DBRS Morningstar Comments on MUFG's Sale of Union Bank to US Bancorp

MUFG Bank Ltd (MUFG or the Group, Long-Term Issuer Rating of A (high), Stable trend) announced on September 21, 2021 that it reached an agreement to sell MUFG Union Bank, N.A. (Union Bank) to US Bancorp (Long-Term Issuer Rating of AA, Stable trend). Given the Group’s broader commitment to optimizing its overseas operations, DBRS Morningstar sees the transaction as broadly neutral for the Group from a credit perspective. As part of the transaction, MUFG will enter a share purchase agreement to sell a 100% stake to US Bancorp in return of 2.9% of US Bancorp’s shares. Along with the share sale, the Retail and Commercial Businesses of Union Bank will be transferred to US Bancorp. MUFG will retain the Global Corporate & Investment banking and Global Markets businesses as well as other remaining functions and the Group will continue to focus on expanding its Corporate and Investment banking and Global Markets in the US. Following approval by both banks’ boards of directors on the day of the announcement, the share transfer is expected to be completed during H1 2022, subject to regulatory approvals.

This transaction is part of MUFG’s review of its overseas business portfolio within its Medium Term Business Plan (MTBP) for the period FY21-FY23 announced on April 1, 2021. Under this plan, MUFG aims to optimize capital allocation and improve profitability by replacing low profitable assets with high profitable assets. We consider that the announced sale makes sense from a capital and business perspective as it will allow MUFG to reinvest capital in areas such as digital and overseas asset management / Investor Services, where the Group sees high growth opportunities and which could potentially partly offset the ongoing revenue pressure from the low interest rate environment.

Union Bank, is one of the largest regional banks in California but as for many US regional peers, the bank requires significant investments in its franchise, including areas such as technology and digitalization, to remain competitive in the US market. We recognise that after the transaction, Union Bank’s businesses will benefit from being part of a larger Group, with robust earnings generation and franchise capabilities which will support these investments going forward.

In our view, the announced transaction reinforces MUFG’s interest in the US market by establishing banking partnerships. After the announced transaction, MUFG will hold a 2.9% stake in US Bancorp and this opens the door to potential opportunities for businesses partnerships with US Bancorp, the 5th largest bank by assets in the US. Since 2008, MUFG has had a strategic alliance with Morgan Stanley (MS, Long-Term Issuer Rating of A (high)) and this is a strong contributor to the Group's earnings (38% of FY20 net attributable income). The strategic alliance consists of two joint venture securities companies in Japan, with a 60% economic interest in each, as well as joint corporate finance operations in the US. In addition, MUFG holds an approximately 20.1% equity stake in Morgan Stanley.

Transaction details
The transaction value is approximately USD 17.6 billion. MUFG will receive USD 8 billion, of which USD 5.5 billion in cash and USD 2.5 billion worth in shares. MUFG will transfer to US Bancorp USD 105.4 billion of assets, USD 57.7 billion of loans (around 6% of the Group’s net loans at end-FY20) and USD 89.9 billion of deposits at end-FY20 along with 309 branches and net income of USD 593 million in FY20. Union Bank’s Global Corporate & Investment banking and Global Markets businesses totaling circa USD 22.6 billion of assets will remain within MUFG, with these and certain other assets and liabilities being transferred to MUFG’s US branches or affiliates prior to the closing of the transaction.

The transaction is expected to be positive from a capital perspective, with MUFG’s Common Equity Tier 1 (CET1) ratio improving approximately 45 bps, potentially positioning the CET1 ratio in the target range of 9.5% - 10% which was originally set under its MTBP. At end-FY20 the Group’s CET1 ratio, including net unrealised gains/losses on available-for-sale-securities, of 11.9% at end-FY20 was 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. MUFG also expects to incur some extraordinary expenses from FY21.