MOODY'S DOWNGRADES DAIWA BANK'S CREDIT RATINGS (LT DEPOSIT TO Baa3)
Tokyo, 02-13-98 -- Moody's Investors Service lowered Daiwa Bank's long-term deposit rating to Baa3 from Baa1, its short-term rating to Prime-3 from Prime-2, and bank financial strength rating to E from D. Also lowered were debt ratings assigned to securities issued by Daiwa's overseas subsidiaries. Those ratings were placed on review for possible downgrade on October 28, 1998, and this concludes the review.
The downgrade reflects Moody's concerns that Daiwa's lingering asset quality problems will continue to pressure its capital base. A generally weak economy in Japan will likely result in further deterioration of Daiwa's loan portfolio. Daiwa's loan loss reserve coverage appears low in relation to peers. In addition, Daiwa remains exposed to significant contingent risks arising from its nonbank affiliates and certain large borrowers, such as problematic construction companies and real estate developers. The main bank relationship with such borrowers may result in material future credit costs. Daiwa's economic capital is problematic and vulnerable to stock market volatility.
Daiwa has maintained a leading position in the corporate pension trust business, and there is a long-term opportunity in this field. However, it is unlikely that the bank will generate a meaningful portion of profits solely from this line of business. Daiwa's primary operating base is Osaka, where a number of financial institutions, including two larger city banks, compete fiercely. Moody's is concerned that the bank's business franchise will be challenged by on-going deregulation, and this could lead to a further contraction of profit margins in its banking businesses.
Headquartered in Osaka, Daiwa Bank, Ltd. is the smallest of Japan's nine city banks. The bank is also permitted to engage in trust banking businesses. As of September 30, 1998, the bank had unconsolidated banking assets ¾16.2 trillion (US$132 billion) and trust assets of ¾18.4 trillion (US$150 billion).
The following ratings were lowered:
Daiwa Bank – the bank financial strength rating to E from D, the long-term deposit rating to Baa3 from Baa1, the short-term deposit rating to Prime-3 from Prime-2.
Daiwa Bank (Capital Management) Plc. – the long-term debt rating to Ba1 from Baa1, and the short-term rating to Prime-3 from Prime-2.
Daiwa International Finance (Cayman) Ltd. – the subordinated debt rating to Ba2 from Baa2.
Daiwa Merchant Bank (Singapore) Ltd. – the long-term senior debt rating to Ba1 from Baa1.
Daiwa Overseas Finance Ltd. – the long-term senior debt rating to Ba1 from Baa1, and the short-term rating to Prime-3 from Prime-2.
Daiwa PB Limited – the junior subordinated debt rating to Ba3 from Baa3.
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