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Rating Action:

Moody's affirms MUFG Americas Holdings Corporation (senior A3); stable outlook

17 Jan 2017

New York, January 17, 2017 -- Moody's Investors Service affirmed the ratings of MUFG Americas Holdings Corporation (MUAH) and its bank subsidiary MUFG Union Bank, N.A. with a stable outlook. MUAH is rated A3 for senior unsecured debt. MUFG Union Bank has bank deposit ratings of Aa2/Prime-1 and a standalone baseline credit assessment (BCA) of a2. The bank's senior unsecured debt rating is A2 and its counterparty risk assessments are A1(cr)/Prime-1(cr).

The following ratings and assessments have been affirmed:

Issuer: MUFG Americas Holdings Corporation

..Affirmations:

....Long Term Domestic Issuer Rating, A3, Stable

....Long Term Domestic Debt Rating, A3, Stable

....Senior Unsecured Shelf, (P)A3

....Subordinate Shelf, (P)A3

....Preferred Shelf, (P)Baa1

....Pref. shelf Non-cumulative, (P)Baa2

....Outlook, Remains Stable

Issuer: MUFG Union Bank, N.A.

..Affirmations:

....Long Term Domestic Deposit Rating, Aa2, Stable

....Long Term Domestic Issuer Rating, A2, Stable

....Long Term Domestic Debt Rating, A2, Stable

.... Short Term Domestic Deposit Rating, P-1

.... Commercial Paper, P-1

....Long Term Domestic Bank Note Program, (P)A2

....Subordinate Domestic Bank Note Program, (P)A3

....Short Term Domestic Bank Note Program, (P)P-1

.... Adjusted Baseline Credit Assessment, a2

.... Baseline Credit Assessment, a2

.... Long Term Counterparty Risk Assessmen , A1(cr)

.... Short Term Counterparty Risk Assessment, P-1(cr)

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of the ratings and stable outlook was based on MUAH's balance sheet strengths, particularly its conservative asset risk and good capital position. These strengths offset its key challenges of weak profitability and a higher level of wholesale funding, which is the result of MUAH's reorganization as the US intermediate holding company for its parent, Mitsubishi UFJ Financial Group. As part of this reorganization, MUAH now owns MUFG Securities Americas Inc. (MUSA), its parent's US broker-dealer.

MUAH's long-term and recent asset quality performance has been good with problem loans equal to 1.4% of loans and net charge-offs of 0.37% for the first nine months of 2016. The strength of MUAH's asset quality is its large residential mortgage and home equity portfolios, where the performance benefits from conservative underwriting characterized by high FICOs and low LTVs. MUAH's oil and gas loan portfolio has negatively influenced its asset quality metrics and comprised the bulk of its still low problem loans and net charge-offs. This portfolio equates to just 3% of loans, reserves are high, and commodity prices have improved so it should not negatively affect MUAH's future results.

The inclusion of the broker-dealer weakens MUAH's consolidated liquidity profile and asset risk. Regarding liquidity, MUAH's wholesale funding increased considerably with the addition of MUSA's securities loaned or sold under repurchase agreements. MUSA also contributes a large holding of liquid assets, but this is only a partial mitigant to the rise in wholesale funding. Regarding the asset risk profile of the broker-dealer, MUSA has operational and market risks that are not prevalent in MUAH's banking activities. The broker-dealer does not contribute much to earnings and is highly leveraged. However, its risk appetite is low, which is consistent with the rating agency's view of MUAH risk management.

Despite the US broker-dealer's high leverage, MUAH had sound consolidated tangible common equity as a percentage of risk-weighted assets of 13.4% as of 30 September 2016, which is above the median of US a2 BCA peers and Moody's views it as a credit strength. MUAH increased its capital position in 2016 as a result of its reorganization.

A key credit challenge for MUAH remains its low profitability. This results from its high overhead ratio of as high as 80% in recent periods, a lower proportion of noninterest income, a low net interest margin, and elevated oil and gas credit provisions. MUAH is likely to see improvement in the short-term from lower provisions. Improvements in revenue and expenses will take longer to realize.

MUAH's debt and deposit ratings are the result of its a2 BCA and Moody's advanced Loss Given Failure (LGF) analysis. Relative to its BCA, MUAH's senior bank-level debt, and its deposits, are notched higher than most US regional banks because the rating agency expects a comparatively larger proportion of unsecured long-term debt in MUAH's liability structure, which should lessen losses if MUAH failed. MUAH's volume of debt fell below the levels required by LGF to support this higher notching in 2016 as a result of maturities that were not offset be new issuance because of the uncertainty regarding debt issuance requirements of the Federal Reserve's Total Loss Absorbing Capital (TLAC) rules. Moody's expects this gap to be temporary because the rules were finalized in mid-December and MUAH will need to issue debt to conform.

What Could Change the Rating Up

An increase in MUAH's profitability would drive upward pressure on the standalone BCA. Because higher interest rates alone are not likely to solve this challenge, improvements in non-interest income and a more efficient operating profile are necessary to create upward rating pressure. A reduction of wholesale funding would also be positive.

What Could Change the Rating Down

MUAH is likely to be a platform for its parent company to expand in the US. Downward movement of the standalone BCA could occur if MUAH's growth initiatives led to an increase in its risk profile. A weakening of MUAH's capital position or underwriting discipline would also be negative given that these support the current above-average BCA.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rita Sahu
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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