DBRS: MUAH 2Q14 Earnings Up Substantially; Higher PCI-related NII, Core Loan Growth & Inv. Gains

Summary:
• Net income of $249 million was up a substantial 42% sequentially, reflecting higher purchased credit-impaired (PCI) net interest income, solid core loan growth, higher investment gains and lower expenses.
• Previously known as UnionBanCal Corporation, the name was effectively changed on July 1, 2014 to MUFG Americas Holdings Corporation.
• DBRS rates MUFG Americas Holdings Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) views MUFG Americas Holdings Corporation’s (MUAH or the Company) 2Q14 results as strong with MUAH reporting significant positive operating leverage sequentially. While much of the increase in earnings can be attributable to higher PCI-related net interest income and investment gains, underlying fundamentals are improving as evidenced by loan and deposit growth, and improving expense control. Moreover, both strong asset quality and capital continue to support the rating.

Effective July 1, 2014 UnionBanCal Corporation was renamed MUFG Americas Holdings Corporation (MUAH) and Union Bank, N.A. changed its legal name to MUFG Union Bank, N.A. (the Bank). Besides the name change, the U.S. branch banking management and operations of the Bank of Tokyo-Mitsubishi UFJ Ltd. were integrated within the Bank to better position the overall Group to meet customer needs.

PCI-related net interest income mostly from the early payoff of certain loans primarily drove the 12% increase in net interest income sequentially. Nonetheless, excluding the impact of PCI loans, net interest income would have been higher driven by average loan growth (primarily from commercial and industrial and residential mortgage loan growth), as well as a modest expansion in the core net interest margin. Meanwhile, noninterest income also increased 12%, primarily from higher net gains on certain investments. Overall, total revenue increased a strong 12% compared to 1Q14, but DBRS notes that PCI-related net interest income can be volatile from quarter to quarter.

Positively, noninterest expenses declined 2%, or 1% adjusting for special items, sequentially. As a result of positive operating leverage, the adjusted efficiency ratio was a vastly improved 60.30% in 2Q14 from 67.95% in 1Q14.

The balance sheet remains strong, although nonperforming assets did tick up modestly from very low levels. Meanwhile, at June 30, 2014, MUAH estimated its common equity tier 1 risk-based capital ratio under the standardized approach on a fully phased-in basis under Basel III at a strong 11.63%.

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

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