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Rating Action:

Moody's affirms ratings for MUFG, SMFG, and Mizuho; reviews MUFG's BCA

 The document has been translated in other languages

28 Aug 2019

NOTE: On September 11, 2019, the press release was corrected as follows: In the third sentence of the third paragraph of the RATINGS RATIONALE section, the TCE/RWA was changed to 11.3%. Revised release follows.

Tokyo, August 28, 2019 -- Moody's Japan K.K. has today affirmed the A1 senior unsecured debt ratings of the three Japanese megabank groups, namely, Mitsubishi UFJ Financial Group, Inc. (MUFG), Sumitomo Mitsui Financial Group, Inc. (SMFG), and Mizuho Financial Group, Inc. (Mizuho).

In addition, Moody's has affirmed the A1 long-term and Prime-1 short-term deposit ratings of the three groups' main subsidiary banks — namely, MUFG Bank, Ltd., Sumitomo Mitsui Banking Corporation (SMBC) and Mizuho Bank, Ltd., with stable outlooks.

Moody's has also affirmed SMBC's a3 Baseline Credit Assessment (BCA) and adjusted BCA, and Mizuho Bank's baa1 BCA and adjusted BCA.

At the same time, Moody's has placed on review for downgrade, MUFG Bank's a3 BCA and adjusted BCA.

Moody's affirmed the A1 long-term senior unsecured debt and deposit ratings of the three megabanks, reflecting Moody's assessment of a very high probability of government support for the banks in times of stress, given the banks' importance to Japan's financial system.

MUFG and SMFG's A1 long-term senior unsecured debt ratings and their subsidiary banks' A1 long-term deposit ratings incorporate a two-notch uplift for government support from the banks' a3 adjusted BCAs. Mizuho's A1 long-term senior unsecured debt ratings and Mizuho Bank's long-term deposit ratings incorporate a three-notch uplift for government support from the bank's baa1 adjusted BCA.

Japan's persistent ultralow interest rate environment has led to a challenging operating environment for banks in the country. Specifically, the situation has led to structurally weak and declining core profitability. Moody's has captured these challenges by lowering the Macro Profile it assigns to Japan to Strong from Strong+ by applying a negative one-notch adjustment to the Industry Structure score.

While the megabanks are less affected by the operating environment than Japanese regional banks because of the large banks' greater international and product diversification, Japan is their core market and net interest margins will remain pressured. Their profitability is also negatively affected by investment in technology and process re-engineering, while credit costs are likely to normalize somewhat in the context of the slowing global economy.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_204276 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

Moody's placed MUFG Bank's a3 BCA and adjusted BCA on review for downgrade because its core earnings profile may no longer be consistent with its current BCA. Moreover, it has not been building its capital as rapidly as its competitors, partly because of its higher returns to shareholders versus its megabank peers. MUFG's consolidated tangible common equity/risk-weighted assets (TCE/RWA) of 10.2% at March 31, 2019 was relatively weak when compared with the bank's BCA, and as against other global systemically important banks. Its liquidity profile remains very strong, especially in yen, and is not a focus of Moody's review.

Despite the challenging environment, Moody's affirmed SMBC's a3 BCA and adjusted BCA because it has consistently maintained stronger profitability than other megabanks in recent years, helped by contributions from its non-banking subsidiaries and affiliates. SMFG's consolidated capital ratios have also improved, and are the strongest of its peer group, as measured by its TCE/RWA of 13.8% at March 31, 2019. Asset quality remains very strong, and the bank's risk appetite does not appear to be increasing materially. The bank's liquidity profile remains very strong, especially in yen.

Moody's also affirmed Mizuho Bank's baa1 BCA and adjusted BCA. While the bank shows the weakest profitability of its megabank peer group, this gap is adequately accounted for by its BCA, which is one notch lower when compared with SMBC. Mizuho continues to exhibit low asset risk and has strengthened its capitalization, as demonstrated by its TCE/RWA of 11.3% at March 31, 2019. As with the other megabanks, its liquidity profile continues to be very strong, especially in yen.

The affirmation of the three banks' A1 long-term ratings reflects Moody's assumption of a very high likelihood of government support for the banks, in times of need. In the case of MUFG, even if Moody's lowers the bank's BCA by one notch, all its credit ratings would likely be affirmed, because the support notching would be widened by one notch.

The A1 ratings assigned to the senior unsecured bonds issued by MUFG, SMFG, and Mizuho are at the same level as the A1 long-term ratings assigned to the subsidiary banks, reflecting Moody's assessment of a very high likelihood of government support that will benefit the banks and the holding companies equally.

FACTORS THAT COULD LEAD TO AN UPGRADE OF MUFG

MUFG's ratings are unlikely to be upgraded, given that they are already at the same level as the Government of Japan's sovereign rating of A1, with a stable outlook.

In addition, upward pressure on the bank's BCAs is unlikely, given that it is on review for downgrade. The bank's BCA and adjusted BCA may be confirmed, if it demonstrates a clear path to improving core profitability and capitalization.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF MUFG

The rating review will focus on MUFG's plans to boost earnings streams in the coming years to offset the negative impact of continuing pressure on net interest margins, heavy investments in technology, and the likely normalization of its credit costs. A BCA and adjusted BCA downgrade is likely, if Moody's judges that it will be difficult for the bank to stabilize its earnings, without material reliance on realized gains from its equity holdings. The review will also focus on the bank's capitalization targets.

FACTORS THAT COULD LEAD TO AN UPGRADE OF SMFG AND MIZUHO

The ratings of SMFG and Mizuho are unlikely to be upgraded, given that they are already at the same level as the Government of Japan's sovereign rating.

In addition, upward pressure on the banks' BCAs is unlikely, unless there is a material change in Japan's operating environment that is conducive to higher profitability and leads to stronger capital generation.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF SMFG and MIZUHO

The ratings could be downgraded if (1) core profitability continues to decline; (2) the banks undertake acquisitions or expansions that materially increase their overall risk profile relative to their capital base; (3) Japan's sovereign rating is downgraded; or (4) there is a reduction in Moody's assumption of government support incorporated into the senior unsecured and subordinated instruments, which could occur, if the government's support framework changes and moves toward supporting particular debt class(es) rather than the banking entity that includes the bank holding company.

The principal methodology used in these ratings was Banks (Japanese) published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Tokyo, Mitsubishi UFJ Financial Group, Inc. is the largest of the three megabanks in terms of total assets. At the end of March 2019, the bank reported consolidated assets totaling JPY311 trillion.

Headquartered in Tokyo, Sumitomo Mitsui Financial Group, Inc. is the second largest of the three megabanks in terms of total assets. At the end of March 2019, the bank reported consolidated assets totaling JPY204 trillion.

Headquartered in Tokyo, Mizuho Financial Group, Inc. is the smallest of the three megabanks in terms of total assets. At the end of March 2019, the bank reported consolidated assets totaling JPY201 trillion.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

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.

Shunsaku Sato
VP - Senior Credit Officer
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: 852 3758 1350
Client Service: 852 3551 3077

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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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