Fitch Downgrades MUFG Group's Rating to 'A-'; Stable Outlook
08/04/2020 11:29
(The following statement was released by the rating agency) Fitch Ratings-Tokyo-April 08: Fitch Ratings has downgraded to 'A-', from 'A', the Long-Term Issuer Default Ratings (IDR) of Mitsubishi UFJ Financial Group, Inc. (MUFG) and its subsidiaries - MUFG Bank, Ltd. and Mitsubishi UFJ Trust and Banking Corporation (together, MUFG group). The Long-Term IDR of Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (MUMSS) was also downgraded to 'A-' from 'A'. At the same time, Fitch has downgraded the Long-Term IDR of ACOM CO., LTD. to 'BBB+', from 'A-'. The Outlook is Stable. A full list of rating actions is below. The downgrade reflects Fitch's assessment that a weaker and more challenging operating environment for the Japanese banks as a result of the coronavirus pandemic is likely to negatively affect MUFG's credit profile, although the extent of the economic and financial market implications are unclear. Fitch expects a deep global recession in 2020, with world economic activity to decline by 1.9% in 2020, with US GDP down by 3.3%, the eurozone down by 4.2% and Japan down by 2.7%, with further downside risk; see Global Economic Outlook - COVID-19 Crisis Update April 2 2020 at www.fitchratings.com/site/re/10116672 Mitsubishi UFJ Financial Group, Inc.; Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Viability Rating; Downgrade; a- ; Support Rating; Affirmed; 1 ; Support Rating Floor; Affirmed; A- ----senior unsecured; Long Term Rating; Downgrade; A- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.; Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Support Rating; Affirmed; 1 ACOM CO., LTD.; Long Term Issuer Default Rating; Downgrade; BBB+; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; BBB+; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Support Rating; Downgrade; 2 Mitsubishi UFJ Trust and Banking Corporation; Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Viability Rating; Downgrade; a- ; Support Rating; Affirmed; 1 ; Support Rating Floor; Affirmed; A- MUFG Bank, Ltd.; Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Viability Rating; Downgrade; a- ; Support Rating; Affirmed; 1 ; Support Rating Floor; Affirmed; A- ----senior unsecured; Long Term Rating; Downgrade; A- ----subordinated; Long Term Rating; Criteria Observation Removed; A- ----subordinated; Long Term Rating; Downgrade; BBB Key Rating Drivers IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS, VIABILITY RATINGS AND SENIOR DEBT The downgrade of the Viability Ratings is driven by Fitch's assessment of the downward pressure on the operating environment for Japanese banks. The deep global economic downturn adds to domestic structural challenges, such as negative policy rates, intense competition, changing client needs and the country's ageing and shrinking population. This is reflected in Fitch's revision of outlook to negative on our operating environment factor mid-point 'a-'. Fitch expects the challenging operating environment to pressure the group's ability to restore sustainable profitability and test the group's underwriting and risk management standards, particularly in its offshore markets, where we expect to see weaker asset quality. Higher credit costs and impairments on investments from market dislocation, such as the recently announced one-time amortisation of goodwill at MUFG's Asian banks, will further pressure its ability to improve profitability. Failure to execute the medium-term business plan, including revenue growth and cost reduction, would undermine the long-term sustainability of earnings, which could pressure the group's ability to generate capital commensurate with its risk appetite. However, Fitch believes MUFG will maintain its capitalisation (common equity Tier 1 ratio of 12.2% at end-March 2019 and 12.6% at end-2019), as we expect the increase in risk appetite to be gradual, well-controlled and accompanied by loss-absorption buffers. The group's ratings reflect Fitch's view that MUFG's strong company profile, which is characterised by solid franchises in the domestic market and geographical diversification, with a balanced and diversified risk profile, is under pressure from the operating environment challenges. It has become more difficult to maintain pricing and growth, including at its overseas businesses, in the face of low interest rates globally. We believe the Viability Ratings are sensitive to the downside. The ratings are supported by MUFG group's sound liquidity and funding position, which is underpinned by abundant access to domestic deposits stemming from a sound franchise and diversified operations. Foreign-currency funding is strengthened via increasing foreign-currency deposits, foreign-currency borrowings and currency swaps. The Long-Term IDRs are at the same level as the Viability Ratings and Support Rating Floors. The Outlook reflects the Outlook on the Japan sovereign (A/Stable). Fitch assesses MUFG and its subsidiaries on a consolidated basis. MUFG group's Support Rating and Support Rating Floor reflect Fitch's view that, as a systematically important group in Japan, there is an extremely high probability that it will receive government support in case of need. The government can pre-emptively provide financial assistance to a solvent bank holding company when a serious system disruption is anticipated under Japan's Deposit Insurance Act. We do not believe support prospects have deteriorated, even though MUFG issued senior loss-absorbing debt through the holding company in response to the Financial Stability Board's global requirements. We equalise the ratings between the holding company and operating entities, as we expect support to equally benefit all entities. The ratings on the senior unsecured debt issued by MUFG and MUFG Bank are at the same level as the entities' IDRs, in line with Fitch's criteria. MUFG's senior bonds, which are eligible as total loss-absorbing capacity, are also rated at the same level as its Long-Term IDR, as we believe the holding company's failure and senior-level default risk are similar to that of wholly owned operating banks, despite the notes' structural subordination features. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES MUFG Bank's Basel II Tier 2 instrument is rated two notches below its anchor rating, which is consistent with the base case in Fitch's Bank Rating Criteria published 28 February 2020. The instrument was downgraded by two notches to reflect a one notch downgrade on its anchor rating and one notch for poor recovery expectation based on the new criteria. The anchor rating for the instrument is the IDR because Fitch believes that support can be factored into such instrument ratings, as the government can pre-emptively provide financial assistance to systemically important financial institutions. The rating on the instrument have been removed from the Criteria Under Observation, on which it was placed following the publication of Fitch's updated Bank Rating Criteria; see Fitch Places One IDR, Debt Ratings of 26 APAC Banks Under Criteria Observation, published 4 March 2020, at www.fitchratings.com/site/pr/10113130 SUBSIDIARY AND AFFILIATED COMPANIES The Long-Term IDRs of MUMSS, which is 60% indirectly owned by MUFG and 40% by US-based Morgan Stanley (A/Stable), are equalised with the IDR of its ultimate parent, MUFG. The ratings reflect MUMSS' key role in supporting the group's securities business. The company also engages in retail, investment banking, sales, trading and research. The Outlook is Stable, in line with MUFG's IDR. The Long-Term IDRs of ACOM, a 40% owned subsidiary of MUFG, reflect ACOM's strategic role as one of Japan's leading providers of consumer finance services. Its rating is notched down one notch from the IDR of MUFG, which maps to a Support Rating of '2'. The Outlook is Stable, in line with MUFG's support-driven IDR. RATING SENSITIVITIES IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT Factors that could, individually or collectively, lead to negative rating action/downgrade: Any change in assumptions around lower propensity or deterioration in the sovereign's ability to provide timely support to MUFG could lead to negative rating action on the Support Ratings, leading to lower Support Rating Floors. A downgrade of the sovereign ratings, which reflects a deterioration of the sovereign's ability to provide support, would lead to lower Support Ratings Floors and Support Ratings. A downgrade of the Viability Ratings would not immediately affect the IDRs, since the IDRs are underpinned by the Support Rating Floors. Factors that could, individually or collectively, lead to positive rating action/upgrade: Upgrade on the sovereign ratings could lead to positive rating action on the Support Rating Floors, support-driven IDRs and senior debt ratings. This is not our base case under a deep global recession. An upgrade of the Viability Ratings above the Support Rating Floors would also result in similar rating action on the IDRs and senior debt ratings. VIABILITY RATINGS Factors that could, individually or collectively, lead to negative rating action/downgrade: Further challenges in the operating environment for the Japanese banks, such as a prolonged deep recession, could lead us to revise down the operating environment factor mid-point to 'bbb+'. This, in turn, would affect the benchmark mid-points on quantitative factors. Fitch's base case economic outlook is for a deep recession in 2Q20, with recovery from 3Q20, although with downside risk. Negative rating action could be caused by a sharp deterioration in profitability or a lack of sustainable earnings improvement. This could follow from a dislocation in any of the group's larger overseas markets leading to deterioration of franchise strength, or from weaker asset quality. Deterioration in capitalisation could also lead to negative rating action. A large increase in risk appetite, such as a significant rise in risky assets that exposes capital and earnings to higher volatility without commensurate increases in risk buffers, could lead to a downgrade. An increase in risky assets could stem from a rising exposure to riskier types of lending, especially late in the credit-cycle, or an increase in higher-risk investments. The common equity Tier 1 ratio consistently falling below 12% could lead to a downgrade, even if the operating environment mid-point remains at 'a-'. This could be due to a non-performing loan/total loan ratio consistently above 1.5% (2019: 1%), resulting in an operating profit/risk weighted asset ratio continuously below 0.9% (nine months ending December 2019: 0.93%, financial year ending March 2019 (FYE19): 0.88%, FYE18: 0.98%). Failure to maintain double leverage below 120% or a change in the consolidated-base supervision approach by the regulator could lead to a downgrade of MUFG's Viability Rating. Factors that could, individually or collectively, lead to positive rating action/upgrade: Sustained recovery and stabilisation of the global and domestic economy could ease pressure on the operating environment. However, we expect domestic structural challenges to remain a constraint. Successful execution of the management plan to continually improve capitalisation to meet its target, ensuring a sufficient buffer commensurate with risk, stable and sustainable profitability, with less reliance on volatile trading income, and maintenance of healthy asset quality could lead to positive rating action. SUBORDINATED DEBT Factors that could, individually or collectively, lead to negative rating action/downgrade: -Downgrade of IDRs could lead to negative rating action on the subordinated debt rating. Factors that could, individually or collectively, lead to negative rating action/downgrade: -Upgrade of IDRs could lead to positive rating action on the subordinated debt rating SUBSIDIARY AND AFFILIATED COMPANIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -Any negative rating action on MUFG could lead to negative rating action on MUMSS and ACOM. -Deterioration in MUFG's ability or propensity to support MUMSS or ACOM, including due to a decline in ownership or their strategic importance to the group, could lead to negative rating action on MUMSS or ACOM. Factors that could, individually or collectively, lead to positive rating action/upgrade: -Any positive rating action on MUFG would lead to positive rating action on MUMSS and ACOM. Best/Worst Case Rating Scenario Ratings of financial institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit www.fitchratings.com/site/re/10111579 Summary of Financial Adjustments Total assets and total liabilities exclude acceptances and guarantees from Japan's generally accepted accounting principles balance sheet to be globally comparable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Primary Rating Analyst Kaori Nishizawa, Director +81 3 3288 2783 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3rd Floor 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Secondary Rating Analyst Yuka Negami, Director +81 3 3288 2686 Committee Chairperson Tim Roche, Senior Director +61 2 8256 0310 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10110041 Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10110170 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10117012 Solicitation Status https://www.fitchratings.com/site/pr/10117012#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10117012#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO