DBRS Upgrades MUFG Bank to A (high) / R-1 (middle), Stable Trend

DBRS Ratings Limited (DBRS) has upgraded the ratings of MUFG Bank, Ltd. (the Bank), including its Long-Term Issuer Rating to A (high) and the Short-Term Issuer Rating to R-1 (middle). The trend on all ratings is now Stable. The Intrinsic Assessment (IA) of the Bank is now A (high), and DBRS notes that it is based upon the financial strength of the consolidated Mitsubishi UFJ Financial Group (MUFG or the Group). The Support Assessment remains at SA2. 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), Stable trend, there is currently no uplift to MUFG’s Long-Term Issuer Rating. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The ratings upgrade reflects the recent upgrade of DBRS’s rating on Japan to A (high) from ‘A’, as well as the improvement in the Bank’s IA to A (high) from ‘A’. The improvement in the IA reflects the resilient earnings performance of the Group, the strong franchise in its core Japanese market and its significant overseas operations. The consistent earnings are supported by the high level of revenue diversification, which has helped to offset the pressure from modest growth in domestic demand and the low interest rate environment. The A (high) IA also incorporates DBRS’ view that MUFG’s asset quality is good, as evidenced by its low levels of non-performing loans. However, holdings of Japanese Government Bonds and Japanese equities remain sizeable, even though the Bank is actively managing these portfolios down. MUFG’s funding & liquidity position is strong, supported by its solid domestic deposit base, although its non-Japanese operations continue to rely on market funding to a greater degree. Capitalisation levels are solid, albeit these incorporate sizeable unrealised gains on available-for-sale securities.

RATING DRIVERS
There could be upward pressure on the Bank’s issuer and senior debt ratings if: 1) the sovereign rating is upgraded further 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 a strengthening of the Group’s profitability and progress with the cost efficiency initiatives being implemented by the Group; 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 Issuer Rating. Absent any change to the sovereign rating, negative pressure on the Issuer Rating would require a two notch downgrade of the IA. DBRS views that this is unlikely. However, this outcome could arise from a substantial deterioration in the Group’s asset quality or a significant weakening in its capital position.

RATING RATIONALE
MUFG is the largest of the Japanese mega-banking groups, with a core franchise in Japan. MUFG has significant market shares in retail and corporate banking, consumer lending, capital markets and wealth management. The Group also has a growing overseas franchise, mainly in the United States and Asia. MUFG’s earnings have been largely resilient in recent years, as solid performance in overseas loan and deposit businesses along with low credit costs have counterbalanced the low interest rate environment and modest loan demand in Japan. As part of its medium-term business plan, the Group is aiming to boost net operating profits by approximately JPY 250 billion by end-FY20. Cost control is an important element in this plan with MUFG aiming to reach an efficiency ratio of 60% (April-September 2018 (1H18): 69.8%) over the medium-to-long term (towards end-FY23). The Bank aims to reduce its total workload by 30% through increased use of robotics and artificial intelligence. It expects to reduce its workforce by 6,000 employees, mainly through attrition, by FY23.

DBRS views MUFG’s risk profile as conservative. It has strong asset quality, as indicated by its non-performing loans ratio of 0.62% of total gross loans at end-1H18, when this ratio is calculated on a combined MUBK and MUTB basis (including Trust Account). DBRS also notes that the credit quality in some of the Group’s other significant markets remains strong. The Group’s holdings of Japanese equities and government bonds, however, continue to present risk management challenges due to concentration risk and the potential impact from market risk fluctuations. Even though DBRS views positively that the Group has made significant progress in reducing its JGB holdings in recent years, the portfolio does remain sizeable at 132% of the Group’s Tier 1 Capital at end-1H18. DBRS also notes the Group has been steadily reducing the ratio of Japanese equity holdings towards its target of approximately 10% of Tier 1 Capital by end-March 2021; at end-1H18, MUFG’s Japanese equity holdings stood at 13.8% of Tier 1 Capital, down from 19.7% at end-FY14.

MUFG’s funding profile is supported by its large and solid domestic retail base that contributes to a Group net loan-to-deposit ratio of 62% at end-1H18, largely unchanged over the past 18 months. The Group’s overseas operations have a loan-to-deposit ratio of 115% at end-1H18%, which reflects their greater use of market funding, primarily mid-to-long term corporate bond issuances and currency swaps. DBRS will continue monitoring trends in MUFG’s overseas operations funding given this funding mix.

DBRS views MUFG’s capital position as solid. It has a fully-loaded Common Equity Tier 1 (CET1) ratio of 11.9%, including the impact of net unrealised gains/losses on available-for-sale-securities, and a transitional Basel III leverage ratio of 5.05% at end-1H18. Excluding the impact of net unrealised gains/losses on available-for-sale securities, MUFG’s CET1 ratio was 9.7% at end-1H18. However, this ratio is still above the minimum regulatory requirement and in line with the Group’s target of a minimum CET1 ratio of 9.5% at end-FY17, on a fully-loaded basis. MUFG targets, on a post-Basel III reforms basis, a CET1 ratio of approximately 11% towards end-FY20.

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 applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS 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’s outlooks and ratings are under regular surveillance

For further information on DBRS 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: Ross Abercromby, Managing Director - 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 30, 2018

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