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, this reflects 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 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

In maintaining MUFG Bank’s Intrinsic Assessment at A (high), DBRS Morningstar recognises the strength of the Group’s franchise in its domestic Japanese market and the significance of its expanding overseas operations. DBRS Morningstar expects the Group’s earnings generation and risk profile to be adversely affected by the major economic slowdown and market disruption driven by the COVID-19 pandemic (COVID-19) both in Japan and the US. However, the Group has a strong balance sheet position and a diversified franchise which should mitigate some of the profitability and asset quality challenges that will emerge in coming quarters. As the impact of the COVID-19 outbreak unfolds, DBRS Morningstar will continue to monitor its potentially adverse impact on the Group’s profitability, asset quality and capital.

The IA incorporates the Group’s solid credit risk profile and sound asset quality to date along with its strong funding and liquidity position, supported by its solid domestic customer deposit base, and its strong capital position. Nevertheless, similar to its domestic peers, the Group has sizeable holdings of Japanese Government Bonds and Japanese equities, which albeit reducing over the years, continue to expose the Group to volatility in its regulatory capital ratios. The IA also takes into account that higher credit costs driven by the COVID-19 environment will add further pressure to the Group’s profitability, which is already impacted by the negative interest environment in Japan. The IA also takes into account that overseas business operations make strong usage of market funding, albeit this has been slightly improved in recent years, partly helped by overseas deposit growth.

RATING DRIVERS
Given the scale of the economic disruption caused by the COVID-19 outbreak, an upgrade of the Long-term Issuer rating is unlikely. An upgrade of the Bank’s Long-Term ratings would require that: 1) the sovereign rating is upgraded and uplift for systemic support is consequently incorporated into the ratings in line with the SA2 Support Assessment; or 2) the Group’s 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 Long-Term Issuer Rating would require a two-notch downgrade of the IA. This could occur from a substantial deterioration in the Group’s asset quality and a significant weakening in its capital position, potentially as a result of a prolonged adverse economic impact from COVID-19.

RATING RATIONALE
Mitsubishi UFJ Financial Group is the largest of the Japanese mega bank groups, with total assets of JPY 336.5 trillion (approximately USD 3,128 billion) at end-FY2019. The Group owns MUFG Union Bank in the US, which is one of the largest regional banks. In Asia, the Group owns majority stakes in Bank of Ayudhya (Krungsri), one of the leading domestic banks in Thailand, and PT Bank Danamon Indonesia, Tbk (Bank Danamon), and has a strong presence in wealth management and aviation finance.

MUFG has demonstrated resilient earnings in recent years, as the solid performance of its overseas businesses offset the ongoing pressure in its domestic operations, partly arising from the very low interest rate environment in Japan. In FY2019, profit attributable to owners of the parent was down 39.5% to JPY 528.1 billion , negatively impacted by one-off goodwill impairment of overseas consolidated subsidiaries, impairment on equity holdings due to the significant market value declines in Q4 2019, and higher loan loss provisions, which included a COVID-19 provision of JPY 50.0 billion. For FY2020, the Group expects profitability to be further impacted by the COVID-19 environment primarily through lower revenues and higher loan loss provisions of approximately JPY 450 billion. Cost control remains a priority for MUFG: its cost-to-income ratio was 70.2% in FY19, weaker than for most of the Group’s domestic and international peers, however, we anticipate that the Group will accelerate its efforts to contain costs.

MUFG has a solid credit risk profile and strong asset quality, which has remained stable in spite of various acquisitions in recent years, partly supported by the benign economic environment in its main markets. Non-performing loans (NPLs), based on the Financial Reconstruction Law (FRL) and when calculated on a combined MUBK and MUTB basis (including Trust Account), accounted for 0.65% of total gross loans at end-2019. The Group has exposure to sectors which could potentially be negatively affected if the COVID-19 outbreak were to be prolonged, including exposure to aircraft business (JPY 1.8 trillion) , and natural resources (JPY 7.9 trillion) [MUFG Full FY19 Presentation p.20]. Moreover, the Group has relatively high concentration to Japanese equities and government bonds, which presents risk management challenges and expose the Group to valuation fluctuations. The Group’s JGB holdings accounted for a sizeable 139% of the Group’s Tier 1 Capital at end-FY2019, and its exposure to Japanese equity holdings accounted for 12.8% of Tier 1 Capital.

MUFG has a strong funding and liquidity profile, largely underpinned by its solid domestic customer deposit base. The Group’s net loan-to-deposit ratio was a sound 58 % at end-FY2019. However, DBRS Morningstar notes that the Group’s overseas operations make strong use of market funding albeit this has been gradually reduced, supported by strong growth in overseas deposits. Wholesale funding (including medium to long-term funding in the form of corporate bonds, and currency swaps) represented 39% of total Non-JPY funding at end-FY2019 , while the Group also makes use of short-term funding to fund its overseas operations exposing the Group to potentially higher funding costs, or a change in investor confidence. The Group’s liquidity position is strong. The Liquidity Coverage ratio (LCR) was 155% and the Group had Highly Liquid assets (HQLA) representing a high 31% of total assets at end-FY19.

MUFG has a solid capital position even though regulatory capital ratios were negatively impacted by lower retained earnings in FY2019 and an increase in dividend payments. Similar to domestic peers, regulatory capital ratios also include significant unrealised gains on Japanese equity holdings. 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-FY2019, down from 12.6% at end- H1 2019 as a result of significant market volatility in Q4 2019. Excluding net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 9.8% at end-FY2019, albeit still well above the minimum regulatory requirement of 8.5%, which include the G-SIB surcharge of 1.5%. The Group’s transitional Basel III leverage ratio was 4.4% at end-FY2019.

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

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’s FY2019 Results 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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363015

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

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: December 24, 2004
Last Rating Date: January 28, 2020

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