September 18, 2014 / 7:28 AM / 3 years ago

Fitch Affirms Ratings on Nomura and Daiwa

(The following statement was released by the rating agency) TOKYO/HONG KONG/SINGAPORE, September 18 (Fitch) Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDRs) of Nomura Holdings, Inc. (Nomura Holdings) and its wholly owned subsidiaries, Nomura Securities Co., Ltd. (Nomura Securities) and Nomura Financial Products & Services, Inc. (NFPS) at 'A-/F1'. Fitch has also affirmed the Long-Term and Short-Term IDRs of Daiwa Securities Group Inc. (Daiwa Securities Group) and its wholly owned subsidiary, Daiwa Securities Co. Ltd. (Daiwa Securities) at 'BBB+/F2'. Fitch also affirmed the Support Ratings (SRs) and Support Rating Floors (SRFs) of Nomura Holdings and Nomura Securities (jointly referred to as Nomura) at '1/A-', and those of Daiwa Securities Group and Daiwa Securities (jointly referred to as Daiwa) at '2/BBB+'. The Viability Ratings (VR) were affirmed for all of the entities: Nomura Holdings at 'bbb', Nomura Securities at 'bbb+', Daiwa Securities Group at 'bbb+' and Daiwa Securities at 'bbb+'. The Rating Outlooks on the Long-Term IDRs are Stable for all the entities. A full list of the rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - SRs and SRFs The affirmation of the SRs and SRFs for Nomura at '1/A-' reflects Fitch's view that Nomura continues to play a key role in Japan's capital market backed by its position as the largest securities company in the country. Nomura is engaged in a wide range of financial services such as brokerage, underwriting and investment banking. The SRs and SRFs factor in Fitch's belief that the authorities would view Nomura as systemically important in the domestic economy and their failures would lead to serious disruption in markets. As a consequence, they are highly likely to receive financial support from the government under the Deposit Insurance Law (DIL). 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 through stress arising from NFPS, the government is highly likely to support Nomura Holdings, with such support likely to flow through to NFPS, if required. The SRs and SRFs for Daiwa at '2/BBB+' reflect their distinctive systemic importance as the second-largest securities company in Japan. However, the SRs and SRFs also factor in Fitch's belief that potential contagion risk in the financial system from Daiwa's failure would be less than that arising from a failure of Nomura, based on their different sizes in domestic/cross-border activities. This results in a difference of one notch in their SRs and SRFs. The equalisation of the SRs between the parents and subsidiaries for Nomura and Daiwa is based on the consolidated supervision by the Japanese authorities under the Financial Instruments and Exchange Act. This, combined with Nomura's and Daiwa's interconnectedness 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 filter into core subsidiaries. KEY RATING DRIVERS - IDRs, Senior Debts and VRs The 'A-' IDRs of Nomura and NFPS and Nomura Holdings' senior debt rating of 'A-' are driven by their SRs and SRFs. The rating on Nomura Bank International plc's (NBI) senior note program is aligned with the support-driven IDRs of Nomura Holdings as the payment of principal and interest of the notes are unconditionally and irrevocably guaranteed by Nomura Holdings. The IDRs of Daiwa of 'BBB+' and Daiwa Securities' senior debt ratings of 'BBB+' are driven by their VRs. The affirmation of the VRs for Nomura and Daiwa reflects reduced operating performance pressure on the entities, helped by a stronger domestic market and relatively stable key risk metrics, with the expectation that these will be maintained in the short and medium term. The affirmation is also captures Fitch's belief that performance prospects remain clouded by uncertainty regarding the success of Abenomics-related reforms, which could adversely affect market confidence. The VRs for Nomura and Daiwa take into account the strength of their domestic franchises, relatively low level of profitability, and the potential for performance volatility arising from often variable market conditions. Nomura and Daiwa have adequate capitalisation, which continues to compare favourably with many global universal banks - Nomura Holdings' Fitch core capital ratio was about 14% and Daiwa Securities Group's was 24% as at end-March 2014. Also, their market risk is modest relative to their capital levels and they have adequate liquidity positions. Meanwhile, they are more reliant on market-sensitive wholesale funding compared with commercial banks with stable funding sources, and have higher gross leverage ratios - about 17 times at Nomura Holdings and 18 times at Daiwa Securities Group at end-June 2014 - relative to global peers, although that is mainly due to large exposures to short-term repo transactions. The variations in Nomura's and Daiwa's risk control methods, which arise from the different degree of risks that the two groups face, are also incorporated into the VRs. The 'bbb' VR at Nomura Holdings, which is a notch lower than Nomura Securities', incorporates Nomura Holdings' greater exposure to overseas risks and regulations due to its extensive global franchise, and larger contingent liabilities to its subsidiaries compared with those of Nomura Securities. Also, Nomura Securities' more consistent profitability backed by a stable retail franchise underpins the notching. Fitch does not assign a VR to NFPS as its operation is highly integrated with the parent's and it could not exist without participation in the group's trading businesses. The VRs of Daiwa Securities Group and Daiwa Securities are aligned at 'bbb+', reflecting the group's flat structure, with Daiwa Securities being the single core operating subsidiary focused on the domestic market. RATING SENSITIVITIES - SRs and SRFs Fitch believes that the SRs and SRFs for Nomura and Daiwa will be maintained even if the Japan's sovereign rating (A+/ Negative) is downgraded by one notch to 'A', as the immediate impact of the downgrade on the operating environment is likely to be immaterial. Nevertheless, the SRs and SRFs for both groups will be revisited if there is any material change in Fitch's view on the Japanese government's propensity to provide support, which should mainly result from pressure from global regulatory developments substantially hampering the government's intention to provide support. However, Fitch believes that the existing framework under the DIL is unlikely to change over the medium term. 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 and/or transactions, could result in a 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 Holding's propensity to provide support, such as due to reduced ownership, would result in the downgrade of NFPS's SR. RATING SENSITIVITIES - IDRs, Senior Debts and VRs The IDRs of Nomura and NFPS, senior debt ratings of Nomura Holdings and senior note program rating of NBI are driven by Nomura Holding's SR and SRF. Therefore, those ratings will be downgraded if the SR and SRF of Nomura Holdings were downgraded. Daiwa's Long-Term IDRs and Daiwa Securities' senior debt ratings are in line with the respective VRs and SRFs. Thus, simultaneous downgrade of the VRs and SRFs will lead to a downgrade of their Long-Term IDRs and senior debt ratings. Nomura's and Daiwa's VRs remain sensitive to market conditions as their profitability is directly linked to trading, sales of financial instruments and asset/debt valuations. Both groups aim to expand a stable revenue source, the asset/wealth management business. However, the increasing competition among major players in this business area could hamper such efforts. Positive rating drivers for Nomura's and Daiwa's VRs include sustainable improvement in profitability generated by solid improvement in Japan's real economy and further reinforcement of stable revenue source. Offsetting these positive drivers could be substantial earnings pressure from the deterioration of market confidence, and a material increase in risk appetite that could stem from a recurrence of hasty expansion in overseas businesses without a corresponding strengthening of capital buffers. For Nomura Holdings, heightened regulatory uncertainty and legal risk could also be negative for the VR. The full list of rating actions follows: Nomura Holdings: - 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 '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 Stable - 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-' Nomura Financial Products & Services: - 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' Nomura Bank International plc: - USD4.5bn 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. Daiwa Securities Group: - Long-Term Foreign and Local Currency IDRs affirmed at 'BBB+'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F2' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB+' Daiwa Securities: - Long-Term Foreign and Local Currency IDRs affirmed at 'BBB+'; Outlook Stable - Short-Term Foreign and Local Currency IDRs affirmed at 'F2' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '2' - Support Rating Floor affirmed at 'BBB+' - Senior debt affirmed at 'BBB+' Contact: Primary Analyst Miki Murakami Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Secondary Analyst Chikako Horiuchi Director +852 2263 9924 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Securities Firms Criteria", dated 31 January 2014 and "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, are available at Related research "Japan: Support for Systemically Important NBFIs", dated 29 October 2013 Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Securities Firms Criteria here Rating FI Subsidiaries and Holding Companies here Japan: Support for Systemically Important NBFIs here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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