UnionBanCal Corp. on Monday reported third-quarter profit well below analyst estimates and said loan losses are creeping into its commercial and industrial portfolio.
In the last time the San Francisco company reports earnings before Mitsubishi UFJ Financial Group Inc. of Tokyo acquires the shares it does not own already, the $62.6 billion-asset UnionBanCal said net income fell 18% from a year earlier, to $104.8 million, or 75 cents a share. The average estimate of analysts polled by Thomson Reuters was $1.09.
Though UnionBanCal has been struggling for several quarters with problem residential construction loans, it is now showing marked deterioration in commercial and industrial loans, said Philip B. Flynn, its chief operating officer.
"In the past, most of our problems have come out of the home builder segment, but we've anticipated that we would have more problems bleeding into the general economy," Mr. Flynn said in an interview Monday. "For the next few quarters, there's going to be a lot of pressure in the economy, which is going to be impacting our borrowers." The company said it saw deterioration in all types of C&I loans.
Joe Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said the company's provision for loan losses, at $117 million, was roughly 50% higher than the its earlier guidance of $65 million to $85 million, and depressed results.
UnionBanCal also posted an unexpected spike in commercial and industrial loan nonperformers (a fourfold increase from a year earlier, to $162 million) and chargeoffs (a fourteenfold rise, to $42 million), Mr. Morford said. The company had said in the second quarter that the C&I market was softening, and now "the spread of deterioration is starting to materialize," Mr. Morford said. "This is an ominous sign for what's in store for other banks in the West, and for the industry in general," he said.
UnionBanCal's loan-loss provision rose sevenfold from a year earlier, to $117 million, and nearly sixfold from the second quarter's $95 million. The provision for credit losses, including losses on loans and off-balance-sheet commitments, rose sixfold from a year earlier, to $125 million. Overall, net chargeoffs rose thirtyfold from a year earlier, to $63 million, or 0.53% of average total loans. Net chargeoffs more than doubled from the second quarter. Nonperforming assets rose nearly sixfold from a year earlier, to $304 million, or 0.49% of total assets, and rose 35% from the second quarter.
Earnings from continuing operations fell 27%, to $110.1 million, or 79 cents a share. Revenue rose 13% from a year earlier, to $721 million.
"We are pleased with our core earnings," Mr. Flynn said. Net interest income rose 22% from a year earlier, to $522 million, mainly because of lower rates on deposits and strong loan growth, partially offset by lower yields on earning assets. Total loans rose 21.5% from a year earlier, to $48.3 billion. UnionBanCal's net interest margin rose 16 basis points from a year earlier, to 3.67%. Total deposits were flat at $43.5 billion. Noninterest income fell 4.6% from a year earlier, to $198.7 million, as revenue from trading fell and deposit, trust, and investment fees was flat. UnionBanCal remained well capitalized; at Sept. 30 its Tier 1 capital ratio was 8.03% and its risk-based capital ratio was 10.94%.
Mr. Flynn said, "Mitsubishi has already said they have a goal of being one of the top five banks in the world, and this is part of their whole intent on depositing more capital and investment here in the U.S." The Toyko company will complete the deal next month.