Fitch Publishes MUFG Rtg; Rates Asia's 1st TLAC Eligible Notes
The senior bonds will constitute direct, unconditional, unsecured and unsubordinated general obligations of MUFG and rank pari passu without any preference among themselves and with all of its other unsecured indebtedness, other than subordinated indebtedness and except for statutorily preferred indebtedness. The notes will be structurally subordinated to the liabilities of MUFG's subsidiaries, including Bank of Tokyo-Mitsubishi UFJ (BTMU) and Mitsubishi UFJ Trust & Banking Corporation (MUTB).
The proceeds will be down-streamed in full to the operating subsidiaries as obligations which rank pari passu with other senior unsecured obligations of the operating subsidiaries. The final rating is contingent upon receipt of final documents conforming to information already received.
Established in 2005, MUFG is engaged in a wide range of businesses including commercial and trust banking, brokerage, credit card, consumer finance, asset management, and lease operations. It also has an extensive domestic and global operations network.
KEY RATING DRIVERS
IDRs AND VIABILITY RATING
The Viability Rating (VR) underpins MUFG's IDR and reflects the banking group's strong domestic franchises, solid liquidity profiles in yen, sound asset quality and solid capital, which Fitch expects will be sustained through various capital management initiatives. Recent improvements in capital counter MUFG's rising appetite for risk outside Japan, although modest earnings and market risks still expose the group to volatility.
The ratings of MUFG and its operating banks - BTMU (A/Stable) and MUTB (A/Stable) are equalised due to MUFG's role as the bank's holding company, functional interconnectedness, the regulator's group-level focus, and the expectation that double leverage at MUFG will be maintained below 120%.
SUPPORT RATING AND SUPPORT RATING FLOOR
MUFG's Support Rating (SR) and Support Rating Floor (SRF) of '1' and 'A-' respectively reflect Fitch's view that Japan's Deposit Insurance Law (DIL) reinforces prospects for support for systemically important financial institutions (SIFI), despite a global trend towards reducing the extent of sovereign support for banks. As a global SIFI, MUFG would also likely be regarded by Japan's authorities as a domestic SIFI (although no entities have been formally designated as yet), and would be extremely likely to receive government support if required. Rather than resolving failing SIFIs through a court process or Specified Measure 2 (SM2) set forth in Article 126-2 of the DIL (in which case an entity would already be insolvent), Fitch believes that Japan's authorities would defer to Specified Measure 1 of the DIL in providing support - either in the form of liquidity, guarantees or capital injections.
SENIOR (TLAC) DEBT
The senior unsecured notes issued by MUFG are intended to qualify as TLAC debt, as they will be subordinated to certain operational "excluded liabilities" (which in any case currently do not exist at MUFG) and structurally subordinated to the operating subsidiary banks' debt.
A resolution plan stipulating the resolution process in Japan has not yet been made public by the Financial Services Agency, but Fitch views it as highly likely that Japan would adopt a Single Point of Entry approach, with MUFG being the groups' resolution entity. Fitch believes Japan's DIL provides the legislative framework to enable the resolution authority to bail-in senior debt (convert to equity or write-off the notes) and SM2 of the DIL to be the mechanism by which an "orderly resolution" can be achieved.
Fitch's understanding is that losses to holders of these notes would only occur in the event that resolution by way of a court process (that is, winding up) was determined by the resolution authority under SM2, in which case MUFG would be insolvent (that is, net capital deficiency). In Fitch's view, it is difficult to assess today whether any losses incurred by noteholders at that point would be significantly different from other general senior debt (if issued).
The potential for a VR upgrade is limited for MUFG in light of the rating's proximity to the Japanese sovereign's IDRs (A/Stable). For the same reasons, MUFG's VR could be downgraded if the sovereign was to also be downgraded.
Negative rating action on the banking group's VR is currently not envisaged due to its stable asset quality and adequate capital buffers. However, the VR may be negatively affected if sudden and unexpected deterioration in the operating environment occurred - such as uncertainty/failure of Abenomics - materially and adversely impacts the group's financial profile. Downward pressure may also result from an unexpected material increase in risk appetite (without a corresponding increase in risk buffers) or an increase in exposure to equities, leading to potentially higher volatility in earnings and/or capital. Negative rating action on MUFG's VR could also stem from double leverage (119% at September 2015) being sustained beyond 120%, although Fitch expects it to be managed down over time. A material acquisition - although not expected - could also lead to a change in the group's ratings.
IDRs, SRs AND SRFs
A downgrade of the ratings could be triggered by a downgrade of the sovereign ratings. A downgrade of the VR would trigger a downgrade of the IDRs, although it would likely be limited to one notch given the current SRF of 'A-'. The potential for upgrade is limited in light of the rating's proximity to the Japanese sovereign's IDRs.
Further downgrade of the sovereign's IDRs to below 'A' would lead to a review of the SRs and SRFs of all banks.
SENIOR (TLAC) DEBT
The rating of the senior unsecured notes issued by MUFG would be directly affected by a change in MUFG's IDRs which could stem from either a downgrade of the sovereign rating or of MUFG's VR. However, in the case of the latter, the rating of the senior unsecured notes would also be then underpinned by its 'A-' SRF.
Negative action could stem from an unexpected change in the regulatory framework which clearly and materially increases the loss severity of the notes relative to other senior unsecured debt.