Bank of Tokyo-Mitsubishi UFJ (Canada) Pillar 3 Disclosures As at July 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 Operational 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 3 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 July 31, 2013: Common Equity Tier 1 capital Common shares (unlimited number of common shares without par value; $ 485,631 4,021,932 shares issued and outstanding) Retained earnings 250,065 Accumulated other comprehensive income - unrealized gains on available-for-sale securities 21 Common Equity Tier 1 capital (CET1) / Tier 1 capital (T1) 735,717 Tier 2 capital Subordinated debt 240,000 Tier 2 capital (T2) 240,000 Total capital (TC = T1 + T2) $ 975,717 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 11.03% which exceeds the regulatory requirements by 4.03%. 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 July 31, 2013 was 14.63%. It exceeds those future requirements set by OSFI. The following table shows the Bank's risk-weighted assets and capital ratios as at July 31, 2013 under the CAR guideline 2013: Common Equity Tier 1 capital / Tier 1 capital $ 735,717 Tier 2 capital 240,000 Total capital $ 975,717 Risk-weighted Assets Credit risk Corporate $ 6,157,278 Bank 69,542 Securitizations 292,585 Other 21,624 Total credit risk $ 6,541,029 Operational risk 129,288 Total risk-weighted assets (1) $ 6,670,317 Common Equity Tier 1 capital / Tier 1 capital ratio 11.03% Total capital ratio 14.63% (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 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 the loan portfolio (such as historical losses on the portfolio, levels of arrears, credit utilisation, loan to collateral 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 3 of 12
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, 2013 was: Other off- Undrawn Repo-style balance sheet Derivative Total Industry Drawn commitments transactions items assets exposure Agricultural $ 51,386 $ 62,233 $ - $ 107 $ - $ 113,726 Manufacturing 392,713 598,194-53,333 1,337 1,045,577 Wholesale trade 322,351 63,901-1,892 173 388,317 Natural resources and energy 313,935 1,658,911-7,670 1,499 1,982,015 Transportation, communication 1,086,562 2,005,073-72,819 47 3,164,501 and other utilities Financial institutions 1,498,763 409,716 649,954 29,481 6,733 2,594,647 Retail trade 240,159 178,283-7,309-425,751 Construction/real estate 140,108 88,995-1,442-230,545 Service 200,096 195,563-8,491-404,150 Accounts receivable factored 8,000 - - - - 8,000 $ 4,254,073 $ 5,260,869 $ 649,954 $ 182,544 $ 9,789 $ 10,357,229 Impaired loan gross of individual allowance Transportation, communication and other utilities $ 214 - - - - $ 214 The aging of business loans and acceptances at the reporting date was: Current Past due (61-90 days) Past due (over 90 days) $ 4,254,073 - - Total business loans and acceptances $ 4,254,073 Less: Allowance for impairment (15,295) Total business loans and acceptances per financial statements 4,238,778 Less: Reclassification of debt securities not quoted in an active market purchased from financial (635,764) 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 $ 3,603,014 Page 4 of 12
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, 2013 was: Other off- Undrawn Repo-style balance sheet Derivative Total Geographical area Drawn commitments transactions items assets exposure Canada $ 4,236,617 $ 5,250,472 $ 649,954 $ 149,843 $ 8,297 $ 10,295,183 Argentina 642 - - - - 642 Australia 16,600 - - - - 16,600 Cayman Island 214 - - - - 214 Japan - - - 7,354-7,354 United Kingdom - - - 106-106 United States - 10,397-25,241 1,492 37,130 $ 4,254,073 $ 5,260,869 $ 649,954 $ 182,544 $ 9,789 $ 10,357,229 Impaired loan gross of individual allowance Cayman Island $ 214 - - - - $ 214 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 transactions items assets exposure $ 847,270 $ 459,675 $ 649,954 $ 170,246 $ 9,048 $ 2,136,193 2,544,980 4,540,279-12,298 741 7,098,298 861,823 260,915 - - - 1,122,738 $ 4,254,073 $ 5,260,869 $ 649,954 $ 182,544 $ 9,789 $ 10,357,229 The following table summarizes the changes in allowance for credit losses for the period ended July 31, 2013. Individual allowance Collective allowance On-balance Off-balance On-balance Off-balance sheet sheet sheet sheet Total Beginning balance as at November 1, 2012 $ 492 $ - $ 14,178 $ 2,503 $ 17,173 (Recovery of)/charge for impairment (347) - 912 (1,180) (615) Recoveries 41 - - - 41 Translation adjustment 19 - - - 19 Ending balance as at July 31, 2013 $ 205 $ - $ 15,090 $ 1,323 $ 16,618 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 sheet items Total Riskweighted Assets Sovereign Bank Total Bank exposure Corporate - all unrated Total corporate exposure Total Gross Credit Exposure 0% 19,987 82,176 - - - 102,163-0% - - 553,143 - - 553,143-20% 213,171-96,970 22,921 14,652 347,714 69,542 213,171-650,113 22,921 14,652 900,857 69,542 0% - - - - 1,185 1,185-20% 10 - - - - 10 2 100% 3,622,347 2,414,761-8,105 112,063 6,157,276 6,157,276 3,622,357 2,414,761-8,105 113,248 6,158,471 6,157,278 3,855,515 2,496,937 650,113 31,026 127,900 7,161,491 6,226,820 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 July 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 $ 10 $ 1,185 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 $ 38,377 $ 467 $ - $ 93 Foreign exchange contracts 1,744,496 30,559-12,596 $ 1,782,873 $ 31,026 $ - $ 12,689 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 Risk-weighted Assets Net exposure Rated exposure Investor AAA to AA- $ 336,189 $ - $ 336,189 $ 67,238 Unrated exposures Investor Unrated most senior securitization exposure 300,450-300,450 225,338 - "look-through" approach Other unrated exposure 214 9 205 9 $ 636,853 $ 9 $ 636,844 $ 292,585 Page 9 of 12
Operational 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 July 31, 2013, the operational risk capital charge was $129,288 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 July 31, 2013 Before-tax impact on net interest income and on equity 100bp increase in interest rates $ 913 100bp decrease in interest rates (650) 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. 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 sole discretion. The Bank does not participate in a "cost of living" adjustment process but rather a "market-based" salary adjustment process. A market-based adjustment is based on a full examination and alignment of salary in regards to many internal and external factors such as : skill set, education, geographical location, average salary of comparable position outside of the organization, etc. 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 a cash basis. The Bank does not have other forms of payment such as signing bonuses or 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. Employees' performance are evaluated in the annual performance review based on employee's overall competencies in relation to the work and goals. This 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. At the discretion of Senior Management, the Bank provides severance pay to terminated employees on a case-bycase basis. The Bank reviews the remuneration program at least once a year. Last review was conducted in March. 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 - July 31, 2013 Senior Management Other Material Risk Takers Fixed remuneration Salary $ 762 $ 1,020 Variable remuneration Discretionary bonus $ 217 $ 286 Page 12 of 12