Bank of Tokyo-Mitsubishi UFJ (Canada) Pillar 3 Disclosures As at January 31, 2013
Table of Contents Page Scope of application 1 Capital structure 1 Capital adequacy 2 Credit risk: general disclosures 3-5 Credit risk: disclosures for portfolio subject to the standardized approach 6 Credit risk mitigation: disclosures for standardized approach 7 General disclosure for exposures related to counterparty credit risk 8 Securitization: disclosure for standardized approach 9 Operation risk 10 Interest rate risk 10 Remuneration practices and policies 11-12
Scope of application In this document, the Bank of Tokyo-Mitsubishi UFJ (Canada) (the "Bank") provides its Pillar III disclosure as required by the Office of the Superintendent of Financial Institutions Canada (OSFI). The Bank is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., in Japan (the "parent bank"). The Bank was formed on January 1, 2006 as a result of an amalgamation between Bank of Tokyo-Mitsubishi (Canada) and UFJ Bank Canada and is licensed to operate in Canada as a foreign bank subsidiary with full banking powers under the Bank Act Canada. The Bank has offices in Toronto, Vancouver and Montreal. Its head office is at Royal Bank Plaza, South Tower, 200 Bay Street, Suite 1700, Toronto, Ontario, Canada M5J 2J1. With respect to capital, the Bank's objective is to maintain a capital base so as to maintain shareholder and market confidence and comply with regulatory requirements and to sustain future development of its business. The Bank has to comply with OSFI's Capital Adequacy Requirements (CAR) guideline including the definition of capital and the capital requirements set out therein. Effective January 1, 2013, OSFI updated its CAR guideline adopting Basel III requirements set out by the Basel Committee on Banking Supervision (BCBS), in particular 'Basel III: A global regulatory framework for more resilient banks and banking systems, dated December 2010 (revised June 2011) and Capitalisation of bank exposures to central counterparties, dated July 2012'. The adoption of Basel III is intended to strengthen the quality of capital as well as the required target ratios. Capital structure The Bank's total capital consists of tier 1 and tier 2 capital. Tier 1 capital consists of common equity tier 1 capital in the form of common shares, retained earnings and accumulated other comprehensive income (AOCI); the Bank does not hold any additional tier 1 capital. Tier 2 capital consists of subordinated debt. There is no regulatory adjustments to Tier 1 capital in 2013 as they will begin on January 1, 2014. The Bank issued 2 subordinated debts to its parent bank. All subordinated debts are compliant with Nonviability Contingent Capital (NVCC) requirements. The following table provides the Bank's composition of total capital as at January 31, 2013: Common Equity Tier 1 capital Common shares (unlimited number of common shares without par value; 4,021,932 shares issued and outstanding) $ 485,631 Retained earnings 225,796 Accumulated other comprehensive income - unrealized gains on AFS securities 30 Common Equity Tier 1 capital (CET1) / Tier 1 capital (T1) 711,457 Tier 2 capital Subordinated debt 165,000 Tier 2 capital (T2) 165,000 Total capital (TC = T1 + T2) $ 876,457 Page 1 of 12
Capital adequacy Canadian banks are required to comply with a common equity tier 1 capital target ratio of 7% effective first quarter of 2013. The Bank s common equity tier 1 capital ratio is 11.2% which exceeds the regulatory requirements by 4.2%. By the first quarter of 2014, Canadian banks are further expected to comply with a total tier 1 capital target ratio of 8.5% and a total capital target ratio of 10.5%. The Bank s total capital ratio as at January 31, 2013 was 13.80%. It exceeds those future requirements set by OSFI. The following table shows the Bank's risk weighted assets and capital ratios as at January 31, 2013 under the CAR guideline 2013: Common Equity Tier 1 capital / Tier 1 capital $ 711,457 Tier 2 capital 165,000 Total capital $ 876,457 Risk Weighted Assets Credit risk Corporate $ 5,826,024 Bank 20,139 Securitizations 372,806 Other 18,838 Total credit risk $ 6,237,807 Operation risk 115,088 Total risk weighted assets (1) $ 6,352,895 Common Equity Tier 1 capital / Tier 1 capital ratio 11.20% Total capital ratio 13.80% (1) Credit risk is determined under the standardized approach. Operational risk is determined under the basic indicator approach. Credit risk and operational risk are defined in the CAR guideline issued by OSFI. The market risk requirements are not applicable to the Bank because the Bank's value of trading book assets or the value of trading book liabilities does not exceed the thresholds set by OSFI. Page 2 of 12
Credit risk: general disclosures Credit risk is the risk that a customer or a counterparty to a financial instrument will cause a financial loss for the Bank by failing to discharge an obligation. The Bank applies the Basel III standardized approach to credit risk for computing the regulatory capital charge for credit risk. The Bank's credit risk management policy establishes the framework in which the Bank manages its credit risk. Amongst others, the following components are defined within the policy: credit authority, portfolio quality, credit extension policy, portfolio concentration limit, risk grading, lending policy of highly leveraged transactions and account officer responsibilities. The Bank ensures that credit risk is managed and controlled in compliance with the policy. Credit Examination of the Americas (HQA) performs an internal examination, at a minimum of every 18 months, on the implementation of credit policies and procedures, and assesses the effectiveness of the Bank's credit risk management program. The results are reported to Senior Management and Board of Directors. Impairment assessment The Bank aims to maintain a sufficient level of reserves to cover incurred losses by addressing impairment in 2 areas: individually assessed allowances and collectively assessed allowances. For accounting and regulatory purposes, the Bank uses an incurred loss model for the recognition of losses on impaired financial assets. This means that losses are only recognised when objective evidence of a specific loss event has been observed. The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. Individually assessed allowances Individual allowances are determined on an item-by-item basis and reflect the associated estimated credit loss. The individual allowance is the amount required to reduce the carrying value of an impaired loan to its estimated realizable amount. The estimated realizable amount is determined by discounting the expected future cash flows at the effective interest rate inherent in the loan at the date of impairment. This normally encompasses re-assessment of the enforceability of any collateral held and the timing and amount of actual and anticipated receipts. When the amounts and timing of future cash flows cannot be measured with reasonable reliability, either the fair value of any security underlying the loan, net of any expected realization costs or the observable market price for the loan is used to measure the estimated realizable amount. Collectively assessed allowances Collective allowances are established to absorb expected credit losses on the aggregate exposures in each of the Bank's business lines, for which losses cannot yet be determined on an item-by-item basis. The allowance is established through the application of historical loss factors to outstanding facilities, letters of credit, letters of guarantee and acceptances. Page 3 of 12
Credit risk: general disclosures (continued) Credit risk exposure by portfolio and sector before allowance for impairment, gross of unearned discount and before credit risk mitigation as at January 31, 2013 was: Undrawn Repo-style Other off- Derivative Total Industry Drawn commitment transactions balance sheet assets exposure Agricultural $ 64,198 $ 58,437 $ - $ 107 $ - $ 122,742 Manufacturing 256,833 459,702-61,101 377 778,013 Wholesale trade 305,501 65,419-1,819 2,178 374,917 Natural resources and energy 321,867 1,636,989-4,021 651 1,963,528 Transportation, communication 870,319 1,935,693-74,928 22 2,880,962 and other utilities Financial institutions 1,588,831 417,623 448,203 28,489 7,397 2,490,543 Retail trade 311,124 165,894-7,216-484,234 Construction/real estate 109,503 120,930-3,158-233,591 Service 244,464 169,906-8,204-422,574 Accounts receivable factored 34,300 - - - - 34,300 $ 4,106,940 $ 5,030,593 $ 448,203 $ 189,043 $ 10,625 $ 9,785,404 Impaired loans (net of individual allowance) Transportation, communication and other utilities $ 430 - - - - $ 430 The aging of business loans and acceptances at the reporting date was: Current Past due (61-90 days) Past due (over 90 days) Total business loans and acceptances per financial statements Less: Reclassification of debt securities not quoted in an active market purchased from financial institutions reported in loans as required by IAS 39 Financial Instruments : Recognition and Measurement to securities in Consolidated Monthly Balance Sheet return (M4) Total loans and acceptances reported in OSFI M4 $ $ $ 4,106,940 - - 4,106,940 771,308 3,335,632 Page 4 of 12
Credit risk: general disclosures (continued) Credit risk exposure by geographical area before allowance for impairment, gross of unearned discount and before credit risk mitigation as at January 31, 2013 was: Undrawn Repo-style Other off- Derivative Total Geographical area Drawn commitment transactions balance sheet assets exposure Canada Australia Cayman Island Argentina United States United Kingdom $ 4,060,013 $ 5,021,205 $ 97,988 $ 189,043 $ 10,054 $ 9,378,303 16,600 - - - - 16,600 921 - - - - 921 623 9,377 - - - 10,000 28,783 11 - - 571 29,365 - - 350,215 - - 350,215 $ 4,106,940 $ 5,030,593 $ 448,203 $ 189,043 $ 10,625 $ 9,785,404 Impaired loans (net of individual allowance) Cayman Island $ 430 - - - - $ 430 Residual Contractual Maturity Breakdown With 1 year 1-5 years Greater than 5 years Undrawn Repo-style Other off- Derivative Total Drawn commitment transactions balance sheet assets exposure $ 641,614 $ 613,222 $ 448,203 $ 180,157 $ 10,204 $ 1,893,400 2,452,757 4,086,495-8,860 421 6,548,533 1,012,569 330,876-26 - 1,343,471 $ 4,106,940 $ 5,030,593 $ 448,203 $ 189,043 $ 10,625 $ 9,785,404 The following table summarizes the changes in allowance for credit losses for the period ended January 31, 2013. Allowance for credit losses, beginning of period $ 17,173 Provision for credit losses (685) Recoveries 39 Translation adjustment (1) Allowance for credit losses, end of period $ 16,526 The level of allowance for impairment is sufficient compared to the Bank's historical loss experience. Page 5 of 12
Credit risk: disclosures for portfolios subject to the standardized approach The Bank uses the standardized approach to credit risk under Basel III to calculate its credit risk capital charge. The Bank benchmarks its internal ratings to S&P and Moody's rating equivalents for internal assessment and early warning trigger purposes. Corporate credit exposures are unrated with a risk weight of 100%, except in the case one customer which uses DBRS and Fitch to rate the exposure. DBRS and Fitch are recognized by OSFI as eligible External Credit Assessment Institutions (ECAIs). The exposure is risk weighted at 20% because it receives 2 ratings of AAA to AA-. The table below details the credit quality of the Bank's exposures after credit risk mitigation across its exposure classes. Risk weight Drawn Exposure Undrawn Commitments Repo-style transactions OTC Derivatives Other offbalance Total Riskweighted Sovereign Bank Total Bank exposure Corporate - all unrated Total corporate exposure Total Gross Credit Exposure 0% 20,098 79,784 99,882-0% - - 447,686 - - 447,686-20% 69,213-530 16,793 14,155 100,691 20,139 69,213-448,216 16,793 14,155 548,377 20,139 0% - - - - 1,285 1,285-20% 30 - - - - 30 6 100% 3,337,561 2,368,491-7,548 112,418 5,826,018 5,826,018 3,337,591 2,368,491-7,548 113,703 5,827,333 5,826,024 3,426,902 2,448,275 448,216 24,341 127,858 6,475,592 5,846,163 Page 6 of 12
Credit risk mitigation: disclosure for standardised approach Collateral valuation and management The Bank's policies and processes for collateral valuation and management are driven by: a legal document framework that is bilaterally agreed with our clients; and a collateral management risk framework enforcing transparency through self-assessment and management reporting. For collateralized portfolio by marketable securities, the valuation is performed daily. Exceptions are governed by the calculation frequency described in the legal documentation. The mark-to-market prices used for valuing collateral are a combination of firm and market prices sourced from trading platforms and service providers, where appropriate. The management of collateral is standardized and centralized to ensure complete coverage of traded products. As at January 31, 2013, the Bank holds collateral against business in the form of cash and securities. Collateral and guarantees are used for credit risk mitigation purposes as these liquid collaterals provide added security in recovering the Bank s asset in case of defaults. Credit risk mitigation used for standardized approach Eligible financial collateral Eligible guarantees Corporate - all unrated $ 30 $ 1,285 Page 7 of 12
General disclosure for exposures related to counterparty credit risk Counterparty Credit Risk is the risk that the counterparty to a derivative transaction could default before the final settlement of the transaction s cash flows. The analysis of counterparty credit risk adopts the methodology established by the parent bank and is used globally. Business Unit is responsible for assessing the creditworthiness of counterparty and applying for appropriate credit limits related to their respective business. All credit counterparty risk associated limits are approved by responsible credit divisions of the parent bank. Middle Office and Back Office are responsible monitoring and adhering to the various policies and procedures associated with their respective areas of responsibility. Credit risk exposure to each counterparty is monitored daily to ensure compliance to the Bank's approved limits and guidelines. The Bank's counterparty risk is primarily calculated on foreign exchange, interest rate swap and bond future transactions. The monitoring is carried out via established limits, quantifiable measures and active discussion in the monthly Asset Liability meeting and Credit Risk Management meetings. Risk exposures are evaluated continuously against approved limits and guidelines set by the parent bank and reviewed by credit officers and Senior Management. Risk in excess of limit guidelines requires remedial countermeasures and specific approval. The Bank calculates the regulatory capital charge for Counterparty Credit Risk (CCR) using the standardized approach outlined in OSFI's CAR guideline. The exposure is calculated using the Current Exposure Method (CEM). To calculate the Credit Value Adjustment (CVA) risk capital charge the standardized CVA risk capital charge for banks not using the Internal Model Method (IMM) as prescribed by OSFI in the CAR guideline is applied. Type of contract Notional principal amount Current credit exposure Netting & collateral Risk weighted assets Interest rate contracts $ 43,455 $ 566 $ - $ 113 Foreign exchange contracts 1,189,804 23,775-10,793 $ 1,233,259 $ 24,341 $ - $ 10,906 Page 8 of 12
Securitization: disclosure for standardised approach Banks must apply the securitization framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitizations or similar structures that contain features common to both. Since securitizations may be structured in many different ways, the capital treatment of a securitization exposure must be determined on the basis of its economic substance rather than its legal form. The Bank acts as an investor to a securitization exposure in the form of a loan which falls into the definition of a traditional securitization. A traditional securitization is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investor depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The loan is unrated and is treated as claims on corporate. The standard risk weight for unrated claims on corporates is 100%. The Bank's securitization exposures also include investments in debt instruments issued by 2 special purpose entities (SPEs). The 2 debt instruments are backed by auto loans and auto leases and are risk weighted as follows: (1) applies "look through" approach and is risk weighted at 75%, and (2) uses 2 eligible ECAI ratings and is risk weighted at 20% Gross exposure Individual allowance Net exposure Risk-weighted assets Rated exposure Investor AAA to AA- $ 375,479 $ - $ 375,479 $ 75,096 Unrated exposures Investor Unrated most senior securitization exposure 396,369-396,369 297,277 - "look-through" approach Other unrated exposure 924 491 433 433 $ 772,772 $ 491 $ 772,281 $ 372,806 Page 9 of 12
Operation risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people / systems or from external events. To calculate the capital requirements for operational risk, the Bank has adopted the Basic Indicator Approach (BIA). The BIA requires institutions to calculate operational risk capital requirements by applying a factor of 15% to a three-year average of positive annual gross income. Gross income is defined as net interest income plus non-interest income. At January 31, 2013, the operational risk capital charge was $115,088 thousand. Interest rate risk Interest rate risk is the financial risk to which a portfolio is exposed to if interest rates change arises. The Bank mitigates its interest rate risk through a combination of policy and control procedures (Limits/guidelines). The Bank also conducts stress testing Interest Rate Risk in the Banking Book testing (IRRBB testing) to assess the potential risk and capital impact arising from the stressed scenarios. The IRRBB testing is conducted monthly, discussed at the monthly ALM Committee and reported quarterly to BOD (Board of Directors). ALM Committee reviews the Bank's market risk framework and aligns the market risk management framework with business strategies. Interest rate risk is managed through methods such as gap analysis, duration analysis, average position cost analysis, and stress simulation models. Testing measures include data such as current balance, contractual rates of interest associated with the instruments and portfolios, principal payments, interest reset dates, maturities, the rate index used for reprising, and contractual interest rate ceilings or floors for adjusted rate items. (in thousands of Canadian dollars) As at January 31, 2013 Before-tax impact on net interest income and on equity 100bp increase in interest rates $ 422 100bp decrease in interest rates (411) Page 10 of 12
Remuneration practices and policies The Bank's remuneration program is to maintain levels of compensation that are internally equitable, externally competitive and financially feasible. The program is designed to support key business strategies and create a strong, performance oriented environment. At the same time, the program is risk-focused which is consistent with and promotes effective risk management. Roles of Senior Management and Board of Directors Actively oversee the compensation system s design and operations to ensure that compensation works in harmony with other practices to implement balanced risk postures. Monitor and review the compensation system to ensure the system operates as intended. Senior Management refers to the President & CEO and Executive Vice Presidents. Currently there are 3 employees in this category. For those employees whose actions have a material impact on the risk exposure of the Bank (considered as other material risk takers): Remuneration is determined independently of other business areas and is adequate to attract qualified and experienced staff. Performance measurement is based principally on the achievement of the objectives of their functions. Senior Management designates following positions as 'Other material risk takers': Head of Compliance Head of Treasury Heads of Corporate Banking Currently there are 6 employees in this category. Every year the Board approves appointment of officers who are designated vice president and above. The Bank s remuneration program applies to all Bank of Tokyo-Mitsubishi UFJ (Canada) staff in Canada, including Toronto, Montreal and Vancouver offices. Overview of the key features and objectives of remuneration program: Annual Base Salary Review Employees are typically eligible for a salary review annually following the performance review process. The Bank s Base Salary Program endeavors to maintain a competitive position with regard to employee compensation in the relevant marketplace. Decisions regarding the Bank s compensation structure are based on labour market conditions, available financial resources and the Bank s desire to provide appropriate pay to employees. Employee performance is an important factor considered in salary adjustments. Not all salary reviews result in an increase being given. All decisions with respect to salary are within the Bank s sole discretion. Page 11 of 12
Remuneration practices and policies (continued) The Bank seeks professional advice from external compensation consultants to obtain market information for periodic compensation review. Also the Bank participates in salary surveys and benchmarks remuneration packages externally and internally to ensure the highest caliber of staff are retained and rewarded throughout the organization. Bonus Incentive Employees with satisfactory performance generally are eligible for bonus consideration. Incentive bonuses are paid at the Bank s sole discretion based on factors such as individual and/or group and/or Bank performance and profitability and in accordance with applicable bonus program terms. Decisions as to whether to award a bonus, the amount of such award and who is eligible for reward rest entirely with the Bank. Bonuses, when given, are paid only to eligible employees who are actively employed at the time of bonus distribution. Bonuses are given to incentivise employees to work hard in pursuit of profit. The Bank has strong credit policies and procedures in place to control front-line incentives towards excessive risk. Bonus is paid on cash basis. The Bank does not have other forms of payment such as shares or share-linked instruments. Also the Bank does not have deferral policy on bonus payment. Annual Performance Review Employee s performance is appraised annually. Online performance review is completed and returned by employee and immediate supervisor. All performance evaluation forms submitted are reviewed by Senior Management and Human Resources. The Bank s Performance Review Program is designed to promote effective internal communication between supervisors/managers and employees, provide action plans for employee development, recognize and stimulate achievement and determine compensation level. All performance reviews are based on the employee s overall competencies in relation to the work and goals. The Bank reviews the remuneration program at least once a year. Last review was conducted in 2012. The Bank also participates in Employment Equity reporting. The reports submitted by the employer describe the employment situation at the Bank. This report is rated based on scoring criteria set out by the Federal Government. (in thousands of Canadian dollars) Total value of remuneration awards for the period November 1, 2012 - January 31, 2013 Senior Management Other Material Risk Takers Fixed remuneration Salary $ 257 $ 356 Variable remuneration Discretionary bonus $ 64 $ 60 Page 12 of 12