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Rating Action:

MOODY'S DOWNGRADES ASAHI BANK'S LONG-TERM DEPOSIT RATING TO Baa3, AND CONFIRMS DAIWA BANK'S LONG-TERM DEPOSIT RATING AT Baa3

05 Feb 2002
MOODY'S DOWNGRADES ASAHI BANK'S LONG-TERM DEPOSIT RATING TO Baa3, AND CONFIRMS DAIWA BANK'S LONG-TERM DEPOSIT RATING AT Baa3

Tokyo, February 05, 2002 -- Moody's Investors Services has downgraded Asahi Bank (Asahi)'s long and short-term deposit rating to Baa3/Prime-3 from Baa1/Prime-2. The rating agency also lowered the long-term senior unsecured debt rating to Ba1 from Baa2, senior subordinated debt rating to Ba2 from Baa3, and the junior subordinated debt rating to B1 from Baa3. The trust unit rating representing preferred shares issued by the bank was also downgraded to B2 from Ba1. At the same time, Moody's confirmed the ratings of Daiwa Bank. These rating actions conclude the review initiated on July 10, 2001. The rating outlook is negative.

The rating actions reflect Moody's expectation that Asahi's capitalisation continues to be exposed to higher levels of market and credit risks volatility, and the bank's still insufficient level of protection against those risks. As a result of large provisionings and the diminished value of equity securities holdings, the bank's capitalisation has deteriorated to the point in which preprovisioning profit now serves as the only cushion to absorb possible rise in credit and market related losses. Accounting provisioning is substantially strengthened by the bank's plan to add reserves, but its wholesale exposure still incorporates a number of large (albeit decreasing) problem credits. Moody's believes these credits could deteriorate to a level which exceeds the increased provisioning, and possibly at a much faster pace than management has projected.

Moody's anticipates that Asahi's asset quality will also be pressured by residual risks associated with the continued downward pressure on its middle market portfolio in the current deflationary operating environment. Its large equity portfolio will also require a lengthy timeframe for further meaningful disposal and to positively affect its credit standing. Therefore, Moody's believes that projected improvement in Asahi's stand-alone financial fundamentals in the near to medium term contains a high degree of uncertainty.

Moody's notes that Asahi still has a strong operating franchise supported by its retail-focused infrastructure. However, its plan to improve its risk-adjusted margin from its retail/middle market-focused portfolio may prove to be a formidable task, given the unabated competition in commodity products from megabanking groups.

The confirmation of Daiwa Bank (Daiwa)'s ratings reflects the bank's very weak economic capitalisation, and the limited prospect of improving its bottom line profitability. The rating outlook is negative. Daiwa has a similar profile as Asahi in terms of market and credit risks, and Moody's believes the Osaka market is beset with severe structural stress on its fundamentals. Daiwa's retail strategies for maintaining an effective balance between earnings and portfolio improvement for deteriorating middle markets will also face significant challenges.

Recently, Asahi and Daiwa announced that Asahi will participate in a Daiwa Bank-led integration scheme as a subsidiary bank under a holding company structure (by March 2002) to ensure the continuation of government preferred dividend payments and to improve market perception of the bank. However, Moody's considers that the prospect of prompt and realistic improvement in its competitive positioning and franchise to be very difficult. The ultimate integration into a Daiwa Bank holding company structure would create a banking group with combined size of 50 trillion yen. However, Moody's believes that the integration process in the Japanese culture usually takes an extended period of time before concrete benefits emerge.

The notching differential between senior subordinated and junior subordinated debt ratings for Asahi has been equalised to that of Daiwa Bank. This is based on Moody's view as to the increased uncertainty associated with the treatment of those junior subordinated securities for very weak financial institutions - especially given the new systemic support mechanism characterised by the withdrawal of full guarantee for depositors.

The following ratings were downgraded:

Asahi Bank, Ltd. - the long-term and short-tem deposit ratings to Baa3/Prime-3 from Baa1/Prime-2; long-term unsecured senior debt rating to Ba1 from Baa2; subordinated debt rating to Ba2 from Baa3; junior subordinated debt rating to B1 from Baa3; and the issuer rating to Baa3 from Baa1.

Asahi Finance (Cayman) Ltd.- subordinated debt rating to Ba2 from Baa3; and junior subordinated debt rating to B1 from Baa3.

AB International Cayman Trust - preferred stock rating to B2 from Ba1.

Asahi Bank, Ltd. (Cayman Branch) - short-term deposit rating to Prime-3 from Prime-2.

The following ratings were confirmed:

Daiwa Bank, Ltd: Baa3/Prime-3 long and short-tem deposit ratings; Ba2 senior subordinated debt rating; and B1 junior subordinated debt rating.

Daiwa International Finance (Cayman): Ba2 senior subordinated debt rating.

Daiwa PB Limited: B1 junior subordinated debt rating.

Tokyo
Brian Oak
Managing Director
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Mutsuo Suzuki
Senior Vice President
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

No Related Data.
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