DBRS Downgrades the Short-Term Ratings of Bank of Tokyo-Mitsubishi UFJ, Ltd. and Related Entities

DBRS has today downgraded the Short-Term Instruments rating of the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) to R-1 (low) from R-1 (middle), with a Stable trend. Concurrently, DBRS has confirmed the Issuer Rating and Long-Term Deposits & Senior Debt of BTMU at “A,” with Stable trends. These rating actions conclude the review initiated on October 9, 2013, which is related to the impact of the removal of the rating floor in Japan for critically important banking organizations (CIBs). The intrinsic assessment for BTMU remains unchanged at A (low) and the long-term ratings of “A” incorporate the implied support of the Japanese government, adding one notch to the intrinsic assessment (refer to Support Assessment).

DBRS removed Japan’s “A” and “R-1 (middle)” rating floor on October 9, 2013, following an assessment of the applicability of the rating floor for CIBs in Japan. Previously, the short-term ratings of BTMU benefited from a one-notch uplift, from R-1 (low) to R-1 (middle). Following the removal of the Japanese rating floor, the short-term ratings of BTMU have been downgraded to R-1 (low), returning to its rating prior to the one-notch uplift. On the other hand, the long-term ratings of BTMU continue to incorporate a one-notch uplift from its intrinsic rating, in line with other systemically important banks in Japan. Also, the ratings of BTMU continue to be based on DBRS’s assessment of Mitsubishi UFJ Financial Group, Inc. (MUFG or the Group) as a whole and reflect the Group’s strong domestic franchise, reasonable asset quality and strong liquidity and funding profile.

MUFG’s strong domestic franchise and growing international exposure is a key rating strength. The Group operates in more than 40 countries, providing customers, small to medium enterprises and corporations with a broad range of financing solutions, including commercial banking, securitization, leases and other products and services. However, the Group still has relatively low international exposure (24% of reported total net operating profit) and has targeted its overseas segment as an area for growth. This has been demonstrated by MUFG’s acquisition of UnionBanCal Corporation (rated “A”) in the United States, a strategic alliance with Morgan Stanley and the recent acquisition of Bank of Ayudhya in Thailand.

Furthermore, the ratings are also supported by MUFG’s reasonable asset quality and strong liquidity and funding profile. The Group’s non-performing loans to gross loans ratio remained strong relative to its global peers at 1.86% during the half year ended September 30, 2013 (H1 2014), decreasing from 2.24% for the year ended March 31, 2011. In addition, MUFG has maintained a disciplined approach to liquidity management and sustained a highly liquid balance sheet, with liquid assets representing 52.1% of total assets; it has also maintained its deposit levels well in excess of its loan book.

On the other hand and similar to its peers, the Group’s relatively weak earnings profile has been a key challenge to its rating. Weak domestic loan growth and low levels of prevailing interest rates in Japan have led to intense competition and weak net interest margins. The Group’s international loan portfolio grew significantly by 7.6% in H1 2014, while domestic loans only increased by 1.4%.

Nevertheless, capital levels have strengthened moderately as the Group continued to remain profitable, resulting in sustained organic capital generation. As of H1 2014, MUFG’s Basel III Tier 1 ratio improved to 13.1% from 12.7% as at March 31, 2013. Overall, MUFG’s current capital levels provide reasonable loss absorption capacity and it should be well positioned to attain the standards required under Basel III.

SUPPORT ASSESSMENT (SA)
DBRS has assigned a support assessment of SA-2 to MUFG, which reflects the expectation of systemic and timely external support by the government of Japan (rated A (high)). The Japanese government supported the large domestic banks through their difficult period with the injection of public funds, the establishment of a number of schemes to deal with non-performing assets and the support of mergers among the large banks. While the government funding has been repaid by each of the three mega-banks, the SA-2 support assessment reflects DBRS’s expectation of further support, should it be required. As a result of the SA-2 support assessment, the Group’s intrinsic assessment of A (low) receives a one-notch uplift for a final rating of “A.”

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website under Methodologies.