Mitsubishi UFJ Financial Group Ratings Affirmed; Off CreditWatch Negative; Outlook Negative

Stocks News Friday November 27, 2015 17:50 —PRESS RELEASE LOCAL

Bangkok--27 Nov--Standard & Poor's TOKYO (Standard & Poor's) Nov. 27, 2015--Standard & Poor's Ratings Servicestoday said that it has affirmed its 'A' long-term counterparty credit ratingon Mitsubishi UFJ Financial Group Inc. (MUFG) and removed the rating fromCreditWatch with negative implications, where it was placed on Oct. 23, 2015. At the same time, we affirmed our 'A+' long-term counterparty credit ratingson three of MUFG's "core" subsidiaries and removed the ratings fromCreditWatch negative (see list below). The outlooks on the long-term ratingson MUFG and the three core subsidiaries are negative. We also affirmed our issue ratings on the long-term debts and hybrid securities issued by eitherMUFG or the three core subsidiaries and removed the ratings from CreditWatchnegative. We had put these ratings on CreditWatch negative on Oct. 23 toreflect our following views: MUFG's risk-adjusted capital (RAC) ratio faceddownward pressure from its increasing risk-weighted assets (RWA); and ouranchor for Japanese banks, which is the starting point of our rating analysisfor the group, was under strain. In our rating actions today, we also affirmedour short-term counterparty credit ratings on the three core subsidiaries ofMUFG (see list below). These short-term ratings were not subject to theCreditWatch placements that we made on Oct. 23. Our rating affirmations on MUFG and the three core subsidiaries and removal ofthe ratings from CreditWatch are based on our projection that MUFG's RAC ratiowill likely exceed our 7% threshold for an "adequate" capital and earningsassessment over the next 18 to 24 months. This projection is part of ourbase-case scenario and it resulted from our assessment of the management'scapital strategy and the changes that we projected for the group's RWA andtotal adjusted capital (TAC), which is the numerator for calculating the RACratio. Based on this assessment, we believe that its unsupported group creditprofile (GCP) will likely remain at the current level. We had previously expected that asset growth would outpace accumulation ofretained earnings, mainly due to rising overseas exposures and yendepreciation, and drag down MUFG's RAC ratio, which would weaken the group'sunsupported GCP. However, lending growth slowed in the first half of fiscal2015 (ending March 31, 2016) after accelerating for several years, and thegroup has been steadily accumulating capital. We expect the group's RWA growthto continue to slow while its capital will likely grow, thanks to themanagement's recognition of the need to enhance the group's capitalization.Accordingly, we now project that MUFG's RAC ratio will likely improvemoderately and just barely exceed 7%. The negative outlooks on MUFG and the three core subsidiaries reflect ourbase-case scenario view that there is a one-in-three chance that we maydowngrade these entities in the next one or two years, given that we still seedownward pressure on our anchor for MUFG and that we also see downwardpressure on our assessment of the group's capital and earnings because we areuncertain if MUFG's RAC ratio will improve. We would lower the ratings if: (1)we revise downward our anchor for MUFG and our assessment of the group'scapital and earnings, which could happen if we revise downward the economicscore in our Banking Industry And Country Assessment (BICRA) for Japan; (2) MUFG's RAC ratio fails to improve, leading us to revise our current assessmentof the group's capital and earnings; or (3) the group further increases itsexposures outside of Japan, prompting us to revise the weighted averageeconomic scores that we apply to determine the anchor for the group.Specifically, we may consider revising downward our assessment of the group'scapital and earnings if we project that MUFG's RAC ratio will likely remainbelow 7%, which could happen if the group's assets were to grow at a fasterrate than its capital. Conversely, we may revise the outlooks on MUFG and the three core subsidiariesto stable from negative if our concern about heightened economic risk and itseffects on Japan's banking sector were to ease below our current expectations;and if we project that MUFG's RAC ratio will likely exceed 7% with asufficient buffer. We may also consider revising the outlooks on MUFG and thethree subsidiaries if we see other factors that could cause us to reviseupward our assessment of the group's unsupported GCP. There are rated group subsidiaries of MUFG that are not subject to this roundof rating actions. We are reviewing the rating impact on these subsidiariesfrom the rating actions that we have taken today on their parent company.

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