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Fitch Revises Outlooks on Nomura and Daiwa to Stable; Affirms Ratings
May 22, 2017 / 4:35 AM / in 7 months

Fitch Revises Outlooks on Nomura and Daiwa to Stable; Affirms Ratings

(The following statement was released by the rating agency) TOKYO, May 22 (Fitch) Fitch Ratings has revised the Outlooks on the following entities to Stable from Negative and affirmed the Long-Term Issuer Default Ratings (IDRs) on the entities at 'A-': - 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 A full list of the rating actions is at the end of this rating action commentary. The Outlook revision follows the affirmation of Japan's sovereign rating at 'A' and revision of the Outlook to Stable from Negative on 27 April 2017 (see <a href="https://www.fitchratings.com/site/pr/1022824">Fitch Revises Outlook on Japan to Stable; Affirms at 'A'.) KEY RATING DRIVERS IDRS AND SENIOR DEBT The IDRs of Nomura Holdings, Nomura Securities and NFPS are driven by their SRs and SRFs. The senior debt ratings of Nomura Holdings, and 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 support-driven IDRs of Nomura Holdings. The IDRs of Daiwa are driven by their SRs and SRFs. Daiwa Securities' senior debt ratings are aligned with its support-driven IDRs. The revision to the Stable Outlook is in line with the Stable Outlook on the sovereign rating, as the IDRs are driven by Fitch's expectations of support from the Japanese authorities. The revision in the Outlook on the sovereign rating reflects the improving economic outlook for Japan, which has lowered risks over the trajectory of public debt. VIABILITY RATINGS (VRs) The VRs for Nomura and Daiwa reflect their superior market positions within the domestic financial system and strong capitalisations, which compare favourably with that of many global universal banks (Nomura Holdings' Fitch Core Capital ratio was about 20% at end-March 2017 and Daiwa Securities Group's was 24% at end- 2016). The affirmation factors in the exposure and sensitivity of the respective business models to various degrees of volatility inherent in operating across global financial markets. The performance of Nomura in the financial year ended March 2017 (FYE17) reflects the steps taken to exit more challenging areas of its overseas operations. Daiwa's overseas operations have improved, but the effect on its overall performance was limited given the overseas operations' relatively small size. Profit from the domestic business dropped for both Nomura and Daiwa, due to subdued investor sentiment in the domestic retail equity market, but increasing focus on stable sources of revenue and operations allowed overall profitability to remain adequate. These initiatives have helped to mitigate some of the earnings volatilities from market-driven brokerage businesses. Both groups continue to focus on expansion of stable revenue sources that are not asset intensive by further strengthening their asset and wealth management businesses. However, the increasing competition among major players will make execution of their strategies more challenging. The VRs also factor in their larger reliance on market-sensitive wholesale funding than commercial banks with more stable funding sources. Nomura Securities' 'bbb+' VR, which is a notch higher than that of Nomura Holdings, reflects Nomura Securities' more stable profitability, which is backed by its leading and stable domestic retail franchise. The difference also incorporates Nomura Holdings' more sizeable overseas operations and the related risks and regulations due to its global franchise, and larger contingent liabilities at its subsidiaries compared with those of Nomura Securities. However, in Fitch's view, the difference is diminishing as the group streamlined its overseas operations in FYE16-FYE17, as reflected in four consecutive quarters of pre-tax profits from overseas businesses. Fitch does not assign a VR to NFPS as its operation is highly integrated with the parent and it could not exist without participation in the group's trading businesses. The VRs of Daiwa Securities Group and Daiwa Securities are equalised, reflecting the group's flat structure with Daiwa Securities being the single core operating subsidiary focused on the domestic market. SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs) 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 authorities' designation of Nomura and Daiwa as domestic systemically important financial institutions. As a consequence, they are extremely likely to receive financial support from the government under the Deposit Insurance Act, 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 in the group 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, with such support likely to flow through to NFPS, if required, given its critical role of booking various derivative products with various counterparties in the group. The equalisation of the SRs and SRFs between the parents and subsidiaries for 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 filter into core subsidiaries, as necessary. RATING SENSITIVITIES IDRS AND SENIOR DEBT The IDRs of Nomura and NFPS, senior debt ratings of Nomura Holdings and ratings on the senior note programmes of NBI and NIF are driven by Nomura Holding's 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. VIABILITY RATINGS (VRs) For Nomura, a track record of more stable profitability and reduced risk appetite over the medium term, such as from streamlining of overseas operations, would support an upgrade of the VR. For both Nomura and Daiwa, sustained, stable profitability stemming from a lower-cost structure and further strengthening in stable revenue sources would be a positive influence on the VRs. Improvement in their gross leverage ratios (total assets divided by total equity) to levels better than those of global peers is an additional positive rating driver. The rating attributes of the VRs of Nomura and Daiwa are broadly stable. A material pick-up in risk appetite would weigh on the VRs. SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs) 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. For NFPS, a downgrade of the 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 receded. Also, a decrease in Nomura Holdings' propensity to provide support, such as due to reduced ownership, would result in the downgrade of NFPS's SR. The rating actions are as follows: Nomura Holdings: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook revised to Stable from Negative - 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 affirmed at 'A-' Nomura Securities: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook revised to Stable from Negative - 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 revised to Stable from Negative - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Support Rating affirmed at '1' NBI: - Note, warrant 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: -Note, warrant 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 revised to Stable from Negative - 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 revised to Stable from Negative - 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 / programme affirmed at 'A-' Contact: Primary Analyst Naoki Morimura (Nomura) 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 (Daiwa) Director +81 3 3288 2783 Secondary Analyst Naoki Morimura (Daiwa) Director +81 3 3288 2686 Kaori Nishizawa (Nomura) Director +81 3 3288 2783 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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