The credit rating assigned to Joint Stock Company MUFG Bank (Eurasia) (hereinafter, the Bank) is based on the very high likelihood of extraordinary support fr om Mitsubishi UFJ Financial Group, Inc., the parent entity having high creditworthiness (hereinafter, the Supporting Entity, the SE, or the Group). The Bank is characterized by the high standalone creditworthiness assessment (SCA) that takes into account strong capital adequacy, adequate risk profile, liquidity and funding positions, and medium business profile.
As of August 1, 2021, the Bank ranked 71st by assets and 45th by equity in the Russian market. MUFG Bank, Ltd. (hereinafter, the Parent Bank), the largest Japanese bank and a key financial entity of the Group, is the sole shareholder of the Bank. The Bank’s business includes providing universal banking and lending services to Japanese companies operating in Russia and other corporate customers of the Group, as well as interbank and foreign exchange transactions.
Key assessment factors
Very high likelihood of extraordinary support from the shareholder. In ACRA’s opinion, in case of need, the Parent Bank may provide the Bank with long-term and short-term financing and capital injections in light of the following:
The creditworthiness of the Parent Bank is high compared to the standalone creditworthiness of the Bank. The scope of the Bank’s business is not a factor that could lim it the effectiveness of potential support;
The Group exercises complete shareholder and operational control over the Bank (the Parent Bank determines the Bank’s corporate risk management procedures and standards, taking into account Russian law);
The Bank and the Group operate under the same brand and therefore a possible default of the Bank may be associated with the Group;
The Agency takes into account the fact that the SE operates in a jurisdiction that differs from the jurisdiction of presence of the Bank, which makes the possibility of providing support dependent on the freedom of movement of capital between the countries. In addition, the termination of the Bank’s activities or its deconsolidation will not lead to the emergence of critical risks for the implementation of the group-wide strategy.
Due to the above, as well as taking into account possible reputational risks for the Parent Bank in the event of the Bank’s default, ACRA sets the Bank’s credit rating at AAA(RU).
The business profile reflects the Bank’s middle positions in the Russian banking system and moderate diversification of operating income that mainly stems from interest payments on corporate loans and bank deposits and income from foreign exchange transactions.
The Bank’s strategy primarily aims to provide a full range of financial services to the Group’s customers in Russia. In the next 12–18 months, the Bank has no plans to develop new business lines and take additional risks associated with that.
The ownership structure of the Bank is completely transparent. The assessment of the corporate governance strategy and quality is high.
Very high loss absorption buffer. The Bank has maintained high regulatory capital adequacy ratios (as of July 1, 2021, the N1.2 core capital adequacy ratio was 141.75%), which allows the Bank to comfortably withstand a material increase of cost of risk by more than 500 bps in the next 12–18 months, according to ACRA’s stress tests. The extraordinary level of capital adequacy is due to the fact that so far, the Bank has employed a policy of keeping the retained earnings level at 100% coupled with the fact that guarantees provided by the Group help prevent over-inflation of risk-weighted assets.
Over the past five years, the averaged capital generation ratio (ACGR) has been 864 bps due to the stable profitability of the Bank in conjunction with other favorable operating performance indicators: for the past three years, the CTI (cost to income) ratio amounted to about 34.8% and the NIM (net interest margin) to about 3.7%.
Adequate risk profile. The Bank’s risk management system matches the specifics and scale of its business; the system is based on the requirements of the Group and close supervision by the Parent Bank.
As of July 1, 2021, the Bank had no overdue or impaired loans, which is a result of its strict credit underwriting criteria that is focused primarily on the subsidiaries of Japanese companies and international corporations with a high level of creditworthiness. Most of the Bank’s loans are covered by guarantees issued by the Parent Bank and the parent companies of borrowers. The risk profile of the Bank is impacted by the high concentration of the portfolio on the top 10 groups of borrowers (about 94.7% of the portfolio).
The level of operational risk does not affect the risk profile assessment. The market risk of the Bank is insignificant.
The funding and liquidity factor is assessed as adequate. The Bank demonstrates a sufficient surplus of short-term liquidity in both the base case and stress scenarios of ACRA. The Agency assesses the Bank’s long-term liquidity position as strong.
In addition, the Bank has access to significant credit facilities from the parent bank and other credit institutions, as well as to regulatory funding.
The funding factor is pushed down by the concentration of the Bank’s resource base on corporate customers’ funds. As of January 1, 2021, the share of funds of the largest lender amounted to about 24.8% of liabilities, and the share of the top 10 lenders was 70.9% of liabilities.
The Bank’s funding is based on corporate deposits and current accounts, as well as funds provided by the Parent Bank: 73.2% and 24.8% of liabilities, respectively, as of January 1, 2021. At the same time, the risks of high concentration on corporate funds has been taken into account in assessing the concentration on the funds of the largest lenders, therefore, the Agency has not reduced the funding factor assessment in this regard.
The Parent Bank retaining its shareholding and operating control over the Bank;
The Bank following the current business model and maintaining operational performance and the high quality of its loan portfolio and other assets.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A negative rating action may be prompted by:
Declining involvement of the Group in its Russian business and a change in the shareholding structure of the Bank;
Material deterioration in the Bank’s capital adequacy ratios, performance and loan portfolio quality.
Support: ACRA is of the opinion that in case of need, the Supporting Entity would be able to provide the Bank with extraordinary support in the form of capital and/or liquidity. Taking into account the support factors, the Bank’s rating is set four notches above the SCA.
There are no outstanding issues.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of Joint Stock Company MUFG Bank (Eurasia) was published by ACRA for the first time on October 2, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Joint Stock Company MUFG Bank (Eurasia), information from publicly available sources, and ACRA’s own databases. The rating analysis was carried out using the IFRS statements of Joint Stock Company MUFG Bank (Eurasia) and the financial statements of Joint Stock Company MUFG Bank (Eurasia) drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Joint Stock Company MUFG Bank (Eurasia) participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Joint Stock Company MUFG Bank (Eurasia). No conflicts of interest were discovered in the course of credit rating assignment.