Fitch Affirms MUFG Americas Holdings Corp's L-T IDR at 'A' Following Large Regional Bank Review

NEW YORK--()--Fitch Ratings has affirmed MUFG Americas Holdings Corporation (MUAH) ratings at 'A/F1'. The Rating Outlook remains Stable. The affirmation reflects strong capital levels and solid asset quality metrics through the cycle.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUAH), PNC Financial Services Group, Inc. (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

Fitch has affirmed MUAH's IDR at 'A' reflecting the company's solid capitalization and asset quality. These strengths are balanced against MUAH's weaker earnings and higher deposit costs compared to peer. Fitch also notes elevated growth levels in commercial and shared national credit (SNC) portfolios, which is viewed cautiously given the competitive dynamics and potentially weaker underwriting standards seen in the space.

Capital remains the primary ratings strength for the institution. MUAH's TCE ratio remains the highest amongst the large regional peer group. The tangible common equity (TCE) ratio for the company improved to 10.8% up from 9.1% the prior year. Fitch expects MUAH to retain elevated capital levels relative to peers.

MUAH maintained solid asset quality through the cycle. In particular, MUAH's residential portfolio significantly outperformed the sector due to maintenance of pragmatic underwriting standards such as FICO scores over 720 and loan to values at 80% or lower. Asset Quality remains strong with NPAs and credit costs remaining low compared to the large regional peers. MUAH solid history of execution and low loss levels through the cycle is a ratings strength for the company. However, MUAH has generated loan growth in excess of its peers. Loans have grown by a 6.9% compounded annual rate since 2012, which Fitch views cautiously.

Fitch expects MUAH's earnings profile to remain a rating weakness for the company. Both return on average assets and pre-tax, pre-provision income rank second lowest amongst the large regional peer group. Weak earnings are attributed to weak net interest margin, higher cost of funds and weak fee revenue contribution. Given MUAH's relatively higher dependence on spread income, Fitch expects higher earnings volatility though rate cycles for the company.

MUAH benefits from a solid deposit-gathering network, which is principally located in the western U.S. The company's loan to deposit ratio stood at 89%, which is slightly below the large regional bank peer median. Fitch expects loan to deposit ratios to rise in the medium term as the Federal Reserve's monetary policy becomes less accommodative. Although MUAH's funding profile is solid, the cost of deposits is significantly higher than its peers.

MUAH is a $109 billion holding company headquartered in San Francisco and is one of the 30 largest commercial bank holding companies in the U.S. Its bank subsidiary, MUFG Union Bank, N.A., is a full service commercial bank with banking offices predominantly located in the west coast. MUAH is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which is a subsidiary of Mitsubishi UFJ Financial Group, Inc.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Fitch does not envision any near-term upside to the ratings as the level of earnings and diversity of revenues lag similarly rated peers.

Capital levels are the highest amongst the peer group. However, should capital levels be managed to materially lower levels near the peer group median, the ratings could be downgraded. Asset quality deterioration could also be a negative ratings driver, particularly in light of commercial portfolio growth over the past two years. Although not anticipated, ratings could be downgraded if its parent's rating (BTMU; rated 'A' with a Stable Outlook by Fitch) were to be downgraded by several notches.

KEY RATING DRIVERS - HOLDING COMPANY

MUAH's IDR and VR are 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 default probabilities.

RATING SENSITIVITIES - HOLDING COMPANY

Should MUAH 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 operating companies. This is viewed as unlikely though for MUAH given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's view that MUAH may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

MUAH has a Support Rating of '1'. The '1' support reflects the extremely high probability of support from its parent, BTMU. Since this support is based on institutional support, there is no Support Floor Rating assigned.

RATING SENSITVITIES - 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 propensity to provide support.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by MUAH and by various issuing vehicles are all notched down from MUAH or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by MUAH and its subsidiaries are primarily sensitive to any change in MUAH VR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

MUAH uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by MUAH and its subsidiaries are primarily sensitive to any change in MUAH long- and short-term IDRs.

Fitch has affirmed the following ratings:

Fitch has affirmed the ratings as follows:

MUFG Americas Holdings Corporation

--Long-term IDR at 'A'; Outlook Stable;

--Short-term IDR at 'F1';

--Viability rating at 'a';

--Support rating '1';

--Senior debt at 'A'

--Subordinated debt at 'A-'.

MUFG Union Bank, N.A.

--Long-term IDR at 'A'; Outlook Stable;

--Short-term IDR at 'F1';

--Viability rating at 'a';

--Support rating '1';

--Long-term deposits at 'A+';

--Short-term deposits at 'F1';

--Senior debt at 'A';

--Subordinated debt at 'A-';

--Commercial paper at 'F1'.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 1Q14' (April 1, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891977

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Contacts

Fitch Ratings
Primary Analyst
Jaymin Berg, +1 212-908-0368
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar, +1 312-368-5472
Senior Director
or
Committee Chairperson
Joo-Yung Lee, +1 212-908-0560
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jaymin Berg, +1 212-908-0368
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar, +1 312-368-5472
Senior Director
or
Committee Chairperson
Joo-Yung Lee, +1 212-908-0560
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com