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Rating Action:

Moody's revises Mizuho outlook to negative

15 Nov 2007
Moody's revises Mizuho outlook to negative

Tokyo, November 15, 2007 -- Moody's Investors Service assigned a negative outlook to C bank financial strength ratings and Aa2 long-term credit ratings of Mizuho Corporate Bank, Ltd., Mizuho Bank, Ltd., Mizuho Trust and Banking Co. Ltd. and long-term ratings of other subsidiaries including those supported by keep-well letter from Mizuho Corporate Bank, Ltd. (Mizuho Securities Co., Ltd,. and Mizuho International plc), following Mizuho Financial Group's (MHFG) announcement of interim results for FYE3/2008. According to MHFG's announcement, MHFG's estimate for FYE3/2008 is adjusted to JPY650billion due to expectation of additional losses on RMBS and CDO related exposure (including sub-prime) at Mizuho Securities Co., Ltd. Mizuho banks' all long-term and Prime-1 short-term ratings were affirmed. Rating outlook for Aa2 credit rating of Trust & Custody Services Bank, Ltd. (TCSB) is also changed to negative from stable, while bank financial strength rating of TCSB continues to carry stable outlook as we expect it will remain managed on an independent basis in light of its role as a custodian of client assets.

The size of the writedown and the scale of RMBS and CDO related exposure (including sub-prime) substantially exceed Moody's prior expectations about Mizuho's limited exposure to such related assets. While risk appetite and credit concentration profile has been assumed high for Mizuho due to its business model for Japan corporate banking, this writedown and the increase of CDO exposure in the first half of 2007 raises question regarding the effectiveness of Mizuho's risk management and its risk appetite. Large inflation of such exposure outside Japan do add another potential source of income volatility to its existing LOBs (line of business) already characterised by lower risk adjusted return, high domestic credit concentration and high market risks. In Moody's view, Mizuho is the only Japanese institution that is having such large CDO exposure in its trading portfolio.

However, the impact of write-downs is believed to be absorbable relative to earnings and capital of Mizuho Financial Group and Mizuho Corporate Bank (majority owned shareholder of Mizuho Securities Co., Ltd.). Also, the risk of large exposure to overseas RMBS and CDOs in its investment portfolio of banking account is currently neutralized by its large unrealized gains in its investment securities. However, the overall cushion in investment securities is also subject to trend of Japanese equity market, and cross shareholding equities are difficult to sell on a large scale.

Mizuho's exposure to other risk concentrations outside Japan such as leveraged loan commitments, US asset backed CP, and structured investment vehicle as an investor is believed to be modest with limited potential pressure on its capital when compared to other global peers.

The C BFSR is also supported by Mizuho's diversified set of domestic businesses which produce a stable stream of earnings under stabilised domestic environment. Such generated earnings base and substantial financial cushion in its investment securities portfolio should enable Mizuho to absorb the impact from potential further writedowns on its remaining RMBS and CDO related exposure (including sub-prime).

Negative outlook reflects remaining uncertainty about the Mizuho's management willingness to manage its risk appetite more in commensurate with its current available financial resources and its franchise constraint as a Japan's domestic institution. Moody's notes that Mizuho must keep a conservative balance between its moderate financial profiles with weak earnings depth and weak capital and limited franchise outside Japan to warehouse these positions and the risks that holding this concentrated position would entail. Also, there is a risk that future developments in global credit markets may further deteriorate. A further write-down that is far beyond the scale of the projected size of Mizuho would be viewed by Moody's as an indication that risk appetite was higher than anticipated, and would lead to further negative pressure on the rating. To resolve the negative outlook Moody's will also examine Mizuho's future risk appetite and controls.

In affirming the Prime-1 short-term ratings Moody's observed that Mizuho continues to maintains a solid liquidity position through its strong retail and middle market franchise in Japan.

Mizuho Financial Group is one of the largest financial group in Japan with the total consolidated assets of JPY152trillion.

Tokyo
Mutsuo Suzuki
Senior Vice President
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Yasunobu Doi
VP-SCO - Team Leader
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

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