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, 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, providing strong and diversified earnings generation ability. The IA also considers MUFG’s solid credit risk profile and sound asset quality even though non-performing loans (NPLs) have experienced some deterioration in Japan. The IA also takes into consideration the Group’s strong funding and liquidity position, underpinned by a 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 that present some management challenges and add volatility to regulatory capital through unrealized gains and losses. The Group historically made significant usage of non-JPY Funding in its overseas operations, although this proportion has significantly reduced in the past years and is now more in line with international standards. The ratings also take into account the expectation that under the uncertain global macroeconomic environment, credit costs are likely to continue pressuring 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 that 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. Downward pressure on the IA would likely be driven by a sustained weakening of the Group’s capital levels.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
Mitsubishi UFJ Financial Group is the largest of the Japanese mega bank groups, with total assets of JPY 373.7 trillion at end-March 2022 (end-FY21) (approximately USD 3,065.1 billion) and has significant domestic market shares in retail and corporate banking as well as wealth management. The group also has a strong overseas franchise, and in Asia MUFG 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 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 21.4% equity stake in Morgan Stanley. In September 2021, MUFG announced that it was selling all the shares of its US subsidiary MUFG Union Bank (MUB) to US Bancorp (USB) for USD 8 billion. The transaction is expected to be finalized in the second half of 2022 subject to regulatory approval and once completed MUFG is expected to hold a minority stake of 2.9% in USB.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar considers MUFG earnings generation to be sound, supported by its good geographical and business diversification. In FY21, MUFG reported profit attributable to owners of the parent of JPY 1,130.8 billion, significantly up from JPY 777 billion in FY20. The FY21 results were mainly supported by significant capital gains from the sale of Japanese shareholdings as well as higher contributions from Morgan Stanely. Cost control remains a key priority for the Group with operating expenses amounting to JPY 2,747.2 billion in FY21, an increase of 2.8% year-on-year (YoY) mainly reflecting negative FX impact. Excluding the FX impact, operating costs were marginally down YoY. Credit costs for FY21 amounted to JPY 331.4 billion, a substantial decrease from JPY 515.5 billion in FY20 mainly attributed to lower overseas provisions as the Group released some of the forward looking provisions in its US operations as a result of improved macroeconomic indicators and the announced sale of MUB. Nevertheless, DBRS Morningstar notes that FY21 credit costs also included additional provisions of JPY 140 billion related to portfolios exposed to Russia.

Risk Combined Building Block (BB) Assessment: Strong
MUFG’s asset quality remains sound, although there has been some increase in non-performing loans (NPLs) in FY21. NPLs, based on the Japanese Banking Act and the Financial Reconstruction Law (FRL) calculated on a consolidated basis accounted for 1.18% of total gross loans at end-March 2022, compared to 1.14% at end-March 2021. The NPL increase was largely driven by deterioration in some large corporates in Japan. The Group holds a sizeable portfolio of Japanese Government Bonds (JGBs), accounting for a notable 214% of the Group’s Tier 1 capital at end-FY21, which in DBRS Morningstar’s view exposes the Group to market and interest rate risks. The Group made good progress in reducing its Japanese equity holdings, with the ratio standing at 10.9% at end-March 2022, considerably down from the 16.6% at end-FY16.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
MUFG has a strong funding and liquidity profile, underpinned by a solid domestic deposit base and sound access to financial markets for funding. While the group was the recipient of strong deposit growth both in Japan and overseas in FY20, customer deposit growth normalised in FY21 and only grew 1.8% YoY. The Group’s net loan-to-deposit ratio (LTD) was 50.7% at end-FY21 flat YoY. Wholesale funding in the Group’s overseas operations (including corporate bonds, collateralised funding and mid-currency swaps) accounted for 31% of total non-JPY funding at end-FY21, similar to end-FY20, but down from 39% at end-FY19 . The Group’s liquidity position is strong. MUFG reported an average Liquidity Coverage Ratio (LCR) of 170.4% for the period January-March 2022 and the Group’s HQLA represented a high 34.6% of total assets at end-FY21.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views MUFG’s capital position as solid, supported by sound earnings 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 11.0% at end-FY21, slightly below the previous year. Excluding net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 9.5% at end-FY21, which compares to a minimum regulatory requirement of 8.5%. The Group reported a leverage ratio of 5.14% at end-FY21.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398633

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, Mitsubishi UFJ Financial Group (MUFG) Consolidated Summary Report for the Fiscal Year Ended March 31, 2022, MUFG Databook FY2021, MUFG IR Presentation FY2021, MUFG Progress Report April 2022. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/398634

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: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: 12/24/2004
Last Rating Date: 06/23/2021

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