DBRS Morningstar Confirms MUFG Bank’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of MUFG Bank, Ltd. (MUFG Bank or the Bank), including its Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). The trend on all ratings is Stable. The Intrinsic Assessment (IA) of the Bank is based upon the financial strength of the consolidated Mitsubishi UFJ Financial Group (MUFG or the Group) and is maintained at A (high). The Support Assessment remains at SA2, with this reflecting DBRS Morningstar’s expectation of timely systemic support in case of need, given the Bank’s systemic importance to the Japanese financial system. However, given the sovereign rating of Japan is currently A (high) with a Stable trend, there is currently no uplift to MUFG Bank’s Long-Term Issuer Rating. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of MUFG Bank’s IA at A (high) reflects the Group’s franchise strength in its domestic Japanese market and meaningful overseas operations, which in DBRS Morningstar’s view has provided resilient earnings generation to face the challenging environment caused by the COVID-19 pandemic. The IA also considers MUFG’s solid credit risk profile and sound asset quality, although non-performing loans (NPLs) have increased as a result of the pandemic. The IA also takes into consideration the Group’s solid funding and liquidity position, which is supported by its robust domestic customer deposit base, as well as its sound capital position, even though capital ratios incorporate significant unrealised capital gains from securities.

Similar to its domestic peers, MUFG’s IA also takes into account the sizeable exposure to Japanese Government Bonds and Japanese equities as well as strong usage of wholesale funding, particularly short-term funding, in its overseas operations. The ratings also take into consideration that higher credit costs, although expected to be lower going forward than in FY20, will continue to add pressure to the Group’s profitability.

RATING DRIVERS
An upgrade of the Bank’s Long-Term ratings would require that the sovereign rating is upgraded and uplift for systemic support is consequently incorporated into the ratings in line with the SA2 Support Assessment, or the Group’s credit strength improves, and the overseas activities increase sufficiently that the proportion and quality of profits and exposures outside of Japan lead to the IA being positioned higher than the sovereign rating.

A downgrade of the sovereign rating would likely lead to a downgrade of the ratings. Absent any change to the sovereign rating or to the Support Assessment, a downgrade of the Bank’s Long-Term Issuer Rating would require a two-notch downgrade of the IA. A downgrade of the IA would likely be driven by a substantial deterioration in the Group’s asset quality or capital position, potentially as a result of the uncertain economic environment driven by COVID-19.

RATING RATIONALE
Mitsubishi UFJ Financial Group is the largest of the Japanese mega bank groups, with total assets of JPY 359.4 trillion at end-FY20 (approximately USD 3,250.2 billion). The Group owns MUFG Union Bank in California, one of the largest regional banks in the USA. In Asia, the Group owns majority stakes in Bank of Ayudhya (Krungsri), one of the leading banks in Thailand, and PT Bank Danamon Indonesia, Tbk (Bank Danamon), and has a strong presence in wealth management and aviation finance. Since 2008, MUFG has had a strategic alliance with Morgan Stanley through two joint venture securities companies in Japan with MUFG holding a 60% economic interest in each. In addition, MUFG currently holds an approximate 20.1% equity stake in Morgan Stanley.

MUFG has demonstrated resilient earnings generation under the challenging economic environment driven by the COVID-19 pandemic, which DBRS Morningstar considers is supported by strong geographic revenue diversification and the solid performance of its overseas businesses. In FY20, MUFG reported profit attributable to owners of the parent of JPY 777 billion, significantly up from JPY 528.1 billion in FY19 partly reflecting the absence of JPY 343.3 billion impairment of goodwill amortisation on Krungsri and Bank Danamon in FY19. The FY20 results benefitted from the strong performance of its capital markets businesses as well as higher gains on the sale of domestic equity holdings and higher contributions from Morgan Stanley. These helped offset revenue pressure in its domestic operations, which were negatively impacted by the ultra-low interest rate environment and lower consumption levels Year-on-Year (YoY). Credit costs more than doubled YoY in FY20, partly driven by COVID-19. Cost containment remains a key priority for the Group, with operating expenses in FY20 totalling 2,749.4 billion, down 1.9% YoY, as a result of reduced expenses both in the domestic and overseas businesses.

MUFG’s asset quality remains sound, although there has been some increase in NPLs. NPLs, based on the Financial Reconstruction Law (FRL) and when calculated on a combined MUBK and MUTB basis (including Trust Account), accounted for 0.85% of total gross loans at end-March 2021, compared to 0.65% at end-March 2020. The increase was largely driven by the energy and mining, and air transportation sectors, as well as some economic sectors in Japan which have been impacted by the pandemic. Furthermore, MUFG has a relatively high concentration to Japanese equities and government bonds, which present risk management challenges and expose the Group to valuation fluctuations. The Group increased its exposure to Japanese Government Bonds (JGB holdings) to JPY 33.4 trillion at end-FY20, up from JPY 21.7 trillion at end-FY19, with these accounting for a notable 209% of the Group’s Tier 1 Capital at end-FY20. Exposure to Japanese equity holdings accounted for a sizeable 11.6% of Tier 1 Capital at end-FY20, although the Group has been gradually reducing this exposure over the years (FY16: 16.6%).

MUFG has a strong funding and liquidity profile, benefitting from a solid domestic deposit base and sound access to financial markets. During FY20, the Group benefitted from strong growth of customer deposits both in Japan and in its overseas operations (up 12.7% YoY and 15.8% YoY respectively), mainly driven by domestic corporates deposits in light of the pandemic and as a result the Group’s net loan-to-deposit ratio (LTD) was 50.3% at end-FY20. Strong growth in overseas deposits helped to reduce the proportion of wholesale funding in the Group’s overseas operations (including corporate bonds, collateralised funding and mid-currency swaps) to 32% of total Non-JPY funding at end-FY20, from 39% at end-FY19. However, DBRS recognizes that the use of short-term funding remains significant at around 17% of total non-JPY funding at end-FY20, although it has reduced from 24% at end-FY19. The Group’s liquidity position is strong. MUFG reported an average Liquidity Coverage Ratio (LCR) of 168.4% for the period January-March 2021 and the Group’s HQLA represented a high 36% of total assets at end-FY20.

DBRS Morningstar views MUFG’s capital position as solid, supported by organic capital generation and good access to capital markets. Similar to domestic peers, regulatory capital ratios include significant unrealised gains on available-for-sale securities. The Group reported a Common Equity Tier 1 (CET1) ratio, including net unrealised gains/losses on available-for-sale-securities, of 11.9% at end-FY20, in line with the previous year. Excluding net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 9.7% at end-FY20, which compares to a minimum regulatory requirement of 8.5%. The Group reported a leverage ratio of 5.45% at end-FY20.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for MUFG Bank, Ltd. are as follows: Franchise Strength – Very Strong/Strong; Earnings – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include MUFG Consolidated Summary report for the fiscal year ended March 31, 2021, MUFG FY19 IR Presentation, MUFG FY20 IR Presentation and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380494

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: December 24, 2004
Last Rating Date: June 24, 2020

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