Morningstar DBRS Confirms MUFG Bank’s LT Issuer Rating at A (high), Trend Remains Stable

DBRS Ratings Limited (Morningstar DBRS) confirmed the ratings of MUFG Bank, Ltd. (MUFG Bank or the Bank), including its Long-Term Issuer credit rating at A (high) and the Short-Term Issuer credit rating at R-1 (middle). The trend on all credit 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 Morningstar DBRS’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 credit rating of Japan is currently A (high) with a Stable trend, there is currently no uplift to MUFG Bank’s Long-Term Issuer credit rating. See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of MUFG Bank’s IA at A (high) reflects the Group’s strong domestic franchise in Japan and its significant overseas operations, which supports the Group’s capacity to generate solid and recurring earnings thanks to a high degree of revenue diversification, in spite of an ultra-low interest environment in Japan. The IA takes into account MUFG’s sound asset quality metrics with low NPLs. At the same time, MUFG has a sizeable exposure in Japanese Government Bonds (JGBs) and Japanese equities which exposes the Group to market and interest rate risks. A change in the Bank of Japan’s monetary policy would have a positive net impact on the Group’s profitability, but in the meantime the average maturity of MUFG’s portfolio of JGBs’ has declined providing the Group with some flexibility to adjust its purchase of JGBs accordingly. The IA takes into consideration the Group’s solid funding and liquidity position, supported by its robust domestic customer base. Nevertheless, Morningstar DBRS considers MUFG to have a relatively high usage of non-JPY wholesale funding in its overseas operations. Lastly, similar to its domestic peers, MUFG’s regulatory capital ratios include unrealised gains on available-for-sale securities, however, Morningstar DBRS views MUFG’s capital position as sound, supported by its ability to generate recurring earnings as well as its good access to capital markets.

CREDIT RATING DRIVERS

An upgrade of the Bank’s Long-Term credit ratings would require an upgrade in the sovereign credit rating and uplift for systemic support is consequently incorporated into the credit ratings in line with the SA2 Support Assessment. Alternatively, an upgrade would also result if the Group’s interconnectedness with the Japanese sovereign declines whilst profitability and capital levels materially improve so that the IA may be positioned higher than the sovereign rating.

A downgrade of the sovereign credit rating would likely lead to a downgrade of MUFG’s credit ratings. Absent any change to the sovereign credit rating or to the Support Assessment, a downgrade of the Bank’s Long-Term Issuer credit 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 profitability and capital levels.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong

Mitsubishi UFJ Financial Group (MUFG or the Group) is the largest of the Japanese megabank groups, with total assets of JPY 397.1 trillion at end-December 2023 (approx. USD 2.814 trillion). The Group has significant domestic market shares in retail and corporate banking, consumer lending, capital markets and wealth management and has a strong overseas franchise. In Asia, MUFG holds a majority stake of 76.8% in Bank of Ayudhya (Krungsri) in Thailand and 92.4% stake in PT Bank Danamon Indonesia, Tbk (Bank Danamon). In addition, MUFG has a strategic alliance with Morgan Stanley (MS) since 2008, with MUFG currently holding a 22.5% equity stake in MS. This partnership is a strong contributor to the Group’s earnings. The sale of MUFG’s US subsidiary, MUFG Union Bank (MUB), to US Bancorp (USB) was finalised with a purchase price of USD 5.5 billion in cash and approximately 44 million shares of USB equity in December 2022. MUFG now holds a minority stake of approximately 4.39% in USB as of end-2023, which also reflects additional USB shares acquired in August 2023 .

Earnings Combined Building Block (BB) Assessment: Good/Moderate

Morningstar DBRS considers MUFG’s earnings generation to be solid, supported by a high level of diversification by geographies and businesses. MUFG reported a profit attributable to owners of the parent of JPY 1,297.9 billion in 9M2023 which increased by JPY 954.7 billion (and up by JPY 152.9 billion on an adjusted basis compared to JPY 1,144.9 billion in 9M 2022 – which is already close to the target of MUFG’s FY23 (end-March 2024) of a net attributable profit of JPY 1,300 billion. Consolidated gross profits increased by approximately 1.1% YoY to JPY 3,619.1 billion in 9M 2023 (up JPY 39.2 billion) mainly thanks to net other income as well as improved net trading income following a rebalancing of the bond portfolio, and lower losses on debt securities. Net fees and commissions were up, driven by an increase in foreign loan-related fees and AM/IS business fees. Net interest income (NII) was down to JPY 1,799.9 billion reflective of continued pressure on NII in Japan due to the ultra-low interest rate environment, RWA reallocation to profitable assets, the deconsolidation of MUB, and the absence of gains on investment trusts cancellation of JPY 540.4 billion included in Q3 2022. Going forward, Morningstar DBRS notes that, if the Bank of Japan increases its base rate from -0.1% to 0%, it would represent a positive net impact on the Group’s net interest income of approximately JPY 50 billion per year based on the assumption that the balance-sheet is unchanged.

Operating expenses decreased to JPY 2,098.8 billion in 9M 2023 due to the sale of MUB . Credit costs for the Group increased to JPY 263.6 billion in 9M 2023, compared to JPY 42.1 billion in 9M 2022 (after the YoY adjustment for the sale of MUB). Overall, MUFG’s 9M 2023 Return on Equity (ROE) was 9.99%. which compares well to MUFG’s ROE guidance for FY 2023 of 7.5%, and the Group’s mid-to long-term target of 9-10%.

Risk Combined Building Block (BB) Assessment: Strong/Good

MUFG’s asset quality remains sound. Non-performing loans (based on the FRA and Japanese Banking Act) increased by 2% to JPY 1,597 billion from end-FY22, representing 1.23% of total loans and bills-discounted at end-December 2023, compared to 1.26% at end-March 2023 and 1.18% at end-March 2022.

MUFG has a sizeable holding of Japanese Government Bonds (JGBs) under the available for sale security designation, representing 134% of the Group’s Tier 1 Capital at end-September 2023, down from 198% at end-September 2022, which exposes them to market and interest rate risk. The Group’s holdings of total JGBs had an average maturity of around 1.3 years at end-September 2023, shorter than 1.9 years at end-September 2022. The reduction of the average remaining period of the Group’s JGBs portfolio decreases the negative impact of potentially rising BOJ’s base rate. Meanwhile, the Group continues to make progress on reducing its exposure to Japanese equities. The ratio of Japanese equities as a percentage of Tier 1 capital significantly decreased to 6.7% at end-September 2023, down from 11.1% at end-September 2022.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong

Morningstar DBRS views MUFG’s funding and liquidity position as strong, supported by a solid and sticky domestic customer base as well as good access to financial markets. Customer deposit grew 1.2% from end-March 2023 to end-December 2023. According to Morningstar DBRS calculations, the Group’s net loan-to-deposit (LTD) ratio was a low 53% at end-December 2023 compared to 50.5% at end-March 2023 and 51% at end-March 2022. In addition, MUFG’s overseas net LTD ratio was 103% at end-September 2023, compared to 95% at end-September 2022. At the same time, Morningstar DBRS estimates the Group has a high usage of non-JPY wholesale funding in its overseas operations, accounting for approximately 50% of total non-JPY funding at end-September 2023. Morningstar DBRS considers MUFG’s liquidity position as well managed and solid. The Group reported an average Liquidity Coverage Ratio (LCR) of 159.5% for the period July-September 2023 and the Net Stable Funding Ratio (NSFR) was 119.2% at end-September 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

MUFG’s capital position is sound, supported by sound earnings generation and good access to capital markets. Similar to its megabank domestic peers, MUFG’s regulatory capital ratios include unrealised gains on available-for-sale securities. Including the impact of net unrealised gains/losses on available-for-sale-securities, the Group reported a Common Equity Tier 1 (CET1) ratio of 11.18% at end-December 2023, compared to the minimum regulatory requirement of 8.5%.

Excluding the net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 9.9% under the current regulatory requirements and 10.5% on a post-Basel III reforms basis at end-September 2023. This is within the Group’s CET1 target of 9.5%-10%, which excludes the net unrealised gains/losses on available-for-sale securities and is based on a post-Basel III reforms basis. The Group reported a leverage ratio of 4.99% at end-September 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/429042.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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 (June 22, 2023), https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Mitsubishi UFJ Financial Group (MUFG) Consolidated Summary Report for the six months ended September 30, 2023 and the nine months ended December 31, 2023, MUFG Financial Highlights for 3rd Quarter of FY2023, MUFG FY2023 H1 IR Presentation, MUFG Databook for FY2023 H1, and MUFG Sustainability Report 2023. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/429039.

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings, Global Financial Institution Group
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 4 January 2002
Last Rating Date: 08 March 2023

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