Fitch Affirms Nomura and Daiwa at 'A-'; Outlook Stable
18/10/2018 08:47
(The following statement was released by the rating agency) Fitch Ratings-Tokyo-October 18: Fitch Ratings has today affirmed the Long-Term Issuer Default Ratings (IDRs) on the following Japanese entities at 'A-' with a Stable Outlook: - Nomura Holdings, Inc. (Nomura Holdings) and its wholly owned subsidiary, Nomura Securities Co., Ltd. (Nomura Securities), which are jointly referred to as Nomura - Nomura Financial Products & Services, Inc. (NFPS), a wholly owned subsidiary of Nomura Holdings - Daiwa Securities Group Inc. (Daiwa Securities Group) and its wholly owned subsidiary Daiwa Securities Co. Ltd. (Daiwa Securities), which are jointly referred to as Daiwa Fitch has affirmed Nomura's and Daiwa's Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A-'. The Viability Ratings (VR) have been affirmed for the entities. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS AND SENIOR DEBT The IDRs of Nomura Holdings and Nomura Securities are driven by their SRs and SRFs. The ratings of NFPS are driven by the SR and its parent Nomura Holdings' IDR. The ratings on the guaranteed senior note programme of Nomura Bank International plc (NBI) and the guaranteed senior note programme of Nomura International Funding Pte. Ltd. (NIF) are aligned with the IDRs of the guarantors Nomura Holdings and Nomura Securities. The IDRs of Daiwa are driven by the SRs and SRFs. Daiwa Securities' senior debt ratings are aligned with its support-driven IDRs. The Stable Outlook reflects the Stable Outlook on Japan's 'A' sovereign rating, which underpins the IDRs. Fitch believes the Japanese economy remains subdued with signs of a slowdown in the near term, although we expect it to be stable in the medium term, backed by accommodative financial conditions, a tight labour market and an increase in business investments leading to the 2020 Tokyo Olympics. VRs The VRs for Nomura and Daiwa reflect their superior market positions within the domestic financial system, a securities business model that is sensitive to financial market fluctuations and relatively strong capitalisation. Nomura Holdings' Fitch Core Capital (FCC) ratio was about 17% and Daiwa Securities Group's was about 25% at end-June 2018, which compare favourably with that of many global universal banks and broker dealer peers. Fitch expects their capitalisation to remain consistent with peers, if not better, after implementation of the finalised Basel III reform. Nomura is also required to meet total loss absorption capital requirements by 2021, which is manageable in Fitch's view as there is a long period allowed for compliance. Fitch applies its Bank Rating Criteria and Non-Bank Financial Institutions Rating Criteria to assess the VRs on Nomura and Daiwa because of their role in the local financial system, Japan's regulatory oversight of the two businesses, their access to the lender of last resort facilities in the country, and their designation as domestic systemically important financial institutions by the authorities. Rating constraints include Fitch's view of the cyclicality of the companies' business models. Nomura and Daiwa have continued to gradually improve both the structure and quality of their earnings by shifting to a more stable asset management-type business but we think the companies will remain susceptible to market sentiment. Nomura suffered low revenue in the fixed-income business with the overseas business posting a pretax loss, while asset management-related businesses were stable in the first quarter of the financial year ending March 2019. Nonetheless, their appetite for market risks appears to have remained low, reflected in low value at risk (VaR) with a VaR to FCC ratio of 0.16% for Nomura and 0.15% for Daiwa at end-March 2018. The VRs of Nomura Holdings and Nomura Securities are equalised as the parent's profit is gradually becoming as stable as that of the subsidiary due to streamlining of overseas operations and a sustained reduction in market risk. On the other hand, as the holding company of the group, Nomura Holdings' organisational structure is more complex with larger overseas operations than the securities arm, and, as a result, it has greater exposure to risks and regulations as well as larger contingent liabilities. Additionally, Nomura Holdings' risk appetite is seen as higher than the domestic securities arm due to the nature of its businesses outside Japan. Nomura Holdings oversees and centrally manages the group's capital and liquidity. Daiwa's overseas operations have improved, but profits remain relatively small and volatile due to dependence on M&A transactions in Europe. The effect on its overall performance has been limited because the overseas operations are small relative to the group. The VRs of Daiwa Securities Group and Daiwa Securities are equalised, reflecting the group's flat structure with Daiwa Securities as the single core operating subsidiary focused on the domestic market. Domestic profits have been under pressure for both Nomura and Daiwa due to low market volatility and subdued investor sentiment in the local retail equity market. However, a focus on stable sources of revenue and operations helped keep overall profitability adequate. These initiatives have mitigated the earnings volatility from the market-driven brokerage businesses. Both groups continue to focus on the expansion of stable revenue sources that are not asset intensive by strengthening their asset and wealth-management businesses. However, the rising competition among major players will make execution of their strategies challenging. The VRs also factor in their higher reliance on market-sensitive wholesale funding than commercial banks although they have shifted their funding towards longer term, more diversified sources and more spread-out maturities. The companies also have sufficient liquidity to continue operations without additional unsecured external financing for at least one year. They have access to unsecured liquidity facilities from the Bank of Japan (similar to the Japanese banks), when necessary. Fitch does not assign a VR to NFPS as its operation is highly integrated with the parent and it cannot exist without participating in the group's trading businesses. SUPPORT RATING AND SUPPORT RATING FLOOR The affirmation of the SRs and SRFs for Nomura and Daiwa reflects Fitch's view that the two groups continue to play key roles in Japan's financial system, backed by their leading franchises. Their SRs and SRFs factor in the government support available to both under the Deposit Insurance Act (DIA), revised and effective since March 2014. The revision includes a resolution framework and pre-emptive measures to prevent failure of non-bank financial institutions that are considered by Japanese authorities as systemically important. Nomura and Daiwa, with their designations as domestic systemically important financial institutions, are extremely likely to receive financial support from the government under the DIA, if required. The '1' SR of NFPS takes into account Fitch's belief that there is an extremely high probability of support from Nomura Holdings, if necessary, given a high degree of integration between NFPS and key entities within the group. NFPS performs a central role by providing a platform to book multiple-currency transactions in the group's global wholesale unit. If the group faced severe financial difficulties, including stress arising from NFPS, the government is highly likely to provide support to Nomura Holdings, and such support is likely to flow through to NFPS, if required, in light of its critical role in booking derivative products with various counterparties in the group. The equalisation of the SRs and SRFs between the parents and subsidiaries of Nomura and Daiwa is based on the consolidated supervision by Japanese authorities under the Financial Instruments and Exchange Act. This, combined with the interconnectedness of Nomura and Daiwa within their respective groups, leads Fitch to believe the authorities would extend financial assistance directly, if required, to a holding company and such support would be expected to flow through to core subsidiaries, when necessary. RATING SENSITIVITIES IDRS AND SENIOR DEBT The IDRs of Nomura and NFPS, and ratings on the senior note programmes of NBI and NIF are driven by Nomura Holdings' SR and SRF. Therefore, those ratings would move together with changes in the SR and SRF of Nomura Holdings. Daiwa's Long-Term IDRs and Daiwa Securities' senior debt ratings are driven by the respective SRs and SRFs. Thus, changes of the SRs and SRFs would lead to changes in their Long-Term IDRs and senior debt ratings. SUPPORT RATING AND SUPPORT RATING FLOOR The '1' SRs and 'A-' SRFs on Nomura and Daiwa are sensitive to perceived changes in the sovereign's ability and propensity to support the financial institutions. A change in Fitch's assessment on the systemic importance of Nomura or Daiwa, derived from factors such as increased substitutability of an entity due to downsizing of operations or transactions, could result in the downgrade of the SRs and SRFs. A downgrade of NFPS's SR would be considered if its functions within the group were to be substantially revised and its position as an integral part of the group were to diminish. A decrease in Nomura Holdings' propensity to provide support, such as due to reduced ownership, would also result in the downgrade of NFPS's SR. VRs A positive influence on Nomura's and Daiwa's VRs would arise from a sustained improvement in the stability and level of their profitability stemming from a lower cost structure and further strengthening in stable revenue sources. The rating attributes of the VRs of Nomura and Daiwa are broadly stable. A material pickup in risk appetite without a corresponding increase in capital buffers would weigh on the VRs. The rating actions are as follows: Nomura Holdings: - 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-' Nomura Securities: - 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-' NFPS: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Support Rating affirmed at '1' NBI: - Senior unsecured notes guaranteed by Nomura Holdings and notes, warrants and certificate programme affirmed at 'A-' The programme rating is only applicable to notes guaranteed by Nomura Holdings. The rating does not cover unguaranteed notes and other instruments issued under the programme. NIF: -Notes, warrants and certificate programme affirmed at 'A-' The programme rating is only applicable to notes guaranteed by Nomura Holdings or Nomura Securities. The rating does not cover unguaranteed notes and other instruments issued under the programme. Daiwa Securities Group: - 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-' Daiwa Securities: - 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 debt and programme affirmed at 'A-' Contact: Primary Analyst Kaori Nishizawa Director +81 3 3288 2783 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Secondary Analyst Jonathan Lee Managing Director +88 62 8175 7601 Committee Chairperson Mark Young Managing Director +44 203 530 1318 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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