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Fitch Revises Outlooks for Japanese Major Banks to Stable; Upgrades VR of MHFG
May 2, 2017 / 9:26 AM / in 6 months

Fitch Revises Outlooks for Japanese Major Banks to Stable; Upgrades VR of MHFG

(The following statement was released by the rating agency) TOKYO, May 02 (Fitch) Fitch Ratings has today revised the rating Outlooks for Mitsubishi UFJ Financial Group, Inc. (MUFG) and its subsidiaries, Sumitomo Mitsui Financial Group, Inc. (SMFG) and its subsidiaries, and Mizuho Financial Group, Inc. (MHFG) and its subsidiaries to Stable from Negative. All the IDRs of these banking groups were affirmed. In addition Fitch has affirmed the IDRs on Sumitomo Mitsui Trust Bank, Limited (SMTB) and its subsidiaries; their Outlooks remain Stable. Furthermore, Fitch has upgraded the Viability Rating on Mizuho Financial Group, Inc. (MHFG) and its subsidiary banks, Mizuho Bank, Ltd. (MHBK) and Mizuho Trust and Banking Co., Ltd. (MHTB), to 'a-' from 'bbb+'. A full list of rating actions is at the end of this commentary. The Outlook revision for these Japanese major banks' IDRs 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'). MHFG's revision of Outlook to Stable from Negative also reflects the upgrade of its VR. Fitch expects the operating environment for Japanese banks to stabilise. Market sentiment has begun to improve as the domestic economy gains some positive momentum leading to very low positive, instead of negative, domestic market interest rates. As a result we have changed our banking system outlook to stable from negative as cyclical pressure is easing, while credit costs remain low, which will support the stabilisation of the Japanese major banks' earnings in the fiscal year ending March 2018 (FYE18). We expect the major Japanese banks' core domestic banking profits to have decreased in FYE17 due to still-weak demand from borrowers, the Bank of Japan's negative interest rate policy, and market volatility in the first half of FYE17. The banks' overseas operations, which contributed an estimated 40% to MUFG's gross operating profit, around 30% to SMFG's and around 30% to MHFG's, are not likely to improve overall profit significantly because we expect them to expand at a slower pace. This slower pace is due to perceived uncertainties in the emerging markets, and forthcoming changes in regulatory capital standards (especially pending revision of risk weight assets). KEY RATING DRIVERS IDRS, VIABILITY RATINGS, SENIOR DEBTS The four banking groups' VRs reflect their respective strong or very sound domestic franchises, solid liquidity profiles in yen, sound asset quality and adequate capital positions, offset by modest profitability. Fitch expects the more stable operating environment to support lower credit costs and modest earnings of the major banks, even though the competitive pressures on interest revenue are likely to continue for a while. 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 some signs of reducing downside risks regarding 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. In the context of the more stable environment, the upgrade in the VR on MHFG and its operating banks reflects Fitch's assessment that the group's capitalisation has improved and our expectation that it will continue to do so. The gap between MHFG's capitalisation and that of the other two Japanese mega banking groups remains, but this has narrowed over time. The upgrade also reflects our expectation of continued enhancement in its resilience to key market risks, specifically the reduction of Japanese government bond (JGBs) exposures and the shorter duration of its JGB holdings. In addition, Fitch expects MHFG to further reduce its equity holdings over the medium term in line with MHFG's public commitment to do so. MHFG's common equity Tier 1 ratio without unrealised gains from available-for-sales (AFS) securities rose to 8.8% on a fully loaded basis at end-2016 (end-March 2015: 7.8%) and Fitch expects it to improve further to slightly above 9% in the near future and 10% by end-March 2019. In addition, MHFG's Fitch Core Capital ratio without unrealised gains from AFS securities improved to 10.4% at end-2016 (end-March 2015: 10.2%). 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. SRS AND SRFS 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 are likely to receive government support in case of need. Fitch believes that the prospects of support for systemically important financial institutions in Japan have not deteriorated, even though there is a global trend towards reducing the extent of sovereign support for banks. SUBORDINATED DEBTS 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, while, Basel III Tier 2 instruments issued by SMFG, MHFG and MHFG's subsidiary are notched twice from their IDRs due to their full and permanent write-down features upon reaching the point of non-viability, resulting in additional loss severity. Fitch uses the higher of the VR or support-driven Long-Term IDR as anchor rating for Tier 2 instruments because we believe that sovereign support would extend to those securities. This is because, Fitch believes that support can be factored into such instrument ratings - under Japan's Deposit Insurance Law, the government can pre-emptively provide financial assistance to a solvent bank holding company, when a serious systemic disruption is anticipated. 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 ACOM were affirmed following the affirmation of the Long-Term IDRs of subsidiary banks of MUFG, a 40% shareholder of ACOM. ACOM, one of the leading providers of consumer financial services in Japan, is viewed as a strategically important subsidiary within the group, and its rating is notched down one level from that of MUFG. RATING SENSITIVITIES IDRS, VRS, SENIOR DEBTS Any negative rating action in the VRs for 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 supported 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). For MHFG and its subsidiaries and SMTB, further positive rating action to be aligned with other two Japanese mega banking groups would depend on further enhancement of capitalisation while stronger earnings are sustained, which would be aided by a sustained improvement in the wider domestic real economy, including sound growth in demand for capex and investment. Negative action on the VRs would likely be a reflection of negative action on the sovereign ratings. A material weakening of the banks' intrinsic profiles is currently not envisaged due to their stable asset quality and adequate 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. A significant acquisition - although not expected - could also lead to a change in the banks' 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. SRS AND SRFS The banks' '1' SRs and 'A-' SRFs are sensitive to perceived changes in the sovereign's ability and propensity to support the banks. SUBORDINATED DEBTS AND OTHER HYBRID SECURITIES 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. Also, any change in the rating of SMTB would lead to a corresponding change in the ratings of SMTBUSA. 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 MHFG MHFG: - 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 upgraded to 'a-' from 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - B3T2 bonds affirmed at 'BBB' MHBK: - 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 upgraded to 'a-' from 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A-' MHTB: - 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 upgraded to 'a-' from 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' Mizuho Financial Group (Cayman) 3 Limited - B3T2 bonds affirmed at 'BBB' Entities under SMFG SMFG: - 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - B3T2 bonds affirmed at 'BBB+' SMBC: - 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' SMBCE: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook revised to Stable from Negative - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Support Rating affirmed at '1' Entities under MUFG MUFG: - 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A' BTMU: - 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured debt affirmed at 'A' - B2T2 bonds affirmed at 'A-' Mitsubishi UFJ Trust and Banking Corporation (MUTB): - 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 'a' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' ACOM: - 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 'F2' - Support Rating affirmed at '1' Entity under Sumitomo Mitsui Trust Holdings, Inc. (SMTH) SMTB: - 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-' SMTBUSA: - 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 Mark Young Managing Director +65 6796 7229+65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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