DBRS Confirms UnionBanCal Corporation at ‘A’; Trend Stable

DBRS has today confirmed the ratings of UnionBanCal Corporation (UB or the Company) and its related entities, including UnionBanCal’s Issuer & Senior Debt rating of ‘A’. The trend for all ratings remains Stable. The rating action follows the recently announced $2 billion capital contribution from its parent company, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, Long-Term Deposits & Senior Debt at ‘A’ with a Stable trend).

UnionBanCal’s ratings reflect its strong banking franchise that is predominantly based in California and supported by a robust low-cost deposit base. The ratings are further underpinned by its recently bolstered strong capital position. While pressured by the recession, asset quality metrics remain better than those of similarly rated peers. The ratings also take into account three consecutive quarterly losses primarily from the privatization and elevated credit costs. DBRS expects additional modest quarterly losses over the short-term as UB should continue to incur higher than normal credit costs. Lastly, the Company is reliant on spread income as non-interest revenues only comprise 24.4% of year-to-date revenues.

UB reported a net loss from continuing operations of $80.0 million in Q2 2009, down from a net loss of $9.8 million in the previous quarter and net income from continuing operations of $134.3 million in Q2 2008. While revenues were basically flat relative to Q1 2009, incremental loan loss provisioning for loan losses of $111 million and an FDIC special assessment of $34 million more than offset lower privatization expenses resulting in the larger quarterly loss. DBRS notes that the Company has aggressively built the loan loss reserve over the past several quarters to address deteriorating asset quality.

UnionBanCal recently announced a substantial capital contribution from BTMU. Absent the capital contribution, DBRS would have likely revised the trend to Negative, given the recent quarterly losses and deteriorating asset quality that has increased the likelihood for continued losses over the short-term. However, the $2 billion capital contribution shows the Company’s commitment to maintaining a strong balance sheet and offsets any ratings pressure. Specifically, the capital contribution raises (on a pro forma basis) UB’s tangible common equity ratio to a very strong 9.11% from a reported 6.56% at June 30, 2009. Furthermore, the capital contribution allows the Company to pursue organic growth opportunities at a time when many competitors are capital constrained.

Asset quality continues to deteriorate, but remains better than those of similarly rated peers in terms of both non-performing asset (NPA) and net charge-off (NCO) levels. However, NPAs reached $1.1 billion, or 2.34% of loans and foreclosed assets, in the second quarter. This amount has grown considerably from 1.69% in the previous quarter and 0.49% a year ago. Once again, NPAs were up across all loan categories with commercial mortgages and construction loans driving the majority of the increase. Meanwhile, NCOs have been accelerating, but remain manageable. During the quarter, NCOs rose to $151 million, or 1.23% of average loans annualized, from $116 million, or 0.95%, in the first quarter. Year-to-date, approximately 86% of all NCOs have come from either the CRE (including construction) or C&I loan portfolios. DBRS notes that while the residential mortgage portfolio (represents about one third of the total loan portfolio) has seen an increase in NPAs, the pace of losses remains very low at $15 million over the first six months. California housing has seen significant price declines, but the Company’s conservative underwriting as evidenced by low loan-to-values and high FICO scores have kept losses low. The total provision for credit losses was $375 million and included $15 million for off-balance sheet commitments. Overall, the reserve remains healthy at 2.21% of total loans and 98.14% of nonaccruals. With the California economy still struggling and unemployment yet to peak, credit costs are likely to remain elevated.

Positively, UB continues to deliver remarkable deposit growth with deposits growing over $15.7 billion to $58.3 billion over the past year demonstrating its franchise strength. Q2 2009 was the strongest quarter yet with average non-interest bearing and interest bearing deposits increasing 11% and 19%, respectively. The majority of the quarterly deposit growth was held at the Federal Reserve, which contributed to significant net interest margin compression of 38 basis points to 3.41%. UB remains very liquid and boasts a very low all-in cost of funds of 0.88%. This low-cost funding is a competitive advantage and provides substantial liquidity.

UnionBanCal Corporation, a bank holding company headquartered in San Francisco, California, reported $74 billion in assets at June 30, 2009.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.