DBRS Confirms UnionBanCal Corporation at “A”; Trend Stable

DBRS has today confirmed the ratings of UnionBanCal Corporation (UB or the Company) and its related entities, including UnionBanCal’s Issuer and Senior Debt rating of “A”. The trend for all ratings remains Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

UnionBanCal’s ratings reflect its healthy balance sheet, which is underpinned by better than peer asset quality, a low-cost robust deposit base that helps contribute to solid core profitability and liquidity, and a strong capital position. DBRS notes that this conservative risk profile has allowed the Company to take advantage of today’s difficult operating environment by being able to expand current banking relationships and attract new ones, as many weakened competitors have been forced to curtail banking activities due to capital constraints or asset quality problems. The ratings also take into account below-peer non-interest revenues as UB has sold off several fee-based businesses recently and a deteriorating homebuilder portfolio.

Since the end of the second quarter, UB has agreed on a tender offer from its parent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, Long-Term Deposits & Senior Debt at “A” with a Stable Trend), to acquire the remaining 35.1% of the publicly held shares of UB BTMU and its affiliates they do not already own for $73.50 per share. BTMU is a wholly owned subsidiary of Mitsubishi UFJ Financial Group, Inc., one of the largest banks in the world by assets. Historically, the DBRS rating rationale for UB has fully discounted the majority ownership position of BTMU due to the Company’s historical operating independence, a board of directors composition that reflects a public, rather than a closely held, company and the lack of financial benefit derived by UB’s affiliation with BTMU. If and when UB becomes a fully owned subsidiary of BTMU, DBRS will assess the changes made, if any, to UB’s business model, operating philosophy and conservative balance sheet to determine any ratings implications. Over the intermediate term, DBRS does not expect any ratings changes.

Compared to banks with more than $20 billion in assets, UB has the lowest cost of funds at 1.56%, which gives the Company a significant competitive advantage as it does not need to chase riskier assets to achieve a strong spread. This, combined with conservative underwriting standards, has contributed to stronger asset quality metrics than those of UB’s peers. Indeed, non-performing assets (NPAs) represented only 0.49% of loans and foreclosed assets in the second quarter, compared with the peer median of 1.10%. Meanwhile, net charge-offs (NCOs) remain relatively low as well, at an annualized 0.28% of average loans compared with the peer median of 0.52%.

As with most banks, the Company’s $700 million homebuilder portfolio remains the most problematic. This exposure represents less than 2.5 quarters of income before provision and taxes and approximately 16% of tangible common equity. DBRS notes that UB already has $115 million in reserves against this portfolio. Overall, the Company has done an excellent job of building the loan loss reserve as provisions have exceeded NCOs by $192 million for the past three quarters. With a recessionary economy and a weak housing market, DBRS expects loan loss provisioning to remain high for the remainder of the year.

In the first half of the year, UB reported income from continuing operations of $256.7 million, which was down 19% from the same period a year ago as a result of higher credit costs. Very strong net interest income growth through robust loan growth and net interest margin expansion was more than offset by incremental loan loss provisioning of $158 million. Tax-effected, the incremental provisions reduced net income by approximately $108 million. Even with the elevated provisions, return on assets from continuing operations was a respectable 0.89%.

Over the past several years, UB has sold off three fee-based businesses, most recently, in June 2008, its insurance brokerage business, as the Company looks to deploy its capital more effectively. While this has improved operating efficiency at the bank, revenue diversification has declined. Non-interest income represented 29% of revenues in the first half of the year, which is relatively low for a bank of this size. Management will look to grow the remaining businesses and has indicated that further divestitures of fee-based businesses are unlikely. The gains from the asset sales have also provided a significant capital cushion to fund loan growth and other business opportunities. At the end of the second quarter, UB’s tangible common equity ratio remained strong at 7.22%.

The holding company’s stand-alone risk profile is adequate. Double leverage is modest at 107% (at June 30, 2008), and the holding company has ample unencumbered liquidity of its own – and access to other assets – to cover its operating expenses and debt service obligations.

UnionBanCal Corporation, a bank holding company headquartered in San Francisco, California, reported $60.6 billion in assets at June 30, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.