Fitch Downgrades Shizuoka Bank to 'A-'; Outlook Stable
08/04/2020 11:29
(The following statement was released by the rating agency) Fitch Ratings-Tokyo-April 08: Fitch Ratings has downgraded The Shizuoka Bank, Ltd.'s Long-Term Issuer Default Ratings (IDR) to 'A-' from 'A' with a Stable Outlook, and its Viability Rating (VR) to 'a-' from 'a'. The IDR downgrade reflects Fitch's assessment that a weaker and more challenging operating environment for Japanese banks as a result of the coronavirus pandemic is likely to adversely affect Shizuoka Bank's credit profile, although the extent of the economic and financial market effects is unclear. Fitch expects world economic activity to decline by 1.9% in 2020, with US GDP down by 3.3%, the eurozone by 4.2% and Japan by 2.7%, with further downside risks, based on our Global Economic Outlook, dated 2 April 2020. For details, see http://www.fitchratings.com/site/re/10116672. The Shizuoka Bank, Ltd.; Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A-; RO:Sta ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Viability Rating; Downgrade; a- ; Support Rating; Affirmed; 2 ; Support Rating Floor; Affirmed; BBB- Key Rating Drivers IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND VIABILITY RATING The VR downgrade is driven by the operating environment, which Fitch believes adds further pressure on Japanese banks amid the economic slowdown and uncertainties over global economic prospects caused by the coronavirus outbreak. This is reflected in Fitch's revision of the outlook on the 'a-' operating environment factor mid-point to negative from stable. The operating environment for Shizuoka Bank has been under pressure, similar to other major Japanese banks, but we think it could be more challenging for the bank. The bank has wider exposure to regional developments as its business operations and clients are largely based in Shizuoka prefecture, with limited geographical diversification compared with major domestic banks. Supply-chain disruptions caused by the outbreak may hamper the regional economy to a greater degree, reflecting the focus of the prefecture's economy on the manufacturing industry, which contributed 40.8% of Shizuoka's GDP in the fiscal year ended March 2017. This may dampen the bank's financial performance. Fitch expects the bank's profitability to be under greater pressure. The bank has been hampered by domestic structural challenges, including a low interest rate policy, because of its reliance on interest income as a main source of revenue. A worsening of its operating environment amid the pandemic could add to its profitability pressures, with a potential increase in credit costs due to a deterioration in its loan portfolio. Fitch believes its loan portfolio would be vulnerable to the downturn as approximately 77% was made up of loans to SMEs at end-September 2019, a sector that faces greater risks amid the economic turmoil. The bank's strong capitalisation will continue to support its VR, with higher ratios than those of Japan's major banks. However, its capital ratios may come under pressure if the economic environment weakens more than we expect in our base case. The bank's VR also factors in its funding base, underpinned by its stable deposit base on the back of its leading franchise. Shizuoka Bank's Support Rating of '2' and Support Rating Floor of 'BBB-' reflect our view that there is a high probability of support from the sovereign, if necessary, due to the bank's large market presence in the prefecture, which is backed by its strong franchise as well as its share of deposits and loans. The bank accounts for 31% and 26% of the prefecture's loans and deposits, respectively. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND VIABILITY RATING Factors that could, individually or collectively, lead to negative rating action/downgrade: Further pressure on the operating environment for the bank, such as a prolonged global economic downturn, could lower the operating environment factor mid-point to 'bbb+' from 'a-'. This would in turn weigh on the VR as it would change the implied benchmark mid-point for its financial profile factors. Further profitability challenges, possibly led by weaker asset quality with an increase in the non-performing loan (NPL) ratio particularly related to loans to regional SMEs, leading to pressure on its capital ratios, could weigh on its VR. Sustained deterioration in Shizuoka Bank's capitalisation with a decline in its common equity Tier 1 ratio to below 15% consistently (16.4% at end-December 2019), which could be accompanied by lower profitability with operating profit to risk-weighted assets remaining below 0.9% (0.95% at end-March 2019), driven by deterioration in loan quality with the NPL ratio sustained above 1.3% (1.1% at end-December 2019), could lead to downward action on the VR even if the operating environment factor mid-point remains at 'a-'. We may take negative action if Fitch believes the bank's capitalisation is no longer commensurate with the risks it takes. Increased risks could be associated with pursuing higher returns, possibly through accelerating loan growth by increasing lending to borrowers with weaker credit profiles or exposure to riskier securities investments, without a corresponding increase in loss-absorption buffers. Shizuoka's IDRs and VR could also be adversely affected if the sovereign's rating is downgraded as Fitch would not rate Shizuoka Bank above Japan (A/Stable). Fitch may take negative action on the bank's Support Rating Floor and Support Rating if we believe the government's propensity to support the bank is lowered or its ability to support the bank has deteriorated significantly. Factors that could, individually or collectively, lead to positive rating action/upgrade: We may take positive action on the VR if there is improved and sustained profitability with lower reliance on interest income, and improvement in asset quality. The Support Rating Floor could be upgraded if Fitch assesses that there is a higher propensity for the sovereign to provide support to the bank. This may happen if the bank's systemic importance increases with a meaningful domestic market share; however, Fitch does not expect such changes over the medium term due to the bank being a regional bank. Best/Worst Case Rating Scenario International scale credit ratings of financial institution issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Summary of Financial Adjustments Total assets and total liabilities exclude acceptances and guarantees from Japan's generally accepted accounting principles balance sheet to be globally comparable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Primary Rating Analyst Yuka Negami, Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3rd Floor 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Secondary Rating Analyst Kaori Nishizawa, Director +81 3 3288 2783 Committee Chairperson Tim Roche, Senior Director +61 2 8256 0310 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10110041 Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10110170 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10116831 Solicitation Status https://www.fitchratings.com/site/pr/10116831#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10116831#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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