Fitch Upgrades Japanese Mega Banks' Viability Ratings
04/03/2013 09:40
March 4 (Reuters) - (The following statement was released by the rating agency) TOKYO, March 04 (Fitch) Fitch Ratings has upgraded the Viability Ratings (VRs) of Mizuho Financial Group, Inc. 8411.T (MHFG), and Sumitomo Mitsui Financial Group, March 4 (Reuters) - Key Rating Drivers and Sensitivities - VRs The upgrade of the VRs reflects sustained improvements in the banks' risk absorption capability despite a persistently challenging operating environment. The VRs continue to be underpinned by the banks' strong domestic franchises and solid liquidity, particularly in yen. The affected banks are MHFG, Mizuho Bank, Ltd. (MHBK) MZFGB.UL , Mizuho Trust & Banking Co., Ltd. (MHTB), Mizuho Corporate Bank, Ltd. MZFGAE.UL (MHCB), SMFG and Sumitomo Mitsui Banking Corporation SUMFGI.UL (SMBC), Bank of Tokyo-Mitsubishi UFJ, Ltd. MTFGTU.UL (BTMU), Mitsubishi UFJ Trust and Banking Corporation MTFGTB.UL (MUTB). The improvements, which have exceeded Fitch's earlier expectations, are most evident in capitalisation (including internal capital generation) for all mega banks. For MUFG and SMFG in particular, their capitalisation now compares favourably with that of many global peers. Despite solid improvements in MHFG's capital ratios, they remain somewhat lower than the average of 'bbb+' rated peers. However, today's action incorporates Fitch's expectation that Mizuho group's internal capital generation will improve further from additional cost reductions through their ongoing group restructuring. Fitch therefore expects MHFG's Basel III-compliant common equity tier 1 ratio (on a fully implemented basis) to reach 8% by end-March 2016, from around 7% currently. The upgrades also reflect reduced equity exposure, gradual earnings diversification and sound asset quality. Fitch believes these improvements will be sustained. This is because of the banks' risk-averse nature, which in part contributes to modest core profitability, their moderate offshore expansion, and a likely less negative, albeit still challenging, domestic operating environment. The affirmation of the VR for SMTB reflects its strong liquidity, modest risk appetite and solid asset quality consistent with its trust banking model, limited interest rate risk and adequate capitalisation. Prospects for improving its core capital are lessrelative to its peers while its smaller franchise than the three mega banking groups' also constraints the ratings. Fitch believes it will take time for synergies from the merger between Sumitomo Trust and Banking Co., Ltd. and Chuo Mitsui Trust and Banking Company, Limited MITBKC.UL in April 2012 to improve SMTB's internal capital generation to levels comparable with higher-rated banks. The Short-Term IDRs have been affirmed at 'F1' to reflect the banks' strong access to funding on the back of their substantial franchises and extensive liquidity within the system. The VRs are sensitive to the broader operating environment and a number of potential risks to which the banks remain exposed. Negative rating action on the banks' VRs is currently not envisaged as their substantial exposures to investment stocks and, in particular, Japanese government bonds are well covered by the banks' improved capitalisation. Fitch views the outlook for economic and market conditions as somewhat supportive for continuing improvements to their financial profiles. Nevertheless, Fitch expects the banks to maintain improvements even in challenging domestic operating conditions. The VRs may be negatively affected by material stress in the operating environment - beyond Fitch's own stress test assumptions. 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. The potential for further VR upgrade is limited for MUFG's subsidiaries, in light of the ratings' proximity to the sovereign IDRs (A+/Negative). Nevertheless, any positive action would likely stem from further substantial improvement in the domestic operating environment resulting in accelerated internal capital generation. Contributions from overseas operations are likely to be moderate in the short- to medium-term with no major changes to the risk/return profile. For SMTB, upside for the VR would arise if successful integration benefits internal capital generation. Similarly, any further positive rating action on the VRs of MHFG and SMFG entities would reflect a structurally improved operating environment as well as further material improvement in their capitalisation without a material increase in risk appetite. In the case of MHFG, given that the rating already factors in meaningful improvement in capitalisation, prospects for a further upgrade in the medium-term are limited. Rating Drivers and Sensitivities - IDRs, Senior Debt, Support Ratings and Support Rating Floor The upgrade of the IDRs of MUFG's banking subsidiaries follows the upgrade of the VRs. Conversely a downgrade in the VRs of MUFG's banking subsidiaries would directly impact their IDRs and senior debt instrument ratings given that their IDRs are driven by the VRs. Any downgrade in VRs of SMFG, MHFG and SMTB would not immediately affect their IDRs, since the IDRs are at their Support Rating Floors (SRF). On the other hand, an upgrade in the VRs of SMFG and SMTB would in turn lead to an upgrade of their IDRs. Currently, MHFG's VR is one notch below its IDR of 'A-'. Therefore, an upgrade in the VR of MHFG would not lead to an upgrade of the IDR unless it is by more than two notches. Fitch expects the banks' Support Ratings (SR) of '1' and SRF of 'A-' to be maintained, even if the sovereign's ratings were downgraded to 'A'. This is based on Fitch's belief that the government's propensity to support the major banks, if necessary, remains intact. Also, the notching between the SRFs of systemically important banks and the sovereign ratings tends to narrow as the latter fall to lower rating categories. However, any downgrade of the sovereign's IDRs to below 'A' would negatively affect the SR and SRF of all banks as well as the support-driven IDRs of MHFG. Subordinated Debt and Other Hybrid Securities - Rating Drivers and Sensitivities 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 ll 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. Subsidiary and Affiliated Company - Rating Drivers and Sensitivities 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 CO., LTD 8572.T (ACOM) have been upgraded following the upgrade of the Long-Term IDRs of affiliated banks under their 40% major shareholder MUFG. ACOM is viewed as a strategically important subsidiary within the group, as a provider of core consumer financial services. Hence, the 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. Today's rating actions are as follows: Entities under MHFG MHFG, MHBK, MHTB: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Fo reign and Local Currency IDRs affirmed at 'F1' - Viability Rating upgraded to 'bbb+' from 'bbb' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' MHCB: - Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating upgraded to 'bbb+' from 'bbb' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A-' Mizuho Capital Investment (USD) 1 Limited MZFGU.UL -Preferred securities upgraded to 'BB' from 'BB-' Mizuho Financial Group (Cayman) Limited MZFGPC.UL : - 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 upgraded to 'a-' from 'bbb+' - 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 upgraded to 'a-' from 'bbb+' - 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 SUMFBP.UL , SMFG Preferred Capital USD 1 Limited SMFPCA.UL : -Preferred securities upgraded to 'BB+' from 'BB' Entities under MUFG BTMU: - Long-Term Foreign and Local Currency IDRs upgraded to 'A' from 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating upgraded to 'a' from 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt upgraded to 'A' from 'A-' - Senior subordinated debt (Lower Tier 2 bonds under Basel II) upgraded to 'A-' from 'BBB+' MUTB: - Long-Term Foreign and Local Currency IDRs upgraded to 'A' from 'A-'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F1' - Viability Rating upgraded to 'a' from 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' MUFG Capital Finance 1 Limited MTFGIA.UL , MUFG Capital Finance 2 Limited MTFGB.UL , MUFG Capital Finance 4 Limited MTFGCD.UL and MUFG Capital Finance 5 Limited: -Preferred securities upgraded to 'BBB-' from 'BB+' ACOM: - Long-Term Foreign and Local Currency IDRs upgraded to 'A-' from 'BBB+'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F2' - Support Rating upgraded to '1' from '2' - Senior unsecured debt upgraded to 'A-' from 'BBB+' Entity under Sumitomo Mitsui Trust Group SMTB: - 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-' ((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net)) Keywords: Fitch Upgrades Japanese Mega Banks' Viability Rati