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Announcement:

Moody's: Outlook for Japanese banking system stable

 The document has been translated in other languages

02 Oct 2014

Tokyo, October 02, 2014 -- Moody's Japan K.K. says that the outlook for Japan's banking system is stable, based on a real GDP growth rate of 0.5%-1.5% for all of 2014 and 1.0%-2.0% for 2015, as well as a low unemployment rate of 3.0%-4.0%.

Moody's expects the operating environment for Japanese banks to remain stable over the next 12-18 months. Moody's stable outlook is consistent with the stable outlooks on individual bank ratings, and the Government of Japan's Aa3 rating.

Asset quality is robust and funding will continue to be a credit strength for Japanese banks, which exhibit very low dependence on confidence-sensitive market funding. However, the banks' domestic profitability remains under pressure, despite low credit costs and positive trends in fee income.

Moody's conclusions were contained in its just-released "Banking System Outlook: Japan", which expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months.

Moody's report looks at Japan's banking system in terms of five factors: Operating environment (which is classified as "stable"); asset quality and capital ("stable"); funding and liquidity ("stable"); profitability and efficiency ("stable"); and systemic support ("stable").

Moody's has maintained a stable outlook on the Japanese banking system since 2012.

The report says Japan's inflation rate has increased moderately, incentivizing banks to shift into risk assets from government bonds. Both of these trends are likely to support increased loan growth.

Moody's points out that the banks' holdings of Japanese government bonds (JGBs) fell to 14% of total banking-system assets in August 2014 from 20% in 2012, a situation which also reflects the Bank of Japan's aggressive purchase of JGBs since April 2013.

As for Japan's nationwide consumption tax, which rose to 8% from 5% in April 2014, and is scheduled to rise to 10% in October 2015, Moody's report says the second increase is unlikely to significantly negatively affect the operating environment for banks, given that Prime Minister Abe has indicated he will only increase the tax in October 2015 if the economy is strong enough to withstand the impact.

Moody's report says the banks' asset-quality metrics are robust compared with global peers, and will remain so over the outlook horizon, as large Japanese corporates overall are highly rated, with moderate leverage and sizeable cash on their balance sheets. In addition, the default rate among small and medium-size enterprises is at its lowest level in at least 15 years.

In terms of funding and liquidity, Moody's points out that the system's loan-to-deposit ratio is only around 60%, and because Japanese banks have one of the lowest ratios of market funding globally, their reliance on confidence-sensitive sources of funding is low.

The banks also hold large liquidity sources in the form of JGBs. In addition, deposits at the Bank of Japan — which have replaced some of the banks' JGB holdings — serve as a large source of liquidity.

As for profitability, Moody's expects the banks to exhibit stable profitability. Moody's says increasing profit contributions from overseas lending, as well as modest further development of domestic fee income will offset pressure on net interest income.

Moody's also says that unlike a number of other countries around the world, the level of systemic support for banks will remain unchanged in Japan, as the authorities have clearly signalled that they will avoid using bail-in or other resolution schemes that impose losses on deposit and debt creditors on a going-concern basis.

Moody's rates 33 banks in Japan, covering approximately 70% of total system assets. At end-March 2014, the three mega banking groups in the country controlled about half of all system assets. Weighted by assets, the 33 banks' average baseline credit assessment is baa1, and their average deposit rating is A1.

Subscribers can access the full report at

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_175868

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Tetsuya Yamamoto
Vice President - Senior Analyst
Financial Institutions Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Graeme Knowd
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Moody's: Outlook for Japanese banking system stable
No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​​​​
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