DBRS Confirms Ratings and Trends of The Bank of Tokyo-Mitsubishi UFJ, Ltd and Related Entity

DBRS has today confirmed the Long-Term Deposits & Senior Debt and Short-Term Instruments ratings of The Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU) and Bank of Tokyo-Mitsubishi UFJ (Canada) at “A” and R-1 (middle), respectively. All trends remain Stable. DBRS has also maintained the intrinsic assessment of BTMU at A (low).

DBRS expanded its floor rating concept to the ratings of the three Japanese mega-banks, including BTMU, in May 2009. The banking subsidiaries were designated as Critically Important Banks (CIBs) and floor ratings of R-1 (middle) and “A” were assigned, reflecting the extensive involvement the banks have in the country’s financial markets and the critical roles they perform in the flow of financial transactions. As such, the loss of market confidence in a CIB’s ability to perform as a counterparty could have an impact on the market’s perception of other participants and lead to a degradation of the functioning of the financial markets.

These ratings represent the floor ratings assigned to Japanese banks. As a result, BTMU’s final rating would not deteriorate in the event that the bank’s intrinsic assessment weakens. However, if DBRS perceives that changes in policies or specific actions indicate that the government’s willingness or ability to support these CIBs has changed, it would revisit the level established for the floor ratings or the reliability of the floor itself.

The intrinsic assessment of Mitsubishi UFJ Financial Group, Inc. (MUFG or the Group) on which this report and analysis are based continues to face two of the three material long-term challenges that it has faced in the past: (1) low levels of profitability, primarily caused by challenges in generating acceptable net interest margins in the domestic banking market, and (2) a high level of exposure to equities through cross-shareholdings. The expectation of further reductions in cross-shareholdings is integrated in the current intrinsic assessment. As for what had previously been the third challenge, low levels of capital has become less of an issue as a result of equity issuances over the past year – MUFG historically has maintained higher levels of capital than its domestic peers and the quality, as now measured by MUFG’s management-defined core Tier 1 capital ratio, continues to be stronger than the domestic peers.

MUFG recorded a profit of ¥217 billion in the nine months to December 31, 2009, versus a loss of ¥42 billion in the comparative period; the return to profitability was largely a function of improved net interest income, reduced losses on equities, good expense management and a lower tax rate, offset by higher credit costs. Unrealized equity, bond and other investment gains declined from a ¥1.0 trillion gain at the end of March 2008 to a loss of over ¥900 billion at the end of March 2009 before recovering to an unrealized gain of ¥529 billion as of December 31, 2009, primarily reflecting volatility in the Nikkei and exposure to structured products.

In November 2008, BTMU acquired the equity of UnionBanCal Corporation (UBC) that it did not already own and subsequently injected an additional US$2 billion in capital into the subsidiary (more information on “A”-rated UBC can be found on our website). The acquisition gave BTMU more control over the future of the bank, although current operations continue to be affected by the weak economic environment. Also in 2008, the Group increased its investment in consumer finance company ACOM Co., Ltd. up to 40% and acquired the equity of Mitsubishi UFJ NICOS Co. Ltd. that it did not already own (a minority stake was later sold to Norinchukin Bank). In October 2008, the Group purchased $9 billion in convertible and non-convertible preferred shares of Morgan Stanley (rated A (high) by DBRS); with subsequent transactions, MUFG now owns 20% (on a fully diluted basis) of the investment banking firm. The Group is planning to form a joint venture between Mitsubishi UFJ Securities and Morgan Stanley Japan Securities with a target date of May 2010.

In 2009, the Group increased its focus on improving capital and capital quality, adopting a target for the core Tier 1 capital ratio, which has been defined as Tier 1 capital excluding preferred securities and preferred shares. MUFG completed a common equity issue in December of just over ¥1.0 trillion, which increased the number of common shares outstanding by about 21.5% and increased the Tier 1 and core Tier 1 ratios to 10.5% and 8.1%, respectively. In addition, MUFG has indicated its intention to reduce its equity shareholdings after discussions with clients, although no target level has been communicated.

Notes:
All figures are in Japanese Yen unless otherwise noted.

DBRS ratings on the Bank of Tokyo-Mitsubishi UFJ (Canada) apply to debt that is guaranteed by The Bank of Tokyo-Mitsubishi UFJ, Ltd.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations (January 14, 2010) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.