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, Long-Term Deposits & Senior Debt at ‘A’ with a Positive trend). Already, MUAH has integrated BTMU’s U.S. branch banking operations, and will likely integrate more parent-owned U.S. businesses as the Company works towards having one intermediate U.S. holding company. Besides complying with the enhanced prudential standards, improving profitability remains the key challenge for MUAH.

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 to MUAH, which implies timely and predictable support from BTMU, if needed. Presently, 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.

Growing fee-based revenues and improving profitability while maintaining a sound balance sheet could lead to positive rating implications. Conversely, sustained below-peer profitability, loan growth that significantly outpaces core deposit growth placing further pressure on funding, or unexpected difficulties complying with enhanced prudential standards could lead to negative rating implications.

Financial performance has weakened in 1H15 compared to 1H14 primarily reflecting lower purchase credit impaired (PCI)-related interest income, and higher expenses. As a result of lower PCI-related interest income and generally declining average earning asset yields, the net interest margin has been under pressure declining a significant 31 basis points since 2Q14 to 2.84%. Positively, credit costs remain low, although the provision for loan losses increased modestly. Adjusting both revenues and expenses to better reflect the core nature of the Company’s ongoing business operations, MUAH’s adjusted efficiency ratio deteriorated and remains high at 71.86% for 1H15. Improving performance remains the primary challenge for MUAH.

Credit quality remains a source of strength for MUAH even with deterioration within its oil and gas portfolio. Specifically, the Company had $3.7 billion of outstanding loans to the oil and gas sector, which represented 4.9% of total loans held for investment, or 31% of tangible common equity at June 30, 2015. Although there have been no charge-offs in the oil and gas portfolio this year, criticized oil and gas loans have almost doubled since year-end to $298 million and DBRS expects further deterioration within this portfolio given sustained low oil and gas prices. Overall, the total portfolio remains strong, as other segments of the portfolio are still improving. Indeed, nonperforming assets have declined by 7% since year-end and totaled $381 million, or just 0.50% of total loans held for investment and OREO at June 30, 2015.

Over the past year, loan growth has easily outpaced core deposit growth, exerting modest pressure on the Company’s funding profile. As a result, core deposits fund approximately 96% of loans held for investment.

Capital remains robust and is almost entirely comprised of common equity. Specifically, MUAH’s tangible common equity ratio was a high 10.72% at June 30, 2015. MUAH’s parent has publicly stated its desire to be a top 10 lender in the U.S. and that it needs to scale up to better distribute rising regulatory costs. Besides banks, the Company’s parent has identified asset management as a potential expansion opportunity, which would bolster fee income at the Company, if such expansion were in the U.S. DBRS would expect BTMU to downstream capital to support any acquisition in order to maintain a strong capital position at MUAH.

MUFG Americas Holdings Corporation, a bank holding company headquartered in New York, New York, reported $114.3 billion in assets at June 30, 2015.

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 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).

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: 22 September 2014

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