Fitch Affirms MUFG Americas Holding Corp's LT IDR at 'A' Following Large Regional Bank Review
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), 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.
MUAH reported a solid minimum Tier 1 common ratio under DFAST of 8%, and given no plans to upstream capital to its parent, its capital ratios remained the same under CCAR. This was despite the Federal Reserve Bank's (FRB) severe loan loss assumptions for MUAH, who performed very well through the financial crisis. MUAH has yet to upstream any dividends to its parent since 2008, when it became a wholly owned subsidiary of Bank of Tokyo-Mitsubishi UFJ, Ltd. However, Fitch expects MUAH to upstream to its parent over the medium- and long-term.
Asset quality remains a secondary key rating strength for the company. MUAH reported the lowest level of credit losses during the financial crisis, and its net charge-offs (NCOs) in 2Q'15 were once again the lowest of these 14 banks. Furthermore, its level of problem assets continue to remain well below peer averages. Fitch attributes MUAH's superior credit performance to conservative and consistent underwriting standards.
MUAH's reserves to total loans of just 70 basis points (bps) at June 30, 2015 are roughly half of the peer average. Low reserve levels reflect MUAH's good credit metrics throughout the cycle, in Fitch's view.
Somewhat offsetting the company's capital and asset quality, MUAH's financial performance lags the other large regional banks in profitability, cost of funds, and efficiency. Fitch attributes MUAH's efficiency to adopting a more formal cost control program later than its peers. As MUAH realizes some of the benefits related to its efficiency initiatives, its earnings may improve over the long term, although Fitch expects it will likely still lag peer averages for some time. Fitch also notes that given very high-level capital levels, some financial ratios (namely ROE) are below peer averages
Given strong asset quality performance during the financial crisis, MUAH's earnings were not plagued with the same level of loan loss provisioning as other large regional banks, and the company has reported a relatively consistent level of earnings over the past 10 years, albeit at lower absolute levels than peers.
Despite a relatively modest economic environment, MUAH has experienced solid loan growth recently. Average loan growth over the past 12 months has slowed somewhat from the prior year, but still remains robust in certain asset classes, including C&I, construction, and residential mortgage lending. However, Fitch expects continued solid loan performance, but some deterioration in loan losses from current unsustainably low levels. Further, the C&I loan growth warrants close monitoring given the industrywide competitive environment for C&I lending and how this may lead to credit issues, especially under a higher interest rate environment.
At June 30, 2015, MUAH had \\$7.7 billion of loan commitments to the oil and gas (O&G) sector, with \\$3.7 billion outstanding, or around 5% of total loans. This is somewhat higher than peer averages. Balances of O&G-criticized loans have increased from year-end 2014 to 8% of total O&G outstandings at June 30, 2015. Fitch expects that there may be more rating downgrades with the Fall borrowing base redeterminations, especially after more hedging activity rolls off, providing borrowers with less price protection.
Fitch notes that the company holds \\$2.8 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 20% of the AFS portfolio. Fitch believes credit monitoring within the portfolio is good. As a result of 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 (LTD) ratio stood at 94%, which is above the large regional bank peer average. MUAH's LTD ratio has trended up over the past couple 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. MUAH issued \\$2.2 billion of senior notes in February 2015 in preparation for foreign banking organization FBO rules, including the expectation that MUAH would provide funding to Mitsubishi UFJ Securities (USA), Inc. (MUS) and other entities which may also be rolled into MUAH. Cash balances provide ample coverage of annual interest and operating expenses. Further, MUAH does not face a maturity until 2018.
MUAH is considered an FBO under the Federal Reserve's rules set forth in March 2014. The rules require an intermediate holding company to hold all U.S. bank and nonbank subsidiaries other than U.S. branches or U.S. agencies. Fitch expects that MUS, the parent's U.S. broker dealer, will be moved under the umbrella of MUAH by July 2016.
Fitch expects that compliance with the rule will be comfortably achieved by the Fed's deadline. MUS's \\$32 billion balance sheet primarily consists of securities purchased under agreements to resell. This relatively large repo book is collateralized by U.S. government and federal agency mortgage-backed securities, requiring daily margining. Fitch anticipates a review of this repo book in the context of the consolidated franchise's balance sheet and the leverage ratio under CCAR, which may become a more binding constraint for MUAH.
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.
SUPPORT RATING
MUAH has a Support Rating of '1' reflecting the extremely high probability of support from its parent, Bank of Tokyo-Mitsubishi UFJ, Ltd. Since this support is based on institutional support, there is no Support Floor Rating assigned. 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 peer's. Ratings also may be sensitive to outsized risk taking in order to improve economic returns.
The long-term IDRs and senior debt ratings could be affected if its parent, Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU, rated 'A'/Stable Outlook by Fitch) were to be downgraded by several notches. This is considered a low-likelihood event given the parent's viability rating is 'a' and the support rating floor is 'A-.'
Fitch expects that MUS will become a legal subsidiary of MUAH by July 2016. At that time, the consolidated liquidity profile's use of short-term debt may increase significantly given MUS's use of short-term repos, absent any actions to shrink the size of MUS's repo book. Fitch will consider MUS's use of short-term funding and its impact on the consolidated funding profile of MUAH, although given MUS's business model, Fitch expects short-term funding may remain elevated relative to its peers.
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.
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';
--Subordinated 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';
--Subordinated debt at 'A-';
--Short-term debt at 'F1';
--Long-term deposits at 'A+';
--Short-term deposit at 'F1';
--Support at '1'.
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