U.S. Bancorp is making a move to bolster a key capital ratio after its acquisition of MUFG Union Bank took a bite out of its capital.
The Minneapolis company said it's issuing 24 million common shares, selling them to Mitsubishi UFJ Financial Group, the former owner of MUFG Union, and using the $936 million in proceeds to satisfy part of a $3.5 billion financial obligation to the Japanese company.
The transaction, which U.S. Bancorp described Wednesday as a debt/equity conversion, is expected to boost the firm's common equity tier 1 ratio but also erode its earnings per share.
U.S. Bank's parent company said the move will increase its common equity tier 1 ratio by approximately 20 basis points. The transaction will also be roughly 1.5% dilutive to the firm's run-rate earnings per share, according to John McDonald, an analyst at Autonomous Research.
U.S. Bancorp has set a target of reaching a common equity tier 1 ratio, including so-called accumulated other comprehensive income, of approximately 9.0% at the end of next year. Following the debt/equity conversion, that ratio will be at 7.1%, according to McDonald.
U.S. Bancorp expects to boost its common equity tier 1 ratio further by allowing little to no growth in its core risk-weighted assets, among other strategies, McDonald wrote Wednesday in a note to clients. The bank also anticipates that it will generate roughly 20-25 basis points of organic growth in its capital ratio each quarter, according to McDonald.
"The company has expressed confidence in getting to its target," McDonald wrote. "All together, today's deal likely adds some comfort for investors."
After U.S. Bancorp announced its plan late Wednesday, its stock price rose 2.6% Thursday in late-afternoon trading.
U.S. Bancorp's common equity tier 1 ratio fell sharply in the fourth quarter of last year as a result of the MUFG Union acquisition, which closed on Dec. 1. Though that ratio has since partially rebounded, the company
In April, HoldCo Asset Management wrote in a research report that the $681 billion-asset company was not holding enough capital for a bank its size.
At the time, U.S. Bancorp executives said that they saw no need to raise capital, arguing that earnings accretion, risk-weighted asset optimization and other factors would bring the company's capital to an appropriate level.
Under the terms of the MUFG Union Bank acquisition, U.S. Bancorp received $3.5 billion in cash, which it was required to repay to Mitsubishi UFJ Financial within five years. It was also obligated to make a reasonable best effort to repay $1 billion of the funds substantially sooner.
U.S. Bancorp said Wednesday that it currently expects to pay the remaining portion of its obligation to Mitsubishi UFJ Financial — roughly $2.5 billion — in cash by the Dec. 1, 2027, deadline.
