This article first appeared in The Edge Financial Daily on September 26, 2017

KUALA LUMPUR: The sale of a 4.6% stake in CIMB Group Holdings Bhd, the country’s second-largest lender by assets, is credit positive for Mitsubishi UFJ Financial Group Inc (MUFG), Moody’s Investors Service said, as it frees up capital.

It is also in line with MUFG’s strategy to improve its capital efficiency, the international rating agency added.

Last Wednesday, MUFG announced it had sold its entire stake i.e. 412 million shares in CIMB — held through Bank of Tokyo-Mitsubishi UFJ Ltd (BTMU) for about ¥68 billion (RM2.55 billion).

“Although MUFG’s ratio of tangible common equity (TCE) to risk-weighted assets (RWAs) was 9.69% on a Basel III transitional phase-in basis at March 31, 2017, we expect the bank will raise this ratio to around 10%.

“We expect this transaction will allow MUFG to reduce its RWAs and increase its TCE, and forecast that MUFG’s TCE/RWA ratio will improve by one to seven basis points on a pro forma basis, depending on the investment’s book value,” Moody’s said in a statement yesterday.

Before the sale, MUFG was CIMB’s fourth-largest shareholder.

“However, as a minority shareholder, BTMU was unable to exercise influence on management decisions, which made its stake in CIMB a drag on MUFG’s capital ratios without much benefit,” said Moody’s.

Moody’s noted that MUFG has a stand-alone subsidiary in Malaysia that has generated solid returns for the group. Also, MUFG will maintain its relationship with CIMB as an alliance partner, positioning MUFG as the most prominent Japanese bank that can offer Islamic finance.

Moody’s is of the view that had Malaysia’s large banks consolidated as it expected, the stake in CIMB would have been a more worthwhile investment.

Still, Moody’s expects MUFG to remain committed to expansion in Asean countries, pointing to Bank of Ayudhya in Thailand as the group’s main vehicle for its regional expansion.

“With a stake of about 77%, MUFG can exert management control and significant influence on Bank of Ayudhya.

“Also, MUFG can use the Bank of Ayudhya to expand into other Asean countries. The Philippines is another key market for MUFG, which has a 20% stake in Security Bank Corp,” said Moody’s.