DBRS Comments on the Q1 2009 Earnings of UnionBanCal Corporation – Senior at “A”

DBRS has today commented on the Q1 2009 earnings of UnionBanCal Corporation (UB or the Company). DBRS rates UB’s Issuer & Senior Debt at “A” with a Stable trend. UB reported a net loss from continuing operations of $9.8 million for the quarter, up from a net loss of $82.9 million in the previous quarter, but down from net income from continuing operations of $122.4 million in Q1 2008. On a sequential-quarter basis, lower privatization expenses and improved trading revenues more than offset higher provisioning for both on and off-balance sheet commitments, higher FDIC premiums and margin contraction. Excluding the privatization expenses, the Company would have reported net income of $11.1 million for the quarter. DBRS notes that further significant asset quality deterioration leading to elevated credit costs material enough to invade capital could have negative ratings implications.

With housing values yet to find a bottom and unemployment still increasing, asset quality remains under pressure. As a result, DBRS expects credit costs to remain elevated the remainder of 2009. Non-performing assets (NPAs) increased sharply to 1.69% of loans and foreclosed assets in the first quarter from 0.88% in the previous quarter and 0.30% in Q1 2008. Showing the impact of the recession, NPAs increased across all loan categories. DBRS notes a change in accounting policy related to residential mortgages and home equity contributed $120 million of the increase. Meanwhile, annualized net charge-offs (NCOs) showed similar deterioration jumping to 0.95% of average loans compared to 0.52% in Q4 2008. Like last quarter, commercial, financial and industrial loans comprised the vast majority of NCOs. The total provision for credit losses was $275 million and included $26 million for off-balance sheet commitments. Overall, the reserve is sound at 2.07% of total loans and 126% of nonaccruals.

Capital and liquidity remain solid. Despite the quarterly loss, the Company’s tangible common equity ratio increased 16 basis points to 7.12% during the quarter as the balance sheet shrunk. Positively, average core deposits grew $4.1 million during the quarter allowing UB to decrease its reliance on wholesale funding. The Company’s robust deposit franchise that includes a significant amount of noninterest bearing deposits underpins the ratings. Overall, UB’s all-in cost of funds remained a very low 1.03%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.