Fitch Ratings: Coronavirus Drives Negative Rating Actions on Japanese Banks as Economic Shock Hits
14/04/2020 03:16
(The following statement was released by the rating agency) Fitch Ratings-Tokyo-April 13: Fitch Ratings has taken various negative rating actions on five Japanese banking groups following the coronavirus outbreak, which is causing global economic disruptions. Fitch expects a deep global recession in 2020 with world economic activity to shrink by 1.9%, with GDP in US to fall by 3.3%, the euro zone by 4.2% and Japan by 2.7%. Furthermore, we expect either economic contraction or significantly lower growth in the main Asia-Pacific markets to which the Japanese banks are exposed. Fitch expects a significant economic shock in 1H20 followed by a moderate recovery through 2021. Fitch's economic forecasts are outlined in our Global Economic Outlook /a , dated 2 April 2020. Downside risks to our economic forecasts are outlined in Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases /a , dated 2 April 2020. Rating actions taken are: --Mitsubishi UFJ Financial Group, Inc. (MUFG): Issuer Default Rating (IDR) downgraded to 'A-' from 'A'; Viability Rating (VR) downgraded to 'a-' from 'a'; Outlook Stable. --Sumitomo Mitsui Financial Group, Inc. (SMFG): IDR affirmed at 'A'; VR affirmed at 'a'; Outlook revised to Negative from Stable --Mizuho Financial Group, Inc. (MHFG): IDR affirmed at 'A-'; VR downgraded to 'bbb+' from 'a-'; Outlook Stable --Sumitomo Mitsui Trust Bank, Limited (SMTB): IDR affirmed at 'A-'; VR affirmed at 'a-'; Outlook Stable --The Shizuoka Bank, Ltd.: IDR downgraded to 'A-' from 'A'; VR downgraded to 'a-' from 'a'; Outlook Stable --All Support Ratings and Support Rating Floors were affirmed. For the first four banking groups, their Support Ratings are '1' and their Support Rating Floors are 'A-'. Shizuoka Bank's Support Rating is '2' and Support Rating Floor is 'BBB-'. For further details, please see the individual rating action commentaries available at www.fitchratings.com. The rating actions are concurrent with our revision of the outlook on our operating environment factor mid-point of 'a-' to negative from stable. This reflects our assessment of weaker and more challenging operating conditions for the Japanese banks, both at home and in many offshore markets, caused by measures to contain the coronavirus pandemic, although the precise impact on economic and financial markets is unclear. The deep global economic downturn adds to the domestic structural challenges facing Japanese banks, such as negative policy rates, intense competition, changing client needs and the ageing and shrinking population. Fitch could lower its assessment of the operating environment further if there are signs that the domestic and world economy will deteriorate further for an extended period. If the operating environment assessment was to be lowered to the 'bbb' range, the banks would typically have to maintain stronger core financial metrics under Fitch's Bank Rating Criteria to be commensurate with their current VRs. Under Fitch's base case scenario, the challenging operating environment will affect Japanese banks' credit profiles, especially their profitability - a structural rating weakness for the Japanese banks since before the implementation of the negative interest-rate policy in February 2016. Even before the coronavirus crisis, Fitch had identified key areas, such as earnings sustainability and business models, which faced mounting structural challenges. The banks' medium-term, strategic objectives to navigate through these challenges and the execution of their strategies could lead to ratings differentiation among the banks. The global economic fallout from the pandemic, in Fitch's view, has significantly added to those challenges and has led Fitch to reassess the expected medium-term outcomes for Japanese banks, as reflected in these rating actions. Specifically, we expect asset quality to deteriorate faster than we previously estimated and from the low non-performing loan ratio levels achieved over the last two years. This deterioration will hamper the banks' efforts to maintain and restore sustainable profitability. The banks' underwriting management and risk control standards are being tested as we expect an increase in credit costs, especially from loans to SMEs and to sectors vulnerable to the coronavirus pandemic and emerging markets, and a rise in devaluation impairments on securities investments due to market dislocations. We expect pressure on Japanese banks' profitability to intensify from weaker business volumes and low interest rates globally due to the deep economic downturn. In our opinion, the banks had, until recently, incrementally increased their risk appetite over the past five or more years. However, we had expected that to be largely offset by additional loss-absorption buffers. Their buffers have been, or are likely to be, eroded to varying degrees. The VRs reflect the differences in the banks' buffers. Banks with the lowest buffers against further pressures - especially on profitability and capitalisation - had their VRs downgraded. Buffers are more substantial at the new ratings. However, some banks remain vulnerable to further downside risk. The VRs of MUFG and SMTB are at the same level as the group's Support Rating Floors, meaning that downside to their Long-Term IDRs (in the event their VRs are downgraded) would most likely come from negative sovereign rating action. This is also the case for MHFG, whose VR is lower than the group's Support Rating Floor. As such, the three banking groups' rating Outlook reflects the Outlook on the Japan sovereign (A/Stable). The Long-Term IDRs and Outlook of SMFG and Shizuoka Bank are in line with their Viability Ratings. Fitch believes that there is an extremely high probability that MUFG, SMFG, MHFG and SMTB would receive government support if needed, as they are systemically important banks in Japan. The government can pre-emptively provide financial assistance to a solvent bank holding company when a serious system disruption is anticipated under Japan's Deposit Insurance Act. We do not believe support prospects have weakened, even though MUFG, SMFG and MHFG have issued senior total loss-absorbing debt (TLAC) through their holding companies in response to the Financial Stability Board's global requirements. Contact: Kaori Nishizawa, CFA Director +81 3 3288 26783 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Japan Yuka Negami Director +81 3 3288 2686 David Wong Senior Director +85 2 2263 9927 Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. Additional information is available on www.fitchratings.com 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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