DBRS Comments on UnionBanCal Corporation’s 4Q11 Earnings – Senior at “A”
DBRS, Inc. (DBRS) has today commented on the 4Q11 earnings of UnionBanCal Corporation (UB or the Company). DBRS rates UB’s Issuer & Senior Debt at “A” with a Stable trend. The Company reported net income attributable to UB of $129 million, down from $172 million in the previous quarter, and from $172 million in 4Q10.
On a sequential quarter basis, lower noninterest income, a higher provision for loan losses (reflecting loan growth, not asset quality deterioration), and higher expenses more than offset higher net interest income. Other highlights of the quarter include solid loan and deposit growth, continued improvements in asset quality and the maintenance of strong capital metrics. As previously noted, The Bank of Tokyo-Mitsubishi UFJ, Ltd., UB’s parent, transferred its trust company to UB, which increased assets by over $900 million and Tier 1 common capital by more than $700 million.
Total revenue of $791 million was stable in 4Q11 relative to 3Q11. Positively, net interest income increased 6% to $640 million reflecting higher loan and securities balances despite modest margin compression of two basis points to 3.29%.
Positively, the Company delivered solid loan and deposit growth. Indeed, excluding covered loans, loans held for investment increased a strong 5% during the quarter and 13% for the year. Loan growth came primarily from commercial and industrial, commercial mortgages and residential mortgage loans. Meanwhile, the Company reported solid deposit growth for the second consecutive quarter after seeing deposit balances trend steadily downward starting in 3Q10 when the Company began running off some more expensive interest bearing deposits. Specifically, total average deposits increased 5% during the quarter and 2% for the year. Importantly, average non-interest bearing deposits increased a robust $1.3 billion, or 7%, during the quarter.
Noninterest income totaled $151 million, which was down a significant $34 million, or 18%, from 3Q11. The decline was driven by the implementation of the Durbin amendment, which limits what banks can charge on debit card transactions, lower merchant banking fees reflecting a slowdown in transactions completed, and lower other noninterest income. The quarterly loss in other noninterest income of $12 million was driven by a loss on sale of private capital investments and accretion adjustments to the indemnification asset related to the FDIC loss-sharing agreement.
Expenses increased $16 million, or 3%, during the quarter primarily driven by higher intangible asset amortization expenses of $7 million primarily related to a write-off of intangible assets associated with the privatization. Additionally, the provision for losses on off-balance sheet provisions was $2 million compared to no provision in 3Q11.
Credit quality remains relatively strong with nonperforming assets (excluding covered assets) declining 10% during the quarter to $618 million, or 1.17% of total loans held for investment and OREO. Meanwhile, net charge-offs (excluding covered assets) totaled $29 million, or 0.21% of average total loans (annualized), an improvement from $43 million, or 0.36%, in 3Q11. The allowance remains solid at 1.67% of total loans, excluding FDIC covered assets, especially considering the Company’s strong asset quality.
Capital metrics are strong giving the Company flexibility to pursue acquisitions and organic growth opportunities. Specifically, UB’s tangible common equity ratio improved ten basis points during the quarter to 10.20%.
Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
The sources of information used for this commentary include company documents and data from SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 7 July 2005
Most Recent Rating Update: 10 January 2011
For additional information on this rating, please refer to the linking document under Related Research.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.