DBRS: UB’s Earnings Down QoQ Driven by Margin Pressure, Despite Lwr Expenses; Credit Remains Strong

Summary:
• Net income of $175 million was down 2% primarily driven by lower net interest income from UB’s purchased credit-impaired loan portfolio.
• Balance sheet fundamentals remain sound with both loan and deposit growth, as well as continued strong credit quality including net recoveries.
• DBRS rates UnionBanCal Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) considers UnionBanCal Corporation’s (UnionBanCal, UB or the Company) 1Q14 results as sound, highlighted by continued core loan and deposit growth. In addition, credit quality remains strong with lower levels of nonperforming assets and net recoveries during the quarter. While profitability remains pressured from the difficult operating environment and high expense base, the overall strength of the balance sheet continues to support the rating.

Adjusting for core revenues and expenses, the Company’s revenues declined at a faster rate than expenses sequentially resulting in modest negative operating leverage. Net interest income was down sequentially, primarily reflecting substantially lower interest income from the UB’s purchased credit-impaired loan portfolio. As a result, UB’s net interest margin contracted a significant 12 basis points during the quarter to 2.87%.

Strong capital helps underpin the rating. Besides having a tangible common equity ratio of 10.65%, UB estimated that its common equity tier 1 risk-based capital ratio under the standardized approach, on a fully phased-in basis under Basel III was 11.42%.

Effective July 1, 2014, Mitsubishi UFJ Financial Group, Inc. (MUFG) announced that it would integrate The Bank of Tokyo-Mitsubishi UFJ (BTMU) U.S. branch banking operations with the operations of Union Bank, N.A. The banking operation will be renamed MUFG Union Bank, N.A. All of BTMU’s Americas banking activities will be overseen by UnionBanCal Corporation, which will also be renamed to MUFG Americas Holding Corporation. DBRS will closely monitor the transition in regards to integration risk, as well as the ability of the newly formed entity to maintain the brand equity built up over the years at Union Bank, N.A. that currently helps support the Company’s franchise strength.

DBRS rates UnionBanCal Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

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