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27 Dec 2001
MOODY'S WILL ASSIGN A3 UNSECURED DEBT RATING TO TWO NEWLY-CREATED MIZUHO BANKS
Tokyo, December 27, 2001 -- Moody's Investors Service will assign A3 unsecured debt rating to two newly-created Mizuho Banks. Mizuho Financial Group is planning an organisational restructuring of its current three operating banking subsidiaries: Dai-ichi Kangyo Bank (DKB), Fuji Bank (Fuji), and Industrial Bank of Japan (IBJ). As a result of the currently proposed restructuring, two new, and different, banking entities are to be created on April 1, 2002. These two banks are to be named Mizuho Bank (MHBK) and Mizuho Corporate Bank (MHCB). The former is to specialise in domestic middle market and retail banking, and the latter will be an institution to target domestic wholesale and international banking. Mizuho Financial Group is to obtain regulatory approval for this restructuring soon.
Moody's understands that the organisational restructuring, including corporate split and merger, will be taken in three steps: 1) DKB's split of its wholesale business to Fuji; 2) Fuji's and IBJ's split of their retail operations to DKB; and 3) IBJ's merger with MHCB. As a result, Fuji will be a surviving entity and will change its name to MHCB, while DKB (also as a surviving entity) will change its name to MHBK. As a consequence of this organisational restructuring, Moody's expects MHBK and MHCB will be able to dispose of unrealised losses in their balance sheet through utilisation of substantial accounting profit 'merger and corporate split' gains.
Moody's will assign to both MHBK and MHCB, a E+ bank financial strength rating (BFSR), A3, Prime-1 deposit rating, A3 unsecured senior debt rating, and Baa1 subordinated debt rating with a stable rating outlook. These ratings are based on consideration of the following systemic support and stand-alone elements.
The current ratings for DKB, Fuji, and IBJ are based on Moody's opinion of three key rating elements. First, they all have very weak financial fundamentals, with credit costs continuously exceeding preprovision profit (PPP) for the majority of the past five years, with resultant weak capitalisation. Second, on a combined basis, the Mizuho banking group has a potentially strong domestic operating franchise (both wholesale and retail) as the largest banking institution in the world. Moody's considers the group could potentially generate above average revenue flows over the long-term period if it can successfully manage continuing pressure on its fundamentals from credit and market risks. These two elements are reflected in its E+ BFSR. Last, but not least, Moody's ratings are also heavily underpinned by the strong expectation that the sheer size and systemic importance of these three institutions to the Japanese economy and corporate sector should ensure them the highest imaginable likelihood of systemic support. Moody's expects that legal resolution of the institution would be extremely unlikely.
Moody's does not see any analytical necessity to revise the current rating rationale for the assignment of ratings for the two newly-created banking entities, even though the restructuring will create entities with different intrinsic risk profiles.
On a stand-alone basis, while MHBK is believed to have a better potential franchise profile (retail/middle market) when compared with MBCB, its near-term financials will be similarly characterised by unabated (although less volatile) downward pressure from deterioration of its middle market special mention portfolio under the current stressful operating environment. Despite the added level of protection by the recent decision to establish special reserve, MHBK's diversified loan portfolio reflects its correlation to the local economy, and the portfolio would still carry many large troubled domestic credits, despite its mission as retail and middle market targeted institution.
In Moody's view, any significant earnings recovery by MHBK would require a rise in the interest rate environment. Stronger earnings projections by the bank assume a higher rate environment and increasing deposit income, which Moody's considers may be over-optimistic and difficult to achieve. Moody's believes credit costs of MHBK for the short-term period are likely to stay at the relatively higher level for the near future due mainly to the absence of any sign of the end of deflation. Unless there is an end to the worsening economic environment, Moody's does not expect a substantial decrease in credit costs, and there will be further emphasis on expense reduction initiatives. MHBK's immediate success in achieving minimal stability of the dynamic between PPP and credit costs is believed to be very important in ensuring a higher level of certainty for dividend payment at holding company level. This is because MHCB's bottom line performance continues to be characterised by the prospect of higher volatility.
As for MHCB, it has two defining characteristics that would indicate a higher intrinsic risk profile. First, it will take time to dispose of the larger weight of cross shareholdings, despite the bank's emphasis on substantially reducing its scale. Second, it has a higher proportion of troubled wholesale credits in many industry segments with over-capacity and excessive interest bearing debts, indicating the inevitable volatility of future credit losses.
However, Moody's recognises three mitigants to these risks: Mizuho's plan to substantially reduce book value of cross shareholding securities through accounting engineering of 'corporate split and merger' in April 2002; recent addition of loan loss reserve including special reserve of yen800billion; and the bank's plan to allocate larger book capital to MHCB on its inception. If successfully put in place at inception, Moody's believes that this would ensure a still weak, but improved, level of protection against further possible market stress and higher volatility of MHCB's credit portfolio.
Moody's believes that MHCB's portfolio continues to be characterised by higher vulnerability to restructuring of troubled Japanese corporations. There is still a residual likelihood of loan loss surprises due to a weakened ability and willingness of banks to support troubled wholesale credits, and the increasing level of regulatory and market scrutiny accelerating the move to exit of those unlikely to survive. This impact is believed to be comparatively large for MBCB in relation to other megabanks as a natural corollary of its sheer presence in Japanese corporate banking.
Moody's considers that, while the recent decision to add additional loan loss reserve including special reserve of JPY800billion by March 2002 would reduce the possible impact of short-term disturbance to its bottom line, credit costs of MHCB may have the potential to increase given its sheer exposure to the Japanese corporate sector. Moody's says that MHCB's credit portfolio could deteriorate to a level which would fully utilise the recently created special reserve for MHCB in a stressful scenario, and at a pace much faster than currently projected by management. Consequently, higher than projected proportion of future PPP may be absorbed by continuing large credit costs, with resultant delayed or unachievable capital recovery. Lastly, Moody's believes that the potential risk of deteriorating market perception of funding vulnerability is greater for MHCB as a consequence of its large market funding (debentures and short-term money). However, this inherent funding vulnerability of MHCB will be, to some extent, redressed by the establishment of a funding arrangement with MHBK, which, in Moody's view, will be endorsed by the regulator.
Moody's expectation of the regulator's flexible and favourably-disposed approach toward the possible need for reallocation of capital through financial assistance between the two entities would add another factor to justify the no-notching differential among those two - even for BFSR. While the regulatory framework surrounding BHCs is still not clearly defined, Moody's believes the importance of the fundamental inter-connectedness of MHCB and MHBK is well recognised by regulators.
In terms of management infrastructure, Mizuho Holdings, Inc. established a system by which all of its operating subsidiaries are managed on a group-wide basis: resource allocation, performance monitoring, and risk management (including both market and portfolio). The strategic business management of these two entities will be managed 'indivisibly' by the Holding Company. Moody's is still sceptical as to whether this would effectively work to generate above average returns in a timely manner, as the actual implementation of the strategies would face challenges implicit in its transformation into a non-developmental bank.
These ratings are strongly predicated on Moody's unchanged view of the Japanese systemic support regime for major banks. While this could be potentially affected by the regulator's developing policy with regard to bank resolution after the lifting of unconditional guarantee of deposit after April 2002, at the same time Moody's does not expect any adverse developments relating to megabanks, including Mizuho banks.
No Related Data.
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