DBRS: MUAH’s 1Q Earnings Down; Balance Sheet Remains Strong

Summary:
• Net income of $137 million, down 10% sequentially on weaker revenues and higher seasonal expenses.
• The Company announced a new CEO, Stephen Cummings, who will become the first CEO who is not an executive from the parent company.
• 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) 1Q15 financial results as relatively weak, especially considering the Company continues to benefit from a benign credit environment. Specifically, adjusted revenues declined 6%, while adjusted expenses increased 2% sequentially. Nonetheless, MUAH’s strong balance sheet continues to underpin the ratings.

The Company announced a new CEO, Stephen Cummings, who will become the first CEO who is not an executive from the parent company. DBRS views this development positively, as the top leadership position will now be held by an executive completely focused on the leading MUAH over the longer term rather than holding the position for a few years before moving on within the parent organization.

Net interest income declined 4% sequentially despite modest earning asset growth, as the net interest margin contracted 11 basis points to 2.70%. Meanwhile, noninterest income also declined 5% reflecting lower merchant banking fees. Overall, adjusted core revenues, which excludes securities gains declined 6% sequentially. Meanwhile, adjusted noninterest expense increased 2% on seasonality and higher pension expense. As a result of negative operating leverage, the Company’s adjusted efficiency ratio was a high 74.9%.

Average loans held for investment balances benefited from higher commercial and industrial and construction balances, which more than offset a decline in residential mortgages. Credit quality remains very strong with lower levels of nonperforming assets and very low net charge-offs.

While the Company did not ask for any capital distributions, the Federal Reserve had no qualitative or quantitative issues with MUAH’s stress testing, unlike several of their foreign bank-owned peers. Capital remains a source of strength with a 10.69% tangible common equity ratio. Moreover, the Company estimated its fully phased in Common Equity Tier 1 risk-based capital ratio Under Basel III’s standardized approach was 12.61%.

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.