Fitch Affirms Ratings on Japanese Major Banks
07/12/2018 08:02
(The following statement was released by the rating agency) Fitch Ratings-Tokyo/Hong Kong-December 07: Fitch Ratings has affirmed the ratings on Mitsubishi UFJ Financial Group, Inc. (MUFG), Sumitomo Mitsui Financial Group, Inc. (SMFG), Mizuho Financial Group, Inc. (MHFG), Sumitomo Mitsui Trust Bank, Limited (SMTB) and their respective subsidiaries (together referred to as 'groups' or 'major banks'). The Outlooks on the groups' Long-Term Issuer Default Ratings (IDRs) are Stable. The affirmations follow Fitch's periodic peer review of major Japanese banks. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VIABILITY RATINGS AND SENIOR DEBT The ratings are driven by each banking groups' intrinsic strength, as reflected in the Viability Ratings. The affirmations reflect Fitch's view that the groups' intrinsic credit profiles will remain firm in light of the stable outlook. They are based on our expectation that increases in risk appetite will be gradual, well controlled and accompanied by sound loss-absorption buffers. Capitalisation has remained adequate and we expect it to gradually be strengthened. The groups benefit from solid franchises in the domestic market and operations that are diversified geographically and by product. Their liquidity and funding positions are sound, with abundant access to deposits in Japan. Deriving competitive advantages in terms of pricing and growth remains, however, structurally challenging, as dollar interest rates continue to rise while domestic interest rates are low and competition fierce. Overseas expansion in various forms - organically as well as through acquisitions - is a firm part of the groups' strategy and we believe they are prepared to increase their risk appetite to boost profitability. Headwinds to the groups' capital ratios come primarily from the increase in risk assets from overseas expansion, while rising total pay-out ratios will also slow capital accumulation for some groups. Steady, albeit low, earning retention will help the major banks' fully loaded common equity Tier 1 ratios to reach 12%-15% by the financial year ending March 2019 (FYE19), or about 2% lower excluding unrealised gains from available-for-sale securities. This compares with the 12%-13% median of international global trading and universal bank peers at end-1H18. Fitch believes the major banks will, as in previous years, post a modest profit in FYE19 as we believe interest margins have bottomed and fee income will gradually pick up as well as thanks to sustained low credit costs and gains on equity sales. Efficiency efforts will begin to show improvement in cost/income ratios and major banks will intensify cost controls to create further room for investments, such as in systems and technology. The ratings on the major banks' senior unsecured debt are at the same level as their IDRs, in line with Fitch's criteria. Senior bonds eligible as total loss-absorbing capacity are also rated the same level as the holding companies' Long-Term IDRs based upon Fitch's view that the holding company's failure and senior-level default risk are similar to that of wholly owned operating banks despite the structural subordination features of the notes. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Ratings and Support Rating Floors of all the major banks reflect Fitch's view that, as systematically important banks in Japan, they remain likely to receive government support in case of need. Under Japan's Deposit Insurance Act, the government can pre-emptively provide financial assistance to a solvent bank holding company when a serious system disruption is anticipated. Fitch believes support prospects have not deteriorated, even though Japan's globally systemically important banks have issued senior loss-absorbing debt through their holding companies in response to the Financial Stability Board's global requirements. Fitch assesses the banking groups on a consolidated basis and we expect sovereign support to be made available on a pre-emptive basis. We equalise ratings between holding companies and operating entities as we expect such support to equally benefit both entities. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The Basel II Tier 2 bonds of MUFG's operating bank, MUFG Bank, Ltd. are rated one notch below its IDR for loss severity. The Basel III Tier 2 instruments issued by SMFG, MHFG and MHFG's subsidiary are notched twice from their IDRs because they will be fully and permanently written down upon reaching the point of non-viability, resulting in additional loss severity. SUBSIDIARY AND AFFILIATED COMPANIES The IDRs of Sumitomo Mitsui Banking Corporation Europe Limited (SMBCE) are in line with the ratings of its 100% parent, Sumitomo Mitsui Banking Corporation (SMBC), the operating bank under SMFG, due to its role as the European operational arm of SMBC. The IDRs of Sumitomo Mitsui Trust Bank (U.S.A.) Limited (SMTBUSA) are in line with the ratings of its 100% parent, SMTB. The Long-Term IDRs of Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (MUMSS), which is 60% indirectly owned by MUFG and 40% owned by US-based Morgan Stanley (A/Stable/F1/a), reflect its key role in supporting the group's securities business. The bank also engages in retail, investment banking, sales, trading and research. The Long-Term IDRs of ACOM CO., LTD., a 40% owned subsidiary of MUFG, reflect ACOM's strategic role as one of the leading providers of consumer financial services in Japan; its rating is notched down one level from that of MUFG. RATING SENSITIVITIES IDRS, VIABILITY RATINGS AND SENIOR DEBT Downgrades to the Viability Ratings could be triggered by unexpected asset-quality deterioration and failure to strengthen capitalisation as per our expectations. The Viability Ratings may also be negatively affected if sudden and unexpected deterioration in the domestic operating environment - such as due to the re-emergence of uncertainty or failure of Abenomics - or a dislocation in any of the groups' larger overseas markets were to adversely affect the major banks' overall financial profiles. Downward pressure may also result from a substantial increase in risk appetite exposing earnings and capital to higher volatility. This could stem from a rising exposure to equities, higher-risk foreign securities and riskier types of lending, especially late in the credit-cycle, without commensurate increases in risk buffers. Weaker earnings or a change in the major banks' dividend payout policies would also negatively pressure capitalisation and leverage, and in turn, the Viability Ratings. Any negative rating action on the Viability Ratings of MUFG and SMFG would result in a similar change to their respective IDRs and the ratings of outstanding senior debt, as their Support Rating Floors are one notch below their respective Viability Ratings. Any downgrade of the Viability Ratings of MHFG and SMTB would not immediately affect their IDRs, since their IDRs would then be underpinned by the Support Rating Floors of 'A-'. Positive rating action for MHFG and SMTB would depend on improved earnings, which would support further enhancement of capitalisation and disciplined risk taking. The potential for a ratings upgrade for MUFG and SMFG is limited in light of their weak earnings generation and their overall capitalisation that is weaker than that of global peers, as well as ratings proximity to the Japanese sovereign's IDRs (A/Stable). MUFG's and SMFG's IDRs and Viability Ratings are also sensitive to negative rating action on the Japanese sovereign. The Viability Ratings of all banking groups are sensitive to holding company considerations, including maintaining double leverage below 120% as well as the supervision approach by the regulatory authorities, which is conducted on a consolidated basis. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Rating is sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the major banks. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The major banks' Tier 2 instrument ratings are broadly sensitive to changes in the banks' IDRs. SUBSIDIARY AND AFFILIATED COMPANIES Any change in the rating of SMBC would lead to a corresponding change in the ratings of SMBCE. Any change in the rating of SMTB would lead to a corresponding change in the ratings of SMTBUSA. Any change in the rating of MUFG would lead to a corresponding change in the ratings of MUMSS. Also, MUFG's ability or propensity to support MUMSS, including due to changes in ownership or MUMSS's strategic importance to the group, would lead to a change in the ratings of MUMSS. 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. The rating actions are as follows: Entities under Mizuho Financial Group, Inc. Mizuho Financial Group, Inc.: - 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-' - Basel III Tier 2 bonds affirmed at 'BBB' 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 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' 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 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' Mizuho Financial Group (Cayman) 3 Limited - Basel III Tier 2 bonds affirmed at 'BBB' Entities under Sumitomo Mitsui Financial Group, Inc. Sumitomo Mitsui Financial Group, Inc.: - 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-' - Basel III Tier 2 bonds affirmed at 'BBB+' Sumitomo Mitsui Banking Corporation: - 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-' Sumitomo Mitsui Banking Corporation Europe Limited (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' Entities under Mitsubishi UFJ Financial Group, Inc. Mitsubishi UFJ Financial Group, Inc.: - 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' MUFG 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A' - Basel II Tier 2 bonds affirmed at 'A-' Mitsubishi UFJ Trust and Banking Corporation: - 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-' Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.: - 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' ACOM CO., LTD.: - 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 Holdings, Inc. Sumitomo Mitsui Trust Bank, Limited: - 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-' Sumitomo Mitsui Trust Bank (U.S.A.) Limited: - 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' 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 Sabine Bauer Senior Director +85 2 2263 9966 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Summary of Financial Statement Adjustments: Total assets and total liabilities exclude acceptances and guarantees from Japan's generally accepted accounting principles balance sheet to be globally comparable. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. 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