DBRS Confirms BTMU at ‘A’, Trend Changed to Positive Following Sovereign Action on Japan

DBRS Ratings Limited (DBRS) confirmed the ratings of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU or the Bank), including its Long-Term Issuer Rating of ‘A’ and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings has been changed to Positive from Stable, following the change in the trend on the ‘A’ sovereign rating of Japan to Positive from Stable on January 26, 2018. Concurrently, DBRS maintained BTMU’s Intrinsic Assessment (IA) at ‘A’ and notes that the IA of BTMU is based upon the financial strength of the consolidated Mitsubishi UFJ Group (MUFG or the Group). The Support Designation remains SA2, which indicates an expectation of timely systemic support in case of need, and this would lead to the incorporation of a notch of systemic uplift to the Bank’s debt ratings, if the sovereign rating were to be upgraded. See the full list of ratings at the end of the press release.

In maintaining BTMU’s IA at ‘A’, DBRS recognises the strong domestic franchise along with the increasing significance of the growing overseas operations. This has helped to counterbalance the profitability challenges faced by the Group in its domestic market, as a result of the ultra-low interest rate environment and strong competition. The current level of the IA also incorporates the good risk performance, the strong funding and liquidity profiles and the sound capitalisation levels.

MUFG is the largest of the Japanese mega-banks. The Group has strong market shares across various products in its core, domestic market, while its overseas presence extends to over 50 countries globally. MUFG’s earnings have been resilient in recent years, as overseas loan and deposit growth along with low credit costs have helped to counterbalance the low interest rate environment and weak loan demand in Japan. As a result of the domestic profitability challenges, the Group has engaged in various cost reduction efforts. DBRS notes that, as part of its recently launched long-term “Re-Imagining Strategy”, the Bank aims to reduce its total workload by 30% through increased use of robotics and artificial intelligence, as well as to reduce its workforce by 6,000 employees, mainly through attrition, by FY23. Elevated regulatory and operational expenses, however, have resulted in the Group’s efficiency ratio reaching 65.1% in 6M17. However, DBRS considers that this level still compares favourably to many international peers. Other strategic initiatives include streamlining the Group structure and strengthening businesses such as Wealth Management and Asset Management.

The Group has a conservative risk profile with strong asset quality. At end-September 2017, non-performing loans (NPLs), calculated on a combined BTMU and MUTB (Mitsubishi UFJ Trust and Banking Corporation) basis, accounted for 0.99% of total gross loans, while the coverage ratio was strong at 82.8%. Credit quality in some of the Group’s other significant markets also appears to be strong, with MUAH (MUFG Americas Holdings) reporting a NPL ratio of 0.59% and Bank of Ayudhya PLC (Krungsri) reporting a NPL ratio of 2.16% at end-September 2017.

Certain risk management challenges, however, are present through MUFG’s sizeable holdings of Japanese Government Bonds (JGBs) and Japanese equities. Even though the Group has reduced its JGB holdings significantly in recent years, the portfolio remains sizeable at JPY 21.7 trillion, or 137% of the Group’s Tier 1 Capital. DBRS notes positively that the JGB duration has been reduced significantly over the last year to 2.5 years at end-September 2017. Moreover, the balance of JGBs with maturity over 10 years has also been lowered gradually and stood at JPY 1.6 trillion at end-September 2017, down from JPY 3.3 trillion at end-September 2016. The Group faces additional market risk through its holdings in Japanese equities, which accounted for nearly 16% of Tier 1 Capital at end-September 2017. DBRS notes that the Group continues to make progress in reducing this ratio towards its target of approximately 10% of Tier 1 Capital by end-March 2020.

MUFG’s funding profile is supported by a solid domestic retail base that contributes to the overall net loan-to-deposit ratio of 63% at end-September. The Group’s overseas operations, with a loan-to-deposit ratio of 117% at end-September 2017, make greater use of market funding; DBRS will continue monitoring trends in MUFG’s overseas operations funding given this funding mix.

MUFG maintains a solid capital position with a fully-loaded Common Equity Tier 1 (CET1) ratio, including the impact of net unrealised gains/losses on available-for-sale-securities, of 12.3%, and a transitional Basel III leverage ratio of 4.92% at end-September 2017. On a fully-loaded basis, i.e., excluding the impact of net unrealised gains/losses on available-for-sale securities, the CET1 ratio falls to 10.0%, which compares to the Group’s target of a minimum CET1 ratio of 9.5% at end-FY17. With an estimated TLAC ratio of 16.8% at end-September 2017, which includes the 2.5% contribution to the Deposit Insurance Fund Reserve (Japanese deposit insurance scheme) and 1.85% TLAC eligible debt, DBRS views the Group as well-positioned to meet future capital requirements.

RATING DRIVERS
There could be upward pressure on the Bank’s issuer and senior debt ratings if 1) the sovereign rating is upgraded and uplift for systemic support is consequently incorporated into the ratings in line with the SA2 support designation; 2) the sovereign rating is upgraded and there is also a strengthening of the Group’s profitability and progress with the cost efficiencies being implemented by the Group; or 3) the Group’s overseas activities increase sufficiently that the proportion and quality of profits and exposures outside Japan lead to the IA being positioned higher than the sovereign rating.

Negative rating pressure could arise from a material deterioration in the Group’s asset quality indicators or funding profile as a result of the overseas expansion, or from a downgrade of the sovereign.

The Grid Summary Grades for the Bank of Tokyo-Mitsubishi UFJ, Ltd. are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: December 24, 2004
Last Rating Date: July 14, 2017

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