Published on 05 Oct 2021.
RAM Ratings has reaffirmed MUFG Bank, Ltd’s (MUFG Bank or the Bank) AAA/Stable/P1 financial institution ratings.
The ratings consider MUFG Bank’s established franchise in Japan, its strong funding and liquidity profile, resilient asset quality indicators and the systemic importance of its parent – Mitsubishi UFJ Financial Group, Inc (MUFG or the Group). MUFG is designated as a global systemically important bank by the Financial Stability Board. We believe both the Group and the Bank will benefit from a high level of government support in times of stress in view of their importance to Japan’s financial system. Given the strong credit linkage between MUFG Bank and the Group, RAM’s analytical viewpoints are underscored by the credit metrics of the Group.
As with other banks, the unprecedented economic crisis poses challenges to asset quality. The magnitude varies across different markets and depends, to a significant degree, on the containment and fiscal measures adopted by governments in response to the pandemic. The Japanese government’s response has been extensive, arresting large-scale deterioration among households and corporates in Japan. We believe the resilient credit quality of MUFG’s domestic book, which constituted 63% of the Group’s total loans as at end-March 2021, will keep the overall credit risk of its loan book manageable.
Operating conditions outside Japan, particularly for MUFG’s operations in Southeast Asia, are likely to remain challenging amid the emergence of new Covid-19 variants and differing levels of progress in national vaccination campaigns. While the Group’s credit cost was modest in 1Q FY Mar 2022, it is not indicative of full-year provisioning requirements. We expect credit cost to come in lower than that seen in FY Mar 2021 following the resumption of economic activities in most markets, albeit staying elevated as economic recovery will be uneven and fragile. MUFG’s credit cost ratio will remain sticky at around 0.3%-0.4% in the near term. As at end-March 2021, MUFG’s GIL and credit cost ratios have risen to 1.25% and 0.46%, respectively (end-March 2020: 1.0% and 0.20%).
Pre-provisioning profit for FY Mar 2021 improved by 13.4% to JPY1.38 tril despite pandemic-induced challenges. The better performance was aided by strong trading gains and tighter operating costs. Consequently, pre-tax profit for the year advanced 25.6% y-o-y to JPY1.04 tril notwithstanding higher credit costs. MUFG’s FY Mar 2020 results had been impacted by a large one-off impairment charge on goodwill incurred for foreign subsidiaries. The Group’s pre-tax profit for 1Q FY Mar 2022 jumped 88.3% y-o-y to JPY496.8 bil, thanks to reduced credit costs.
Funding and liquidity are key strengths of the Group. It benefits from a sturdy base of retail deposits in Japan, with individual deposits making up about 40% of total deposits as at end-June 2021. MUFG’s liquidity coverage ratio and net stable funding ratio were above the respective regulatory minimums as at the same date.
MUFG’s common equity tier-1 (CET-1) capital ratio improved to 13.2% as at end-June 2021 (end-March 2021: 12.3%) owing to profit accretion and lower floor adjustments. Excluding unrealised net gains on available-for-sale securities, the ratio would ease to 10.6%. The Group’s capital ratios are lower than those observed for other global banks but adequate in our view as its risk appetite is controlled. Depending on the eventual size of the one-off expenditure for the recently announced disposal of MUFG Union Bank in the US, the Group’s CET-1 capital ratio could gain up to 45bps from the exercise. The surprise sale will see the exit of MUFG from the retail and commercial space in the US. Going forward, its retail and commercial strategy outside Japan will be driven solely by Bank Danamon and Bank of Ayudhya.
Chan Yin Huei
(603) 3385 2498
Tan Shu Xuan
(603) 3385 2497
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad
Ratings on MUFG Bank, Ltd