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Rating Action:

Moody's affirms Chugoku Bank's A1 ratings; changes outlook to negative

 The document has been translated in other languages

14 Mar 2018

Tokyo, March 14, 2018 -- Moody's Japan K.K. has affirmed all the ratings of The Chugoku Bank, Limited.

At the same time, Moody's has changed the bank's rating outlook to negative from stable.

The affirmed ratings are as follows:

- Baseline credit assessment (BCA): a3

- Adjusted BCA: a3

- Long-term issuer rating: A1

- Long-term bank deposit rating (domestic and foreign currency): A1

- Short-term bank deposit rating (domestic and foreign currency): P-1

- Commercial paper (foreign currency): P-1

- Counterparty Risk (CR) assessment: A1(cr) / P-1(cr)

RATINGS RATIONALE

The affirmation of the bank's a3 BCA is supported by its (1) strong asset-risk profile; (2) solid liquidity profile; and (3) solid operating track record, with no net losses to date.

These positive factors are mitigated by the challenges the bank faces: (1) maintaining strong asset quality despite its rapidly growing loan book; (2) managing its market risk; and (3) maintaining strong capitalization at the same time as increasing risk-weighted assets (RWA).

Furthermore, Moody's changed the outlook on the A1 deposit and issuer ratings to negative from stable, reflecting the risk of a further decline in the bank's capitalization as a result of continued growth in RWA, which could potentially weaken its financial profile.

Chugoku Bank's tangible common equity (TCE)-to-RWA ratio declined to 10.3% as of the end of December 2017 from 11.0% as of the end of March 2016, a result of faster growth in RWA than TCE accumulation.

Chugoku Bank has been increasing loans rapidly and reducing investments in JGBs, in response to negative pressure on profitability caused by the ultra-low interest rate environment. Risk weights assigned to loans are higher than the risk weight assigned to JGBs and as a result the TCE-to-RWA ratio has declined. The rapid increase in loans is credit negative and could undermine the bank's historically strong asset performance track record.

However, to date its asset-risk profile remains strong despite the high loan growth and as yet there have been no signs of asset deterioration. Its nonperforming ratio improved to 1.5% as of the end of December 2017 from 2.1% as of the end of March 2016.

Chugoku Bank's A1 ratings incorporate a two-notch uplift from its a3 BCA. The uplift reflects our assessment of a very high likelihood of government support for the bank in times of stress owing to the bank's importance to the local economy.

What Could Change the Ratings - Up

Upward rating pressure is unlikely, given the negative outlook and the fact that the bank's long-term rating, which incorporates a two-notch uplift from its BCA, is at the same level as Japan's sovereign rating.

The rating outlook could return to stable if the bank can preserve its current capitalization while also maintaining its asset quality and solid liquidity profile.

What Could Change the Ratings - Down

Factors that could result in a downgrade include, but are not limited to:

1. failure to maintain tangible common equity (TCE)-to-RWA ratio of 10% owing to a material increase in the bank's credit or market exposure

2. signs of asset-quality deterioration

3. sustained deterioration in the bank's profitability

4. weakening of its liquidity profile through increased reliance on market funds or investments in less-liquid assets

5. a downgrade of Japan's sovereign rating

The principal methodology used in these ratings was Banks (Japanese) published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Chugoku Bank, Limited, headquartered in Okayama City, Okayama Prefecture, is a regional bank in Japan, with total consolidated assets of JPY8.3 trillion as of the end of December 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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: 81 3 5408 4110
Client Service: 81 3 5408 4100

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 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: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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