Bank of Tokyo-Mitsubishi UFJ (Canada) Pillar 3 Disclosures As at July 31, 2016
Table of Contents Page Scope of application 1 Capital structure 1 Capital adequacy 2-3 Credit risk: general disclosures 4-6 Credit risk: disclosures for portfolio subject to the standardized approach 7 Credit risk mitigation: disclosures for standardized approach 8 General disclosure for exposures related to counterparty credit risk 9 Operational risk 10-11 Interest rate risk 11 Remuneration practices and policies 12-14
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 is located at Royal Bank Plaza, South Tower, 200 Bay Street, Suite 1800, 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. The parent bank obtained approvals from the Minister of Finance and OSFI to establish a full service foreign bank branch in Canada. Pursuant to an asset purchase agreement signed between the parent bank and the Bank, substantially all of its assets and liabilities pertaining to its Canada banking business were transferred to the The Bank of Tokyo-Mitsubishi UFJ, Ltd., Canada Branch (BTMU Canada Branch) on April 18, 2016. The transfer was accounted for at book value under IAS 24 Related Party Disclosures. Capital structure The Bank's total capital consists of tier 1 capital. Tier 1 capital consists of common equity tier 1 capital in the form of common shares, retained earnings, contributed surplus, and accumulated other comprehensive income (AOCI). The Bank does not hold any additional tier 1 capital. Regulatory adjustments to common equity tier 1 capital took effective beginning on January 1, 2014. The following table provides the Bank's composition of total capital as at July 31, 2016: (in thousands of Canadian dollars) As at July 31, 2016 Common Equity Tier 1 capital Common shares (unlimited number of common shares without par value; $ 94,549 746,643 shares issued and outstanding) Contributed surplus 56,147 Retained earnings 98,212 Common Equity Tier 1 capital (CET1) / Tier 1 capital (T1) 248,908 Total capital (TC = T1 ) $ 248,908 Page 1 of 14
Capital adequacy The Bank takes an active approach to capital management with the goal of maintaining a strong capital base to support the development of business and stay ahead of regulatory capital requirements at all times. Internally the Bank calculates the estimated BIS ratio on a daily basis. This calculation is circulated to Senior Management and related departments on a daily basis for a timely control on the risk weighted The Accounting Department reports on the Bank's risk-based capital ratio and leverage ratio to the Senior Management on a monthly basis. Senior Management is accountable for careful monitoring and reporting the status of capital adequacy to its Board of Directors and Parent Bank. The Bank s Capital Plan, including the internal capital target and outcome of the Internal Capital Adequacy Assessment Process (ICAAP) assessment (including result of each stress testing), is presented to and approved by the Board annually. The Bank s capital adequacy in relation to its risk profile and strategy for maintaining its capital level is presented and reviewed by the Board on a quarterly basis. The parent bank reviews the Bank s Capital Plan before it injects any new capital instruments into the Bank to maintain its capital ratio. The plan is expected to contain details of the Bank's three-year strategic and The Bank s Capital Plan, consistent with its Business Plan and considering result of ICAAP assessment, projects the following, Its capital requirements and position over the upcoming years based on its current capital level; Effect on capital of foreseeable changes in its regulatory requirements and business, operational and financial position; and Potential capital requirements relating to the redemption of maturing capital instruments such as subordinated debt. The Bank s Capital Plan identifies the underlying assumptions supporting the projection, quantity, quality and sources of additional capital required. The plan also assesses the availability of any sources identified and estimates the financial impact of raising additional capital. The available financial resources for the Bank s capital include additional capital and subordinated debt from the parent bank. Mitsubishi UFJ Financial Group, Inc., which is the holding company of the parent bank, has provided OSFI with a Support in Principle letter. This support includes injecting additional capital should the Bank s capital fall below the minimum requirements established by OSFI. Senior Management factors the capital adequacy ratio into their daily decision making processes, such as the issuance of new loans, new commitments, etc. The Bank takes measures to ensure the adequacy of its regulatory capital at all times. The Senior Management has set a buffer and escalation point 0.5% above a capital ratio threshold which would provide sufficient time for the Senior Management to take the necessary actions to avoid breach of the internal capital threshold which is set well above the all-in target total capital ratio of 10.5% Pages 2 of 14
Capital adequacy (continued) Canadian banks are required to comply with a common equity tier 1 capital target ratio of 7%, tier 1 capital target ratio of 8.5% and total capital target ratio of 10.5% effective first quarter of 2014. The Bank s tier 1 capital ratio and total capital ratio are 490.68% which exceeds the regulatory requirements by 482.18% and 480.18% respectively. The following table shows the Bank's risk-weighted assets and capital ratios as at July 31, 2016 under the CAR guideline 2013: (in thousands of Canadian dollars) As at July 31, 2016 Common Equity Tier 1 capital / Tier 1 capital $ 248,908 Tier 2 capital - Total capital $ 248,908 Risk-weighted Assets Credit risk Corporate $ 267 Sovereign - Bank 50,458 Securitizations - Other 2 Total credit risk $ 50,727 Operational risk - Total risk-weighted assets before regulatory adjustment (1) $ 50,727 Regulatory adjustment Computer software intangible - Total risk-weighted assets $ 50,727 Common Equity Tier 1 capital / Tier 1 capital ratio 490.68% Total capital ratio 490.68% (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 is not an internationally active institution or domestic systemically important banks (D-SIBs) set by OSFI. Page 3 of 14
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 its 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 Bank's policy and risk appetite. Credit Examination for the Americas (CEA) 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 The Bank determines the allowances appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty's business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realisable value of collateral and the timing of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. Collectively assessed allowances Allowances are assessed collectively for losses on loans and advances that are not individually significant and for individually significant loans and advances that have been assessed individually and found not to be impaired. Allowances are evaluated separately at each reporting date with each portfolio. The collective assessment is made for groups of assets with similar risk characteristics, in order to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident in the individual loans assessments. The collective assessment takes account of data from our loan portfolio (such as historical losses on the portfolio, levels of arrears, credit utilization, loan to collateral value ratios and expected receipts and recoveries once impaired) or economic data (such as current economic conditions, unemployment levels and local or industry-specific problems). The approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance is also taken into consideration. Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans. Page 4 of 14
Credit risk: general disclosures (continued) Credit risk exposure by portfolio and sector gross of allowance for impairment, net of unearned discount and before credit risk mitigation as at July 31, 2016 was: (in thousands of Canadian dollars) As at July 31, 2016 Other off- Undrawn Repo-style balance sheet Derivative Total Industry Drawn commitments Acceptances transactions items assets exposure Manufacturing $ - $ - $ - $ - $ - $ - $ - Wholesale trade - - - - 155-155 Natural resources and energy - - - - - - - Transportation, communication - - - - 380-380 and other utilities Financial institutions - - - - 2,669-2,669 Retail trade - - - - - - - Construction/real estate - - - - - - - Service - - - - - - - Accounts receivable factored - - - - - - - $ - $ - $ - $ - $ 3,204 $ - $ 3,204 The credit exposures were transferred to BTMU Canada Branch. The risks still remain in the Bank due to certain customers' consents not yet received by the Bank. The aging of business loans and acceptances at the reporting date was nil. Page 5 of 14
Credit risk: general disclosures (continued) Credit risk exposure by geographical area gross of allowance for impairment, net of unearned discount and before credit risk mitigation as at July 31, 2016 was: (in thousands of Canadian dollars) As at July 31, 2016 Other off- Undrawn Repo-style balance sheet Derivative Total Geographical area Drawn commitments Acceptances transactions items assets exposure Canada $ - $ - $ - $ - $ 535 $ - $ 535 Japan - - - - - - - United States - - - - 2,669-2,669 $ - $ - $ - $ - $ 3,204 $ - $ 3,204 Residual Contractual Maturity Breakdown Within 1 year 1-5 years Greater than 5 years Other off- Undrawn Repo-style balance sheet Derivative Total Drawn commitments Acceptances transactions items assets exposure $ - $ - $ - $ - $ 3,204 $ - $ 3,204 - - - - - - - - - - - - - - $ - $ - $ - $ - $ 3,204 $ - $ 3,204 The following table summarizes the changes in allowance for credit losses for the period ended July 31, 2016. Individual allowance Collective allowance On-balance Off-balance On-balance Off-balance sheet sheet sheet sheet Total Beginning balance as at November 1, 2015 $ - $ - $ 12,178 $ 1,719 $ 13,897 (Recovery of)/charge for impairment - - - - - Recoveries - - - - - Transferred to BTMU Canada Branch - - (12,178) (1,719) (13,897) Ending balance as at July 31, 2016 $ - $ - $ - $ - $ - The level of allowance for impairment is sufficient compared to the Bank's historical loss experience. Page 6 of 14
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. This rating scale determines the Bank's internal borrower/counterparty risk assessment and early warning trigger. The Bank applies a risk weight of 100% to the Bank's corporate credit exposures. The table below details the credit quality of the Bank's exposures after credit risk mitigation across its exposure classes. (in thousands of Canadian dollars) As at July 31, 2016 Sovereign Total Sovereign exposure Bank Total Bank exposure Corporate - all unrated Total corporate exposure Total Gross Credit Exposure Risk weight Drawn Exposure Undrawn Commitments Repo-style transactions OTC Derivatives Other offbalance sheet items Total Riskweighted Assets 0% 315 - - - - 315-20% - - - - - - - 315 - - - - 315-0% - - - - - - - 20% 248,948 - - - - 248,948 49,790 50% - - - - 1,335 1,335 668 248,948 - - - 1,335 250,283 50,458 0% - - - - - - - 100% - - - - 267 267 267 - - - - 267 267 267 249,263 - - - 1,602 250,865 50,725 Page 7 of 14
Credit risk mitigation: disclosures for standardised approach Collateral valuation and management The Bank's policies and processes for collateral valuation and management are driven by: a legal binding contractual framework that is bilaterally agreed with our clients; and a collateral management risk framework enforcing transparency through self-assessment, regular review, and management reporting. As at July 31, 2016, the Bank does not hold collateral against business in the form of cash and securities. Collateral and/or guarantees are used for credit risk mitigation purposes as the liquid collateral provide added security in recovering the Bank s asset in case of defaults. Credit risk mitigation used for standardized approach was nil. Wrong-way risk Wrong-way risk is defined by the International Swaps and Derivatives Association (ISDA) as the risk that occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty. In short it arises when default risk and credit exposure increase together. The terms wrong-way risk and wrong-way exposure are often used interchangeably. The Bank's exposure to "wrong-way risk" is Nil. Notes: For Corporate Counterparties Internal Rating Scale was used and mapped to S&P equivalent Page 8 of 14
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 a counterparty and applying for appropriate credit limits related to their respective business. All credit counterparty risk associated limits are approved by the 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. All derivatives were transferred to BTMU Canada Branch. Page 9 of 14
Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is embedded in the Bank's business activities, including the practices and controls used to manage other risks. Failure to manage operational risk can result in direct or indirect financial loss, reputational impact, regulatory censure, or failure in the management of other risks such as credit or market risk. The Bank has developed a framework for managing operational risk and evaluates the adequacy of capital within this framework. The framework covers the Bank's appetite and tolerance for operational risk, as specified through the policies for managing this categoryof risk. The framework also includes policies outlining the Bank's approach to identifying, assessing, monitoring, and controlling/mitigating the risk. The Bank uses the operational risk management system established by the parent bank for operational risk identification, assessment, and measurement, as well as monitoring and control. The President ensures that an appropriate risk and capital management system is in place under the Canadian regulatory requirements to manage and mitigate operational risk. Operational risk management The Bank uses a risk management system that includes Control Self-Assessment (CSA), loss data collection, and a monitoring system established by the parent bank. The CSA approach involves functional representatives of the Bank identifying problems or risks regarding individual internal process to enable evaluation of the impact and management status of risk-related issues. CSA aims to strengthen individual risk management capabilities through the work of functional representatives of the Bank. In addition, the Operational Control Committee (OCC) meetings are held every month to review important matters related to operational risk and control including discussing appropriate countermeasures for any operational incidents which may have occurred in the Bank and other overseas offices of the parent bank so as to manage, analyze, and prevent recurrence. Business continuity management The Bank's crisis management manual is developed based on the Bank's systems and shows how to ensure that operations of the Bank are not interrupted or can be restored to normal quickly in the event of a natural disaster, system failure, or liquidity events so as to minimize any disruption to customers and markets. Information security risk management Information security risk management refers to information systems designed to protect the Bank from losses that could result from the alternation, wrongful use, loss, or unauthorized disclosure of information and from the destruction, malfunction, or wrongful use of information systems. The President ensures that appropriate risk and capital management systems are in place consistent with the Canadian regulatory requirements to manage and mitigate information security risk. Management of other operational risks Legal risk: The bank has developed and maintained an effective legal risk management structure to manage its legal risk. Personnel risk: The Bank monitors changes in personnel quality and quantity, and the degree of their effects on the business through daily personnel supervision. Tangible asset risk: The Bank has developed and maintained an effective risk management structure to manage its tangible asset risk. Page 10 of 14
Operational risk (continued) Risk transfers and insurances The Bank uses insurance, outsourcing, or other kinds of risk transfer to mitigate its exposure to the significant operational risks as follows: Personnel risk (key person) - outsourcing Property Insurance Commercial General Liability Financial Institution Directors & Officers Liability Insurance Government Agencies Credit Guarantees 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 an adjusted gross income calculation. 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. All financial portfolios were transferred to BTMU Canada Branch. Page 11 of 14
Remuneration practices and policies The Bank's remuneration program is designed to maintain levels of compensation that are internally and externally equitable 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 and promotes effective risk management. Roles of Senior Management and Board of Directors Actively oversee the compensation practices to ensure that compensation works in harmony with other functions to promote balanced risk postures. Monitor and review the compensation system to ensure the system operates as intended. For those employees whose actions have a material impact on the risk exposure of the Bank (Material Risk Takers and 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. From February 1, 2016 - April 17, 2016, the Material Risk Takers include the Bank's Senior Management and refers to the President & Chief Executive Officer and two Executive Vice Presidents. Other Material Risk Takers include: 1 Deputy General Manager, Vancouver office 1 Chief Risk Officer 1 Chief Compliance Officer 4 Heads of Canadian Corporate Banking (All Offices) 2 Heads of Japanese Corporate Banking (All Offices) 1 Head of Treasury Currently there are 10 employees in this category. From April 18, 2016 - July 31, 2016, the Material Risk Takers include the Bank's Senior Management and refers to the President & Chief Executive Officer and one Executive Vice President. Other Material Risk Takers include: 1 Chief Risk Officer 1 Chief Compliance Officer Currently there are 2 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, Vancouver, and Calgary 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. Additionally, 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 Page 12 of 14
Remuneration practices and policies (continued) Annual Base Salary Review (Cont'd) The Bank does not participate in a cost of living adjustment process but rather a combination of performance and market conditions. Any market adjustments are based on a full examination and alignment of salary in regards to internal and external factors such as : skill set, education, geographical location, average salary of comparable position outside of the organization, etc. The Bank seeks professional advice from external compensation consultants to obtain market information for periodic compensation review. Also the Bank participates in salary surveys to ensure the highest caliber of staff are retained and rewarded throughout the organization. Discretionary Bonus Payments Employees who meet their annual performance expectations are eligible for bonus consideration. Discretionary bonus payments are made at the sole discretion of the Bank. 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 Bank at the time of bonus payments. The Bank has strong credit policies and procedures in place to control front-line incentives towards excessive risk. Bonus is paid on a cash basis. The Bank does not have other forms of payment such as shares or sharelinked instruments. The Bank does not have any deferral program for its compensation program. All employees reported in the Remuneration Disclosures are eligible for bonus payment including Senior Management and Other Material Risk Takers. However, bonus payment dates for expatriates and local employees are different. Annual Performance Review Employee s performance is appraised annually. An online performance review is completed and returned by the employee and the 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 assist in determining compensation payments. Employees' performance are evaluated in the annual performance review based on employee's overall competencies in relation to the work and goals. These performance metrics and scoring will help identify 'high'/'weak' performers, and individual's remuneration level may be adjusted accordingly at the discretion of Senior Management. The Bank's overall performance is measured by the Balance Score Card. The Balance Score Card includes criteria for determining 'high'/'weak' performance metrics that may lead to overall remuneration budget adjustments. The Bank's performance indicator is determined by a combination of performance metrics such as profit and expense amount, number of new transactions, transaction value, average balance of deposit and asset. Page 13 of 14
Remuneration practices and policies (continued) At the discretion of Senior Management, the Bank provides severance pay to terminated employees on a case-by-case basis. The Bank reviews the remuneration program at least once a year. An annual review of the remuneration program runs for a period from February to May each year. The 2015 bonus payout date was March 31, 2016. 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, 2015 - July 31, 2016 Senior Management Other Material Risk November 1, 2014 - July 31, 2015 Senior Management Other Material Risk Fixed remuneration Salary $ 444 $ 948 $ 659 $ 1,763 Variable remuneration Discretionary bonus $ 590 $ 643 $ 583 $ 566 Page 14 of 14