DBRS Confirms UnionBanCal Corporation at ‘A’; Trend Stable

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

UnionBanCal’s ratings reflect its strong banking franchise that is underpinned by a robust low-cost deposit base, strong capital position, and better-than-peer asset quality. The ratings also consider the Company’s reliance on spread income and an elevated expense base. DBRS notes that an inability to generate positive operating leverage over the intermediate term could have negative rating implications. Lastly, UnionBanCal has been an active acquirer over the past several years, and is likely to remain active. As such, management must remain focused on fully integrating and growing these acquisitions to enhance franchise strength.

Since October 2012, the Company has announced or completed four acquisitions with the largest being Pacific Capital Bancorp; a Santa Barbara, California-based financial holding company, which contributed $3.8 billion of loans held for investment and $4.7 billion in deposits when the transaction closed in December. The other deals include two businesses catering to homeowners associations and community management companies, and PB Capital Corporation’s institutional commercial real estate lending division (included approximately $3.5 billion of loans). The current Stable trend incorporates that these deals are fully integrated without any material disruptions to the acquired customer base.

Despite modest credit costs, profitability remains constrained by the low interest rate environment, high expenses, and weak revenue growth. Indeed, excluding securities gains and other non-core items, 1Q13 revenues were up only $1 million to $803 million compared to 1Q12. Meanwhile, adjusted expenses reached $617 million from $566 million in 1Q12. This equates to a relatively high efficiency ratio of 76.8% (the Company includes some securities gains in their calculation, which lowers the ratio to 67.76%). Overall, the Company reported net income attributable to UB of $147 million in 1Q13, up from $123 million in 4Q12, but down from $195 million a year ago. The improved sequential quarter results reflected net securities gains and a lower effective tax rate, which more than offset a decline in net interest income and a higher total provision for credit losses.

Positively, the Company has been able to generate organic loan growth, as well as growth through acquisitions. Most recently, in 1Q13, total loans held for investment increased approximately $800 million, or 1%, to $60.9 billion. When compared to 1Q12, the loan growth is even more pronounced with total loans held for investment increasing a strong 12%. Meanwhile, the deposit franchise remains a key underpinning of the rating. Specifically, the low-cost, stable core deposit base fully funds the loan portfolio. Moreover, approximately one-third of all deposits are non-interest bearing deposits, which contributes to the Company’s solid cost of funds.

Credit quality metrics remain stronger than those of similarly rated peers. During 1Q13, nonperforming assets remained stable and net charge-offs were relatively low. Specifically, excluding PCI loans and FDIC covered OREO, nonperforming assets remained stable at $520 million, or just 0.87% of total loans held for investment and OREO. Meanwhile, excluding PCI loans, net charge-offs remained very manageable at $12 million, or an annualized 0.08% of average loans. The allowance for credit losses as a percentage of total loans, excluding PCI loans, was a sufficient 1.30% at quarter-end.

Capital is strong with a tangible common equity ratio of 10.05% and a Tier 1 common capital ratio of 12.48% at March 31, 2013. UnionBanCal indicated that the PB acquisition would have a minimal impact on overall capital levels.

As a wholly owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, Long-Term Deposits & Senior Debt at ‘A’ with a Stable trend), which has received capital contributions as well as shared management from its parent in the past, DBRS has assigned a SA1 designation, which implies timely and predictable support from BTMU, if needed. At this point in time, UB’s Issuer & Senior Debt rating of ‘A’ does not factor in any support. However, as a supported rating, DBRS notes that UB’s rating is unlikely to fall more than one notch below the rating of BTMU in the event of fundamental credit deterioration in the Company’s intrinsic strength.

UnionBanCal Corporation, a bank holding company headquartered in San Francisco, California, reported $97.0 billion in assets at March 31, 2013.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 18, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: William Schwartz
Initial Rating Date: 7 July 2005
Most Recent Rating Update: 12 March 2012

For additional information on this rating, please refer to the linking document under Related Research.