Published on 11 Oct 2019.
RAM Ratings has reaffirmed the AAA/Stable/P1 financial institution ratings of MUFG Bank, Ltd (MUFG Bank or the Bank). The ratings are supported by MUFG Bank’s established domestic franchise, strong funding and liquidity profile, solid loan quality and the systemic importance of Mitsubishi UFJ Financial Group, Inc (MUFG or the Group). MUFG has been identified as a global systemically important bank by the Financial Stability Board.
The completion of the Group’s acquisition of Indonesia-based Bank Danamon underscores its continued pursuit of a more lucrative retail and commercial banking strategy in the Southeast Asian region. While this approach could introduce some asset quality challenges, especially during economic downturns, it is unlikely to dent MUFG’s credit metrics in any significant manner. The Group’s overall credit performance will stay underpinned by the prudent risk management and the stability of its core market in Japan. MUFG’s gross impaired loan ratio stood at a low 0.9% as at end-June 2019 (end-March 2018: 1.2%). Further, we do not expect its credit cost ratio to materially exceed the historical average of between 0.2% and 0.3%. The Group continued to enjoy write-backs of impairment charges in 1Q FY Mar 2020 (credit costs amounted to JPY5.8 bil in FY Mar 2019).
The profit prospects of Japanese banks remain dim. Fierce competition and ultra-low lending rates will continue to suppress MUFG’s net interest margin – we envisage little improvement in the foreseeable future in view of the Bank of Japan’s extremely accommodative monetary policy. MUFG suffered a rare profit underperformance in FY Mar 2019 when a sizeable impairment loss arising from a failed system integration exercise at its credit card subsidiary, caused the Group to veer off its profit target. As a result, the Group pencilled in a JPY148.5 bil impairment loss, which contributed to a weaker pre-tax profit of JPY1.1 tril in FY Mar 2019 (-19% y-o-y). Its return on risk-weighted assets (RORWA) slipped below 1%. RORWA was subsequently lifted to 1.6% in 1Q FY Mar 2020, albeit somewhat unsustainable, given that the better performance was attributable to higher trading income.
Funding and liquidity is a key strength of Japanese mega banks such as MUFG. The Group has a strong base of retail deposits in Japan, with individual deposits constituting about 43% of total deposits as at end-June 2019. A sizeable pool of liquid assets enables it to comfortably meet the required liquidity coverage ratio. On the flip side, MUFG’s sizeable equity cross-shareholdings and investments in Japanese bonds render its earnings and capitalisation more volatile. As at end-June 2019, the Group’s fully loaded common-equity tier-1 capital ratio, which accounts for unrealised gains on securities, came up to 12.6%. Excluding these gains, the ratio would ease to 10.3%.
Chan Yin Huei
(603) 3385 2498
(603) 3385 2577
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Ratings on MUFG Bank, Ltd