Fitch Affirms Nomura and Daiwa at 'A-'; Outlook Negative
Fitch has affirmed the Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A-' on Nomura Holdings and Nomura Securities (jointly referred to as Nomura) and Daiwa Securities Group and Daiwa Securities (jointly referred to as Daiwa). The Viability Ratings (VR) have been affirmed for all of the entities.
The Rating Outlooks on the Long-Term IDRs are Negative for all the entities.
A full list of the rating actions is at the end of this rating action commentary.
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 Negative Outlook is in line with the Negative Outlook on the sovereign rating, as the IDRs are driven by Fitch's expectations of support from the Japanese authorities. The Negative Outlook on the sovereign rating reflects weakening ability - rather than propensity - of the government to support the financial institutions.
VIABILITY RATINGS
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 16% at end-March 2016 and Daiwa Securities Group's was 23%).
The affirmation factors in volatility risks relating to rising uncertainty over global market turmoil and the sustainability of government initiatives to stimulate domestic economic growth, which may adversely affect market confidence in the short and medium term. The performance of Nomura and Daiwa in the financial year ended March 2016 (FYE16) was negatively affected by the global market turmoil and subdued domestic markets, while their increasing focus on stable sources of revenue and steps taken to exit more challenging areas of overseas operations allowed the companies to remain profitable. These initiatives partially mitigate what Fitch expects to be a challenging operating environment over the medium term.
Both groups aim to expand stable revenue sources that are not asset intensive by further strengthening their asset and wealth management businesses. However, Fitch views that 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, and higher gross leverage ratio (approximately 15x at Nomura Holdings, 16x at Daiwa Securities Group at end-March 2016) relative to higher-rated global peers (average 13x), although that is mainly due to large exposures to short-term repo transactions with various global and domestic financial institutions as liquidity providers in the repo market. Nomura Holdings' and Daiwa Securities Group's adjusted leverage ratios net of repo were 10x and 12x, respectively, compared with the peer average of 14x.
Nomura Holdings' 'bbb' VR, which is a notch lower than that of Nomura Securities, reflects
Nomura Securities' more consistent profitability backed by its leading and stable domestic retail franchise. The difference also incorporates the former's more sizeable overseas operations and related risks and regulations due to its global franchise, and larger contingent liabilities at its subsidiaries compared with those of Nomura Securities.
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 equalised, reflecting the group's flat structure with Daiwa Securities being the single core operating subsidiary focused on the domestic market.
SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of the SR and SRF 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 franchise. 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 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, 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 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 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 will be downgraded if the SR and SRF of Nomura Holdings were lowered.
Daiwa's Long-Term IDRs and Daiwa Securities' senior debt ratings are in line with the respective SRs and SRFs. Thus, lowering of the SRs and SRFs will lead to a downgrade of their Long-Term IDRs and senior debt ratings.
VRs
For Nomura, strengthening structural profitability over the medium term given the ongoing losses overseas would support an improved VR. For both Nomura and Daiwa, sustainable, stable profitability stemming from a lower-cost structure and further reinforcement of 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.
Nomura's and Daiwa's VRs remain sensitive to market conditions as their profitability is linked to trading, sales of financial instruments and asset/debt valuations, and influenced by risk appetite. A material pick-up in risk appetite would weigh on the VRs.
SRs and SRFs
A downgrade in Japan's sovereign rating to 'A-' from 'A' or the sovereign being perceived as less willing to support the securities firms would lead to a downgrade of the SRs and SRFs for both Nomura and Daiwa. This may arise due to the Japanese authorities following other major countries in instituting regulations that reduce implicit government support available to banks. However, Fitch believes that the existing framework under the Deposit Insurance Act is unlikely to change over the medium term, while the process to make changes to domestic laws or regulations that reduce support for banks (for example, senior debt being bailed-in) would likely be protracted.
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 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 Holding's 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 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 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 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 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 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-'
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