October 3, 2017 / 8:55 PM / a year ago

Fitch Affirms MUFG Americas Holding Corporation IDRs at 'A/F1'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has affirmed MUFG Americas Holding Corporation's (MUAH) ratings at 'A/F1.' A full list of rating actions is at the end of this release. 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), and Wells Fargo & Company (WFC). 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 ratings affirmation reflects MUAH's strong capital profile and solid asset quality metrics. Capital is a primary rating strength for MUAH. Fitch core capital and Common Equity Tier 1 both rank remain the highest 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. While MUAH's reserves-to-total loans is the lowest of the peer group, this reflects its low loan losses and good credit metrics throughout the cycle. MUAH is a foreign-owned banking organization, but its ratings reflect the standalone strength of the company and are not driven by support from its ultimate parent, Mitsubishi UFJ Financial Group (MUFG). In June 2016, MUFG designated MUAH as the intermediate holding company (IHC), and on July 2017, MUFG Securities Americas Inc. (MUSA) was transferred to the IHC. The IHC does not include the NY-based branches of MUFG's Japanese banking subsidiaries. MUSA is MUAH's broker-dealer subsidiary, and accounted for approximately 20% of consolidated assets and 8% of consolidated earnings during the first six months of 2017. This is a relatively larger broker-dealer than other large regional peer banks, in terms of earnings and assets. The addition of these assets impacts the Tier 1 leverage ratio, though its remains above the peer median at June 30, 2017. The inclusion of the broker-dealer also impacts the consolidated funding profile with a much higher proportion of short-term repos than peer banks. 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. Following the finalization of new TLAC rules for G-SIBs with foreign operations in the U.S., MUAH will now be required to maintain a minimum amount of TLAC-eligible debt issued internally to its parent or other wholly-owned subsidiaries of the parent, with required compliance beginning Jan. 1, 2019. MUAH expects to restructure existing debt issued to BTMU and replace a portion of externally-placed debt with the issuance of internal TLAC-eligible debt to BTMU or MUFG. This may ultimately impact funding costs as MUAH issues higher cost long-term debt to its parent, as opposed to relying on lower cost deposit funding and externally raised term funding. Despite these expected changes to the funding and earning profiles, 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, primarily due to a lower net interest margin. MUAH also reports the highest efficiency ratio. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured long-term deposit ratings of MUFG Union Bank, N.A. are rated one notch higher than the bank'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 VR is equalized with those of its operating companies and banks, 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 AND SUPPORT RATING FLOOR 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. 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. Greater than peer asset quality deterioration could also be a negative ratings driver. Ratings also may be sensitive to any outsized risk-taking in order to improve economic returns, though Fitch believes this is unlikely given the company's risk profile. Ratings may also be sensitive to an outsized reliance on capital markets revenues. For the first six months of 2017, MUSA's revenues accounted for 9% of consolidated revenues, which is higher than peers. MUAH's ratings would likely be constrained if these more volatile revenues were closer to 25% to 30% of revenues. However, since Fitch views an upgrade as a low likelihood, this is not expected to constrain the ratings. To extent the broker-dealer became an even greater proportion of revenues, ratings could be negatively impacted. 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. Any acquisition may be tempered by current valuations, particularly since it would be an all-cash 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. Since the parent's Rating Outlook is currently Stable, this is viewed as a low likelihood. 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 Though not expected nor viewed as likely, should MUAH's holding company begin to exhibit signs of weakness, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating companies. 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 AND SUPPORT RATING FLOOR 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. 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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