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Rating Action:

Moody's upgrades San-in Godo and Daishi's ratings

 The document has been translated in other languages

16 Jun 2015

Actions follow conclusion of methodology-related review

Tokyo, June 16, 2015 -- Moody's Japan K.K. has concluded its rating reviews on San-in Godo Bank, Ltd. and Daishi Bank, Ltd. These reviews were initiated on 18 March 2015 (see press release at http://www.moodys.com/viewresearchdoc.aspx?docid=PR_320727), following the publication of Moody's new bank rating methodology.

Among the actions Moody's has taken are the following:

San-in Godo Bank, Ltd.

- Long-term bank deposit rating (foreign and domestic currency): upgraded to A2 from A3

- Short-term deposit rating (foreign and domestic currency): upgraded to P-1 from P-2

- Baseline credit assessment (BCA) and Adjusted BCA: raised to baa1 from baa2

Daishi Bank Ltd.

- Long-term bank deposit rating (foreign and domestic currency): upgraded to A2 from A3

- Short-term deposit rating (foreign and domestic currency): upgraded to P-1 from P-2

- BCA and Adjusted BCA: raised to baa1 from baa2

The rating outlooks for both banks are stable.

Moody's has also assigned A1(cr)/Prime-1(cr) Counterparty Risk (CR) assessments to both banks, in line with its new bank rating methodology.

RATINGS RATIONALE

The new bank rating methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

In light of the new banking methodology, Moody's rating actions generally reflect the following considerations:

1) The Strong+ macro profile of Japan

Japanese banks benefit from operating in an economy with substantial economic and institutional strengths.

Japan's Strong+ Macro Profile reflects the country's very large, diverse, and wealthy economy, tempered by weak credit conditions due to high private debt levels relative to GDP.

Lackluster economic growth since the 1990s and an exceptionally long period of mild deflation have contributed to a deterioration in the country's public finances. On December 1, 2014, the rating of the Government of Japan was downgraded to A1 with a stable outlook from Aa3.

An extremely accommodative monetary policy, which is intended to help reflate the country's economy, has driven down credit spreads and investment returns, while loan demand remains weak, resulting in a challenging operating environment for banks to generate profits.

2) Good capitalization and liquidity profile while tempered by moderate asset risk and low profitability

Capitalization and liquidity profile of rated Japanese regional banks, including San-in Godo and Daishi, are solid. However, persistently low interest rates, severe competition, and limited growth opportunities within their home markets pressure their profitability.

3) Very high likelihood of government support

Moody's view that the probability of government support in the event of stress is judged to be very high based on the bank's sizeable market share in deposits and loans in its home market is unchanged.

RATIONALE FOR ASSIGNMENT CR ASSESSMENTS

Moody's has also assigned CR assessments to San-in Godo and Daishi. CR assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessments are an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of a bank should it enter a resolution.

For Japanese banks, the CR Assessment is positioned, prior to government support, one notch above the Adjusted BCA and therefore above senior unsecured and deposit ratings, reflecting Moody's view that its probability of default is lower than that of senior unsecured debt and deposits. Moody's believe that senior obligations represented by the CR Assessment will be more likely preserved in order to limit contagion, minimize losses and avoid disruption of critical functions.

For Japanese banks, the CR Assessments also benefit from government support in line with Moody's support assumptions on deposits and senior unsecured debt. This reflects Moody's view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with Moody's belief that governments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions.

SPECIFIC ANALYTICAL FACTORS FOR THE BANKS

SAN-IN GODO'S DEPOSIT RATINGS UPGRADED; COUNTERPARTY RISK ASSESSMENTS ASSIGNED

Moody's upgraded San-in Godo's long- and short-term deposit ratings to A2 stable/Prime-1 and raised its BCA to baa1 from baa2. Moody's also assigned long- and short-term CR Assessments of A1(cr)/Prime-1(cr) to San-in Godo.

The upgrade reflects an increased emphasis placed on capitalization and liquidity under Moody's new methodology. San-in Godo's BCA of baa1 reflects our assessment of the bank's very strong Tangible Common Equity/risk-weighted assets ratio(TCE ratio), its Funding Structure, and Liquidity Resources.

However, these strengths are tempered by several credit challenges that arise out of structural problems, such as a decreasing population in the bank's home economy and persistently low market interest rates. For example, the bank's profitability faces downward pressure, due to its low loan-to-deposit ratio and declining investment yields, as its fixed income securities portfolio re-prices to prevailing market rates. Furthermore, additional cost cutting opportunities may be limited because of the lower population density in the bank's home market.

San-in Godo Bank, Ltd's A2 long-term rating incorporates a two-notch uplift from its Adjusted BCA of baa1. The uplift reflects our assessment of a very high likelihood of government support for the bank in a situation of stress, given its importance to its local market.

The stable outlook reflects Moody's expectation that the bank's capitalization, funding structure and liquidity resources will remain stable.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Further upgrades in the near term is unlikely, given the upgrades announced today. However, a demonstrated ability to expand its business outside of the bank's home market while maintaining its strong capitalization and good asset quality, would lead us to consider a ratings upgrade.

On the other hand, downward rating pressure could arise from, but is not limited to:

- The TCE ratio falls below 13%

- The bank's risk appetite increases materially to sustain profitability

- Japan's sovereign rating is downgraded

DAISHI'S DEPOSIT RATINGS UPGRADED; COUNTERPARTY RISK ASSESSMENTS ASSIGNED

Moody's upgraded Daishi's long- and short-term deposit ratings to A2 stable/Prime-1 and raised its BCA to baa1 from baa2. Moody's also assigned long- and short-term CR Assessments of A1(cr)/Prime-1(cr) to Daishi.

The upgrade reflects an increased greater importance on funding structure and liquidity under Moody's new methodology. Daishi's BCA of baa1 reflects (1) very strong liquidity profile, firmly backed by solid deposits and highly liquid securities, such as JGB holdings; (2) moderate capital profile; (3) moderate asset risk supported by strong loan quality, but tempered by geographic concentration, loan concentration in the real estate sector, and exposure to market risk; and (4) weak profitability profile.

Daishi's A2 long-term rating incorporates a two-notch uplift from its Adjusted BCA of baa1. The uplift reflects our assessment of a very high likelihood of government support for the bank in a situation of stress, given its importance to the local economy.

The stable outlook reflects Moody's expectation that funding structure and liquidity resources will remain stable.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Further upgrades in the near term is unlikely, given the upgrades announced today. However, we would consider upgrading the bank's ratings if it improves its tangible common equity to risk-weighted assets ratio to around 12% through an ongoing accumulation in retained earnings and if it maintains stability in asset quality.

On the other hand, downward rating pressure could arise from, but is not limited to:

- The TCE ratio falls below 9%

- Liquidity profile weakens though increased reliance on market funds or investments in less liquid assets

- The bank's risk appetite increases materially to sustain profitability

- A downgrade of Japan's sovereign rating

The principal methodology used in these ratings was Banks (Japanese) published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

San-in Godo Bank, Limited, headquartered in Matsue City, Shimane Prefecture, is a regional bank in Japan with total consolidated assets of JPY4.8 trillion at end-March 2015.

Daishi Bank, Limited, headquartered in Niigata City, Niigata Prefecture, is a regional bank in Japan with total consolidated assets of JPY5.2 trillion at end-March 2015.

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

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Moody's upgrades San-in Godo and Daishi's ratings
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