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Rating Action:

MOODY'S UPGRADES RATINGS OF RESONA BANK AND SAITAMA RESONA BANK

24 Jan 2005
MOODY'S UPGRADES RATINGS OF RESONA BANK AND SAITAMA RESONA BANK

Tokyo, January 24, 2005 -- Moody's Investors Service has upgraded to A3 from Baa2 Resona Bank, Ltd.'s (Resona Bank) and Saitama Resona Bank, Ltd.'s (Saitama Resona Bank) long-term deposit ratings and Resona Bank's senior unsecured debt rating, and upgraded to D- from E their bank financial strength ratings (BFSR). Subordinated debt ratings of Resona Bank were also upgraded to Baa1 from Baa3. The banks' Prime-2 short-term bank deposit ratings were not under review and remain unchanged. The preferred stock rating for AB International Cayman Trust was upgraded to Ba3 from Caa1, and will remain under review for further possible upgrade. The rating outlook is now stable for both BFSR and credit ratings. This rating action concludes the review for possible upgrade initiated in December 17, 2004.

The BFSR upgrade recognizes Resona Bank's progress in improving its balance sheet risk profiles, operating efficiency and bottom line profitability. Moody's notes that over the last two years, the group's risk management discipline under its new management has progressed markedly, benefiting from replenished capital availability as a result of injection of government capital in 2003. Ratings of Saitama Resona Bank have been equalized to those of Resona Bank in view of their strong linkage.

The bank's risk culture has evolved as well, underpinning the strategic reduction of large corporate credits and equity and the shifting of capital from relatively volatile and capital-intensive corporate banking activities. Preferred stock rating upgrade reflects the recovery of Resona Holdings' (RHD) distributable profit and the high likelihood that its preferred dividend payment will be resumed in the FY2005.

However, the BFSR continues to factor in RHD unique capital structure constraining that entity's future capital and franchise enhancement. RHD's capital structure is underpinned by a large amount of government common and preferred capital (approximately JPY2.8 trillion), which will likely pressure management to repurchase those preferred stocks purchased by the Japanese government in 1999 on the mandatory conversion dates starting in 2009. In Moody's view, this would likely consume large portion of RHD's future retained internal earnings under normal operating assumptions.

As a result, RHD's capitalization profile continues to limit its ability to expand its franchise relative to other Japanese mega-banks. Its franchise value compared to the other mega-banks' also remains unchanged, despite its competitive trust business franchise.

Although Resona's domestically focused operations are diversified among Tokyo, Saitama and Osaka and the Resona Group is aiming at greater segmentation in its retail and middle markets to ensure competitive differentiation, the lack of an investment banking vehicle and the directional ambiguity reflected by four key operating commercial banks existing under RHD makes Resona's franchise weaker than mega-banks'.

The government preferred capital injected in 2003 has no mandatory conversion date and is therefore more permanent than other such capital. It thus currently allows RHD more flexible capital management. However, its sheer size will continue to present the challenge of normalizing its capital structure beyond 2009, which will require RHD to explore other types of capitalization alternatives in addition to repurchasing the capital from its retained earnings.

The upgrade of credit ratings to A3 also factored in Resona Bank's improved BFSR and Moody's expectation that the bank would receive government support in case of distress. Government support is given less weight in Resona Bank's credit rating than in the other Japanese mega-banks' due to Resona's smaller size, weaker franchise value and lack of international operations.

Further upward movement of the BFSR could stem from, among other things, more progress in improving underlying operating profitability and expanding franchise value, as well as further reduction in credit and market risk levels and concentration. If, on the contrary, the group's credit expense/preprovision profit deteriorated substantially and its risk appetite materially grew with the aim of generating higher revenue, there could be negative rating pressure.

The following ratings were upgraded:

Resona Bank, Ltd.: bank financial strength rating to D- from E, long-term deposit rating to A3 from Baa2, senior unsecured debt rating to A3 from Baa2, senior subordinated debt rating to Baa1 from Baa3, junior subordinated debt rating to Baa1 from Baa3

Saitama Resona Bank, Ltd.: bank financial strength rating to D- from E, long-term deposit rating to A3 from Baa2

Asahi Finance (Cayman) Ltd.: senior and junior subordinated debt ratings to Baa1 from Baa3

Daiwa International Finance (Cayman) Ltd.: senior subordinated debt rating to Baa1 from Baa3

Daiwa PB Limited: junior subordinated debt rating to Baa1 from Baa3

The following rating was upgraded and remains under review for possible upgrade

AB International Cayman Trust: preferred stock rating to Ba3 from Caa1

The following ratings are unaffected by the review:

Resona Bank Ltd.: Prime-2 short-term deposit rating

Saitama Resona Bank Ltd.: Prime-2 short-term deposit 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
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Hong Kong
Wei S. Yen
Managing Director
Financial Institutions Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

No Related Data.
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