DAIWA

DAIWA INSTITUTE OF RESEARCH LTD.

4 June 2007 (No of pages: 18)

Earnings Analysis of Major –I —FY06 Earnings Summary and Operating Environment— (Sumitomo Mitsui Banking Corp is affiliated with Daiwa Securities SMBC. See disclaimer below.)

Equity Research Dept Akira Takai

• Major banks’ aggregate FY06 real net business profit on a parent basis (total sum of their group banks) declined 9.5% y/y to Y3,451.8 billion. Mainstay lending operations fell short of the projections in terms of both volume and spread, while a rise in interest rates eroded treasury income in domestic and foreign operations. Additionally, non-personnel costs significantly lifted overhead above the year- earlier level, weighing on profit.

• Aggregate credit costs net of recoveries reached only Y167.3 billion, as credit costs for newly-emerged non-performing assets tended to be low, except for those related to some non-banks, and banks continued to record loan-loss reserve releases and write-off recoveries. A number of banks also continued to see lower income tax payments, a benefit of deferred tax assets. As a result, aggregate consolidated net income hit Y2,824.8 billion, the second-highest level in history, despite dropping 9.5% below the year-earlier level. Establishment of solid profitability in recent years prompted the majority of major banks to raise common dividends in FY06.

• At its 21 February monetary policy meeting, the BOJ lifted the unsecured overnight call rate to 0.50%, the second hike since 14 July, when the BOJ rescinded its zero interest-rate policy and lifted the call rate to 0.25%. Against this backdrop, the bond market retreated in 1Q but started recovering in 2Q. Meanwhile, the equity market underwent a pullback early in FY06 but reversed course from end-June and entered a clear uptrend at end-2006, reflecting expectations for favorable corporate earnings. However, Japanese equities plunged in line with the setback in global markets at end-FY06, bringing TOPIX close to the end-FY05 level by the close of the fiscal year.

• For FY07, major banks envisage 5.2% growth in aggregate real net business profit on a parent basis. Credit costs are expected to normalize at low levels, supporting an estimated Y2,505 billion in aggregate consolidated net income. Some banks anticipate considerable profit declines, mainly on the absence of lower income tax payments. However, excluding this factor, net income should outpace the FY06 figure and hit lofty levels. The majority of major banks expect to continue raising dividends.

The originator of this report, Daiwa Institute of Research (DIR), and the main users, Daiwa Securities and Daiwa Securities SMBC, are subsidiaries of Daiwa Securities Group. Daiwa Securities Group, DIR, Daiwa Securities, Daiwa Securities SMBC, and other group companies may hold, buy, and sell shares in companies mentioned in this report. Daiwa Securities and Daiwa Securities SMBC offer investment banking services and may make a market for stocks mentioned in this report.

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.

Japanese Equity Research

1. Summary of FY06 Results

Real net business profit In FY06, major banks’ parent* aggregate net business profit declined 5.6% y/y to dropped 9.5% to Y3,451.8 Y3,427.4 billion (Chart 1). Aggregate real net business profit (net business profit billion before additions to/recoveries from general loan-loss reserves, as well as the posting of credit costs for trust bank accounts), which indicates core profit levels, slid 9.5% to Y3,451.8 billion. The majority of banks fell short of their projections announced along with 1H results.

Sluggish lending, solid Looking at major negatives on core profit, lending operations could not stop loan- growth in non-interest deposit interest rate spreads from narrowing or meet their volume targets. Also, income, weak treasury treasury income took a dual hit from massive net bond-related losses at a number of income, and higher banks and narrower spreads due to higher interest rates in and overseas. overhead However, non-interest income remained solid overall, gaining from higher commissions from the sale of financial products, including investment trusts, and an upturn in real estate and other wealth management operations at trust banks. A marked increase in loans outstanding suggested a recovery in overseas operations. Meanwhile, non-personnel and other costs rose across the subsector, weighing on profit.

Net credit costs hit a low As for non-operating items, aggregate net credit costs were capped at Y167.3 billion. Y167.3 billion, net equity- A series of consumer finance firms and installment credit providers plunged deeply related gains dropped to into the red in FY06, and a number of major banks had to book higher provisions for Y84.6 billion losses from loans to non-banks, for which they play the role of a so-called main bank. Even so, gross credit costs remained low overall. Meanwhile, groups including UFJ reported hefty loan-loss reserve releases and/or write-off recoveries. On the other hand, aggregate net equity-related gains slid to Y84.6 billion. Although the figure dropped well below the year-earlier Y451.6 billion, all banks logged net gains, except for Mizuho, which wrote down preferred shares of the closely affiliated Orient Corporation. Some banks reported gains on the sale of ETFs and preferred shares (purchased as financial support for ailing borrowers), while the unwinding of cross shareholdings played out.

Consolidated net income Net income, along with ordinary profit, reached high levels at all banks. That was slid to Y2,824.8 billion, partially because of lower income tax payments, a benefit of deferred tax assets, at the second-highest level many banks, including Resona Bank, which increased deferred tax assets by as much on record as Y233.5 billion. On an aggregate basis, net income declined 16% y/y to Y2,577.7 billion on a parent basis and dropped 9.5% to Y2,824.8 billion on a consolidated basis. Still, net income hit its second-highest level on record. Also, the establishment of solid profitability since FY05 prompted the majority of major banks to raise common dividends.

Total assets edged down, Turning to the balance sheet, aggregate total assets on a parent basis at end-March but net assets advanced 2006 dipped 2.4% y/y. Domestic operations saw sluggish growth in loans outstanding and a reduction in government-bond holdings and deposits held at the BOJ. In contrast, overseas assets, including loans outstanding, jumped significantly, and deposits generally posted stable growth. Additionally, shareholders’ equity expanded on a consolidated and parent basis at a majority of banks, which we attribute to higher retained earnings and statutory reserves resulting from solid profitability at the net level in FY06. Public fund repayments and equity financing by the three mega banking groups and Resona Holdings also affected shareholders’ equity.

* In calculating aggregate major bank parent figures, we added group bank figures for banking groups under holding company structures. Thus, Mizuho Financial Group represents the sum of Mizuho Bank and Mizuho Corporate Bank. Likewise, Mitsubishi UFJ Financial Group is the sum of (1) Bank of -Mitsubishi UFJ (formerly Bank of Tokyo Mitsubishi and UFJ Bank) and (2) Mitsubishi UFJ Trust & Banking (formerly Mitsubishi Trust & Banking and UFJ Trust Bank). Others are as follows: Sumitomo Mitsui Financial Group (Sumitomo Mitsui Banking), Resona Holdings (Resona Bank and Saitama Resona Bank), and Mitsui Trust Holdings (Chuo Mitsui Trust & Banking and Mitsui Asset Trust & Banking). 2 Earnings Analysis of Major Banks–I

FY06 Parent Results (Y bil) Chart 1 Ordinary Real net Net Ordinary Net income Total credit DPS 4) Total Share- income 1) business business profit costs 3) (Y) assets holders' profit 2) profit equity, etc 5) Mizuho 7) FY05 1,168.8 365.7 366.0 206.6 132.5 -31.8 - 70,003.7 2,019.3 FY06 1,264.2 451.5431.1 179.1 206.3 -65.5 - 66,874.8 2,081.3 % chg 8.2 23.517.8 -13.3 55.6 - - -4.5 3.1 Mizuho Corporate 7) FY05 1,537.6 435.2 435.2 513.1 559.2 103.7 - 62,208.6 3,174.2 FY06 1,804.2 306.9 306.9 313.6 323.1 62.3 - 66,111.5 3,500.1 % chg 17.3 -29.5-29.5 -38.9 -42.2 - - 6.3 10.3 Sum of Mizuho FY05 2,706.4 800.9 801.2 719.8 691.7 71.8 - 132,212.4 5,193.5 2 banks FY06 3,068.4 758.5 738.0 492.7 529.4 -3.1 - 132,986.3 5,581.4 % chg 13.4 -5.3-7.9 -31.5 -23.5 - - 0.6 7.5 8411 Mizuho Financial FY05 129.0 - - 113.5 790.2 - 4,000.00 4,793.1 2,752.3 Group FY06 1,250.1 - - 1,218.5 1,239.7 - 7,000.00 4,764.0 3,176.4 % chg 869.1 - - 974.0 56.9 - - -0.615.4

Tokyo-Mitsubishi FY05 3,477.0 1,054.1 1,054.1 904.9 1,089.1 576.7 - 147,091.3 6,605.6 UFJ 6) 7) FY06 3,651.5 899.8 899.8 834.5 669.3 53.4 - 140,613.9 7,021.9 % chg 5.0 -14.6-14.6 -7.8 -38.5 - - -4.4 6.3 Mitsubishi UFJ FY05 675.2 252.8 251.9 243.9 169.4 55.4 - 18,687.9 1,535.2 Trust6) 7) FY06 709.1 274.3 272.4 278.4 211.6 8.1 - 19,243.5 1,687.4 % chg 5.0 8.5 8.2 14.1 24.9 - - 3.0 9.9 Sum of MUFG FY05 4,152.2 1,307.0 1,306.0 1,148.8 1,258.5 632.1 - 165,779.2 8,140.8 2 banks FY06 4,360.6 1,174.1 1,172.2 1,112.9 880.9 61.5 - 159,857.4 8,709.3 % chg 5.0 -10.2 -10.2 -3.1 -30.0 - - -3.6 7.0 8306 MUFG 6) FY05 1,036.7 - - 1,002.3 1,013.4 - 7,000.00 7,650.9 6,112.7 FY06 510.8 - - 478.0 473.9 - 11,000.00 7,494.6 6,254.1 % chg -50.7 - - -52.3 -53.2 - - -2.02.3

Sumitomo Mitsui FY05 2,287.9 965.6 810.6 720.9 519.5 -230.9 - 97,443.4 3,634.8 Banking FY06 2,451.4 740.6 782.3 573.3 315.7 -89.5 - 91,537.2 3,992.9 Corporation % chg 7.1 -23.3 -3.5 -20.5 -39.2 - - -6.1 9.9 8316 Sumitomo Mitsui FY05 55.5 - - 48.3 73.4 - 3,000.00 4,166.3 3,935.4 Financial Group FY06 376.5 - - 364.5 363.5 - 7,000.00 3,959.4 2,997.9 % chg 578.6 - - 655.2 395.2 - - -5.0-23.8

Resona FY05 712.7 239.5 239.0 254.6 317.3 16.1 - 28,336.5 1,252.3 FY06 796.4 263.1 259.4 284.9 546.9 -42.2 - 27,427.0 1,490.0 % chg 11.8 9.9 8.5 11.9 72.3 - - -3.2 19.0 Saitama Resona FY05 178.6 66.6 70.8 55.4 33.0 -7.1 - 9,584.8 273.7 FY06 195.7 76.4 75.3 64.8 35.7 -8.4 - 9,712.7 297.8 % chg 9.6 14.66.4 17.1 8.0 - - 1.38.8 Sum of Resona FY05 891.3 306.1 309.8 310.0 350.3 9.0 - 37,921.2 1,526.0 2 banks FY06 992.1 339.5 334.7 349.8 582.5 -50.6 - 37,139.8 1,787.8 % chg 11.3 10.9 8.0 12.8 66.3 - - -2.1 17.2 8308 Resona Holdings FY05 317.6 - - 302.1 299.0 - 1,000.00 1,408.8 1,017.1 FY06 395.8 - - 384.4 419.1 - 1,000.00 1,364.0 897.5 % chg 24.6 - - 27.2 40.2 - - -3.2-11.8

Sum of Mitsui Trust FY05 423.2 183.1 163.6 125.3 118.3 -62.5 - 12,958.5 870.6 banks FY06 392.8 177.1 155.2 154.2 118.4 -26.4 - 13,273.0 1,012.0 % chg -7.2 -3.3 -5.2 23.1 0.1 - - 2.4 16.2 8309 Mitsui Trust Holdings FY05 25.6 - - 20.0 20.0 - 4.00 670.4 565.7 FY06 25.8 - - 19.1 19.2 - 5.00 717.1 578.2 % chg 1.1 - - -4.5 -4.1 - - 7.02.2

8403 Sumitomo Trust FY05 558.1 164.6 153.3 148.3 88.5 -8.2 12.00 20,371.7 1,096.0 FY06 558.5 175.9 155.7 134.6 81.8 -40.1 17.00 20,405.0 1,195.5 % chg 0.1 6.91.5 -9.3 -7.6 - - 0.29.1 8404 Mizuho Trust 7) FY05 223.3 88.4 87.0 69.7 41.3 -3.0 1.00 6,241.8 444.7 FY06 241.6 86.1 89.3 79.8 68.8 -19.2 1.00 6,586.4 508.4 % chg 8.2 -2.6 2.6 14.5 66.8 - - 5.5 14.3 Total FY05 11,242.4 3,815.6 3,631.6 3,242.7 3,068.1 408.3 - 472,928.2 20,906.5 FY06 12,065.3 3,451.8 3,427.4 2,897.2 2,577.7 -167.3 - 461,785.0 22,787.3 % chg 7.3 -9.5-5.6 -10.7 -16.0 - - -2.49.0 Source: Company materials; compiled by DIR. Notes: The following notes apply to all charts in this report. 1) In the case of holding companies, we have used operating revenues. 2) Before provisions for/recoveries from general loan-loss reserves; for trust banks, also before posting credit costs for trust bank accounts. 3) Net credit costs (gross credit costs in excess of loan-loss reserve releases/write-off recoveries) are shown negative, and net credit recoveries (the opposite) positive. 4) Common dividends per share. 5) End-FY06 shareholders’ equity, etc = Net assets – minority interests – stock options. 6) For FY05, Bank of Tokyo-Mitsubishi UFJ data equals Bank of Tokyo-Mitsubishi plus UFJ Bank; Mitsubishi UFJ Trust data equals Mitsubishi Trust plus UFJ Trust; Mitsubishi UFJ Financial Group (MUFG) data equals Mitsubishi Tokyo Financial Group (MTFG) unless otherwise indicated. MTFG plans a 1000-for-1 stock split on 30 Sep. 07, which is not reflected in this report. 7) Profit and loss items (excluding ordinary income) contain results of corresponding wholly-owned subsidiaries in charge of corporate rehabilitation.

Earnings Analysis of Major Banks–I 3

Highlights of FY06 Results at Each Major Bank Mizuho Financial Group In FY06, real net business profit of the two banks under the umbrella of Mizuho Financial Group hit Y758.5 billion. This represents 11.4% y/y growth excluding a Y120 billion boost in FY05 from one-time dividends from subsidiaries (specializing in corporate rehabilitation). Profit rose mostly due to reduced net bond-related losses at Y107.6 billion in FY05. At the request of close affiliate Orient Corporation, the group wrote down the value of 90% of preferred shares in Orient (Y288 billion) and conducted a debt-equity swap of Y140 billion, which were recognized as non-operating losses. As a result, consolidated net income slid 4.5 % y/y to Y621 billion. The group completed repayments of public funds in July 2006 and then repurchased/cancelled shares owned by companies under the holding company umbrella. Furthermore, it announced the establishment of a common share repurchase program worth up to Y150 billion. Management also intends to raise an annual dividend from Y7,000 in FY06 to Y10,000 in FY07. The group continued to make aggressive moves, including listing on the NYSE in November and acquiring a status of a financial holding company in the US, which could allow it to enter the securities business there.

Mitsubishi UFJ The aggregate real net business profit of the two banks under Mitsubishi UFJ Financial Financial Group Group’s (MUFG) umbrella (Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Trust & Banking) reached Y1,174.1 billion, down 10.2% from the prior-year results of banks under Mitsubishi Tokyo Financial Group and UFJ Holdings combined. Treasury income weakened amid intensified lending competition and higher short-term interest rates domestically and abroad. On the positive side, net credit recoveries of the two banks combined amounted to Y61.5 billion on massive loan-loss reserve releases and write-off recoveries. As a result, despite earnings downgrades and significant net losses at consolidated subsidiary UFJ Nicos and equity-method affiliate Acom, MUFG reported consolidated net income of Y881 billion. In June 2006, MUFG completed public fund repayments ahead of other mega-banking groups. Still, it secured a remarkably high Tier 1 ratio of 7.59% at end-March 2007. Management raised common dividends to Y11,000 per share in FY06 (Y6,000 for shareholders of record at end-March), and hiked annual dividend further to Y14,000 in FY07. The group also plans to attract more individual shareholders by lowering its trading unit to 1/10 of the current level at end-September 2007.

Sumitomo Mitsui Sumitomo Mitsui Financial Group’s (SMFG) real net business profit posted a double- Financial Group digit decline in FY06, sliding 23.3% y/y to Y740.6 billion. Major negatives included (1) lower income from derivative sales following the FSA’s order to suspend marketing and (2) reduced exposure to bonds, which caused Y112.4 billion in net bond-related losses. Meanwhile, the group more than halved its credit costs from Y230.9 billion in FY05 to Y89.5 billion in FY06. Nevertheless, costs overshot the group’s initial budget, as equity-method affiliate Promise’s plunge deeply into the red triggered (1) the booking of provisions against losses on Promise shares at the parent and (2) and equity-method losses and goodwill impairment on a consolidated basis. As a result, consolidated net income plummeted 35.7% y/y to Y441.4 billion. SMFG somewhat lagged behind peers in terms of public fund repayments but completed them in October 2006, prompting the announcement of plans to increase the annual dividend from Y7,000 in FY06 to Y10,000 in FY07.

Resona Holdings Resona Bank saw FY06 real net business profit increase 9.9% y/y to Y263.1 billion. The bank, along with other group banks including Saitama Resona Bank, booked favorable income from retail operations, backed by an increase in housing loans and brisk sales of financial products. Net income soared to Y546.9 billion at Resona Bank alone and Y664.9 billion on a consolidated basis, well above the year-earlier levels, thanks to lower income tax payments—Resona Bank shifted the basis for booking deferred tax assets from one year to five years of taxable income (bringing it in line with all other banking groups), which lifted deferred tax assets by Y233.5 billion at Resona Bank and Y263.6 billion on a consolidated basis. In May 2006, the holding company announced a basic policy for the repayment of public funds. Namely, the company intends to repurchase and retire preferred shares, to avoid share dilution. However, the government will likely continue to sell

4 Earnings Analysis of Major Banks–I

common shares on the market. Under this policy, Resona Holdings repurchased and cancelled preferreds worth Y532.7 billion in aggregate principal (which were issued for public fund injections based on the Financial Function Early Strengthening Law) in January 2007.

Mitsui Trust Holdings In FY06, the real net business profit of Chuo Mitsui Trust & Banking and Mitsui Asset Trust & Banking combined checked in at Y177.1 billion, almost in line with the year- earlier Y183.1 billion. Profit dropped mainly on the absence of gains on housing loan securitization (Y16.2 billion in FY05). However, income from the wealth management business (including real estate commissions) increased steadily. Net credit costs (gross credit costs net of recoveries) plunged to Y26.4 billion, vs. Y62.5 billion in FY05. The bank continued to see lower income tax payments, a benefit from deferred tax assets, allowing consolidated net income to hit Y112.8 billion, in line with the FY05 level of Y119.7 billion. Regarding the repayment of public funds, the holding company sold corresponding preferreds (aggregate principal of Y32 billion) in the open market for Y97.9 billion in July 2006. In October 2007, the bank intends to change its name to Chuo Mitsui Trust Holdings.

Sumitomo Trust & FY06 real net business profit rose 6.9% y/y to Y175.9 billion. Robust trust services and Banking sales of financial products boosted fee and commission income. However, credit costs swelled to Y40.1 billion, vs. Y8.2 billion a year earlier. We believe the bank conservatively downgraded a considerable percentage of loans to non-banks to credit exposures to watch-list borrowers other than loans needing management, which caused consolidated net income to check in at Y103.8 billion, on par with the FY05 level (Y100.1 billion). Sumitomo Trust hiked a dividend for shareholders of record at end- March 2007 to Y8.50 per share and lifted annual dividend to Y17.00. Management targets a dividend payout ratio of 30% of consolidated net income, so we expect ongoing dividend hikes, with annual DPS likely to hit Y18 in FY07. The bank continues to aggressively seek opportunities for acquisitions and tie-ups in a bid to expand its customer base and operations.

Mizuho Trust & Banking In FY06, real net business profit edged down 2.6% y/y to Y86.1 billion. Due in part to synergies with other Mizuho group companies, income from the wealth management business, led by real-estate operations, increased steadily enough to cover an increase in overhead. Credit costs expanded from Y3 billion in FY05 to Y19.2 billion, partly on higher provisions for a number of non-banks. However, consolidated net income hit Y67.7 billion, well above the year-earlier figure, buoyed by net equity-related gains and lower income taxes, a benefit from deferred tax assets. In August 2006, Mizuho Trust repurchased and cancelled a portion of the preferreds (worth Y33 billion) held by the parent Mizuho FG. The bank intends to buy back preferreds worth a maximum of Y60 billion in FY07.

Earnings Analysis of Major Banks–I 5

FY06 Consolidated Results (Y bil) Chart 2 Ordinary Ordinary Net EPS Total assets Shareholders' income profit income (Y) (period-end) equity, etc. (period-end) 8411 Mizuho FG FY05 3,557.5 921.1 649.9 55,157.15 149,612.8 4,805.0 FY06 4,099.7 748.2 621.0 51,474.49 149,880.0 4,911.3 % chg 15.2 -18.8 -4.5 -6.7 0.2 2.2

8306 MUFG1) FY05 5,407.7 1,433.3 1,181.8 93,263.16 187,046.8 7,727.8 FY06 6,094.0 1,457.1 881.0 86,795.08 187,281.0 8,520.3 % chg 12.7 1.7 -25.5 - 0.1 10.3

8316 SMFG FY05 3,705.1 963.6 686.8 94,733.62 107,010.6 4,454.4 FY06 3,901.3 798.6 441.4 57,085.83 100,858.3 3,923.0 % chg 5.3 -17.1 -35.7 -39.7 -5.7 -11.9

8308 Resona Holdings FY05 1,047.1 368.3 383.3 31,943.14 40,399.5 1,657.1 FY06 1,153.3 409.9 664.9 53,933.18 39,985.7 1,811.8 % chg 10.1 11.3 73.5 68.8 -1.0 9.3

8309 Mitsui Trust Holdings FY05 481.0 138.4 119.7 139.04 13,808.8 858.9 FY06 447.1 160.0 112.8 123.33 14,090.5 1,003.9 % chg -7.1 15.6 -5.8 -11.3 2.0 16.9

8403 Sumitomo Trust FY05 789.9 171.9 100.1 59.91 20,631.9 1,118.0 FY06 853.4 170.2 103.8 62.05 21,003.1 1,237.2 % chg 8.0 -1.0 3.7 3.6 1.8 10.7 8404 Mizuho Trust FY05 257.4 72.3 42.8 7.89 6,302.5 450.3 FY06 277.1 83.2 67.7 12.88 6,666.0 512.6 % chg 7.6 15.1 58.4 63.2 5.8 13.8 Total2) FY05 14,988.4 3,996.6 3,121.6 - 518,510.4 20,621.2 FY06 16,548.7 3,743.9 2,824.8 - 513,098.6 21,407.4 % chg 10.4 -6.3 -9.5 - -1.0 3.8 Source: Company materials; compiled by DIR. Notes: The following notes apply to all consolidated charts in this report. 1) FY05 data represents sum of MTFG and UFJ Holdings on a consolidated basis. 2) Excluding Mizuho Trust to eliminate overlapping data.

Highlights of 1H FY06 Parent Results (Y bil) Chart 3 Real net Net Ordinary Net Total net business Additions to/ Net credit business Equity-related Credit profit income credit profit recoveries of costs for profit gains/ Capital Markdown costs for costs* loan-loss trust bank losses gains/ on share- ordinary reserves accounts losses holdings bank accounts A B C D=A+B+C E=F+G F G H I J K=B+C+H Mizuho 216.6 0.0 216.6 2.3 5.3 -3.0 -9.1 209.7 125.4 -5.3 Mizuho Corporate 137.5 0.0 137.5 68.2 74.1 -5.9 -0.8 201.5 213.3 96.2 8411 Sum of Mizuho 2 banks 354.2 0.0 354.2 70.5 79.4 -8.9 -9.9 411.1 338.7 91.0

Tokyo-Mitsubishi UFJ 426.1 0.0 426.1 2.3 17.7 -15.5 -48.8 358.4 422.9 178.8 Mitsubishi UFJ Trust 122.8 0.0 -0.1 122.7 2.5 6.6 -4.1 9.9 127.3 112.6 49.0 8306 Sum of MUFG 2 banks 548.9 0.0 -0.1 548.9 4.8 24.3 -19.6 -38.9 485.6 535.5 227.8

8316 SMBC 311.6 0.0 311.6 8.7 14.6 -5.9 -46.7 269.1 183.6 -33.2

Resona 117.8 -0.5 -0.1 117.2 33.0 38.1 -5.1 -26.5 143.4 386.8 -15.8 Saitama Resona 38.9 -3.2 35.7 -0.5 0.2 -0.7 -3.4 32.2 19.0 -3.7 8308 Sum of Resona 2 banks 156.7 -3.6 -0.1 153.0 32.5 38.3 -5.8 -29.9 175.6 405.7 -19.5

8309 Sum of Mitsui Trust banks 76.8 -6.7 -3.0 67.2 7.2 12.3 -5.1 -4.0 67.3 70.2 -13.6

8403 Sumitomo Trust 86.8 3.3 -0.2 90.0 3.4 4.9 -1.5 -6.5 85.9 55.5 -3.2 8404 Mizuho Trust 39.0 -3.6 0.0 35.4 7.3 7.7 -0.4 -1.2 39.5 24.1 -4.3 Total 1,574.1 -10.6 -3.3 1,560.1 134.5 181.6 -47.1 -137.1 1,534.2 1,613.3 244.9 Source: Company materials; compiled by DIR. *Excluding loan-loss reserve releases/write-off recoveries booked under extraordinary profit.

6 Earnings Analysis of Major Banks–I

Highlights of 2H FY06 Parent Results (Y bil) Chart 4 Real net Net Ordinary Net Total business Additions to/ Credit business Equity-related Credit profit income credit profit recoveries of costs for profit gains/ Capital Markdown costs for costs* loan-loss trust losses gains/ on share- banking reserves banking losses holdings accounts accounts A B C D=A+B+C E=F+G F G H I J K=B+C+H Mizuho 234.9 -20.5 214.4 -167.3 13.3 -180.6 -70.3 -30.6 80.9 -60.2 Mizuho Corporate 169.4 0.0 169.4 -37.7 102.2 -139.9 -7.3 112.1 109.9 -33.9 8411 Sum of Mizuho 2 banks 404.3 -20.5 383.8 -205.0 115.6 -320.5 -77.6 81.6 190.7 -94.1

Tokyo-Mitsubishi UFJ 473.6 0.0 473.6 91.6 110.7 -19.1 -80.6 476.2 246.4 -125.4 Mitsubishi UFJ Trust 151.5 -1.8 -0.0 149.7 12.1 15.0 -2.9 -9.7 151.1 99.1 -40.9 8306 Sum of MUFG 2 banks 625.2 -1.8 -0.0 623.4 103.7 125.7 -22.0 -90.2 627.3 345.4 -166.3

8316 SMBC 429.0 41.7 470.7 2.4 35.0 -32.6 -85.0 304.2 132.1 -56.3

Resona 145.3 -2.9 -0.2 142.2 32.7 34.2 -1.5 -31.9 141.5 160.1 -26.4 Saitama Resona 37.4 2.2 39.6 1.7 1.8 -0.0 -4.9 32.7 16.7 -4.7 8308 Sum of Resona 2 banks 182.7 -0.8 -0.2 181.8 34.5 36.0 -1.5 -36.7 174.1 176.8 -31.1

8309 Sum of Mitsui Trust banks 100.3 -9.7 -2.6 88.0 1.4 1.8 -0.4 -3.9 86.9 48.2 -12.8

8403 Sumitomo Trust 89.1 -22.2 -1.2 65.7 1.7 4.7 -3.0 -13.8 48.6 26.3 -36.9 8404 Mizuho Trust 47.1 6.8 0.0 53.9 11.5 12.3 -0.8 -22.4 40.3 44.8 -14.9 Total 1,877.7 -6.4 -4.0 1,867.3 -49.9 331.0 -380.9 -329.7 1,363.0 964.4 -412.3 Source: Company materials; compiled by DIR. *In the case of banks that posted recoveries from loan loss reserves as extraordinary profit, such recoveries from allowances were deducted from total credit costs.

Highlights of FY06 Parent Results (Y bil) Chart 5 Real net Net Ordinary Net Total business Additions to/ Credit business Equity-related Credit profit income credit profit recoveries of costs for profit gains/ Capital Markdown costs for costs* loan-loss trust losses gains/ on share- banking reserves banking losses holdings accounts accounts A B C D=A+B+C E=F+G F G H I J K=B+C+H Mizuho 451.5 -20.5 431.1 -165.0 18.6 -183.6 -79.4 179.1 206.3 -65.5 Mizuho Corporate 306.9 0.0 306.9 30.5 176.3 -145.8 -8.1 313.6 323.1 62.3 8411 Sum of Mizuho 2 banks 758.5 -20.5 738.0 -134.5 194.9 -329.4 -87.5 492.7 529.4 -3.1

Tokyo-Mitsubishi UFJ 899.8 0.0 899.8 93.9 128.5 -34.6 -129.3 834.5 669.3 53.4 Mitsubishi UFJ Trust 274.3 -1.8 -0.1 272.4 14.6 21.6 -7.0 0.2 278.4 211.6 8.1 8306 Sum of MUFG 2 banks 1,174.1 -1.8 -0.1 1,172.2 108.5 150.0 -41.5 -129.1 1,112.9 880.9 61.5

8316 SMBC 740.6 41.7 782.3 11.1 49.7 -38.6 -131.7 573.3 315.7 -89.5

Resona 263.1 -3.4 -0.4 259.4 65.7 72.3 -6.6 -58.4 284.9 546.9 -42.2 Saitama Resona 76.4 -1.0 75.3 1.3 2.0 -0.7 -8.3 64.8 35.7 -8.4 8308 Sum of Resona 2 banks 339.5 -4.4 -0.4 334.7 67.0 74.3 -7.3 -66.7 349.8 582.5 -50.6

8309 Sum of Mitsui Trust banks 177.1 -16.3 -5.5 155.2 8.6 14.1 -5.5 -7.9 154.2 118.4 -26.4

8403 Sumitomo Trust 175.9 -18.9 -1.4 155.7 5.1 9.6 -4.5 -20.3 134.6 81.8 -40.1 8404 Mizuho Trust 86.1 3.2 0.0 89.3 18.8 20.0 -1.2 -23.7 79.8 68.8 -19.2 Total 3,451.8 -17.0 -7.4 3,427.4 84.6 512.6 -428.1 -466.8 2,897.2 2,577.7 -167.3 Source: Company materials; compiled by DIR. *In the case of banks that posted recoveries from loan loss reserves as extraordinary profit, such recoveries from allowances were deducted from total credit costs.

Earnings Analysis of Major Banks–I 7

Net income lost ground Charts 3, 4, and 5 depict parent earnings in 1H, 2H, and full-FY06. Core profit in all at almost all major banks businesses rose moving into 2H, but non-operating income weakened at almost every in 2H major bank, partly due to loan-loss provisions associated with non-banks. Also, benefits from deferred tax assets concentrated in 1H, one reason why major banks saw net income contract overall in 2H.

No major difference Chart 6 compares parent and consolidated results. Net income declined from the record between the directions of levels posted in FY05 but remained high on both parent and consolidated bases. As parent and consolidated before, there were no significant differences between consolidated and parent net results; impact from non- income at major banks, excluding Mizuho FG, whose results include Mizuho Trust, bank subsidiaries and MUFG, which has Union Bank of California under its umbrella. That said, securities companies have been making higher profit contributions at each banking group (especially at mega banking groups), though their contribution remains limited. The difference at the ordinary level tends to be greater than that at the net level, but this is largely attributable to different accounting practices for parent and consolidated figures regarding interest payments on primary capital certificates (which were issued by 100% parent-owned special purpose companies). As a special factor seen in FY06, some banking groups’ non-bank subsidiaries and/or consumer finance affiliates incurred massive losses due to stepped-up additions to reserves for refunds of excess interest payments charged to borrowers above the ceiling stipulated by the Interest Limitation Law.

Overseas operations Chart 7 shows ordinary income and profit by region. All major banks were profitable, maintain profitability; particularly in the Americas, as well as in Asia (outside Japan) and Europe. Despite the shift to aggressive stance bleaker environment surrounding foreign bond investments amid rising interest rates in Europe and US worldwide, major banks have begun shifting to an aggressive posture in overseas operations, primarily in the lending business, aided by improved risk tolerance and their upgraded credit ratings. Previously, most banks concentrated managerial resources in China and other Asian counties, but they are now gearing up business development in other regions (the Americas and Europe) in a bid to catch up with MUFG. Indeed, Mizuho FG listed on the NYSE in November, and expectations are mounting for medium- to long-term growth in overseas markets.

Aggregate real net Charts 8 and 9 contain banks’ FY07 parent and consolidated earnings projections. business profit to rise Combined parent real net business profit is expected to turn up for the first time in six 5.2% in FY07, the first fiscal years, rising 5.2% y/y to Y3,631 billion. Banks do not envisage a rapid recovery increase in 6 years in the lending business in terms of either volume or spreads. Additionally, overhead is likely to remain on an uptrend. However, higher interest rates should widen the spread between inter-bank and deposit rates, generating meaningful benefits in FY07. Also, treasury income is expected to bottom, supported by reduced net bond-related losses, as well as stable US short-term interest rates. Banks believe retail operations will continue driving earnings, backed in part by higher sales of financial products.

With credit costs expected With credit costs likely to come in at normalized levels, major banks foresee aggregate to normalize, all major credit costs of Y353 billion on a parent basis for FY07. Thus, banks expect combined banks foresee high net net income to hit Y2,164 billion (down 16% y/y) on a parent basis and Y2,505 billion income; many plan (down 11.3%) on a consolidated basis. Although profit may plunge y/y at some banks dividend hikes in the absence of benefits from deferred tax assets, excluding this factor, net income is expected to come in at high levels, outpacing the FY06 figure. Most banks believe consolidated and parent earnings will move in the same direction. Many plan to raise common dividends during the period.

8 Earnings Analysis of Major Banks–I

Differences Between FY06 Consol and Parent Results (Y bil) Chart 6 Ordinary income Ordinary profit Net income Total assets Shareholders' equity, etc 8411 Mizuho FG Parent 3,068.4 492.7 529.4 132,986.3 5,581.4 Consol 4,099.7 748.2 621.0 149,880.0 4,911.3 Difference 1,031.2 255.5 91.5 16,893.8 -670.1

8306 MUFG Parent 4,360.6 1,112.9 880.9 159,857.4 8,709.3 Consol 6,094.0 1,457.1 881.0 187,281.0 8,520.3 Difference 1,733.4 344.2 0.1 27,423.7 -189.1

8316 SMFG Parent 2,451.4 573.3 315.7 91,537.2 3,992.9 Consol 3,901.3 798.6 441.4 100,858.3 3,923.0 Difference 1,449.9 225.3 125.6 9,321.1 -69.9

8308 Resona Holdings Parent 992.1 349.8 582.5 37,139.8 1,787.8 Consol 1,153.3 409.9 664.9 39,985.7 1,811.8 Difference 161.2 60.1 82.4 2,845.9 24.0

8309 Mitsui Trust Holdings Parent 392.8 154.2 118.4 13,273.0 1,012.0 Consol 447.1 160.0 112.8 14,090.5 1,003.9 Difference 54.3 5.8 -5.6 817.5 -8.1

8403 Sumitomo Trust Parent 558.5 134.6 81.8 20,405.0 1,195.5 Consol 853.4 170.2 103.8 21,003.1 1,237.2 Difference 294.9 35.6 22.0 598.1 41.7 8404 Mizuho Trust Parent 241.6 79.8 68.8 6,586.4 508.4 Consol 277.1 83.2 67.7 6,666.0 512.6 Difference 35.5 3.4 -1.1 79.6 4.2 Total Parent 12,065.3 2,897.2 2,577.7 461,785.0 22,787.3 Consol 16,548.7 3,743.9 2,824.8 513,098.6 21,407.4 Difference 4,483.4 846.6 247.2 51,313.7 -1,379.9 Source: Company materials; compiled by DIR. Note: Holding companies’ parent results represent sum of group banks articulated in Chart 1 notes.

FY06 Consolidated Results by Region (Y bil) Chart 7 Asia*/ Elimination/ Japan Americas Europe Subtotal Total Oceania unallocated 8411 Mizuho FG Ordinary income 2,856.8 780.6 496.4 222.0 4,355.8 -256.1 4,099.7 Ordinary expenses 580.6 79.8 54.9 38.1 753.5 -5.3 748.2 Ordinary profit 130,400.5 17,968.2 13,415.7 7,217.7 169,002.1 -19,122.1 149,880.0

8306 MUFG Ordinary income 4,621.2 1,081.2 494.2 429.0 6,625.6 -531.6 6,094.0 Ordinary expenses 1,221.6 191.9 15.0 72.7 1,501.1 -44.0 1,457.1 Ordinary profit 165,489.2 21,375.5 9,280.7 9,589.2 205,734.7 -18,453.6 187,281.0

8316 SMFG Ordinary income 3,337.1 294.0 213.6 271.9 4,116.6 -215.3 3,901.3 Ordinary expenses 650.6 71.0 36.2 68.9 826.8 -28.2 798.6 Ordinary profit 89,301.2 5,775.7 3,190.6 4,514.6 102,782.1 -1,923.8 100,858.3

8308 Resona Holdings Ordinary income NA NA NA NA NA NA NA Ordinary expenses NA NA NA NA NA NA NA Ordinary profit NA NA NA NA NA NA NA

8309 Mitsui Trust Holdings Ordinary income NA NA NA NA NA NA NA Ordinary expenses NA NA NA NA NA NA NA Ordinary profit NA NA NA NA NA NA NA

8403 Sumitomo Trust Ordinary income 750.9 57.7 45.2 30.4 884.3 -30.9 853.4 Ordinary expenses 161.6 5.6 2.6 2.0 171.8 -1.7 170.2 Ordinary profit 19,424.9 1,506.6 1,050.2 509.2 22,490.9 -1,487.9 21,003.1 8404 Mizuho Trust Ordinary income 267.7 10.4 278.1 -1.1 277.1 Ordinary expenses 82.6 1.0 83.6 -0.5 83.2 Ordinary profit 6,577.2 99.0 6,676.2 -10.2 6,666.0 Total Ordinary income 11,566.0 2,213.5 1,249.4 953.3 15,982.2 -1,033.9 14,948.3 Ordinary expenses 2,614.4 348.4 108.6 181.7 3,253.2 -79.2 3,174.0 Ordinary profit 404,615.8 46,626.0 26,937.2 21,830.8 500,009.8 -40,987.4 459,022.4 Source: Company materials; compiled by DIR. *Excluding Japan.

Earnings Analysis of Major Banks–I 9

FY07 Parent Earnings Projections (Y bil) Chart 8 Ordinary Real net Net business Ordinary Net income Credit costs DPS income1) business profit profit2) profit (Y) Mizuho FY06 1,264.2 451.5 431.1 179.1 206.3 -65.5 - FY07 CP 1,400.0 470.0 470.0 380.0 320.0 -50.0 - % chg 10.7 4.1 9.0 112.2 55.1 - - Mizuho Corporate FY06 1,804.2 306.9 306.9 313.6 323.1 62.3 - FY07 CP 2,000.0 300.0 300.0 380.0 330.0 40.0 - % chg 10.9 -2.3 -2.3 21.2 2.1 - - Sum of Mizuho 2 banks FY06 3,068.4 758.5 738.0 492.7 529.4 -3.1 - FY07 CP 3,400.0 770.0 770.0 760.0 650.0 -10.0 - % chg 10.8 1.5 4.3 54.3 22.8 - - 8411 Mizuho FG FY06 1,250.1 - - 1,218.5 1,239.7 - 7,000.00 FY07 CP 630.0 - - 590.0 630.0 - 10,000.00 % chg -49.6 - - -51.6 -49.2 - -

Tokyo-Mitsubishi UFJ FY06 3,651.5 899.8 899.8 834.5 669.3 53.4 - FY07 CP 4,000.0 1,025.0 1,025.0 885.0 530.0 -130.0 - % chg 9.5 13.9 13.9 6.0 -20.8 - - Mitsubishi UFJ Trust FY06 709.1 274.3 272.4 278.4 211.6 8.1 - FY07 CP 800.0 240.0 240.0 210.0 125.0 -20.0 - % chg 12.8 -12.5 -11.9 -24.6 -40.9 - - Sum of MUFG 2 banks FY06 4,360.6 1,174.1 1,172.2 1,112.9 880.9 61.5 - FY07 CP 4,800.0 1,265.0 1,265.0 1,095.0 655.0 -150.0 - % chg 10.1 7.7 7.9 -1.6 -25.6 - - 8306 MUFG3) FY06 510.8 - - 478.0 473.9 -11,000.00 FY07 CP 415.0 - - 385.0 385.0 - 14,000.00 % chg -18.8 - - -19.5 -18.8 - -

SMBC FY06 2,451.4 740.6 782.3 573.3 315.7 -89.5 - FY07 CP 2,600.0 830.0 880.0 700.0 410.0 -90.0 - % chg 6.1 12.1 12.5 22.1 29.9 - - 8316 SMFG FY06 376.5 - - 364.5 363.5 - 7,000.00 FY07 CP 105.0 - - 90.0 85.0 - 10,000.00 % chg -72.1 - - -75.3 -76.6 - -

Resona FY06 796.4 263.1 259.4 284.9 546.9 -42.2 - FY07 CP 700.0 243.0 243.0 198.0 156.0 -45.0 - % chg -12.1 -7.7 -6.3 -30.5 -71.5 - - Saitama Resona FY06 195.7 76.4 75.3 64.8 35.7 -8.4 - FY07 CP 200.0 77.0 77.0 64.0 38.0 -8.0 - % chg 2.2 0.8 2.2 -1.3 6.6 - - Sum of Resona 2 banks FY06 992.1 339.5 334.7 349.8 582.5 -50.6 - FY07 CP 900.0 320.0 320.0 262.0 194.0 -53.0 - % chg -9.3 -5.7 -4.4 -25.1 -66.7 - - 8308 Resona Holdings FY06 395.8 - - 384.4 419.1 - 1,000.00 FY07 CP 600.0 - - 590.0 590.0 - 1,000.00 % chg 51.6 - - 53.5 40.8 - -

Sum of Mitsui Trust banks FY06 392.8 177.1 155.2 154.2 118.4 -26.4 - FY07 CP 420.0 180.0 176.0 150.0 90.0 -20.0 - % chg 6.9 1.7 13.4 -2.7 -24.0 - - 8309 Mitsui Trust Holdings4) FY06 25.8 - - 19.1 19.2 - 5.00 FY07 CP 32.0 - - 26.0 26.0 - 5.00 % chg 23.9 - - 36.0 35.7 - -

8403 Sumitomo Trust FY06 558.5 175.9 155.7 134.6 81.8 -40.1 17.00 FY07 CP 580.0 180.0 180.0 155.0 100.0 -25.0 18.00 % chg 3.9 2.3 15.6 15.2 22.2 - - 8404 Mizuho Trust FY06 241.6 86.1 89.3 79.8 68.8 -19.2 1.00 FY07 CP 230.0 86.0 86.0 80.0 65.0 -5.0 1.00 % chg -4.8 -0.1 -3.7 0.3 -5.5 - - Total FY06 12,065.3 3,451.8 3,427.4 2,897.2 2,577.7 -167.3 - FY07 CP 12,930.0 3,631.0 3,677.0 3,202.0 2,164.0 -353.0 - % chg 7.2 5.2 7.3 10.5 -16.0 - - Source: Company materials; compiled by DIR. Notes: 1) FY06 figures for banks under holding companies are our forecasts. 2) In cases where banks have disclosed projections only for real net business profit in FY06, we tentatively use these figures for net business profit. 3) Figures do not reflect MUFG’s 1000-for-1 stock split planned for 30 Sep. 07. 4) Mitsui Trust intends to change its name to Chuo Mitsui Trust Holdings upon approval at the annual shareholder meeting on 28 Jun. 07. Likewise, subsidiary Mitsui Asset Trust Bank will become Chuo Mitsui Asset Trust Bank. The name change is slated to go into effect from 1 Oct. 07. We have used the current names throughout this report. CP: Company projections.

10 Earnings Analysis of Major Banks–I

FY07 Consolidated Earnings Projections (Y bil) Chart 9 Ordinary income Ordinary profit Net income EPS (Y) 8411 Mizuho FG FY06 4,099.7 748.2 621.0 51,474.49 FY07 CP 4,600.0 1,050.0 750.0 62,894.35 % chg 12.2 40.3 20.8 22.2

8306 MUFG* FY06 6,094.0 1,457.1 881.0 86,795.08 FY07 CP 6,700.0 1,500.0 800.0 77,596.86 % chg 9.9 2.9 -9.2 -10.6

8316 SMFG FY06 3,901.3 798.6 441.4 57,085.83 FY07 CP 4,100.0 980.0 540.0 69,668.19 % chg 5.1 22.7 22.4 22.0

8308 Resona Holdings FY06 1,153.3 409.9 664.9 53,933.18 FY07 CP 1,030.0 280.0 210.0 15,970.37 % chg -10.7 -31.7 -68.4 -70.4

8309 Mitsui Trust Holdings FY06 447.1 160.0 112.8 123.33 FY07 CP 470.0 155.0 85.0 88.96 % chg 5.1 -3.1 -24.6 -27.9

8403 Sumitomo Trust FY06 853.4 170.2 103.8 62.05 FY07 CP 980.0 185.0 120.0 71.66 % chg 14.8 8.7 15.6 15.5 8404 Mizuho Trust FY06 277.1 83.2 67.7 12.88 FY07 CP 265.0 83.5 65.0 12.33 % chg -4.4 0.4 -4.1 -4.3 Total FY06 16,548.7 3,743.9 2,824.8 - FY07 CP 17,880.0 4,150.0 2,505.0 - % chg 8.0 10.8 -11.3 - Source: Company materials; compiled by DIR. *Does not reflect MUFG’s 1000-for-1 stock split planned for 30 Sep. 07. CP: Company projections.

Earnings Analysis of Major Banks–I 11

2. FY06 Operating Environment

BOJ rate hikes in July Below, we review the operating environment in FY06. Charts 10-12 illustrate trends in and February, unsecured Japanese money market rates. On 20 January 2004, the BOJ lifted its target for current overnight call rate raised deposits outstanding to Y30-35 trillion in accordance with its quantitative easing policy. to 0.50% The central bank maintained the status quo until 9 March 2006, when it terminated quantitative easing. At the 14 July monetary policy meeting, the BOJ rescinded its zero interest rate policy and raised the unsecured overnight call rate to 0.25%, restoring interest rates to the Japanese money market for the first time since the introduction of quantitative easing in March 2001. The BOJ instituted a second rate hike on 21 February 2007, lifting the unsecured call rate to 0.50%.

Interest rates and prime Turning to FY06 money market rates, overnight call rates went above 0.25% from July rates and above 0.50% in February, in accordance with the BOJ’s policy. Expectation of an increase in the official rate caused other short-term interest rates to start rising moderately from the onset of FY06. The short-term prime rate (a benchmark for lending rates) rose 25bp on the heels of each of the overnight call rate hikes, moving from 1.375% to 1.875% at most major banks. Medium- to long-term interest rates generally remained on an uptrend through 1Q but reversed the trend from end-August and stayed stable through end-FY06.

Challenging environment The initial phase of the BOJ’s tightening cycle exerted severe downward pressure on for net interest spreads in interest spreads in FY06. Competition intensified amid sluggish loan demand, causing initial phase of BOJ’s ongoing narrowing in loan spreads. The higher interest rates quickly started driving up tightening cycle funding costs. The rate hike in 1H raised the yield on liabilities, though benefits from higher lending rates did not materialize until 2H FY06. Meanwhile, the narrower spread between short- and long-term interest rates seems to have eroded profitability of long-term fixed-rate time deposits.

Japanese Short- and Long-term Interest Rates (%) Chart 10 2.50

2.00

1.50

1.00

0.50

0.00 1/05 4 7 10 1/06 4 7 10 1/07 (month-end) FY05 FY06

Official discount rate 3-month Y TIBOR (B) TSE 10-year JGB futures (A) Spread (A – B)

Source: BOJ; compiled by DIR.

12 Earnings Analysis of Major Banks–I

US short-term interest Chart 13 shows FY06 trends in US interest rates. In keeping with its tightened rates hovering at high monetary policy from end-June 2004, the Federal Open Market Committee (FOMC) levels; US Treasury raised the federal funds rate by 25bp each on 10 May and 29 June. As a result, it market reversed reached 5.25%. However, the committee kept the rate intact at the six meetings up to downtrend from July the one in March 2006, fearing an economic slowdown and inflation. In response, the US Treasury market remained sluggish overall in 1Q (through June 2006) but rebounded in 2Q (starting in July). Japanese banks basically raise funds in money markets and put proceeds in long-term financial instruments, so the market value of their foreign bond portfolios likely suffered greater losses in 1Q amid upward pressure on funding costs from the monetary tightening. The foreign bond markets have returned to stable levels, but short-term interest rates remain high, implying a bleak environment for foreign currency-denominated treasury operations, although the worst is probably past.

Y118.05/$ at end-March Turning to the forex market (Chart 14), the yen strengthened against the dollar in early 2007, so exchange rate FY06 and then started to weaken late in May, ending at Y118.05/$ at end-March 2007. fluctuations had minimal The rate slid only 0.5% from the year-earlier level of Y117.47/$. As a rule, banks do impact on earnings not take currency risks, so the impact from currency fluctuations is limited to higher/lower income from foreign currency-denominated assets in terms of the yen and a rise/decline in the value of foreign currency-denominated risk-weighted assets.

Bond market fell in 1Q In the Japanese bond market (Chart 15), bond yields rose in April 2006, pushing the and rebounded from end- yield on newly-issued 10-year JGBs up to 2.0%. Thereafter, the yield was trapped in August 2006 the range of 1.80–2.00% through mid-August. Then, core CPI (based on new standards) released at end-August came in well below the market consensus, triggering a downward shift in the yield curve (the bull bond market). Even after the BOJ lifted interest rates in February 2007, the market continued to foresee only moderate hikes going forward. As a result, the yield on long-term bonds at end-March 2007 came in below the year-earlier level.

Short-term Prime Rate and Money Market Rates (%) Chart 11 2.00

1.80

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00 1/05 4 7 10 1/06 4 7 10 1/07 (month-end) FY05 FY06

Unsecured overnight call rate 3-month Y TIBOR (B) Short-term prime rate (A) Spread (A – B)

Source: BOJ; compiled by DIR.

Earnings Analysis of Major Banks–I 13

Long-term Prime Rate and One- to Five-year Interest Rate Swaps (%) Chart 12 3.00

2.50

2.00

1.50

1.00

0.50

0.00 1/05 4 7 10 1/06 4 7 10 1/07 (month-end) FY05 FY06

3-month Y TIBOR Long-term prime rate 1-year sw ap rate 3-year sw ap rate 5-year sw ap rate

Source: BOJ; compiled by DIR.

US Interest Rates (%) Chart 13 7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00 1/05 4 7 10 1/06 4 7 10 1/07 (month-end) FY05 FY06

3-month TB (secondary) 5-year TBs 10-year US government bonds Corporate bonds (Aaa)

Source: Compiled by DIR.

14 Earnings Analysis of Major Banks–I

Turnover in Forex Market Chart 14

($ mil) (Y/$) 60,000 130.0

50,000 125.0

40,000 120.0

30,000 115.0

20,000 110.0

10,000 105.0

0 100.0 1/05 4 7 10 1/06 4 7 10 1/07

FY05 FY06

Daily average turnover (Tokyo; left) Spot rate (month-end; right)

Source: BOJ; compiled by DIR.

Domestic Bond Yields (%) Chart 15 2.50

2.00

1.50

1.00

0.50

0.00 1/05 4 7 10 1/06 4 7 10 1/07 FY05 FY06

YTM on new ly issued 10-year JGBs Yield on TSE 10-year JGB futures YTM on 5-year JGBs

Source: BOJ and other; compiled by DIR.

Earnings Analysis of Major Banks–I 15

Aggregate net bond- Major banks’ aggregate net domestic/foreign bond-related losses stood at Y95.8 billion related losses hit Y95.8 at end-FY06 on a parent basis, contracting from net losses of Y157.9 billion in FY05. billion in FY06, and net Some banks managed to post net bond-related gains in FY06, but net losses squeezed unrealized losses on bond core profits for major banks as a whole. In particular, Sumitomo Mitsui’s efforts to holdings contracted to dispose of unrealized losses resulted in Y112.4 billion in net losses. Combined net Y470.6 billion unrealized losses on domestic bond holdings totaled Y470.6 billion (on a parent basis) at end-March 2007, a steep decline from the Y902.8 billion a year earlier. We believe that long-term FRNs accounted for a significant portion of that figure.

Stock market ended FY06 Chart 16 illustrates stock market trends in FY06. Soaring commodity prices caused generally on par with pronounced setbacks in the market at the start of the fiscal year. Mounting fears of further end-FY05 tightening by the Fed triggered sell-offs in global equity markets. Then the Japanese market rebounded sharply at end-June on growing expectations that the Fed would stop raising its official rate. Global markets rallied soon after 2H FY06 began, and expectations for favorable corporate earnings caused the Japanese equity market to follow suit at end-2006. As a result, the Nikkei Average and TOPIX eclipsed Y18,000 and 1,800 points in late February 2007. However, Japanese equities plunged in the aftermath of the global setback at end-February. Thus, the Nikkei Average and TOPIX closed the FY06 at Y17,287.65 and 1,713.61 points, respectively, roughly in line with the year-earlier levels (Y17,059.66 and 1,728.16).

Aggregate net equity- Aggregate net equity-related gains contracted from Y451.6 billion in FY05 to Y84.6 related gains hit Y84.6 billion in FY06. Some banks reported gains on the sale of ETFs and preferred shares billion in FY06, and net purchased as financial support for ailing borrowers (but some booked losses on the unrealized gains on writedown of preferred shares of non-banks), while unwinding of cross shareholdings shareholdings reached played out. At end-March 2007, net unrealized gains on shareholdings among major Y9,215.5 billion banks came in at Y9,215.5 billion, vs. Y8,262.3 billion at end-March 2006. Major banks hold many domestic demand-oriented stocks such as steel, which performed well in FY06, so we believe the market value of bank shareholdings grew faster than the market average.

Stock Market Performance Chart 16 (end-Mar 2006 = 100) (Y) 160 20,000

140 17,500

120 15,000

100 12,500

80 10,000

60 7,500

40 5,000 1/05 4 7 10 1/06 4 7 10 1/07 (month-end) FY05 FY06

TOPIX (lef t) Communications (left) Electronics (left) Steel products (left) Transport equipment (left) Nikkei average (right)

Source: Compiled by DIR.

Translator: Malinda Markham 16 Earnings Analysis of Major Banks–I

The data contained in this report was taken from statistical services, reports in our possession, and from other sources. The opinions and estimates expressed are our own, and we make no representations either as to the accuracy or as to the existence or non-existence of other facts or interpretations that might be significant. The information herein was gathered from responsible sources but we cannot guarantee its accuracy or completeness.

Issues are rated 1, 2, 3, 4, or 5 as follows: 1: Outperform TOPIX/benchmark index by more than 15% over the next six months. 2: Outperform TOPIX/benchmark index by 5-15% over the next six months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next six months. 4: Underperform TOPIX/benchmark index by 5-15% over the next six months. 5: Underperform TOPIX/benchmark index by more than 15% over the next six months.

IMPORTANT

Japan Daiwa Institute of Research Ltd., and Daiwa Securities SMBC Co. Ltd., are members of the Daiwa Securities Group Inc., and public offerings and/or secondary offerings by the corporations listed below were lead-managed by Daiwa Securities SMBC in the last twelve months (excluding straight bond issues).

List of the Companies as of 1 Jun 2007: Japan Petroleum Exploration (1662); mixi (2121); Institute of Applied Medicine (2123); Accordia Golf (2131); GABA Corporation (2133); VSN (2135); Trust Works (2154); Saylor Advertising (2156); Meiji Dairies (2261); Gakujo (2301); Infomart (2492); Daiyu Eight (2662); Sanko Marketing Foods (2762); Akindo Sushiro (2781); Pharmarise (2796); MonotaRO (3064); Life Foods (3065); Stream (3071); Choushimaru (3075); Horiifoodservice (3077); DVx (3079); Tokyo Tatemono Real Estate Sales (3225); Nippon Commercial Investment (3229); Fund Creation (3233); PROPERST (3236); Will (3241); Nihon Chouzai (3341); Toridoll (3397); Toray Industries (3402); SUMCO (3436); PIPED BITS (3831); NTT Data Intramart (3850); Nippon Ichi Software (3851); Cyber Com (3852); I’LL (3854); Rasa Industries (4022); Takagi Seiko (4242) ; Sawai Pharmaceutical (4555); DUSKIN (4665); Idemitsu Kosan (5019); Toyo Tanso (5310); Miyano Machinery (6162); Fujishoji (6257); Hosokawa Micron (6277); Takeuchi Mfg. (6432); NetIndex (6634); Syswave (6636); Mimaki Engineering (6638); Dai-ichi Seiko (6640); Techno Medica (6678); Elecom (6750); Matsushita Electric Industrial (6752); Nidec-Read (6833); Harada Industry (6904); Taiyo Yuden (6976); Sanoyas Hishino Meisho (7020); Takata Corporation (7312); Megane Top (7541); SRI Sports (7825); (8267); Heiwado (8276); The Shimizu Bank (8364); The Bank of (8369); Yamaguchi Financial Group (8418); Ehime Bank (8541); Mitsui Sumitomo (8752); eGuarantee (8771); Keihanshin Real Estate (8818); Fuji (8860); Sun Frontier Fudousan (8934); FJ Next (8935); Human21 (8937); Daiwasystem (8939); Land Business (8944); Noel (8947); Nippon Residential Investment (8962); Life Stage (8991); Atrium (8993); Kyoritsu Maintenance (9616); Senshu Electric (9824).

Hong Kong This publication is produced by Daiwa Institute of Research Ltd. and distributed by Daiwa Institute of Research (Hong Kong) Limited and/or its affiliates. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Institute of Research (Hong Kong) Limited, nor Daiwa Institute of Research Ltd., nor any of its or their respective parent, holding, subsidiaries or affiliate companies, nor any of its or their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content herein, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Institute of Research (Hong Kong) Limited, except where the publication states otherwise.

Daiwa Institute of Research (Hong Kong) Limited, its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers, servants and employees may have positions in or may be materially interested in the securities in any of the markets mentioned or may have also performed investment banking and other services for the issuers of such securities.

United Kingdom This material was produced by Daiwa Institute of Research Ltd., and is distributed by Daiwa Securities SMBC Europe Limited which is regulated by The Authority and is a member of the London Stock Exchange. Daiwa Securities SMBC Europe Limited may, from time to time, to the extent permitted by applicable UK law and other applicable law or regulation, participate or invest in other financing transactions with the issuers of the Securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options therefore and/or may have acted as an underwriter during the past three years for the issuer of such Securities. In addition, employees of Daiwa Securities SMBC Europe Limited and its affiliate may have positions and effect transactions in such Securities or options and may serve as directors of such issuers. Daiwa Securities SMBC Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This document is intended for investors who are not Private Customers within the meaning of the Rules of The Financial Services Authority and should not, therefore, be distributed to Private Customers in the . This document is not to be used or considered as an offer to sell or solicitation of an offer to buy any Securities. Information and opinions contained herein have been compiled or arrived at from sources believed to be reliable, but neither Daiwa Securities SMBC Europe Limited and/or its affiliates accepts liability for any loss arising from the use hereof or makes any representation as to their accuracy or completeness. Any information to which no source has been attributed should be taken as an estimate by Daiwa Institute of Research Ltd. This document is not be relied upon as such or used in substitution for the exercise of independent judgment. Should you enter into investment business with any Daiwa Securities SMBC Europe Limited affiliate outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Germany This document has been approved by Daiwa Securities SMBC Europe Ltd and is distributed in by Daiwa Securities SMBC Europe Ltd, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

North America This report was prepared by Daiwa Institute of Research ("DIR"), a Japanese company. It may not be accurate or complete and should not be relied upon as such. It reflects the preparer's views at the time of its preparation, but it is provided with a time delay and does not reflect events occurring after its preparation. The preparer has no obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation, and needs.

This report does not recommend to U.S. recipients the use of Daiwa Securities SMBC or its non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients will direct commission business to such entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. U.S. customers wishing to obtain further information or effect transactions in any securities mentioned in this report should contact Daiwa Securities America Inc. ("DSA"), Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities. DSA and its affiliates beneficially own one percent or more of a class of common equity securities of the following issuers: Alpha Corporation; Belx Co., Ltd.; Cabin Co. Ltd.; Daiko Denshi Tsushin Ltd.; Daiwa Seiko, Inc.; Ehime Bank Ltd.; Fuji Television Network, Inc.; GDH KK; Imperial Hotel, Ltd.; Japan Securities Finance Co. Ltd.; Japan Securities Agents, Ltd.; Kokusai Densetu Co., Ltd.; Maruzen Company, Limited; Meisei Electric Co., Ltd.; Mitsui Mining Co. Ltd.; NIF Ventures Co. Ltd.; Nomura Co., Ltd.; Shinkin Central Bank; Taito Corporation..

Investment Banking Relationships. DSA or an affiliate has managed or co-managed a public offering of securities in the past 12 months, or has received compensation for investment banking services in the past 12 months, or expects to receive or intends to seek compensation for investment banking services in the next three months, for or from the following issuers: ABN Amro; Abu Dhabi Commercial Bank; ACCA NETWORKS CO. LTD.; Accordia Golf Co. Ltd.; Advance Create Co. Ltd.; Advance Residence Investment Corp.; Adways Co. Ltd.; Aeon Co. Ltd.; Aeon Credit Service Co. Ltd.; Air Products and Chemicals Inc.; Akindo Sushiro Co. Ltd.; Albany International Corp.; Albemarle Corporation; ALC PRESS INC.; Alliance & Leicester Plc.; Alpha Credit Group, Inc.; AMB Property Corporation; American Express Credit Corp.; American General Finance; American International Group Inc.; AnGes MG Inc.; Anglo American Capital; ANX National International; ANZ Banking Group Limited; ANZ National International London; Apamanshop Co. Ltd.; AQ Interactive Inc.; Aramark Services; Arealink Co. Ltd.; Art Corporation; Artnature Inc.; Asahi Breweries Ltd.; Asax Co. Ltd.; ASB Bank Ltd.; AsiaPharm Group, Ltd.; ASIF; Asset Investors Co. Ltd.; ASTMAX Co. Ltd.; Atect Corp.; Australia and New Zealand Banking Group Ltd.; AutoNation; AviChina Industry and Technology Company Limited; Avis Budget Car Rental, LLC.; Azko Nobel; Balls Corp.; Banca Aletti; Banca Comerciala Romana SA; Banca Intesa; Banca Popolare di Vicenza; Banco BPI S.A.; Banco BPI SA Cayman; Banco Guipuzcoano; Banco Popolare di Verona e Novara; BancTec Japan Inc.; Bank Nederlandse Gemeeten; Bank of America Holdings; Bank of Creditanstalt; Bank of China Limited; Bank of Ireland; Bank of Scotia Ltd.; Bank of the Ryukyus Earnings Analysis of Major Banks–I 17

Ltd.; Bank of Western Australia; BAT International Finance; Bayerische Landesbank; BBVA Senior Finance SA; BCP Finance Bank; Belo Corp.; Bemis Corp.; BHP Finance USA Ltd.; BHW Bausparkasse AG; BMW Finance BV; BNP Paribas; Boeing Co.; Boise Cascade Corporation; BOS International Australia Ltd.; Boston Scientific Corp; BP Capital Markets; Bradford & Bingley; Brookfield Asset Management Inc.; Brunswick Corp.; BSK; Bunadarbanki Islands; Caceis Bank Espana SA; CAISSE NATIONALE DES CAISSES D'EPARGNE ET DE PREVOYANCE; Caixa Catalunya International Finance; Caixa D’estalvis Catunun; Caja Duero; CAM Global Finance; Canadian Imperial Bank; Canadian Natural Resources; Carenet Inc.; Cargill Inc.; CCS Inc.; CDG Co. Ltd.; Cedant Timeshare; Central General Development Co. Ltd,; Central Japan Railway Co.; Cetelon; CFF; Chelsea Building Society; Chimney Co. Ltd.; China CITIC Bank Corporation Ltd.; China Merchants Bank Co. Ltd.; China Minsheng Banking; China Resources Power Holdings Co.; Choushinmaru Co. Ltd.; Chubu Electric Power Co. Inc.; CIGNA Corp.; CIT Group, Inc.; CITIC 1616 Holdings Ltd.; Citigroup Global Markets; Citigroup Inc.; Clear Channel Communications; CMS Energy; Coca-Cola Amatil Ltd.; Comcast Corp.; Commonwealth Bank of Australia; Companhia Vale do Rio Doce; Companie de Financement Foncier; ConocoPhilips; Consumers Energy Company; Contec Co. Ltd.; Cooperative Centrale Raiffeisen- Boerenleenbank; Credit Saison Co. Ltd.; CS Group Finance; CVS Corporation; Cyberstep Inc.; Dah Sing Bank; Daibiru Corp.; Daihatsu Diesel Manufacturing Co. Ltd.; Dai-ichi Seiko Co. Ltd.; Daimler ; Dainippon Screen Manufacturing Co. Ltd.; Daio Paper Corp.; Daiseki Co. Ltd.; Daiwa Computer Co. Ltd.; Daiwa Securities Group Inc.; Daiwa Seiko, Inc.; Daiwasystem Co. Ltd.; Data Applications Co. Ltd.; Davide Campari-Milano S.p.A; DA Office Investment Corp.; Dekabank; Depfa ACS Bank; Depfa Bank plc.; Depfa Deutsche Pfandbriefbank AG; Deutsche Apotheke Aerztebank; Deutsche Bahn Finance BV; Deutsche Bank AG; Deutsche Bank Aktiengesellshaft; Deutsche Bank Capital Finance Trust; Deutsche Bank Finance; Dexia Credit Local; Dexia Municipal Agency; Di-Nikko Engineering KK; Dow Chemical Company; Duskin Co. Ltd.; DVB Group Merchant Bank Asia; Dvx Inc.; Dydo Drinco, Inc.; East Japan Railway Co.; Ebara Corporation; EFG Hellas plc.; Egnatia Finance; eGuarantee Inc.; Elecom Co. Ltd.; Elmo Co. Ltd.; Emirates Bank International PJSC; Eneserve Corp.; Enoteca Co. Ltd.; Enterprise Products Operating LP; ES-Con Japan Ltd.; E*Trade Securities Co. Ltd.; Eurofima; Eurohypo AG.; Export Development Canada; Export-Import Bank of India; FEDEX Corporation; Finconsumo SPA; FJ Next Co. Ltd.; Ford Credit Australia Limited; Ford Motor Company; Ford Motor Credit Company; Freddie Mac; Fuji Corp. Ltd.; Fuji Electric Co. Ltd.; Fuji Food System Co. Ltd.; Fujikura Ltd.; Fujishoji Co. Ltd.; Fukoku Mutual Life Insurance Co.; REIT Investment Fund; Fund Creation Co. Ltd.; Furukawa Electric Co. Ltd.; GABA Corp.; Gakujo Co Ltd.; Gannett Co. Inc.; GE Capital Australia Funding; GECC; General Electric Capital Corporation; Georgia Pacific Corp.; Global One Real Estate Investment Corp.; GM; GMAC; Goldman Sachs Group, Inc.; Graphisoft; Harada Industry Co. Ltd.; Harrah’s Entertainment Inc.; Harrah’s Inc.; Harrah’s Operating Company; HBOS Treasury Service; HCA Inc.; Heiwa Real Estate Co. Ltd.; Heiwado Co. Ltd.; Hellenic Bank; Hershey Company; Hertz Corp.; HI Corp.; Himaraya Co. Ltd.; Hiraki Co. Ltd.; Hirata Corp.; Hitachi Chemical Co. Ltd.; Hitachi Zosen Fukui Corp.; Hokkaido Electric Power Co. Inc.; Hokuhoku Financial Group Inc.; Hokuriku Electric Power Co.; Horiifoodservice Co. Ltd.; Hoshiden Corp.; Hosokawa Micron Corp.; HSH N Finance; HSH Nordbank AG; Human21 Corp.; Humana Inc.; Hyperconception Corp.; Hypo Real Estate International; Idemitsu Kosan Co. Ltd.; IKB Finance BV; Impexbank; Indian Railway Finance Corporation; Industrial and Commercial Bank of China Limited; Industrial Bank of Korea; Infomart Corp.; Inspect Inc.; Institute of Applied Medicine Inc.; Instituto de Credito Official; International Business Machine Corp; International Finance Corp.; International Hotel Group; International Lease Finance Corp.; Interspace Co. Ltd.; Intesa Bank Ireland plc.; Intrance Co. Ltd.; Ishii Hyoki Co. Ltd.; Ishikawajima-Harima Heavy Industries Co., Ltd.; Islandsbanki FBA; Islandsbanki FBA HF; Itochu Corp.; Japan Airlines Co. Ltd.; Japan Bank for International Co-operation; Japan Expressway Holding and Debt Repayment Agency; Japan Hotel & Resort Investment Corp.; Japan Logistics Fund, Inc.; Japan Prime Realty Investment Corp.; Japan Real Estate Investment Corp.; Japan Retail Fund Investment Corp.; Japan Single-Residence REIT Inc.; J-Com Co. Ltd.; JFE Holdings Inc.; Joint Corp.; Joint REIT Investment Corp.; JP Morgan Chase; J-Product Corp.; Kanamoto Co. Ltd.; Kansai Electric Power Co.; Kansai Urban Banking Corp.; HF; Kaupthing Bunadarbanki HF; Kawasaki Heavy Industries Ltd.; Kawasaki Kisen Kaisha Ltd.; KBC IFIMA NV; Keihan Electric Railway Co. Ltd.; Keihanshin Real Estate Co. Ltd.; Keio Electric Railway Co. Ltd.; Kenedix Inc.; Kenedix Realty Investment Corp.; Kennedy-Wilson Japan; Keyware Solutions Inc.; KFW Bankengruppe; KFW International Finance; KGaA; Kinki Nippon Railway Co. Ltd.; Kitz Corp.; Bussan Co. Ltd.; Kommunalbanken ; Kookmin Bank; Korea Electric Power Co.; Korea National Housing Corporation; Kuraudia Co. Ltd.; Kyoei Steel Ltd.; Kyoritsu Maintenance Co. Ltd.; Kyowa Medical Corp.; Kyushu Electric Power Co. Ltd.; Land Business Co. Ltd.; Landesbank Baden-Wuerttemberg; Landeskreditbank BW Foerdebank; Islands HF; L’attrait Co. Ltd.; LB Baden- Wuerttemberg; LBHI MTNG; Lehman Brothers Holdings Inc.; Li Ning Company Ltd.; Life Foods Co. Ltd.; Life Stage Co. Ltd.; LIVING Corp. Inc.; Lotte Shopping; Louis Vuitton Moet-Hennessy; LVMH; Macquarie Bank Ltd.; Maeda Corp.; Makino Milling Machine Co. Ltd.; Marubeni Corp.; Maruzen Co. Ltd.; Masco Corp.; MasterCard Incorporated; Matsushita Electric Industrial Co. Ltd.; Mazda Motor Corp.; Meadwestvaco Corp.; MediciNova Inc.; Megane TOP Co. Ltd.; Meiji Dairies Corp.; Meiko Electronics Co. Ltd.; Meisei Electric Co. Ltd.; MGM Mirage Inc; MID REIT Inc.; Midsouth Holdings; Millea Holdings Inc.; Millennium America; Mimaki Engineering Co. Ltd.; Mitsubishi Chemical Corp.; Mitsubishi Corp.; Mitsubishi Heavy Industries Ltd.; Inc.; Mitsubishi Tokyo Financial Group Inc.; Mitsui & Associates Telepark Corp.; Mitsui & Co. Ltd.; Mitsui Chemicals Inc.; Mitsui Engineering & Shipbuilding Co. Ltd.; Mitsui Fudosan Co. Ltd.; Mitsui Mining & Smelting Co. Ltd.; Mitsui OSK; Mitsui Sumitomo Insurance Co. Ltd.; Mitsui Trust Holdings Inc.; Mitsui-Soko Co. Ltd.; Mixi Inc.; Miyachi Technos Corp.; Miyano Machinery Inc.; Mizuho Bank Ltd.; Mizuho Corporate Bank Ltd.; MK Capital Management Corp.; MonotaRO Co. Ltd.; Mori Hills REIT Investment Corp.; NACF; Railroad Co. Ltd.; Nankai Electric Railway Co. Ltd.; Natexis; National Agricultural Co.; National Australia Bank Ltd.; National Bank of Canada; National Grid Co. Plc.; National Rural Utilities Cooperation Finance Corp.; Nationwide Building Society; Nestle Australia Limited; Nestle Holdings; New City Residence Investment Corp.; Next Co. Ltd.; NIB Capital Bank; NIC Autotec Inc.; Nichirei Corp.; Nidec-Read Corp.; Nihon Chouzai Co. Ltd.; Nihon M&A Center Inc.; Nikko Citigroup; Nintendo Co. Ltd.; Nippon Accommodations Fund Inc.; Nippon Broadcasting System, Inc.; Nippon Commercial Investment Corp.; Nippon Hotel Fund Investment Corp.; Nippon Life; Nippon Life Insurance; Nippon Mining Holdings Inc.; Nippon Oil Corp.; Nippon Residential Investment Corp.; Nippon Restaurant Corp.; Nippon Sanso Corp.; Nippon Telegraph & Telephone Corp.; Nippon Unipac Holding; Nishi-Nippon Railroad Co. Ltd.; Nissan Diesel Motor Co. Ltd.; Nissan Financial Services Co. Ltd.; Noel Co. Ltd.; Nomura International PLC; Nomura Real Estate Holdings Inc.; Nomura Real Estate Residential Fund Inc.; Norddeutsche LB; Noritz Corp; Northern Rock Plc.; NRW Bank; NTT Leasing; NTT Urban Development Corp.; Nuflare Technology Inc.; NYSE Group Inc.; Obara Corp.; Odakyu Electric Railway Co. Ltd.; OJSC NK Rosneft; Okamura Corp.; Okinawa Electric Power; OKO Bank plc.; Okuma Holdings Inc.; Onoken Co. Ltd.; Oracle Corp.; ORIX Corp.; Gas Co. Ltd.; Overnight Corporation; Owens Corning; Pacific Management Corp.; Pacific Systems Corp.; Pegasus Sewing Machine Manufacturing Co. Ltd.; Peoples Insurance Company of China; Pharmarise Corp.; PHH Corp.; Piped Bits Co. Ltd.; Plains All American; Poplar Co. Ltd.; POSCO; Power Up Co. Ltd.; Post Properties, Inc.; Prologis; Promise Co. Ltd.; Properst Co. Ltd.; Rabo Australia Ltd.; Rabobank Nederland; Rann International; Rasa Industries Ltd.; RCI Banque SA; Realogy Corp.; Reins International Inc.; Renault S.A.; Rengo Co. Ltd.; Rentenbank; Re-plus residential investment Inc.; Resona Holdings Inc.; Right On Co. Ltd.; Rinnai Corp.; Risa Partners Inc.; Rosneft; Royal Bank of Scotland; Sabre Holdings; Sakai Moving Service Co. Ltd.; Sanden Corp.; Sanei-International Co. Ltd.; Sankei Building Co. Ltd.; Sanko Marketing Foods Co. Ltd.; Sanoyas Hishino Meisho Corp.; Santander International; Sanyo Shinpan Finance Co. Ltd.; Breweries Ltd.; Sawai Pharmaceutical Co. Ltd.; Senshu Electric Co. Ltd.; Severn Trent Water; Sharp Corp.; Shikoku Electric Power Co. Inc.; Shiseido Co. Ltd.; Showa Shell Sekiyu KK; Sihuan Pharmaceutical Holdings Group Ltd.; Simon Property Group LP; SK Corp.; SNS Bank Nederland; Societe Nationale des Chemins de Fer Francais; Sojitz Corp.; Sovrisc BV; Sparebanken Rogaland; Sprint Nextel Corp.; SRI Sports Ltd.; State of North Rhine-Westphalia; Stream Co. Ltd.; Sumco Corp; Sumikin Bussan Corp.; Sumisho Electronics Co. Ltd; Sumitomo Chemical Co. Ltd.; Sumitomo Light Metal; Sumitomo Metal Industries Ltd.; Sumitomo Metal Mining Co. Ltd.; Sumitomo Mitsui Banking Corp.; Sumitomo Realty & Development Co. Ltd.; Sun Capital Management Corp.; Sun Frontier Fudousan Co. Ltd.; Svensk Exportkredit AB; System Integrator Corp.; Syswave Corp.; Tac Co. Ltd.; Taiheiyo Cement Corp.; Tai-I International Holdings; Taisei Co. Ltd.; Taiyo Yuden Co. Ltd.; Takata Corp.; Takebishi Corp.; Talisman Energy; Telefonica; Telepark Corp.; Telstra Corp. Ltd.; Terna spa; The Bank of Fukuoka Ltd.; The Bank of Ikeda Ltd.; The Bank of Iwate Ltd.; The Bank of Kyoto Ltd.; The Bank of Nagoya Ltd.; The Bank of Tokyo-Mitsubishi Ltd.; The Bear Stearns Cos Inc.; The Bank; The Chugoku Electric Power Co., Inc.; The Daisan Bank Ltd.; The Higashi-Nippon Bank Ltd.; The Hokkoku Bank Ltd.; The Hyakugo Bank Ltd.; The Japan General Estate Co. Ltd.; The Juroku Bank Ltd.; The Kansai Electric Power Co. Inc.; The Minato Bank Ltd.; The Miyazaki Bank Ltd.; The Musashino Bank Ltd.; The Norinchukin Bank; The Ogaki Kyoritsu Bank Ltd.; The Senshu Bank Ltd.; The Shimizu Bank Ltd.; The Sumitomo Trust & Banking Co. Ltd.; The Tokyo Star Bank Ltd.; Time Warner, Inc.; Tobu Railway Co. Ltd.; Toho Gas Co Ltd.; Toho Titanium Co. Ltd.; Tohoku Electric Power Co. Inc.; Tokuden Co. Ltd.; Tokyo Electric Power Co.; Tokyo Metro Co. Ltd.; Tokyo Tatemono Co. Ltd.; Tokyo Tatemono Real Estate Sales Co. Ltd.; Tokyu Corp.; Tokyu Land Corporation; Tokyu Store Chain; Toll Brothers; Top Engineering Co. Ltd.; Toray Industries Inc.; Toshiba Corp.; Toshiba Plant Systems & Services Corp.; Total Capital SA; Toyo Tanso Co. Ltd.; Toyobo Co. Ltd.; Toyota Credit Canada, Inc.; Toyota Finance Australia Ltd.; Toyota Finance Corp.; Toyota Industries Corp.; Toyota Motor Corp.; Toyota Motor Credit Corporation; Toyota Tsusho Corp.; TS Tech Co. Ltd.; Turkiye Halk Bankasi AS; Ube Material Industries Ltd.; UBS AG; UBS Jersey; UBS Preferred Funding Trust; UFJ Bank; Unicredito Italiano; Union Pacific Corp.; United Technologies; Universe Co. Ltd.; UP Inc.; Urbanet Corp. Co. Ltd.; US Cellular Corp.; USJ Co. Ltd.; Vale Overseas Limited.; Value Commerce Co. Ltd.; Verite Co. Ltd.; Verizon Global Funding Corp.; Viacom Inc.; Volkswagen International Finance NV; VSN Inc.; WDI Corp.; Welcia Kanto Co. Ltd.; Wellpoint Inc.; West Japan Railway Co.; West LB; Westpac Banking Corporation; Whirlpool Corp.; Will Co. Ltd.; William Street Funding; Wonder Corp.; Wuerttembergische Versicherung; Xcel Energy, Inc.; Xingda International Holdings Ltd.; Yachiyo Bank Ltd.; Yachiyo Industry Co. Ltd.; Yamaguchi Financial Group Inc.; Yorozu Corp.; Zakkaya Bulldog Co. Ltd.; Zenrin Co. Ltd.; Zetton Inc.; ZhongHui Holdings Ltd..

The statements in the two preceding paragraphs are made as of May 1, 2007.

DSA Market Making. DSA made a market in securities or ADRs of the following issuers at the time this report was published: Daiei Inc.; FUJIFILM Holdings Corp.; Internet Initiative Japan Inc.; Makita Corp.; MediciNova Inc.; Millea Holdings Inc.; Mitsui & Co. Ltd.; NEC Corp.; Nissan Motor Co. Ltd.; Trend Micro Inc.; Wacoal Holdings Corp.

Research Analyst Conflicts. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not aware of any material relevant conflict of interest involving them or DSA, except as noted: no exceptions.

Research Certification. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s) is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

18 Earnings Analysis of Major Banks–I