Fitch Affirms Major Japanese Banks' Ratings; Outlooks Stable
02/12/2013 07:46
(The following statement was released by the rating agency) TOKYO, December 02 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of two major Japanese banking groups and their banking subsidiaries - Mizuho Financial Group, Inc. (MHFG) and Sumitomo Mitsui Financial Group, Inc. (SMFG) - and Sumitomo Mitsui Trust Bank, Limited (SMTB). The agency has also affirmed the ratings of Mitsubishi UFJ Financial Group, Inc.'s (MUFG) two banking subsidiaries in Japan and ACOM CO., LTD (ACOM). The Rating Outlooks are Stable for all entities. A full list of rating actions is at the end of this commentary. The rating actions follow a periodic review of the major Japanese banking groups. Fitch will publish the main findings of this review in a report "2014 Outlook: Japanese 'Mega' Banks", available at www.fitchratings.com. Fitch concludes that the major banks are likely to maintain a modest improvement in their performance, which is captured by their current ratings. KEY RATING DRIVERS - VRs The Viability Ratings (VRs) reflect the four banking groups' sound asset quality and solid liquidity in yen, backed by strong domestic franchises. The ratings also factor in consistent improvement in the banks' risk absorption capability. The banks' still-large strategic equity holdings remain the key rating constraint, as the investments could give rise to volatility in the banks' internal capital generation and capitalisation. Fitch believes the improvement in risk absorption capability will be sustained. This is because of the banks' generally risk-averse nature, which in part contributes to modest core profitability. Also, moderate offshore expansion (despite some evidence of growing risk appetite overseas) and a less challenging domestic operating environment will help the banks hold down potential credit risks. RATING SENSITIVITIES - VRs The potential for a VR upgrade is limited for MUFG's subsidiaries, in light of the ratings' proximity to the Japanese sovereign's IDRs (A+/Negative). For SMFG, Sumitomo Mitsui Banking Corporation (SMBC), MHFG and its banking subsidiaries, and SMTB, any positive action would likely stem from further structural improvement in the domestic operating environment leading to stronger loan growth, accelerated internal capital generation without a material increase in risk appetite, and larger absorption buffers. Negative rating action on all the banks' VRs is currently not envisaged due to their stable asset quality and adequate buffers, particularly against potential market risk stemming from their substantial investments in stocks and Japanese government bonds. However, the VRs may be negatively affected if material stress in the operating environment adversely impacts the banks' risk buffers. Downward pressure may also result from an unexpected increase in risk appetite without a corresponding increase in capital buffers, leading to potentially higher earnings volatility or slower internal capital generation. KEY RATING DRIVERS - IDRs, Senior Debt, SRs and SRFs The Long-Term IDRs of all banks except MHFG and its subsidiaries are driven by the banks' respective VRs. MHFG group's Long-Term IDRs are based on sovereign support, and are at the banks' Support Rating Floors (SRFs). The Support Ratings (SRs) and SRFs of all major banks reflect Fitch's view that, as systematically important banks in Japan, the banks would be most likely to receive government support in case of need. Fitch believes that the prospects of support for systemically important financial institutions in Japan have not deteriorated even though there is a global move toward reducing the extent of sovereign support should banks require assistance. The Short-Term IDRs of all banks reflect their strong access to funding due to solid franchises and abundant liquidity within the system. Also, the extensive liquidity support programs by the Bank of Japan continue to substantially mitigate risks to the banks' liquidity. RATING SENSITIVITIES - IDRs, Senior Debt, SRs and SRFs The IDRs of MUFG's banking subsidiaries are driven by their VRs and any change in the VRs could result in a change to their IDRS and senior debt ratings. An upgrade of the IDRs of SMFG and its subsidiaries, and SMTB would follow an upgrade of the VRs. However, a downgrade in the VRs would not affect the IDRs, which are aligned with their SRFs. Currently, the VRs of MHFG and its subsidiaries are one notch below their 'A-' IDRs. Therefore, the upgrade in the VRs of the group would not lead to an upgrade of their IDRs unless it is by more than two notches. Any downgrade of the VRs of MHFG and its subsidiaries would not immediately affect their IDRs, since their IDRs are at the SRFs. Fitch expects the banks' '1' SRs and 'A-' SRFs to be maintained, even if the sovereign's ratings were downgraded to 'A' (currently 'A+'/Negative). This is based on Fitch's belief that the government's propensity to support the major banks, if necessary, remains intact. However, any downgrade of the sovereign's IDRs to below 'A' would negatively affect the SRs and SRFs of all banks as well as the support-driven IDRs of MHFG and its subsidiaries. KEY RATING DRIVERS and SENSITIVITIES - Subordinated Debt and Other Hybrid Securities Preferred securities issued by subsidiaries of MUFG, MHFG and SMFG are rated four notches below the respective parents' VRs - two notches for loss severity and two notches for non-performance risk due to the constraint of coupon suspension - in line with Fitch's criteria on performing instruments. Subordinated debt under Basel II are rated one notch below the IDRs, reflecting Fitch's expectations that sovereign support, if required by the banks, would preclude them from legal failure. As a result, subordinated debt, like senior debt, would not default. KEY RATING DRIVERS and SENSITIVITIES - Subsidiary and Affiliated Company The IDRs of Sumitomo Mitsui Banking Corporation Europe Limited (SMBCE) are in line with the ratings of its 100% parent, SMBC, given its role as the European operational arm of SMBC. The Long-Term IDRs of ACOM were affirmed following the affirmation of the Long-Term IDRs of affiliated banks under MUFG, a 40% shareholder of ACOM. ACOM is viewed as a strategically important subsidiary within the group, because it provides core consumer financial services. Hence, ACOM's IDRs are notched down one level from MUFG banking subsidiaries' IDRs. Any change in the notching approach would likely be driven by changes in MUFG's ability or propensity to support ACOM, including due to changes in ownership levels or strategic importance. A full list of rating actions follows: Entities under MHFG MHFG, Mizuho Trust & Banking Co., Ltd.: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' Mizuho Bank, Ltd.: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A-' Mizuho Capital Investment (USD) 1 Limited -Preferred securities affirmed at 'BB' Mizuho Financial Group (Cayman) Limited: - Senior subordinated debt (Lower Tier 2 bonds under Basel ll) affirmed at 'BBB+' Entities under SMFG SMFG: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' SMBC: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A-' SMBCE: - Long-Term Foreign Currency IDR affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Support Rating affirmed at '1' SMFG Preferred Capital GBP 1 Limited, SMFG Preferred Capital USD 1 Limited: -Preferred securities affirmed at 'BB+' Entities under MUFG Bank of Tokyo-Mitsubishi UFJ, Ltd.: - Long-Term Foreign and Local Currency IDRs affirmed at 'A'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'a' - S