DBRS Comments on the Q4 2008 Earnings of UnionBanCal Corporation – Senior at “A”

DBRS has today commented on the Q4 2008 earnings of UnionBanCal Corporation (UB or the Company). DBRS rates UB’s Issuer & Senior Debt at “A” with a Stable trend. UB reported a net loss from continuing operations of $82.9 million for the quarter, down from net income of $110.1 million in the previous quarter and $109.2 million in Q4 2007. On a sequential-quarter basis, higher expenses, primarily related to the privatization, lower non-interest income and significantly higher provisions for credit losses, more than offset net interest margin (NIM) expansion, which contributed to increased net interest income. Excluding the privatization expenses, the Company would have reported a net loss of $5.9 million for the quarter. For the year, UB had net income from continuing operations (excluding the privatization) of $367.1 million.

With asset quality deteriorating, the Company has aggressively built up the allowance for credit losses. Indeed, provisions have significantly outpaced net charge-offs(NCOs), which has bolstered the allowance for credit losses to 1.74% of total loans from 1.43% in Q3 2008 and 1.20% a year ago. Non-performing assets (NPAs) increased to 0.88% of loans and foreclosed assets in the fourth quarter from 0.63% in the previous quarter and 0.14% in Q4 2007. NPAs within the commercial, financial and industrial portfolio continue to drive the decline in loan quality. Meanwhile, NCOs remained relatively stable on a sequential-quarter basis at 0.52% of average loans. Given the continued decline in the economy, DBRS expects further deterioration in asset quality, but UB’s earnings generation capabilities and solid capital base provide a substantial cushion to successfully navigate through this negative credit cycle.

In November 2008, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU; Long-Term Deposits & Senior Debt at “A” with a Stable trend) acquired all the remaining shares of UB, which completed the privatization. The transaction resulted in $129 million in related expenses in the fourth quarter, or $77 million after tax. The privatization added $2.7 billion in goodwill and intangibles. To help offset this increase of goodwill and its negative impact on tangible common equity, BTMU contributed $1 billion in capital. As a result, the Company’s tangible common equity ratio remained solid at 6.96%. DBRS notes that since UB is owned by a foreign bank, it was not eligible for a capital investment under the U.S. Treasury’s Capital Purchase Program. However, the Company is participating in both components of the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program and has access to the Federal Reserve’s Term Auction Facility as well.

During the quarter, the Company benefited from margin expansion of 19 basis points to 3.86% as asset yields increased and funding costs declined. DBRS notes that average core deposits grew a very robust 11% from the third quarter. Overall, UB continues to benefit from its low-cost funding base, which had an average all-in cost of funds of 1.51%.

Given the Company’s diverse earnings stream, underpinned by a very healthy core deposit franchise and relatively strong balance sheet, DBRS expects UB to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.