The FINANCIAL — Fitch Ratings has on May 18 downgraded Mizuho Financial Group (MHFG) – Japan's second largest banking group in terms of asset size – and its subsidiary banks (altogether, hereafter referred to as Mizuho).
The downgraded ratings include their Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'A' from 'A+', Individual ratings to 'C' from 'B/C', senior unsecured debt ratings to 'A' from 'A+', and preferred securities ratings to 'BBB-' from 'A'.
At the same time, the Long-term foreign and local currency IDRs have been removed from Rating Watch Negative (RWN) as they are now at their support floor of 'A', while the Individual rating and the ratings on preferred securities remain on RWN. The group's Short-term foreign and local currency IDRs have been affirmed at 'F1'. A full rating breakdown of the group holding companies and their operating subsidiaries is provided at the end of this commentary.
The rating actions follow Fitch's ongoing review of the three Japanese major bank groups' performance and prospects. The downgrades largely reflect the severe impact of a worsening operating environment in the wake of the domestic and international recession. The adverse environment resulted in the group's worse-than-expected performance in the financial year ended March 2009, and weakened capital quality. Despite the higher pre-provisioning operating profits, which benefited mainly from an absence of the huge write-downs of overseas securitised products that impacted earnings in the previous financial year, Mizuho reported JPY588bn net losses, compared with the JPY311bn net profits it achieved in FYE March 2008.
The poorer results owed primarily to three major factors, namely: credit costs (JPY536bn), net losses related to stocks (JPY400bn), and ongoing losses on investments in securitised products (JPY135bn). Despite some capital relief from the adoption of an advanced internal rating-based approach, the sizeable losses lowered the group's Tier 1 capital ratio by 1% to 6.38%, compared with 7.4% in March 2008. The net losses also weakened the group's core Tier 1 capital ratio, comprised mainly of common equity and retained earnings.
Significantly higher credit costs were attributable mainly to increased bad debt charges in its domestic loan book. The problem loans arose particularly from the real estate and construction sectors, followed by an increase in bad debt charges across industries as the financial turmoil started to hit the "real" economies to damage not only leveraged borrowers. The agency believes that Mizuho's relatively large risk positions in the leveraged loans and project financing segments overseas also contributed to surging credit charges in its wholesale book.
Mizuho expects a return to profit this year, assuming a substantial decrease in credit charges and the absence of stock market shocks, coupled with further top-line recovery. However, Fitch expects the adverse environment to continue to affect the Japanese mega banks' performance and capital positions this year, particularly through an increase in the level of corporate bankruptcies in Japan and overseas. The agency does not expect such severe non-performing loan (NPL) problems among the major banks as in the previous crisis, thanks largely to their improved credit risk management and partly the government's several safety-net measures to uphold borrowers' financing. Still, while it is moderately exposed to small and medium enterprises (SME), Mizuho has established a strong franchise among medium to large corporate borrowers, with relatively large exposure to these segments. Fitch notes that major restructuring charges that large-sized corporate borrowers suffered last financial year ahead of SMEs have affected their performance. The restructuring losses relating to these large borrowers contributed to the bank's faster increase in credit costs than that of retail-oriented banks through major changes in classification for the large borrowers. The agency also expects the negative impact from the stock market downturn to be more limited in the current financial year due to sizeable write-downs undertaken in the last fiscal year. Nevertheless, Mizuho's higher-than-peer exposure to the domestic stock markets relative to its Tier 1 capital will remain the core issue that will undermine the bank's resilience to downturns. Fitch also believes Mizuho's remaining risk positions in leveraged financing are substantial and remain a key downside risk.
Mizuho's Tier 1 capital and core Tier 1 capital ratio were the lowest among its domestic peers and therefore provide the bank with less resilience to further downturns. Recognising this, Mizuho has announced a plan to raise capital in the form of common equity of up to JPY600bn and up to JPY200bn in preferred securities to bolster its capital and cover the refinancing of a JPY176bn preferred security coming due for the first call in June. Fitch takes the view that while the planned equity financing is a positive move, it will still leave the bank thinly capitalised, especially at the core capital level, and hence leave it vulnerable to any further deterioration in its assets. The RWN will be resolved within the next three months after Fitch has assessed downside risks from the bank's asset quality issues, and the bank's ability to achieve an adequate level of Tier 1 and core Tier 1 capital ratio.
The complete list of ratings is as follows.
Ratings of Mizuho Financial Group (MHFG) and subsidiary banks Mizuho Bank (MHBK), Mizuho Corporate Bank (MHCB) and Mizuho Trust and Banking (MHTB):
Long-term foreign and local currency Issuer Default Ratings (IDRs) downgraded to 'A' from 'A+'; off RWN; Outlook Stable
Short-term foreign and local currency IDRs affirmed at 'F1'
Individual ratings downgraded to 'C' from 'B/C'; remain on RWN
Support ratings affirmed at '1'
Support Rating Floors affirmed at 'A'
MHBK's and MHCB's senior unsecured debt ratings downgraded to 'A' from 'A+'
MHFG's preferred securities ratings (Mizuho Capital Investment (EUR) 1 Limited, Mizuho Capital Investment (USD) 1 Limited, and Mizuho Financial Group (Cayman) Limited) downgraded to 'BBB-' from 'A'; remain on RWN
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