to be materially
different from our estimates and could materially exceed our allowance. If our
actual loan losses are higher than we currently expect, our current allowance
for credit losses will be insufficient. If general economic conditions
deteriorate, causing us to change some of our assumptions and estimates, if the
value of collateral we hold declines or if we are adversely affected by other
factors to an extent that is worse than anticipated, we may have to provide for
additional allowance for credit losses. For a detailed discussion of our
allowance policy and the historical trend of allowances for credit losses, see
"Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Critical Accounting Estimates--Allowance for Credit Losses" and "Item
5.B. Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Financial Condition--Allowance for Credit Losses, Nonperforming and
Past Due Loans."
The credit quality of our loan portfolio may be adversely affected by the
continuing financial difficulties of the Japanese real estate and construction
sectors.
We have a large exposure to borrowers in the real estate and construction
sectors. The Japanese real estate and construction industries have been
severely and adversely affected by the sharp decline in Japanese real estate
values and the number of construction projects. Japanese real estate prices
have declined for twelve straight years and may still be falling. Several
larger companies in these industries have been restructured through legal
proceedings or through out-of-court agreements, including concessions by
lenders. We expect these problems to continue for the foreseeable future. A
number of real estate and construction companies, including some to which we
have extended credit, may be in restructuring negotiations or considering
whether to seek bankruptcy protection. If these companies are unsuccessful in
their restructuring efforts or seek bankruptcy protection, or if other lenders
discontinue or decrease their financial support to these companies for any
reason, there may be further significant deteriorations of the credit quality
of our loan portfolio, which would expose us to further loan losses. For a
detailed discussion of our exposure to the Japanese real estate and
construction sectors and our historical problem loans in those sectors, see
"Item 5.B. Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Financial Condition--Allowance for Credit Losses, Nonperforming and
Past Due Loans" and "Selected Statistical Data--Loan Portfolio."
The credit quality of our loan portfolio may be adversely affected by the
continuing financial difficulties of the Japanese wholesale and retail sectors.
We have a large exposure to borrowers in the wholesale and retail sectors.
Several Japanese wholesalers and retailers have been restructured or are
undergoing restructurings through legal proceedings or through out-of-court
agreements, including concessions by lenders. If consumer spending continues to
decline as a result of Japan's extended economic downturn, if other lenders to
distressed wholesalers and retailers discontinue or decrease their financial
support to those companies for any reason, or if their restructuring efforts
are not successful, there may be a further or extended deterioration of the
credit quality of our loan portfolio, which would expose us to substantial
additional loan losses. For a detailed discussion of our exposure to the
Japanese
8
wholesale and retail sectors and our historical problem loans in those sectors,
see "Item 5.B. Operating and Financial Review and Prospects--Liquidity and
Capital Resources--Financial Condition-- Allowance for Credit Losses,
Nonperforming and Past Due Loans" and "Selected Statistical Data--Loan
Portfolio."
Our exposure to troubled borrowers may increase, and our recoveries from them
may be lower than expected.
We may provide additional loans to troubled borrowers. We may forbear from
exercising some or all of our rights as a creditor against them, and we may
forgive loans to them in conjunction with their debt restructuring. We may take
these steps even when our legal rights might permit us to take stronger action
against the borrower and even when others might take stronger action against
the borrower to maximize recovery or to reduce exposure in the short term. We
may provide support to troubled borrowers for any of the following reasons or
for other reasons:
.. political or regulatory considerations;
.. reluctance to push a major client into default or bankruptcy or to disrupt
a restructuring plan supported by other lenders; and
.. a perceived responsibility for the obligations of our affiliated and
associated companies.
These practices may substantially increase our exposure to troubled borrowers
and increase our loan losses.
We may experience losses because our remedies for credit defaults by our
borrowers are limited.
We may not be able to realize the value of the collateral held by us or enforce
our rights against defaulting customers because of:
.. the difficulty of foreclosing on collateral in Japan;
.. the illiquidity of and depressed values in the Japanese real estate market;
and
.. the depressed values of pledged securities held as collateral.
Recent corporate credibility issues may increase our problem loans or otherwise
negatively affect our results of operations.
Recent high-profile bankruptcy filings and reports of past accounting
irregularities, including fraud, in the United States and other countries have
raised corporate credibility issues, particularly with respect to public
companies. In response to these developments and regulatory responses to these
developments in the United States and elsewhere, regulators, auditors and
corporate managers generally have begun to review financial statements more
thoroughly and conservatively. As a result, additional accounting
irregularities may be uncovered and additional bankruptcy filings may be made
in the United States and elsewhere. Such developments could increase our credit
costs if they directly involve our borrowers or indirectly affect our
borrowers' credit.
We may not be able to maintain our capital ratios above minimum required
levels, which could result in the suspension of some or all of our operations.
We, as a holding company, and our Japanese subsidiary banks, Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, are each required to maintain
risk-weighted capital ratios above the levels specified in the capital adequacy
guidelines of Japan's Financial Services Agency, or the Financial Services
Agency. The capital ratios are calculated in accordance with Japanese banking
regulations based on information derived from our financial statements prepared
in accordance with Japanese GAAP. Our subsidiaries in California, UnionBanCal
Corporation and Union Bank of California, N.A., which we refer to,
collectively, as UNBC, are subject to similar
9
U.S. capital adequacy guidelines. We or our subsidiary banks may be unable to
continue to satisfy the capital adequacy requirements because of:
.. declines in the value of our securities portfolio;
.. credit costs we may incur as we dispose of problem loans and remove
impaired assets from our balance sheet;
.. credit costs we may incur due to losses from a future deterioration in
asset quality;
.. a reduction in the value of our deferred tax assets;
.. changes in accounting rules or in the guidelines regarding the calculation
of bank holding companies' or banks' capital ratios;
.. our inability to refinance our subordinated debt obligations with equally
subordinated debt;
.. adverse changes in foreign currency exchange rates; and
.. other adverse developments discussed in these Risk Factors.
If our capital ratios fall below required levels, the Financial Services Agency
could require us to take a variety of corrective actions, including withdrawal
from all international operations or suspension of all or part of our business
operations. For a discussion of our capital ratios and the related regulatory
guidelines, see "Item 4.B. Information on the Company--Business
Overview--Supervision and Regulation--Japan--Capital Adequacy" and "Item 5.B.
Operating and Financial Review and Prospects--Liquidity and Capital
Resources--Capital Adequacy."
Our capital ratios may also be negatively affected by contemplated or recently
adopted regulatory changes.
Several proposed regulatory changes and market factors could have an adverse
impact on our capital ratios. In particular, the Financial System Council of
the Financial Services Agency is discussing the adoption of rules limiting the
amount of deferred tax assets that may be included in the calculation of Tier I
and/or total regulatory capital. The imposition of any such limits would likely
reduce our regulatory capital, perhaps materially. At March 31, 2003, our
deferred tax assets amounted to (Yen)1,362 billion under Japanese GAAP, which
was included in our Tier I capital of (Yen)3,128 billion calculated in
accordance with Japanese GAAP as required by the Financial Services Agency. In
addition, effective March 31, 2003, the Financial Services Agency strongly
suggested that major banks calculate loan loss reserves for certain impaired
loans by analyzing the projected cash flows from those loan assets, discounted
to present value, instead of basing reserves on historical loan loss data. We
had already been employing a methodology to calculate our loan loss reserves
for these credits based on their estimated cash flows. However, if in the
future the Financial Services Agency adopts a calculation methodology that is
different from ours, the size of our allowance for loan losses under Japanese
GAAP could increase. Because our capital ratios are calculated under Japanese
GAAP, this change may reduce our capital ratios materially.
Our results of operations and capital ratios will be negatively affected if we
are required to reduce our deferred tax assets.
We and our Japanese subsidiary banks determine the amount of our net deferred
tax assets and our regulatory capital pursuant to Japanese GAAP and the
Japanese banking regulations, which differ from US GAAP and U.S. regulations.
Under current Japanese banking regulations, all deferred tax assets established
pursuant to Japanese GAAP are included in regulatory capital. Currently,
Japanese GAAP generally permits the establishment of deferred tax assets for
tax benefits that are expected to be realized during a period that is
reasonably foreseeable, generally five fiscal years. The calculation of
deferred tax assets is based upon various assumptions, including assumptions
with respect to future taxable income. Actual results may differ significantly
from these assumptions. Even if our ability to include deferred tax assets in
regulatory capital is not affected by rule changes, if we conclude, based on
our taxable income projections, that we or our subsidiary banks will be unable
to realize a portion of the deferred tax assets, our deferred tax assets may be
reduced and, as a result, our results of operations may be negatively affected
and our capital ratios may decline.
10
We may not be able to refinance our subordinated debt obligations with equally
subordinated debt, and as a result our capital ratios may be adversely affected.
Under Japanese GAAP, at March 31, 2003, subordinated debt accounted for
approximately 34.2% of our total capital, approximately 34.4% of Bank of
Tokyo-Mitsubishi's total capital and approximately 34.7% of Mitsubishi Trust
Bank's total capital. We may not be able to refinance our subordinated debt
obligations with equally subordinated debt. The failure to refinance these
subordinated debt obligations with equally subordinated debt may reduce our
total capital and, as a result, negatively affect our capital ratios.
If the Japanese stock market declines, we may incur additional losses on our
securities portfolio and our capital ratios will be adversely affected.
We hold large amounts of marketable equity securities. The market values of
these securities are inherently volatile and have generally and substantially
been declining in recent years. We will incur losses on our securities
portfolio if the Japanese stock market declines. Material declines in the
Japanese stock market may also materially adversely affect our capital ratios.
For a detailed discussion of our holdings of marketable equity securities and
the effect of market declines on our capital ratios, see "Item 5.B. Operating
and Financial Review and Prospects--Liquidity and Capital Resources--Capital
Adequacy" and "Selected Statistical Data--Investment Portfolio."
The value of our equity portfolio could decline due to expected sales of shares
in the market by us and others.
Many Japanese financial institutions have traditionally held large amounts of
equity securities of their customers. In November 2001, the Japanese government
enacted a law forbidding bank holding companies and banks, including us, Bank
of Tokyo-Mitsubishi and Mitsubishi Trust Bank, from holding stock, the
aggregate value of which is in excess of their adjusted Tier I capital after
September 30, 2004, a date which was later extended to after September 30,
2006. Partly in response to this legislation and partly to reduce risk-weighted
assets, we and many other financial institutions have been selling and will
continue to sell off large amounts of equity securities. The sale of equity
securities by Japanese financial institutions may have depressed and may
further depress the value of Japanese equity securities, including those in our
securities portfolio. In order to remain compliant with the new legislation or
to reduce our risk exposure, we may sell some of our equity securities at
depressed prices. For a detailed discussion of our equity securities portfolio,
see "Item 5.B. Operating and Financial Review and Prospects--Liquidity and
Capital Resources--Financial Condition--Investment Portfolio" and "Selected
Statistical Data--Investment Portfolio."
Our efforts to reduce our cross-shareholdings of equity securities may
adversely affect our relationships with customers.
A substantial portion of our equity securities portfolio is held under
cross-shareholding relationships where we hold customers' securities for
business relationship purposes. The sales of equity securities, whether to
comply with the prohibition on holding stock in excess of adjusted Tier I
capital after September 30, 2006, to reduce our risk exposure to fluctuations
in equity security prices or otherwise, will reduce our cross-shareholdings,
which may have an adverse effect on our relationships with our customers. In
addition, our plans to reduce our cross-shareholdings may encourage some of our
customers to sell their shares of our common stock, which may have a negative
impact on our stock price.
Unexpected or sudden increases in interest rates may negatively affect the
value of our bond portfolio.
We have a significant amount of Japanese government bonds and foreign bonds,
including U.S. Treasury bonds. An increase in interest rates, particularly if
such increase is unexpected or sudden, may negatively affect the value of our
bond portfolio. Most recently, in June and July 2003, the yield on Japanese
10-year government bonds surged to approximately 1% after reaching a record low
of below 0.5% and we consequently incurred losses on our bond portfolio during
those months. For a detailed discussion of our bond portfolio, see "Selected
Statistical Data--Investment Portfolio."
11
Our trading and investment activities expose us to interest rate, exchange rate
and other risks.
We undertake extensive trading and investment activities involving a variety of
financial instruments, including derivatives. Our income from these activities
is subject to volatility caused by, among other things, changes in interest
rates, foreign currency exchange rates and equity and debt prices. For example:
.. Increases in interest rates have an adverse effect on the value of our
fixed income securities portfolio, as discussed above; and
.. The strengthening of the yen against the US dollar and other foreign
currencies reduces the value, in our financial statements, of our
substantial portfolio of foreign-currency denominated investments.
In addition, downgrades of the credit ratings of some of the fixed income
securities in our portfolio could negatively affect our results of operations.
Our results of operations and financial condition in future periods will be
exposed to risks of loss associated with these activities. For a discussion of
our investment portfolio and related risks see "Item 5.B. Operating and
Financial Review and Prospects--Liquidity and Capital Resources--Financial
Condition--Investment Portfolio" and "Item 11. Quantitative and Qualitative
Disclosures about Market Risk."
A significant downgrade of our credit ratings could have a negative effect on
us.
A significant downgrade of our credit ratings by one or more of the credit
rating agencies could have a negative effect on our treasury operations and
other aspects of our business. In the event of a downgrade of our credit
ratings, our treasury unit may have to accept less favorable terms in its
transactions with counterparties, including capital raising activities, or may
be unable to enter into some transactions. This could have a negative impact on
the profitability of our treasury and other operations and adversely affect our
results of operations and financial condition.
We may not be able to achieve the goals of our business strategies.
We are currently pursuing various business strategies to improve our
profitability. For various reasons, these strategies may be unsuccessful or
have unintended consequences. For example:
.. We may be unable to increase the volume of our loans to financially sound
clients;
.. We may be unable to increase our lending spreads with pre-existing
customers;
.. Greater competition or other market conditions may prevent us from
increasing our level of fee income;
.. We may be unable to successfully implement and realize the benefits of our
cost reduction plans and measures;
.. We may have difficulty in coordinating the operations of our subsidiaries
and affiliates as planned due to legal restrictions, internal conflict or
market resistance;
.. The costs of integration may be higher than we expect, and we may not
achieve cost reductions as fully or as quickly as expected;
.. We may lose customers and business as we integrate and, in some cases,
rebrand some of our subsidiaries' or affiliates' operations;
.. Our efforts to streamline operations may require more time than expected
and cause some negative reactions from our customers; and
.. We may have difficulty integrating the systems within our group.
12
We will be exposed to increased risks as we expand the range of our products
and services.
As we expand the range of our products and services beyond our traditional
banking and trust businesses and as the sophistication of financial products
and management systems grows, we will be exposed to new and increasingly
complex risks. For example, through the recent formation of Mitsubishi
Securities Co., Ltd., we intend to expand our securities business. We may have
no experience or only limited experience with the risks related to the expanded
range of these products and services. Moreover, some of the activities which
our subsidiaries engage in, such as derivatives and foreign currency trading,
present volatile and substantial risks. Our risk management systems may prove
to be inadequate and may not work in all cases or to the degree required. As a
result, we are subject to substantial market, credit and other risks in
relation to the expanding scope of our products and services and trading
activities, which could result in our incurring substantial losses. In
addition, our efforts to offer new services and products may not succeed if
product or market opportunities develop more slowly than expected or if the
profitability of opportunities is undermined by competitive pressures. For a
detailed discussion of our risk management systems, see "Item 11. Quantitative
and Qualitative Disclosures about Market Risk."
Any adverse changes in UNBC's business could significantly affect our results
of operations.
UNBC contributes to a significant portion of our net income. Any adverse change
in the business or operations of UNBC could significantly affect our results of
operations. Factors that could negatively affect UNBC's results include adverse
economic conditions in California, particularly the energy crisis and the
decline in the technology sector, adverse conditions following the terrorist
attacks in September 2001, a potential downturn in the real estate and housing
industries in California, substantial competition in the California banking
market and negative trends in debt ratings and equity valuations of various
borrowers, such as power companies, resulting from large corporate bankruptcy
filings. In addition, the appreciation of the yen against the US dollar reduces
UNBC's reported profits in our operating results. For a detailed segment
discussion relating to UNBC, see "Item 5.A. Operating and Financial Review and
Prospects--Operating Results--Business Segment Analysis--Bank of
Tokyo-Mitsubishi."
We are exposed to substantial credit and market risks in Asian and Latin
American countries.
We are active in the Asian and Latin American regions through a network of
branches and subsidiaries and are thus exposed to a variety of credit and
market risks associated with countries in these regions. If a decline in the
value of Asian or Latin American currencies occurs, it could adversely affect
the creditworthiness of some of our borrowers in those regions. The loans we
make to Asian and Latin American borrowers and banks are often denominated in
yen, US dollars or other foreign currencies. These borrowers often do not hedge
the loans to protect against fluctuations in the values of local currencies. A
devaluation of the local currency would make it more difficult for a borrower
earning income in that currency to pay its debts to us and others. In addition,
some Asian and Latin American countries may attempt to support the value of
their currencies by raising domestic interest rates. If this happens, the
borrowers in these countries would have to devote more of their resources to
repaying their domestic obligations, which may adversely affect their ability
to repay their debts to us and other foreign lenders. The limited credit
availability resulting from these and related conditions may adversely affect
economic conditions in some countries. This could cause a further deterioration
of the credit quality of borrowers and banks in those countries and cause us to
incur further losses. In addition, we are active in other regions that expose
us to risks similar to the risks described above and also risks specific to
those regions, which may cause us to incur losses or suffer other adverse
effects. For a more detailed discussion of our credit exposure to Asian and
Latin American countries, see "Item 5.B. Operating and Financial Review and
Prospects--Liquidity and Capital Resources--Financial Condition--Allowance for
Credit Losses, Nonperforming and Past Due Loans."
13
Our income and expenses relating to our international operations and our
foreign assets and liabilities are all exposed to foreign currency fluctuations.
Our international operations are subject to fluctuations in foreign currency
exchange rates against the Japanese yen. When the yen appreciates, yen amounts
for transactions denominated in foreign currencies, including a substantial
portion of UNBC's transactions, decline. In addition, a portion of our assets
and liabilities are denominated in foreign currencies. To the extent that our
foreign-currency denominated assets and liabilities are not matched in the same
currency or appropriately hedged, fluctuations in foreign currency exchange
rates against the yen may adversely affect our financial condition, including
our capital ratios. In addition, fluctuations in foreign exchange rates will
create foreign currency translation gains or losses. For a historical
discussion of the effect of changes in foreign currency exchange rates, see
"Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Effect of Change in Exchange Rate on Foreign Currency Translation."
Losses relating to our pension plans and a decline in returns on our plan
assets may negatively affect our results of operations and financial condition.
We may incur losses if the fair value of our pension plans' assets declines, if
the rate of return on our pension assets declines or if there is a change in
the actuarial assumptions on which the calculations of the projected benefit
obligations are based. Changes in the interest rate environment and other
factors may also adversely affect the amount of unfunded pension obligations
and the resulting annual amortization expense.
We may have to compensate for losses in our loan trusts and jointly operated
designated money in trusts. This could have a negative effect on our results of
operations.
Mitsubishi Trust Bank may have to compensate for losses of principal of all
loan trusts and some jointly operated designated money in trust. Funds in those
guaranteed trusts are generally invested in loans and securities. Mitsubishi
Trust Bank is required to maintain reserves in the accounts of those guaranteed
trusts for loan losses and other impairments of principal, but the amount of
these compensation obligations does not appear as a liability on our balance
sheet. If the amount of assets and reserves held in the guaranteed trusts falls
below the principal as a result of loan losses, losses in the investment
portfolio or otherwise, which are not absorbed by the profit earned by the
trusts, Mitsubishi Trust Bank would be required to make a payment on the
guaranties. For a detailed discussion of guaranteed trusts, see "Item 5.
Operating and Financial Review and Prospects."
Trust beneficiaries of loan trusts and jointly operated designated money in
trust are entitled to a semi-annual dividend, which in practice is the
"projected rate" published semi-annually. As a result, sharp declines in
interest rates or in the value of the securities held in its trusts' investment
portfolios will reduce partly performance-dependent trust fees that Mitsubishi
Trust Bank generates from its loan trusts and jointly operated designated money
in trust and will thus adversely affect our results of operations.
Restrictions on our subsidiaries' ability to pay dividends and make other
distributions could limit amounts payable to us.
As a holding company, substantially all of our cash flow comes from dividends
that our Japanese bank subsidiaries pay to us. Under some circumstances,
various statutory or contractual provisions may restrict the amount of
dividends our subsidiaries can pay to us. Among other things, if our operating
subsidiaries do not have sufficient earnings, they will be unable to pay us
dividends and we, in turn, may be unable to pay dividends.
Risks Related to the Japanese Banking Industry
Recent efforts by the Japanese government to encourage the disposal of problem
loans by March 31, 2005 could exacerbate our credit losses.
The Financial Services Agency announced in October 2002 that it would strive to
reduce by about half the aggregate ratio of nonperforming credits to total
credits of major banks, including Bank of Tokyo-Mitsubishi
14
and Mitsubishi Trust Bank, by March 31, 2005. The disposal of nonperforming
credits pursuant to this policy could increase our credit losses if we are
required to, or elect to, sell or write-off our problem loans at a larger
discount, in a larger amount and/or in a different time or manner than we would
have otherwise. For a more detailed discussion of recent government
initiatives, see "Item 5.A. Operating and Financial Review and
Prospects--Operating Results--Recent Developments."
Adverse regulatory developments or changes in laws, government policies or
economic controls could have a negative impact on our results of operations.
We conduct our business subject to ongoing regulation and associated regulatory
risks, including the effects of changes in the laws, regulations, policies,
voluntary codes of practice and interpretations in Japan and the other markets
which we operate in. Future developments or changes in laws, regulations,
policies, voluntary codes of practice, fiscal or other policies and their
effects are unpredictable and beyond our control. In particular, the Financial
Services Agency announced various regulatory changes that it would consider.
The Financial Services Agency also has the authority to conduct, at any time,
inspections to review banks' accounts, including those of Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank. Any of the changes referred to
above or any action that must be taken by us, whether as a result of regulatory
developments or changes or inspections, could negatively affect our business
and results of operations.
Our business may be adversely affected by negative developments with respect to
other Japanese financial institutions, both directly and through the effect
they may have on the overall Japanese banking environment and on their
borrowers.
Many Japanese financial institutions, including banks, non-bank lending and
credit institutions, affiliates of securities companies and insurance
companies, are experiencing and expect to continue to experience declining
asset quality and capital adequacy and other financial problems. This may lead
to severe liquidity and solvency problems, which have in the past resulted in
the liquidation, government control or restructuring of affected institutions.
The continued financial difficulties of other financial institutions could
adversely affect us because:
.. we have extended loans to banks and other financial institutions that are
not our consolidated subsidiaries, some of which are classified as
nonaccrual and restructured loans;
.. we are a shareholder of some other banks and financial institutions that
are not our consolidated subsidiaries;
.. we may be requested to participate in providing assistance to support
distressed financial institutions that are not our consolidated
subsidiaries;
.. troubled banks and financial institutions may discontinue or decrease their
credit support to troubled borrowers to whom we are also a lender,
resulting in significant failures of those borrowers and/or a deterioration
in the quality of our loan portfolio;
.. financial institutions may become majority owned and/or controlled by the
Japanese government as a result of the government's conversion of their
preferred shares into common stock and/or injection of additional public
funds into financial institutions pursuant to the Deposit Insurance Law,
such as the recent public fund injection to Resona Bank, Ltd., or other
newly introduced frameworks for the injection of public funds into
financial institutions;
.. if the government takes control of major financial institutions, we will
become a direct competitor of government-controlled financial institutions
and may be put at a competitive disadvantage if the Japanese government
provides regulatory, tax, funding or other benefits to those financial
institutions to strengthen their capital, facilitate their sale or
otherwise;
.. deposit insurance premiums could rise if deposit insurance funds prove to
be inadequate; and
.. repeated or large-scale bankruptcies and/or government support or control
of financial institutions could generally undermine depositor confidence or
adversely affect the overall banking environment.
15
Our business may be adversely affected by competitive pressures, which have
increased significantly due to regulatory changes.
In recent years, the Japanese financial system has been increasingly
deregulated and barriers to competition have been reduced. In addition, the
Japanese financial industry has been undergoing significant consolidation, as a
result of which larger and more integrated financial institutions have emerged
as our competitors. If we are unable to compete effectively in this more
competitive and deregulated business environment, our business, results of
operations and financial condition will be adversely affected. For a more
detailed discussion of our competition in Japan, see "Item 4.B. Information on
the Company--Business Overview--Competition--Japan."
We might have to pay risk premiums on borrowings from international financial
institutions or be subject to credit limitations by them.
As a result of concerns regarding asset quality and the failure of several
large Japanese financial institutions, international financial institutions
have in the past:
.. charged an additional risk premium to Japanese financial institutions for
short-term borrowings in the interbank market; and
.. placed restrictions on the amount of credit, including interbank deposits,
that they extend to Japanese banks.
These restrictions on credit resulted in higher operating expenses and
decreased profitability for affected Japanese banks. If conditions in the
Japanese banking and other financial sectors further deteriorate, international
markets could again impose risk premiums or credit restrictions on Japanese
banks, including us.
We may be adversely affected if the economic conditions in Japan worsen.
Since the early 1990s, the Japanese economy has performed poorly due to a
number of factors, including weak consumer spending and lower capital
investment by Japanese companies, causing a large number of corporate
bankruptcies and the failure of several major financial institutions. The
Japanese economy may not be recovering, and the outlook for the economy as a
whole remains uncertain, in part, because:
.. unemployment rates remain at a historic high;
.. real estate prices have not recovered from their decline over the past
decade; and
.. Japanese stock prices have declined significantly, reaching a 20-year low
in April 2003.
These factors may worsen. If they do, our earnings and credit quality may be
adversely affected. For a discussion of Japan's current economic environment,
see "Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Business Environment--Economic Environment in Japan."
A change to the current interest rate policy could adversely affect our results
of operations.
The Bank of Japan now maintains interest rates at near zero percent. If
interest rate policies change, we could be adversely affected by lower spreads
or a decline in the value of our investments in Japanese government bonds. In
addition, an increase in interest rates may increase our problem loans as some
of our borrowers may not be able to meet the increased interest payment
requirements. This would adversely affect our results of operations and
financial condition.
We may have to pay more regional bank taxes.
In April 2000, the Tokyo Metropolitan Government began imposing a tax of 3.0%
on the gross operating profits of banks operating within its jurisdiction. In
March 2002, the Tokyo District Court overturned the Tokyo local tax. On January
30, 2003, the Tokyo High Court also overturned the local tax. In February 2003,
however, the
16
Tokyo Metropolitan Government appealed the judgment to the Supreme Court of
Japan. In response to these court rulings, Osaka Prefectural Government, which
was planning to impose a similar tax, revised its prefectural ordinance in
March 2003 to delay the enforcement of the new tax for one year. Banks,
including our subsidiary banks, are also challenging in court the legality of
the Osaka local tax. Other prefectures may implement similar local bank taxes.
Depending on the outcome of these court cases and the decisions of other
prefectures, we may have to pay more local bank taxes. In addition, pursuant to
tax reform initiatives, a new uniform local tax, which will be levied based on
company size, will be introduced during our fiscal year ending March 31, 2005.
For a discussion of local taxes, see "Item 5.A. Operating and Financial Review
and Prospects--Operating Results--Recent Developments--Legal Proceedings for
Local Taxes."
Risks Related to Owning Our Shares
Efforts by other companies to reduce their shareholdings may adversely affect
our stock price.
Many companies in Japan that hold our shares have announced plans to reduce
their shareholdings in other companies. Our own announced plans to sell
cross-held shares in other companies may further encourage those companies and
other companies to sell our shares. If an increased number of shares of our
common stock are sold in the market, it will adversely affect the trading price
of our shares.
Negative media coverage of Japan's banking industry may have a materially
adverse effect on our stock price.
Recently, Japan's banking industry has been covered extensively by both
Japanese and foreign media. This coverage includes Japanese banks' problem
loans and deferred tax assets. Much of this coverage has been negative and some
of this coverage suggests that the amount of problem loans that Japanese banks
actually hold is substantially greater than what is disclosed and that the
amount of deferred tax assets recognized by Japanese banks is excessively high.
Negative media coverage of Japan's banking industry focusing on problem loans,
deferred tax assets and other issues, whether or not accurate and whether or
not applicable to us, may have a materially adverse effect on our stock price.
Rights of shareholders under Japanese law may be different from those under the
laws of jurisdictions within the United States and other countries.
Our Articles of Incorporation, the regulations of our board of directors and
the Japanese Commercial Code govern our corporate affairs. Legal principles
relating to such matters as the validity of corporate procedures, directors'
and officers' fiduciary duties and shareholders' rights are different from
those that would apply if we were not a Japanese corporation. Shareholders'
rights under Japanese law are different in some respects from shareholders'
rights under the laws of jurisdictions within the United States and other
countries. You may have more difficulty in asserting your rights as a
shareholder than you would as a shareholder of a corporation organized in a
jurisdiction outside of Japan. For a detailed discussion of the relevant
provisions under the Japanese Commercial Code and our Articles of
Incorporation, see "Item 10.B. Additional Information--Memorandum and Articles
of Association."
It may not be possible for investors to effect service of process within the
United States upon us or our directors, senior management or corporate
auditors, or to enforce against us or those persons judgments obtained in U.S.
courts predicated upon the civil liability provisions of the federal securities
laws of the United States.
We are a joint stock company incorporated under the laws of Japan. Almost all
of our directors, senior management and corporate auditors reside outside of
the United States. Many of our and their assets are located in Japan and
elsewhere outside the United States. It may not be possible, therefore, for
U.S. investors to effect service of process within the United States upon us or
these persons or to enforce against us or these persons judgments obtained in
the U.S. courts predicated upon the civil liability provisions of the federal
securities laws
17
of the United States. We believe that there is doubt as to the enforceability
in Japan, in original actions or in actions to enforce judgments of U.S.
courts, of liabilities predicated solely upon the federal securities laws of
the United States.
Risks Related to Owning ADSs
As a holder of ADSs, you have fewer rights than a shareholder has and you must
act through the depositary to exercise these rights.
The rights of our shareholders under Japanese law to take actions including
voting their shares, receiving dividends and distributions, bringing derivative
actions, examining our accounting books and records and exercising appraisal
rights are available only to shareholders of record. Because the depositary,
through its custodian, is the record holder of the shares underlying the ADSs,
a holder of ADSs may not be entitled to the same rights as a shareholder. In
your capacity as an ADS holder, you are not able to bring a derivative action,
examine our accounting books and records or exercise appraisal rights, except
through the depositary.
Foreign exchange rate fluctuations may affect the US dollar value of our ADSs
and dividends payable to holders of our ADSs.
Market prices for our ADSs may fall if the value of the yen declines against
the US dollar. In addition, the US dollar amount of cash dividends and other
cash payments made to holders of our ADSs would be reduced if the value of the
yen declines against the US dollar.
Item 4. Information on the Company.
A. History and Development of the Company
Mitsubishi Tokyo Financial Group, Inc.
Mitsubishi Tokyo Financial Group, Inc. is a joint stock company (kabushiki
kaisha) incorporated in Japan under the Commercial Code of Japan. On April 2,
2001, Bank of Tokyo-Mitsubishi, Mitsubishi Trust Bank and Nippon Trust Bank
established Mitsubishi Tokyo Financial Group, Inc. to be a holding company for
the three of them. Before that, each of the banks had been a publicly held
company. On April 2, 2001, through a stock-for-stock exchange, they became
wholly-owned subsidiaries of Mitsubishi Tokyo Financial Group, Inc., and the
former shareholders of the three banks became shareholders of Mitsubishi Tokyo
Financial Group, Inc. Nippon Trust Bank was later merged into Mitsubishi Trust
Bank. As a result, Mitsubishi Tokyo Financial Group, Inc. now has two directly
held banking subsidiaries, Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank,
although each of these two banks also has other subsidiaries of its own.
Mitsubishi Tokyo Financial Group, Inc.'s registered address is 4-1, Marunouchi
2-chome, Chiyoda-ku, Tokyo 100-6326, Japan, and its telephone number is
81-3-3240-8111.
The Bank of Tokyo-Mitsubishi, Ltd.
Bank of Tokyo-Mitsubishi is a major commercial banking organization in Japan
and provides a broad range of domestic and international banking services from
its offices in Japan and around the world. Bank of Tokyo-Mitsubishi is a "city"
bank, as opposed to a regional bank. Bank of Tokyo-Mitsubishi's registered head
office is located at 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8388,
Japan, and its telephone number is 81-3-3240-1111. Bank of Tokyo-Mitsubishi is
a joint stock company (kabushiki kaisha) incorporated in Japan under the
Japanese Commercial Code.
Bank of Tokyo-Mitsubishi was formed through the merger, on April 1, 1996, of
The Mitsubishi Bank, Limited and The Bank of Tokyo, Ltd. The origins of
Mitsubishi Bank can be traced to the Mitsubishi Exchange Office, a money
exchange house established in 1880 by Yataro Iwasaki, a key figure in the
Japanese industrial revolution and the founder of the Mitsubishi industrial,
commercial and financial group. In 1895, the Mitsubishi Exchange
18
Office was succeeded by the Banking Division of the Mitsubishi Goshi Kaisha,
the holding company of the "Mitsubishi group" of companies, that began in the
late 19th century with interests in shipping and trading. Mitsubishi Bank had
been a principal bank to many of the Mitsubishi group companies, but broadened
its relationships to cover a wide range of Japanese industries, small and
medium-sized companies and individuals.
Bank of Tokyo was established in 1946 as a successor to The Yokohama Specie
Bank, Ltd., a special foreign exchange bank established in 1880. In the postwar
period, because of the need to establish a financial institution specializing
in foreign trade financing, the government of Japan promulgated the Foreign
Exchange Bank Law in 1954, and Bank of Tokyo became the only bank licensed
under that law. Because of its license, Bank of Tokyo received special
consideration from the Ministry of Finance in establishing its offices abroad
and in many other aspects relating to foreign exchange and international
finance. The worldwide network of Bank of Tokyo was more extensive than that of
any other Japanese bank, and through this network, Bank of Tokyo was engaged in
a full range of commercial banking activities, both in Japan and overseas,
serving the diverse financial requirements of its clients throughout the world.
On September 1, 2002, Bank of Tokyo-Mitsubishi completed the merger of its
securities subsidiaries and affiliate, KOKUSAI Securities Co., Ltd.,
Tokyo-Mitsubishi Securities Co., Ltd. and Tokyo-Mitsubishi Personal Securities
Co., Ltd., and Mitsubishi Trust Bank's securities affiliate, Issei Securities
Co., Ltd., to form Mitsubishi Securities Co., Ltd., or Mitsubishi Securities.
Since the merger, Bank of Tokyo-Mitsubishi has been consolidating various areas
of its securities and investment banking business, such as mergers and
acquisitions, part of its derivative operations, corporate advisory and
securitization operations, to Mitsubishi Securities.
Bank of Tokyo-Mitsubishi is a member of the "Mitsubishi group" of companies.
The expression "Mitsubishi group" is used to describe 29 companies with
historical links to a prewar group of companies that were under common control.
Although there are numerous, generally small, cross-shareholdings among these
companies even today and frequent organized gatherings of their chairmen and
presidents, since the end of World War II, the Mitsubishi group companies have
been managed and operated independently. The shares of 21 of the Mitsubishi
group companies are publicly listed in Japan, and these companies are engaged
in a broad range of activities including manufacturing, trading, natural
resources, transportation, real estate, banking and insurance.
The Mitsubishi Trust and Banking Corporation
Mitsubishi Trust Bank is a major trust bank in Japan, providing trust and
banking services to meet the financing and investment needs of clients in Japan
and the rest of Asia, as well as in the United States and Europe. In May 2003,
Mitsubishi Trust Bank moved its registered head office to 4-5, Marunouchi
1-chome, Chiyoda-ku, Tokyo 100-8212, Japan. Its telephone number is
81-3-3212-1211. Mitsubishi Trust Bank is also a joint stock company (kabushiki
kaisha) incorporated in Japan under the Japanese Commercial Code.
Mitsubishi Trust Bank traces its history to The Mitsubishi Trust Company,
Limited, which was founded by the leading members of the Mitsubishi group
companies in 1927. The Japanese banking and financial industry was
reconstructed after World War II and, in 1948, Mitsubishi Trust Bank was
authorized to engage in the commercial banking business, in addition to its
trust business, under the new name Asahi Trust & Banking Corporation. In 1952,
the bank changed its name again, to The Mitsubishi Trust and Banking
Corporation.
Nippon Trust Bank and The Tokyo Trust Bank, Ltd., which were previously
subsidiaries of Bank of Tokyo-Mitsubishi, were merged into Mitsubishi Trust
Bank on October 1, 2001. By combining the trust-related resources and expertise
of these three trust banks, we believe the new Mitsubishi Trust Bank is
well-positioned to provide clients with trust services that will better match
their evolving needs.
Like Bank of Tokyo-Mitsubishi, Mitsubishi Trust Bank is a member of the
"Mitsubishi group" of companies.
19
B. Business Overview
Mitsubishi Tokyo Financial Group, Inc. is one of the world's leading bank
holding companies. Through our two directly held subsidiary banks, Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, and their subsidiaries, we provide
a full range of domestic and international financial services, including
commercial banking, investment banking and asset management services, and trust
services, to individuals and corporate customers.
While maintaining the corporate cultures and core competencies of Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, Mitsubishi Tokyo Financial Group,
Inc., as the holding company, seeks to work with them to find ways to:
.. establish a more diversified financial services group operating across
business sectors;
.. leverage the flexibility afforded by our organizational structure to expand
our business;
.. benefit from the collective expertise of Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank;
.. achieve operational efficiencies and economies of scale; and
.. enhance the sophistication and comprehensiveness of the group's risk
management expertise.
To address the extraordinary challenges facing us, we are continuing our
efforts to complete the strengthening of our financial base for future growth
through the reduction of our problem loans and equity portfolio. Moreover, we
are moving aggressively to improve our profit structure to achieve stable
growth through a more integrated management of our subsidiaries. We aim to
increase our domestic loan volume selectivity and to readjust loan pricing and
have been expanding our fee-generating services. More recently, we have
increasingly focused on the growing retail business sector by developing new
products and services and reaching customers through more efficient
distribution channels. In an effort to reduce expenses, we are reducing the
number of our branches and personnel. We also aim to streamline part of our
operations and systems by integrating, standardizing and, in some cases,
outsourcing Bank of Tokyo-Mitsubishi's and Mitsubishi Trust Bank's systems.
Through these efforts and by better coordinating our subsidiaries' activities
as an integrated group, we are building on our solid position within the
Japanese financial sector to emerge as a globally competitive, diversified
financial services group.
Bank of Tokyo-Mitsubishi
Bank of Tokyo-Mitsubishi is a major Japanese commercial banking organization.
It provides a broad range of domestic and international banking services in
Japan and around the world. As of June 1, 2003, Bank of Tokyo-Mitsubishi's
network in Japan included 257 branches, 21 sub-branches, one agency, 57 loan
plazas, 479 branch ATMs and 13,003 convenience store-based, non-exclusive ATMs.
Bank of Tokyo-Mitsubishi organizes its operations based on customer and product
segmentation, as follows:
.. retail banking;
.. commercial banking;
.. global corporate banking;
.. investment banking and asset management, and Mitsubishi Securities;
.. UNBC;
.. operations services;
.. treasury; and
.. other, including systems services and eBusiness & IT initiatives.
20
For a detailed analysis of financial results by business segments, which is
based on our business organizations, see "Item 5.A. Operating and Financial
Review and Prospects--Operating Results--Business Segment Analysis--Bank of
Tokyo-Mitsubishi." For a detailed analysis of financial results by geographic
segment, see "Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Geographic Segment Analysis."
Retail Banking Business Unit
The retail banking business unit of Bank of Tokyo-Mitsubishi offers a full
range of banking products and services, including financial consulting
services, to individual customers in Japan. In addition to its branch offices
and other direct distribution channels, the retail banking business unit offers
products and services through e-net ATMs (a convenience store-based ATM network
utilized by a number of different banks), telephone and internet banking
services and mail order. Some of the unit's branches are joint branches with
either Mitsubishi Trust Bank or Mitsubishi Securities, or both.
As part of the effort to realize synergies between our two Japanese bank
subsidiaries, the unit markets to its retail customers select trust products of
Mitsubishi Trust Bank under a trust agency arrangement.
Deposits and loans. The unit offers a full range of bank deposit products. One
such product is a multiple purpose bank account that not only includes ordinary
deposits but also has overdraft privileges collateralized by time deposits,
bank debentures and public bonds held in custody. The unit also offers housing
loans, educational loans, special purpose loans, card loans and other loans to
individuals.
Investment trusts. The unit offers 27 equity and bond funds and a program
fund, the M-CUBE program, which is exclusively organized for Bank of
Tokyo-Mitsubishi by Frank Russell Company, and combines four specific funds. We
offer a menu of funds that allows our customers to achieve their desired
balance of risk diversification and return.
Tokyo-Mitsubishi Direct. The unit offers a telephone and internet banking
service called Tokyo-Mitsubishi Direct. Since the service was launched in 1999,
the number of customers has risen steadily, reaching 1.7 million individual
customers in March 2003, which is approximately 11% of the unit's total
customer base.
Credit cards. The unit offers Master Card and VISA credit cards through
several channels. Through Bank of Tokyo-Mitsubishi, it offers the
Tokyo-Mitsubishi Card. It also offers credit cards through Bank of
Tokyo-Mitsubishi's subsidiaries, DC Card Co., Ltd. and Tokyo Credit Service,
Ltd.
Tokyo-Mitsubishi Cash One. Since March 2002, the unit has offered loans to its
customers through Tokyo-Mitsubishi Cash One Ltd., a consumer credit company
established jointly by Bank of Tokyo-Mitsubishi, Mitsubishi Trust Bank and
three leading Japanese consumer credit companies: Acom Co., Ltd., DC Card and
JACCS Co., Ltd.
Commercial Banking Business Unit
The commercial banking business unit of Bank of Tokyo-Mitsubishi mainly
provides banking products and services to a wide range of business customers,
from large corporations to medium-sized and small businesses, and is
responsible for customer relationships. The unit serves these customers through
120 offices in Japan as well as directly from its headquarters. The unit
provides traditional commercial banking services, such as deposits, settlement,
foreign exchange and loans, as well as trust products of Mitsubishi Trust Bank,
electronic banking and highly sophisticated consultancy services. The unit
works closely with other business units, such as the treasury unit and the
investment banking and asset management business unit.
Financing and fund management. The unit advises on financing methods for its
customers' various financing needs, including loans with derivatives, corporate
bonds, commercial paper, asset backed securities, securitization programs and
syndicated loans. The unit also offers a wide range of products to meet its
customers' fund management needs, such as deposits with derivatives, government
bonds, debenture notes and investment funds.
21
Advice on business expansion overseas. The unit provides advisory services to
its clients launching businesses overseas, particularly Japanese companies
expanding into other Asian countries.
Settlement services. The unit provides electronic banking services that allow
customers to make domestic and overseas remittances electronically. The unit's
settlement and cash management services include global settlement services,
Global Cash Management Services, a global pooling/netting service, and Treasury
Station, a fund management system for group companies. These services are
particularly useful to customers who do business worldwide.
Risk management. The unit offers swap, option and other risk-hedge programs to
customers seeking to control foreign exchange, interest rate and other business
risks.
Corporate management/financial strategies. The unit provides advisory services
to its customers in the areas of mergers and acquisitions, inheritance-related
business transfers and stock listings. The unit also helps its customers
develop financial strategies to restructure their balance sheets. These
strategies include the use of credit lines, factoring services and
securitization of real estate.
Corporate welfare facilities. The unit offers products and administrative
services to help its customers with employee benefit plans. As a service to
these customers, it often provides housing loans to their employees. It also
provides company-sponsored employee savings plans and defined contribution
plans.
Global Corporate Banking Business Unit
The global corporate banking business unit of Bank of Tokyo-Mitsubishi provides
banking services to large Japanese corporations and their overseas operations
as well as to non-Japanese corporations who do business on a global basis. The
unit serves these customers through corporate banking divisions in Tokyo, a
global network of 55 overseas branches and sub-branches, 17 representative
offices and overseas banking subsidiaries.
Overseas business support. The unit provides a full range of services to
support customers' overseas activities, including loans, deposits, assistance
with mergers and acquisitions and cash management services. The unit provides
financial services to customers in cooperation with other business units, such
as the treasury unit and the investment banking and asset management business
unit, and also through subsidiaries that are part of these units, such as
Mitsubishi Securities, Tokyo-Mitsubishi International plc and BTM Capital
Corporation.
During the fiscal year ended March 31, 2003, the unit provided advisory
services to help customers develop financial strategies, such as arranging the
issuance of asset-backed commercial paper, providing credit commitments and
securitizing real estate in Japan. Together with the investment banking and
asset management business unit, the unit also developed its investment banking
business to increase non-interest income.
Global Cash Management Service. Bank of Tokyo-Mitsubishi started offering our
Global Cash Management Service, or GCMS, through our foreign branches in 2000.
This service allows customers to monitor their foreign accounts and make
remittances through their personal computers. This service is now available
through 14 foreign branches and the total number of GCMS corporate customers
was over 1,800 at the end of March 2003, an increase of about 600 customers
during the fiscal year ended March 31, 2003.
Strengthening relationships with banking institutions in China. Bank of
Tokyo-Mitsubishi has been strengthening its relationship with Chinese local
banks to support Japanese and non-Japanese companies entering the Chinese
market. Bank of Tokyo-Mitsubishi currently has cooperation arrangements with
four state-owned commercial banks in China with respect to Chinese
yuan-denominated short-term funding and settlement. In August 2002, Bank of
Tokyo-Mitsubishi entered into an alliance with China Development Bank to create
new opportunities for Bank of Tokyo-Mitsubishi's customers to obtain Chinese
yuan-denominated long-term loans.
22
Investment Banking and Asset Management Business Unit, and Mitsubishi Securities
Bank of Tokyo-Mitsubishi's investment banking business unit and asset
management business unit were merged in May 2003 to form the investment banking
and asset management business unit.
The unit provides capital markets, derivatives, structured finance and other
services. Other business units of Bank of Tokyo-Mitsubishi cooperate with the
investment banking and asset management business unit in offering services to
their customers. The unit provides some of its investment banking services,
such as syndicated loans and structured finance, through the Bank of
Tokyo-Mitsubishi itself, but for regulatory reasons most of the securities
business is conducted through subsidiaries and affiliates.
The unit provides asset management and trust products and services mainly to
high net worth individuals, branch customers and corporate clients in Japan.
Generally, these products and services are delivered to customers of Bank of
Tokyo-Mitsubishi through the retail banking business unit and the commercial
banking business unit, and are provided by Tokyo-Mitsubishi Asset Management,
Ltd. and Mitsubishi Trust Bank.
Mitsubishi Securities. In September 2002, we merged Bank of Tokyo-Mitsubishi's
securities subsidiaries and affiliate, KOKUSAI Securities Co., Ltd.,
Tokyo-Mitsubishi Securities Co., Ltd. and Tokyo-Mitsubishi Personal Securities
Co., Ltd., and Mitsubishi Trust Bank's securities affiliate, Issei Securities
Co., Ltd., to create Mitsubishi Securities. As of March 31, 2003, Mitsubishi
Tokyo Financial Group, Inc. owned 58.72% of Mitsubishi Securities. Mitsubishi
Securities functions as the core of our securities and investment banking
business, and since the merger we have been consolidating most of our
securities business and various areas of our investment banking business, such
as mergers and acquisitions, derivatives, corporate advisory and securitization
operations that were previously conducted through Bank of Tokyo-Mitsubishi's
investment banking unit, into Mitsubishi Securities. Starting with the fiscal
year ended March 31, 2003, we started to account for Mitsubishi Securities as a
separate segment for financial management purposes. For more details, see "Item
5.A. Operating and Financial Review and Prospects--Operating Results--Business
Segment Analysis--Bank of Tokyo-Mitsubishi."
Mitsubishi Securities advises its corporate clients, both Japanese and
non-Japanese, on domestic and cross-border mergers and acquisitions. It has
merger and acquisition teams in Tokyo, New York and Singapore and works with
other strategic partners in the United States and the United Kingdom.
Mitsubishi Securities seeks a wider range of customers and higher profitability
by cooperating with Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank and by
broadening the products and services it can offer. Mitsubishi Securities serves
individual customers through a new business model, which includes opening up
joint branches with Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank, and
provides state-of-the-art financial solutions to corporate customers.
Mitsubishi Securities is reorganizing its branch network and plans to increase
the number of joint branches with the Bank of Tokyo-Mitsubishi and Mitsubishi
Trust Bank. In addition, in order to streamline its business management
structure, Mitsubishi Securities is implementing a plan to acquire overseas
subsidiaries from Bank of Tokyo-Mitsubishi. Mitsubishi Securities has
established a project team to promote cost reduction across the board by
restructuring existing subsidiaries and further streamlining its operations.
Mitsubishi Securities is also strengthening its internal control functions and
inspection/audit functions and is working to raise employee awareness of
compliance-related issues.
Derivatives. The unit develops and offers derivatives products for risk
management and other financial needs. The unit has trading desks and sales
teams specializing in derivatives in Tokyo, Singapore, Hong Kong, London and
New York.
Securitization. In the securitization area, the unit is primarily engaged in
asset-backed commercial paper programs and has securitization teams based in
Tokyo, New York and London. It executed a securitization of apartment loans in
the fiscal year ended March 31, 2003, and continues to develop and structure
new types of transactions.
23
Syndicated loans. The unit structures and syndicates many types of loan
transactions, including term loans, revolving credit and structured
transactions. It has loan syndication operations in Tokyo, New York, London,
Hong Kong and Singapore. We arranged syndicated loans with an aggregate
principal amount totaling $42.8 billion in the calendar year 2002.
Structured finance. The unit engages in project finance, lease finance, real
estate finance and other types of non-recourse financings. It provides
customers with financial advisory services, loan arrangements and agency
services. It has teams located in Tokyo, Hong Kong, Singapore, London, New York
and Boston. We arranged financing for projects with an aggregate project value
of approximately $1.5 billion in the calendar year 2002.
Other investment banking services. In the United States, the unit offers
leasing services through two subsidiaries, BTM Capital Corporation and BTM
Leasing and Finance, Inc. BTM Capital Corporation offers a wide range of
leasing services to non-Japanese customers, while BTM Leasing and Finance
focuses on providing services to the U.S. subsidiaries and affiliates of
Japanese corporations.
Asset management. Tokyo-Mitsubishi Asset Management, Ltd., a licensed
discretionary investment advisor and investment trust management company,
provides investment management and advisory services for institutional
investors, including pension funds. It also offers a wide array of investment
products which, as of March 31, 2003, are marketed by almost 60 Japanese
financial institutions, including the Bank of Tokyo-Mitsubishi and regional
banks, mainly to individual customers.
Tokyo-Mitsubishi Asset Management has expanded its investment product line and
in the fiscal year ended March 31, 2003 launched three new funds that mainly
invest in fixed-income securities issued by foreign governments and pay
dividends monthly.
The Bank of Tokyo-Mitsubishi and Tokyo-Mitsubishi Asset Management also
maintain business relationships with Mellon Financial Corporation, Frank
Russell Company and Schroder Investment Management. Tokyo-Mitsubishi Asset
Management distributes sophisticated investment products advised by each of
them.
Defined Contribution Plan. We provide consulting services for defined
contribution plans through Defined Contribution Plan Consulting of Japan Co.,
Ltd., which was established by the Bank of Tokyo-Mitsubishi in alliance with
Mitsubishi Trust Bank, Meiji Life Insurance Company and Tokio Marine & Fire
Insurance, Ltd., following legislation introduced in October 2001. Defined
Contribution Plan Consulting of Japan provides a full range of services, such
as plan administration services and advising clients in the selection of
investment products, to meet various needs for our corporate clients and the
plan participants.
Wealth management. In 2002, two wealth management companies were established
to capitalize on our wealth management resources and capabilities. In August
2002, Mitsubishi Tokyo Wealth Management Securities, Ltd. began its operations,
and in September 2002, Mitsubishi Tokyo Wealth Management (Switzerland), Ltd.
took over the private banking business from Bank of Tokyo-Mitsubishi
(Switzerland), Ltd. These two subsidiaries provide sophisticated and broad
investment services and solutions to high net worth customers.
UNBC Business Unit
As of June 30, 2003, Bank of Tokyo-Mitsubishi owned 65.6% of UnionBanCal
Corporation, a publicly traded company listed on the New York Stock Exchange.
UnionBanCal is a U.S. commercial bank holding company. Union Bank of
California, N.A., UnionBanCal's bank subsidiary, is one of the largest
commercial banks in California based on total assets and total deposits and is
among the oldest banks on the West Coast, having roots as far back as 1864.
UNBC 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.
24
UNBC's operations are divided into four primary groups.
The Community Banking and Investment Services Group. The group offers its
customers a broad spectrum of financial products. With a broad line of checking
and savings, investment, loan and fee-based banking products, individual and
business clients, including not-for-profit, small and institutional investors,
can each have their specific needs met. As of June 30, 2003, these products
were offered in 271 full-service branches, primarily in California, as well as
in Oregon and Washington. In addition, the group offers international and
settlement services, e-banking through its web site, check cashing services at
its Cash & Save locations and tailored loan and investment products to its high
net worth retail customers. Business customers are offered employee benefit,
401(k) administration, corporate trust, securities lending and custody (global
and domestic) services. The group also provides investment advisory services
and manages a proprietary mutual fund family, called "HighMark Funds," through
a registered broker-dealer subsidiary and a registered investment advisor
subsidiary.
In 2001, UNBC acquired the Fullerton, California-based Armstrong/Robitaille,
Inc. In December 2002, UNBC acquired the San Diego, California-based John
Burnham & Company. In March 2003, UNBC acquired the Pleasanton,
California-based Tanner Insurance Brokers, Inc. Tanner is one of the largest
full-service independent brokers of property and casualty insurance products in
California. These acquired brokers allow UNBC to offer an extensive array of
cost-effective risk management services and insurance products to business and
retail customers.
During 2002, UNBC acquired the Simi Valley, California-based First Western Bank
and the Santa Clarita, California-based Valencia Bank & Trust. In July 2003,
UNBC also acquired Monterey Bay Bank, a community bank headquartered in
Watsonville, California. The integration of these three banks expanded UNBC's
geographic presence in both Southern and Northern California and increased its
opportunities to provide its existing retail and business customers with a
fuller range of financial services.
These transactions are examples of UNBC's commitment to expansion through
targeted acquisitions and are consistent with its strategies to diversify
earnings and broaden its branch network.
The Commercial Financial Services Group. The group offers a variety of
commercial financial services, including commercial loans and project
financing, real estate financing, asset-based financing, trade finance and
letters of credit, lease financing, customized cash management services and
selected capital markets products. The group's customers include middle-market
companies, large corporations, real estate companies and other more specialized
industry customers. In addition, specialized depository services are offered to
title and escrow companies, retailers, domestic financial institutions,
bankruptcy trustees and other customers with significant deposit volumes.
The International Banking Group. The group primarily provides correspondent
banking and trade finance-related products and services to financial
institutions worldwide, primarily in Asia. The group also serves select
corporate clients in various countries worldwide, particularly in Asia. The
group has a long and stable history of providing correspondent and
trade-related services to international financial institutions.
The Global Markets Group. The group, in collaboration with other UNBC business
groups, offers customers a broad range of products. They include a variety of
foreign exchange products and risk management products, such as interest rate
swaps and options. The group trades money market and fixed income securities in
the secondary market and serves institutional investment needs. The group also
manages market-related risks for UNBC as part of its responsibilities for
asset/liability management, including funding UNBC's liquidity needs and
addressing its interest rate risk.
Operations Services Unit
Through its operations services unit, Bank of Tokyo-Mitsubishi provides
operations, settlement and custody services to its other business units. The
unit also earns fee income by providing settlement and remittance
25
services, including correspondent banking services, and both domestic and
global custody services to Bank of Tokyo-Mitsubishi's customers. In addition,
the unit also offers competitive operations and settlement services to other
financial institutions to meet their outsourcing needs.
Operations services. The operations division of Bank of Tokyo-Mitsubishi's
operations services unit provides operations services for the domestic
commercial banking activities of the retail banking, commercial banking and
global corporate banking business units. In February 2002, Bank of
Tokyo-Mitsubishi introduced an automated seal matching system. Bank of
Tokyo-Mitsubishi has also expanded centralized processing at its operations
centers, which will increase the efficiency of its branch offices. On March 31,
2003, Bank of Tokyo-Mitsubishi entered into an alliance with 22 other regional
banks to cooperate with regard to logistics among domestic branches in order to
achieve more efficient branch network operations.
The operations division also offers outsourcing services in foreign remittance,
export and import operations for Japanese financial institutions. As of March
31, 2003, 72 Japanese banks utilized Bank of Tokyo-Mitsubishi's foreign
remittance services offered under its "Global Operation Automatic Link (GOAL)"
brand name, and a number of major Japanese banks outsourced their export and
import operations to Bank of Tokyo-Mitsubishi.
Correspondent banking and settlement. The payment and clearing services
division of Bank of Tokyo-Mitsubishi's operations services unit maintains
financial institutions' accounts with correspondent arrangements. As of March
31, 2003, Bank of Tokyo-Mitsubishi had correspondent arrangements with 3,068
foreign banks and other financial institutions, of which 1,736 had yen
settlement accounts with Bank of Tokyo-Mitsubishi. Bank of Tokyo-Mitsubishi
also had correspondent arrangements with 156 Japanese financial institutions,
for which Bank of Tokyo-Mitsubishi held 139 yen and foreign currency accounts.
The Foreign Exchange Yen Clearing System in Japan introduced an entrustment
procedure for yen clearing through which banks may entrust other banks to
conduct yen clearing for them. Bank of Tokyo-Mitsubishi has the largest share
of this business in the market. As of March 31, 2003, 47 regional and foreign
banks in Japan outsourced their yen clearing operations to Bank of
Tokyo-Mitsubishi. Bank of Tokyo-Mitsubishi handled approximately 25% of these
transactions based on transaction amounts and is a market leader in the yen
settlement business.
Bank of Tokyo-Mitsubishi's payment and clearing services division is also
taking the initiative in the global implementation of the Continuous Linked
Settlement operation, which is intended to eliminate the settlement risk that
can occur when foreign exchange deals are settled.
Economic Cooperation Office. The Economic Cooperation Office of Bank of
Tokyo-Mitsubishi's operations division provides services related to Japan's
official development assistance.
Custody. After the merger of the investment banking and the asset management
business units, custody services was transferred to the operations services
unit from the asset management business unit. Bank of Tokyo-Mitsubishi offers
domestic custody services to foreign investors who invest in securities in
Japan and global custody services to Japanese investors through its subsidiary,
Bank of Tokyo-Mitsubishi (Luxembourg) S.A. At March 31, 2003, approximately
(Yen)26 trillion of assets were held under custodial arrangements, not
including the (Yen)15 trillion of assets held under custodial arrangements at
Union Bank of California. Bank of Tokyo-Mitsubishi serves a wide range of
institutional investors, both domestic and international, including commercial
banks, insurance companies, major global custodians, central banks and
international settlement organizations. Despite significant consolidation in
the industry, Bank of Tokyo-Mitsubishi maintains a leading role in both
domestic and global custody services.
Treasury Unit
The treasury unit of Bank of Tokyo-Mitsubishi manages Bank of
Tokyo-Mitsubishi's overall funding requirements. The unit is responsible for
the bank's asset liability management and manages the bank's securities
26
investment portfolio, foreign exchange and derivatives transactions, including
proprietary trading. It works with other business units to provide various
financial products such as foreign currency forward, currency options and
commercial paper.
The treasury unit is active in financial markets worldwide and has global
treasury offices in Tokyo, New York, London, Singapore and Hong Kong.
As part of its asset liability management for Bank of Tokyo-Mitsubishi, the
treasury unit seeks to control the interest rate and liquidity risks of Bank of
Tokyo-Mitsubishi and to make it possible for it to conduct its investment and
fund-raising activities within an appropriate range of risk. The treasury unit
centrally monitors and manages all interest rate risk and liquidity risk for
Bank of Tokyo-Mitsubishi.
In the international money markets, the treasury unit raises foreign currency
funds through inter-bank transactions, deposits and certificates of deposit. It
actively deals in short-term yen-denominated instruments, such as interest rate
swaps, futures and futures options. Bank of Tokyo-Mitsubishi is a major market
maker in short-term yen interest rate swaps.
Bank of Tokyo-Mitsubishi is a leading market maker for the Tokyo foreign
exchange and over-the-counter currency option markets. Bank of Tokyo-Mitsubishi
has a large market share of transactions in the US dollar-yen sector and in
other major cross currency and currency option trading.
The unit also actively trades in the secondary market for Japanese government
bonds, local government bonds and government guaranteed bonds.
Other Units
Bank of Tokyo-Mitsubishi also has business units including:
.. system services, having responsibility for Bank of Tokyo-Mitsubishi's
computer systems;
.. eBusiness & IT initiatives, having responsibility for developing and
overseeing information technology within the Bank of Tokyo-Mitsubishi as
well as related business opportunities; and
.. the corporate center, which retains functions such as strategic planning,
overall risk management, internal auditing and compliance within Bank of
Tokyo-Mitsubishi.
Mitsubishi Trust Bank
Mitsubishi Trust Bank is one of the major trust banks in Japan. It engages in
the following businesses:
.. trust-banking business;
.. trust assets business;
.. real estate business; and
.. global markets business.
As of March 31, 2003, Mitsubishi Trust Bank had a network of 49 branches and
four sub-branches. For a detailed analysis of financial results by business
segment, see "Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Business Segment Analysis--Mitsubishi Trust Bank," and for a detailed
analysis of financial results by geographic segment, see "Item 5.A. Operating
and Financial Review and Prospects--Operating Results--Geographic Segment
Analysis."
Trust-Banking Business Group
The trust-banking business group of Mitsubishi Trust Bank provides retail
banking and trust services, corporate financing services and stock transfer
agency services. The trust-banking business group provides a full range of
27
trust and commercial banking products and various financial services to
individuals, corporations, institutional investors and public organizations.
Mitsubishi Trust Bank offers some of its products and services through its
trust agency arrangements with various banks, including Bank of
Tokyo-Mitsubishi. The group also offers its clients expertise in such areas as
stock transfer agency services, which include consultations on stock listing
and legal matters, stock title transfer and stock-related administration
services.
As it serves as the first point of contact with customers, this group is
responsible for building and maintaining good relationships with retail and
corporate clients.
Retail banking services. The trust-banking business group offers a variety of
asset-management and asset administration services to individuals. The group's
asset management products include savings instruments such as current accounts,
ordinary deposits, time deposits, deposits at notice and other deposit
facilities. It also offers trust products, such as loan trusts and money
trusts, and other investment products, such as investment trusts,
performance-based money trusts and foreign-currency deposits.
The group creates portfolios tailored to the customers' needs by combining
savings instruments and investment products. The group also provides a range of
asset management and asset administration products as well as customized trust
products for high net worth individuals. Examples of services offered include
advisory services relating to, among other things, the purchase and disposal of
real estate and effective land utilization and testamentary trusts.
Since 1999, Mitsubishi Trust Bank has offered a members-only service called the
"Excellent Club" targeted at customers who have aggregate balances of over
(Yen)10 million per household at Mitsubishi Trust Bank. The Excellent Club
currently has a membership of over 250,000 households. Members of the Excellent
Club have access to, among other things, favorable interest rates and fee
discounts, wealth management services and special products such as the
"Excellent Club time deposits."
Corporate finance products and services. The trust-banking business group
offers a range of services which integrate trust and banking functions in order
to satisfy the financial needs of approximately 8,000 corporate clients.
Examples of traditional commercial banking services include loans, the
arrangement of syndicated loans, securitization and the establishment of loan
commitments. Leveraging Mitsubishi Trust Bank's experience and know-how
relating to the asset management business, real estate brokerage and appraisal
services, the group offers services tailored to the financial strategies of
each client, including securitization of real estate, receivables and other
assets.
With respect to securitization services, the group is engaged in the
securitization of the Government Housing Loan Corporation's housing loans and
the securitization of nonperforming loans in cooperation with Japan's
Resolution and Collection Corporation, or RCC. As of March 31, 2003, the
outstanding balance of loan credits (including nonperforming loans), property,
sales credits and other credits to be securitized was over (Yen)5 trillion.
In order to meet the various needs of corporate customers, the group offers
appropriate solutions by providing trust banking that combines trust services,
such as those related to pensions and real estate, with diverse financing
options.
Stock transfer agency services. The group offers stock transfer agency
services for corporate clients where Mitsubishi Trust Bank acts as agent, as
designated under the Japanese Commercial Code, and handles various
administrative procedures such as stock title transfer and the calculation and
payment of dividends. The group also offers consultation services relating to
investor relations and corporate governance to listed companies and advises
companies planning to go public on how to prepare for an initial public
offering and other practical procedures involved in the issuance of shares. The
group also provides a service that enables companies to send shareholder
meeting notices to, and receive proxies from, shareholders via the internet. As
of March 31, 2003, Mitsubishi Trust Bank was serving as the stock transfer
agent for 910 companies based in Japan and overseas.
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Trust Assets Business Group
The trust assets business group provides fiduciary asset management and
administration services. As of March 31, 2003, the balance of corporate pension
assets entrusted to Mitsubishi Trust Bank surpassed the level held by all other
trust banks in Japan.
This group is strengthening its consulting capabilities in response to an
increasing demand for specialized consulting services as more Japanese
companies seek to reform their pension and human resources systems. In February
2003, the group was the first in the industry to create a specialized pension
consulting division.
Trust assets management services. The group manages investment funds,
corporate pensions, public pensions, public sector funds and individual funds
on behalf of its clients and in accordance with their investment objectives.
To address the diverse needs of Mitsubishi Trust Bank's clients, the group
offers a wide range of products, including actively managed funds for investors
seeking to outperform the market as well as passively managed or indexed funds,
which are becoming increasingly popular. The group also provides currency
overlay management services and alternative investment products.
Asset administration and custodial services. In the asset administration
business, the group provides a broad range of administrative and custodial
services to corporations, institutional investors and other clients. In May
2002, Mitsubishi Trust Bank transferred to Master Trust Bank of Japan, Ltd.
assets under management encompassing securities held by funds including pension
trusts, specified money trusts and securities investment trusts. Master Trust
Bank of Japan is a trust bank which specializes in asset administration. It was
established in May 2000 by Mitsubishi Trust Bank, Nippon Life, UFJ Trust Bank,
Meiji Life and Deutsche Bank. In October 2002, UFJ Trust Bank transferred its
assets under management encompassing securities held by funds, including
pension trusts and specified money trusts, to Master Trust Bank of Japan,
increasing its trust assets to approximately (Yen)63 trillion as of March 31,
2003.
Real Estate Business Group
In addition to its principal business of real estate brokerage operations, the
real estate business group utilizes its significant know-how relating to the
securitization of real estate and real estate development, management and
appraisal, to meet the diverse real estate-related needs of retail and
corporate clients. The group is also focused on providing services that build
on the experience and expertise of a trust bank. For example, the group offers
advice relating to clients' real estate assets in the context of the
restructuring of their businesses and financial strategies and their balance
sheets, as clients try to respond to changes in the accounting treatment of
impairment losses and the increased focus on consolidated financial statements
under Japanese GAAP. The group retains the services of a large number of highly
qualified experts, including registered architects, registered real estate
transaction managers, appraisers and associate appraisers and registered real
estate consultants and has met the international ISO 9001 standard.
Global Markets Business Group
The global markets business group is active in various financial operations,
including banking, money and capital markets operations, securities investments
and custody operations and asset management. With the U.S., European and Asian
markets as its core foundation, the group's business, through efficient
management of its portfolio of financial products including securities, loan
receivables and derivatives, has consistently maintained a high level of
profitability and has been one of Mitsubishi Trust Bank's most important
businesses.
In the area of international finance, the group offers loans, guarantees and
other credit facilities to multinational corporate clients, including the
overseas affiliates of Japanese corporations.
Mitsubishi Trust Bank maintains a presence in the world's major financial
markets through a network of five branches, three representative offices and
six major subsidiaries. Mitsubishi Trust Bank has business ties with six major
financial institutions in five key Asian countries.
29
Competition
We face strong competition in all of our principal areas of operation. The
deregulation of the Japanese financial markets as well as structural reforms in
the regulation of the financial industry have resulted in dramatic changes in
the Japanese financial system. Structural reforms have prompted Japanese banks
to merge or reorganize their operations, thus changing the nature of the
competition from other financial institutions as well as from other types of
businesses.
Japan
Deregulation. Competition in Japan has intensified as a result of the
relaxation of regulations relating to Japanese financial institutions.
Previously, there were various restrictions, such as foreign exchange controls,
ceilings on deposit interest rates and restrictions that compartmentalized
business sectors. These restrictions served to limit competition. However, as a
result of the deregulation of the financial sector, such as through the
"Financial Big Bang" which was announced in 1996, most of these restrictions
were lifted before 2000. Deregulation has eliminated barriers between different
types of Japanese financial institutions, which are now able to compete
directly against one another. Deregulation and market factors have also
facilitated the entry of various large foreign financial institutions into the
Japanese domestic market.
The Law Amending the Relevant Laws for the Reform of the Financial System, or
the Financial System Reform Act, which was promulgated in June 1998, provided a
framework for the reform of the Japanese financial system by reducing the
barriers between the banking, securities and insurance businesses and enabled
financial institutions to engage in businesses which they were not permitted to
conduct before. The Banking Law, as amended, now permits banks to engage in the
securities business by establishing or otherwise owning domestic and overseas
securities subsidiaries with the approval of the Financial Services Agency, an
agency of the cabinet office. We expect a further increase in competition among
financial institutions in these new areas of permissible activities.
In terms of new market entrants, other financial institutions, such as Orix
Corporation, and non-financial companies, such as Sony Corporation and
Ito-Yokado Co., Ltd., have also begun to offer various banking services, often
through non-traditional distribution channels. Also, in recent years, various
large foreign financial institutions have significantly expanded their presence
in the Japanese domestic market. Citigroup, for example, has expanded its
banking activities and moved aggressively to provide investment banking and
other financial services.
In the corporate banking sector, the principal effect of these reforms has been
the increase in competition as two structural features of Japan's highly
specialized and segmented financial system have eroded:
.. the separation of banking and securities businesses in Japan; and
.. the distinctions among the permissible activities of Japan's three
principal types of private banking institutions.
For a discussion of the three principal types of private banking institutions,
see " --The Japanese Financial System." In addition, in recent years, Japanese
corporations are increasingly raising funds by accessing the capital markets,
both within Japan and overseas, resulting in a decline in demand for loan
financing. Furthermore, as foreign exchange controls have been generally
eliminated, our customers can now have direct access to foreign financial
institutions, with whom we must also compete.
In the consumer banking sector, the deregulation of interest rates on yen
deposits and other factors have enabled our bank subsidiaries to offer
customers an increasingly attractive and diversified range of products. For
example, banks may now sell investment trusts and some types of insurance
products, with the possibility of expanding to additional types of insurance
products in the future. We face competition in this sector from other private
financial institutions as well as from Japan Post, a government-run public
services corporation established on April 1, 2003, which was formerly known as
the Postal Service Agency and which is the world's largest holder of deposits.
30
Recently, competition has also increased due to the development of new products
and distribution channels. For example, Japanese banks have started competing
with one another by developing innovative proprietary computer technologies
that allow them to deliver basic banking services in a more efficient manner
and to create sophisticated new products in response to customer demand.
The trust assets business is a promising growth area that is competitive and
becoming more so because of changes in the industry. In addition, there is
growing corporate demand for change in the trust regulatory environment, such
as reform of the pension system and related accounting regulations under
Japanese GAAP. However, competition may increase in the future as regulatory
barriers to entry are lowered. Currently, the Financial System Council is
considering whether to expand the types of property that can be entrusted and
to allow non-financial companies to conduct trust business. If these changes
are implemented, the trust business will expand but at the same time there will
be more competition.
Integration. Another major reason for heightened competition in Japan is the
integration and reorganization of Japanese financial institutions. In 1998,
amendments were made to the Banking Law to allow the establishment of bank
holding companies, and this development together with various factors, such as
the decline of institutional strength caused by the bad loan crisis and
intensifying global competition, resulted in a number of integrations involving
major banks in recent years. In September 2000, The Dai-Ichi Kangyo Bank,
Limited, The Fuji Bank, Limited and The Industrial Bank of Japan, Limited
jointly established a holding company, Mizuho Holdings, Inc., to own the three
banks. In April 2002, these three banks were reorganized into two banks--Mizuho
Bank, Ltd. and Mizuho Corporate Bank, Ltd. In April 2001, The Sumitomo Bank,
Limited and The Sakura Bank, Limited were merged into Sumitomo Mitsui Banking
Corporation. In April 2001, The Sanwa Bank, Limited, The Tokai Bank, Limited
and The Toyo Trust and Banking Company, Limited jointly established a holding
company, UFJ Holdings, Inc., to own the three banks. In January 2002, the three
banks were reorganized into two banks, UFJ Bank Limited and UFJ Trust Bank
Limited. In December 2001, The Daiwa Bank, Ltd. and two regional banks
established Daiwa Bank Holdings Inc., which in March 2002 consolidated with
Asahi Bank, Ltd. and changed its corporate name to Resona Holdings, Inc. in
October 2002. For information on the injection of public funds into Resona
Bank, Ltd., a subsidiary bank of Resona Holdings, Inc., see "--Supervision and
Regulation--Japan--Deposit Insurance and Government Investment in Financial
Institutions."
Foreign
In the United States, we face substantial competition in all aspects of our
business. We face competition from other large U.S. and foreign-owned
money-center banks, as well as from similar institutions that provide financial
services. Through Union Bank of California, we compete principally with U.S.
and foreign-owned money-center and regional banks, thrift institutions,
insurance companies, asset management companies, investment advisory companies,
consumer finance companies, credit unions and other financial institutions.
In other international markets, we face competition from commercial banks and
similar financial institutions, particularly major international banks and the
leading domestic banks in the local financial markets in which we conduct
business.
The Japanese Financial System
Japanese financial institutions may be categorized into three types:
.. the central bank, namely the Bank of Japan;
.. private banking institutions; and
.. government financial institutions.
The Bank of Japan
The Bank of Japan's role is to maintain price stability and the stability of
the financial system to ensure a solid foundation for sound economic
development.
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Private Banking Institutions
Private banking institutions in Japan are commonly classified into three
categories (the following numbers are based on currently available information
published by the Financial Services Agency):
.. ordinary banks (122 ordinary banks and 72 foreign commercial banks with
ordinary banking operations);
.. trust banks (27 trust banks, including nine Japanese subsidiaries of
foreign financial institutions); and
.. long-term credit banks (two long-term credit banks).
Ordinary banks in turn are classified as city banks, of which there are six,
including Bank of Tokyo-Mitsubishi, and regional banks, of which there are 116.
In general, the operations of ordinary banks correspond to commercial banking
operations in the United States. City banks and regional banks are
distinguished based on head office location as well as the size and scope of
their operations.
The city banks are generally considered to constitute the largest and most
influential group of banks in Japan. Generally, these banks are based in large
cities, such as Tokyo and Osaka, and operate nationally through networks of
branch offices. City banks have traditionally emphasized their business with
large corporate clients, including the major industrial companies in Japan.
However, in light of deregulation and other competitive factors, many of these
banks, including Bank of Tokyo-Mitsubishi, in recent years have increased their
emphasis on other markets, such as small and medium-sized companies and retail
banking.
With some exceptions, the regional banks tend to be much smaller in terms of
total assets than the city banks. Each of the regional banks is based in one of
the Japanese prefectures and extends its operations into neighboring
prefectures. Their clients are mostly regional enterprises and local public
utilities, although the regional banks also lend to large corporations. In line
with the recent trend among financial institutions toward mergers or business
tie-ups, various regional banks have announced or are currently negotiating or
pursuing integration transactions, in many cases in order to be able to
undertake the huge investments required in information technology.
Trust banks, including Mitsubishi Trust Bank, provide various trust services
relating to money trusts, pension trusts and investment trusts and offer other
services relating to real estate, stock transfer agency and testamentary
services as well as banking services.
Long-term credit banks are engaged primarily in providing long-term loans to
Japanese industries, principally with funds obtained from the issue of
debentures.
In recent years, almost all of the city banks have consolidated with other city
banks and also, in some cases, with trust banks or long-term credit banks.
Integration among these banks was achieved, in most cases, through the use of a
bank holding company as discussed in "--Competition--Japan--Integration" and
"--Supervision and Regulation--Japan--Bank Holding Company Regulations."
In addition to ordinary banks, trust banks and long-term credit banks, other
private financial institutions in Japan, including shinkin banks or credit
associations, and credit cooperatives, are engaged primarily in making loans to
small businesses and individuals.
Government Financial Institutions
Since World War II, a number of government financial institutions have been
established. These corporations are wholly owned by the government and operate
under its supervision. Their funds are provided mainly from government sources.
32
Among them are the following:
.. The Development Bank of Japan, whose purpose is to contribute to the
economic development of Japan by extending long-term loans, mainly to
primary and secondary sector industries;
.. Japan Bank for International Cooperation, whose purpose is to supplement
and encourage the private financing of exports, imports, overseas
investments and overseas economic cooperation;
.. Japan Finance Corporation for Small Business, The Government Housing Loan
Corporation and The Agriculture, Forestry and Fisheries Finance
Corporation, the purpose of each of which is to supplement private
financing in its relevant field of activity; and
.. The Postal Service Agency, which was reorganized in April 2003 into Japan
Post, a government-run public services corporation.
In addition, in May 2003, the Tokyo Metropolitan Government announced its plan
to establish a new bank as early as during the fiscal year beginning April 1,
2004. This will be the first case in which a local government creates a bank.
The new bank is expected to offer various banking businesses, including deposit
acceptances, lending and foreign currency exchanges and settlement services.
The details of the new bank, including the extent and size of its services, are
currently not certain.
Supervision and Regulation
Japan
Supervision. As a result of the deregulation and structural reforms in the
Japanese financial industry, Japanese financial institutions gained the
opportunity to provide a wider range of financial products and options to their
clients as discussed in "--Competition--Japan," while at the same time becoming
subject to stricter control and supervision.
After several reorganizations of Japanese governmental agencies, the Financial
Services Agency was established in 1998. It is responsible for supervising and
inspecting financial institutions, making policy for the overall Japanese
financial system and conducting insolvency proceedings with respect to
financial institutions. The Bank of Japan, as the central bank for financial
institutions, conducts "on-site inspections," in which its staff visits
financial institutions and inspects the assets and risk management systems of
those institutions.
The Banking Law. Among various acts that regulate financial institutions, the
Banking Law and its subordinated orders and ordinances are regarded as the
fundamental law for ordinary banks and other private financial institutions.
The Banking Law addresses bank holding companies, capital adequacy, inspections
and reporting, as well as the scope of business activities, disclosure,
accounting, limitation on granting credit and standards for arm's length
transactions.
Bank holding company regulations. In December 1997, the Anti-Monopoly Law was
amended to generally permit the creation and existence of holding companies,
which had been previously prohibited, except in circumstances in which the
existence of a holding company would result in an excessive concentration of
economic power. Additional legislative measures relating to holding companies
of certain types of financial institutions, such as banks, trust banks and
securities companies, were also proposed around this time and they ultimately
became effective in March 1998. In connection with those legislative measures
and amendments, in December 1997, the Fair Trade Commission amended the
guidelines under the Anti-Monopoly Law to relax the standards for approval of a
financial institution's stockholdings of more than 5% in another company,
thereby permitting a financial institution to acquire interests in other
financial institutions.
A bank holding company is prohibited from carrying on any business other than
the management of its subsidiaries and other incidental businesses. A bank
holding company may have any of the following as a
33
subsidiary: a bank (including a trust bank and a long-term credit bank), a
securities company, an insurance company or a foreign subsidiary that is
engaged in the banking, securities or insurance business. In addition, a bank
holding company may have as a subsidiary any company that is engaged in a
business relating or incidental to the businesses of the companies mentioned
above, such as a credit card company, a leasing company or an investment
advisory company. Companies that cultivate new business fields may also become
the subsidiary of a bank holding company.
Capital adequacy. The capital adequacy guidelines adopted by the Financial
Services Agency that are applicable to Japanese bank holding companies and
banks with international operations closely follow the risk-weighted approach
proposed by the Basel Committee on Banking Supervision of the Bank for
International Settlements, and are intended to further strengthen the soundness
and stability of Japanese banks.
In addition to credit risks, the guidelines regulate market risks. Market risk
is defined as the risk of losses in on- and off-balance-sheet positions arising
from movements in market prices. The risks subject to these guidelines are:
.. the risks pertaining to interest rate-related instruments and equities in
the trading book; and
.. foreign exchange risks and commodities risks of the bank.
Under the risk-based capital framework for credit risk purposes of the capital
adequacy guidelines, on-balance-sheet assets and off-balance-sheet exposures
are assessed according to broad categories of relative risk, based primarily on
the credit risk of the counterparty and country transfer risk. Five categories
of risk weights (0%, 10%, 20%, 50%, 100%) are applied to the different types of
balance sheet assets. Off-balance-sheet exposures are taken into account by
applying different categories of "credit conversion factors" to arrive at
credit-equivalent amounts, which are then weighted in the same manner as
on-balance-sheet assets involving similar counterparties, except that the
maximum risk weight is 50% for exposures relating to foreign exchange, interest
rate and other derivative contracts.
With regard to capital, the capital adequacy guidelines are in accordance with
the standards of the Bank for International Settlement for a target minimum
standard ratio of capital to modified risk-weighted assets of 8.0%. Modified
risk-weighted assets is the sum of risk-weighted assets compiled for credit
risk purposes and market risks multiplied by 12.5. The capital adequacy
guidelines place considerable emphasis on tangible common stockholders' equity
as the core element of the capital base, with appropriate recognition of other
components of capital.
Capital is classified into three tiers, referred to as Tier I, Tier II and Tier
III. Tier I capital generally consists of stockholders' equity items, including
common stock, preferred stock, capital surplus, retained earnings (which
includes deferred tax assets) and minority interests, but recorded goodwill and
other items, such as treasury stock, are deducted from Tier I capital. Tier II
capital generally consists of:
.. general reserves for credit losses, subject to a limit of 1.25% of modified
risk-weighted assets;
.. 45% of the unrealized gains on investment securities available for sale;
.. 45% of the land revaluation excess;
.. the balance of perpetual subordinated debt; and
.. the balance of subordinated term debt with an original maturity of over
five years up to 50% of Tier I capital.
Tier III capital generally consists of short-term subordinated debt with an
original maturity of at least two years and which is subject to a "lock-in"
provision, which stipulates that neither interest nor principal may be paid if
such payment would cause the bank's overall capital amount to be less than its
minimum capital requirement. At least 50% of the minimum capital requirements
must be maintained in the form of Tier I capital.
34
Several regulatory changes have been proposed with respect to the calculation
of capital ratios. In particular, the Financial System Council of the Financial
Services Agency is discussing the adoption of rules limiting the amount of
deferred tax assets that maybe included in the calculation of Tier I and/or
total regulatory capital.
Inspection and reporting. By evaluating banks' systems of self-assessment,
auditing their accounts and reviewing their compliance with laws and
regulations, the Financial Services Agency monitors the financial soundness of
banks, including the status and performance of their control systems for
business activities. The inspection of banks is performed pursuant to a
Financial Inspection Manual published by the Financial Services Agency with a
view to emphasizing (i) each bank's self-assessment rather than the advice of
the governmental authority and (ii) risk management made by each bank instead
of a simple assessment of its assets. In recent years, the Financial Services
Agency has continuously conducted special inspections of major banks in Japan
regarding the grading and levels of write-offs and provisioning of some of
their borrowers.
The Financial Services Agency, if necessary in order to secure the sound and
appropriate operation of a bank's business, may request the submission of
reports or materials from, or conduct an on-site inspection of, the bank and/or
the bank holding company which holds the bank. If a bank's capital adequacy
ratio falls below a specified level, the Financial Services Agency may request
such bank to submit an improvement program and may restrict or suspend a bank's
operation when it determines that such action is necessary.
Under the amendments to the Banking Law and its subordinated orders and
ordinances, which became effective as of April 1, 2002, a person who desires to
hold 20% or, in exceptional cases 15%, or more of the voting rights of a bank
holding company or a bank is required to obtain prior approval from the Prime
Minister. In addition, the Prime Minister may request the submission of reports
or materials from, or conduct an inspection of, the person who holds 20% or
15%, as the case may be, or more of the voting rights of a bank holding company
or a bank if necessary in order to ensure the appropriate business operation of
such bank.
Furthermore, any person who becomes a holder of more than 5% of the voting
rights of a bank holding company or bank must report its ownership of voting
rights to the Director of the relevant local finance bureau within five
business days. In addition, any subsequent change of 1% or more in any
previously reported holding or any change in material matters set out in
reports previously filed must be reported, with some exceptions.
The Bank of Japan also conducts inspections of banks similar to those
undertaken by the Financial Services Agency. The amended Bank of Japan Law
provides that the Bank of Japan and financial institutions may agree as to the
form of inspection to be conducted by the Bank of Japan.
Laws limiting shareholdings of banks. The provisions of the Anti-Monopoly Law
that prohibit a bank from holding more than 5% of another company's voting
rights do not apply to a bank holding company. However, the Banking Law
prohibits a bank holding company and its subsidiaries from holding, on an
aggregated basis, more than 15% of the voting rights of companies other than
those which can legally become subsidiaries of bank holding companies.
In November 2001, a law which imposes a limitation on a bank's shareholding of
up to the amount equivalent to its Tier I capital was enacted. This limitation
was scheduled to become effective in September 2004, but the effective date has
been postponed to September 2006. To assist banks in complying with this
limitation while mitigating the adverse impact on the stock market, the Banks'
Shareholdings Purchase Corporation was established through the contributions of
128 financial institutions to acquire stocks from banks at market prices. The
lifespan of the Banks' Shareholdings Purchase Corporation was extended to March
31, 2017.
In October 2002, the Policy Board of the Bank of Japan issued guidelines for
the Bank of Japan's purchase of listed stocks from commercial banks whose
aggregate value of stockholdings exceed their Tier I capital. The
35
Bank of Japan has adopted this policy for the purpose of assisting commercial
banks in reducing the size of their share portfolios without materially
adversely affecting prevailing market prices. Under the guidelines, which were
revised in March 2003, the Bank of Japan will acquire up to (Yen)3 trillion of
stock from the portfolios of commercial banks at prevailing market prices and
not sell the acquired securities until after September 2007.
The Securities and Exchange Law. Article 65 of the Securities and Exchange
Law of Japan generally prohibits a bank from engaging in the securities
business. Under this law, banks, including Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank, may not engage in the securities business except for
limited activities such as dealing in, underwriting and acting as broker for,
Japanese governmental bonds, Japanese local government bonds and Japanese
government guaranteed bonds, and selling investment trusts certificates.
In general, the restrictions of the Securities and Exchange Law do not extend
directly to the subsidiaries of banks located outside Japan, which engage in
the securities business mainly in connection with capital-raising by Japanese
companies outside of Japan.
Despite the general prohibition under Article 65, the Financial System Reform
Act allows banks, trust banks and securities companies to engage in the
businesses of other financial sectors through their subsidiaries in Japan.
Furthermore, banks' securities subsidiaries in Japan are now permitted to
engage in the underwriting and brokerage of not only bonds, but also equity
securities. This has enabled the securities subsidiaries of banks to offer
various securities-related services to their customers.
In addition, Mitsubishi Tokyo Financial Group, Inc. and certain of its
subsidiaries are required to file with the Director of the Kanto Local Finance
Bureau of the Ministry of Finance a securities report for each fiscal period
supplemented by semi-annual and extraordinary reports pursuant to the
Securities and Exchange Law.
Anti-money laundering laws. Under the Law for Punishment of Organized Crimes
and Regulation of Criminal Profits, banks and other financial institutions are
required to report to the competent minister, in the case of banks, the
Commissioner of the Financial Services Agency, any assets which they receive
while conducting their businesses that are suspected of being illicit profits
from criminal activity.
Law concerning trust business conducted by financial institutions. Under the
Trust Business Law, joint stock companies that are licensed by the Prime
Minister as trust companies are allowed to conduct trust business. In addition,
under the Law Concerning Concurrent Operation for Trust Business by Financial
Institutions, banks and other financial institutions, as permitted by the Prime
Minister, are able to conduct trust business.
Deposit insurance system and government investment in financial institutions.
The Deposit Insurance Law is intended to protect depositors if a financial
institution fails to meet its obligations. The Deposit Insurance Corporation
was established in accordance with that law.
City banks, including Bank of Tokyo-Mitsubishi, regional banks, trust banks,
including Mitsubishi Trust Bank, long-term credit banks and various other
credit institutions participate in the deposit insurance system on a compulsory
basis.
Under the Deposit Insurance Law, the maximum amount of protection is (Yen)10
million per customer within one bank. However, the deposits in some accounts
such as current accounts and ordinary accounts are fully protected without a
maximum amount limitation until the end of March 2005. From April 1, 2005, all
deposits will be subject to the (Yen)10 million cap, which is currently
applicable only to time deposits, except for non-interest bearing deposits that
are redeemable on demand and used by the depositor primarily for payment and
settlement functions. Currently, the Deposit Insurance Corporation charges
insurance premiums equal to 0.09% on the deposits in current accounts, ordinary
accounts and other similar accounts, which are fully protected as mentioned
above, and premiums equal to 0.08% on the deposits in other accounts.
36
Since 1998, the failure of a number of large-scale financial institutions has
led to the introduction of various measures with a view to stabilize Japan's
financial system, including financial support from the national budget.
The Law Concerning Emergency Measures for Revitalization of Financial Function,
or the Financial Revitalization Law, enacted in October 1998, provides for (i)
temporary national control of a failed financial institution, (ii) the dispatch
of a financial resolution administrator to the failed financial institution,
and (iii) the establishment of a bridge bank which takes over the business of
the failed financial institution on a temporary basis.
The Law Concerning Emergency Measures for Early Strengthening of Financial
Function, or the Financial Function Early Strengthening Law, also enacted in
October 1998, provided for government funds to be made available to financial
institutions "prior to failure" as well as to financial institutions with
"sound" management, to increase the capital ratio of such financial
institutions and to strengthen their function as financial market
intermediaries. The availability of new funds for this purpose ended on March
31, 2001. Capital injections made under the Financial Function Early
Strengthening Law amounted to approximately (Yen)10 trillion.
Starting in April 2001, amendments to the Deposit Insurance Law established a
new framework which enables the Deposit Insurance Corporation to inject capital
into a bank if the Prime Minister recognizes it must do so to guard against
financial systemic risk. In May 2003, Resona Bank, Ltd., a subsidiary bank of
Resona Holdings, Inc., was recognized by the Prime Minister to be in need of a
subscription of shares and other measures to expand its capital. Such
recognition was made in accordance with Article 102, Section 1 of the Deposit
Insurance Law. In response to such recognition, Resona Bank, Ltd. applied for
and received an injection of public funds in the total amount of (Yen)1.96
trillion.
Taxation topics concerning banks. Our bank subsidiaries, Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, are involved in legal proceedings
with the Tokyo Metropolitan Government and Osaka Prefectural Government
regarding recent local taxes enacted by those governments. For a more detailed
discussion of these legal proceedings, see "Item 5.A. Operating and Financial
Review and Prospects--Operating Results--Recent Developments--Legal Proceedings
for Local Taxes" and the notes to our consolidated financial statements.
United States
As a result of our operations in the United States, we are subject to extensive
U.S. federal and state supervision and regulation.
Overall supervision and regulation. We are subject to supervision, regulation
and examination with respect to our U.S. operations by the Board of Governors
of the Federal Reserve System, or the Federal Reserve Board, because we are a
bank holding company under the U.S. Bank Holding Company Act of 1956, as
amended, or the BHCA, and pursuant to the International Banking Act of 1978, as
amended, or the IBA, because our Japanese subsidiary banks, Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, maintain branches and agencies in
the United States.
The Federal Reserve Board functions as our "umbrella" or overall regulator
under amendments to the BHCA effected by the Gramm-Leach-Bliley Act of 1999,
which among other things:
.. prohibited further expansion of activities in which bank holding companies,
acting directly or through nonbank subsidiaries, may engage;
.. authorized qualifying bank holding companies to opt to become "financial
holding companies," and thereby acquire the authority to engage in an
expanded list of activities, including merchant banking, insurance
underwriting and a full range of securities activities; and
37
.. modified the role of the Federal Reserve Board by specifying new
relationships between the Federal Reserve Board and the functional
regulators of subsidiaries of both bank holding companies and financial
holding companies.
We have not elected to become a financial holding company.
The BHCA generally prohibits each of a bank holding company and a foreign
banking organization that maintains branches or agencies in the United States
from, directly or indirectly, acquiring more than 5% of the voting shares of
any company engaged in non-banking activities in the United States unless the
bank holding company or foreign banking organization has elected to become a
financial holding company, as discussed above, or the Federal Reserve Board has
determined, by order or regulation, that such activities are so closely related
to banking as to be a proper incident thereto and has granted its approval to
the bank holding company or foreign banking organization for such an
acquisition. The BHCA also requires a bank holding company or foreign banking
organization that maintains branches or agencies in the United States to obtain
the prior approval of an appropriate federal banking authority before
acquiring, directly or indirectly, the ownership of more than 5% of the voting
shares or control of any U.S. bank or bank holding company. In addition, under
the BHCA, a U.S. bank or a U.S. branch or agency of a foreign bank is
prohibited from engaging in various tying arrangements involving it or its
affiliates in connection with any extension of credit, sale or lease of any
property or provision of any services.
U.S. branches and agencies of subsidiary Japanese banks. Under the authority of
the IBA, our subsidiary banks in Japan, Bank of Tokyo-Mitsubishi and Mitsubishi
Trust Bank, operate seven branches, two agencies and four representative
offices in the United States. Bank of Tokyo-Mitsubishi operates branches in Los
Angeles and San Francisco, California; Chicago, Illinois; New York, New York;
Portland, Oregon; and Seattle, Washington; agencies in Atlanta, Georgia and
Houston, Texas; and representative offices in Washington, D.C; Minneapolis,
Minnesota; Dallas, Texas; and Jersey City, New Jersey. Mitsubishi Trust Bank
operates a branch in New York, New York.
The IBA provides, among other things, that the Federal Reserve Board may
examine U.S. branches and agencies of foreign banks, and that each such branch
and agency shall be subject to on-site examination by the appropriate federal
or state bank supervisor as frequently as would a U.S. bank. The IBA also
provides that if the Federal Reserve Board determines that a foreign bank is
not subject to comprehensive supervision or regulation on a consolidated basis
by the appropriate authorities in its home country, or if there is reasonable
cause to believe that the foreign bank or its affiliate has committed a
violation of law or engaged in an unsafe or unsound banking practice in the
United States, the Federal Reserve Board may order the foreign bank to
terminate activities conducted at a branch or agency in the United States.
U.S. branches and agencies of foreign banks must be licensed, and are also
supervised and regulated, by a state or by the Office of the Comptroller of the
Currency, or the OCC, the federal regulator of national banks. All of the
branches and agencies of Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank in
the United States are state-licensed. Under U.S. federal banking laws,
state-licensed branches and agencies of foreign banks may engage only in
activities that would be permissible for their federally-chartered or licensed
counterparts, unless the Federal Reserve Board determines that the additional
activity is consistent with sound practices. U.S. federal banking laws also
subject state-licensed branches and agencies to the single-borrower lending
limits that apply to federal branches and agencies, which generally are the
same as the lending limits applicable to national banks, but are based on the
capital of the entire foreign bank.
As an example of state supervision, the branches of Bank of Tokyo-Mitsubishi
and Mitsubishi Trust Bank in New York are licensed by the New York State
Superintendent of Banks, or the Superintendent, pursuant to the New York
Banking Law. Under the New York Banking Law and the Superintendent's
regulations, each of Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank must
maintain with banks in the State of New York eligible assets as defined and in
amounts determined by the Superintendent. These New York branches must also
submit
38
written reports concerning their assets and liabilities and other matters, to
the extent required by the Superintendent, and are examined at periodic
intervals by the New York State Banking Department. In addition, the
Superintendent is authorized to take possession of the business and property of
Bank of Tokyo-Mitsubishi or Mitsubishi Trust Bank located in New York whenever
events specified in the New York Banking Law occur.
U.S. subsidiary banks. We indirectly own and control three U.S. banks:
.. Bank of Tokyo-Mitsubishi Trust Company, New York, New York (through Bank of
Tokyo-Mitsubishi, a registered bank holding company),
.. Union Bank of California, N.A. (through Bank of Tokyo-Mitsubishi and its
subsidiary, UnionBanCal Corporation, a registered bank holding company), and
.. Mitsubishi Trust & Banking Corporation (U.S.A.), New York, New York
(through Mitsubishi Trust Bank, a registered bank holding company).
Bank of Tokyo-Mitsubishi Trust Company and Mitsubishi Trust & Banking
Corporation (U.S.A.) are chartered by the State of New York and are subject to
the supervision, examination and regulatory authority of the Superintendent
pursuant to the New York Banking Law. Union Bank of California, N.A., is a
national bank subject to the supervision, examination and regulatory authority
of the OCC.
The Federal Deposit Insurance Corporation, or the FDIC, is the primary federal
agency responsible for the supervision, examination and regulation of the two
New York-chartered banks referred to above, and insures the deposits of all
three U.S. subsidiary banks. In the event of the failure of an FDIC-insured
bank, the FDIC is virtually certain to be appointed as receiver, and would
resolve the failure under provisions of the Federal Deposit Insurance Act.
An FDIC-insured institution that is affiliated with a failed or failing
FDIC-insured institution can be required to indemnify the FDIC for losses
resulting from the insolvency of the failed institution, even if this causes
the affiliated institution also to become insolvent. In the liquidation or
other resolution of a failed FDIC-insured depository institution, deposits in
its U.S. offices and other claims for administrative expenses and employee
compensation are afforded priority over other general unsecured claims,
including deposits in offices outside the United States, non-deposit claims in
all offices and claims of a parent company. Moreover, under long-standing
Federal Reserve Board policy, a bank holding company is expected to act as a
source of financial strength for its subsidiary banks and to commit resources
to support such banks.
Bank capital requirements and capital distributions. Our U.S. bank subsidiaries
and UnionBanCal Corporation, our U.S. subsidiary bank holding company, are
subject to applicable risk-based and leverage capital guidelines issued by U.S.
regulators for banks and bank holding companies. All of our U.S. subsidiary
banks are "well capitalized" under those guidelines as they apply to banks, and
our U.S. subsidiary bank holding company exceeds all minimum regulatory capital
requirements applicable to domestic bank holding companies. The Federal Deposit
Insurance Corporation Improvement Act of 1991, or FDICIA, provides, among other
things, for expanded regulation of insured depository institutions, including
banks, and their parent holding companies. As required by FDICIA, the federal
banking agencies have established five capital tiers ranging from "well
capitalized" to "critically undercapitalized" for insured depository
institutions. As an institution's capital position deteriorates, the federal
banking regulators may take progressively stronger actions, such as further
restricting affiliate transactions, activities, asset growth or interest
payments. In addition, FDICIA generally prohibits an insured depository
institution from making capital distributions, including the payment of
dividends, or the payment of any management fee to its holding company, if the
insured depository institution would subsequently become undercapitalized.
The availability of dividends from insured depository institutions in the
United States is limited by various other statutes and regulations. The
National Bank Act and other federal laws prohibit the payment of dividends by a
39
national bank under various circumstances and limit the amount a national bank
can pay without the prior approval of the OCC. In addition, state-chartered
banking institutions are subject to dividend limitations imposed by applicable
federal and state laws.
Other regulated U.S. subsidiaries. Our nonbank subsidiaries that engage in
securities or futures-related activities in the United States are regulated by
appropriate functional regulators, such as the SEC, the Commodities Futures
Trading Commission, any self-regulatory organizations of which they are
members, and the appropriate state regulatory agencies. These nonbank
subsidiaries are required to meet separate minimum capital standards as imposed
by those regulatory authorities.
The Gramm-Leach-Bliley Act removed almost all of the pre-existing statutory
barriers to affiliations between commercial banks and securities firms by
repealing Sections 20 and 32 of the Glass-Steagall Act. At the same time,
however, the so-called "push-out" provisions of the Gramm-Leach-Bliley Act
narrowed the exclusion of banks, including the U.S. branches of Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, from the definitions of "broker"
and "dealer" under the Securities Exchange Act of 1934, potentially requiring
all such banks to transfer some activities to affiliated broker-dealers. In May
2001, the SEC issued interim rules defining some terms in the "push-out"
provisions and granting banks additional exemptions from broker-dealer
registration. Since that time, the SEC has made modifications to the proposed
rules and has extended the time period for compliance with such rules several
times. In April 2003, the SEC extended the date by which banks must bring their
activities into compliance with some of the push-out provisions related to
broker-dealer activities by exempting banks from the definition of "broker"
until November 12, 2004. The rules narrowing the exclusion of banks from the
definition of "dealer" are scheduled to become effective on September 30, 2003.
It is possible that the SEC will further modify these rules or delay their
effectiveness.
USA PATRIOT Act. The USA PATRIOT Act of 2001 substantially broadened the scope
of U.S. anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extraterritorial jurisdiction of the United States. Failure of a
financial institution to comply with the USA PATRIOT Act's requirements could
have serious legal and reputational consequences for the institution.
C. Organizational Structure
The following chart presents our basic corporate structure:
[FLOW CHART]
Mitsubishi Tokyo Financial Group, Inc.
100% 100%
The Bank of The Mitsubishi Trust and
Tokyo-Mitsubishi, Ltd. Banking Corporation
Mitsubishi Tokyo Financial Group, Inc. is the direct shareholder of Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank. The other subsidiaries and
affiliated companies are held indirectly under these two subsidiaries.
40
Set forth below is a list of our significant subsidiaries at March 31, 2003.
Proportion of Proportion
Country of ownership of voting
Name incorporation interest (%) interest (%)
---- ------------- ------------- ------------
The Bank of Tokyo-Mitsubishi, Ltd...................... Japan 100.00 100.00
The Mitsubishi Trust and Banking Corporation........... Japan 100.00 100.00
Mitsubishi Securities Co., Ltd......................... Japan 58.72 58.42
DC Card Co., Ltd....................................... Japan 43.06 43.06
The Diamond Mortgage Co., Ltd.(1)...................... Japan 100.00 100.00
Tokyo-Mitsubishi Asset Management Ltd.................. Japan 53.36 53.36
Mitsubishi Tokyo Wealth Management Securities, Ltd..... Japan 100.00 100.00
The Diamond Factors Limited............................ Japan 76.94 76.94
The Diamond Home Credit Company Limited................ Japan 99.66 99.66
MTB Investment Technology Institute Co., Ltd........... Japan 100.00 100.00
Tokyo-Mitsubishi Cash One Ltd.......................... Japan 63.50 63.50
Defined Contribution Plan Consulting of Japan Co., Ltd. Japan 70.00 70.00
BOT Lease Co., Ltd..................................... Japan 17.65 17.65
UnionBanCal Corporation................................ United States 65.49 65.49
Union Bank of California, N.A.......................... United States 65.49 65.49
Bank of Tokyo-Mitsubishi Trust Company................. United States 100.00 100.00
Tokyo-Mitsubishi International plc..................... United Kingdom 100.00 100.00
Mitsubishi Tokyo Wealth Management (Switzerland), Ltd.. Switzerland 100.00 100.00
Mitsubishi Trust International Limited................. United Kingdom 100.00 100.00
Mitsubishi Trust & Banking Corporation (U.S.A.)........ United States 100.00 100.00
Mitsubishi Trust Finance (Ireland) PLC................. Ireland 100.00 100.00
Spectrum Capital, Ltd.................................. United States 75.00 75.00
-----
(1) In February 2003, we decided to dissolve The Diamond Mortgage Co., Ltd.,
our mortgage securities subsidiary. For a more detailed discussion, see
"Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Recent Developments--Dissolution of Mortgage Securities
Subsidiary."
D. Property, Plants and Equipment
The following table presents our premises and equipment at cost as of March 31,
2002 and 2003:
At March 31
-----------------------------
2002 2003
-------------- --------------
(in millions)
Land......................... (Yen) 200,191 (Yen) 193,278
Buildings.................... 443,828 432,230
Equipment and furniture...... 530,380 489,307
Leasehold improvements....... 232,509 234,443
Construction in progress..... 3,294 20,134
-------------- --------------
Total..................... 1,410,202 1,369,392
Less accumulated depreciation 728,836 725,598
-------------- --------------
Premises and equipment--net.. (Yen) 681,366 (Yen) 643,794
============== ==============
Our head office is located at 4-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, and
comprises 2,221.19 square meters of office space. At March 31, 2003, we
conducted our banking operations either in our owned premises or in leased
properties.
41
The following table presents the areas and book values of our material office
and other properties at March 31, 2003:
Area Book value
----------------------------- -------------
(in thousands of square feet) (in millions)
Owned land...... 11,213 (Yen)193,278
Leased land..... 1,239 --
Owned buildings. 17,806 183,418
Leased buildings 12,489 --
Our owned land and buildings are primarily used by our branches. Most of the
buildings and land owned by us are free from material encumbrances, except as
described below.
In March 1999, Bank of Tokyo-Mitsubishi sold a 50% undivided interest in each
of its head office land and building and its main office land and building and,
at the same time, Bank of Tokyo-Mitsubishi entered into an agreement to lease
back from the buyer the 50% undivided interests of the buildings sold for a
period of seven years. We accounted for these transactions as financing
arrangements.
During the fiscal year ended March 31, 2003, we invested approximately
(Yen)50.6 billion in our subsidiaries primarily for office renovations and
purchases of furniture and equipment.
Item 5. Operating and Financial Review and Prospects.
A. Operating Results
The following discussion and analysis should be read in conjunction with "Item
3.A. Key Information--Selected Financial Data" and our consolidated financial
statements and related notes included elsewhere in this Annual Report.
Introduction
We are a holding company for Bank of Tokyo-Mitsubishi and Mitsubishi Trust
Bank. Through our subsidiary banks, we provide a broad range of financial
services, including commercial banking, investment banking, asset management
and trust banking services, to individual and corporate customers. The banking
industry and the global financial markets are influenced by many unpredictable
factors, including economic conditions, monetary policy, international
political events, liquidity in global markets and regulatory developments. Our
operations are significantly affected by external factors, such as the level
and volatility of interest rates, currency exchange rates, stock and real
estate markets and other economic and market conditions. In particular, serious
problems with nonperforming assets and depressed stock and real estate markets
resulting from prolonged severe economic conditions in Japan have significantly
affected our operations in recent years. Japanese financial institutions have
experienced and are still experiencing protracted asset quality problems. In
addition, we hold a significant number of shares in some of our customers for
strategic purposes, in particular to maintain long-term relationships. These
shareholdings expose us to a risk of losses resulting from a decline in their
market prices. Accordingly, our results of operations may vary significantly
from period to period because of unpredictable events, including unexpected
failures of large corporate borrowers, defaults in emerging markets and market
volatility.
Recent Developments
Global Offering of Our Common Stock
In March 2003, we issued 489,694 new shares of our common stock, and our
subsidiary banks, Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank, also sold
an aggregate of 155,027 shares of our common stock at a public offering price
of (Yen)475,000 per share in a global offering. We received approximately
(Yen)222.2 billion in aggregate net cash proceeds from the issuance of new
shares of our common stock in the global offering, which was used to make
equity investments in our subsidiary banks and for general corporate purposes.
Our subsidiary banks
42
received approximately (Yen)70.6 billion in aggregate net cash proceeds from
the sale of our shares in the global offering, which were used for their
general corporate purposes. After deducting underwriters' discounts and
commissions and offering expenses, the global offering increased our capital
stock by (Yen)111.6 billion and capital surplus by (Yen)150.4 billion, and
decreased our treasury stock by (Yen)79.3 billion.
Acquisition and Merger of Securities Companies
On September 1, 2002, KOKUSAI Securities Co., Ltd., a former equity method
investee and a listed securities firm in Japan, Tokyo-Mitsubishi Securities
Co., Ltd., a former subsidiary, Tokyo-Mitsubishi Personal Securities Co., Ltd.,
a former subsidiary, and Issei Securities Co., Ltd., a former equity method
investee, were merged into one securities company, with KOKUSAI Securities
continuing as the surviving corporation, under the new name of Mitsubishi
Securities Co., Ltd. The merger was consummated through a stock-for-stock
exchange, as a result of which we acquired, immediately after the merger, an
equity interest of 56.76% in Mitsubishi Securities. The acquisitions of the net
assets of KOKUSAI Securities, Issei Securities and Tokyo-Mitsubishi Personal
Securities were accounted for using the purchase method. The cost of
acquisition was determined based on the quoted market price of KOKUSAI
Securities' common stock during the five-day period before and after April 8,
2002 when the terms of the acquisition were agreed to and announced. No
goodwill was recognized as a result of the merger. The decrease in the net
assets of Tokyo-Mitsubishi Securities was accounted for as a sale of investment
in a subsidiary, resulting in a (Yen)22.5 billion loss for the fiscal year
ended March 31, 2003, which was included in non-interest expense: other
non-interest expenses.
Adoption of Consolidated Corporate-Tax System
In March 2003, the Japanese tax authorities approved our application to file
our tax returns under the consolidated corporate-tax system. We filed our tax
returns under the consolidated corporate-tax system for the fiscal year ended
March 31, 2003. Under the new consolidated system, we base tax payments on the
combined profits or losses of the parent company and its wholly-owned domestic
subsidiaries. We are required to pay, for the fiscal years ended or ending
March 31, 2003 and 2004, a surcharge tax of 2.0% of taxable income in addition
to the national corporate income tax rate, which is currently 30.0%.
Amendments of Local Tax System
The Japanese government enacted uniform local tax laws in March 2003, which
introduced value-added taxes and replaced a part of the existing local taxes
based on income. Under the new local tax laws, enterprise taxes will be
computed based on three components: (a) amount of profit, (b) amount of
value-added (total payroll, net interest paid or received, net rent paid and
income before use of net operating losses) and (c) amount of total paid-in
capital. The taxes are computed by adding together the totals of each of the
three components each of which is calculated separately. The new local tax
becomes effective for the fiscal year beginning after March 31, 2004.
Legal Proceedings for Local Taxes
In the fiscal year ended March 31, 2001, both the Tokyo Metropolitan Government
and Osaka Prefectural Government began to impose local taxes that were
applicable only to large banks operating within their respective jurisdictions,
including our subsidiary banks, based on their gross operating profits. We
recognized the impact of the local taxes in our statements of operations and
accounted for them as non-interest expenses for the fiscal years ended March
31, 2001, 2002 and 2003. Banks, including our subsidiary banks, are currently
challenging the legality of the local taxes in both Tokyo and Osaka. In March
2002, the tax imposed by the Tokyo Metropolitan Government was overturned by
the Tokyo District Court. In January 2003, the Tokyo High Court also overturned
the local tax and ordered the Tokyo Metropolitan Government to, among other
things, refund the tax payments that banks, including our subsidiary banks, had
paid over the past fiscal years. The refund represents the difference between
the 3.0% tax on the gross operating profits paid by the banks and the amount
computed based on their taxable incomes under the former rule. The Tokyo
Metropolitan Government has appealed this decision and the matter is presently
being litigated in the Supreme Court of Japan.
43
On September 17, 2003, attorneys representing the banks, including our
subsidiary banks, came to a basic agreement as part of the proceedings in the
Supreme Court with attorneys representing the Tokyo Metropolitan Government as
to the conditions of a settlement. The conditions of the settlement include (a)
a revision of the applicable tax rate to 0.9% from the current 3.0%, effective
retroactive to the date of enactment of the local tax in the fiscal year ended
March 31, 2001 and (b) a refund representing the difference between the amount
already paid by the banks and the amount computed based on the newly enacted
rate plus accrued interest. The settlement is subject to the approval of each
bank participating in the litigation and an amendment by the Tokyo Metropolitan
Assembly to the municipal ordinance imposing the local tax. If the banks and
the Tokyo Metropolitan Government settle pursuant to the terms contemplated by
the basic agreement, we will be entitled to a tax refund for the fiscal years
ended March 31, 2001, 2002 and 2003 amounting to (Yen)39.7 billion plus accrued
interest. To date, no decisions have been made by the Osaka District Court
concerning the local tax imposed by the Osaka Prefectural Government.
Because the legal process has not been completed, we have not recorded any gain
in our consolidated financial statements concerning the tax refund mentioned
above.
Pension Plan Amendment
In November 2002, one of our subsidiary banks, Bank of Tokyo-Mitsubishi,
amended its pension plan to reduce employee pension benefits by amounts ranging
from 7% to 20% commencing with employees who retire on or after April 1, 2003.
This plan amendment is expected to lower our net periodic pension costs and
decrease our pension obligations.
Planned Transfer to the Japanese Government of the Substitutional Portion of
Employee Pension Fund Liabilities
On June 30, 2003, Bank of Tokyo-Mitsubishi, our subsidiary bank, submitted to
the government an application to transfer the obligation to pay benefits for
future employee service related to the substitutional portion in defined
benefit pension plans established under the Japanese Welfare Pension Insurance
Law, and the application was approved by the government on August 1, 2003. Upon
that approval, Bank of Tokyo-Mitsubishi began making pension insurance payments
to the government and the government assumed the benefit obligations arising
from future employee services. However, in order to complete the entire
separation process, Bank of Tokyo-Mitsubishi must make another application for
transfer to the government of the remaining substitutional portion related to
the benefit obligation for past services, but the timing of the application has
not been decided. Upon the approval of the second application, Bank of
Tokyo-Mitsubishi will transfer to a government agency its remaining
substitutional obligation and related pension plan assets, which amount will be
determined pursuant to a government formula, and in exchange be released from
paying the remaining substitutional portion of the benefits to its employees.
For more detailed information on the transfer of pension fund liabilities, see
"--Liquidity and Capital Resources--Financial Condition--Severance Indemnities
and Pension Liabilities."
Government Plan to Revive Financial Sector
In late 2002, the Japanese government announced its plan to restore confidence
in the Japanese financial system. Under the plan, the Financial Services
Agency, the Bank of Japan and other elements of the government of Japan have
taken several steps to address the asset quality problems faced by many
Japanese financial institutions, strengthen the capital base, improve the
governance of major Japanese banks and bring greater stability to the financial
system. These steps announced or taken by the government include more rigorous
assessment of assets, improvement of capital ratios, improvement of governance,
extension of deposit guarantees, government support of distressed financial
institutions, improvement of the Financial Services Agency's monitoring system
and a new framework for corporate revival.
The government plan primarily features the acceleration of disposals of
nonperforming loans held by major banks, including Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank, and the rehabilitation of companies with financial
difficulty. Under the Program for Financial Revival, the Financial Services
Agency has stated that it
44
will strive to normalize the problems with nonperforming loans by March 31,
2005, by reducing major banks' ratios of nonperforming loans to total loans by
about half, and will aim to create a stronger financial system that can support
these structural reforms. In connection with the acceleration of the disposal
of nonperforming loans, the RCC, which is wholly owned by the Deposit Insurance
Corporation, has been playing an important role as a purchaser of nonperforming
loans.
Under the government plan, in order to assist commercial banks in reducing the
size of their equity share portfolios without materially adversely affecting
prevailing stock market prices, the Bank of Japan began purchasing stocks held
by banks. Transfers of stocks to the Bank of Japan are sale transactions
without any continuing involvements. In order to minimize the risk of price
decline of such investments and seeking to comply with the legislation
forbidding banks from holding stocks with aggregate market values less
unrealized gains in excess of their Tier I capital after September 30, 2004, a
date which was later extended to after September 30, 2006 as discussed below,
we have substantially reduced our holdings of strategic equity investments.
On December 11, 2002, the Deposit Insurance Law and other related laws were
amended. Prior to the amendment, guarantees of liquid deposits, such as
ordinary deposits and current deposits were set to be capped at (Yen)10 million
per customer within one bank starting on April 1, 2003. Under the amended
deposit insurance system, the Deposit Insurance Corporation guarantees in full
all current deposits, ordinary deposits and other specified deposits until
March 31, 2005. From April 1, 2005, all deposits will be subject to the (Yen)10
million cap, which is currently applicable only to time deposits, except for
non-interest bearing deposits that are redeemable on demand and used by the
depositor primarily for payment and settlement functions.
Revision to Legislation Forbidding Banks from Holding Stocks in Excess of Tier
I Capital
On July 25, 2003, the Japanese government enacted a revision to the legislation
forbidding banks from holding stocks with aggregate market values less
unrealized gains in excess of their Tier I capital. The revision postpones the
date after which banks will be forbidden from such holdings of stocks to
September 30, 2006. The revision also extends the lifespan of the Banks'
Shareholdings Purchase Corporation to March 31, 2017 and abolishes subordinated
contributions, which, under the previous legislation, banks were required to
make at the time of a sale of stocks to the Special Account of the Banks'
Shareholdings Purchase Corporation at a rate of 8% of the price at which the
stocks were sold. This revision became effective in August 2003.
Establishment of the Industrial Revitalization Corporation of Japan
In April 2003, revisions to the Law on Special Measures for Industrial
Revitalization were made to introduce the newly established Industrial
Revitalization Corporation of Japan, or the Industrial Revitalization
Corporation. The Industrial Revitalization Corporation is expected to
contribute to the revitalization of borrowers with financial difficulties and
the restoration of confidence in the Japanese financial system by accelerating
the disposal of problem loans. For these purposes, the Industrial
Revitalization Corporation purchases loans, especially restructured loans, from
non-primary lending banks at fair value reflecting the borrowers' business
plans and cooperates with primary lending banks to assist the borrowers in
revitalizing their businesses and operations. Under the current plan, the
Industrial Revitalization Corporation will purchase loans over two years, and
then generally sell them to third parties within three years. The Industrial
Revitalization Corporation is scheduled to be dissolved in five years when it
sells all loans that it purchased from banks. We made investments of (Yen)9.0
billion in April 2003 in the Deposit Insurance Corporation, a shareholder of
the Industrial Revitalization Corporation, which corresponds to approximately
18% interest in the Industrial Revitalization Corporation. Depending on the
Industrial Revitalization Corporation's performance in five years and the
Industrial Revitalization Corporation's net assets at that time, we may receive
a surplus in addition to the redemption of the investments or may incur losses
up to the amount of our investments.
Dissolution of Mortgage Securities Subsidiary
In February 2003, we decided to dissolve our mortgage securities subsidiary,
The Diamond Mortgage Co., Ltd., due to the adverse business environment for the
mortgage securities business. We had been engaged in the
45
mortgage securities business primarily through Diamond Mortgage. Although
Diamond Mortgage has already ceased its operations, it still had assets of
approximately (Yen)17 billion at March 31, 2003, and we will collect or dispose
of these assets by March 2004 through an ongoing liquidation process.
Special Inspections by the Financial Services Agency
From the end of January through April 2003, the Financial Services Agency
conducted a second round of special inspections to evaluate large loans at
major banks, including Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank. The
results of these inspections were released on April 25, 2003. The objective of
the special inspections was to ensure that loans to certain large borrowers
were appropriately classified and that sufficient levels of write-offs and
provisioning were recorded on a timely basis, reflecting the borrowers'
business and market conditions. The Financial Services Agency's special
inspection did not have a significant effect on our allowance calculation under
US GAAP or the amounts of loans evaluated for impairment for that purpose.
Business Environment
Economic Environment in Japan
Amid growing concerns over the prospects for Japan's fragile economic recovery,
Japanese financial institutions, including us, have faced several significant
challenges, such as rapidly evolving Japanese banking regulations, low Japanese
stock prices, a record low for long-term interest rates, continuing high levels
of corporate bankruptcy filings and widespread corporate downsizing during the
fiscal year ended March 31, 2003.
Japanese equity indices declined for the third consecutive fiscal year with the
Nikkei Stock Average, which is an average of 225 blue-chip stocks listed on the
Tokyo Stock Exchange, declining 27.7% from (Yen)11,024.94 at March 29, 2002 to
(Yen)7,972.71 at March 31, 2003. Also, the Tokyo Stock Price Index, or TOPIX,
which is a composite index of all stocks listed on First Section of the Tokyo
Stock Exchange, declined 25.7% from 1,060.19 at March 29, 2002 to 788.00 at
March 31, 2003. After March 31, 2003, the Japanese equity indices have
improved, and the Nikkei Stock Average has risen to around the (Yen)10,000
level in recent months.
The Bank of Japan maintained a near zero interest rate policy for the fiscal
year ended March 31, 2003. A continued shift of funds from the slumping stock
markets to Japanese government bonds helped push up bond prices, driving down
yields. Long-term interest rates significantly declined during the fiscal year
ended March 31, 2003. The yield on 10-year government bonds, used as a
benchmark for long-term interest rates, started the fiscal year at 1.40% and
finished the fiscal year at 0.70%, reaching a record low. After March 31, 2003,
the bond markets and market interest rates have been very volatile. The
benchmark long-term yield surged to over 1% levels in recent months, after
hitting a record low of below 0.5%, and consequently bond prices generally
declined during those months.
Under the near zero interest rate policy maintained by the Bank of Japan, the
short-term prime lending rate, used as a benchmark for loans of less than one
year, stayed at 1.375% per annum for the fiscal year ended March 31, 2003,
while interest rates on deposits further declined, reaching a record low.
Land prices continued to show a significant decline during the fiscal year
ended March 31, 2003. This decline was evidenced by a 6.4% decline in average
government-set official land prices nationwide as of January 1, 2003, which
represents the twelfth straight year of decline. Nationwide residential land
prices fell 5.8% on average, 0.6% more than the decline in the previous fiscal
year, while nationwide commercial land prices dropped 8.0%, 0.3% lower than the
decline in the previous fiscal year.
High levels of corporate bankruptcy filings, with over 18,000 cases, continued
during the fiscal year ended March 31, 2003 although they decreased 5.6% as
compared with the previous fiscal year. This was the second worst period in
terms of number of cases after the collapse of the bubble economy in the early
1990s.
In the foreign exchange markets, the value of the yen against the US dollar
generally appreciated during the fiscal year ended March 31, 2003 while it
depreciated against other foreign currencies such as the euro. In terms of the
noon buying rate of the Federal Reserve Bank of New York, the value of the yen
against the US dollar fluctuated from a high of (Yen)115.71 to a low of
(Yen)133.40 during the fiscal year ended March 31, 2003, and finished the
fiscal year at (Yen)118.07 as compared with (Yen)132.70 at the prior fiscal
year end.
46
International Financial Markets
The international financial markets also had a challenging year with sharp and
significant declines in global equity markets, political and economic turmoil
in various countries, including the war in Iraq, poor corporate earnings,
increased number of bankruptcies in developed countries and accounting and
governance scandals in the United States.
During the fiscal year ended March 31, 2003, global stock prices declined
significantly and long-term interest rates had steadily declined. In the United
States, which has been an important market for our financial services, equity
markets experienced the sharpest declines since the 1970s. The Dow Jones
Industrial Average dropped 23.2% and the Nasdaq Composite Index fell 27.3%
during the fiscal year ended March 31, 2003. While stock prices in the United
States significantly declined, bond prices rose sharply, bringing a sharp
decline in yield on the 10-year U.S. Treasury bond, the benchmark for long-term
interest rates. The yield on 10-year U.S. Treasury bonds started the fiscal
year at 5.41% and finished the fiscal year at 3.82%. The U.S. Federal Reserve
Bank decreased interest rates by 50 basis points in November 2002, bringing the
federal funds rate target to 1.25%. The federal funds rate remained unchanged
throughout the balance of the fiscal year ended March 31, 2003. Subsequent to
March 31, 2003, the federal funds rate target was lowered by 25 basis points to
1.00%.
In addition, European markets declined significantly with a further decline
from the previous fiscal year in the technology sector across most of Europe.
Because of the weak economy, the European Central Bank decreased its policy
rates (refinancing rates) by 50 basis points in December 2002 and 25 basis
points in March 2003 to 2.5%. Elsewhere in Asia, stock markets generally moved
in line with the global averages although economic growth generally remained
comparatively superior to the rest of the world, with China in the vanguard of
economic growth rates.
Critical Accounting Estimates
Our financial statements are prepared in accordance with US 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. The notes to our consolidated financial statements provide a
summary of our significant accounting policies. The following is a summary of
the critical accounting estimates.
Impairment of Investment Securities
US GAAP requires recognizing in earnings an impairment loss of investment
securities for a decline in fair value that is other than temporary.
Determinations of whether a decline is other than temporary often involve
estimating the outcome of future events. Management judgment is required in
determining whether factors exist that indicate that an impairment loss has
been incurred at the balance sheet date. These judgments are based on
subjective as well as objective factors.
Marketable equity securities. In particular, the Japanese stock markets have
experienced a significant downturn and volatility during recent years. In view
of the diversity and volume of our shareholdings, the declining but volatile
equity markets make it difficult for us to determine whether the declines are
other than temporary. In determining whether a decline in fair value is other
than temporary for a particular stock, in addition to a significant decline in
fair value below cost, we need to determine if the decline is attributable to
adverse conditions specifically related to conditions in the issuer's industry,
or attributable to a deterioration of the particular issuer. We also consider
the issuer's credit rating in cases where the issuers are our borrowers. In
addition, we consider the length of period that the decline has existed. If the
decline in fair value below cost has continued for more than six months, we
generally deem such decline to be other than temporary. After considering these
factors, individual equity securities are written down to fair value when we
determine that a decline in fair value below the cost of securities is other
than temporary. As of March 31, 2003, gross unrealized losses of marketable
equity securities were (Yen)46.9 billion and we believe that such losses are
temporary based on the criteria applied.
47
Debt securities. Determination of other than temporary decline in fair value
of debt securities is primarily based on the credit standing of the issuers
under our credit rating system. In addition, the extent of decline in fair
value is also taken into consideration. If fair value significantly declines
below cost, we generally deem such decline to be other than temporary. However,
a substantial majority of our investments in debt securities are in high-grade
fixed-rate bonds, including sovereign bonds such as U.S. treasury bonds. Such
investments are subject to cyclical market price fluctuations due to market
interest rate and foreign exchange rate changes. We generally consider a
decline in fair value of such bonds below cost due to market interest rate and
foreign exchange fluctuations, if any, to be not other than temporary, because
we generally have the intent and ability to hold such investments for a period
longer than that inherent in short-term price fluctuations.
Non-marketable equity securities. We consider the credit standing of issuers
and the extent of decline in net assets of issuers to determine whether the
decline is other than temporary. When we determine that the decline is other
than temporary, non-marketable equity securities are written down to our share
of the amount of issuers' net assets.
The equity securities and debt securities markets are inherently volatile, and
the values have significantly fluctuated in recent years. Accordingly, our
assessment involves risks and uncertainties depending on the market condition.
If we later conclude that a decline is other than temporary, the impairment
loss may significantly affect our result of operations and financial condition
in future periods.
During the fiscal year ended March 31, 2003, the Japanese stock markets
experienced a long, sustained decline. In light of this recent decline, we have
reassessed and modified our estimate of the extent of decline in fair value
that should be considered as other than temporary and recognized additional
impairment losses based on this change in accounting estimate.
Allowance for Credit Losses
The allowance for credit losses represents management's estimate of probable
losses in our loan portfolio. The evaluation process involves a number of
estimates and judgments. The allowance is based on two principles of
accounting: (1) Statement of Financial Accounting Standards, or SFAS, No. 5,
"Accounting for Contingencies," which requires that losses be accrued when they
are probable of occurring and can be estimated; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which require that losses be accrued based on the differences
between the present value of expected future cash flows discounted at the
loan's effective interest rate, the fair value of collateral or values that are
observable in the secondary market and the loan balance.
Our allowance for credit losses consists of an allocated allowance and an
unallocated allowance. The allocated allowance comprises (i) the allowance for
specifically identified problem loans, (ii) the allowance for large groups of
smaller balance homogeneous loans, (iii) the allowance for loans exposed to
specific country risk and (iv) the formula allowance.
Each of these components is determined based upon estimates that can and do
change when actual events occur. The allowance for specifically identified
problem loans, which represent large-balance, non-homogeneous loans that have
been individually determined to be impaired, uses various techniques to arrive
at an estimate of loss. Historical loss information, discounted cash flows,
fair value of collateral and secondary market information are all used to
estimate those losses. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment, and the allowance for such loans is
established through a process that begins with estimates of probable losses
inherent in the portfolio, based upon various analyses, including historical
delinquency and credit loss experience. The allowance for loans exposed to
specific country risk is based on an estimate of probable losses relating to
our exposure to countries that we identify as having a high degree of transfer
risk. We use a country risk grading system that assigns risk ratings to
individual countries. To determine the risk rating, we consider the instability
of foreign currency and difficulties regarding our borrowers' ability to
service their debt.
48
The formula allowance uses a model based on historical losses as an indicator
of future losses and as a result could differ from losses incurred in the
future. However, since this history is updated with the most recent loss
information, the differences that might otherwise occur are mitigated. The use
of these values is inherently subjective and our actual losses could be more or
less than the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in the
allocated allowance. For further information regarding our allowance for credit
losses, see "--Liquidity and Capital Resources-- Financial Condition--Allowance
for Credit Losses, Nonperforming and Past Due Loans."
In addition to the allowance for credit losses on the loan portfolio, we
maintain an allowance for credit losses on off-balance-sheet credit
instruments, including commitments to extend credit, a variety of guarantees
and standby letters of credit. Such allowance is included in other liabilities.
With regard to the allocated allowance for specifically identified credit
exposure and the allocated formula allowance, we apply the same methodology
that we use in determining the allowance for loan credit losses.
Valuation of Deferred Tax Assets
A valuation allowance for deferred tax assets is recognized if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. All available evidence,
both positive and negative, is considered to determine whether, based on the
weight of that evidence, a valuation allowance is needed. Future realization of
the tax benefit of existing deductible temporary differences or carryforwards
ultimately depends on the existence of sufficient taxable income in future
periods.
In determining a valuation allowance, we perform a review of future taxable
income (exclusive of reversing temporary differences and carryforwards) and
future reversals of existing taxable temporary differences. Due to losses in
recent years and continuing weak economic conditions, the determination of the
valuation allowance involves difficult judgments to estimate future taxable
income.
At March 31, 2003, we had operating loss carryforwards of (Yen)2,238.3 billion.
Future realization of the tax benefit of the carryforwards or existing
deductible temporary differences ultimately depends on the existence of
sufficient taxable income in future periods. Based on our estimates of future
taxable income, we recognized a valuation allowance for a portion of the
operating loss carryforwards.
Because the establishment of the valuation allowance is an inherently uncertain
process involving estimates, currently established allowance may not be
sufficient. If the estimated allowance is not sufficient, we will incur
additional deferred tax expenses, which could materially affect our operating
results in future periods.
Accounting for Goodwill
US GAAP requires us to test goodwill for impairment at least annually using a
two-step process that begins with an estimation of the fair value of a
reporting unit of our business, which is to be compared with the carrying
amount of the unit, to identify potential impairment of goodwill. The fair
value of a reporting unit is defined as the amount at which the unit as a whole
could be bought or sold in a current transaction between willing parties. Since
an observable quoted market price for units is not always available, the
estimate of fair value is based on the best information available, including
prices for comparable units and the results of using other valuation techniques
including the present value technique, which requires an estimation of future
cash flows and other assumptions. If the carrying amount of a reporting unit
exceeds its estimated fair value, the second step of the goodwill impairment
test is performed to measure the amount of impairment loss. This test requires
comparison of the implied fair value of the unit's goodwill with the carrying
amount of that goodwill. The estimation of the implied fair value of the
reporting unit's goodwill requires us to allocate the fair value of a reporting
unit to all of the assets and liabilities of that unit, including any
unrecognized intangible assets, if any, since the implied fair value is
determined as the excess of the fair value of a reporting unit over the net
amounts assigned to its assets
49
and liabilities in the allocation. Accordingly, the second step of the
impairment test also requires an estimate of the fair value of individual
assets and liabilities, including any unrecognized intangible assets that
belongs to that unit.
Accrued Severance Indemnities and Pension Liabilities
We have defined benefit retirement plans, including lump-sum severance
indemnities and pension plans, which cover substantially all of our employees.
Severance indemnities and pension costs are calculated based upon a number of
actuarial assumptions, including discount rates, expected long-term rates of
return on our plan assets and rates of increase in future compensation levels.
In accordance with US GAAP, actual results that differ from the assumptions are
accumulated and amortized over future periods, and affect our recognized net
periodic pension costs and accrued severance indemnities and pension
obligations in future periods accordingly. We had an unrecognized net actuarial
loss for domestic severance indemnities and pension plans of (Yen)511.0 billion
at March 31, 2003. Differences in actual experience or changes in assumptions
may affect our financial condition and operating results in future periods.
The discount rates for the domestic plans are set to reflect the interest rates
of high-quality fixed-rate instruments with maturities that correspond to the
timing of future benefit payments.
In developing our assumptions for expected long-term rates of return, we refer
to the historical average returns earned by the plan assets and the rates of
return expected to be available for reinvestment of existing plan assets, which
reflect recent changes in trends and economic conditions, including market
price. We also evaluate input from our actuaries, including their reviews of
asset class return expectations.
Valuation of Financial Instruments with No Available Market Prices
Some assets and liabilities, including available-for-sale securities, trading
accounts and derivatives, are reflected at their estimated fair values in our
financial statements. Fair values for the substantial majority of our portfolio
of financial instruments with no available market prices are determined based
upon externally verifiable model inputs and quoted prices. All financial
models, which are used for independent risk monitoring, must be validated and
periodically reviewed by qualified personnel independent of the area that
created the model. The fair value of derivatives is determined based upon
liquid market prices evidenced by exchange-traded prices, broker-dealer
quotations or prices of other transactions with similarly rated counterparties.
If available, quoted market prices provide the best indication of value. If
quoted market prices are not available for fixed maturity securities and
derivatives, we discount expected cash flows using market interest rates
commensurate with the credit quality and maturity of the investment.
Alternatively, we may use matrix or model pricing to determine an appropriate
fair value. In determining fair values, we consider various factors, including
time value, volatility factors and underlying options, warrants and derivatives.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or the FASB, issued
SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized.
Instead, these assets are tested annually for impairment. Effective April 1,
2002, we adopted the provisions of SFAS No. 142 and performed the required
transitional impairment tests of goodwill and intangible assets with indefinite
lives. The adoption of SFAS No. 142 resulted in a cumulative adjustment charge
to our earnings of (Yen)0.5 billion relating to the impairment of goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses the financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. SFAS No. 143 applies to the legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the
50
normal operation of a long-lived asset. A legal obligation is an obligation
that a party is required to settle as a result of an existing or enacted law,
statute, ordinance, or written or oral contract, or by legal construction of a
contract under the doctrine of promissory estoppel. This statement is effective
for fiscal years beginning after June 15, 2002. We do not expect that the
adoption of this statement will have a material impact on our financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets by
establishing additional criteria, as compared to previous US GAAP, to be used
to determine when a long-lived asset is held for sale. It also broadens the
definition of discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 did not have a material impact on our financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The provisions of SFAS No. 145 that relate to the rescission of Statement No. 4
are effective for fiscal years beginning after May 15, 2002. Any gain or loss
on extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion 30 for
classification as an extraordinary item are to be reclassified. The provisions
of this statement that relate to SFAS No. 13 are effective for transactions
occurring after May 15, 2002. All other provisions of SFAS No. 145 are
effective for financial statements issued on or after May 15, 2002. The
adoption of SFAS No. 145 did not have a material impact on our financial
condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement replaces the guidance
provided by Emerging Issues Task Force issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that costs associated with an exit or disposal activity be recognized when a
liability is incurred rather than at the date of a commitment to an exit or
disposal plan. This statement is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a
material impact on our financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This statement provides guidance on the accounting for
the acquisition of a financial institution, which had previously been addressed
in SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142. In
addition, this statement amends SFAS No. 144, to include long-term
customer-relationship intangible assets such as depositor and credit cardholder
intangible assets and would require these assets to be subject to an
undiscounted cash flow recoverability impairment test that SFAS No. 144
requires for other long-lived assets that are held and used. The adoption of
SFAS No. 147 did not have a material impact on our financial condition or
results of operations.
In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34."
FIN No. 45 requires that guarantors recognize, at the inception of a guarantee,
a liability for the fair value of the obligations it has undertaken in issuing
a guarantee. In addition, FIN No. 45 requires entities to disclose the nature
of the guarantees, the maximum potential amount of future payments under the
guarantee, the carrying amount of the liability for the guarantor's obligations
under the guarantee and the nature of recourse provisions or available
collateral that would enable the guarantor to recover the amounts paid under
the guarantee. The recognition requirements are not required for guarantees
that are accounted for as derivatives under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The disclosures are required
for guarantees including those accounted for as derivatives under SFAS No. 133.
The initial recognition and initial measurement
51
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002, regardless of the guarantor's fiscal year-end. The
disclosure requirements in FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a material impact on our financial condition or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for the transition accounting for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted under some circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on our financial
condition or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN No. 46 addresses
consolidation by business enterprises of variable interest entities. The
consolidation requirements of FIN No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period beginning after
June 15, 2003. Some of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN No. 46 resulted in
consolidation of certain commercial paper conduits with total assets and total
liabilities each of (Yen)45.1 billion, which were created after January 31,
2003. See Note 25 to our consolidated financial statements for more detailed
information. We continue to evaluate the impact of applying FIN No. 46 and as a
result of the evaluation, we may identify additional entities that need to be
consolidated or disclosed.
In January 2003, the Emerging Issues Task Force, or EITF, of the FASB reached a
consensus on Issue No. 03-2, "Accounting for the Transfer to the Japanese
Government of the Substitutional Portion of Employee Pension Fund Liabilities,"
or EITF 03-2, which was ratified by the FASB in February 2003. EITF 03-2
addresses accounting for a transfer to the Japanese government of the
substitutional portion of an employees' pension fund plan and requires
employers to account for the entire separation process of the substitutional
portion from an entire plan (including a corporate portion) upon completion of
the transfer to the government of the substitutional portion of the benefit
obligation and related plan assets as the culmination of a series of steps in a
single settlement transaction. It also requires that the difference between the
fair value of the obligation and the assets required to be transferred to the
government, if any, should be accounted for as a subsidy from the government,
separately from a settlement gain or loss of the substitutional portion of the
obligation, upon completion of the transfer. See "--Liquidity and Capital
Resources--Financial Condition--Severance Indemnities and Pension Liabilities"
for discussions about our transfer of pension fund liabilities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. We have not completed our assessment of the impact of this statement on
our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures some
financial instruments with characteristics of both liabilities and equity and
requires that an issuer classify a financial instrument that is within its
scope as a liability, or an asset in some circumstances. This
52
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We have not completed our assessment of
the impact of this statement on our financial statements.
Results of Operations
The following table sets forth a summary of our results of operations for the
fiscal years ended March 31, 2001, 2002 and 2003:
Years ended March 31,
----------------------------------------
2001 2002 2003
------------ ------------ ------------
(in billions)
Interest income............................................................. (Yen)2,283.0 (Yen)2,017.0 (Yen)1,585.3
Interest expense............................................................ 1,310.6 939.1 539.9
------------ ------------ ------------
Net interest income......................................................... 972.4 1,077.9 1,045.4
------------ ------------ ------------
Provision for credit losses................................................. 797.1 601.7 455.6
Non-interest income......................................................... 851.2 367.8 846.7
Non-interest expense........................................................ 1,022.9 1,168.2 1,189.8
------------ ------------ ------------
Income (loss) before income tax expense (benefit) and cumulative effect of a
change in accounting principle............................................ 3.6 (324.2) 246.7
Income tax expense (benefit)................................................ 62.8 (101.8) 42.9
------------ ------------ ------------
Income (loss) before cumulative effect of a change in accounting principle.. (59.2) (222.4) 203.8
Cumulative effect of a change in accounting principle, net of tax........... -- 5.9 (0.5)
------------ ------------ ------------
Net income (loss)........................................................... (Yen) (59.2) (Yen) (216.5) (Yen) 203.3
============ ============ ============
During the fiscal year ended March 31, 2003, we included net trading account
profits (losses), net foreign exchange gains (losses) and net investment
securities gains (losses) in a single line item captioned non-interest income.
Previously, if we had net losses in any of those categories for a particular
period, we reported those net losses in non-interest expense. Non-interest
income and non-interest expense for prior periods have been reclassified to
conform to the current year presentation. There was no impact on net income
(loss) in any period resulting from the change. The current year presentation
decreased both non-interest income and expense by (Yen)104.6 billion for the
fiscal year ended March 31, 2001 and (Yen)333.0 billion for the fiscal year
ended March 31, 2002.
We reported (Yen)203.3 billion of net income for the fiscal year ended March
31, 2003, compared to a (Yen)216.5 billion loss for the fiscal year ended March
31, 2002. Our earnings per share for the fiscal year ended March 31, 2003 were
(Yen)33,963.40 (basic) and (Yen)31,137.71 (diluted), compared to a net loss per
share of (Yen)39,733.32 (basic and diluted) for the fiscal year ended March 31,
2002. Income before income tax expense and cumulative effect of a change in
accounting principle for the fiscal year ended March 31, 2003 was (Yen)246.7
billion, compared with a (Yen)324.2 billion loss for the fiscal year ended
March 31, 2002. These significant improvements in our operating results were
primarily attributable to the following:
.. Provision for credit losses decreased (Yen)146.1 billion, or 24.3%, from
(Yen)601.7 billion for the fiscal year ended March 31, 2002 to (Yen)455.6
billion for the fiscal year ended March 31, 2003, due primarily to a
decrease in impaired loans, specifically nonaccrual and restructured loans.
Impaired loans decreased (Yen)1,426.0 billion, or 35.2%, for the fiscal
year ended March 31, 2003. This decrease primarily reflected collections,
sales and charge-offs of domestic nonperforming loans.
.. Non-interest income increased (Yen)478.9 billion, or 130.3%, from
(Yen)367.8 billion for the fiscal year ended March 31, 2002 to (Yen)846.7
billion for the fiscal year ended March 31, 2003. This increase was
attributable to an increase in fees and commissions of (Yen)36.2 billion,
foreign exchange gains-net of (Yen)25.6 billion compared
53
to foreign exchange losses-net of (Yen)333.0 billion for the fiscal year
ended March 31, 2002 and an increase in net trading account profits of
(Yen)128.3 billion.
These favorable changes were partially offset by a decrease of (Yen)32.5
billion in net interest income as a result of the continuing low interest rate
environment and an increase of (Yen)21.6 billion in non-interest expense.
The effective income tax rate for the fiscal year ended March 31, 2003 was
17.4% and 22.5 percentage points lower than the normal effective statutory tax
rate of 39.9%. This low tax rate primarily resulted from a change in tax rates
and from the realization of previously unrecognized tax benefits of our
subsidiaries.
Net Interest Income
Net interest income is a function of:
.. the amount of interest-earning assets;
.. 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;
.. the general level of interest rates; and
.. the proportion of interest-earning assets financed by non-interest-bearing
liabilities and equity.
The following is a summary of the interest rate spread for the fiscal years
ended March 31, 2001, 2002 and 2003:
Years ended March 31,
----------------------------------------------------------------
2001 2002 2003
-------------------- -------------------- --------------------
Average Average Average Average Average Average
balance rate balance rate balance rate
------------- ------- ------------- ------- ------------- -------
(in billions, except percentages)
Interest-earning assets:
Domestic............... (Yen)61,175.9 1.50% (Yen)59,823.9 1.37% (Yen)62,705.7 1.19%
Foreign................ 22,220.5 6.16 25,368.5 4.73 23,646.7 3.55
------------- ------------- -------------
Total........... (Yen)83,396.4 2.74% (Yen)85,192.4 2.37% (Yen)86,352.4 1.84%
============= ============= =============
Financed by:
Interest-bearing funds:
Domestic............... (Yen)58,048.5 0.83% (Yen)61,150.4 0.53% (Yen)64,873.0 0.34%
Foreign................ 17,701.3 4.69 17,599.3 3.50 14,835.1 2.13
------------- ------------- -------------
Total........... 75,749.8 1.73 78,749.7 1.19 79,708.1 0.68
Non-interest-bearing funds 7,646.6 -- 6,442.7 -- 6,644.3 --
------------- ------------- -------------
Total.................. (Yen)83,396.4 1.57% (Yen)85,192.4 1.10% (Yen)86,352.4 0.63%
============= ============= =============
Spread on:
Interest-bearing funds. 1.01% 1.18% 1.16%
Total funds............ 1.17% 1.27% 1.21%
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Net interest income for the fiscal year ended March 31, 2003 was (Yen)1,045.4
billion, a decrease of (Yen)32.5 billion, or 3.0%, from (Yen)1,077.9 billion
for the fiscal year ended March 31, 2002. This decrease was due primarily to a
decline in the average interest rate spread in the further declining interest
rate environment. The decline in interest rate spread more than offset the
impact of a net increase in average interest-earning assets.
The average interest rate spread decreased 2 basis points from 1.18% for the
fiscal year ended March 31, 2002 to 1.16% for the fiscal year ended March 31,
2003. Net interest income as a percentage of average total interest-
54
earning assets decreased 6 basis points from 1.27% for the fiscal year ended
March 31, 2002 to 1.21% for the fiscal year ended March 31, 2003.
Average interest-earning assets for the fiscal year ended March 31, 2003 was
(Yen)86,352.4 billion, an increase of (Yen)1,160.0 billion, or 1.4%, from
(Yen)85,192.4 billion for the fiscal year ended March 31, 2002. This increase
was principally attributable to an increase of (Yen)2,689.6 billion in average
investment securities, partially offset by decreases in average
interest-earning deposits, average call loans and funds sold and average
receivables under resale agreements. The increase in average investment
securities was attributable primarily to increases in Japanese national
government and foreign bonds, including U.S. treasury bonds, and reflected few
viable investment options due to the extremely low rates of return in Japan.
The average of interest-bearing liabilities for the fiscal year ended March 31,
2003 was (Yen)79,708.1 billion, an increase of (Yen)958.4 billion, or 1.2%,
from (Yen)78,749.7 billion for the fiscal year ended March 31, 2002. This
increase was principally attributable to an increase in average domestic
deposits, which was primarily comprised of average demand deposits, partly
offset by a decrease in average debentures and a decrease in short-term funds
in money markets, such as call money and funds purchased, and payables under
repurchase agreements.
Net interest income for the fiscal year ended March 31, 2003 included a net
gain of approximately (Yen)2.7 billion resulting from derivative financial
instruments used for hedging purposes. The net gain increased our net interest
margin by 0.3 basis points for the fiscal year ended March 31, 2003.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Net interest income for the fiscal year ended March 31, 2002 was (Yen)1,077.9
billion, an increase of (Yen)105.5 billion, or 10.9%, from (Yen)972.4 billion
for the fiscal year ended March 31, 2001. Although interest income and interest
expense both decreased during the fiscal year ended March 31, 2002 due to the
declining interest rate environment in Japan and overseas, an increase in
average foreign interest-earning assets primarily contributed to the increase
in net interest income. Average foreign interest-earning assets increased
(Yen)3,148.0 billion, or 14.2%, to (Yen)25,368.5 billion for the fiscal year
ended March 31, 2002 while average domestic interest-earning assets decreased
(Yen)1,352.0 billion, or 2.2%, to (Yen)59,823.9 billion for the fiscal year
ended March 31, 2002. The increase in average foreign interest-earning assets
for the fiscal year March 31, 2002 primarily reflected an increase in average
foreign investment securities of (Yen)1,704.1 billion and an increase in
average foreign loans of (Yen)1,466.8 billion, which were primarily funded by
an increase in domestic deposits. The average domestic deposits increased
(Yen)3,628.6 billion to (Yen)44,807.0 billion for the fiscal year ended March
31, 2002. The increase in interest income due to the increase in average
interest-earning assets more than offset the increase in interest expense due
to the increase in average interest-bearing liabilities.
Net interest income as a percentage of average total interest-earning assets
increased 10 basis points from 1.17% for the fiscal year ended March 31, 2001
to 1.27% for the fiscal year ended March 31, 2002. The average interest rate
spread increased 17 basis points from 1.01% for the fiscal year ended March 31,
2001 to 1.18% for the fiscal year ended March 31, 2002. Although the total
interest rate spread increased for the fiscal year ended March 31, 2002, this
increase did not contribute to the increase in total net interest income. The
average interest rate spread between foreign interest-earning assets and
foreign interest-bearing liabilities decreased for the fiscal year ended March
31, 2002 decreased 24 basis points while the average interest rate spread
between domestic interest-earning assets and domestic interest-bearing
liabilities increased 17 basis points. The decrease in net interest income due
to the decreased average interest rate spread on foreign activities, which is
relatively high, more than offset the increase in net interest income due to
the increased spread on domestic activities.
Net interest income for the fiscal year ended March 31, 2002 included a net
gain of approximately (Yen)7.6 billion resulting from derivative financial
instruments used for hedging purposes while net interest income for the fiscal
year ended March 31, 2001 included such gain of (Yen)1.6 billion. These net
gains increased our net interest margin by 0.3 basis points for the fiscal year
ended March 31, 2001 and by 0.9 basis points for the fiscal year ended March
31, 2002.
55
For a more detailed analysis of interest rate spread, see "Selected Statistical
Data--Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential--Average Balance Sheets, Interest and Average
Rates."
Provision for Credit Losses
Provisions for credit losses are charged to operations to maintain the
allowance for credit losses at a level deemed appropriate by management. See
"--Liquidity and Capital Resources--Financial Condition--Allowance for Credit
Losses, Nonperforming and Past Due Loans" for a description of the approach and
methodology used to establish the allowance for credit losses.
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
The provision for credit losses for the fiscal year ended March 31, 2003 was
(Yen)455.6 billion, representing a decrease of (Yen)146.1 billion, or 24.3%,
from (Yen)601.7 billion for the fiscal year ended March 31, 2002. This decrease
was attributable primarily to a decrease in the impairment allowance of
(Yen)401.9 billion from (Yen)1,296.3 billion at March 31, 2002 to (Yen)894.4
billion at March 31, 2003, which reflected a decrease of (Yen)1,426.0 billion
in impaired loans during the fiscal year ended March 31, 2003.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
The provision for credit losses for the fiscal year ended March 31, 2002
decreased (Yen)195.4 billion, or 24.5%, from (Yen)797.1 billion for the fiscal
year ended March 31, 2001. This decrease was primarily attributable to the fact
that the provision for the fiscal year ended March 31, 2001 increased due to a
significant rise in impaired loans, in particular restructured loans, as
compared with the previous year.
Non-Interest Income
The following table is a summary of our non-interest income for the fiscal
years ended March 31, 2001, 2002 and 2003:
Years ended March 31,
-------------------------------------
2001* 2002* 2003
----------- ----------- -----------
(in billions)
Fees and commissions:
Trust fees................................................ (Yen) 114.6 (Yen) 123.6 (Yen) 103.8
Fees on funds transfer and service charges for collection. 60.0 60.9 61.1
Fees and commissions on international business............ 51.3 53.5 54.5
Fees and commissions on credit card business.............. 47.9 51.0 63.7
Service charges on deposits............................... 22.7 29.8 34.6
Other fees and commissions................................ 162.9 173.1 210.4
----------- ----------- -----------
Total.............................................. 459.4 491.9 528.1
Trading account profits--net................................. 229.5 138.5 266.8
Foreign exchange gains (losses)--net......................... (104.6) (333.0) 25.6
Investment securities gains (losses)--net.................... 232.5 20.6 (21.3)
Other........................................................ 34.4 49.8 47.5
----------- ----------- -----------
Total non-interest income............................. (Yen) 851.2 (Yen) 367.8 (Yen) 846.7
=========== =========== ===========
--------
* Reclassified to conform to the presentation for the fiscal year ended March
31, 2003.
Non-interest income includes, in addition to fees and commissions and other
non-interest income, net trading account profits, net foreign exchange gains
(losses) and net investment securities gains (losses).
Net trading account profits primarily include net gains (losses) on trading
securities and interest rate derivative instruments entered into for trading
purposes. Trading account assets or liabilities are carried at fair value and
56
any changes in the value of trading account assets or liabilities, including
interest rate derivatives, are recorded in net trading account profits.
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 foreign exchange gains (losses) primarily include net gains (losses) on
currency derivative instruments entered into for trading purposes and
transaction gains (losses) on the translation into Japanese yen of monetary
assets and liabilities denominated in foreign currencies. 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. This is primarily
because the transaction gains (losses) on translation of securities available
for sale, such as bonds denominated in foreign currencies, are not included in
current earnings, but are reflected in other changes in equity from nonowner
sources, while in principle all transaction gains (losses) on translation of
monetary liabilities denominated in foreign currencies are included in current
earnings.
Net investment securities gains (losses) primarily include net gains on sales
of marketable securities, particularly marketable equity securities. In
addition, impairment losses are recognized as offset of net investment
securities gains when management concludes that declines in fair value of
investment securities are other than temporary. We have recognized high levels
of impairment losses in recent years as fair values continued to decline in
equity markets.
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Non-interest income for the fiscal year ended March 31, 2003 was (Yen)846.7
billion, an increase of (Yen)478.9 billion, or 130.3%, from (Yen)367.8 billion
for the fiscal year ended March 31, 2002. This increase was attributable to an
increase in fees and commissions of (Yen)36.2 billion, foreign exchange
gains-net of (Yen)25.6 billion compared to foreign exchange losses-net of
(Yen)333.0 billion for the fiscal year ended March 31, 2002, an increase in net
trading account profits of (Yen)128.3 billion.
Fees and commissions for the fiscal year ended March 31, 2003 were (Yen)528.1
billion, an increase of (Yen)36.2 billion, or 7.4%, from (Yen)491.9 billion for
the fiscal year ended March 31, 2002. This increase primarily reflected an
increase of (Yen)37.3 billion in other fees and commissions. Other fees and
commissions for the fiscal year ended March 31, 2003 included (Yen)2.8 billion
of new fees and commissions earned in connection with our insurance brokerage
activities and (Yen)19.4 billion of fees and commissions of Mitsubishi
Securities, which became our consolidated subsidiary on September 1, 2002. An
increase of (Yen)3.4 billion in fees and commissions at UnionBanCal Corporation
also contributed to the increase in other fees and commissions. The increase in
other fees and commissions was partly offset by a decrease of (Yen)19.8
billion, or 16.0%, in trust fees. The decrease in trust fees primarily
reflected a decrease in fee income for administration services as a result of
the transfer of certain trust assets to Master Trust Bank of Japan, Ltd., an
equity investee, in May 2002.
Net trading account profits for the fiscal year ended March 31, 2003 were
(Yen)266.8 billion, an increase of (Yen)128.3 billion, or 92.7%, from
(Yen)138.5 billion for the fiscal year ended March 31, 2002. The net trading
account profits for the fiscal years ended March 31, 2002 and 2003 consisted of
the following:
Years ended March 31,
----------------------
2002 2003
---------- ----------
(in billions)
Net profits on derivative instruments, primarily interest-rate futures, swaps and options (Yen)149.3 (Yen)254.9
Net profits (losses) on trading securities............................................... (10.8) 11.9
---------- ----------
Net trading account profits........................................................... (Yen)138.5 (Yen)266.8
========== ==========
The increase in net profits on derivative instruments was due primarily to an
increase in net profits on interest rate swaps and interest rate options. In
particular, in order to manage interest rate risks on domestic deposits, we
57
had net receive-fix and pay-variable positions in our interest rate swap
portfolios. These portfolios gained value in the declining interest rate
environment.
The net profits on trading securities for the fiscal year ended March 31, 2003
were (Yen)11.9 billion, compared to net losses of (Yen)10.8 billion for the
fiscal year ended March 31, 2002. This improvement in trading securities
transactions primarily reflected net profits on sales of foreign trading bonds.
Net foreign exchange gains for the fiscal year ended March 31, 2003 were
(Yen)25.6 billion, compared to net foreign exchange losses of (Yen)333.0
billion for the fiscal year ended March 31, 2002. Major components of net
foreign exchange gains (losses) by source of transactions for the fiscal years
ended March 31, 2002 and 2003 are summarized below:
Years ended March 31,
----------------------
2002 2003
----------- ---------
(in billions)
Transaction gains (losses) on translation of foreign currency long-term debt (Yen) (18.7) (Yen)37.2
Net losses on foreign exchange contracts entered into for trading purposes.. (78.0) (100.3)
Other-net................................................................... (236.3) 88.7
----------- ---------
Net foreign exchange gains (losses)...................................... (Yen)(333.0) (Yen)25.6
=========== =========
Transaction gains on translation of foreign currency long-term debt for the
fiscal year ended March 31, 2003 reflected primarily the appreciation of the
yen against the US dollar and other foreign currencies. We had net losses on
foreign exchange contracts entered into for trading purposes for the fiscal
year ended March 31, 2003 due to the unfavorable foreign exchange markets.
Other foreign exchange net gains for the fiscal year ended March 31, 2003
reflected transaction gains on translation of foreign currency-denominated
borrowings used to manage the foreign currency exposure of available-for-sale
debt securities. This increase was due primarily to the appreciation of the yen
against the US dollar and other foreign currencies while transaction losses on
translation of foreign currency-denominated available-for-sale debt securities
were recorded in other changes in equity from nonowner sources.
Net investment securities losses for the fiscal year ended March 31, 2003 were
(Yen)21.3 billion, compared to net gains of (Yen)20.6 billion for the fiscal
year ended March 31, 2002. Major components of net investment securities gains
(losses) for the fiscal year ended March 31, 2002 and 2003 are summarized below:
Years ended March 31,
------------------------
2002 2003
----------- -----------
(in billions)
Net gains on sales of marketable equity securities (Yen) 277.2 (Yen) 170.5
Impairment losses on marketable equity securities. (281.0) (352.4)
Other............................................. 24.4 160.6
----------- -----------
Net investment securities gains (losses)....... (Yen) 20.6 (Yen) (21.3)
=========== ===========
Pursuant to the legislation forbidding banks, including our Japanese subsidiary
banks, from holding stocks with aggregate market values less unrealized gains
in excess of their Tier I capital after September 30, 2004, a date which was
later extended to after September 30, 2006, we actively sold our marketable
equity securities. The decrease in net gains on sales of marketable equity
securities reflected further declining stock market prices during the fiscal
year ended March 31, 2003 as discussed in "--Business Environment--Economic
Environment in Japan." In addition to sales in the stock markets, we sold
marketable equity securities to the Bank's Shareholdings Purchase Corporation
and the Bank of Japan and through exchange traded funds for the fiscal year
ended March 31, 2003.
58
The increase in impairment losses on marketable equity securities for the
fiscal year ended March 31, 2003 also reflected the continuing declines in
stock prices in Japan. We have determined other than temporary declines in fair
value of marketable equity securities primarily based on factors such as
internal credit rating, the extent of decline in market price and the length of
time during which the decline has existed. Due to the change in the accounting
estimate as described in "--Critical Accounting Estimates--Impairment of
Investment Securities," we recognized additional impairment losses on
investment securities amounting to (Yen)26.5 billion for the fiscal year ended
March 31, 2003.
Other net gains primarily included net gains on sales of debt securities,
including bonds. The increase in such gains resulted mainly from increased
sales of foreign bonds. The market prices of foreign bonds generally rose as
interest rates declined during the fiscal year ended March 31, 2003.
Other non-interest income decreased (Yen)2.3 billion, or 4.7%, from (Yen)49.8
billion for the fiscal year ended March 31, 2002 to (Yen)47.5 billion for the
fiscal year ended March 31, 2003. Other non-interest income is primarily
comprised of income from the lease of software, net gains on sales of various
assets, including software and other dividend income. The decrease for the
fiscal year ended March 31, 2003 reflected several small decreases in these
components.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Non-interest income for the fiscal year ended March 31, 2002 decreased
(Yen)483.4 billion, or 56.8%, from (Yen)851.2 billion for the fiscal year ended
March 31, 2001. This decrease was primarily attributable to a decrease in net
trading account profits of (Yen)91.0 billion, and a decrease in net investment
securities gains of (Yen)211.9 billion and an increase in net foreign exchange
losses of 228.4 billion. These decreases were partially offset by an increase
in fees and commissions of (Yen)32.5 billion.
Fees and commissions for the fiscal year ended March 31, 2002 were (Yen)491.9
billion, an increase of (Yen)32.5 billion, or 7.1%, from (Yen)459.4 billion for
the fiscal year ended March 31, 2001. This increase was due primarily to an
increase of (Yen)9.0 billion in trust fees and an increase of (Yen)10.2 billion
in other fees and commissions. Other fees and commissions primarily include
fees on issuing guaranties, fees on underwriting business, service charges on
deposits of overseas offices and commissions on custodial services. These fees
and commissions have increased in recent years partially because of our
strengthened investment banking and asset management businesses. Also, the yen
depreciation against the US dollar and other foreign currencies contributed to
the increase in fees and commissions. In terms of the average exchange rate,
the yen depreciated approximately 13% against the US dollar during the fiscal
year ended March 31, 2002 and for calendar year 2001 as compared with the
previous fiscal and calendar years, respectively.
Trading account profits-net decreased (Yen)91.0 billion, or 39.7%, to
(Yen)138.5 billion for the fiscal year ended March 31, 2002. The net trading
account profits for the fiscal years ended March 31, 2001 and 2002 consisted of
the following:
Years ended March 31,
---------------------
2001 2002
---------- ----------
(in billions)
Net profits on derivative instruments, primarily interest-rate futures, swaps and options (Yen)199.5 (Yen)149.3
Net profits (losses) on trading securities............................................... 30.0 (10.8)
---------- ----------
Net trading account profits........................................................... (Yen)229.5 (Yen)138.5
========== ==========
The decrease in net profits on derivative instruments was due primarily to an
increase in losses on interest-rate swaps used for trading purposes (net
receive-variable and, pay-fixed positions). We, however, recorded the net
profits with derivatives used to manage interest rate exposures of certain
interest-earning assets or interest-bearing liabilities, which do not meet the
specific criteria for hedge accounting. Net losses on trading securities for
the fiscal year ended March 31, 2002 as compared with the net profits for the
previous fiscal year were due primarily to unfavorable financial markets in
which interest rates were stable under low interest rate environment.
59
Net foreign exchange losses for the fiscal year ended March 31, 2002 were
(Yen)333.0 billion, an increase of (Yen)228.4 billion from the losses of
(Yen)104.6 billion for the fiscal year ended March 31, 2001. Major components
of net foreign exchange losses by source of transactions for the fiscal years
ended March 31, 2001 and 2002 are summarized below:
Years ended March 31,
------------------------
2001 2002
----------- -----------
(in billions)
Transaction losses on translation of foreign currency long-term debt...... (Yen) (35.9) (Yen) (18.7)
Net losses on foreign exchange contracts entered into for trading purposes (156.1) (78.0)
Other--net................................................................ 87.4 (236.3)
----------- -----------
Net foreign exchange losses............................................ (Yen)(104.6) (Yen)(333.0)
=========== ===========
Transaction losses on translation of foreign currency long-term debt for the
fiscal year ended March 31, 2002 reflected the depreciation of the yen value
against the US dollar and other foreign currencies. We had net losses on
foreign exchange contracts entered into for trading purposes for the fiscal
years ended March 31, 2002 because of unfavorable foreign exchange markets.
Other foreign exchange net losses for the fiscal year ended March 31, 2002
partially reflected the fact that foreign currency-denominated borrowings used
to hedge the foreign currency exposure of available-for-sale debt securities no
longer qualified as hedging instruments under SFAS No. 133 starting on April 1,
2001 and, therefore, the transaction losses on such borrowings were recognized
in earnings for the fiscal year ended March 31, 2002.
Net investment securities gains for the fiscal year ended March 31, 2002 were
(Yen)20.6 billion, representing a decrease of (Yen)211.9 billion, or 91.1%,
from net gains of (Yen)232.5 billion for the fiscal year ended March 31, 2001.
Major components of net investment securities gains for the fiscal years ended
March 31, 2001 and 2002 are summarized below:
Years ended March 31,
------------------------
2001 2002
----------- -----------
(in billions)
Net gains on sales of marketable equity securities (Yen) 440.7 (Yen) 277.2
Impairment losses on marketable equity securities. (262.0) (281.0)
Other............................................. 53.8 24.4
----------- -----------
Net investment securities gains................ (Yen) 232.5 (Yen) 20.6
=========== ===========
The decrease in net gains on sale of marketable equity securities for the
fiscal year ended March 31, 2002 was due primarily to an increase in losses on
sales of equity securities with relatively high costs. During the fiscal year
ended March 31, 2001, we selectively sold equity securities with relatively low
costs. During the fiscal year ended March 31, 2002, due to the enactment of
legislation forbidding banks from holding stocks in excess of Tier I capital
after September 30, 2004, a date which was later extended to after September
30, 2006, we had to reduce our strategic shareholdings irrespective of cost
basis.
The increase in impairment losses on marketable equity securities for the
fiscal year ended March 31, 2002 primarily reflected continuing declines in
stock prices, as evidenced by the 15.2% decline in the Nikkei Stock Average and
the 17.0% decline in TOPIX for the fiscal year ended March 31, 2002.
The decrease in other net gains for the fiscal years ended March 31, 2002
primarily reflected a decrease in net gains on sales of domestic bonds in
stable but low interest rate environment.
Other non-interest income increased due primarily to an increase in various
income of overseas operations, such as lease income.
60
Non-Interest Expense
The following table shows a summary of non-interest expense for the fiscal
years ended March 31, 2001, 2002 and 2003:
Years ended March 31,
--------------------------------------
2001* 2002* 2003
------------ ------------ ------------
(in billions)
Salaries and employee benefits................. (Yen) 403.7 (Yen) 456.6 (Yen) 499.5
Occupancy expenses--net........................ 137.4 134.8 121.1
Losses on other real estate owned.............. 16.4 6.2 0.3
Amortization of intangible assets.............. 31.7 36.9 46.9
Goodwill amortization.......................... 4.4 7.9 --
Insurance premiums, including deposit insurance 41.8 43.5 48.3
Communications................................. 19.5 21.3 22.0
Other.......................................... 368.0 461.0 451.7
------------ ------------ ------------
Total non-interest expense.................. (Yen)1,022.9 (Yen)1,168.2 (Yen)1,189.8
============ ============ ============
--------
* Reclassified to conform to the presentation for the fiscal year ended March
31, 2003.
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Non-interest expense for the fiscal year ended March 31, 2003 was (Yen)1,189.8
billion, an increase of (Yen)21.6 billion, or 1.9%, from (Yen)1,168.2 billion
for the fiscal year ended March 31, 2002. This increase was due primarily to an
increase of (Yen)42.9 billion in salaries and employee benefits, partially
offset by a decrease of (Yen)13.7 billion in net occupancy expenses.
Salaries and employee benefits for the fiscal year ended March 31, 2003 were
(Yen)499.5 billion, an increase of (Yen)42.9 billion, or 9.4%, from (Yen)456.6
billion for the fiscal year ended March 31, 2002. This increase primarily
reflected an increase of (Yen)13.2 billion in net periodic pension costs and an
increase of (Yen)24.3 billion of salaries and employee benefits of Mitsubishi
Securities, which became our consolidated subsidiary on September 1, 2002 as a
result of the merger of four securities companies. The increase in net periodic
pension costs was due primarily to an increase of (Yen)11.8 billion in
amortization of net actuarial loss. In accordance with SFAS No. 87, "Employers'
Accounting for Pensions," the minimum amortization of actuarial loss was
included as a component of net periodic pension costs for the fiscal years
ended March 31, 2002 and 2003 as the unrealized net loss exceeded 10% of the
projected benefit obligation. The net actuarial loss reflected the fact that
the actual return on plan assets fell below the expected return on plan assets
during recent fiscal years. Plan assets, which include pension funds managed by
various life insurance companies, investment advisory companies and trust
banks, consisted of interest-earning deposits at banks, Japanese government
bonds, other debt securities and marketable equity securities issued by
domestic and foreign entities. Pension assets managed by insurance companies
are included in pooled investment portfolios. Expected rates of return on plan
assets are reviewed annually and computed primarily based on the historical
average of long-term returns on such assets. The continuously depressed
Japanese economy has adversely affected domestic stock markets. As a result,
with respect to our domestic subsidiaries' plans, the actual return on the plan
assets was negative by (Yen)48.7 billion for the fiscal year ended March 31,
2002 and negative by (Yen)63.3 billion for the fiscal year ended March 31,
2003. We decreased the expected rate of return on plan assets from 4.45% for
the fiscal year ended March 31, 2002 to 3.73% for the fiscal year ended March
31, 2003. The increase in salaries and employee benefits was partially offset
by a decrease in salaries resulting from a reduction in the number of employees.
Net occupancy expenses for the fiscal year ended March 31, 2003 were (Yen)121.1
billion, a decrease of (Yen)13.7 billion, or 10.2%, from (Yen)134.8 billion for
the fiscal year ended March 31, 2002. This decrease was due primarily to the
reduction and consolidation of offices as a whole, while net occupancy expenses
of Mitsubishi Securities contributed to an increase in net occupancy expenses.
61
Losses on other real estate owned for the fiscal year ended March 31, 2003 were
(Yen)0.3 billion, a decrease of (Yen)5.9 billion, or 95.1%, from (Yen)6.2
billion for the fiscal year ended March 31, 2002. This decrease reflected a
decrease in other real estate owned primarily through sales.
Intangible asset amortization for the fiscal year ended March 31, 2003 was
(Yen)46.9 billion, an increase of (Yen)10.0 billion, or 27.0%, from (Yen)36.9
billion for the year ended March 31, 2002. This increase primarily reflected an
increase in the capitalized cost of software as we continued to invest in new
information systems.
There was no goodwill amortization expense for the fiscal year ended March 31,
2003 as a result of the adoption of SFAS No. 142, which eliminated the
amortization of goodwill, effective April 1, 2002.
Insurance premiums for the fiscal year ended March 31, 2003 were (Yen)48.3
billion, an increase of (Yen)4.8 billion, or 11.1%, from (Yen)43.5 billion for
the fiscal year ended March 31, 2002. This increase primarily reflected an
increase in domestic deposits.
Communication expense for the fiscal year ended March 31, 2003 of (Yen)22.0
billion was substantially unchanged from (Yen)21.3 billion for the fiscal year
ended March 31, 2002.
Other non-interest expenses for the fiscal year ended March 31, 2003 were
(Yen)451.7 billion, a decrease of (Yen)9.3 billion, or 2.0%, from (Yen)461.0
billion for the fiscal year ended March 31, 2002. This decrease was due
primarily to a decrease of (Yen)35.5 billion in the provision for allowance for
off-balance-sheet credit instruments. The provision for allowance for
off-balance-sheet credit instruments for the fiscal year ended March 31, 2002
included an allocated provision of (Yen)19.6 billion against loan commitments
extended to WorldCom, Inc. We fulfilled the commitments extended to WorldCom,
Inc. and recorded charge-offs for the fiscal year ended March 31, 2003. The
decrease in this provision was partially offset by a (Yen)22.5 billion loss
which resulted from the decrease in net assets in Tokyo-Mitsubishi Securities
as mentioned in "--Recent Developments--Acquisition and Merger of Securities
Companies."
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Non-interest expense for the fiscal year ended March 31, 2002 increased
(Yen)145.3 billion, or 14.2%, from (Yen)1,022.9 billion for the fiscal year
ended March 31, 2001. This increase primarily reflected an increase in salaries
and employee benefits of (Yen)52.9 billion and an increase in other
non-operating expenses of (Yen)93.0 billion.
Salaries and employee benefits for the fiscal year ended March 31, 2002 were
(Yen)456.6 billion, an increase of (Yen)52.9 billion, or 13.1%, from (Yen)403.7
billion for the fiscal year ended March 31, 2001. This increase primarily
reflected an increase in net periodic pension costs, as well as an increase in
amounts paid to employees outside Japan, whose salaries and other benefits
denominated in currencies other than yen increased due to the yen depreciation
against the US dollar and other foreign currencies. The increase in net
periodic pension costs was due primarily to an increase in amortization of net
actuarial loss and a decrease in expected return on plan assets. The decrease
in expected return on plan assets for the plans of Bank of Tokyo-Mitsubishi,
Mitsubishi Trust Bank and certain domestic subsidiaries resulted from a
decrease in expected rate of return on plan assets from 4.79% for the fiscal
year ended March 31, 2001 to 4.45% for the fiscal year ended March 31, 2002.
These increases were partially offset by a decrease in salary expense resulting
from a reduction in the number of employees.
Net occupancy expenses for the fiscal year ended March 31, 2002 were (Yen)134.8
billion, a decrease of (Yen)2.6 billion, or 1.9%, from (Yen)137.4 billion for
the fiscal year ended March 31, 2001. This decrease was due primarily to the
closing and consolidation of offices, which was partially offset by an increase
in overseas occupancy expenses resulting from the yen depreciation against the
US dollar and other foreign currencies.
Losses on other real estate owned for the fiscal year ended March 31, 2002 were
(Yen)6.2 billion, a decrease of (Yen)10.2 billion, or 62.1%, from (Yen)16.4
billion for the fiscal year ended March 31, 2001. This decrease reflected a
62
significant reduction in our other real estate owned from (Yen)33.9 billion at
March 31, 2001 to (Yen)11.7 billion at March 31, 2002 through asset sales to
third parties.
Intangible asset amortization for the fiscal year ended March 31, 2002 was
(Yen)36.9 billion, an increase of (Yen)5.2 billion, or 16.4%, from (Yen)31.7
billion for the fiscal year ended March 31, 2001. This increase primarily
reflected an increase in amortization of capitalized cost of software.
Goodwill amortization for the fiscal year ended March 31, 2002 was (Yen)7.9
billion, an increase of (Yen)3.5 billion, or 76.9%, from (Yen)4.4 billion for
the fiscal year ended March 31, 2001. This increase was primarily due to
amortization of goodwill related to the additional acquisition of the 17%
minority ownership in Nippon Trust Bank on April 4, 2002.
Insurance premiums for the fiscal year ended March 31, 2002 were (Yen)43.5
billion, an increase of (Yen)1.7 billion, or 4.0%, from (Yen)41.8 billion for
the fiscal year ended March 31, 2001. This increase primarily reflected an
increase in deposit insurance premiums resulting from an increase in domestic
deposits.
Communication expense for the fiscal year ended March 31, 2002 was (Yen)21.3
billion and was substantially unchanged from (Yen)19.5 billion for the fiscal
year ended March 31, 2001.
Other non-interest expenses for the fiscal year ended March 31, 2002 were
(Yen)461.0 billion, an increase of (Yen)93.0 billion, or 25.3%, from (Yen)368.0
billion for the fiscal year ended March 31, 2001. This increase was primarily
due to an increase of (Yen)36.2 billion in provision for credit losses on
off-balance sheet instruments, an increase of approximately 14.6 billion in
overseas operating expenses and an increase in fees paid to outside servicers.
The increase in overseas operating expenses primarily reflected the
depreciation of the yen against the US dollar and other foreign currencies and
an increase in advertising and other operating expenses of UnionBanCal
Corporation.
Income Tax Expense (Benefit)
The following table presents a summary of our income tax expense (benefit):
Years ended March 31,
---------------------------------------
2001 2002 2003
------------ ------------ -----------
(in billions)
Income (loss) before income tax expense (benefit) (Yen) 3.6 (Yen) (324.2) (Yen) 246.7
Income tax expense (benefit)..................... (Yen) 62.8 (Yen) (101.8) (Yen) 42.9
Effective tax rate............................... 1,748.8% 31.4% 17.4%
Normal effective statutory tax rate.............. 38.9% 38.0% 39.9%
In September 2002, we applied to the tax authorities for approval of our
election to file our national income tax returns based on the newly introduced
consolidated corporate-tax system starting from the fiscal year ended March 31,
2003. In March 2003, we received the approval for our application from the tax
authorities. The consolidated corporate-tax system allows companies to base tax
payments on the combined profits or losses of a parent company and its
wholly-owned domestic subsidiaries, and requires us to pay, for the fiscal
years ended or ending March 31, 2003 and 2004, a surcharge tax of 2.0% of
taxable income in addition to the national corporate income tax rate of 30.0%
applied to separate tax returns filers. The increase in the normal effective
statutory tax rate for the fiscal year ended March 31, 2003 resulted from this
surcharge tax. This change in tax rate due to the adoption of the consolidated
corporate-tax system resulted in a decrease of (Yen)37.4 billion in income tax
expense for the fiscal year ended March 31, 2003 through an increase in
deferred tax assets.
63
We accounted for local taxes based on the gross operating profits to the Tokyo
Metropolitan Government and the Osaka Prefectural Government as non-interest
expenses for the fiscal years ended March 31, 2001, 2002 and 2003. See
"--Recent Developments--Legal Proceedings for Local Taxes."
Also, as discussed in "--Recent Developments--Amendments of Local Tax System,"
for the fiscal year beginning after March 31, 2004, new uniform local taxes
become effective. These new rules introduce value-added taxes and replace a
part of the existing local taxes based on income. The new local taxes are
computed based on three components: (a) amount of profit, (b) amount of
value-added (total payroll, net interest paid or received, net rent paid and
income before use of net operating losses) and (c) amount of total paid-in
capital. The taxes are computed by adding together the totals of each of the
three components each of which is calculated separately.
The enactment of new uniform local tax laws mentioned above, which will
supersede the current local taxes, including the local taxes levied by Tokyo
Metropolitan Government, resulted in a decrease of (Yen)75.1 billion in income
tax expense for the fiscal year ended March 31, 2003 through an increase in
deferred tax assets.
Reconciling items between combined normal effective statutory tax rates and
effective income tax rates for the fiscal years ended March 31, 2001, 2002 and
2003 are summarized as follows:
Years ended March 31,
---------------------
2001 2002* 2003
------- ----- -----
Combined normal effective statutory tax rate........................... 38.9 % 38.0% 39.9%
Reconciling items:
Nondeductible expenses.............................................. 237.3 2.9 4.4
Goodwill amortization............................................... 31.0 0.7 --
Dividends from foreign subsidiaries................................. 225.8 1.3 3.2
Foreign tax credit and payments..................................... (90.4) (1.9) 10.1
Lower tax rates applicable to income of foreign subsidiaries........ (93.8) (2.7) (0.7)
Foreign income exempted for income tax purpose...................... (88.9) (0.5) --
Foreign tax assessment (refund)..................................... 30.1 (0.7) (3.5)
Minority interests.................................................. 184.3 2.5 0.6
Change in valuation allowance....................................... 284.7 16.8 18.2
Expiration of loss carryforwards of subsidiaries.................... 733.1 0.1 3.5
Enacted change in tax rates......................................... 245.4 -- (30.4)
Realization of previously unrecognized tax benefits of subsidiaries. -- (11.2) (27.5)
Other--net.......................................................... 11.3 (0.7) (0.4)
------- ----- -----
Effective income tax rate.............................................. 1,748.8% 31.4% 17.4%
======= ===== =====
--------
* In calculating the effective income tax rate for the fiscal year ended March
31, 2002, the reconciling items were subtracted from the combined normal
effective statutory tax rate since loss before income tax benefit was
recorded in that fiscal year.
The effective income tax rate of 17.4% for the fiscal year ended March 31, 2003
was 22.5 percentage points lower than the normal effective statutory tax rate
of 39.9%. This lower tax rate primarily reflected an enacted
64
change in tax rate and realization of previously unrecognized tax benefits of
subsidiaries. The enacted change in tax rate resulted from the adoption of the
consolidated corporate-tax system and the new uniform local taxes, which
introduced value-added taxes as discussed above, and accounted for 30.4% in the
reconciliation above. The realization of previously unrecognized tax benefits
of subsidiaries primarily related to the liquidation of several of our domestic
subsidiaries with accumulated losses, including The Diamond Mortgage Co., Ltd.,
and accounted for 27.5% in the reconciliation above.
The effective tax credit rate of 31.4% for the fiscal year ended March 31, 2002
was 6.6 percentage points lower than the normal effective statutory tax rate of
38.0%. The lower tax rate was attributable primarily to an increase in the
valuation allowance. The valuation allowance provided against deferred tax
assets increased (Yen)43.5 billion from (Yen)213.1 billion at March 31, 2001 to
(Yen)256.6 billion at March 31, 2002. The net increase in total valuation
allowance of (Yen)43.5 billion for the fiscal year ended March 31, 2002
primarily reflected an increase in the valuation allowance of our domestic
subsidiaries, which was principally provided against deferred tax assets on
operating loss carryforwards that were not expected to be realized. The effect
of the increase in the valuation allowance was partially offset by realization
of previously unrecognized tax benefits of our subsidiaries.
Business Segment Analysis
We measure the performance of each of our business segments in terms of
"operating profit" in accordance with the regulatory reporting requirements of
the Financial Services Agency. Operating profit and other segment information
are based on Japanese GAAP and are not consistent with our financial statements
prepared on the basis of US GAAP. For example, operating profit under Japanese
GAAP does not reflect items such as most of the provisions for credit losses,
foreign exchange gains (losses) and equity investment securities gains (losses).
Nippon Trust Bank and Tokyo Trust Bank, both former subsidiaries of Bank of
Tokyo-Mitsubishi, were merged with and into Mitsubishi Trust Bank on October 1,
2001. The segment information for Bank of Tokyo- Mitsubishi for the fiscal year
ended March 31, 2001 has been restated and does not include the operating
results of Nippon Trust Bank and Tokyo Trust Bank. The segment information for
Mitsubishi Trust Bank has not been restated although it reflects the combined
results of operations after the merger on October 1, 2001. The operating
results of Nippon Trust Bank and Tokyo Trust Bank are separately presented
following the segment information of Bank of Tokyo-Mitsubishi and Mitsubishi
Trust Bank.
Bank of Tokyo-Mitsubishi
Bank of Tokyo-Mitsubishi maintains its business unit system based on customer
and product segmentation. Bank of Tokyo-Mitsubishi's major business units
during the fiscal year ended March 31, 2003 were:
.. retail banking, which provides banking products and services to individual
customers in Japan;
.. commercial banking, which provides banking products and services to large
corporations and some small and medium-sized companies;
.. global corporate banking, which provides banking services to large Japanese
corporations and their overseas operations as well as non-Japanese
corporations who do business on a global basis, excluding UNBC's customers;
.. investment banking, which provides advisory and other services related to
mergers and acquisitions, securities services of the Bank of
Tokyo-Mitsubishi, syndicated loans, project financing, derivatives and
securitization and other investment banking activities;
.. asset management, which provides asset management and trust products and
services mainly to high net worth individuals, branch customers and
corporate clients in Japan;
.. UNBC, which includes Bank of Tokyo-Mitsubishi's subsidiaries in California,
UnionBanCal Corporation and Union Bank of California, N.A.;
65
.. operations services, which provides operations and settlement services to
its other business units, including settlement and foreign exchange;
.. treasury, which conducts its asset and liability management and liquidity
management; and
.. other, which consists of:
. systems services, which is responsible for its computer systems;
. eBusiness & IT Initiatives, which is responsible for developing
information technology business opportunities;
. the corporate center, which retains functions such as strategic planning,
overall risk management, internal auditing and compliance; and
. the elimination of duplicated amounts of net revenue among business
segments.
For the fiscal years ended March 31, 2001 and 2002, Bank of Tokyo-Mitsubishi's
securities subsidiaries were included in the investment banking business unit.
In response to the incorporation of Mitsubishi Securities into which these
securities subsidiaries were merged on September 1, 2002, Bank of
Tokyo-Mitsubishi began measuring the results of Mitsubishi Securities
separately from its investment banking business unit in the latter half of the
fiscal year ended March 31, 2003. Accordingly, Bank of Tokyo-Mitsubishi
presented Mitsubishi Securities as a separate operating segment for the fiscal
year ended March 31, 2003. Presentation for prior years has been reclassified
to conform to the presentation for the fiscal year ended March 31, 2003.
Mitsubishi Securities segment includes Mitsubishi Securities and its
subsidiaries that provide a broad range of retail and corporate securities
services and products including retail brokerage, securitization, M&A advisory
and derivatives.
Further, after the incorporation of Mitsubishi Securities, Bank of
Tokyo-Mitsubishi transferred part of the investment banking business, including
securitization, M&A advisory and derivatives, to Mitsubishi Securities from its
investment banking business unit. This transfer did not significantly affect
the current fiscal year results of the investment banking business unit or
Mitsubishi Securities. It is not practicable to restate the previous fiscal
years' information based on the current fiscal year's presentation or to recast
the current fiscal year's information based on the previous fiscal years'
presentation to reflect this transfer.
In May 2003, Bank of Tokyo-Mitsubishi integrated the investment banking
business unit and the asset management business unit into one business unit
under the name of investment banking and asset management business unit. Since
this integration of business units was made subsequent to March 31, 2003, we
did not reclassify the business segment information for the fiscal years ended
March 31, 2001, 2002 and 2003 to reflect such integration.
66
The following table shows the business segment information for the fiscal years
ended March 31, 2001, 2002 and 2003:
Global
Retail Commercial Corporate Investment Asset Operations Mitsubishi
Banking Banking Banking Banking Management UNBC Services Treasury Securities
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in billions)
Fiscal year ended
March 31, 2001*:
Net Revenue............. (Yen)301.5 (Yen)286.7 (Yen)270.6 (Yen) 74.0 (Yen) 8.8 (Yen)256.2 (Yen)22.4 (Yen)105.1 (Yen) 20.3
Operating expenses...... 231.3 130.5 124.5 50.0 12.7 131.9 18.1 23.2 22.1
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Operating profit (loss). (Yen) 70.2 (Yen)156.2 (Yen)146.1 (Yen) 24.0 (Yen) (3.9) (Yen)124.3 (Yen) 4.3 (Yen) 81.9 (Yen) (1.8)
========== ========== ========== ========== ========== ========== ========= ========== ==========
Fiscal year ended
March 31, 2002*:
Net Revenue............. (Yen)283.1 (Yen)297.7 (Yen)282.1 (Yen)101.8 (Yen) 8.9 (Yen)295.9 (Yen)21.5 (Yen)207.1 (Yen) 12.8
Operating expenses...... 230.6 126.8 134.6 50.6 13.9 163.6 17.6 28.4 22.0
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Operating profit (loss). (Yen) 52.5 (Yen)170.9 (Yen)147.5 (Yen) 51.2 (Yen) (5.0) (Yen)132.3 (Yen) 3.9 (Yen)178.7 (Yen) (9.2)
========== ========== ========== ========== ========== ========== ========= ========== ==========
Fiscal year ended
March 31, 2003:
Net Revenue............. (Yen)280.0 (Yen)286.6 (Yen)262.9 (Yen) 94.7 (Yen) (2.9) (Yen)275.8 (Yen)19.9 (Yen)287.8 (Yen) 55.1
Operating expenses...... 211.7 127.0 129.9 46.2 16.5 161.6 16.9 26.7 65.9
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Operating profit (loss). (Yen) 68.3 (Yen)159.6 (Yen)133.0 (Yen) 48.5 (Yen)(19.4) (Yen)114.2 (Yen) 3.0 (Yen)261.1 (Yen)(10.8)
========== ========== ========== ========== ========== ========== ========= ========== ==========
Other Total
----------- ------------
Fiscal year ended
March 31, 2001*:
Net Revenue............. (Yen) (27.2) (Yen)1,318.4
Operating expenses...... 146.8 891.1
----------- ------------
Operating profit (loss). (Yen)(174.0) (Yen) 427.3
=========== ============
Fiscal year ended
March 31, 2002*:
Net Revenue............. (Yen) (58.4) (Yen)1,452.5
Operating expenses...... 57.0 845.1
----------- ------------
Operating profit (loss). (Yen)(115.4) (Yen) 607.4
=========== ============
Fiscal year ended
March 31, 2003:
Net Revenue............. (Yen) (88.1) (Yen)1,471.8
Operating expenses...... 80.1 882.5
----------- ------------
Operating profit (loss). (Yen)(168.2) (Yen) 589.3
=========== ============
--------
* The segment information for the fiscal years ended March 31, 2001 and 2002
was restated to conform to the presentation for the fiscal year ended March
31, 2003.
When Bank of Tokyo-Mitsubishi's business units work together to provide
services to customers, we assign the total amount of net revenue derived from
those services to each participating business unit without dividing the net
revenue. As a result, some items of net revenue are duplicated among the
participating segments. The duplicated amounts are eliminated in the "Other"
column. The following is a summary of the duplicated amounts between those
segments shown in columns and those shown in the rows. The total of such
duplicated amounts is included in "Other" in the table above.
Global Total
Commercial Corporate Asset Amount
Banking Banking Management Eliminated
---------- --------- ---------- ----------
(in billions)
Fiscal year ended March 31, 2001:
Investment banking............ (Yen)5.6 (Yen)28.0 (Yen)0.5 (Yen)34.1
======== ========= ======== =========
Fiscal year ended March 31, 2002:
Investment banking............ (Yen)7.8 (Yen)30.2 (Yen) -- (Yen)38.0
======== ========= ======== =========
Fiscal year ended March 31, 2003:
Investment banking............ (Yen)9.7 (Yen)28.7 (Yen) -- (Yen)38.4
======== ========= ======== =========
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Total net revenue increased (Yen)19.3 billion, or 1.3%, from (Yen)1,452.5
billion for the fiscal year ended March 31, 2002 to (Yen)1,471.8 billion for
the fiscal year ended March 31, 2003. This increase was due mainly to an
increase of (Yen)80.7 billion in the treasury unit and an increase of (Yen)42.3
billion at Mitsubishi Securities. This increase was partially offset by a
decrease of (Yen)20.1 billion in the UNBC business unit.
Total operating expenses increased (Yen)37.4 billion, or 4.4%, from (Yen)845.1
billion for the fiscal year ended March 31, 2002 to (Yen)882.5 billion for the
fiscal year ended March 31, 2003. This increase was due mainly to an increase
of (Yen)43.9 billion in operating expenses for Mitsubishi Securities and an
increase of (Yen)23.1 billion in operating expenses included in the "Other"
column. The increase was partially offset by a decrease of (Yen)18.9 billion in
the retail banking business unit.
67
Net revenue of the retail banking business unit decreased (Yen)3.1 billion, or
1.1%, from (Yen)283.1 billion for the fiscal year ended March 31, 2002 to
(Yen)280.0 billion for the fiscal year ended March 31, 2003. This decrease was
mainly due to a decrease in net interest income of (Yen) 10.9 billion,
reflecting a decline in interest margins due to declining interest rates in yen
and foreign currencies. The decrease was partially offset by an increase in net
fees of (Yen)6.1 billion, reflecting an increase in fee income on insurance
products and domestic funds transfers.
Net revenue of the commercial banking business unit decreased (Yen)11.1
billion, or 3.7%, from (Yen)297.7 billion for the fiscal year ended March 31,
2002 to (Yen)286.6 billion for the fiscal year ended March 31, 2003. This
decrease was mainly due to a decrease of (Yen)20.0 billion in net interest
income, which primarily reflected a decrease in volume of commercial loans and
a decrease in dividend income. The decrease in commercial loans was partly
attributable to the disposal of problem loans. The decrease in Bank of
Tokyo-Mitsubishi's dividend income reflected the reduction in its holdings of
strategic equity investments. These decreases were partially offset by an
increase in other income of (Yen)4.6 billion, reflecting an increase in income
on derivative products.
Net revenue of the global corporate banking business unit decreased (Yen)19.2
billion, or 6.8%, from (Yen)282.1 billion for the fiscal year ended March 31,
2002 to (Yen)262.9 billion for the fiscal year ended March 31, 2003. This
decrease was mainly due to a decrease of (Yen)11.1 billion in net interest
income and a decrease in net revenue of subsidiaries of (Yen)10.1 billion. The
decrease in net interest income reflected a decline in interest margins on
loans and deposits in the declining interest rate environment in Japan and
foreign countries and the decrease in net revenue of its subsidiaries reflected
a decrease in interest income in our overseas subsidiaries in the declining
interest rate environment.
Net revenue of the investment banking business unit decreased (Yen)7.1 billion,
or 6.9%, from (Yen)101.8 billion for the fiscal year ended March 31, 2002 to
(Yen)94.7 billion for the fiscal year ended March 31, 2003. This decrease was
mainly due to a decrease of (Yen)10.1 billion in net revenue of its
subsidiaries, reflecting depressed securities trading operations in its
overseas subsidiaries. The decrease was partially offset by an increase in
other income of (Yen)4.4 billion, reflecting an increase in gains on
derivatives trading.
Net revenue of the asset management business unit decreased (Yen)11.8 billion,
or 132.6%, from (Yen)8.9 billion for the fiscal year ended March 31, 2002 to a
loss of (Yen)2.9 billion for the fiscal year ended March 31, 2003. This
decrease was mainly attributable to a decrease of (Yen)9.7 billion in other
income, which primarily reflected a decrease in gains on trust funds and
investment trusts due to declining stock markets in Japan.
Net revenue of the UNBC business unit decreased (Yen)20.1 billion, or 6.8%,
from (Yen)295.9 billion for the fiscal year ended March 31, 2002 to (Yen)275.8
billion for the fiscal year ended March 31, 2003. This decrease was largely due
to the appreciation of the yen against the US dollar at the end of UNBC's 2002
fiscal year compared to that of the previous year.
Net revenue of the operation services unit decreased (Yen)1.6 billion, or 7.4%,
from (Yen)21.5 billion for the fiscal year ended March 31, 2002 to (Yen)19.9
billion for the fiscal year ended March 31, 2003, mainly due to a decline in
revenue of its domestic subsidiaries.
Net revenue of the treasury unit increased (Yen)80.7 billion, or 39.0%, from
(Yen)207.1 billion for the fiscal year ended March 31, 2002 to (Yen)287.8
billion for the fiscal year ended March 31, 2003. This increase was mainly due
to an increase in interest income and other income, which primarily reflected
an increase in gains on investments in domestic and foreign bonds and an
increase in gains on its foreign currency asset and liability management
operations reflecting a decline in the foreign currency interest rate.
Net revenue of Mitsubishi Securities increased (Yen)42.3 billion, or 330.7%,
from (Yen)12.8 billion for the fiscal year ended March 31, 2002 to (Yen)55.1
billion for the fiscal year ended March 31, 2003. This increase was mainly due
to the merger that formed Mitsubishi Securities on September 1, 2002. There was
no revenue of KOKUSAI
68
Securities Co., Ltd. recorded for the fiscal year ended March 31, 2002 because
Bank of Tokyo-Mitsubishi accounted for its investment in this company under the
equity method and did not consolidate it.
The increase in operating expenses in the "Other" column primarily reflected a
significant decrease in the provision for credit losses. Credit losses are
allocated to the corporate center rather than being reflected in each business
segment.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Total net revenue increased (Yen)134.1 billion, or 10.2%, from (Yen)1,318.4
billion for the fiscal year ended March 31, 2001 to (Yen)1,452.5 billion for
the fiscal year ended March 31, 2002. This increase was due mainly to an
increase of (Yen)102.0 billion in the treasury unit and an increase of
(Yen)39.7 billion in the UNBC business unit. This increase was partially offset
by a decrease of (Yen)18.4 billion in the retail banking business unit.
Total operating expenses decreased (Yen)46.0 billion, or 5.2%, from (Yen)891.1
billion for the fiscal year ended March 31, 2001 to (Yen)845.1 billion for the
fiscal year ended March 31, 2002. This decrease was due mainly to a decrease of
(Yen)89.8 billion in operating expenses included in the "Other" column. The
decrease was partially offset by an increase of (Yen)31.7 billion in the UNBC
business unit due mainly to an increase in advertising and other operating
expenses.
Net revenue of the retail banking business unit decreased (Yen)18.4 billion, or
6.1%, from (Yen)301.5 billion for the fiscal year ended March 31, 2001 to
(Yen)283.1 billion for the fiscal year ended March 31, 2002. This decrease was
mainly due to a decrease in net interest income of (Yen)21.3 billion,
reflecting a decline in interest margins between on deposits and debentures due
to declining interest rates in Japanese yen and other foreign currencies.
Net revenue of the commercial banking business unit increased (Yen)11.0
billion, or 3.9%, from (Yen)286.7 billion for the fiscal year ended March 31,
2001 to (Yen)297.7 billion for the fiscal year ended March 31, 2002. This
increase was mainly due to an increase of (Yen)4.0 billion in net fee income
(mainly increases in commitment line fees and safe deposit box rental income),
an increase of (Yen)3.9 billion in other income (mainly gains on derivative
transactions) and an increase of (Yen)2.3 billion in revenues mainly from a
newly consolidated subsidiary.
Net revenue of the global corporate banking business unit increased (Yen)11.5
billion, or 4.2%, from (Yen)270.6 billion for the fiscal year ended March 31,
2001 to (Yen)282.1 billion for the fiscal year ended March 31, 2002. This
increase was mainly due to an increase of (Yen)7.9 billion in net fee income,
such as commitment line fees and fees on investment banking business. This
increase was partially offset by an increase in foreign exchange losses
relating to the economic crisis in Argentina.
Net revenue of the investment banking business unit increased (Yen)27.8
billion, or 37.5%, from (Yen)74.0 billion for the fiscal year ended March 31,
2001 to (Yen)101.8 billion for the fiscal year ended Mach 31, 2002. This
increase was largely attributable to an increase of (Yen)5.9 billion in net
interest income relating mainly to structured finance, an increase of (Yen)3.7
billion in net fee income relating mainly to securitization of loans and
syndication of loans and an increase of (Yen)4.5 billion in other income
relating mainly to gains on derivative transactions. The profits of its
subsidiaries also contributed to the increase.
Net revenue of the asset management business unit increased (Yen)0.1 billion,
or 1.7%, from (Yen)8.8 billion for the fiscal year ended March 31, 2001 to
(Yen)8.9 billion for the fiscal year ended March 31, 2002. This increase
reflected an increase of (Yen)4.1 billion in net interest income, which
primarily resulted from a decrease in funding costs. The increase was partially
offset by a decrease in trust fees.
Net revenue of the UNBC business unit increased (Yen)39.7 billion, or 15.5%,
from (Yen)256.2 billion for the fiscal year ended March 31, 2001 to (Yen)295.9
billion for the fiscal year ended March 31, 2002. This increase was largely due
to the depreciation of the yen against the US dollar.
69
Net revenue of the operations services unit decreased (Yen)0.9 billion, or
4.1%, from (Yen)22.4 billion for the fiscal year ended March 31, 2001 to
(Yen)21.5 billion for the fiscal year ended March 31, 2002, mainly due to a
decrease in the volume of domestic operation and settlement services.
Net revenue of the treasury unit increased (Yen)102.0 billion, or 97.0%, from
(Yen)105.1 billion for the fiscal year ended March 31, 2001 to (Yen)207.1
billion for the fiscal year ended March 31, 2002. This increase was mainly due
to an increase in net interest income, which primarily reflected an increase in
interest income on foreign currency treasury business, resulting from a decline
in foreign currency interest rates and an increase in gains on investments in
foreign bonds.
The decrease in operating expenses in the "Other" column primarily reflected a
significant decrease in the general provision for credit losses. Credit losses
are allocated to the corporate center rather than being reflected in each
business segment.
Mitsubishi Trust Bank
Mitsubishi Trust Bank has the following business groups:
.. trust-banking business, which provides retail banking and trust services,
corporate financing services and stock transfer agency services;
.. trust assets business, which provides asset management and administration
services;
.. real estate business, which provides brokerage, securitization, appraisal,
advisory and other real estate services;
.. global markets business, which provides various financial operations
including banking, money markets and capital markets operations, securities
investments, custody operations and asset management; and
.. other, which consists of:
. interest and dividends on certain investment securities held for
relationship management; and
. administrative divisions of the headquarters, such as personnel and
planning.
Mitsubishi Trust Bank measures the financial performance of its subsidiaries
based on ordinary profit or loss shown in their financial statements. Because
of the limited significance of its subsidiary operations, Mitsubishi Trust Bank
does not allocate the subsidiaries' financial performance to business groups,
and manages them on an aggregate basis. The results of these subsidiaries are
included in "Other."
Effective April 1, 2001, the former banking business group was renamed the
trust-banking business group to reflect the emphasis the group places on the
development of the synergies between the banking businesses and the trust
businesses. In addition, the real estate business group was newly established
effective April 1, 2001, to handle the real estate business which was
previously part of the banking business group based on the management's belief
that this business would grow as its customer base expands. The segment
information for the fiscal year ended March 31, 2001 is restated to reflect
these changes made during the fiscal year ended March 31, 2002.
As previously mentioned, Nippon Trust Bank and Tokyo Trust Bank were merged
with and into Mitsubishi Trust Bank on October 1, 2001. However, it is not
practicable to restate the business segment information for the fiscal year
ended March 31, 2001 and for the six months ended September 30, 2001 to reflect
the effect of the merger because the differences in the policies and processes
of compiling and summarizing segment information among Mitsubishi Trust Bank,
Nippon Trust Bank and Tokyo Trust Bank made it impractical to precisely and
reasonably allocate the financial performance of Nippon Trust Bank and Tokyo
Trust Bank to each of the relevant business groups of Mitsubishi Trust Bank.
70
The following table shows the business segment information for the fiscal years
ended March 31, 2001, 2002 and 2003:
Trust- Trust Real Global
Banking Assets Estate Markets Other Total
---------- --------- --------- ---------- --------- ----------
(in billions)
Fiscal year ended March 31, 2001:
Net revenue................... (Yen)114.6 (Yen)49.9 (Yen)12.0 (Yen)101.1 (Yen)30.0 (Yen)307.6
Operating expenses............ 67.7 26.8 6.3 16.6 27.2 144.6
Subsidiaries.................. -- -- -- -- 3.0 3.0
---------- --------- --------- ---------- --------- ----------
Operating profit.............. (Yen) 46.9 (Yen)23.1 (Yen) 5.7 (Yen) 84.5 (Yen) 5.8 (Yen)166.0
========== ========= ========= ========== ========= ==========
Fiscal year ended March 31, 2002:
Net revenue................... (Yen)116.4 (Yen)54.3 (Yen)11.7 (Yen)105.9 (Yen)27.7 (Yen)316.0
Operating expenses............ 69.1 33.2 8.1 17.9 31.5 159.8
Subsidiaries.................. -- -- -- -- (0.3) (0.3)
---------- --------- --------- ---------- --------- ----------
Operating profit (loss)....... (Yen) 47.3 (Yen)21.1 (Yen) 3.6 (Yen) 88.0 (Yen)(4.1) (Yen)155.9
========== ========= ========= ========== ========= ==========
Fiscal year ended March 31, 2003:
Net revenue................... (Yen)120.1 (Yen)38.0 (Yen)16.7 (Yen)137.2 (Yen)22.6 (Yen)334.6
Operating expenses............ 73.4 28.0 9.7 17.6 27.5 156.2
Subsidiaries.................. -- -- -- -- 4.8 4.8
---------- --------- --------- ---------- --------- ----------
Operating profit (loss)....... (Yen) 46.7 (Yen)10.0 (Yen) 7.0 (Yen)119.6 (Yen)(0.1) (Yen)183.2
========== ========= ========= ========== ========= ==========
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Total net revenue increased (Yen)18.6 billion, or 5.9%, from (Yen)316.0 billion
for the fiscal year ended March 31, 2002 to (Yen)334.6 billion for the fiscal
year ended March 31, 2003. This increase primarily reflected a (Yen)5.0 billion
increase in the real estate business group and a (Yen)31.3 billion increase in
the global markets business group. These increases were partially offset by a
decrease of (Yen)16.3 billion in the trust assets business group.
Net revenue of the trust-banking business group increased (Yen)3.7 billion, or
3.2%, from (Yen)116.4 billion for the fiscal year ended March 31, 2002 to
(Yen)120.1 billion for the fiscal year ended March 31, 2003. This increase was
due to an increase of (Yen)6.3 billion in net interest income and an increase
of (Yen)3.7 billion in other fee income. These increases were partially offset
by a decrease of (Yen)6.2 billion in trust fees earned with respect to jointly
operated designated money in trusts, principally resulting from a decrease in
principal of loan trusts. The increase in net interest income was mainly
attributable to an improvement in interest margin. The increase in other fee
income was due to an increase in fees and commissions obtained for sales of
investment trusts and variable annuities.
Net revenue of the trust assets business group decreased (Yen)16.3 billion, or
30.1%, from (Yen)54.3 billion for the fiscal year ended March 31, 2002 to
(Yen)38.0 billion for the fiscal year ended March 31, 2003. This decrease was
mainly due to a decrease in fee income for asset administration services as a
result of certain trust assets transferred to Master Trust Bank of Japan Ltd.,
an equity investee of Mitsubishi Trust Bank.
Net revenue of the real estate business group increased (Yen)5.0 billion, or
43.1%, from (Yen)11.7 billion for the fiscal year ended March 31, 2002 to
(Yen)16.7 billion for the fiscal year ended March 31, 2003. This increase was
mainly due to an increase in real estate brokerage commissions.
Net revenue of the global markets business group increased (Yen)31.3 billion,
or 29.6%, from (Yen)105.9 billion for the fiscal year ended March 31, 2002 to
(Yen)137.2 billion for the fiscal year ended March 31, 2003. This increase was
mainly due to an increase in net interest income resulting from an improvement
in interest margin and an increase in debt securities, and an increase in other
income resulting from an increase in the profit on sales of Japanese government
bonds and other debt securities.
71
Net revenue of "Other" decreased (Yen)5.1 billion, or 18.6%, from (Yen)27.7
billion for the fiscal year ended March 31, 2002 to (Yen)22.6 billion for the
fiscal year ended March 31, 2003. This decrease was mainly due to a decrease in
dividend income resulting from a reduction in certain investment securities
held for relationship management.
Total operating expenses decreased (Yen)3.6 billion, or 2.2%, from (Yen)159.8
billion for the fiscal year ended March 31, 2002 to (Yen)156.2 billion for the
fiscal year ended March 31, 2003. This decrease was primarily due to a decrease
of (Yen)5.2 billion in the trust assets business group. The decrease was
attributable to a decrease in salaries and system maintenance cost for asset
administration services as a result of certain trust assets transferred to the
Master Trust Bank of Japan Ltd.
The operating profit of subsidiaries on a combined basis increased (Yen)5.1
billion, from an operating loss of (Yen)0.3 billion for the fiscal year ended
March 31, 2002 to an operating profit of (Yen)4.8 billion for the fiscal year
ended March 31, 2003. The profit for the fiscal year ended March 31, 2003 was
mainly due to a decrease in credit costs, which had increased in the fiscal
year ended March 31, 2002.
As a result, total operating profit for the fiscal year ended March 31, 2003
amounted to (Yen)183.2 billion, an increase of (Yen)27.3 billion, or 17.4%,
from (Yen)155.9 billion for the fiscal year ended March 31, 2002.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Total net revenue increased (Yen)8.4 billion, or 2.7%, from (Yen)307.6 billion
for the fiscal year ended March 31, 2001 to (Yen)316.0 billion for the fiscal
year ended March 31, 2002. The improvement in total net revenue was largely due
to a (Yen)4.4 billion increase in the trust assets business group net revenue
and a (Yen)4.8 billion increase in the global markets business group net
revenue.
Net revenue of the trust-banking business group increased (Yen)1.8 billion, or
1.6%, from (Yen)114.6 billion for the fiscal year ended March 31, 2001 to
(Yen)116.4 billion for the fiscal year ended March 31, 2002. This increase was
mainly due to an increase of (Yen)7.6 billion in fee income, resulting from
increases in fees and commissions obtained for arrangements of off-balancing
trade receivables, securitization of real estate, sales of investment trusts
and stock transfer agency services. The increase in fee income was partially
offset by a decrease of (Yen)3.1 billion in net interest income on loans and a
decrease of (Yen)2.6 billion in trust fees earned with respect to jointly
operated designated money in trusts.
Net revenue of the trust assets business group increased (Yen)4.4 billion, or
8.9%, from (Yen)49.9 billion for the fiscal year ended March 31, 2001 to
(Yen)54.3 billion for the fiscal year ended March 31, 2002. This increase was
mainly due to an increase in fee income such as the securities-trust-related
fees including trust fees on specified money trusts (Tokkin) and independently
operated designated money in trusts (Shiteitan), and fees for debt security
paying agent services.
Net revenue of the real estate business group decreased (Yen)0.3 billion, or
2.7%, from (Yen)12.0 billion for the fiscal year ended March 31, 2001 to
(Yen)11.7 billion for the fiscal year ended March 31, 2002. The decrease was
largely due to a decrease in the number of brokerage transactions.
Net revenue of the global markets business group increased (Yen)4.8 billion, or
4.8%, from (Yen)101.1 billion for the fiscal year ended March 31, 2001 to
(Yen)105.9 billion for the fiscal year ended March 31, 2002. Although other
income decreased by (Yen)23.9 billion from the fiscal year ended March 31, 2001
mainly due to the reduced profit on sale of bonds, including government bonds,
net interest income increased by (Yen)36.8 billion from the previous fiscal
year largely due to decreased funding costs resulting from a decline in
short-term foreign currency interest rates.
Total operating expenses for the fiscal year ended March 31, 2002 were
(Yen)159.8 billion, an increase of (Yen)15.2 billion, or 10.5%, from previous
fiscal year operating expenses of (Yen)144.6 billion. This increase was
primarily due to the addition of personnel following the October 2001 merger
with Nippon Trust Bank and Tokyo Trust Bank.
72
For the fiscal year ended March 31, 2002, subsidiaries on a combined basis
recorded an operating loss of (Yen)0.3 billion, a decrease of (Yen)3.3 billion
from the previous fiscal year profit of (Yen)3.0 billion. The loss was mainly
due to an increase in credit costs resulting from increased disposals of
problem assets by an overseas subsidiary.
As a result, total operating profit for the fiscal year ended March 31, 2002
amounted to (Yen)155.9 billion, a decrease of (Yen)10.1 billion, or 6.1%, from
(Yen)166.0 billion for the fiscal year ended March 31, 2001.
Nippon Trust Bank and Tokyo Trust Bank
As discussed above, operating results of Nippon Trust Bank and Tokyo Trust Bank
for the fiscal year ended March 31, 2001, and for the six months ended
September 30, 2001 are not included in the segment information for Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank. The following is a summary of net
revenue, operating expenses and operating profit for each of these periods:
Nippon Tokyo
Trust Trust
Bank Bank Total
--------- -------- ---------
(in billions)
Fiscal year ended March 31, 2001:
Net revenue...................... (Yen)33.9 (Yen)3.1 (Yen)37.0
Operating expenses............... 19.0 1.2 20.2
--------- -------- ---------
Operating profit................. (Yen)14.9 (Yen)1.9 (Yen)16.8
========= ======== =========
Six months ended September 30, 2001:
Net revenue...................... (Yen)11.3 (Yen)0.8 (Yen)12.1
Operating expenses............... 13.7 0.6 14.3
--------- -------- ---------
Operating profit (loss).......... (Yen)(2.4) (Yen)0.2 (Yen)(2.2)
========= ======== =========
The operating loss of Nippon Trust Bank for the six months ended September 30,
2001 resulted from a decrease in net revenue and an increase in operating
expenses, as compared to the corresponding period in the prior fiscal period.
The decrease in net revenue primarily reflected a decrease in loan trust
balances due to termination of such operations and a decrease in the number of
real estate brokerage transactions. The increase in operating expenses was
attributable to an increase in net periodic pension cost.
73
Geographic Segment Analysis
The following table sets forth total revenue, income (loss) before income tax
expense (benefit) and net income (loss) on a geographic basis based principally
on the domicile of activities for the fiscal years ended March 31, 2001, 2002
and 2003:
Years ended March 31,
----------------------------------------
2001 2002 2003
------------ ------------ ------------
(in billions)
Total revenue (interest income and non-interest income):
Domestic............................................. (Yen)1,549.5 (Yen)1,225.0 (Yen)1,289.0
------------ ------------ ------------
Foreign:
United States.................................... 758.7 547.4 618.3
Europe........................................... 357.9 244.4 256.5
Asia/Oceania Excluding Japan..................... 267.6 239.0 150.6
Other Areas*..................................... 200.5 128.9 117.6
------------ ------------ ------------
Total foreign................................. 1,584.7 1,159.7 1,143.0
------------ ------------ ------------
Total..................................... (Yen)3,134.2 (Yen)2,384.7 (Yen)2,432.0
============ ============ ============
Income (loss) before income tax expense (benefit):
Domestic............................................. (Yen) (344.8) (Yen) (387.1) (Yen) (92.3)
------------ ------------ ------------
Foreign:
United States.................................... 88.5 (31.4) 173.9
Europe........................................... 113.6 8.5 52.0
Asia/Oceania Excluding Japan..................... 84.1 44.8 61.5
Other Areas*..................................... 62.2 41.0 51.6
------------ ------------ ------------
Total foreign................................. 348.4 62.9 339.0
------------ ------------ ------------
Total..................................... (Yen) 3.6 (Yen) (324.2) (Yen) 246.7
============ ============ ============
Net income (loss):
Domestic............................................. (Yen) (362.3) (Yen) (236.5) (Yen) (70.6)
------------ ------------ ------------
Foreign:
United States.................................... 58.1 (57.0) 143.0
Europe........................................... 112.0 4.1 37.3
Asia/Oceania Excluding Japan..................... 72.0 35.0 43.3
Other Areas*..................................... 61.0 37.9 50.3
------------ ------------ ------------
Total foreign................................. 303.1 20.0 273.9
------------ ------------ ------------
Total..................................... (Yen) (59.2) (Yen) (216.5) (Yen) 203.3
============ ============ ============
--------
* Other Areas primarily include Canada, Latin America and the Caribbean.
In connection with the 2003 reclassifications in non-interest income and
non-interest expenses previously mentioned, total revenues, which consist of
interest income and non-interest income, for prior periods have been
reclassified.
Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002
Domestic total revenue increased (Yen)64.0 billion, or 5.2%, from (Yen)1,225.0
billion for the fiscal year ended March 31, 2002 to (Yen)1,289.0 billion for
the fiscal year ended March 31, 2003. This increase primarily reflected an
increase in net trading account profits. The increase was partially offset by a
decrease in interest income.
74
Foreign total revenue decreased (Yen)16.7 billion, or 1.4%, from (Yen)1,159.7
billion for the fiscal year ended March 31, 2002 to (Yen)1,143.0 billion for
the fiscal year ended March 31, 2003. This decrease primarily reflected a
decrease in interest income. The decrease was partially offset by increases in
net foreign exchange gains and net investment securities gains.
Domestic loss before income tax for the fiscal year ended March 31, 2003 was
(Yen)92.3 billion, compared to a (Yen)387.1 billion loss for the fiscal year
ended March 31, 2002. This improvement primarily reflected a decrease in the
provision for credit losses and increases in net trading account profits.
Foreign income before income taxes increased (Yen)276.1 billion from (Yen)62.9
billion for the fiscal year ended March 31, 2002 to (Yen)339.0 billion for the
fiscal year ended March 31, 2003. This increase primarily reflected increases
in net investment securities gains and net foreign exchange gains. This
increase was partially offset by an increase in the provision for credit losses.
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001
Domestic total revenue decreased (Yen)324.5 billion, or 20.9%, from
(Yen)1,549.5 billion for the fiscal year ended March 31, 2001 to (Yen)1,225.0
billion for the fiscal year ended March 31, 2002. This decrease primarily
reflected decreases in interest income, net trading account profits and net
investment securities gains.
Foreign total revenue decreased (Yen)425.0 billion, or 26.8%, from (Yen)1,584.7
billion for the fiscal year ended March 31, 2001 to (Yen)1,159.7 billion for
the fiscal year ended March 31, 2002. This decrease primarily reflected trading
account losses in Europe in the latter period and a decrease in interest income
in the United States and other areas due to declining interest rates, partially
offset by the effect of the depreciation of the yen against the US dollar and
other foreign currencies.
Domestic loss before income taxes increased (Yen)42.3 billion, or 12.3%, from
(Yen)344.8 billion for the fiscal year ended March 31, 2001 to (Yen)387.1
billion for the fiscal year ended March 31, 2002. This increase was due
primarily to decreases in net interest income, net trading account profits and
net investment securities gains.
Foreign income before income taxes decreased (Yen)285.5 billion, or 81.9%, from
(Yen)348.4 billion for the fiscal year ended March 31, 2001 to (Yen)62.9
billion for the fiscal year ended March 31, 2002. This decrease primarily
reflected foreign exchange losses in the United States and Europe due to the
depreciation of the yen against the US dollar and other foreign currencies, an
increase in credit losses in the United States, particularly those relating to
the bankruptcy of Enron Corporation, and a net trading loss in Europe.
Effect of Change in Exchange Rate on Foreign Currency Translation
The average exchange rate for the fiscal year ended March 31, 2003 was
(Yen)121.94 per $1.00, compared to the prior fiscal year's average exchange
rate of (Yen)125.13 per $1.00. The average exchange rate for the conversion of
the US dollar financial statements of some of our foreign subsidiaries for the
fiscal year ended December 31, 2002 was (Yen)125.34 per $1.00, compared to the
average exchange rate for the fiscal year ended December 31, 2001 of
(Yen)121.54 per $1.00.
In terms of the average exchange rate, the change in the average exchange rate
of the yen against the US dollar and other foreign currencies resulted in
translation gains on total revenue of approximately (Yen)11 billion, net
interest income of approximately (Yen)1 billion and income before income taxes
of approximately (Yen)2 billion for the fiscal year ended March 31, 2003.
75
B. Liquidity and Capital Resources
Financial Condition
Total Assets
Our total assets at March 31, 2003 were (Yen)96.53 trillion, representing an
increase of (Yen)2.16 trillion, or 2.3%, from (Yen)94.37 trillion at March 31,
2002. This increase was due primarily to an increase of (Yen)2.46 trillion in
cash and due from banks, an increase of (Yen)1.08 trillion in investment
securities available for sale, an increase of (Yen)0.87 trillion in trading
account assets and an increase of (Yen)0.52 trillion in deferred tax assets.
This increase was partially offset by a decrease of (Yen)1.38 trillion in net
loans and a decrease of (Yen)1.03 trillion in call loans and funds sold.
We have allocated a substantial portion of our assets to international
activities. As a result, reported amounts are affected by changes in the value
of the yen against the US dollar and other foreign currencies. Foreign assets
are denominated primarily in US dollars. The following table shows our total
assets at March 31, 2002 and 2003 by geographic region based principally on the
domicile of the obligors:
At March 31,
---------------------
2002 2003
---------- ----------
(in trillions)
Japan........................... (Yen)69.16 (Yen)69.73
---------- ----------
Foreign:
United States of America..... 12.35 13.21
Europe....................... 6.67 7.89
Asia/Oceania Excluding Japan. 3.30 3.15
Other Areas*................. 2.89 2.55
---------- ----------
Total foreign............ 25.21 26.80
---------- ----------
Total................. (Yen)94.37 (Yen)96.53
========== ==========
--------
* Other Areas primarily include Canada, Latin America and the Caribbean.
At March 31, 2003, the noon buying rate of the Federal Reserve Bank of New York
was (Yen)118.07 per $1.00, as compared with (Yen)132.70 per $1.00 at March 29,
2002. The yen equivalent amount of foreign currency denominated assets and
liabilities increases as the yen/US dollar exchange rate becomes higher,
evidencing a "weaker" yen, and decreases as the yen/US dollar exchange rate
becomes lower, evidencing a "stronger" yen. The appreciation of the yen against
the US dollar and other foreign currencies during the fiscal year ended March
31, 2003 decreased the yen value of our total assets by approximately (Yen)2.20
trillion. See "Item 3.A. Key Information--Selected Financial Data--Exchange
Rate Information."
76
Loan Portfolio
The following table sets forth our loans outstanding, before deduction of
allowance for credit losses, at March 31, 2002 and 2003, based on
classification by industry segment as defined by the Bank of Japan for
regulatory reporting purposes, which is not necessarily based on use of
proceeds:
At March 31,
--------------------------------------------------------
2002 2003
------------------ -------------------------------------
Old classification Old classification New classification
------------------ ------------------ ------------------
(in billions)
Domestic:
Manufacturing................................ (Yen) 6,394.5 (Yen) 6,119.5 (Yen) 6,034.3
Construction................................. 1,535.2 1,277.4 1,277.4
Real estate.................................. 4,923.7 4,297.7 4,298.1
Services..................................... 4,549.7 5,062.0 4,953.8
Wholesale and retail......................... 5,984.0 5,634.8 5,458.3
Banks and other financial institutions....... 4,271.2 3,598.0 3,598.0
Communication and information services....... -- -- 1,516.0
Other industries............................. 3,850.0 5,004.7 3,858.2
Consumer..................................... 7,049.1 7,425.7 7,425.7
------------- ------------- -------------
Total domestic........................... 38,557.4 38,419.8 38,419.8
------------- ------------- -------------
Foreign:
Governments and official institutions........ 326.1 235.1 235.1
Banks and other financial institutions....... 680.4 928.1 928.1
Commercial and industrial.................... 9,708.1 8,413.5 8,413.5
Other........................................ 1,000.1 510.1 510.1
------------- ------------- -------------
Total foreign............................ 11,714.7 10,086.8 10,086.8
------------- ------------- -------------
Total................................. 50,272.1 48,506.6 48,506.6
Less unearned income and deferred loan fees--net 42.4 41.0 41.0
------------- ------------- -------------
Total................................. (Yen)50,229.7 (Yen)48,465.6 (Yen)48,465.6
============= ============= =============
During the fiscal year ended March 31, 2003, the Bank of Japan changed its
industry segment classifications. This change primarily included the
introduction of a new category: "Communication and information services." Due
to the introduction of this new category, some businesses previously included
in "Manufacturing," "Services" and "Other industries" were reclassified into
"Communication and information services." To facilitate the change, we have
modified our loan reporting system. For the purpose of comparison, the
information as of March 31, 2003 includes loans outstanding, before allowance
for credit losses, by type of industry, both based on the prior years' industry
segment classification and on the new industry segment classification.
Loans are our primary use of funds. The average loan balance accounted for
57.7% of total interest-earning assets for the fiscal year ended March 31, 2002
and 57.6% for the fiscal year ended March 31, 2003.
At March 31, 2003, our total loans were (Yen)48.47 trillion, representing a
decrease of (Yen)1.76 trillion, or 3.5%, from (Yen)50.23 trillion at March 31,
2002. Before the deduction of unearned income and deferred loan fees--net, our
loan balance at March 31, 2003 consisted of (Yen)38.42 trillion of domestic
loans and (Yen)10.09 trillion of foreign loans while the loan balance at March
31, 2002 consisted of (Yen)38.56 trillion of domestic loans and (Yen)11.71
trillion of foreign loans.
Domestic loans decreased (Yen)0.14 trillion, or 0.4%, from (Yen)38.56 trillion
at March 31, 2002 to (Yen)38.42 trillion at March 31, 2003. This decrease
reflected disposals of nonperforming loans and depressed loan demand in a
variety of industries in the continued weak economy in Japan. Although loans to
borrowers in most industries decreased, loans to borrowers in the services
industry and consumer loans increased during the fiscal year ended March 31,
2003. The increase in consumer loans primarily reflected a continuing increase
in residential mortgage loans.
77
Foreign loans decreased (Yen)1.62 trillion, or 13.9%, from (Yen)11.71 trillion
at March 31, 2002 to (Yen)10.09 trillion at March 31, 2003. This decrease was
primarily attributable to the appreciation of the yen against the US dollar and
other foreign currencies. In terms of fiscal year-end exchange rates, the yen
appreciated approximately 11.0% against the US dollar during the fiscal year
ended March 31, 2003. In addition, in terms of local currencies in our overseas
subsidiaries and offices, loans generally decreased for the fiscal year ended
March 31, 2003, primarily due to the slowdown in the global economy, although
UnionBanCal Corporation, our largest overseas subsidiary, increased its loans
due primarily to an increase in residential and commercial mortgage loans.
Allowance for Credit Losses, Nonperforming and Past Due Loans
The following table shows a summary of the changes in the allowance for credit
losses for the fiscal years ended March 31, 2001, 2002 and 2003:
Year ended March 31,
----------------------------------------
2001 2002 2003
------------ ------------ ------------
(in billions)
Balance at beginning of year............................... (Yen)1,486.2 (Yen)1,717.0 (Yen)1,735.2
------------ ------------ ------------
Provision for credit losses................................ 797.1 601.7 455.6
------------ ------------ ------------
Charge-offs:
Domestic................................................ (556.5) (513.2) (753.8)
Foreign................................................. (87.9) (156.2) (139.8)
------------ ------------ ------------
Total............................................... (644.4) (669.4) (893.6)
Recoveries................................................. 46.1 66.0 78.8
------------ ------------ ------------
Net charge-offs............................................ (598.3) (603.4) (814.8)
Other, principally foreign exchange translation adjustments 32.0 19.9 (15.9)
------------ ------------ ------------
Balance at end of year..................................... (Yen)1,717.0 (Yen)1,735.2 (Yen)1,360.1
============ ============ ============
Pursuant to the program for financial revival mentioned in "--Operating
Results--Recent Developments--Government Plan to Revive Financial Sector" and
in order to improve our loan quality, we accelerated disposals of nonperforming
loans through sales to the RCC and other third parties. The following table
provides comparative data in relation to our sales of nonperforming loans to
the RCC and other third parties for the fiscal years ended March 31, 2002 and
2003:
Additional
Principal Allowance Loans, provision
amount for credit net of for credit
of loans/(1)/ losses/(2)/ allowance losses
- ------------ ---------- ---------- ----------
(in billions)
For the fiscal year ended March 31, 2002 (Yen)275.1 (Yen)160.6 (Yen)114.5 (Yen) 5.7
For the fiscal year ended March 31, 2003 653.1 317.4 335.7 47.3
--------
(1) Represents principal amount after the deduction of charge-offs made before
the sales of nonperforming loans.
(2) Represents allowance for credit losses at the latest balance-sheet date.
Additional provisions for credit losses associated with the sales of
nonperforming loans increased from (Yen)5.7 billion for the fiscal year ended
March 31, 2002 to (Yen)47.3 billion for the fiscal year ended March 31, 2003,
due primarily to a significant increase in the volume of loans sold,
particularly to the RCC. For the fiscal year ended March 31, 2003, our sales of
nonperforming loans included not only loans to companies that were the subject
of bankruptcy proceedings or that were virtually bankrupt but also, in
comparison with prior years, a higher percentage of loans to companies that
were likely to become bankrupt. Many of the loans that we sold were loans to
companies that suffered further deterioration during the period, loans secured
by collateral that during the period appeared increasingly inadequate, or loans
to borrowers that we concluded during the period would have difficulty in
successfully restructuring their business or improving their financial
conditions.
78
Additional provisions in connection with the sale of nonperforming loans may
arise from a decline in the credit quality of the loans or the value of the
underlying collateral between the most recent measurement date for financial
reporting purposes (i.e., September 30 or March 31 of each year) and the date
of actual sales. In addition, third party purchasers may purchase nonperforming
loans at a discount reflecting greater than average risks, including risks of
future decline in the value of the loans and collateral during the collection
period associated with investments in the nonperforming loans or the underlying
real estate collateral. It is difficult to estimate with accuracy the actual
prices at which loan assets will be sold, particularly in light of our strategy
of seeking to dispose particularly of assets that are perceived to be of
declining quality. Accordingly, losses attributable to developments in the
intervening periods, including sales negotiated with third party purchasers,
for loans sold are recorded as part of additional provisions for credit losses.
In the years ended March 31, 2002 and 2003, we also sold loans that were not
recorded as nonperforming in aggregate principal amounts of (Yen)88.2 billion
and (Yen)38.9 billion, respectively, and recorded additional provisions for
credit losses of (Yen)7.6 billion and (Yen)4.9 billion, respectively, in
connection with those sales. Although not categorized as nonperforming as of
the most recent balance sheet date, most of these loans had suffered a decline
in their credit quality as of the date of their sale and were sold as a
precautionary measure to avoid further decline in the value of the loans and to
avoid additional losses in the future.
As a result of our active disposals of nonperforming loans, our balance of such
loans significantly decreased for the fiscal year ended March 31, 2003. We
expect to continue selling nonperforming loans during the fiscal year ending
March 31, 2004 to the RCC, other parties and possibly to the newly-created
Industrial Revitalization Corporation, in part to improve our asset quality and
in part to comply with the Financial Services Agency's directives.
Charge-offs for the fiscal year ended March 31, 2003 were (Yen)893.6 billion,
an increase of (Yen)224.2 billion, or 33.5%, from (Yen)669.4 billion for the
fiscal year ended March 31, 2002. Charge-offs of domestic nonperforming loans
for the fiscal year ended March 31, 2003 increased by (Yen)240.6 billion from
the fiscal year ended March 31, 2002. On the other hand, charge-offs of
overseas nonperforming loans for the fiscal year ended March 31, 2003 decreased
by (Yen)16.4 billion from the fiscal year ended March 31, 2002.
The increase in charge-offs of domestic nonperforming loans resulted from our
focus on the disposition of such loans. As part of the Emergency Economic
Package announced in April 2001, the Japanese government provided guidance to
major banks to remove from their balance sheets within the next two fiscal
years nonperforming loans to borrowers who were classified as "likely to become
bankrupt" or below that were outstanding at the end of September 2000. The
Japanese government also urged major banks to remove within the next three
fiscal years loans that were newly classified as such after October 2000. In
accordance with these guidelines and our continuing effort to improve the
quality of our assets, we have accelerated the removal of outstanding loans to
borrowers who are classified as "likely to become bankrupt" or below through
means such as write-offs, sales to third parties, including the RCC, and debt
forgiveness.
Of the (Yen)240.6 billion increase in charge-offs of domestic nonperforming
loans, (Yen)181.6 billion related to increased charge-offs of problem loans to
the real estate industry and (Yen)30.7 billion related to increased charge-offs
of problem loans to the services industry. The increases in charge-offs in
these two industries were largely due to large charge-offs incurred for a small
number of borrowers in the fiscal year ended March 31, 2003.
79
The following table summarizes the allowance for credit losses by component at
each fiscal year-end:
At March 31,
--------------------------------------
2001 2002 2003
------------ ------------ ------------
(in billions)
Allocated allowance:
Specific--specifically identified problem loans....... (Yen)1,245.5 (Yen)1,301.6 (Yen) 894.4
Large groups of smaller balance homogeneous loans..... 26.8 38.3 38.0
Loans exposed to specific country risk................ 15.3 28.3 13.1
Formula--substandard, special mention and other loans. 371.3 344.4 391.3
Unallocated allowance.................................... 58.1 22.6 23.3
------------ ------------ ------------
Total allowance....................................... (Yen)1,717.0 (Yen)1,735.2 (Yen)1,360.1
============ ============ ============
Allowance policy. Our credit rating system is closely linked to the risk
grading standards set by the Japanese regulatory authorities for asset
classification, and is used as a basis for establishing the allowance for
credit losses. 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 a discussion of our credit
rating system, see "Item 11. Quantitative and Qualitative Disclosures about
Market Risk--Credit Risk Management--Credit Rating System."
Change in total allowance and provision for credit losses. At March 31, 2003,
total allowance for credit losses was (Yen)1,360.1 billion, or 2.81% of the
total loan portfolio and 49.41% of total nonaccrual and restructured loans and
accruing loans contractually past due 90 days or more. At March 31, 2002, total
allowance for credit losses was (Yen)1,735.2 billion, or 3.45% of the total
loan portfolio and 41.66% of total nonaccrual and restructured loans and
accruing loans contractually past due 90 days or more.
During the fiscal years ended March 31, 2001, 2002 and 2003, there were no
significant additions to the allowance for credit losses resulting from
directives, advice or counsel from governmental or regulatory bodies.
Provision for credit losses for the fiscal year ended March 31, 2003 was
(Yen)455.6 billion, a decrease of (Yen)146.1 billion from (Yen)601.7 billion
for the fiscal year ended March 31, 2002. This decrease primarily reflected a
significant decrease in impaired loans, which resulted mainly from disposals of
nonperforming loans.
Provision for credit losses for the fiscal year ended March 31, 2002 was
(Yen)601.7 billion, a decrease of (Yen)195.4 billion from (Yen)797.1 billion
for the fiscal year ended March 31, 2001. This decrease primarily reflected the
fact that the provision for the fiscal year ended March 31, 2001 increased
primarily because of a significant rise in impaired loans, in particular
restructured loans.
Allocated allowance for specifically identified problem loans. The allocated
credit loss allowance for specifically identified problem loans represents the
allowance against impaired loans called for in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." Impaired loans primarily include
nonaccrual loans and restructured loans. We generally discontinue accrual of
interest income on loans when substantial doubt exists as to the full and
timely collection of either principal or interest, or when principal or
interest is contractually past due one month or more with respect to loans of
banking subsidiaries, including Bank of Tokyo-Mitsubishi and Mitsubishi Trust
Bank, and 90 days or more with respect to loans of certain foreign banking
subsidiaries. Loans are classified as restructured loans when we grant a
concession to the borrowers for economic or legal reasons related to the
borrowers' financial difficulties. Detailed reviews of impaired loans are
performed twice a year, at the end of June and December, shortly after annual
or semi-annual financial statements for most Japanese companies first become
available. During the three month periods beginning in June and December each
year and ending on the balance sheet dates, management reassesses borrowers'
ratings in response to events occurring during such intervening periods,
including bankruptcy, past due principal or interest, downgrading of external
credit rating, declining stock price, business restructuring and other events.
As part of an ongoing review process, our credit officers monitor changes in
all customers' creditworthiness during the periods between the detailed
80
reviews. These detailed reviews form an integral part of our overall control
process. An impaired loan is evaluated individually based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral if the
loan is collateral-dependent at balance-sheet date.
The following table summarizes nonaccrual and restructured loans, and accruing
loans that are contractually past due 90 days or more as to principal or
interest payments, at March 31, 2001, 2002 and 2003:
At March 31,
----------------------------------------------------------
2001 2002 2003
-------------- -------------- ----------------------------
Old Old Old New
classification classification classification classification
-------------- -------------- -------------- --------------
(in billions, except percentages)
Nonaccrual loans:
Domestic:
Manufacturing......................................... (Yen) 118.9 (Yen) 142.6 (Yen) 112.2 (Yen) 111.1
Construction.......................................... 202.5 213.5 149.9 149.9
Real estate........................................... 939.3 841.4 266.4 266.4
Services.............................................. 247.7 214.9 85.6 87.5
Wholesale and retail.................................. 230.0 251.0 239.0 224.5
Banks and other financial institutions................ 125.6 58.6 17.8 17.8
Communication and information services................ -- -- -- 14.1
Other industries...................................... 40.0 39.7 54.3 53.9
Consumer.............................................. 163.1 166.3 151.0 151.0
------------- ------------- ------------- -------------
Total domestic..................................... 2,067.1 1,928.0 1,076.2 1,076.2
Foreign................................................... 223.8 245.6 337.4 337.4
------------- ------------- ------------- -------------
Total nonaccrual loans............................. 2,290.9 2,173.6 1,413.6 1,413.6
------------- ------------- ------------- -------------
Restructured loans:
Domestic:
Manufacturing......................................... 276.2 303.0 218.4 215.6
Construction.......................................... 148.8 190.0 118.5 118.5
Real estate........................................... 471.9 422.5 264.9 264.9
Services.............................................. 232.0 248.6 146.2 164.0
Wholesale and retail.................................. 479.8 442.4 315.5 292.8
Banks and other financial institutions................ 93.8 55.4 19.9 19.9
Communication and information services................ -- -- -- 11.1
Other industries...................................... 61.9 83.5 43.0 39.6
Consumer.............................................. 91.2 113.8 86.4 86.4
------------- ------------- ------------- -------------
Total domestic..................................... 1,855.6 1,859.2 1,212.8 1,212.8
Foreign................................................... 98.9 109.2 106.2 106.2
------------- ------------- ------------- -------------
Total restructured loans........................... 1,954.5 1,968.4 1,319.0 1,319.0
------------- ------------- ------------- -------------
Accruing loans contractually past due 90 days or more:
Domestic.................................................. 24.0 20.3 17.5 17.5
Foreign................................................... 3.4 2.7 2.9 2.9
------------- ------------- ------------- -------------
Total accruing loans contractually past due
90 days or more.................................. 27.4 23.0 20.4 20.4
------------- ------------- ------------- -------------
Total.............................................. (Yen) 4,272.8 (Yen) 4,165.0 (Yen) 2,753.0 (Yen) 2,753.0
============= ============= ============= =============
Total loans........................................ (Yen)49,670.9 (Yen)50,229.7 (Yen)48,465.6 (Yen)48,465.6
============= ============= ============= =============
Nonaccrual and restructured loans, and accruing loans
contractually past due 90 days or more as a percentage
of total loans............................................. 8.60% 8.29% 5.68% 5.68%
============= ============= ============= =============
81
As previously mentioned, the Bank of Japan changed the industry segment
classification during the fiscal year ended March 31, 2003. For the purpose of
comparison, the information as of March 31, 2003 includes both loans
outstanding by type of industry based on the prior years' industry segment
classification and the new industry segment classification.
Total nonaccrual loans were (Yen)1,413.6 billion at March 31, 2003, a decrease
of (Yen)760.0 billion, or 35.0%, from (Yen)2,173.6 billion at March 31, 2002.
This decrease was attributable primarily to a decrease of (Yen)575.0 billion in
domestic nonaccrual loans to borrowers in the real estate industry and a
decrease of (Yen)129.3 billion in domestic nonaccrual loans to borrowers in the
services industry. These decreases principally reflected sales and charge-offs
of such loans during the fiscal year ended March 31, 2003.
Total restructured loans were (Yen)1,319.0 billion at March 31, 2003, a
decrease of (Yen)649.4 billion, or 33.0%, from (Yen)1,968.4 billion at March
31, 2002. Restructured loans to almost all industry segments decreased
substantially during the fiscal year ended March 31, 2003 and this decrease
reflected various factors, including some restructured loans being accounted as
nonaccrual loans due to downgrading, collections and renewals of loan
agreements without any concessions to customers.
The following table summarizes the balances of impaired loans and related
impairment allowances at March 31, 2001, 2002 and 2003, excluding
smaller-balance homogeneous loans:
At March 31,
------------------------------------------------------------------------------
2001 2002 2003
-------------------------- -------------------------- ------------------------
Loan Impairment Loan Impairment Loan Impairment
balance allowance balance allowance balance allowance
------------ ------------ ------------ ------------ ------------ ----------
(in billions)
Requiring an impairment allowance....... (Yen)3,650.9 (Yen)1,243.9 (Yen)3,556.6 (Yen)1,296.3 (Yen)2,408.5 (Yen)894.4
Not requiring an impairment
allowance............................. 551.4 -- 489.1 -- 211.2 --
------------ ------------ ------------ ------------ ------------ ----------
Total................................ (Yen)4,202.3 (Yen)1,243.9 (Yen)4,045.7 (Yen)1,296.3 (Yen)2,619.7 (Yen)894.4
============ ============ ============ ============ ============ ==========
Percentage of the allocated allowance to
total impaired loans.................. 29.6% 32.0% 34.1%
============ ============ ============
In addition to impaired loans presented in the above table, there were loans
held for sale that were impaired of (Yen)3.2 billion and (Yen)3.8 billion at
March 31, 2002 and 2003, respectively.
Impaired loans decreased (Yen)1,426.0 billion, or 35.2%, from (Yen)4,045.7
billion at March 31, 2002 to (Yen)2,619.7 billion at March 31, 2003, reflecting
decreases in nonaccrual loans and restructured loans as set forth above.
The percentage of the allocated allowance to total impaired loans at March 31,
2003 was 34.1%, an increase of 2.1 percentage points from 32.0% at March 31,
2002. The percentage of impairment allowance allocated to nonaccrual loans at
March 31, 2003 was 44.5%, a decrease of 1.6 percentage points from 46.1% at
March 31, 2002. The percentage of impairment allowance allocated to
restructured loans at March 31, 2003 was 22.3%, an increase of 6.3 percentage
points from 16.0% at March 31, 2002.
Based upon a review of borrowers' financial situation, from time to time each
of our banking subsidiaries grants various concessions to troubled borrowers at
the borrowers' requests, when it is difficult for the borrowers to make
payments in accordance with the original loan payment terms, including
reductions in the stated interest rates or the principal amounts of loans, and
extensions of the maturity date at stated interest rates lower than the current
market rates for loans with similar risks. According to the policies of each of
our banking subsidiaries, such modifications are made to mitigate the near-term
burden of the loans provided to the borrowers and better match the payment
terms with the borrower's expected future cash flows or, in cooperation with
other creditors,
82
to reduce the overall debt burden of the borrowers so that they may normalize
their operations, in each case to improve the likelihood that the loans will be
repaid on the revised terms. The nature and amount of the concessions depend on
the particulars of the financial condition of each borrower. In principle,
however, each of our banking subsidiaries does not modify the terms of loans to
borrowers that are considered "Likely to Become Bankrupt," "Virtually Bankrupt"
or "Bankrupt" because in these cases there is little likelihood that the
modification of loan terms would enhance recovery on the loans.
There were no significant changes in the regulatory climate that contributed to
the change in restructured loans for the fiscal years ended March 31, 2001,
2002 and 2003.
Allocated allowance for large groups of smaller-balance homogeneous loans. The
allocated credit loss allowance for large groups of smaller-balance homogeneous
loans is focused on loss experience for the pool rather than on an analysis of
individual loans. Large groups of smaller-balance homogeneous loans primarily
consist of first mortgage housing loans to individuals. The allowance for
groups of performing loans is based on historical loss over a period. In
determining the level of allowance for delinquent groups of loans, we classify
groups of homogeneous loans based on the risk rating and/or the number of
delinquencies. We determine the credit loss allowance for delinquent groups of
loans based on the probability of insolvency by the number of actual
delinquencies and actual loss experience. The loss experience is usually
determined by reviewing the historical loss rate. The allocated credit loss
allowance for large groups of smaller-balance homogeneous loans of (Yen)38.0
billion at March 31, 2003 was substantially unchanged from (Yen)38.3 billion at
March 31, 2002.
Allocated allowance for country risk exposure. The allocated credit loss
allowance for country risk exposure is based on an estimate of probable losses
relating to the exposure to countries that we identify as having a high degree
of transfer risk. We use a country risk grading system that assigns risk
ratings to individual countries. To determine the risk rating, we consider the
instability of foreign currency and difficulties regarding debt servicing.
Major countries with substantial loans outstanding that were in the high-risk
rating and subject to this allowance were Argentina, Indonesia and Columbia at
March 31, 2003. The allowance is determined based on the assessment of
individual country risks, taking into consideration various factors such as the
political and macroeconomic situation, debt repayment capability and the
secondary market price, if available, of debt obligations of the concerned
countries. It is generally based on a function of default probability and
expected recovery ratios, taking external credit ratings into account. The
allocated allowance for country risk exposure decreased (Yen)15.2 billion from
(Yen)28.3 billion at March 31, 2002 to (Yen)13.1 billion at March 31, 2003.
This decrease primarily resulted from a decrease in credit exposure to the
countries, including Argentina and Indonesia, which were subject to this
allowance.
The following is a summary of cross-border outstandings to counterparties in
major Asian countries at March 31, 2002 and 2003:
At March 31,
---------------------
2002 2003
---------- ----------
(in billions)
South Korea............... (Yen)218.9 (Yen)289.2
Singapore................. 255.7 278.0
Hong Kong................. 409.3 224.7
Thailand.................. 223.7 167.4
People's Republic of China 222.9 145.0
Malaysia.................. 156.1 116.2
Philippines............... 80.0 61.3
Indonesia................. 78.2 33.9
The economies of Asian countries, particularly the People's Republic of China,
have generally trended upward with relatively high economic growth rates in
recent years.
83
The extent of credit risk exposure from operations in East Asian countries will
vary from country to country, and borrower to borrower. When we make a loan to
a foreign affiliate of a Japanese corporation, we often obtain a letter or some
other form of commitment of support from the related Japanese corporation in
the event the foreign affiliate becomes insolvent. These types of commitments
may not be legally binding agreements. We do not consider non-legally binding
commitments as equivalent to guarantees and do not take them into account in
the determination of the allowance for credit losses. The amount of loans
guaranteed by legally binding agreements, which have been taken into
consideration in the determination of the allowance for credit losses
pertaining to the countries presented above, was (Yen)275.9 billion at March
31, 2002 and (Yen)352.1 billion at March 31, 2003.
The following is a summary of cross-border outstandings to counterparties in
major Latin American countries at March 31, 2002 and 2003:
At March 31,
---------------------
2002 2003
---------- ----------
(in billions)
Brazil... (Yen)145.4 (Yen)120.0
Mexico... 110.0 76.3
Argentina 74.4 34.1
The economies in Latin American countries generally continued to decline during
the fiscal year ended March 31, 2003. The significant economic turmoil and
deterioration in Argentina, including abandoning peso convertibility to the US
dollar, continued for the fiscal year ended March 31, 2003. As a result of
these events, the Argentina government defaulted on its obligations at the end
of calendar 2001 and during the fiscal year ended March 31, 2003 and local
companies faced serious difficulties in servicing their debt. Although the
Argentine government and other parties are working on a debt-restructuring
program, the recent failure of Argentina to meet all payment obligations on a
World Bank-guaranteed bond had repercussions in the international debt
securities market. In response to the economic environment in Argentina, we
reduced our credit exposure from cross-border outstandings of (Yen)74.4 billion
at March 31, 2002 to (Yen)34.1 billion at March 31, 2003. We provided an
allocated credit loss allowance for that country exposure of (Yen)18.1 billion
at March 31, 2002 and (Yen)7.2 billion at March 31, 2003.
Formula allowance for substandard, special mention and unclassified loans. The
formula allowance is calculated by applying loss factors to outstanding
substandard, special mention and unclassified loans. The evaluation of inherent
loss for these loans involves a high degree of uncertainty, subjectivity and
judgment because probable credit losses are not identified with specific
credits. In determining the formula allowance, we rely on a statistical
analysis that incorporates a percentage of total loans based on historical loss
experience.
Bank of Tokyo-Mitsubishi has accumulated sufficient data to estimate credit
losses using a methodology defined by the credit rating system. Estimated
losses inherent in the loan portfolio at the balance sheet date are calculated
by multiplying the default ratio by the irrecoverable ratio (determined as a
complement of the recovery ratio). The default ratio represents the
survivability of individual borrowers by each credit risk rating over the
preceding five-year period and is determined by credit risk rating, taking into
account the historical number of defaults of borrowers within each credit risk
rating divided by the total number of borrowers within that credit risk rating
existing at the beginning of the observation period. The recovery ratio is
determined by the historical experience of collections against loans in default.
Mitsubishi Trust Bank also computes the formula allowance based on a similar
methodology on the basis of historical loss experience except for a few
technical differences in methodology including shorter observation periods to
develop the ratio for formula allowance of each credit rating calculation and
the extent of grouping of loans in computing the allowance, reflecting the
smaller size of the loan portfolio.
84
UnionBanCal Corporation, our largest overseas subsidiary, calculates the
formula allowance by applying loss factors to outstanding loans and certain
unused commitments, in each case based on the internal risk grade of such
loans, leases and commitments. Changes in risk grades affect the amount of the
formula allowance. Loss factors are based on historical loss experience and may
be adjusted for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
developed in the following ways:
.. pass graded loss factors for commercial, financial and industrial loans, as
well as all problem graded loan loss factors, are derived from a migration
model that tracks historical losses over a period, which we believe
captures the inherent losses in our loan portfolio;
.. pass graded loss factors for commercial real estate loans and construction
loans are based on the average annual net charge-off rate over a period
reflective of a full economic cycle; and
.. pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment, home equity,
residential mortgage loans and automobile leases.
Though there are a few technical differences in methodology of allowance for
credit losses as mentioned above, we examine overall sufficiency of formula
allowance periodically by back-test comparison with the actual results
subsequent to the balance sheet date.
The formula allowance increased (Yen)46.9 billion from (Yen)344.4 billion as of
March 31, 2002 to (Yen)391.3 billion as of March 31, 2003. This increase was
due primarily to an increase in allowance for credit losses on loans to
borrowers classified as "Close Watch" for which higher percentages are applied.
Unallocated allowance. The unallocated allowance contains amounts that are
based on management's evaluation of conditions that are not directly measured
in the determination of the formula and specific allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. The conditions include the following, as our
management understood them to exist at the balance sheet date:
.. general economic and business conditions affecting our key lending areas;
.. credit quality trends, including trends in nonperforming loans expected to
result from existing conditions;
.. collateral values;
.. loan volumes and concentrations;
.. seasoning of the loan portfolio;
.. specific industry conditions within portfolio segments;
.. recent loss experience in particular segments of the portfolio;
.. duration of the current business cycle;
.. bank regulatory examination results; and
.. findings of our internal credit examiners.
To the extent that any of these conditions is evidenced by a specifically
identifiable problem credit as of the evaluation date, management's estimate of
the effect of the condition may be reflected as a specific allowance,
applicable to the specific credit. Where any of these conditions is not
evidenced by a specifically identifiable problem credit as of the evaluation
date, management's evaluation of the probable loss related to the condition is
first reflected in the formula allowance and then considered in the unallocated
allowance. The allowance for credit losses is based upon estimates of probable
losses inherent in the loan portfolio. Although we use
85
methodologies that are intended to reduce the differences between estimated and
actual losses, the actual losses can vary from the estimated amounts.
The unallocated allowance increased (Yen)0.7 billion from (Yen)22.6 billion at
March 31, 2002 to (Yen)23.3 billion at March 31, 2003. This increase primarily
reflected the continued weak and uncertain economies in Japan and overseas,
including the United States where we have heightened concerns for borrowers in
the power and airline sectors.
Allowance for Off-balance-sheet Credit Instruments
In addition to the allowance for credit losses on the loan portfolio, we
maintain an allowance for credit losses on off-balance-sheet credit
instruments, including commitments to extend credit, a variety of guarantees
and standby letters of credit. This allowance is included in other liabilities.
With regard to the specific allocated allowance for specifically identified
credit exposure and the allocated formula allowance, we apply the same
methodology that we use in determining the allowance for loan credit losses.
The allowance for credit losses on off-balance-sheet credit instruments was
(Yen)83.3 billion at March 31, 2003, a decrease of (Yen)19.3 billion, or 18.9%,
from (Yen)102.6 billion at March 31, 2002. This decrease primarily reflected
the fact that the allowance at March 31, 2002 included an allocated allowance
of (Yen)19.6 billion against loan commitments extended to WorldCom, Inc. We
fulfilled the commitments extended to WorldCom and recorded charge-offs for the
fiscal year ended March 31, 2003.
Investment Portfolio
Our investment securities are primarily comprised of marketable equity
securities and Japanese national government and Japanese government agency
bonds, which are classified as available-for-sale securities. We hold equity
securities of some of our customers for strategic purposes, in particular to
maintain long-term relationships with these customers. However, we are required
to reduce our shareholdings in accordance with the legislation forbidding banks
from holding stock, the aggregate value of which is in excess of our Tier I
Capital after September 30, 2004, a date which was later extended to after
September 30, 2006.
Investment securities increased (Yen)1.02 trillion, or 4.3%, from (Yen)23.68
trillion at March 31, 2002 to (Yen)24.70 trillion at March 31, 2003.
Available-for-sale securities increased (Yen)1.08 trillion from (Yen)23.28
trillion at March 31, 2002 to (Yen)24.36 trillion at March 31, 2003. This
increase was due primarily to an increase in Japanese government bonds and
foreign bonds, including U.S. Treasury bonds, partially offset by a decrease in
marketable equity securities. The increase in these bonds reflected the fact
that there were few viable investment options other than such investments due
to the extremely low rates of return in Japan.
Net unrealized gains on available for sale securities included in the
investment portfolio at March 31, 2002 and 2003 were (Yen)1.93 trillion and
(Yen)1.08 trillion, respectively. These net unrealized gains related
principally to marketable equity securities and the decrease in net unrealized
gains reflected a significant decline in market prices at March 31, 2003
compared to March 31, 2002, and realized gains through sales for the fiscal
year ended March 31, 2003.
Since March 31, 2003, the Japanese equities indices have risen, and accordingly
unrealized gains of our equity securities portfolio has improved. On the other
hand, since March 31, 2003, our bond portfolio value has experienced
substantial declines as market interest rates rose significantly in most recent
months. However, since stock and bond prices are inherently volatile, we are
not able to estimate the expected impacts of fluctuations in these market
prices on our future financial condition or results of operations.
During the fiscal year ending March 31, 2004, we plan to sell marketable equity
securities with an aggregate cost of approximately (Yen)750 billion under
Japanese GAAP. We intend to select investments to be sold based on market
86
conditions and on the outcome of negotiations with issuers of such securities
and, accordingly, our plan to sell such investments is subject to future
circumstances and reconsideration.
Cash and Due from Banks
Cash and due from banks at March 31, 2003 was (Yen)4.29 trillion, an increase
of (Yen)2.46 trillion from (Yen)1.83 trillion at March 31, 2002. Net cash
provided by operating activities was (Yen)0.78 trillion and net cash provided
by financing activities was (Yen)2.12 trillion, while net cash used in
investing activities was (Yen)0.40 trillion. Net cash provided by financing
activities primarily resulted from a net increase in deposits of (Yen)4.75
trillion, which was partially offset by a net decrease in debentures of
(Yen)1.63 trillion.
Interest-earning Deposits in Other Banks
Interest-earning deposits in other banks fluctuate significantly from day to
day depending upon the volatility of financial markets. Interest-earning
deposits in other banks at March 31, 2003 were (Yen)4.01 trillion, a decrease
of (Yen)0.32 trillion, or 7.4%, from (Yen)4.33 trillion at March 31, 2002. This
decrease primarily reflected the declining interest rate environment in
interbank markets.
Total Liabilities
At March 31, 2003, total liabilities were (Yen)93.98 trillion, an increase of
(Yen)2.24 trillion, or 2.4%, from (Yen)91.74 trillion at March 31, 2002. This
increase primarily reflected increases of (Yen)3.64 trillion in total deposits
and (Yen)1.11 trillion in trading account liabilities. This increase was
partially offset by a decrease of (Yen)1.63 trillion in debentures, and a
decrease in the yen values for liabilities denominated in the US dollar
resulting from the appreciation of the yen as mentioned below.
The appreciation of the yen against the US dollar and other foreign currencies
during the fiscal year ended March 31, 2003 decreased the yen values for
liabilities denominated in foreign currencies by approximately (Yen)1.96
trillion.
Deposits
Deposits are our primary source of funds. Total average deposits increased
(Yen)4.82 trillion from (Yen)60.07 trillion for the fiscal year ended March 31,
2002 to (Yen)64.89 trillion for the fiscal year ended March 31, 2003. This
increase reflects a (Yen)5.64 trillion increase in average domestic
interest-bearing deposits and a (Yen)0.81 trillion increase in average domestic
non-interest-bearing deposits, partially offset by a (Yen)2.02 trillion
decrease in average foreign interest-bearing deposits.
Domestic deposits increased (Yen)4.32 trillion from (Yen)51.92 trillion at
March 31, 2002 to (Yen)56.24 trillion at March 31, 2003, while foreign deposits
decreased (Yen)0.68 trillion from (Yen)11.74 trillion at March 31, 2002 to
(Yen)11.06 trillion at March 31, 2003.
Although the Deposit Insurance Corporation guarantees in full all current
deposits, ordinary deposits and other specified deposits until March 31, 2005,
under the Deposit Insurance Law amended in December 2002, the movements toward
the removal of blanket deposit insurance with the (Yen)10 million maximum have
led some depositors to transfer their deposits to more financially stable
banks. The increases in our average domestic deposits for the fiscal year ended
March 31, 2003 and in our domestic deposits at March 31, 2003 partly reflected
such movements.
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 liability management operations to match interest
87
rate risk exposure resulting from loans and other interest-earning assets and
for managing funding costs of various financial instruments at an appropriate
level as a whole, based on our forecast of future interest rate levels.
Short-term borrowings include call money and funds purchased, payables under
repurchase agreements, payables under lending transactions, due to trust
accounts and other short-term borrowings.
Total average balance of short-term borrowings decreased (Yen)1.02 trillion
from (Yen)14.01 trillion for the fiscal year ended March 31, 2002 to (Yen)12.99
trillion for the fiscal year ended March 31, 2003. This decrease was due
primarily to a decrease of (Yen)1.25 trillion in due to trust account.
Short-term borrowings decreased (Yen)1.26 billion from (Yen)14.84 trillion at
March 31, 2002 to (Yen)13.58 trillion at March 31, 2003. This decrease was due
primarily to a decrease of (Yen)0.88 trillion in due to trust account and a
decrease of 0.71 trillion in payables under securities lending transactions,
which was partially offset by an increase of (Yen)0.64 trillion in payables
under repurchase agreements.
The decrease in average due to trust account for the fiscal year ended March
31, 2003 and the decrease in due to trust account at March 31, 2003 primarily
reflected a decrease in principal of loan trusts that were placed with
Mitsubishi Trust Bank.
Long-term Debt
Long-term debt decreased (Yen)0.02 trillion from (Yen)5.18 trillion at March
31, 2002 to (Yen)5.16 trillion at March 31, 2003. During the fiscal year ended
March 31, 2003, we raised an aggregate of (Yen)1.07 trillion and repaid
(Yen)1.08 trillion of long-term debt (net decrease of (Yen)0.01 trillion). The
rest of the decrease was primarily attributable to foreign exchange rate
differences. We raised an aggregate of (Yen)0.33 trillion through the issuance
of subordinated debt and an aggregate of (Yen)0.74 trillion through the
issuance of unsubordinated debt.
Severance Indemnities and Pension Liabilities
We have defined benefit pension plans in Japan and overseas, which cover
substantially all of our employees. In Japan, we have Employees' Pension Fund
plans, which are defined benefit pension plans established under the Japanese
Welfare Pension Insurance Law. These plans are composed of (a) a substitutional
portion based on the pay-related part of the old-age pension benefits
prescribed by the Japanese Welfare Pension Insurance Law (similar to social
security benefits in the U.S.) and (b) a corporate portion based on a
contributory defined benefit pension arrangement established at the discretion
of each employer. An employer with an Employees' Pension Fund plan and its
employees are exempted from contributions to Japanese Pension Insurance that
would otherwise be required if they had not elected to fund the substitutional
portion of the benefit through an Employees' Pension Fund plan arrangement. The
Employees' Pension Fund plan, in turn, pays both the corporate and
substitutional pension benefits to retired beneficiaries out of its plan
assets. Benefits of the substitutional portion are based on a standard
remuneration schedule as determined by the Japanese Welfare Pension Insurance
Law, but the benefits of the corporate portion are based on a formula
determined by each employer's Employees' Pension Fund plan. In June 2001, the
Japanese Welfare Pension Insurance Law was amended to permit each employer's
Employees' Pension Fund plan to separate the substitutional portion from its
Employees' Pension Fund plan and transfer the obligation and related assets to
the government. The separation process occurs in several phases.
As mentioned in "--Operating Results--Recent Developments--Planned Transfer to
the Japanese Government of the Substitutional Portion of Employee Pension Fund
Liabilities," on August 1, 2003, the government approved Bank of
Tokyo-Mitsubishi's application to transfer the obligation to pay benefits for
future employee service related to the substitutional portion. Upon that
approval, Bank of Tokyo-Mitsubishi began making pension insurance payments to
the government and the government assumes the benefit obligations arising from
future employee services. However, in order to complete the entire separation
process, Bank of Tokyo-Mitsubishi must make another application for transfer to
the government of the remaining substitutional portion (that is, the
88
benefit obligation related to past services), but the timeline has not been
finalized. Upon completion of the separation, the remaining substitutional
obligation and related plan assets, determined pursuant to a government
formula, will be transferred to a government agency, and Bank of
Tokyo-Mitsubishi will be released from paying the remaining substitutional
portion of the benefits to its employees. After the separation, both Bank of
Tokyo-Mitsubishi and its employees will be required to make periodic
contributions to the Japanese Pension Insurance, and the Japanese government
will be responsible for all benefit payments earned under the Japanese Welfare
Pension Insurance Law.
The impact on our financial statements of the transfer, which will be accounted
for in accordance with EITF 03-2, discussed in "--Operating Results--Recently
Issued Accounting Pronouncements," is not known and cannot be reasonably
estimated until the completion of the transfer.
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 shown a historically high rollover rate among our corporate customers and
individual depositors. These deposit products provide us with a sizable source
of stable and low-cost funds. While approximately 60% of certificates of
deposits and time deposits mature within three months, we continuously monitor
relevant interest rate characteristics of these funds and utilize asset and
liability management techniques to manage the possible impact of the rollovers
on our net interest margin. Our average deposits, combined with average
shareholders' equity, funded 70.5% of our average total assets of (Yen)95.5
trillion during the fiscal year ended March 31, 2003. Most of the remaining
funding was 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 mainly three to five years' maturity. Liquidity may also be provided by
the sale of financial assets, including securities available for sale, trading
account securities and loans. Additional liquidity may be provided by the
maturity of loans.
In connection with our plan to sell down our strategic equity investments, we
have reduced our holdings of strategic equity investments, primarily through
sales in the market. We have also implemented alternative strategies that
facilitate the sale of our equity holdings, such as the transfers of some of
our equity holdings to an existing exchange traded fund, sales to the Banks'
Shareholdings Purchase Corporation and the Bank of Japan. Our access to
liquidity from sales of strategic equity investments and other equity
securities is dependent on market conditions at the time of each intended sale.
We do not, however, anticipate that we will be dependent on sales of equity
securities for liquidity.
Shareholders' Equity
The following table presents a summary of our shareholders' equity at March 31,
2002 and March 31, 2003:
At March 31,
--------------------------------
2002 2003
------------ ------------
(in billions, except percentages)
Preferred stock.......................................... (Yen) 222.1 (Yen) 222.1
Common stock............................................. 873.2 984.7
Capital surplus.......................................... 850.8 1,058.6
Retained earnings........................................ 248.1 405.5
Accumulated other changes in equity from nonowner sources 523.3 (114.8)
Less treasury stock, at cost............................. (91.0) (3.2)
------------ ------------
Total shareholders' equity............................ (Yen)2,626.5 (Yen)2,552.9
============ ============
Ratio of total shareholders' equity to total assets...... 2.78% 2.64%
89
Total shareholders' equity decreased (Yen)73.6 billion, or 2.8%, from
(Yen)2,626.5 billion at March 31, 2002 to (Yen)2,552.9 billion at March 31,
2003, and the ratio of total shareholders' equity to total assets also showed a
decrease of 0.14 percentage points from 2.78% at March 31, 2002 to 2.64% at
March 31, 2003. The decrease in total shareholders' equity for the fiscal year
ended March 31, 2003, and the resulting decrease in the ratio to total assets,
were principally attributable to a decrease of (Yen)507.4 billion in net
unrealized gains on investment securities available for sale, net of taxes,
recorded as part of accumulated other changes in equity from nonowner sources.
The decrease was partially offset by an increase of (Yen)157.4 billion in
retained earnings, resulting from net income for the fiscal year ended March
31, 2003 and an increase in common stock and capital surplus of (Yen)111.5
billion and of (Yen)207.8 billion, resulting primarily from the global offering
of our common stock.
Due to our holdings of a large amount of marketable Japanese equity securities
and the volatility of the equity markets in Japan, changes in the fair value of
marketable equity securities have significantly affected our shareholders'
equity. The following table presents information relating to the accumulated
net unrealized gains before tax effect in respect of marketable equity
securities at March 31, 2002 and 2003:
At March 31,
--------------------------------
2002 2003
------------ ----------
(in billions, except percentages)
Accumulated net unrealized gains................ (Yen)1,610.5 (Yen)725.8
Accumulated net unrealized gains to total assets 1.71% 0.75%
The decrease in accumulated net unrealized gains on marketable equity
securities at March 31, 2003 was mainly due to declines in Japanese stock
markets during the fiscal year then ended.
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 initiate mandatory actions by regulators that,
if undertaken, could have a direct material effect on our consolidated
financial statements.
We continually monitor our risk-adjusted capital ratio closely and manage our
operations in consideration of the capital ratio requirements. These ratios are
affected not only by fluctuations in the value of our assets, including our
marketable securities and deferred tax assets, but also by fluctuations in the
value of the yen against the US dollar and other foreign currencies and by
general price levels of Japanese equity securities. Moreover, additional credit
costs under Japanese GAAP negatively affect our capital ratios. Declines of
stock prices and real estate values in recent years, and high levels of credit
costs have negatively affected our capital ratios.
Capital Requirements for Banking Institutions in Japan
A Japanese banking institution is subject to the minimum capital adequacy
requirements both on a consolidated basis and a stand-alone basis, and is
required to maintain the minimum capital irrespective of whether it operates
independently or as a subsidiary under the control of another company. A bank
holding company is also subject to the minimum capital adequacy requirements on
a consolidated basis. Under the Financial Services Agency's guidelines, capital
is classified into three tiers, referred to as Tier I, Tier II and Tier III.
Our Tier I capital generally consists of shareholders' equity items, including
common stock, Class 1 and Class 2 non-cumulative preferred stocks, capital
surplus, minority interests and retained earnings (which includes deferred tax
assets), but recorded goodwill and other items, such as treasury stock, are
deducted from Tier I capital. Our Tier II generally consists of general
reserves for credit losses up to 1.25% of risk-weighted assets, 45% of the
unrealized gains on investment securities available for sale, 45% of the land
revaluation excess, the balance of perpetual subordinated debt and the balance
of subordinated term debt with an original maturity of over five years subject
to certain limitations, up to 50% of Tier I capital. Our Tier III capital
consists of short-term subordinated debt with an
90
original maturity of at least two years, subject to certain limitations. At
least 50% of the minimum capital ratio must be maintained in the form of Tier I
capital.
Under the Japanese regulatory capital requirements, our consolidated capital
components, including Tier I, Tier II and Tier III and risk-weighted assets are
calculated from our consolidated financial statements prepared under Japanese
GAAP. Also, each of the consolidated and stand-alone capital components of our
banking subsidiaries in Japan is calculated from consolidated and
non-consolidated financial statements prepared under Japanese GAAP,
respectively.
For a detailed discussion of the capital adequacy guidelines adopted by the
Financial Service Agency and proposed amendments, see "Item 4.B. Information on
the Company--Business Overview--Supervision and Regulation--Japan--Capital
adequacy."
Capital Requirements for Banking Institutions in the United States of America
In the United States, UnionBancal Corporation and its banking subsidiary, Union
Bank of California, N.A., our largest subsidiaries operating outside Japan, are
subject to various regulatory capital requirements administered by U.S. Federal
banking agencies, including minimum capital requirements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
they must meet specific capital guidelines that involve quantitative measures
of their assets, liabilities and certain off-balance-sheet items as calculated
under U.S. regulatory accounting practices. Their capital amounts and prompt
corrective action classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
For a detailed discussion of the capital adequacy guidelines applicable to our
U.S. bank subsidiaries, see "Item 4.B. Information on the Company--Business
Overview--Supervision and Regulation--United States--Bank Capital Requirements
and Capital Distributions."
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 Securities and Exchange Law
of Japan and related ordinance require securities firms to maintain a minimum
capital ratio of 120% calculated by as a percentage of capital accounts less
certain illiquid 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 detail the
definition of essential components of the capital ratios, including capital,
illiquid assets deductions, 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 regulatory reporting and a capital ratio
of 100% or less may lead to a suspension of all or part of the business for a
period of time and cancellation of a license. Overseas securities subsidiaries
are subject to the relevant regulatory capital requirements of the countries or
jurisdictions in which they operate. At March 31, 2003, Mitsubishi Securities's
capital accounts, less certain illiquid assets, of (Yen)243.1 billion were
444.2% of its total amounts equivalent to market, counterparty credit and
operations risks.
91
Mitsubishi Tokyo Financial Group Ratios
The table below presents our consolidated risk-based capital, risk-adjusted
assets and risk-based capital ratios at March 31, 2002 and 2003 (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 Financial Services Agency):
At March 31,
--------------------------------
Minimum capital
2002 2003 ratios required
------------- ------------- ---------------
(in billions, except percentages)
Capital components:
Tier I capital........... (Yen) 3,181.1 (Yen) 3,128.6
Tier II capital.......... 3,145.3 2,847.6
Tier III capital......... -- 30.0
Total risk-based capital. 6,220.5 5,968.4
Risk-weighted assets........ 60,335.8 55,049.6
Capital ratios:
Tier I capital........... 5.27% 5.68% 4.00%
Total risk-based capital. 10.30 10.84 8.00
Our total risk-based capital ratio increased 0.54 percentage points from 10.30%
at March 31, 2002 to 10.84% at March 31, 2003. This increase was due primarily
to a reduction in risk-weighted assets, which primarily resulted from, among
other things, sales and collections of nonperforming loans, sales of marketable
equity securities and the appreciation of the yen against the US dollar and
other currencies during the fiscal year ended March 31, 2003.
Capital Ratios of Our Subsidiary Banks in Japan
The table below presents the risk-based capital ratios of Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank at March 31, 2002 and 2003
(underlying figures are calculated in accordance with Japanese banking
regulations based on information derived from their consolidated and
non-consolidated financial statements prepared in accordance with Japanese
GAAP, as required by the Financial Services Agency):
At March 31,
------------ Minimum capital
2002 2003 ratios required
----- ----- ---------------
Consolidated capital ratios:
Bank of Tokyo-Mitsubishi
Tier I capital............... 5.25% 5.34% 4.00%
Total risk-based capital..... 10.29 10.43 8.00
Mitsubishi Trust Bank
Tier I capital............... 6.23 6.66 4.00
Total risk-based capital..... 10.83 12.00 8.00
Stand-alone capital ratios:
Bank of Tokyo-Mitsubishi
Tier I capital............... 5.19 5.12 4.00
Total risk-based capital..... 10.37 10.24 8.00
Mitsubishi Trust Bank
Tier I capital............... 6.25 6.16 4.00
Total risk-based capital..... 10.90 11.23 8.00
At March 31, 2003, management believes that our subsidiary banks are in
compliance with capital adequacy requirements.
92
Capital Ratios of Subsidiary Banks in the United States
The table below presents the risk-based capital ratios of UnionBanCal
Corporation and Union Bank of California, both subsidiaries of Bank of
Tokyo-Mitsubishi, at December 31, 2001 and 2002:
At December 31,
-------------- Minimum Ratios OCC requires
2001 2002 capital ratios required to be "well-capitalized"
----- ----- ----------------------- ------------------------
UnionBanCal Corporation:
Tier I capital (to risk-weighted
assets)............................ 11.47% 11.18% 4.00% --
Tier I capital (to quarterly average
assets)*........................... 10.53 9.75 4.00 --
Total capital (to risk-weighted
assets)............................ 13.35 12.93 8.00 --
Union Bank of California:
Tier I capital (to risk-weighted
assets)............................ 10.63% 10.37% 4.00% 6.00%
Tier I capital (to quarterly average
assets)*........................... 9.69 9.01 4.00 5.00
Total capital (to risk-weighted
assets)............................ 12.19 11.87 8.00 10.00
--------
* Excludes certain intangible assets.
Management believes that, as of December 31, 2002, UnionBanCal Corporation and
Union Bank of California met all capital adequacy requirements to which they
are subject.
As of December 31, 2002, Union Bank of California was categorized as
"well-capitalized" under the regulatory framework for prompt corrective action
in accordance with the notification from the OCC. To be categorized as "well
capitalized," Union Bank of California must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed Union Bank of California's category.
Transfer of Marketable Equity Securities Other than Sales in the Market
In addition to the sales in the stock markets, we transferred our marketable
equity securities to the Special Account of the Banks' Shareholdings Purchase
Corporation, to the exchange traded funds for the fiscal years ended March 31,
2002 and 2003 and also to the Bank of Japan for the fiscal year ended March 31,
2003.
Transfers to the Banks' Shareholdings Purchase Corporation
We transferred marketable equity securities to the Special Account of the
Banks' Shareholdings Purchase Corporation with aggregate market values of
(Yen)20.6 billion and (Yen)2.3 billion for the fiscal years ended March 31,
2002 and 2003, respectively. We transferred no marketable equity securities to
the General Account for the fiscal years ended March 31, 2002 and 2003. In
connection with the transfers to the Special Account, we recognized a (Yen)5.9
billion gain for the fiscal year ended March 31, 2002 and a (Yen)0.01 billion
loss for the fiscal year ended March 31, 2003. The carrying value of preferred
contributions with the General Account was (Yen)2.0 billion at March 31, 2002
and the carrying value of subordinated contributions with the Special Account
was (Yen)1.7 billion at March 31, 2002. For the fiscal year ended March 31,
2003, we made (Yen)0.1 billion of subordinated contributions in the Special
Account, and evaluated our preferred and subordinated contributions for
impairment and recognized an impairment loss of (Yen)3.8 billion. Consequently,
the carrying values of our preferred and subordinated
93
contributions were both zero at March 31, 2003. The principal amount of loans
receivable from the Special Account amounted to (Yen)35.6 billion and (Yen)79.7
billion at March 31, 2002 and 2003, respectively.
Transfers to Exchange Traded Fund
In addition to the transfers to the Banks' Shareholdings Purchase Corporation,
we transferred marketable equity securities that are listed on the First
Section of the Tokyo Stock Exchange to exchange traded funds for the fiscal
years ended March 31, 2002 and 2003. We concurrently entered into sales
agreements for marketable equity securities and purchase agreements for the
fund units of the exchange traded funds with a securities company. The exchange
traded funds established by the securities company's affiliate holds the equity
securities that we transferred. We transferred marketable equity securities to
the securities company with an aggregate cost of (Yen)326 billion for (Yen)392
billion for the fiscal year ended March 31, 2002 and with an aggregate cost of
(Yen)164 billion for (Yen)241 billion for the fiscal year ended March 31, 2003.
We concurrently purchased from the securities company the fund units at the
market prices of (Yen)528 billion for the fiscal year ended March 31, 2002 and
(Yen)362 billion for the fiscal year ended March 31, 2003. Since the stocks
that we sold accounted for a majority in the stocks of the exchange traded fund
at the time of sale and purchase, we accounted for our remaining holdings of
exchange traded fund units with market values of (Yen)91 billion at March 31,
2002 and (Yen)149 billion at March 31, 2003 as retained interests.
Transfers to the Bank of Japan
In response to the government plan to revive Japan's financial sector, the Bank
of Japan began purchasing marketable equity securities from banks, including
us, starting in November 2002. Each bank is permitted to sell to the Bank of
Japan its marketable equity securities up to the lower of (Yen)0.75 trillion or
the amount of aggregate market values less unrealized gains in excess of its
Tier I capital at the most recent balance sheet date. The maximum amount of
stocks purchased from banks by the Bank of Japan is (Yen)3 trillion. The Bank
of Japan will purchase marketable equity securities from banks until the end of
September 2004. Transfers of stocks to the Bank of Japan are sales transactions
without transferors' continuing involvements. We sold marketable equity
securities with an aggregate market value of (Yen)181.6 billion to the Bank of
Japan during the fiscal year ended March 31, 2003.
94
Off-balance-sheet Arrangements
In the normal course of our business, we engage in several types of
off-balance-sheet arrangements to meet the financing needs of our customers,
including various types of guarantees, commitments to extend credit and
commercial letters of credit. The following table summarizes these commitments
at March 31, 2003:
Amount of commitment expiration by period
--------------------------------------------------------
Less
than 1 1-3 4-5 Over 5
year years years years Total
----------- ---------- ---------- ---------- -----------
(in billions)
Guarantees:
Standby letters of credit and financial guarantees. (Yen) 1,655 (Yen) 532 (Yen) 399 (Yen)1,435 (Yen) 4,021
Performance guarantees............................. 742 236 62 52 1,092
Liquidity facilities............................... 1,361 -- -- -- 1,361
Derivative instruments............................. 23,839 2,587 1,954 674 29,054
Guarantees for the repayment of trust principal.... 531 1,307 379 194 2,411
Liabilities of trust accounts...................... 2,819 9 9 241 3,078
Others............................................. 2 -- -- -- 2
----------- ---------- ---------- ---------- -----------
Total Guarantees............................... 30,949 4,671 2,803 2,596 41,019
----------- ---------- ---------- ---------- -----------
Other off-balance-sheet instruments:
Commitments to extend credit....................... 21,252 2,345 1,709 285 25,591
Commercial letters of credit....................... 378 6 2 1 387
Others............................................. 716 5 1 38 760
----------- ---------- ---------- ---------- -----------
Total Other off-balance-sheet instruments...... 22,346 2,356 1,712 324 26,738
----------- ---------- ---------- ---------- -----------
Total.......................................... (Yen)53,295 (Yen)7,027 (Yen)4,515 (Yen)2,920 (Yen)67,757
=========== ========== ========== ========== ===========
See Note 24 to our consolidated financial statements for a description of the
nature of our guarantees and other off-balance-sheet instruments.
The contractual amounts of these guarantees and other off-balance-sheet
instruments represent the amounts at risk should the contracts be fully drawn
upon with a subsequent default by our customer and a decline in the value of
the underlying collateral. Because 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. At March
31, 2003, approximately 79% of these commitments will expire within one year,
17% from one year to five years and 4% after five years. Such risks are
monitored and managed as a part of our risk management system as set forth in
"Item 11. Quantitative and Qualitative Disclosures about Market Risk." In
addition, in accordance with SFAS No. 5, "Accounting for Contingencies," we
evaluate off-balance-sheet arrangement in the manner described in Note 1 to our
consolidated financial statements.
In the aggregate, the income generated from fees and commissions is one of our
most important sources of revenue. Such income amounted to (Yen)528.1 billion
during the fiscal year ended March 31, 2003, accounting for approximately 62%
of our non-interest income for the year. However, the fees generated
specifically from off-balance-sheet arrangements are not a dominant source of
our fees and commissions.
Some of our off-balance-sheet arrangements are related to the activities of
special purpose entities. Such arrangements include the following types of
special purpose entities.
Commercial Paper Conduits
As a part of our banking activities, we provide our customers with asset-backed
financing and facilitate their access to the asset-backed securities market,
including the commercial paper market. Typically, we encourage
95
our customers to transfer their financial assets, primarily receivables, to
special purpose entities which purchase the assets with funds obtained by
issuing commercial paper or, in some cases, borrowing from us. Because the cash
flows for the commercial paper is derived from the transferred assets, which
are the only assets of the special purpose entities, the commercial paper is
called asset-backed CP. Asset-backed CP typically mature within one to six
months, which approximates the terms of the underlying trade receivables.
We provide liquidity facilities to special purpose entities in amounts equal to
the outstanding balances of the asset-backed CP to ensure the redemption of the
asset-backed CP. The liquidity facilities are to be used in the event of any
disruption in the commercial paper market and/or to manage mismatches in cash
flows between the redemption of the asset-backed CP and the collection of the
trade receivables. We also act as a dealer for asset-backed CP programs and
distribute asset-backed CP primarily to institutional investors. We
occasionally hold asset-backed CP in our trading account portfolio before
marketing them to third party investors. The average holding period of an
asset-backed CP before distribution to third party investors is approximately
12 days.
The total assets of the special purpose entities to which we provide liquidity
facilities were (Yen)2,684.0 billion at March 31, 2002 and (Yen)3,182.3 billion
at March 31, 2003, and total liabilities of such entities were (Yen)2,682.9
billion at March 31, 2002 and (Yen)3,181.8 billion at March 31, 2003. Our
arrangement fees and commissions and commitment fees were (Yen)7.8 billion for
the fiscal year ended March 31, 2002 and (Yen)9.3 billion for the fiscal year
ended March 31, 2003. We provided liquidity and credit enhancements that were
available for the redemption of outstanding asset-backed CP in the amounts of
(Yen)1,906.4 billion at March 31, 2002 and (Yen)2,418.8 billion at March 31,
2003. We also held in our portfolio of trading securities asset-backed CP
issued by these entities in the amounts of (Yen)1,330.7 billion at March 31,
2002 and (Yen)1,058.1 billion at March 31, 2003.
Investment Funds
We hold equity or other forms of interest in various investment funds that
invest in equity and debt securities, including listed Japanese securities and
investment grade bonds and, to a limited extent, other types of assets. In
addition to such interests, we have commitments to provide additional
investments to these funds as stipulated in the applicable investment
agreements. Further, we occasionally sell assets such as nonperforming loans to
these funds, in particular the Corporate Recovery Fund and Nonperforming Loan
Fund, when we believe that such sale may improve our asset quality.
Corporate Recovery Fund. We have non-controlling equity interests in corporate
recovery funds whose principal business purpose is to generate profits by
investing in companies in the process of restructuring and then, typically,
selling these investments after the companies complete their restructurings.
Such funds purchase nonperforming loans from us or others and in some cases
acquire majority ownership in the borrower companies by means of a
debt-for-equity swap. Our non-voting interests in these funds amounted to
(Yen)0.4 billion at March 31, 2002 and (Yen)7.3 billion at March 31, 2003,
respectively. In addition, at March 31, 2003, we had commitments to make
additional contributions of up to (Yen)15.9 billion to these funds.
The total assets of the corporate recovery funds in which we have interests
were approximately (Yen)0.9 billion at March 31, 2002 and (Yen)21.1 billion at
March 31, 2003. We sold to corporate recovery funds nonperforming loans with an
aggregate net book value of (Yen)0.3 billion during the fiscal year ended March
31, 2002 and an aggregate net book value of (Yen)7.0 billion for (Yen)4.1
billion during the fiscal year ended March 31, 2003. For a detailed discussion
on additional provisions for credit losses associated with the sale of such
loans, see "--Financial Condition--Allowance for Credit Losses, Nonperforming
and Past Due Loans."
Nonperforming Loan Fund. Some third party investors utilize special purpose
entities to purchase nonperforming loans which they fully own and control. We
dispose of our nonperforming assets by means of several types of sales
transactions. In some cases, we retained post-sale involvements with these
entities where we provided backup lending on a limited recourse basis or
continued to act as a servicer. During the fiscal year ended March 31, 2003, we
did not have any material transactions with this type of entity. Remaining
exposures
96
to this fund, primarily consisting of limited recourse loans to this type of
entity, were also immaterial at March 31, 2003.
Venture Capital Fund. We own non-controlling equity interests in investment
funds managed by fund management companies who have discretionary investment
powers. These funds seek to invest in start-up companies or companies that are
rapidly developing. The aggregate assets of these funds were approximately
(Yen)709.5 billion at March 31, 2002 and (Yen)654.4 billion at March 31, 2003.
We made contributions to these funds amounting to (Yen)13.5 billion at March
31, 2002 and (Yen)20.6 billion at March 31, 2003. At March 31, 2003, in
accordance with the applicable limited partnership agreements, we have
commitments to make additional contributions of up to (Yen)31.3 billion when
required by the fund management companies.
Investment Trust. We purchase the share units of investment trusts as mid- to
long-term investments. These investment trusts are managed by investment
advisory companies with the objective of investing in a diversified portfolio
consisting of equity and debt securities, primarily shares of Japanese public
companies. At March 31, 2003, our share units in investment trusts amounted to
approximately (Yen)411.1 billion, which is equal to our maximum loss exposure.
Generally, we are not obligated to invest in or extend funds by purchasing
additional share units and our off-balance-sheet exposures or commitments
relating to this type of special purpose entity were not material.
Asset Backed Financing
We extend, by ourselves or with other lenders, non-recourse asset-backed loans
to special purpose entities which hold beneficial interests in real property to
finance projects including real estate development, natural resource
development and property management. Some of the special purpose entities are
real estate investment trusts, or REITs, that issue certificates of beneficial
interest which are traded on exchanges. These entities are created and managed
by the third parties, which in many cases provide equity to these entities.
Under the non-recourse loans, we are exposed to the risk of credit loss in the
event of default on the underlying assets or if the related projects generate
insufficient cash flow to service their debt. However, for most of these
financings, the equity provided by the project owners is sufficient to absorb
expected losses. Expected returns to the project owners are arranged to be the
most significant among all returns and thus, we generally do not consider
ourselves a primary beneficiary of this type of special purpose entity.
We manage the credit risks associated with the non-recourse loans by adhering
to our lending policies and by regularly monitoring the collectibility of the
loans. At March 31, 2003, our off-balance-sheet exposures and commitments
relating to this type of special purpose entity were not material.
Trusts
We offer a variety of trust products and also manage and administer a wide
range of trust arrangements. Such arrangements include securities investment
trusts, pension trusts and trusts used in the securitization of assets
originated by and transferred to third parties. In a typical trust arrangement,
we manage and administer the entrusted assets on behalf of our customers in an
agency, fiduciary and trust capacity. In general, we do not assume the risks
associated with the trust assets, which are borne by our customers. However, in
limited cases, we assume such risks through guarantees or protections as
provided in the applicable trust agreements. See Notes 14 and 24 to our
consolidated financial statements for further details.
Repackaged Instruments
We repackage financial instruments to create new financial instruments with
features that match our customers' needs and preferences. We purchase financial
instruments such as bonds and transfer them to special purpose entities which
then issue new instruments. The special purpose entities may enter into
derivative transactions including interest rate and currency swaps with us or
other financial institutions to modify the cash flows of the
97
underlying financial instruments. We underwrite and market to our customers the
new instruments issued by the special purpose entities. At March 31, 2003, we
did not have material off-balance-sheet exposures or commitments relating to
this type of special purpose entity.
See Note 25 to our consolidated financial statements for an analysis of the
future application of FIN No. 46 regarding these entities as of March 31, 2003.
Contractual Cash Obligations
The following table shows a summary of our contractual cash obligations at
March 31, 2003:
Payments due by period
----------------------------------------------------------------------------
Less than Over 5
1 year 1-3 years 4-5 years years Total
----------- ---------- ---------- ---------- -----------
(in billions)
Contractual cash obligations:
Time deposits............. (Yen)27,339 (Yen)6,318 (Yen)1,551 (Yen) 44 (Yen)35,252
Debentures................ 383 253 -- -- 636
Long-term debt............ 426 1,329 800 2,554 5,109
Capital lease obligations. 11 22 12 5 50
Operating leases.......... 22 39 21 33 115
----------- ---------- ---------- ---------- -----------
Total................. (Yen)28,181 (Yen)7,961 (Yen)2,384 (Yen)2,636 (Yen)41,162
=========== ========== ========== ========== ===========
Non-exchange Traded Contracts Accounted for at Fair Value
The use of non-exchange traded or over-the-counter contracts provides us with
the ability to adapt to the varied requirements of a wide customer base while
mitigating market risks. Non-exchange traded contracts are accounted for at
fair value, which is generally based on pricing models or quoted market prices
for instruments with similar characteristics. Gains or losses on non-exchange
traded contracts are included in "Trading account profits--net" in our
consolidated statements of operations. These contracts consist primarily of
crude oil commodity contracts. The following table summarizes the changes in
fair value for non-exchange traded contracts for the fiscal years ended March
31, 2002 and 2003:
Years ended March 31,
------------------------
2002 2003
----------- -----------
(in millions)
Net fair value of contracts outstandings at beginning of year......................... (Yen) (606) (Yen) (568)
Changes attributable to contracts realized or otherwise settled during the fiscal year 2,530 (3,599)
Fair value of new contracts when entered into during the fiscal year.................. (9) (8)
Other changes in fair value, principally revaluation at end of year................... (2,483) 14,450
----------- -----------
Net fair value of contracts outstandings at end of year............................... (Yen) (568) (Yen)10,275
=========== ===========
During the fiscal year ended March 31, 2002, the fair value of non-exchange
traded contracts decreased primarily due to a decline in the fair value of
crude oil commodity contracts indexed to the WTI crude oil price, reflecting
the continuous decline of crude oil prices over the year. During the fiscal
year ended March 31, 2003, the fair value of non-exchange traded contracts
increased primarily due to an increase in the fair value of oil commodity
contracts indexed to the WTI crude oil prices, reflecting political factors in
the Middle East and other factors.
98
The following table summarizes the maturities of non-exchange traded contracts
at March 31, 2003:
Net fair value of contracts--
unrealized gains
-------------------------------------------------
Prices based on models and
Prices actively quoted other valuation methods
---------------------- --------------------------
(in millions)
Maturity less than 1 year. (Yen)8,407 (Yen)195
Maturity less than 3 years 981 248
Maturity less than 5 years 124 81
Maturity 5 years or more.. 239 --
---------- --------
Total fair values...... (Yen)9,751 (Yen)524
========== ========
C. Research and Development, Patents and Licenses, etc.
Not applicable.
D. Trend Information
The information required by this item is set forth in Item 5.A. and 5.B. of
this Annual Report.
E. Off-balance-sheet Arrangements
See the discussion under "Item 5.B. Operating and Financial Review and
Prospects--Liquidity and Capital Resources."
F. Tabular Disclosure of Contractual Obligations
See the discussion under "Item 5.B. Operating and Financial Review and
Prospects--Liquidity and Capital Resources."
G. Safe Harbor
See the discussion under "Forward-Looking-Statements."
99
Item 6. Directors, Senior Management and Employees.
A. Directors and Senior Management
The following table sets forth the members of our board of directors and
executive officers as of July 4, 2003, together with their respective dates of
birth and positions.
Name Date of Birth Position at MTFG Previous or Current Position
---- ------------- ---------------- ----------------------------
Akio Utsumi September 7, 1942 Director, Chairman and President of Mitsubishi Trust Bank
Co-Chief Executive Officer
Shigemitsu Miki April 4, 1935 Director, President and Chief President of Bank of Tokyo-
Executive Officer Mitsubishi
Tatsunori Imagawa October 15, 1943 Senior Managing Director and Former Senior Managing Director
Chief Planning Officer of Bank of Tokyo-Mitsubishi
Tadahiko Fujino September 25, 1943 Senior Managing Director and Former Senior Managing Director
Chief Financial Officer of Mitsubishi Trust Bank
Asataro Miyake July 10, 1944 Senior Managing Director and Former Managing Director of
Chief Risk Management Bank of Tokyo-Mitsubishi
Officer
Nobuo Kuroyanagi December 18, 1941 Director Deputy President of Bank of
Tokyo-Mitsubishi
Haruya Uehara July 25, 1946 Director Deputy President of Mitsubishi
Trust Bank
Hajime Sugizaki April 3, 1945 Director Senior Managing Director of
Mitsubishi Trust Bank
Katsunori Nagayasu April 6, 1947 Director Managing Director of Bank of
Tokyo-Mitsubishi
Tetsuo Iwata April 30, 1948 Director Managing Director of Bank of
Tokyo-Mitsubishi
Ryotaro Kaneko June 20, 1941 Director President of Meiji Life Insurance
Company
Kunio Ishihara October 17, 1943 Director President of The Tokio Marine &
Fire Insurance Co., Ltd.
President of Millea Holdings, Inc.
The following is a brief biography of each of our directors and executive
officers:
Akio Utsumi has been a director and the chairman of the board of directors and
co-chief executive officer since April 2001. He has also been the president of
Mitsubishi Trust Bank since June 1999. He served as a deputy president of
Mitsubishi Trust Bank from June 1998 to June 1999 and as a senior managing
director of Mitsubishi Trust Bank from June 1995 to June 1998. Mr. Utsumi
served as a managing director of Mitsubishi Trust Bank from June 1993 to June
1995 and as a director of Mitsubishi Trust Bank from June 1991 to June 1993.
Shigemitsu Miki has been the chief executive officer since April 2002, prior to
which he was co-chief executive officer from April 2001 to April 2002. He has
been a director and the president since April 2001. He has also been the
president of Bank of Tokyo-Mitsubishi since June 2000. He served as a deputy
president of Bank of Tokyo-Mitsubishi from May 1997 to June 2000 and as a
senior managing director of Bank of Tokyo-Mitsubishi from June 1994 to May
1997. Mr. Miki served as a managing director of Bank of Tokyo-Mitsubishi from
June 1989 to June 1994 and as a director of Bank of Tokyo-Mitsubishi from June
1986 to June 1989.
Tatsunori Imagawa has been a senior managing director and chief planning
officer since May 2003. He served as a director from April 2001 to May 2003. He
served as a senior managing director of Bank of Tokyo-Mitsubishi from June 2002
to May 2003. He served as a managing director of Bank of Tokyo-Mitsubishi from
May 1997 to June 2002. Mr. Imagawa served as a director of Bank of
Tokyo-Mitsubishi from June 1993 to May 1997.
100
Tadahiko Fujino has been a senior managing director and chief financial officer
since April 2001. Before that, he served as a senior managing director of
Mitsubishi Trust Bank from April 2000 to April 2001. He served as a managing
director of Mitsubishi Trust Bank from June 1997 to April 2000. Mr. Fujino
served as a director of Mitsubishi Trust Bank from June 1994 to June 1997.
Asataro Miyake has been a senior managing director and chief risk management
officer since June 2003. Before that date, he served as a managing director of
Bank of Tokyo-Mitsubishi since June 1998, during which period he also served as
a board member from June 1998 to June 2001 and from June 2002 to June 2003. Mr.
Miyake served as a director of Bank of Tokyo-Mitsubishi from June 1995 to June
1998.
Nobuo Kuroyanagi has been a director since June 2003. He has also been a deputy
president of Bank of Tokyo-Mitsubishi since June 2002. He served as a managing
director of Bank of Tokyo-Mitsubishi from June 1996 to June 2002, during which
period he also served as a board member from June 1996 to June 2001. Mr.
Kuroyanagi served as a director of Bank of Tokyo-Mitsubishi from June 1992 to
June 1996.
Haruya Uehara has been a director since June 2003. He has also been a deputy
president of Mitsubishi Trust Bank since June 2002. He served as a senior
managing director of Mitsubishi Trust Bank from June 2001 to June 2002 and as a
managing director of Mitsubishi Trust Bank from June 1998 to June 2001.
Mr. Uehara served as a director of Mitsubishi Trust Bank from June 1996 to June
1998.
Hajime Sugizaki has been a director since April 2001. He has also been a senior
managing director of Mitsubishi Trust Bank since June 2001. He served as a
managing director of Mitsubishi Trust Bank from June 1999 to June 2001. Mr.
Sugizaki served as a director of Mitsubishi Trust Bank from June 1997 to June
1999.
Katsunori Nagayasu has been a director since April 2001. He has also been a
managing director of Bank of Tokyo-Mitsubishi since June 2002. He served as a
managing director of Nippon Trust Bank from June 2000 to September 2001. Nippon
Trust Bank subsequently merged into Mitsubishi Trust Bank, and he served as a
managing director of Mitsubishi Trust Bank from October 2001 to June 2002. Mr.
Nagayasu served as a director of Bank of Tokyo-Mitsubishi from June 1997 to
June 2000.
Tetsuo Iwata has been a director since June 2003. He has also been a managing
director of Bank of Tokyo-Mitsubishi since May 2003 and has served as a board
member since June 2003. Mr. Iwata served as a director of Bank of
Tokyo-Mitsubishi from June 1999 to May 2003, during which period he also served
as a board member from June 1999 to June 2001.
Ryotaro Kaneko has been a director since April 2001. He has also been the
president of Meiji Life Insurance Company since April 1998. Mr. Kaneko served
as a senior managing director of Meiji Life Insurance Company from April 1997
to April 1998 and served as a managing director of Meiji Life Insurance Company
from April 1994 to April 1997.
Kunio Ishihara has been a director since June 2002. He has also been the
president of The Tokio Marine & Fire Insurance Co., Ltd. since June 2001. He
has also been the president of Millea Holdings, Inc. since April 2002. Mr.
Ishihara served as a senior managing director of The Tokio Marine & Fire
Insurance Co., Ltd., from June 2000 to June 2001 and served as a managing
director of The Tokio Marine & Fire Insurance Co., Ltd., from June 1998 to June
2000.
101
The following table sets forth our corporate auditors as of July 4, 2003,
together with their respective dates of birth and positions.
Name Date of Birth Position at MTFG Previous or Current Position
---- ------------- ---------------- ----------------------------
Setsuo Uno April 29, 1942 Corporate Auditor Corporate Auditor of Bank of Tokyo-Mitsubishi
Yosuke Serizawa September 9, 1943 Corporate Auditor Corporate Auditor of Mitsubishi Trust Bank
Takuo Oi May 15, 1942 Corporate Auditor Corporate Auditor of Bank of Tokyo-Mitsubishi
Mitsuo Minami November 5, 1933 Corporate Auditor Corporate Auditor of Bank of Tokyo-Mitsubishi
Professor, Department of Business
Administration, Bunkyo Gakuin University
(Former Chairman & Chief Executive Officer of
Tohmatsu & Co.)
Takeo Imai January 29, 1942 Corporate Auditor Attorney-at-law
Setsuo Uno has been a corporate auditor since June 2003. He has also been a
corporate auditor of Bank of Tokyo-Mitsubishi since June 2003. He served as a
senior managing director from April 2001 to June 2003. He served as a managing
director of Bank of Tokyo-Mitsubishi from May 1997 to March 2001. Mr. Uno
served as a director of Bank of Tokyo-Mitsubishi from June 1992 to May 1997.
Yosuke Serizawa has been a corporate auditor since April 2001. He has also been
a corporate auditor of Mitsubishi Trust Bank since June 1999. Mr. Serizawa
served as a director of Mitsubishi Trust Bank from June 1995 to June 1999.
Takuo Oi has been a corporate auditor since June 2003. He has also been a
corporate auditor of Bank of Tokyo-Mitsubishi since June 2002. He served as a
managing director of Bank of Tokyo-Mitsubishi from May 1997 to June 2002,
during which period he also served as a board member of Bank of
Tokyo-Mitsubishi from May 1997 to June 2001. Mr. Oi served as a director of
Bank of Tokyo-Mitsubishi from June 1994 to May 1997.
Mitsuo Minami has been a corporate auditor since April 2001. He has also been a
corporate auditor of Bank of Tokyo-Mitsubishi since June 2001. He has also been
a professor of the department of Business Administration at Bunkyo Gakuin
University since April 1999. Mr. Minami served as chairman and chief executive
officer of Tohmatsu & Co. from May 1995 to May 1997.
Takeo Imai has been a corporate auditor since April 2001. He has been a partner
of the law firm Miyake, Imai & Ikeda since January 1972.
The board of directors, executive officers and corporate auditors may be
contacted through our headquarters at Mitsubishi Tokyo Financial Group, Inc.,
4-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-6326, Japan.
All directors and corporate auditors were elected at a general meeting of
shareholders. The regular term of office of a director is two years and of a
corporate auditor is four years from the date of assumption of office. However,
the term of office of a corporate auditor elected before the general meeting of
shareholders held on June 2003 is three years. Directors and corporate auditors
may serve their terms until the close of the annual general meeting of
shareholders held in the last year of their terms. Directors and corporate
auditors may serve any number of consecutive terms. There is no regular term of
office for corporate officers.
B. Compensation
An aggregate of (Yen)345 million was paid by Mitsubishi Tokyo Financial Group,
Inc. and its subsidiaries as remuneration, including bonuses but excluding
retirement allowances, during the year ended March 31, 2003 to our directors
and corporate auditors.
102
In accordance with customary Japanese business practice, when a director or
corporate auditor retires, a proposal to pay a retirement allowance is
submitted at the annual ordinary general meeting of shareholders for approval.
After the shareholders' approval is obtained, the retirement allowance for a
director or corporate auditor is fixed by the board of directors or by
consultation among the corporate auditors in accordance with our internal
regulations and practice and generally reflects the position of the director or
corporate auditor at the time of retirement, the length of his service as a
director or corporate auditor and his contribution to our performance.
Mitsubishi Tokyo Financial Group, Inc. does not set aside reserves for any such
retirement payments for directors and corporate auditors. During the fiscal
year ended March 31, 2003, an aggregate of (Yen)18 million was paid by us and
our subsidiaries as an allowance to directors of Mitsubishi Tokyo Financial
Group, Inc. who have retired.
Mitsubishi Tokyo Financial Group, Inc. has not implemented a stock option plan.
Two of Mitsubishi Tokyo Financial Group, Inc.'s subsidiaries, Mitsubishi
Securities and UNBC, have several stock-based compensation plans. Mitsubishi
Tokyo Financial Group, Inc. does not have a pension foundation, although each
of Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank does have a pension
foundation.
As of September 10, 2003, our directors and corporate auditors held the
following numbers of shares of our common stock:
Number of Shares
Directors Registered
--------- ----------------
Akio Utsumi....... 11
Shigemitsu Miki... 43
Tatsunori Imagawa. 22
Tadahiko Fujino... 12
Asataro Miyake.... 15
Nobuo Kuroyanagi.. 24
Haruya Uehara..... 11
Hajime Sugizaki... 10
Katsunori Nagayasu 3
Tetsuo Iwata...... 8
Ryotaro Kaneko.... --
Kunio Ishihara.... --
Number of Shares
Corporate Auditors Registered
------------------ ----------------
Setsuo Uno........ 23
Yosuke Serizawa... 10
Takuo Oi.......... 22
Mitsuo Minami..... 10
Takeo Imai........ --
C. Board Practices
Our Articles of Incorporation provide for a board of directors of not more than
fifteen members and not more than six corporate auditors. Our corporate
officers are responsible for executing our business operations, and our
directors oversee these officers and set our fundamental strategies.
We currently have twelve directors. Our board of directors has ultimate
responsibility for the administration of our affairs. Our board of directors is
empowered to appoint by resolution representative directors from among the
directors who may represent us severally. Our board of directors may also
appoint from their members by resolution a chairman, a president, deputy
presidents, senior managing directors and managing directors. Senior managing
directors and the managing directors assist the president and deputy
presidents, if any, in the management of our day-to-day business. All of our
executive officers are currently directors.
103
Under the Commercial Code of Japan, directors must refrain from engaging in any
business that is in competition with us unless approved by a board resolution,
and no director may vote on a proposal, arrangement or contract in which that
director is deemed to be materially interested.
Neither the Commercial Code nor our Articles of Incorporation contain special
provisions as to the borrowing power exercisable by a director, to the
retirement age of our directors and corporate auditors or to a requirement of
our directors and corporate auditors to hold any shares of our capital stock.
The Commercial Code requires a resolution of the board of directors for a
company to acquire or dispose of material assets, to borrow substantial amounts
of money, to employ or discharge important employees, such as executive
officers, and to establish, change or abolish material corporate organizations,
such as a branch office.
We currently have five corporate auditors, including two external corporate
auditors. Our corporate auditors, who are not required to be certified public
accountants, have various statutory duties, including principally:
.. the examination of the financial statements, business reports, proposals
and other documents which our board of directors prepares and submits to a
general meeting of shareholders;
.. the examination of our directors' administration of our affairs; and
.. the preparation and submission of a report on their examination to a
general meeting of shareholders.
Our corporate auditors are obliged to attend meetings of our board of
directors. They may make statements at the meetings if they deem necessary,
although they are not entitled to vote at the meetings. The Law Concerning
Special Exceptions from the Commercial Code Relating to Audit, etc. of
Joint-Stock Corporations provides that there may not be less than three
corporate auditors. One or more corporate auditors, who are required to serve
on a full-time basis, must be designated by the corporate auditors from among
their members. At least one of the corporate auditors must be a person who has
not been an employee or a director of Mitsubishi Tokyo Financial Group, Inc. or
any of its subsidiaries within the previous five years. After the close of the
annual ordinary general meeting of shareholders to be held in June 2006, at
least half of our corporate auditors must be "external corporate auditors" who
have not been an employee or a director of Mitsubishi Tokyo Financial Group,
Inc. or any of its subsidiaries within the previous five years.
For additional information on our board practices, see "--Directors and Senior
Management."
D. Employees
As of March 31, 2003 we had approximately 44,500 employees. In addition, as of
March 31, 2003, we had approximately 13,000 part-time and temporary employees.
During the fiscal year ended March 31, 2003, our total employees increased by
approximately 1,500 primarily as a result of the addition of Mitsubishi
Securities and other companies as consolidated subsidiaries. The following
tables show the percentages of our employees in our different business units
and geographically, as of March 31, 2003. Most of our employees are members of
our employee's union, which negotiates on behalf of employees in relation to
remuneration and working conditions.
Business unit
-------------
Bank of Tokyo-Mitsubishi:
Retail Banking........... 18%
Commercial Banking....... 7%
Global Corporate Banking. 13%
Investment Banking....... 13%
UnionBanCal Corporation.. 22%
Operation Services....... 4%
Treasury................. 2%
Other units.............. 6%
104
Business unit
-------------
Mitsubishi Trust Bank:
Trust-Banking................... 5%
Trust Assets.................... 2%
Real Estate..................... 1%
Global Markets.................. 1%
Administration and subsidiaries. 7%
---
100%
Location
--------
Bank of Tokyo-Mitsubishi:
Japan........................ 52%
United States................ 23%
Europe....................... 2%
Asia/Oceania excluding Japan. 6%
Other areas.................. 1%
Mitsubishi Trust Bank:
Japan........................ 15%
United States................ 0%
Europe....................... 0%
Asia/Oceania excluding Japan. 0%
---
100%
E. Share Ownership
The information required by this item is set forth in "--Compensation."
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders
Common Stock
As of March 31, 2003, we had 216,531 registered shareholders of common stock.
The ten largest holders of our common stock appearing on the register of
shareholders as of March 31, 2003, and the number and the percentage of such
shares held by them, were as follows:
Number of shares Percentage of total
Name held shares in issue
---- ---------------- -------------------
Japan Trustee Services Bank, Ltd.(1)......... 340,747 5.46%
Master Trust Bank of Japan, Ltd.(1).......... 261,592 4.19
Meiji Life Insurance Company(2).............. 175,000 2.80
Nippon Life Insurance Company................ 145,380 2.33
Hero & Co.(3)................................ 130,086 2.08
Mitsubishi Heavy Industries, Ltd.(4)......... 118,740 1.90
The Tokio Marine and Fire Insurance Co., Ltd. 114,693 1.84
The Dai-ichi Mutual Life Insurance Company... 88,036 1.41
UFJ Trust Bank Limited(1).................... 82,205 1.31
Mitsubishi Electric Corporation.............. 62,159 0.99
--------- -----
Total..................................... 1,518,638 24.36
========= =====
--------
(1) Includes the shares held in trust accounts, which do not disclose the names
of beneficiaries.
105
(2) These shares are those held in a pension trust account with Master Trust
Bank of Japan, Ltd. for the benefit of retirement plans with voting rights
retained by Meiji Life Insurance Company.
(3) An owner of record for American Depositary Shares of the company.
(4) These shares are those held in a pension trust account with Master Trust
Bank of Japan, Ltd. for the benefit of retirement plans with voting rights
retained by Mitsubishi Heavy Industries, Ltd.
At March 31, 2003, 225.77 shares, representing less than 0.01% of the
outstanding common stock, were held by our directors and corporate auditors.
At March 31, 2003, 315,810.16 shares, representing 5.06% of our outstanding
common stock, were owned by 169 U.S. shareholders of record who are residents
of the United States (and a non-resident of Japan), one of whom is the ADR
depository's nominee holding 130,086.00 shares, or 2.08% of our outstanding
common stock.
In March 2003, Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank sold an
aggregate of 155,027 shares of our common stock. See "Item 5.A. Operating and
Financial Review and Prospects--Operating Results--Recent Developments--Global
Offering of Our Common Stock."
Preferred Shares
The ten largest holders of our class 1 preferred shares, which are non-voting,
appearing on the register of shareholders as of March 31, 2003, and the number
and the percentage of such shares held by them, were as follows:
Number of shares Percentage of total
Name held shares in issue
---- ---------------- -------------------
The Tokio Marine & Fire Insurance Co., Ltd. 16,700 20.51%
Mitsubishi Corporation..................... 16,700 20.51
Meiji Life Insurance Company............... 16,700 20.51
Kirin Brewery Co., Ltd..................... 10,000 12.28
Asahi Glass Co., Ltd....................... 3,400 4.17
Diamond Lease Company Limited.............. 3,400 4.17
Tokyu Corporation.......................... 3,400 4.17
Honda Motor Co., Ltd....................... 3,400 4.17
Mitsubishi Chemical Corporation............ 2,000 2.45
Mitsubishi Electric Corporation............ 1,700 2.08
------ -----
Total................................... 77,400 95.08%
====== =====
The holders of our class 2 preferred shares, which are non-voting, appearing on
the register of shareholders as of March 31, 2003, and the number and the
percentage of such shares held by them, were as follows:
Number of shares Percentage of total
Name held shares in issue
---- ---------------- -------------------
Meiji Life Insurance Company...................... 35,000 35.00%
The Tokio Marine & Fire Insurance Company, Limited 25,000 25.00
Mitsubishi Corporation............................ 25,000 25.00
Mitsubishi Estate Company, Limited................ 5,000 5.00
Asahi Glass Co., Ltd.............................. 2,500 2.50
Kirin Brewery Co., Ltd............................ 2,500 2.50
Kinki Nippon Railway Co., Ltd..................... 2,500 2.50
Tokyu Corporation................................. 2,500 2.50
------- ------
Total.......................................... 100,000 100.00%
======= ======
106
B. Related Party Transactions
We and our subsidiary banks had, and expect to have in the future, banking
transactions and other transactions in the ordinary course of business with our
related parties. Although for the fiscal year ended March 31, 2003, such
transactions included, but were not limited to, call money, loans, electronic
data processing, leases and management of properties, those transactions were
immaterial and were made at prevailing market rates, terms and conditions and
do not involve more than the normal risk of collectibility or present other
unfavorable features.
None of our directors or corporate auditors, and none of the close members of
their respective families, has had any transactions or has any presently
proposed transactions that are material or any transactions that are unusual in
their nature or conditions, involving goods, services or tangible or intangible
assets, to which we were, are or will be a party.
No loans have been made to our directors or corporate auditors other than in
the normal course of business, on normal commercial terms and conditions. In
addition, since July 2002, no loans have been made to our directors or
corporate auditors other than as permitted under Section 402 of the
Sarbanes-Oxley Act of 2002.
No family relationship exists among any of our directors or corporate auditors.
No arrangement or understanding exists between any of our directors or
corporate auditors and any other person pursuant to which any director or
corporate auditor was elected to their position at Mitsubishi Tokyo Financial
Group, Inc.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information.
A. Consolidated Statements and Other Financial Information
The information required by this item is set forth in our consolidated
financial statements starting on page F-1 of this Annual Report and in
"Selected Statistical Data" starting on page A-1 of this Annual Report.
Legal Proceedings
Our bank subsidiaries, Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank, are
involved in legal proceedings with the Tokyo Metropolitan Government and the
Osaka Prefectural Government regarding recent local taxes enacted by those
governments. For a more detailed discussion of these legal proceedings, see
"Item 5.A. Operating and Financial Review and Prospects--Operating
Results--Recent Developments--Legal Proceedings for Local Taxes" and the notes
to our consolidated financial statements.
Distributions
Our board of directors submits a recommendation for an annual dividend for our
shareholders' approval at the ordinary general meeting of shareholders
customarily held in June of each year. The annual dividend is usually
distributed immediately following shareholders' approval to holders of record
at the end of the preceding fiscal year. In addition to annual dividends, we
may make cash distributions by way of interim dividends to shareholders of
record as of September 30 of each year from our retained earnings as of the end
of the preceding fiscal year by resolution of our board of directors. On July
27, 2003, we paid an annual dividend of (Yen)4,000 per share of common stock
for the fiscal year ended March 31, 2003. Our board of directors elected not to
pay any interim dividends to shareholders of record of our common stock as of
September 30, 2002 in light of the volatile financial and economic conditions
prevailing in the Japanese financial sector.
107
Under the Japanese foreign exchange regulations currently in effect, dividends
paid on shares held by non-residents of Japan may be converted into any foreign
currency and repatriated abroad. Under the terms of the deposit agreement
pursuant to which ADSs are issued, the depositary is required, to the extent
that in its judgment it can convert Japanese yen on a reasonable basis into US
dollars and transfer the resulting US dollars to the United States, to convert
all cash dividends that it receives in respect of deposited shares into US
dollars and to distribute the amount received, after deduction of any
applicable withholding taxes, to the holders of ADSs. See "Item 10.D.
Additional Information--Exchange Controls--Foreign Exchange and Foreign Trade
Law."
B. Significant Changes
No significant changes have occurred since the date of our consolidated
financial statements included in this Annual Report.
Item 9. The Offer and Listing.
A. Offer and Listing Details
Market Price Information
The following table shows, for the periods indicated, the reported high and low
sale prices for shares of our common stock on the Tokyo Stock Exchange and of
the ADSs on the New York Stock Exchange. The table also includes high and low
market price quotations from the Tokyo Stock Exchange translated in each case
into US dollars per ADS at the Federal Reserve Bank of New York's noon buying
rate on the relevant date.
Translated into US Price per ADS on the
Price per share on the TSE dollars per ADS(1) NYSE
------------------------------ ------------------ --------------------
High Low High Low High Low
-------------- ------------ ------ ----- ------ -----
(yen) (US$) (US$)
Fiscal year ended March 31, 2002
First quarter.................... (Yen)1,350,000(2) (Yen)970,000 $11.13(3) $7.87 $11.27 $8.00
Second quarter................... 1,140,000 886,000 9.84 7.13 9.50 7.26
Third quarter.................... 1,020,000 754,000 8.45 5.97 8.35 5.95
Fourth quarter................... 948,000 688,000 7.40 5.15 7.40 5.15
Fiscal year ended March 31, 2003
First quarter.................... 1,060,000 770,000 8.52 6.43 8.42 5.91
Second quarter................... 925,000 700,000 7.80 5.93 7.64 5.98
Third quarter.................... 901,000 620,000 7.31 5.13 7.34 5.08
Fourth quarter................... 737,000 438,000 6.25(4) 3.74 6.20 3.65
Fiscal year ending March 31, 2004
March............................ 515,000 438,000 4.39 3.74 4.34 3.65
April............................ 456,000 351,000 3.86 2.92 3.82 2.98
May.............................. 466,000 389,000 4.00 3.27 4.05 3.40
June............................. 548,000 459,000 4.57 3.87 4.63 3.94
July............................. 610,000 524,000 5.16 4.39 5.28 4.39
August........................... 707,000 475,000 6.02 3.99 5.99 4.03
September (through September 18). 747,000 642,000 6.44 5.51 6.50 5.59
--------
(1) US dollar amounts have been translated, for your convenience, from yen at
the Federal Reserve Bank of New York's noon-buying rate as of the relevant
high and low market quotation dates.
(2) (Yen)1,350,000 is the high market price quotation for both May 2 and May 7,
2001.
(3) The US dollar amount has been translated, for your convenience, from yen at
the rate of (Yen)121.34 = $1.00 which is the Federal Reserve Bank of New
York's noon-buying rate as of May 7, 2001.
108
(4) There was no Federal Reserve Bank of New York noon-buying rate available as
of the relevant high market quotation date of January 20, due to a holiday.
For your convenience, the US dollar amount has been translated from yen at
the rate of (Yen)117.88 = $1.00 which is the noon-buying rate as of January
17, 2003.
B. Plan of Distribution
Not applicable.
C. Markets
The primary market for our common stock is the Tokyo Stock Exchange, or the
TSE. Our common stock is also listed on the Osaka Securities Exchange in Japan
and on the Official List of the UK Listing Authority and traded on the market
for listed securities on the London Stock Exchange in the United Kingdom. ADSs,
each representing one one-thousandth of a share of common stock, are quoted on
the New York Stock Exchange, or NYSE, under the symbol, "MTF."
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Our Corporate Purpose
Article 2 of our Articles of Incorporation provides that our corporate purpose
is to carry on the following businesses:
.. administration and management of banks, trust banks, specialized securities
companies, insurance companies or other companies which we may own as our
subsidiaries under the Japanese Banking Law; and
.. any other business incidental to, or relating to any of, the businesses
mentioned in the preceding clause.
Board of Directors
For discussion of the provisions of our Articles of Incorporation as they apply
to our directors, see "Item 6.C. Directors, Senior Management and
Employees--Board Practices."
Common Stock
We summarize below the material provisions of our Articles of Incorporation,
our share handling regulations and the Commercial Code of Japan (Law No. 48 of
1899) as they relate to joint stock companies, also known as
109
kabushiki kaisha. Because it is a summary, this discussion should be read
together with our Articles of Incorporation and share handling regulations,
which have been filed as exhibits to this Annual Report.
General
A joint stock company is a legal entity incorporated under the Commercial Code.
The investment and rights of the shareholders of a joint stock company are
represented by shares of stock in the company and shareholders' liability is
limited to the amount of the subscription for the shares.
Our authorized common share capital is 22,000,000 shares of common stock with
no par value. As of March 31, 2003, a total of 6,232,161.72 shares of common
stock (including 3,226 shares of common stock held by Mitsubishi Tokyo
Financial Group, Inc. and its consolidated subsidiaries as treasury stock) were
issued. Each of the shares issued and outstanding is fully paid and
non-assessable. As of March 31, 2003, we were authorized to issue 421,400
shares of preferred stock, including 81,400 class 1 preferred shares, 100,000
class 2 preferred shares, 120,000 class 3 preferred shares and 120,000 class 4
preferred shares. As of March 31, 2003, we had 81,400 class 1 preferred shares,
100,000 class 2 preferred shares and no class 3 or class 4 preferred shares
issued and outstanding. As of September 10, 2003, 37,500 shares of class 2
preferred stock were converted into 107,619.71 shares of common stock.
We may issue shares from our authorized but unissued share capital following a
resolution to that effect by our board of directors. An increase in our
authorized share capital is only possible by amendment of our Articles of
Incorporation, which generally requires shareholders' approval.
Under the Commercial Code, shares must be registered and are transferable by
delivery of share certificates. In order to assert shareholders' rights against
us, a shareholder must have its name and address registered on our register of
shareholders, in accordance with our share handling regulations. The registered
holder of deposited shares underlying the ADSs is the depositary for the ADSs,
or its nominee. Accordingly, holders of ADSs will not be able to assert
shareholders' rights other than as provided in the agreement between us, the
depositary and the holders of the ADSs.
A holder of shares may choose, at its discretion, to participate in the central
clearing system for share certificates under the Law Concerning Central
Clearing of Share Certificates and Other Securities of Japan. Participating
shareholders must deposit certificates representing the shares to be included
in this clearing system with the Japan Securities Depository Center, Inc. If a
holder is not a participating institution in the Japan Securities Depositary
Center, it must participate through a participating institution, such as a
securities company or bank having a clearing account with the Japan Securities
Depositary Center. All shares deposited with the Japan Securities Depositary
Center will be registered in the name of the Japan Securities Depositary Center
on our register of shareholders. Each participating shareholder will in turn be
registered on our register of beneficial shareholders and be treated in the
same way as shareholders registered on our register of shareholders. Delivery
of share certificates is not required to transfer deposited shares. Entry of
the share transfer in the books maintained by the Japan Securities Depositary
Center for participating institutions, or in the books maintained by a
participating institution for its customers, has the same effect as delivery of
share certificates. This central clearing system is intended to reduce
paperwork required in connection with transfers of shares. Beneficial owners
may at any time withdraw their shares from deposit and receive share
certificates.
Dividends
Dividends are distributed in proportion to the number of shares owned by each
shareholder on the record date for the dividend. Dividends for each financial
period may be distributed following shareholders' approval at an ordinary
general meeting of shareholders.
Payment of dividends on common stock is subject to the preferential dividend
rights of holders of preferred stock.
110
Under our Articles of Incorporation, our financial accounts are closed on March
31 of each year, and dividends, if any, are paid to shareholders of record at
March 31 following shareholders' approval at an ordinary general meeting of
shareholders. In addition to year-end dividends, our board of directors may by
resolution declare an interim cash dividend to shareholders of record as of
September 30 of each year. Under the Commercial Code and the Banking Law, we
may distribute annual or interim dividends only if:
.. we have set aside in our legal reserve an amount equal to at least
one-tenth of the annual dividend and any other amount paid by us as an
appropriation of retained earnings or of any interim dividend, as the case
may be; or
.. the sum of the amount in our legal reserve and additional paid-in capital
is at least one-quarter of our stated capital.
We may distribute annual or interim dividends out of the excess of our net
assets, on a non-consolidated basis, over the aggregate of:
(1) our stated capital;
(2) our additional paid-in capital;
(3) our accumulated legal reserve;
(4) the legal reserve to be set aside in respect of the dividend concerned and
any other proposed payment by way of appropriation of retained earnings;
(5) the excess, if any, of unamortized expenses incurred in preparation for the
commencement of business and in connection with research and development
over the aggregate of the amounts referred to in (2), (3) and (4) above;
(6) subscription money for new shares, or security money to be applied to such
subscription money, if any, recorded on our balance sheet;
(7) if assets are stated at market value on our balance sheet, the excess, if
any, of the aggregate market value over the aggregate acquisition cost of
those assets; and
(8) the balance, if any, recorded on our balance sheet as a result of
reevaluating land which we own for business purposes.
In the case of interim dividends, if we decrease our stated capital or our
legal reserve after the preceding fiscal year end, such decreased figures shall
be applied to (1) and (3) above. (This condition became effective in September
2003.)
In the case of interim dividends, net assets are calculated by reference to the
balance sheet as of the end of the preceding fiscal year, adjusted to reflect:
(a) any subsequent payment by way of appropriation of retained earnings and
transfer to legal reserve in respect of such payment;
(b) any subsequent transfer of retained earnings to stated capital; and
(c) if we have been authorized, pursuant to a resolution of an ordinary general
meeting of shareholders or the board of directors, to repurchase our own
shares, the total amount of the repurchase price for those shares that may
be paid by us.
Interim dividends may not be paid if there is a risk that at the end of the
fiscal year, there may not be any excess of net assets over the aggregate of
the amounts referred to in (1) through (8) above.
In Japan, the "ex-dividend" date and the record date for any dividends precede
the date of determination of the amount of the dividend to be paid. The market
price of shares generally becomes ex-dividend on the third
111
business day prior to the record date. Under our Articles of Incorporation, we
are not obligated to pay any dividends which are left unclaimed for a period of
five years after the date on which they first became payable.
Stock Splits
Stock splits of our outstanding stock may be effected at any time by resolution
of the board of directors. When a stock split is to be effected, we may
increase the amount of the authorized share capital to cover the stock split by
amending our Articles of Incorporation by resolution of the board of directors
without approval by special resolution of the general meeting of shareholders,
unless more than one class of stock is issued and outstanding. Shareholders
will not be required to exchange stock certificates for new stock certificates,
but certificates representing the additional stock resulting from the stock
split will be issued to shareholders. We must give public notice of the stock
split, specifying a record date at least two weeks prior to the record date
and, in addition, promptly after the stock split takes effect, give notice to
each shareholder specifying the number of shares to which such shareholder is
entitled by virtue of the stock split.
Fractional Shares
Fractional shares may arise from, among other things, a stock split or a
combination of outstanding shares into a smaller number of shares. A holder of
fractional shares constituting one-hundredth of one share or any integral
multiple of one-hundredth of one share will be registered in our register of
fractional shares. Fractional shares will carry no voting rights, but, pursuant
to the Commercial Code and our Articles of Incorporation, the holders of
fractional shares will have the right to receive dividends and interim
dividends, if any, on their fractional shares. No certificates for fractional
shares will be issued and therefore fractional shares will not normally be
transferable. However, the registered holders of fractional shares may at any
time require us to purchase the fractional shares at the shares' current market
price. Also, registered holders of fractional shares may require us to sell
them a number of fractional shares, of which number, when combined with the
number already held by such holder, shall become one share; provided that such
request is met only when we own the necessary number of our shares.
New Unit Share System
The new unit share system (tan-gen kabu) was introduced by amendments to the
Commercial Code, which became effective on October 1, 2001. Currently, we do
not use the new unit share system. However, we may use the new unit share
system by amending our Articles of Incorporation, which requires shareholders'
approval. Under the new unit share system, a company may provide in its
articles of incorporation that a unit comprises a specified number of shares
that is equal to or less than 1,000 and that does not exceed one-two hundredth
of the number of issued shares. A company may provide in its articles of
incorporation that the company will not issue certificates representing a
number of shares less than a unit. Under the new unit share system, one unit of
shares has one voting right. A holder of less than one unit of shares has no
voting right. If we adopt the new unit share system, shareholders may require
us to purchase shares constituting less than a unit at the current market
price. Our board of directors may reduce the number of shares constituting a
unit or cease to use the unit share system by amendments to our Articles of
Incorporation even though amendments to the Articles of Incorporation generally
require a special resolution of the ordinary general meeting of shareholders.
General Meeting of Shareholders
The ordinary general meeting of our shareholders is usually held in June of
each year in Chiyoda-ku, Tokyo. In addition, we may hold an extraordinary
general meeting of shareholders whenever necessary by giving at least two
weeks' advance notice to shareholders. The record date for ordinary general
meetings of our shareholders is March 31.
Any shareholder holding at least 300 voting rights or 1% of the total number of
voting rights for six months or longer may propose a matter to be considered at
a general meeting of shareholders by submitting a written request to a
representative director at least six weeks prior to the date of the meeting.
112
Voting Rights
A shareholder has one voting right for each whole share. However, a corporate
shareholder may not exercise its voting rights if we hold more than one quarter
of the total voting rights with respect to that shareholder. Under our Articles
of Incorporation, except as otherwise provided by law or by other provisions of
our Articles of Incorporation, a resolution can be adopted at a shareholders'
meeting by the holders of a majority of the voting rights represented at the
meeting. The Commercial Code and our Articles of Incorporation require a quorum
of not less than one third of the total number of voting rights for election of
our directors and corporate auditors.
The Commercial Code and our Articles of Incorporation provide that a quorum of
not less than one-third of outstanding voting rights, excluding those owned by
our subsidiaries and affiliates of which we own, directly or indirectly, more
than 25 percent, must be present at a shareholders' meeting to approve
specified corporate actions, such as:
.. the amendment of our Articles of Incorporation, except in some limited
cases;
.. the removal of a director or corporate auditor;
.. a dissolution, merger or consolidation, except for certain types of mergers;
.. a stock-for-stock exchange or stock-for-stock transfer, except in some
limited circumstances;
.. the transfer of the whole or an important part of our business;
.. a reduction of stated capital;
.. a corporate split, except in some limited circumstances;
.. the acquisition of the whole business of another company, except in some
limited circumstances;
.. the offering to persons other than shareholders of stock at a specially
favorable price, or of stock acquisition rights or bonds or notes with
stock acquisition rights with specially favorable conditions; and
.. the repurchase of our own stock from a specific party.
At least two-thirds of the voting rights represented at the meeting must
approve these actions.
There is no cumulative voting for the election of directors or corporate
auditors.
Subscription Rights
Holders of shares have no preemptive rights under our Articles of
Incorporation. Under the Commercial Code, however, our board of directors may
determine that shareholders be given subscription rights in connection with a
particular issue of new shares. In this case, these subscription rights must be
given on uniform terms to all shareholders as of a specified record date by
public notice at least two weeks prior to the record date. A notification to
each individual shareholder must also be given at least two weeks prior to the
date of expiration of the subscription rights.
Rights to subscribe for new shares may be transferable or non-transferable, as
determined by our board of directors. If subscription rights are not
transferable, a purported transfer by a shareholder will not be enforceable
against us.
Stock Acquisition Rights
We may issue stock acquisition rights (shinkabu yoyakuken), which in the United
States are often in the form of warrants, or bonds with stock acquisition
rights that cannot be detached (shinkabu yoyakuken-tsuki shasai), which in the
United States are often in the form of convertible bonds or bonds with
non-detachable warrants. Except where the issuance would be on "specially
favorable" terms, the issuance of stock acquisition rights or
113
bonds with stock acquisition rights may be authorized by a resolution of our
board of directors. Upon exercise of the stock acquisition rights, the holder
of such rights may either acquire shares by paying the applicable exercise
price or, if so determined by a resolution of our board of directors, by making
a substitute payment, such as having the convertible bonds redeemed for no cash
in lieu of the exercise price.
Liquidation Rights
Upon our liquidation, the assets remaining after payment of all debts,
liquidation expenses, taxes and preferred distributions to holders of shares of
our preferred stock will be distributed among the holders of our common stock
in proportion to the number of shares they own.
Transfer Agent
Mitsubishi Trust Bank is the transfer agent for our common stock. The office of
Mitsubishi Trust Bank for this purpose is located at 4-5, Marunouchi 1-chome,
Chiyoda-ku, Tokyo, 100-8212, Japan. Mitsubishi Trust Bank maintains our
register of shareholders and our register of lost share certificates, and
records transfers of ownership upon presentation of share certificates.
Reports to Shareholders
We furnish to our shareholders notices, in Japanese, of shareholders' meetings,
annual business reports, including our financial statements, and notices of
resolutions adopted at our shareholders' meetings.
Record Dates and Closing of Shareholders' Register
As stated above, March 31 is the record date for the payment of annual
dividends, if any, and the determination of shareholders entitled to vote at
ordinary general meetings of our shareholders. September 30 is the record date
for the payment of interim dividends, if any. In addition, by a resolution of
our board of directors and after giving at least two weeks' prior public
notice, we may at any time set a record date or close the shareholders'
register temporarily, for a period not in excess of three months, in order to
determine the shareholders who are entitled to the rights pertaining to our
shares. The trading of our shares and the delivery of certificates may continue
even while the shareholders' register is closed.
Repurchase of Our Shares of Common Stock
We may repurchase our own shares:
.. through the Tokyo Stock Exchange or other stock exchanges on which our
shares are listed, if authorized by an ordinary resolution of an ordinary
general meeting of shareholders;
.. by way of a tender offer, if authorized by an ordinary resolution of an
ordinary general meeting of shareholders;
.. through the TSE or other stock exchanges on which our shares are listed, or
by way of tender offer, if authorized by a resolution of the board of
directors provided that we have amended our Articles of Incorporation to
enable the board to make such a resolution (an amendment to the Commercial
Code which enables the above became effective in September 2003);
.. from a specific party, if authorized by a special resolution of an ordinary
general meeting of shareholders; or
.. from subsidiaries, if authorized by a resolution of the board of directors.
When the repurchase is made by us from a specific party, as authorized by a
special resolution of an ordinary general meeting of shareholders, any
shareholder may make a demand to a director, five days or more prior to the
relevant shareholders' meeting, that we also repurchase the shares held by that
shareholder.
114
Repurchase of our own shares pursuant to an authorization of our ordinary
shareholders' meeting from persons other than our subsidiaries must satisfy
various specified requirements, including the requirement that the total amount
of the repurchase price may not exceed the amount of the retained earnings
available for annual dividend payments after taking into account a reduction,
if any, of the stated capital, additional paid-in capital or legal reserve (if
such reduction of the stated capital, additional paid-in capital or legal
reserve has been authorized pursuant to a resolution of the relevant ordinary
general meeting of shareholders), minus the amount to be paid by way of
appropriation of retained earnings for the relevant fiscal year and the amount
to be transferred to stated capital. If we repurchase shares from subsidiaries,
the total amount of the repurchase price may not exceed the amount of the
retained earnings available for interim dividend payments minus the amount of
interim dividends, if paid. If it is anticipated that the net assets on our
balance sheet as at the end of the relevant fiscal year will be less than the
aggregate amount of the stated capital, additional paid-in capital and other
items as described in (1) through (8) in the fourth paragraph under "--Common
Stock--Dividends," we may not repurchase our own shares.
We may hold our own shares so repurchased without restrictions. In addition, we
may cancel or dispose of our own shares that we hold by a resolution of our
board of directors. As of March 31, 2003, Mitsubishi Tokyo Financial Group,
excluding its subsidiaries, owned 1,655.46 treasury shares.
Preferred Stock
The following is a summary of information concerning the shares of our
preferred stock, including brief summaries of the relevant provisions of our
Articles of Incorporation, the share handling regulations and the Commercial
Code as currently in effect. The detailed rights of our preferred shares are
set out in our Articles of Incorporation and the resolutions of our board of
directors relating to the issuance of the relevant stock.
General
Under our Articles of Incorporation, we are authorized to issue four classes of
preferred shares. Our preferred shares have equal preference over shares of
common stock in respect of dividend entitlements and distribution upon our
liquidation, but holders of the preferred shares are not entitled to vote at
general meetings of shareholders, subject to the exceptions provided under the
Commercial Code. As of March 31, 2003, 81,400 shares of class 1 and 100,000
shares of class 2 preferred shares were outstanding, but there were no class 3
or class 4 preferred shares outstanding. We may, at any time, purchase and
redeem, at fair value, any shares of preferred stock outstanding out of
earnings available for distribution to shareholders.
Class 1 and class 3 preferred shares are not convertible into our common stock
but are redeemable at our discretion. We may redeem shares of class 1 preferred
shares at (Yen)3,000,000 per share, in whole or in part, on or after January
21, 2004. The redemption terms of class 3 preferred shares will be determined
by the board of directors at the time of issuance of class 3 preferred shares.
Class 2 and class 4 preferred shares are convertible into our common stock at
the option of the holder during a conversion period. At the option of the
holders, class 2 preferred shares are convertible into common stock from July
31, 2003 to July 31, 2008 at the conversion price of (Yen)1,357,559.2 per share
for July 31, 2003 and (Yen)696,898.5 per share from August 1, 2003 to July 31,
2008. The conversion price will be revised annually on August 1 of each year
from 2003 through 2007 to reflect, subject to certain adjustments, the average
market closing price of our common stock on the TSE for the 30 business days
starting from the 45th business day prior to the date of revision of the
conversion price. The conversion price will not exceed the initial conversion
price of (Yen)1,357,559.2 nor be below (Yen)696,898.5 unless certain events or
circumstances arise. Class 2 preferred shares which are not converted at the
option of the holders will be mandatorily converted into common stock on August
1, 2008, at the conversion price determined based on the average market closing
price of the common stock traded on the TSE for the 30 business days starting
from the 45th business day prior to the date of mandatory conversion. In the
event the average market closing price is below (Yen)714,285, the conversion
price will be (Yen)714,285. The conversion terms of class 4 preferred shares
will be determined by the board of directors at the time of issuance of class 4
preferred shares.
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Preferred Dividends
In priority to the payment of dividends to holders of our common stock, the
amount of preferred dividends for class 1 preferred shares is (Yen)82,500 per
share per fiscal year and for class 2 preferred shares is (Yen)16,200 per share
per fiscal year. The amounts of the preferred dividends for class 3 and class 4
preferred shares are to be set by resolution of our board of directors at the
time of issuance. The annual dividend per share may not exceed (Yen)250,000 per
share per fiscal year for class 3 preferred shares and (Yen)125,000 per share
per fiscal year for class 4 preferred shares. In the event that our board of
directors determines to pay an interim dividend to holders of our common stock,
we will, in priority to the payment of that interim dividend, pay a preferred
interim dividend to holders of our preferred shares and the amount of that
preferred interim dividend will be deducted from the preferred dividend payable
on preferred shares in respect of the same fiscal year.
No payment of dividends on our preferred shares or any other shares can be made
unless we have sufficient retained earnings and, in the case of annual
preferred dividends, the shareholders at the relevant ordinary general meeting
of shareholders or, in the case of preferred interim dividends, the board of
directors, resolves to distribute the retained earnings.
Dividends on our preferred shares are non-cumulative. If the full amount of any
dividend is not declared on our preferred shares in respect of any fiscal year,
holders of our preferred shares do not have any right to receive dividends in
respect of the deficiency in any subsequent fiscal year, and we will have no
obligation to pay the deficiency or to pay any interest whether or not
dividends are paid in respect of any subsequent fiscal year. The holders of our
preferred shares are not entitled to any further dividends or other
participation in or distribution of our profits.
Liquidation Rights
In the event of our voluntary or involuntary liquidation, holders of our
preferred shares will be entitled, equally in rank as among themselves, to
receive out of our residual assets upon liquidation a distribution of
(Yen)3,000,000 per share for class 1 preferred shares, (Yen)2,000,000 per share
for class 2 preferred shares and (Yen)2,500,000 per share in the case of each
of the class 3 preferred shares and class 4 preferred shares before any
distribution of assets is made to holders of our common stock. The holders of
our preferred shares are not entitled to any further dividends or other
participation in or distribution of our residual assets upon our liquidation.
Voting Rights
No holder of our preferred shares has the right to receive notice of, or to
vote at, a general meeting of shareholders, except as otherwise specifically
provided under the Commercial Code or other applicable law. Under the
Commercial Code, holders of our preferred shares will be entitled to receive
notice of, and have one voting right per preferred share at, our general
meetings of shareholders:
. from the commencement of our ordinary general meeting of shareholders if
an agenda for approval to declare a preferred dividend is not submitted
to such meeting; or
. from the close of any ordinary general meeting of shareholders if a
proposed resolution to declare a preferred dividend is not approved at
such meeting until such time as a resolution of an ordinary general
meeting of shareholders declaring a preferred dividend is passed.
American Depositary Shares
The Bank of New York will issue the American depositary receipts, or ADRs. Each
ADR will represent ownership interests in American depositary shares, or ADSs.
Each ADS represents one thousandth of a share of our common stock. Each ADS is
held by Bank of Tokyo-Mitsubishi, acting as custodian, at its principal office
in Tokyo, on behalf of The Bank of New York, acting as depositary. Each ADS
will also represent securities, cash
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or other property deposited with The Bank of New York but not distributed to
ADS holders. The Bank of New York's corporate trust office is located at 101
Barclay Street, New York, New York 10286 and its principal executive office is
located at One Wall Street, New York, New York 10286, U.S.A.
You may hold ADSs either directly or indirectly through your broker or other
financial institution. If you hold ADSs directly, you are an ADS holder. This
description assumes you hold your ADSs directly. If you hold the ADSs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADS holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
The Bank of New York will actually be the registered holder of the common
stock, so you will have to rely on it to exercise your rights as a shareholder.
Our obligations and the obligations of The Bank of New York are set out in a
deposit agreement among us, The Bank of New York and you, as an ADS holder. The
deposit agreement and the ADSs are governed by New York law.
The following is a summary of the material terms of the deposit agreement.
Because it is a summary, it does not contain all the information that may be
important to you. For more complete information, you should read the entire
deposit agreement and the form of ADR.
Share Dividends and Other Distributions
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares of common stock or other
deposited securities, after deducting its fees and expenses. You will receive
these distributions in proportion to the number of shares your ADSs represent.
Cash. The Bank of New York will convert any cash dividend or other cash
distribution we pay on our common stock into US dollars, if it can do so on a
reasonable basis and can transfer the US dollars to the United States. If that
is not possible or if any approval from the Japanese government is needed and
cannot be obtained, the deposit agreement allows The Bank of New York to
distribute the yen only to those ADS holders to whom it is possible to do so.
The Bank of New York will hold the yen it cannot convert for the account of the
ADS holders who have not been paid. It will not invest the yen and it will not
be liable for any interest.
Before making a distribution, any withholding taxes that must be paid under
Japanese law will be deducted. See "--Taxation--Japanese Taxation." The Bank of
New York will distribute only whole US dollars and cents and will round
fractional cents to the nearest whole cent. If the relevant exchange rates
fluctuate during a time when The Bank of New York cannot convert the Japanese
currency, you may lose some or all of the value of the distribution.
Shares. The Bank of New York may distribute new ADSs representing any shares
we may distribute as a dividend or free distribution, if we furnish The Bank of
New York promptly with satisfactory evidence that it is legal to do so. The
Bank of New York will only distribute whole ADSs. It will sell shares which
would require it to issue a fractional ADS and distribute the net proceeds in
the same way as it distributes cash dividends. If The Bank of New York does not
distribute additional ADSs, each ADS will also represent the new shares.
Rights to receive additional shares. If we offer holders of our common stock
any rights to subscribe for additional shares of common stock or any other
rights, The Bank of New York may, after consultation with us, make those rights
available to you. We must first instruct The Bank of New York to do so and
furnish it with satisfactory evidence that it is legal to do so. If we do not
furnish this evidence and/or do not give these instructions, and The Bank of
New York decides that it is practical to sell the rights, The Bank of New York
will sell the rights and distribute the proceeds in the same way as it
distributes cash dividends. The Bank of New York may allow rights that are not
distributed or sold to lapse. In that case, you will receive no value for them.
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If The Bank of New York makes rights available to you, upon instruction from
you it will exercise the rights and purchase the shares on your behalf. The
Bank of New York will then deposit the shares and issue ADSs to you. It will
only exercise the rights if you pay it the exercise price and any other charges
the rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation and transfer
of the ADSs issued after the exercise of the rights. For example, you may not
be able to trade the ADSs freely in the United States. In this case, The Bank
of New York may issue the ADSs under a separate restricted deposit agreement
which will contain the same provisions as the deposit agreement, except for
changes needed to put the restrictions in place. The Bank of New York will not
offer you rights unless those rights and the securities to which the rights
relate are either exempt from registration or have been registered under the
U.S. Securities Act with respect to a distribution to you. We will have no
obligation to register under the Securities Act those rights or the securities
to which they relate.
Other distributions. The Bank of New York will send to you anything else we
distribute on deposited securities by any means it thinks is legal, fair and
practical. If it cannot make the distribution in that way, The Bank of New York
has a choice. It may decide to sell what we distributed and distribute the net
proceeds, in the same way as it does with cash. Or, it may decide to hold what
we distributed, in which case ADSs will also represent the newly distributed
property.
The Bank of New York is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs, shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADSs, shares, rights or anything else to ADS holders. This
means that you may not receive the distributions we make on our shares or any
value for them if it is illegal or impractical for us or The Bank of New York
to make them available to you.
Deposit, Withdrawal and Cancellation
The Bank of New York will issue ADSs if you or your broker deposits shares or
evidence of rights to receive shares with the custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will register the appropriate
number of ADSs in the names you request and will deliver the ADSs at its
corporate trust office to the persons you request.
In certain circumstances, subject to the provisions of the deposit agreement,
The Bank of New York may issue ADSs before the deposit of the underlying
shares. This is called a pre-release of ADSs. A pre-release is closed out as
soon as the underlying shares are delivered to the depositary. The depositary
may receive ADSs instead of the shares to close out a pre-release. The
depositary may pre-release ADSs only on the following conditions:
.. Before or at the time of the pre-release, the person to whom the
pre-release is made must represent to the depositary in writing that it or
its customer, as the case may be, owns the shares to be deposited;
.. The pre-release must be fully collateralized with cash or collateral that
the depositary considers appropriate;
.. The depositary must be able to close out the pre-release on not more than
five business days' notice.
The pre-release will be subject to whatever indemnities and credit regulations
that the depositary considers appropriate. In addition, the depositary will
limit the number of ADSs that may be outstanding at any time as a result of a
pre-release.
You may turn in your ADSs at the Corporate Trust Office of The Bank of New
York's office. Upon payment of its fees and expenses and of any taxes or
charges, such as stamp taxes or stock transfer taxes or fees, The Bank of New
York will deliver (1) the underlying shares to an account designated by you and
(2) any other deposited securities underlying the ADS at the office of the
custodian. Or, at your request, risk and expense, The Bank of New York will
deliver the deposited securities at its Corporate Trust Office.
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The ADSs may only be presented for cancellation and release of the underlying
shares of common stock or other deposited securities in multiples of 1,000
ADSs. Holders of ADRs evidencing less than 1,000 ADSs will not be entitled to
delivery of any underlying shares or other deposited securities unless such
ADRs, together with other ADRs presented by the same holder at the same time,
represent in the aggregate at least 1,000 ADSs. If any ADSs are surrendered but
not cancelled pursuant to the preceding sentence, The Bank of New York will
execute and deliver an ADR or ADRs evidencing the balance of ADSs not so
cancelled to the person or persons surrendering the same.
Voting Rights
If you are an ADS holder on a record date fixed by The Bank of New York, you
may instruct The Bank of New York to vote the shares underlying your ADSs at a
meeting of our shareholders in accordance with the procedures set forth in the
deposit agreement.
The Bank of New York will notify you of the upcoming meeting and arrange to
deliver our voting materials to you. The notice shall contain (a) such
information as is contained in such notice of meeting, (b) a statement that as
of the close of business on a specified record date you will be entitled,
subject to any applicable provision of Japanese law and our Articles of
Incorporation, to instruct The Bank of New York as to the exercise of the
voting rights, if any, pertaining to the amount of shares or other deposited
securities represented by your ADSs, and (c) a brief statement as to the manner
in which such instructions may be given, including an express indication that
instructions may be given to The Bank of New York to give a discretionary proxy
to a person designated by us. Upon your written request, received on or before
the date established by The Bank of New York for such purpose, The Bank of New
York shall endeavor in so far as practicable to vote or cause to be voted the
amount of shares or other deposited securities represented by your ADSs in
accordance with the instructions set forth in your request. So long as Japanese
law provides that votes may only be cast with respect to one or more whole
shares or other deposited securities, The Bank of New York will aggregate
voting instructions to the extent such instructions are the same and vote such
whole shares or other deposited securities in accordance with your
instructions. If, after aggregation of all instructions to vote received by The
Bank of New York, any portion of the aggregated instructions constitutes
instructions with respect to less than a whole share or other deposited
securities, The Bank of New York will not vote or cause to be voted the shares
or other deposited securities to which such portion of the instructions apply.
The Bank of New York will not vote or attempt to exercise the right to vote
that attaches to the shares or other deposited securities, other than in
accordance with the instructions of the ADS holders.
We cannot assure you that you will receive the voting materials in time to
ensure that you can instruct The Bank of New York to vote your shares. In
addition, The Bank of New York is not responsible for failing to carry out
voting instructions or for the manner of carrying out voting instructions as
long as it has acted in good faith. This means that you may not be able to
exercise your right to vote and there may be nothing you can do if your shares
are not voted as you requested.
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Fees and Expenses
ADR holders must pay: For:
--------------------- ----
$5.00 (or less) per 100 ADSs (or portion thereof)...... Each issuance of an ADS, including as a result of a
distribution of shares or rights or other property
Each cancellation of an ADS, including if the
agreement terminates
$0.02 (or less) per ADSs............................... To the extent permitted by securities exchange on
which the ADSs may be listed for trading any cash
payment
Registration or transfer fees.......................... Transfer and registration of shares on the share
register of the foreign registrar from your name to the
name of The Bank of New York or its agent when
you deposit or withdraw shares
Expenses of The Bank of New York....................... Conversion of foreign currency to US dollars cable,
telex and facsimile transmission expenses
Taxes and other governmental charges The Bank of
New York or Bank of Tokyo-Mitsubishi, as
custodian, have to pay on any ADS or share
underlying an ADS, for example, stock transfer taxes,
stamp duty or withholding taxes...................... As necessary
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on
your ADSs or on the deposited securities underlying your ADSs. The Bank of New
York may refuse to transfer your ADSs or allow you to withdraw the deposited
securities underlying your ADSs until those taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your
ADSs to pay any taxes owed and you will remain liable for any deficiency. If it
sells deposited securities, it will, if appropriate, reduce the number of ADSs
to reflect the sale and pay to you any property remaining after it has paid the
taxes.
Reclassifications, Recapitalizations and Mergers
If we:
.. reclassify, split up or consolidate any of our shares or the deposited
securities,
.. recapitalize, reorganize, merge, liquidate, consolidate or sell all or
substantially all of our assets or take any similar action, or
.. distribute securities on the shares that are not distributed to you,
then,
(1) the cash, shares or other securities received by The Bank of New York will
become deposited securities and each ADS will automatically represent its
equal share of the new deposited securities unless additional ADSs are
issued; and
(2) The Bank of New York may, and will if we request, issue new ADSs or ask you
to surrender your outstanding ADSs in exchange for new ADSs, identifying
the new deposited securities.
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Amendment and Termination
We may agree with The Bank of New York to amend the deposit agreement and the
ADSs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges, registration
fees, cable, telex or facsimile transmission costs, delivery costs or other
such expenses, or prejudices an important right of ADS holders, it will only
become effective three months after The Bank of New York notifies you of the
amendment. At the time an amendment becomes effective, you are considered, by
continuing to hold your ADS, to agree to the amendment and to be bound by the
ADSs and the deposit agreement as amended. However, no amendment will impair
your right to receive the deposited securities in exchange for your ADSs.
The Bank of New York will terminate the deposit agreement if we ask it to do
so, in which case it must notify you at least 30 days before termination. The
Bank of New York may also terminate the deposit agreement if The Bank of New
York has told us that it would like to resign and we have not appointed a new
depositary bank within 60 days.
If any ADSs remain outstanding after termination, The Bank of New York will
stop registering the transfers of ADSs, will stop distributing dividends to ADS
holders and will not give any further notices or do anything else under the
deposit agreement other than:
(1) collect dividends and distributions on the deposited securities,
(2) sell rights and other property offered to holders of deposited securities,
and
(3) deliver shares and other deposited securities in exchange for ADSs
surrendered to The Bank of New York.
At any time after one year following termination, The Bank of New York may sell
any remaining deposited securities. After that, The Bank of New York will hold
the money it received on the sale, as well as any other cash it is holding
under the deposit agreement for the pro rata benefit of the ADS holders that
have not surrendered their ADSs. It will not invest the money and has no
liability for interest. The Bank of New York's only obligations will be to
account for the money and other cash and with respect to indemnification and to
retain depositary documents. After termination, our only obligations will be
with respect to indemnification and to pay certain amounts to The Bank of New
York.
Limitations on Obligations and Liability to ADS Holders
The deposit agreement expressly limits our obligations and the obligations of
The Bank of New York. It also limits our liability and the liability of The
Bank of New York. We and The Bank of New York:
.. are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
.. are not liable if either is prevented or delayed by law, any provision of
our Articles of Incorporation or circumstances beyond their control from
performing their obligations under the deposit agreement;
.. are not liable if either exercises or fails to exercise discretion
permitted under the deposit agreement;
.. have no obligation to become involved in a lawsuit or other proceeding
related to the ADSs or the deposit agreement on your behalf or on behalf of
any other party unless indemnified to their satisfaction; and
.. may rely upon any advice of or information from legal counsel, accountants,
any person depositing shares, any ADS holder or any other person believed
in good faith to be competent to give them that advice or information.
In the deposit agreement, we and The Bank of New York agree to indemnify each
other for liabilities arising out of acts performed or omitted by the other
party in accordance with the deposit agreement.
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Requirements for Depositary Actions
Before The Bank of New York will issue or register transfer of an ADS, make a
distribution on an ADS, or permit withdrawal of shares, it may require:
.. payment of stock transfer or other taxes or other governmental charges and
transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities,
.. production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary, and
.. compliance with regulations it may establish, from time to time, consistent
with the deposit agreement, including presentation of transfer documents.
The Bank of New York may refuse to deliver, transfer, or register transfers of
ADSs generally when its transfer books are closed, when our transfer books are
closed or at any time if it or we think it advisable to do so.
You have the right to cancel your ADSs and withdraw the underlying shares at
any time except:
.. when temporary delays arise because: (1) The Bank of New York has closed
its transfer books or we have closed our transfer books; (2) the transfer
of shares is blocked to permit voting at a shareholders' meeting; or (3) we
are paying a dividend on the shares;
.. when you or other ADS holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges; or
.. when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or to the withdrawal of
shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
Reports and Other Communications
The Bank of New York will make available for your inspection at its corporate
trust office any reports and communications, including any proxy soliciting
material, that it receives from us, if those reports and communications are
both (a) received by The Bank of New York as the holder of the deposited
securities and (b) made generally available by us to the holders of the
deposited securities. If we ask it to, The Bank of New York will also send you
copies of those reports it receives from us.
Inspection of Transfer Books
The Bank of New York will keep books for the registration and transfer of ADSs,
which will be open for your inspection at all reasonable times. You will only
have the right to inspect those books if the inspection is for the purpose of
communicating with other owners of ADSs in connection with our business or a
matter related to the deposit agreement or the ADSs.
C. Material Contracts
Other than as described in this Annual Report, all contracts entered into by us
since our establishment on April 2, 2001 were entered into in the ordinary
course of business.
D. Exchange Controls
Foreign Exchange and Foreign Trade Law
The Foreign Exchange and Foreign Trade Law of Japan, including related cabinet
orders and ministerial ordinances, governs several aspects of the issuance of
our shares and equity-related securities. It also applies in
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some cases to the acquisition and holding of our shares or ADSs representing
such shares by non-residents of Japan and by foreign investors. Generally, the
Foreign Exchange and Foreign Trade Law currently in effect does not affect the
right of a non-resident of Japan to purchase or sell an ADR outside Japan for
non-Japanese currency.
"Non-residents of Japan" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Branches and other offices of Japanese corporations located outside Japan are
treated as non-residents of Japan, but branches and other offices located
within Japan of non-resident corporations are regarded as residents of Japan.
"Foreign investors" are defined as:
.. individuals not resident in Japan;
.. corporations which are organized under the laws of foreign countries or
whose principal offices are located outside Japan;
.. corporations of which 50% or more of the shares are held by individuals not
resident of Japan and corporations which are organized under the laws of
foreign countries or whose principal offices are located outside Japan; and
.. corporations, a majority of officers (or a majority of officers having the
power of representation) of which are non-resident individuals.
Acquisitions of Shares
Under the Foreign Exchange and Foreign Trade Law, if a foreign investor
acquires shares of stock of a Japanese company listed on any stock exchange in
Japan or traded on the over-the-counter market in Japan, referred to as listed
shares, from a resident of Japan, and, as a result of such acquisition, the
foreign investor and related parties directly or indirectly hold 10% or more of
the then total outstanding shares of the subject corporation, the foreign
investor is generally required to file a report after the fact with the
Minister of Finance and any other Ministers sharing jurisdiction over the
business of the corporation. If the acquisition concerns national security or
meets other conditions specified in the Foreign Exchange and Foreign Trade Law,
the foreign investor must file a prior notification in respect of the proposed
acquisition with the Ministers, and the Ministers may request a modification or
prohibition of the proposed acquisition. If the foreign investor does not agree
with the request, the Ministers may issue an order for the modification or
prohibition of such acquisition.
A non-resident of Japan is generally not required to make prior notification or
obtain prior approval of acquisitions of listed shares, although the Foreign
Exchange and Foreign Trade Law provides the Ministry of Finance with the power,
in exceptional circumstances, to require prior approval for any such
acquisition from resident(s) by a non-resident of Japan.
The acquisition of shares by non-resident shareholders by way of stock splits
is not subject to any of these notification and confirmation requirements.
Dividends and Proceeds of Sales
Under Japanese foreign exchange regulations currently in effect, dividends paid
on, and the proceeds of sales in Japan of, shares held by non-residents of
Japan may be converted into any foreign currency and repatriated abroad.
Deposits and Withdrawals under American Depositary Facility
The deposit of shares with us, in our capacity as custodian and agent for the
depositary, in Tokyo, the issuance of ADSs by the depositary to a non-resident
of Japan in respect of the deposit and the withdrawal of the underlying
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shares upon the surrender of the ADSs are not subject to any of the formalities
or restrictions referred to above. However, where as a result of a deposit or
withdrawal the aggregate number of shares held by the depositary, including
shares deposited with us as custodian for the depositary, or the holder
surrendering ADSs, as the case may be, would be 10% or more of the total
outstanding shares, a report will be required, and in specified circumstances,
a prior notification may be required, as noted above.
Reporting of Substantial Shareholdings
Under Japan's Securities and Exchange Law, any person who becomes, beneficially
and solely or jointly, a holder of more than 5% of the total issued shares of
capital stock of a company which is listed on any Japanese stock exchange or
whose shares are traded on the over-the-counter market in Japan generally must
report his or its share ownership to the Director of a relevant local finance
bureau within 5 business days. A similar report must also be made in respect of
any subsequent change of 1% or more in any previously reported holding or any
change in material matters set out in reports previously filed, with some
exceptions. For this purpose, shares issuable to such person upon conversion of
convertible securities or exercise of warrants (including stock acquisition
rights) are taken into account in determining both the number of shares held by
such holder and the issuer's total issued share capital. Copies of each
ownership report must also be furnished to the issuer of such shares and to all
Japanese stock exchanges on which the shares are listed or, in the case of
shares traded over-the-counter, the Japan Securities Dealers Association.
E. Taxation
Japanese Taxation
The following sets forth the material Japanese tax consequences to owners of
shares or ADSs who are non-resident individuals or non-Japanese corporations
without a permanent establishment in Japan to which the relevant income is
attributable, which we refer to as "non-resident holders" in this section. The
statements regarding Japanese tax laws below are based on the laws in force and
as interpreted by the Japanese taxation authorities as at the date of this
Annual Report and are subject to changes in the applicable Japanese laws,
double taxation treaties, conventions or agreements or interpretations thereof
occurring after that date. This summary is not exhaustive of all possible tax
considerations that may apply to a particular investor, and potential investors
are advised to satisfy themselves as to the overall tax consequences of the
acquisition, ownership and disposition of shares or ADSs, including
specifically the tax consequences under Japanese law, the laws of the
jurisdiction of which they are resident and any tax treaty between Japan and
their country of residence, by consulting their own tax advisers.
For the purpose of Japanese tax law and the Tax Convention (as defined below),
a U.S. holder of ADSs will be treated as the owner of the shares underlying the
ADSs evidenced by the ADRs.
Generally, a non-resident holder of shares or ADSs is subject to Japanese
withholding tax on dividends paid by us. In the absence of any applicable tax
treaty, convention or agreement reducing the maximum rate of withholding tax,
the rate of Japanese withholding tax applicable to dividends paid by us to
non-resident holders is 10% for dividends to be paid on or before December 31,
2003, 7% for dividends to be paid between January 1, 2004 and March 31, 2008
and 15% thereafter, except for dividends paid to any individual non-resident
holder who holds 5% or more of our issued shares for which the applicable rate
is 20%. Japan has income tax treaties, conventions or agreements whereby this
withholding tax rate is set at, in most cases, 15% for portfolio investors,
with, among other countries, Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States. Japanese tax law provides in general that if the Japanese
statutory rate is lower then the maximum rate applicable under tax treaties,
conventions or agreements, the Japanese statutory rate shall be applicable.
The Convention between the United States of America and Japan for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income, which we refer to as the Tax Convention,
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established the maximum rate of Japanese withholding tax which may be imposed
on dividends paid to a United States resident not having a permanent
establishment in Japan. Under the Tax Convention, the maximum withholding rate
for U.S. shareholders and U.S. holders of ADSs is generally set at 15% of the
gross amount distributed. However, the maximum rate is 10% of the gross amount
distributed if the recipient is a corporation and (1) during the part of the
paying corporation's taxable year, which precedes the date of payment of the
dividend and during the whole of its prior taxable year, if any, at least 10%
of the voting shares of the paying corporation were owned by the recipient
corporation, and (2) not more than 25% of the gross income of the paying
corporation for such prior taxable year, if any, consisted of interest or
dividends as defined in the Tax Convention.
Non-resident holders of shares who are entitled to a reduced rate of Japanese
withholding tax on payments of dividends on the shares by us are required to
submit an Application Form for the Income Tax Convention regarding Relief from
Japanese Income Tax on Dividends in advance through us to the relevant tax
authority before the payment of dividends. A standing proxy for non-resident
holders may provide this application service for the non-resident holders.
Non-resident holders who do not submit an application in advance will generally
be entitled to claim a refund from the relevant Japanese tax authority of
withholding taxes withheld in excess of the rate of an applicable tax treaty.
Gains derived from the sale or other disposition of shares or ADSs within or
outside Japan by a non-resident holder are not, in general, subject to Japanese
income or corporation taxes or other Japanese taxes.
Any deposits or withdrawals of shares by a non-resident holder in exchange for
ADSs are not subject to Japanese income or corporation tax.
Japanese inheritance and gift taxes, at progressive rates, may be payable by an
individual who has acquired shares or ADSs as legatee, heir or donee, even if
neither the individual nor the decedent nor the donor is not a Japanese
resident.
U.S. Taxation
The following sets forth the material United States federal income tax
consequences of the ownership of shares and ADSs by a U.S. holder, as defined
below. This summary is based on United States federal income tax laws,
including the United States Internal Revenue Code of 1986, or the Code, its
legislative history, existing and proposed regulations thereunder, published
rulings and court decisions, and on the Tax Convention, all of which are
subject to change, possibly with retroactive effect.
The following summary is not a complete analysis or description of all
potential United States federal income tax consequences to a particular U.S.
holder. It does not address all United States federal income tax considerations
that may be relevant to all categories of potential purchasers, certain of
which (such as banks or other financial institutions, insurance companies,
dealers in securities, tax-exempt entities, non-U.S. persons, persons holding a
share or an ADS as part of a "straddle," "hedge," conversion or integrated
transaction, holders whose "functional currency" is not the US dollar, holders
liable for alternative minimum tax and holders of 10% or more of our voting
shares) are subject to special tax treatment. This summary does not address any
foreign, state, local or other tax consequences of investments in our shares or
ADSs.
This summary addresses only shares or ADSs held as capital assets.
As used herein, a "U.S. holder" is a beneficial owner of shares or ADSs, as the
case may be, that is, for U.S. federal income tax purposes:
.. a citizen or resident of the United States,
.. a corporation created or organized under the laws of the United States or
any political subdivision thereof,
125
.. an estate, the income of which is subject to U.S. federal income tax
regardless of its source, or
.. a trust
. which is subject to the supervision of a court within the United States
and the control of one or more United States persons as described in
Section 7701(a)(30) of the Code; or
. that has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a United States person.
We urge U.S. holders to consult their own tax advisors concerning the United
States federal, state and local and other tax consequences to them of the
purchase, ownership and disposition of shares or ADSs.
This summary is based in part on representations by the depositary and assumes
that each obligation under the deposit agreement and any related agreement will
be performed in accordance with their respective terms. For United States
federal income tax purposes, holders of ADSs will be treated as the owners of
the shares represented by the ADSs. The U.S. Treasury has expressed concerns
that parties to whom ADSs are pre-released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. holders of ADSs.
Accordingly, the discussion on the creditability of Japanese taxes described
below could be affected by future actions that may be taken by the U.S.
Treasury.
Special adverse United States federal income tax rules apply if a U.S. holder
holds shares or ADSs of a company that is treated as a "passive foreign
investment company" (a "PFIC") for any taxable year during which the U.S.
holder held shares or ADSs. Based upon proposed Treasury Regulations which are
not yet in effect but are proposed to become effective for taxable years
beginning after December 31, 1994 or, for electing taxpayers, for taxable years
beginning after December 31, 1986, and upon certain management estimates, we do
not expect Mitsubishi Tokyo Financial Group, Inc. to be a PFIC for United
States federal income tax purposes in the current year or in future years.
However, there can be no assurance that the described proposed regulations will
be finalized in their current form, and the determination of whether Mitsubishi
Tokyo Financial Group, Inc. is a PFIC is based upon, among other things, the
composition of our income and assets and the value of our assets from time to
time.
Taxation of Dividends
U.S. holders will include the gross amount of any distribution received with
respect to shares or ADSs (before reduction for Japanese withholding taxes), to
the extent paid out of the current or accumulated earnings and profits (as
determined for United States federal income tax purposes) of Mitsubishi Tokyo
Financial Group, Inc., as ordinary income in their gross income. Dividends
received by a U.S. holder will not be eligible for the "dividends-received
deduction" allowed to United States corporations in respect of dividends
received from other United States corporations. To the extent that an amount
received by a U.S. holder exceeds such holder's allocable share of our current
earnings and profits, such excess will be applied first to reduce such holder's
tax basis in its shares or ADSs, thereby increasing the amount of gain or
decreasing the amount of loss recognized on a subsequent disposition of the
shares or ADSs. Then, to the extent such distribution exceeds such U.S.
holder's tax basis, such excess will be treated as capital gain. The amount of
the dividend will be the US dollar value of the Japanese yen payments received.
This value will be determined at the spot Japanese yen/US dollar rate on the
date the dividend is received by the depositary in the case of U.S. holders of
ADSs, or by the shareholder in the case of U.S. holders of shares, regardless
of whether the dividend payment is in fact converted into US dollars at that
time. If the Japanese yen received as a dividend are not converted into US
dollars on the date of receipt, a U.S. holder will have basis in such Japanese
yen equal to their dollar value on the date of receipt, and any foreign
currency gains or losses resulting from the conversion of the Japanese yen will
generally be treated as U.S. source ordinary income or loss.
Subject to certain limitations, the Japanese tax withheld will be creditable
against the U.S. holder's United States federal income tax liability. For
foreign tax credit limitation purposes, the dividend will be income from sources
126
outside the United States. The limitation on foreign taxes eligible for credit
is calculated separately with respect to specific classes of income. For this
purpose, dividends we pay will constitute "passive income" or, in the case of
certain U.S. holders, "financial services income."
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") affects
the taxation of dividends. The Act eliminates the tax rate difference between
"qualified dividends" and capital gains for United States individual investors.
Qualified dividends include dividends received from both domestic corporations
and "qualified foreign corporations." Qualified foreign corporations include
those corporations eligible for the benefits of an income tax treaty with the
U.S. Dividends received by U.S. investors from a foreign corporation that was a
foreign investment company (under Section 1246(b) of the Code), a passive
foreign investment company (under Section 1297 of the Code) or a foreign
personal holding company (under Section 552 of the Code) in either the taxable
year of the distribution or the preceding taxable year are not qualified
dividends. We believe that Mitsubishi Tokyo Financial Group, Inc. is a
qualified foreign corporation and that dividends received by U.S. investors
with respect to shares or ADSs of Mitsubishi Tokyo Financial Group, Inc. will
be qualified dividends. Note that these provisions do not effect dividends
received by non-U.S. investors.
Taxation of Capital Gains
Upon a sale or other disposition of shares or ADSs, a U.S. holder will
recognize gain or loss in an amount equal to the difference between the US
dollar value of the amount realized and the U.S. holder's tax basis, determined
in US dollars, in such shares or ADSs. Such gain or loss will be capital gain
or loss and will be long-term capital gain or loss if the U.S. holder's holding
period for such shares or ADSs exceeds one year. A U.S. holder's adjusted tax
basis in its shares or ADSs will generally be the cost to the holder of such
shares or ADSs. Any such gain or loss realized by a U.S. holder upon disposal
of the shares or ADSs will generally be income or loss from sources within the
United States for foreign tax credit limitation purposes.
Any deposits and/or withdrawals of shares made with respect to ADSs are not
subject to United States federal income tax.
Information Reporting and Backup Withholding
Dividends paid on shares or ADSs to a U.S. holder, or proceeds from a U.S.
holder's sale or other disposition of shares or ADS, may be subject to
information reporting requirements. Those dividends or proceeds from sale or
disposition may also be subject to backup withholding unless the U.S. holder:
.. is a corporation or comes within some other categories of exempt
recipients, and, when required, demonstrates this fact, or
.. provides a correct taxpayer identification number on a properly completed
U.S. Internal Revenue Service Form W-9 or substitute form, certifies that
the U.S. holder is not subject to backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules.
Any amount withheld under these rules will be creditable against the U.S.
holder's United States federal income tax liability or refundable to the extent
that it exceeds such liability if the U.S. holder provides the required
information to the Internal Revenue Service. If a U.S. holder is required to
and does not provide a correct taxpayer identification number, the U.S. holder
may be subject to penalties imposed by the Internal Revenue Service.
F. Dividends and Paying Agents
Not applicable.
127
G. Statement by Experts
Not applicable.
H. Documents on Display
We file periodic reports and other information with the SEC. You may read and
copy any document that we file with the SEC at the SEC's public reference room
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the SEC's regional offices. Please call the SEC at 1-800-732-0330 for
further information on the operation of its public reference rooms. The SEC
also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC (http://www.sec.gov). You may also inspect our SEC reports and
other information at the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005. Some of this information may also be found on our website
at http://www.mtfg.co.jp.
I. Subsidiary Information
Please refer to discussion under "Item 4.C. Information on the
Company--Organizational Structure."
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
Rapid and extensive changes in the Japanese banking environment make risk
management a continual challenge. Many of these changes arise from continuing
economic and financial globalization and further advances in information
technology. Our business opportunities are expanding and competition is
increasing. We are affected by ongoing reforms in the Japanese financial
system, such as changes that allow for the integration of operations, business
alliances across different industries and new entrants into the industries in
which we participate. These and other changes contribute to the risks we face.
We face credit risks, market risks, liquidity risks, operations risks,
information security risks and other risks. We seek to manage all of these
risks through our risk management system. The risks we face may be broadly
divided into two types. One type consists of credit and market risks that are
inherent in our profit-seeking activities. The second type involves risks
associated with our own operations. Our management goal is to achieve a balance
between earnings and risks. For this purpose, we have instituted an integrated
risk management policy throughout our group to identify, quantify, control,
monitor and manage risk using consistent standards and techniques in each of
our businesses.
Risk Management System
We have an integrated risk management framework. The holding company and each
of the subsidiary banks have their own chief risk officers and risk management
divisions.
We determine our group-wide risk management policy at the holding company
level, and our subsidiary banks implement the policy accordingly. The holding
company seeks to raise group-wide risk awareness, integrate and improve the
group's risk management framework, allocate risk capital appropriately and
eliminate specific concentrations of risk. Our board of directors is
responsible for our group-wide risk management and control principles, and the
boards of directors of our subsidiary banks are responsible for the respective
bank's risk management and control principles.
Our corporate risk management committee, which is a subcommittee of our
executive committee, reviews and evaluates key risks relating to the group. Our
corporate risk management division, which reports directly to the chief risk
management officer and the corporate risk management committee, monitors the
risks in the day-to-day operations of the group as a whole. Other committees,
offices and divisions at each of our subsidiary banks monitor and manage their
own risks.
128
Integrated Risk Management
We employ a capital allocation system that assists us in managing our risks in
relation to our profit targets and expected returns. We allocate economic
capital to each of our subsidiary banks based on quantitative risk, type of
risk and type of operation. Economic capital is calculated from credit risk,
market risk, operational risk and stock portfolio risk. Capital allocation
decisions are made semiannually in consultation with our subsidiary banks, and
we monitor and manage these allocations constantly. We adopted a risk adjusted
performance measurement as our management tool. This measurement enables us to
better assess our profitability and efficiency relative to our risks.
Credit Risk Management
Credit risk is the risk that we will be unable to collect the amount due to us
on the due date of a particular obligation as a result of the deterioration of
the borrower's financial condition. Credit risk is realized when a credit
instrument previously extended to a borrower loses part or all of its value.
This in turn exposes us to financial loss. We have established an internal
framework to maintain our asset quality, manage credit risk exposure and
achieve earnings commensurate with the risks undertaken by us.
Quantitative Analysis of Credit Risk
Using a highly complex model, we analyze our credit risk quantitatively. This
model measures credit risk based on historical data relating to credit amounts,
default rates and recovery rates that we have collected from our subsidiary
banks and takes into account the correlation among borrowers' default
probabilities. We manage our credit risk based upon this analysis.
Portfolio Management
We work to achieve earnings commensurate with the risk levels undertaken by us.
Our strategy is to price our products based upon expected losses, as determined
in accordance with our internal credit rating system. At the same time, by
monitoring loan amounts and credit exposure by credit rating, type of business
and region, we seek to avoid a concentration of our credit risks in specific
categories.
We have a specialized unit that sets credit ceilings by country to address and
manage country risk. We regularly review these credit ceilings and adjust them
when credit conditions change materially in any country.
Credit Risk Management System
We closely monitor and supervise the credit portfolios of our subsidiary banks.
We seek to identify problem credits at an early stage. We use the same credit
rating and self-assessment system for our subsidiary banks, Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank.
Under our credit risk management system, each subsidiary bank manages its own
credit risk on a global consolidated basis, and we oversee and manage credit
risks on a group-wide basis.
At each of our subsidiary banks, we have in place a system of checks and
balances in which a credit administration section that is independent of the
business development sections screens individual transactions and manages the
extension of credit. Additionally, our management regularly holds investment
and financial meetings and credit and investment council meetings to review
important matters related to credit risk management.
Credit Rating System
We use a credit rating system with a scale of 1 to 15 to evaluate credit risk,
as set out in the table below. Based on this system, we conduct a
self-assessment of our assets and a quantitative risk measurement of credit
risk,
129
manage our loan portfolio and determine our pricing strategy. The credit rating
system, which is based on the concept of probabilities of default, is
consistent with both the method of evaluating credit risk under the new Basel
Capital Accord and those of third-party credit rating agencies. Our credit
rating system is also designed to conform to the regulatory authorities' risk
grading standards for classified loans. With respect to country risk, we assess
each country using ten alphanumeric grades and determine a country risk rating.
Credit rating
---------------------------------------------------------------------------------
1-9 10-12 13 14 15
------ ----------- ------------------------- ------------------ --------
Borrower grade Normal Close Watch(1) Likely to Become Bankrupt(2) Virtually Bankrupt(3) Bankrupt(3)
--------
(1) Borrowers classified as "Close Watch" require close scrutiny because their
business performance is unstable or their financial condition is
unfavorable. Borrowers ranked 10, 11, and 12 correspond with "Needs
Attention" and borrowers ranked 12 also correspond with "Special
Attention," a subcategory of "Needs Attention," under the Financial
Services Agency's classification.
(2) Borrowers classified as "Likely to Become Bankrupt" are not yet bankrupt,
but are in financial difficulty with poor progress in achieving their
business restructuring plans or are likely to become bankrupt in the
future. Borrowers ranked 13 correspond with "In Danger of Bankruptcy" under
the Financial Service Agency's classification.
(3) Borrowers classified as "Virtually Bankrupt" and "Bankrupt" are considered
to be virtually bankrupt or are legally bankrupt. Borrowers ranked 14 and
15 correspond with "De Facto Bankrupt" and "Bankrupt," respectively, under
the Financial Services Agency's classification.
Our subsidiary banks perform a detailed assessment of all borrowers that
commences at the end of June and December of each year. In addition, credit
officers constantly monitor changes in all of our customers' creditworthiness.
These detailed reviews form an integral part of our overall control process to
ensure that all loans are properly evaluated as part of the ongoing review
process. Our credit officers are required to assess the ratings of all
borrowers semiannually during the three month periods from June and December
each year to the balance sheet dates in response to events that occur during
the intervening periods including bankruptcies, past due principal or interest,
downgrades of external credit ratings, declines in stock price, business
restructurings and other events. During the periods from June and December to
the balance sheet dates, our subsidiary banks' credit officers are also
required to regularly report changes in (1) all borrowers' ratings, (2) the
value of collateral or guarantees of all borrowers classified under the
Financial Service Agency's classification as "Needs Attention," "Special
Attention," "In Danger of Bankruptcy," "De Facto Bankrupt," and "Bankrupt" and
(3) outstanding balance of credit of all borrowers other than borrowers
classified as "Normal."
Reduction of Problem Loans
In April 2001, the Japanese government urged major banks to remove from their
balance sheets nonperforming loans classified as "In Danger of Bankruptcy" or
below existing as of the end of September 2000 within two years and newly
identified nonperforming loans within three years. In April 2002, the Financial
Services Agency announced a directive that banks, in relation to the three-year
framework above, take measures to, in principle, remove one-half of their
nonperforming loans within a year and a major portion of them (i.e.,
approximately 80%), within two years. For a detailed discussion of our problem
loans, see "Item 5.B. Operating and Financial Review and Prospects--Liquidity
and Capital Resources--Financial Condition--Allowance for Credit Losses,
Nonperforming and Past Due Loans."
We have made the reduction of problem loans one of our top priorities and have
aggressively disposed of problem loans by, among other measures, selling them
to the RCC, which was established by the Japanese Government to purchase
problem loans.
130
Risk Management of Strategic Equity Portfolio
Through our banking subsidiaries, we hold shares in some of our clients for
strategic purposes, in particular to maintain long-term relationships with
these clients. These investments have the potential to increase business
revenues and to appreciate in value.
At the same time, there is a risk that we will suffer losses on shares held for
strategic purposes. Price fluctuation is an inherent risk in equity investment.
We regard the management of this risk as essential. We are seeking to lower our
exposure to this risk by reducing the amount of shares we hold for strategic
purposes.
Reducing the amount of shares held for strategic purposes and thereby
minimizing the risk of price declines has become a pressing issue for banks in
Japan. Reductions have become necessary to manage risks effectively and to
comply with the law to limit the shareholdings of banks. The law requires banks
to reduce the balance of their shares to a level below the level of their Tier
I capital by September 2006.
In addition to the disposition of shares undertaken to satisfy legal
requirements, we carry out a quantitative analysis of the risks related to our
strategically-held shares from a risk management viewpoint. According to our
calculations, the market value of our total strategically-held shares as of
March 31, 2003 increases or decreases approximately (Yen)3.9 billion when the
TOPIX Index moves one percentage point upward or downward.
We monitor the amount of strategically-held shares to maintain quantitative
risks at an appropriate level in relation to our Tier I capital and to achieve
earnings that compensate for the risks undertaken by us.
Market Risk Management
Market risk is the risk that the value of our assets and liabilities could be
adversely affected by changes in market variables such as interest rates,
securities prices or foreign exchange rates.
Market Risk Management System
Through our market risk management system, we monitor our overall market risks
at the holding company level, while our subsidiary banks manage the market
risks related to their own trading and non-trading activities on a global
consolidated basis.
Market Risk Management Process at Subsidiary Banks
At each of our subsidiary banks, we maintain checks and balances through a
system in which back and middle offices operate independently from front
offices. In addition, ALM committee and ALM council meetings are held at Bank
of Tokyo-Mitsubishi and Mitsubishi Trust Bank, respectively, every month to
review important matters related to market risk and control.
Our subsidiary banks have established quantitative limits relating to market
risk based on their allocated economic capital. In addition, in order to keep
losses within predetermined limits, our subsidiary banks have established
stop-loss rules which set limits for the maximum amount of losses arising from
market activities.
Market Risk Management and Control
Market risk is managed quantitatively through methods such as value at risk, or
VaR, and stress testing as well as qualitatively by ensuring that appropriate
processes and systems are in place for data management, reporting and
evaluation. Various risk profiles are analyzed and evaluated and findings are
reported to the executive committee and the corporate risk management committee
of the holding company.
131
Our subsidiary banks set the quantitative limits for market risk and stop loss
and their middle offices monitor these limits on a daily basis. The middle
office of the holding company monitors our subsidiary banks' control over their
limits and reports to its chief risk management officer on a daily basis as
well.
In addition, with respect to the operation of each of their business units,
each of our subsidiary banks manage the market risks relating to our assets and
liabilities, such as interest rate risk and exchange rate risk, by entering
into various hedging transactions using marketable securities and derivatives,
including futures, options and swaps. For a detailed discussion of the
financial instruments employed as part of our risk management strategy, see
Note 23 to our consolidated financial statements.
Market Risk Measurement
Market risks consist of general risks and specific risks. General market risks
result from changes in entire markets, while specific risks relate to changes
in the prices of individual stocks and bonds which are independent from the
overall direction of the market.
To measure general market risk, we use the VaR technique to estimate changes in
the market value of portfolios within a certain period by statistically
analyzing past market data. We use the VaR technique to monitor and manage
market risks quantitatively on a daily basis, taking into account risk
diversification effects among all of our portfolios.
Our model for calculating our overall VaR uses a variance/covariance matrix of
approximately 680 risk factors with statistical data based on three years of
historical data. It takes into account the correlation among risk factors and
estimates non-linear option risks using a scenario or simulation approach. We
use this system to analyze our overall market risk profile as well as that of
each of our subsidiary banks.
We also conduct stress testing and backtesting. Some market situations are
extremely difficult to predict and some events are statistically very
infrequent. Stress testing uses scenarios that estimate the amount of loss
likely to be incurred by a portfolio in such situations or as a result of such
events. Backtesting is a method that verifies the reliability of
risk-calculation models by retrospectively comparing estimates of risk with the
gains and losses produced by actual market movements.
In addition to measuring the market risk for our business as a whole, our
subsidiary banks also measure their own risk independently with their internal
models. This allows each of our subsidiaries to manage their own risk
internally and to calculate their equity capital ratios based on the applicable
Basel Capital Accord. Our subsidiary banks also conduct independent stress
testing and backtesting using their own models.
We plan to apply a historical simulation approach to all of our risk categories
in the future, in order to supplement the variance/covariance method currently
being used. We are continuously seeking to improve the quality of our market
risk management.
Illustrations of Market Risks in the Fiscal Year Ended March 31, 2003
Trading Activities
The VaR for our total trading activities in the fiscal year ended March 31,
2003 is presented in the table below. Quantitative market risks as of March 31,
2003 were lower in most categories compared to those as of March 31, 2002. As
of March 31, 2003, market risks related to interest rate, equities and
commodities had decreased, while risk related to foreign exchange rates
increased. On a daily average basis, market risks related to interest rate,
equities and commodities decreased while risk related to foreign exchange rates
increased slightly.
132
(April 2002--March 2003)(1)
-----------------------------------------------
(in billions)
VaR for Trading Activities
Risk category: Daily average High Low March 31, 2003
-------------- ------------- --------- --------- --------------
Interest rate............... (Yen) 1.46 (Yen)2.52 (Yen)0.93 (Yen) 1.01
Of which, yen............... 0.52 1.05 0.19 0.39
Of which, US dollars........ 0.66 1.39 0.33 0.40
Foreign exchange............ 0.80 1.56 0.20 1.04
Equities.................... 0.63 1.44 0.27 0.31
Commodities................. 0.14 0.28 0.05 0.08
Less diversification effect. (0.48) -- -- (0.38)
---------- --------- --------- ----------
Total................... (Yen) 2.55 (Yen)3.59 (Yen)1.73 (Yen) 2.06
========== ========= ========= ==========
(April 2001--March 2002)(1)
-----------------------------------------------
(in billions)
VaR for Trading Activities
Risk category: Daily average High Low March 31, 2002
-------------- ------------- --------- --------- --------------
Interest rate............... (Yen) 1.90 (Yen)3.29 (Yen)1.09 (Yen) 1.18
Of which, yen............... 0.96 1.70 0.46 0.79
Of which, US dollars........ 0.89 1.85 0.30 0.44
Foreign exchange............ 0.69 1.79 0.20 0.41
Equities.................... 0.78 1.52 0.45 0.75
Commodities................. 0.17 0.39 0.08 0.18
Less diversification effect. (0.52) -- -- (0.38)
---------- --------- --------- ----------
Total................... (Yen) 3.02 (Yen)4.58 (Yen)2.10 (Yen) 2.14
========== ========= ========= ==========
--------
(1) Based on a one-day holding period, with a confidence interval of 99% based
on three years of historical data. The highest and lowest VaR 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.
The daily average VaR by quarter in the fiscal year ended March 31, 2003 was as
follows:
Quarter Daily average VaR
------- -----------------
April - June 2002...... (Yen)2.70 billion
July - September 2002.. (Yen)2.93 billion
October - December 2002 (Yen)2.39 billion
January - March 2003... (Yen)2.16 billion
Quantitative market risks fluctuate throughout the year, reflecting the
reaction of trading activities to market volatility. Although market conditions
were often volatile during the fiscal year ended March 31, 2003, our
trading-related revenue was relatively stable, with positive trading-related
revenue recorded for 203 of 260 trading days during this period. Furthermore,
the amount of trading-related revenue per day was kept within a stable range,
with only 19 days of positive revenue and four days of negative revenue
exceeding (Yen)1 billion.
Backtesting
We conduct backtesting in which estimated quantitative risks are compared to
actual realized and unrealized losses in order to verify the accuracy of our
VaR measurement model. Actual losses never exceeded VaR in our backtesting of
trading days in the fiscal year ended March 31, 2003. This means that our VaR
model provided reasonably accurate measurements during the fiscal year ended
March 31, 2003.
133
Stress Testing
We calculate, on a daily basis, the possible losses of our current positions in
each market sector, applying the greatest one-day volatility recorded to date.
As of March 31, 2003, we held a total trading activity position of (Yen)17.4
billion of possible loss of trading positions.
Capital Charges for Market Risk
The market risk regulations stipulated in the Basel Capital Accord require us
to include the effects of market risk in calculating capital adequacy ratios.
Both subsidiary banks use an internal model approach to calculate general
market risks and a standardized approach to calculate specific market risks. In
applying the internal model approach, our subsidiary banks are required to meet
qualitative and quantitative criteria. Internal and external examinations have
demonstrated that both banks' systems have been able to meet these strict
requirements.
Non-trading Activities
VaR for our total non-trading activities as of March 31, 2003, excluding market
risks related to our strategic equity portfolio and measured using the same
standard as used for trading activities, was (Yen)23.35 billion, a (Yen)4.12
billion decrease from March 31, 2002. In the fiscal year ended March 31, 2003,
interest rate risks increased (Yen)0.62 billion, while forex-related market
risks and equities-related risks declined (Yen)3.62 billion and (Yen)1.94
billion respectively as a result of the decrease in exposure.
Interest rate risks accounted for approximately 95% of our non-trading activity
market risks, excluding the forex-related market risks related to converting
foreign currency-denominated assets in Argentina to pesos, as required by
Argentina regulations. In the fiscal year ended March 31, 2003, the daily
average interest rate VaR totaled (Yen)21.21 billion, with the highest recorded
VaR being (Yen)25.97 billion and the lowest being (Yen)16.87 billion.
The daily average interest rate VaR by quarter in the fiscal year ended March
31, 2003 was as follows:
Quarter Daily average VaR
------- ------------------
April - June 2002...... (Yen)19.55 billion
July - September 2002.. (Yen)21.74 billion
October - December 2002 (Yen)22.41 billion
January - March 2003... (Yen)21.11 billion
We analyze interest rate risks by major currencies compared to the previous
fiscal year. The Japanese yen interest rate risk ratio as of March 31, 2003
decreased significantly from 46% to 28%, while US dollar-related interest rate
risk ratio increased from 44% to 50% and euro-related interest rate risk
increased from 7% to 20%, each as compared to March 31, 2002.
Operational Risk Management
Operational risk refers to losses sustained due to defective internal control
systems and disasters and other external factors. The need for the
establishment of an operational risk management system is growing as
operational risk loss incidents continue to occur not only at financial
institutions but at other companies as well. In response to this need, the
Basel Committee on Banking Supervision requires banks to charge operational
risks to capital in the New Basel Capital Accord. We deal with a wide variety
of risks including those related to liquidity, operations, information
security, staff management, criminal activity, transactions with customers,
legal and compliance matters, disasters, strategy and business management,
regulation changes and business reputation. To manage group-wide operational
risk, we are developing a risk management system that includes operational risk
identification, assessment, control and monitoring.
134
Liquidity Risk Management
Liquidity risk is mainly the risk of incurring losses if a poor financial
position hampers our subsidiaries' ability to cover funding requirements. Our
subsidiary banks maintain appropriate liquidity in both Japanese yen and
foreign currencies. Our subsidiary banks manage the daily funding mechanism and
the funding sources, such as liquidity gap, liquidity-supplying products such
as commitment lines and buffer assets. In the fiscal year ended March 31, 2003,
although there was a general decline in the price of our stock, we did not
experience any problems with our funding.
In relation to our total liquidity risk, we have established the following
categories to assess group-wide liquidity risks: Normal, Pre-Concern,
With-Concern and Critical. The front offices and risk management offices of the
holding company and of our subsidiary banks exchange information and data on
cash flows even at the Normal stage. At higher alert stages, we centralize
group-wide information about cash flow information and liquidity risk. We have
also established a system for liaison and consultation on funding in
preparation for emergencies, such as catastrophies, wars and terrorist attacks.
Operations Risk Management
Operations risk is the risk that we will incur losses because our management or
our employees fail to perform their jobs properly, cause accidents or engage in
improprieties. To reduce operations risk, our subsidiary banks endeavor to
ensure the strict observance of procedures and rules, use automation and
systems to reduce manual work and enhance systems for the management of cash
and other instruments that require physical handling. They also provide
operational counseling and have implemented cross-checking measures such as
internal audits. We share data on operational incidents internally to prevent
the recurrence of similar events.
Information Security Risk Management
Information security risk management refers to information systems designed to
protect the group from losses that could result from the alteration, wrongful
use, loss or unauthorized disclosure of information and from the destruction,
malfunction or wrongful use of information systems. When developing any
information system, we perform tests designed to prevent breakdowns. In
addition, we have in place measures designed to minimize the effects of a
system breakdown, including contingency plans, failsafe mechanisms and disaster
prevention training. To safeguard customer information, we have taken steps to
prevent unauthorized infiltration of our computer systems and to strictly guard
confidentiality. We share data on system breakdowns and information security
incidents internally to help prevent the recurrence of similar events.
Compliance
We consider compliance to be one of the most important considerations in
conducting our businesses. As such, we regularly review our compliance systems
and seek enhancements throughout our organization. Our holding company actively
participates in the planning of our overall compliance efforts and continuously
monitors and supervises the status of these efforts. We have a committee, which
includes directors in charge of compliance at the holding company and our
subsidiary banks, that holds quarterly meetings and considers items needed to
improve and strengthen our overall compliance framework. In addition, the
holding company's compliance advisory committee, which is composed of external
experts in the fields of law and accounting, also aims to improve the
effectiveness and transparency of our compliance efforts by making relevant
proposals to the board of directors of our holding company.
Our subsidiary banks each maintain an office dedicated to the coordination of
compliance-related activities. These offices seek to raise staff awareness of
compliance issues by implementing compliance programs and issuing and updating
compliance manuals that explain relevant legal requirements and internal rules,
as well as through various staff training sessions. Compliance committee
meetings are held at regular intervals to confirm the bank's compliance status
and to discuss related topics. Compliance officers are appointed at all of our
135
domestic and overseas headquarters and branch offices to perform periodic
self-assessment and training. Independent checks are performed by separate
internal audit sections to assess the effectiveness of our compliance measures.
Internal Audit
An internal audit is the process by which the internal auditing sections
independently verify the adequacy and effectiveness of the internal control
systems of our compliance and business operations. The audit office of the Bank
of Tokyo-Mitsubishi and the audit division of Mitsubishi Trust Bank are
independent of the activities which they audit. They monitor the risk
management process in our business operations and evaluate the effectiveness of
our internal control systems. These sections seek to improve and correct any
problem or issue identified.
In establishing efficient and effective audit work schedules, the type and
magnitude of the risks involved are considered in determining the frequency and
depth of the audit activities. In the audit and compliance division of the
holding company, we have a monitoring group which evaluates and verifies the
appropriateness and effectiveness of internal control structures, including our
risk management structure. As a core component of its activities, we utilize
process-oriented audits, in accordance with the internal control framework
advocated by the Committee of Sponsoring Organizations of the Treadway
Commission, to ensure the effectiveness and efficiency of operations,
reliability of financial reporting and compliance with applicable laws and
regulations. We have carried out audit-related joint projects with our
subsidiary banks, including business integration audits, establishment of
general audit guidelines and joint training programs.
We have a committee, which includes directors in charge of internal audit and
compliance at the holding company and our subsidiary banks, that holds
quarterly meetings. This committee discusses our internal audit structure and
important policies for the group. The committee also reviews various projects
and, if appropriate, promotes them group-wide.
Item 12. Description of Securities Other Than Equity Securities.
Not applicable.
136
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications of the Rights of Security Holders and Use of
Proceeds.
None.
Item 15. Controls and Procedures.
An evaluation was carried out under the supervision and with the participation
of our management, including the Chief Executive Officer, or CEO, the Co-Chief
Executive Officer, or Co-CEO, and Chief Financial Officer, or CFO, of the
effectiveness of our disclosure controls and procedures as of a date within
ninety days prior to the filing date of this Annual Report. Based on the
evaluation, the CEO, Co-CEO and CFO have concluded that our disclosure controls
and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. Subsequent to the date of their
evaluation, there were no significant changes in our internal controls or in
other factors that could significantly affect the disclosure controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Item 16.A. Audit Committee Financial Expert.
For the fiscal year ended March 31, 2003, compliance was not required.
Item 16.B. Code of Ethics.
For the fiscal year ended March 31, 2003, compliance was not required.
Item 16.C. Principal Accountant Fees and Services.
For the fiscal year ended March 31, 2003, compliance was not required.
Item 16.D. Exemptions from the Listing Standards for Audit Committees.
For the fiscal year ended March 31, 2003, compliance was not required.
137
PART III
Item 17. Financial Statements.
In lieu of responding to this item, we have responded to Item 18 of this Annual
Report.
Item 18. Financial Statements.
The information required by this item is set forth in our consolidated
financial statements starting on page F-1 of this Annual Report.
Item 19. Exhibits.
Exhibit Description
------- -----------
1(a) Articles of Incorporation of Mitsubishi Tokyo Financial Group, Inc., as amended and restated on June
27, 2003.
1(b) Corporation Meetings Regulations of Mitsubishi Tokyo Financial Group, Inc., as adopted on April 2,
2001.*
1(c) Board of Directors Regulations of Mitsubishi Tokyo Financial Group, Inc., as amended on June 27,
2002.*
1(d) Share Handling Regulations of Mitsubishi Tokyo Financial Group, Inc., as amended and restated on
July 1, 2003.
2(a) Form of stock certificates.
2(b) Form of American Depositary Receipt.**
2(c) Deposit Agreement, dated as of April 2, 2001, among Mitsubishi Tokyo Financial Group, Inc., The
Bank of New York and the holders from time to time of American Depositary Receipts issued
thereunder.**
2(d) Indenture dated as of October 11, 1995 between MBL International Finance (Bermuda) Trust, The
Mitsubishi Bank, Limited and The Bank of New York, and First Supplemental Indenture dated as of
April 2, 2001 between MBL International Finance (Bermuda) Trust, The Bank of Tokyo-Mitsubishi,
Ltd. (as successor to The Mitsubishi Bank, Limited), Mitsubishi Tokyo Financial Group, Inc. and The
Bank of New York.*
4(a) Plan of Reorganization for business combination by and among Bank of Tokyo-Mitsubishi,
Mitsubishi Trust Bank and Nippon Trust Bank.*
4(b) Merger Agreement, dated as of April 8, 2002, among KOKUSAI Securities Co., Ltd., Tokyo-
Mitsubishi Securities Co., Ltd., Tokyo-Mitsubishi Personal Securities Co., Ltd. and Issei Securities
Co., Ltd.*
8 Subsidiaries of the Company--see "Item 4.C. Information on the Company--Organizational
Structure."
31 Certifications required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR
240.15d-14(a)).
32 Certifications required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
1350).
99 Consent of Auditors.
--------
* Incorporated by reference from the Annual Report on Form 20-F filed on
August 12, 2002.
** Incorporated by reference from the Registration Statement on Form F-6 (Reg.
No. 333-13338) filed on April 2, 2001.
138
SELECTED STATISTICAL DATA
Due to close integration of foreign and domestic activities, it is difficult to
make a precise determination of assets, liabilities, income and expenses of our
foreign operations. The foreign operations as presented include the business
conducted by overseas subsidiaries and branches, and the international business
conducted by the several international banking related divisions headquartered
in Japan. Our management believes that the results appropriately represent our
domestic and foreign activities.
During the fiscal year ended March 31, 2003, the Bank of Japan changed the
industry segment loan classification. Such change primarily includes an
introduction of new "Communication and information services" category. Due to
the introduction of the new category, certain businesses previously included in
"Manufacturing," "Services," and "Other" industries were reclassified into
"Communication and information services." This change is expected to bring more
transparent and detailed description of loan portfolio. In response to the
change, we modified the loan reporting system. For the purpose of comparison,
we provide the information by industry segment as of March 31, 2003, including
III. Loan Portfolio and IV. Summary of Loan Loss Experience, based on both old
and new industry segment classification.
A-1
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
Average Balance Sheets, Interest and Average Rates
The following table shows our average balances, interest and average interest
rates for the last three fiscal years. Average balances are generally based on
a daily average while a month-end average is used for certain average balances
when it is not practicable to obtain applicable daily averages. The average
balances determined by such methods are considered to be representative of our
operations.
Years ended March 31,
---------------------------------------
2001
--------------------------------------
Average Average
balance Interest rate
--------------- -------------- -------
(in millions, except percentages)
Assets:
Interest-earning assets:
Interest-earning deposits in
other banks:
Domestic......................... (Yen) 402,084 (Yen) 14,013 3.49%
Foreign.......................... 5,275,074 222,613 4.22
--------------- --------------
Total........................... 5,677,158 236,626 4.17
--------------- --------------
Call loans, funds sold, and
receivables under resale
agreements and securities
borrowing transactions:
Domestic......................... 2,473,617 11,454 0.46
Foreign.......................... 2,620,118 173,050 6.60
--------------- --------------
Total........................... 5,093,735 184,504 3.62
--------------- --------------
Trading account assets:
Domestic......................... 2,676,732 12,541 0.47
Foreign.......................... 607,061 4,413 0.73
--------------- --------------
Total........................... 3,283,793 16,954 0.52
--------------- --------------
Investment securities (see Note 1):
Domestic......................... 15,684,644 128,838 0.82
Foreign.......................... 4,090,733 239,843 5.86
--------------- --------------
Total........................... 19,775,377 368,681 1.86
--------------- --------------
Loans (see Note 2):
Domestic......................... 39,938,817 748,113 1.87
Foreign.......................... 9,627,502 728,096 7.56
--------------- --------------
Total........................... 49,566,319 1,476,209 2.98
--------------- --------------
Total interest-earning assets:
Domestic......................... 61,175,894 914,959 1.50
Foreign.......................... 22,220,488 1,368,015 6.16
--------------- --------------
Total........................... 83,396,382 2,282,974 2.74
--------------- --------------
Non-interest-earning assets:
Cash and due from banks............ 1,272,323
Other non-interest-earning
assets............................ 6,152,635
Allowance for credit losses........ (1,479,857)
---------------
Total non-interest-earning
assets......................... 5,945,101
---------------
Total average assets................ (Yen)89,341,483
===============
Years ended March 31,
-------------------------------------------------------------------------------
2002 2003
-------------------------------------- --------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
--------------- -------------- ------- --------------- -------------- -------
(in millions, except percentages)
Assets:
Interest-earning assets:
Interest-earning deposits in
other banks:
Domestic......................... (Yen) 472,188 (Yen) 8,690 1.84% (Yen) 366,422 (Yen) 3,773 1.03%
Foreign.......................... 4,862,738 151,094 3.11 3,199,132 68,850 2.15
--------------- -------------- --------------- --------------
Total........................... 5,334,926 159,784 3.00 3,565,554 72,623 2.04
--------------- -------------- --------------- --------------
Call loans, funds sold, and
receivables under resale
agreements and securities
borrowing transactions:
Domestic......................... 2,008,863 6,341 0.32 1,504,164 4,518 0.30
Foreign.......................... 2,895,879 159,478 5.51 2,488,450 57,326 2.30
--------------- -------------- --------------- --------------
Total........................... 4,904,742 165,819 3.38 3,992,614 61,844 1.55
--------------- -------------- --------------- --------------
Trading account assets:
Domestic......................... 3,165,218 11,525 0.36 3,754,855 10,335 0.28
Foreign.......................... 720,614 3,619 0.50 634,006 1,710 0.27
--------------- -------------- --------------- --------------
Total........................... 3,885,832 15,144 0.39 4,388,861 12,045 0.27
--------------- -------------- --------------- --------------
Investment securities (see Note 1):
Domestic......................... 16,142,601 128,352 0.80 17,975,354 122,601 0.68
Foreign.......................... 5,794,882 271,041 4.68 6,651,722 268,825 4.04
--------------- -------------- --------------- --------------
Total........................... 21,937,483 399,393 1.82 24,627,076 391,426 1.59
--------------- -------------- --------------- --------------
Loans (see Note 2):
Domestic......................... 38,035,043 661,904 1.74 39,104,895 604,989 1.55
Foreign.......................... 11,094,350 614,917 5.54 10,673,412 442,431 4.15
--------------- -------------- --------------- --------------
Total........................... 49,129,393 1,276,821 2.60 49,778,307 1,047,420 2.10
--------------- -------------- --------------- --------------
Total interest-earning assets:
Domestic......................... 59,823,913 816,812 1.37 62,705,690 746,216 1.19
Foreign.......................... 25,368,463 1,200,149 4.73 23,646,722 839,142 3.55
--------------- -------------- --------------- --------------
Total........................... 85,192,376 2,016,961 2.37 86,352,412 1,585,358 1.84
--------------- -------------- --------------- --------------
Non-interest-earning assets:
Cash and due from banks............ 1,487,867 1,979,459
Other non-interest-earning
assets............................ 7,423,316 8,829,311
Allowance for credit losses........ (1,727,559) (1,682,955)
--------------- ---------------
Total non-interest-earning
assets......................... 7,183,624 9,125,815
--------------- ---------------
Total average assets................ (Yen)92,376,000 (Yen)95,478,227
=============== ===============
--------
Notes:
1. Tax-exempt income of tax-exempt investment securities has not been
calculated on a tax equivalent basis because the effect of such calculation
would not be material.
2. Average balances on loans outstanding include all nonaccrual and
restructured loans. See "III. Loan Portfolio." The amortized portion of net
loan origination fees (costs) is included in interest income on loans,
representing an adjustment to the yields with insignificant impact.
A-2
Years ended March 31,
---------------------------------------------------------------------------------------------
2001 2002 2003
------------------------------------- ------------------------------------- ---------------
Average Average Average Average Average
balance Interest rate balance Interest rate balance
--------------- -------------- ------- --------------- -------------- ------- ---------------
(in millions, except percentages)
Liabilities and shareholders'
equity:
Interest-bearing liabilities:
Deposits:
Domestic........................ (Yen)41,178,462 (Yen) 245,180 0.60% (Yen)44,807,025 (Yen) 157,484 0.35% (Yen)50,445,839
Foreign......................... 11,552,974 529,332 4.58 10,982,859 328,159 2.99 8,964,019
--------------- -------------- --------------- -------------- ---------------
Total.......................... 52,731,436 774,512 1.47 55,789,884 485,643 0.87 59,409,858
--------------- -------------- --------------- -------------- ---------------
Debentures--Domestic............. 3,915,720 32,285 0.82 2,931,103 20,491 0.70 1,343,078
--------------- -------------- --------------- -------------- ---------------
Call money, funds purchased,
and payables under
repurchase agreements and
securities lending
transactions:
Domestic........................ 4,074,516 66,475 1.63 5,392,511 23,944 0.44 4,839,297
Foreign......................... 3,127,256 194,210 6.21 3,603,909 176,396 4.89 3,652,399
--------------- -------------- --------------- -------------- ---------------
Total.......................... 7,201,772 260,685 3.62 8,996,420 200,340 2.23 8,491,696
--------------- -------------- --------------- -------------- ---------------
Due to trust account--
Domestic........................ 4,023,941 27,825 0.69 2,940,975 16,683 0.57 1,691,359
--------------- -------------- --------------- -------------- ---------------
Other short-term borrowings and
trading account liabilities:
Domestic........................ 2,125,283 18,173 0.86 2,071,577 15,784 0.76 2,870,818
Foreign......................... 874,676 19,057 2.18 1,001,886 30,783 3.07 624,089
--------------- -------------- --------------- -------------- ---------------
Total.......................... 2,999,959 37,230 1.24 3,073,463 46,567 1.52 3,494,907
--------------- -------------- --------------- -------------- ---------------
Long-term debt:
Domestic........................ 2,730,602 91,182 3.34 3,007,228 89,028 2.96 3,682,595
Foreign......................... 2,146,354 86,899 4.05 2,010,632 80,311 3.99 1,594,637
--------------- -------------- --------------- -------------- ---------------
Total.......................... 4,876,956 178,081 3.65 5,017,860 169,339 3.37 5,277,232
--------------- -------------- --------------- -------------- ---------------
Total interest-bearing liabilities:
Domestic........................ 58,048,524 481,120 0.83 61,150,419 323,414 0.53 64,872,986
Foreign......................... 17,701,260 829,498 4.69 17,599,286 615,649 3.50 14,835,144
--------------- -------------- --------------- -------------- ---------------
Total.......................... 75,749,784 1,310,618 1.73 78,749,705 939,063 1.19 79,708,130
--------------- -------------- --------------- -------------- ---------------
Non-interest-bearing
liabilities....................... 10,127,448 10,580,687 13,338,569
--------------- --------------- ---------------
Shareholders' equity............... 3,464,251 3,045,608 2,431,528
--------------- --------------- ---------------
Total average liabilities and
shareholders' equity.............. (Yen)89,341,483 (Yen)92,376,000 (Yen)95,478,227
=============== =============== ===============
Net interest income and average
interest rate spread.............. (Yen) 972,356 1.01% (Yen)1,077,898 1.18%
============== ==== ============== ====
Net interest income as a
percentage of average total
interest-earning assets........... 1.17% 1.27%
==== ====
Years ended March 31,
----------------------
2003
----------------------
Average
Interest rate
-------------- -------
(in millions, except
percentages)
Liabilities and shareholders'
equity:
Interest-bearing liabilities:
Deposits:
Domestic........................ (Yen) 86,460 0.17%
Foreign......................... 157,295 1.75
--------------
Total.......................... 243,755 0.41
--------------
Debentures--Domestic............. 8,508 0.63
--------------
Call money, funds purchased,
and payables under
repurchase agreements and
securities lending
transactions:
Domestic........................ 13,403 0.28
Foreign......................... 94,018 2.57
--------------
Total.......................... 107,421 1.27
--------------
Due to trust account--
Domestic........................ 8,673 0.51
--------------
Other short-term borrowings and
trading account liabilities:
Domestic........................ 14,033 0.49
Foreign......................... 17,287 2.77
--------------
Total.......................... 31,320 0.90
--------------
Long-term debt:
Domestic........................ 92,214 2.50
Foreign......................... 48,026 3.01
--------------
Total.......................... 140,240 2.66
--------------
Total interest-bearing liabilities:
Domestic........................ 223,291 0.34
Foreign......................... 316,626 2.13
--------------
Total.......................... 539,917 0.68
--------------
Non-interest-bearing
liabilities.......................
Shareholders' equity...............
Total average liabilities and
shareholders' equity..............
Net interest income and average
interest rate spread.............. (Yen)1,045,441 1.16%
============== ====
Net interest income as a
percentage of average total
interest-earning assets........... 1.21%
====
The percentage of average total assets attributable to foreign activities was
28.7%, 33.6% and 29.3%, respectively, for the fiscal years ended March 31,
2001, 2002 and 2003.
The percentage of average total liabilities attributable to foreign activities
was 29.9%, 33.9% and 29.9%, respectively, for the fiscal years ended March 31,
2001, 2002 and 2003.
A-3
Analysis of Net Interest Income
The following table shows changes in our net interest income between changes in
volume and changes in rate for the fiscal year ended March 31, 2002 compared to
the fiscal year ended March 31, 2001 and the fiscal year ended March 31, 2003
compared to the fiscal year ended March 31, 2002.
Year ended March 31, 2001 versus Year ended March 31, 2002 versus
year ended March 31, 2002 year ended March 31, 2003
------------------------------------------ ------------------------------------------
Increase (decrease) due Increase (decrease) due
to changes in to changes in
--------------------------- ---------------------------
Volume Rate Net change Volume Rate Net change
------------ ------------- ------------- ------------ ------------- -------------
(in millions)
Interest income:
Interest-earning deposits in other banks:
Domestic............................ (Yen) 1,290 (Yen) (6,613) (Yen) (5,323) (Yen) (1,319) (Yen) (3,598) (Yen) (4,917)
Foreign............................. (13,690) (57,829) (71,519) (44,376) (37,868) (82,244)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... (12,400) (64,442) (76,842) (45,695) (41,466) (87,161)
------------ ------------- ------------- ------------ ------------- -------------
Call loans, funds sold, and receivables
under resale agreements and
securities borrowing transactions:
Domestic............................ (1,694) (3,419) (5,113) (1,583) (240) (1,823)
Foreign............................. 15,186 (28,758) (13,572) (10,761) (91,391) (102,152)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... 13,492 (32,177) (18,685) (12,344) (91,631) (103,975)
------------ ------------- ------------- ------------ ------------- -------------
Trading account assets:
Domestic............................ 1,779 (2,795) (1,016) 1,623 (2,813) (1,190)
Foreign............................. 570 (1,364) (794) (261) (1,648) (1,909)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... 2,349 (4,159) (1,810) 1,362 (4,461) (3,099)
------------ ------------- ------------- ------------ ------------- -------------
Investment securities (see Note 2):
Domestic............................ 3,641 (4,127) (486) 12,500 (18,251) (5,751)
Foreign............................. 79,707 (48,509) 31,198 34,629 (36,845) (2,216)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... 83,348 (52,636) 30,712 47,129 (55,096) (7,967)
------------ ------------- ------------- ------------ ------------- -------------
Loans:
Domestic............................ (34,132) (52,077) (86,209) 16,552 (73,467) (56,915)
Foreign............................. 81,302 (194,481) (113,179) (18,065) (154,421) (172,486)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... 47,170 (246,558) (199,388) (1,513) (227,888) (229,401)
------------ ------------- ------------- ------------ ------------- -------------
Total interest income:
Domestic............................ (29,116) (69,031) (98,147) 27,773 (98,369) (70,596)
Foreign............................. 163,075 (330,941) (167,866) (38,834) (322,173) (361,007)
------------ ------------- ------------- ------------ ------------- -------------
Total........................... (Yen)133,959 (Yen)(399,972) (Yen)(266,013) (Yen)(11,061) (Yen)(420,542) (Yen)(431,603)
============ ============= ============= ============ ============= =============
--------
Notes:
1. Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total "net change."
2. Tax-exempt income of tax-exempt investment securities has not been
calculated on a tax equivalent basis because the effect of such calculation
would not be material.
A-4
Year ended March 31, 2001 Year ended March 31, 2002
versus year ended March 31, 2002 versus year ended March 31, 2003
------------------------------------------ ------------------------------------------
Increase (decrease) Increase (decrease)
due to changes in due to changes in
--------------------------- ---------------------------
Volume Rate Net change Volume Rate Net change
------------ ------------- ------------- ------------ ------------- -------------
(in millions)
Interest expense:
Deposits:
Domestic........................ (Yen) 12,753 (Yen)(100,449) (Yen) (87,696) (Yen) 9,664 (Yen) (80,688) (Yen) (71,024)
Foreign......................... (17,840) (183,333) (201,173) (41,467) (129,397) (170,864)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... (5,087) (283,782) (288,869) (31,803) (210,085) (241,888)
------------ ------------- ------------- ------------ ------------- -------------
Debentures--Domestic............... (7,688) (4,106) (11,794) (11,018) (965) (11,983)
------------ ------------- ------------- ------------ ------------- -------------
Call money, funds purchased, and
payables under repurchase
agreements and securities lending
transactions:
Domestic........................ 5,852 (48,383) (42,531) (1,679) (8,862) (10,541)
Foreign......................... 23,330 (41,144) (17,814) 1,248 (83,626) (82,378)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... 29,182 (89,527) (60,345) (431) (92,488) (92,919)
------------ ------------- ------------- ------------ ------------- -------------
Due to trust account--Domestic..... (6,987) (4,155) (11,142) (7,003) (1,007) (8,010)
------------ ------------- ------------- ------------ ------------- -------------
Other short-term borrowings and
trading account liabilities:
Domestic........................ (418) (1,971) (2,389) 3,907 (5,658) (1,751)
Foreign......................... 3,069 8,657 11,726 (11,433) (2,063) (13,496)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... 2,651 6,686 9,337 (7,526) (7,721) (15,247)
------------ ------------- ------------- ------------ ------------- -------------
Long-term debt:
Domestic........................ 8,189 (10,343) (2,154) 16,912 (13,726) 3,186
Foreign......................... (5,483) (1,105) (6,588) (14,345) (17,940) (32,285)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... 2,706 (11,448) (8,742) 2,567 (31,666) (29,099)
------------ ------------- ------------- ------------ ------------- -------------
Total interest expense:
Domestic........................ 11,701 (169,407) (157,706) 10,783 (110,906) (100,123)
Foreign......................... 3,076 (216,925) (213,849) (65,997) (233,026) (299,023)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... (Yen) 14,777 (Yen)(386,332) (Yen)(371,555) (Yen)(55,214) (Yen)(343,932) (Yen)(399,146)
============ ============= ============= ============ ============= =============
Net interest income:
Domestic........................ (Yen)(40,817) (Yen) 100,376 (Yen) 59,559 (Yen) 16,990 (Yen) 12,537 (Yen) 29,527
Foreign......................... 159,999 (114,016) 45,983 27,163 (89,147) (61,984)
------------ ------------- ------------- ------------ ------------- -------------
Total....................... (Yen)119,182 (Yen) (13,640) (Yen) 105,542 (Yen) 44,153 (Yen) (76,610) (Yen) (32,457)
============ ============= ============= ============ ============= =============
--------
Note--Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total "net change."
A-5
II. Investment Portfolio
The following table shows information as to the value of our investment
securities available for sale and being held to maturity at March 31, 2001,
2002 and 2003.
At March 31,
---------------------------------------------------------------------------------------------
2001 2002
---------------------------------------------- ----------------------------------------------
Net
Estimated Net Amortized Estimated unrealized
Amortized market unrealized cost market gains
cost value gains (Restated) value (Restated)
--------------- --------------- -------------- --------------- --------------- --------------
(in millions)
Securities available
for sale:
Domestic:
Japanese national
government and
Japanese
government
agency bonds...... (Yen) 7,940,554 (Yen) 8,018,687 (Yen) 78,133 (Yen) 9,887,613 (Yen) 9,951,250 (Yen) 63,637
Corporate bonds.... 1,263,076 1,283,096 20,020 1,341,079 1,353,028 11,949
Marketable equity
securities........ 4,145,826 6,483,719 2,337,893 3,695,451 5,279,562 1,584,111
Other securities... 459,380 469,988 10,608 844,695 854,358 9,663
--------------- --------------- -------------- --------------- --------------- --------------
Total domestic.... 13,808,836 16,255,490 2,446,654 15,768,838 17,438,198 1,669,360
--------------- --------------- -------------- --------------- --------------- --------------
Foreign:
U.S. Treasury and
other U.S.
government
agencies
bonds............. 723,624 738,957 15,333 1,004,277 1,031,942 27,665
Other governments
and official
institutions
bonds............. 1,131,873 1,153,331 21,458 1,706,593 1,790,712 84,119
Mortgage-backed
securities........ 2,110,821 2,135,756 24,935 1,444,359 1,523,026 78,667
Other securities... 1,403,352 1,447,381 44,029 1,432,354 1,498,938 66,584
--------------- --------------- -------------- --------------- --------------- --------------
Total foreign..... 5,369,670 5,475,425 105,755 5,587,583 5,844,618 257,035
--------------- --------------- -------------- --------------- --------------- --------------
Total............ (Yen)19,178,506 (Yen)21,730,915 (Yen)2,552,409 (Yen)21,356,421 (Yen)23,282,816 (Yen)1,926,395
=============== =============== ============== =============== =============== ==============
Securities being held
to maturity:
Domestic:
Japanese national
government and
Japanese
government
agency bonds...... (Yen) 114,489 (Yen) 120,118 (Yen) 5,629 (Yen) 89,945 (Yen) 94,266 (Yen) 4,321
Other securities... 116,773 122,482 5,709 107,544 112,296 4,752
--------------- --------------- -------------- --------------- --------------- --------------
Total domestic.... 231,262 242,600 11,338 197,489 206,562 9,073
--------------- --------------- -------------- --------------- --------------- --------------
Foreign:
U.S. Treasury and
other U.S.
government
agencies
bonds............. 4,301 4,320 19 -- -- --
Other governments
and official
institutions
bonds............. 68,168 71,441 3,273 69,529 72,822 3,293
Other securities... 2,476 2,566 90 5,145 5,340 195
--------------- --------------- -------------- --------------- --------------- --------------
Total foreign..... 74,945 78,327 3,382 74,674 78,162 3,488
--------------- --------------- -------------- --------------- --------------- --------------
Total............ (Yen) 306,207 (Yen) 320,927 (Yen) 14,720 (Yen) 272,163 (Yen) 284,724 (Yen) 12,561
=============== =============== ============== =============== =============== ==============
At March 31,
-----------------------------------------------
2003
----------------------------------------------
Estimated Net
Amortized market unrealized
cost value gains
--------------- --------------- --------------
(in millions)
Securities available
for sale:
Domestic:
Japanese national
government and
Japanese
government
agency bonds...... (Yen)10,912,961 (Yen)11,023,887 (Yen) 110,926
Corporate bonds.... 1,179,487 1,185,335 5,848
Marketable equity
securities........ 2,718,804 3,428,344 709,540
Other securities... 824,975 834,750 9,775
--------------- --------------- --------------
Total domestic.... 15,636,227 16,472,316 836,089
--------------- --------------- --------------
Foreign:
U.S. Treasury and
other U.S.
government
agencies
bonds............. 2,524,559 2,559,314 34,755
Other governments
and official
institutions
bonds............. 2,705,042 2,853,815 148,773
Mortgage-backed
securities........ 1,195,741 1,211,111 15,370
Other securities... 1,222,506 1,267,510 45,004
--------------- --------------- --------------
Total foreign..... 7,647,848 7,891,750 243,902
--------------- --------------- --------------
Total............ (Yen)23,284,075 (Yen)24,364,066 (Yen)1,079,991
=============== =============== ==============
Securities being held
to maturity:
Domestic:
Japanese national
government and
Japanese
government
agency bonds...... (Yen) 70,208 (Yen) 74,095 (Yen) 3,887
Other securities... 95,904 101,833 5,929
--------------- --------------- --------------
Total domestic.... 166,112 175,928 9,816
--------------- --------------- --------------
Foreign:
U.S. Treasury and
other U.S.
government
agencies
bonds............. -- -- --
Other governments
and official
institutions
bonds............. 25,020 27,596 2,576
Other securities... -- -- --
--------------- --------------- --------------
Total foreign..... 25,020 27,596 2,576
--------------- --------------- --------------
Total............ (Yen) 191,132 (Yen) 203,524 (Yen) 12,392
=============== =============== ==============
A-6
Subsequent to the filing of our Annual Report on Form 20-F for the fiscal year
ended March 31, 2002, management determined that amortized costs and net
unrealized gains on securities available for sale for the fiscal year ended
March 31, 2002 were erroneously disclosed. As a result, such amounts have been
restated for the amounts previously reported as follows:
2002
- --------------------------------------------------------
Amortized cost Net unrealized gains
----------------------------- --------------------------
As previously As previously
reported As restated reported As restated
-------------- -------------- ------------- ------------
(in millions)
Securities available for sale:
Foreign:
U.S. Treasury and other U.S. government agencies
bonds........................................... (Yen)1,007,414 (Yen)1,004,277 (Yen) 24,528 (Yen) 27,665
Other governments and official institutions bonds. 1,753,882 1,706,593 36,830 84,119
Mortgage-backed securities........................ 1,455,274 1,444,359 67,752 78,667
Other securities.................................. 1,371,013 1,432,354 127,925 66,584
-------------- -------------- ------------ ------------
Total foreign................................... (Yen)5,587,583 (Yen)5,587,583 (Yen)257,035 (Yen)257,035
============== ============== ============ ============
Investment securities other than available for sale or being held to maturity
(i.e., nonmarketable equity securities, presented in other investment
securities in the consolidated financial statements) were carried at costs of
(Yen)168,547 million, (Yen)129,498 million and (Yen)145,431 million, at March
31, 2001, 2002 and 2003, respectively. The corresponding estimated fair values
at those dates were not readily determinable.
A-7
The following table presents the book values, maturities and weighted average
yields of investment securities available for sale and being held to maturity,
excluding equity securities, at March 31, 2003. Weighted average yields are
calculated based on amortized cost. Yields on tax-exempt obligations have not
been calculated on a tax equivalent basis because the effect of such
calculation would not be material:
Maturities Maturities
after one year after five years but Maturities
Maturities within but within within after
one year five years ten years ten years
------------------- -------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------- ----- --------------- ----- -------------- ----- -------------- -----
(in millions, except percentages)
Securities available for sale:
Domestic:
Japanese national government
and Japanese government
agency bonds................. (Yen)2,820,344 0.11% (Yen) 5,520,809 0.69% (Yen)2,393,351 1.42% (Yen) 289,383 0.81%
Corporate bonds............... 274,935 1.45 844,462 1.34 57,693 1.01 8,245 0.84
Other securities.............. 310,098 0.87 366,431 3.07 75,517 1.59 82,704 0.52
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total domestic.............. 3,405,377 0.29 6,731,702 0.90 2,526,561 1.42 380,332 0.75
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Foreign:
U.S. Treasury and other U.S.
government agencies.......... 58,795 3.21 2,205,440 2.91 209,957 3.93 85,122 5.39
Other governments and official
institutions................. 305,768 3.58 1,892,438 4.23 617,710 4.42 37,899 4.61
Mortgage-backed securities.... 36,252 2.18 68,001 5.87 62,295 4.96 1,044,563 5.19
Other securities.............. 192,301 1.93 657,990 2.85 208,848 4.09 45,653 4.89
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total foreign............... 593,116 2.92 4,823,869 3.45 1,098,810 4.29 1,213,237 5.18
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total...................... (Yen)3,998,493 0.67% (Yen)11,555,571 1.95% (Yen)3,625,371 2.27% (Yen)1,593,569 4.12%
============== ==== =============== ==== ============== ==== ============== ====
Securities being held to
maturity:
Domestic:
Japanese national government
and Japanese government
agency bonds................. (Yen) 15,427 2.42% (Yen) 37,349 2.16% (Yen) 17,432 1.90% (Yen) -- --%
Other securities.............. 9,848 2.92 29,127 2.30 56,929 1.73 -- --
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total domestic.............. 25,275 2.62 66,476 2.22 74,361 1.77 -- --
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Foreign:
U.S. Treasury and other U.S.
government agencies.......... -- -- -- -- -- -- -- --
Other governments and official
institutions................. -- -- 25,020 7.21 -- -- -- --
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total foreign............... -- -- 25,020 7.21 -- -- -- --
-------------- ---- --------------- ---- -------------- ---- -------------- ----
Total...................... (Yen) 25,275 2.62% (Yen) 91,496 3.59% (Yen) 74,361 1.77% (Yen) -- --%
============== ==== =============== ==== ============== ==== ============== ====
Total
--------------------
Amount Yield
--------------- -----
Securities available for sale:
Domestic:
Japanese national government
and Japanese government
agency bonds................. (Yen)11,023,887 0.70%
Corporate bonds............... 1,185,335 1.35
Other securities.............. 834,750 1.86
--------------- ----
Total domestic.............. 13,043,972 0.83
--------------- ----
Foreign:
U.S. Treasury and other U.S.
government agencies.......... 2,559,314 3.09
Other governments and official
institutions................. 2,853,815 4.20
Mortgage-backed securities.... 1,211,111 5.12
Other securities.............. 1,104,792 3.00
--------------- ----
Total foreign............... 7,729,032 3.80
--------------- ----
Total...................... (Yen)20,773,004 1.92%
=============== ====
Securities being held to
maturity:
Domestic:
Japanese national government
and Japanese government
agency bonds................. (Yen) 70,208 2.15%
Other securities.............. 95,904 2.03
--------------- ----
Total domestic.............. 166,112 2.08
--------------- ----
Foreign:
U.S. Treasury and other U.S.
government agencies.......... -- --
Other governments and official
institutions................. 25,020 7.21
--------------- ----
Total foreign............... 25,020 7.21
--------------- ----
Total...................... (Yen) 191,132 2.75%
=============== ====
Excluding Japanese national government bonds, the following table sets forth
the securities of individual issuers held in our investment securities
portfolio which exceeded 10% of our consolidated shareholders' equity at March
31, 2003.
Amortized
cost Fair value
-------------- --------------
(in millions)
U.S. Treasury and other U.S. government agencies bonds............................ (Yen)2,524,559 (Yen)2,559,314
German federal bonds.............................................................. 844,365 904,517
French government bonds........................................................... 489,940 507,921
Mortgage-backed securities issued by U.S. Federal Home Loan Mortgage Corporation.. 451,236 463,610
Mortgage-backed securities issued by U.S. Federal National Mortgage Association... 412,538 415,277
Mortgage-backed securities issued by U.S. Government National Mortgage Association 331,966 332,225
A-8
As a result of the restatement described above, the following table which sets
forth the securities of individual issuers held in our investment securities
portfolio exceeding 10% of our consolidated shareholders' equity, excluding
Japanese national government bonds, at March 31, 2002, was also restated as
follows:
Amortized cost Fair value
----------------------------- -----------------------------
As previously As previously
reported As restated reported As restated
-------------- -------------- -------------- --------------
(in millions)
U.S. Treasury and other U.S. government agencies
bonds............................................... (Yen)1,007,414 (Yen)1,004,277 (Yen)1,031,942 (Yen)1,031,942
Mortgage-backed securities issued by U.S. Federal
National Mortgage Association....................... 408,786 392,176 419,389 419,389
Mortgage-backed securities issued by U.S. Federal Home
Loan Mortgage Corporation........................... 329,506 321,118 344,361 344,361
French government bonds............................... 461,629 439,072 454,505 454,505
III. Loan Portfolio
The following table shows our loans outstanding, before deduction of allowance
for credit losses, by domicile and type of industry of borrower at March 31 of
each of the five years in the period ended March 31, 2003. Classification of
loans by industry is based on the industry segment loan classification as
defined by the Bank of Japan for regulatory reporting purposes and is not
necessarily based on use of proceeds:
At March 31,
-----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------- --------------- --------------- --------------- -------------------------------
Old Old Old Old Old New
classification classification classification classification classification classification
--------------- --------------- --------------- --------------- --------------- ---------------
(in millions)
Domestic:
Manufacturing............... (Yen) 7,171,934 (Yen) 6,877,734 (Yen) 6,451,672 (Yen) 6,394,459 (Yen) 6,119,502 (Yen) 6,034,347
Construction................ 1,931,928 1,816,338 1,726,278 1,535,191 1,277,407 1,277,407
Real estate................. 5,594,982 5,045,318 5,272,787 4,923,688 4,297,718 4,298,146
Services.................... 5,398,917 5,010,678 4,763,938 4,549,692 5,062,035 4,953,830
Wholesale and retail........ 7,734,297 6,926,200 6,592,660 5,983,958 5,634,752 5,458,337
Banks and other financial
institutions............... 4,241,691 3,947,735 4,069,828 4,271,182 3,598,028 3,598,028
Communication and
information services....... -- -- -- -- -- 1,516,020
Other industries............ 3,649,278 3,837,809 2,797,419 3,850,153 5,004,704 3,858,031
Consumer.................... 6,905,666 7,141,689 6,934,440 7,049,095 7,425,702 7,425,702
--------------- --------------- --------------- --------------- --------------- ---------------
Total domestic........... 42,628,693 40,603,501 38,609,022 38,557,418 38,419,848 38,419,848
--------------- --------------- --------------- --------------- --------------- ---------------
Foreign:
Governments and official
institutions............... 362,404 244,172 315,321 326,086 235,093 235,093
Banks and other financial
institutions............... 745,783 692,322 783,501 680,449 928,059 928,059
Commercial and industrial... 9,617,336 7,652,750 8,820,141 9,708,102 8,413,452 8,413,452
Other....................... 1,711,988 887,507 1,173,223 1,000,044 510,179 510,179
--------------- --------------- --------------- --------------- --------------- ---------------
Total foreign............ 12,437,511 9,476,751 11,092,186 11,714,681 10,086,783 10,086,783
--------------- --------------- --------------- --------------- --------------- ---------------
Total................. 55,066,204 50,080,252 49,701,208 50,272,099 48,506,631 48,506,631
Less unearned income and
deferred loan fees--net........ 37,454 30,868 30,305 42,374 41,062 41,062
--------------- --------------- --------------- --------------- --------------- ---------------
Total................. (Yen)55,028,750 (Yen)50,049,384 (Yen)49,670,903 (Yen)50,229,725 (Yen)48,465,569 (Yen)48,465,569
=============== =============== =============== =============== =============== ===============
--------
Notes:
1. Loans to the 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, mortgage
lending and credit card businesses.
2. The table includes loans held for sale of (Yen)3,178 million and (Yen)3,965
million at March 31, 2002 and 2003, respectively.
A-9
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the maturities of our loan portfolio at March 31,
2003:
Old Classification
Maturity
------------------------------------------------------------------
One year or less One to five years Over five years Total
---------------- ----------------- --------------- ---------------
(in millions)
Domestic:
Manufacturing............................ (Yen) 4,190,901 (Yen) 1,715,952 (Yen) 212,649 (Yen) 6,119,502
Construction............................. 903,806 292,043 81,558 1,277,407
Real estate.............................. 1,650,339 1,568,213 1,079,166 4,297,718
Services................................. 2,860,602 1,616,585 584,848 5,062,035
Wholesale and retail..................... 4,088,596 1,332,266 213,890 5,634,752
Banks and other financial institutions... 2,144,640 919,801 533,587 3,598,028
Other industries......................... 3,328,678 1,197,943 478,083 5,004,704
Consumer:
Installment loans to individuals..... 252,831 1,497,090 4,996,080 6,746,001
Other................................ 530,492 55,326 93,883 679,701
--------------- --------------- --------------- ---------------
Total domestic.................... 19,950,885 10,195,219 8,273,744 38,419,848
Foreign..................................... 5,112,742 2,809,922 2,164,119 10,086,783
--------------- --------------- --------------- ---------------
Total............................. (Yen)25,063,627 (Yen)13,005,141 (Yen)10,437,863 (Yen)48,506,631
=============== =============== =============== ===============
New Classification
Maturity
------------------------------------------------------------------
One year or less One to five years Over five years Total
---------------- ----------------- --------------- ---------------
(in millions)
Domestic:
Manufacturing............................ (Yen) 4,132,152 (Yen) 1,694,551 (Yen) 207,644 (Yen) 6,034,347
Construction............................. 903,806 292,043 81,558 1,277,407
Real estate.............................. 1,650,639 1,568,341 1,079,166 4,298,146
Services................................. 2,806,768 1,581,088 565,974 4,953,830
Wholesale and retail..................... 3,985,352 1,279,660 193,325 5,458,337
Banks and other financial institutions... 2,144,640 919,801 533,587 3,598,028
Communication and information services... 879,670 388,961 247,389 1,516,020
Other industries......................... 2,664,535 918,358 275,138 3,858,031
Consumer:
Installment loans to individuals..... 252,831 1,497,090 4,996,080 6,746,001
Other................................ 530,492 55,326 93,883 679,701
--------------- --------------- --------------- ---------------
Total domestic.................... 19,950,885 10,195,219 8,273,744 38,419,848
Foreign..................................... 5,112,742 2,809,922 2,164,119 10,086,783
--------------- --------------- --------------- ---------------
Total............................. (Yen)25,063,627 (Yen)13,005,141 (Yen)10,437,863 (Yen)48,506,631
=============== =============== =============== ===============
A-10
The above loans due after one year which had predetermined interest rates and
floating or adjustable interest rates at March 31, 2003 are shown below.
Domestic Foreign Total
--------------- -------------- ---------------
(in millions)
Predetermined rate......... (Yen) 7,450,626 (Yen)1,648,368 (Yen) 9,098,994
Floating or adjustable rate 11,018,337 3,325,673 14,344,010
--------------- -------------- ---------------
Total................... (Yen)18,468,963 (Yen)4,974,041 (Yen)23,443,004
=============== ============== ===============
Nonaccrual, Past Due and Restructured Loans
We generally discontinue accrual of interest income on loans when substantial
doubt exists as to the full and timely collection of either principal or
interest, or when principal or interest is contractually past due one month or
more with respect to loans of banking subsidiaries, including Bank of
Tokyo-Mitsubishi and Mitsubishi Trust Bank, and 90 days or more with respect to
loans of certain foreign banking subsidiaries.
A-11
The following table shows the distribution of our nonaccrual loans,
restructured loans and accruing loans which are contractually past due 90 days
or more as to principal or interest payments at March 31 of each of the five
years in the period ended March 31, 2003, based on the domicile and type of
industry of the borrowers:
At March 31,
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
-------------- -------------- -------------- -------------- -----------------------------
Old Old Old Old Old New
classification classification classification classification classification classification
-------------- -------------- -------------- -------------- -------------- --------------
(in millions)
Nonaccrual loans:
Domestic:
Manufacturing.................. (Yen) 141,830 (Yen) 112,245 (Yen) 118,935 (Yen) 142,572 (Yen) 112,152 (Yen) 111,107
Construction................... 138,803 226,170 202,506 213,491 149,918 149,918
Real estate.................... 981,504 829,616 939,267 841,414 266,408 266,408
Services....................... 457,083 290,286 247,697 214,877 85,602 87,492
Wholesale and retail........... 380,076 389,262 229,965 251,061 238,986 224,468
Banks and other financial
institutions.................. 245,533 140,928 125,649 58,568 17,794 17,794
Communication and
information services.......... -- -- -- -- -- 14,081
Other industries............... 26,848 23,921 39,963 39,687 54,330 53,922
Consumer....................... 83,809 56,206 163,076 166,333 150,989 150,989
-------------- -------------- -------------- -------------- -------------- --------------
Total domestic.............. 2,455,486 2,068,634 2,067,058 1,928,003 1,076,179 1,076,179
-------------- -------------- -------------- -------------- -------------- --------------
Foreign:
Governments and official
institutions.................. 895 1,032 2,336 3,341 1,747 1,747
Banks and other financial
institutions.................. 19,670 14,458 8,403 9,119 8,387 8,387
Commercial and
industrial.................... 198,951 167,271 180,760 226,054 271,090 271,090
Other.......................... 31,599 26,604 32,345 7,059 56,156 56,156
-------------- -------------- -------------- -------------- -------------- --------------
Total foreign............... 251,115 209,365 223,844 245,573 337,380 337,380
-------------- -------------- -------------- -------------- -------------- --------------
Total....................... 2,706,601 2,277,999 2,290,902 2,173,576 1,413,559 1,413,559
============== ============== ============== ============== ============== ==============
Restructured loans:
Domestic.......................... 632,187 449,673 1,855,616 1,859,176 1,212,832 1,212,832
Foreign........................... 23,143 53,206 98,879 109,190 106,236 106,236
-------------- -------------- -------------- -------------- -------------- --------------
Total....................... 655,330 502,879 1,954,495 1,968,366 1,319,068 1,319,068
============== ============== ============== ============== ============== ==============
Accruing loans contractually past due
90 days or more:
Domestic.......................... 78,129 62,286 24,005 20,276 17,533 17,533
Foreign........................... 37,708 1,751 3,392 2,764 2,866 2,866
-------------- -------------- -------------- -------------- -------------- --------------
Total....................... 115,837 64,037 27,397 23,040 20,399 20,399
============== ============== ============== ============== ============== ==============
Total....................... (Yen)3,477,768 (Yen)2,844,915 (Yen)4,272,794 (Yen)4,164,982 (Yen)2,753,026 (Yen)2,753,026
============== ============== ============== ============== ============== ==============
--------
Note--The above table does not include real estate acquired in full or partial
satisfaction of debt and certain assets under the management of the Cooperative
Credit Purchasing Company which are recorded at estimated fair value less
estimated cost to sell.
Gross interest income which would have been accrued at the original terms on
domestic nonaccrual and restructured loans outstanding during the fiscal year
ended March 31, 2003 was approximately (Yen)60.2 billion, of which (Yen)46.5
billion was included in the results of operations for the year. Gross interest
income which would have been accrued at the original terms on foreign
nonaccrual and restructured loans outstanding for the fiscal year ended March
31, 2003 was approximately (Yen)17.2 billion, of which (Yen)11.1 billion was
included in the results of operations for the year.
A-12
Foreign Loans Outstanding
Cross-border outstandings are defined, for this purpose, as including loans
(including accrued interest), acceptances, interest-earning deposits with other
banks, other interest-earning investments and any other monetary assets
denominated in Japanese yen or other non-local currencies. Material local
currency loans outstanding which are neither hedged nor funded by local
currency borrowings are included in cross-border outstandings.
At March 31, 2001 and 2002, we had no cross-border outstandings to borrowers in
any foreign country which total exceeded 0.75% of consolidated total assets.
The following table sets forth our cross-border outstandings for the country in
which total were between 0.75% and 1% of consolidated total assets at March 31,
2003.
Cross-border Percentage of
outstandings total assets
------------- -------------
(in millions)
United Kingdom (Yen)810,668 0.84%
Guarantees of outstandings of borrowers of other countries are considered to be
outstandings of the guarantor. Loans made to, or deposits placed with, a branch
of a foreign bank located outside the foreign bank's home country are
considered to be loans to, or deposits with, the foreign bank. Outstandings of
a country do not include principal or interest amounts of which are supported
by written, legally enforceable guarantees by guarantors of other countries or
the amounts of outstandings to the extent that they are secured by tangible,
liquid collateral held and realizable by Bank of Tokyo-Mitsubishi, Mitsubishi
Trust Bank and their subsidiaries outside the country in which they operate.
In addition to credit risk, cross-border outstandings are subject to country
risk that as a result of political or economic conditions in a country,
borrowers may be unable or unwilling to pay principal and interest according to
contractual terms. Other risks related to cross-border outstandings include the
possibility of insufficient foreign exchange and restrictions on its
availability.
In order to manage country risk, we establish various risk management measures
internally. Among other things, we first regularly monitor economic conditions
and other factors globally and assess country risk in each country where we
have cross-border exposure. For purposes of monitoring and controlling the
amount of credit exposed to country risk, we set a country limit, the maximum
amount of credit exposure for an individual country, in consideration of the
level of country risk and our ability to bear such potential risk. We also
determine our credit policy for each country in accordance with its country
risk level and our business plan with regard to the country. Assessment of
country risk, establishment of country limits, and determination of country
credit policies are subject to review and approval by our senior management and
are updated periodically.
Exposure to East Asia
We maintain a substantial network of branches and subsidiaries in East Asia and
the region has been an important market for our financial services. In response
to recent developments in the regional economy, we regularly reassess the
country risk of each country in the region, to adjust exposure levels, and to
review and revise country credit policies.
A-13
The following table represents our cross-border outstandings and unused
commitments at March 31, 2002 and 2003, to certain East Asian countries:
At March 31,
-------------------------------------------------
2002 2003
------------------------ ------------------------
Cross-border Unused Cross-border Unused
outstanding commitments outstanding commitments
------------ ----------- ------------ -----------
(in billions)
South Korea............... (Yen)218.9 (Yen) 1.1 (Yen)289.2 (Yen) 1.3
Indonesia................. 78.2 11.2 33.9 34.0
Thailand.................. 223.7 6.8 167.4 8.8
Malaysia.................. 156.1 10.7 116.2 2.2
Philippines............... 80.0 13.7 61.3 3.6
Hong Kong................. 409.3 2.2 224.7 0.6
People's Republic of China 222.9 4.7 145.0 8.8
Singapore................. 255.7 5.3 278.0 17.8
Exposure to South America
The following is a summary of cross-border outstandings to counterparties in
major South American countries at March 31, 2002 and 2003:
At March 31,
---------------------
2002 2003
---------- ----------
(in billions)
Brazil... (Yen)145.4 (Yen)120.0
Mexico... 110.0 76.3
Argentina 74.4 34.1
The economies in South American countries generally continued to decline during
the fiscal year ended March 31, 2003. The significant economic turmoil and
deterioration in Argentina, including abandoning peso convertibility to the US
dollar, continued for the fiscal year ended March 31, 2003. As a result of
these events, the Argentina government defaulted on its obligations at the end
of calendar 2001 and during the fiscal year ended March 31, 2003 local
companies faced serious difficulties in servicing their debt. Although the
Argentine government and other parties are working on a debt-restructuring
program, the recent failure of Argentina to meet all payment obligations on a
World Bank-guaranteed bond had repercussions in the international debt
securities market. In response to the economic environment in Argentina, we
reduced our credit exposure from cross-border outstandings of (Yen)74.4 billion
at March 31, 2002 to (Yen)34.1 billion at March 31, 2003. We provided an
allocated credit loss allowance for that country exposure of (Yen)18.1 billion
at March 31, 2002 and (Yen)7.2 billion at March 31, 2003.
Loan Concentrations
At March 31, 2003, there were no concentrations of loans to a single industry
group of borrowers, as defined by the Bank of Japan for industry segment loan
classification, which exceeded 10% of our consolidated total loans, except for
loans in a category disclosed in the table of loans outstanding above.
Credit Risk Management
We have a credit rating system, under which borrowers and transactions are
graded on a worldwide basis. We calculate probability of default by statistical
means and manage our credit portfolio based on this credit rating system. For a
detailed description of this system and other elements of our risk management
structure, see "Item 11. Quantitative and Qualitative Disclosures about Market
Risk--Credit Risk Management."
A-14
IV. Summary of Loan Loss Experience
The following table shows an analysis of our loan loss experience by type of
borrowers' business for each of the five years in the period ended March 31,
2003:
Years ended March 31,
--------------------------------------------------------------------
1999 2000 2001
-------------- -------------- --------------
Old Old Old
classification classification classification
-------------- -------------- --------------
(in millions, except percentages)
Allowance for credit losses at beginning
of year................................. (Yen)1,281,091 (Yen)1,813,680 (Yen)1,486,212
-------------- -------------- --------------
Provision for credit losses.............. 1,239,000 372,449 797,081
-------------- -------------- --------------
Charge-offs:
Domestic:
Manufacturing........................ 25,224 25,537 31,386
Construction......................... 27,530 77,878 82,078
Real estate.......................... 135,597 98,201 154,887
Services............................. 160,194 53,877 72,673
Wholesale and retail................. 29,031 191,839 152,723
Banks and other financial
institutions........................ 106,727 67,782 22,453
Communication and information
services............................ -- -- --
Other industries..................... 10,172 47,209 6,069
Consumer............................. 38,119 39,827 34,291
-------------- -------------- --------------
Total domestic..................... 532,594 602,150 556,560
-------------- -------------- --------------
Total foreign...................... 140,981 121,882 87,879
-------------- -------------- --------------
Total.............................. 673,575 724,032 644,439
-------------- -------------- --------------
Recoveries:
Domestic.............................. 1,338 25,244 26,666
Foreign............................... 8,784 19,052 19,411
-------------- -------------- --------------
Total.............................. 10,122 44,296 46,077
-------------- -------------- --------------
Net charge-offs.......................... 663,453 679,736 598,362
-------------- -------------- --------------
Other--principally foreign exchange
translation adjustments................. (42,958) (20,181) 32,053
-------------- -------------- --------------
Allowance for credit losses at end of
year.................................... (Yen)1,813,680 (Yen)1,486,212 (Yen)1,716,984
============== ============== ==============
Allowance for credit losses applicable to
foreign activities:
Balance at beginning of year.......... (Yen) 264,186 (Yen) 295,131 (Yen) 190,571
============== ============== ==============
Balance at end of year................ (Yen) 295,131 (Yen) 190,571 (Yen) 243,716
============== ============== ==============
Provision for credit losses........... (Yen) 193,610 (Yen) 25,661 (Yen) 105,664
============== ============== ==============
Ratio of net charge-offs during the year
to average loans outstanding during
the year................................ 1.15% 1.30% 1.21%
Years ended March 31,
-----------------------------------------------------
2002 2003
-------------- ------------------------------
Old Old New
classification classification classification
-------------- -------------- --------------
(in millions, except percentages)
Allowance for credit losses at beginning
of year................................. (Yen)1,716,984 (Yen)1,735,180 (Yen)1,735,180
-------------- -------------- --------------
Provision for credit losses.............. 601,689 455,630 455,630
-------------- -------------- --------------
Charge-offs:
Domestic:
Manufacturing........................ 55,916 75,430 75,278
Construction......................... 35,365 60,837 60,837
Real estate.......................... 150,684 332,264 332,414
Services............................. 51,803 82,478 87,573
Wholesale and retail................. 96,745 117,138 109,257
Banks and other financial
institutions........................ 64,615 20,817 20,817
Communication and information
services............................ -- -- 5,002
Other industries..................... 11,500 25,304 23,090
Consumer............................. 46,550 39,594 39,594
-------------- -------------- --------------
Total domestic..................... 513,178 753,862 753,862
-------------- -------------- --------------
Total foreign...................... 156,203 139,776 139,776
-------------- -------------- --------------
Total.............................. 669,381 893,638 893,638
-------------- -------------- --------------
Recoveries:
Domestic.............................. 42,112 57,790 57,790
Foreign............................... 23,865 21,037 21,037
-------------- -------------- --------------
Total.............................. 65,977 78,827 78,827
-------------- -------------- --------------
Net charge-offs.......................... 603,404 814,811 814,811
-------------- -------------- --------------
Other--principally foreign exchange
translation adjustments................. 19,911 (15,863) (15,863)
-------------- -------------- --------------
Allowance for credit losses at end of
year.................................... (Yen)1,735,180 (Yen)1,360,136 (Yen)1,360,136
============== ============== ==============
Allowance for credit losses applicable to
foreign activities:
Balance at beginning of year.......... (Yen) 243,716 (Yen) 244,650 (Yen) 244,650
============== ============== ==============
Balance at end of year................ (Yen) 244,650 (Yen) 263,929 (Yen) 263,929
============== ============== ==============
Provision for credit losses........... (Yen) 127,348 (Yen) 151,783 (Yen) 151,783
============== ============== ==============
Ratio of net charge-offs during the year
to average loans outstanding during
the year................................ 1.23 % 1.64% 1.64 %
A-15
The following table shows an allocation of our allowance for credit losses at
the end of each of the five years in the period ended March 31, 2003:
At March 31,
------------------------------------------------------------------------------------------------------
1999 2000 2001 2002
----------------------- ------------------------ ------------------------ ------------------------
Old Old Old Old
classification classification classification classification
----------------------- ------------------------ ------------------------ ------------------------
% of % of % of % of
loans in loans in loans in loans in
each each each each
category category category category
to total to total to total to total
Amount loans Amount loans Amount loans Amount loans
-------------- -------- --------------- -------- --------------- -------- --------------- --------
(in millions, except percentages)
Domestic:
Manufacturing.......... (Yen) 92,791 13.02% (Yen) 98,296 13.73% (Yen) 159,387 12.98% (Yen) 162,828 12.72%
Construction........... 119,853 3.51 124,352 3.63 133,752 3.47 168,595 3.05
Real estate............ 498,246 10.16 429,928 10.07 505,479 10.61 541,093 9.79
Services............... 225,420 9.80 178,237 10.01 172,568 9.59 175,281 9.05
Wholesale and
retail................ 294,605 14.05 221,466 13.83 203,814 13.26 216,510 11.90
Banks and other
financial institutions 171,477 7.70 64,934 7.88 86,470 8.19 59,971 8.50
Communication
and information
services.............. -- -- -- -- -- -- -- --
Other industries....... 15,641 6.63 57,684 7.67 47,607 5.63 48,466 7.67
Consumer............... 75,684 12.54 104,139 14.26 106,031 13.95 95,156 14.02
Foreign:
Governments and
official
institutions.......... 30,299 0.66 14,769 0.49 18,571 0.63 33,304 0.65
Banks and other
financial
institutions.......... 27,133 1.35 9,328 1.38 11,322 1.58 6,847 1.35
Commercial and
industrial............ 217,736 17.47 144,028 15.28 192,484 17.75 189,332 19.31
Other.................. 19,963 3.11 22,446 1.77 21,339 2.36 15,167 1.99
Unallocated............. 24,832 -- 16,605 -- 58,160 -- 22,630 --
-------------- ------ --------------- ------ --------------- ------ --------------- ------
Total................ (Yen)1,813,680 100.00% (Yen)1,486,212 100.00% (Yen)1,716,984 100.00% (Yen)1,735,180 100.00%
============== ====== =============== ====== =============== ====== =============== ======
Allowance as a
percentage of
loans.................. 3.30% 2.97% 3.46% 3.45%
Allowance as a
percentage of
nonaccrual and
restructured loans
and accruing loans
contractually past
due 90 days or
more................... 52.15% 52.24% 40.18% 41.66%
At March 31,
-------------------------------------------------
2003
------------------------------------------------
Old New
classification classification
----------------------- -----------------------
% of % of
loans in loans in
each each
category category
to total to total
Amount loans Amount loans
-------------- -------- -------------- --------
(in millions, except percentages)
Domestic:
Manufacturing.......... (Yen) 143,262 12.62% (Yen) 141,549 12.44%
Construction........... 139,662 2.63 139,662 2.63
Real estate............ 231,686 8.86 231,686 8.86
Services............... 124,182 10.44 129,678 10.21
Wholesale and
retail................ 209,594 11.62 198,053 11.25
Banks and other
financial institutions 51,204 7.42 51,204 7.42
Communication
and information
services.............. -- -- 19,385 3.13
Other industries....... 74,060 10.32 62,433 7.97
Consumer............... 99,247 15.31 99,247 15.31
Foreign:
Governments and
official
institutions.......... 2,298 0.48 2,298 0.48
Banks and other
financial
institutions.......... 6,366 1.91 6,366 1.91
Commercial and
industrial............ 216,058 17.34 216,058 17.34
Other.................. 39,207 1.05 39,207 1.05
Unallocated............. 23,310 -- 23,310 --
-------------- ------ -------------- ------
Total................ (Yen)1,360,136 100.00% (Yen)1,360,136 100.00%
============== ====== ============== ======
Allowance as a
percentage of
loans.................. 2.81% 2.81%
Allowance as a
percentage of
nonaccrual and
restructured loans
and accruing loans
contractually past
due 90 days or
more................... 49.41% 49.41%
While allowance for credit losses contains amounts allocated to components of
specifically identified loans as well as a group on portfolio of loans, the
allowance for credit losses is available for credit losses in the entire loan
portfolio and the allocations shown above are not intended to be restricted to
the specific loan category. Accordingly, as the evaluation of credit risks
changes, allocations of the allowance will be changed to reflect current
conditions and various other factors.
A-16
V. Deposits
The following table shows the average amount of, and the average rate paid on,
the following deposit categories for each of the three years in the period
ended March 31, 2003:
Years ended March 31,
----------------------------------------------------------------------
2001 2002 2003
---------------------- ---------------------- ----------------------
Average Average Average Average Average Average
amount rate amount rate amount rate
--------------- ------- --------------- ------- --------------- -------
(in millions, except percentages)
Domestic offices:
Non-interest-bearing demand
deposits.......................... (Yen) 2,186,090 -- (Yen) 2,621,296 -- (Yen) 3,427,440 --
Interest-bearing demand
deposits.......................... 11,803,418 0.13% 14,385,013 0.04% 21,255,898 0.02%
Deposits at notice.................. 1,564,168 1.49 1,800,904 1.01 1,504,532 0.75
Time deposits....................... 25,372,595 0.78 26,272,795 0.49 24,734,506 0.29
Certificates of deposit............. 2,438,281 0.33 2,348,313 0.14 2,950,903 0.03
Foreign offices, principally from banks
located in foreign countries:
Non-interest-bearing demand
deposits.......................... 1,412,761 -- 1,654,887 -- 2,053,080 --
Interest-bearing deposits,
principally time deposits and
certificates of deposit........... 11,552,974 4.58 10,982,859 2.99 8,964,019 1.75
--------------- --------------- ---------------
Total........................... (Yen)56,330,287 (Yen)60,066,067 (Yen)64,890,378
=============== =============== ===============
Deposits at notice represent interest-bearing demand deposits which require the
depositor to give two or more days notice in advance to withdrawal.
The average amounts of total deposits by foreign depositors included in
domestic offices for the fiscal years ended March 31, 2001, 2002 and 2003 were
(Yen)378,840 million, (Yen)485,399 million and (Yen)667,129 million,
respectively.
At March 31, 2003, the balance and remaining maturities of time deposits and
certificates of deposit issued by domestic offices in amounts of (Yen)10
million (approximately US$85 thousand at the Federal Reserve Bank of New York's
noon buying rate on March 31, 2003) or more and such deposits issued in amounts
of US$100,000 or more are shown in the following table.
Certificates of
Time deposits deposit Total
--------------- --------------- ---------------
(in millions)
Domestic offices:
Three months or less.................. (Yen) 6,963,087 (Yen)3,598,823 (Yen)10,561,910
Over three months through six months.. 1,815,368 148,683 1,964,051
Over six months through twelve months. 2,424,261 21,315 2,445,576
Over twelve months.................... 2,467,993 40 2,468,033
--------------- -------------- ---------------
Total............................. (Yen)13,670,709 (Yen)3,768,861 (Yen)17,439,570
=============== ============== ===============
Foreign offices.......................... (Yen) 5,344,997
===============
A-17
VI. Short-Term Borrowings
The following table shows certain additional information with respect to our
short-term borrowings for each of the three years in the period ended March 31,
2003:
Years ended March 31,
------------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
(in millions, except percentages)
Call money, funds purchased, and payables under repurchase
agreements and securities lending transactions:
Average balance outstanding during the year.............. (Yen) 7,201,772 (Yen)8,996,420 (Yen) 8,491,696
Maximum balance outstanding at any month-end during the
year................................................... 10,546,870 9,252,127 17,520,365
Balance at end of year................................... 8,727,358 9,243,032 9,319,870
Weighted average interest rate during the year........... 3.62% 2.23% 1.27%
Weighted average interest rate on balance at end of year. 2.01% 1.09% 1.18%
Due to trust account:
Average balance outstanding during the year.............. (Yen) 4,023,941 (Yen)2,940,975 (Yen) 1,691,359
Maximum balance outstanding at any month-end during the
year................................................... 4,488,591 3,353,489 2,188,326
Balance at end of year................................... 3,672,718 2,282,225 1,401,618
Weighted average interest rate during the year........... 0.69% 0.57% 0.51%
Weighted average interest rate on balance at end of year. 0.73% 0.51% 0.51%
Other short-term borrowings:
Average balance outstanding during the year.............. (Yen) 1,641,905 (Yen)2,077,604 (Yen) 2,808,049
Maximum balance outstanding at any month-end during the
year................................................... 3,032,747 3,318,634 2,870,339
Balance at end of year................................... 2,129,991 3,318,634 2,854,028
Weighted average interest rate during the year........... 1.65% 2.22% 1.01%
Weighted average interest rate on balance at end of year. 1.48% 1.09% 0.48%
A-18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors................................................................... F-2
Consolidated Balance Sheets as of March 31, 2002 and 2003........................................ F-3
Consolidated Statements of Operations for the Years ended March 31, 2001, 2002 and 2003.......... F-4
Consolidated Statements of Changes in Equity from Nonowner Sources for the Years ended March 31,
2001, 2002 and 2003............................................................................ F-5
Consolidated Statements of Shareholders' Equity for the Years ended March 31, 2001, 2002 and 2003 F-6
Consolidated Statements of Cash Flows for the Years ended March 31, 2001, 2002 and 2003.......... F-7
Notes to Consolidated Financial Statements....................................................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Mitsubishi Tokyo Financial Group, Inc.
(Kabushiki Kaisha Mitsubishi Tokyo Financial Group):
We have audited the accompanying consolidated balance sheets of Mitsubishi
Tokyo Financial Group, Inc. (Kabushiki Kaisha Mitsubishi Tokyo Financial Group)
("MTFG") and subsidiaries as of March 31, 2002 and 2003, and the related
consolidated statements of operations, changes in equity from nonowner sources,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 2003. These financial statements are the responsibility of
MTFG's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MTFG and subsidiaries at March 31,
2002 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 4, the disclosure of amortized costs and unrealized gains
and losses of investment securities as of March 31, 2002 has been restated.
As discussed in Note 1 to the consolidated financial statements, MTFG changed
its method of accounting for derivative financial instruments and hedging
activities in the year ended March 31, 2002, and its method of accounting for
goodwill and other intangible assets in the year ended March 31, 2003.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
September 12, 2003 (September 17, 2003 as to Note 33)
F-2
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2003
2002 2003
--------------- ---------------
(in millions)
ASSETS
Cash and due from banks (Note 10).................................................. (Yen) 1,832,399 (Yen) 4,288,581
Interest-earning deposits in other banks (Note 10)................................. 4,332,180 4,009,986
Call loans and funds sold (Note 13)................................................ 1,626,760 595,567
Receivables under resale agreements................................................ 1,122,680 1,169,479
Receivables under securities borrowing transactions................................ 1,953,242 1,848,124
Trading account assets (including assets pledged that secured parties are
permitted to sell or repledge of (Yen)856,331 million in 2002 and
(Yen)1,807,819 million in 2003) (Notes 3 and 10).................................. 7,497,253 8,363,383
Investment securities (Notes 4 and 10):
Securities available for sale--carried at estimated fair value (including
assets pledged that secured parties are permitted to sell or repledge of
(Yen)2,101,338 million in 2002 and (Yen)3,049,692 million in 2003)............... 23,282,816 24,364,066
Securities being held to maturity--carried at amortized cost (estimated fair
value of (Yen)284,724 million in 2002 and 203,524 million in 2003)............... 272,163 191,132
Other investment securities....................................................... 129,498 145,431
--------------- ---------------
Total investment securities...................................................... 23,684,477 24,700,629
--------------- ---------------
Loans, net of unearned income and deferred loan fees (including assets pledged
that secured parties are permitted to sell or repledge of (Yen)765,575 million
in 2002 and (Yen)864,978 million in 2003) (Notes 5 and 10)........................ 50,229,725 48,465,569
Allowance for credit losses (Notes 5 and 6)........................................ (1,735,180) (1,360,136)
--------------- ---------------
Net loans......................................................................... 48,494,545 47,105,433
--------------- ---------------
Premises and equipment--net (Note 7)............................................... 681,366 643,794
Accrued interest................................................................... 213,697 173,351
Customers' acceptance liability.................................................... 37,608 28,261
Intangible assets (Note 8)......................................................... 186,617 186,898
Goodwill (Note 8).................................................................. 41,386 48,143
Deferred tax assets (Note 9)....................................................... 1,120,831 1,640,046
Other assets (Notes 5 and 17)...................................................... 1,540,073 1,730,038
--------------- ---------------
Total......................................................................... (Yen)94,365,114 (Yen)96,531,713
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Notes 10 and 11):
Domestic offices:
Non-interest-bearing............................................................. (Yen) 3,091,407 (Yen) 3,987,854
Interest-bearing................................................................. 48,826,155 52,257,085
Overseas offices:
Non-interest-bearing............................................................. 2,166,464 2,434,297
Interest-bearing................................................................. 9,575,475 8,624,442
--------------- ---------------
Total deposits................................................................ 63,659,501 67,303,678
Debentures (Note 12)............................................................... 2,269,122 636,060
Call money and funds purchased (Notes 10 and 13)................................... 2,542,489 2,689,892
Payables under repurchase agreements (Note 10)..................................... 3,786,560 4,424,035
Payables under securities lending transactions (Note 10)........................... 2,913,983 2,205,943
Due to trust account (Note 14)..................................................... 2,282,225 1,401,618
Other short-term borrowings (Notes 10 and 15)...................................... 3,318,634 2,854,028
Trading account liabilities (Note 3)............................................... 2,495,768 3,603,153
Obligations to return securities received as collateral............................ 315,538 950,138
Bank acceptances outstanding....................................................... 37,608 28,261
Accrued interest................................................................... 211,010 132,655
Long-term debt (Notes 10 and 15)................................................... 5,183,841 5,159,132
Other liabilities (Notes 9, 16 and 17)............................................. 2,722,338 2,590,183
--------------- ---------------
Total liabilities............................................................. 91,738,617 93,978,776
--------------- ---------------
Commitments and contingent liabilities (Notes 24 and 26)
Shareholders' equity (Note 21):
Capital stock (Notes 18 and 19) :
Preferred stock:
Class 1--authorized, 81,400 shares; issued and outstanding, 81,400 shares
in 2002 and 2003, with no stated value (aggregate liquidation preference
of (Yen)244,200 million)..................................................... 122,100 122,100
Class 2--convertible: authorized, 100,000 shares; issued and outstanding,
100,000 shares in 2002 and 2003, with no stated value (aggregate
liquidation preference of (Yen)200,000 million).............................. 100,000 100,000
Class 3--authorized, 120,000 shares; no shares issued or outstanding.......... -- --
Class 4--convertible: authorized, 120,000 shares; no shares issued or
outstanding.................................................................. -- --
Common stock--authorized, 22,000,000 shares; issued, 5,742,468 shares in 2002
and 6,232,162 shares in 2003, with no stated value............................. 873,156 984,708
Capital surplus (Note 19)......................................................... 850,835 1,058,611
Retained earnings (Notes 20 and 33):
Appropriated for legal reserve................................................... 236,537 237,474
Unappropriated................................................................... 11,593 168,036
Accumulated other changes in equity from nonowner sources, net of taxes........... 523,250 (114,790)
--------------- ---------------
Total............................................................................ 2,717,471 2,556,139
Less treasury stock, at cost--169,639 common shares in 2002 and 3,226 common
shares in 2003................................................................. 90,974 3,202
--------------- ---------------
Shareholders' equity--net........................................................ 2,626,497 2,552,937
--------------- ---------------
Total......................................................................... (Yen)94,365,114 (Yen)96,531,713
=============== ===============
See the accompanying notes to Consolidated Financial Statements.
F-3
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003
2001
---------------
(in millions)
Interest income:
Loans, including fees (Note 5)................................................................... (Yen) 1,476,209
Deposits in other banks.......................................................................... 236,626
Investment securities:
Interest...................................................................................... 305,832
Dividends..................................................................................... 62,849
Trading account assets........................................................................... 16,954
Call loans and funds sold........................................................................ 28,499
Receivables under resale agreements and securities borrowing transactions........................ 156,005
---------------
Total....................................................................................... 2,282,974
---------------
Interest expense:
Deposits......................................................................................... 774,512
Debentures....................................................................................... 32,285
Call money and funds purchased................................................................... 22,452
Payables under repurchase agreements and securities lending transactions......................... 238,233
Due to trust account............................................................................. 27,825
Other short-term borrowings and trading account liabilities...................................... 37,230
Long-term debt................................................................................... 178,081
---------------
Total....................................................................................... 1,310,618
---------------
Net interest income.............................................................................. 972,356
Provision for credit losses (Notes 5 and 6)...................................................... 797,081
---------------
Net interest income after provision for credit losses............................................ 175,275
---------------
Non-interest income:
Fees and commissions (Note 27)................................................................... 459,403
Foreign exchange gains (losses)--net (Notes 1 and 3)............................................. (104,617)
Trading account profits--net (Notes 1 and 3)..................................................... 229,508
Investment securities gains (losses)--net (Notes 1 and 4)........................................ 232,502
Other non-interest income........................................................................ 34,411
---------------
Total....................................................................................... 851,207
---------------
Non-interest expense:
Salaries and employee benefits (Note 16)......................................................... 403,739
Occupancy expenses--net (Notes 7 and 26)......................................................... 137,373
Losses on other real estate owned................................................................ 16,434
Goodwill amortization (Note 8)................................................................... 4,444
Amortization of intangible assets (Note 8)....................................................... 31,734
Insurance premiums, including deposit insurance.................................................. 41,798
Communications................................................................................... 19,415
Other non-interest expenses...................................................................... 367,956
---------------
Total....................................................................................... 1,022,893
---------------
Income (loss) before income tax expense (benefit) and cumulative effect of a change in accounting
principle....................................................................................... 3,589
Income tax expense (benefit) (Note 9)............................................................ 62,763
---------------
Income (loss) before cumulative effect of a change in accounting principle....................... (59,174)
Cumulative effect of a change in accounting principle, net of tax (Note 1)....................... --
---------------
Net income (loss)................................................................................ (Yen) (59,174)
===============
Income available to preferred shareholders....................................................... (Yen) 8,336
---------------
Net income (loss) available to common shareholders............................................... (Yen) (67,510)
===============
Amounts per share (*) (**) (Notes 20 and 22):
Basic earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... (Yen)(12,274.55)
Basic earnings (loss) per common share--net income (loss) available to common shareholders....... (12,274.55)
Diluted earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... (12,274.55)
Diluted earnings (loss) per common share--net income (loss) available to common shareholders..... (12,274.55)
2002
---------------
(in millions)
Interest income:
Loans, including fees (Note 5)................................................................... (Yen) 1,276,821
Deposits in other banks.......................................................................... 159,784
Investment securities:
Interest...................................................................................... 336,278
Dividends..................................................................................... 63,115
Trading account assets........................................................................... 15,144
Call loans and funds sold........................................................................ 19,318
Receivables under resale agreements and securities borrowing transactions........................ 146,501
---------------
Total....................................................................................... 2,016,961
---------------
Interest expense:
Deposits......................................................................................... 485,643
Debentures....................................................................................... 20,491
Call money and funds purchased................................................................... 17,853
Payables under repurchase agreements and securities lending transactions......................... 182,487
Due to trust account............................................................................. 16,683
Other short-term borrowings and trading account liabilities...................................... 46,567
Long-term debt................................................................................... 169,339
---------------
Total....................................................................................... 939,063
---------------
Net interest income.............................................................................. 1,077,898
Provision for credit losses (Notes 5 and 6)...................................................... 601,689
---------------
Net interest income after provision for credit losses............................................ 476,209
---------------
Non-interest income:
Fees and commissions (Note 27)................................................................... 491,864
Foreign exchange gains (losses)--net (Notes 1 and 3)............................................. (333,034)
Trading account profits--net (Notes 1 and 3)..................................................... 138,460
Investment securities gains (losses)--net (Notes 1 and 4)........................................ 20,598
Other non-interest income........................................................................ 49,819
---------------
Total....................................................................................... 367,707
---------------
Non-interest expense:
Salaries and employee benefits (Note 16)......................................................... 456,568
Occupancy expenses--net (Notes 7 and 26)......................................................... 134,787
Losses on other real estate owned................................................................ 6,233
Goodwill amortization (Note 8)................................................................... 7,862
Amortization of intangible assets (Note 8)....................................................... 36,932
Insurance premiums, including deposit insurance.................................................. 43,452
Communications................................................................................... 21,266
Other non-interest expenses...................................................................... 461,049
---------------
Total....................................................................................... 1,168,149
---------------
Income (loss) before income tax expense (benefit) and cumulative effect of a change in accounting
principle....................................................................................... (324,233)
Income tax expense (benefit) (Note 9)............................................................ (101,832)
---------------
Income (loss) before cumulative effect of a change in accounting principle....................... (222,401)
Cumulative effect of a change in accounting principle, net of tax (Note 1)....................... 5,867
---------------
Net income (loss)................................................................................ (Yen) (216,534)
===============
Income available to preferred shareholders....................................................... (Yen) 4,168
---------------
Net income (loss) available to common shareholders............................................... (Yen) (220,702)
===============
(in Yen)
Amounts per share (*) (**) (Notes 20 and 22):
Basic earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... (Yen)(40,789.57)
Basic earnings (loss) per common share--net income (loss) available to common shareholders....... (39,733.32)
Diluted earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... (40,789.57)
Diluted earnings (loss) per common share--net income (loss) available to common shareholders..... (39,733.32)
2003
--------------
(in millions)
Interest income:
Loans, including fees (Note 5)................................................................... (Yen)1,047,420
Deposits in other banks.......................................................................... 72,623
Investment securities:
Interest...................................................................................... 344,422
Dividends..................................................................................... 47,004
Trading account assets........................................................................... 12,045
Call loans and funds sold........................................................................ 7,320
Receivables under resale agreements and securities borrowing transactions........................ 54,524
--------------
Total....................................................................................... 1,585,358
--------------
Interest expense:
Deposits......................................................................................... 243,755
Debentures....................................................................................... 8,508
Call money and funds purchased................................................................... 12,708
Payables under repurchase agreements and securities lending transactions......................... 94,713
Due to trust account............................................................................. 8,673
Other short-term borrowings and trading account liabilities...................................... 31,320
Long-term debt................................................................................... 140,240
--------------
Total....................................................................................... 539,917
--------------
Net interest income.............................................................................. 1,045,441
Provision for credit losses (Notes 5 and 6)...................................................... 455,630
--------------
Net interest income after provision for credit losses............................................ 589,811
--------------
Non-interest income:
Fees and commissions (Note 27)................................................................... 528,108
Foreign exchange gains (losses)--net (Notes 1 and 3)............................................. 25,558
Trading account profits--net (Notes 1 and 3)..................................................... 266,816
Investment securities gains (losses)--net (Notes 1 and 4)........................................ (21,293)
Other non-interest income........................................................................ 47,457
--------------
Total....................................................................................... 846,646
--------------
Non-interest expense:
Salaries and employee benefits (Note 16)......................................................... 499,470
Occupancy expenses--net (Notes 7 and 26)......................................................... 121,080
Losses on other real estate owned................................................................ 305
Goodwill amortization (Note 8)................................................................... --
Amortization of intangible assets (Note 8)....................................................... 46,917
Insurance premiums, including deposit insurance.................................................. 48,259
Communications................................................................................... 22,043
Other non-interest expenses...................................................................... 451,686
--------------
Total....................................................................................... 1,189,760
--------------
Income (loss) before income tax expense (benefit) and cumulative effect of a change in accounting
principle....................................................................................... 246,697
Income tax expense (benefit) (Note 9)............................................................ 42,877
--------------
Income (loss) before cumulative effect of a change in accounting principle....................... 203,820
Cumulative effect of a change in accounting principle, net of tax (Note 1)....................... (532)
--------------
Net income (loss)................................................................................ (Yen) 203,288
==============
Income available to preferred shareholders....................................................... (Yen) 12,504
--------------
Net income (loss) available to common shareholders............................................... (Yen) 190,784
==============
Amounts per share (*) (**) (Notes 20 and 22):
Basic earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... (Yen)34,058.11
Basic earnings (loss) per common share--net income (loss) available to common shareholders....... 33,963.40
Diluted earnings (loss) per common share--income (loss) available to common shareholders before
cumulative effect of a change in accounting principle........................................... 31,228.45
Diluted earnings (loss) per common share--net income (loss) available to common shareholders..... 31,137.71
--------
(*) Amounts for the year ended March 31, 2001 have been adjusted to reflect the
stock-for-stock exchanges on April 2, 2001 creating MTFG (see Note 2).
(**) For the year ended March 31, 2003, Class 2 Preferred Stock was included in
the computation of the diluted amounts based on the conversion price as of
year-end (see Notes 18 and 22).
See the accompanying notes to Consolidated Financial Statements.
F-4
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FROM NONOWNER SOURCES
FOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003
Gains (Losses) Gains (Losses)
before income Income tax net of income
tax expense (expense) tax expense
(benefit) benefit (benefit)
--------------- ------------ --------------
(in millions)
Year ended March 31, 2001:
Net loss...................................................................... (Yen) (59,174)
-------------
Other changes in equity from nonowner sources:
Net unrealized holding losses on investment securities available for sale.. (Yen) (874,301) (Yen)339,259 (535,042)
Reclassification adjustment for gains included in net loss................. (275,460) 107,452 (168,008)
--------------- ------------ -------------
Total................................................................... (1,149,761) 446,711 (703,050)
--------------- ------------ -------------
Minimum pension liability adjustments...................................... (114,171) 39,735 (74,436)
--------------- ------------ -------------
Foreign currency translation adjustments................................... 52,415 (15,415) 37,000
Reclassification adjustment for losses included in net loss................ 6,502 (1,438) 5,064
--------------- ------------ -------------
Total................................................................... 58,917 (16,853) 42,064
--------------- ------------ -------------
Total changes in equity from nonowner sources................................. (Yen)(794,596)
=============
Year ended March 31, 2002:
Net loss...................................................................... (Yen)(216,534)
-------------
Other changes in equity from nonowner sources:
Net unrealized holding losses on investment securities available for sale.. (Yen) (558,583) (Yen)211,868 (346,715)
Reclassification adjustment for gains included in net loss................. (46,325) 18,075 (28,250)
--------------- ------------ -------------
Total................................................................... (604,908) 229,943 (374,965)
--------------- ------------ -------------
Cumulative effect of a change in accounting principle...................... 2,065 (808) 1,257
Net unrealized gains on derivatives qualifying for cash flow hedges........ 7,982 (2,916) 5,066
Reclassification adjustment for gains included in net loss................. (4,254) 1,627 (2,627)
--------------- ------------ -------------
Total................................................................... 5,793 (2,097) 3,696
--------------- ------------ -------------
Minimum pension liability adjustments...................................... (122,746) 30,815 (91,931)
--------------- ------------ -------------
Foreign currency translation adjustments................................... 84,355 (5,444) 78,911
Reclassification adjustment for losses included in net loss................ 115 -- 115
--------------- ------------ -------------
Total................................................................... 84,470 (5,444) 79,026
--------------- ------------ -------------
Total changes in equity from nonowner sources................................. (Yen)(600,708)
=============
Year ended March 31, 2003:
Net income.................................................................... (Yen) 203,288
-------------
Other changes in equity from nonowner sources:
Net unrealized holding losses on investment securities available for sale.. (Yen) (846,396) (Yen)337,697 (508,699)
Reclassification adjustment for gains included in net income............... 1,553 (288) 1,265
--------------- ------------ -------------
Total................................................................... (844,843) 337,409 (507,434)
--------------- ------------ -------------
Net unrealized gains on derivatives qualifying for cash flow hedges........ 10,885 (4,164) 6,721
Reclassification adjustment for gains included in net income............... (9,545) 3,651 (5,894)
--------------- ------------ -------------
Total................................................................... 1,340 (513) 827
--------------- ------------ -------------
Minimum pension liability adjustments...................................... (132,113) 51,265 (80,848)
--------------- ------------ -------------
Foreign currency translation adjustments................................... (54,698) 3,599 (51,099)
Reclassification adjustment for losses included in net income.............. 591 (77) 514
--------------- ------------ -------------
Total................................................................... (54,107) 3,522 (50,585)
--------------- ------------ -------------
Total changes in equity from nonowner sources................................. (Yen)(434,752)
=============
See the accompanying notes to Consolidated Financial Statements.
F-5
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003
2001 2002 2003
-------------- -------------- --------------
(in millions)
Preferred stock (Class 1) (Note 18):
Balance at beginning of year.................................................... (Yen) 122,100 (Yen) 122,100 (Yen) 122,100
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 122,100 (Yen) 122,100 (Yen) 122,100
============== ============== ==============
Preferred stock (Class 2) (Note 18):
Balance at beginning of year.................................................... (Yen) 100,000 (Yen) 100,000 (Yen) 100,000
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 100,000 (Yen) 100,000 (Yen) 100,000
============== ============== ==============
Common stock (Note 19):
Balance at beginning of year.................................................... (Yen) 856,664 (Yen) 856,664 (Yen) 873,156
Issuance of new shares of common stock.......................................... -- -- 111,552
Issuance of new shares of common stock in exchange for the minority shares of
Nippon Trust Bank Limited...................................................... -- 16,492 --
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 856,664 (Yen) 873,156 (Yen) 984,708
============== ============== ==============
Capital surplus (Note 19):
Balance at beginning of year.................................................... (Yen) 838,008 (Yen) 831,105 (Yen) 850,835
Issuance of new shares of common stock.......................................... -- -- 110,620
Issuance of new shares of common stock in exchange for the minority shares of
Nippon Trust Bank Limited...................................................... -- 16,120 --
Recognition of tax benefit arising from treasury stock held by subsidiaries..... -- -- 54,008
Gains (Losses) on sales of shares of treasury stock, net of taxes............... (6,903) 3,610 43,148
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 831,105 (Yen) 850,835 (Yen)1,058,611
============== ============== ==============
Retained earnings appropriated for legal reserve (Note 20):
Balance at beginning of year.................................................... (Yen) 210,196 (Yen) 221,689 (Yen) 236,537
Transfer from unappropriated retained earnings.................................. 11,493 14,848 937
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 221,689 (Yen) 236,537 (Yen) 237,474
============== ============== ==============
Unappropriated retained earnings (Note 20):
Balance at beginning of year.................................................... (Yen) 398,263 (Yen) 271,246 (Yen) 11,593
Net income (loss)............................................................... (59,174) (216,534) 203,288
-------------- -------------- --------------
Total....................................................................... 339,089 54,712 214,881
-------------- -------------- --------------
Deduction:
Cash dividends (Note 1) (*):
Common share--(Yen)8,255.25 in 2001, (Yen)4,127.63 in 2002 and (Yen)6,000.00
in 2003 per share........................................................... (48,014) (24,103) (33,404)
Preferred share (Class 1)--(Yen)82,500.00 in 2001, (Yen)41,250.00 in
2002 and (Yen)123,750.00 in 2003 per share.................................. (6,716) (3,358) (10,074)
Preferred share (Class 2)--(Yen)16,200.00 in 2001, (Yen)8,100.00 in 2002 and
(Yen)24,300.00 in 2003 per share............................................ (1,620) (810) (2,430)
Transfer to retained earnings appropriated for legal reserve................... (11,493) (14,848) (937)
-------------- -------------- --------------
Total....................................................................... (67,843) (43,119) (46,845)
-------------- -------------- --------------
Balance at end of year (Note 33)................................................ (Yen) 271,246 (Yen) 11,593 (Yen) 168,036
============== ============== ==============
Accumulated other changes in equity from nonowner sources, net of taxes:
Net unrealized gains on investment securities available for sale (Note 4):
Balance at beginning of year................................................... (Yen)1,905,295 (Yen)1,202,245 (Yen) 827,280
Net change during the year..................................................... (703,050) (374,965) (507,434)
-------------- -------------- --------------
Balance at end of year......................................................... (Yen)1,202,245 (Yen) 827,280 (Yen) 319,846
-------------- -------------- --------------
Net unrealized gains on derivatives qualifying for cash flow hedges (Note 23):
Balance at beginning of year................................................... (Yen) -- (Yen) -- (Yen) 3,696
Cumulative effect of a change in accounting principle.......................... -- 1,257 --
Net change during the year..................................................... -- 2,439 827
-------------- -------------- --------------
Balance at end of year......................................................... (Yen) -- (Yen) 3,696 (Yen) 4,523
-------------- -------------- --------------
Minimum pension liability adjustments (Note 16):
Balance at beginning of year................................................... (Yen) (15,928) (Yen) (90,364) (Yen) (182,295)
Net change during the year..................................................... (74,436) (91,931) (80,848)
-------------- -------------- --------------
Balance at end of year......................................................... (Yen) (90,364) (Yen) (182,295) (Yen) (263,143)
-------------- -------------- --------------
Foreign currency translation adjustments:
Balance at beginning of year................................................... (Yen) (246,521) (Yen) (204,457) (Yen) (125,431)
Net change during the year..................................................... 42,064 79,026 (50,585)
-------------- -------------- --------------
Balance at end of year......................................................... (Yen) (204,457) (Yen) (125,431) (Yen) (176,016)
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) 907,424 (Yen) 523,250 (Yen) (114,790)
============== ============== ==============
Treasury stock:
Balance at beginning of year.................................................... (Yen) (153,669) (Yen) (108,932) (Yen) (90,974)
Purchases of shares of treasury stock........................................... (1,005) (7,381) (965)
Sales of shares of treasury stock............................................... 46,057 25,339 89,976
Net increase resulting from changes in consolidated subsidiaries................ (315) -- (1,239)
-------------- -------------- --------------
Balance at end of year.......................................................... (Yen) (108,932) (Yen) (90,974) (Yen) (3,202)
============== ============== ==============
Total shareholders' equity...................................................... (Yen)3,201,296 (Yen)2,626,497 (Yen)2,552,937
============== ============== ==============
--------
(*) Amounts have been adjusted to reflect the stock-for-stock exchanges on
April 2, 2001 creating MTFG (see Note 2).
See the accompanying notes to Consolidated Financial Statements.
F-6
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003
2001 2002
---------------- ----------------
(in millions)
Cash flows from operating activities:
Net income (loss)........................................................................ (Yen) (59,174) (Yen) (216,534)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 93,216 105,094
Goodwill amortization.................................................................. 4,444 7,862
Provision for credit losses............................................................ 797,081 601,689
Investment securities losses (gains)--net.............................................. (232,502) (20,598)
Foreign exchange losses (gains)--net................................................... 24,241 524,272
Provision for deferred income tax benefit.............................................. (40,372) (129,151)
Increase in trading account assets, excluding foreign exchange contracts............... (1,769,413) (196,044)
Increase (decrease) in trading account liabilities, excluding foreign
exchange contracts.................................................................... 227,502 (1,604,006)
Decrease (increase) in accrued interest receivable and other receivables............... (44,750) 128,646
Increase (decrease) in accrued interest payable and other payables..................... 171,781 (190,986)
Other--net............................................................................. (95,779) 67,013
---------------- ----------------
Net cash provided by (used in) operating activities.................................. (923,725) (922,743)
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale.......................... 31,027,773 34,164,318
Proceeds from maturities of investment securities available for sale..................... 16,154,100 8,495,287
Purchases of investment securities available for sale.................................... (50,785,346) (45,404,685)
Proceeds from maturities of investment securities being held to maturity................. 79,579 36,970
Purchases of investment securities being held to maturity................................ (211,016) --
Proceeds from sales of other investment securities....................................... 33,469 53,872
Purchases of other investment securities................................................. (15,111) (19,111)
Net decrease (increase) in loans......................................................... 884,808 (552,865)
Net decrease (increase) in interest-earning deposits in other banks...................... (567,952) 1,920,108
Net decrease (increase) in call loans, funds sold, and receivables under resale
agreements and securities borrowing transactions........................................ (2,334,422) 927,975
Proceeds from sales of premises and equipment............................................ 15,604 49,036
Capital expenditures for premises and equipment.......................................... (54,405) (110,391)
Other--net............................................................................... (148,398) (107,402)
---------------- ----------------
Net cash used in investing activities................................................ (5,921,317) (546,888)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits................................................................. 3,423,211 2,274,803
Net decrease in debentures............................................................... (1,135,584) (1,136,959)
Net increase in call money, funds purchased, and payables under repurchase agreements and
securities lending transactions......................................................... 4,286,605 88,080
Net decrease in due to trust account..................................................... (7,758) (1,390,493)
Net increase (decrease) in other short-term borrowings................................... (65,043) 1,355,660
Proceeds from issuance of long-term debt................................................. 1,159,777 884,991
Repayment of long-term debt.............................................................. (920,967) (767,312)
Proceeds from issuance of new shares of common stock, net of stock issue expenses........ -- --
Proceeds from sales of treasury stock.................................................... 34,878 32,577
Payments to acquire treasury stock....................................................... (1,005) (7,381)
Dividends paid........................................................................... (56,342) (28,275)
Other--net............................................................................... (282,109) 202,481
---------------- ----------------
Net cash provided by financing activities............................................ 6,435,663 1,508,172
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents.............................. 26,070 64,190
---------------- ----------------
Net increase (decrease) in cash and cash equivalents...................................... (383,309) 102,731
Cash and cash equivalents at beginning of year............................................ 2,112,977 1,729,668
---------------- ----------------
Cash and cash equivalents at end of year.................................................. (Yen) 1,729,668 (Yen) 1,832,399
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................................. (Yen) 1,125,616 (Yen) 1,127,859
Income taxes, net of refunds.............................................................. 227,900 98,203
Non-cash investing activities:
Loans transferred to other real estate owned.............................................. 6,432 7,605
Investment securities being held to maturity transferred to available-for-sale category
(Note 4)................................................................................. 369,039 --
Marketable equity securities transferred to employee retirement benefit trusts (Note 16).. -- 133,158
2003
----------------
(in millions)
Cash flows from operating activities:
Net income (loss)........................................................................ (Yen) 203,288
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 109,943
Goodwill amortization.................................................................. --
Provision for credit losses............................................................ 455,630
Investment securities losses (gains)--net.............................................. 21,293
Foreign exchange losses (gains)--net................................................... (302,967)
Provision for deferred income tax benefit.............................................. (18,733)
Increase in trading account assets, excluding foreign exchange contracts............... (1,116,568)
Increase (decrease) in trading account liabilities, excluding foreign
exchange contracts.................................................................... 1,390,349
Decrease (increase) in accrued interest receivable and other receivables............... 35,053
Increase (decrease) in accrued interest payable and other payables..................... (80,862)
Other--net............................................................................. 84,556
----------------
Net cash provided by (used in) operating activities.................................. 780,982
----------------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale.......................... 27,063,999
Proceeds from maturities of investment securities available for sale..................... 15,897,034
Purchases of investment securities available for sale.................................... (44,832,560)
Proceeds from maturities of investment securities being held to maturity................. 73,279
Purchases of investment securities being held to maturity................................ --
Proceeds from sales of other investment securities....................................... 26,950
Purchases of other investment securities................................................. (62,782)
Net decrease (increase) in loans......................................................... 215,607
Net decrease (increase) in interest-earning deposits in other banks...................... 69,379
Net decrease (increase) in call loans, funds sold, and receivables under resale
agreements and securities borrowing transactions........................................ 1,116,562
Proceeds from sales of premises and equipment............................................ 70,248
Capital expenditures for premises and equipment.......................................... (50,596)
Other--net............................................................................... 13,107
----------------
Net cash used in investing activities................................................ (399,773)
----------------
Cash flows from financing activities:
Net increase in deposits................................................................. 4,751,481
Net decrease in debentures............................................................... (1,633,157)
Net increase in call money, funds purchased, and payables under repurchase agreements and
securities lending transactions......................................................... 129,750
Net decrease in due to trust account..................................................... (880,607)
Net increase (decrease) in other short-term borrowings................................... (621,985)
Proceeds from issuance of long-term debt................................................. 1,072,400
Repayment of long-term debt.............................................................. (1,084,018)
Proceeds from issuance of new shares of common stock, net of stock issue expenses........ 222,172
Proceeds from sales of treasury stock.................................................... 82,944
Payments to acquire treasury stock....................................................... (965)
Dividends paid........................................................................... (45,904)
Other--net............................................................................... 132,497
----------------
Net cash provided by financing activities............................................ 2,124,608
----------------
Effect of exchange rate changes on cash and cash equivalents.............................. (49,635)
----------------
Net increase (decrease) in cash and cash equivalents...................................... 2,456,182
Cash and cash equivalents at beginning of year............................................ 1,832,399
----------------
Cash and cash equivalents at end of year.................................................. (Yen) 4,288,581
================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................................. (Yen) 620,534
Income taxes, net of refunds.............................................................. 50,471
Non-cash investing activities:
Loans transferred to other real estate owned.............................................. 124
Investment securities being held to maturity transferred to available-for-sale category
(Note 4)................................................................................. --
Marketable equity securities transferred to employee retirement benefit trusts (Note 16).. 24,611
See the accompanying notes to Consolidated Financial Statements.
F-7
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
On April 2, 2001, Mitsubishi Tokyo Financial Group, Inc. (Kabushiki Kaisha
Mitsubishi Tokyo Financial Group) ("MTFG") was established, as a bank holding
company, through which The Bank of Tokyo-Mitsubishi, Ltd. ("BTM"), The
Mitsubishi Trust and Banking Corporation ("Mitsubishi Trust"), and Nippon Trust
Bank Limited ("NTB"), a former subsidiary of BTM, have become wholly-owned
subsidiaries pursuant to the stock-for-stock exchanges. NTB was later merged
into Mitsubishi Trust. The business combination was accounted for as a pooling
of interests and, accordingly, the historical information has been restated as
if the combination had been in effect for all periods presented. See Note 2 for
further information regarding the business combination.
The accompanying consolidated financial statements are stated in Japanese yen,
the currency of the country in which MTFG is incorporated and principally
operates. The accompanying consolidated financial statements have been prepared
on the basis of generally accepted accounting principles and prevailing
practices within the banking industry in the United States of America ("US
GAAP"). In certain respects, the accompanying consolidated financial statements
reflect adjustments which are not included in the consolidated financial
statements issued by MTFG and certain of its subsidiaries in accordance with
applicable statutory requirements and accounting practices in the countries of
incorporation. The major adjustments include those relating to (1) investment
securities, (2) derivative financial instruments, (3) allowance for credit
losses, (4) income taxes, (5) foreign currency translation, (6) premises and
equipment, (7) transfer of financial assets, (8) pension liability, (9)
goodwill, and (10) lease transactions.
Fiscal periods of certain subsidiaries, which ended on or after December 31,
and MTFG's fiscal year, which ended on March 31, have been treated as
coterminous. For the years ended March 31, 2001, 2002 and 2003, the effect of
recording intervening events for the three-month periods ended March 31 on
MTFG's proportionate equity in net income of subsidiaries with fiscal periods
ending on December 31, would have resulted in a decrease of (Yen)4.74 billion,
a decrease of (Yen)2.29 billion and an increase of (Yen)3.18 billion,
respectively. No intervening events occurred during each of the three-month
periods ended March 31, 2001, 2002 and 2003 which, if recorded, would have had
effects of more than 1% of total assets, loans, total liabilities, deposits or
shareholders' equity as of March 31, 2001, 2002 and 2003.
Description of Business
MTFG and its subsidiaries (together, the "MTFG Group") conduct domestic and
international financial business through BTM and Mitsubishi Trust, each of the
principal subsidiaries of MTFG having domestic and international networks of
branches, offices and subsidiaries in Japan and around the world. BTM is a
major commercial banking institution, providing a broad range of financial
services to consumers and corporations through commercial banking, investment
banking and other activities. Mitsubishi Trust is a trust and banking
subsidiary whose primary business encompasses banking, asset management and
administration, fiduciary and agency services, and real estate services. MTFG
management recognizes that BTM and Mitsubishi Trust, including their
subsidiaries, conducting each of their business with substantial autonomy,
constitute principal segments of the MTFG Group. See Note 28 for more
information by business segment.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent
F-8
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term primarily
relate to the determinations or valuations of the allowance for credit losses
on loans and off-balance-sheet credit instruments, deferred tax assets,
derivative financial instruments, goodwill, investment securities and accrued
severence indemnities and pension liabilities.
Summary of Significant Accounting Policies
Significant accounting policies applied in the accompanying consolidated
financial statements are summarized below:
Consolidation--The consolidated financial statements include the accounts of
MTFG and its subsidiaries over which substantive control is exercised through
either majority ownership of voting stock and/or other means, including, but
not limited to, the possession of the power to direct or cause the direction of
the management and policies of entities. In situations in which the MTFG Group
has less than 100% but greater than 50% of ownership in entities, such entities
are consolidated and minority interests are also recorded in Other liabilities.
Minority interests in earnings or losses of subsidiaries are reported in Other
non-interest expense. Intercompany items have been eliminated. Investments in
affiliated companies (companies over which the MTFG Group has the ability to
exercise significant influence) are accounted for by the equity method of
accounting and are reported in Other assets. MTFG's equity interests in the
earnings of these equity investees and gains or losses realized on disposition
of such investments are reported in Other non-interest income.
Assets that the MTFG Group holds in an agency, fiduciary or trust capacity are
not assets of the MTFG Group and, accordingly, are not included in the
accompanying consolidated balance sheets.
Cash Flows--For the purposes of reporting cash flows, cash and cash equivalents
are defined as those amounts included in the consolidated balance sheets under
the caption Cash and due from banks, all of which mature within 90 days. Cash
flows from qualified hedging activities are classified in the same category as
the items being hedged.
Translation of Foreign Currency Financial Statements and Foreign Currency
Transactions--Financial statements of overseas entities are translated into
Japanese yen using the respective year-end exchange rates for assets and
liabilities. Income and expense items are translated at average rates of
exchange for the respective periods.
Except for overseas entities located in highly inflationary economies, foreign
currency translation gains and losses related to the financial statements of
overseas entities of the MTFG Group, net of related income tax effects, are
credited or charged directly to Foreign currency translation adjustments, a
component of accumulated other changes in equity from nonowner sources. Tax
effects of gains and losses on foreign currency translation of financial
statements of overseas entities are not recognized unless it is apparent that
the temporary differences will reverse in the foreseeable future. If
applicable, foreign exchange translation gains and losses pertaining to
entities located in highly inflationary economies are recorded in Foreign
exchange gains (losses)--net, as appropriate. For these entities, premises and
equipment and the related depreciation and amortization thereof are translated
at exchange rates prevailing at dates of acquisition.
Foreign currency denominated assets and liabilities are translated into
Japanese yen at the respective year-end foreign exchange rates. Foreign
currency denominated income and expenses are translated using average rates of
F-9
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exchange for the respective periods. Gains and losses from such translation are
included in Foreign exchange gains (losses)--net, as appropriate.
Repurchase Agreements, Securities Lending and Other Secured Financing
Transactions--Securities sold with agreements to repurchase ("repurchase
agreements"), securities purchased with agreements to resell ("resale
agreements") and securities lending and borrowing transactions are accounted
for as sales of securities with related off-balance-sheet forward repurchase
commitments and purchases of securities with related off-balance-sheet forward
resale commitments, respectively, if they meet the relevant conditions for the
surrender of control as provided by Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a replacement of FASB Statement No. 125."
If the conditions are not met, the transactions are treated as secured
financing and lending.
Collateral--For secured lending transactions, including resale agreements,
securities borrowing transactions, commercial lending and derivative
transactions, the MTFG Group, as a secured party, has generally the right to
require the counterparties to provide collateral, including letters of credit,
and cash, securities and other financial assets. For most securities lending
transactions, the MTFG Group maintains strict levels of collateralization
governed by daily mark-to-market analysis. Financial assets pledged as
collateral are generally negotiable financial instruments and are permitted to
be sold or repledged by secured parties. If the MTFG Group sells these
financial assets received as collateral, it recognizes the proceeds from the
sale and its obligation to return the collateral. For secured borrowing
transactions, principally repurchase agreements and securities lending
transactions and derivative transactions, where the secured party has the right
to sell or repledge financial assets pledged as collateral, the MTFG Group
separately reports those financial assets pledged as collateral in the
consolidated balance sheets.
Trading Account Securities--Securities and money market instruments held in
anticipation of short-term market movements and for resale to customers are
included in Trading account assets, and short trading positions of these
instruments are included in Trading account liabilities. Trading positions are
carried at fair value on the consolidated balance sheets and recorded on a
trade date basis. Changes in the fair value of trading positions are recognized
currently in Trading account profits--net, as appropriate.
Investment Securities--Debt securities for which the MTFG Group has both the
positive intent and ability to hold to maturity are classified as Securities
being held to maturity and carried at amortized cost. The MTFG Group maintains
a portfolio of securities being held to maturity that had been classified by
Mitsubishi Trust before the business combination on April 2, 2001. In the year
ended March 31, 2001, BTM changed its intent to hold securities previously
classified as being held to maturity and transferred such securities to the
available-for-sale category. Any remaining securities in BTM's held-to-maturity
portfolio were reclassified as securities available for sale for the year ended
March 31, 2001. All subsequent acquisitions of securities are classified as
either available for sale or trading for at least two years. Debt securities
that the MTFG Group may not hold to maturity and marketable equity securities,
other than those classified as trading account securities, are classified as
Securities available for sale, and are carried at their fair values, with
unrealized gains and losses reported on a net-of-tax basis within accumulated
other changes in equity from nonowner sources, which is a component of
shareholders' equity. Nonmarketable equity securities are stated at cost as
Other investment securities. Individual debt and equity securities are written
down to fair value with the resulting losses charged to operations when, in the
opinion of management, a decline in estimated fair value below the cost of such
securities is other than temporary. Such impairment loss is included in
Investment securities gains (losses)--net in the statement of operations. In
determining other than temporary declines in fair value to be recognized as an
impairment loss on investment securities, the MTFG Group generally considers
factors such as the financial condition of the issuer, the extent of decline in
fair value, and the length of period that the decline in fair value below cost
has existed.
F-10
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Particularly with regard to equity securities, the MTFG Group looks to the
historical volatility of Japanese stock prices to set the extent of decline in
fair value that warrant impairment loss recognition. During the year ended
March 31, 2003, the Japanese stock markets experienced a long, sustained
decline. In light of this recent decline, the MTFG Group has reassessed and
modified its estimate of the extent of decline in fair value that should be
considered as other than temporary. Due to this change in accounting estimate,
the MTFG Group recognized additional impairment losses on investment securities
amounting to (Yen)26,530 million, which decreased net income by (Yen)16,325
million, basic earnings per common share--net income available to common
shareholders by (Yen)2,906.18, and diluted earnings per common share--net
income available to common shareholders by (Yen)2,784.51, respectively, for the
year ended March 31, 2003. Interest and dividends on investment securities are
reported in Interest Income. Dividends are recognized when the shareholders'
right to receive dividend is established. Gains and losses on disposition of
investment securities are computed using the average cost method and are
recognized on the trade date.
Derivative Financial Instruments--The MTFG Group engages in derivative
activities involving swaps, forwards and options, and other types of derivative
contracts. Derivatives are used in trading activities to generate trading
revenues and fee income for its own account and to respond to the customers'
financial needs. Derivatives are also used to manage its exposures to
fluctuations in interest and foreign exchange rates, equity and commodity
prices.
Derivatives entered into for trading purposes are carried at fair value and are
reported as Trading account assets or Trading account liabilities. Fair values
are based on market or broker-dealer quotes when available. Valuation models
such as present value and pricing models are applied to current market
information to estimate fair values when such quotes are not available. The
fair values of derivative contracts executed with the same counterparty under
legally enforceable master netting agreements are presented on a net basis.
Changes in the fair value of such contracts are recognized currently in Foreign
exchange gains (losses)--net with respect to foreign exchange contracts and in
Trading account profits--net with respect to interest rate contracts and other
types of contracts.
Embedded derivatives that are not clearly and closely related to the host
contracts and meet the definition of derivatives are separated from the host
contracts and measured at fair value unless the contracts embedding derivatives
are measured at fair value in its entirety.
Derivatives are used for asset and liability management to manage exposures to
fluctuations in interest and foreign exchange rates arising from mismatches of
asset and liability positions. Such derivatives may include contracts that
qualify for hedge accounting. At inception of hedge accounting, each derivative
is designated as a hedging instrument and documented with related information
such as the risk management objective and strategy for hedge, which includes
the hedged item and the risk being hedged and the method used to assess the
hedge's effectiveness. Derivatives are evaluated in order to determine if they
qualify for hedge accounting. The hedging derivative instruments must be highly
effective in achieving offsetting changes in fair values or variable cash flows
from the hedged items attributable to the risk being hedged. Any
ineffectiveness, which arises during the hedging relationship, is recognized in
Non-interest income or expense in the period in which it arises. All qualifying
hedging derivatives are valued at fair value and included in Other assets or
Other liabilities. For fair value hedges of interest-bearing assets or
liabilities, the change in the fair value of the hedged item and the hedging
instruments is recognized in net interest income to the extent that it is
effective. For all other fair value hedges, the change in the fair value of the
hedged item and change in fair value of the derivative are recognized in
non-interest income or expense. For cash flow hedges, the unrealized changes in
fair value to the extent effective are recognized in accumulated other changes
in equity from nonowner sources to the extent that it is effective. Amounts
realized on cash flow hedges related to variable rate loans are recognized in
net interest income in the period when the cash flow from the hedged item is
realized. The fair value of cash flow hedges related to forecasted
transactions, if any, is recognized in non-interest income or expense in the
period when the forecasted transaction occurs. Any difference that arises from
gains or losses on hedging derivatives offsetting corresponding gains or losses
on the hedged items, and gains and losses on derivatives attributable to the
risks excluded from the
F-11
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assessment of hedge effectiveness are currently recognized in non-interest
income or expense. Derivatives that do not qualify for hedge accounting are
considered trading positions and are accounted for as such.
Prior to the adoption of SFAS No. 133, fair value of derivatives used for
hedging purposes generally were not recorded on the consolidated balance sheet.
Amounts payable and receivable on interest rate swaps and currency swaps were
accrued according to the contractual terms and included in the related revenue
and expense category as an adjustment to yield on the associated instruments.
Loans--Loans are carried at the principal amount outstanding, adjusted for
unearned income and deferred net nonrefundable loan fees and costs. Loans held
and intended for dispositions or sales in secondary market are transferred to
the held-for-sale classification and carried at the lower of cost or estimated
fair value generally on an individual basis. Loan origination fees, net of
certain direct origination costs are deferred and recognized over the
contractual life of the loan as an adjustment of yield using the method that
approximates the interest method. Interest income on loans that are not
impaired are accrued and credited to interest income as it is earned. Unearned
income and discount and premium of a purchased loan is deferred and recognized
over the life of the loan using the method that approximates the interest
method.
Loans are considered impaired when, based on current information and events, it
is probable that the MTFG Group will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis by
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Loans are generally placed on nonaccrual status when substantial doubt exists
as to the full and timely collection of either principal or interest, or when
principal or interest is contractually past due one month or more with respect
to loans of domestic banking subsidiaries, including BTM and Mitsubishi Trust,
and 90 days or more with respect to loans of certain foreign banking
subsidiaries. A nonaccrual loan may be restored to an accrual basis when
interest and principal payments are current and management expects that the
borrower will make future contractual payments as scheduled. When a loan is
placed on nonaccrual status, interest accrued but not received is generally
reversed against interest income. Cash receipts on nonaccrual loans, for which
the ultimate collectibility of principal is uncertain, are applied as principal
reductions; otherwise, such collections are credited to income. The MTFG Group
does not capitalize any accrued interest in its principal balances of impaired
loans at each balance sheet date.
Loan Securitization--The MTFG Group securitizes and services commercial and
industrial loans in the normal course of business. The MTFG Group accounts for
a transfer of loans in a securitization transaction as a sale if it meets
relevant conditions for the surrender of control in accordance with SFAS No.
140. Otherwise, the transfer is accounted for as a collateralized borrowing
transaction. Interests in loans sold through a securitization accounted for as
a sale may be retained in the form of subordinated tranches or beneficial
interests. These retained interests are primarily recorded in Securities
available for sale. The previous carrying amount of the loans involved in the
transfer is allocated between the loans sold and the retained interests based
on their relative fair values at the date of the securitization. Since quoted
market prices are generally not available, the MTFG Group usually estimates
fair value of these retained interests based on the present value of future
expected cash flows by using modeling techniques that involve management's best
estimates of key assumptions, which may include default rates, recovery rates,
and discount rates. Retained interests that can contractually be prepaid or
F-12
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
otherwise settled in such a way that the MTFG Group would not recover
substantially all of its investment are accounted for as investment securities
available for sale.
Allowance for Credit Losses--The MTFG Group maintains an allowance for credit
losses to absorb losses inherent in the loan portfolio. Actual credit losses
(amounts deemed uncollectible, in whole or in part), net of recoveries, are
deducted from the allowance for credit losses, as net charge-offs, generally
based on detailed loan reviews and credit assessment of management at each
balance-sheet date. The MTFG Group generally applies charge-off policy to all
loans in its portfolio regardless of the type of borrower. A provision for
credit losses, which is a charge against earnings, is added to bring the
allowance to a level which, in management's opinion, is appropriate to absorb
probable losses inherent in the credit portfolio.
A key element relating to policies and discipline used in determining the
allowance for credit losses is the credit classification and the related
borrower categorization process. The categorization is based on conditions that
may affect the ability of borrowers to service their debt, taking into
consideration current financial information, historical payment experience,
credit documentation, public information, analyses of relevant industry
segments and current trends. In determining the appropriate level of the
allowance, the MTFG Group evaluates the probable loss by category of loan based
on its type and characteristics.
The allowance for credit losses for non-homogeneous loans consists of an
allocated allowance for specifically identified problem loans, an allocated
allowance for country risk exposure, a formula allowance and an unallocated
allowance. An allocated allowance is also established for large groups of
smaller-balance homogeneous loans. Non-homogeneous loans such as commercial
loans are evaluated individually and the allowance for such loans is comprised
of specific, country risk, formula and unallocated allowances.
The credit loss allowance for individual customers represents the impairment
allowance determined in accordance with SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." The MTFG Group measures the impairment of a loan,
with the exception of large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
on the loan's observable market price, or based on the fair value of the
collateral if the loan is collateral dependent, when it is probable that the
MTFG Group will be unable to collect all amounts due according to the
contractual terms of the loan agreement. For certain subsidiaries, some
impaired loans are aggregated for the purpose of measuring impairment using
historical loss factors. Generally, the MTFG Group's impaired loans include
nonaccrual loans, restructured loans and other loans specifically recognized
for impairment.
The credit loss allowance for country risk exposure is a country-specific
allowance for substandard, special mention and unclassified loans. The
allowance is established to supplement the formula allowance for these loans,
based on an estimate of probable losses relating to the exposure to countries
that are identified by management to have a high degree of transfer risk. The
measure is generally based on a function of default probability and recovery
ratio with reference to external credit ratings. For allowance for specifically
identified cross-border problem loans, the MTFG Group incorporates transfer
risk in its determination of related allowance for credit losses.
The formula allowance is calculated for group of loans collectively evaluated
for unidentified impairment by applying loss factors to outstanding
substandard, special mention and unclassified loans. The evaluation of inherent
loss for these loans involves a high degree of uncertainty, subjectivity and
judgment because probable credit losses are not easily identifiable or
measurable. In determining the formula allowance, the MTFG Group, therefore,
relies on a statistical analysis that incorporates loss factor percentages of
total loans outstanding based on historical experience. Corresponding to the
periodical impairment identification and self-assessment process, the
estimation of formula allowance is back-tested comparing with the actual
results subsequent to the balance sheet date.
The unallocated allowance is composed of attribution factors, which are based
upon management's evaluation of various conditions that are not directly
measured in the determination of the allocated allowance. The conditions
F-13
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
evaluated in connection with the unallocated allowance may include existing
general economic and business conditions affecting the key lending areas of the
MTFG Group, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, specific industry conditions
within portfolio segments, recent loss experience in particular segments of the
portfolio, duration of the current business cycle, bank regulatory examination
results and findings of the MTFG Group's internal credit examiners.
The credit loss allowance for large groups of smaller-balance homogeneous loans
is focused on loss experience for the pool rather than on a detailed analysis
of individual loans. The allowance is determined primarily based on probable
net charge-offs and the probability of insolvency based on the number of
delinquencies.
Allowance for Off-Balance-Sheet Credit Instruments--The MTFG Group maintains an
allowance for credit losses on off-balance-sheet credit instruments, including
commitments to extend credit, guarantees, standby letters of credit and other
financial instruments. The allowance is recorded as a liability and includes
the specific allowance for specifically identified credit exposure and the
allocated formula allowance. With regard to the specific allowance for
specifically identified credit exposure and allocated formula allowance, the
MTFG Group adopts the same methodology used in determining the allowance for
loan credit losses. Credit losses related to derivatives are considered in the
fair valuation of the derivatives.
The MTFG Group periodically assesses the credit exposures related to individual
investment assets within trust accounts in order to determine the level of
allowance required for guarantees for repayment of certain trust principal.
Provisions for credit losses are recognized in the consolidated financial
statements when, in the opinion of management, aggregate credit losses are
judged to exceed the reserve set aside within the trust account and profits
earned during each trust accounting period, and the trust principal is deemed
to be impaired.
Net changes in the allowance for off-balance-sheet credit instruments are
accounted for as Other non-interest expense.
Premises and Equipment --Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is charged to
operations over the estimated useful lives of the related assets. Leasehold
improvements are depreciated over the terms of the respective leases or the
estimated useful lives of the improvements, whichever are shorter. Depreciation
of premises and equipment is computed under the declining-balance method with
respect to premises and equipment of BTM, Mitsubishi Trust and certain other
subsidiaries, and under the straight-line method with respect to premises and
equipment of other subsidiaries, at rates principally based on the following
estimated useful lives:
Years
--------
Buildings.............. 15 to 50
Equipment and furniture 5 to 20
Leasehold improvements. 3 to 39
Maintenance, repairs and minor improvements are charged to operations as
incurred. Major improvements are capitalized. Net gains or losses on
dispositions of premises and equipment are included in Other non-interest
income or expense, as appropriate.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount to future undiscounted net cash flows
expected to be generated by the asset. If an asset is considered to be
impaired, the impairment to be recognized is measured by the amount by
F-14
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which the carrying amount of the asset exceeds the fair value. For purposes of
recognition and measurement of an impairment loss, a long-lived asset or assets
are grouped with other assets and liabilities at the lowest level with
independent and identifiable cash flows. Assets to be disposed of by sale are
reported at the lower of the carrying amount or fair value less estimated cost
to sell.
Other Real Estate Owned--Real estate assets acquired in full or partial
satisfaction of debt are held for sale, and are initially recorded at fair
value less estimated cost to sell at the date of acquisition and classified as
Other assets. After acquisition, valuations are periodically performed by
management and the real estate assets are carried at the lower of the carrying
amount or fair value less estimated cost to sell. Routine holding costs,
subsequent declines in appraisal value, and net gains or losses on disposal are
included in Losses on other real estate owned as incurred.
Goodwill--The MTFG Group has classified as goodwill the excess of the cost of
the MTFG Group's investments in subsidiaries over the MTFG Group's share of net
assets at dates of acquisition in purchase transactions. Goodwill related to
the investments in affiliated companies is included in the investments
accounted for by the equity method. On April 1, 2002, the MTFG Group adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which provides goodwill
acquired in a purchase business combination should not be amortized and is
subject to the impairment test. Goodwill is recorded at a designated reporting
unit level for the purpose of assessing impairment. An impairment loss, if any,
is recognized to the extent that the carrying amount of goodwill exceeds its
implied fair value. Prior to the adoption of SFAS No. 142, in accordance with
Accounting Principles Board Opinion ("APB") No. 17, goodwill was amortized over
periods not exceeding 10 years.
Software--The MTFG Group capitalizes certain costs associated with the
acquisition or development of internal-use software. Costs subject to
capitalization are salaries and employee benefits for employees who are
directly associated with and who devote time to the internal-use computer
software project, to the extent of the time spent directly on the project. Once
the software is ready for its intended use, the MTFG Group begins to amortize
capitalized costs on a straight-line basis over its estimated useful life.
Accrued Severance and Pension Liabilities--BTM, Mitsubishi Trust and certain
other subsidiaries have defined benefit retirement plans, including lump-sum
severance indemnities plans. The costs of the plans, based on actuarial
computations of current and future employee benefits, are charged to Salaries
and employee benefits.
Debentures and Long-Term Debt--Premiums, discounts and issuance costs of
debentures and long-term debt are amortized based on the method that
approximates the interest method over the terms of the debentures and long-term
debt.
Obligations under Guarantees--The MTFG Group provides customers with a variety
of guarantees and similar arrangements, including standby letters of credit,
financial and performance guarantees, credit protections, and liquidity
facilities. The MTFG Group recognizes guarantee fee income over the guarantee
period. It is MTFG's dominant business practice to receive such guarantee fee
at the inception of the guarantee, which approximates market value of guarantee
and is carried as liability until the period when it should be included in
income.
Fees and Commissions--Fees and commissions on international business primarily
consist of fees from international funds transfer and collection services, and
trade-related financing services. Fees and commissions on credit card business
are composed of interchange income, annual fees, royalty and other service
charges from franchisees. Other fees and commissions primarily include fees
from investment banking service, including underwriting, brokerage and advisory
services, arrangement fees on securitizations, service charges on deposit
accounts, fees on guarantees, and fees on other services.
F-15
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition of major components of fees and commissions is as follows;
(1) fees on funds transfer and collection services, fees from investing banking
services are generally recognized as revenue when the related services are
performed, (2) fees from trade-related financing services are recognized over
the period of the financing, (3) trust fees are recorded on an accrual basis,
generally based on the volume of trust assets under management and/or the
operating performance for the accounting period of each trust account. With
respect to trust accounts with guarantee of trust principal, trust fees are
determined based on the profits earned by individual trust account during the
trust accounting period, less deductions, including provision for reserve,
impairment for individual investments and dividends paid to beneficiary
certificate holders. The trust fees for these trust accounts are accrued based
on the amounts expected to be earned during the accounting period of each trust
account, (4) annual fees and royalty and other service charges related to the
credit card business are recorded on a straight-line basis as services are
provided, (5) interchange income from credit card business is recognized as
billed, (6) service charges on deposit accounts, and fees and commissions from
other services are generally recognized over the period that the service is
provided, and (7) fees on guarantees are generally recognized over the
contractual periods of respective guarantees. Amounts initially recorded as an
asset corresponding to the obligations at fair value are generally recognized
as revenue over the terms of the guarantees as the MTFG Group is deemed to be
released from the risk under guarantees.
Income Taxes--The provision for income taxes is determined using the asset and
liability method of accounting for income taxes. Under this method, deferred
income taxes reflect the net tax effects of (1) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, and (2) operating loss and tax
credit carryforwards. A valuation allowance is recognized for any portion of
the deferred tax assets where it is considered more likely than not that it
will not be realized. The provision for deferred taxes is based on the change
in the net deferred tax asset or liability from period to period.
Free Distributions of Common Shares--As permitted by the Commercial Code of
Japan (the "Code"), Japanese companies, upon approval by the Board of
Directors, may make a free distribution of shares, in the form of a "stock
split" as defined, to shareholders. In accordance with generally accepted
accounting practice in Japan, such distribution does not give rise to any
change in capital stock or capital surplus account. Common shares distributed
are recorded as shares issued on the distribution date. See Note 19.
Amounts per Common Share--Basic earnings per share ("EPS") excludes dilutive
effects of potential common shares and is computed by dividing income available
to common stock shareholders by the weighted average number of common shares
outstanding for the period, while diluted EPS gives effect to all dilutive
potential common shares that were outstanding during the period. See Note 22
for the computation of basic and diluted EPSs.
Comprehensive Income (Loss)--The MTFG Group's comprehensive income includes net
income or loss and other changes in equity from nonowner sources. All changes
in unrealized gains and losses on investment securities available for sale,
unrealized gains and losses on derivatives qualifying for cash flow hedges,
minimum pension liability adjustments and foreign currency translation
adjustments constitute the MTFG Group's changes in equity from nonowner sources
and are presented, with related income tax effect, in the consolidated
statements of changes in equity from nonowner sources.
Accounting Change
Goodwill and Other Intangible Assets--Effective April 1, 2002, the MTFG Group
adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill, formerly amortized over its
F-16
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
useful life, no longer be amortized and be tested for impairment at least
annually. Further, SFAS No. 142 requires that intangible assets that have
finite useful lives will continue to be amortized over their useful lives while
intangible assets with indefinite lives will no longer be amortized and are
subject to impairment testing at least annually.
The MTFG Group has performed the required transitional impairment tests of
goodwill and intangible assets with indefinite lives upon adoption of SFAS No.
142. The initial adoption resulted in a cumulative adjustment charge to
earnings of (Yen)532 million.
Impairment or Disposal of Long-Lived Assets--In August 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets by establishing additional criteria as
compared to existing accounting principles to determine when a long-lived asset
is held for sale. It also broadens the definition of discontinued operations.
This statement carries over the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of," and was adopted by the MTFG Group on April 1, 2002. The
adoption of SFAS No. 144 did not have a material impact on the results of
operations or financial position.
Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13--In April 2002,
the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." The provisions
of SFAS No. 145 related to the rescission of Statement No. 4 are effective for
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB No. 30 for classification as an
extraordinary item shall be reclassified. The provisions of this statement
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. All other provisions of SFAS No. 145 are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS No. 145 did
not have a material impact on the results of operations or financial position.
Costs Associated with Exit or Disposal Activities--In June 2002, the FASB
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. This
statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The adoption of SFAS No. 146 did not have
a material impact on the results of operations or financial position.
Acquisitions of Certain Financial Institutions--In October 2002, the FASB
issued SFAS No. 147,"Acquisitions of Certain Financial Institutions, an
amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9."
This statement eliminates specialized accounting guidance related to certain
acquisitions. The adoption of SFAS No. 147 did not have a material impact on
the MTFG Group's financial condition or results of operations.
Guarantor's Accounting and Disclosure Requirements for Guarantees--Effective
January 1, 2003, the MTFG Group adopted the initial recognition and measurement
provisions of FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB interpretation No. 34," which requires that, for
guarantees within the scope of FIN No. 45 issued or amended after December 31,
2002, a liability for the fair value of the obligation undertaken in issuing
the guarantee be recognized. It also requires a guarantor to disclose its
obligations under certain guarantees that it has issued. The
F-17
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adoption of FIN No. 45 did not have a material impact on the MTFG Group's
financial position or results of operations. See Note 24 for disclosures
required under FIN No. 45.
Stock-Based Compensation--In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements to require
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The transition and annual disclosure
requirements under this Statement are effective for financial statements for
fiscal years ending after December 15, 2002.
Two subsidiaries of MTFG have several stock-based compensation plans, which are
described more fully in Note 31. As permitted by the provisions of SFAS No.
123, they account for those stock-based compensation plans by the intrinsic
value based method prescribed in APB No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations; and, no compensation expense has been
recognized for the stock option grants.
Had the stock-based compensation plans been accounted for under the fair value
method of SFAS No. 123, the MTFG Group's compensation expense, net income
(loss), and net income (loss) per share would have been the pro forma amounts
indicated in the following table.
Years ended March 31,
------------------------------------------------
2001 2002 2003
--------------- --------------- --------------
(in millions)
Reported net income (loss)......................................... (Yen) (59,174) (Yen) (216,534) (Yen) 203,288
Stock-based employee compensation expense (determined under
fair value based method for all awards, net of tax).............. (741) (1,369) (2,019)
--------------- --------------- --------------
Pro forma net income (loss), after stock-based employee
compensation expense............................................. (Yen) (59,915) (Yen) (217,903) (Yen) 201,269
=============== =============== ==============
Basic earnings (loss) per common share--net income (loss) available
to common shareholders: (in Yen)
Reported........................................................ (Yen)(12,274.55) (Yen)(39,733.32) (Yen)33,963.40
Pro forma....................................................... (12,409.34) (39,979.72) 33,603.94
Diluted earnings (loss) per common share--net income (loss)
available to common shareholders:
Reported........................................................ (12,274.55) (39,733.32) 31,137.71
Pro forma....................................................... (12,409.34) (39,979.72) 30,793.30
Compensation expense recognized for stock-based compensation other than stock
options for the years ended March 31, 2001, 2002 and 2003 was not significant.
Variable Interest Entities--In January 2003, the FASB issued FIN No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN No. 46 addresses consolidation by business enterprises of variable interest
entities. The consolidation requirements of FIN No. 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to entities created on or before January 31, 2003 in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable
F-18
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest entity was created. See Note 25 for further discussion on the variable
interest entities in which the MTFG Group holds variable interests.
Derivative Instruments and Hedging Activities--On April 1, 2001, the MTFG Group
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires
that all derivatives, whether designated as a hedge or not, be recorded on the
balance sheet at fair value. SFAS No. 133 also requires that derivative
instruments used to hedge be identified specifically to assets, liabilities,
firm commitments or anticipated transactions and be expected to remain
effective throughout the life of the hedge. Derivative instruments that do not
qualify as either a fair value hedge or cash flow hedge are valued at fair
value and classified as trading account assets or liabilities with the
resultant gain or loss recognized in current earnings. The cumulative effect of
the change in accounting principle, net of tax, was to increase net income by
(Yen)5,867 million and other changes in equity from nonowner sources by
(Yen)1,257 million, respectively.
Reclassifications
For the year ended March 31, 2003, the MTFG Group presented net trading account
profits (losses), net foreign exchange gains (losses), and net investment
securities gains (losses) in a single line item of non-interest income in the
consolidated statement of operations. Previously, if the MTFG Group had net
losses in any of those categories for a particular period, the MTFG Group
reported those net losses in non-interest expense. Non-interest income and
non-interest expense for prior periods have been reclassified to conform to the
current year presentation. Other reclassifications and format changes have been
made to prior year amounts to conform to the current year presentation.
Recently Issued Accounting Pronouncements
Accounting for Asset Retirement Obligations--In June 2001, the FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
addresses the financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 applies to the legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of a long-lived asset. A
legal obligation that a party is required to settle as a result of an existing
or enacted law, statute, ordinance, or written or oral contract, or by legal
construction of a contract under the doctrine of promissory estoppel. This
statement is effective for fiscal years beginning after June 15, 2002. The MTFG
Group does not expect that the adoption of this statement will have a material
impact on its financial condition or results of operations.
Transfer to the Japanese Government of the Substitutional Portion of Employee
Pension Fund Liabilities--In January 2003, the Emerging Issues Task Force of
the FASB reached a consensus on Issue No. 03-2, "Accounting for the Transfer to
the Japanese Government of the Substitutional Portion of Employee Pension Fund
Liabilities" ("EITF 03-2"), which was ratified by the FASB in February 2003.
EITF 03-2 addresses accounting for a transfer to the Japanese government of a
substitutional portion of an employee pension fund and requires employers to
account for the entire separation process of a substitutional portion from an
entire plan upon completion of the transfer to the government of the
substitutional portion of the benefit obligation and related plan assets as the
culmination of a series of steps in a single settlement transaction. It also
requires that the difference between the fair value of the obligation and the
assets required to be transferred to the government, if any, should be
accounted for as a subsidy from the government, separately from gain or loss on
settlement of the substitutional portion of the obligation, upon completion of
the transfer.
F-19
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 30, 2003, BTM submitted to the government an application to transfer
the obligation to pay benefits for future employee service related to the
substitutional portion and the application was approved on August 1, 2003. In
order to complete the entire separation process, however, BTM must make another
application for transfer to the government of the remaining substitutional
portion. But the timing of the application has not been decided. Upon
completion of the separation, the substitutional obligation and related plan
assets will be transferred to a government agency, and BTM will be released
from paying the substitutional portion of the benefits to its employees. The
impact on MTFG's consolidated financial statements of the transfer accounted
for in accordance with EITF 03-2 is not known and cannot be reasonably
estimable until the completion of the transfer.
Derivative Instruments and Hedging Activities--In April 2003, the FASB issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivatives
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. In particular, this
Statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and (2) clarifies when a
derivative contains a financing component that warrants special reporting in
the statement of cash flows (3) amends the definition of underlyings, one of
three characteristics of derivatives, to include the occurrence or
non-occurrence of a specified event such as scheduled payment under a contract,
and (4) amends certain other existing pronouncements, in particular, those
related to the scope of instruments that are subject to the requirements of
SFAS No. 133. This Statement is generally effective for contracts entered into
or modified after June 30, 2003. The MTFG Group has not completed the study of
what effect SFAS No. 149 would have on the financial position or the results of
operations, and cannot reasonably estimate the impact on the financial position
or results of operations.
Certain Financial Instruments with Characteristics of both Liabilities and
Equity--In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The MTFG Group has not
completed evaluating the impact of adoption of the statement.
2. BUSINESS COMBINATION
As discussed in Note 1, on April 2, 2001, MTFG was established as a bank
holding company through which BTM, Mitsubishi Trust and NTB have become
wholly-owned subsidiaries pursuant to stock-for-stock exchanges. 5,742 thousand
shares of MTFG's common stock were issued in exchange for all of the
outstanding shares of BTM's, Mitsubishi Trust's and NTB's common stock based on
exchange ratio of 1.00, 0.70 and 0.14 shares of MTFG's common stock for each
1,000 shares of BTM, Mitsubishi Trust and NTB, respectively. Each 1,000 shares
of BTM's Class 1 Preferred Stock and each 1,000 shares of Mitsubishi Trust's
Class 1 Preferred Stock were exchanged for a share of Class 1 and Class 2
Preferred Stock of MTFG, respectively. The business combination was accounted
for under the pooling-of-interests method and, accordingly, the historical
financial information has been restated as if the business combination had been
in effect for all the periods presented.
The stock-for-stock exchanges also involved the exchange of 27,951 shares of
MTFG's common stock of (Yen)33.0 billion at fair value with 199,655 thousands
of common shares held by NTB's minority shareholders, which has been accounted
for as a purchase.
F-20
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth certain financial data with respect to the
combined and separate results of BTM and Mitsubishi Trust for the year ended
March 31, 2001. The results for NTB are included within BTM because NTB had
been a subsidiary of BTM before the consummation of the business combination.
2001
--------------
(in millions)
Interest income and non-interest income:
BTM........................................................................................... (Yen)2,512,112
Mitsubishi Trust.............................................................................. 619,248
--------------
Total..................................................................................... 3,131,360
Adjustments to eliminate securities unrealized losses and impairment losses of cross-shareholding
of common stock................................................................................ 23,827
Adjustment to reflect the combining interests in subsidiaries and equity method investees........ 413
Elimination of other intercompany transactions................................................... (21,419)
--------------
Combined, as restated............................................................................ (Yen)3,134,181
==============
Net loss:
BTM........................................................................................... (Yen) (107,684)
Mitsubishi Trust.............................................................................. 36,874
--------------
Total..................................................................................... (70,810)
Adjustments to eliminate securities unrealized losses and impairment losses of cross-shareholding
of common stock, net of related income taxes................................................... 14,914
Adjustment to reflect the combining interests in subsidiaries and equity method investees, net of
income taxes................................................................................... 431
Elimination of other intercompany transactions................................................... (3,709)
--------------
Combined, as restated............................................................................ (Yen) (59,174)
==============
Accumulated other changes in equity from nonowner sources:
BTM........................................................................................... (Yen) 620,701
Mitsubishi Trust.............................................................................. 274,363
--------------
Total..................................................................................... 895,064
Adjustments to eliminate securities unrealized losses and impairment losses of cross-shareholding
of common stock, net of related income taxes................................................... 12,494
Adjustment to reflect the combining interests in subsidiaries and equity method investees, net of
income taxes................................................................................... (134)
--------------
Combined, as restated............................................................................ (Yen) 907,424
==============
--------
Note: The combined and restated amounts of interest income and non-interest
income presented above were restated to conform to the current year
presentation. See Note 1 "Reclassifications" for further information
regarding the restatement.
On October 1, 2001, as part of the business combination, NTB and The Tokyo
Trust Bank, Ltd.("TTB"), which was another one of the trust subsidiaries,
merged with and into Mitsubishi Trust through a stock-for-stock exchange. This
merger was recorded at historical cost as transfers and exchanges among
entities under common control.
F-21
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. TRADING ACCOUNT ASSETS AND LIABILITIES
The following table shows trading account assets and liabilities, carried at
estimated fair value, at March 31, 2002 and 2003. For trading derivative
contracts executed under legally enforceable master netting agreements, related
assets and liabilities are bilaterally offset and reported net by counterparty.
2002 2003
--------------- ---------------
(in millions)
Trading account assets:
Trading securities:
Japanese government, prefectural and municipal bonds.............. (Yen) 1,425,588 (Yen) 1,833,922
Commercial paper.................................................. 2,804,750 2,492,950
Foreign governments bonds and other securities.................... 789,344 462,120
--------------- ---------------
Total.......................................................... 5,019,682 4,788,992
--------------- ---------------
Trading derivative assets:
Interest rate contracts:
Forward and futures............................................... 141,377 28,660
Swap and swap-related products.................................... 3,501,232 4,297,090
Options purchased................................................. 75,371 126,987
--------------- ---------------
Total.......................................................... 3,717,980 4,452,737
--------------- ---------------
Foreign exchange contracts:
Forward and futures............................................... 612,148 565,006
Swaps............................................................. 463,794 471,308
Options purchased................................................. 73,369 58,214
--------------- ---------------
Total.......................................................... 1,149,311 1,094,528
--------------- ---------------
Other contracts, mainly equity and credit-related contracts......... 178,481 39,256
Bilateral netting of derivatives under master netting agreements.... (2,568,201) (2,012,130)
--------------- ---------------
Total.................................................................... (Yen) 7,497,253 (Yen) 8,363,383
=============== ===============
Trading account liabilities:
Trading securities sold, not yet purchased........................... (Yen) 176,954 (Yen) 205,708
Trading derivative liabilities:
Interest rate contracts:
Forward and futures............................................... 140,695 35,283
Swap and swap-related products.................................... 3,122,510 4,036,752
Options written................................................... 78,720 115,595
--------------- ---------------
Total.......................................................... 3,341,925 4,187,630
--------------- ---------------
Foreign exchange contracts:
Forward and futures............................................... 740,248 512,864
Swaps............................................................. 625,064 608,237
Options written................................................... 66,977 67,852
--------------- ---------------
Total.......................................................... 1,432,289 1,188,953
--------------- ---------------
Other contracts, mainly equity and credit-related contracts......... 112,801 32,992
Bilateral netting of derivatives under master netting agreements.... (2,568,201) (2,012,130)
--------------- ---------------
Total.................................................................... (Yen) 2,495,768 (Yen) 3,603,153
=============== ===============
See Note 30 for the methodologies and assumptions used to estimate fair values.
F-22
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The MTFG Group performs trading activities through market-making, sales and
arbitrage, while maintaining risk levels within appropriate limits in
accordance with its risk management policy. Net trading gains for the years
ended March 31, 2001, 2002 and 2003 comprised the following:
2001 2002 2003
------------- ------------ -------------
(in millions)
Interest rate and other derivative contracts..... (Yen) 199,445 (Yen)149,301 (Yen) 254,895
Trading account securities, excluding derivatives 30,063 (10,841) 11,921
------------- ------------ -------------
Trading account profits--net..................... 229,508 138,460 266,816
Foreign exchange derivative contracts............ (156,113) (78,020) (100,277)
------------- ------------ -------------
Net trading gains................................ (Yen) 73,395 (Yen) 60,440 (Yen) 166,539
============= ============ =============
4. INVESTMENT SECURITIES
The amortized costs and estimated fair values of investment securities
available for sale and being held to maturity at March 31, 2002 and 2003 were
as follows:
2002 2003
----------------------------------------------------------- ---------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair Amortized
(Restated) (Restated) (Restated) value cost
--------------- -------------- ------------ --------------- ---------------
(in millions)
Securities available for sale:
Debt securities:
Japanese national
government and Japanese
government agency
bonds...................... (Yen) 9,887,613 (Yen) 67,280 (Yen) 3,643 (Yen) 9,951,250 (Yen)10,912,961
Japanese prefectural and
municipal bonds............ 509,850 10,439 224 520,065 463,387
Foreign governments and
official institutions
bonds...................... 2,710,870 127,385 15,601 2,822,654 5,229,601
Corporate bonds............. 2,245,290 50,876 6,599 2,289,567 2,014,766
Mortgage-backed
securities................. 1,452,359 82,399 3,792 1,530,966 1,203,359
Other debt securities....... 672,464 10,547 3,188 679,823 594,725
Marketable equity securities. 3,877,975 1,702,182 91,666 5,488,491 2,865,276
--------------- -------------- ------------ --------------- ---------------
Total.......................... (Yen)21,356,421 (Yen)2,051,108 (Yen)124,713 (Yen)23,282,816 (Yen)23,284,075
=============== ============== ============ =============== ===============
Securities being held to
maturity--debt securities:
Japanese government agency
bonds....................... (Yen) 89,945 (Yen) 4,321 (Yen) -- (Yen) 94,266 (Yen) 70,208
Japanese prefectural and
municipal bonds............. 107,544 4,754 2 112,296 95,904
Foreign governments and
official institutions bonds. 69,529 3,293 -- 72,822 25,020
Corporate bonds.............. 2,664 95 -- 2,759 --
Other debt securities........ 2,481 100 -- 2,581 --
--------------- -------------- ------------ --------------- ---------------
Total.......................... (Yen) 272,163 (Yen) 12,563 (Yen) 2 (Yen) 284,724 (Yen) 191,132
=============== ============== ============ =============== ===============
2003
-------------------------------------------
Gross Gross Estimated
unrealized unrealized fair
gains losses value
-------------- ----------- ---------------
(in millions)
Securities available for sale:
Debt securities:
Japanese national
government and Japanese
government agency
bonds...................... (Yen) 112,885 (Yen) 1,959 (Yen)11,023,887
Japanese prefectural and
municipal bonds............ 9,798 25 473,160
Foreign governments and
official institutions
bonds...................... 193,058 9,530 5,413,129
Corporate bonds............. 43,320 8,377 2,049,709
Mortgage-backed
securities................. 21,678 6,360 1,218,677
Other debt securities....... 503 786 594,442
Marketable equity securities. 772,706 46,920 3,591,062
-------------- ----------- ---------------
Total.......................... (Yen)1,153,948 (Yen)73,957 (Yen)24,364,066
============== =========== ===============
Securities being held to
maturity--debt securities:
Japanese government agency
bonds....................... (Yen) 3,887 (Yen) -- (Yen) 74,095
Japanese prefectural and
municipal bonds............. 5,929 -- 101,833
Foreign governments and
official institutions bonds. 2,576 -- 27,596
Corporate bonds.............. -- -- --
Other debt securities........ -- -- --
-------------- ----------- ---------------
Total.......................... (Yen) 12,392 (Yen) -- (Yen) 203,524
============== =========== ===============
F-23
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to the issuance of MTFG's consolidated financial statements for the
year ended March 31, 2002, management determined that amortized costs and gross
unrealized gains and losses on securities available for sale for the year ended
March 31, 2002 were erroneously disclosed. These errors had no impact on the
consolidated financial position or results of operations. As a result, such
amounts have been restated from the amounts previously reported as follows:
2002
- -------------------------------------------------------------------------------------
Amortized cost Gross unrealized gains Gross unrealized losses
----------------------------- ----------------------------- -------------------------
As previously As previously As previously
reported As restated reported As restated reported As restated
-------------- -------------- -------------- -------------- ------------- -----------
(in millions)
Debt securities:
Foreign governments and
official institutions
bonds.................... (Yen)2,761,296 (Yen)2,710,870 (Yen) 106,298 (Yen) 127,385 (Yen) 44,940 (Yen)15,601
Corporate bonds............ 2,232,789 2,245,290 64,976 50,876 8,198 6,599
Mortgage-backed
securities............... 1,463,274 1,452,359 80,779 82,399 13,087 3,792
Other debt securities...... 623,624 672,464 61,185 10,547 4,986 3,188
Marketable equity securities 3,877,975 3,877,975 2,010,664 1,702,182 400,148 91,666
Investment securities other than securities available for sale or being held to
maturity (i.e., nonmarketable equity securities presented in Other investment
securities) were carried at cost of (Yen)129,498 million and (Yen) 145,431
million, at March 31, 2002 and 2003, respectively. The corresponding estimated
fair values at those dates were not readily determinable. The MTFG Group
periodically monitors the status of each investee including the credit ratings
and changes in the MTFG Group's share of net assets in the investees as
compared with its shares at the time of investment, to determine if impairment
losses, if any, are to be recognized on these nonmarketable securities.
See Note 30 for the methodologies and assumptions used to estimate the fair
values.
The amortized cost and estimated fair value of debt securities being held to
maturity and the estimated fair value of debt securities available for sale at
March 31, 2003 by contractual maturity are shown below. Expected maturities
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties. 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
original final maturities.
Available-for-
Held-to-maturity sale
------------------------- ---------------
Amortized Estimated Estimated
cost fair value fair value
------------ ------------ ---------------
(in millions)
Due in one year or less......... (Yen) 25,275 (Yen) 25,681 (Yen) 3,998,493
Due from one year to five years. 91,496 97,439 11,555,571
Due from five years to ten years 74,361 80,404 3,625,371
Due after ten years............. -- -- 1,593,569
------------ ------------ ---------------
Total........................... (Yen)191,132 (Yen)203,524 (Yen)20,773,004
============ ============ ===============
For the years ended March 31, 2001, 2002 and 2003, proceeds from sales of
securities available for sale were (Yen)31,027,773 million, (Yen)34,164,318
million and (Yen)27,063,999 million, respectively. For the years ended March 31,
F-24
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2001, 2002 and 2003, gross realized gains on those sales were (Yen)605,014
million, (Yen)492,145 million and (Yen)576,757 million, respectively, and gross
realized losses on those sales were (Yen)107,640 million, (Yen)172,427 million
and (Yen)208,023 million, respectively. In September 2000, BTM changed its
intent to hold securities originally classified as held-to-maturity and
transferred (Yen)369 billion at carrying value of such securities to the
available-for-sale category while Mitsubishi Trust maintained its positive
intent and ability to hold its held-to-maturity securities without any sales or
transfers of such securities during the year ended March 31, 2001. As a result
of the transfer, unrealized gains on securities available for sale were
recorded against shareholders' equity and were not significant. The MTFG Group
classified all acquisitions of securities as either available for sale or
trading for the period of two years after BTM's transfer of securities being
held to maturity into another category.
For the years ended March 31, 2001, 2002 and 2003, losses resulting from
write-downs of investment securities to reflect the decline in value considered
to be other than temporary were (Yen)264,783 million, (Yen)293,861 million and
(Yen)395,515 million, respectively, which were included in investment
securities gains (losses)-net in the consolidated statements of operations.
Exchange Traded Fund
For the years ended March 31, 2002 and 2003, BTM transferred marketable equity
securities to an exchange-traded fund ("ETF"), sponsored by a securities firm.
BTM concurrently entered into sales agreements for marketable equity securities
and purchase agreements for the fund units of the ETF with the securities firm.
BTM transferred its marketable equity securities to the securities firm with an
aggregate cost of (Yen)325,749 million for (Yen)391,698 million for the year
ended March 31, 2002, and an aggregate cost of (Yen)163,861 million for
(Yen)240,574 million for the year ended March 31, 2003. The securities firm
contributed these marketable equity securities and additional securities
purchased from the market to the ETF in order to link the ETF performance to
the TOPIX (a composite index of all stocks listed on the First Section of the
Tokyo Stock Exchange ("TSE")). Certificates issued by the ETF (the "ETF
certificates") are linked to the TOPIX and have been listed on the TSE. BTM
purchased the ETF certificates at the fair value of (Yen)527,967 million for
the year ended March 31, 2002, and (Yen)361,782 million for the year ended
March 31, 2003, with an intention to sell them in the market or to the
securities firm in the near future.
The MTFG Group accounted for the ETF certificates purchased from the securities
firm as retained interests in the marketable equity securities transferred to
the securities firm. The MTFG Group accounted for the transfer of marketable
equity securities as a sale when the MTFG Group received as proceeds cash or
financial instruments other than the ETF certificates. For the years ended
March 31, 2002 and 2003, the MTFG Group recognized gains of (Yen)35,442 million
and (Yen)41,883 million, respectively, on the sales of the ETF certificates.
The MTFG Group held the ETF certificates with fair values of (Yen)91,252
million at March 31, 2002 and (Yen)148,646 million at March 31, 2003 in the
Securities Available for Sale. The ETF certificates are carried at fair value
based on the market prices observed in the TSE and the fair value change is
closely linked with the movement of the TOPIX (1,060.19 points and 788.00
points, respectively, at March 29, 2002 and March 31, 2003).
Banks' Shareholdings Purchase Corporation
Under a law forbidding banks from holding stocks in excess of their Tier I
capital after September 30, 2004, a date which was later extended to after
September 30, 2006 as discussed below, the Banks' Shareholdings Purchase
Corporation ("BSPC") was established in January 2002 in order to soften the
impact on the stock market of sales of cross-shareholdings. BSPC began
accepting share offers from financial institutions on February 15, 2002. It has
been funded by financial institutions, including BTM and Mitsubishi Trust,
which made initial contributions of (Yen)2,000 million ("preferred
contributions"). BSPC will be disbanded when BSPC sells all shares that it
purchased from financial institutions, or by March 31, 2017 as discussed below,
at the latest.
F-25
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BSPC has two accounts to purchase stock from financial institutions; the
General Account and the Special Account. In the General Account, each selling
financial institution funds the amount of purchase by BSPC without guarantees
by the Japanese government, and the financial institution will assume any gains
or losses on sales by BSPC of the stocks. In the Special Account, each selling
financial institution has to make contributions of 8% of the selling prices to
BSPC for purchases made prior to the effective date of the amendment to the
above-mentioned law to fund any future losses ("subordinated contributions").
The purchase amount in the Special Account is funded by borrowings guaranteed
by the Japanese government with a limit of (Yen)2.0 trillion. The cumulative
net loss on sales of stocks in the Special Account, which will not be
determined and finalized before the liquidation of BSPC, will be compensated by
the subordinated contributions at first, and then by the preferred
contributions. If there is a remaining loss, the government, as a guarantor,
will be liable for the loss. On the other hand, if there is a cumulative net
asset at the time of the liquidation, the asset is first used to repay the
preferred contributions and then to repay the subordinated contributions. After
that if any remaining asset exists, it will be paid out and the amounts will be
determined based on the amounts of the both contributions. The remaining gain
over the double amount of contributions will belong to the Japanese government.
At the establishment in January 2002, BTM and Mitsubishi Trust paid (Yen)2,000
million to BSPC as preferred contributions. BTM and Mitsubishi Trust sold
marketable equity securities with aggregate market values of (Yen)20,647
million and (Yen)2,289 million, respectively, for the years ended March 31,
2002 and 2003. At the time of sales, BTM and Mitsubishi Trust made to the
Special Account subordinated contributions of (Yen)1,652 million and (Yen)183
million, respectively, for the years ended March 31, 2002 and 2003. Also, BTM
and Mitsubishi Trust made loans to BSPC to fund its purchases of marketable
equity securities, and the loans to BSPC, which are guaranteed by the Japanese
government, amounted to (Yen)35,600 million and (Yen)79,735 million,
respectively, at March 31, 2002 and 2003. For the year ended March 31, 2003,
the MTFG Group evaluated its preferred contributions of (Yen)2,000 million and
subordinated contributions of (Yen)1,835 million for impairment, and recognized
an impairment loss of (Yen)3,835 million in total.
The MTFG Group accounts for the transfers of marketable equity securities to
the General Account, if any, as secured borrowings. With respect to the
transfers of marketable equity securities to the Special Account, if the fair
value of the securities sold to the Special Account is greater than 10% of the
fair value of all securities held by the special account, the MTFG Group
accounts for the subordinated contributions as a partial retained interest in
the sale. The MTFG Group made no sale of securities whose fair value was
greater than 10% of the fair value of all securities held by the Special
Account until now. For the years ended March 31, 2002 and 2003, the MTFG Group
recognized a gain of (Yen)5,913 million and a loss of (Yen)10 million,
respectively, on the sale of marketable equity securities to the Special
Account.
On July 25, 2003, the Japanese government enacted a revision to the legislation
forbidding banks from holding stocks in excess of their Tier I capital. The
revision includes the extension of the effective date to September 30, 2006
after which banks will be forbidden from holding stocks in excess of Tier I
capital. The revision also includes the extension of the lifespan of BSPC to
March 31, 2017 and the abolition of subordinated contributions discussed above.
The revision became effective in August 2003.
The Bank of Japan
The Bank of Japan began purchasing marketable equity securities at fair value
from banks, including BTM and Mitsubishi Trust, from November 2002 aiming to
enhance the stability of the Japanese financial system by reducing marketable
equity securities from balance sheets of banks. Transfers of securities to the
Bank of Japan are sales transactions without transferors' continuing
involvement. BTM and Mitsubishi Trust sold marketable equity securities with an
aggregate market value of (Yen)181.6 billion to the Bank of Japan for the year
ended March 31, 2003.
F-26
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LOANS
Loans at March 31, 2002 and 2003 by domicile and type of industry of borrower
are summarized below:
Classification of loan by industry is based on the industry segment loan
classification as defined by the Bank of Japan.
2002 2003
------------------ -------------------------------------
Old classification Old classification New classification
------------------ ------------------ ------------------
(in millions)
Domestic:
Manufacturing................................. (Yen) 6,394,459 (Yen) 6,119,502 (Yen) 6,034,347
Construction.................................. 1,535,191 1,277,407 1,277,407
Real estate................................... 4,923,688 4,297,718 4,298,146
Services...................................... 4,549,692 5,062,035 4,953,830
Wholesale and retail.......................... 5,983,958 5,634,752 5,458,337
Banks and other financial institutions........ 4,271,182 3,598,028 3,598,028
Communication and information services........ -- -- 1,516,020
Other industries.............................. 3,850,153 5,004,704 3,858,031
Consumer...................................... 7,049,095 7,425,702 7,425,702
--------------- --------------- ---------------
Total domestic............................ 38,557,418 38,419,848 38,419,848
--------------- --------------- ---------------
Foreign:
Governments and official institutions......... 326,086 235,093 235,093
Banks and other financial institutions........ 680,449 928,059 928,059
Commercial and industrial..................... 9,708,102 8,413,452 8,413,452
Other......................................... 1,000,044 510,179 510,179
--------------- --------------- ---------------
Total foreign............................. 11,714,681 10,086,783 10,086,783
--------------- --------------- ---------------
Less unearned income and deferred loan fees - net 42,374 41,062 41,062
--------------- --------------- ---------------
Total..................................... (Yen)50,229,725 (Yen)48,465,569 (Yen)48,465,569
=============== =============== ===============
--------
Note: The table includes loans held for sale of (Yen)3,178 million and
(Yen)3,965 million at March 31, 2002 and 2003, respectively.
During the year ended March 31 2003, the Bank of Japan changed the industry
segment loan classification. Such change primarily includes an introduction of
new "Communication and information services" category. Due to the introduction
of the new category, certain businesses previously included in "Manufacturing,"
"Services" and "Other" industries were reclassified into "Communication and
information services." This change is expected to provide a more transparent
and detailed description of the loan portfolio. In response to the change, the
MTFG Group modified its loan reporting system. For the purpose of comparison,
the information as of March 31, 2003 includes both loans outstanding, before
allowance for credit losses, by type of industry based on the prior years'
industry segment classification and the new industry segment classification.
Substantially all domestic loans are made under agreements which, as customary
in Japan, provide that a bank may, under certain conditions, require the
borrower to provide collateral (or additional collateral) or guarantees with
respect to the loans, and that the bank may treat any collateral, whether
furnished as security for loans or otherwise, as collateral for all
indebtedness to the bank. At March 31, 2002 and 2003, such collateralized loans
originated by the MTFG Group, which were principally collateralized by real
estate, marketable securities and accounts receivable, amounted to
(Yen)9,003,420 million and (Yen)8,514,286 million, respectively, which
represented 23% and 22%, respectively, of the total domestic loans at March 31,
2002 and 2003.
F-27
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nonaccrual and restructured loans were (Yen)4,141,942 million and
(Yen)2,732,627 million at March 31, 2002 and 2003, respectively. Had interest
on these loans been accrued at the original terms of agreement, gross interest
income on such loans for the years ended March 31, 2002 and 2003 would have
been approximately (Yen)101.1 billion and (Yen)77.4 billion, respectively, of
which approximately (Yen)75.4 billion and (Yen)57.6 billion, respectively, was
included in interest income on loans in the accompanying consolidated
statements of operations. Accruing loans contractually past due 90 days or more
were (Yen)23,040 million and (Yen)20,399 million at March 31, 2002 and 2003,
respectively.
Impaired Loans
The MTFG Group's impaired loans primarily include nonaccrual loans and
restructured loans. A summary of the recorded balances of impaired loans and
related impairment allowance at March 31, 2002 and 2003 is shown below:
2002 2003
----------------------------- ---------------------------
Recorded Impairment Recorded Impairment
loan balance allowance loan balance allowance
-------------- -------------- -------------- ------------
(in millions)
Requiring an impairment allowance.... (Yen)3,556,557 (Yen)1,296,281 (Yen)2,408,523 (Yen)894,380
Not requiring an impairment allowance 489,131 -- 211,193 --
-------------- -------------- -------------- ------------
Total................................ (Yen)4,045,688 (Yen)1,296,281 (Yen)2,619,716 (Yen)894,380
============== ============== ============== ============
--------
Note: In addition to impaired loans presented in the above table, there were
loans held for sale that were impaired of (Yen)3,178 million and
(Yen)3,790 million at March 31, 2002 and 2003, respectively.
The average recorded investments in impaired loans were approximately
(Yen)3,217 billion, (Yen)4,209 billion and (Yen)3,375 billion, respectively,
for the years ended March 31, 2001, 2002 and 2003.
For the years ended March 31, 2001, 2002 and 2003, the MTFG Group recognized
interest income of approximately (Yen)57.1 billion, (Yen)77.0 billion and
(Yen)67.8 billion, respectively, on impaired loans. Interest income on
nonaccrual loans was recognized on a cash basis when ultimate collectibility of
principal is certain; otherwise, cash receipts are applied as principal
reductions. Interest income on accruing impaired loans, including restructured
loans, was recognized on an accrual basis to the extent that the collectibility
of interest income was reasonably certain based on management's assessment.
Lease Receivable
As part of its financing activities, the MTFG Group enters into leasing
arrangements with customers. The MTFG Group's leasing operations are performed
through leasing subsidiaries and consist principally of direct financing leases
involving various types of data processing equipment, office equipment and
transportation equipment.
As of March 31, 2002 and 2003, the components of the investment in direct
financing leases were as follows:
2002 2003
------------ ------------
(in millions)
Minimum lease payment receivable............ (Yen)510,180 (Yen)683,034
Estimated residual values of leased property 49,225 64,537
Less--unearned income....................... (47,251) (61,222)
------------ ------------
Net investment in direct financing leases... (Yen)512,154 (Yen)686,349
============ ============
F-28
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payment receivables under noncancelable leasing agreements
as of March 31, 2003 are as follows:
Direct
financing
leases
-------------
(in millions)
Year ending March 31:
2004................................ (Yen)162,485
2005................................ 139,041
2006................................ 96,139
2007................................ 62,732
2008................................ 36,915
2009 and thereafter................. 185,722
------------
Total minimum lease payment receivables (Yen)683,034
============
Government-led Loan Restructuring Program
Under the legislation enacted by the Japanese Diet in June 1996, which
incorporates the restructuring program for the loans of seven failed
housing-loan companies (the "Jusen"), the Deposit Insurance Corporation ("DIC")
established a Housing Loan Corporation ( "HLAC") to collect and dispose of the
loans of the liquidated Jusen. In 1999, HLAC merged with the Resolution and
Collection Bank Limited to create the Resolution and Collection Corporation
("RCC"), which is wholly owned by the DIC.
Financial institutions, including the MTFG Group, waived the repayment of
substantial amounts of the loans to the Jusen and transferred the remaining
balances to HLAC. Financial institutions were requested to make loans to HLAC
to finance its collection activities, and in the year ended March 31, 1997 the
MTFG Group made loans of (Yen)407,078 million with the original maturity term
of 15 years, which were included in the loan portfolio as of March 31, 2002 and
2003. The 15-year term loans to HLAC, which are guaranteed by the DIC under the
legislation and the loan agreements, mature in 2011 and earn interest at TIBOR
(Tokyo Interbank Offered Rate) plus 0.125%. The terms and conditions on the
loans of other financial institutions to HLAC are the same except for
agricultural financial institutions.
Under this restructuring program, a Financial Stabilization Fund (the "Special
Fund") was established within the DIC, and the Bank of Japan and other
financial institutions established another fund (the "New Fund"). These funds
are principally invested in Japanese government bonds. The MTFG Group made
non-interest-earning deposits of (Yen)176,089 million with the Special Fund and
the New Fund in the year ended March 31, 1997. The deposit balances as of March
31, 2002 and 2003, which are included in Other Assets, were (Yen)132,655
million and (Yen)136,681million, respectively, reflecting a present value
discount and subsequent amortization of the discount during the period until
the expected maturity date. The non-interest-earning deposits with these funds
are expected to mature in 15 years from the deposit dates, which coincides with
the planned operational lifespan of HLAC.
It is uncertain what losses (so-called "stage two loss"), if any, may
ultimately be incurred by RCC through the collection of the Jusen loans during
the 15-year term. If any such losses ultimately occur, the Japanese government
will be liable for half of such losses, and the investment income to be earned
by the Special Fund during the 15 years is to be used to cover the remaining
half of the losses. The investment income to be earned by the New Fund during
the 15 years is used to compensate for a portion of the public funds used for
the Jusen restructuring.
F-29
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Although the impact on future financial results is subject to reasonable
estimation, at this time management believes all loans and deposits will be
collectible according to their respective terms.
Sales of Loans
The MTFG Group originates various types of loans to corporate and individual
customers in Japan and overseas in the normal course of its business. The
Financial Services Agency of Japan (the "FSA") announced in October 2002 that
it will strive to reduce the aggregate ratio of nonperforming credits to total
credits of major Japanese banks, including MTFG's domestic banking
subsidiaries, to about half by March 31, 2005. Pursuant to the FSA's policy and
in order to improve its loan quality, BTM and Mitsubishi Trust actively
disposed of nonperforming loans during the year ended March 31, 2003. Most of
such nonperforming loans were disposed of by sales to third party purchasers
including RCC without any continuing involvements. Management of BTM and
Mitsubishi Trust generally decides on approvals for disposals after the
significant sales terms, including prices, are negotiated. As such, loans are
disposed of by sales shortly after the loans are transferred to the held for
sale classification. For the years ended March 31, 2001, 2002 and 2003, the
losses on sales of loans, which represents an additional provision for credit
losses on such decision, were (Yen)2,637 million, (Yen)13,375 million and
(Yen)52,241 million, respectively. Such losses are included in provision for
credit losses in the accompanying consolidated statements of operations.
Loan Securitization
The MTFG Group had no significant transfers of loans in securitization
transactions accounted for as sales for the years ended March 31, 2002 and
2003, and did not retain any significant interests associated with loans
transferred in securitizations at March 31, 2003.
Related Party Loans
In some cases, the banking subsidiaries of MTFG make loans to related parties,
including their directors and executive officers, as a course of their normal
commercial banking business. At March 31, 2002 and 2003, outstanding loans to
such related parties were immaterial.
In the opinion of management, these related party loans were made on
substantially the same terms, including interest rates and collateral
requirements, as those terms prevailing at the date these loans were made. For
the years ended March 31, 2001, 2002 and 2003, there were no loans to related
parties that were charged-off. Additionally, at March 31, 2002 and 2003, there
were no loans to related parties that were impaired.
F-30
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the years ended March 31, 2001,
2002 and 2003 are shown below:
2001 2002 2003
-------------- -------------- --------------
(in millions)
Balance at beginning of year............................... (Yen)1,486,212 (Yen)1,716,984 (Yen)1,735,180
-------------- -------------- --------------
Provision for credit losses................................ 797,081 601,689 455,630
-------------- -------------- --------------
Charge-offs................................................ 644,439 669,381 893,638
Less--Recoveries........................................... 46,077 65,977 78,827
-------------- -------------- --------------
Net charge-offs............................................ 598,362 603,404 814,811
-------------- -------------- --------------
Other, principally foreign exchange translation adjustments 32,053 19,911 (15,863)
-------------- -------------- --------------
Balance at end of year..................................... (Yen)1,716,984 (Yen)1,735,180 (Yen)1,360,136
============== ============== ==============
As explained in Note 5, nonperforming loans were actively disposed of by sale
during recent years. The allocated allowance for credit losses for such loans
were removed from the allowance for credit losses and transferred to the
valuation allowance for loans held for sale upon decision to sell. Net
charge-offs in the above table include the decrease in allowance for credit
losses due to loan disposal activity amounting to (Yen)46.0 billion, (Yen)174.0
billion and (Yen)369.6 billion for the years ended March 31, 2001, 2002 and
2003, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment at March 31, 2002 and 2003 consisted of the following:
2002 2003
-------------- --------------
(in millions)
Land......................... (Yen) 200,191 (Yen) 193,278
Buildings.................... 443,828 432,230
Equipment and furniture...... 530,380 489,307
Leasehold improvements....... 232,509 234,443
Construction in progress..... 3,294 20,134
-------------- --------------
Total..................... 1,410,202 1,369,392
Less accumulated depreciation 728,836 725,598
-------------- --------------
Premises and equipment--net.. (Yen) 681,366 (Yen) 643,794
============== ==============
Premises and equipment include capitalized leases, principally related to data
processing equipment, which amounted to (Yen)37,763 million and (Yen) 38,750
million of acquisition cost at March 31, 2002 and 2003, respectively.
Accumulated depreciation on such capitalized leases at March 31, 2002 and 2003
amounted to (Yen)17,627 million and (Yen)22,517 million, respectively.
Depreciation expense of premises and equipment for the years ended March 31,
2001, 2002 and 2003 was (Yen)61,482 million, (Yen)68,162 million and
(Yen)63,026 million, respectively.
In March 1999, BTM sold a 50% undivided interest in each of its head office
land and building (including structure and equipment) for (Yen)91,500 million
and of its main office land and building (including structure and equipment)
for (Yen)9,100 million to a real estate company. At the same time, BTM entered
an agreement to lease
F-31
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
back the 50% undivided interests of the buildings sold from the buyer over a
period of 7 years. BTM accounted for these transactions as financing
arrangements, and recorded the total proceeds of (Yen)100,600 million as a
financing obligation. Under the lease agreement, BTM made non-interest-bearing
deposits of (Yen)8,000 million with the buyer-lessor in March 1999. The lease
payments are determined each year upon negotiations with the buyer-lessor,
based on future market conditions and expenditures for significant improvements
and related expenses of the buildings to be born by the buyer-lessor. The lease
agreement is noncancelable during the lease period of 7 years. At the end of
lease, BTM has no obligations or options specified in the lease agreement.
At March 31, 2002 and 2003, the financing obligation was (Yen)101,806 million
and (Yen)102,208 million, respectively, and total rental payments amounted to
(Yen)6,504 million and (Yen)6,190 million, respectively, for the years ended
March 31, 2002 and 2003.
In the year ended at March 31, 2003, the MTFG Group recognized (Yen)13,004
million of impairment losses for long-lived assets, primarily domestic real
estate to be disposed of, which were formerly used for its domestic banking
operations. In addition, (Yen)2,619 million of impairment losses were
recognized for real estate held for sale. These losses are included in Other
non-interest expenses. In computing the amount of impairment losses, fair value
was determined primarily based on market prices, if any, or estimated price
based on appraised value.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 1, on April 1, 2002, the MTFG Group adopted SFAS No. 142
which requires that goodwill, formerly subject to amortization, no longer be
amortized and be tested for impairment at least annually. Further, SFAS No. 142
requires that intangible assets with finite useful lives continue to be
amortized over their useful lives while intangible assets with indefinite lives
no longer be amortized and subject to impairment testing at least annually.
On April 1, 2002, the MTFG Group has performed the required transitional
impairment tests of goodwill and intangible assets with indefinite lives upon
adoption of SFAS No. 142. The initial adoption resulted in a cumulative
adjustment charge to earnings of (Yen)532 million related to the impairment of
goodwill. Such cumulative adjustment primarily resulted from an impairment of
goodwill related to a U.S. leasing business and was measured using the
discounted future cash flow method. Intangible assets with indefinite lives,
which were amortized in the prior periods, were immaterial.
F-32
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
The changes in the carrying amount of goodwill by business segment during the
year ended March 31, 2003 are as follows:
BTM Mitsubishi Trust
------------------------------------------- -----------------------
Global
Corporate Investment Mitsubishi Trust Real
Banking Banking Securities UNBC Assets Estate
--------- ---------- ---------- ----------- ----------- -----------
(in millions)
Balance at March 31, 2002........................... (Yen) 23 (Yen) 509 (Yen) -- (Yen)11,169 (Yen)14,735 (Yen)14,950
Impairment recognized by the transitional impairment
test............................................... (23) (509) -- -- -- --
Goodwill acquired during the year................... -- -- 408 9,646 -- --
Reclassified to core deposit intangible............. -- -- -- (1,799) -- --
Foreign currency translation adjustments and other.. -- -- -- (966) -- --
-------- --------- -------- ----------- ----------- -----------
Balance at March 31, 2003........................... (Yen) -- (Yen) -- (Yen)408 (Yen)18,050 (Yen)14,735 (Yen)14,950
======== ========= ======== =========== =========== ===========
Total
-----------
Balance at March 31, 2002........................... (Yen)41,386
Impairment recognized by the transitional impairment
test............................................... (532)
Goodwill acquired during the year................... 10,054
Reclassified to core deposit intangible............. (1,799)
Foreign currency translation adjustments and other.. (966)
-----------
Balance at March 31, 2003........................... (Yen)48,143
===========
See Note 28 for the business segment information of the MTFG Group.
Net income (loss) and amounts per common share for the years ended March 31,
2001, 2002 and 2003 adjusted to exclude amortization expense related to
goodwill are as follows:
2001 2002 2003
--------------- --------------- --------------
Net income (loss) (in millions):
Reported income (loss)............................................... (Yen) (59,174) (Yen) (216,534) (Yen) 203,288
Goodwill amortization................................................ 5,014 7,877 --
--------------- --------------- --------------
Adjusted net income (loss)........................................... (Yen) (54,160) (Yen) (208,657) (Yen) 203,288
=============== =============== ==============
Basic earnings (loss) per share (in yen):
Reported basic earnings (loss) per share--net income (loss) available
to common shareholders............................................. (Yen)(12,274.55) (Yen)(39,733.32) (Yen)33,963.40
Goodwill amortization................................................ 911.64 1,418.11 --
--------------- --------------- --------------
Adjusted basic earnings (loss) per share--net income (loss) available
to common shareholders............................................. (Yen)(11,362.91) (Yen)(38,315.21) (Yen)33,963.40
=============== =============== ==============
Diluted earnings (loss) per share (in yen):
Reported diluted earnings (loss) per share--net income (loss)
available to common shareholders................................... (Yen)(12,274.55) (Yen)(39,733.32) (Yen)31,137.71
Goodwill amortization................................................ 911.64 1,418.11 --
--------------- --------------- --------------
Adjusted diluted earnings (loss) per share--net income (loss)
available to common shareholders................................... (Yen)(11,362.91) (Yen)(38,315.21) (Yen)31,137.71
=============== =============== ==============
F-33
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other intangible assets
The table below presents the gross carrying amount, accumulated amortization
and net carrying amount, in total and by major class of intangible assets at
March 31, 2002 and 2003:
2002 2003
-------------------------------------- --------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
------------ ------------ ------------ ------------ ------------ ------------
(in millions)
Intangible assets subject to
amortization:
Software........................ (Yen)278,670 (Yen)149,132 (Yen)129,538 (Yen)354,692 (Yen)196,611 (Yen)158,081
Core deposit intangible......... 3,291 2,605 686 5,486 3,886 1,600
Other........................... 18,644 12,414 6,230 7,565 3,163 4,402
------------ ------------ ------------ ------------ ------------ ------------
Total....................... (Yen)300,605 (Yen)164,151 136,454 (Yen)367,743 (Yen)203,660 164,083
============ ============ ============ ============
Intangible assets recorded in
connection with the additional
minimum pension liabilities under
SFAS No. 87 (See Note 16)........ 42,539 14,568
Intangible assets not subject to
amortization..................... 7,624 8,247
------------ ------------
Total.............................. (Yen)186,617 (Yen)186,898
============ ============
Intangible assets subject to amortization acquired during the year ended March
31, 2003 amounted (Yen)90,869 million, which primarily consist of capitalized
cost of software. The weighted average amortization period for capitalized
software is five years, and the amount of its residual value is immaterial.
The estimated aggregate amortization expense for intangible assets for the next
five years is as follows:
(in millions)
-------------
Year ending March 31,
2004.............. (Yen)46,905
2005.............. 41,725
2006.............. 33,785
2007.............. 22,551
2008.............. 9,506
F-34
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES
The detail of current and deferred income tax expense (benefit) for the years
ended March 31, 2001, 2002 and 2003 was as follows:
2001 2002 2003
------------- ------------- -------------
(in millions)
Current:
Domestic............................................................... (Yen) 53,683 (Yen) (8,612) (Yen) 17,976
Foreign................................................................ 49,452 39,454 43,634
------------- ------------- -------------
Total.............................................................. 103,135 30,842 61,610
------------- ------------- -------------
Deferred:
Domestic............................................................... (41,730) (118,358) (53,150)
Foreign................................................................ 1,358 (14,316) 34,417
------------- ------------- -------------
Total.............................................................. (40,372) (132,674) (18,733)
------------- ------------- -------------
Income tax expense (benefit)........................................... 62,763 (101,832) 42,877
------------- ------------- -------------
Income tax expense reported in cumulative effect of a change in
accounting principle.................................................... -- 3,523 --
------------- ------------- -------------
Income tax expense (benefit) reported in shareholders' equity relating to:
Investment securities available for sale............................... (446,711) (229,943) (337,409)
Cumulative effect of a change in accounting principle.................. -- 808 --
Derivatives qualifying for cash flow hedges............................ -- 1,289 513
Minimum pension liability adjustments.................................. (39,735) (30,815) (51,265)
Foreign currency translation adjustments............................... 16,853 5,444 (3,522)
------------- ------------- -------------
Total.............................................................. (469,593) (253,217) (391,683)
------------- ------------- -------------
Total..................................................................... (Yen)(406,830) (Yen)(351,526) (Yen)(348,806)
============= ============= =============
Income taxes in Japan applicable to the MTFG Group are imposed by the national,
prefectural and municipal governments, and in the aggregate resulted in a
normal effective statutory rate of approximately 38.9%, 38.0% and 39.9%,
respectively, for the years ended March 31, 2001, 2002 and 2003. Foreign
subsidiaries are subject to income taxes of the countries in which they operate.
In March 2003, the MTFG's application to file its tax returns under the
consolidated corporate-tax system was approved by the Japanese tax authorities,
and the consolidated corporate-tax system has become effective for the year
ended March 31, 2003. The new consolidated system allows companies to base tax
payments on the combined profits or losses of a parent company and its wholly
owned domestic subsidiaries. Due to the adoption of the consolidated
corporate-tax system, they are required to pay, for the years ended March 31,
2003 and ending March 31, 2004, a surcharge tax of 2.0% of taxable income in
addition to the national corporate income tax rate. As a result, the combined
normal effective statutory tax rate changed from approximately 38.0% to 39.9%.
The change in tax rate due to adoption of the consolidated-tax system decreased
income tax expense by (Yen)37,352 million for the year ended March 31, 2003.
On March 30, 2000, the Tokyo Metropolitan Assembly passed a new tax rule that
changed the basis on which it taxes large banks conducting business in Tokyo.
BTM and Mitsubishi Trust are subject to the new rule. The new
F-35
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rule requires large banks to pay a 3.0% local tax on their gross operating
income derived from their Tokyo operations for a period of five years
commencing April 1, 2000.
On May 30, 2000, the Osaka Prefectural Assembly also passed a new tax rule that
is substantially the same as the rule approved by the Tokyo Metropolitan
Assembly. The new rule requires large banks to pay a 3.0% local tax on their
gross operating income derived from Osaka operations for a period of five years
commencing April 1, 2001. The new rules resulted in a decrease in the normal
effective statutory rate by 0.9% to 38.0%. As a result of the change in tax
rates, income tax expenses increased (Yen)12,727 million for the year ended
March 31, 2001.
The banks subject to the new tax rule, including BTM and Mitsubishi Trust,
filed a complaint in October 2000 with the Tokyo District Court, calling for
nullification of the new tax, which they claimed, unfairly targets banks. On
March 26, 2002, the Tokyo District Court rejected the new tax enacted by the
Tokyo Metropolitan Assembly. The court ordered the Tokyo Metropolitan
Government to refund (Yen)72.4 billion in tax payments to 18 major banks and to
pay an additional (Yen)1.8 billion in compensation.
On March 29, 2002, the Metropolitan Government lodged an appeal at the Tokyo
High Court. Following the decision of the Tokyo District Court, 16 major banks
filed a lawsuit on April 4, 2002 with the Osaka District Court against the
Osaka Prefectural Government, seeking to nullify the new tax rule. In response
to the lawsuit, on May 30, 2002, the Osaka Prefectural Government enacted a
revised tax rule that changed the taxation for the year ended March 31, 2002
and the years subject to the new tax rule. Under the revised tax rule, for the
years ended March 31, 2002 and 2003, large banks became subject to local taxes
based on the lower of the 3.0% local tax on their gross operating income or the
local tax computed based on net income. As a result of the revisions, BTM and
Mitsubishi Trust did not pay any local taxes to the Osaka Prefectural
Government for the years ended March 31, 2002 and 2003. BTM and Mitsubishi
Trust incurred new local taxes to the Tokyo Metropolitan Government of
(Yen)18.4 billion, (Yen)18.6 billion and (Yen)19.6 billion for the years ended
March 31, 2001, 2002 and 2003, respectively. Had BTM and Mitsubishi Trust paid
the local taxes based on net income under the former rule, tax expense would
have been (Yen)6.6 billion for the year ended March 31, 2001, and zero for the
years ended March 31, 2002 and 2003.
On January 30, 2003, the Tokyo High Court also rejected the new tax rule and
ordered the Tokyo Metropolitan Government to refund tax payments that the banks
had paid over the past two years, which represents the difference between the
3.0% tax on the gross operating profits paid by the banks and the amount
computed based on net income under the former rule. The order includes the
refund of (Yen)30.4 billion to BTM and Mitsubishi Trust. However, the Tokyo
High Court reversed the lower court on the issue of additional compensation.
The Tokyo Metropolitan Government appealed this decision to the Supreme Court
of Japan. To date, there have been no decisions made by the Osaka District
Court. Given the fact that the legal process has not been completed, MTFG Group
has not recorded any gain in MTFG Group's consolidated financial statements.
In March 2003, the Japanese government amended the local tax law. Under the
amended local tax law, a corporation size-based enterprise tax will be
effective, which will supersede the current enterprise tax, including the local
taxes levied by the Tokyo Metropolitan Government and Osaka Prefectural
Government, from the year ending March 31, 2005. As a result, the normal
effective statutory tax rate for the year ending March 31, 2005 will be
approximately 40.5% effective April 1, 2004. The respective newly enacted rates
were used in calculating the future expected tax effects of temporary
differences as of March 31, 2003 that are expected to reverse during and
subsequent to the year ending March 31, 2005. The change in tax rate resulted
in a decrease of (Yen)75,121 million in income tax expense for the year ended
March 31, 2003.
F-36
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the effective income tax rate reflected in the accompanying
consolidated statements of operations to the combined normal effective
statutory tax rate for the years ended March 31, 2001, 2002 and 2003 was as
follows:
2001 2002 2003
------- ----- -----
Combined normal effective statutory tax rate........................... 38.9 % 38.0% 39.9%
Increase (decrease) in taxes resulting from:
Nondeductible expenses.............................................. 237.3 2.9 4.4
Goodwill amortization............................................... 31.0 0.7 --
Dividends from foreign subsidiaries................................. 225.8 1.3 3.2
Foreign tax credit and payments..................................... (90.4) (1.9) 10.1
Lower tax rates applicable to income of foreign subsidiaries........ (93.8) (2.7) (0.7)
Foreign income exempted for income tax purpose...................... (88.9) (0.5) --
Foreign tax assessment (refund)..................................... 30.1 (0.7) (3.5)
Minority interest................................................... 184.3 2.5 0.6
Change in valuation allowance....................................... 284.7 16.8 18.2
Expiration of loss carryforwards of subsidiaries.................... 733.1 0.1 3.5
Enacted change in tax rates......................................... 245.4 -- (30.4)
Realization of previously unrecognized tax benefits of subsidiaries. -- (11.2) (27.5)
Other--net.......................................................... 11.3 (0.7) (0.4)
------- ----- -----
Effective income tax rate.............................................. 1,748.8% 31.4% 17.4%
======= ===== =====
In calculating the effective income tax rate for the year ended March 31, 2002,
the reconciling items were subtracted from the combined normal effective
statutory tax rate since loss before income tax benefit was recorded in that
year.
F-37
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities are computed for each tax jurisdiction
using current enacted tax rates applicable to periods when the temporary
differences are expected to reverse. The tax effects of the items comprising
the MTFG Group's net deferred tax assets at March 31, 2002 and 2003 were as
follows:
2002 2003
-------------- --------------
(in millions)
Deferred tax assets:
Allowance for credit losses....................................... (Yen) 930,745 (Yen) 694,972
Net operating loss carryforwards.................................. 250,188 893,459
Accrued severance indemnities and pension liabilities............. 125,702 177,602
Investment securities............................................. -- 149,622
Non-interest-earning funds with the Special Fund and the New Fund
(See Note 5).................................................... 16,602 16,431
Other real estate owned........................................... 5,715 227
Accrued liabilities and other..................................... 53,963 64,670
Sale-and-leaseback transactions................................... 36,338 38,893
Foreign currency translation losses on foreign currency debt...... 24,693 --
Depreciation...................................................... 20,780 18,622
Valuation allowance............................................... (256,579) (318,709)
-------------- --------------
Total deferred tax assets..................................... 1,208,147 1,735,789
-------------- --------------
Deferred tax liabilities:
Investment securities............................................. 180 --
Deferred profit on property for income tax purposes............... 14,865 15,720
Equipment and auto leasing........................................ 102,505 96,769
Derivative financial instruments.................................. 23,578 34,934
Other............................................................. 7,666 9,186
-------------- --------------
Total deferred tax liabilities................................ 148,794 156,609
-------------- --------------
Net deferred tax assets.............................................. (Yen)1,059,353 (Yen)1,579,180
============== ==============
The valuation allowance was provided primarily against deferred tax assets
recorded at the MTFG Group's domestic subsidiaries with operating loss
carryforwards. The net change in the valuation allowance for deferred income
tax assets was an increase of (Yen)43,451 million and (Yen)62,130 million for
the years ended March 31, 2002 and 2003, respectively, which primarily
reflected an increase in such operating loss carryforwards of these
subsidiaries.
F-38
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2003, the MTFG Group had operating loss carryforwards of
(Yen)2,238,334 million and tax credit carryforwards of (Yen)4,099 million for
tax purposes. Such carryforwards, if not utilized, are scheduled to expire as
follows:
Operating loss Tax credit
carryforwards carryforwards
-------------- -------------
(in millions)
Year ending March 31:
2004.................... (Yen) 47,763 (Yen) --
2005.................... 79,473 --
2006.................... 144,701 --
2007.................... 260,035 --
2008 and thereafter..... 1,676,864 3,951
No definite expiration date 29,498 148
-------------- ----------
Total............... (Yen)2,238,334 (Yen)4,099
============== ==========
Income taxes are not provided on undistributed earnings of foreign
subsidiaries, which are considered to be indefinitely reinvested in the
operations of such subsidiaries. At March 31, 2003, such undistributed earnings
of foreign subsidiaries amounted to approximately (Yen)233 billion.
Determination of the amount of unrecognized deferred tax liabilities with
respect to these undistributed earnings is not practicable because of the
complexity associated with its hypothetical calculation including foreign
withholding taxes and foreign tax credits. MTFG has neither plans nor the
intention of disposing of investments in foreign subsidiaries and, accordingly,
does not expect to record capital gains or losses, or otherwise monetize its
foreign subsidiaries' undistributed earnings. Rather, MTFG will receive a
return on investments in foreign subsidiaries by way of dividends.
Income (loss) before income tax expense (benefit) for the years ended March 31,
2001, 2002 and 2003 was as follows:
2001 2002 2003
------------- ------------- ------------
(in millions)
Domestic income (loss) (Yen)(153,242) (Yen)(386,432) (Yen)128,315
Foreign income........ 156,831 62,199 118,382
------------- ------------- ------------
Total.............. (Yen) 3,589 (Yen)(324,233) (Yen)246,697
============= ============= ============
10. PLEDGED ASSETS AND COLLATERAL
Pledged Assets
At March 31, 2003, assets mortgaged, pledged, or otherwise subject to lien were
as follows:
(in millions)
--------------
Due from banks............ (Yen) 49
Trading account securities 1,860,338
Investment securities..... 5,000,521
Loans..................... 2,004,583
Other..................... 21,143
--------------
Total.................. (Yen)8,886,634
==============
F-39
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The above pledged assets are classified by type of liabilities to which they
relate as follows:
(in millions)
--------------
Deposits................................................................ (Yen) 240,809
Call money and funds purchased.......................................... 831,600
Payables under repurchase agreements and securities lending transactions 6,160,895
Other short-term borrowings and long-term debt.......................... 1,653,270
Other................................................................... 60
--------------
Total................................................................ (Yen)8,886,634
==============
In addition, at March 31, 2003, certain investment securities, principally
Japanese national government and Japanese government agency bonds, aggregating
(Yen)4,046,756 million were pledged as collateral for acting as a collection
agent of public funds, for settlement of exchange at the Bank of Japan and
Tokyo Bankers Association, for derivative transactions and for certain other
purposes.
Under Japanese law, Japanese banks are required to maintain certain minimum
reserves on deposit with the Bank of Japan based on the amount of deposit
balances and certain other factors. There are similar reserve deposit
requirements for foreign offices engaged in banking businesses in foreign
countries. At March 31, 2002 and 2003, the reserve funds maintained by the MTFG
Group, which are included in Cash and Due from Banks and Interest-earning
Deposits in Other Banks, were (Yen)650,642 million and (Yen)2,879,345 million,
respectively. Average reserves during the years ended March 31, 2002 and 2003
were (Yen)659,602 million and (Yen)1,302,729 million, respectively.
Collateral
The MTFG Group accepts and provides financial assets as collateral for
transactions, principally commercial loans, repurchase agreements and
securities lending transactions, call money, and derivatives. Financial assets
eligible for such collateral include, among others, marketable equity
securities, trade and note receivables and certificates of deposit.
Secured parties, including creditors and counterparties to certain transactions
with the MTFG Group, may sell or repledge financial assets provided as
collateral. Certain contracts, however, may not be specific about the secured
party's right to sell or repledge collateral under the applicable statutes and,
therefore, whether or not the secured party is permitted to sell or repledge a
collateral would differ depending on the interpretations of specific provisions
of the existing statutes, contract or certain market practices. If the MTFG
Group determines, based on available information, that a financial asset
provided as collateral might not be sold or repledged by the secured parties,
such collateral is not separately reported in the consolidated balance sheets.
If a secured party is permitted to sell or repledge financial assets provided
as collateral by contract or custom under the existing statutes, the MTFG Group
reports such pledged financial assets separately on the face of the
consolidated balance sheets. At March 31, 2003, the MTFG Group pledged
(Yen)3,143 billion of collateral that may not be sold or repledged by the
secured parties.
Certain banking subsidiaries accept collateral for commercial loans and certain
banking transactions under a standardized agreement with customers, which
provides that these banking subsidiaries may require the customers to provide
collateral or guarantors with respect to the loans and other banking
transactions. Financial assets pledged as collateral are generally negotiable
and transferable instruments, and such negotiability and transferability is
authorized by applicable legislation. In principle, Japanese legislation
permits these banking
F-40
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiaries to repledge financial assets accepted as collateral unless
otherwise prohibited by contract or relevant statutes. Nevertheless, the MTFG
Group did not sell or repledge nor does plan to sell or repledge such
collateral accepted in connection with commercial loans before a debtor's
default or other credit events specified in the agreements as it is not
customary within the banking industry in Japan to dispose of collateral before
a debtor's default and other specified credit events. Derivative agreements
commonly used in the marketplace do not prohibit a secured party's disposition
of financial assets received as collateral, and in resale agreements and
securities borrowing transactions, securities accepted as collateral may be
sold or repledged by the secured parties. At March 31, 2003, the fair value of
the collateral accepted by the MTFG Group that is permitted to be sold or
repledged was approximately (Yen)7,199 billion, of which approximately
(Yen)3,114 billion was sold or repledged. The amount includes the collateral
that may be repledged under the current Japanese legislation but the MTFG Group
does not dispose of before counterparties' default in accordance with the
customary practice within the Japanese banking industry.
11. DEPOSITS
The balances of time deposits, including certificates of deposit ("CDs"),
issued in amounts of (Yen)10 million (approximately US$85 thousand at the
Federal Reserve Bank of New York's noon buying rate on March 31, 2003) or more
with respect to domestic deposits and issued in amounts of US$100,000 or more
with respect to foreign deposits were (Yen)16,885,029 million and
(Yen)6,783,568 million, respectively, at March 31, 2002, and (Yen)17,439,570
million and (Yen)5,344,997 million, respectively, at March 31, 2003.
The maturity information at March 31, 2003 for domestic and foreign time
deposits, including CDs, is summarized as follows:
Domestic Foreign
--------------- --------------
(in millions)
Due in one year or less................. (Yen)20,494,893 (Yen)6,843,991
Due after one year through two years.... 3,228,337 108,733
Due after two years through three years. 2,916,052 64,755
Due after three years through four years 857,639 3,642
Due after four years through five years. 683,494 6,631
Due after five years.................... 39,626 4,489
--------------- --------------
Total................................ (Yen)28,220,041 (Yen)7,032,241
=============== ==============
12. DEBENTURES
In Japan, certain banks, including BTM, were authorized to issue discount and
coupon debentures in the domestic market under applicable banking laws. The
Bank of Tokyo, Ltd., which merged with The Mitsubishi Bank, Limited to create
BTM, was authorized to issue such debentures and, after the merger in 1996, BTM
was also permitted to issue discount and coupon debentures in the domestic
market through March 2002 under the Law concerning the Merger and Conversion of
Financial Institutions of Japan.
F-41
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debentures at March 31, 2002 and 2003 comprised the following:
2002 2003
-------------- ------------
(in millions)
One-year discount debentures, net of amortized discount of (Yen)98 million in 2002--
discount at issuance of 0.01% to 0.04% in 2002.................................... (Yen) 824,722 (Yen) --
Three-year coupon debentures with interest of 0.02% to 0.30% (0.02% to 0.80% in
2002)............................................................................. 655,101 260,880
Five-year coupon debentures with interest of 0.80% to 1.70% (0.80% to 2.10% in
2002)............................................................................. 789,299 375,180
-------------- ------------
Total............................................................................ (Yen)2,269,122 (Yen)636,060
============== ============
The following is a summary of maturities of debentures subsequent to March 31,
2003:
(in millions)
-------------
Year ending March 31:
2004.............. (Yen)382,782
2005.............. 253,278
------------
Total......... (Yen)636,060
============
13. CALL LOANS AND FUNDS SOLD, AND CALL MONEY AND FUNDS PURCHASED
A summary of funds transactions for the years ended March 31, 2001, 2002 and
2003 is as follows:
2001 2002
--------------------- ---------------------
(in millions)
Average balance during the year:
Call money and funds purchased................. (Yen)1,799,133 (Yen)1,968,252
Call loans and funds sold...................... 1,212,028 1,230,103
--------------------- ---------------------
Net funds purchased position...................... (Yen) 587,105 (Yen) 738,149
===================== =====================
Call money and funds purchased:
Outstanding at end of year:
Amount..................................... (Yen)2,358,036 (Yen)2,542,489
Principal range of maturities.............. 1 day to 30 days 1 day to 30 days
Weighted average interest rate............. 0.90% 0.61%
Maximum balance at any month-end during the
year......................................... (Yen) 2,406,836 (Yen) 2,542,489
Weighted average interest rate paid during the
year......................................... 1.25% 0.91%
2003
---------------------
(in millions)
Average balance during the year:
Call money and funds purchased................. (Yen)2,175,394
Call loans and funds sold...................... 597,004
---------------------
Net funds purchased position...................... (Yen)1,578,390
=====================
Call money and funds purchased:
Outstanding at end of year:
Amount..................................... (Yen)2,689,892
Principal range of maturities.............. 1 day to 30 days
Weighted average interest rate............. 0.30%
Maximum balance at any month-end during the
year......................................... (Yen) 2,981,442
Weighted average interest rate paid during the
year......................................... 0.58%
Average balances are generally based on a daily average while a month-end
average is used for certain average balances when it is not practicable to
obtain applicable daily averages.
14. DUE TO TRUST ACCOUNT
Mitsubishi Trust holds assets on behalf of its customers in an agent, fiduciary
or trust capacity. Such trust account assets are not the MTFG Group's
proprietary assets and are managed and accounted for separately.
F-42
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
However, excess cash funds of individual trust accounts are often placed with
Mitsubishi Trust that manages the funds together with its own funds in its
proprietary account. Due to trust account reflects a temporary placement of the
excess funds from individual trust accounts and, in view of the MTFG Group's
funding, due to trust account bears a nature similar to short-term funding,
including demand deposits and other overnight funds purchased, in a manner that
the balance changes in response to the day-to-day changes in the excess funds
placed by the trust accounts. A summary of due to trust account transactions
for the years ended March 31, 2001, 2002 and 2003 is as follows:
2001 2002 2003
-------------- -------------- --------------
(in millions)
Average balance outstanding during the year..... (Yen)4,023,941 (Yen)2,940,975 (Yen)1,691,359
Maximum balance at any month-end during the year 4,488,591 3,533,489 2,188,326
Weighted average interest rate during the year.. 0.69% 0.57% 0.51%
15. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
At March 31, 2002 and 2003, the MTFG Group had unused lines of credit amounting
to (Yen)3,492,516 million and (Yen)3,431,430 million, respectively. The amounts
principally consist of the lines of collateralized intraday overdrafts without
interest charges and collateralized overnight loans on bills at the official
discount rate granted by the Bank of Japan, which are used to cover shortages
in the Bank of Japan account and to meet liquidity needs. The MTFG Group may
borrow from the Bank of Japan on demand up to the total amount of collateral
eligible for credit extension.
Other short-term borrowings at March 31, 2002 and 2003 comprised the following:
2002 2003
-------------- --------------
(in millions)
Domestic offices:
Loans on notes and acceptances transferred with recourse (rediscount). (Yen)1,462,940 (Yen)1,227,170
Commercial paper...................................................... 596,000 466,000
Borrowings from financial institutions................................ 587,372 626,000
Other................................................................. 324,692 221,416
-------------- --------------
Total domestic offices............................................ 2,971,004 2,540,586
-------------- --------------
Foreign offices:
Commercial paper...................................................... 198,367 221,209
Other................................................................. 149,766 92,599
-------------- --------------
Total foreign offices............................................. 348,133 313,808
-------------- --------------
Total............................................................. 3,319,137 2,854,394
Less unamortized discount................................................ 503 366
-------------- --------------
Other short-term borrowings--net......................................... (Yen)3,318,634 (Yen)2,854,028
============== ==============
Weighted average interest rate on outstanding balance at end of year..... 1.09% 0.48%
F-43
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of other short-term borrowing transactions for the years ended March
31, 2001, 2002 and 2003 is as follows:
2001 2002 2003
-------------- -------------- --------------
(in millions)
Average balance outstanding during the year..... (Yen)1,641,905 (Yen)2,077,604 (Yen)2,808,049
Maximum balance at any month-end during the year 3,032,747 3,318,634 2,870,339
Weighted average interest rate during the year.. 1.65% 2.22% 1.01%
Long-term debt (with original maturities of more than one year) at March 31,
2002 and 2003 comprised the following:
2002 2003
-------------- --------------
(in millions)
BTM:
Obligations under capital leases............................ (Yen) 26,122 (Yen) 22,407
Obligation under sale-and-leaseback transactions............ 101,806 102,208
Unsubordinated debt:
Insurance companies and other institutions, maturing
serially through 2022, principally 0.06%-7.30%......... 271,402 350,427
Fixed rate bonds, payable in Japanese yen, due
2003-2022, principally 0.25%-2.69%..................... 1,340,000 1,730,000
Adjustable rate bonds, payable in Japanese yen, due
2005, 0.20%............................................ 36,890 --
Subordinated debt:
Fixed rate notes, payable in United States dollars,
due 2010, 8.40%........................................ 266,311 240,250
Fixed rate bonds, payable in Japanese yen, due
2006-2012, principally 0.55%-2.39%..................... 120,000 200,000
Fixed rate borrowings, payable in Japanese yen, due
2003-2012, principally 1.69%- 6.20%.................... 428,555 402,650
Adjustable rate bonds, payable in Japanese yen, due
2011-2012, principally 0.58%- 1.05%.................... 32,000 33,000
Adjustable rate borrowings, payable in Japanese yen,
due 2007-2012, principally 0.98%-6.30%................. 157,600 202,500
Floating rate borrowings, payable in Japanese yen,
due 2003-2010, principally 0.07%- 1.65%................ 26,000 12,900
-------------- --------------
Total................................................. 2,806,686 3,296,342
-------------- --------------
Mitsubishi Trust:
Obligation under capital leases............................. 1,302 585
Unsubordinated debt:
Insurance companies and other institutions, due
2003-2007, principally 0.00%-4.75%..................... 48,205 45,947
Subordinated debt:
Fixed rate borrowings, payable in Japanese yen, due
2004-2012, principally 2.00%- 4.92%.................... 50,000 53,000
Adjustable rate borrowings, payable in Japanese yen,
due 2010-2012, principally 0.63%-3.25%................. 44,000 34,000
Floating rate borrowings, payable in Japanese yen,
due 2003-2006, principally 0.86%- 1.50%................ 65,000 64,000
Perpetual bonds, payable in Japanese yen, principally
1.13%-2.25%............................................ 42,200 65,600
Fixed rate bonds, payable in Japanese yen, due 2010,
2.70%.................................................. 30,000 30,000
Adjustable rate bonds, payable in Japanese yen, due
2010-2016, principally 0.78%-2.45%..................... 91,300 116,400
-------------- --------------
Total................................................. 372,007 409,532
-------------- --------------
F-44
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002 2003
-------------- --------------
(in millions)
Other subsidiaries:
Unsubordinated debt:
Insurance companies and other institutions, due
2003-2011, principally 0.32%-8.77%..................... (Yen) 119,733 (Yen) 225,343
3% Exchangeable Guaranteed Notes due 2002, payable in
United States dollars.................................. 266,417 --
0.25%-1.25% Convertible Bonds due 2013-2014, payable
in Japanese yen........................................ -- 51,295
Fixed rate bonds and notes, payable in United States
dollars, due 2004-2011, principally 4.78%-6.53%........ 40,259 38,013
Fixed rate bonds and notes, payable in Japanese yen,
due 2003-2017, principally 0.14%- 4.40%................ 178,982 98,588
Adjustable rate bonds and notes, payable in United
States dollars, due 2007, principally 7.00%-7.17%...... 16,942 8,744
Adjustable rate bonds and notes, payable in Japanese
yen, due 2003-2021, principally 0.42%-4.59%............ 57,690 21,645
Floating rate bonds and notes, payable in United
States dollars, due 2005-2017, principally
2.15%-6.63%............................................ 9,264 3,585
Floating rate bonds and notes, payable in Japanese
yen, due 2003-2022, principally 0.32%-4.63%............ 59,148 65,865
Floating rate notes, payable in Euro, due 2017, 4.59%.... -- 1,254
Obligations under capital leases and other
miscellaneous debt..................................... 14,782 40,476
-------------- --------------
Total unsubordinated debt............................. 763,217 554,808
-------------- --------------
Subordinated debt:
Insurance companies and other institutions, due
2005-2010, principally 3.10%-3.39%..................... 1,553 4,335
Undated notes, payable in Japanese yen, principally
0.43%-4.90%............................................ 60,000 58,000
Fixed rate undated notes, payable in Japanese yen,
principally 1.71%-2.60%................................ -- 9,791
Perpetual Bonds, payable in Japanese yen, principally
1.15%-3.15%............................................ 20,300 20,300
Fixed rate bonds and notes, payable in United States
dollars, due 2007, principally 6.20%-7.35%............. 26,995 6,418
Fixed rate bonds and notes, payable in Japanese yen,
due 2003-2028, principally 0.40%- 5.10%................ 101,795 95,407
Adjustable rate undated notes, payable in United
States dollars, 3.04%.................................. 76,531 4,796
Adjustable rate undated notes, payable in Japanese
yen, principally 0.78%-3.16%........................... 359,490 335,809
Adjustable rate bonds and notes, payable in United
States dollars, due 2009, 2.22%........................ 114,129 3,556
Adjustable rate bonds and notes, payable in Japanese
yen, due 2006-2014, principally 0.14%-5.92%............ 368,858 193,871
Floating rate undated notes, payable in Japanese yen,
principally 1.37%-1.58%................................ -- 53,697
Floating rate bonds and notes, payable in United
States dollars, due 2003-2012, principally
2.85%-5.12%............................................ 2,645 5,996
Floating rate bonds and notes, payable in Japanese
yen, due 2003-2027, principally 0.18%-5.06%............ 58,915 60,318
Other miscellaneous debt................................. 2,700 2,657
-------------- --------------
Total subordinated debt............................... 1,193,911 854,951
Mandatorily redeemable preferred securities of
subsidiary grantor trust (See Note 23).................... 48,020 43,499
-------------- --------------
Total................................................. 2,005,148 1,453,258
-------------- --------------
Total.......................................................... (Yen)5,183,841 (Yen)5,159,132
============== ==============
--------
Notes:
1. Adjustable rate debts are debts where interest rates are reset in accordance
with the terms of the debt agreements, and floating rate debts are debts
where interest rates are repriced in accordance with movements of market
indices.
2. 0.25%-1.25% Convertible Bonds of (Yen)51,295 million, unsubordinated debt of
other subsidiaries, can be convertible into common stock of Mitsubishi
Securities.
F-45
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain unsubordinated bonds and notes (aggregating (Yen)69,557 million at
March 31, 2003), and certain subordinated bonds and notes (aggregating
(Yen)819,250 million at March 31, 2003) issued by subsidiaries are guaranteed,
on a subordinated basis, by MTFG, BTM, Mitsubishi Trust or a subsidiary as to
payment of principal and interest.
BTM, Mitsubishi Trust and certain other subsidiaries entered into interest rate
and currency swaps for certain debt in order to manage exposure to interest
rate and currency exchange rate movements. As a result of these swap
arrangements, the effective interest rates may differ from the coupon rates
reflected in the above table. The interest rates for the adjustable and
floating rate debt shown in the above table are those in effect at March 31,
2002 and 2003. Certain interest rates are determined by formulas and may be
subject to certain minimum and maximum rates. Floating and adjustable debt
agreements may provide for interest rate floors to prevent negative interest
payments (i.e., receipts).
Certain debt agreements permit BTM, Mitsubishi Trust and some other
subsidiaries to redeem the related debt, as a whole or in part, prior to
maturity at the option of the issuer on terms specified in the respective
agreements.
The following is a summary of maturities of long-term debt subsequent to March
31, 2003:
Mitsubishi Other
BTM Trust subsidiaries Total
-------------- ------------ -------------- --------------
( in millions )
Year ending March 31:
2004................ (Yen) 269,965 (Yen) 56,620 (Yen) 111,804 (Yen) 438,389
2005................ 503,966 20,184 131,182 655,332
2006................ 579,094 26,149 89,866 695,109
2007................ 347,704 24,547 78,050 450,301
2008................ 268,934 3,032 89,033 360,999
2009 and thereafter. 1,326,679 279,000 953,323 2,559,002
-------------- ------------ -------------- --------------
Total........... (Yen)3,296,342 (Yen)409,532 (Yen)1,453,258 (Yen)5,159,132
============== ============ ============== ==============
16. SEVERANCE INDEMNITIES AND PENSION PLANS
All employees of MTFG are loaned from BTM and Mitsubishi Trust. The employees
are subject to severance indemnities and pension plans of each of these
subsidiaries described below, and included in the calculation of pension costs
and liabilities of BTM and Mitsubishi Trust.
Domestic Subsidiaries
BTM, Mitsubishi Trust, and certain other domestic subsidiaries have severance
indemnities plans under which their employees in Japan, other than those who
are directors, are entitled, under most circumstances, upon mandatory
retirement at normal retirement age or earlier termination of employment, to
lump-sum severance indemnities. Under the severance indemnities plans, benefit
payments in the form of lump-sum cash payment without allowing a benefit payee
an option to receive annuity payments, upon mandatory retirement at normal
retirement age or earlier termination of employment, are provided. When a
benefit is paid in a single payment to a benefit payee under the plans, the
payment represents final relief of the obligation.
BTM, Mitsubishi Trust, and certain other domestic subsidiaries also have funded
contributory defined benefit pension plans (private plans) which cover
substantially all of their employees in Japan and provide for lifetime
F-46
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
annuity payments commencing at age 65 based on eligible compensation at the
time of severance, years of service and other factors. These domestic
subsidiaries have Employees' Pension Fund plans ("EPF"s), which are defined
benefit pension plans established under the Japanese Welfare Pension Insurance
Law ("JWPIL"). These plans are composed of (a) substitutional portion based on
the pay-related part of the old-age pension benefits prescribed by JWPIL
(similar to social security benefits in the United States) and (b) a corporate
portion based on a contributory defined benefit pension arrangements
established at the discretion of each subsidiary. The subsidiaries with an EPF
and their employees are exempted from contributions to Japanese Pension
Insurance ("JPI") that would otherwise be required if they had not elected to
fund the substitutional portion of the benefit through an EPF arrangement. The
EPF, in turn, pays both the corporate and substitutional pension benefits to
retired beneficiaries out of its plan assets. Benefits of the substitutional
portion are based on a standard remuneration schedule as determined by the
JWPIL, but the benefits of the corporate portion are based on a formula
determined by each employer/EPF. Pension benefits and plan assets applicable to
the substitutional portion are included with the corporate portion of these
domestic subsidiaries in the determination of net periodic costs and funded
status.
In June 2001, the JWPIL was amended to permit each employer/EPF to separate the
substitutional portion from its EPF and transfer the obligation and related
assets to the government. The separation process occurs in several phases.
In June 2003, BTM submitted to the government an application to transfer the
obligation to pay benefits for future employee service related to the
substitutional portion, and the application was approved by the government on
August 1, 2003. Upon that approval, BTM began making pension insurance payments
to the government and the government assumes the benefit obligations arising
from future employee services. However, in order to complete the entire
separation process, BTM must make another application for transfer of the
remaining substitutional portion (benefit obligation related to past services),
but the timing of the application has not been decided. Upon the approval of
the second application, BTM will transfer to a government agency some of its
plan assets and, in exchange, be released from paying the remaining
substitutional portion of the benefit obligations for past employee services.
The impact on MTFG's consolidated financial statements of the transfers
accounted for in accordance with EITF 03-2 is not known and cannot be
reasonably estimable until the completion of the transfer, as explained in Note
1 to the consolidated financial statements.
BTM and Mitsubishi Trust also have funded non-contributory defined benefit
pension plans, providing benefits to certain retired employees, excluding
directors, in Japan, based on eligible compensation at the time of severance,
years of service and other factors. BTM's plan covers retired employees whose
service period with BTM was 5 years or more, and provides for lifetime or
certain limited period annuity payments commencing at age 60. Mitsubishi
Trust's plan covers retired employees whose service period with Mitsubishi
Trust was 20 years or more, and provides for a 10-year period annuity payment
commencing at the month following the retirement or, at the option of each
eligible employee, at age 60.
F-47
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic cost of the severance indemnities and pension plans, net of
contributions made by employees, for the years ended March 31, 2001, 2002 and
2003 included the following components:
2001 2002 2003
------------ ------------ ------------
(in millions)
Service cost--benefits earned during the year............................. (Yen) 22,108 (Yen) 22,741 (Yen) 25,295
Interest costs on projected benefit obligation............................ 25,291 25,166 24,200
Expected return on plan assets............................................ (27,271) (24,403) (25,450)
Amortization of unrecognized net obligation at transition................. 4,272 4,199 4,086
Amortization of unrecognized prior service cost........................... 3,521 3,405 2,132
Amortization of net actuarial loss........................................ 2,058 10,998 22,506
Loss on settlements....................................................... 4,295 5,240 6,373
------------ ------------ ------------
Net periodic benefit cost................................................. (Yen) 34,274 (Yen) 47,346 (Yen) 59,142
============ ============ ============
Weighted-average assumptions used:
Discount rates in determining expense.................................. 3.10% 2.88% 2.47%
Discount rates in determining benefit obligation....................... 2.88 2.47 1.88
Rates of increase in future compensation level for determining expense. 2.88 3.12 3.09
Rates of increase in future compensation level for determining benefit
obligation........................................................... 3.12 3.09 2.96
Expected rates of return on plan assets................................ 4.79 4.45 3.73
F-48
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the combined funded status and amounts
recognized in the accompanying consolidated balance sheets at March 31, 2002
and 2003 for the plans of BTM, Mitsubishi Trust and certain other domestic
subsidiaries. BTM and some of its domestic subsidiaries have measured plan
assets and benefit obligations at December 31 each year for the purpose of
financial statements whereas Mitsubishi Trust has used March 31 each year for
the measurement date. Accordingly, funded status and amounts recognized in the
table below shows the combined amounts of those presented in the consolidated
financial statements of these subsidiaries.
2002 2003
------------------------------------------- -----------------------------
Severance Severance
indemnities indemnities
plans and non- plans and non-
contributory Contributory contributory Contributory
pension plans pension plans Total pension plans pension plans
-------------- ------------- ------------- -------------- -------------
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year........ (Yen)140,487 (Yen) 748,468 (Yen) 888,955 (Yen) 143,065 (Yen) 835,942
Service cost.................................. 6,362 16,379 22,741 7,976 17,319
Interest cost................................. 3,953 21,213 25,166 3,887 20,313
Plan participants' contributions.............. -- 2,974 2,974 -- 2,934
Amendments.................................... -- (3,431) (3,431) (3,447) (44,027)
Acquisitions.................................. -- -- -- 28,106 --
Actuarial loss................................ 7,677 69,546 77,223 16,205 90,182
Benefits paid................................. (2,607) (19,207) (21,814) (1,893) (21,299)
Lump-sum payment.............................. (12,807) -- (12,807) (15,280) --
------------ ------------- ------------- ------------- -------------
Benefit obligation at end of year.............. 143,065 835,942 979,007 178,619 901,364
------------ ------------- ------------- ------------- -------------
Change in plan assets:
Fair value of plan assets at beginning of
year.......................................... 20,250 515,772 536,022 78,602 580,511
Actual return (negative return) on plan
assets....................................... (11,138) (37,610) (48,748) (14,057) (49,214)
Acquisitions.................................. -- -- -- 12,248 --
Employer contributions........................ 71,606 118,582 190,188 2,492 85,909
Plan participants' contributions.............. -- 2,974 2,974 -- 2,934
Benefits paid................................. (2,116) (19,207) (21,323) (1,893) (21,299)
------------ ------------- ------------- ------------- -------------
Fair value of plan assets at end of year....... 78,602 580,511 659,113 77,392 598,841
------------ ------------- ------------- ------------- -------------
Projected benefit obligation in excess of plan
assets at end of year......................... (64,463) (255,431) (319,894) (101,227) (302,523)
Contributions to or benefits paid from plan
assets during the three month periods
ended March 31, 2002 and 2003................ 2,698 10,716 13,414 5,034 10,289
Unrecognized net actuarial loss............... 50,882 289,644 340,526 75,634 435,413
Unrecognized prior service cost............... 1,621 19,766 21,387 (2,015) (26,205)
Unrecognized net (asset) obligation at
transition................................... (1,538) 16,796 15,258 (841) 12,115
------------ ------------- ------------- ------------- -------------
Net amount recognized........................ (Yen)(10,800) (Yen) 81,491 (Yen) 70,691 (Yen) (23,415) (Yen) 129,089
============ ============= ============= ============= =============
Amounts recognized in the balance sheets:
Prepaid pension cost.......................... (Yen) 301 (Yen) -- (Yen) 301 (Yen) 334 (Yen) --
Accrued pension liability..................... (45,595) (203,819) (249,414) (75,766) (245,008)
Intangible assets............................. 1,927 40,586 42,513 1,710 12,843
Accumulated other changes in equity from
nonowner sources............................. 32,567 244,724 277,291 50,307 361,254
------------ ------------- ------------- ------------- -------------
Net amount recognized........................ (Yen)(10,800) (Yen) 81,491 (Yen) 70,691 (Yen) (23,415) (Yen) 129,089
============ ============= ============= ============= =============
2003
---------------
Total
--------------
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year........ (Yen) 979,007
Service cost.................................. 25,295
Interest cost................................. 24,200
Plan participants' contributions.............. 2,934
Amendments.................................... (47,474)
Acquisitions.................................. 28,106
Actuarial loss................................ 106,387
Benefits paid................................. (23,192)
Lump-sum payment.............................. (15,280)
--------------
Benefit obligation at end of year.............. 1,079,983
--------------
Change in plan assets:
Fair value of plan assets at beginning of
year.......................................... 659,113
Actual return (negative return) on plan
assets....................................... (63,271)
Acquisitions.................................. 12,248
Employer contributions........................ 88,401
Plan participants' contributions.............. 2,934
Benefits paid................................. (23,192)
--------------
Fair value of plan assets at end of year....... 676,233
--------------
Projected benefit obligation in excess of plan
assets at end of year......................... (403,750)
Contributions to or benefits paid from plan
assets during the three month periods
ended March 31, 2002 and 2003................ 15,323
Unrecognized net actuarial loss............... 511,047
Unrecognized prior service cost............... (28,220)
Unrecognized net (asset) obligation at
transition................................... 11,274
--------------
Net amount recognized........................ (Yen) 105,674
==============
Amounts recognized in the balance sheets:
Prepaid pension cost.......................... (Yen) 334
Accrued pension liability..................... (320,774)
Intangible assets............................. 14,553
Accumulated other changes in equity from
nonowner sources............................. 411,561
--------------
Net amount recognized........................ (Yen) 105,674
==============
--------
Note: The aggregated accumulated benefit obligations of these plans were
(Yen)921,527 million and (Yen) 1,012,330 million, respectively, as of
March 31, 2002 and 2003. The severance indemnities plans generally employ
a multi-variable, non-linear formula based upon compensation at the time
of severance, rank and years of service. Employees with service in excess
of one year are qualified to receive lump-sum severance indemnities.
F-49
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plan assets, which include pension trust funds managed by certain life
insurance companies, investment advisory companies and trust banks, consisted
of interest-earning deposits at banks, Japanese government bonds, other debt
securities and marketable equity securities issued by domestic and foreign
entities. Pension assets managed by insurance companies are included in pooled
investment portfolios.
In accordance with the provisions of SFAS No. 87, the MTFG Group has recorded
an additional minimum liability representing the excess of the accumulated
benefit obligation over the fair value of plan assets and accrued pension
liabilities previously recorded. A corresponding amount is recognized as an
intangible asset to the extent of unrecognized net obligation at transition and
prior service costs, with the remaining balance recorded as a separate
reduction of shareholders' equity, net of income taxes.
In accordance with BTM's, Mitsubishi Trust's and certain domestic subsidiaries'
employment practices, certain early-terminated employees are entitled to
special lump-sum termination benefits. The amounts charged to operations for
such early termination benefits for the years ended March 31, 2001, 2002 and
2003 were (Yen)10,386 million, (Yen)9,914 million and (Yen)14,150 million,
respectively.
For the year ended March 31, 2001, Mitsubishi Trust firstly prepared its
financial statements in accordance with US GAAP. In the course of the
compilation, Mitsubishi Trust management concluded that it is not feasible to
obtain the actuarial information necessary to implement SFAS No. 87 as of the
effective date specified in the standard, which was the fiscal year ended March
31, 1990 for Mitsubishi Trust. Accordingly, Mitsubishi Trust assumed that it
adopted SFAS No. 87 as of April 1, 1995 for the purpose of the consolidated
financial statements. The net obligation at transition was (Yen)33,577 million
and the estimated remaining service period is 17.5 years at the date of
adoption. Six years passed between the effective date and the assumed adoption
date. Mitsubishi Trust recorded (Yen)11,512 million of the net transition
obligation directly to equity and is amortizing the remaining portion of the
obligation over the 11.5 years.
In accordance with amendments to the relevant welfare pension legislation, BTM
amended its contributory defined benefit pension plans to change the age of
commencement of lifetime annuity payments from 60 to 65 in January 2002, which
was reflected in the consolidated financial statements for the year ended March
31, 2003 because of BTM's measurement date of December 31, 2001. Furthermore,
in November 2002, BTM amended its pension plan to reduce employee pension
benefits by amounts ranging from 7% to 20%, which will be payable to employees
who retire on or after April 1, 2003. The effect of the negative amendments was
a decrease in (Yen)44,027 million of the projected benefit obligation.
Mitsubishi Securities, one of BTM's securities subsidiaries, amended its
pension plan to change the lifetime annuity payments to limited period annuity
payments. The amendment resulted in a decrease of (Yen)3,447 million of the
projected benefit obligation.
During the years ended March 31, 2002 and 2003, BTM and Mitsubishi Trust
entered into retirement benefit trust agreements with a domestic trust bank and
contributed marketable equity securities at fair value of (Yen)133,158 million
and (Yen)24,612 million, respectively, to the trusts designated to pay benefits
for their severance indemnities plans and contributory pension plans. The
contributions were accounted for as sales with an aggregate gain of (Yen)26,225
million and a loss of (Yen)1,175 million, respectively, recognized for the
years then ended. Such contributions were accounted for as sales because the
transfer met the sale accounting criteria of SFAS No. 140, and the securities
placed into the trust were qualified as plan assets as defined by SFAS No. 87.
Foreign Offices and Subsidiaries
Foreign offices and subsidiaries also have defined contribution plans and/or
defined benefit plans, which in the aggregate are not considered significant.
The cost of such plans charged to operations for the years ended
F-50
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2001, 2002 and 2003 were (Yen)5,688 million, (Yen)5,682 million and
(Yen)7,140 million, respectively, including (Yen)2,678 million, (Yen)2,584
million and (Yen)3,487 million, respectively, for defined contribution plans.
Foreign offices and subsidiaries have postemployment and/or postretirement
plans for eligible employees and retirees. The costs charged to operations for
the years ended March 31, 2001, 2002 and 2003 were (Yen)1,136 million,
(Yen)1,373 million and (Yen)1,962 million, respectively.
Certain of the MTFG's subsidiaries in the United States of America maintain
employees' retirement plans, which are qualified retirement plans covering
substantially all of the employees of such subsidiaries. The plans are
non-contributory defined benefit plans, which provide benefit upon retirement
based on years of service and average compensation. The plans are funded on a
current basis in compliance with the requirement of the Employee Retirement
Income Security Act of the United States of America. These subsidiaries also
provide certain post employment benefits and postretirement benefits other than
pensions for employees. Plan assets are generally invested in U.S. government
securities, corporate bonds and mutual funds.
Net periodic cost of the employees' retirement and other benefit plans of
certain offices and subsidiaries in the United States of America for the years
ended March 31, 2001, 2002 and 2003 included the following components:
2001 2002 2003
----------- ----------- -----------
(in millions)
Service cost--benefits earned during the year............................. (Yen) 3,016 (Yen) 3,521 (Yen) 4,492
Interest costs on projected benefit obligation............................ 5,163 6,317 7,550
Expected return on plan assets............................................ (5,980) (7,462) (9,167)
Amortization of unrecognized net obligation at transition................. 403 233 455
Amortization of unrecognized prior service cost........................... (26) (30) (31)
Amortization of net actuarial loss........................................ 28 378 722
Loss on curtailment....................................................... 661 -- --
Gain on settlement........................................................ (31) -- --
----------- ----------- -----------
Net periodic benefit cost................................................. (Yen) 3,234 (Yen) 2,957 (Yen) 4,021
=========== =========== ===========
Weighted-average assumptions used:
Discount rates in determining expense.................................. 7.71% 7.53% 7.30%
Discount rates in determining benefit obligation....................... 7.53 7.30 6.79
Rates of increase in future compensation level for determining expense. 5.00 5.00 4.89
Rates of increase in future compensation level for determining benefit
obligation........................................................... 5.00 4.89 4.90
Expected rates of return on plan assets................................ 8.35 8.30 8.35
F-51
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the funded status and amounts recognized in the
accompanying consolidated balance sheets at March 31, 2002 and 2003 for the
employees' retirement and other benefit plans of certain offices and
subsidiaries in the United States of America:
2002 2003
------------ ------------
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year............................. (Yen) 80,144 (Yen)107,916
Service cost...................................................... 3,521 4,492
Interest cost..................................................... 6,317 7,550
Plan participants' contributions.................................. 168 202
Amendments........................................................ -- (1,071)
Actuarial loss.................................................... 8,422 15,836
Benefits paid..................................................... (3,912) (4,678)
Translation adjustments........................................... 13,256 (10,796)
------------ ------------
Benefit obligation at end of year................................... 107,916 119,451
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year...................... 80,577 94,787
Actual return (negative return) on plan assets.................... (3,749) (9,015)
Employer contributions............................................ 9,427 24,154
Plan participants' contributions.................................. 168 202
Benefits paid..................................................... (3,882) (4,577)
Translation adjustments........................................... 12,246 (9,103)
------------ ------------
Fair value of plan assets at end of year............................ 94,787 96,448
------------ ------------
Projected benefit obligation in excess of plan assets at end of year (13,129) (23,003)
Unrecognized net actuarial loss................................... 17,486 47,866
Unrecognized prior service cost................................... 62 156
Unrecognized net obligation at transition......................... 5,443 3,343
------------ ------------
Net amount recognized........................................... (Yen) 9,862 (Yen) 28,362
============ ============
Amounts recognized in the balance sheets:
Prepaid pension cost.............................................. (Yen) 13,211 (Yen) 30,645
Accrued pension liability......................................... (2,887) (3,375)
Intangible assets................................................. 26 15
Accumulated other changes in equity from nonowner sources......... (488) 1,077
------------ ------------
Net amount recognized........................................... (Yen) 9,862 (Yen) 28,362
============ ============
F-52
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. OTHER ASSETS AND LIABILITIES
Major components of other assets and liabilities at March 31, 2002 and 2003
were as follows:
2002 2003
-------------- --------------
(in millions)
Other assets:
Accounts receivable:
Receivables from brokers, dealers and customers for securities
transactions............................................................. (Yen) 499,588 (Yen) 445,617
Other...................................................................... 332,403 227,669
Investments in affiliated companies............................................ 95,421 60,814
Other real estate owned........................................................ 11,724 7,337
Other.......................................................................... 600,937 988,601
-------------- --------------
Total................................................................... (Yen)1,540,073 (Yen)1,730,038
============== ==============
Other liabilities:
Accounts payable:
Payables to brokers, dealers and customers for securities transactions..... (Yen)1,255,434 (Yen) 706,899
Other...................................................................... 407,185 471,274
Deferred tax liabilities....................................................... 61,478 60,866
Allowance for off-balance-sheet credit instruments............................. 102,629 83,274
Accrued pension liability...................................................... 254,955 330,942
Minority interest.............................................................. 210,503 338,728
Accrued and other liabilities.................................................. 416,877 580,520
Guarantees and indemnifications................................................ 13,277 17,680
-------------- --------------
Total................................................................... (Yen)2,722,338 (Yen)2,590,183
============== ==============
At March 31, 2002 and 2003, the valuation allowance to write down the carrying
amounts of other real estate owned to their estimated fair value less estimated
cost to sell was (Yen)11,195 million and (Yen)5,814 million, respectively. The
valuation allowance decreased by (Yen)56,190 million, (Yen)26,461 million and
(Yen)5,381 million, respectively, during the years ended March 31, 2001, 2002
and 2003.
Investments in affiliated companies, which are accounted for using the equity
method, include marketable equity securities carried at (Yen)68,341 million and
(Yen)11,743 million, respectively, at March 31, 2002 and 2003. Corresponding
aggregated market values were (Yen)71,680 million and (Yen)17,975 million,
respectively.
18. PREFERRED STOCK
At March 31, 2003, MTFG was authorized to issue 81,400 shares of Class 1
Preferred Stock, 100,000 shares of Class 2 Preferred Stock, 120,000 shares of
Class 3 Preferred Stock and 120,000 shares of Class 4, without par value.
All classes of preferred stock are non-voting and have equal preference over
MTFG's common stock for the payment of dividends and the distribution of assets
in the event of a liquidation or dissolution of MTFG. They are all
non-cumulative and non-participating for dividend payments. Shareholders of
Class 1, Class 2, Class 3 and Class 4 Preferred Stock receive a liquidation
distribution at (Yen)3,000 thousand, (Yen)2,000 thousand, (Yen)2,500 thousand
and (Yen)2,500 thousand per share, respectively, and do not have the right to
participate in any further liquidation distributions.
F-53
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Class 1 Preferred Stock
Class 1 Preferred Stock is redeemable at the option of MTFG. An annual dividend
of (Yen)82,500 per share and redemption terms, including a redemption price,
are stipulated by the Articles of Incorporation.
On January 21, 1999, BTM issued 81,400 thousand shares of Class 1 preferred
stock at (Yen)3,000 per share ((Yen)244,200 million in the aggregate). On April
2, 2001, MTFG issued 81,400 shares of Class 1 Preferred Stock in exchange for
Class 1 preferred stock of BTM at an exchange ratio of one share of MTFG's
Class 1 Preferred Stock for each 1,000 shares of BTM Class 1 preferred stock.
MTFG may redeem shares of Class 1 Preferred Stock at (Yen)3,000 thousand per
share, in whole or in part, on or after January 21, 2004.
Class 2 Preferred Stock
Class 2 Preferred Stock is convertible into common stock at the option of the
shareholders during a conversion period. The conversion is mandatorily required
on the date immediately following the closing date of the conversion period. An
annual dividend of (Yen)16,200 per share and conversion terms, including the
conversion period, are stipulated by the Articles of Incorporation.
On March 31, 1999, Mitsubishi Trust issued 100,000 thousand shares of Class 1
preferred stock at (Yen)2,000 per share ((Yen)200,000 million in the
aggregate). On April 2, 2001, MTFG issued 100,000 shares of Class 2 Preferred
Stock in exchange for Class 1 preferred stock of Mitsubishi Trust on exchange
ratio of one share of MTFG's Class 2 Preferred Stock for each 1,000 shares of
Mitsubishi Trust's Class 1 preferred stock.
At the option of the shareholders, Class 2 Preferred Stock is convertible into
common stock during the period from July 31, 2003 to July 31, 2008 at the
conversion price of (Yen)1,357,559.2 per share. The conversion price will be
reset annually on August 1 of each year from 2003 through 2007 to reflect, with
certain adjustments, as defined, the average market closing price of the common
stock of MTFG traded on the Tokyo Stock Exchange for the 30 business days
starting from the 45th business day prior to the date of reset of the
conversion price. The conversion price will not exceed the initial conversion
price of (Yen)1,357,559.2 nor be below (Yen)696,898.5 unless certain events or
circumstance, as defined, arise after the issuance of Class 2 Preferred Stock
shares.
Class 2 Preferred Stock shares which are not converted at the option of the
shareholders will be mandatorily converted into common stock on August 1, 2008,
at the conversion price determined based on the average market closing price of
the common stock traded on the Tokyo Stock Exchange for the 30 business days
starting from the 45th business day prior to the date of mandatory conversion.
In the event the average market closing price is below (Yen)714,285.0, the
conversion price will be (Yen)714,285.0.
During the year ended at March 31, 2003, MTFG has issued 489,694 of new shares
of common stock at the price of (Yen)475,000 per share. As a result of the
issuance of new shares of common stock, the initial conversion price of Class 2
Preferred Stock has been adjusted from (Yen)1,391,428.0 to (Yen)1,357,559.2,
and the upper limit and the lower limit of the conversion price that will be
revised annually has been adjusted from (Yen)1,391,428.0 to (Yen)1,357,559.2
and from (Yen)714,285.0 to (Yen)696,898.5, respectively.
On July 10, 2003, MTFG announced that, pursuant to the terms and conditions of
Class 2 Preferred Stock provided in the Articles of Incorporation, the
conversion price of the Class 2 Preferred Stock has been reset from
(Yen)1,357,559.2 to (Yen)696,898.5 reflecting low average market price of
common stock during the period before July 10, 2003. The reset conversion price
is effective on and after August 1, 2003.
F-54
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended March 31, 2003, Class 2 Preferred Stock was determined as
dilutive securities and was included in the computation of the diluted earnings
per common share.
Class 3 Preferred Stock
Class 3 Preferred Stock is redeemable at the option of MTFG. At the time of
issuance, the Board of Directors determines an issue price, an annual dividend
(not to exceed (Yen)250,000 per share), and redemption terms, including a
redemption price. No shares of the Class 3 Preferred Stock were issued and
outstanding at March 31, 2002 and 2003.
Class 4 Preferred Stock
Class 4 Preferred Stock is convertible into common stock at the option of
preferred stock shareholders during the conversion period. The conversion is
mandatorily required on the date immediately following the closing date of the
conversion period. At the time of issuance, the Board of Directors determines
an issue price, an annual dividend (not to exceed (Yen)125,000 per share), and
conversion terms, including the conversion period. No shares of the Class 4
Preferred Stock were issued and outstanding at March 31, 2002 and 2003.
MTFG may, at any time, repurchase and retire, at fair value, any Classes of
Preferred Stocks out of earnings available for distribution to the shareholders.
19. COMMON STOCK AND CAPITAL SURPLUS
The changes in the number of issued shares of common stock during the years
ended March 31, 2001, 2002 and 2003 were as follows:
2001 2002 2003
--------- --------- ---------
(shares)
Balance at beginning of year........................................ 5,587,068 5,587,068 5,742,468
Issuance of new shares of common stock.............................. -- -- 489,694
Issuance of new shares of common stock in exchange for the shares of
NTB............................................................... -- 155,400 --
--------- --------- ---------
Balance at end of year.............................................. 5,587,068 5,742,468 6,232,162
========= ========= =========
Under the Code, issuances of common stock, including conversions of bonds and
notes, are required to be credited to the common stock account for at least 50%
of the proceeds and to the legal capital surplus account ("legal capital
surplus") for the remaining amounts.
The Code permits Japanese companies, upon approval by the Board of Directors,
to issue shares in the form of a "stock split," as defined in the Code (see
Note 1). Also, the Code prior to April 1, 1991 permitted Japanese companies to
issue free share distributions. BTM and Mitsubishi Trust from time to time made
free share distributions. These free distributions usually were from 5% to 10%
of outstanding common stock and publicly-owned corporations in the United
States issuing shares in similar transactions would be required to account for
them as stock dividends as of the shareholders' record date by reducing
retained earnings and increasing the appropriate capital accounts by an amount
equal to the fair value of the shares issued. The application of such United
States accounting practice to the cumulative free distributions made by BTM and
Mitsubishi Trust at March 31, 2003, would have increased capital accounts by
(Yen)1,910,106 million with a corresponding decrease in unappropriated retained
earnings. MTFG did not issue shares in the form of "stock split" in each of
three years in the period ended March 31, 2003.
F-55
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Code permits, upon approval of the Board of Directors, the transfer of
amounts from the legal capital surplus to the capital stock account.
The Code, as amended effective on October 1, 2001 (the "Code Amendments")
permits Japanese companies to effect purchases of their own shares pursuant to
a resolution by the shareholders at an annual general meeting until the
conclusion of the following ordinary general meeting of shareholders, and to
hold such shares as its treasury shares indefinitely regardless of any purpose.
However, the Code requires the amount of treasury stock purchased be within the
amount of retained earnings available for dividends. Disposition of treasury
stock is subject to the approval of the Board of Directors and is to follow the
procedures similar to the public offering of shares for subscription. Prior to
the amendment, in principle, reacquisition of treasury shares was prohibited
with the exception of reacquisition for retirement and certain limited
purposes, as specified by the Code. Any treasury shares were required to be
disposed of shortly.
Parent Company Shares Held by a Subsidiary Bank
At March 31, 2003, BTM owned shares of common stock of MTFG. Such shares are
included in treasury stock in the accompanying consolidated balance sheets and
deducted from MTFG's shareholders' equity. For the year ended March 31, 2003,
MTFG shares held by BTM were written down for tax purposes. The tax consequence
of such write-down was treated as a capital transaction and credited to capital
surplus.
20. RETAINED EARNINGS, LEGAL RESERVE AND DIVIDENDS
In addition to the Code, Japanese banks, including BTM and Mitsubishi Trust,
are required to comply with the Banking Law of Japan (the "Banking Law").
Legal Reserve Set Aside as Appropriation of Retained Earnings and Legal Capital
Surplus
Under the Code
Effective October 1, 2001, the Code Amendments provide that an amount at least
equal to 10% of the aggregate amount of cash dividends and certain
appropriations of retained earnings associated with cash outlays applicable to
each period shall be appropriated and set aside as a legal reserve until the
aggregate amount of legal reserve set aside as appropriation of retained
earnings and the legal capital surplus equals 25% of stated capital as defined
in the Code.
Prior to the Code Amendments, the Code provided that an amount at least equal
to 10% of the aggregate amount of cash dividends and certain appropriations of
retained earnings associated with cash outlays applicable to each period shall
be appropriated and set aside as a legal reserve until such reserve equals 25%
of common stock. The retained earnings so appropriated may be used to eliminate
or reduce a deficit by resolution of the shareholders or may be transferred to
capital stock by resolution of the Board of Directors.
Under the Banking Law
In line with the Code Amendments, on June 29, 2001, amendments to the Banking
Law (the "Banking Law Amendments") were promulgated and became effective on
October 1, 2001. The Banking Law Amendments provide that an amount at least
equal to 20% of the aggregate amount of cash dividends and certain
appropriations of retained earnings associated with cash outlays applicable to
each fiscal period shall be appropriated and set aside as a legal reserve until
the aggregate amount of legal reserve set aside as appropriation of retained
earnings and the legal capital surplus equals 100% of stated capital as defined
in the Code.
F-56
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to the Banking Law Amendments, the Banking Law provided that an amount at
least equal to 20% of the aggregate amount of cash dividends and certain
appropriations of retained earnings associated with cash outlays applicable to
each fiscal period shall be appropriated and set aside as a legal reserve until
such reserve equals 100% of stated capital as defined in the Code. The retained
earnings so appropriated may be used to eliminate or reduce a deficit by
resolution of the shareholders or may be transferred to capital stock by
resolution of the Board of Directors.
Transfer of Legal Reserve
Under the Code Amendments
Effective October 1, 2001, under the Code Amendments, Japanese companies,
including MTFG, are permitted, pursuant to a resolution by the shareholders at
a general meeting, to make legal reserve set aside as appropriation of retained
earnings and legal capital surplus available for dividends until the aggregate
amount of the legal reserve and legal capital surplus equals 25% of stated
capital as defined in the Code, which were formerly permitted only to reduce
deficit and to transfer to stated capital as defined in the Code.
Under the Banking Law Amendments
Effective October 1, 2001, under the Banking Law Amendments, Japanese banks,
including BTM and Mitsubishi Trust, are permitted, pursuant to a resolution by
the shareholders at a general meeting, to make legal reserve set aside as
appropriation of retained earnings and legal capital surplus available for
dividends until the aggregate amount of the legal reserve and legal capital
surplus equals 100% of stated capital as defined in the Code.
The Code permits the transfer, upon approval of the shareholders, of a portion
of unappropriated retained earnings available for dividends to stated capital
as defined in the Code.
Unappropriated Retained Earnings and Dividends
Under the Code, the amount available for dividends is based on the amount
recorded in the MTFG's general books of account maintained in accordance with
accepted Japanese accounting practices. The adjustments included in the
accompanying consolidated financial statements but not recorded in MTFG's
general books of account as explained in Note 1 have no effect on the
determination of retained earnings available for dividends under the Code. In
addition to the provision that requires an appropriation for legal reserve as
described above, the Code and the Banking Law impose certain limitations on the
amount available for dividends. Under the Banking Law, MTFG, BTM and Mitsubishi
Trust have to meet the minimum capital adequacy requirements and distributions
of the retained earnings of MTFG, BTM and Mitsubishi Trust, which are otherwise
distributable to shareholders, are restricted in order to maintain the minimum
4.0% Tier I capital for capital adequacy purpose.
MTFG was established on April 2, 2001 with common stock of (Yen)924,400
million, preferred stock of (Yen)222,100 million, legal capital surplus of
(Yen)2,838,693 million and no retained earnings in accordance with the Code and
accounting principles generally accepted in Japan. None of the retained
earnings recorded in MTFG's general books of account, prepared in accordance
with accounting principles generally accepted in Japan, as of March 31, 2002
((Yen)67,541 million, exclusive of the amounts to be appropriated for legal
reserves and gross unrealized gains on fair valuation of assets, as defined, if
any), is restricted by such limitations under the Code or by the Banking Law as
described above.
MTFG's amount available for dividends, as of March 31, 2003, is (Yen)643,009
million, which is based on the amount recorded in MTFG's general books of
account under generally accepted accounting principles in
F-57
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Japan. MTFG's amount available for dividends increased by (Yen)575,468 million
compared with (Yen)67,541 million as of March 31, 2002. The increase in
retained earnings is primarily because MTFG transferred (Yen)600,000 million of
legal capital surplus to unrestricted capital surplus pursuant to the
resolution by the shareholders at the general meeting, which is permitted by
the Code Amendment and the Banking Law Amendment described above.
Annual dividends, including those for preferred stock, are approved by the
shareholders at an annual general meeting held subsequent to the fiscal year to
which the dividends are applicable. In addition, a semi-annual interim dividend
payment may be made by resolution of the Board of Directors, subject to
limitations imposed by the Code and the Banking Law.
In the accompanying consolidated statements of shareholders' equity, dividends
and appropriations to legal reserve shown for each year represent dividends
approved and paid during the year and the related appropriation to legal
reserve.
21. REGULATORY CAPITAL REQUIREMENTS
Japan
MTFG, BTM and Mitsubishi Trust are subject to various regulatory capital
requirements promulgated by the regulatory authorities of the countries in
which they operate. Failure to meet minimum capital requirements will initiate
certain mandatory actions by regulators that, if undertaken, could have a
direct material effect on MTFG's consolidated financial statements.
In Japan, MTFG, BTM, and Mitsubishi Trust are subject to regulatory capital
requirements administered by the FSA in accordance with the provisions of the
Banking Law and related regulations. A banking institution is subject to the
minimum capital adequacy requirements both on a consolidated basis and a
stand-alone basis, and is required to maintain the minimum capital irrespective
of whether it operates independently or as a subsidiary under the control of
another company. When a bank holding company manages operations of its banking
subsidiaries, it is required to maintain the minimum capital adequacy ratio on
a consolidated basis in the same manner as its subsidiary banks. The FSA
provides two sets of capital adequacy guidelines. One is a set of guidelines
applicable to Japanese banks and bank holding companies with foreign offices
conducting international operations, as defined, and the other is applicable to
Japanese banks and bank holding companies that are not engaged in international
operations.
Under the capital adequacy guidelines applicable to a Japanese banking
institution with international operations conducted by foreign offices, the
minimum target capital ratio of 8.0% is required. The capital adequacy
guidelines adopt the approach of risk-weighted capital measure based on the
framework developed and proposed by the Basel Committee on Banking Supervision
of the Bank for International Settlements and involve quantitative credit
measures of the assets and certain off-balance-sheet items as calculated under
accounting principles generally accepted in Japan. The MTFG Group's proprietary
assets do not include trust assets under management and administration in a
capacity of agent or fiduciary and, accordingly trust account assets are
generally not included in the capital measure. However, guarantees for trust
principals are counted as off-balance-sheet items requiring for a capital
charge in accordance with the capital adequacy guidelines. Also, a banking
institution engaged in certain qualified trading activities, as defined, is
required to calculate an additional capital charge for market risk using either
the institution's own internal risk measurement model or a standardized process
proposed and defined by the Bank for International Settlements. Capital is
classified into
F-58
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
three tiers, referred to as Tier I, Tier II and Tier III. Tier I generally
consists of shareholders' equity (including common stock, preferred stock,
capital surplus, minority interests and retained earnings) less any recorded
goodwill. Tier II generally consists of general reserves for credit losses up
to 1.25% of risk-weighted assets, 45% of the unrealized gains on investment
securities available for sale, 45% of the land revaluation excess, the balance
of perpetual subordinated debt and the balance of subordinated term debt with
an original maturity of over five years subject to some limitations, up to 50%
of Tier I capital. Preferred stocks are includable in Tier I capital unless the
preferred stocks have fixed maturity, in which case, such preferred stocks will
be components of Tier II capital. Tier III capital generally consists of
short-term subordinated debt with an original maturity of at least two years,
subject to certain limitations. At least 50% of the minimum capital ratio must
be maintained in the form of Tier I capital.
If a banking institution is not engaged in international operations conducted
by foreign offices, it is subject to the other set of capital adequacy
requirements with a minimum target capital ratio of 4.0%. Such guidelines
incorporate measures of risk under the risk-weighted approach similar to the
guidelines applicable to banking institutions with international operations.
Qualifying capital is classified into Tier I and Tier II capital.
The Banking Law and related regulations require that one of three categories be
assigned to banks and bank holding companies, based on its risk-adjusted
capital adequacy ratio if the bank fails to meet the minimum target capital
adequacy ratio. These categories indicate capital deterioration, which may be
subject to certain prompt corrective action by the FSA.
MTFG, BTM and Mitsubishi Trust have international operations conducted by
foreign offices, as defined, and are subject to the 8.0% capital adequacy
requirement. For the purpose of calculating the additional charge for market
risk, MTFG, BTM and Mitsubishi Trust have adopted the internal risk measurement
model approach for general market risk calculations.
F-59
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The risk-adjusted capital amounts and ratios of MTFG, BTM and Mitsubishi Trust
presented in the following table are based on amounts calculated in accordance
with accounting principles generally accepted in Japan as required by the FSA.
For capital
Actual adequacy purposes
-------------------- -------------------
Amount Ratio Amount Ratio
-------------- ----- -------------- -----
(in millions except percentages)
Consolidated:
At March 31, 2002:
Total capital (to risk-weighted assets):
MTFG....................................... (Yen)6,220,529 10.30% (Yen)4,826,869 8.00%
BTM........................................ 5,010,273 10.29 3,892,627 8.00
Mitsubishi Trust........................... 1,309,224 10.83 966,824 8.00
Tier I capital (to risk-weighted assets):
MTFG....................................... 3,181,174 5.27 2,413,435 4.00
BTM........................................ 2,556,677 5.25 1,946,313 4.00
Mitsubishi Trust........................... 753,834 6.23 483,412 4.00
At March 31, 2003:
Total capital (to risk-weighted assets):
MTFG....................................... (Yen)5,968,401 10.84% (Yen)4,403,971 8.00%
BTM........................................ 4,687,703 10.43 3,592,242 8.00
Mitsubishi Trust........................... 1,237,273 12.00 824,583 8.00
Tier I capital (to risk-weighted assets):
MTFG....................................... 3,128,681 5.68 2,201,985 4.00
BTM........................................ 2,400,251 5.34 1,796,121 4.00
Mitsubishi Trust........................... 686,719 6.66 412,291 4.00
Stand-alone:
At March 31, 2002:
Total capital (to risk-weighted assets):
BTM........................................ (Yen)4,360,606 10.37% (Yen)3,363,679 8.00%
Mitsubishi Trust........................... 1,298,313 10.90 952,869 8.00
Tier I capital (to risk-weighted assets):
BTM........................................ 2,182,853 5.19 1,681,839 4.00
Mitsubishi Trust........................... 744,493 6.25 476,434 4.00
At March 31, 2003:
Total capital (to risk-weighted assets):
BTM........................................ (Yen)3,979,265 10.24% (Yen)3,107,780 8.00%
Mitsubishi Trust........................... 1,242,201 11.23 884,313 8.00
Tier I capital (to risk-weighted assets):
BTM........................................ 1,991,981 5.12 1,553,890 4.00
Mitsubishi Trust........................... 681,916 6.16 442,157 4.00
The MTFG Group has securities subsidiaries in Japan and overseas, which are
also subject to regulatory capital requirements. In Japan, the Securities and
Exchange Law and related ordinance require securities firms to maintain a
minimum capital ratio of 120% calculated by as a percentage of capital accounts
less certain fixed assets, as determined in accordance with accounting
principles generally accepted in Japan, 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
regulatory reporting and a capital ratio of 100% or less may lead to a
suspension of all or part of the business for a period of time and cancellation
of a license.
F-60
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Overseas securities subsidiaries are subject to the relevant regulatory capital
requirements of the countries or jurisdictions in which they operate.
Management believes, as of March 31, 2003, that MTFG, BTM, Mitsubishi Trust and
other regulated securities subsidiaries meet all capital adequacy requirements
to which they are subject.
United States of America
In the United States of America, Union BanCal Corporation ("UNBC") and its
banking subsidiary Union Bank of California, N.A. ("UBOC"), BTM's largest
subsidiaries operating outside Japan, are subject to various regulatory capital
requirements administered by U.S. Federal banking agencies, including minimum
capital requirements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, UNBC and UBOC must meet specific
capital guidelines that involve quantitative measures of UNBC's and UBOC's
assets, liabilities, and certain off-balance-sheet items as calculated under
U.S. regulatory accounting practices. UNBC's and UBOC's capital amounts and
UBOC's prompt corrective action classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require UNBC and UBOC to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to
quarterly average assets (as defined).
UNBC's and the UBOC's actual capital amounts and ratios are presented as
follows:
For capital
Actual adequacy purposes
------------ ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(in millions, except percentages)
UNBC:
At December 31, 2001:
Total capital (to risk-weighted assets).......... $4,260 13.35% $2,553 8.00%
Tier I capital (to risk-weighted assets)......... 3,661 11.47 1,276 4.00
Tier I capital (to quarterly average assets)..... 3,661 10.53 1,390 4.00
At December 31, 2002:
Total capital (to risk-weighted assets).......... 4,241 12.93 2,625 8.00
Tier I capital (to risk-weighted assets)......... 3,667 11.18 1,312 4.00
Tier I capital (to quarterly average assets)..... 3,667 9.75 1,504 4.00
Ratios OCC
For capital requires to be
Actual adequacy purposes "well capitalized"
------------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in millions, except percentages)
UBOC:
At December 31, 2001:
Total capital (to risk-weighted assets).......... $3,811 12.19% $2,502 8.00% $3,127 10.00%
Tier I capital (to risk-weighted assets)......... 3,323 10.63 1,251 4.00 1,876 6.00
Tier I capital (to quarterly average assets)..... 3,323 9.69 1,371 4.00 1,714 5.00
At December 31, 2002:
Total capital (to risk-weighted assets).......... 3,819 11.87 2,573 8.00 3,216 10.00
Tier I capital (to risk-weighted assets)......... 3,335 10.37 1,286 4.00 1,930 6.00
Tier I capital (to quarterly average assets)..... 3,335 9.01 1,481 4.00 1,851 5.00
F-61
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management believes, as of December 31, 2002, that UNBC and UBOC met all
capital adequacy requirements to which they are subject.
As of December 31, 2001 and 2002, the most recent notification from the U.S.
Office of the Comptroller of the Currency ("OCC") categorized UBOC as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," UBOC must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed UBOC's category.
22. EARNINGS (LOSS) PER COMMON SHARE
Reconciliations of net income (loss) and weighted average number of common
shares outstanding used for the computation of basic earnings (loss) per common
share to the adjusted amounts for the computation of diluted earnings (loss)
per common share for the years ended March 31, 2001, 2002 and 2003 were as
follows:
2001 2002 2003
--------------- --------------- --------------
(in millions)
Income (Numerator):
Net income (loss) before cumulative effect of a change in accounting principle. (Yen) (59,174) (Yen) (222,401) (Yen) 203,820
Cumulative effect of a change in accounting principle.......................... -- 5,867 (532)
--------------- --------------- --------------
Net income (loss).............................................................. (59,174) (216,534) 203,288
Income available to preferred shareholders..................................... (8,336) (4,168) (12,504)
--------------- --------------- --------------
Income (loss) available to common shareholders................................. (Yen) (67,510) (Yen) (220,702) (Yen) 190,784
=============== =============== ==============
Effect of dilutive securities:
Convertible preferred stock (Class 2).......................................... (Yen) -- (Yen) -- (Yen) 2,430
3% Exchangeable Guaranteed Notes redeemed on November 30, 2002................. -- -- (10,660)
--------------- --------------- --------------
Income (loss) available to common shareholders and assumed conversions......... (Yen) (67,510) (Yen) (220,702) (Yen) 182,554
=============== =============== ==============
2001 2002 2003
--------------- --------------- --------------
(thousands of shares)
Shares (Denominator):
Weighted average common shares outstanding..................................... 5,500 5,555 5,617
Effect of dilutive securities:
Convertible preferred stock (Class 2).......................................... -- -- 147
3% Exchangeable Guaranteed Notes redeemed on November 30, 2002................. -- -- 99
--------------- --------------- --------------
Weighted average common shares for diluted computation......................... 5,500 5,555 5,863
=============== =============== ==============
2001 2002 2003
--------------- --------------- --------------
(in yen)
Amounts per share:
Basic earnings (loss) per common share:
Income (loss) available to common shareholders before cumulative effect of a
change in accounting principle.............................................. (Yen)(12,274.55) (Yen)(40,789.57) (Yen)34,058.11
Cumulative effect of a change in accounting principle........................ -- 1,056.25 (94.71)
--------------- --------------- --------------
Net income (loss) available to common shareholders........................... (Yen)(12,274.55) (Yen)(39,733.32) (Yen)33,963.40
=============== =============== ==============
Diluted earnings (loss) per common share:
Income (loss) available to common shareholders before cumulative effect of a
change in accounting principle.............................................. (Yen)(12,274.55) (Yen)(40,789.57) (Yen)31,228.45
Cumulative effect of a change in accounting principle........................ -- 1,056.25 (90.74)
--------------- --------------- --------------
Net income (loss) available to common shareholders........................... (Yen)(12,274.55) (Yen)(39,733.32) (Yen)31,137.71
=============== =============== ==============
F-62
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average number of common shares outstanding during each year is
appropriately adjusted to give retroactive effect to the free distribution of
shares made to shareholders, if any, and the stock-for-stock exchanges in
connection with the business combination, as described in Note 2. Accordingly,
the number of common shares and per-share amounts set forth above are
hypothetical and do not reflect actual amounts recorded in the historical
financial statements of BTM and Mitsubishi Trust.
For the year ended March 31, 2001 1 3/4% Convertible Bonds due 2002, 3%
Exchangeable Guaranteed Notes due 2002, Exchangeable undated bonds, 2 1/2%
Convertible Bonds due 2001, 3 1/4% Convertible Bonds due 2003 and Class 2
Preferred Stock could have potentially diluted earnings per common share in the
future, and for the year ended March 31, 2002, 3% Exchangeable Guaranteed Notes
due 2002 and Class 2 Preferred Stock could have potentially diluted earnings
per common share in the future. These potentially dilutive common shares were
not included in the computation of earnings per common share--assuming dilution
for the years ended March 31, 2001 and 2002 due to their antidilutive effects.
For the year ended March 31, 2003, Class 2 Preferred Stock that could
potentially dilute earnings per common share in the future and 3% Exchangeable
Guaranteed Notes due 2002 that had been redeemed in November 2002 were included
in the computation of earnings per common share.
In computing the number of the dilutive potential common shares of the year
ended March 31,2003, Class 2 Preferred Stock has been based on the conversion
price as of year-end (i.e., (Yen)1,357,559.2).
MTFG has reset the conversion price from (Yen)1,357,559.2 to (Yen)696,898.5 as
described in Note 18. Based on the reset conversion price of (Yen)696,898.5,
for the year ended March 31, 2003, the effect of dilutive convertible preferred
stock (Class 2) would be 287 thousand shares and weighted average common shares
for diluted computation would be 6,003 thousand shares. Based on the reset
conversion price, in each column of diluted earnings (loss) per common share,
income (loss) before cumulative effect of a change in accounting principle,
cumulative effect of a change in accounting principle, and net income (loss)
for the year ended March 31, 2003 would be (Yen)30,501.84, (Yen)(88.63) and
(Yen)30,413.21, respectively.
23. DERIVATIVE FINANCIAL INSTRUMENTS
The MTFG 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. The MTFG Group is a party to derivatives, including swaps, forwards,
options and other types of derivatives, dealing primarily with market risk
associated with interest rate, foreign currency, equity and commodity prices,
and credit risk associated with counterparty's nonperformance of transactions.
Market risk is the possibility that future changes in market indices make the
financial instruments less valuable. Credit risk is the possibility that a loss
may result from a counterparty's failure to perform according to the terms and
conditions of the contract, which may exceed the value of underlying
collateral. To reduce credit risk, the MTFG Group may require collateral or
guaranties based on a case-by-case assessment of creditworthiness of each
customer and evaluation of the instrument. The MTFG Group also uses master
netting agreements in order to mitigate overall counterparty credit risk.
Trading Activities
The MTFG Group's trading activities include dealing and other activities
measured at fair value with gains and losses recognized currently in earnings.
As part of its trading activities, the MTFG Group offers a variety of
derivative financial instruments and debt instruments for managing interest
rate and foreign exchange risk to its
F-63
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
domestic and foreign corporate and financial institution customers. The MTFG
Group also enters into other types of derivative transactions, including equity
and credit-related contracts, for its own account.
Risk Management Activities
As part of risk management activities, the MTFG Group uses certain derivative
financial instruments to manage its interest rate and currency exposures. The
MTFG Group maintains an overall interest rate risk management strategy that
incorporates the use of interest rate contracts to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
The MTFG Group's goal is to manage interest rate sensitivity so that movements
in interest rates do not adversely affect net interest income. As a result of
interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate
or depreciate in market value. Gains or losses on the derivative instruments
that are linked to the hedged fixed-rate assets and liabilities are expected to
substantially offset this unrealized appreciation or depreciation. Interest
income and interest expense on hedged variable-rate assets and liabilities,
respectively, increase or decrease as a result of interest rate fluctuations.
Gains and losses on the derivative instruments that are linked to these hedged
assets and liabilities are expected to substantially offset this variability in
earnings.
The MTFG Group enters into interest rate swaps and other contracts as part of
its interest rate risk management strategy primarily to alter the interest rate
sensitivity of its loans, investment securities and deposit liabilities. The
MTFG Group's principal objectives in risk management include asset and
liability management. Asset and liability management is viewed as one of the
methods for the MTFG Group to manage its interest rate exposures on
interest-bearing assets and liabilities. Interest rate contracts, which are
generally non-leveraged generic interest rate and basis swaps, options and
futures, allow the MTFG Group to effectively manage its interest rate risk
position. Option contracts primarily consist of caps, floors, swaptions and
options on index futures. Futures contracts used for asset and liability
management activities are primarily index futures providing for cash payments
based upon the movement of an underlying rate index. The MTFG Group enters into
forward exchange contracts, currency swaps and other contracts in response to
currency exposures resulting from on-balance-sheet assets and liabilities
denominated in foreign currencies in order to limit the net foreign exchange
position by currency to an appropriate level.
The risk management activities reduce the MTFG Group's risk exposures
economically, however, derivatives used for the risk management activities
often fail to meet certain conditions to qualify for hedge accounting and the
MTFG Group accounts for such derivatives as trading positions.
For the years ended March 31, 2002 and 2003, except for derivative transactions
conducted by certain foreign subsidiaries, the MTFG Group accounts for
derivatives held for risk management purposes as trading positions and measured
them at fair value.
Embedded Derivatives
Derivative features embedded in other non-derivative host contracts are
separated from the host contracts and measured at fair value when they are not
clearly and closely related to the host contract and meet the definition of a
derivative. The change in the fair value of such an embedded derivative is
recognized currently in earnings, unless it is qualified as a hedge. The
carrying amount is reported on the consolidated balance sheet with the host
contract. The MTFG Group accounts for credit-linked notes as host contracts
with embedded derivatives and measures the entire contracts at fair value.
F-64
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UnionBanCal Corporation
UNBC adopts hedging strategies and uses some types of derivatives to achieve
cash flow hedge and fair value hedge accounting for certain transactions.
Cash Flow Hedges
UNBC engages in several types of cash flow hedging strategies for which the
hedged transactions are forecasted future loan interest payments, and the
hedged risk is the variability in those payments due to changes in the
designated benchmark rate, e.g., the US dollar LIBOR. In these strategies, the
hedging instruments are matched with groups of variable rate loans such that
the tenor of the variable rate loans and that of the hedging instrument is
identical. Cash flow hedging strategies include the utilization of purchased
floors, caps, corridor options and interest rate swaps. The maximum length of
time over which UNBC is hedging this exposure is 6.75 years.
UNBC uses purchased interest rate floors to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments received
under the floor contracts offset the decline in interest income on loans caused
by the relevant LIBOR index falling below the floor's strike rate.
UNBC uses interest rate floor corridors to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to
be received under the floor corridor contracts offset the decline in interest
income on loans caused by the relevant LIBOR index falling below the corridor's
upper strike rate, but only to the extent the index falls to the lower strike
rate. The corridor will not provide protection from declines in the relevant
LIBOR index to the extent it falls below the corridor's lower strike rate.
UNBC uses interest rate swaps to hedge the variable cash flows associated with
1-month LIBOR or 3-month LIBOR indexed loans. Payment to be received (or paid)
under the swap contracts will offset the fluctuations in interest income on
loans caused by changes in the relevant LIBOR index. As such, these instruments
hedge all fluctuations in the loans' interest income caused by changes in the
relevant LIBOR index.
UNBC uses purchased interest rate caps to hedge the variable interest cash
flows associated with the forecasted issuance and rollover of short-term, fixed
rate negotiable certificates of deposit ("CDs"). In these hedging
relationships, UNBC hedges the LIBOR component of the CD rates, which is either
3-month LIBOR or 6-month LIBOR, based on the CD's original term to maturity,
which reflects their repricing frequency. Net payments to be received under the
cap contracts offset the increase in interest expense caused by the relevant
LIBOR index rising above the cap's strike rate.
Hedging transactions are structured at inception so that the notional amounts
of the hedging instruments are matched with an equal principal amount of loans
or CDs, the index and repricing frequencies of the hedging instruments matches
those of the loans or CDs, and the period in which the designated hedged cash
flows occur is equal to the term of the hedging instruments. As such, most of
the ineffectiveness in the hedging relationship results from the mismatch
between the timing of reset date on the hedging instruments versus those of the
loans or CDs. During 2002, UNBC recognized a net gain of US$0.4 million due to
ineffectiveness, which is recognized in Non-interest expense, compared to a net
gain of US$0.5 million during 2001.
For cash flow hedges, based upon amounts included in accumulated other changes
in equity from nonowner sources at March 31, 2003, the MTFG Group expects to
recognize a gross increase of (Yen)9.5 billion in net interest income for the
year ending March 31, 2004. This amount could differ from amounts actually
realized due to changes in interest rates and the addition of other hedges
subsequent to March 31, 2003.
F-65
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value Hedge
UNBC engages in an interest rate hedging strategy in which an interest rate
swap is associated with a specific interest bearing liability, Mandatorily
Redeemable Preferred Securities of Subsidiary Grantor Trust ("Trust Preferred
Securities"), in order to essentially convert a portion of 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, the US dollar LIBOR.
Fair value hedging transactions are structured at inception so that the
notional amounts of the swap match an associated principal amount of the Trust
Preferred Securities. The interest payment dates, the expiration date, and the
embedded call option of the swap match those of the Trust Preferred Securities.
The ineffectiveness in fair value hedges during 2002 resulted in a net gain of
US$0.6 million compared to a net loss of US$0.1 million during 2001.
UNBC engages in an interest rate hedging strategy in which an interest rate
swap is associated with a specified interest bearing liability, five-year,
medium-term debt issuance, 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, the US dollar LIBOR.
The fair value hedging transaction for the medium-term notes was structured at
inception to mirror all of the provisions of the medium-term notes, which
allows UNBC to assume that no ineffectiveness exists.
24. OBLIGATIONS UNDER GUARANTEES AND OTHER OFF-BALANCE-SHEET INSTRUMENTS
Obligations under Guarantees
The MTFG Group provides customers with a variety of guarantees and similar
arrangements, including standby letters of credit, financial and performance
guarantees, credit protections, liquidity facilities, other off-balance-sheet
credit-related supports and similar instruments, in order to meet the
customers' financial and business needs. The table below summarizes the
contractual or notional amounts with regard to obligations under guarantees and
similar arrangements at March 31, 2003. The contractual or notional amounts of
these instruments represent the maximum potential amounts of future payments
without consideration of possible recoveries under recourse provisions or from
collateral held or pledged.
For certain types of derivatives, such as written interest rate options and
written currency options, the maximum potential future payments are unlimited.
Accordingly, it is impracticable to estimate such maximum potential amount of
future payments. As such, the notional amounts of the related contracts, other
than the maximum potential payments, are included in the table.
F-66
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The MTFG Group mitigates credit risk exposure resulting from guarantees by
utilizing various techniques, including collateralization in the form of cash,
securities, and real properties based on management's credit assessment of the
guaranteed parties and the related credit profile. In order to manage the
credit risk exposure, the MTFG Group also enters into sub-participation
contracts with third parties who will fund a portion of the credit facility and
bear its share of the loss to be incurred in the event that the borrower fails
to fulfill its obligations. The following table includes unfunded commitments
of (Yen)70.9 billion, which are participated out to third parties. Contractual
or notional amounts summarized in the following table may not necessarily bear
any direct relationship to the future actual credit exposure, primarily because
of those risk management techniques.
Maximum
potential/
Contractual Amount by expiration period
or -------------------------------------------------------
Notional Less than 1-2 2-3 3-5 Over 5
amount 1 year years years years years
----------- ----------- ---------- ---------- ---------- ----------
(in billions)
Standby letters of credit and financial guarantees (Yen) 4,021 (Yen) 1,655 (Yen) 235 (Yen) 297 (Yen) 399 (Yen)1,435
Performance guarantees............................ 1,092 742 151 85 62 52
Liquidity facilities.............................. 1,361 1,361 -- -- -- --
Derivative instruments............................ 29,054 23,839 1,359 1,228 1,954 674
Guarantees for the repayment of trust principal... 2,411 531 740 567 379 194
Liabilities of trust accounts..................... 3,078 2,819 7 2 9 241
Others............................................ 2 2 -- -- -- --
----------- ----------- ---------- ---------- ---------- ----------
Total............................................. (Yen)41,019 (Yen)30,949 (Yen)2,492 (Yen)2,179 (Yen)2,803 (Yen)2,596
=========== =========== ========== ========== ========== ==========
Nature of guarantee contracts
Standby letters of credit and financial guarantees generally include an
obligation of an issuer or a designated third party to guarantee the
performance of the customer to the beneficiary under the terms of contracts
such as lending contracts and other similar financial transactions. The MTFG
Group is required to make payments to the guaranteed parties in the events that
the customers fail to fulfill the obligations under the contracts. The
guarantees whose contractual maturities are over 5 years are mainly comprised
of guarantees of housing loans.
Performance guarantees are the contracts that contingently require the MTFG
Group to make payments to the guaranteed party based on another party's failure
to perform under an obligating agreement, except financial obligation. For
example, performance guarantees include guarantees of completion of
construction projects.
Liquidity facilities may include a provision of guarantees of collection of
contractual cash flows under an asset securitization structure, involving
variable interest entities. Such guarantee provisions protect beneficiary of
assets securitization from negative returns relating to shortfalls of cash
collections on the underlying assets held by the securitization vehicle. See
Note 25 for additional information on the MTFG Group's operations regarding
variable interest entities.
Derivative instruments that are deemed to be included within the definition of
guarantees as prescribed in FIN No. 45 include certain written options and
credit default swaps. In order for the MTFG Group to determine if those
derivative instruments meet the definition of guarantees as prescribed in FIN
No. 45, the MTFG Group has to track whether the counterparties are actually
exposed to the losses that will result from the adverse change in the
underlyings. Accordingly, the MTFG Group has disclosed information on all
credit default swaps and certain written options that have possibilities to
meet the definition of guarantees as prescribed in FIN No. 45, regardless of
whether the counterparties have assets or liabilities related to the
underlyings of the derivatives.
F-67
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Guarantees for the repayment of trust principal includes guarantees which the
MTFG Group provides for the repayment of principal of certain types of trust
products, including certain jointly operated designated money in trusts and
loan trusts. The MTFG Group manages and administers trust assets in a capacity
of agent or fiduciary on behalf of its customers and trust assets are
segregated from the own assets of the MTFG Group, who keeps records for the
trust activities separately. The MTFG Group, in principle, does not assume any
risks associated with the trust assets under management, however, as permitted
by applicable laws, the MTFG Group provides guarantees for the repayment of
principal of such trust products. At March 31, 2002 and 2003, the contract
amounts of such guarantees for repayment of trust principal were (Yen)3,441
billion and (Yen)2,411 billion, respectively. The accounting methods used for
the segregated records of trust activities are different from financial
accounting principles and practices. However, the MTFG Group follows an
approach similar to those used for its own assets to identify an impairment of
an asset included in the trusts with guaranteed principal, with inherent
variations peculiar to trust accounting. Amounts of loans deemed to be impaired
are written off directly and are charged to the trust account profits earned
during the trust accounting period. Write-downs of securities are also directly
charged to the trust account profits. The amounts of trust assets written-off
in the segregated records were (Yen)11,213 million and (Yen)5,740 million,
respectively, for the years ended March 31, 2002 and 2003. These amounts of
write-offs were reflected in the segregated records as deductions before net
profits earned by trust accounts for the accounting period. In addition, part
of trust account profits are set aside as a reserve to absorb losses in the
trust asset portfolios in the segregated records in accordance with relevant
legislation concerning trust business and/or trust agreement. Statutory reserve
for loan trusts are established at a rate of 4.0% of the trust fees up to the
amounts of 0.5% of the trust principal in accordance with the legislation.
Reserves for jointly operated designated money in trusts are established at a
rate of 0.3% of the balance of loans and other assets in the trust account
assets in accordance with the related trust agreement. The amounts of such
reserves set aside in the segregated records were (Yen)13,998 million and
(Yen)9,427 million, respectively, at March 31, 2002 and 2003. The MTFG Group is
required to provide an allowance for off-balance-sheet instruments on such
guarantees in the financial statements only when aggregate losses on trust
assets are judged to exceed the reserve and the profit earned by the trust
account, and the principal is deemed to be impaired. Management believes that
the reserve is sufficient to absorb probable losses inherent in the trust asset
portfolios and that the MTFG Group will not incur any losses on the guarantees.
Liabilities of trust accounts represent the trustee's potential responsibility
for temporary payments of liabilities of trust accounts. A trust may incur
external liabilities to finance its activities and obtain certain services
during the terms of the trust arrangement. While, in principle, any liabilities
of a trust are payable by the trust account, a trustee's responsibility may be
interpreted to encompass temporary payments for the trust account liabilities
when the trust account has insufficient liquidity available for such
liabilities. At March 31, 2003, there were liabilities of (Yen)3,078 billion in
the segregated records of trust accounts for which the MTFG Group may be
responsible, principally including obligations to return collateral under
security lending transactions. The MTFG Group has experienced no significant
losses on such responsibilities and its exposure to the risk associated with
the temporary payments is judged to be remote because trust account liabilities
are covered by the corresponding trust account assets and principals. The MTFG
Group continuously monitors the liabilities of trust accounts and assesses the
trust account's ability to perform its obligations to prevent any unfavorable
outcomes. The MTFG Group will claim its recourse for its temporary payments
against the beneficiaries. Also, certain agreements have provisions limiting
the MTFG Group's responsibility as a trustee to the trust account assets.
Others include contingent consideration agreements and security lending
indemnifications. Contingent consideration agreements provide guarantees on
additional payments to acquired insurance agencies' shareholders based on the
agencies' future performance in excess of established revenue and/or earnings
before interest, taxes, depreciation and amortization thresholds. Security
lending indemnifications are the indemnifications for institutional customers
of securities lending transactions against counterparty default. All lending
transactions are collateralized, primarily by cash.
F-68
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Carrying amount
At March 31, 2003, the carrying amounts of the liabilities related to
guarantees and similar instruments set forth above are (Yen)211,058 million,
which are included in Other liabilities and Trading account liabilities. In
addition, Other liabilities also include an allowance for off-balance-sheet
instruments of (Yen)62,840 million related to these transactions.
Other Off-Balance-Sheet Instruments
In addition to obligations under guarantees set forth above, the MTFG Group
issues other off-balance-sheet instruments for purposes other than trading.
Such off-balance-sheet instruments contain lending-related commitments,
including commitments to extend credit and commercial letters of credit that
the MTFG Group provides to meet the financing needs of its customers. Once the
MTFG Group issues these financial instruments, the MTFG Group is required to
extend credit to or make certain payments to the customers or beneficiaries
specified pursuant to the underlying contracts unless otherwise provided in the
contracts. Since many of these commitments expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
At March 31,2003, approximately 84% of these commitments will expire within one
year, 15% from one year to five years and 1% after five years. The table below
summarizes the contractual amounts with regard to these commitments at March
31, 2002 and 2003.
2002 2003
----------- -----------
(in billions)
Commitments to extend credit.... (Yen)29,367 (Yen)25,591
Commercial letters of credit.... 378 387
Resale and repurchase agreements 677 631
Securities lending transactions. 451 83
Commitments to make investments. 40 46
Commitments to extend credit, which generally have fixed expiration dates or
other termination clauses, are legally binding agreements to lend to customers.
Commitments are different from guarantees in that the commitments are generally
revocable or have provisions that enable the MTFG Group to avoid payments in
the event of violations of any conditions of the contracts and certain
deterioration of the potential borrowers' financial condition. Commitments to
extend credit may expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Commercial letters of credit, used for facilitating trade transactions, are
generally secured by underlying goods. The MTFG Group continually monitors the
type and amount of collateral and other security, and requires counterparties
to provide additional collateral or guarantors as necessary.
Repurchase and resale transactions are collateralized financing agreements. In
a sale of securities or other financial instruments with agreement to
repurchase them, the MTFG Group sells securities or other financial instruments
at a stated price to a counterparty and agrees to repurchase identical
financial instruments from the same counterparty at a later date at the
predetermined price which reflect the principal amount and interest. In a
purchase of securities or other financial instruments with agreement to resale
them, the MTFG Group receives securities or other financial instruments for a
stated price from a counterparty and agrees to sell them to the same
counterparty at a later date at the predetermined price reflecting the
principal amount and interest. When certain conditions specified in SFAS No.140
are met, the MTFG Group accounts for resale agreements as purchase of financial
instruments with related off-balance-sheet forward resale commitments and
repurchase agreements as sale of financial instruments with related
off-balance-sheet forward repurchase agreements. The MTFG Group
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MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
bears the off-balance-sheet risk related to the forward resale and repurchase
commitments, including credit risk and market risk.
Securities lending transactions involve the lending of securities borrowed from
other financial institutions or customers' securities held in custody to third
party borrowers. The MTFG Group generally obtains collateral from borrowers,
including cash and securities, with similar fair value. The MTFG Group follows
strict levels of collateralization governed by daily mark-to-market analyses
and a review of the creditworthiness of borrowers to control exposure to credit
losses resulting from a reduction in the underlying collateral value and
nonperformance by borrowers.
Commitments to make investments are legally binding contracts to make
additional contributions to corporate recovery or private equity investment
funds in accordance with limited partnership agreements. Some of these funds,
in which the MTFG Group has significant variable interests, are described in
Note 25.
Concentration of Credit Risk
Although the MTFG Group's portfolio of financial instruments, including
on-balance-sheet instruments, is widely diversified along industry and
geographic lines, a significant portion of the transactions with
off-balance-sheet risk are entered into with other financial institutions.
25. VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FIN No. 46, which provides new consolidation
accounting guidance for an enterprise involved with a variable interest entity.
The variable interest entity is defined as an entity whose total equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional financial support or whose equity holders lack
some typical characteristics of a controlling financial interest. Variable
interests in a variable interest entity are defined as contractual, ownership,
or other pecuniary interests in the entity that change with changes in the
entity's net asset value. A primary beneficiary is an enterprise that has a
variable interest that will absorb a majority of the entity's expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur, or both. FIN No. 46 requires a primary beneficiary to consolidate
the variable interest entity. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
For variable interest entities created before February 1, 2003, the provisions
of FIN No. 46 become effective for the MTFG Group during the year ending March
31, 2004.
In the normal course of its business, the MTFG Group is a party to various
entities which may be deemed to be variable interest entities such as
commercial paper conduits, various investment funds, special purpose entities
created for asset-back financing, and trusts.
The MTFG Group administers several third-party owned, multi-seller finance
companies (commercial paper conduits) that purchase financial assets, primarily
pools of receivables, from third-party customers. Assets purchased by these
conduits are generally funded by issuing commercial paper, or partly by
borrowings from the MTFG Group. While customers basically continue to service
the transferred trade receivables and absorb the first losses of the conduits
by providing collateral in the form of excess assets in typical cases, the MTFG
Group underwrites, distributes, makes a market in commercial paper issued by
the conduits, and also provides liquidity facilities to the entities, which may
function as second loss enhancement.
In accordance with FIN No. 46, the MTFG Group consolidated two commercial paper
conduits created after January 31, 2003 in its fiscal year ended March 31,
2003. At March 31, 2003, MTFG held all the commercial paper issued by these
conduits with total assets and liabilities amounting to (Yen)45.1 billion. All
of the conduits'
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MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets are collateral for the commercial paper and are classified as loans and
securities in the consolidated balance sheet of the MTFG Group.
The transition provision of FIN No. 46 requires certain disclosure about
variable interest entities created before February 1, 2003. Although the MTFG
Group is in the process of evaluating the impact of FIN No. 46, it is
reasonably possible that FIN No. 46 will require consolidation or additional
disclosures related to, the variable interest entities described below.
Commercial Paper Conduits
At March 31, 2003, total assets of the commercial paper conduits created before
February 1, 2003 were (Yen)3,182.7 billion and the MTFG Group's maximum
exposure to loss as a result of its involvement with the conduits was
approximately (Yen)2,522.1 billion, which is computed as the total exposure to
the entity including liquidity facilities, loans, and commercial papers held by
the MTFG Group.
Investment Funds
The MTFG Group holds investments in various investment funds that collectively
invest in equity and debt securities including listed Japanese securities and
investment grade bonds, and, to a limited extent, securities and other
interests issued by companies in a start-up or restructuring stage. Such
investment funds are managed by investment advisory companies or fund
management companies that make investment decision and administer the funds.
At March 31, 2003, total assets of these funds were approximately (Yen)3,346.0
billion, while the MTFG Group's investments in these funds were (Yen)420.1
billion. In addition, the MTFG Group has committed to make additional
contributions of up to (Yen)16.2 billion to certain investment funds. Total of
these represents the MTFG Group's maximum exposure to loss as a result of its
involvement with these funds.
Special Purpose Entities Created for Asset Back Financing
The MTFG Group extends non-recourse asset-backed loans to special purpose
entities which hold beneficial interests in real properties to provide
financing of special purpose projects including real estate development and
natural resource development managed by third parties. The MTFG Group generally
acts as a member of a group of lenders in many cases and does not have any
equity investment in the entities, which is typically provided by project
owners. For most of these financings, the equity provided by the project owners
of is sufficient level to absorb expected losses. Expected returns to the
owners are arranged to be the most significant among all returns. Accordingly,
the MTFG expects that most of these entities will ultimately be determined not
to be variable interest entities.
However, in transactions with entities whose capital is exceptionally thin and
the MTFG Group's share of financing is dominant, the MTFG Group may ultimately
be required to consolidate such variable interest entities. At March 31, 2003,
the MTFG Group's maximum exposure to loss was (Yen)13.2 billion, consisting
primarily of non-recourse, asset-backed loans to such entities with total
assets of (Yen)24.4 billion.
Trust Products
The MTFG Group offers a variety of trust products and manages and administers a
wide range of trust arrangements including securities investment trusts,
pension trusts and trusts used in the securitization of assets originated by
and transferred to third parties. In a typical trust arrangement, the MTFG
Group manages and
F-71
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
administers the assets on behalf of the customers in an agency, fiduciary and
trust capacity. In principle, the MTFG Group does not assume risks associated
with the entrusted assets, which are borne by the customers, although in
limited cases the MTFG Group may assume risks through guarantees or certain
protections as provided in the trust agreement. For most trust arrangements,
expected returns and losses to be received and assumed by the customers depend
on the performance and operations of the trusts. Generally, the expected
returns are larger than the fees received by the MTFG Group. Accordingly, the
MTFG Group expects that it will not ultimately be determined to be the primary
beneficiary or that its interests in a trust arrangement will not become
significant in most cases.
The MTFG Group has consolidated certain special purpose entities, which may be
variable interest entities, under current accounting guidance. At March 31,
2003, total assets of such consolidated entities were immaterial. As the MTFG
Group is still in the process of assessing and analyzing the impact of the
adoption of FIN No. 46 for existing and future arrangements and interests in
various entities, additional entities may be identified that will need to be
consolidated or disclosed by the MTFG Group.
26. COMMITMENTS AND CONTINGENT LIABILITIES
The MTFG Group leases certain office space and equipment under noncancelable
agreements expiring through the year 2015.
Future minimum rental commitments for noncancelable leases at March 31, 2003
were as follows:
Capitalized Operating
leases leases
----------- ------------
(in millions)
Year ending March 31:
2004................................. (Yen)11,874 (Yen) 22,195
2005................................. 12,124 20,330
2006................................. 10,116 18,618
2007................................. 7,546 11,100
2008................................. 4,801 9,349
2009 and thereafter.................. 5,146 33,402
----------- ------------
Total minimum lease payments..... 51,607 (Yen)114,994
============
Amount representing interest............ (2,424)
-----------
Present value of minimum lease payments. (Yen)49,183
===========
Total rental expense for the years ended March 31, 2001, 2002 and 2003 was
(Yen)46,545 million, (Yen)47,610 million and (Yen)52,641million, respectively.
F-72
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The MTFG Group is involved in various litigation matters. In the opinion of
management, the MTFG Group's liabilities, if any, when ultimately determined
will not have a material adverse effect on the MTFG Group's results of
operations and financial position.
27. FEES AND COMMISSIONS INCOME
Details of fees and commissions income for the years ended March 31, 2001, 2002
and 2003 were as follows:
2001 2002 2003
------------ ------------ ------------
(in millions)
Trust fees................................................ (Yen)114,604 (Yen)123,645 (Yen)103,803
Fees on funds transfer and service charges for collections 60,038 60,910 61,093
Fees and Commissions on international business............ 51,354 53,469 54,537
Fees and Commissions on credit card business.............. 47,852 51,005 63,681
Service charges on deposits............................... 22,672 29,791 34,626
Other fees and commissions................................ 162,883 173,044 210,368
------------ ------------ ------------
Total.................................................. (Yen)459,403 (Yen)491,864 (Yen)528,108
============ ============ ============
28. BUSINESS SEGMENTS
MTFG conducts its business through its principal subsidiaries, BTM and
Mitsubishi Trust, which have been granted substantial autonomy in conducting
their business, and, therefore, management currently recognizes each of BTM and
Mitsubishi Trust as a principal business segment of the MTFG Group.
The business segment information of BTM and its subsidiaries ("BTM Group") and
Mitsubishi Trust and its subsidiaries ("Mitsubishi Trust Group"), set forth
below, is derived from the internal management reporting system used by
management to measure the performance of the business segments. Unlike
financial accounting, there is no authoritative body of guidance for management
accounting. The business segment information, set forth below, is based on the
financial information prepared in accordance with Japanese GAAP along with
internal management accounting rules and practices. Accordingly, the format and
information is presented primarily on the basis of Japanese GAAP and is not
consistent with the consolidated financial statements prepared on the basis of
US GAAP. A reconciliation is provided for the total amounts of segments' total
operating profits of BTM Group and Mitsubishi Trust Group with income (loss)
before income tax expense (benefit) and cumulative effect of a change in
accounting principle under US GAAP.
See Note 29 for financial information relating to the MTFG Group's operations
by geographic area. The geographic financial information is consistent with the
basis of the accompanying consolidated financial statements.
BTM Group
BTM Group was organized based on a business unit system during the year ended
March 31, 2003 as follows:
.. The Retail Banking business unit provides banking products and services to
individual customers in Japan.
.. The Commercial Banking business unit provides banking products and services
to large corporations and some small and medium-sized companies.
F-73
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
.. The Global Corporate Banking business unit provides banking services to
large Japanese corporations and their overseas operations as well as
non-Japanese corporations who do business on a global basis, excluding
UNBC's customers.
.. The Investment Banking business unit provides advisory and other services
related to mergers and acquisitions, securities services of BTM, syndicated
loans, project financing, derivatives and securitization and other
investment banking activities.
.. The Asset Management business unit provides asset management and trust
products and services mainly to high net worth individuals, branch
customers and corporate clients in Japan.
.. The UNBC business unit includes BTM's subsidiaries in California,
UnionBanCal Corporation and Union Bank of California, N.A.
.. The Operations Services unit provides operations and settlement services to
BTM Group's other business units, including settlement and foreign exchange.
.. The Treasury unit conducts BTM Group's asset and liability management and
liquidity management.
For the years ended March 31, 2001 and 2002, BTM's securities subsidiaries were
included in the investment banking business unit. In response to the
incorporation of Mitsubishi Securities into which these securities subsidiaries
were merged on September 1, 2002, BTM began measuring the results of Mitsubishi
Securities separately from its investment banking business unit in the latter
half of the year ended March 31, 2003. Accordingly, BTM presented Mitsubishi
Securities as a separate operating segment for the year ended March 31, 2003.
Presentation for prior years has been reclassified to conform to the
presentation for the fiscal year ended March 31, 2003.
Mitsubishi Securities segment includes Mitsubishi Securities and its
subsidiaries that provide a broad range of retail and corporate securities
services and products including retail brokerage, securitization, M&A advisory
and derivatives.
Further, after the incorporation of Mitsubishi Securities, BTM transferred part
of the investment banking business, including securitization, M&A advisory and
derivatives, to Mitsubishi Securities from its investment banking business
unit. This transfer did not significantly affect the current year results of
the investment banking business unit or Mitsubishi Securities. It is not
practicable to restate the previous years' information based on the current
year's presentation or to recast the current year's information based on the
previous years' presentation to reflect this transfer.
In May 2003, BTM integrated the investment banking business unit and asset
management business unit into one business unit under the name of investment
banking and asset management business unit. Since this integration of business
units was made subsequent to March 31, 2003, BTM did not reclassify the
business segment information for the years ended March 31, 2001, 2002 and 2003
to reflect such integration.
F-74
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The financial performances of BTM Group's major business units and Mitsubishi
Securities, derived from the internal management reporting system, are
summarized below. Management does not use information on segments' total assets
to allocate resources and assess performance and has not prepared information
on segment assets. Accordingly, business segments' information on total assets
is not available.
Global
Retail Commercial Corporate Investment Asset Operations
Banking Banking Banking Banking Management UNBC Services
------------ ------------ ------------ ------------ ------------ ------------ -----------
(in millions)
Year ended March 31,
2001:
Net revenue:
BTM:
Net interest
income............. (Yen)197,587 (Yen)215,171 (Yen)133,659 (Yen) (1,934) (Yen) (4,443) (Yen) -- (Yen) 1,380
Net fees............ 19,716 39,652 60,478 27,833 6,440 -- 3,572
Other............... 11,872 22,803 22,612 22,253 (2,255) -- 1,380
BTM's subsidiaries... 72,276 9,047 53,850 25,838 9,046 256,225 16,040
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total.............. 301,451 286,673 270,599 73,990 8,788 256,225 22,372
Operating expenses..... 231,343 130,453 124,491 49,968 12,737 131,869 18,107
------------ ------------ ------------ ------------ ------------ ------------ -----------
Operating profit (loss) (Yen) 70,108 (Yen)156,220 (Yen)146,108 (Yen) 24,022 (Yen) (3,949) (Yen)124,356 (Yen) 4,265
============ ============ ============ ============ ============ ============ ===========
Year ended March 31,
2002:
Net revenue:
BTM:
Net interest
income............. (Yen)176,297 (Yen)216,041 (Yen)136,872 (Yen) 3,941 (Yen) (361) (Yen) -- (Yen) 867
Net fees............ 23,314 43,631 68,365 31,492 5,274 -- 3,988
Other............... 10,737 26,723 18,956 26,748 (4,915) -- 1,137
BTM's subsidiaries... 72,787 11,342 57,887 39,573 8,943 295,898 15,458
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total.............. 283,135 297,737 282,080 101,754 8,941 295,898 21,450
Operating expenses..... 230,602 126,834 134,559 50,585 13,884 163,641 17,635
------------ ------------ ------------ ------------ ------------ ------------ -----------
Operating profit (loss) (Yen) 52,533 (Yen)170,903 (Yen)147,521 (Yen) 51,169 (Yen) (4,943) (Yen)132,257 (Yen) 3,815
============ ============ ============ ============ ============ ============ ===========
Year ended March 31,
2003:
Net revenue:
BTM:
Net interest
income............. (Yen)165,407 (Yen)196,033 (Yen)125,811 (Yen) 6,082 (Yen) (24) (Yen) -- (Yen) 733
Net fees............ 29,383 46,250 65,040 28,080 3,912 -- 3,716
Other............... 12,645 31,337 24,273 31,100 (14,572) -- 841
BTM's subsidiaries... 72,534 12,964 47,787 29,465 7,772 275,834 14,569
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total.............. 279,969 286,584 262,911 94,727 (2,912) 275,834 19,859
Operating expenses..... 211,695 126,995 129,945 46,176 16,524 161,585 16,937
------------ ------------ ------------ ------------ ------------ ------------ -----------
Operating profit (loss) (Yen) 68,274 (Yen)159,589 (Yen)132,966 (Yen) 48,551 (Yen)(19,436) (Yen)114,249 (Yen) 2,922
============ ============ ============ ============ ============ ============ ===========
Mitsubishi
Treasury Securities Other* Total
------------ ------------ ------------- --------------
(in millions)
Year ended March 31,
2001:
Net revenue:
BTM:
Net interest
income............. (Yen) 60,507 (Yen) -- (Yen) (42,988) (Yen) 558,939
Net fees............ (2,924) -- (35,577) 119,190
Other............... 46,047 -- 43,014 167,726
BTM's subsidiaries... 1,500 20,303 8,432 472,557
------------ ------------ ------------- --------------
Total.............. 105,130 20,303 (27,119) 1,318,412
Operating expenses..... 23,211 22,144 146,766 891,089
------------ ------------ ------------- --------------
Operating profit (loss) (Yen) 81,919 (Yen) (1,841) (Yen)(173,885) (Yen) 427,323
============ ============ ============= ==============
Year ended March 31,
2002:
Net revenue:
BTM:
Net interest
income............. (Yen)152,008 (Yen) -- (Yen) (21,416) (Yen) 664,249
Net fees............ (5,009) -- (40,522) 130,533
Other............... 57,811 -- (4,960) 132,237
BTM's subsidiaries... 2,265 12,784 8,571 525,508
------------ ------------ ------------- --------------
Total.............. 207,075 12,784 (58,327) 1,452,527
Operating expenses..... 28,370 21,992 57,001 845,103
------------ ------------ ------------- --------------
Operating profit (loss) (Yen)178,705 (Yen) (9,208) (Yen)(115,328) (Yen) 607,424
============ ============ ============= ==============
Year ended March 31,
2003:
Net revenue:
BTM:
Net interest
income............. (Yen)180,127 (Yen) -- (Yen) (49,935) (Yen) 624,234
Net fees............ (6,222) -- (37,185) 132,974
Other............... 111,863 -- (6,972) 190,515
BTM's subsidiaries... 2,068 55,060 6,022 524,075
------------ ------------ ------------- --------------
Total.............. 287,836 55,060 (88,070) 1,471,798
Operating expenses..... 26,712 65,928 80,008 882,505
------------ ------------ ------------- --------------
Operating profit (loss) (Yen)261,124 (Yen)(10,868) (Yen)(168,078) (Yen) 589,293
============ ============ ============= ==============
--------
* Other includes the Systems Services unit, the eBusiness & IT Initiatives
unit, and the Corporate Center and eliminates overlapping allocation.
Management measures performance of each business unit by "operating profit,"
which includes profits or losses of BTM's subsidiaries. Financial information
of each of BTM's subsidiaries is assigned to only one business unit, based on
its major products or services provided and its major type of customers.
"Operating profit" is a defined term in BTM's regulatory reporting to the FSA.
"Net revenue" above includes net interest income, net fees (that is, fees and
commissions received, net of fees paid and other related expenses), and other
gains, such as net trading gains, net foreign exchange gains, and net gains
from sales of debt investment securities measured under Japanese GAAP. Interest
income and expenses between business units are determined using an internal
transfer pricing system, based on current market rates.
F-75
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Operating expenses" include salaries and employee benefits, occupancy and
certain other non-interest expenses. In determining operating profit, BTM Group
does not assign to each business unit certain income and expense items such as
specific provisions for loan loss reserve, equity investment securities gains
or losses, minority interest in earnings or losses of BTM's subsidiaries,
equity in earnings or losses of BTM's affiliated companies, goodwill
amortization and impairment, net gains or losses from disposition of premises
and equipment, and other certain non-interest income and expense items.
Frequently, the business units work together in connection with providing
services to customers. In accordance with BTM Group's internal management
accounting policies, BTM Group does not apportion the net revenue relating to a
particular transaction among the participating business units. Instead, BTM
Group assigns the total amount of net revenue relating to each of these
transactions to each participating business unit. As a result, some items of
net revenue are recorded as part of the operating results of more than one
business unit. Any overlapping allocations are eliminated in the "Other"
column. The following is the summary of the aggregate amounts of this
overlapping allocation of net revenue for the business units for the years
ended March 31, 2001, 2002 and 2003.
Global Total
Retail Commercial Corporate Asset amount
Banking Banking Banking Management eliminated
------- ---------- ----------- ---------- -----------
(in millions)
Year ended March 31, 2001:
Investment banking...... (Yen) 3 (Yen)5,606 (Yen)28,005 (Yen)538 (Yen)34,152
Year ended March 31, 2002:
Investment banking...... -- 7,837 30,157 -- 37,994
Year ended March 31, 2003:
Investment banking...... -- 9,722 28,709 -- 38,431
On April 2, 2001, NTB became a wholly owned subsidiary of MTFG and has been
excluded from BTM's consolidation. On October 1, 2001, NTB and TTB merged with
and into Mitsubishi Trust and, accordingly, BTM's segment internal management
reports do not include the financial performance of NTB and TTB subsequent to
the merger. Their post-merger financial performance is reflected in Mitsubishi
Trust's segment information. BTM's segment information for the year ended March
31, 2001 has been restated to reflect the exclusion of NTB and TTB from its
consolidation. NTB's operation principally includes pension trust services,
securities operations, real estate services, property management services, and
stock transfer agency services. TTB's principal business includes securities
lending transactions, asset securitizations and other financial securities. The
following is a summary of financial performance of NTB and TTB for the year
ended March 31, 2001 and six months ended September 30, 2001, derived from the
internal management systems of these banks without any adjustments.
Year ended Six months ended
March 31, 2001 September 30, 2001
-------------- ------------------
(in millions)
Net revenue............ (Yen)37,020 (Yen)12,100
Operating expenses..... 20,210 14,341
----------- -----------
Operating profit (loss) (Yen)16,810 (Yen)(2,241)
=========== ===========
F-76
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mitsubishi Trust Group
Effective April 1, 2001, Mitsubishi Trust reorganized its business group
structure and redefined functions and activities performed by each of its
operating groups; Trust-Banking, Trust Assets, Real Estate and Global
Markets. In addition, Mitsubishi Trust includes the financial performance of
subsidiaries in its internal management reporting for year ended March 31,
2002. Due to the merger of NTB and TTB with and into Mitsubishi Trust on
October 1, 2001, only the financial performance of NTB and TTB for the second
half of the year ended March 31, 2002 and the year ended March 31, 2003 are
reflected in Mitsubishi Trust's business segment information.
Principal business activities of each operating group are as follows:
.. The Trust-Banking business group provides retail banking and trust
services, corporate financing services and stock transfer agent services
.. The Trust Assets business group provides asset management and
administration services
.. The Real Estate business group provides brokerage, securitization,
appraisal, advisory and other real estate services
.. The Global Markets business group provides various financial operations
including banking, money markets and capital markets operations, securities
investments, custody operations and asset management.
F-77
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The financial performance of the Mitsubishi Trust Group's business groups,
derived from the internal management reporting system, is summarized below.
Business segment information for the year ended March 31, 2001 has been
restated to reflect changes in group structure and inclusion of subsidiary
information discussed above. However, it is not practicable to restate business
segment information for the year ended March 31, 2001 to reflect the effect of
merger of NTB and TTB because the differences in the policy and process of
compiling and summarizing segment information between Mitsubishi Trust and NTB
and TTB have made impractical the precise and reasonable allocation of
financial performance of NTB and TTB to each of the Mitsubishi Trust's business
groups. Management does not use information on segments' total assets to
allocate resources and assess performance, and has not prepared information on
segment assets. Accordingly, business segments' information on total assets is
not available.
Trust- Trust Real Global
Banking Assets Estate Markets Other*
------------ ----------- ----------- ------------ -----------
(in millions)
Year ended March 31, 2001:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen) 75,848 (Yen) -- (Yen) -- (Yen) 59,255 (Yen)15,069
Fees on jointly operated designated money in
trusts........................................... 19,163 -- -- 32,415 14,612
Other fees........................................ 19,380 49,904 12,004 287 --
Other............................................. 213 -- -- 9,140 350
------------ ----------- ----------- ------------ -----------
Total.......................................... 114,604 49,904 12,004 101,097 30,031
Operating expenses................................... 67,654 26,796 6,316 16,587 27,212
Mitsubishi Trust's subsidiaries...................... -- -- -- -- 3,003
------------ ----------- ----------- ------------ -----------
Operating profit..................................... (Yen) 46,950 (Yen)23,108 (Yen) 5,688 (Yen) 84,510 (Yen) 5,822
============ =========== =========== ============ ===========
Year ended March 31, 2002:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen) 72,706 (Yen) -- (Yen) -- (Yen) 96,072 (Yen)10,711
Fees on jointly operated designated money in
trusts........................................... 16,563 -- -- 27,910 17,016
Other fees........................................ 27,017 54,334 11,683 (3,306) --
Other............................................. 105 -- -- (14,768) (50)
------------ ----------- ----------- ------------ -----------
Total............................................. 116,391 54,334 11,683 105,908 27,677
Operating expenses................................... 69,139 33,249 8,083 17,858 31,421
Mitsubishi Trust's subsidiaries...................... -- -- -- -- (293)
------------ ----------- ----------- ------------ -----------
Operating profit (loss).............................. (Yen) 47,252 (Yen)21,085 (Yen) 3,600 (Yen) 88,050 (Yen)(4,037)
============ =========== =========== ============ ===========
Year ended March 31, 2003:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen) 79,025 (Yen) -- (Yen) -- (Yen)108,988 (Yen) 6,180
Fees on jointly operated designated money in
trusts........................................... 10,382 -- -- 21,971 16,463
Other fees........................................ 30,708 37,986 16,720 (5,012) --
Other............................................. 31 -- -- 11,301 (117)
------------ ----------- ----------- ------------ -----------
Total.......................................... 120,146 37,986 16,720 137,248 22,526
Operating expenses................................... 73,456 27,986 9,710 17,684 27,377
Mitsubishi Trust's subsidiaries...................... -- -- -- -- 4,738
------------ ----------- ----------- ------------ -----------
Operating profit (loss).............................. (Yen) 46,690 (Yen)10,000 (Yen) 7,010 (Yen)119,564 (Yen) (113)
============ =========== =========== ============ ===========
Total
------------
(in millions)
Year ended March 31, 2001:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen)150,172
Fees on jointly operated designated money in
trusts........................................... 66,190
Other fees........................................ 81,575
Other............................................. 9,703
------------
Total.......................................... 307,640
Operating expenses................................... 144,565
Mitsubishi Trust's subsidiaries...................... 3,003
------------
Operating profit..................................... (Yen)166,078
============
Year ended March 31, 2002:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen)179,489
Fees on jointly operated designated money in
trusts........................................... 61,489
Other fees........................................ 89,728
Other............................................. (14,713)
------------
Total............................................. 315,993
Operating expenses................................... 159,750
Mitsubishi Trust's subsidiaries...................... (293)
------------
Operating profit (loss).............................. (Yen)155,950
============
Year ended March 31, 2003:
Mitsubishi Trust:
Net revenue:
Net interest income............................... (Yen)194,193
Fees on jointly operated designated money in
trusts........................................... 48,816
Other fees........................................ 80,402
Other............................................. 11,215
------------
Total.......................................... 334,626
Operating expenses................................... 156,213
Mitsubishi Trust's subsidiaries...................... 4,738
------------
Operating profit (loss).............................. (Yen)183,151
============
--------
* Other includes certain divisions of the corporate headquarters (e.g.,
personnel and planning) and adjustments.
F-78
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management measures performance of each business group by "operating profit."
"Operating profit" is a defined term in Mitsubishi Trust's regulatory reporting
to the FSA. The financial performance of subsidiaries are measured by ordinary
profit or loss derived from the financial statements of Mitsubishi Trust's
subsidiaries. Because of limited significance of subsidiary operations,
Mitsubishi Trust does not assign the subsidiary financial performances to
business groups but manages them on an aggregate basis.
"Net revenue" above includes net interest income, net fees (that is, fees and
commissions received, net of fees paid and other related expenses), and other
gains, such as net trading gains, net foreign exchange gains, and net gains
from sales of investment debt securities measured under Japanese GAAP.
"Operating expenses" include salaries and employee benefits, occupancy and
certain other non-interest expenses. In determining operating profit, the
Mitsubishi Trust Group does not assign to each business group certain income
and expense items such as provisions for loan loss reserve, equity investment
securities gains or losses, minority interest in earnings or losses of
Mitsubishi Trust's subsidiaries, equity in earnings or losses of Mitsubishi
Trust's affiliated companies, goodwill amortization and impairment, net gains
or losses from disposition of premises and equipment, and other certain
non-interest income and expense items.
"Fees on jointly operated designated money in trusts" include trust fees,
accounted for on a cash basis, which are associated with loan trusts and other
types of jointly operated designated money in trusts, including certain money
trusts with guarantee for the repayment of principal. The amounts assigned to
the Trust-Banking business group are fees associated with the return on lending
activities and the amounts assigned to the Global Markets business group are
fees resulting from the management of investment securities included in the
trust accounts. Amounts of write-downs for trust assets recorded within each
trust account, which eventually reduce the trust fees to be recognized in
Mitsubishi Trust's financial statements, are excluded from the business group's
performance measure on jointly operated designated money in trusts, and the fee
amounts are before provision for credit losses on individual trust assets. Such
credit losses, recognized within each trust account, are shown in the
reconciliations of the business segments' total operating profit to income or
loss before income tax expense or benefit and cumulative effect of a change in
accounting principle. Fees on such trusts are determined at the end of
respective accounting periods of individual trust accounts and Mitsubishi Trust
recognizes such fees, on a cash basis, in its Japanese GAAP financial
statements. For measuring the performance of the Trust-Banking and Global
Markets business groups, Mitsubishi Trust focuses on the results of performance
during the term corresponding to the fiscal period. Since the trust accounting
periods do not necessarily correspond with Mitsubishi Trust's fiscal period,
fee amounts shown in the Japanese GAAP financial statements would not meet the
objective of management reporting without certain adjustments. Accordingly,
Mitsubishi Trust allocates amounts to the business group to show the fee
amounts that would have been earned, on an accrual basis, if each trust
accounting period has corresponded with Mitsubishi Trust's fiscal period.
"Other fees" include trust fees other than fees on certain jointly operated
designated money in trusts, such as retirement benefit trusts and
securities-related trust, including specified money trust and independently
operated designated money in trust, and fiduciary and custodial services
related to asset management and administration. Fees and commissions on
securitizations, stock transfer agency services and real estate business are
also included in this line.
"Net revenue" included in the "Other" column includes interest and dividends on
certain investment securities held for relationship management. "Fees on
jointly operated designated money in trusts" under " Other" include the amounts
representing the recoveries of trust assets previously written off and reversal
of the statutory reserve, both of which are accounted for as a reduction of the
trust fees. Also, included in the amounts under "Other" are the adjustments for
the amounts of the Trust-Banking business group based on Mitsubishi Trust's
fiscal period to the segments' total amounts, which are determined, based on
the accounting periods of the trust accounts.
F-79
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation
As set forth above, the measurement bases and the income and expenses items
covered are very different between the internal management reporting system and
the accompanying consolidated statements of operations. Therefore, it is
impracticable to present reconciliations of the business segments' total
information, other than operating profit, to corresponding items in the
accompanying consolidated statements of operations.
Reconciliations of the total amounts of total operating profits of BTM Group
and Mitsubishi Trust Group under the internal management reporting system for
the years ended March 31, 2001, 2002 and 2003 above to income (loss) before
income tax expense (benefit) and cumulative effect of a change in accounting
principle shown on the consolidated statements of operations are as follows:
2001 2002 2003
--------- --------- ---------
(in billions)
Operating profit:
BTM Group.......................................................................... (Yen) 427 (Yen) 607 (Yen) 589
Mitsubishi Trust Group............................................................. 166 156 183
--------- --------- ---------
Total.......................................................................... 593 763 772
Trust fees adjusted for credit losses of trust assets.............................. (37) (19) (8)
Provision for credit losses........................................................ (688) (580) (404)
Trading account profits............................................................ 96 12 47
Equity investment securities gains (losses)--net................................... 169 (23) (270)
Debt investment securities gains--net.............................................. 16 21 162
Foreign exchange gains (losses)--net............................................... (73) (275) 84
Losses on other real estate owned.................................................. (16) (6) --
Goodwill amortization.............................................................. (4) (8) --
Minority interest.................................................................. (20) (22) (1)
Other--net......................................................................... (32) (187) (135)
--------- --------- ---------
Income (loss) before income tax expense (benefit) and cumulative effect of a change in
accounting principle................................................................ (Yen) 4 (Yen)(324) (Yen) 247
========= ========= =========
29. FOREIGN ACTIVITIES
Foreign operations include the business conducted by overseas offices, as well
as international business conducted from domestic offices, principally several
international banking-related divisions of BTM's and Mitsubishi Trust's Head
Office in Tokyo, and involve various transactions with debtors and customers
residing outside Japan. Close integration of the MTFG Group's foreign and
domestic activities makes precise estimates of the amounts of assets,
liabilities, income and expenses attributable to foreign operations difficult
and necessarily subjective. Assets, income and expenses attributable to foreign
operations are allocated to geographical areas based on the domiciles of the
debtors and customers.
Generally, interest rates with respect to funds borrowed and loaned between
domestic and foreign operations are based on prevailing money market rates
appropriate for the transactions. In general, the MTFG Group has allocated all
direct expenses and a proportionate share of general and administrative
expenses to income derived from foreign loans and other transactions by the
MTFG Group's foreign operations. The following table sets forth estimated total
assets at March 31, 2001, 2002 and 2003, and estimated total revenue, total
expenses, income (loss) before income tax expense (benefit) and net income
(loss) for the respective years then ended.
F-80
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Domestic Foreign
--------------- --------------------------------------------------------------
United
States of Asia/Oceania Other
Japan America Europe excluding Japan areas*
--------------- --------------- -------------- --------------- --------------
(in millions)
Year ended March 31, 2001:
Total revenue...................... (Yen) 1,549,490 (Yen) 758,663 (Yen) 357,946 (Yen) 267,602 (Yen) 200,480
Total expenses..................... 1,894,333 670,125 244,349 183,512 138,273
Income (loss) before income tax
expense (benefit)................. (344,843) 88,538 113,597 84,090 62,207
Net income (loss).................. (362,280) 58,104 111,950 72,011 61,041
Total assets at end of year........ 68,251,884 11,890,868 7,333,229 3,408,333 2,604,636
Year ended March 31, 2002:
Total revenue...................... 1,225,000 547,360 244,372 239,004 128,932
Total expenses..................... 1,612,151 578,801 235,852 194,189 87,908
Income (loss) before income tax
expense (benefit) and cumulative
effect of a change in accounting
principle......................... (387,151) (31,441) 8,520 44,815 41,024
Net income (loss).................. (236,546) (57,036) 4,131 34,984 37,933
Total assets at end of year........ 69,162,382 12,346,379 6,668,616 3,297,980 2,889,757
Year ended March 31, 2003:
Total revenue...................... 1,288,980 618,292 256,498 150,580 117,654
Total expenses..................... 1,381,282 444,437 204,477 89,056 66,055
Income (loss) before income tax
expense (benefit) and cumulative
effect of a change in accounting
principle......................... (92,302) 173,855 52,021 61,524 51,599
Net income (loss).................. (70,636) 142,954 37,273 43,315 50,382
Total assets at end of year........ 69,731,714 13,210,140 7,893,478 3,154,016 2,542,365
Total
---------------
(in millions)
Year ended March 31, 2001:
Total revenue...................... (Yen) 3,134,181
Total expenses..................... 3,130,592
Income (loss) before income tax
expense (benefit)................. 3,589
Net income (loss).................. (59,174)
Total assets at end of year........ 93,488,950
Year ended March 31, 2002:
Total revenue...................... 2,384,668
Total expenses..................... 2,708,901
Income (loss) before income tax
expense (benefit) and cumulative
effect of a change in accounting
principle......................... (324,233)
Net income (loss).................. (216,534)
Total assets at end of year........ 94,365,114
Year ended March 31, 2003:
Total revenue...................... 2,432,004
Total expenses..................... 2,185,307
Income (loss) before income tax
expense (benefit) and cumulative
effect of a change in accounting
principle......................... 246,697
Net income (loss).................. 203,288
Total assets at end of year........ 96,531,713
--------
* Other areas primarily include Canada, Latin America and the Caribbean.
The following is an analysis of certain asset and liability accounts related to
foreign activities at March 31, 2002 and 2003:
2002 2003
--------------- ---------------
(in millions)
Cash and due from banks............................ (Yen) 251,135 (Yen) 452,142
Interest-earning deposits in other banks........... 2,641,903 3,234,017
--------------- ---------------
Total......................................... (Yen) 2,893,038 (Yen) 3,686,159
=============== ===============
Trading account assets............................. (Yen) 1,868,779 (Yen) 1,825,919
=============== ===============
Investment securities.............................. (Yen) 5,937,177 (Yen) 7,926,797
=============== ===============
Loans--net of unearned income and deferred loan
fees.............................................. (Yen)11,668,017 (Yen)10,051,649
=============== ===============
Deposits, principally time deposits and
certificates of deposit by foreign banks.......... (Yen)11,791,971 (Yen)11,135,306
=============== ===============
Funds borrowed:
Call money, funds purchased, and receivables
under repurchase agreements and securities
lending transactions........................... (Yen) 2,429,634 (Yen) 2,924,532
Other short-term borrowings..................... 622,414 422,061
Long-term debt.................................. 1,833,252 1,206,093
--------------- ---------------
Total......................................... (Yen) 4,885,300 (Yen) 4,552,686
=============== ===============
Trading account liabilities........................ (Yen) 1,456,605 (Yen) 1,274,334
=============== ===============
F-81
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2001 and 2002, the MTFG Group had no cross-border outstandings, as
defined in the Securities Act Industry Guides 3, in any foreign country, which
exceeded 0.75% of consolidated total assets.
The table below shows cross-border outstandings for the country in respect of
which such outstandings totaled between 0.75% and 1% of consolidated total
assets at March 31, 2003.
Cross-border Percentage of
Outstandings Total Assets
------------- -------------
(in millions)
United Kingdom (Yen)810,668 0.84%
30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Quoted market prices, when available, are used to estimate fair values of
financial instruments. However, quoted market prices are not available for a
substantial portion of financial instruments and, therefore, fair values for
such financial instruments are estimated using discounted cash flow models or
other valuation techniques. Although management uses its best judgment in
estimating fair values of financial instruments, estimation methodologies and
assumptions used to estimate fair values are inherently subjective.
Accordingly, the estimates presented herein are not necessarily indicative of
net realizable or liquidation values. The use of different estimation
methodologies and/or market assumptions may have a significant effect on the
estimated fair values. The estimated fair values of financial instruments do
not include valuations of related intangible assets such as core deposits.
The following is a summary of carrying amounts and estimated fair values of
financial instruments at March 31, 2002 and 2003:
2002 2003
----------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
(in billions)
Financial assets:
Cash, due from banks, call loans and funds sold, and receivables
under resale agreements and securities borrowing transactions.... (Yen)10,867 (Yen)10,867 (Yen)11,912 (Yen)11,912
Trading account assets, excluding derivatives...................... 5,020 5,020 4,789 4,789
Investment securities.............................................. 23,555 23,568 24,555 24,567
Loans, net of allowance for credit losses.......................... 48,495 48,741 47,105 47,483
Other financial assets............................................. 1,763 1,763 1,898 1,898
Derivative financial instruments:
Trading activities.............................................. 2,478 2,478 3,574 3,574
Activities qualifying for hedges................................ 13 13 15 15
Financial liabilities:
Non-interest-bearing deposits, call money and funds purchased, and
payables under repurchase agreements and securities lending
transactions..................................................... 14,501 14,501 15,742 15,742
Interest-bearing deposits.......................................... 58,402 58,416 60,882 60,900
Debentures......................................................... 2,269 2,280 636 638
Trading account liabilities, excluding derivatives................. 177 177 206 206
Obligations to return securities received as collateral............ 316 316 950 950
Due to trust account............................................... 2,282 2,282 1,402 1,402
Other short-term borrowings........................................ 3,319 3,319 2,854 2,854
Long-term debt..................................................... 5,184 5,340 5,159 5,378
Other financial liabilities........................................ 2,282 2,282 1,878 1,878
Derivative financial instruments:
Trading activities.............................................. 2,319 2,319 3,397 3,397
Activities qualifying for hedges................................ 2 2 -- --
F-82
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The methodologies and assumptions used to estimate the fair value of the
financial instruments are summarized below.
Cash, due from banks, call loans and funds sold, and receivables under resale
agreements and securities borrowing transactions--For cash, due from banks
including interest-earning deposits, and call loans and funds sold, the
carrying amounts are a reasonable estimate of the fair values because of their
short-term nature and limited credit risk. For receivables under resale
agreements and securities borrowing transactions, the fair values are based on
quoted market prices, when available, or estimated with reference to quoted
market prices for similar instruments when quoted market prices are not
available.
Trading account securities--Trading account securities and short trading
positions of securities are carried at fair value, which is principally based
on quoted market prices, when available. If the quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Investment securities--The fair values of investment securities, where quoted
market prices or secondary market prices are available, are equal to such
market prices. For investment securities, when quoted market prices or
secondary market prices are not available, the fair values are estimated using
quoted market prices for similar securities or based on appraised value as
deemed appropriate by management. The fair value of investment securities other
than those classified as available for sale or being held to maturity (i.e.,
nonmarketable equity securities) at March 31, 2002 and 2003 were not readily
determinable. Therefore, the above summary does not include the carrying
amounts of such investment securities amounting to (Yen)129 billion and
(Yen)145 billion at March 31, 2002 and 2003, respectively.
Loans--The fair values of loans are estimated for groups of similar
characteristics, including type of loan, credit quality and remaining maturity.
In incorporating the credit risk factor, management concluded that the
allowance for credit losses adequately adjusts the related book values for
credit risk. For floating- or adjustable-rate loans, which mature or are
repriced within a short period of time, the carrying values are considered to
be a reasonable estimate of fair values. For fixed-rate loans, market prices
are not generally available and the fair values are estimated by discounting
the estimated future cash flows based on the contracted maturity of the loans.
The discount rates are based on the current market rates corresponding to the
applicable maturity. Where quoted market prices or estimated fair values are
available, primarily for loans to refinancing countries, loans held for
dispositions or sales and certain other foreign loans, the fair values are
based on such market prices and estimated fair values, including secondary
market prices. For nonperforming loans, the fair values are generally
determined on an individual basis by discounting the estimated future cash
flows and may be based on the appraisal value of underlying collateral as
appropriate.
Other financial assets--The estimated fair values of other financial assets,
which primarily include accrued interest receivable, customers' acceptance
liabilities and accounts receivable, approximate their carrying amounts.
Derivative financial instruments--The estimated fair values of derivative
financial instruments are the amounts the MTFG Group would receive or pay to
terminate the contracts at the balance-sheet date, taking into account the
current unrealized gains or losses on open contracts. They are based on market
or dealer quotes when available. Valuation models such as present value and
option pricing models are applied to current market information to estimate
fair values when such quotes are not available.
Non-interest-bearing deposits, call money and funds purchased, payables under
repurchase agreements and securities lending transactions, and obligations to
return securities received as collateral--The fair values of
non-interest-bearing deposits are equal to the amounts payable on demand. For
call money and funds purchased,
F-83
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the carrying amounts are a reasonable estimate of the fair values because of
their short-term nature. For payables under repurchase agreements and
securities lending transactions and obligations to return securities received
as collateral, the fair values are generally based on quoted market prices,
when available, or estimated using quoted market prices for similar instruments
when quoted market prices are not available.
Interest-bearing deposits--The fair values of demand deposits, deposits at
notice, and certificates of deposit maturing within a short period of time are
the amounts payable on demand. Fair values of time deposits and certificates of
deposit maturing after a short period of time are estimated by discounting the
estimated cash flows using the rates currently offered for deposits of similar
remaining maturities or the applicable current market rates.
Debentures--The fair values of debentures are estimated using a discounted cash
flow model based on quoted market rates or, if available, secondary market
rates currently available for debentures with similar terms and remaining
maturities.
Due to trust account--For due to trust account, which reflects a temporary
placement of excess fund from individual trust accounts managed by the trust
banking subsidiary in their fiduciary and trust capacity, the carrying amount
is a reasonable estimate of the fair value due to its nature similar to
short-term funding, including demand deposits and other overnight funds
purchased, in a manner that the balance changes in response to the day-to-day
changes in excess funds placed by the trust accounts.
Other short-term borrowings--For most other short-term borrowings, the carrying
amounts are a reasonable estimate of the fair values because of their
short-term nature. For certain borrowings, fair values are estimated by
discounting the estimated future cash flows using applicable current market
interest rates or comparable rates for similar instruments, which represent the
MTFG Group's cost to raise funds with a similar remaining maturity.
Long-term debt--For convertible bonds and certain subordinated debt, the fair
values are estimated based on quoted market prices of the instruments. The fair
value of other long-term debt are estimated using a discounted cash flow model
based on rates applicable to the MTFG Group for debt with similar terms and
remaining maturities.
Other financial liabilities--The estimated fair values of other financial
liabilities, which primarily include accrued interest payable, bank
acceptances, accounts payable and obligations under standby letters of credit
and guarantees, approximate their carrying amounts. Effective January 1, 2003,
the MTFG Group adopted the initial recognition and measurement provisions of
FIN No. 45, which requires that, for guarantees within the scope of FIN No. 45
issued or amended after December 31, 2002, liability for the fair value of the
obligations undertaken in issuing the guarantees be initially measured at fair
value. The fair values of obligations under standby letters of credit and
guarantees are based on fees received or receivable by the MTFG Group.
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, 2002 and 2003 was not material.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 2002 and 2003. These amounts have not
been comprehensively revalued since that date and, therefore, current estimates
of fair values may have changed significantly from the amounts presented herein.
F-84
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
31. STOCK-BASED COMPENSATION
Two subsidiaries of MTFG, which are Mitsubishi Securities and UNBC, have
several stock-based compensation plans.
Mitsubishi Securities
Under the Code, companies are permitted to purchase their own shares in the
market in order to implement a stock option plan when approved by the
shareholders.
Pursuant to resolutions approved at the general shareholders' meetings,
Mitsubishi Securities offers stock option plans which provide directors,
executive officers, eligible employees and certain other persons with options
to purchase shares (at the respective exercise prices stipulated in each plan)
as follows:
Date of approval at the shareholders' meeting Exercise period Shares
--------------------------------------------- ----------------------------- ---------
June 29, 1999 July 1, 2001 to June 30, 2003 1,575,000
June 29, 2000 July 1, 2002 to June 30, 2005 2,057,000
June 28, 2001 July 1, 2003 to June 30, 2006 2,272,000
---------
Total 5,904,000
=========
The plans provide for the granting of stock options having an exercise price
not less than the market value of Mitsubishi Securities' common stock on the
date of grant. Following is the option activity for the period from September
1, 2002 to March 31, 2003:
Weighted-average
Number of shares exercise price
---------------- ----------------
Outstanding at September 1, 2002 5,512,000 (Yen)1,278
Granted......................... -- --
Exercised....................... -- --
Forfeited....................... -- --
--------- ----------
Outstanding at end of year...... 5,512,000 1,278
========= ==========
Exercisable at end of year...... 3,403,000 (Yen)1,566
========= ==========
The following table details the distribution of stock options outstanding as of
March 31, 2003:
Options exercisable at
Options outstanding at March 31, 2003 March 31, 2003
- --------------------------------------------- ----------------------------
Weighted-average
Range of exercise Number remaining Weighted-average Number Weighted-average
prices outstanding contractual life exercise price exercisable exercise price
----------------- ----------- ---------------- ---------------- ----------- ----------------
(Yen) 812 2,109,000 3.3 years (Yen) 812 -- (Yen) --
1,546-1,595 3,403,000 1.4 1,566 3,403,000 1,566
--------- ---------
5,512,000 3,403,000
========= =========
UNBC
UNBC has two management stock plans. The Year 2000 UnionBanCal Corporation
Stock Plan, effective January 1, 2000 (the "2000 Stock Plan"), and the
UnionBanCal Corporation Management Stock Plan, restated
F-85
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective June 1, 1997 (the "1997 Stock Plan"), have 16.0 million and 6.6
million shares, respectively, of the UNBC's common stock authorized to be
awarded to key employees and outside directors of UNBC at the discretion of the
Executive Compensation and Benefits Committee of the Board of Directors (the
"Committee"). Employees on rotational assignment from BTM are not eligible for
stock awards.
The Committee determines the term of each stock option grant, up to a maximum
of ten years from the date of grant. The exercise price of the options issued
under the Stock Plan shall not be less than the fair market value on the date
the option is granted. Unvested restricted stock issued under the Stock Plan is
shown as a reduction to retained earnings. The value of the restricted shares
at the date of grant is amortized to compensation expense over the vesting
period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 2000, 2001 and 2002, UNBC granted options to non-employee directors and
various key employees, including policy-making officers under the 1997 and 2000
Stock Plans. Under both Stock Plans, options granted to employees vest pro-rata
on each anniversary of the grant date and become fully exercisable three years
from the grant date, provided that the employee has completed the specified
continuous service requirement. The options vest earlier if the employee dies,
is permanently disabled, or retires under certain grant, age, and service
conditions. Options granted to non-employee directors are fully vested on the
grant date and exercisable 33 1/3 percent on each anniversary under the 1997
Stock Plan, and fully vested and exercisable on the grant date under the 2000
Stock Plan. The following is a summary of stock option transactions under the
Stock Plans.
Years ended December 31,
------------------------------------------------------------------------------------
2000 2001 2002
--------------------------- --------------------------- ----------------------------
Number of Weighted-average Number of Weighted-average Number of Weighted-average
shares exercise price shares exercise price shares exercise price
--------- ---------------- --------- ---------------- ---------- ----------------
Options outstanding,
beginning of year........ 3,281,273 $28.46 5,191,899 $28.47 7,939,271 $29.79
Granted................. 2,126,506 27.99 3,448,242 30.03 2,911,652 43.49
Exercised............... (98,004) 13.18 (557,597) 19.02 (2,187,170) 28.57
Forfeited............... (117,876) 32.04 (143,273) 29.91 (148,284) 34.05
--------- --------- ----------
Options outstanding, end of
year..................... 5,191,899 $28.47 7,939,271 $29.79 8,515,469 $34.71
========= ========= ==========
Options exercisable, end of
year..................... 2,135,228 $25.90 3,009,555 $29.53 3,031,478 $31.08
========= ========= ==========
The weighted-average fair value of options granted was $10.21 during 2000,
$10.38 during 2001, and $16.67 during 2002.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 2000, 2001 and 2002:
2000 2001 2002
------- ------- -------
Risk-free interest rate. 6.4% 4.9% 4.9%
Expected lives.......... 5 years 5 years 5 years
Expected volatility..... 44% 45% 46%
Expected dividend yields 3.5% 3.4% 2.3%
F-86
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding.
Options outstanding at December 31, 2002 Options exercisable at December 31, 2002
--------------------------------------------- ----------------------------------------
Weighted-average
Range of exercise Number remaining Weighted-average Number Weighted-average
prices outstanding contractual life exercise price exercisable exercise price
------------------ ----------- ---------------- ---------------- ----------- ----------------
$ 11.25-11.25 33,000 2.3 years $11.25 33,000 $11.25
18.29-25.00 314,392 4.5 22.23 275,285 22.07
27.56-38.04 5,290,575 7.1 30.81 2,648,693 31.84
42.69-48.51 2,877,502 9.2 43.53 74,500 45.91
--------- ---------
8,515,469 3,031,478
========= =========
In 2000, 2001 and 2002, UNBC also granted 13,500 shares, 6,000 shares and 6,000
shares, respectively, of restricted stock to key officers, including
policy-making officers, under the Stock Plan. The awards of restricted stock
vest pro-rata on each anniversary of the grant date and become fully vested
four years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age,
and service conditions. Restricted shareholders have the right to vote their
restricted shares and receive dividends.
The following is a summary of restricted stock transactions under the Stock
Plan.
Years ended December 31,
-----------------------------------------------------------------------------------
2000 2001 2002
--------------------------- --------------------------- ---------------------------
Weighted-average Weighted-average Weighted-average
Number of grant date Number of grant date Number of grant date
shares fair value shares fair value shares fair value
--------- ---------------- --------- ---------------- --------- ----------------
Restricted stock awards
outstanding, beginning of
year..................... 1,496,106 $14.05 1,506,162 $14.11 1,511,526 $14.19
Granted................. 13,500 25.00 6,000 37.10 6,000 45.00
Cancelled............... (3,444) 31.66 (636) 37.47 (459) 32.61
--------- --------- ---------
Restricted stock awards
outstanding, end of year. 1,506,162 $14.11 1,511,526 $14.19 1,517,067 $14.31
========= ========= =========
Restricted stock awards
vested, end of year...... 1,408,696 $13.00 1,469,354 $13.66 1,503,305 $14.09
========= ========= =========
At December 31, 2000, 2001 and 2002, 8,969,424 shares, 5,659,091 shares and
2,890,182 shares, respectively, were available for future grants as either
stock options or restricted stock under the Stock Plan. The number of shares
available for future grants at December 31, 2002 does not include six million
shares authorized, but not registered, during 2002.
Effective January 1, 1997, UNBC established a Performance Share Plan. Eligible
participants may earn performance share awards to be redeemed in cash three
years after the date of grant. Performance shares are linked to shareholder
value in two ways: (1) the market price of the UNBC's common stock; and (2)
return on equity, a performance measure closely linked to value creation.
Eligible participants generally receive grants of performance shares annually.
The total number of performance shares granted under the plan cannot exceed
600,000. UNBC granted 31,500 shares in 2000, 68,000 shares in 2001, and 61,500
shares in 2002. No
F-87
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
performance shares were forfeited in 2000 or 2002. In 2001, 9,000 performance
shares were forfeited. The value of a performance share is equal to the market
price of UNBC's common stock. All cancelled or forfeited performance shares
become available for future grants.
32. PARENT COMPANY ONLY FINANCIAL INFORMATION
Distributions of retained earnings of BTM and Mitsubishi Trust are restricted
in order to meet the minimum capital adequacy requirements under the Banking
Law. Also, retained earnings of these banking subsidiaries are restricted in
accordance with the statutory reserve requirements under the Code (see Notes 20
and 21).
The following table presents the parent company only financial information of
MTFG.
Condensed Balance Sheets
2002 2003
-------------- --------------
(in millions)
Assets:
Cash and interest-earning deposits with banks...... (Yen) 39,212 (Yen) 34,359
Investments in subsidiaries........................ 2,573,874 2,512,591
Investments in convertible bonds of a subsidiary... 266,417 --
Other assets....................................... 19,883 18,764
-------------- --------------
Total assets................................... (Yen)2,899,386 (Yen)2,565,714
============== ==============
Liabilities and shareholders' equity:
Convertible bonds.................................. (Yen) 266,417 (Yen) --
Other liabilities.................................. 6,472 12,777
-------------- --------------
Total liabilities.................................. 272,889 12,777
-------------- --------------
Shareholders' equity.................................. 2,626,497 2,552,937
-------------- --------------
Total liabilities and shareholders' equity..... (Yen)2,899,386 (Yen)2,565,714
============== ==============
F-88
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Condensed Statements of Operations
2001 2002 2003
------------ ------------- ------------
(in millions)
Income:
Dividends from subsidiaries........................... (Yen) -- (Yen) 67,523 (Yen) 22,067
Management fees from subsidiaries..................... -- 4,967 3,814
Interest income....................................... -- 7,145 4,736
Other income.......................................... -- 191 126
------------ ------------- ------------
Total income............................................. -- 79,826 30,743
------------ ------------- ------------
Expense:
Operating expenses.................................... -- 5,426 3,159
Interest expense...................................... -- 7,166 4,730
Other expense......................................... -- 49 366
------------ ------------- ------------
Total expense..................................... -- 12,641 8,255
------------ ------------- ------------
Equity in undistributed net income (loss) of subsidiaries (59,174) (283,855) 181,750
------------ ------------- ------------
Income (loss) before income tax expense or benefit....... (59,174) (216,670) 204,238
Income tax expense (benefit)............................. -- (136) 950
------------ ------------- ------------
Net income (loss)........................................ (Yen)(59,174) (Yen)(216,534) (Yen)203,288
============ ============= ============
Condensed Statements of Cash Flows
2002 2003
------------- -------------
(in millions)
Operating activities:
Net income(loss)............................................................. (Yen)(216,534) (Yen) 203,288
Adjustments and other........................................................ 283,365 (181,203)
------------- -------------
Net cash provided by operating activities....................................... 66,831 22,085
------------- -------------
Investing activities:
Proceeds from maturities of investments in convertible bonds of a subsidiary. -- 243,804
Net decrease(increase) in interest-earning deposits with banks............... (38,700) 5,873
Purchase of equity investment in a subsidiary................................ (12,827) (210,277)
Other........................................................................ (14,639) (3,830)
------------- -------------
Net cash provided by (used in) investing activities............................. (66,166) 35,570
------------- -------------
Financing activities:
Proceeds from sales of treasury stock........................................ 6,998 --
Payments to acquire treasury stock........................................... (7,381) (965)
Proceeds from issurance of new shares of common stock........................ -- 222,172
Repayment of convertible bonds............................................... -- (243,804)
Dividends paid............................................................... -- (46,915)
Other........................................................................ 230 12,877
------------- -------------
Net cash used in financing activities........................................... (153) (56,635)
------------- -------------
Net increase in cash and cash equivalents....................................... 512 1,020
------------- -------------
Cash and cash equivalents at end of year........................................ (Yen) 512 (Yen) 1,532
============= =============
--------
Note -- For the year ended March 31, 2001, there were no activities involving
cash flows.
F-89
MITSUBISHI TOKYO FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
33. EVENTS SINCE MARCH 31, 2003
Approval of Dividends
On June 27, 2003, the shareholders approved payment of cash dividends to the
shareholders of record on March 31, 2003 of (Yen)41,250 per share of Class 1
preferred stock, totaling (Yen)3,357 million, of (Yen)8,100 per share of Class
2 preferred stock, totaling (Yen)810 million, and of (Yen)4,000 per share of
common stock, totaling (Yen)24,922 million.
Legal Proceedings for Local Taxes in Tokyo
On September 17, 2003, attorneys representing the banks, including BTM and
Mitsubishi Trust, came to a basic agreement as part of the proceedings in the
Supreme Court discussed in Note 9 with attorneys representing the Tokyo
Metropolitan Government as to the conditions of a settlement. The conditions of
the settlement include (a) a revision of the applicable tax rate to 0.9% from
the current 3.0%, effective retroactive to the date of the enactment of the
local tax in the year ended March 31, 2001 and (b) a refund representing the
difference between the amount already paid by the banks and the amount computed
based on the newly enacted rate plus accrued interest. The settlement is
subject to the approval of each bank participating in the litigation and an
amendment by the Tokyo Metropolitan Assembly to the municipal ordinance
imposing the local tax. If the banks and the Tokyo Metropolitan Government
settle pursuant to the terms contemplated by the basic agreement, the MTFG
Group will be entitled to a tax refund for the years ended March 31, 2001, 2002
and 2003 amounting to (Yen)39.7 billion plus accrued interest. As the
settlement has not been finalized, no amount related to the refund has been
recorded in the consolidated financial statements.
* * * * *
F-90
Signature
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
MITSUBISHI TOKYO FINANCIAL
GROUP, INC.
By: /s/ SHIGEMITSU MIKI
-----------------------------
Name: Shigemitsu Miki
Title: President and Chief Executive
Officer
Date:September 29, 2003
EXHIBIT INDEX
Exhibit Description
------- -----------
1(a) Articles of Incorporation of Mitsubishi Tokyo Financial Group, Inc., as amended and restated on June
27, 2003.
1(b) Corporation Meetings Regulations of Mitsubishi Tokyo Financial Group, Inc., as adopted on April 2,
2001.*
1(c) Board of Directors Regulations of Mitsubishi Tokyo Financial Group, Inc., as amended on June 27,
2002.*
1(d) Share Handling Regulations of Mitsubishi Tokyo Financial Group, Inc., as amended and restated on
June 1, 2003.
2(a) Form of stock certificates.
2(b) Form of American Depositary Receipt.**
2(c) Deposit Agreement, dated as of April 2, 2001, among Mitsubishi Tokyo Financial Group, Inc., The
Bank of New York and the holders from time to time of American Depositary Receipts issued
thereunder.**
2(d) Indenture dated as of October 11, 1995 between MBL International Finance (Bermuda) Trust, The
Mitsubishi Bank, Limited and The Bank of New York, and First Supplemental Indenture dated as of
April 2, 2001 between MBL International Finance (Bermuda) Trust, The Bank of Tokyo-Mitsubishi,
Ltd. (as successor to The Mitsubishi Bank, Limited), Mitsubishi Tokyo Financial Group, Inc. and The
Bank of New York.*
4(a) Plan of Reorganization for business combination by and among Bank of Tokyo-Mitsubishi,
Mitsubishi Trust Bank and Nippon Trust Bank.*
4(b) Merger Agreement, dated as of April 8, 2002, among KOKUSAI Securities Co., Ltd., Tokyo-
Mitsubishi Securities Co., Ltd., Tokyo-Mitsubishi Personal Securities Co., Ltd. and Issei Securities
Co., Ltd.*
8 Subsidiaries of the Company--see "Item 4.C. Information on the Company--Organizational
Structure."*
31 Certifications required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR
240.15d-14(a)).
32 Certifications required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 or Chapter 63 of Title 18 of the United States Code (18 U.S.C.
1350).
99 Consent of Auditors.
--------
* Incorporated by reference from the Annual Report on Form 20-F filed on
August 12, 2002.
** Incorporated by reference from the Registration Statement on Form F-6 (Reg.
No. 333-13338) filed on April 2, 2001.