DBRS Confirms MUFG Americas Holdings Corporation at ‘A’; Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of MUFG Americas Holdings Corporation (MUAH or the Company - formerly UnionBanCal Corporation) and its related entities, including the Company’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.

MUAH’s ratings and Stable trend reflect its strong banking franchise that is underpinned by a robust capital position and better-than-peer asset quality. The ratings also consider the Company’s evolving internal reorganization with its parent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU or the parent, Long-Term Deposits & Senior Debt at ‘A’ with a Stable trend), as the Company works towards complying with the Federal Reserve’s enhanced prudential standards for foreign banking organizations operating in the United States. While DBRS views MUAH as well placed to comply, the transformation will take significant time and resources over the next several years, as the implementation date approaches. Moreover, as MUAH integrates the U.S. branch banking operations of BTMU, and potentially other businesses previously operated by the parent, DBRS will closely monitor the impact to MUAH’s franchise, including the business mix, the overall risk profile and the associated impact to its currently strong balance sheet. Other challenges include the Company’s reliance on spread income and an elevated, albeit improving, expense base.

As a wholly owned subsidiary of BTMU that 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. Most recently, the Company has undergone a rebranding that more closely reflects the ultimate parent’s name. At this point in time, MUAH’s Issuer & Senior Debt rating of ‘A’ does not factor in any support. However, as a supported rating, DBRS notes that MUAH’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.

For 1H14, net income reportable to MUAH increased 46% from 1H13 to $424 million reflecting higher net interest income from both loan growth, as well as higher purchase credit impaired (PCI)-related interest income. Moreover, the Company benefited from lower expenses, which declined 7% from 1H13 primarily driven by lower merger and integration costs. On a DBRS-adjusted core basis, income before provisions and taxes totaled $645 million in 1H14, an increase of approximately 50% from 1H13. While the increase in earnings can mostly 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.

Credit quality metrics remain stronger than those of similarly rated peers and earnings have benefited from provision reversals the past several years. Indeed, excluding PCI loans and FDIC covered OREO, nonperforming assets totaled just $511 million, or 0.71% of total loans held for investment and OREO. Meanwhile, 1H14 net charge-offs were basically zero following net recoveries in 1Q14 and modest NCOs in 2Q14. As a result of loan growth and provision reversals, MUAH’s allowance for credit losses as a percentage of total loans, excluding PCI loans, has dropped considerably to 0.98%, which still more than covers nonaccrual loans. DBRS notes that strong loan growth will likely lead to higher provisioning needs in 2H14, but that asset quality should remain strong.

Capital remains robust and helps support the rating. Specifically, MUAH’s tangible common equity ratio was a high 10.84% at June 30, 2014. Despite already solid capital, MUAH received a capital contribution of $1.2 billion from its parent in 4Q13 to help support balance sheet growth. DBRS notes that the parent’s eventual strategy is to have a top ten bank in the United States and appears open to a large acquisition, if the right opportunity becomes available. DBRS would not view a large acquisition in the near-term favorably, preferring the Company to focus on integrating U.S. businesses formerly operated by its parent.

Positively, the Company received a non-objection from the Federal Reserve earlier this year to its 2014 Capital Plan, which was MUAH’s first submission under the more strenuous Comprehensive Capital Analysis and Review (CCAR) program. This helps support DBRS’s view that the Company is well placed to meet enhanced regulatory requirements, especially when compared to other foreign banking organizations in the U.S., of which half failed their submissions.

MUFG Americas Holdings Corporation, a bank holding company headquartered in New York, New York, reported $108.8 billion in assets at June 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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: 25 June 2013

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