December 18, 2017 / 6:01 AM / 6 months ago

Fitch Affirms Ratings on Japanese Major Banks

(The following statement was released by the rating agency) TOKYO, December 18 (Fitch) Fitch Ratings has affirmed the ratings on Mitsubishi UFJ Financial Group, Inc. (MUFG) and its subsidiaries, Sumitomo Mitsui Financial Group, Inc. (SMFG) and its subsidiaries, Mizuho Financial Group, Inc. (MHFG) and its subsidiaries, and Sumitomo Mitsui Trust Bank Limited (SMTB) and its subsidiary. The Outlooks on their Long-Term Issuer Default Ratings (IDRs) are Stable. We expect the Japanese major banks' core domestic banking profits to remain under pressure in the financial year ending March 2018 (FYE18) because net interest margins continue to be constrained by still weak loan demand and intense competition. However, Fitch believes that the major banks will, as in previous years, post a modest profit in FYE18 thanks to low credit costs and favourable domestic stock market conditions. Further expansion of the banks' overseas operations, which accounted for an estimated 40% of MUFG's gross operating profit, around 30% of SMFG's and around 30% of MHFG's, will likely be affected by pressures on profitability and expectations to further boost capital, in line with trends seen at global peers. We believe growth will be lower in FYE18 than in recent years. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS ISSUER DEFAULT RATINGS, VIABILITY RATINGS AND SENIOR DEBT The ratings of the four banking groups in this review are driven by their intrinsic strength. They reflect their respective strong - or very sound - franchises, particularly domestically, although they have been strengthened overseas as well; solid liquidity profiles in yen; and sound asset quality. They also consider the banks' modest profitability, while capital positions are under pressure to keep pace with improvements observed at global peers. Fitch is of the view that overall asset quality will remain at a favourable level due to the stable domestic operating environment, as well as signs of reducing downside risks in the major banks' overseas portfolios, particularly those in emerging markets. Fitch expects the banks to continue to trim their investment portfolios to reduce volatility in their earnings and capitalisation. Although the sensitivity of foreign bonds to interest rate movements is higher than that of other investments, Fitch is of the view that the Japanese major banks have enhanced their overall resilience to key market risks by cutting their exposure to Japanese government bonds (JGBs) and equity holdings. Capitalisation has remained adequate and is likely to gradually improve. However, the Japanese banks' fully loaded common equity Tier 1 (CET1) ratios still compare unfavourably with the median of international global trading and universal bank peers of about 13%. We expect Japanese major banks' fully-loaded CET1 ratio to stabilise at 12%-13% and CET1 ratios without unrealised gains from available-for-sale securities at 9.5%-11% in FYE18. Recent announcements of Basel III reforms are likely to result in RWA inflation by 2027, which Fitch expects the banks to be able to offset by the time such regulatory changes will be implemented because of a likely long grandfathering period. In the meantime, we expect the Japanese major banks to prioritise the efficient use of capital and cost controls. The ratings on the senior unsecured debt issued by the banks are at the same level as their IDRs, in line with Fitch's criteria. Senior bonds eligible as total loss-absorbing capacity (TLAC) are also rated the same level as 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 structural subordination features of notes. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Ratings (SRs) and Support Rating Floors (SRFs) 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 Law, the government can pre-emptively provide financial assistance to a solvent bank holding company, when a serious system disruption is anticipated. Fitch believes that the support prospects have not deteriorated, even though the Japanese globally systemically important banks have issued senior loss-absorbing debt (through their holding companies) in response to Financial Stability Board's global requirements. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Bank of Tokyo-Mitsubishi UFJ, Ltd.'s (BTMU, the operating bank under MUFG) Basel II Tier 2 bonds are rated one notch (for loss severity) below its IDR. The Basel III Tier 2 instruments issued by SMFG, MHFG and MHFG's subsidiary are notched twice from their IDRs because they may be fully and permanently written down upon reaching the point of non-viability, resulting in additional loss severity. SUBSIDIARIES AND AFFILIATED COMPANY 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, given 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, and engages in the retail business, investment banking business, sales, trading and research. The Long-Term IDRs of ACOM, 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 ISSUER DEFAULT RATINGS, VIABILITY RATINGS AND SENIOR DEBT Any negative rating action in the VRs of MUFG and SMFG would result in a change to their IDRs and the ratings of outstanding senior debts as their SRFs are one notch below their respective VRs. Any downgrade of the VRs of MHFG and SMTB would not immediately affect their IDRs, since their IDRs would then be underpinned by the SRFs of 'A-'. The potential for a VR upgrade for MUFG and SMFG is limited in light of the ratings' proximity to the Japanese sovereign's IDRs (A/Stable) as well as their overall capitalisation that is weaker than that of peers. For MHFG and its subsidiaries and SMTB, positive rating action to align their ratings with those of the other two Japanese mega banking groups would depend on further enhancement of capitalisation while stronger earnings are sustained (without any meaningful increase in risk appetite), which would be aided by further improvement in the wider domestic real economy, including sound growth in demand for capex and investment. Any negative rating actions on the VRs of the Japanese major banks are mostly likely to result from negative action on the sovereign ratings. A material weakening of the banks' intrinsic profiles is currently not envisaged due to their outlook for stable asset quality and further building of capital buffers. However, the VRs may be negatively affected if sudden and unexpected deterioration in the operating environment - such as due to the re-emergence of 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. Weakening of internal capital generation due to lower earnings or change in the banks' dividend payout policies would also negatively pressure the scores on capitalisation and leverage, and in turn, the VR. A significant acquisition that raises the overall risk profile of the banks could also lead to a change in ratings. The VRs 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 currently conducted on a consolidated basis. SUPPORT RATINGS AND SUPPORT RATING FLOORS The banks' '1' SRs and 'A-' SRFs are sensitive to perceived changes in the sovereign's ability and propensity to support the banks. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on the Tier 2 instruments are sensitive to changes in the banks' IDRs. SUBSIDIARIES 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 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. FULL LIST OF RATING ACTIONS 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-' - Senior unsecured debt 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: - 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' Bank of Tokyo-Mitsubishi UFJ, 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: - 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 Naoki Morimura (MUFG, MHFG) Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Kaori Nishizawa (SMFG, SMTB) Director +81 3 3288 2783 Secondary Analyst Naoki Morimura (SMFG, SMTB) Director +81 3 3288 2686 Kaori Nishizawa (MUFG, MHFG) Director +81 3 3288 2783 Committee Chairperson Jonathan Cornish Managing Director +852 2263 9901 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@fitchratings.com. 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