DBRS Comments on the Q3 2009 Earnings of UnionBanCal Corporation – Senior at “A”

DBRS has today commented on the Q3 2009 earnings of UnionBanCal Corporation (UB or the Company). DBRS rates UB’s Issuer & Senior Debt at “A” with a Stable trend. UB reported a smaller net loss from continuing operations of $17.0 million for the quarter compared to a net loss of $80.0 million in Q2 2009. However, performance remains considerably down from net income from continuing operations of $110.1 million a year ago. On a sequential quarter basis, lower incremental total provision for credit losses of $55 million, improved net interest income from earning assets growth, $12.7 million in securities gains and no FDIC special assessment more than offset margin contraction of 10 basis points (bps) and lower trading and merchant banking revenues. Excluding the impact of the privatization, UB would have reported a small net loss of $5.7 million. Other highlights of the quarter include continued exceptional core deposit growth and a $2 billion capital contribution from the Company’s parent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU). The significant capital contribution offsets any rating pressure from deteriorating asset quality and weaker financial performance.

Asset quality remains a challenge, but there were some encouraging signs. While non-performing assets (NPA) increased another $300 million to $1.4 billion, net charge-offs (NCO) declined by $15 million to $136 million. Specifically, NPAs reached 2.84% of loans and foreclosed assets, up from 2.34% in the second quarter. The growth in NPAs was driven by weakness within the commercial mortgage and construction loan portfolios. Meanwhile, NCOs declined to 1.11% of average loans annualized from 1.23% in the second quarter. Showing the weakness of residential housing in California, residential mortgage losses reached a still very manageable $14 million, but did cause year-to-date residential NCOs to almost double. Even though there have been some promising economic signs and a return to growth for the national economy, significant issues remain in California, which should keep provisioning needs elevated and mute earnings.

DBRS notes that the Company has aggressively built up its credit loss reserves. Indeed, since the start of 2009, UB’s total provision for credit losses has exceeded NCOs by $565 million. The allowance for credit losses more than covers nonaccrual loans and the allowance for credit losses represents 2.97% of total loans positioning the Company nicely to return to robust profitability once the economy gets on more solid footing.

The significant $2 billion capital contribution from BTMU greatly enhanced the balance sheet. The Company’s tangible common equity ratio increased to a peer leading 8.94% from 6.56% in the second quarter. The capital contribution allows the Company to pursue growth opportunities at a time when many competitors are capital constrained and should provide a competitive advantage.

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.