DBRS: MUAH’s 3Q14 Earnings Relatively Stable QoQ Despite Negative Operating Leverage

Summary:
• Net income of $246 million was down modestly sequentially, reflecting negative operating leverage.
• The balance sheet remains supportive of the ratings with pristine asset quality and sound capital, but a high expense base continues to subdue profitability.
• DBRS rates MUFG Americas Holdings Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) considers MUFG Americas Holdings Corporation’s (MUAH or the Company) 3Q14 results as mixed. Positively, the Company continues to generate solid loan growth, capital is strong and asset quality remains pristine. However, the loan growth is outpacing core deposit growth and high expenses continue to subdue profitability.

In conjunction with the integration of all The Bank of Tokyo Mitsubishi UFJ Ltd.’s (BTMU) U.S. banking operations into MUAH’s primary bank subsidiary that became effective July 1, 2014 (including the addition of approximately 2,300 BTMU employees), the two entities have entered into a master services agreement that shares certain revenues and expenses. The impact of this agreement has increased fee income, as well as expenses.

Net interest income declined 7% sequentially, reflecting the large amount of PCI-related net interest income realized in 2Q14 mostly from the early payoff of certain loans. This dynamic also contributed to a substantial decline in the net interest margin. Positively, excluding the impact of the PCI portfolio, the margin would have increased modestly. Meanwhile, fees from affiliates related to the master services agreement, as well as higher trading account activities, securities gains and merchant banking fees all contributed to noninterest income increasing 92%. Overall, adjusting for securities gains and other non-core items, revenues grew 1% sequentially.

Noninterest expense increased a high 24% sequentially. Even when adjusting for staff costs associated with fees from affiliates – support services, and other special items, noninterest expense still grew by over 7%. As a result of negative operating leverage, the Company’s adjusted efficiency ratio was a relatively high 63.42%

A strong balance sheet continues to support the rating, but DBRS notes that solid loan growth continues to outpace core deposit growth, pressuring the funding profile. Credit quality is pristine with very low levels of nonperforming assets and net charge-offs. Lastly, MUAH’s estimated Basel III Common Equity Tier 1 risk-based capital ratio under the standardized approach on a fully phased-in basis was a strong 11.89%.

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.