Fitch Upgrades SMFG; Affirms Other Major Japanese Banks

Acom

17/11/2015 07:27

(The following statement was released by the rating agency)

TOKYO, November 17 (Fitch) Fitch Ratings has upgraded the Long-Term Issuer 
Default Ratings (IDRs) of Sumitomo Mitsui Financial Group, Inc. (SMFG) and its 
subsidiary banks to 'A' from 'A-', reflecting the upgrade of the banking group's 
Viability Rating (VR) to 'a' from 'a-'. 

Fitch has affirmed the ratings of Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) and 
Mitsubishi UFJ Trust and Banking Corporation (MUTB), the two main banking 
subsidiaries of Mitsubishi UFJ Financial Group, Inc. (MUFG). The agency also 
affirmed the ratings of Mizuho Financial Group, Inc. (MHFG) and the ratings on 
Sumitomo Mitsui Trust Bank, Limited (SMTB). The ratings of MUFG's consumer 
finance subsidiary, ACOM CO., LTD (ACOM), have also been affirmed. 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. 

KEY RATING DRIVERS 

VIABILITY RATINGS

The Viability Ratings (VRs) reflect the four banking groups' respective strong 
or very sound domestic franchises, solid liquidity profiles in yen, sound asset 
quality and adequate capital positions - the latter has been bolstered by the 
improvement in equity markets in the past 30 months, and Fitch expects it to 
continue improving through consistent retained earnings. That said, 
profitability remains modest in the sustained low interest-rate environment. 

The upgrade in SMFG's VR reflects the consistent outperformance (relative to the 
other major banks) in profitability and enhanced resilience against key market 
risks, specifically its reduction of Japanese government bond (JGBs) exposures 
and the shorter duration of its JGB holdings. SMFG's CET 1 ratio reached 12.1% 
on a fully loaded basis and 9.8%, excluding unrealized gains from 
available-for-sale securities, at end-September 2015, which is comparable to 
that at MUFG (12.0% and 10.0% respectively), which has a similar risk appetite 
and earnings mix.

Nevertheless, market risks stemming mainly from the four banking groups' 
substantial investment portfolios could give rise to some volatility in their 
earnings and capitalisation, although Fitch believes the banks have reduced 
their investment holdings and will continue to trim them. 

Fitch expects the banks' core domestic banking profits to improve slightly, but 
remain stable in the short to medium term, given still-weak demand from the 
corporate sector and the low interest-rate environment. The banks' performances 
in recent years have benefited from market-related income (such as equity gains 
and the sale of financial products) and decreases in credit costs. They have 
also diversified their sources of earnings. 

Growth in the banks' overseas operations has become more significant as they 
seek to reduce reliance on domestic operations and boost profitability. Fitch 
expects the banks to continue expanding abroad, but they likely at a pace no 
faster than in previous years, so profitability is not likely to improve 
significantly. Their offshore net interest margins (NIM) remain modest, at an 
average of less than 2% for the financial year ended March 2015 (FYE15). 

Meanwhile, a stable, yet challenging domestic operating environment, will help 
the banks hold down potential credit risks.  

IDRS, SENIOR DEBTS, SRS AND SRFS

The Long-Term IDRs of all banks, except MHFG, MHBK and MHTB, 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 ratings on the 
senior debt are based on the banks' IDRs.

The Support Ratings (SRs) and SRFs of all the major banks reflect Fitch's view 
that, as systematically important banks in Japan, they 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 trend towards reducing the extent of 
sovereign support for banks. 

SUBORDINATED DEBTS 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. 

For subordinated debt issued under Basel II (B2T2) or Basel III (B3T2), the 
anchor rating - which best reflects non-performance risk - is the higher of the 
VR or support-driven Long-Term IDR. This is because, Fitch believes that support 
can be factored into such instrument ratings - under Japan's Deposit Insurance 
Law, the government can pre-emptively provide financial assistance to a solvent 
bank holding company, when a serious systemic disruption is anticipated.

BTMU's B2T2 bonds are rated one notch (for loss severity) below its VR. 
Meanwhile, B3T2 instruments issued by SMFG and MHFG's subsidiary are notched 
twice from the respective VRs to reflect the prospect of the full and permanent 
write-down of the securities upon reaching the point of non-viability, resulting 
in additional loss severity

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 subsidiary banks of MUFG, a 40% shareholder of ACOM. ACOM, one 
of the leading providers of consumer financial services in Japan, is viewed as a 
strategically important subsidiary within the group, and its rating is notched 
down one level from that of the subsidiary banks of MUFG.

RATING SENSITIVITIES

VIABILITY RATINGS

The potential for a VR upgrade is limited for MUFG's subsidiaries, BTMU and 
MUTB, as well as SMFG and its subsidiary, Sumitomo Mitsui Banking Corporation 
(SMBC), in light of the ratings' proximity to the Japanese sovereign's IDRs 
(A/Stable). For the same reasons, their VRs could be downgraded were the 
sovereign to also be downgraded.

For MHFG and its subsidiaries, Mizuho Bank, Ltd. (MHBK) and Mizuho Trust & 
Banking Co., Ltd. (MHTB), and SMTB, positive rating action would be aided by a 
sustained improvement in the wider domestic real economy, including sound growth 
in demand for capex/investment. Fitch views MHFG's recent capital improvement as 
positive, but it is broadly in line with prior expectations when its VR was last 
upgraded in 2013, and thus the agency is looking for further and sustained 
improvement if the VR is to be upgraded again, given uncertainty about risks 
inherent to the operating environment. 

Negative rating action on all the banks' VRs is currently not envisaged due to 
their stable asset quality and adequate capital buffers. However, the VRs may be 
negatively affected if sudden and unexpected deterioration in the operating 
environment - such as due to uncertainty or failure of Abenomics - adversely 
impacts the banks' financial profiles. Downward pressure may also result from an 
unexpected substantial increase in risk appetite (without a corresponding 
increase in risk buffers) or an increase in exposure to equities, leading to 
potentially higher volatility in earnings and capital. A significant acquisition 
- although not expected - could also lead to a change in the banks' ratings.

IDRS, SENIOR DEBTS, SRS AND SRFS

The IDRs of BTMU and MUTB are driven by their VRs and any change in the VRs 
could result in a change to their IDRs and the ratings of outstanding senior 
debts. 

The IDRs of SMFG and SMBC are also driven by their VRs and any change in the VRs 
could result in a change to their IDRs and the ratings of outstanding senior 
debts.

Currently, the VRs of MHFG, MHBK and MHTB 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.

An upgrade of the IDRs of SMTB would follow an upgrade of its VR. However, a 
downgrade in the VR would not necessarily affect the IDRs, which are aligned 
with the SRFs. Any negative action on the IDRs would likely be a reflection of 
negative action on the sovereign ratings.

The banks' '1' SRs and 'A-' SRFs has been maintained, even after the downgrade 
of the sovereign's ratings to 'A' from 'A+', based on Fitch's belief that the 
government's propensity to support the major banks, if necessary, remains 
intact. However, the Outlook on the banks' IDRs would be driven by the Outlook 
on the sovereign ratings. Further downgrade of the sovereign's IDRs to below 'A' 
would lead to a review of the SRs and SRFs of all banks. 

SUBORDINATED DEBTS AND OTHER HYBRID SECURITIES

A downgrade of BTMU's VR would lead to a downgrade of the rating on its B2T2 
instruments. Also, a downgrade of SMFG's VR would lead to a downgrade of the 
ratings on its B3T2 instruments as its IDR of 'A' is underpinned by an 'a' VR. 
For MHFG's subsidiaries, a downgrade of their VRs would not affect the ratings 
of their B3T2 instruments as their IDRs would then be underpinned by the 'A-' 
SRFs. 

Meanwhile, substantial changes in the resolution framework that increase the 
chances of loss-absorption being triggered, or changes in assessment of the 
banks' systemic importance that reduce the likelihood of pre-emptive support 
would lead Fitch to review the anchor rating of the subordinated debts. 
Nevertheless, Fitch believes such changes will be unlikely in the foreseeable 
future.   

SUBSIDIARY AND AFFILIATED COMPANY

Any change in the rating of SMBC would lead to a corresponding change in the 
ratings of SMBCE.

Any change in the notching approach for ACOM's rating would likely be driven by 
changes in MUFG's ability or propensity to support ACOM, including due to 
changes in ownership or ACOM's strategic importance to the group. 

FULL LIST OF RATING ACTIONS

Entities under MHFG

MHFG:

- 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-' 

- B3T2 affirmed at 'BBB'

MHBK:

- 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-'

MHTB: 

- 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 Capital Investment (USD) 1 Limited 

-Preferred securities affirmed at 'BB'

Mizuho Financial Group (Cayman) 3 Limited

- B3T2 affirmed at 'BBB'

Entities under SMFG

SMFG:

- 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-'

- B3T2 upgraded to 'BBB+' from 'BBB'  

SMBC: 

- 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-' 

SMBCE: 

- Long-Term Foreign-Currency IDR upgraded to 'A' from '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 upgraded to 'BBB-' from 'BB+' 

Entities under MUFG

BTMU:

- 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' 

- B2T2 affirmed at 'A-' 

MUTB:

- 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-'

MUFG Capital Finance 1 Limited, MUFG Capital Finance 2 Limited, MUFG Capital 
Finance 4 Limited and MUFG Capital Finance 5 Limited: 

- Preferred securities affirmed at 'BBB-'

ACOM:

- Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable

- Short-Term Foreign- and Local-Currency IDRs affirmed at 'F2' 

- Support Rating affirmed at '1' 

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-'

Contact: 

Primary Analyst

Naoki Morimura 

Director

+81 3 3288 2686

Fitch Ratings Japan Limited

Kojimachi Crystal City East Wing 3F

4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083

Secondary Analyst

Jonathan Cornish 

Managing Director

+852 2263 9901

Committee Chairperson

Mark Young

Managing Director

+65 6796 7229

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria  (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

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