MUFG’s Union Bank Disposal — the USD 50bn Question
Mitsubishi UFJ Financial Group (MUFG) reached a definitive agreement with U.S. Bancorp (USB) to sell all shares in MUFG Union Bank (MUB), held through MUFG Americas Holdings Corporation, to USB as the most appropriate decision to:
- unlock MUB’s potential franchise value and contribute to customers and communities in the U.S. as well as — because MUFG plans to retain the resulting 2.9% ownership in USB, betting on USB as one of the digitalization leaders to be better able to transform the business
- improve MUFG’s capital efficiency and to maximize shareholders’ value of MUFG, because directly, there is an estimated 60bps positive impact on the Tier 1 capital ratio through a decrease in risk-weighted assets and the proceeds of the disposal
What has been widely reported in the media as a USD 8bn transaction is in fact presented in the MUFG briefing deck as a total transaction value of USD 17.6bn. That is because in addition to the USD 8bn in the form of cash and stock considerations, MUB will separately release USD 9.6bn of capital through a dividend or share repurchase prior to the closing.
The USD 8bn consideration is 1.28x book value of tangible net assets, which — what a coincidence — is exactly the average price/book ratio for banking firms, as of the first quarter of 2021, according to Investopia. This average hides a rather wide range from around 0.4 for Deutsch Bank to 1.80 for JPMorgan (we had just done that analysis as part of our discussion on the Kakao Pay IPO).
As per the above entity structure, MUFG’s non-branch assets are organized under an Intermediate Holding Company (IHC) called MUFG Americas Holdings Corporation (MUAH), which is required for foreign banking organizations with combined US assets of USD 100bn or more, and US non-branch assets of USD 50bn or more.
Running an IHC is costly as it requires participation in Fed stress tests, recovery & resolution planning, and most important of all, capitalization levels independent of the group. So, would MUFG have a fighting chance to get below that USD 50bn threshold?
We determine that MUAH had assets of USD 165bn (as of December 31, 2020). The MUB disposal removes USD 105bn as per the defined transaction perimeter (as of June 30, 2021). There are an additional USD 22.6bn in Global Corporate & Investment Banking (GCIB) assets, represented by the red arrow in above chart, that will be transferred to MUFG Bank’s US branches or its affiliates.
Hence, if we understand the numbers correctly, then MUAH will remain with approximately USD 37 in balance sheet, below the USD 50bn threshold. As long as the total of branch and non-branch assets does not exceed USD 100bn then, the requirement for an IHC is eliminated.
So what is the future MUFG business in the Americas going to look like?
MUFG remains committed to the U.S. market through MUFG U.S. operations and will discuss forming business alliances with USB
Essentially, MUFG will largely follow a partnership model. In addition to being an investor in USB, MUFG plans to develop a deeper business alliance with USB. The question is, what for? Clearly, this transactions marks the end of MUFG-owned and -operated US consumer business. Would such business alliance then include digitalization expertise to be imported into MUFG’s Japanese home market? On the other hand, the large shareholding in Morgan Stanley allows for a strong collaboration across investment banking and wealth management. What remains as MUFG-operated is then primarily the corporate business.
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