UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of February, 2004
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MITSUBISHI TOKYO FINANCIAL GROUP, INC.
(Translation of registrant's name into English)
4-1, Marunouchi 2-chome, Chiyoda-ku
Tokyo 100-6326, Japan
(Address of principal executive offices)
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[Indicate by check mark whether the registrant files or
will file annual reports under cover Form 20-F or Form 40-F.]
Form 20-F __X__ Form 40-F _____
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.]
Yes ____ No __X__
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 25, 2004
MITSUBISHI TOKYO FINANCIAL GROUP, INC.
By: /s/ Atsushi Inamura
-------------------------------------
Name: Atsushi Inamura
Title: Chief Manager, General Affairs
Corporate Administration Division
Mitsubishi Tokyo Financial Group, Inc.
Mitsubishi Tokyo Financial Group, Inc. (MTFG) is a holding company
established to oversee the operations of its wholly-owned subsidiaries The Bank
of Tokyo-Mitsubishi, Ltd. (BTM) and The Mitsubishi Trust and Banking
Corporation (MTBC), and their subsidiaries. Its primary responsibilities center
on facilitating business synergies among the entities of the Group, on setting
the Group's overall strategic direction, and on managing the Group's risk
globally. Shares of the holding company are listed on the Tokyo, Osaka, New
York (NYSE ticker: MTF), and London stock exchanges. Group member banks BTM and
MTBC are leading commercial and trust banks, respectively. BTM offers an
extensive scope of commercial and investment banking products and services. It
also provides trust and asset management services in close cooperation with
MTBC. The BTM Group's global network, spanning over 40 countries, is unrivaled
among its Japanese peers. MTBC provides a full array of trust and banking
offerings to meet the financing and investment needs of retail and corporate
clients in Japan and around the world. These include pension, asset management
and administration, fiduciary, real estate, stock transfer agency, financing,
and other services.
CONTENTS
Financial Highlights and Ratios..................................... 1
Message from Management............................................. 2
Topics.............................................................. 5
Financial Review.................................................... 9
Market Risk......................................................... 37
Condensed Consolidated Financial Statements......................... 38
Condensed Consolidated Balance Sheets............................... 39
Condensed Consolidated Statements of Income......................... 40
Condensed Consolidated Statements of Changes in Equity from Nonowner
Sources........................................................... 41
Condensed Consolidated Statements of Shareholders' Equity........... 42
Condensed Consolidated Statements of Cash Flows..................... 43
Notes to Condensed Consolidated Financial Statements................ 44
Average Balance Sheets, Interest and Average Rates.................. 61
All figures contained in this report are calculated according to U.S. GAAP,
unless otherwise noted.
This document contains statements that constitute forward-looking statements
within the meaning of the United States Private Securities Litigation Reform
Act of 1995. Such forward-looking statements do not represent any guarantee by
management of future performance. In addition, certain forward-looking
statements represent targets that management will strive to achieve by
implementing MTFG's business strategies. Such targets are not projections, do
not represent management's current estimates, and may not be achieved. All
forward-looking statements involve risks and uncertainties. MTFG may not be
successful in implementing its business strategies, and management may fail to
achieve its targets, for a wide range of possible reasons, including adverse
economic conditions in Japan, the United States, or other markets; declining
real estate or stock prices; additional corporate bankruptcies or additional
problems in business sectors to which MTFG companies lend; difficulties or
delays in integrating MTFG's businesses and achieving desired cost savings;
increased competitive pressures; changes in laws and regulations applicable to
MTFG's businesses; and adverse changes in Japanese economic policies. Please
see the annual report on Form 20-F for the fiscal year ended March 31, 2003,
filed by MTFG, for additional information regarding the risks in our businesses.
Financial Highlights and Ratios (Unaudited)
Six months ended September 30,
-------------------------------------------------
2002 2003
--------------- --------------------------------
Yen Yen US dollars /(1)/
--------------- ---------------- ---------------
(in millions, except per share data and
percentages)
Income statement data:
Net interest income....................................................... (Yen) 532,716 (Yen) 518,697 $ 4,655
Provision (credit) for credit losses...................................... 232,632 (130,675) (1,173)
Non-interest income....................................................... 571,452 713,967 6,407
Non-interest expense...................................................... 603,661 582,689 5,229
Income taxes.............................................................. 163,622 251,794 2,260
Cumulative effect of a change in accounting principle, net of tax......... (532) -- --
Net income................................................................ 103,721 528,856 4,746
Net income available to common shareholders............................... 95,385 524,688 4,709
Amounts per share (in yen):
Basic earnings per common share--income available to common
shareholders before cumulative effect of a change in accounting
principle................................................................ (Yen) 17,191.86 (Yen) 83,825.00 $ 752.27
Basic earnings per common share--net income available to common
shareholders............................................................. 17,096.50 83,825.00 752.27
Diluted earnings per common share--income available to common
shareholders before cumulative effect of a change in accounting
principle................................................................ 15,147.97 80,512.47 722.54
Diluted earnings per common share--net income available to common
shareholders............................................................. 15,057.33 80,512.47 722.54
Cash dividends per share declared during the period--common shares........ 6,000.00 4,000.00 35.90
Cash dividends per share declared during the period--preferred shares
(Class 1)................................................................ 82,500.00 41,250.00 370.19
Cash dividends per share declared during the period--preferred shares
(Class 2)................................................................ 16,200.00 8,100.00 72.69
Balance sheet data:
Total assets.............................................................. (Yen)92,316,029 (Yen)101,848,779 $914,016
Loans, net of allowance for credit losses................................. 46,520,013 46,900,599 420,897
Total liabilities......................................................... 89,969,890 98,625,301 885,088
Deposits.................................................................. 63,844,120 69,856,596 626,910
Shareholders' equity...................................................... 2,346,139 3,223,478 28,928
Average balances:
Total assets.............................................................. (Yen)92,940,735 (Yen)100,524,201 $902,129
Interest-earning assets................................................... 85,555,468 90,074,822 808,353
Interest-bearing liabilities.............................................. 78,538,741 83,865,889 752,633
Shareholders' equity...................................................... 2,534,166 2,661,086 23,881
Return on equity and assets:
Net income available to common shareholders as a percentage of total
average assets /(2)/..................................................... 0.20% 1.04% 1.04%
Net income available to common shareholders as a percentage of
average shareholders' equity /(2)/....................................... 7.51% 39.33% 39.33%
Net interest income as a percentage of total average interest-earning
assets /(2)/............................................................. 1.24% 1.15% 1.15%
Average shareholders' equity as a percentage of total average assets...... 2.73% 2.65% 2.65%
Credit quality data:
Allowance for credit losses............................................... (Yen) 1,571,232 (Yen) 1,069,044 $ 9,594
Allowance for credit losses as a percentage of loans...................... 3.27% 2.23% 2.23%
Nonaccrual and restructured loans, and accruing loans contractually past
due 90 days or more...................................................... (Yen) 3,571,818 (Yen) 2,234,265 $ 20,051
Nonaccrual and restructured loans, and accruing loans contractually past
due 90 days or more as a percentage of loans............................. 7.43% 4.66% 4.66%
Net loan charge-offs...................................................... (Yen) 383,610 (Yen) 157,375 $ 1,412
Net loan charge-offs as a percentage of average loans /(2)/............... 1.54% 0.65% 0.65%
Average interest rate spread /(2)/........................................ 1.18% 1.11% 1.11%
Risk-adjusted capital ratio calculated under Japanese GAAP................ 10.49% 12.44% 12.44%
--------
(1)For the convenience of readers, the US dollar amounts are presented as
translations of Japanese yen amounts at the rate of (Yen)111.43=US$1.00, the
noon buying rate on September 30, 2003 in New York City for cable transfers
in Japanese yen as certified for customs purposes by the Federal Reserve
Bank of New York.
(2)Annualized.
1
Message from Management
Mitsubishi Tokyo Financial Group, Inc. is pleased to report on its financial
results and business activities for the six-month period from April 1, 2003 to
September 30, 2003.
During this period the global financial and economic environment showed
signs of improvement, with a reduction of military operations in Iraq, control
of the SARS epidemic, and in particular, clear signs of recovery in the U.S.
economy. In Japan also there was some brighter economic news, as exports and
production picked up and capital investment increased. Deflationary pressure
remained, however, and consumer prices continued to fall.
Short-term market interest rates in Japan remained close to zero throughout
the period under review, although long-term rates rose significantly after
falling to a record low in June. Interest rates were also low in the U.S. and
in the euro zone. In the foreign exchange market, the dollar/yen exchange rate
generally moved between 115 and 120 yen to the dollar. However, following the
September 20 meeting of finance ministers and central bank governors from the
G7 nations, the value of the yen started to appreciate rapidly.
MTFG made considerable progress in growing its profitability during this
six-month period, and we are also confident that we have now overcome the
issues associated with non-performing loans (NPLs) and our equity portfolio.
This success has in turn laid the foundations for a new stage in the growth and
integration of MTFG.
Interim financial results
Net income for the six months ended September 30, 2003 was (Yen)528.9
billion, an increase of (Yen)425.2 billion, or 409.9% from the six months ended
September 30, 2002, and diluted earnings per common share for the period were
(Yen)80,512.47, an increase of (Yen)65,455.14 from the comparable period in
fiscal 2002. This major improvement in our operating results was primarily
attributable to a reversal of our allowance for credit losses, an increase in
non-interest income, and a decrease in non-interest expense.
The reversal of the allowance for credit losses of (Yen)130.7 billion for
the six months ended September 30, 2003, compared with a provision for credit
losses of (Yen)232.6 billion for the comparable period in fiscal 2002. This
significant contribution to income was due mainly to improvement of our loan
portfolio through disposals of nonperforming loans and the more stable credit
status of borrowers in Japan as evidenced by the decreased number of bankruptcy
filings during the period under review.
Net interest income for the six months ended September 30, 2003 was
(Yen)518.7 billion, a decrease of (Yen)14.0 billion, or 2.6%, from the first
half of fiscal 2002. This decrease was due primarily to a decline in the
average interest rate spread reflecting further decreases in interest rates
overseas.
Non-interest income increased (Yen)142.5 billion, or 24.9%, to (Yen)714.0
billion. This increase was primarily attributable to an increase of (Yen)146.2
billion in net foreign exchange gains and an increase of (Yen)120.0 billion in
net investment securities gains. These increases were partially offset by a
decrease of (Yen)127.5 billion in net trading account profits.
Non-interest expense decreased (Yen)21.0 billion to (Yen)582.7 billion. The
decrease primarily reflected the fact that non-interest expense for the
previous interim period included a (Yen)22.5 billion loss resulting from the
decrease in net assets in a subsidiary that was accounted for as a sale in
connection with the merger of four Group securities companies.
2
MTFG's risk adjusted capital ratio, calculated under accounting principles
generally accepted in Japan, increased to 12.44% at September 30, 2003 from
10.84% at March 31, 2003 and the Tier 1 capital ratio also improved to 6.75%
from a level of 5.68% at March 31, 2003.
Business strategy
MTFG's operating environment continues to change rapidly as the needs of
retail and corporate customers become more sophisticated and diverse amid
ongoing deregulation and expansion of capital markets. In such a rapidly
evolving environment MTFG's financial health and the fact that we are not
supported by public funds give us a considerable competitive advantage over our
peers, and the strategic flexibility to move to a new stage of our development.
In addition, MTFG's rich resources in our core competencies position us well to
create new value for our customers and our Group.
In December 2003 we announced a reshaping of the entire Group's business
model to allow us to pursue this opportunity. Utilizing the respective
strengths of BTM, MTBC and Mitsubishi Securities we will reorganize from a
vertical to a horizontal structure, concentrating on three core business areas:
retail, corporate and trust assets.
We have also set an aspiration for the Group of becoming one of the world's
top ten financial institutions by market capitalization within three years.
This aspiration is underpinned by our targets (under Japanese GAAP) of a
consolidated return on equity of 14-15% in fiscal 2006 and an expense ratio in
the middle of the 40-50% range in that fiscal year. In particular we are aiming
for the contribution from our three core businesses to grow from around 50% of
total net operating profits in fiscal 2002, to around 75% by fiscal 2006, as
these businesses drive strong growth in net operating profits.
In this new stage of MTFG's development, which we have designated 'Towards
our target - Global Top 10', we will pursue a much more integrated strategy,
shifting the axis of our approach such that our basic strategic focus is on
customer needs rather than business type.
We have identified three key levels of value creation in our new business
model and underlying each of these is our determination to evolve from the
pursuit of synergies by combination to the pursuit of synergies by integration.
In the first level we plan to eliminate duplication and pursue scale benefits.
In the second level, on a Group-wide basis, we aim to increase product
cross-selling and face customers as a seamless organization. The third level of
value creation, which lies at the core of our pursuit of synergy through
integration, is to significantly grow income through introducing new service
channels.
MTFG Plaza, a new, integrated financial services channel providing
comprehensive financial services for retail clients is one of the highlights of
our channel strategy. Another new initiative in our retail business is the new
Comprehensive Card that we plan to launch in early fiscal 2004. Similarly, in
our corporate business we will implement our Global Partner strategy that
integrates our banking, trust and securities businesses as we seek to deliver
new value to our customers. Our plan to integrate two Group asset management
companies further illustrates our pursuit of value through integration and our
determination to eliminate duplication.
In order to fully realize our aspirations we will adopt an integrated
business group system and enhance the role of the holding company, from a
strategic coordination body to become the provider of integrated strategic
management for the Group. Under the new system, commencing in April 2004, MTFG
will formulate strategic decisions on an integrated basis for the whole Group;
these will then be implemented by Group members. We will also make some
adjustments
3
to our consolidated governance system, strengthening the role of MTFG's
Executive Committee and increasing the number of outside directors. Moreover,
throughout the Group, management will strive to encourage a mindset that
prioritizes overall benefit to the consolidated Group. All employees must also
adopt the viewpoint of the customer, set high targets for their achievements
and be results oriented, and top management will lead change in the Group by
changing themselves.
MTFG is moving to a new stage of its development as a diversified,
comprehensive financial services Group. We have a dynamic new business model
that will allow us to operate on a more efficient, integrated basis, and a
clear strategy for growth. On behalf of the management and staff of the Group
we would like to thank all our stakeholders for their continuing support for
MTFG as we work together to fulfill our aspirations and to meet the challenges
of the future.
February 2004
Akio Utsumi Shigemitsu Miki
Chairman & Co-CEO President & CEO
4
Topics
During the first half of fiscal 2003, MTFG and its group companies continued to
make steady progress in each of the Group's core businesses of banking, trust
banking, and securities
MTFG's public offering and sale of common stock named Asia-Pacific issue of the
year
MTFG's March 2003 public offering and sale of common stock was named
'Asia-Pacific Equity Issue of the Year' by International Financing Review. IFR
selected MTFG's offering as overall the best issue made in the region between
January and December 2003. The offering was the first time in 13 years that a
Japanese financial institution had raised capital by issuing common stock and
it was the first ever global offering of common stock by a Japanese financial
institution in the U.S., Europe and Japan. In addition, this successful issue
increased both the amount and quality of MTFG's capital during extremely severe
economic and market conditions.
MTFG Plaza
MTFG Plaza is a new comprehensive financial services channel for retail
customers, that aims to deliver the best products and services to customers
through fully integrated joint branches in a prompt and convenient fashion. The
first MTFG Plaza will be opened in Tokorozawa City, Saitama Prefecture on
February 23, 2004.
The Tokorozawa MTFG Plaza will be a large operation serviced by around 130
staff and providing the services of foreign exchange specialist World Currency
Shop as well as those of The Bank of Tokyo-Mitsubishi, Ltd. (BTM), The
Mitsubishi Trust and Banking Corporation (MTBC), and Mitsubishi Securities Co.,
Ltd. (Mitsubishi Securities).
Under integrated management, the outlet will offer onestop access to the
combined financial services of MTFG in an easy-to-use and convenient format.
The BTM Loan Plaza, MTBC Trust Plaza (real estate services), and World Currency
Shop at Tokorozawa MTFG Plaza will be open in the evenings and on Saturdays and
Sundays, a first in the Japanese financial services industry.
International business
The scale and profitability of MTFG's overseas operations continued to
exceed those of its main Japanese competitors. For the six months to September
30, 2003, under Japanese GAAP, some 31.4% of MTFG's ordinary income came from
overseas operations, more than double the percentage of its nearest rival.
Project Finance International (PFI) magazine's decision to award MTFG six
'Deals of the Year', a 'Loan of the Year' award from International Financing
Review magazine and MTFG's rise to 8th position in PFI's ranking of global lead
arrangers for 2003 further illustrate the strength of our global network.
China
BTM has moved rapidly to expand Renminbi banking services to support its
customers' growing businesses in China. In October 2003, the Tianjin branch
became BTM's fourth branch to receive permission to conduct Renminbi business,
and from January 2004 began providing Renminbi financing, deposit, and
settlement services in addition to BTM's branches in Shenzhen, Shanghai and
Dalian.
In December 2003, BTM's Shanghai branch started Renminbi banking services
for customers in Chongqing and Chengdu in Sichuan Province and other parts of
inland China. It also started a factoring service for Renminbi-based account
receivables to meet the financing and off-balance sheet requirements of its
customers.
5
Renminbi banking services for Chinese companies are also opening up, and
once BTM receives permission to start this business it will establish a
factoring service for account receivables with Chinese companies to enable its
customers to hedge their payment risk.
Retail banking
Significant achievements in our retail businesses included the following
(under Japanese GAAP):
BTM succeeded in raising the amount of newly extended residential mortgage
loans by 45% to (Yen)860 billion during the six months to September 30, 2003
primarily due to the introduction of a new 30-year fixed rate loan. Sales of
equity investment trusts, insurance and investment pensions soared 38% to
(Yen)200 billion compared with the second half of fiscal 2002, as BTM launched
10 new products. The number of new accounts for the Main Bank service, BTM's
core platform for retail customers, continued to grow during the first half,
rising 21% to 2.1 million. Finally, foreign currency deposits by individuals at
BTM continued to rise, with the total climbing 10% during the first half of the
fiscal year to (Yen)800 billion by September 30.
Comprehensive Card
In November 2003, BTM set up the Strategic Comprehensive Card & Credit
Division to oversee management of its multi-functional comprehensive card.
Scheduled for release in fiscal 2004, the comprehensive card incorporates
e-money, debit and credit card functions as well as biometric recognition. BTM
plans to issue 0.5 to 1 million comprehensive cards annually, making this the
first card of its type to be launched on such a scale. BTM believes that the
enhanced convenience and security features of the new card will improve
customer convenience, lead to an increase in customer transaction volume, and
become a significant new revenue source.
Further increase in convenience store ATMs
By the end of September 2003, BTM had increased the number of ATMs installed
in convenience stores more than 30% from the year before to 14,417. Open all
day, every day, in tens of thousands of locations across Japan, convenience
stores have become an integral part of consumers' daily lives and a key
distribution channel for a wide range of consumer products and services. In
expanding its network of convenience store ATMs, BTM further improves customer
convenience whilst also allowing it to reduce its own branch network and
related costs.
BTM providing MTBC trust agency services for individuals at all its branches
In July 2003, BTM started providing MTBC's trust products aimed at
individual customers at all its branches (excluding sub-branches), a first for
a non-trust bank. The trust products provided are: the Lifetime Gift Trust or
'Personal Trust'; the Equity Disposal Trust; and the Marketable Securities
Administration Trust, and these are tailor made to meet the specific needs of
individual customers. In this way MTFG is taking maximum advantage of BTM's
extensive branch network, while leveraging MTBC's specialist expertise, to
provide rapid and precise solutions to its customers' needs for asset
management and asset administration.
Increased business with SMEs
In October 2003, BTM established a special department responsible for the
planning, development and marketing of loans to small- and medium-sized
businesses. To speed up credit assessment, the bank also began to utilize a
standard assessment model and raised the approval limits of branch managers.
Using a combination of channels such as the internet and BTM's network of 120
branches geared to corporate customers, the bank aims to enhance customer
services.
6
BTM aims to improve its product offerings and increase unsecured lending to
small- and medium-sized companies, a business area where lending spreads are
relatively good. In this fiscal year BTM aims to grow new unsecured lending to
SMEs by (Yen)300 billion, building on the (Yen)100 billion newly provided in
the first half of the fiscal year.
Japan's leading pension fund manager
MTBC reaffirmed its position as Japan's top corporate pension fund manager,
recording the industry's largest growth in funds under management during the
first half of the fiscal year. As of September 30, 2003, MTBC's corporate
pension fund assets under management grew to (Yen)7.66 trillion as MTBC
recorded leading market shares of 20% in pension trust assets and 31% in
pension tokkin (specified money trusts for pension plans).
MTBC offers a broad range of pension services including pension plan
consulting, pension asset and liability management (ALM), and asset management
consulting and provides clients with top quality products and advice across all
major asset classes. Customers' appreciation of the range and quality of MTBC's
services was illustrated by the trust bank's top ranking in a survey by Rating
and Investment Information, Inc. (R&I) in November 2003 that asked pension
manager sponsors which manager they would most like to employ.
MTBC real estate investment funds for corporate pension funds
In August 2003, MTBC became the first Japanese trust bank to create and sell
a real estate investment fund to corporate pension funds. MTBC sold (Yen)5
billion of this approximately (Yen)25 billion fund to corporate pension funds,
and followed up this success in November with a second fund of approximately
(Yen)16 billion, of which (Yen)5.3 billion was sold to corporate pension funds.
These funds manage beneficial rights to real estate created by the
securitization of real estate, and meet growing requirements of corporate
pension funds for stable dividends and a diversified investment portfolio.
Looking ahead, MTBC plans to develop and market further leading-edge investment
products aligned with the needs of corporate pension funds.
MTBC asset succession planning services
In October 2003, MTBC launched a range of new asset succession planning
services that provide long-term asset plans for individuals. These services
help customers to make decisions on asset planning by analyzing their existing
assets then proposing long-term asset plans to meet their needs. The service
also adjusts plans to take into account changes in the financial markets, the
economy, and the taxation system, as well as changes in the circumstances of
MTBC's customers.
Underpinning this new service from MTBC is its long experience in asset
management, real estate, and inheritance that gives it a powerful advantage in
helping each of its customers choose the optimum plan for their financial
assets.
MTBC's IPO club
In December 2003, in another new initiative MTBC established a membership
club that provides information to corporate clients aiming to newly list their
shares. The club aims to support the corporate development of members as they
move towards IPO by providing them with valuable information and networking
opportunities.
7
The club's roles include distributing e-zines carrying a wide variety of
articles about going public, holding seminars, offering advice on making
business plans, and providing models for articles of incorporation.
The club also holds a range of study groups for managers and provides advice
on capital structure planning and on issues such as business succession and
asset management. In these ways MTBC endeavors to fully support corporate
customers that are considering an IPO.
Mitsubishi Securities
Mitsubishi Securities, a consolidated subsidiary, has moved rapidly to
streamline its branch network and grow revenues following its formation in
September 2002. In the six months to September 30, 2003, under Japanese GAAP,
Mitsubishi Securities returned to profit, reporting consolidated net income of
(Yen)20.5 billion. Underlying this improved performance was a 1,226% increase
in net gain on trading securities and an approximately 76% increase in
commissions.
Mitsubishi Securities is also promoting its Retail Revival Plan and
completed, eight months ahead of schedule, the reduction of the number of
retail branches from 95 to 68 as of July 31, 2003 through closure or
integration. As of January 31, 2004, 28 of these are joint branches that
Mitsubishi Securities shares with BTM or both BTM and MTBC.
In 2003, Mitsubishi Securities was joint bookrunner for Volkswagen Financial
Services' samurai bond issue, which was selected as International Financing
Review's 'Samurai Bond Deal of Year'. Further evidence of the growing
reputation of Mitsubishi Securities was its rise to fourth place overall in The
Nikkei Financial Daily's 2003 ranking of companies in the Japanese securities
industry.
UnionBanCal Corporation
In 2003, UnionBanCal Corporation (UNBC), a consolidated subsidiary of BTM,
extended its excellent record of strong growth. For the year ended December 31,
2003, under U.S. GAAP, UNBC's net income rose 11.2% from the previous year to
$587.1 million, while operating earnings per diluted common share rose 15.8% to
$3.89. The growth in earnings was driven by strong non-interest income growth
and a significant improvement in asset quality.
In September, UNBC announced it had agreed to merge Business Bank of
California into its subsidiary, Union Bank of California (UBOC). The merger
adds 15 full-service branches to UBOC's branch network, further extending
UBOC's operations in California, where it is the second-largest bank
headquartered in the state with nearly 300 branches.
8
FINANCIAL REVIEW
9
Financial Review
Introduction
We are a holding company for The Bank of Tokyo-Mitsubishi, Ltd. ("BTM") and
The Mitsubishi Trust and Banking Corporation ("MTBC"). Through our subsidiary
banks and their affiliates, we provide a broad range of financial services,
including commercial banking, securities and investment banking, asset
management and trust banking services, to individual and corporate customers.
The financial services 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 and Japanese financial
institutions in general. 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
Legal Proceedings for Local Taxes
On October 8, 2003, BTM and MTBC entered into a settlement-at-court with the
Tokyo Metropolitan Government and the Tokyo Governor and withdrew their
complaints regarding the Tokyo Metropolitan Government's local tax on large
banks. The settlement included (a) a revision of the applicable tax rate to
0.9% from 3.0%, effective retroactive to the date of the 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. On October 7, 2003, BTM
and MTBC received an aggregate tax refund plus accrued interest amounting to
(Yen)42.0 billion. As the settlement had not been finalized at September 30,
2003, we have not recorded any gain in the condensed consolidated financial
statements for the six months period ended September 30, 2003.
Further Integration of Investment Banking and Securities Businesses
After the formation of Mitsubishi Securities, a subsidiary of BTM, in
September 2002, BTM transferred part of its investment banking business,
including securitization, M&A advisory and derivatives, to Mitsubishi
Securities. As part of streamlining our investment banking and securities
businesses, certain foreign subsidiaries of BTM located in the United States,
Hong Kong and Singapore were placed under the control of Mitsubishi Securities
during the six months ended September 30, 2003.
Planned Transfer to the Japanese Government of the Substitutional Portion of
Employee Pension Fund Liabilities
The planned transfer of the substitutional portion of employee pension fund
liabilities discussed in our Annual Report on Form 20-F ("Form 20-F") is still
in process and the final impact of the transfer is currently not determinable.
For an explanation of the accounting treatment, see "Recently Issued Accounting
Pronouncements" below.
10
Dissolution of Mortgage Securities Subsidiary
We have decided to dissolve The Diamond Mortgage Co., Ltd. due to the
adverse business environment for the domestic mortgage securities business. The
subsidiary has already ceased its operations but is in the process of ongoing
liquidation procedures. The progress of liquidation did not materially impact
our results of operations for the six months ended September 30, 2003.
Business Environment
During the six months ended September 30, 2003, as uncertainty in the
economy decreased with the end of the war in Iraq and the containment of the
SARS epidemic, the economies outside of Japan, especially the United States
economy, showed signs of recovery. In Japan several trends indicated signs of
recovery, such as reports that exports and production increased and that
capital investment sentiment improved. However, price deflation continued as
indicated by the decline of consumer prices.
Looking at the money market in the United States, the Federal Fund Rate was
lowered to 1.00% in June 2003. In the EU, the European Central Bank's policy
rate was reduced to 2.00% in June 2003. In Japan, The Bank of Japan raised the
target balance for the current account to around (Yen)27 to (Yen)30 trillion in
May 2003 in order to ensure liquidity in the Japanese financial market. In
January 2004, The Bank of Japan further raised the target balance for the
current account to around (Yen)30 to (Yen)35 trillion. During the six months
ended September 30, 2003, while the short-term interest rate remained at near
zero percent, the yield on 10-year government bonds, used as a benchmark for
long-term interest rates, started the period at around 0.7% and finished the
period at around 1.4% after declining to the historical low level of 0.4% in
June 2003. Between October 2003 and January 2004, the yield fluctuated in the
range of 1.2% to 1.5%.
The Japanese stock markets have experienced a significant upturn after May
2003. The Nikkei Stock Average, which is an average of 225 stocks listed on the
Tokyo Stock Exchange, gained 28.2% from 7,972.71 at March 31, 2003 to 10,219.05
at September 30, 2003. Between October 2003 and January 2004, the Nikkei Stock
Average has been around 10,000 and ended at 10,783.61 on January 30, 2004.
In the foreign exchange markets, although the Japanese yen-US dollar
exchange rate had generally remained in the range of (Yen)115 to (Yen)120,
after the meeting of the G-7 finance ministers and central bank governors held
on September 20, 2003, the value of the Japanese yen rose rapidly against the
US dollar. The noon buying rates of the Federal Reserve Bank of New York were
(Yen)118.07 per $1.00 at March 31, 2003 and (Yen)111.43 per $1.00 at September
30, 2003. Between October 2003 and January 2004, the noon buying rates
fluctuated in the range of (Yen)105.52 per $1.00 to (Yen)111.20 per $1.00, and
the trend of yen appreciation against the US dollar continued.
The number of corporate bankruptcy filings in Japan during the six months
ended September 30, 2003 decreased 13.5% as compared with the corresponding
period in the previous fiscal year, falling below 9,000 cases for the first
time in four years on a half-term basis.
Critical Accounting Estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles and prevailing practices within the banking industry in
the United States of America ("US GAAP"). The preparation of financial
statements in accordance with US GAAP requires
11
management to make difficult, complex or subjective judgments regarding the
valuation of assets and liabilities. The accounting policies are fundamental to
understanding our operating and financial review and prospects. Critical
accounting estimates include impairment of investment securities, allowance for
credit losses, valuation of deferred tax assets, accounting for goodwill,
accrued severance indemnities and pension liabilities, and valuation of
financial instruments with no available market prices. For a further discussion
of our critical accounting estimates, see our Form 20-F.
New Accounting Pronouncements Adopted
Effective January 1, 2003, we adopted the initial recognition and
measurement provisions of Financial Accounting Standards Board 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. The
adoption of FIN No. 45 did not have a material impact on our financial position
or results of operations.
In January 2003, the Financial Accounting Standards Board (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 ("VIEs"). The consolidation
requirements of FIN No. 46 apply immediately to VIEs 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, which has been
amended by the FASB as described below.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN No. 46R"). FIN No. 46R modifies FIN No. 46 in certain respects including
the scope exception, the definition of VIEs, and other factors that would
affect the determination of VIEs and primary beneficiaries that consolidate
VIEs. FIN No. 46R, as written, applies to VIEs created prior to January 31,
2003 no later than the end of the first reporting period that ends after March
15 2004, and to all special purpose entities no later than the first reporting
period that ends on or after December 31, 2003. Accordingly, we currently
expect to apply FIN No. 46R for the fiscal year ending March 31, 2004. However,
management understands that the application date of FIN No. 46R to foreign
private issuers ("FPIs") is under discussion, and that it is possible that the
application date for FPIs may be changed; in which case the application date
for us may be changed to the fiscal year ending March 31, 2005.
Refer to our Form 20-F for further discussion of the VIEs in which we hold
variable interests, including the required transitional disclosure. Although we
are in the process of assessing and analyzing the impact of the adoption of FIN
No. 46R, results of current analysis indicate that our relationship with VIEs
have not materially changed from the facts disclosed in our Form 20-F.
Effective April 1, 2003, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 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 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. The adoption of SFAS No. 143 did not have a
material impact on our financial position or results of operations.
12
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 derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative, (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. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material impact on our financial position or results of
operations.
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. SFAS
No. 150 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, which is our fiscal year ending March 31,
2005. On November 7, 2003, FASB Staff Position No. 150-3, "Effective Date,
Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," delayed the
effective date of certain provisions of SFAS No. 150 for certain mandatorily
redeemable noncontrolling interests.
We are not a party to any financial instruments after May 31, 2003, to which
SFAS No. 150 must be applied immediately but have not completed evaluating the
impact of the adoption of SFAS No. 150 to other instruments. Accordingly, we
cannot reasonably estimate the ultimate impact of SFAS No. 150 on our financial
position or results of operations.
Recently Issued Accounting Pronouncements
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.
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. The timing of the application has not been decided. Upon completion of
the separation, the substitutional obligation and related plan assets will be
13
transferred to a government agency, and BTM will be released from paying the
substitutional portion of the benefits to its employees. The impact on our
consolidated financial statements of the transfer accounted for in accordance
with EITF 03-2 is not known and cannot be reasonably estimated until the
completion of the transfer.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88, and 106" ("SFAS No. 132R"), which replaces existing
FASB disclosure requirements for pensions. SFAS No. 132R requires disclosure of
more details about plan assets, benefit obligations, cash flows, benefit costs
and other relevant information. SFAS No. 132R is generally effective for fiscal
years ending after December 15, 2003, and for interim periods beginning after
December 15, 2003.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"), which supersedes AICPA
Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans" and
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans
or debt securities acquired in a transfer if those differences are
attributable, at least, in part, to credit quality. SOP 03-3 limits accretable
yield to the excess of the investor's estimate of undiscounted cash flows over
the investor's initial investment in the loan and prohibits the recognition of
the non-accretable difference. Under SOP 03-3, subsequent increases in cash
flows expected to be collected generally should be recognized prospectively
through adjustment of the loan's yield over its remaining life while any
decreases in such cash flows should be recognized as impairments. SOP 03-3 also
provides guidance with regard to presentation and disclosures.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. We have not completed the study of what effect SOP 03-3
would have on our financial position or results of operations.
Results of Operations
The following table sets forth a summary of our results of operations for
the six months ended September 30, 2002 and 2003:
Six months ended
September 30,
-----------------------
2002 2003
---------- -----------
(in billions)
Interest income........................................................... (Yen)818.5 (Yen) 745.2
Interest expense.......................................................... 285.8 226.5
---------- -----------
Net interest income....................................................... 532.7 518.7
Provision (credit) for credit losses...................................... 232.6 (130.7)
Non-interest income....................................................... 571.5 714.0
Non-interest expense...................................................... 603.7 582.7
---------- -----------
Income before income taxes and cumulative effect of a change in accounting
principle............................................................... 267.9 780.7
Income taxes.............................................................. 163.6 251.8
---------- -----------
Income before cumulative effect of a change in accounting principle....... 104.3 528.9
Cumulative effect of a change in accounting principle, net of tax......... (0.6) --
---------- -----------
Net income................................................................ (Yen)103.7 (Yen) 528.9
========== ===========
14
Net income for the six months ended September 30, 2003 was (Yen)528.9
billion, an increase of (Yen)425.2 billion, or 409.9%, from (Yen)103.7 billion
for the six months ended September 30, 2002. Diluted earnings per common share
for the six months ended September 30, 2003 were (Yen)80,512.47, an increase of
(Yen)65,455.14, from (Yen)15,057.33 for the six months ended September 30,
2002. Income before income taxes and cumulative effect of a change in
accounting principle for the six months ended September 30, 2003 was (Yen)780.7
billion, an increase of (Yen)512.8 billion, or 191.4%, from (Yen)267.9 billion
for the six months ended September 30, 2002. These changes in our operating
results were primarily attributable to the following:
. Reversal of allowance for credit losses of (Yen)130.7 billion was
recorded for the six months ended September 30, 2003, compared with
provision for credit losses of (Yen)232.6 billion for the six months
ended September 30, 2002. The reversal of allowance for credit losses was
due mainly to improvement of our loan portfolio as evidenced by the
reduction in our nonperforming and impaired loans through various
measures that we have taken, including the disposal of nonperforming
loans, and improving credit status of borrowers in Japan as evidenced by
the decreased number of bankruptcy filings during the six months ended
September 30, 2003.
. Non-interest income increased (Yen)142.5 billion, or 24.9%, from
(Yen)571.5 billion for the six months ended September 30, 2002 to
(Yen)714.0 billion for the six months ended September 30, 2003. This
increase was primarily attributable to an increase of (Yen)146.2 billion
in net foreign exchange gains reflecting the yen appreciation against
foreign currencies, and an increase of (Yen)120.0 billion in net
investment securities gains mainly due to the improvement of Japanese
stock market prices. These increases were partially offset by a decrease
of (Yen)127.5 billion in net trading account profits.
. Non-interest expense decreased (Yen)21.0 billion, or 3.5%, from
(Yen)603.7 billion for the six months ended September 30, 2002 to
(Yen)582.7 billion for the six months ended September 30, 2003. The
decrease primarily reflected the fact that non-interest expense for the
previous interim period included a (Yen)22.5 billion loss resulting from
the decrease in net assets in a subsidiary that was accounted for as a
sale of investment in the subsidiary in connection with the merger of the
four securities companies as explained in our Form 20-F.
These favorable changes were partially offset by a decrease of (Yen)14.0
billion in net interest income from (Yen)532.7 billion for the six months ended
September 30, 2002 to (Yen)518.7 billion for the six months ended September 30,
2003.
Our results of operation may be affected by external and unpredictable
events, including unexpected failure of borrowers, defaults in emerging markets
and financial and stock market volatility. Accordingly, the interim results are
not necessarily indicative of the results for the full fiscal year. For
detailed risk factors of our operations, please see our Form 20-F.
15
Net Interest Income
The following is a summary of the interest rate spread for the six months
ended September 30, 2002 and 2003:
Six months ended September 30,
----------------------------------------------------
2002 2003
------------------------- -------------------------
Average Average rate Average Average rate
balance (Annualized) balance (Annualized)
------------- ------------ ------------- ------------
(in billions, except percentages)
Interest-earning assets:
Domestic.................. (Yen)61,874.2 1.22% (Yen)65,865.6 1.14%
Foreign................... 23,681.3 3.70 24,209.2 3.04
------------- ---- ------------- ----
Total................. (Yen)85,555.5 1.91% (Yen)90,074.8 1.65%
============= ==== ============= ====
Financed by:
Interest-bearing liabilities:
Domestic.................. (Yen)63,963.1 0.35% (Yen)68,567.8 0.31%
Foreign................... 14,575.6 2.38 15,298.1 1.55
------------- ---- ------------- ----
Total................. 78,538.7 0.73 83,865.9 0.54
Non-interest-bearing funds... 7,016.8 -- 6,208.9 --
------------- ---- ------------- ----
Total................. (Yen)85,555.5 0.67% (Yen)90,074.8 0.50%
============= ==== ============= ====
Spread on:
Interest-bearing funds.... 1.18% 1.11%
Total funds............... 1.24% 1.15%
Net interest income for the six months ended September 30, 2003 was
(Yen)518.7 billion, a decrease of (Yen)14.0 billion, or 2.6%, from (Yen)532.7
billion for the six months ended September 30, 2002.
This decrease was due primarily to a decline in the average interest rate
spread. In addition, the decrease in average loans, which earn relatively
higher yields, contributed to the decrease in net interest income. The average
interest rate spread decreased 7 basis points from 1.18% for the six months
ended September 30, 2002 to 1.11% for the six months ended September 30, 2003.
The average rate of both the foreign interest-earning assets and foreign
interest-bearing liabilities declined during the six months ended September 30,
2003 primarily due to the decline in foreign short-term interest rates in most
markets. Since the average balance of foreign interest-earning assets for the
six months ended September 30, 2003 was about 1.6 times larger than the average
balance of foreign interest-bearing liabilities for the same period, the
decline in the average rate had a negative effect on our net interest income.
Net interest income as a percentage of average total interest-earning assets
decreased 9 basis points from 1.24% for the six months ended September 30, 2002
to 1.15% for the six months ended September 30, 2003. Average interest-earning
assets for the six months ended September 30, 2003 were (Yen)90,074.8 billion,
an increase of (Yen)4,519.3 billion, or 5.3%, from (Yen)85,555.5 billion for
the six months ended September 30, 2002. The increase was primarily
attributable to an increase of (Yen)3,047.5 billion in investment securities
and an increase of (Yen)1,109.9 billion in call loans, funds sold, and
receivables under resale agreements and securities borrowing transactions.
These increases were partially offset by a decrease of (Yen)1,040.3 billion in
average loans. Average interest-bearing liabilities increased (Yen)5,327.2
billion, or 6.8%, from (Yen)78,538.7 billion for the six months ended September
30, 2002 to (Yen)83,865.9 billion for the six months ended September 30, 2003
while average non-interest-bearing funds decreased (Yen)807.9 billion, or
11.5%, from (Yen)7,016.8 billion for the six months ended September 30, 2002 to
(Yen)6,208.9 billion for the six months ended September 30, 2003 which also had
a negative impact on our net interest income. The increase in average
16
interest-bearing liabilities primarily reflected an increase of (Yen)3,358.6
billion in average deposits and partially led to an increase in the current
accounts with The Bank of Japan, which are accounted for as cash and due from
banks (non-interest-earning assets), under its decision to raise the target
balance of current accounts as discussed in Business Environment.
Provision (Credit) 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
"Financial Condition-Allowance for Credit Losses, Nonperforming and Past Due
Loans" in our Form 20-F for a detailed description of the approach and
methodology used to establish the allowance for credit losses.
Reversal of allowance for credit losses of (Yen)130.7 billion was recorded
for the six months ended September 30, 2003, compared with provision for credit
losses of (Yen)232.6 billion for the six months ended September 30, 2002. This
change in the provision (credit) for credit losses is due mainly to a decrease
in our specific allowance as a result of our reduction of nonperforming loans
and a decrease in our formula allowance reflecting a decline in loans
classified as special mention or substandard loans. For a further discussion of
allowance for credit losses, see "Financial Condition-Allowance for Credit
Losses, Nonperforming and Past Due Loans."
Non-Interest Income
The following table is a summary of our non-interest income for the six
months ended September 30, 2002 and 2003:
Six months ended
September 30,
---------------------
2002 2003
---------- ----------
(in billions)
Fees and commissions:
Trust fees................................................. (Yen) 54.9 (Yen) 42.8
Fees on funds transfer and service charges for collections. 30.6 30.3
Fees and commissions on credit card business............... 26.0 29.2
Fees and commissions in international business............. 27.0 28.0
Service charges on deposits................................ 17.8 17.9
Other fees and commissions................................. 95.5 119.4
---------- ----------
Total fees and commissions............................. 251.8 267.6
Trading account profits--net.................................. 145.5 18.0
Foreign exchange gains--net................................... 113.5 259.7
Investment securities gains--net.............................. 28.9 148.9
Other......................................................... 31.8 19.8
---------- ----------
Total non-interest income........................... (Yen)571.5 (Yen)714.0
========== ==========
Non-interest income for the six months ended September 30, 2003 was
(Yen)714.0 billion, an increase of (Yen)142.5 billion, or 24.9%, from
(Yen)571.5 billion for the six months ended September 30, 2002. This increase
was primarily attributable to an increase of (Yen)146.2 billion in net foreign
exchange gains and an increase of (Yen)120.0 billion in net investment
securities gains, which were partially offset by a decrease of (Yen)127.5
billion in net trading account profits.
Fees and commissions increased (Yen)15.8 billion, or 6.3%, from (Yen)251.8
billion for the six months ended September 30, 2002 to (Yen)267.6 billion for
the six months ended September 30, 2003. This
17
increase primarily reflected an increase in other fees and commissions. Other
fees and commissions increased mainly because only one month of fees and
commissions generated by KOKUSAI Securities Co., Ltd., one of the predecessors
of Mitsubishi Securities, was recorded for the six months ended September 30,
2002, while its fees and commissions for the full six-month period was recorded
for the six months ended September 30, 2003. In addition, fees on securities
business in Mitsubishi Securities increased for the six months ended September
30, 2003 primarily due to an increase in equity related commissions, which was
in line with increased trading volume in the Japanese stock exchange during the
same period. Other contributing factors to the increase in other fees and
commissions include expanding fee businesses such as agency fees earned upon
the sale of annuity to individual customers at branches of our subsidiary banks
which act as a sales agent for insurance companies. These increases in other
fees and commissions were partially offset by a decrease of (Yen)12.1 billion
in trust fees, from (Yen)54.9 billion for the six months ended September 30,
2002 to (Yen)42.8 billion for the six months ended September 30, 2003,
primarily due to a decrease in fee income earned on loan trusts.
Net trading account profits for the six months ended September 30, 2003 were
(Yen)18.0 billion, a decrease of (Yen)127.5 billion, or 87.6%, from (Yen)145.5
billion for the six months ended September 30, 2002. Net trading account
profits for the six months ended September 30, 2002 and 2003 consisted of the
following:
Six months ended
September 30,
----------------------
2002 2003
---------- ----------
(in billions)
Net profits (losses) on derivative instruments, primarily interest rate futures,
swaps and options............................................................. (Yen)151.0 (Yen)(37.0)
Net profits (losses) on trading securities...................................... (5.5) 55.0
---------- ----------
Trading account profits--net................................................. (Yen)145.5 (Yen) 18.0
========== ==========
Profits (losses) on derivative instruments were largely affected by interest
rate swaps principally held for risk management purpose. Although such
contracts were entered into for risk management purposes, a majority of them
did not meet the conditions to qualify for hedge accounting under U.S. GAAP and
we accounted for such derivatives as trading positions. See our Form 20-F for a
description of similar contracts. For the six months ended September 30, 2003,
we generally maintained net receive-fix and pay-variable positions in our
interest rate swap portfolios for the purpose of managing interest rate risks
on domestic deposits, and our interest rate swap positions resulted in losses
in value under the rising interest rate environment toward the end of the
interim period. The net losses on derivative instruments were partially offset
by an increase in net profits on trading securities of (Yen)60.5 billion,
primarily reflecting improved performance of bond dealings and stock dealings
at Mitsubishi Securities supported by high interest rate volatility and the
recovery of Japanese stock markets during the six months ended September 30,
2003.
Net foreign exchange gains for the six months ended September 30, 2003 were
(Yen)259.7 billion, an increase of (Yen)146.2 billion, or 128.8%, from
(Yen)113.5 billion for the six months ended September 30, 2002. The increase in
net foreign exchange gains primarily reflected an increase in transaction gains
on translation of monetary liabilities denominated in foreign currencies due to
the yen appreciation. All transaction gains or losses on translation of
monetary liabilities denominated in foreign currencies are included in current
earnings. However, the transaction gains or 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.
18
Net investment securities gains for the six months ended September 30, 2003
were (Yen)148.9 billion, an increase of (Yen)120.0 billion, or 415.8%, from
(Yen)28.9 billion for the six months ended September 30, 2002. Major components
of net investment securities gains for the six months ended September 30, 2002
and 2003 are summarized below:
Six months ended
September 30,
-----------------------
2002 2003
----------- ----------
(in billions)
Net gains on sales of marketable equity securities....... (Yen) 106.8 (Yen)136.2
Impairment losses on marketable equity securities........ (176.5) (6.3)
Other--net, principally gains on sales of debt securities 98.6 19.0
----------- ----------
Investment securities gains--net...................... (Yen) 28.9 (Yen)148.9
=========== ==========
The increase in net investment securities gains during the six months ended
September 30, 2003 reflected an improvement in stock market prices. This
increase was partially offset by a decrease in net gains on sales of debt
securities due to adverse market condition including a sudden increase in
long-term interest rates in June 2003 in Japan and the yen appreciation, which
depressed the yen-denominated value of foreign bonds. As discussed in Note 12
to Condensed Consolidated Financial Statements, we determined that a
substantial portion of our investment in the Ashigin Financial Group with the
carrying value of (Yen)4.8 billion was impaired subsequent to September 30,
2003, based on the quoted stock market price level after the announcement of
temporary nationalization.
Non-Interest Expense
The following table is a summary of our non-interest expense for the six
months ended September 30, 2002 and 2003:
Six months ended
September 30,
---------------------
2002 2003
---------- ----------
(in billions)
Salaries and employee benefits (Yen)241.7 (Yen)252.8
Occupancy expenses--net....... 60.4 59.6
Other non-interest expenses... 301.6 270.3
---------- ----------
Total non-interest expense. (Yen)603.7 (Yen)582.7
========== ==========
Non-interest expense for the six months ended September 30, 2003 was
(Yen)582.7 billion, a decrease of (Yen)21.0 billion, or 3.5%, from (Yen)603.7
billion for the six months ended September 30, 2002. This decrease was
primarily due to the fact that other non-interest expenses for the six months
ended September 30, 2002 included a (Yen)22.5 billion loss resulting from the
decrease in net assets in a subsidiary that was accounted for as having been
sold in connection with the merger of the four securities companies on
September 1, 2002. The decrease in other non-interest expenses was partially
offset by an increase of (Yen)11.1 billion in salaries and employee benefits.
The increase in salaries and employee benefits was primarily due to an increase
of (Yen)12.8 billion in salaries and employee benefits in Mitsubishi
Securities, as only one month of salaries and employee benefits of KOKUSAI
Securities Co., Ltd., one of the predecessors of Mitsubishi Securities, was
recorded for the six months ended September 30, 2002, while salaries and
employee benefits for Mitsubishi Securities for the full six-month period was
recorded for the six months ended September 30, 2003.
19
Income Taxes
The following table presents a summary of income taxes for the six months
ended September 30, 2002 and 2003:
Six months ended
September 30,
----------------------
2002 2003
---------- ----------
(in billions, except
percentages)
Income before income taxes......... (Yen)267.9 (Yen)780.7
Income taxes....................... (Yen)163.6 (Yen)251.8
Effective tax rate................. 61.1% 32.3%
Normal effective statutory tax rate 38.0% 39.9%
During the six months period ended September 30, 2002, we accounted for
income taxes as a separate return filer since our application to file our tax
returns under the consolidated corporate-tax system was not approved. During
the six months period ended September 30, 2003, we accounted for income taxes
as a consolidated corporate-tax return filer. Income taxes have been impacted
by this change in terms of tax rate (see our Form 20-F for a description of the
surcharge tax of 2.0% for consolidated corporate-tax return filer) and the
availability of future taxable income that is permitted to be offset by
deductible temporary differences in future periods.
The combined normal effective statutory tax rates were 38.0% for the six
months ended September 30, 2002 and 39.9% for the six months ended September
30, 2003. For the six months ended September 30, 2003, income taxes as a
percentage of income before income taxes were 32.3%, which was 7.6% lower than
the statutory tax rate of 39.9%. The lower tax rate for the six months ended
September 30, 2003 was due primarily to a decrease in the valuation allowance
against deferred tax assets. The valuation allowance decreased (Yen)92.4
billion from (Yen)318.7 billion at March 31, 2003, to (Yen)226.3 billion at
September 30, 2003, as a result of achieving taxable income in the current
interim period in excess of the projected current interim period taxable income
at March 31, 2003 and an improved realizability of the future tax benefit based
on increased expected taxable income in future periods. The higher tax rate for
the six months ended September 30, 2002 was primarily due to an increase in
valuation allowance and nondeductible expenses, including the (Yen)22.5 billion
loss resulting from the decrease in net assets in a subsidiary relating to the
merger of the four securities companies. For a detailed discussion of the loss
recorded in connection with the merger, see our Form 20-F.
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 Service Agency of Japan. Operating profit and other segment
information is based on Japanese GAAP and is 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 provision
(credit) for credit losses, foreign exchange gains (losses) and equity
investment securities gains (losses).
20
BTM
The following table shows the business segment information for BTM and its
subsidiaries for the six months ended September 30, 2002 and 2003:
Investment
Global Banking and
Retail Commercial Corporate Asset Operations Mitsubishi
Banking Banking Banking Management UNBC Services Treasury Securities Other
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
(in billions)
Six months ended September 30, 2002:
Net revenue....... (Yen)135.0 (Yen)142.1 (Yen)128.6 (Yen)40.8 (Yen)134.6 (Yen)13.4 (Yen)156.0 (Yen)13.0 (Yen) (42.7)
Operating expenses 107.9 63.7 70.5 28.4 78.0 12.6 13.4 16.2 74.3
---------- ---------- ---------- --------- ---------- --------- ---------- --------- -----------
Operating profit
(loss)........... (Yen) 27.1 (Yen) 78.4 (Yen) 58.1 (Yen)12.4 (Yen) 56.6 (Yen) 0.8 (Yen)142.6 (Yen)(3.2) (Yen)(117.0)
========== ========== ========== ========= ========== ========= ========== ========= ===========
Six months ended September 30, 2003:
Net revenue....... (Yen)144.9 (Yen)143.3 (Yen)124.6 (Yen)53.9 (Yen)139.8 (Yen)12.4 (Yen)109.2 (Yen)71.5 (Yen) (38.0)
Operating expenses 101.6 61.1 62.8 24.6 83.1 11.9 13.2 54.7 19.6
---------- ---------- ---------- --------- ---------- --------- ---------- --------- -----------
Operating profit
(loss)........... (Yen) 43.3 (Yen) 82.2 (Yen) 61.8 (Yen)29.3 (Yen) 56.7 (Yen) 0.5 (Yen) 96.0 (Yen)16.8 (Yen) (57.6)
========== ========== ========== ========= ========== ========= ========== ========= ===========
Total
----------
Six months ended September 30, 2002:
Net revenue....... (Yen)720.8
Operating expenses 465.0
----------
Operating profit
(loss)........... (Yen)255.8
==========
Six months ended September 30, 2003:
Net revenue....... (Yen)761.6
Operating expenses 432.6
----------
Operating profit
(loss)........... (Yen)329.0
==========
For the six months ended September 30, 2002, BTM's securities subsidiaries
were included in the investment banking business unit. However, a significant
portion of BTM's domestic securities subsidiaries were merged into Mitsubishi
Securities on September 1, 2002. Accordingly, BTM began measuring the results
of Mitsubishi Securities separately from BTM's investment banking business unit
in the latter half of the fiscal year ended March 31, 2003. BTM presented
Mitsubishi Securities as a separate operating segment for the six months ended
September 30, 2003. Presentation for the six months ended September 30, 2002
has been reclassified to conform to the presentation for the six months ended
September 30, 2003.
After the formation of Mitsubishi Securities, BTM transferred part of its
investment banking business, including securitization, M&A advisory and
derivatives, to Mitsubishi Securities. This transfer did not significantly
affect the current year results of BTM's investment banking business unit or
Mitsubishi Securities. It is not practicable to restate the previous year's
information based on the current year's presentation or to recast the current
year's information based on the previous year's presentation.
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. Accordingly, BTM presented the
investment banking and asset management business unit as a single operating
segment for the six months ended September 30, 2003. Presentation for the six
months ended September 30, 2002 has been reclassified to conform to the
presentation for the six months ended September 30, 2003.
As discussed in "Recent Developments--Further Integration of Investment
Banking and Securities Business", certain foreign subsidiaries of BTM's
investment banking and asset management business unit were placed under the
control of Mitsubishi Securities during the six months ended September 30,
2003. This change was not material to the operating results of BTM's investment
banking and asset management business unit or Mitsubishi Securities for the six
months ended September 30, 2003. Further, the change is not reflected to the
business segment information table above since it occurred subsequent to the
semi-annual period ends of these subsidiaries.
In addition, BTM transferred its custody business, which had been included
in the asset management business unit, to the operation services unit during
the six months ended September 30, 2003. Presentation for the six months ended
September 30, 2002 has been reclassified to conform to the presentation for the
six months ended September 30, 2003.
21
When BTM Group'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 table sets forth the amounts that were assigned to each business unit
for the same services and the total duplicated amount that is eliminated for
each period:
Global Total
Commercial Corporate amount
Banking Banking eliminated
---------- --------- ----------
(in billions)
Six months ended September 30, 2002:
Investment banking and asset management. (Yen)4.3 (Yen)13.6 (Yen)17.9
Six months ended September 30, 2003:
Investment banking and asset management. (Yen)9.8 (Yen)18.4 (Yen)28.2
Total net revenue increased (Yen)40.8 billion, or 5.7%, from (Yen)720.8
billion for the six months ended September 30, 2002 to (Yen)761.6 billion for
the six months ended September 30, 2003. This increase was due mainly to the
inclusion of the full six months' results of Mitsubishi Securities for the six
months ended September 30, 2003 compared to the results of Mitsubishi
Securities from September 1, 2002 to September 30, 2002 being included for the
six months ended September 30, 2002, and an increase of (Yen)13.1 billion in
the investment banking and asset management business unit. The increase was
partially offset by a decrease of (Yen)46.8 billion in the treasury unit.
Total operating expenses decreased (Yen)32.4 billion, or 7.0%, from
(Yen)465.0 billion for the six months ended September 30, 2002 to (Yen)432.6
billion for the six months ended September 30, 2003. This decrease was due
mainly to a decrease of (Yen)54.7 billion in "Other" column. The decrease was
partially offset by expenses associated with the full six months operations of
Mitsubishi Securities compared to only one month operations being reflected for
the six months ended September 30, 2002.
Net revenue of the retail banking business unit increased (Yen)9.9 billion,
or 7.3%, from (Yen)135.0 billion for the six months ended September 30, 2002 to
(Yen)144.9 billion for the six months ended September 30, 2003. This increase
was mainly due to an increase in net fees of (Yen)8.8 billion, which primarily
reflected an increase in fees on sales of investment trusts and annuity.
Net revenue of the commercial banking business unit increased (Yen)1.2
billion, or 0.8%, from (Yen)142.1 billion for the six months ended September
30, 2002 to (Yen)143.3 billion for the six months ended September 30, 2003.
This increase was due mainly to an increase of (Yen)5.3 billion in other
income, which primarily reflected an increase in income on sales of derivative
products. The increase was partially offset by a decrease in net interest
income of (Yen)6.1 billion, reflecting our continued effort to reduce our
problem loans.
Net revenue of the global corporate banking business unit decreased (Yen)4.0
billion, or 3.1%, from (Yen)128.6 billion for the six months ended September
30, 2002 to (Yen)124.6 billion for the six months ended September 30, 2003.
This decrease was due mainly to a decrease of (Yen)6.6 billion in net revenue
of BTM's subsidiaries. There was no revenue of associated with BTM Information
Services, Inc. for the six months ended September 30, 2003, which was dissolved
during the second half of the fiscal year ended March 31, 2003.
Net revenue of the investment banking and asset management business unit
increased (Yen)13.1 billion, or 32.3%, from (Yen)40.8 billion for the six
months ended September 30, 2002 to (Yen)53.9 billion for the six months ended
September 30, 2003. This increase was due mainly to an increase of (Yen)5.6
22
billion on other income and an increase of (Yen)3.7 billion in net interest
income. The increase in other income reflected an increase in income on sales
of derivative products and the increase in net interest income reflected
increased interest income from syndicated loans.
Net revenue of the UNBC business unit increased (Yen)5.2 billion, or 3.9%,
from (Yen)134.6 billion for the six months ended September 30, 2002 to
(Yen)139.8 billion for the six months ended September 30, 2003. This increase
was due mainly to an increase in service charges on deposits and an increase in
insurance agency commissions.
Net revenue of the operations services unit decreased (Yen)1.0 billion, or
7.1%, from (Yen)13.4 billion for the six months ended September 30, 2002 to
(Yen)12.4 billion for the six months ended September 30, 2003. This decrease
was due mainly to a decrease in net revenue associated with one of BTM's
domestic subsidiary.
Net revenue of the treasury unit decreased (Yen)46.8 billion, or 30.0%, from
(Yen)156.0 billion for the six months ended September 30, 2002 to (Yen)109.2
billion for the six months ended September 30, 2003. This decrease was due
mainly to a decrease of net interest income of (Yen)44.4 billion, which
primarily reflected a decrease in gains on its foreign currency asset and
liability management operations.
Net revenue of Mitsubishi Securities increased (Yen)58.5 billion, or 449.1%
from (Yen)13.0 billion for the six months ended September 30, 2002 to (Yen)71.5
billion for the six months ended September 30, 2003. This increase was due
mainly to the merger that formed Mitsubishi Securities on September 1, 2002.
Only one month of revenue of KOKUSAI Securities Co., Ltd., one of the
predecessors of Mitsubishi Securities, was recorded for the six months ended
September 30, 2002 because BTM has accounted for its investment in this company
under the equity method prior to the merger and did not consolidate it, while
Mitsubishi Securities' revenue was fully consolidated for the six months ended
September 30, 2003. Net revenue of Mitsubishi Securities also increased for the
six months ended September 30, 2003, due to an increase in fees and commissions
and trading account profits reflecting favorable market conditions.
Net revenue included in "Other" increased (Yen)4.7 billion, or 10.7%, from a
loss of (Yen)42.7 billion for the six months ended September 30, 2002 to a loss
of (Yen)38.0 billion for the six months ended September 30, 2003. This increase
was due mainly to decrease of funding costs. The decrease in operating expenses
of "Other" column primarily reflected a significant decrease in the provision
for general allowance for credit losses, from (Yen)59.5 billion for the six
months ended September 30, 2002 to nil for the six months ended September 30,
2003. Operating profit does not include the reversal of allowance for credit
losses.
23
MTBC
The following table shows the business segment information for MTBC and its
subsidiaries for the six months ended September 30, 2002 and 2003:
Trust- Trust Real Global
Banking Assets Estate Markets Other Total
--------- --------- -------- --------- --------- ----------
(in billions)
Six months ended September 30, 2002:
Net revenue...................... (Yen)59.8 (Yen)16.8 (Yen)7.7 (Yen)58.1 (Yen) 9.4 (Yen)151.8
Operating expenses............... 36.8 14.6 4.7 8.9 13.8 78.8
Subsidiaries..................... -- -- -- -- 3.5 3.5
--------- --------- -------- --------- --------- ----------
Operating profit (loss).......... (Yen)23.0 (Yen) 2.2 (Yen)3.0 (Yen)49.2 (Yen)(0.9) (Yen) 76.5
========= ========= ======== ========= ========= ==========
Six months ended September 30, 2003:
Net revenue...................... (Yen)60.4 (Yen)14.5 (Yen)6.2 (Yen)90.3 (Yen) 7.2 (Yen)178.6
Operating expenses............... 36.2 13.8 4.8 8.2 14.3 77.3
Subsidiaries..................... -- -- -- -- 3.4 3.4
--------- --------- -------- --------- --------- ----------
Operating profit (loss).......... (Yen)24.2 (Yen) 0.7 (Yen)1.4 (Yen)82.1 (Yen)(3.7) (Yen)104.7
========= ========= ======== ========= ========= ==========
Total net revenue increased (Yen)26.8 billion, or 17.7%, from (Yen)151.8
billion for the six months ended September 30, 2002 to (Yen)178.6 billion for
the six months ended September 30, 2003. This increase was due mainly to an
increase of (Yen)32.2 billion in the global markets business group.
Net revenue of the trust-banking business group increased (Yen)0.6 billion,
or 1.1%, from (Yen)59.8 billion for the six months ended September 30, 2002 to
(Yen)60.4 billion for the six months ended September 30, 2003. This increase
was due mainly to an increase of (Yen)3.1 billion in other fee income,
reflecting an increase in fees and commissions obtained for sales of investment
trusts and variable annuities. The increase was partially offset by a decrease
of (Yen)2.1 billion in trust fees earned with respect to jointly operated
designated money trusts, principally resulting from the decrease in principal
of loan trusts.
Net revenue of the trust assets business group decreased (Yen)2.3 billion,
or 13.8%, from (Yen)16.8 billion for the six months ended September 30, 2002 to
(Yen)14.5 billion for the six months ended September 30, 2003. This decrease
was due mainly to a decrease in pension trust fee income.
Net revenue of the real estate business group decreased (Yen)1.5 billion, or
19.7%, from (Yen)7.7 billion for the six months ended September 30, 2002 to
(Yen)6.2 billion for the six months ended September 30, 2003. This decrease was
due mainly to a decrease in real estate brokerage commissions.
Net revenue of the global markets business group increased (Yen)32.2
billion, or 55.4%, from (Yen)58.1 billion for the six months ended September
30, 2002 to (Yen)90.3 billion for the six months ended September 30, 2003. This
increase was due mainly to an increase in net interest income resulting from an
increase in debt securities, and an increase in other income resulting from an
increase in the profits on sales of Japanese government bonds and other debt
securities.
Net revenue of "Other" decreased (Yen)2.2 billion, or 23.1%, from (Yen)9.4
billion for the six months ended September 30, 2002 to (Yen)7.2 billion for the
six months ended September 30, 2003. The decrease was mainly due to a decrease
in reversal of statutory reserves required for loan trusts.
Operating expenses decreased (Yen)1.5 billion or 1.8%, from (Yen)78.8
billion for the six months ended September 30, 2002 to (Yen)77.3 billion for
the six months ended September 30, 2003. This decrease was due mainly to a
decrease in personnel costs.
24
As a result, total operating profit for the six months ended September 30,
2003 was (Yen)104.7 billion, an increase of (Yen)28.2 billion, or 36.8%, from
(Yen)76.5 billion for the six months ended September 30, 2002.
Financial Condition
The following discussion of financial condition as of September 30, 2003
primarily focuses on changes and developments since March 31, 2003.
Total Assets
Our total assets at September 30, 2003 were (Yen)101.85 trillion, an
increase of (Yen)5.32 trillion, or 5.5%, from (Yen)96.53 trillion at March 31,
2003. This increase was mainly due to an increase of (Yen)1.86 trillion in cash
and due from banks, an increase of (Yen)2.92 trillion in receivables under
securities borrowing transactions and an increase of (Yen)1.35 trillion in
trading account assets. These increases were partially offset by a decrease in
loans and investment securities. Loans, before deducting allowance for credit
losses, decreased (Yen)0.50 trillion, or 1.0%, from (Yen)48.47 trillion at
March 31, 2003 to (Yen)47.97 trillion at September 30, 2003. In line with this
decrease in the loan balance and reflecting improvement in loan portfolio
quality, the allowance for credit losses decreased (Yen)0.29 trillion, or
21.4%. Total investment securities decreased (Yen)1.62 trillion, or 6.6%, from
(Yen)24.70 trillion at March 31, 2003 to (Yen)23.08 trillion at September 30,
2003. Deferred tax assets decreased (Yen)0.31 trillion, or 18.9%, from
(Yen)1.64 trillion at March 31, 2003 to (Yen)1.33 trillion at September 30,
2003.
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, 2003 and September 30, 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.
March 31, 2003 September 30, 2003
-------------- ------------------
(in billions)
Domestic:
Manufacturing................................ (Yen) 6,034.3 (Yen) 5,864.6
Construction................................. 1,277.4 1,158.3
Real estate.................................. 4,298.1 4,195.5
Services..................................... 4,953.8 4,923.9
Wholesale and retail......................... 5,458.3 5,158.6
Banks and other financial institutions....... 3,598.0 3,853.8
Communication and information services....... 1,516.0 952.4
Other industries............................. 3,858.2 4,550.7
Consumer..................................... 7,425.7 7,945.8
------------- -------------
Total domestic........................... 38,419.8 38,603.6
------------- -------------
Foreign:
Governments and official institutions........ 235.1 144.4
Banks and other financial institutions....... 928.1 799.0
Commercial and industrial.................... 8,413.5 8,009.0
Other........................................ 510.1 444.2
------------- -------------
Total foreign............................ 10,086.8 9,396.6
------------- -------------
Less unearned income and deferred loan fees--net 41.0 30.6
------------- -------------
Total *.................................. (Yen)48,465.6 (Yen)47,969.6
============= =============
--------
* Includes loans held for sale of (Yen)4.0 billion and (Yen)13.2 billion at
March 31, 2003 and September 30, 2003, respectively, which are carried at
lower-of-cost or estimated fair value.
25
At September 30, 2003, our total loans were (Yen)47.97 trillion, a decrease
of (Yen)0.50 trillion, or 1.0%, from (Yen)48.47 trillion at March 31, 2003. The
loan balance at September 30, 2003 consisted of (Yen)38.60 trillion of domestic
loans and (Yen)9.40 trillion of foreign loans. The loan balance at March 31,
2003 consisted of (Yen)38.42 trillion of domestic loans and (Yen)10.09 trillion
of foreign loans.
As shown in the table above, the impact of decrease in foreign loans, which
exceeded the offsetting effect of increase in domestic loans, made the total
loan balance decrease. Domestic loans increased (Yen)0.18 trillion to
(Yen)38.60 trillion at September 30, 2003 from (Yen)38.42 trillion at March 31,
2003. This increase is primarily due to an increase in consumer loans. In
particular, we originated residential mortgage loans more than any prior
periods. Domestic loans to industries such as manufacturing, construction, real
estate, services, wholesale and retail, communication and information services
declined, partly reflecting our continued efforts to reduce nonperforming
assets through charge-offs, collection and sales of nonperforming loans.
Domestic loans to other industries increased mainly due to an increase in loans
to public sector.
Foreign loan balance decreased (Yen)0.69 trillion, or 6.8%, from (Yen)10.09
trillion at March 31, 2003 to (Yen)9.40 trillion at September 30, 2003. The
decrease primarily reflected the appreciation of the yen against the US dollar
from (Yen)118.07 per $1.00 at March 31, 2003 to (Yen)111.43 per $1.00 at
September 30, 2003 in terms of the noon buying rate.
Allowance for Credit Losses, Nonperforming and Past Due Loans
Total nonperforming loan decreased significantly as a result of our
continued efforts to revive financially distressed companies, and to dispose of
nonperforming loans as well as a decline in new nonaccrual loans reflecting
general improvement of the Japanese economy as reflected in decreased number of
corporate bankruptcy filings in Japan during the six months ended September 30,
2003.
This resulted in a decrease in provision for the credit losses and the
amount of charge-offs during the six months ended September 30, 2003 compared
with the six months ended September 30, 2002.
The following table shows a summary of the change in the allowance for
credit losses for the year ended March 31, 2003 and the six months ended
September 30, 2002 and 2003:
Six months ended
Year ended September 30,
March 31, --------------------------
2003 2002 2003
------------ ------------ ------------
(in billions)
Balance at beginning of period............................. (Yen)1,735.2 (Yen)1,735.2 (Yen)1,360.1
------------ ------------ ------------
Provision (credit) for credit losses....................... 455.6 232.6 (130.7)
------------ ------------ ------------
Charge-offs:
Domestic................................................ 753.8 327.0 127.1
Foreign................................................. 139.8 93.0 49.0
Total............................................... 893.6 420.0 176.1
------------ ------------ ------------
Less--Recoveries........................................... 78.8 36.4 18.7
------------ ------------ ------------
Net charge-offs............................................ 814.8 383.6 157.4
Other, principally foreign currency translation adjustments (15.9) (13.0) (3.0)
------------ ------------ ------------
Balance at end of period................................... (Yen)1,360.1 (Yen)1,571.2 (Yen)1,069.0
============ ============ ============
26
The provision (credit) for credit losses changed significantly and resulted
in a credit (reversal) of (Yen)130.7 billion during the six months ended
September 30, 2003 primarily due to a significant decrease in our specific
allowance for nonperforming loans, which reflects a decline in nonperforming
loans as shown in the table below. In addition, our formula allowance for loans
not specifically reviewed decreased as a result of a decline in loans
classified as special mention and substandard loans. Net charge-offs declined
due to a decline in nonperforming loans, which is the result of our continued
initiatives to reduce such assets through disposition or restructuring.
In connection with our sales of nonperforming loans to the Resolution and
Collection Corporation and other third parties, we may record additional
provisions for credit losses or gains depending on the negotiated prices. For
the six months ended September 30, 2003, we recorded a credit (reversal of
allowance) of (Yen)5.2 billion in connection with loan sales, as the loans'
sales price exceeded the loan balance, net of allowances.
As explained more fully in our Form 20-F, additional provisions in
connection with the sale of nonperforming loans to the Resolution and
Collection Corporation and to other third parties may arise from factors such
as a decline in the credit quality of the loans or the value of the underlying
collateral subsequent to the prior reporting date, risk appetite and investment
policy of the purchasers. During the six months ended September 30, 2003, we
did not incur material additional provisions for credit losses, primarily
because the volume of loan sales during the six months ended September 30, 2003
was much smaller than that of the prior period, reflecting the progress of our
initiatives to decrease nonperforming loans, and the unexpected adverse changes
in borrowers' credit-worthiness was not as severe as the prior period. However,
due to inherent uncertainty of factors that may affect negotiated prices which
reflects the borrowers' financial condition and the value of underlying
collateral in loan sale transactions, the results during this interim period
are not necessarily indicative of the results expected in future periods.
The following table summarizes the allowance for credit losses by component
at March 31, 2003 and September 30, 2003:
March 31, September 30,
2003 2003
------------ -------------
(in billions)
Allocated allowance:
Specific--specifically identified problem loans....... (Yen) 894.4 (Yen) 665.5
Large groups of smaller-balance homogeneous loans..... 38.0 41.4
Loans exposed to specific country risk................ 13.1 9.0
Formula--substandard, special mention and other loans. 391.3 334.1
Unallocated allowance.................................... 23.3 19.0
------------ ------------
Total allowance................................... (Yen)1,360.1 (Yen)1,069.0
============ ============
See our Form 20-F for a description of each type of allowance and our
accounting policy.
At September 30, 2003, the total allowance for credit losses was
(Yen)1,069.0 billion, or 2.23% of our total loan portfolio and 47.85% of total
nonaccrual and restructured loans and accruing loans contractually past due 90
days or more. The decrease in allowance for credit losses of (Yen)291.1
billion, or 21.4%, was primarily attributable to a decrease in allocated
allowance for specifically identified problem loans of (Yen)228.9 billion. As a
result, we recorded a reversal of allowance for credit losses of (Yen)130.7
billion for the six months ended September 30, 2003, compared with provision
for credit losses of (Yen)232.6 billion for six months ended September 30, 2002.
27
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, 2003 and September 30, 2003:
March 31, September 30,
2003 2003
------------- -------------
(in billions, except
percentages)
Nonaccrual loans:
Domestic:
Manufacturing.................................................... (Yen) 111.1 (Yen) 86.7
Construction..................................................... 149.9 140.3
Real estate...................................................... 266.4 209.6
Services......................................................... 87.5 73.2
Wholesale and retail............................................. 224.5 108.7
Banks and other financial institutions........................... 17.8 16.2
Communication and information services........................... 14.1 10.6
Other industries................................................. 53.9 46.3
Consumer......................................................... 151.0 158.4
------------- -------------
Total domestic................................................ 1,076.2 850.0
Foreign.............................................................. 337.4 199.4
------------- -------------
Total nonaccrual loans........................................ 1,413.6 1,049.4
------------- -------------
Restructured loans:
Domestic:
Manufacturing.................................................... 215.6 186.3
Construction..................................................... 118.5 95.9
Real estate...................................................... 264.9 216.7
Services......................................................... 164.0 133.6
Wholesale and retail............................................. 292.8 283.0
Banks and other financial institutions........................... 19.9 14.0
Communication and information services........................... 11.1 12.8
Other industries................................................. 39.6 32.5
Consumer......................................................... 86.4 88.2
------------- -------------
Total domestic................................................ 1,212.8 1,063.0
Foreign.............................................................. 106.2 104.2
------------- -------------
Total restructured loans...................................... 1,319.0 1,167.2
------------- -------------
Accruing loans contractually past due 90 days or more:
Domestic............................................................. 17.5 14.8
Foreign.............................................................. 2.9 2.9
------------- -------------
Total accruing loans contractually past due 90 days or
more........................................................ 20.4 17.7
------------- -------------
Total......................................................... (Yen) 2,753.0 (Yen) 2,234.3
============= =============
Total loans................................................... (Yen)48,465.6 (Yen)47,969.6
============= =============
Nonaccrual and restructured loans, and accruing loans contractually
past due 90 days or more as a percentage of total loans............... 5.68% 4.66%
============= =============
Based on the Japanese government's "Program for Financial Revival" to reduce
nonperforming loans and our own initiative to improve the quality of our loan
portfolio, we have successfully reduced nonperforming loans through the
disposition of nonperforming loans,
28
our continued efforts to revive financially distressed companies which lead to
upgradings of credit risk and collection of loans. In particular, our
designated team has been providing various advisory support to financially
distressed companies to improve their financial conditions and has been
assisting them in enhancing their corporate values, which resulted in upgrading
of their credit risks. In addition, improving conditions in several facets of
the Japanese economy and our continued stringent self-assessment of our
portfolio has enabled us to significantly reduce new nonperforming loans.
The total amount of nonaccrual loans, restructured loans, and accruing loans
that are contractually past due 90 days or more as to principal or interest
payments decreased (Yen)518.7 billion from (Yen)2,753.0 billion at March 31,
2003 to (Yen)2,234.3 billion at September 30, 2003. Nonaccrual loans,
restructured loans and accruing loans contractually past due 90 days or more as
a percentage of total loans decreased from 5.68% to 4.66% at March 31, 2003 and
September 30, 2003, respectively.
Total nonaccrual loans were (Yen)1,049.4 billion at September 30, 2003, a
decrease of (Yen)364.2, or 25.8%, from (Yen)1,413.6 billion at March 31, 2003.
Nonaccrual loans decreased in most of the segments of loans, as presented in
the table above. Among them, a decrease of (Yen)115.8 billion in domestic
nonaccrual loans to borrowers in the wholesale and retail and a decrease of
(Yen)138.0 billion in foreign nonaccrual loans were prominent. Such decreases
reflected sales of loans as described before as well as upgrades of certain
large borrowers that showed improvement in credit quality.
Total restructured loans were (Yen)1,167.2 billion at September 30, 2003, a
decrease of (Yen)151.8 billion, or 11.5%, from (Yen)1,319.0 billion at March
31, 2003. Except for a few segments, restructured loans decreased in most
segments, as presented in the table above. These decreases are attributable to
collection of the restructured loans and improvement in some of our borrowers'
credits. Summary of changes from March 31, 2003 to September 30, 2003 by the
segment is as follows:
. Decrease of (Yen)125.6 billion in the wholesale and retail industry
segment. Nonaccrual loans decreased by (Yen)115.8 billion and
restructured loans decreased by (Yen)9.8 billion. These declines in loan
balance are due primarily to loan sales, write-offs and rating upgrades
of certain borrowers to special mention or normal statue reflecting
improved credit risks.
. Decrease of (Yen)105.0 billion in the real estate industry segment.
Nonaccrual loans decreased by (Yen)56.8 billion and restructured loans
decreased by (Yen)48.2 billion. These declines in loan balance are due to
loan sales, charge-offs and collection of loans.
. Decrease of (Yen)140.0 billion in the foreign segment. Nonaccrual loans
decreased by (Yen)138.0 billion and restructured loans decreased by
(Yen)2.0 billion. These declines in loan balances are due to loan sales
and upgrades of certain borrowers of loans.
The following table summarizes the balance of impaired loans and related
impairment allowance at March 31, 2003 and September 30, 2003, excluding large
groups of smaller-balance homogeneous loans:
March 31, 2003 September 30, 2003
------------------------ ------------------------
Loan Impairment Loan Impairment
balance allowance balance allowance
------------ ---------- ------------ ----------
(in billions, except percentages)
Requiring an impairment allowance............... (Yen)2,408.5 (Yen)894.4 (Yen)1,837.3 (Yen)663.4
Not requiring an impairment allowance........... 211.2 -- 236.9 --
------------ ---------- ------------ ----------
Total........................................ (Yen)2,619.7 (Yen)894.4 (Yen)2,074.2 (Yen)663.4
============ ========== ============ ==========
Percentage of the allocated impairment allowance
to total impaired loans....................... 34.1% 32.0%
============ ============
29
In addition to impaired loans presented in the above table, we had loans
held for sale that were impaired of (Yen)3.8 billion and (Yen)7.2 billion at
March 31, 2003 and September 30, 2003, respectively.
Impaired loans decreased (Yen)545.5 billion, or 20.8%, from (Yen)2,619.7
billion at March 31, 2003 to (Yen)2,074.2 billion at September 30, 2003. The
percentage of the allocated allowance to total impaired loans at September 30,
2003 was 32.0%, a decrease of 2.1%, from 34.1% at March 31, 2003.
The following is a summary of cross-border outstandings to counterparties in
major Asian and Latin American countries at March 31, 2003 and September 30,
2003:
March 31, September 30,
2003 2003
---------- -------------
(in billions)
Hong Kong................. (Yen)224.7 (Yen)305.6
South Korea............... 289.2 274.3
Singapore................. 278.0 232.2
Thailand.................. 167.4 163.7
People's Republic of China 145.0 160.8
Malaysia.................. 116.2 120.4
Philippines............... 61.3 47.4
Indonesia................. 33.9 26.4
Brazil.................... 120.0 107.9
Mexico.................... 76.3 69.8
Argentina................. 34.1 22.1
Outstandings in Hong Kong and Malaysia increased while they decreased in
Argentine and Indonesia, which countries had higher country risk.
In conjunction with the relative decline in uncertainties, including the end
to the war in Iraq, and low interest rate policy in the US, foreign currency
reserves of emerging countries generally have shown an increase resulting in
the improvement of their country risks. However, we are carefully evaluating
country risks on a country by country basis as there are still some countries
whose country risks are unstable.
Investment Portfolio
Consistent with prior years, our investment securities are primarily
comprised of marketable equity securities held for strategic purpose, and high
quality fixed-rate bonds, including Japanese and foreign government bonds.
Investment securities decreased (Yen)1.62 trillion, or 6.6%, from (Yen)24.70
trillion at March 31, 2003 to (Yen)23.08 trillion at September 30, 2003, due
primarily to a decrease in available-for-sale securities of (Yen)1.75 trillion.
30
The following table shows information as to the value of our investment
securities available for sale and being held to maturity at March 31, 2003 and
September 30, 2003.
March 31, 2003 September 30, 2003
---------------------------------------- ----------------------------------------
Net
Net unrealized
Amortized Estimated unrealized Amortized Estimated gains
cost fair value gains cost fair value (losses)
------------- ------------- ------------ ------------- ------------- ------------
(in billions)
Securities available for sale:
Debt securities, principally
Japanese government
bonds and corporate
bonds............................ (Yen)20,418.8 (Yen)20,773.0 (Yen) 354.2 (Yen)18,789.6 (Yen)18,684.0 (Yen)(105.6)
Marketable equity
securities....................... 2,865.3 3,591.1 725.8 2,625.6 3,929.3 1,303.7
------------- ------------- ------------ ------------- ------------- ------------
Total securities available
for sale..................... (Yen)23,284.1 (Yen)24,364.1 (Yen)1,080.0 (Yen)21,415.2 (Yen)22,613.3 (Yen)1,198.1
============= ============= ============ ============= ============= ============
Debt securities being held to
maturity, principally Japanese
prefectural and official
institutions bonds.................. (Yen) 191.1 (Yen) 203.5 (Yen) 12.4 (Yen) 275.6 (Yen) 282.7 (Yen) 7.1
============= ============= ============ ============= ============= ============
Investment securities other than available for sale or held to maturity
(i.e., nonmarketable equity securities presented in Other investment
securities) were carried at cost of (Yen)145.4 billion and (Yen)186.1 billion,
at March 31, 2003 and September 30, 2003, respectively. The corresponding
estimated fair values at those dates were not readily determinable.
Available-for-sale securities decreased (Yen)1.75 trillion from (Yen)24.36
trillion at March 31, 2003 to (Yen)22.61 trillion at September 30, 2003. The
decrease of (Yen)2.09 trillion in debt securities available for sale primarily
reflected the decrease in our holdings of Japanese government bonds and
declines in fair value of Japanese government bonds due to an increase in
long-term interest rates. Long-term interest rates in Japan jumped up to around
1.7% from record low rate of 0.4% in June 2003, which pushed down the market
value of fixed-rate bonds such as Japanese national government bonds. Although
we recognized necessary impairment losses on these bonds in accordance with our
accounting policy that requires evaluation of the credit standing of the
issuer, the length of price decline, and the depth of price decline, net
unrealized gains on these debt securities available-for-sale turned into net
unrealized losses. The decrease in debt securities available for sale was
partially offset by an increase of (Yen)0.34 trillion in marketable equity
securities, which was primarily attributable to the upturn in the Japanese
stock markets even though we actively sold our marketable equity securities
during the six months ended September 30, 2003.
Cash and Due from Banks
Cash and due from banks increased (Yen)1.86 trillion, or 43.3%, from
(Yen)4.29 trillion at March 31, 2003 to (Yen)6.15 trillion at September 30,
2003. Net cash used in operating activities was (Yen)0.45 trillion and net cash
used in investment activities was (Yen)2.58 trillion, while net cash provided
by financing activities was (Yen)4.83 trillion. Net cash provided by financing
activities primarily resulted from a net increase in deposits of (Yen)3.06
trillion and a net increase in other short term borrowings of (Yen)1.32
trillion.
31
Receivables under Securities Borrowing Transactions
Receivables under securities borrowing transactions increased (Yen)2.92
trillion, or 158.0%, from (Yen)1.85 trillion at March 31, 2003 to (Yen)4.77
trillion at September 30, 2003. This increase was primarily due to our
increased activity in the securities borrowing market.
Trading Account Assets
Trading account assets increased (Yen)1.35 trillion, or 16.1%, from
(Yen)8.36 trillion at March 31, 2003 to (Yen)9.71 trillion at September 30,
2003. This increase was primarily due to an increase of trading securities,
which was mainly comprised of an increase of bonds held for trading purposes.
Deferred Tax Assets
Deferred tax assets decreased (Yen)0.31 trillion, or 18.9%, from (Yen)1.64
trillion at March 31, 2003 to (Yen)1.33 trillion at September 30, 2003. This
decrease was due primarily to a decrease in existing deductible temporary
differences. The decrease in existing deductible temporary differences
reflected a decrease in allowance for credit losses and an increase in
unrealized gains on investment securities available for sale. A decrease in net
operating losses carryforwards, which is attributable to the existence of
taxable income in domestic banking subsidiaries for the six months ended
September 30, 2003, also contributed to the decrease in deferred tax assets.
The calculation of deferred tax assets is based on various assumptions,
including assumptions with respect to our future taxable income. Actual results
may differ significantly from these assumptions. If we conclude that we will
not be able to realize a portion of our deferred tax assets in the future based
on future taxable income projection at that time, we may reduce our deferred
tax assets. Similar adjustments to our deferred tax assets calculated under
Japanese GAAP will in turn reduce our regulatory capital ratios.
Total Liabilities
Total liabilities at September 30, 2003 was (Yen)98.63 trillion, an increase
of (Yen)4.65 trillion, or 4.9%, from (Yen)93.98 trillion at March 31, 2003.
This increase was primarily due to an increase of (Yen)2.56 trillion in
deposits and an increase of (Yen)1.55 trillion in short-term borrowings.
Deposits
Deposits are our primary source of funds. At September 30, 2003, total
deposits were (Yen)69.86 trillion, an increase of (Yen)2.56 trillion, or 3.8%,
from (Yen)67.30 trillion at March 31, 2003. This increase reflected an increase
in domestic non-interest bearing deposits from foreign banks in Japan due to
their increased liquidity in Japan, and an increase in domestic interest
bearing foreign currency deposits.
Short-Term Borrowings
Short-term borrowings increased (Yen)1.55 trillion, or 11.5%, from
(Yen)13.58 trillion at March 31, 2003 to (Yen)15.13 at September 30, 2003.
Short-term borrowings include call money and funds purchased, payables under
repurchase agreements, payables under securities lending transactions, due to
trust account and other short-term borrowings. Other short-term borrowings
increased by (Yen)1.33 trillion primarily due to an increase of funding from
The Bank of Japan in connection with its daily money market operations.
Long-Term Debt
Long-term debt increased (Yen)0.25 trillion, or 4.8%, from (Yen)5.16
trillion at March 31, 2003 to (Yen)5.41 trillion at September 30, 2003, due
primarily to several bond issuances during the six months ended September 30,
2003.
32
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 and individual
depositors. At September 30, 2003, our total deposits were (Yen)69.86 trillion,
an increase of (Yen)2.56 trillion, from (Yen)67.30 trillion at March 31, 2003.
These deposit products provide us with a sizable source of stable and low-cost
funds. We continuously monitor relevant interest rate characteristics of these
funds and utilize asset and liability management techniques to manage the
possible impact on our net interest margin by the rollovers. Our average
deposits, combined with average shareholders' equity, funded 70.6% of our
average total assets of (Yen)100.52 trillion during the six months ended
September 30, 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 sale of financial assets, including
securities available for sale, trading account securities and loans. Additional
liquidity may be provided by the maturity of the loans outstanding.
Shareholders' Equity
The following table presents a summary of our shareholders' equity at March
31, 2003 and September 30, 2003.
March 31, 2003 September 30, 2003
-------------- ------------------
(in billions, except percentages)
Preferred stock........................................... (Yen) 222.1 (Yen) 178.3
Common stock.............................................. 984.7 1,028.5
Capital surplus........................................... 1,058.6 1,057.9
Retained earnings......................................... 405.5 905.4
Accumulated other changes in equity from nonowner sources,
net of taxes............................................ (114.8) 55.5
Less treasury stock, at cost.............................. (3.2) (2.1)
------------- -------------
Total shareholders' equity............................. (Yen)2,552.9 (Yen)3,223.5
------------- -------------
Ratio of total shareholders' equity to total assets....... 2.64% 3.16%
============= =============
Total shareholders' equity increased (Yen)670.6 billion, or 26.3%, from
(Yen)2,552.9 billion at March 31, 2003 to (Yen)3,223.5 billion at September 30,
2003. This increase was primarily due to an increase of (Yen)499.9 billion in
retained earnings resulting from the net income for the six months ended
September 30, 2003.
Our preferred stock decreased (Yen)43.8 billion from (Yen)222.1 billion at
March 31, 2003 to (Yen)178.3 billion at September 30, 2003 due to the
conversion by some of the holders of class 2 preferred shares into common
stock. Consequently, our common stock increased (Yen)43.8 billion from
(Yen)984.7 billion at March 31, 2003 to (Yen)1,028.5 billion at September 30,
2003.
33
Due to our holding 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, 2003 and September 30, 2003.
March 31, 2003 September 30, 2003
-------------- ------------------
(in billions, except percentages)
Accumulated net unrealized gains................ (Yen)725.8 (Yen)1,303.7
Accumulated net unrealized gains to total assets 0.75% 1.28%
The increase in accumulated net unrealized gains on marketable equity
securities at September 30, 2003 was mainly due to the upturn in the Japanese
stock markets.
On November 25, 2003, the Board of Directors approved payment of cash
dividends to the shareholders of record on September 30, 2003 of (Yen)41,250
per share of Class 1 preferred stock, totaling (Yen)3.4 billion, and (Yen)8,100
per share of Class 2 preferred stock, totaling (Yen)0.5 billion.
Capital Adequacy
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, 2003 and September 30, 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 Financial
Services Agency of Japan.
Minimum
March 31, September 30, capital ratios
2003 2003 required
------------- ------------- --------------
(in billions, except percentages)
Capital components:
Tier I capital........... (Yen) 3,128.7 (Yen) 3,683.7
Tier II capital.......... 2,847.6 3,127.2
Total risk-based capital. 5,968.4 6,789.8
Risk-weighted assets........ 55,049.6 54,543.4
Capital ratios:
Tier I capital........... 5.68% 6.75% 4.00%
Total risk-based capital. 10.84 12.44 8.00
34
Capital Ratios of Our Subsidiary Banks in Japan
The table below presents the risk-based capital ratios of BTM and MTBC, our
banking subsidiaries in Japan, at March 31, 2003 and September 30, 2003.
Underlying figures for each of the consolidated and stand-alone capital
components 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, respectively, as required
by the Financial Services Agency of Japan.
Minimum
March 31, September 30, capital ratios
2003 2003 required
--------- ------------- --------------
Consolidated capital ratios:
BTM:
Tier I capital........... 5.34% 6.45% 4.00%
Total risk-based capital. 10.43 11.89 8.00
MTBC:
Tier I capital........... 6.66 7.44 4.00
Total risk-based capital. 12.00 14.13 8.00
Stand-alone capital ratios:
BTM:
Tier I capital........... 5.12 6.39 4.00
Total risk-based capital. 10.24 12.23 8.00
MTBC:
Tier I capital........... 6.16 7.55 4.00
Total risk-based capital. 11.23 14.34 8.00
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 are subsidiaries of BTM, at
December 31, 2002 and June 30, 2003.
Minimum
December 31, June 30, capital ratios
2002 2003 required
------------ -------- --------------
UnionBanCal Corporation:
Tier I capital
(to risk-weighted assets)..... 11.18% 11.44% 4.00%
Tier I capital
(to quarterly average assets). 9.75 9.63 4.00
Total capital
(to risk-weighted assets)..... 12.93 13.06 8.00
Minimum Ratios OCC*
December 31, June 30, capital ratios requires to be
2002 2003 required "well capitalized"
------------ -------- -------------- ------------------
Union Bank of California:
Tier I capital
(to risk-weighted assets)..... 10.37% 10.74% 4.00% 6.00%
Tier I capital
(to quarterly average assets). 9.01 8.99 4.00 5.00
Total capital
(to risk-weighted assets)..... 11.87 12.18 8.00 10.00
--------
* OCC represents the Office of the Comptroller of the Currency of the United
States.
35
Off-Balance Sheet Arrangements
In the normal course of business, we engage in several types of
off-balance-sheet arrangements to meet the financing needs of customers,
including various types of guarantees, commitments to extend credit and
commercial letters of credit. The contractual amounts of these guarantees and
other off-balance-sheet instruments represent the amounts at risk should the
contracts be fully draw upon with a subsequent default by our customer and a
decline in the value of the underlying collateral. Since many of these
contracts expire without being drawn down, the total contractual or notional
amounts of these contracts do not necessarily represent our future cash
requirements. See Note 9 to our Condensed Consolidated Financial Statements for
the contractual or notional amounts of such contracts.
Some of our off-balance-sheet arrangements are related to the activities of
variable interest entities. Refer to our Form 20-F for further discussion of
these variable interest entities. As described in "--Recently Issued Accounting
Pronouncements," results of our current analysis indicate that our relationship
with variable interest entities has not materially changed from the facts
disclosed in our Form 20-F.
36
Market Risk
Trading Activities
The value at risk, or VaR, for our total trading activities for the six
months ended September 30, 2003 is presented in the table below. Quantitative
market risks at September 30, 2003 were higher compared to those at March 31,
2003. Market risks related to interest rate and equities increased, while risk
related to foreign exchange rates decreased. On a quarterly basis, the daily
average VaR was (Yen)2.19 billion for the three months ended June 30, 2003 and
(Yen)2.47 billion for the three months ended September 30, 2003. We conducted
back-testing for the 250 past business days prior to September 30, 2003 and the
absolute value of losses never exceeded VaR.
VaR for Trading Activities
(April 2003-September 2003)(1)
--------------------------------------------------------
March 31,
Daily September 30, 2003
Risk category: average High Low 2003 (reference)
-------------- ---------- --------- --------- ------------- -----------
(in billions)
Interest rate............ (Yen) 1.57 (Yen)2.25 (Yen)1.01 (Yen) 1.38 (Yen) 1.01
Of which, yen......... 0.69 1.29 0.28 0.91 0.39
Of which, U.S. dollar. 0.59 1.18 0.22 0.22 0.40
Foreign exchange......... 0.59 0.86 0.31 0.44 1.04
Equities................. 0.42 0.85 0.22 0.57 0.31
Commodities.............. 0.08 0.15 0.02 0.09 0.08
(Diversification effect). (0.35) -- -- (0.33) (0.38)
---------- --------- --------- ---------- ----------
Total................. (Yen) 2.33 (Yen)3.40 (Yen)1.59 (Yen) 2.15 (Yen) 2.06
========== ========= ========= ========== ==========
--------
(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 VaRs were taken
from different days. Simple summation of VaRs by risk category is not equal
to total VaR due to the effect of diversification.
Non-Trading Activities
The VaR for our non-trading activities at September 30, 2003, excluding
market risks related to strategic equity investments and measured using the
same standard as used for trading activities, was (Yen)24.56 billion, an
(Yen)1.21 billion increase from March 31, 2003.
Interest rate risks accounted for approximately 93% of our non-trading
activity market risks, whose VaR was (Yen)22.96 billion at September 30, 2003.
The daily average interest rate VaR was (Yen)26.96 billion, with the highest
recorded VaR being (Yen)35.40 billion, and the lowest being (Yen)22.10 billion.
On a quarterly basis, the daily average VaR was (Yen)24.81 billion for the
three months ended June 30, 2003, and (Yen)29.07 billion for the three months
ended September 30, 2003. We analyze interest rate risks by major currencies
compared to March 31, 2003. The Japanese yen interest rate risk ratio as of
September 30, 2003 increased from 28% to 48%, while US dollar-related interest
rate risk ratio decreased from 50% to 39% and euro-related interest rate risk
ratio decreased from 20% to 12%, each as compared to March 31, 2003.
37
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
38
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
2002
(Unaudited)
---------------
Assets:
Cash and due from banks......................................................................................... (Yen) 2,248,902
Interest-earning deposits in other banks........................................................................ 4,148,565
Call loans, funds sold, and receivables under resale agreements................................................. 2,359,578
Receivables under securities borrowing transactions............................................................. 1,990,738
Trading account assets (including assets pledged that secured parties are permitted to sell or repledge of
(Yen)1,090,382 million at September 30, 2002, (Yen)1,807,819 million at March 31, 2003 and (Yen)2,243,357
million at September 30, 2003)................................................................................. 7,327,701
Investment securities:
Securities available for sale--carried at estimated fair value (including assets pledged that secured parties
are permitted to sell or repledge of (Yen)2,909,808 million at September 30, 2002, (Yen)3,049,692 at
March 31, 2003 and (Yen)1,896,949 million at September 30, 2003)............................................. 23,394,650
Securities being held to maturity--carried at amortized cost.................................................. 242,168
Other investment securities................................................................................... 138,289
---------------
Total investment securities................................................................................. 23,775,107
---------------
Loans, net of unearned income and deferred loan fees (including assets pledged that secured parties are
permitted to sell or repledge of (Yen)739,146 million at September 30, 2002, (Yen)864,978 million at March
31, 2003 and (Yen)658,616 million at September 30, 2003)....................................................... 48,091,245
Allowance for credit losses..................................................................................... (1,571,232)
---------------
Net loans................................................................................................... 46,520,013
---------------
Premises and equipment--net..................................................................................... 635,139
Accrued interest................................................................................................ 181,262
Customers' acceptance liability................................................................................. 30,775
Intangible assets............................................................................................... 200,341
Goodwill........................................................................................................ 41,070
Deferred tax assets............................................................................................. 1,254,430
Other assets.................................................................................................... 1,602,408
---------------
Total..................................................................................................... (Yen)92,316,029
===============
Liabilities and Shareholders' Equity:
Deposits:
Domestic offices:
Non-interest-bearing........................................................................................ (Yen) 3,544,419
Interest-bearing............................................................................................ 49,743,486
Overseas offices, principally interest-bearing................................................................ 10,556,215
---------------
Total deposits.............................................................................................. 63,844,120
---------------
Debentures...................................................................................................... 1,198,007
Call money, funds purchased, and payables under repurchase agreements........................................... 6,504,990
Payables under securities lending transactions.................................................................. 2,222,914
Due to trust account and other short-term borrowings............................................................ 4,491,849
Trading account liabilities..................................................................................... 2,656,621
Obligations to return securities received as collateral......................................................... 742,487
Bank acceptances outstanding.................................................................................... 30,775
Accrued interest................................................................................................ 152,248
Long-term debt.................................................................................................. 5,323,484
Other liabilities............................................................................................... 2,802,395
---------------
Total liabilities........................................................................................... 89,969,890
---------------
Commitments and contingent liabilities
Shareholders' equity:
Capital stock:
Preferred stock:
Class 1--authorized, 81,400 shares; issued and outstanding, 81,400 shares at September 30, 2002,
March 31, 2003 and September 30, 2003 with no stated value (aggregate liquidation preference
of (Yen)244,200 million)................................................................................. 122,100
Class 2--convertible: authorized, 100,000 shares; issued, 100,000 shares at September 30, 2002,
March 31, 2003 and September 30, 2003; outstanding, 100,000 shares at September 30, 2002
and March 31, 2003, and 56,200 shares at September 30, 2003 with no stated value (aggregate
liquidation preference of (Yen)200,000 million at September 30, 2002 and March 31, 2003, and
112,400 million at September 30, 2003)................................................................... 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 at September 30, 2002,
6,232,162 shares at March 31, 2003 and 6,357,861 shares at September 30, 2003 with no stated
value...................................................................................................... 873,156
Capital surplus............................................................................................... 908,461
Retained earnings:
Appropriated for legal reserve.............................................................................. 237,474
Unappropriated.............................................................................................. 72,637
Accumulated other changes in equity from nonowner sources, net of taxes....................................... 115,067
---------------
Total....................................................................................................... 2,428,895
Less treasury stock, at cost--158,034 common shares at September 30, 2002, 3,226 common shares at
March 31, 2003 and 2,367 common shares at September 30, 2003............................................... 82,756
---------------
Shareholders' equity--net................................................................................... 2,346,139
---------------
Total..................................................................................................... (Yen)92,316,029
===============
March 31,
2003
---------------
(in millions)
Assets:
Cash and due from banks......................................................................................... (Yen) 4,288,581
Interest-earning deposits in other banks........................................................................ 4,009,986
Call loans, funds sold, and receivables under resale agreements................................................. 1,765,046
Receivables under securities borrowing transactions............................................................. 1,848,124
Trading account assets (including assets pledged that secured parties are permitted to sell or repledge of
(Yen)1,090,382 million at September 30, 2002, (Yen)1,807,819 million at March 31, 2003 and (Yen)2,243,357
million at September 30, 2003)................................................................................. 8,363,383
Investment securities:
Securities available for sale--carried at estimated fair value (including assets pledged that secured parties
are permitted to sell or repledge of (Yen)2,909,808 million at September 30, 2002, (Yen)3,049,692 at
March 31, 2003 and (Yen)1,896,949 million at September 30, 2003)............................................. 24,364,066
Securities being held to maturity--carried at amortized cost.................................................. 191,132
Other investment securities................................................................................... 145,431
---------------
Total investment securities................................................................................. 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)739,146 million at September 30, 2002, (Yen)864,978 million at March
31, 2003 and (Yen)658,616 million at September 30, 2003)....................................................... 48,465,569
Allowance for credit losses..................................................................................... (1,360,136)
---------------
Net loans................................................................................................... 47,105,433
---------------
Premises and equipment--net..................................................................................... 643,794
Accrued interest................................................................................................ 173,351
Customers' acceptance liability................................................................................. 28,261
Intangible assets............................................................................................... 186,898
Goodwill........................................................................................................ 48,143
Deferred tax assets............................................................................................. 1,640,046
Other assets.................................................................................................... 1,730,038
---------------
Total..................................................................................................... (Yen)96,531,713
===============
Liabilities and Shareholders' Equity:
Deposits:
Domestic offices:
Non-interest-bearing........................................................................................ (Yen) 3,987,854
Interest-bearing............................................................................................ 52,257,085
Overseas offices, principally interest-bearing................................................................ 11,058,739
---------------
Total deposits.............................................................................................. 67,303,678
---------------
Debentures...................................................................................................... 636,060
Call money, funds purchased, and payables under repurchase agreements........................................... 7,113,927
Payables under securities lending transactions.................................................................. 2,205,943
Due to trust account and other short-term borrowings............................................................ 4,255,646
Trading account liabilities..................................................................................... 3,603,153
Obligations to return securities received as collateral......................................................... 950,138
Bank acceptances outstanding.................................................................................... 28,261
Accrued interest................................................................................................ 132,655
Long-term debt.................................................................................................. 5,159,132
Other liabilities............................................................................................... 2,590,183
---------------
Total liabilities........................................................................................... 93,978,776
---------------
Commitments and contingent liabilities
Shareholders' equity:
Capital stock:
Preferred stock:
Class 1--authorized, 81,400 shares; issued and outstanding, 81,400 shares at September 30, 2002,
March 31, 2003 and September 30, 2003 with no stated value (aggregate liquidation preference
of (Yen)244,200 million)................................................................................. 122,100
Class 2--convertible: authorized, 100,000 shares; issued, 100,000 shares at September 30, 2002,
March 31, 2003 and September 30, 2003; outstanding, 100,000 shares at September 30, 2002
and March 31, 2003, and 56,200 shares at September 30, 2003 with no stated value (aggregate
liquidation preference of (Yen)200,000 million at September 30, 2002 and March 31, 2003, and
112,400 million at September 30, 2003)................................................................... 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 at September 30, 2002,
6,232,162 shares at March 31, 2003 and 6,357,861 shares at September 30, 2003 with no stated
value...................................................................................................... 984,708
Capital surplus............................................................................................... 1,058,611
Retained earnings:
Appropriated for legal reserve.............................................................................. 237,474
Unappropriated.............................................................................................. 168,036
Accumulated other changes in equity from nonowner sources, net of taxes....................................... (114,790)
---------------
Total....................................................................................................... 2,556,139
Less treasury stock, at cost--158,034 common shares at September 30, 2002, 3,226 common shares at
March 31, 2003 and 2,367 common shares at September 30, 2003............................................... 3,202
---------------
Shareholders' equity--net................................................................................... 2,552,937
---------------
Total..................................................................................................... (Yen)96,531,713
===============
September 30,
2003
(Unaudited)
----------------
Assets:
Cash and due from banks......................................................................................... (Yen) 6,146,842
Interest-earning deposits in other banks........................................................................ 3,632,526
Call loans, funds sold, and receivables under resale agreements................................................. 2,548,561
Receivables under securities borrowing transactions............................................................. 4,767,886
Trading account assets (including assets pledged that secured parties are permitted to sell or repledge of
(Yen)1,090,382 million at September 30, 2002, (Yen)1,807,819 million at March 31, 2003 and (Yen)2,243,357
million at September 30, 2003)................................................................................. 9,711,675
Investment securities:
Securities available for sale--carried at estimated fair value (including assets pledged that secured parties
are permitted to sell or repledge of (Yen)2,909,808 million at September 30, 2002, (Yen)3,049,692 at
March 31, 2003 and (Yen)1,896,949 million at September 30, 2003)............................................. 22,613,343
Securities being held to maturity--carried at amortized cost.................................................. 275,587
Other investment securities................................................................................... 186,149
----------------
Total investment securities................................................................................. 23,075,079
----------------
Loans, net of unearned income and deferred loan fees (including assets pledged that secured parties are
permitted to sell or repledge of (Yen)739,146 million at September 30, 2002, (Yen)864,978 million at March
31, 2003 and (Yen)658,616 million at September 30, 2003)....................................................... 47,969,643
Allowance for credit losses..................................................................................... (1,069,044)
----------------
Net loans................................................................................................... 46,900,599
----------------
Premises and equipment--net..................................................................................... 612,963
Accrued interest................................................................................................ 155,991
Customers' acceptance liability................................................................................. 20,555
Intangible assets............................................................................................... 231,448
Goodwill........................................................................................................ 51,488
Deferred tax assets............................................................................................. 1,329,689
Other assets.................................................................................................... 2,663,477
----------------
Total..................................................................................................... (Yen)101,848,779
================
Liabilities and Shareholders' Equity:
Deposits:
Domestic offices:
Non-interest-bearing........................................................................................ (Yen) 4,923,055
Interest-bearing............................................................................................ 53,311,678
Overseas offices, principally interest-bearing................................................................ 11,621,863
----------------
Total deposits.............................................................................................. 69,856,596
----------------
Debentures...................................................................................................... 517,499
Call money, funds purchased, and payables under repurchase agreements........................................... 7,528,704
Payables under securities lending transactions.................................................................. 2,080,340
Due to trust account and other short-term borrowings............................................................ 5,520,915
Trading account liabilities..................................................................................... 3,466,253
Obligations to return securities received as collateral......................................................... 1,746,315
Bank acceptances outstanding.................................................................................... 20,555
Accrued interest................................................................................................ 112,296
Long-term debt.................................................................................................. 5,407,370
Other liabilities............................................................................................... 2,368,458
----------------
Total liabilities........................................................................................... 98,625,301
----------------
Commitments and contingent liabilities
Shareholders' equity:
Capital stock:
Preferred stock:
Class 1--authorized, 81,400 shares; issued and outstanding, 81,400 shares at September 30, 2002,
March 31, 2003 and September 30, 2003 with no stated value (aggregate liquidation preference
of (Yen)244,200 million)................................................................................. 122,100
Class 2--convertible: authorized, 100,000 shares; issued, 100,000 shares at September 30, 2002,
March 31, 2003 and September 30, 2003; outstanding, 100,000 shares at September 30, 2002
and March 31, 2003, and 56,200 shares at September 30, 2003 with no stated value (aggregate
liquidation preference of (Yen)200,000 million at September 30, 2002 and March 31, 2003, and
112,400 million at September 30, 2003)................................................................... 56,200
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 at September 30, 2002,
6,232,162 shares at March 31, 2003 and 6,357,861 shares at September 30, 2003 with no stated
value...................................................................................................... 1,028,508
Capital surplus............................................................................................... 1,057,916
Retained earnings:
Appropriated for legal reserve.............................................................................. 239,454
Unappropriated.............................................................................................. 665,828
Accumulated other changes in equity from nonowner sources, net of taxes....................................... 55,545
----------------
Total....................................................................................................... 3,225,551
Less treasury stock, at cost--158,034 common shares at September 30, 2002, 3,226 common shares at
March 31, 2003 and 2,367 common shares at September 30, 2003............................................... 2,073
----------------
Shareholders' equity--net................................................................................... 3,223,478
----------------
Total..................................................................................................... (Yen)101,848,779
================
See the accompanying notes to Condensed Consolidated Financial Statements.
39
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
Six months ended
September 30,
------------------------------
2002 2003
-------------- --------------
(in millions, except
per share data)
Interest income:
Loans, including fees................................................................... (Yen) 544,972 (Yen) 473,211
Deposits in other banks................................................................. 41,077 25,533
Investment securities................................................................... 196,536 205,589
Trading account assets.................................................................. 4,706 15,296
Call loans, funds sold, and receivables under resale agreements and securities borrowing
transactions........................................................................... 31,173 25,609
-------------- --------------
Total................................................................................ 818,464 745,238
-------------- --------------
Interest expense:
Deposits................................................................................ 130,277 91,012
Debentures.............................................................................. 5,657 2,313
Call money, funds purchased, and payables under repurchase agreements and securities
lending transactions................................................................... 53,949 51,826
Due to trust account, other short-term borrowings, and trading account liabilities...... 18,928 22,687
Long-term debt.......................................................................... 76,937 58,703
-------------- --------------
Total................................................................................ 285,748 226,541
-------------- --------------
Net interest income..................................................................... 532,716 518,697
Provision (credit) for credit losses.................................................... 232,632 (130,675)
-------------- --------------
Net interest income after provision (credit) for credit losses.......................... 300,084 649,372
-------------- --------------
Non-interest income:
Fees and commissions.................................................................... 251,841 267,627
Foreign exchange gains--net............................................................. 113,511 259,704
Trading account profits--net............................................................ 145,548 17,983
Investment securities gains--net........................................................ 28,870 148,916
Other non-interest income............................................................... 31,682 19,737
-------------- --------------
Total................................................................................ 571,452 713,967
-------------- --------------
Non-interest expense:
Salaries and employee benefits.......................................................... 241,732 252,813
Occupancy expenses--net................................................................. 60,418 59,639
Other non-interest expenses............................................................. 301,511 270,237
-------------- --------------
Total................................................................................ 603,661 582,689
-------------- --------------
Income before income taxes and cumulative effect of a change in accounting
principle.............................................................................. 267,875 780,650
Income taxes............................................................................ 163,622 251,794
-------------- --------------
Income before cumulative effect of a change in accounting principle..................... 104,253 528,856
Cumulative effect of a change in accounting principle, net of tax....................... (532) --
-------------- --------------
Net income.............................................................................. (Yen) 103,721 (Yen) 528,856
============== ==============
Income allocable to preferred shareholders.............................................. (Yen) 8,336 (Yen) 4,168
-------------- --------------
Net income available to common shareholders............................................. (Yen) 95,385 (Yen) 524,688
============== ==============
Amounts per share (in yen):
Basic earnings per common share--income available to common shareholders before
cumulative effect of a change in accounting principle.................................. (Yen)17,191.86 (Yen)83,825.00
Basic earnings per common share--net income available to common shareholders............ 17,096.50 83,825.00
Diluted earnings per common share--income available to common shareholders before
cumulative effect of a change in accounting principle.................................. 15,147.97 80,512.47
Diluted earnings per common share--net income available to common shareholders.......... 15,057.33 80,512.47
See the accompanying notes to Condensed Consolidated Financial Statements.
40
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
from Nonowner Sources (Unaudited)
Gains (Losses), Net of
Income Taxes
---------------------------
Six months ended
September 30,
---------------------------
2002 2003
------------- ------------
(in millions)
Net income............................................................. (Yen) 103,721 (Yen)528,856
------------- ------------
Other changes in equity from nonowner sources:
Net unrealized holding gains (losses) on investment securities
available for sale................................................ (287,675) 176,693
Reclassification adjustment for gains included in net income........ (40,296) (92,271)
------------- ------------
Total........................................................... (327,971) 84,422
------------- ------------
Net unrealized gains on derivatives qualifying for cash flow hedges. 2,649 3,068
Reclassification adjustment for gains included in net income........ (2,965) (3,410)
------------- ------------
Total........................................................... (316) (342)
------------- ------------
Minimum pension liability adjustments............................... (18,500) 74,492
------------- ------------
Foreign currency translation adjustments............................ (61,457) 11,516
Reclassification adjustment for losses included in net income....... 61 247
------------- ------------
Total........................................................... (61,396) 11,763
------------- ------------
Total changes in equity from nonowner sources.......................... (Yen)(304,462) (Yen)699,191
============= ============
See the accompanying notes to Condensed Consolidated Financial Statements.
41
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
Six months ended
September 30,
------------------------------
2002 2003
-------------- --------------
(in millions)
Preferred stock (Class 1):
Balance at beginning of period................................................. (Yen) 122,100 (Yen) 122,100
-------------- --------------
Balance at end of period....................................................... (Yen) 122,100 (Yen) 122,100
============== ==============
Preferred stock (Class 2):
Balance at beginning of period................................................. (Yen) 100,000 (Yen) 100,000
Conversion of Class 2 preferred stock to common stock.......................... -- (43,800)
-------------- --------------
Balance at end of period....................................................... (Yen) 100,000 (Yen) 56,200
============== ==============
Common stock:
Balance at beginning of period................................................. (Yen) 873,156 (Yen) 984,708
Issuance of new shares of common stock by conversion of Class 2 preferred stock -- 43,800
-------------- --------------
Balance at end of period....................................................... (Yen) 873,156 (Yen)1,028,508
============== ==============
Capital surplus:
Balance at beginning of period................................................. (Yen) 850,835 (Yen)1,058,611
Recognition of tax benefit arising from treasury stock held by a subsidiary.... 54,008 --
Gains (losses) on sale of shares of treasury stock, net of taxes............... 3,618 (695)
-------------- --------------
Balance at end of period....................................................... (Yen) 908,461 (Yen)1,057,916
============== ==============
Retained earnings appropriated for legal reserve:
Balance at beginning of period................................................. (Yen) 236,537 (Yen) 237,474
Transfer from unappropriated retained earnings................................. 937 1,980
-------------- --------------
Balance at end of period....................................................... (Yen) 237,474 (Yen) 239,454
============== ==============
Unappropriated retained earnings:
Balance at beginning of period................................................. (Yen) 11,593 (Yen) 168,036
Net income..................................................................... 103,721 528,856
-------------- --------------
Total.................................................................. 115,314 696,892
-------------- --------------
Deduction:
Cash dividends:
Common share.............................................................. (33,404) (24,916)
Preferred share (Class 1)................................................. (6,716) (3,358)
Preferred share (Class 2)................................................. (1,620) (810)
Transfer to retained earnings appropriated for legal reserve................ (937) (1,980)
-------------- --------------
Total.................................................................. (42,677) (31,064)
-------------- --------------
Balance at end of period....................................................... (Yen) 72,637 (Yen) 665,828
============== ==============
Accumulated other changes in equity from nonowner sources, net of taxes:
Balance at beginning of period................................................. (Yen) 523,250 (Yen) (114,790)
Net change during the period................................................... (408,183) 170,335
-------------- --------------
Balance at end of period....................................................... (Yen) 115,067 (Yen) 55,545
============== ==============
Treasury stock:
Balance at beginning of period................................................. (Yen) (90,974) (Yen) (3,202)
Purchases of shares of treasury stock.......................................... (1,571) (66)
Sales of shares of treasury stock.............................................. 9,789 1,195
-------------- --------------
Balance at end of period....................................................... (Yen) (82,756) (Yen) (2,073)
============== ==============
Total shareholders' equity..................................................... (Yen)2,346,139 (Yen)3,223,478
============== ==============
See the accompanying notes to Condensed Consolidated Financial Statements.
42
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended
September 30,
----------------------------------
2002 2003
---------------- ----------------
(in millions)
Cash flows from operating activities:
Net income............................................................................. (Yen) 103,721 (Yen) 528,856
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:...........................................................................
Provision (credit) for credit losses................................................ 232,632 (130,675)
Investment securities gains--net.................................................... (28,870) (148,916)
Foreign exchange losses (gains)--net................................................ 115,979 (314,237)
Provision for deferred income taxes................................................. 132,954 226,406
Increase in trading account assets, excluding foreign exchange contracts............ (257,898) (997,300)
Increase in trading account liabilities, excluding foreign exchange contracts....... 700,851 308,864
Decrease in accrued interest receivable and other receivables....................... 27,017 14,055
Decrease in accrued interest payable and other payables............................. (55,765) (14,418)
Other--net.......................................................................... 99,612 79,669
---------------- ----------------
Net cash provided by (used in) operating activities.............................. 1,070,233 (447,696)
---------------- ----------------
Cash flows from investing activities:.....................................................
Proceeds from sales and maturities of investment securities available for sale......... 22,204,801 24,803,591
Purchases of investment securities available for sale.................................. (22,768,633) (23,767,351)
Proceeds from maturities of investment securities being held to maturity............... 23,945 29,186
Purchases of investment securities being held to maturity.............................. -- (39,927)
Proceeds from sales of other investment securities..................................... 6,512 7,474
Purchases of other investment securities............................................... (17,558) (58,364)
Net decrease in loans.................................................................. 915,611 118,653
Net decrease (increase) in interest-earning deposits in other banks.................... (43,849) 194,271
Net decrease (increase) in call loans, funds sold, and receivables under resale
agreements and securities borrowing transactions...................................... 364,751 (3,658,834)
Other--net............................................................................. 116,322 (208,554)
---------------- ----------------
Net cash provided by (used in) investing activities.............................. 801,902 (2,579,855)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits............................................................... 1,107,440 3,061,922
Net decrease in debentures............................................................. (1,071,192) (118,561)
Net increase (decrease) in call money, funds purchased, and payables under repurchase
agreements and securities lending transactions........................................ (402,844) 321,807
Net increase (decrease) in other short-term borrowings................................. (526,124) 1,318,956
Net decrease in due to trust account................................................... (646,757) (65,077)
Proceeds from issuance of long-term debt............................................... 572,193 810,295
Repayment of long-term debt............................................................ (396,598) (547,503)
Dividends paid......................................................................... (41,724) (29,000)
Other--net............................................................................. 18,350 76,560
---------------- ----------------
Net cash provided by (used in) financing activities.............................. (1,387,256) 4,829,399
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents.............................. (68,376) 56,413
---------------- ----------------
Net increase in cash and cash equivalents................................................. 416,503 1,858,261
Cash and cash equivalents at beginning of period.......................................... 1,832,399 4,288,581
---------------- ----------------
Cash and cash equivalents at end of period................................................ (Yen) 2,248,902 (Yen) 6,146,842
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................................................. (Yen) 341,273 (Yen) 240,835
Income taxes, net of refunds.............................................................. 21,522 25,416
Non-cash investing activities:
Marketable equity securities transferred to employee retirement benefit trusts............ -- 87,586
Held-to-maturity securities transferred from available-for-sale category.................. -- 78,343
See the accompanying notes to Condensed Consolidated Financial Statements.
43
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. BASIS OF SEMIANNUAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited semiannual condensed consolidated financial
statements are stated in Japanese yen, the currency of the country in which
Mitsubishi Tokyo Financial Group, Inc. ("MTFG") is incorporated and principally
operates. Such condensed consolidated financial statements include the accounts
of MTFG and its subsidiaries (collectively, the "MTFG Group") and reflect all
adjustments (consisting of normal recurring adjustments) that, in the opinion
of management, are necessary for a fair presentation of amounts involved to
conform with generally accepted accounting principles and prevailing practices
within the banking industry in the United States of America ("US GAAP"). The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with consolidated financial statements included in MTFG's
Annual Report on Form 20-F for the fiscal year ended March 31, 2003 ("Form
20-F"). Certain information that would be included in annual financial
statements but not required for semiannual reporting purpose under US GAAP has
been omitted or condensed.
The preparation of condensed consolidated financial statements in conformity
with US GAAP requires management to use estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
New Accounting Pronouncements Adopted
Goodwill and Other Intangible Assets--Effective April 1, 2002, the MTFG
Group adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill,
formerly amortized over its 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 performed the required impairment tests of goodwill and
intangible assets with indefinite lives upon adoption of SFAS No. 142. The
initial adoption resulted in a cumulative effect charge to earnings of (Yen)532
million.
Guarantor's Accounting and Disclosure Requirements for Guarantees--Effective
January 1, 2003, the MTFG Group adopted the initial recognition and measurement
provisions of Financial Accounting Standards Board 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. The adoption of
FIN No. 45 did not have a material impact on the financial position or results
of operations.
44
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
Variable Interest Entities--In January 2003, the Financial Accounting
Standards Board (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 ("VIEs").
The consolidation requirements of FIN No. 46 apply immediately to VIEs 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, which
has been amended by the FASB as described below.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN No. 46R"). FIN No. 46R modifies FIN No. 46 in certain respects including
the scope exception, the definition of VIEs, and other factors that would
affect the determination of VIEs and primary beneficiaries that consolidate
VIEs. FIN No. 46R, as written, applies to VIEs created prior to January 31,
2003 no later than the end of the first reporting period that ends after March
15, 2004, and to all special purpose entities no later than the first reporting
period that ends on or after December 31, 2003. Accordingly, the MTFG Group
currently expects to apply FIN No. 46R for the fiscal year ending March 31,
2004. However, management understands that the application date of FIN No. 46R
to foreign private issuers ("FPIs") is under discussion, and that it is
possible that the application date for FPIs may be changed; in which case the
application date for the MTFG Group may be changed to the fiscal year ending
March 31, 2005.
Refer to Form 20-F for further discussion of the VIEs in which the MTFG
Group holds variable interests, including the required transitional disclosure.
Although the MTFG Group is in the process of assessing and analyzing the impact
of the adoption of FIN No. 46R, results of current analysis indicate that its
relationship with VIEs has not materially changed from the facts disclosed in
Form 20-F.
Accounting for Asset Retirement Obligations--Effective April 1, 2003, the
MTFG Group adopted SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 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 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. The adoption of SFAS No. 143 did not have a
material impact on the financial position or results of operations.
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
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. In particular,
SFAS No. 149 (1) clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative, (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
45
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
of instruments that are subject to the requirements of SFAS No. 133. SFAS No.
149 is generally effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 did not have a material 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. SFAS No. 150 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, which is MTFG Group's
fiscal year ending March 31, 2005. On November 7, 2003, FASB Staff Position No.
150-3, "Effective Date, Disclosures, and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity," delayed the effective date of certain provisions of SFAS No. 150 for
certain mandatorily redeemable noncontrolling interests.
The MTFG Group is not a party to any financial instruments after May 31,
2003, to which SFAS No. 150 must be applied immediately but has not completed
evaluating the impact of the adoption of SFAS No. 150 to other instruments.
Accordingly, the MTFG Group cannot reasonably estimate the ultimate impact of
SFAS No. 150 on the financial position or results of operations.
Recently Issued Accounting Pronouncements
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.
On June 30, 2003, The Bank of Tokyo-Mitsubishi, Ltd. ("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. 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 estimated until the completion of the
transfer.
46
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
Disclosure about pension and other postretirement benefit--In December 2003,
the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB Statements No.
87, 88, and 106" ("SFAS No. 132R"), which replaces existing FASB disclosure
requirements for pensions. SFAS No. 132R requires disclosure of more details
about plan assets, benefit obligations, cash flows, benefit costs and other
relevant information. SFAS No. 132R is generally effective for fiscal years
ending after December 15, 2003, and for interim periods beginning after
December 15, 2003.
Loans and Debt Securities Acquired in a Transfer--In December 2003, the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in
a Transfer" ("SOP 03-3"), which supersedes AICPA Practice Bulletin 6,
"Amortization of Discounts on Certain Acquired Loans" and addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least, in
part, to credit quality. SOP 03-3 limits accretable yield to the excess of the
investor's estimate of undiscounted cash flows over the investor's initial
investment in the loan and prohibits the recognition of the non-accretable
difference. Under SOP 03-3, subsequent increases in cash flows expected to be
collected generally should be recognized prospectively through adjustment of
the loan's yield over its remaining life while any decreases in such cash flows
should be recognized as impairments. SOP 03-3 also provides guidance with
regard to presentation and disclosures.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. The MTFG Group has not completed the study of what effect
SOP 03-3 would have on the financial position or results of operations.
47
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
2. INVESTMENT SECURITIES
The amortized costs and estimated fair values of investment securities
available for sale and being held to maturity at March 31, 2003 and September
30, 2003 were as follows:
March 31, 2003
-------------------------------
Amortized Estimated
cost fair value
--------------- ---------------
Securities available for sale:
Debt securities, principally
Japanese government
bonds and corporate
bonds........................... (Yen)20,418,799 (Yen)20,773,004
Marketable equity
securities...................... 2,865,276 3,591,062
--------------- ---------------
Total securities available for
sale............................ (Yen)23,284,075 (Yen)24,364,066
=============== ===============
Debt securities being held to
maturity, principally Japanese
prefectural and official
institutions bonds.................. (Yen) 191,132 (Yen) 203,524
=============== ===============
September 30, 2003
-------------------------------------------------------------
Net
Net unrealized
unrealized Amortized Estimated gains
gains cost fair value (losses)
-------------- --------------- --------------- --------------
(in millions)
Securities available for sale:
Debt securities, principally
Japanese government
bonds and corporate
bonds........................... (Yen) 354,205 (Yen)18,789,613 (Yen)18,684,064 (Yen) (105,549)
Marketable equity
securities...................... 725,786 2,625,620 3,929,279 1,303,659
-------------- --------------- --------------- --------------
Total securities available for
sale............................ (Yen)1,079,991 (Yen)21,415,233 (Yen)22,613,343 (Yen)1,198,110
============== =============== =============== ==============
Debt securities being held to
maturity, principally Japanese
prefectural and official
institutions bonds.................. (Yen) 12,392 (Yen) 275,587 (Yen) 282,658 (Yen) 7,071
============== =============== =============== ==============
In the fiscal 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 during the fiscal year ended March 31, 2001. The MTFG Group classified
subsequent acquisitions of securities as either available for sale or trading
until the fiscal year ended March 31, 2003. In the six months ended September
30, 2003, the MTFG Group reassessed the appropriateness of the classification
of the securities which had been classified as available for sale and
reclassified (Yen)78,343 million of such securities into the held-to-maturity
category. The transfer did not have a material impact on the financial position
or results of operations.
48
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans at March 31, 2003 and September 30, 2003 by domicile and industry of
the borrower are summarized below. Classification of loans by industry is based
on the industry segment loan classifications as defined by The Bank of Japan.
March 31, September 30,
2003 2003
--------------- ---------------
(in millions)
Domestic:
Manufacturing................................ (Yen) 6,034,347 (Yen) 5,864,556
Construction................................. 1,277,407 1,158,309
Real estate.................................. 4,298,146 4,195,529
Services..................................... 4,953,830 4,923,882
Wholesale and retail......................... 5,458,337 5,158,570
Banks and other financial institutions....... 3,598,028 3,853,788
Communication and information services....... 1,516,020 952,370
Other industries............................. 3,858,031 4,550,737
Consumer..................................... 7,425,702 7,945,841
--------------- ---------------
Total domestic........................... 38,419,848 38,603,582
--------------- ---------------
Foreign:
Governments and official institutions........ 235,093 144,390
Banks and other financial institutions....... 928,059 799,031
Commercial and industrial.................... 8,413,452 8,009,005
Other........................................ 510,179 444,231
--------------- ---------------
Total foreign............................ 10,086,783 9,396,657
--------------- ---------------
Less unearned income and deferred loan fees--net 41,062 30,596
--------------- ---------------
Total *.................................. (Yen)48,465,569 (Yen)47,969,643
=============== ===============
--------
* Includes loans held for sale of (Yen)3,965 million at March 31, 2003 and
(Yen)13,208 million at September 30, 2003, which are carried at lower-of-cost
or estimated fair value.
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 The
Mitsubishi Trust and Banking Corporation ("MTBC"), and 90 days or more with
respect to loans of certain foreign banking subsidiaries, except when the loans
are in the process of collection based upon the judgment of management.
49
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
The following is a summary of nonaccrual loans, restructured loans and
accruing loans past due 90 days or more at March 31, 2003 and September 30,
2003:
March 31, September 30,
2003 2003
-------------- --------------
(in millions)
Nonaccrual loans..................................... (Yen)1,413,559 (Yen)1,049,397
Restructured loans................................... 1,319,068 1,167,186
Accruing loans contractually past due 90 days or more 20,399 17,682
-------------- --------------
Total *....................................... (Yen)2,753,026 (Yen)2,234,265
============== ==============
--------
* Includes loans held for sale of (Yen)3,790 million at March 31, 2003 and
(Yen)7,197 million at September 30, 2003.
The MTFG Group's impaired loans primarily include nonaccrual loans and
restructured loans. At March 31, 2003 and September 30, 2003, the impaired
loans were (Yen)2,619,716 million and (Yen)2,074,165 million, respectively,
which do not include loans held for sale that were impaired of (Yen)3,790
million and (Yen)7,197 million, respectively.
Changes in the allowance for credit losses for the six months ended
September 30, 2002 and 2003 were as follows:
Six months ended
September 30,
------------------------------
2002 2003
-------------- --------------
(in millions)
Balance at beginning of period............................. (Yen)1,735,180 (Yen)1,360,136
-------------- --------------
Provision (credit) for credit losses....................... 232,632 (130,675)
Charge-offs................................................ 419,999 176,149
Less--Recoveries........................................... 36,389 18,774
-------------- --------------
Net charge-offs............................................ 383,610 157,375
-------------- --------------
Other, principally foreign currency translation adjustments (12,970) (3,042)
-------------- --------------
Balance at end of period................................... (Yen)1,571,232 (Yen)1,069,044
============== ==============
4. ASSETS PLEDGED
At September 30, 2003, assets pledged as collateral for call money, funds
purchased, payables for repurchase agreements and securities lending
transactions, other short-term borrowings, and long-term debt and for certain
other purposes were as follows:
September 30,
2003
--------------
(in millions)
Trading account assets (Yen)2,295,020
Investment securities. 4,214,774
Loans................. 2,339,040
Other................. 20,791
--------------
Total.......... (Yen)8,869,625
==============
50
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
5. PARENT COMPANY SHARES HELD BY SUBSIDIARY BANKS
MTFG's subsidiary banks owned shares of common stock of MTFG. Such shares
were included in treasury stock in the condensed consolidated balance sheets as
a deduction from shareholders' equity.
During the six months ended September 30, 2002, the common shares of MTFG
held by one of the subsidiary banks were written down for tax purposes. The tax
consequence of such write-down was treated as a capital transaction and
credited to capital surplus.
6. REGULATORY CAPITAL REQUIREMENTS
MTFG, BTM, MTBC, UnionBanCal Corporation ("UNBC"), a subsidiary of BTM, and
certain other subsidiaries are subject to various banking and other regulatory
requirements including capital requirements promulgated by the regulatory
authorities in countries in which they operate. As such, failure to meet such
regulatory requirements, including evolving regulatory measures being
implemented by the Japanese government with respect to the Japanese banking
industry, may have a direct material impact on MTFG's consolidated financial
statements.
The table below presents MTFG's consolidated risk-based capital,
risk-adjusted assets, and risk-based capital ratios at March 31, 2003 and
September 30, 2003 (underlying figures are calculated in accordance with
Japanese banking regulations based on information derived from the financial
statements prepared in accordance with Japanese GAAP as required by the
Financial Services Agency of Japan):
Minimum
capital
March 31, September 30, ratios
2003 2003 required
--------------- --------------- --------
(in millions, except percentages)
Capital components:
Tier I capital........... (Yen) 3,128,681 (Yen) 3,683,723
Tier II capital.......... 2,847,637 3,127,237
Total risk-based capital. 5,968,401 6,789,776
Risk-weighted assets........ 55,049,634 54,543,364
Capital ratios:
Tier I capital........... 5.68% 6.75% 4.00%
Total risk-based capital. 10.84 12.44 8.00
51
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
The table below presents the consolidated and stand-alone risk-based capital
ratios of BTM and MTBC at March 31, 2003 and September 30, 2003 (underlying
figures are calculated in accordance with Japanese banking regulations based on
information derived from the financial statements prepared in accordance with
Japanese GAAP as required by the Financial Services Agency of Japan):
Minimum
capital
March 31, September 30, ratios
2003 2003 required
--------- ------------- --------
Consolidated capital ratios:
BTM:
Tier I capital........... 5.34% 6.45% 4.00%
Total risk-based capital. 10.43 11.89 8.00
MTBC:
Tier I capital........... 6.66 7.44 4.00
Total risk-based capital. 12.00 14.13 8.00
Stand-alone capital ratios:
BTM:
Tier I capital........... 5.12 6.39 4.00
Total risk-based capital. 10.24 12.23 8.00
MTBC:
Tier I capital........... 6.16 7.55 4.00
Total risk-based capital. 11.23 14.34 8.00
The table below presents the risk-based capital ratios of UNBC and Union
Bank of California, a subsidiary of UNBC, at December 31, 2002 and June 30,
2003:
Minimum
capital
December 31, June 30, ratios
2002 2003 required
------------ -------- --------
UNBC:
Tier I capital (to risk-weighted assets)..... 11.18% 11.44% 4.00%
Tier I capital (to quarterly average assets). 9.75 9.63 4.00
Total capital (to risk-weighted assets)...... 12.93 13.06 8.00
Ratios
Minimum OCC*
capital requires to
December 31, June 30, ratios be "well
2002 2003 required capitalized"
------------ -------- -------- ------------
Union Bank of California:
Tier I capital (to risk-weighted assets)..... 10.37% 10.74% 4.00% 6.00%
Tier I capital (to quarterly average assets). 9.01 8.99 4.00 5.00
Total capital (to risk-weighted assets)...... 11.87 12.18 8.00 10.00
--------
* OCC represents the Office of the Comptroller of the Currency of the United
States.
52
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
7. EARNINGS PER COMMON SHARE
Basic earnings per common share ("EPS") excludes the dilutive effects of
potential common shares and is computed by dividing net income available to
common 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 for the period.
The weighted average number of shares used in the computations of basic EPS
and diluted EPS were 5,579 thousand shares and 5,870 thousand shares,
respectively, for the six months ended September 30, 2002, and 6,259 thousand
shares and 6,516 thousand shares, respectively, for the six months ended
September 30, 2003.
For the six months ended September 30, 2002, the 3% Exchangeable Guaranteed
Notes due 2002 and Class 2 Preferred Stock were included to compute diluted
EPS. For the six months ended September 2003, Class 2 Preferred Stock,
convertible securities and stock options issued by the subsidiaries were
included to compute diluted EPS. The convertible securities are 1 1/4%
Convertible Bonds due 2013 and 1/4% Convertible Bonds due 2014 issued by
Mitsubishi Securities. The stock options are based on the stock-based
compensation plans of UNBC.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The MTFG Group uses various derivative financial instruments, including
interest rate swaps and foreign currency forward contracts, for trading,
customer accommodation and risk management purposes. The MTFG Group's trading
activities include dealing and customer accommodation activities to meet the
financial needs of its customers and related derivatives are measured at fair
value with gains and losses recognized currently in earnings. The MTFG Group
also accounts for derivatives held for risk management purpose as trading
positions and measures them at fair value with gains/losses recognized
currently in earnings unless such derivatives qualify for hedge accounting.
UNBC adopts hedging strategies and uses certain derivatives to achieve hedge
accounting. Cash flow hedge strategy is adopted primarily for the purpose of
hedging forecasted future loan interest payments as well as future interest
income from variable rate loans, utilizing interest rate swaps and various
other interest rate options. A fair value hedge is intended to effectively
convert certain fixed rate liabilities (including a trust preferred security
and medium-term notes) into floating rate instruments. Gains and losses
recorded due to hedge ineffectiveness were not material for the six months
ended September 30, 2002 or 2003.
53
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
9. OBLIGATIONS UNDER GUARANTEES AND OTHER OFF-BALANCE-SHEET INSTRUMENTS
The MTFG Group provides customers with a variety of guarantees and similar
arrangements as described in its Form 20-F. The table below presents the
contractual or notional amounts of such guarantees at March 31, 2003 and
September 30, 2003:
March 31, September 30,
2003 2003
----------- -------------
(in billions)
Standby letters of credit and guarantees....... (Yen) 4,021 (Yen) 3,887
Performance guarantees......................... 1,092 1,187
Liquidity facilities........................... 1,361 619
Derivative instruments......................... 29,054 23,420
Guarantees for the repayment of trust principal 2,411 2,243
Liabilities of trust accounts.................. 3,078 4,303
Others......................................... 2 1
----------- -----------
Total................................... (Yen)41,019 (Yen)35,660
=========== ===========
In addition to obligations under guarantees and similar arrangements set
forth above, the MTFG Group issues other off-balance-sheet instruments to meet
the financing needs of its customers and other purposes as described in its
Form 20-F. The table below presents the contractual amounts with regard to such
instruments at March 31, 2003 and September 30, 2003:
March 31, September 30,
2003 2003
----------- -------------
(in billions)
Commitments to extend credit.... (Yen)25,591 (Yen)25,676
Commercial letters of credit.... 387 263
Resale and repurchase agreements 631 184
Securities lending transactions. 83 283
Commitments to make investments. 46 39
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 financial position or results of
operations.
10. BUSINESS SEGMENTS
MTFG conducts its business through its principal subsidiaries, BTM and MTBC,
which have been granted substantial autonomy in conducting their business, and,
therefore, management currently recognizes each of BTM and MTBC as a principal
business segment of the MTFG Group.
The business segment information of BTM and its subsidiaries ("BTM Group")
and MTBC and its subsidiaries ("MTBC Group"), set forth below, is derived from
the internal management reporting systems 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
54
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
the basis of Japanese GAAP and is not consistent with the condensed
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 MTBC Group with income before income taxes and
cumulative effect of a change in accounting principle under US GAAP. Management
of each subsidiary does not use information on segments' total assets to
allocate resources and assess performance and has not prepared information on
segment assets. Accordingly, business segment information on total assets is
not available.
BTM Group
Investment
Global Banking and
Retail Commercial Corporate Asset Operations
Banking Banking Banking Management UNBC Services Treasury
------------ ------------ ------------ ----------- ------------ ----------- ------------
(in millions)
Six months ended September 30, 2002:
Net revenue:
BTM:
Net interest
income............ (Yen) 81,797 (Yen)100,154 (Yen) 59,370 (Yen) 2,613 (Yen) -- (Yen) 317 (Yen) 91,425
Net fees........... 10,065 22,029 33,970 13,360 -- 3,808 (3,186)
Other.............. 5,815 15,004 10,348 7,837 -- 406 66,598
BTM's subsidiaries... 37,317 4,943 24,885 16,959 134,564 8,855 1,122
------------ ------------ ------------ ----------- ------------ ----------- ------------
Total.............. 134,994 142,130 128,573 40,769 134,564 13,386 155,959
Operating expenses..... 107,883 63,761 70,485 28,351 77,968 12,530 13,396
------------ ------------ ------------ ----------- ------------ ----------- ------------
Operating profit (loss) (Yen) 27,111 (Yen) 78,369 (Yen) 58,088 (Yen)12,418 (Yen) 56,596 (Yen) 856 (Yen)142,563
============ ============ ============ =========== ============ =========== ============
Six months ended September 30, 2003:
Net revenue:
BTM:
Net interest
income............ (Yen) 84,196 (Yen) 94,085 (Yen) 60,083 (Yen) 6,320 (Yen) -- (Yen) 330 (Yen) 47,070
Net fees........... 18,887 23,381 33,675 15,779 -- 3,463 (2,848)
Other.............. 5,774 20,289 12,580 13,483 -- 413 64,249
BTM's subsidiaries... 36,054 5,523 18,289 18,350 139,776 8,234 698
------------ ------------ ------------ ----------- ------------ ----------- ------------
Total.............. 144,911 143,278 124,627 53,932 139,776 12,440 109,169
Operating expenses..... 101,644 61,047 62,796 24,665 83,094 11,970 13,176
------------ ------------ ------------ ----------- ------------ ----------- ------------
Operating profit (loss) (Yen) 43,267 (Yen) 82,231 (Yen) 61,831 (Yen)29,267 (Yen) 56,682 (Yen) 470 (Yen) 95,993
============ ============ ============ =========== ============ =========== ============
Mitsubishi
Securities Other* Total
----------- ------------- ------------
Six months ended September 30, 2002:
Net revenue:
BTM:
Net interest
income............ (Yen) -- (Yen) (24,843) (Yen)310,833
Net fees........... -- (18,035) 62,011
Other.............. -- (4,051) 101,957
BTM's subsidiaries... 13,012 4,339 245,996
----------- ------------- ------------
Total.............. 13,012 (42,590) 720,797
Operating expenses..... 16,222 74,397 464,993
----------- ------------- ------------
Operating profit (loss) (Yen)(3,210) (Yen)(116,987) (Yen)255,804
=========== ============= ============
Six months ended September 30, 2003:
Net revenue:
BTM:
Net interest
income............ (Yen) -- (Yen) 20,866 (Yen)312,950
Net fees........... -- (19,195) 73,142
Other.............. -- (42,268) 74,520
BTM's subsidiaries... 71,454 2,573 300,951
----------- ------------- ------------
Total.............. 71,454 (38,024) 761,563
Operating expenses..... 54,666 19,537 432,595
----------- ------------- ------------
Operating profit (loss) (Yen)16,788 (Yen) (57,561) (Yen)328,968
=========== ============= ============
--------
* Other includes the Systems Services unit, the e-Business & Initiatives unit,
and the Corporate Center and eliminates overlapping allocation.
For the six months ended September 30, 2002, BTM's securities subsidiaries
were included in the investment banking business unit. However, a significant
portion of BTM's domestic securities subsidiaries were merged into Mitsubishi
Securities on September 1, 2002. Accordingly, BTM began measuring the results
of Mitsubishi Securities separately from BTM's investment banking business unit
in the latter half of the fiscal year ended March 31, 2003. BTM presented
Mitsubishi Securities as a separate operating segment for the six months ended
September 30, 2003. Presentation for the six months ended September 30, 2002
has been reclassified to conform to the presentation for the six months ended
September 30, 2003.
After the formation of Mitsubishi Securities, BTM transferred part of its
investment banking business, including securitization, M&A advisory and
derivatives, to Mitsubishi Securities. This transfer did not significantly
affect the current year results of BTM's investment banking
55
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
business unit or Mitsubishi Securities. It is not practicable to restate the
previous year's information based on the current year's presentation or to
recast the current year's information based on the previous year's presentation.
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. Accordingly, BTM presented the
investment banking and asset management business unit as a single operating
segment for the six months ended September 30, 2003. Presentation for the six
months ended September 30, 2002 has been reclassified to conform to the
presentation for the six months ended September 30, 2003.
Certain securities subsidiaries of BTM's investment banking and asset
management business unit located in the United States, Hong Kong and Singapore
were placed under the control of Mitsubishi Securities during the six months
ended September 30, 2003. This change was not material to the operating results
of BTM's investment banking and asset management business unit or Mitsubishi
Securities for the six months ended September 30, 2003. Further, the change is
not reflected to the business segment information table above since it occurred
subsequent to the semi-annual period ends of these subsidiaries.
In addition, BTM transferred its custody business, which had been included
in the asset management business unit, to the operations services unit during
the six months ended September 30, 2003. Presentation for the six months ended
September 30, 2002 has been reclassified to conform to the presentation for the
six months ended September 30, 2003.
Management measures performance of each business unit by "operating profit,"
which includes profits or losses of BTM's subsidiaries. Financial information
for 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 BTM's regulatory reporting to the
Financial Services Agency of Japan.
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 six months
ended September 30, 2002 and 2003:
Global Total
Commercial Corporate amount
Banking Banking eliminated
---------- ----------- -----------
(in millions)
Six months ended September 30, 2002:
Investment banking and asset management. (Yen)4,337 (Yen)13,610 (Yen)17,947
Six months ended September 30, 2003:
Investment banking and asset management. 9,826 18,368 28,194
56
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
MTBC Group
Trust- Trust Real Global
Banking Assets Estate Markets Other* Total
----------- ----------- ---------- ----------- ----------- ------------
(in millions)
Six months ended September 30, 2002:
MTBC:
Net revenue:
Net interest income................. (Yen)38,762 (Yen) -- (Yen) -- (Yen)56,162 (Yen) 2,342 (Yen) 97,266
Fees on jointly operated designated
money in trusts................... 6,126 -- -- 12,236 7,140 25,502
Other fees.......................... 14,904 16,825 7,724 (2,665) -- 36,788
Other............................... 15 -- -- (7,648) (118) (7,751)
----------- ----------- ---------- ----------- ----------- ------------
Total........................... 59,807 16,825 7,724 58,085 9,364 151,805
Operating expenses.................... 36,811 14,606 4,737 8,906 13,723 78,783
MTBC's subsidiaries................... -- -- -- -- 3,516 3,516
----------- ----------- ---------- ----------- ----------- ------------
Operating profit (loss)............... (Yen)22,996 (Yen) 2,219 (Yen)2,987 (Yen)49,179 (Yen) (843) (Yen) 76,538
=========== =========== ========== =========== =========== ============
Six months ended September 30, 2003:
MTBC:
Net revenue:
Net interest income................. (Yen)38,416 (Yen) -- (Yen) -- (Yen)63,059 (Yen) 1,842 (Yen)103,317
Fees on jointly operated designated
money in trusts................... 4,014 -- -- 9,403 5,768 19,185
Other fees.......................... 18,003 14,497 6,204 (3,146) -- 35,558
Other............................... 4 -- -- 20,973 (410) 20,567
----------- ----------- ---------- ----------- ----------- ------------
Total........................... 60,437 14,497 6,204 90,289 7,200 178,627
----------- ----------- ---------- ----------- ----------- ------------
Operating expenses.................... 36,219 13,817 4,841 8,185 14,264 77,326
MTBC's subsidiaries................... -- -- -- -- 3,405 3,405
----------- ----------- ---------- ----------- ----------- ------------
Operating profit (loss)............... (Yen)24,218 (Yen) 680 (Yen)1,363 (Yen)82,104 (Yen)(3,659) (Yen)104,706
=========== =========== ========== =========== =========== ============
--------
* Other includes net revenue and operating expenses relating to certain
divisions of the corporate headquarters (e.g., personnel and planning) and
certain other adjustments.
Management measures performance of each business group by "operating
profit." "Operating profit" is a defined term in MTBC's regulatory reporting to
the Financial Services Agency of Japan. The financial performance of
subsidiaries are measured by ordinary profit or loss derived from the financial
statements of MTBC's subsidiaries. Because of the limited significance of
subsidiary operations, MTBC does not assign the subsidiary financial
performance to business groups but manages them on an aggregate basis.
Reconciliation
As set forth above, the measurement bases and the income and expense items
covered are very different between the internal management reporting system and
the accompanying condensed consolidated statements of income. Therefore, it is
impracticable to present reconciliations of the business segments' total
information, other than operating profit, to corresponding items in the
accompanying condensed consolidated statements of income.
57
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
Reconciliations of the total amounts of operating profits of BTM Group and
MTBC Group under the internal management reporting systems for the six months
ended September 30, 2002 and 2003 presented above to income before income taxes
and cumulative effect of a change in accounting principle shown on the
condensed consolidated statements of income are as follows:
Six months ended
September 30,
-------------------
2002 2003
--------- --------
(in billions)
Operating profit:
BTM Group.............................................................. (Yen) 256 (Yen)329
MTBC Group............................................................. 77 105
--------- --------
Total.............................................................. 333 434
Trust fees adjusted for credit losses of trust assets..................... (5) (8)
(Provision) credit for credit losses...................................... (173) 131
Trading account profits (losses)--net..................................... 29 (83)
Equity investment securities gains (losses)--net.......................... (82) 141
Debt investment securities gains--net..................................... 79 9
Foreign exchange gains--net............................................... 136 234
Losses on other real estate owned......................................... (6) --
Minority interest......................................................... -- (14)
Other--net................................................................ (43) (63)
--------- --------
Income before income taxes and cumulative effect of a change in accounting
principle............................................................... (Yen) 268 (Yen)781
========= ========
58
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued) (Unaudited)
11. STOCK-BASED COMPENSATION
As described in Form 20-F, two subsidiaries of MTFG have several stock-based
compensation plans. As permitted by the provision of SFAS No. 123, they account
for those stock-based compensation plans by the intrinsic value method
prescribed in APB No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations; and, no compensation expense has been recognized for
stock option grants.
Had the stock-based compensation plans be accounted for under the fair value
based method of SFAS No. 123, the MTFG Group's compensation expense, net
income, and net income per share would have been the pro forma amounts
indicated in the following table:
Six months ended
September 30,
------------------------------
2002 2003
-------------- --------------
(in millions)
Reported net income.............................................. (Yen) 103,721 (Yen) 528,856
Stock-based employee compensation expense (determined under the
fair value based method for all awards, net of tax)............ (900) (963)
-------------- --------------
Pro forma net income, after stock-based employee compensation
expense........................................................ (Yen) 102,821 (Yen) 527,893
============== ==============
(in yen)
Basic earnings per common share--net income available to common
shareholders:
Reported...................................................... (Yen)17,096.50 (Yen)83,825.00
Pro forma..................................................... 16,935.10 83,671.15
Diluted earnings per common share--net income available to common
shareholders:
Reported...................................................... 15,057.33 80,512.47
Pro forma..................................................... 14,903.98 80,364.69
Compensation expense recognized for stock-based compensation other than
stock options for the six months ended September 30, 2002 and 2003 was not
significant.
12. EVENTS SINCE SEPTEMBER 30, 2003
Legal Proceedings for Local Taxes
On October 8, 2003, BTM and MTBC entered into a settlement-at-court with the
Tokyo Metropolitan Government and the Tokyo Governor and withdrew their
complaints regarding the Tokyo Metropolitan Government's local tax on large
banks. The settlement included (a) a revision of the applicable tax rate to
0.9% from 3.0%, effective retroactive to the date of the 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. On October 7, 2003, BTM
and MTBC received an aggregate tax refund plus accrued interest amounting to
(Yen)41,958 million. As the settlement had not been finalized at September 30,
2003, the MTFG Group did not record any gain in the accompanying condensed
consolidated financial statements.
59
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (concluded) (Unaudited)
Temporary National Control of the Ashikaga Bank
In November 2003, the Japanese Government announced that the Ashikaga Bank,
an unaffiliated regional bank in Japan, would be put into government control
(temporary national control) in accordance with the Deposit Insurance Law
because the Ashikaga Bank recorded a substantial amount of deficit and its
risk-adjusted capital ratio became below 0%. In December 2003, the Japanese
Government had completed acquisition of all shares of the Ashikaga Bank without
consideration, which was held by the Ashigin Financial Group, the holding
company of the Ashikaga Bank. Thereafter, the Ashigin Financial Group filed for
a relief under the Corporate Rehabilitation Law in December 2003.
At September 30, 2003, the MTFG Group had an outstanding loan balance, net
of allowance for credit losses, amounting to (Yen)1.2 billion to Ashikaga Bank,
which was determined collectible based on current available information. In
addition, the MTFG Group has an investment in shares of common stock issued by
the Ashigin Financial Group of (Yen)4.8 billion at September 30, 2003. These
shares were classified as available-for-sale securities and were measured at
fair value based on the quoted market price as of September 30, 2003, in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Since the announcement of the government control of the
Ashikaga Bank, the share price has been significantly below the level of market
price as of September 30, 2003. The MTFG Group determined that substantial
portion of its investment in the Ashigin Financial Group was impaired
subsequent to September 30, 2003, based on quoted stock price level after the
announcement of temporary nationalization. Accordingly, the accompanying
condensed consolidated financial statements do not reflect such subsequent
impairment of the investment for the six months ended September 30, 2003.
Approval of Dividends
On November 25, 2003, the Board of Directors approved payment of cash
dividends to the shareholders of record on September 30, 2003 of (Yen)41,250
per share of Class 1 preferred stock, totaling (Yen)3,358 million, and
(Yen)8,100 per share of Class 2 preferred stock, totaling (Yen)455 million.
* * * * *
60
Mitsubishi Tokyo Financial Group, Inc. and Subsidiaries
Average Balance Sheets, Interest and Average Rates (Unaudited)
Six months ended September 30,
-------------------------------------------------------------------------------------
2002 2003
----------------------------------------- ------------------------------------------
Average Average
Average rate Average rate
balance Interest (Annualized) balance Interest (Annualized)
--------------- ------------ ------------ ---------------- ------------ ------------
(in millions, except percentages)
Assets:
Interest-earning assets:
Interest-earning deposits in other
banks.............................. (Yen) 3,475,664 (Yen) 41,077 2.36% (Yen) 3,304,758 (Yen) 25,533 1.54%
Call loans, funds sold, and
receivables under resale
agreements and securities
borrowing transactions............. 3,994,051 31,173 1.56 5,103,939 25,609 1.00
Trading account assets.............. 4,444,002 4,706 0.21 6,017,093 15,296 0.51
Investment securities............... 24,091,386 196,536 1.63 27,138,906 205,589 1.51
Loans............................... 49,550,365 544,972 2.19 48,510,126 473,211 1.95
--------------- ------------ ---- ---------------- ------------ ----
Total interest-earning
assets.......................... 85,555,468 818,464 1.91 90,074,822 745,238 1.65
--------------- ------------ ---- ---------------- ------------ ----
Non-interest-earning assets:
Cash and due from banks............. 1,745,596 3,475,459
Other non-interest-earning
assets............................. 7,341,140 8,318,357
Allowance for credit losses......... (1,701,469) (1,344,437)
--------------- ----------------
Total non-interest-earning
assets.......................... 7,385,267 10,449,379
--------------- ----------------
Total average assets................... (Yen)92,940,735 (Yen)100,524,201
=============== ================
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Deposits............................ (Yen)58,325,956 130,277 0.45 (Yen) 61,684,610 91,012 0.29
Debentures.......................... 1,787,337 5,657 0.63 581,686 2,313 0.79
Call money, funds purchased, and
payables under repurchase
agreements and securities
lending transactions............... 8,293,538 53,949 1.30 10,921,674 51,826 0.95
Due to trust account, other short-
term borrowings, and trading
account liabilities................ 5,137,591 18,928 0.73 5,439,928 22,687 0.83
Long-term debt...................... 4,994,319 76,937 3.07 5,237,991 58,703 2.24
--------------- ------------ ---- ---------------- ------------ ----
Total interest-bearing
liabilities..................... 78,538,741 285,748 0.73 83,865,889 226,541 0.54
--------------- ------------ ---- ---------------- ------------ ----
Non-interest-bearing liabilities....... 11,867,828 13,997,226
--------------- ----------------
Shareholders' equity................... 2,534,166 2,661,086
--------------- ----------------
Total average liabilities and
shareholders' equity.................. (Yen)92,940,735 (Yen)100,524,201
=============== ================
Net interest income and average
interest rate spread.................. (Yen)532,716 1.18% (Yen)518,697 1.11%
============ ==== ============ ====
Net interest income as a
percentage of total average
interest-earning assets............... 1.24% 1.15%
==== ====
61
MTFG Stock Exchange Listings
Tokyo
Osaka
New York (NYSE ticker: MTF)
London
Mitsubishi Tokyo Financial Group, Inc.
4-1, Marunouchi 2-chome,
Chiyoda-ku, Tokyo 100-6326, Japan
Tel: 81-3-3240-8111
www.mtfg.co.jp/english/
The Bank of Tokyo-Mitsubishi, Ltd.
7-1, Marunouchi 2-chome,
Chiyoda-ku, Tokyo 100-8388, Japan
Tel: 81-3-3240-1111
www.btm.co.jp/english/
The Mitsubishi Trust and Banking Corporation
4-5, Marunouchi 1-chome
Chiyoda-ku, Tokyo 100-8212, Japan
Tel: 81-3-3212-1211
www.mitsubishi-trust.co.jp/english/engl00.html
Printed in Japan (February 2004)