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Rating Action:

Moody's downgrades Mizuho's ratings

08 Apr 2009

Tokyo, April 08, 2009 -- Moody's Investors Service lowered the deposit and senior debt ratings of Mizuho Bank, Ltd. (MHBK), Mizuho Corporate Bank, Ltd. (MHCB), Mizuho Trust & Banking Co., Ltd. (MHTB) and Trust & Custody Services Bank, Ltd. (TCSB) to Aa3 from Aa2, and the subordinated debt ratings to A1 from Aa3. Moody's also downgraded to Baa1 from A2 the ratings on the preferred securities issued by the special purpose corporations of Mizuho Financial Group, Inc. (MHFG). The banks' as well as MHFG's Prime-1 short-term ratings were unaffected.

The bank financial strength ratings (BFSR) of MHBK, MHCB, and MHTB were lowered to D+ from C, and their Baseline Credit Assessments (BCAs) were also lowered to Baa3 from A3. Moody's BFSR represents its opinion of a bank's intrinsic safety and soundness and, as such, excludes certain external credit support elements. The ratings outlook is stable for all ratings of MHBK, MHCB, MHTB, and TCSB including the BFSR.

These actions had no impact on the TCSB's C BFSR and A3 BCA. These remain unchanged as we expect the bank will continue to be managed independently in light of its role as a custodian of client assets with strong standalone fundamentals. These actions conclude a review for possible downgrade that commenced on December 15, 2008.

The downgrade of the Mizuho banks' BFSR and BCA reflect Moody's opinion that MHFG's Tier I capital ratio (7.29% as of December 31, 2008) could come under further downward pressure in the short to medium term, increasing the probability that external capital support will be needed. The more modest downgrades of Mizuho banks' deposit, senior debt and subordinated debt ratings relative to those of BFSR and BCA are based on Moody's expectation of very high systemic support for these instruments, and the view that such support may enable the substantial value of its franchise to materialise in the medium to long-term.

Today's rating actions are consistent with Moody's recent announcement that it is recalibrating some of the weights and relative importance attached to certain rating factors within its current bank rating methodologies. Capital adequacy, in particular, takes on increasing importance in determining the BFSR in the current environment. Meanwhile, debt and deposit ratings will reflect the fact that Moody's expects that its support assumptions will continue to increase for systemically important institutions during this global financial crisis. (Please see Moody's special comment "Calibrating Bank Ratings in the Context of the Global Financial Crisis").

BFSR downgrade due to increased pressures on capital

The downgrade of Mizuho banks' BFSR to D+ from C reflects the increased pressure on MHFG's capital and constrained capital flexibility of MHFG under current deteriorating operating environment. Whereas MHFG's current regulatory capital position is far above the regulatory minimum, MHFG's Tier I capital has been heavily dependent upon preferred stock and preferred securities. Such constrained capital structure of MHFG, coupled with its comparatively larger holdings of equity at the higher cost should expose MHFG to a higher impairment risk of its weak capital position.

MHFG's capital challenges are made more acute because of deteriorating domestic operating environment. MHFG's earning for FY2008 is likely to be impacted by large impairment losses from Japanese equities. A weak Japanese economy is likely to contribute to a rise in credit expenses and non-performing loans, most notably SME loans. In Moody's view, this may require additional loan loss provisions in FY2009 and into FY2010 in light of the difficult operating environment for Japan corporates. This could lead MHFG to seek additional capital in difficult primary markets for bank capital. While Moody's does not expect that the difficulties MHFG may face in refinancing its existing capital from domestic markets will be significant, Mizuho's capital flexibility is more restrained due to its high reliance on preferred stocks and securities.

While the Mizuho banks have leading positions in Japan's retail and wholesale markets, the franchise value of MHFG's core businesses is suffering from the low interest rate environment and the lack of progress in diversification of earnings at group level. Accordingly, Moody's does not expect MHFG to generate significant amounts of earnings in FY2009 and FY2010. Internal capital retention is therefore likely to be weak and MHFG's sizable common and preferred dividends relative to net income, could place additional pressure upon its already weak capital position.

When assessing MHFG's ability to absorb future losses, Moody's incorporates additional factors other than MHFG's current capital position. These include: 1) Mizuho banks' strong liquidity which allows it to sustain its fundamental banking operations, 2) modest but ongoing downward pressure on the banks' historical pre-provisioning earnings for next one to two years, 3) the likelihood of Japan's equity market (Nikkei index) possibly declining to JPY7000, 4) additional stress on the banks' domestic SME loan portfolio as a result of the contraction of the Japanese economy and the continued rise in SME defaults, 5) the limited probability of significant credit stress on the bank's large loan portfolio to large domestic corporate, which is relatively large compared to the peers, 6) the assumption that preferred and common dividends will remain at approximately JPY130billion per year.

The stable outlook on the BFSR reflects Moody's view that MHFG's strong franchise in domestic markets and pre-provision earnings would enable it to contain the deterioration of its Tier I capital ratio below the level of 6%. However, in Moody's view, this level is low for an institution like MHFG exposed to large credit and market risks.

Downward trigger includes the possible stress situations when MHFG's capital ratios would be exposed to further declines due possibly to a more stressful credit environment for its large sized borrowers as well as a further decline in Nikkei index to below JPY7000.

Systemic support and valuable franchise benefit deposit and debt ratings

In Moody's view, despite MHFG's capital challenges, a modest lowering of its deposit and senior and subordinated debt ratings was appropriate because Moody's assumes that systemic support for Mizuho banks is very high and that its valuable franchise will remain intact. In Moody's view, the Mizuho banks would almost certainly be a recipient of systemic support if such support should be required, given its importance to the Japanese economy and financial system. This has been demonstrated in the past, and would likely benefit all of the banks' depositors and senior and subordinated debt holders.

Widening the notching of preferred

The downgrade of the preferred securities rating to Baa1 from A2 was based on Moody's current notching guidelines that notching would be widened if the bank's BFSR would be falling into D range.

Previous rating action and principal methodologies

The last rating action on Mizuho banks took place on December 15, 2008 when Moody's placed all of Mizuho banks' long-term ratings and their BFSRs under review for possible downgrade.

The principal methodologies used in rating this issuer were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

The following is a list of entities whose ratings have been affected:

Mizuho Bank, Ltd.: bank financial strength rating to D+ from C, issuer rating to Aa3 from Aa2, long-term deposit rating to Aa3 from Aa2, senior unsecured debt rating to Aa3 from Aa2, senior and junior subordinated debt ratings to A1 from Aa3

Mizuho Corporate Bank, Ltd.: bank financial strength rating to D+ from C, issuer rating to Aa3 from Aa2, long-term deposit rating to Aa3 from Aa2, senior unsecured debt rating to Aa3 from Aa2, senior and junior subordinated debt ratings to A1 from Aa3

Mizuho Corporate Asia (HK) Limited: senior unsecured debt rating to Aa3 from Aa2

Mizuho Corporate Bank Nederland N.V.: senior unsecured debt rating to Aa3 from Aa2

Mizuho Corporate Bank, Ltd. Hong Kong Branch: long-term deposit rating to Aa3 from Aa2

Mizuho Corporate Bank, Ltd. Paris Branch: long-term deposit rating to Aa3 from Aa2

Mizuho Corporate Bank, Ltd. Sydney Branch: senior unsecured debt rating to Aa3 from Aa2

Mizuho Finance (Aruba) A.E.C.: senior and junior subordinated debt rating to A1 from Aa3

Mizuho Finance (Cayman) Limited: senior and junior subordinated debt rating to A1 from Aa3

Mizuho Finance (Curacao) N.V.: senior unsecured debt rating to Aa3 from Aa2, senior and junior subordinated debt rating to A1 from Aa3

Mizuho International plc: senior unsecured debt rating to Aa3 from Aa2

Mizuho Securities Co., Ltd.: senior unsecured debt rating to Aa3 from Aa2

Mizuho Financial Group (Cayman) Limited: senior and junior subordinated debt rating to A1 from Aa3

Mizuho Capital Investment (USD) 1 Limited: preferred securities rating to Baa1 from A2

Mizuho Capital Investment (EUR) 1 Limited: preferred securities rating to Baa1 from A2

Mizuho Capital Investment (USD) 2 Limited: preferred securities rating to Baa1 from A2

Mizuho Trust & Banking Co., Ltd: bank financial strength rating to D+ from C, long-term deposit rating to Aa3 from Aa2, senior unsecured debt rating to Aa3 from Aa2, senior and junior subordinated debt ratings to A1 from Aa3

Mizuho TB (Aruba) A.E.C.: senior and junior subordinated debt rating to A1 from Aa3

Trust & Custody Services Bank, Ltd.: long-term deposit rating to Aa3 from Aa2

Mizuho Financial Group is one of the largest financial groups in Japan with total consolidated assets of approximately JPY157trillion.

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
Maki Hanatate
VP - Senior Credit Officer
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades Mizuho's ratings
No Related Data.
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