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Rating Action:

Moody's affirms MUFG Americas Holdings Corporation (senior unsecured A2); changes outlook to negative

04 Dec 2019

New York, December 04, 2019 -- Moody's Investors Service ("Moody's") has affirmed the ratings and assessments of MUFG Americas Holdings Corporation (MUAH) and its bank subsidiary, MUFG Union Bank, N.A. At the same time, Moody's changed the rating outlook on both entities to negative from stable. MUAH has a senior unsecured debt rating of A2. The bank is rated Aa2/Prime-1 for long- and short-term deposits and A2 for senior unsecured debt. The bank has counterparty risk ratings (CRR) of A1/Prime-1 and counterparty risk assessments of Aa3(cr)/Prime-1(cr). The bank's baseline credit assessment of a2 and adjusted BCA of a1 were also affirmed.

MUAH is a wholly-owned subsidiary and the US intermediate holding company (IHC) of Mitsubishi UFJ Financial Group, Inc. (MUFG, senior unsecured A1).

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The affirmation of the a2 BCA reflects Moody's unchanged assessment of MUAH's standalone credit assessment, supported by strong asset quality and capitalization, though MUAH remains challenged by its profitability that is well below US peers and a higher amount of confidence-sensitive wholesale funding, resulting in high refinancing risk. The foundation of Moody's assessment of its low asset risk is the company's conservative credit risk management and absence of material concentration risks, which has resulted in good asset quality metrics. Approximately 45% of its loan portfolio consisted of residential mortgage and home equity loans as of 30 September 2019, which had a minimal loss history, even during the stressed 2008-09 period, because of the conservative underwriting standards. Commercial & industrial loans and commercial real estate loans account for the majority of the remainder of the loan portfolio. The company's loans, in particular its residential and commercial real estate mortgages, are concentrated in California. However, this geographic risk concentration is mitigated by the size and diversity of the Californian economy and MUAH's focus on the metropolitan and coastal areas of California, which tend to perform better than the state and the US. Because of the low risk profile of its loan portfolio, MUAH's loan yield has been below peers and a driver of its low profitability.

Since becoming the IHC of its parent organization in 2016, MUAH has been the holding company of US broker-dealer, MUFG Securities Americas Inc. (MUSA), which accounted for 20% of its assets as of 30 September 2019. Moody's views MUSA's risk appetite as low, and the operational and market risks that its activities involve are incorporated in the asset risk assessment of MUAH.

Capitalization has been a long-standing strength of the company, which the rating agency attributes to the private ownership and modest shareholder distributions. As of 30 June 2019, MUAH's tangible common equity to risk-weighted asset ratio was 13.2%, which is higher than most publicly-traded large US bank peers and US bank peers with an a2 BCA.

Regarding funding and liquidity, MUAH carries a larger amount of confidence-sensitive wholesale funding with associated refinancing risks, relative to most large US bank peers because of its ownership of MUSA, which holds a large balance of securities loaned or sold under repurchase agreements, and its total loss absorbing capital (TLAC) requirements as the IHC of a global systemically important bank. The refinancing risk from the large usage of wholesale funding risk is partially mitigated by its large holding of liquid assets, which includes MUSA's securities borrowed or purchased under resale agreements and large cash and investment balances.

The company's key credit challenge remains its below-peer average profitability, which was the driver of the outlook change to negative. MUAH's net income was 0.3% of tangible banking assets for the first half of 2019 compared to the 1.3% median for a2 BCA US peers. MUAH's low profitability is the product of a low net interest margin, which was 2.03%, an elevated cost/income ratio of 82.6%, and limited noninterest income. MUAH is executing a multi-year program to improve its operational efficiency, optimize its balance sheet, and enhance its revenue generation. At the same time, it is also investing in technology and digitalization. This program is the latest in a series of strategic initiatives, including business and organizational changes, that the company has undertaken over the last few years which have pressured its profitability. Additionally, MUAH's reported profitability is clouded by the services it provides to MUFG's other US operations under a master services agreement. Moody's expects that the strategic initiatives underway will result in continued elevated expenses before they yield profitability improvement and that higher profitability levels that are supportive of the current rating will be a longer-term endeavor. The company incurred a net loss for the third quarter of 2019 because of a $1.6 billion goodwill impairment, which had no implications for Moody's assessment because it is a non-cash charge and does not affect tangible common equity.

The adjusted BCA and consequently, the long-term debt and deposit ratings of MUAH include a one-notch rating uplift from its 100% ownership by MUFG, primarily through its lead bank MUFG Bank, Ltd. (BCA a3). Moody's continues to assess a very high probability of affiliate support to MUAH from MUFG, because it is a strategic and material subsidiary of MUFG. Over its years of ownership, MUFG has repeatedly demonstrated support for MUAH. MUAH accounted for 6% of MUFG's assets, as of 30 June 2019, and is the IHC for MUFG's US operations. MUAH is also included in MUFG's resolution strategy.

Moody's believes that MUAH's exposure to environmental risks is low, consistent with its general assessment for the global banking sector. The bank's exposure to social risks is moderate, consistent with Moody's general assessment for the global banking sector. As well, governance risks are largely internal rather than externally driven. Moody's does not have any particular governance concerns for MUAH at this point.

Factors that Could Lead to an Upgrade

An increase in MUAH's profitability would drive upward pressure on the standalone BCA if resulting from sustainable, improved operational efficiency and revenue growth, without weakening the company's risk profile. A reduction in the share of wholesale funding would also be positive for MUAH's credit profile and its ratings.

Factors that Could Lead to a Downgrade

Downward movement of the standalone BCA could occur if MUAH is not able to achieve traction in its profitability enhancements in the next 12 to 18 months. Initiatives with potential to increase its asset risk could also weaken ratings. Signals of this would be a large acquisition, above peer average organic growth, and/or increased leverage. A weakening of MUAH's underwriting discipline would also be negative for the bank's credit profile, given that this is a key support to the current above-peer average BCA. If the standalone BCA were to move down by one notch, the adjusted BCA and long-term debt and deposit ratings would also decline by one notch.

Upward or downward changes in the adjusted BCA could result from changes in our assumption of affiliate support or a change in the credit profiles of MUFG or MUFG Bank, Ltd.

The principal methodology used in these ratings was Banks Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Outlook Actions:

..Issuer: MUFG Americas Holdings Corporation

....Outlook, Changed To Negative From Stable

..Issuer: MUFG Union Bank, N.A.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: MUFG Americas Holdings Corporation

.... Issuer Rating, Affirmed A2; outlook revised to negative from stable

....Senior Unsecured Regular Bond/Debenture, Affirmed A2; outlook revised to negative from stable

..Issuer: MUFG Union Bank, N.A.

.... Adjusted Baseline Credit Assessment, Affirmed a1

.... Baseline Credit Assessment, Affirmed a2

.... Long Term Counterparty Risk Assessment, Affirmed Aa3(cr)

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

.... Long Term Counterparty Risk Rating, Affirmed A1

.... Short Term Counterparty Risk Rating, Affirmed P-1

.... Issuer Rating, Affirmed A2; outlook revised to negative from stable

.... Long Term Deposit Rating, Affirmed Aa2; outlook revised to negative from stable

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

....Senior Unsecured Bank Note Program, Affirmed (P)A2

....Subordinate Bank Note Program, Affirmed (P)A2

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

....Commercial Paper, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A2; outlook revised to negative from stable

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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