DBRS : Downgrades Ratings of BTMU to ‘A’, Stable Trend Post Sovereign Downgrade

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Date of Release: January 30, 2017

January 30, 2017

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DBRS Ratings Limited (DBRS) has today downgraded the ratings of the Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU or the Bank), including its Long-Term Deposits & Senior Debt rating to 'A' from A (high), and its Short-Term Instruments rating to R-1 (low) from R-1 (middle). The trend on all ratings is now Stable. Concurrently, DBRS has maintained BTMU's intrinsic assessment (IA) at 'A', along with its SA2 support assessment, which indicates an expectation of timely systemic support in case of need. However, with the current rating of the Japanese sovereign at 'A', which is equal to the IA of BTMU, there is currently no uplift to the Bank's ratings. BTMU's IA is based upon the financial strength of the consolidated Mitsubishi UFJ Financial Group (MUFG or the Group).

This action follows the downgrade of the Japanese sovereign to 'A' from A (high) in December 2016. MUFG has a strong level of international diversification of revenues, however given its high level of interconnectedness with the Japanese sovereign, its ratings remain correlated with the sovereign rating. In maintaining BTMU's IA at 'A', DBRS recognises the Group's solid domestic franchise, along with its growing overseas operations, which have continued to offset the profitability challenges present within the Group's domestic market. The ratings also incorporate the Group's solid capital levels, good asset quality and strong funding and liquidity profile.

MUFG has reported relatively resilient earnings over recent years, as strong overseas earnings growth, along with low credit costs, have helped to offset the ongoing weak domestic loan demand and low interest rate environment within Japan. With domestic challenges unlikely to abate in the short-to-medium term, DBRS also views positively MUFG's focus on cost control, with various cost reduction measures currently underway, including the strategic reallocation of human resources in Asia and the ongoing reorganisation of BTMU offices in continental Europe. Although increased regulatory costs have pressured the Group's efficiency ratio recently, DBRS notes, that at 63.1% in 1H16, the ratio continues to compare favourably to international peers, and remains only marginally above the Group's mid-term business target of approximately 60%.

DBRS views MUFG's credit risk profile as generally conservative. The Group's loan book shows good levels of industry diversification, and credit quality remains strong, with a non-performing loans (NPLs) ratio of only 1.18% at end-1H16, and a coverage ratio of 81.4%. Credit quality also appears to be strong in the Group's other major markets, with MUFG Americas Holdings Corporation (MUAH) reporting an NPL ratio of 0.91% at end-September 2016, and Bank of Ayudhya 'Krungsri' reporting an NPL ratio of 2.1%.

The Group's lending exposure to sectors that are currently more vulnerable to increased stress, such as energy, also appears well managed. At end-1H16, only 1.50% of the Group's energy and mining portfolio, which totalled JPY 9.1 trillion, was classified as non-performing. DBRS also notes that approximately 90% of NPLs are covered by collateral, guarantees or loan loss allowances, whilst only 16% of the Group's JPY 2.2 trillion project finance credit exposure in the natural resource sector is not guaranteed by Export Credit Agencies (ECAs) or other sponsors contains commodity price risk.

The Group's Japanese equities and government bond holdings present certain risk management challenges. Despite progress in reducing its Japanese Government Bonds (JGB) holdings in recent years, the Group's JGB portfolio remains significant at JPY 25.5 trillion at end-1H16, equivalent to 180% of Tier 1 capital. As a result, the level of interest-rate risk faced by MUFG remains high, especially in light of the transforming maturity and extended duration of the portfolio in recent years, as illustrated by the x4 increase in the balance of JGBs with a maturity of over 10 years since end-FY13, to JPY 3.3 trillion at end-1H16, and increase in duration of the portfolio to 3.9 years at end-1H16. MUFG also faces market risk from its considerable exposure to Japanese equities, which has the potential to lead to both P&L and capital ratio volatility as a result of unrealised gains and losses. DBRS does, however, positively note the Group's commitment to reduce the ratio of domestic listed equities to Tier 1, which stood at 18% at end-1H16, to approximately 10% over the next five years. The Group has made gradual progress against its stated aim in 1H16, with the sale of approximately JPY 85 billion of equities.

MUFG's funding position is underpinned by a very strong retail deposit base in Japan, leading to a loan-to-deposit (LTD) ratio for the Group of 64.4% at end-1H16. With MUFG reporting an overseas LTD ratio of 114% at end-1H16, or 110% excluding the impact of foreign currency fluctuations, the Group's overseas operations rely on a larger proportion of market funding. Although the cost of foreign currency-based funding, particularly that of USD funding, increased noticeably in 2016, driven in part by regulatory changes, DBRS notes positively that short-term funding, in the form of CD and CP, remains low at BTMU (equivalent to only 8% of non-JPY funding at 1H16), whilst all non-JPY loans at BTMU are fully funded by deposits, including those at central banks, mid-long term corporate bond issuance and currency swaps. The Group's liquidity profile also remains solid, with MUFG reporting a Liquidity Coverage Ratio (LCR) of 133.4% at end-1H16.

MUFG maintains a solid capital profile, with a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio (including net unrealised gains on marketable securities) of 12.5% at end-1H16, and a transitional Basel III leverage ratio of 4.7%. Although MUFG's fully-loaded CET1 ratio drops to 10.1% at end-1H16 when excluding the impact of net unrealised gains on marketable securities, DBRS notes that it remains above both the end-2019 regulatory minimum and the Group's internal target of 9.5% of higher. With an estimated Total Loss Absorbing Capacity (TLAC) ratio of 15.8% at end-1H16, including the 2.5% contribution of the Japanese deposits insurance system and 1.1% of TLAC eligible debt, DBRS also views the Group as well positioned to meet minimum future TLAC requirements.

RATING DRIVERS
Positive rating pressure could result from further sustainable diversification of revenues and strengthening of profitability, whilst maintaining a strong, conservative risk profile. An upgrade of the sovereign rating would be positive for the Bank's ratings.

Negative rating pressure could result from a significant deterioration in the Group's asset quality as a result of its overseas expansion, or from a further downgrade of the sovereign

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, the Bank of Japan, the Japanese Financial Services Authority and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS's outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority ('ESMA') in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman - Managing Director, Head of EU FIG, Global FIG
Rating Committee Chair: Roger Lister - Managing Director, Chief Credit Officer, Global FIG & Sovereign Ratings
Initial Rating Date: November 30, 1982
Last Rating Date: February 18, 2016

DBRS Ratings Limited
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31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [e-mail].

Ratings

Issuer	Debt Rated	Rating Action	Rating	Trend	Notes	Published	Issued
Bank of Tokyo-Mitsubishi UFJ, Ltd., The	Issuer Rating	Downgraded	A	Stb		Jan 30, 2017	EU
Bank of Tokyo-Mitsubishi UFJ, Ltd., The	Long-Term Deposits & Senior Debt	Downgraded	A	Stb		Jan 30, 2017	EU
Bank of Tokyo-Mitsubishi UFJ, Ltd., The	Short-Term Instruments	Downgraded	R-1 (low)	Stb		Jan 30, 2017	EU
The Bank of Tokyo-Mitsubishi UFJ, Ltd., Canada Branch	Long-Term Deposits & Senior Debt	Downgraded	A	Stb		Jan 30, 2017	EU
The Bank of Tokyo-Mitsubishi UFJ, Ltd., Canada Branch	Short-Term Instruments	Downgraded	R-1 (low)	Stb		Jan 30, 2017	EU

US = USA Issued, NRSRO CA = Canada Issued, NRSRO EU = EU Issued E = EU Endorsed
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-participating

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