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Rating Action:

MOODY'S DOWNGRADES RESONA HOLDING'S RELATED PREFERRED STOCK RATING TO Caa1 AND RESONA BANK'S JUNIOR SUBORDINATED DEBT RATING TO B1. ALL OTHER RATINGS ARE RE-AFFIRMED

19 May 2003
MOODY'S DOWNGRADES RESONA HOLDING'S RELATED PREFERRED STOCK RATING TO Caa1 AND RESONA BANK'S JUNIOR SUBORDINATED DEBT RATING TO B1. ALL OTHER RATINGS ARE RE-AFFIRMED

Tokyo, May 19, 2003 -- Moody's Investors Service downgraded the preferred stock rating of AB International Cayman Trust to Caa1 from B2. The junior subordinated debt rating of Resona Bank was also downgraded to B1 from Ba3 and remains under review for further possible downgrade. All other deposit and debt ratings of Resona Bank Ltd. (RSBK), Saitama Resona Bank Ltd. (SRBK), and Resona Banking & Trust Banking Co., Ltd. (RSTB) were affirmed. The rating outlook for these institutions is stable.

The rating actions followed the announcements by Resona Holdings, Inc. (RSHD) of its decision to apply for government capital injection under the Deposit Insurance Law, and to suspend dividends payment on its preferred stock obligations. According to RSHD's announcement, Resona Bank Ltd. will post large net losses for FYE 3/2003, and its regulatory capital ratio will decline to slightly above 2% as of 3/2003. Large net losses of RSBK are mainly caused by the reduced incorporation of deferred tax assets for its FYE3/2003 results. Accordingly, RSHD's consolidated regulatory capital ratio will deteriorate to 3.8% as of 3/2003. As a result, RSHD will recognise approximately JPY1.161 trillion in mark-down losses for its investment in its subsidiaries (mainly the equities of Resona Bank Ltd.), which will wipe out the distributable profits of RSHD on a standalone basis. According to the terms and conditions of preferred stock and securities, Resona Holdings will suspend preferred dividends payment on these obligations. The downgrade of preferred stock rating of AB International Cayman Trust to Caa1 reflects this dividend suspension.

The downgrade of RSBK's junior subordinated obligations to B1 from Ba3 and continued review for downgrade reflect the deterioration of RSBK's regulatory capital ratio and erosion of the its distributable profits, which would allow the bank to defer its interest payment on the junior subordinated securities. The continued review status reflects the increased uncertainty arising from possible regulatory intervention in the servicing of these securities.

The affirmation of all other deposit and debt ratings of RSBK, SRBK, and RSTB is based on Moody's expectation that strong systemic support will be extended in a timely manner from the Japanese Government and the Bank of Japan (BOJ) to RSHD and banking entities under RSHD as a "special support bank" to ensure steady normal banking operations of those banking entities. In consideration of RSHD's large banking assets size and its systemic importance as a nation-wide retail and middle market targeted banking institution, Moody's expects large re-capitalisation injection will be made to RSBK, coupled with strong liquidity support including special loans from BOJ to those banking entities. It is Moody's expectation that RSBK will continue paying its interest payment on its senior subordinated securities without regulatory intervention.

The rating affirmation for SRBK (long and short-term deposit ratings at Baa3 and Prime-3, and bank financial strength rating of E) reflects relatively better and unaffected regulatory capital of SRBK for FYE3/2003. However, the rating agency notes that SRBK's financial linkage to RSBK is very high due to large short-term fund placements from SRBK to RSBK.

The ratings (long and short-term deposit ratings at A3 and Prime-1, and bank financial strength rating of C) of The Resona Trust & Banking Co., Ltd. is unaffected due to its unique risk profile and engineered risk separation from those two banking entities (RSBK and SRBK) at the time of its establishment in 2002. RSTB is a specialised trust and fiduciary institution which operations are largely immune from market and credit risks. However, its business initiatives and franchise may be affected negatively by these developments surrounding RSBK and RSHD.

The rating outlook for RSBK, SRBK and RSTB is stable reflecting strong and solid support from the Japanese government.

As exemplified in E bank financial strength rating for RSBK (including ex-Daiwa Bank), Moody's has long pointed out the significant under-capitalisation of RSBK. Re-capitalisation by government will be a necessary step to redress this serious weakness, while allowing RSBK to perform its important ordinary banking functions. However, Moody's expects that increasingly stringent assessment of deferred tax assets of Japanese banks by auditors and Japanese banks' large reliance on tangibility of deferred tax assets would add uncertainty to the Japanese bank ratings in general, and particularly for those Tier I capital securities. The implementation of "special support bank" mechanism to a large Japanese bank such as Resona banking groups will provide a significant policy challenge for Japanese regulators to maintain a necessary banking functions of a large Japanese bank while addressing its under-capitalisation without causing a systemic crisis.

While the decision to inject government capital into the large banking institution is a positive development, Moody's continues to view that the gross under-capitalisation of the banking system remains unresolved. The lack of visible signs of improvement in the underlying economy coupled with the diminishing flexibility of regulators to provide forbearance would continue to place increasing pressure on the fundamentals of the large Japanese banks.

RSBK and SRBK are wholly-owned banking subsidiaries of RSHD, which is a bank holding company. Resona Bank is the succeeding entity of Daiwa Bank with expected total banking assets of JPY31 trillion, and took over the wholesale banking and non-Saitama retail and middle market businesses of Asahi Bank on March 1, 2003. SRBK is a banking entity with total banking assets of JPY8 trillion, and assumed the retail and middle market operations of Asahi Bank in Saitama and nearby areas. These two banking institutions, with total combined assets of approximately JPY40 trillion, rank among Japan's large banking groups.

The following ratings were downgraded:

AB International Cayman Trust: Preferred stock rating to Caa1 from B2.

Resona Bank Ltd.: Junior subordinated debt rating to B1 from Ba3, and remains under review for further possible downgrade.

Asahi Finance (Cayman) Ltd.: Junior subordinated debt rating to B1 from Ba3, and remains under review for further possible downgrade

Daiwa PB Limited: Junior subordinated debt rating to B1 from Ba3, and remains under review for further possible downgrade

The following ratings were affirmed:

Resona Bank Ltd.: E bank financial strength rating, Baa3 long-term deposit rating; Prime-3 short-term deposit rating; Ba1 senior unsecured debt rating, Ba2 senior subordinated debt rating

Saitama Resona Bank Ltd.: E bank financial strength rating, Baa3 long-term deposit rating, and Prime-3 short-term deposit rating

Asahi Finance (Cayman) Ltd.: Ba2 senior subordinated debt rating

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

Resona Trust & Banking Co., Ltd.: C bank financial strength rating, A3 and Prime-1 long and short-term deposit ratings

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

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

No Related Data.
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