New York, October 15, 2020 -- Moody's Investors Service, ("Moody's") has
downgraded the long-term ratings and assessments of MUFG Americas
Holdings Corporation (MUAH) and its bank subsidiary, MUFG Union
Bank, N.A. MUAH's senior unsecured debt rating
was downgraded to A3 from A2. For MUFG Union Bank, N.A.,
long-term deposits were downgraded to Aa3 from Aa2 and senior unsecured
debt to A3 from A2. The short-term deposit rating of Prime-1
was affirmed. The bank's standalone baseline credit assessment
(BCA) was downgraded to a3 from a2 and the adjusted BCA to a2 from a1.
The rating outlook is stable.
MUAH is a wholly-owned subsidiary and the US intermediate holding
company (IHC) of Mitsubishi UFJ Financial Group, Inc. (MUFG,
senior unsecured A1). The adjusted BCA incorporates one notch of
affiliate support.
'The ratings downgrade was the result of the company's weaker
earnings profile relative to rated US bank peers, which has become
more challenging to address with the weakened economic environment brought
on by the coronavirus' said Rita Sahu, Vice President -
Senior Credit Officer.
Moody's regards the coronavirus outbreak as a social risk under its environmental,
social and governance (ESG) framework, given the substantial implications
for public health and safety.
Downgrades:
..Issuer: MUFG Americas Holdings Corporation
....LT Issuer Rating, Downgraded to
A3 from A2, Stable from Negative
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2, Stable from Negative
..Issuer: MUFG Union Bank, N.A.
....Adjusted Baseline Credit Assessment,
Downgraded to a2 from a1
....Baseline Credit Assessment, Downgraded
to a3 from a2
....LT Counterparty Risk Assessment,
Downgraded to A1(cr) from Aa3(cr)
....LT Counterparty Risk Rating (Local Currency),
Downgraded to A2 from A1
....LT Counterparty Risk Rating (Foreign Currency),
Downgraded to A2 from A1
....LT Issuer Rating, Downgraded to
A3 from A2, Stable from Negative
....Senior Unsecured Bank Note Program,
Downgraded to (P)A3 from (P)A2
....Subordinate Bank Note Program, Downgraded
to (P)A3 from (P)A2
....ST Bank Note Program, Downgraded
to (P)P-2 from (P)P-1
....Commercial Paper, Downgraded to
P-2 from P-1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2, Stable from Negative
....LT Bank Deposits, Downgraded to
Aa3 from Aa2, Stable from Negative
Affirmations:
..Issuer: MUFG Union Bank, N.A.
....ST Counterparty Risk Assessment,
Affirmed P-1(cr)
....ST Counterparty Risk Rating (Local Currency),
Affirmed P-1
....ST Counterparty Risk Rating (Foreign Currency),
Affirmed P-1
....ST Bank Deposits, Affirmed P-1
Outlook Actions:
..Issuer: MUFG Americas Holdings Corporation
....Outlook, Changed To Stable From
Negative
..Issuer: MUFG Union Bank, N.A.
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
The downgrade of the BCA to a3 from a2 reflects the strategic challenges
of the firm to improve its profitability and enhance its banking franchise,
at a time when the operating environment is considerably weaker because
of the spread of the coronavirus pandemic. MUAH is in the middle
of executing a multi-year strategic plan to simplify its operating
model, focus on target client segments, and improve operational
efficiency. This includes a transformation of its operational and
technology strategy. As a result of its strategic challenges,
MUAH's profitability has been well below similarly-rated
US bank peers for several years and Moody's expects this gap to
persist over the long term. The a3 BCA is now positioned at the
median of rated US bank peers.
MUAH's net income as a percentage of tangible banking assets was
0.78% (adjusted to exclude a goodwill impairment) in 2019
and a net loss of -0.45% for the first half of 2020,
which are both well below the median of US peers with BCAs of a2 and a3.
The median net income/tangible banking assets for US peers with an a3
BCA was 1.22% in 2019 and 0.46% for the first
half of 2020. MUAH's preprovision profitability has also
been weaker, primarily because of a high cost-income ratio.
MUAH's poor operational efficiency reflects the costs of implementing
its strategic initiatives, which have been ongoing for several years,
along with an inflated cost structure and below-average net interest
margin. Moody's expects that MUAH will realize improvements
to its franchise and profitability, but these are likely to be longer-term
results, which will leave a performance gap with similarly-rated
US peers for at least the next two to three years. Additionally,
its progress is threatened by the uncertain shape and pace of the economic
recovery.
MUAH's key credit strengths are its asset risk and capitalization.
Through economic cycles, MUAH has maintained a consistent and conservative
risk culture and avoided problematic concentrations, which has resulted
in good asset quality metrics. Approximately 39% of its
loan portfolio consisted of residential mortgage and home equity loans
as of 30 June 2020, which had a minimal loss history, even
during the last recession, 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.
MUAH has moderately increased its risk appetite as a means to improve
its returns. Moody's still expects that MUAH will outperform
most similarly-rated peers on credit costs, but this will
not be enough to offset the weakness in preprovision profitability.
Capitalization has been a long-standing key credit strength of
the company, which the rating agency attributes to the private ownership
and modest shareholder distributions. As of 30 June 2020,
MUAH's tangible common equity to risk-weighted asset ratio was
13.6%, which is higher than most publicly traded large
US bank peers and US bank peers with an a3 BCA.
Regarding funding and liquidity, MUAH carries a larger amount of
confidence-sensitive wholesale funding with associated refinancing
risk, relative to most large US bank peers because of its ownership
of MUFG Securities Americas (MUSA), a broker-dealer which
holds a large balance of securities loaned or sold under repurchase agreements.
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. As of 30 June 2020,
MUAH's ratio of market funds/tangible banking assets was 27%,
a decline from 33% at year-end 2019. This decline
reflects strong deposit growth and a smaller balance sheet at MUSA.
MUAH is also subject to the total loss absorbing capital (TLAC) requirements
for IHCs of global systemically important banks. To comply,
it holds senior unsecured debt due to MUFG Bank, Ltd. equal
to about 4% of its tangible banking assets, which the rating
agency does not consider confidence sensitive.
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 (senior unsecured A1), 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 5% of MUFG's assets
as of 30 June 2020, and is the IHC for MUFG's US operations.
MUAH is also included in MUFG's resolution plan.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action reflects the impact of the breadth and
severity of the shock, and the deterioration in credit quality it
has triggered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An increase in MUAH's preprovision profitability on a sustainable
basis could lead to a higher standalone BCA if resulting from 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 BCA and its ratings.
A higher BCA would lead to a ratings upgrade assuming no changes to the
parent credit profile and Moody's assumption of affiliate support.
Strategic initiatives with potential to increase MUAH's asset risk
could weaken the BCA and the ratings. Examples 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. If the standalone
BCA were to be lowered 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, and in turn the
ratings, could result from changes in Moody's 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 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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
