Fitch Upgrades SMFG; Affirms Other Major Japanese Banks
Fitch has affirmed the ratings of Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) and Mitsubishi UFJ Trust and Banking Corporation (MUTB), the two main banking subsidiaries of Mitsubishi UFJ Financial Group, Inc. (MUFG). The agency also affirmed the ratings of Mizuho Financial Group, Inc. (MHFG) and the ratings on Sumitomo Mitsui Trust Bank, Limited (SMTB). The ratings of MUFG's consumer finance subsidiary, ACOM CO., LTD (ACOM), have also been affirmed. The Rating Outlooks are Stable for all entities.
A full list of rating actions is at the end of this commentary.
The rating actions follow a periodic review of the major Japanese banking groups.
KEY RATING DRIVERS
VIABILITY RATINGS
The Viability Ratings (VRs) reflect the four banking groups' respective strong or very sound domestic franchises, solid liquidity profiles in yen, sound asset quality and adequate capital positions - the latter has been bolstered by the improvement in equity markets in the past 30 months, and Fitch expects it to continue improving through consistent retained earnings. That said, profitability remains modest in the sustained low interest-rate environment.
The upgrade in SMFG's VR reflects the consistent outperformance (relative to the other major banks) in profitability and enhanced resilience against key market risks, specifically its reduction of Japanese government bond (JGBs) exposures and the shorter duration of its JGB holdings. SMFG's CET 1 ratio reached 12.1% on a fully loaded basis and 9.8%, excluding unrealized gains from available-for-sale securities, at end-September 2015, which is comparable to that at MUFG (12.0% and 10.0% respectively), which has a similar risk appetite and earnings mix.
Nevertheless, market risks stemming mainly from the four banking groups' substantial investment portfolios could give rise to some volatility in their earnings and capitalisation, although Fitch believes the banks have reduced their investment holdings and will continue to trim them.
Fitch expects the banks' core domestic banking profits to improve slightly, but remain stable in the short to medium term, given still-weak demand from the corporate sector and the low interest-rate environment. The banks' performances in recent years have benefited from market-related income (such as equity gains and the sale of financial products) and decreases in credit costs. They have also diversified their sources of earnings.
Growth in the banks' overseas operations has become more significant as they seek to reduce reliance on domestic operations and boost profitability. Fitch expects the banks to continue expanding abroad, but they likely at a pace no faster than in previous years, so profitability is not likely to improve significantly. Their offshore net interest margins (NIM) remain modest, at an average of less than 2% for the financial year ended March 2015 (FYE15).
Meanwhile, a stable, yet challenging domestic operating environment, will help the banks hold down potential credit risks.
IDRS, SENIOR DEBTS, SRS AND SRFS
The Long-Term IDRs of all banks, except MHFG, MHBK and MHTB, are driven by the banks' respective VRs. MHFG group's Long-Term IDRs are based on sovereign support, and are at the banks' Support Rating Floors (SRFs). The ratings on the senior debt are based on the banks' IDRs.
The Support Ratings (SRs) and SRFs of all the major banks reflect Fitch's view that, as systematically important banks in Japan, they would be most 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
Preferred securities issued by subsidiaries of MUFG, MHFG and SMFG are rated four notches below the respective parents' VRs - two notches for loss severity and two notches for non-performance risk due to the constraint of coupon suspension - in line with Fitch's criteria on performing instruments.
For subordinated debt issued under Basel II (B2T2) or Basel III (B3T2), the anchor rating - which best reflects non-performance risk - is the higher of the VR or support-driven Long-Term IDR. 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.
BTMU's B2T2 bonds are rated one notch (for loss severity) below its VR. Meanwhile, B3T2 instruments issued by SMFG and MHFG's subsidiary are notched twice from the respective VRs to reflect the prospect of the full and permanent write-down of the securities upon reaching the point of non-viability, resulting in additional loss severity
SUBSIDIARY AND AFFILIATED COMPANY
The IDRs of Sumitomo Mitsui Banking Corporation Europe Limited (SMBCE) are in line with the ratings of its 100% parent, SMBC, given its role as the European operational arm of SMBC.
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 the subsidiary banks of MUFG.
RATING SENSITIVITIES
VIABILITY RATINGS
The potential for a VR upgrade is limited for MUFG's subsidiaries, BTMU and MUTB, as well as SMFG and its subsidiary, Sumitomo Mitsui Banking Corporation (SMBC), in light of the ratings' proximity to the Japanese sovereign's IDRs (A/Stable). For the same reasons, their VRs could be downgraded were the sovereign to also be downgraded.
For MHFG and its subsidiaries, Mizuho Bank, Ltd. (MHBK) and Mizuho Trust & Banking Co., Ltd. (MHTB), and SMTB, positive rating action would be aided by a sustained improvement in the wider domestic real economy, including sound growth in demand for capex/investment. Fitch views MHFG's recent capital improvement as positive, but it is broadly in line with prior expectations when its VR was last upgraded in 2013, and thus the agency is looking for further and sustained improvement if the VR is to be upgraded again, given uncertainty about risks inherent to the operating environment.
Negative rating action on all the banks' VRs 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 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.
IDRS, SENIOR DEBTS, SRS AND SRFS
The IDRs of BTMU and MUTB are driven by their VRs and any change in the VRs could result in a change to their IDRs and the ratings of outstanding senior debts.
The IDRs of SMFG and SMBC are also driven by their VRs and any change in the VRs could result in a change to their IDRs and the ratings of outstanding senior debts.
Currently, the VRs of MHFG, MHBK and MHTB are one notch below their 'A-' IDRs. Therefore, the upgrade in the VRs of the group would not lead to an upgrade of their IDRs unless it is by more than two notches. Any downgrade of the VRs of MHFG and its subsidiaries would not immediately affect their IDRs, since their IDRs are at the SRFs.
An upgrade of the IDRs of SMTB would follow an upgrade of its VR. However, a downgrade in the VR would not necessarily affect the IDRs, which are aligned with the SRFs. Any negative action on the IDRs would likely be a reflection of negative action on the sovereign ratings.
The banks' '1' SRs and 'A-' SRFs has been maintained, even after the downgrade of the sovereign's ratings to 'A' from 'A+', based on Fitch's belief that the government's propensity to support the major banks, if necessary, remains intact. However, the Outlook on the banks' IDRs would be driven by the Outlook on the sovereign ratings. Further downgrade of the sovereign's IDRs to below 'A' would lead to a review of the SRs and SRFs of all banks.
SUBORDINATED DEBTS AND OTHER HYBRID SECURITIES
A downgrade of BTMU's VR would lead to a downgrade of the rating on its B2T2 instruments. Also, a downgrade of SMFG's VR would lead to a downgrade of the ratings on its B3T2 instruments as its IDR of 'A' is underpinned by an 'a' VR. For MHFG's subsidiaries, a downgrade of their VRs would not affect the ratings of their B3T2 instruments as their IDRs would then be underpinned by the 'A-' SRFs.
Meanwhile, substantial changes in the resolution framework that increase the chances of loss-absorption being triggered, or changes in assessment of the banks' systemic importance that reduce the likelihood of pre-emptive support would lead Fitch to review the anchor rating of the subordinated debts. Nevertheless, Fitch believes such changes will be unlikely in the foreseeable future.
SUBSIDIARY AND AFFILIATED COMPANY
Any change in the rating of SMBC would lead to a corresponding change in the ratings of SMBCE.
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 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-'
- B3T2 affirmed at 'BBB'
MHBK:
- 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 unsecured debt affirmed at 'A-'
MHTB:
- 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-'
Mizuho Capital Investment (USD) 1 Limited
-Preferred securities affirmed at 'BB'
Mizuho Financial Group (Cayman) 3 Limited
- B3T2 affirmed at 'BBB'
Entities under SMFG
SMFG:
- Long-Term Foreign- and Local-Currency IDRs upgraded to 'A' from 'A-'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1'
- Viability Rating upgraded to 'a' from 'a-'
- Support Rating affirmed at '1'
- Support Rating Floor affirmed at 'A-'
- B3T2 upgraded to 'BBB+' from 'BBB'
SMBC:
- Long-Term Foreign- and Local-Currency IDRs upgraded to 'A' from 'A-'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1'
- Viability Rating upgraded to 'a' from 'a-'
- Support Rating affirmed at '1'
- Support Rating Floor affirmed at 'A-'
SMBCE:
- Long-Term Foreign-Currency IDR upgraded to 'A' from 'A-'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1'
- Support Rating affirmed at '1'
SMFG Preferred Capital GBP 1 Limited, SMFG Preferred Capital USD 1 Limited:
- Preferred securities upgraded to 'BBB-' from 'BB+'
Entities under MUFG
BTMU:
- 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-'
- Senior unsecured debt affirmed at 'A'
- B2T2 affirmed at 'A-'
MUTB:
- 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-'
MUFG Capital Finance 1 Limited, MUFG Capital Finance 2 Limited, MUFG Capital Finance 4 Limited and MUFG Capital Finance 5 Limited:
- Preferred securities affirmed at 'BBB-'
ACOM:
- Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable
- Short-Term Foreign- and Local-Currency IDRs affirmed at 'F2'
- Support Rating affirmed at '1'
Entity under Sumitomo Mitsui Trust Group
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-'
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