Message from the CEO

Demonstrating Our Strength by Advancing Decisive Reforms in an Adverse Operating Environment

Results of the First Year of the Medium-Term Business Plan —Progressing with Structural Reforms and Facing New ChallengesResults of the First Year of the Medium-Term Business Plan

In 2015, the global economy was significantly affected by the abrupt slowing of once-burgeoning investment-backed growth in the Chinese economy and the end of radical monetary easing policies of the United States. These two factors had been powering the drive to get the economy back on track since its derailment into worldwide recession in the wake of the Lehman Brothers bankruptcy in 2008.

With the waning of these driving forces, however, economic deceleration has been spreading throughout emerging nations, and a fall in oil and mineral prices has led to economic deterioration in resource-exporter countries, with market conditions becoming increasingly volatile. Moreover, the rise of the so-called “Islamic State” and Syrian refugee crisis are posing serious geopolitical and social threats to European stability. Meanwhile, in June 2016, the people of the United Kingdom voted in favor of “Brexit,” approving the exit from the European Union. In sum, in many ways instability is setting in around the world.

Against this backdrop, the Mitsubishi UFJ Financial Group (MUFG) launched a new medium-term business plan in April 2015 in conjunction with the 10th anniversary of its establishment.

Centered on the theme “Evolution and reform to achieve sustainable growth for MUFG,” the plan was formulated on the assumption of various factors affecting our future operating environment. Among these assumptions are the following:

  • •In Japan, the working population will rapidly decrease due to a graying society and a declining birth rate.
  • •The composition of businesses and industries will change over time.
  • •Under “Abenomics,” an economic stimulus package that has entered its second stage under the initiative of the current Abe administration, domestic business sectors will see structural reforms.
  • •Overseas, although the U.S. economy is improving, Europe will face lingering political and economic issues, while the deceleration of economic growth in China and other emerging nations will lead to new developments that require close monitoring.
  • •Furthermore, the advancing “digital revolution” may well evolve into a game changer that impacts industry around the world at a pace far faster than expected.

Giving due consideration to such factors, we are continuing to ensure that we remain a corporate group boasting strong competitiveness and capable of achieving sustainable growth over the next decade.

Outline of Medium-Term Business Plan (FY 2015-FY 2017)

Now I will explain the results of the first year of the medium-term business plan and challenges we confronted.

Making Steady Progress, MUFG Meets Earnings Targets in Every Business SectorProgress

Taking a look at the results for the year ended March 31, 2016 (Fiscal 2015), I would like to discuss progress made in our wealth management business for retail customers in Japan. In a historic move, MUFG, along with Morgan Stanley, made a coordinated global offering, simultaneously listing the three previously government-owned Japan Post Group member companies, with the total value of their shares amounting to ¥1.4 trillion.

To pull off this major placement project, MUFG fully employed its broking channels, creating the largest stock subscription it has offered since launching a securities joint venture with Morgan Stanley. In the process, we strove to cultivate an even broader investor base and, to this end, focused on winning customers who have not used securities-related services by fully leveraging our customer contacts at bank counters. This, in turn, helped facilitate a shift in an ongoing customer trend from savings to investment. Our efforts have thus yielded a new securities business model that only MUFG is capable of operating.

In the domestic corporate banking business, loans increased steadily. Also, we have seen significant results in asset management services for corporate customers with abundant cash reserves and the real estate brokerage business, which entails the collaboration of banking and trust bank units to take the advantage of the burgeoning market environment. We became the industry leader in terms of M&A advisory service for domestic and cross-border deals and bond underwriting service in Japan. We also ranked second in equity underwriting. At the same time, we were able to secure such robust ancillary business as loans and foreign exchange, suggesting that our unique business model bring us huge advantages.

In May 2016, MUFG agreed to form a strategic capital and business alliance with Hitachi Capital Corporation (HC). With MUFG acquiring a 23% equity stake in HC from its parent, Hitachi, Ltd. Together, Hitachi, HC, MUFG, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), and Mitsubishi UFJ Lease & Finance Company Limited (MUL), will work to strengthen the operations of HC and MUL while establishing a comprehensive financing platform capable of supporting the social infrastructure business in Japan and its expansion overseas. In addition, HC and MUL plan to initiate discussions aimed at stepping up their partnerships, with an eye to the possibility of business integration.

Meanwhile, the global banking business has seen deceleration in growth, particularly in Asia, amid the slowing of growth in economies worldwide. However, our steady efforts to develop and upgrade our business foundation made progress. We appointed Mr. Stephen Cummings as BTMU’s CEO for the United States (U.S. CEO). Under his leadership, BTMU hired experienced senior employees in the United States and integrated key management personnel at MUFG Union Bank, N.A. (Union Bank), a local Group subsidiary based on the West Coast, and BTMU’s U.S. branch network.

In Asia, the Thailand-based Bank of Ayudhya Public Company Limited, which we acquired in 2013, and Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), an equity-method affiliate, recorded firm performances. In April 2016, we acquired a 20% equity stake in Security Bank Corporation, the fifth-largest private bank in the Philippines, where economic growth has been remarkable. In these ways, we stepped up initiatives to seize growth opportunities arising from burgeoning Asian economies.

In the global markets business, we have seen instability and the tightening of relevant regulations, which have prompted restructuring and downsizing among some major global financial institutions. Nevertheless, collaborative efforts between MUFG’s banking and securities units yielded favorable results. Specifically, our sales and trading (S&T) operations, backed by customer flows, recorded firm results in Japan and overseas. In our Asset Liability Management (ALM) operations, we began to place a greater emphasis on foreign-currency-denominated assets in response to lower interest rates on the yen. By doing so, we were able to post sufficient valuation gains while securing profit in excess of initial forecasts, although it was down year on year. We are also steadily moving toward the upcoming integration of our S&T business, consolidating our banking and securities units, scheduled for fiscal 2016 or later.

In the asset management and investor services business, we established Mitsubishi UFJ Kokusai Asset Management Co., Ltd. in July 2015 through the merger of Mitsubishi UFJ Asset Management Co., Ltd. and KOKUSAI Asset Management Co., Ltd. This merger was intended to reinforce our investment management structure. Bringing together the strengths of the two merged companies, which lie in product development and sales channels, the new company will be even quicker to create and deliver products finely tuned to customer needs. In the field of investor services, we continually expanded our global network in specific areas, including hedge funds and private equity, through such means as acquiring a business from the Switzerland-based UBS Group AG. As a result, MUFG is now ranked among the top ten firms worldwide in terms of the value of fund assets under administration in these fields.

In fiscal 2015, we faced severe conditions in the second half, thus posting a year-on-year decrease in profit. However, thanks to the success of the aforementioned initiatives, we were able to meet our target for profit attributable to shareholders, set at ¥950 billion, as announced at the beginning of the fiscal year.

Digital Strategies

In line with its digital strategies, MUFG’s Digital Innovation Division is charged with the R&D of new digital financing technologies and business models on an across-the-board basis for a range of Group companies engaged in the banking, trust, and securities businesses. Overseas, our representatives in Silicon Valley, New York, and Singapore support a global network that enables us to swiftly introduce cutting-edge technologies and businesses and make investment decisions. In addition, we have launched the MUFG FinTech Accelerator Program aimed at nurturing FinTech entrepreneurs, and we host “hackathon” events. These and other proactive initiatives are expected to bring future benefits, for example, allowing lower-cost cross-border bank transfers and an AI-based investment advisory service. Furthermore, technological breakthroughs may enable the drastic streamlining of processes to ensure compliance with complicated regulations (RegTech), the application of blockchain technology to enhance trade and settlement infrastructures, and the significant automation of back-office work. In other words, financial business as we know it today can be changed significantly by new technologies.

On the other hand, increased digitization is bringing with it serious cybersecurity problems. In February 2016, for example, a fraudulent money transfer perpetrated against the Bangladesh Central Bank sent a wake-up call to bankers around the world regarding the dire threat of cyber theft. MUFG is not immune to the danger of such an attack. Therefore, we are taking lessons from our overseas counterparts and continuously updating our security measures to secure our ability to counter every new maneuver that cyber attackers may make. We are also aware of the importance of relevant international public-private initiatives.

Addressing Three Adverse Factors and Assuring Secure Global Governance while Disseminating a Corporate Culture that Values PrinciplesThree Adverse Factors and Global Governance

Now, let me shift our sights to some of the challenges confronting us.

First, we must address external adverse factors affecting the operating environment. As I mentioned above, the deceleration of the global economy and a resulting rise in credit costs, as well as a lingering worldwide trend toward low interest rates—and in some cases, negative interest rates—are together posing difficult challenges. MUFG has enjoyed steady growth in the past several years under a policy of maintaining a strong domestic base while seeking out growth opportunities overseas. However, this growth can be stalled by economic deceleration overseas, especially in Asia—our second “home market.” Also, net credit costs that had been benefits due to a reversal of the provision for credit losses in the past few years have become a factor that eats into profit, even though the current net credit cost ratio is still lower than the average for the past 10 years and has remained low for some time. In fiscal 2015, we saw an upsurge in credit costs, especially in the U.S. petroleum exploration and production sector, due to a steep decline in oil gas prices, in addition to rating downgrades for some major borrowers. Above all, the central-bank driven negative interest rate policy is putting downward pressure on net interest income. As the positive impact of this policy on the economy is not yet clear, a sense of uncertainty about the economic outlook is engendering caution about making new investments in the household and corporate sectors, significantly affecting the operation of financial institutions.

Second, we are striving to secure solid global governance. Our operations presently encompass broad geographical areas, with more than 140,000 employees working in approximately 50 countries around the world. Therefore, our governance system needs to be tailored to the characteristics of each market region as well as local laws and regulations, while ensuring that an integrated approach is maintained on a global basis. In sum, we need a flexible yet solid governance system. The past has shown us that a worldwide financial crisis can force even prominent global financial groups to downsize or even withdraw from a given market when stress reveals governance-related vulnerabilities. We cannot fail to learn from their experience.

MUFG has a number of measures in place to realize solid governance at both the local and global levels. For example, our U.S. Risk Committee supervises overall risk management activities undertaken with regard to our U.S. operations, reporting to MUFG’s Risk Committee, which itself reports to the Board of Directors. The creation of an effective internal control system capable of governing wide geographical regions and business areas is challenging. We believe that what matters most is management’s determination to keep our organizational structure simple and not tolerate the existence of blind spots. To that end, we must maintain focus on our core businesses and market regions.

Third, we recognize that compliance and corporate culture are becoming ever more important to our business. Since the worldwide recession, financial institutions have been embroiled in a series of enforcement actions and legal scandals. These incidents include serious LIBOR violations, the manipulation of exchange rates, the inappropriate marketing of securitized paper, sanctions and money laundering, and assisting in tax evasion. As a result, the moral bearings of financial institutions and their employees have come under scrutiny.

Financial institutions have also made significant expenditures to resolve these liabilities and to strengthen their compliance programs. As regulations vary by country, conducting business beyond borders requires that we painstakingly ensure compliance with multiple sets of rules for multiple countries. This is a heavy burden on management, but there must be no deficiency in legal compliance.

Accordingly, MUFG’s management has made ensuring compliance in global business a key internal control issue. Even when there are no concrete rules for a specific business field, we will not tolerate actions that go against our principles. To prevent illegal or unethical actions, we must have a corporate culture that discourages any motivation to carry out such actions. Discussions at recent Board of Director meetings have focused on the issue of our corporate culture. MUFG’s management, including me, will disseminate a clear message to raise the compliance awareness of all employees. At the same time, we will remain attentive to problems perceived by frontline colleagues while persistently working to resolve such problems.

Results of Our Corporate Governance Reforms and Future InitiativesCorporate Governance

We are relentlessly striving to improve our corporate governance, clarifying the roles of the Board of Directors and securing competent and diverse individuals as our outside directors, with each director, and the management team as a whole, strongly committed to this pursuit.

Having shifted its governance structure from a conventional Japanese system to a “company with committees” system in June 2015, MUFG has until now been striving to build an even more sophisticated governance system. When it comes to governance systems, I adhere to the principle of substance over form. Even the United States, where many corporations have been in the vanguard of corporate governance systems, saw a case of major corporate accounting misconduct in the early 2000s. This was followed by the global financial crisis, one of the causes of which is a financial institution’s failure to implement solid governance. Obviously, adherence to “form” doesn’t guarantee “effectiveness.”

MUFG formed a dedicated Board Governance Committee. Over the course of a year, this committee was able to establish the current governance system, and we are continually working to make improvements to this system.

We believe that a solid governance system requires: 1) defined roles for the Board of Directors, 2) the provision of resources necessary to facilitate active discussions at the Board of Directors meetings, and 3) the clear awareness and commitment of each director and management team to effective corporate governance.

The Board of Directors’ role is to formulate basic strategies, establish internal control systems, appoint key personnel, and monitor business execution. We believe that all these functions should be reinforced by competent and diverse outside directors. With this in mind, our outside directors include individuals who have held CEO or CFO positions in different sectors, an expert in international corporate accounting, a lawyer who is well versed in governance issues, and a university professor specializing in finance. Each of these individuals contributes to discussions based on experience and knowledge. In addition, our Outside Director Meeting, chaired by Mr. Tsutomu Okuda, convenes additional sessions to deliberate on such important management issues as capital policy. In these ways, we have been striving to better reflect the opinions of outside directors in management.

Looking ahead, we will facilitate outside directors’ understanding of MUFG operations by, for example, hosting an off-site meeting to discuss strategies. We will also better use our succession plans to nurture the next generation of management personnel.

Last, we are aware of the importance of communicating points raised at the Board of Directors meetings with each business division and Group operating company. Securing such smooth communication across the board is key to creating new value, which will, in turn, be delivered to our stakeholders, including our customers. I am serving concurrently as a director at Morgan Stanley, and I’ve seen remarkable progress in that company’s efforts to improve corporate governance over the past several years. We will remain quick to incorporate their best practices to improve our own.

Committed to Securing Sustainable Growth in an Evolving Business EnvironmentSecuring Sustainable Growth

Facing arduous conditions, we will demonstrate our true strength by accelerating evolution and reforms, holding strong against three adverse factors.

Amid a drastically changing management environment, our basic strategy of maintaining a strong domestic franchise while seeking growth opportunities overseas remains unchanged. To overcome current adversities, we will accelerate our initiatives to achieve evolution and reforms by focusing on the customer perspective, taking a Group-driven approach, and making productivity improvements in line with the current medium-term business plan. We grow when we are able to recognize the opportunity offered by change, however unfavorable it may first seem. It is often said that trials reveal your true strength. We believe that now is the time to do our utmost and prove our true strength.

Accordingly, I’ll explain specific initiatives for growth by prevailing in the face of the three main adverse factors before us. We have formulated these initiatives for “accelerating evolution”—an expression purposefully used in the medium-term business plan.

First, we are committed to tackling the impact of the deceleration of growth in economies around the world, which has led to the slowing of growth in our existing overseas operations. Our overseas business consists of three core segments: corporate finance, commercial banking (retail and SME business), and asset management / investors services business. We pursue these core businesses with due consideration given to the geographical distribution of our global network encompassing Asia, the Americas, and Europe.

As for corporate finance, we have been engaging in this business since we began to expand overseas. Today, virtually all our international footholds, in approximately 50 countries around the globe, provide this service. Although we began by serving mainly Japanese companies, our current customer portfolio consists mainly of major foreign companies, in fact, they now account for around 70%. In Asia, growth in this field has slowed down due to shrinking trade and investment, despite initial expectations. But our operations in the United States and Europe have seen progress in line with projections. Breaking away from a business model that is overly dependent on lending, we will pursue a shift to a cross-selling business structure involving transaction banking, including cash management; market products; and capital market transactions, thereby enhancing RORA.

As for commercial banking, we began entering ASEAN nations over the past several years, successfully expanding an overseas network that had previously consisted only of Union Bank, based on the U.S. West Coast. Specifically, we invested in VietinBank (Vietnam), Bank of Ayudhya (Thailand), and Security Bank (the Philippines). The home countries of these three banks are now developing economic ties with Japan and boast burgeoning growth potentials. We intend to strategically seize growth opportunities resulting from rising domestic demand in these countries. By bringing to bear our knowledge, financing techniques, and management methodologies to help these companies enhance their corporate value, we will step up mutually beneficial collaboration and eventually develop an MUFG version of the trans-pacific partnership. Since the current showings of these Asian partner banks are favorable, we are confident that they will become significant contributors to our efforts to overcome the adverse factors.

In addition, our existing operations related to corporate finance, along with Union Bank, are facing the challenge of enhancing top-line revenues while reining in rising expenses, including those necessary to secure responsiveness to new regulations. To resolve this challenge, Union Bank and BTMU integrated their U.S. branches, while in Europe BTMU branches are being merged into the Dutch subsidiary. BTMU also plans to establish an administrative center in Manila, the Philippines, to consolidate the back-office operations of its Asian offices. In these ways, we are implementing a variety of reform measures.

As for the asset management business, we are aspiring to expand these operations in the face of growing wealth accumulation in terms of both household and corporate savings despite the deceleration of growth in economies around the world and anxieties over long-term stagnation. In addition, the international financial industry is now seeing a growing presence of asset management companies, which have been picking up business as banks and securities firms under tighter regulations have gradually lost financing brokerage abilities. Of course, in the field of pension and investment trusts, MUFG is one of the largest players in Japan. Overseas, however, we’ve not been fully venturing beyond our alliance with equity-method affiliates, such as the UK-based Aberdeen and the Australia-based AMP. We will step up our efforts to boost revenues from commission fees in this business, with an eye to diversifying our profit base.

Second, we are determined to not allow rising credit costs to undermine our operations. Although our domestic business is not expected to suffer from an immediate rise in credit costs, we are highly vigilant to cyclical changes in the environment and the possibilities of bubble economies resulting from radical monetary-easing policies across the globe. Overseas, we will reduce our total credit exposures for the resource and energy sectors while abstaining from credit concentration in other cyclical industrial segments. Simultaneously, we will enhance our responsiveness to drastic changes in the market environment.

Third, we are implementing multiple countermeasures against the effect of the negative interest rate policy. We are also striving to leverage the advantageous aspects of this policy through the stimulation of potential funding demand and the development of investment products. To these ends, we are implementing three initiatives, as follows.

The first initiative is curbing expenses while improving productivity. For example, we have reviewed overlaps of functions across our organization. As I mentioned previously, we are integrating BTMU’s overseas banking footprints while integrating S&T business currently conducted separately by banking and securities entities. BTMU is also pursuing the downsizing of its domestic workforce, looking to decrease the number of career track employees by 3,500 (or approximately 21.1%) over the next 10 years.

The second initiative is enhancing risk-return management. We are striving to increase “hybrid loans” —with higher margins and a limited range of eligible borrowers—, certain proportions of which are recognized by rating agencies as capital. Simultaneously, by distributing financial products backed by these loans, we will earn fees while satisfying the unmet needs of investors favoring higher returns. We also are discussing the revisions of service fees, which had been set by taking deposit revenues for granted.

The third initiative is reducing our strategic equity holdings. In response to the enactment of Japan’s Corporate Governance Code and from the perspective of risk mitigation, we began divesting such stocks since last year. So far, our strategically held stocks have sold at a level exceeding our projections. We will continue to sell these stocks in a systematic manner while consulting with our corporate clients to gain their understanding.

In addition, in June 2016, younger business leaders at MUFG launched an intersectional task force aimed at deliberating measures to improve productivity. Without exceptions, the task force is actively scrutinizing every aspect of our operations, ranging from corporate functions and distribution channels to the back office, with an eye toward remaining on-trend with digitization of the industry.

Meanwhile, Mitsubishi UFJ NICOS Co., Ltd recorded a loss in the first half of fiscal 2015. This was mainly attributable to the posting of additional allowance for the refunding of interest overcharges and the reversal of deferred tax assets due to a downward revision in future taxable income resulting from the formulation of system upgrade plans. Currently, the renewal of systems is positioned as a key project affecting the company’s future performance, which had been operating three separate systems for three separate card brands—an unfavorable situation requiring emergency stopgap solutions over the years. By integrating these systems into a single sophisticated system, this project is expected to realize more cost-competitive operations. As a core MUFG subsidiary in the field of payment services, Mitsubishi UFJ NICOS will contribute to Group performance through the development of cutting-edge digital payment and new B-to-B-to-C businesses in collaboration with BTMU.

Nurturing Globally Capable Human Resources by Imbuing All Employees with MUFG Values and CultureHuman Resources

Last, I would like to comment on the nurturing and promotion of our human resources.

I believe that for a financial business, its human resources are its most essential resources. Although the advance of digitization may change the nature of the roles that human beings play in business, I am pretty sure that machines will never be able to take over such functions as strategic decision-making, leadership, and building bonds of trust with customers. Moreover, in step with the expansion of our business fields and geographical areas of operations, nurturing the next generation of leaders and employees is becoming an issue of critical importance.

When it comes to nurturing human resources, diversity will be key to securing competence. Although female colleagues currently account for nearly half of MUFG’s workforce in Japan, I often find myself questioning the barriers that continue to hinder them in realizing their full potential. More than 40,000 employees work at overseas Group companies, but I would ask, “How many of them have been promoted to key leadership positions?” In 2016, BTMU appointed two female corporate executive officers to supervise its overseas operations, while Mitsubishi UFJ Trust and Banking Corporation (MUTB) appointed one female corporate executive officer for domestic operations. At BTMU, the number of domestic employees taking maternity or childcare leave reached 1,500 (or approximately 9.7% of female colleagues), reflecting efforts to help employees strike an optimal work-life balance. BTMU has 47 women in general manager or branch manager positions. However, they are mainly in our retail banking business. There is much more to be done regarding gender equality. We will strive to assist women with their career development in a broader range of business fields.

At BTMU and MUTB, we also have raised the number of corporate executive officers hired overseas to 11. Not being content with the current status, we will accelerate our diversity initiatives by, for example, appointing a foreign national as a candidate for independent director of our board in the near future.

We are also aware of the importance of nurturing globally capable human resources. We launched the Global Leaders’ Forum, an across-the-board initiative aimed at nurturing the next generation of MUFG leaders; and expanded the scope of the forum’s activities to encompass the entire Group. Although I’ve been impressed by participants’ growing leadership competencies every time I attend a forum to comment on their final reports, I have repeatedly communicated the importance of spreading MUFG values and culture. Leaders are expected to seize every opportunity to disseminate clear messages about the Group’s mission, vision, and values among employees through the various channels available to them while ensuring that the principles they share are put into practice. As always, I’m fully committed to communicating this message, as are all other top management personnel.

In ConclusionIn Conclusion

For fiscal 2016, we have set our target for profit attributable to shareholders at ¥850 billion. This figure is down ¥100 billion compared with fiscal 2015. Although we will post a decrease in annual profit for the second consecutive year, we believe that, by meeting adversity head on, MUFG will be able to demonstrate its true strength. Now is the time for decisively taking a step forward, taking on new challenges and proving ourselves a corporate group worthy of the trust of our stakeholders. With all Group employees committed to this endeavor and with a shared sense of urgency, in fiscal 2016 MUFG will rally its strengths to execute the initiatives discussed above, blazing a path toward fiscal 2017, the final year of the current medium-term business plan.

We sincerely ask for your continued understanding and support.

July 2016

Nobuyuki Hirano Director President & Group CEO

Nobuyuki Hirano
President & Group CEO

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