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

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 that 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 robust franchise, being the largest of the Japanese mega-bank groups, solid and improving earnings generation, sound asset quality metrics, solid funding and liquidity positions, and sound capitalisation levels.

MUFG has a highly diversified business model. The Group has leading market shares and well-entrenched domestic franchise in Japan along with significant overseas operations. Interest rates have started to rise in Japan since March 2024, positively impacting the Group's net profits beside a more favorable operating business environment. MUFG has sound asset quality metrics with low non-performing loans (NPLs). At the same time, MUFG has material, albeit declining, exposure in Japanese Government Bonds (JGBs) and Japanese equities, which exposes the Group to market and interest rate risks. Morningstar DBRS considers the Group has a solid funding and liquidity position, supported by its robust and sticky domestic customer base. Nevertheless, MUFG also has a relatively high usage of non-JPY wholesale funding in its overseas operations. Capitalization levels are solid supported by its ability to generate recurring earnings as well as its good access to capital markets. MUFG's capital ratios, however, include volatile unrealised gains on available-for-sale (AFS) securities like its mega-bank domestic peers.

The Company's IA of A (high) has been assigned at the midpoint of the Intrinsic Assessment Range. We view MUFG's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS

Given the SA2 support assessment, an upgrade of the Bank's Long-Term credit ratings would require an upgrade in the sovereign credit rating while maintaining or improving current financial fundamentals.

A downgrade of the sovereign credit rating would 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, capital levels, and/or risk profile.

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 413.1 trillion at end-December 2024 (approx. USD 2.7 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 in Bank of Ayudhya (Krungsri) in Thailand and in PT Bank Danamon Indonesia, Tbk (Bank Danamon). In addition, MUFG has a strategic alliance with Morgan Stanley (MS) since 2008, with MUFG holding a 23.1% equity stake in MS at end-September 2024. This partnership is a strong contributor to the Group's earnings. In terms of overseas acquisitions, Morningstar DBRS notes the Group focuses on three key areas: Asia, digital (such as in Thailand and Philippines in 2024), or asset management companies.

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

MUFG reported a profit attributable to owners of the parent of JPY 1,748.9 billion in 9M2024 (approximately USD 11.5 billion) up by 34.7% year-on-year (YoY) from JPY 1,297.9 billion in 9M2023 (approximately USD 8.5 billion) - 99% to the target of MUFG's FY24 (end-March 2025). MUFG's 9M 2024 Return on Equity (ROE) increased to 12.3%, which is above MUFG's ROE target of 9%, and the Group's mid-to long-term target of 9-10%.

Morningstar DBRS considers MUFG's earnings generation to be solid, supported by a high level of diversification by geographies and businesses, and more recently steadily rising rates in Japan. Consolidated gross profits increased by approximately 13.9% YoY to JPY 4,121.3 billion in 9M 2024 from JPY 3,619.1 billion in 9M 2023 (up JPY 502.2 billion) mainly due to higher net interest income (NII) supported by a recovery in JPY NII and overseas acquisitions. Net interest income (NII) was up 20.8% overall to JPY 2,174 billion, or up JPY 374.0 billion from JPY 1,799.9 billion mainly reflective of lending volume growth in Japan. Net fees and commissions also increased thanks to good performance in the fee business both domestically and globally (solutions, wealth management, and asset management/investment services businesses). Morningstar DBRS also notes that net losses on debt securities were realised as a result of rebalancing the bond portfolio.

Going forward, Morningstar DBRS notes that the governor of the Bank of Japan has pledged to raise rates further which will positively impact NII further. According to MUFG, the impact of the Bank of Japan increases in base rate to 0.50% in January 2025 from 0.25% is expected to represent a net impact on the Group's net interest income of approximately JPY 20 billion in FY24, JPY 110 billion in FY25, and JPY 160 billion in FY26 based on the assumption that the balance-sheet is unchanged.

Operating expenses increased by 14.7% to JPY 2,406.6 billion in 9M 2024 from JPY 2,098.8 billion in 9M 2023 in part due to increased investments, inflation, and the effect of overseas acquisitions. Credit costs for the Group decreased to JPY 251.0 billion in 9M 2024 from JPY 263.6 billion in 9M 2023, reflecting the absence of the previous' year provision for the general allowance for credit losses at the Bank.

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) were JPY 1,967.9 billion at end-December 2024, representing 1.40% of total loans and bills-discounted at end-December 2024, lower than 1.51% at end-March 2024, but higher than 1.26% at end-March 2023 and 1.18% at end-March 2022.

Although reducing, MUFG has material holding of Japanese Government Bonds (JGBs) which exposes them to market and interest rate risk. Under the available for sale (AFS) security designation, MUFG held JGBs of approximately JPY 18.8 trillion at end-December 2024. down from JPY 21.4 trillion at end-March 2024. AFS JGBs holdings accounted for a lower 94.6% of the Group's Tier 1 Capital at end-September 2024. This is reflecting that MUFG has been rebalancing its total securities portfolio by reducing holding of AFS securities while increasing its share to held to maturity securities to decrease interest rate risk. In addition, both Japanese and foreign bonds are hedged.

Furthermore, the Group has continued to reduce its exposure to Japanese equities. The ratio of AFS Japanese equities as a percentage of Tier 1 capital was 22.34% at end-September 2024, significantly down from 29.40% at end-September 2022. MUFG's Japanese equity holdings represented 22.2% of the Group's consolidated assets at end-September 2024 which compares well to a target of less than 20% in the current medium term business plan. The Group's target is to achieve a reduction of JPY 700 billion by the end of its FY24-FY26 plan on an acquisition cost basis, of which JPY 225 billion was achieved in 9M 2024 and JPY 248 billion was agreed to be sold by FY26. This compares to JPY 539 billion sold between FY21-FY23, above initial plan of JPY 500 billion.

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 deposits grew approximately 1% from end-March 2024 to end-December 2024. According to Morningstar DBRS calculations, the Group's net loan-to-deposit (LTD) ratio was 55.5% at end-December 2024 compared to 52.8% at end-March 2024. MUFG's overseas net LTD ratio was 99% at end-September 2024, improved from 103% at end-September 2022. Nevertheless, 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 2024, but that it also mainly funds liquid investment securities that can be quickly converted into cash and interbank market operations. Overseas loans are financed with the deposits and mid-to long-term market funding. Overall, Morningstar DBRS considers MUFG's liquidity position as well managed and solid. The Group reported an average Liquidity Coverage Ratio (LCR) of 163.0% for the period July-September 2024 and the Net Stable Funding Ratio (NSFR) was 119.2% at end-September 2024.

Capitalisation Combined Building Block (BB) Assessment: Good

MUFG's capital position is sound, supported by sound earnings generation and good access to capital markets. MUFG's regulatory capital ratios include unrealised gains on AFS securities like its mega-bank domestic peers. Including the impact of net unrealised gains/losses on available-for-sale-securities, the Group reported a Common Equity Tier 1 (CET1) ratio of 14.3% at end-September 2024, up from13.5% at end-March 2024 and 10.7% at end- March 2023. This ratio represented a capital cushion of 580 bps over the minimum regulatory capital requirement of 8.5%.

Excluding the net unrealised gains/losses on AFS securities, MUFG's CET1 ratio was 12.8% under the current regulatory requirements (430 bps buffer) and 11.20% on a post-Basel III reforms basis at end-September 2024 (270 bps above 8.5%). This is above the Group's CET1 target of 9.5%-10.5%, which excludes the net unrealised gains/losses on available-for-sale securities and is based on a post-Basel III reforms basis. Meanwhile the Group reported a solid leverage ratio of 5.59% at end-September 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/449434.

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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in Japanese yen unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (04 June 2024) https://dbrs.morningstar.com/research/433881 In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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 these credit ratings include Morningstar Inc. and company documents. Other sources include Mitsubishi UFJ Financial Group (MUFG) Consolidated Summary Report for the six months ended September 30, 2024 and the nine months ended December 31, 2024, MUFG Financial Highlights for 3rd Quarter of FY2024, MUFG FY2024 H1 IR Presentation, MUFG Databook for FY2024 H1, and MUFG Key Capital Metrics for 3rd Quarter of FY2024. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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's trends 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/449433.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Sector Lead
Rating Committee Chair: William Schwartz, Associate Credit Rating Officer, Credit Practices Group
Initial Rating Date: 4 January 2002
Last Rating Date: 07 March 2024

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