Fitch Affirms Mitsubishi UFJ Securities (USA), Inc.'s IDRs at 'A/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Mitsubishi UFJ Securities (USA), Inc.'s (MUS USA) Issuer Default Ratings (IDRs) at 'A/F1'. The Rating Outlook is Stable. MUS USA is a wholly owned indirect subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG), rated 'A/F1'.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS

Fitch considers MUS USA to be a core subsidiary of MUFG due in part to its importance to the company's overall strategy. The ratings are equalized and linked with the other core subsidiaries: Bank of Tokyo-Mitsubishi UFJ (BTMU) and MUFG Americas Holding Corporation. 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.

Due to foreign bank rules issued in 2014, MUS USA will be moved under a U.S.-based intermediate holding company by July 1, 2016. The U.S. intermediate holding company (IHC) will consolidate most of MUFG's legal entities under one umbrella in the U.S., which consists primarily of MUS USA and MUFG Union Bank, N.A., the primary operating bank of MUFG Americas Holding Corporation (MUAH).

Fitch expects that compliance with the rule will be comfortably achieved by the Fed's deadline. MUS's $34 billion balance sheet primarily consists of securities purchased under agreements to resell. This relatively large repo book is collateralized by U.S. government and federal agency mortgage-backed securities, requiring daily margining, mitigating the credit risk. That said, Fitch anticipates the size of this repo book will decline in the context of the consolidated franchise's balance sheet and the leverage ratio, which may become a more binding constraint for MUAH.

RATING SENSITIVITIES

IDRS

Once MUS USA becomes part of the IHC, 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.

MUS USA's ratings will be linked to the ratings of MUAH, rated 'A/F1' by Fitch. 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. MUAH's IDR and senior debt ratings could be impacted if the parent were to be downgraded by multiple notches; however, this is viewed as a lower likelihood.

Fitch published ratings on MUFG in February 2016 at 'A/F1' with a Stable Outlook. Refer to the press release titled 'Fitch Publishes MUFG Rtg, Rates Asia's 1st TLAC Eligible Notes' dated Feb. 16, 2015 for additional information.

MUAH's Viability Rating of 'a' was affirmed on Oct. 5, 2015 reflecting its strong capital profile and solid asset quality metrics. Somewhat offsetting the company's capital and asset quality, MUAH's financial performance lags the other large regional banks, and MUAH has reported robust loan growth over the past several years. Lastly, MUAH's energy-related exposure is on the higher-end of the Fitch-rated peer universe. Depending on the pace and trajectory of future oil prices, this may lead to elevated provisioning for MUAH, and could lead to negative rating actions.

Fitch expects that MUS will become a legal subsidiary of MUAH by July 2016. At that time, MUAH's liquidity profile's use of short-term debt will increase given MUS's use of short-term repos. Fitch will consider MUS's use of short-term funding and its impact on the consolidated funding profile of MUAH for any rating implications, especially as it compares to large regional peer banks.

Fitch has affirmed the following ratings:

Mitsubishi UFJ Securities (USA), Inc.

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

--Short-term IDR at 'F1'.

Additional information is available on 'www.fitchratings.com.'

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000077

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000077

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst
Doriana Gamboa
Senior Director
+1-212-908-0865
or
Committee Chairperson
Justin Fuller
Senior Director
+1-312-368-2057
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst
Doriana Gamboa
Senior Director
+1-212-908-0865
or
Committee Chairperson
Justin Fuller
Senior Director
+1-312-368-2057
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com