Fitch Upgrades Daiwa to 'A-'; Affirms Nomura at 'A-'
Fitch has upgraded the Support Rating (SR) on Daiwa Securities Group and Daiwa Securities (jointly referred to as Daiwa) to '1' and revised the Support Rating Floor (SRF) to 'A-' from '2' and 'BBB+' respectively. The SR and SRF of Nomura Holdings and Nomura Securities (jointly referred to as Nomura) were affirmed at '1' and 'A-'. The Viability Ratings (VR) have been affirmed for all of the entities.
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 upgrade of the SR and SRF for Daiwa reflects Fitch's reassessment of the role Daiwa plays in Japan's financial markets as the second-largest securities firm. The agency believes the Japanese authorities would not distinguish between the two largest securities firms in terms of systemic importance - either of their failures would significantly impact the financial system. Fitch believes that Daiwa is likely to be designated by Japanese authorities as a domestic systemically important financial institution (D-SIFI), and it is therefore just as likely as Nomura to receive financial support via the Deposit Insurance Law (DIL), if required.
Fitch notes that across developed markets - particularly in Europe - the general momentum is for implementation of new regulations that make sovereign support less reliable than has been evident in the past. However, despite its prominent role in G20 and Financial Stability Board discussions, Japan's propensity to support its most systemically important institutions has not wavered, in Fitch view, with the authorities able to defer to support funds available under the DIL to support its financial institutions, if required. Moreover, Japan's securities firms are not expected to be designated as global SIFIs, and thus are not likely to be subjected to additional total loss absorbing capital (TLAC) requirements.
The affirmation of the SR and SRF for Nomura reflects Fitch's view that Nomura continues to play a key role in Japan's financial system, backed by its leading franchise. Nomura's SR and SRF factor in Fitch's belief that the authorities view Nomura as systemically important (and it is likely to be designated as a D-SIFI), the failure of which would lead to serious disruption in domestic markets. As a consequence, it is extremely likely to receive financial support from the government under the 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, given its critical role of booking various derivative products with various counterparties in the group.
The equalisation of the SRs and SRFs between parent and subsidiary 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.
IDRS AND SENIOR DEBT
The IDRs of Nomura and NFPS, and Nomura Holding's senior debt ratings are driven by their SRs and SRFs. The rating of the Nomura Bank International plc's (NBI) senior note programme is aligned with the support-driven IDRs of Nomura Holdings as payment of principal and interest on the notes is unconditionally and irrevocably guaranteed by Nomura Holdings. The rating of Nomura International Funding Pte. Ltd.'s (NIF) senior note programme is also aligned with the support-driven IDRs of Nomura Holdings or Nomura Securities by the guarantee from either Nomura Holdings or Nomura Securities.
The IDRs of Daiwa and Daiwa Securities' senior debt ratings are driven by their SRs and SRFs.
VIABILITY RATINGS
The affirmation of the VRs for Nomura and Daiwa reflects the stabilisation of their performance since FYE13 (financial year ended March 2013) on the strength of improved domestic market conditions. The affirmation also factors in potential volatility risks relating to uncertainties regarding the success of Abenomics-related reforms, which could adversely affect market confidence in the short and medium term.
The VRs for Nomura and Daiwa reflect their strong capitalisation, which compares favourably with many global universal banks (Nomura Holdings' Fitch Core Capital ratio was about 14% at end-March 2015 and Daiwa Securities Group's was 24%), their superior market position within the domestic financial system, and modest market risk on trading accounts.
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 16 times at Nomura Holdings, 17 times at Daiwa Securities Group at end-June 2015) relative to global peers, although that is mainly due to large exposures to short-term repo transactions with various global and domestic financial institutions.
The 'bbb' VR at Nomura Holdings, which is a notch lower than Nomura Securities, incorporates the former's greater exposure to overseas risks and regulations due to its global franchise, and larger contingent liabilities to its subsidiaries compared with those of Nomura Securities. Nomura Securities' more constant profitability backed by a stable retail franchise also underpins the notching.
Meanwhile, 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 reflect the group's flat structure with Daiwa Securities being the single core operating subsidiary focused on the domestic market.
RATING SENSITIVITIES
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, which implies the government's propensity to provide support is diminished. However, Fitch believes that the existing framework under the DIL is unlikely to change over the medium term, while any changes to domestic laws/regulations to make it less possible to receive support (for example, senior debt being bailed-in) would likely be protracted.
Furthermore, a change in Fitch's assessment on 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.
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.
VIABILITY RATINGS
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. In this regard, maintaining strong capitalisation is imperative to appropriately mitigate risk. Both groups aim to expand stable revenue sources (that are not asset intensive) by further strengthening their asset/wealth management businesses to provide comprehensive consulting services. However, Fitch views that the increasing competition among major players will make execution of their strategies more challenging.
Positive rating drivers for Nomura's and Daiwa's VRs include sustainable improvement in profitability stemming from a lower-cost structure generated by solid improvement in Japan's real economy and further reinforcement of stable revenue sources.
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:
- USD5.0bn 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.
Nomura International Funding Pte. Ltd.:
-USD4.5bn 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 upgraded to 'A-' from 'BBB+'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs upgraded to'F1' from 'F2'
- Viability Rating affirmed at 'bbb+'
- Support Rating upgraded to '1' from '2'
- Support Rating Floor revised to 'A-' from 'BBB+'
Daiwa Securities:
- Long-Term Foreign- and Local-Currency IDRs upgraded to 'A-' from 'BBB+'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs upgraded to'F1' from 'F2'
- Viability Rating affirmed at 'bbb+'
- Support Rating upgraded to '1' from '2'
- Support Rating Floor revised to 'A-' from 'BBB+'-
- Senior debt upgraded to 'A-' from at 'BBB+'
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