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Rating Action:

Moody's: Japan banks' keep-well letter supported subsidiaries on review for possible downgrade

19 Mar 2010

Tokyo, March 19, 2010 -- Moody's Investors Service has placed on review for possible downgrade the ratings of eight subsidiaries (engaging mainly in securities broking, but including an overseas banking subsidiary) of Japanese banks, that are supported by keep-well letters from their parent or sibling banks (parent banks).

The review has been prompted by Moody's departure from its past practice with regard to rating the keep-well letter supported subsidiaries of Japanese banks. Previously, when analyzing subsidiaries supported by keep-well letters, ratings were generally uplifted to the level of the parent bank's debt rating, regardless of the subsidiaries' standalone credit assessment or baseline credit assessment (BCA).

This practice had been underpinned by Moody's positive evaluation of Japan's traditionally strong parent/subsidiary support relationships, as demonstrated by cases where parents provided extensive liquidity and capital support when needed. Also underpinning Moody's practice had been the strong commitments articulated in the keep-well letters, with regard to ownership maintenance, liquidity commitments, and positive net-worth maintenance.

The change in approach has been prompted by Moody's changing view on two issues: appropriate degree of incorporation of parent support and the need for BCA. With regard to parent support, ratings supported by keep-well letters have traditionally benefited substantially from the high systemic support components of the parent banks' debt ratings. While to date Japan has seen no historical case of regulatory intervention that prevented a parent bank from extending support even during the country's banking crisis, in light of the primary purpose of systemic support to protect the parent bank's depositors -- not to directly support the senior unsecured creditors of its subsidiaries, in a stress situation, the risk of intervention could increase for the keep-well supported entities, relative to the guaranteed entities.

With regard to the BCA, the growing complexity of the investment banking business model could significantly impact the financial fundamentals of the parent bank as evidenced in many cases of non-Japanese banks. Up to now, the scale and complexity of investment banking at Japanese banks' securities subsidiaries has been generally modest relative to a parent's available financial resources, and losses stemming from the recent financial crisis have been lower than at the international wholesale investment banks. However, the Japanese banks' increasing strategic emphasis on investment banking highlights the need to better capture fundamentals -- and reflect the differences in the subsidiaries' final ratings.

Moody's notes that the rating actions announced here do not indicate any recent change in the standalone credit fundamentals of these issuers or their parents -- or in the issuers' strategic importance to their parents.

The rating reviews will focus on assessment of BCA of such entities to the extent possible, their strategic importance to the parents, the degree of integrated nature of their investment banking business, and re-assessing the appropriate level of uplift from their BCAs.

Below is a list of those supported entities whose ratings have been placed on review for possible downgrade.

Mitsubishi UFJ Securities Co., Ltd. -- Aa2 long-term issuer rating

Mitsubishi UFJ Securities International plc -- Aa2 Euro Medium Term Note Programme senior unsecured rating, Aa2 long-term senior unsecured and issuer ratings, and Aa3 Euro Medium Term Note Programme subordinated rating

Mitsubishi UFJ Securities (HK) Capital, Ltd. -- Aa2 long-term euro certificate of deposit programme rating

Mitsubishi UFJ Trust International Limited -- Aa2 long-term issuer rating

Nikko Cordial Securities Inc. -- Aa2 long-term issuer rating

Sumitomo Mitsui Banking Corporation Europe Limited -- Aa2 long-term deposit rating

Mizuho Securities Co., Ltd. -- Aa3 Euro Medium Term Note Programme rating, and Aa3 long-term unsecured senior debt rating

Mizuho International plc -- Aa3 Euro Medium Term Note Programme rating, and Aa3 long-term unsecured senior debt rating

Moody's last rating action on Mitsubishi UFJ Securities Co., Ltd., Mitsubishi UFJ Securities International plc, Mitsubishi UFJ Securities (HK) Capital, Ltd. and Mitsubishi UFJ Trust International Limited was on August 12, 2009, when all ratings were confirmed after downward review.

The last rating action on Mizuho Securities Co., Ltd. and Mizuho International plc was on May 8, 2009, when assigning Aa3 rating to the EMTN programme.

The last rating action on Sumitomo Mitsui Banking Corporation Europe Limited was on August 25, 2009, when all ratings were confirmed after downward review.

The last rating action on Nikko Cordial Securities Inc. was on January 19, 2010, when the rating was upgraded to Aa2 from A2.

Ratings are assigned by evaluating factors we believe are relevant to an entity's credit profile, such as franchise value, risk positioning, operating and regulatory environment, and financial fundamentals versus its competitors, as well as the company's projected performance in the near to medium term. These attributes are compared to those of other issuers both inside and outside its core industry. The methodologies used to determine the ratings for these companies can be found at www.moodys.com in the Research & Ratings directory, in the Rating Methodologies subdirectory.

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

Tokyo
Natsuko Ishida
Analyst
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's: Japan banks' keep-well letter supported subsidiaries on review for possible downgrade
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