DBRS Confirms BTMU at A; Trend Changed to Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU or the Bank) including its Long-Term Deposits & Senior Debt rating of “A” and its Short-Term Instruments rating of R-1 (low). The Trend on all ratings has been changed to Positive from Stable. BTMU’s ratings incorporate an intrinsic assessment (IA) of A (low), which is based upon the financial strength of the consolidated Mitsubishi UFJ Financial Group (MUFG or the Group). The IA is combined with a support assessment of SA-2, which results in a one notch uplift to the final rating from the IA. The SA-2 reflects the systemic importance of MUFG to the financial system in Japan, and the generally supportive regulatory framework. See the full list of ratings at the end of the press release.

The confirmation of the debt ratings reflects the Group’s resilient domestic franchise, as well as the growing overseas operations, which have helped to offset the challenges faced by MUFG and its Japanese bank peers in the low-growth, low-interest rate domestic market. The ratings also reflect the Group’s good asset quality, solid capital levels and solid funding base as well as recognizing the concentration risk posed by the Group’s high level of domestic government bonds. The change in the Trend to Positive, reflects DBRS’s view that the Group has strengthened its financial profile by carrying out a well-controlled expansion overseas, while building up regulatory capital and reducing equity investments.

Upward ratings pressure could be sustained, if the Group is able to maintain earnings stability and a solid risk profile. Downward pressure on the ratings would be likely if the Group increased the risk profile of its overseas expansion.

MUFG’s strong franchise in Japan, where the Group has an approximate 20% share of domestic deposits as of end-March 2014 (DBRS calculation), underpins the Group’s ratings. The Group has a strong presence domestically in commercial banking, retail and consumer finance, asset administration and asset management, capital markets and securities. DBRS also views positively the diversification provided by the Group’s stable operations in the US (MUFG Americas Holdings Corporation, rated “A”, Stable trend, by DBRS), the growing operations in Asia and the Group’s global strategic alliance with Morgan Stanley. Overseas assets were 37% of total assets at end-March 2014, compared to 31% at end-March 2012 (DBRS calculation). Overall, in 9M FY14 MUFG reported income before provisions and taxes (IBPT) of JPY 927 billion, up 18% on 9m FY13, supported by good growth in overseas activities and investment banking and the consolidation of Bank of Ayudhya (Krungsri), the subsidiary in Thailand.

In DBRS’s opinion, MUFG has a generally conservative risk profile supported by a cyclically low level of bankruptcies in Japan. Total impaired loans as a percentage of gross loans were 1.1% at end-December 2014 and the Group reported a credit writeback of JPY 30.9 billion in 9M FY14. The Group’s commercial lending is well diversified by industry and performance.

MUFG’s funding position is underpinned by a very strong retail deposit base in Japan, leading to a loan-to-deposit ratio for the Group of 73% at end-December 2014. The loan-to-deposit ratio for the overseas activities is relatively weaker at 119% at end-December 2014. DBRS will continue to monitor how the growth of MUFG’s overseas operations is funded, though DBRS expects the overseas funding profile to remain manageable. One consequence of the surplus of domestic deposits and lack of demand for credit in Japan has been that MUFG, as with other Japanese banks, holds a very large portfolio of domestic government bonds (JGBs). At end-December 2014 the portfolio was JPY 38.2 trillion, or equivalent to 340% of equity (DBRS calculation). The JGB holdings, which had a duration of 3.1 years at end-December 2014, are a source of liquidity, but could lead to earnings volatility due to interest rate risk exposure, and also contribute to a concentration in exposure to the Japanese sovereign (rated A (high), Stable trend by DBRS). Following the recent extension of quantitative easing plans by the Bank of Japan, banks have reduced their JGB holdings, and MUFG reduced its holdings from JPY 48.5 trillion at end March 2013 to JPY 38.2 trillion at end-December 2014.

DBRS views MUFG as having built up a solid capital position. At end-September 2014, the Bank reported a fully-loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 11.4%. MUFG, like its mega-bank peers, has a meaningful exposure to Japanese equities, which leads to some volatility in the P&L and capital ratios due to unrealized gains and losses. MUFG has reduced its Japanese equity investments based on the acquisition price from 28.6% of Tier 1 capital at end-March 2012 to 22.1% at end-September 2014, but unrealized gains are significant. DBRS notes that MUFG has taken a conservative approach and also monitors its capital ratios excluding the impact of net unrealized gains on securities available for sale (9.4% rather than 11.4% at end-September 2014).

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The 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.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Roger Lister
Initial Rating Date: 30 November 1982
Most Recent Rating Update: 19 February 2015

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.