Fitch Affirms MUFG Americas Holding Corporation IDRs at 'A/F1'; Outlook Stable
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).
Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS
IDRS, VRs AND SENIOR DEBT
The affirmation reflects MUAH's strong capital profile and solid asset quality metrics. Capital is a primary rating strength for MUAH. Tangible common equity, Fitch core capital and regulatory capital levels all rank at the top of the large regional peer group. MUAH maintains strong capital primarily from retained earnings growth, capital contributions from the parent in the past, as well as the absence of any dividend payments to the parent.
Asset quality remains a secondary key rating strength for the company. MUAH reported the lowest level of credit losses during the financial crisis, despite being heavily exposed to residential real estate lending in California. Fitch attributes MUAH's superior credit performance to conservative and consistent underwriting standards. NCOs and problem assets remain below peer median. Fitch notes that MUAH's reserves-to-total loans is the lowest of the peer group, though higher than a year ago, and reflects MUAH's good credit metrics throughout the cycle.
On July 1, 2016, Mitsubishi UFJ Financial Group, Inc. (MUFG) designated MUAH as its IHC in accordance with foreign bank rules, and transferred substantially all of its U. S. subsidiaries to the IHC, including the broker-dealer MUFG Securities Americas Inc. (formerly Mitsubishi UFJ Securities (USA), Inc.). The U. S. IHC now includes most of MUFG's legal entities under one umbrella in the U. S., which consists primarily of the broker-dealer and MUFG Union Bank, N. A., the primary operating bank in the U. S. The IHC does not include the NY-based branches of MUFG's Japanese banking subsidiaries.
The transferred subsidiaries had approximately $31 billion in assets and $30 billion of liabilities at June 30, 2016, consisting substantially of securities sold under agreement to repurchase (repos). Revenues transferred were approximately $237 million for first half 2016 (1H16), or roughly 10% of pro forma consolidated revenues. While MUAH does not expect capital ratios to change significantly, the addition of the broker-dealers assets decreases Tier 1 leverage ratio by approximately 2% to an estimated 9.6% on a pro forma basis, still considered acceptable, and only modestly below the peer median of 10.2% of June 30, 2016.
MUAH received no objection to its capital plan under CCAR this year. While MUFG Americas Securities Americas Inc. had not been transferred at the time of this year's annual stress tests, MUAH was to include in its capital plan an assessment of how the transfers of subsidiary assets and liabilities would impact the company's capital adequacy over the planning horizon, as the IHC formation occurs within the nine-quarter period. MUAH's minimum Tier 1 leverage ratio under the severely adverse scenario this year was 7%, only 10bps below the level the year before and still well above the 4% minimum. Similar to years past, MUAH did not propose or request any capital distributions or dividend payments.
Fitch notes that the inclusion of the broker-dealer does impact the consolidated funding profile with a much higher proportion of short-term repos than peer banks. Fitch notes that the reliance on short-term wholesale funding reliance is projected to be an estimated 23% of total funding. However, the associated credit risk appears manageable since the relatively large repo book is collateralized by U. S. government and federal agency mortgage-backed securities, which require daily margining.
It is also still unclear whether MUAH will need to issue TLAC debt to the parent, which may impact funding costs as MUAH issues higher cost long-term debt to its parent, as opposed to relying on lower cost deposit funding. Despite these changes to the funding profile, MUAH's ratings are not affected, primarily supported by strong capital profile and asset quality performance.
Somewhat offsetting the company's capital and asset quality, MUAH's profitability lags the other large regional banks, notwithstanding much improved earnings in 2Q16 which included a loan loss reserve reversal and much higher fees from affiliates. MUAH reported a reversal of provision for credit losses reflecting stabilization in the company's oil & gas exposure, and improving credit quality elsewhere.
At June 30, 2016, MUAH had $5.8 billion of loan commitments to the oil and gas (O&G) sector, with $2.8bn outstanding, or around 4% of total loans, as compared to less than 2% for the peers. Balances of O&G-criticized loans were the highest of the peer group at 55% at June 30, 2016, though reserve coverage at 10.2% of loans was also the highest in the group. E&P criticized balances did improve in 2Q16, and oil prices have shown some improvement over the past twelve months. Fitch does not anticipate that energy-related losses will impair MUAH's capital profile, but may pressure earnings over the near-term if prices deteriorate again.
Fitch notes that the company also holds $3.2 billion of its securities in collateralized loan obligations (CLOs), although the ratings split is not publicly disclosed. This is the largest relative balance of its peer group at approximately 25% of the AFS portfolio. Fitch believes credit monitoring within the portfolio is good. Due to the issuance of the Volcker Rule, many legacy CLOs are no longer permissible investments and must mature, be restructured or be disposed of by July 21, 2017.
MUAH benefits from a solid deposit-gathering network, which is principally located in the western U. S. The company's loan-to-deposit ratio stood at 96%, which is above the large regional bank peer median. MUAH's LTD ratio has trended up over the past couple of years given strong loan growth, which has outpaced deposits. Fitch also notes that the cost of deposits is significantly higher than its peers, which impacts profitability.
Holding company liquidity is considered good. Its long-term debt at June 30, 2015 totaled $2.9 billion, with maturities ranging from 2018-2036. Cash balances provide ample coverage of annual interest expenses, and MUAH does not face a maturity until 2018.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
MUAH's subordinated debt is notched one level below its VR of 'a' for loss severity. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.
LONG - AND SHORT-TERM DEPOSIT RATINGS
The uninsured deposit ratings of MUFG Union Bank, N. A. are rated one notch higher than MUAH's IDR and senior unsecured debt because U. S. uninsured deposits benefit from depositor preference. U. S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
HOLDING COMPANY
MUAH's IDR and VR are equalized with those of its bank, reflecting its role as the bank holding company, which is mandated in the U. S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.
SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of MUFG Securities Americas Inc. (MUS (USA)) are equalized with MUAH's IDR reflecting Fitch's view that it is core to the parent's overall strategy. MUS (USA) provides MUFG's U. S. and international customers access to U. S. capital markets through debt and equity capital raising, and market making.
MUFG desires to continue to grow internationally, including in the U. S., to both diversify and improve revenues for the entire group. To that end, Fitch believes there is a significant level of management and operational integration between MUS (USA), MUFG and other core subsidiaries. Because MUS (USA) is able to serve MUFG Union Bank, N. A. in the U. S. and BTMU in Japan, MUS USA is integral to both domestic and overseas business strategies.
In addition to MUS (USA)'s strategic fit within the broader group, Fitch also notes that MUFG has demonstrated support of MUS (USA) through capital injections and liquidity facilities. Fitch expects that MUFG would continue to provide capital and liquidity support to MUS USA should the need arise.
SUPPORT RATING
MUAH has a Support Rating of '1' reflecting the extremely high probability of support from its parent, Mitsubishi UFJ Financial Group, Inc. (MUFG), rated 'A/F1.' Since this support is based on institutional support, there is no Support Floor Rating assigned.
MUFG's Rating Outlook was revised to Negative on June 16, 2016, following the affirmation of Japan's sovereign rating at 'A' and revision of the Outlook to Negative from Stable.
MUAH's IDR is based on its stand-alone strength, and does not incorporate ratings uplift from its parent.
RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
MUAH's ratings are solidly situated at current levels. Fitch does not envision any near-term upside to the ratings as the level of earnings significantly lags similarly rated peers.
Should capital levels be managed to materially lower levels, the ratings could be downgraded. Asset quality deterioration could also be a negative ratings driver, particularly if its relative experience in energy-related credits is worse than peers. Ratings also may be sensitive to any outsized risk-taking in order to improve economic returns.
Fitch views MUAH as one of the few large regional banks that is both in the position to, and has an interest in, bank M&A. Further, MUAH's parent has expressed a desire to continue to grow internationally, including in the U. S., to both diversify and improve revenues for the entire group. Fitch would evaluate any transaction on its individual merits. As such, rating implications are dependent on the financial implication, strategic rationale, and execution risks inherent in any transaction.
Ratings could be affected if its parent were to be downgraded by several notches. An assessment of MUAH's franchise and ratings would occur given potential contagion risks in the case of weaknesses in the parent's credit profile.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for MUAH and its operating companies' subordinated debt are sensitive to any change to MUAH's VR.
LONG - AND SHORT-TERM DEPOSIT RATINGS
The long - and short-term deposit ratings are sensitive to any change to MUAH's long - and short-term IDR.
HOLDING COMPANY
Should MUAH's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the bank.
RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY
As the IDRs of MUFG Americas Securities Inc. (MUS USA) are equalized with those of MUAH, MUS (USA)'s ratings would be driven by changes in MUAH's ability or propensity to support MUS (USA) including due to changes in ownership or Fitch's view of MUS (USA)'s importance to the group.
SUPPORT RATING
MUAH's Support Rating is sensitive to Fitch's view of its importance to the parent company and to the parent company's ability and propensity to provide support.
Full list of rating actions:
Fitch has affirmed the following ratings:
MUFG Americas Holding Corporation
--Long-Term Issuer Default Rating (IDR) at 'A'; Outlook Stable;
--Short-Term IDR at 'F1';
--Viability at 'a';
--Senior debt at 'A';
--Support at '1'.
MUFG Union Bank, National Association
--Long-Term IDR at 'A'; Outlook Stable;
--Short-Term IDR at 'F1';
--Viability at 'a';
--Senior debt at 'A';
--Short-term debt at 'F1';
--Long-term deposits at 'A+';
--Short-term deposit at 'F1';
--Support at '1'.
MUFG Securities Americas Inc.
--Long-Term IDR at 'A'; Outlook Stable;
--Short-Term IDR at 'F1'.
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