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Rating Action:

Moody's assigns Prime-1 rating to Chugoku Bank's Euro Commercial Paper program

 The document has been translated in other languages

16 Dec 2016

Tokyo, December 16, 2016 -- Moody's Japan K.K. has assigned a definitive Prime-1 rating to the Euro commercial paper program of The Chugoku Bank, Limited (deposits A1 stable, BCA a3).

The Euro commercial paper program was originally assigned a provisional (P)Prime-1 rating on 1 December, 2016; the assignment of the definitive Prime-1 rating follows the formal signing of the program documents.

The program rated is:

- USD1,000 million, Euro commercial paper program

RATINGS RATIONALE

The Prime-1 rating of Chugoku Bank's Euro CP program reflects the bank's A1 long-term deposit rating, which incorporates a two-notch uplift from its a3 baseline credit assessment (BCA). The uplift reflects our assessment of a very high likelihood of support from the Government of Japan (A1 stable) for the bank in times of stress, due to its importance to its local market.

Our government support assumptions extend to the ECP program, especially in cases where Chugoku Bank -- after exhausting all other means to raise liquidity -- requires immediate access to foreign currency to timely redeem maturing ECPs.

Under most foreseeable scenarios, however, we do not expect Chugoku Bank to require emergency liquidity support from the Bank of Japan because it is rated A1 for long-term deposits and has ready access to foreign currency.

However, we believe that the Bank of Japan would provide emergency liquidity to Chugoku Bank, if necessary, under the Bank of Japan Act Article 38, because an ECP redemption delay by a Japanese bank would undermine the credibility of the Japanese financial system. We also expect the Bank of Japan's London and New York offices to help coordinate such effort as needed.

Article 38 of the Bank of Japan Act stipulates that the central bank, as the lender of last resort, may provide uncollateralized loans to financial institutions experiencing a temporary shortage of funds, to maintain the stability of the financial system.

As for alternative liquidity, Chugoku Bank has put in place a repo agency agreement with Mizuho International plc (MHI: Backed Senior Unsecured A1 stable) and Mizuho Trust and Banking (Luxembourg) S.A. (MHTB(Lux)): unrated) as the custodian. MHTB(Lux) is also the Issuing and Paying Agent for the ECP program. Both MHI and MHTB(Lux) are integral parts of Mizuho Financial Group, Inc. (Mizuho A1 stable), which is the second largest commercial bank in Japan by total assets.

Further supporting the timely redemption of maturing ECPs is the stipulation under the ECP program, which states that MHTB(Lux) -- as the Issuing and Paying Agent -- shall pay the full amount of the maturing ECPs, if MHTH(Lux) is satisfied that it will receive such full amount later.

We believe that Mizuho will help facilitate the timely redemption of maturing ECPs, if necessary, based on Mizuho's established relationship with Chugoku Bank within Japan and as the facilitator of virtually all key aspects of the ECP program, including the repo agency agreement and the custodian.

In Moody's view, the ECP program will allow the bank to diversify Chugoku Bank's funding sources and reduce its reliance on its other short-term funding sources. While the ECP program would not be a perfect replacement for the bank's short-term funding sources, the judicious use of the program would allow Chugoku Bank to tap into new investors, and which -- under normal market conditions -- would contribute to the diversification of its funding sources.

Chugoku Bank's a3 BCA reflects our assessment of the bank's: (1) strong capital, despite being under pressure; (2) strong overall asset risk profile, despite rapid loan growth and its moderate exposure to market risk; (3) weak but stable profitability, with no net losses recorded to date; and (4) solid liquidity profile.

What Could Change the Long-term Ratings - Up

The bank's A1 long-term deposit rating -- which incorporates a two notch uplift from its BCA -- is currently at the same level as Japan's sovereign rating. As such, positive action on the bank's rating is unlikely in the absence of upward pressure on the sovereign rating.

However, we would consider raising the bank's BCA if it improves its TCE ratio to above 13% on a sustained basis.

What Could Change the Long-term Ratings - Down

We would consider downgrading Chugoku Bank's long-term ratings in the event of:

- A failure to maintain a TCE ratio of 11% due to a material increase in credit or market exposure

- Signs of asset quality deterioration

- A sustained deterioration in the bank's profitability

- A weakening in its liquidity profile through an increased reliance on market funds or investments in less-liquid assets

- A downgrade of Japan's sovereign rating

The principal methodology used in this rating was Banks (Japanese) published in February 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Chugoku Bank, Limited, headquartered in Okayama, had consolidated assets of JPY8.3 trillion at end-September 2016.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Graeme Knowd
MD - Banking
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

No Related Data.
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