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

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 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. The IA takes into account MUFG’s sound asset quality metrics with low NPLs. At the same time, MUFG has sizeable exposure towards Japanese Government Bonds and Japanese equities which, in DBRS Morningstar’s view, exposes the Group to market and interest rate risks. The IA takes into consideration the Group’s solid funding and liquidity position, supported by its robust domestic customer base. However, we note that MUFG has relatively high usage of non-JPY wholesale funding in its overseas operations.

Similar to its domestic peers, MUFG’s regulatory capital ratios include unrealised gains on available-for-sale securities. Unrealised gains have declined in 2022 given the higher interest rate environment. Nevertheless, DBRS Morningstar views MUFG’s capital position as sound, supported by its ability to generate recurring earnings as well as its good access to capital markets.

The ratings also take into account the still challenging global economic environment as well as Japan’s expansionary monetary policy which could continue to add pressure to the Group’s profitability.

RATING DRIVERS

An upgrade of the Bank’s Long-Term ratings would require an upgrade in the sovereign rating and uplift for systemic support is consequently incorporated into the ratings in line with the SA2 Support Assessment. Alternatively, an upgrade would also result if the Group’s credit strength improves, and the overseas activities increase sufficiently so 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 profitability and capital levels.

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 391.4 trillion at end-December 2022 (9M 2022). 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 with presence in over 50 countries. 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 been part of a strategic alliance with Morgan Stanley (MS) since 2008, with MUFG currently holding a 21.4% equity stake in MS. This partnership is a strong contributor to the Group’s earnings. In December 2022, 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. As of end-December 2022, MUFG holds a minority stake of approximately 3% in US Bancorp.

Earnings Combined Building Block (BB) Assessment: Moderate

DBRS Morningstar considers MUFG’s earnings generation to be solid, supported by a high level of diversification by geographies and businesses. Consolidated gross profits increased 21% year-on-year (YOY) to JPY 3,579.8 billion in 9M 2022 mainly driven by higher net interest income which was supported by higher overseas interest rates. However, MUFG reported a profit attributable to owners of the parent of JPY 343.1 billion in 9M 2022, down from JPY 1,070.3 billion in 9M 2021 due valuation losses on bonds and other instruments of JPY 517.6 billion as well as higher credit costs associated to the fair value of loans in the context of the sale of MUB. After considering the approximately JPY 801.7 billion that will be recorded as extraordinary gains following MUB’s transfer, net profit was JPY 1,144.9 billion in 9M 2022, up 7% YOY.

Operating expenses increased to JPY 2,198.3 in 9M 2022, up 8.9% YOY, however, excluding the FX impact and accounting effects related to the sale of MUB, operating expenses were flat YOY. Credit costs for the Group increased to JPY 484.5 billion in 9M 2022, up from a low JPY 27.2 billion in 9M 2021, of which JPY 442.4 billion was related to valuation losses on loans to be sold in connection with the MUB transfer, triggered by the devaluation of the JPY and a higher U.S. interest rate environment. Overall, MUFG’s Return on Equity (ROE) guidance for FY 2023 is 7.5%, and the Group’s mid-to long-term target is 9-10%.

Risk Combined Building Block (BB) Assessment: Strong

MUFG’s asset quality remains sound. Non-performing loans (based on the FRA and Japanese Banking Act) decreased by 6% to JPY 1,377.8 billion from end-FY21, representing 1.02% of total loans and bills-discounted at end-December 2022, below 1.18% at end-March 2022 and 1.14% at end-March 2021. Approximately 47% of NPLs at end-December 2022 were related to domestic exposures, followed by Asia (28%), Americas (12%) and Europe (13%). MUFG has a sizeable holding of Japanese Government Bonds (JGBs) under the available for sale security designation, representing 198% of the Group’s Tier 1 Capital at end-September 2022, which exposes them to market and interest rate risk. Meanwhile, the Group continues to make progress on reducing their exposure to Japanese equities. The ratio of Japanese equities as a percentage of Tier 1 capital stood at 11.1% at end-September 2022, down from 14.2% at end-March 2018.

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

DBRS Morningstar views MUFG’s funding and liquidity position as strong, supported by a solid domestic customer base and good access to financial markets. Customer deposit growth has normalised after benefitting from strong growth during the pandemic and only grew 2.3% from end-March 2022 to end-December 2022. The Group’s net loan-to-deposit (LTD) ratio increased to 54% at end-December 2022 vs. 51% at end-March 2022, as loan growth outpaced deposit growth. MUFG’s overseas net LTD ratio increased to 125% at end-September 2022, up from 122% at end-March 2022. Furthermore, the Group has a high reliance on non-JPY wholesale funding in its overseas operations, accounting for 34% of total non-JPY funding at end-September 2022. We view MUFG’s liquidity position as solid. The Group reported an average Liquidity Coverage Ratio (LCR) of 158.6% for the period July-September 2022 and the Net Stable Funding Ratio (NSFR) was 120.5% at end-September 2022.

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 9.8% at end-September 2022, 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 9.4% under the current regulatory requirements and 9.9% on a post-Basel III reforms basis. 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 4.49% at end-September 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410676

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors 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 (17 May 2022)

Notes:

DBRS Morningstar notes that this Press Release was amended on 9 March 2023 to include the full title of the principal methodology.

All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Mitsubishi UFJ Financial Group (MUFG) Consolidated Summary Report for the six months ended September 30, 2022 and the nine months ended December 31, 2022, MUFG Financial Highlights for 3rd Quarter of FY2022, MUFG FY2022 H1 IR Presentation, MUFG Databook for FY2022 H1, and MUFG Sustainability Report 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/410677

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 24 December 2004
Last Rating Date: 21 June 2022

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