Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 3Q08 Earnings update; misses expectations
Previous Edition: Minor Changes in Estimates, October 14, 2008.
Flash Update [earnings update in progress; final report to follow]
On October 20, 2008, UB announced its 3Q08 financial results. Highlights are as follows:
· Net Interest income was $522.3 million, up 21.8% y/y from $429.0 million. The Company’s reported net interest income was lower than the Zacks Digest average estimate of $530.0 million.
· Total non-interest income was $198.7 million, down 4.6% y/y from $208.2 million. The Company’s reported non-interest income was almost in line with the Zacks Digest average estimate of $198.0 million.
· Total non-interest expense was $443.8 million, up 16.5% y/y from $380.8 million. The Company’s reported non-interest expense was higher than the Zacks Digest average estimate of $423.0 million.
· Total revenue was $721.0 million, up 13.2% y/y from $637.1 million. The Company’s reported total revenue was lower than the Zacks Digest Average estimate of $728.0 million.
· Net income was $104.8 million, down 17.8% from $127.5 million in 3Q07.
· GAAP EPS was $0.75, down 18.5% from $0.92 in 3Q07. The Company’s reported diluted GAAP EPS was lower than the Zacks Digest average estimate of $1.11
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON UB.
Portfolio Manager Executive Summary [Note: not changed since the last report; Earnings Report will follow]
Based in San Francisco, California, UnionBanCal Corporation (UB) is a bank holding company, approximately 65% of which is owned by The Bank of Tokyo-Mitsubishi, Ltd. The bank offers commercial loans and project financing, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services, and selected capital markets products. The bank also offers investment and financial management, trust services, private banking, insurance services, and global custody services.
Out of the six firms rating the stock, two provided Positive ratings, three provided Neutral ratings, and one provided a Negative rating. Five out of the six firms provided target prices while four provided valuation metrics, P/E multiple and DCF methods being the most common. The firm with the highest target price rated the stock Sector Perform and based its valuation on 2.33x current tangible book value, while the firm with the lowest target price rated the stock Market Perform and based its valuation on 1.2x P/TBV.
Neutral or equivalent outlook (50.0%; 3/6 firms): The target prices range from $40.00 to $73.50. Although the firm expects UB’s credit measures to continue to fare better than peers, considering the weakening economic environment, it remains cautious of the company’s ability to meaningfully reduce provision costs in the second half of 2008. They do not believe that UB is out of danger in terms of rising credit costs. Nevertheless, the firms expect the credit losses to be manageable. However, considering UB’s sluggish growth prospects, ongoing regulatory issues, and its large foreign ownership, the firms foresee little opportunity for the stock’s relative multiple to improve substantially in the near term. The firms believe ultimately the Mitsubishi UFJ Financial Group, Inc. (MUFG) deal will materialize, but MUFG will likely raise its offer potentially to pacify current shareholders. Given the unique ownership structure, the firms do not expect additional bidders.
Positive or equivalent (33.3%; 2/6 firms): The target prices range from $50.00 to $60.00. The firms appreciate management’s ability to prepare the company for the currently tough credit environment, while continuing to lend to and grow its book of business. They further believe that the company has been more aggressive in recognizing a weaker credit environment compared to other regional banks. They further believe UB has modest exposure to risky assets, high-quality funding, and an attractive valuation and sees solid upside relative to its peers.
Negative or equivalent outlook (16.7%; 1/6 firms): Only one firm provided a target price of $63.00. According to the firm, Mitsubishi UFJ should pay more as UB is in the best position historically. However, the firm stated that it looks like a done deal and investors should collect their cash and quit.
General long-term outlook on UB: The firms believe UB is well positioned for growth. It has a strong franchise in the growing West Coast markets and management continues to invest in the business, especially to expand its fee-based offerings. It has proved very successful in growing deposits. Its location provides exposure both to cyclical improvements in the national and California economies and to secular growth in commerce between the West Coast and Asia. The company’s relatively low exposure to residential construction loans (1.5% of total loans), puts the company in a better position than peers to weather the housing downturn.
October 14, 2008
Recent Events [Note: not changed since the last report; Earnings Report will follow]
On October 8, 2008, Union Bank of California announced that it has lowered its lending rate to 4.50 % from 5.00%.
On September 28, 2008, Mitsubishi UFJ Financial Group, Inc. (MUFG), its wholly owned subsidiary, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), and UnionBanCal Corporation announced the successful completion of the cash tender offer by MUFG and BTMU to purchase all of the outstanding shares of UB that MUFG and its affiliates do not already own. On August 18, 2008, UB announced that it reached an agreement with Mitsubishi UFJ Financial Group Inc. under which the latter, through its subsidiary Bank of Tokyo-Mitsubishi UFJ, would acquire the remaining 35% stake in UB that it does not already own, at a raised price of $3.5 billion, or $73.50 a share. Earlier, Mitsubishi UFJ had made a tender offer (on August 12, 2008) of $500 million, or $63 per share for the stake. Bank of Tokyo-Mitsubishi UFJ already owns a 65.4% stake in UB.
On September 25, 2008, Union Bank of California said its regulator lifted a cease-and-desist order relating to its anti-money-laundering practices after taking corrective actions.
On September 22, 2008, Union Bank of California, N.A., announced that Pierre P. Habis has joined the company as head of Branch Banking, which includes direct overseeing of more than 325 branches in California, as well as Union Bank’s Small Business Banking and Priority Banking® groups.
On September 16, 2008, Union Bank of California has opened a wine industry services office in St. Helena to increase support for wine and related industries in Napa and surrounding counties. The new office is located at 899 Adams Street, Suite F-1 and is operated by Senior Relationship Manager James A. Barrett.
On July 23, 2008, UB announced that Kyota Omori will succeed Norimichi Kanari as chairman of the Board effective immediately. Kanari, who has served as chairman of UB and its principal subsidiary, Union Bank of California, N.A., since February 2007, stepped down from his position. Omori, will serve as non-resident chairman of UnionBanCal and Union Bank of California.
On July 23, 2008, UB announced that it will pay a regular cash dividend of 52 cents per common share for 3Q08. The dividend was paid on October 3, 2008, to shareholders of record as of September 5, 2008. The dividend rate is unchanged from the prior quarter.
On July 21, 2008, UB announced its 2Q08 financial results. Highlights are as follows:
· Net interest income was $512.9 million, up 19% y/y from $431.0 million.
· Total non-interest income was $199.6 million, down 1.01% y/y from $201.7 million.
· Total non-interest expense was $419.3 million, up 9.5% y/y from $383.1 million.
· Total revenue was $712.5 million, up 12.6% y/y from $632.7 million.
· Net income was $141.3 million, down 14.5% from $165.4 million in 2Q07.
· GAAP EPS was $1.02, down 14.3% from $1.19 in 2Q07.
Overview [Note: not changed since the last report; Earnings Report will follow]
The analysts have identified the following factors for evaluating investment merits of UB:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Strong balance sheet
· Stable net interest margin
· Good control of core expenses
· Active capital management that is expected to enable UB to return value to shareholders through buybacks
· Not a potential takeover candidate
Growth Opportunities
· Geographically diverse markets / Fundamentals
· Unsustainably low credit costs
· Expectation of higher expenses in the coming quarters
· Non-interest bearing deposits are likely to decline
· Negative deposit mix shift will increase the cost of funding
Macro Issues
· A slowing California housing market may weaken the source of low-cost funding, and negatively impact NII
· A slow down in real estate transactions will impact loan growth
· Residential real estate refinancing is declining due to the rising rates
Based in San Francisco, California, UnionBanCal Corporation (UB) is a bank holding company, approximately 65% of which is owned by The Bank of Tokyo-Mitsubishi, Ltd. The bank offers commercial loans and project financing, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services, and selected capital markets products. The bank also offers investment and financial management, trust services, private banking, and global custody services. Its primary subsidiary, Union Bank of California, is the third largest commercial bank in California and one of the 25 largest banks in the United States. The bank has 337 banking offices in California, Oregon, and Washington, and 2 international offices, principally along the Pacific Rim. The company's website is www.uboc.com. UB operates on a calendar year basis.
Note: UB completed the sale of its insurance brokerage business to a North Carolina based financial company on June 2, 2008. Commencing in 2Q08, the results of the insurance brokerage business have been reported in discontinued operations and all prior periods have been restated to reflect this accounting treatment.
July 28, 2008
Revenue [Note: not changed since the last report; Earnings Report will follow]
The tables are current as of 10/06/08.
Total revenue as compiled by Zacks Research Digest is shown in the table below:
($ in million) / 2Q07A / 1Q08A / 2Q08A / 3Q08E / 4Q08E / 2007A / 2008E / 2009E / 2010ENet Interest Income / 431 / 463 / 513 / 530 ↓ / 543 / 2,049↓ / 2,214↑ / 2,431
Provision for
Credit Losses / 5 / 72 / 95 / 84 / 83 / 81 / 334↑ / 340↑ / 234
Core Non-interest Income / 202 / 200 / 198 / 202 / 791↓ / 830↑ / 852
Securities Gains / 0 / 0 / 0 / 0 / 2 / 1 / 0
Total Non-interest Income / 202 / 200 / 198 / 202 / 791↓ / 830↑ / 852
Total Revenue / 633 / 713 / 728 / 745 / 2,841↓ / 3,044↑ / 3,283
Net Interest Margin / 3.56% / 3.54% / 3.73%↓ / 3.73%↓ / 3.70%↓ / 3.70% / 3.69%↑ / 3.76%
NOTE: Few 1Q08 and 2007 figures have been left blank in the table as the analysts did not provide restated figures.
In 2Q08, total revenue (taxable-equivalent net interest income plus non interest income) was $713 million, up 12.6%y-o-y.
Net interest income was $513.0 million in 2Q08, up $82.0 million or 19.0% y-o-y, primarily due to strong loan growth and lower rates paid on interest bearing liabilities, partially offset by lower yields on earning assets and a deposit mix shift from non-interest bearing and low-cost deposits into higher-cost deposits.
In 2Q08, non-interest income was $199.6 million, down $2.0 million or 1.0% y-o-y. Service charges on deposit accounts were flat with higher account analysis fees offset by lower overdraft fees. Trust and investment management fees increased $4.1 million or 10.5% primarily due to an increase in trust assets. Net gain on private capital investments was $1.3 million versus $20.2 million in 2Q07.
($ in million) / 4Q06A / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07A / 2007A / 1Q08A / 2Q08A /Core Non-interest Income detail /
Service charges on deposit accounts / 77 / 320 / 75 / 77 / 76 / 76 / 304 / 75 / 78
Trust and investment management fees / 49 / 195 / 49 / 40 / 51 / 42 / 158 / 43 / 44
Brokerage commissions and fees / 9 / 36 / 10 / 10 / 10 / 10 / 40 / 10 / 11
Merchant banking fees / 14 / 42 / 9 / 9 / 10 / 16 / 44 / 12 / 11
Other Core Non-Interest Income / 66 / 57
Total Core Non-Interest Income / 202 / 200
NOTE: A few figures have been left blank in the table as the analysts did not provide restated figures.
Please refer to the separately published spreadsheet of UB for additional detail and updated forecasts.
Margins [Note: not changed since the last report; Earnings Report will follow]
Provided below is a summary of margins as compiled by Zacks Research Digest:
2Q07A / 1Q08A / 2Q08A / 3Q08E / 4Q08E / 2007A / 2008E / 2009E / 2010EPre-tax operating margin / 38.7% / 27.8% / 30.4%↓ / 31.6%↓ / 29.1% / 31.1%↑ / 35.6%
After-tax net operating margin / 26.2% / 18.6% / 20.5%↓ / 21.3%↓ / 19.6% / 20.8%↓ / 24.2%
Efficiency ratio / 60.5% / 58.8% / 58.1%↑ / 57.3% / 59.1%↓ / 57.7%↓ / 57.2%
NOTE: 1Q08 and 2007 figures have been left blank in the table as the analysts did not provide restated figures.
Non-interest expense in 2Q08 was $419.3 million, an increase of $36.3 million, or 9.5% y-o-y. Salaries and employee benefits expenses increased $11.4 million, or 4.9%, primarily due to annual merit increases and higher accruals for performance-related incentive expense, partially offset by lower pension expense. The provision for losses on off-balance sheet commitments was $5.0 million in 2Q08 versus zero in 2Q07. Other non-interest expense increased $5.4 million, or 17.2%, primarily due to higher regulatory agency fees in 2Q08 as credits available from prior quarters were exhausted.
Outlook
The Zacks Digest model projects average y-o-y growth rates for total non-interest expenses of 4.7% and 6.9% for 2009 and 2010, respectively, as compared to revenue growth rates of 7.2% and 7.9% for 2009 and 2010, respectively.