Press Release

DBRS Morningstar Confirms MUFG Bank’s Long-Term Issuer Rating at A (high), Stable trend

Banking Organizations
January 28, 2020

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 and 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 that the sovereign rating of Japan is 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 Group’s strong franchise in its core Japanese market as well as its increasing overseas operations. The IA also reflects the Group’s resilient profitability and the high revenue diversification. It also takes into consideration the Group’s solid credit risk profile and sound asset quality, and the solid capitalisation, even though regulatory capital ratios incorporate sizeable unrealised gains on securities. Similar to its domestic peers, the Group has sizeable holdings of Japanese Government Bonds and Japanese equities, albeit the Group has been managing these exposures down. The IA also take into account MUFG’s strong funding and liquidity position, which is supported by its solid domestic customer deposit base, and that overseas business operations make strong usage on market funding, albeit this has been slightly improved in recent years.

RATING DRIVERS
There could be upward pressure on the Bank’s Long-Term ratings if: 1) the sovereign rating is upgraded and uplift for systemic support is consequently incorporated into the ratings in line with the SA2 support designation; 2) the sovereign rating is upgraded and there is also strengthening of the Group’s profitability whilst maintaining a conservative risk-taking approach; or 3) the Group’s overseas activities increase sufficiently that the proportion and quality of profits and exposures outside 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, negative pressure on the Long-Term Issuer Rating would require a two notch downgrade of the IA. DBRS Morningstar views that this is unlikely. However, this outcome could arise from a substantial deterioration in the Group’s asset quality and a significant weakening in its capital position.

RATING RATIONALE
Mitsubishi UFJ Financial Group is the largest of the Japanese mega bank groups, with total assets of JPY 314.5 trillion (approximately USD 2,909.3 billion) at end-September 2019 (end-1H19). Since 2008, MUFG has a strategic alliance with Morgan Stanley while in recent years the Group has made a series of strategic investments in order to strengthen its presence outside Japan and further diversify its revenues. In the US, the Group owns MUFG Union Bank, which is one of the largest regional banks with total assets of USD 134.7 billion at end-September 2019 while in Southeast Asia, MUFG owns majority stakes in Bank of Ayudhya (Krungsri), one of the leading domestic banks in Thailand, and PT Bank Danamon Indonesia, Tbk (Bank Danamon). More recently, the Group finalised the acquisitions of the wealth manager Colonial First State Global Asset Management and of the Aviation Finance division of the German lender DVB Bank.

DBRS Morningstar considers that MUFG has demonstrated resilient earnings in recent years, partly supported by the solid performance of its overseas businesses. This, combined with low credit costs, has partly offset the ongoing revenue pressure in its domestic operations. In 1H19, however, MUFG reported profits attributable to owners of the parent of JPY 609.9 billion (USD 5.6 billion), down 6.2% year-on-year (yoy). The decrease was largely driven by higher impairment charges and higher operating costs. Consolidated gross profits were up 4.8% yoy, largely reflecting net gains on debt securities, which partly helped offset the ongoing pressure in net interest income as a result of the low interest rate environment and the low credit demand in Japan. In 1H19, the cost-to-income ratio was 68.0%, improved from 71% the year before, , but weaker than for most of the Group’s international peers.

DBRS Morningstar views MUFG as having a good credit risk profile, with strong asset quality. 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 0.66% of total gross loans at end-September 2019. Nonetheless, the Group has relatively high concentration to Japanese equities and government bonds, which in DBRS Morningstar’s view present risk management challenges and expose the Group to valuation fluctuations. The Group continues to reduce its JGB holdings, which totalled JPY 20.2 trillion and accounted for a sizeable 125% of the Group’s Tier 1 Capital at end-September 2019. Similarly, the Group has also been steadily reducing its Japanese equity holdings to 13.0% of Tier 1 Capital at end-September 2019, or approximately 11.7% when including the agreements in place, with MUFG targeting for these to reduce further to approximately 10% of Tier 1 Capital by end-March 2021.

DBRS Morningstar views MUFG as having a strong funding and liquidity profile, benefitting from a solid domestic customer deposit base. The Group’s net loan-to-deposit ratio was a sound 58.6% at end-1H19. However, DBRS Morningstar notes that the Group’s overseas operations make strong use of market funding. Wholesale funding (including short and medium to long-term funding in the form of corporate bonds, interbank funding and commercial paper) represented a fairly high 58% of total funding at end-FY18, although the proportion has been fairly stable over the years. Strong growth of overseas deposits (up 10% from end-FY16 to end-FY18 and stable loan balances, however, have resulted in the overseas net loan-to-deposit ratio improving to 138% at end-1H19 from 157% at end-FY16, a level that in DBRS Morningstar’s views remains high.

DBRS Morningstar considers MUFG’s capital position as solid, supported by organic capital generation and good access to capital markets. At end-September 2019, the Group reported a Common Equity Tier 1 (CET1) ratio, including net unrealised gains/losses on available-for-sale-securities, of 12.6%, and a transitional Basel III leverage ratio of 4.89%. Excluding net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 10.2% at end-1H18, still well above the minimum regulatory requirement of 8.5%, which include the G-SIB surcharge of 1.5%.

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.

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents 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 twelve month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS Morningstar reviews 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.

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: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 24, 2004
Last Rating Date: January 28, 2019

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