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Rating Action:

Moody's places SMBC and its banking subsidiaries on review for possible downgrade

07 May 2009

Tokyo, May 07, 2009 -- Moody's Investors Service has today placed on review for possible downgrade various ratings of Sumitomo Mitsui Banking Corporation (SMBC).

The ratings affected are its C bank financial strength rating (BFSR), A3 base line credit assessment (BCA), Aa2 senior long-term debt and deposit ratings, and other long-term subordinated debt ratings, including the A2-rated preferred securities issued by special purpose corporations of Sumitomo Mitsui Financial Group Inc. (SMFG).

Furthermore, the Aa2 long-term deposits ratings, Aa3 senior/junior subordinated debts ratings of Kansai Urban Banking Corporation (KUBC) and Aa2 long-term deposits ratings of Minato Bank, Ltd. (Minato) were placed on review for possible downgrade. Both are consolidated banking subsidiaries of SMBC. However, their D BFSRs and Ba2 BCAs are not affected, and continue to carry negative outlooks. At the same time, Moody's affirmed the Prime-1 short-term ratings of SMBC, KUBC, and Minato.

Moody's rating action follows SMFG's announcement on May 1, 2009 that SMFG and SMBC have agreed with Citigroup and Nikko Citi Holdings, Inc. that SMBC will acquire all the operations of Nikko Cordial Securities Inc. (NCS: Baa2 with stable outlook) and some other businesses, including the domestic debt and equity underwriting operation of Nikko Citigroup Limited (Baa1 with negative outlook). According to the announcement, the acquisition price is approximately JPY545billion, which is estimated at more than 10% of SMFG's Tier I capital as of March 2009.

The review for possible downgrade of SMBC was prompted by Moody's concern that SMFG and SMBC's capital and liquidity profiles will be adversely affected due to the need for capital and liquidity to be allocated to this significant acquisition.

Moody's recent rating affirmation of SMBC on April 16, 2009 -- with negative outlook -- did incorporate to a large extent the expected positive impact of a forthcoming re-capitalization (common stock issue of JPY800billion at maximum) of SMFG to redress its eroded capital, the result in turn of JPY390billion in net losses for FY2008. But this rating affirmation had not factored in the possibly negative implications of a large acquisition initiative -- such as that announced -- on SMFG's financial flexibility.

In Moody's view, the decision to embark on such a large acquisition -- against the backdrop of a challenging operating environment for banking as well as securities broking -- may indicate the heightened risk appetite of SMFG management in view of poorly performing past significant investments in non-banking areas.

Despite the planned re-capitalization of SMFG and the less capital-intensive nature of NCS's brokerage operations, this latest acquisition initiative would increase its group-based risk assets. Accordingly, in Moody's view, the expected benefits of the forthcoming re-capitalization for SMBC's balance sheet risk may likely be diluted.

And for SMFG, Moody's notes that significant integration and co-ordination challenges may arise for its retail brokerage and investment banking businesses in view of SMFG's current strategic relationships with Daiwa Securities Group Inc.(Baa1 under review for possible downgrade) and Daiwa Securities SMBC Co. Ltd. (A1 under review for possible downgrade).

The review for possible downgrade of KUBC and Minato has been prompted by the review of SMBC's ratings. Moody's deposit and debt ratings for these two banks are heavily reliant on the very high probability of extraordinary support from SMBC in case of stress situations. Accordingly, downward pressure on SMBC's deposit rating would lead to downward pressure on the deposit ratings of KUBC and Minato.

Moody's says that its review will focus on SMFG's capital plan for managing the diversified and expanding operations of SMBC and its subsidiaries -- in the current difficult operating environment -- and particularly for its domestic loan portfolio and brokerage business.

Moody's last rating action on SMBC was implemented on April 16, 2009 when the bank's ratings were affirmed at Aa2/C (negative outlook).

The principal methodologies used in rating SMBC, KUBC and Minato 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 sub-directory. 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 ratings were placed on review for downgrade:

Sumitomo Mitsui Banking Corporation -- C bank financial strength rating, Aa2 long-term deposit rating, Aa2 issuer rating, Aa2 senior unsecured debt rating, Aa3 senior and junior subordinated debt ratings

Sakura Capital Funding (Cayman) Limited -- Aa3 junior subordinated debt rating

Sakura Finance (Cayman) Limited -- Aa3 senior subordinated debt rating

SMBC Capital Markets, Inc. -- Aa2 senior unsecured debt rating

SMBC International Finance N.V. -- Aa3 senior and junior subordinated debt ratings

Sumitomo Mitsui Banking Corporation Europe -- C bank financial strength rating, Aa2 long-term deposit rating

Sumitomo Mitsui Finance Australia Limited -- Aa2 senior unsecured debt rating

SMFG Preferred Capital USD 1 Limited -- A2 preferred stock rating

SMFG Preferred Capital GBP 1 Limited -- A2 preferred stock rating

SMFG Preferred Capital JPY 1 Limited -- A2 preferred stock rating

SMFG Preferred Capital USD 2 Limited -- A2 preferred stock rating

SMFG Preferred Capital USD 3 Limited -- A2 preferred stock rating

SMFG Preferred Capital GBP 2 Limited -- A2 preferred stock rating

SMFG Preferred Capital JPY 2 Limited -- A2 preferred stock rating

Kansai Urban Banking Corporation -- Aa2 long-term deposit rating, Aa3 senior and junior subordinated debt ratings.

Minato Bank, Ltd. -- Aa2 long-term deposit rating

Headquartered in Tokyo, Japan, Sumitomo Mitsui Banking Corporation is a major subsidiary of Sumitomo Mitsui Financial Group Inc. which is a major financial group in Japan.

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 places SMBC and its banking subsidiaries on review for possible downgrade
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