DBRS Confirms Ratings and Trends of Mizuho Corporate Bank, Ltd. and Related Entities

DBRS has today confirmed the Short-Term Instruments and Long-Term Deposits and Senior Debt ratings of Mizuho Bank, Ltd. (MB) and Mizuho Corporate Bank, Ltd. (MCB) (together, the Banking Subsidiaries) at R-1 (middle) and “A”, respectively. All trends remain Stable. However, DBRS has reduced the intrinsic assessments of the Banking Subsidiaries from A (low) to BBB (high) as a result of Mizuho only making modest progress in addressing the levels and quality of its capital relative to peers (despite a ¥529 billion common equity issue in 2009). An increase in core capital ratios to levels comparable to peers may have a positive impact on the intrinsic assessment.

The Short-Term Instruments and Long-Term Deposit and Senior Debt ratings represent floor ratings assigned to Japanese banks. As a result, the Banking Subsidiaries’ final ratings were not affected by the reduction in the intrinsic assessment.

In May 2009, DBRS expanded its floor rating concept to the ratings of the three Japanese mega-banks, including the Banking Subsidiaries of Mizuho Financial Group, Inc. (Mizuho or the Group) on which this report and analysis are based. The Banking Subsidiaries were designated as Critically Important Banks (CIBs) and floor ratings of R-1 (middle) and “A” were assigned, reflecting the extensive involvement they have in the country’s financial markets and the critical roles performed in the flow of financial transactions. As such, the loss of market confidence in a CIB’s ability to perform as a counterparty could impact the market’s perception of other participants and lead to a degradation of the functioning of the financial markets. If DBRS perceives that changes in policies or specific actions indicate the government’s willingness or ability to support these CIBs has changed, it would revisit the level established for the floor ratings or the reliability of the floor itself.

The intrinsic assessment of the Banking Subsidiaries continues to face three longstanding challenges: (1) low levels of capital (particularly high quality common equity), (2) low levels of profitability, in part caused by the difficulty in generating net interest margins in the domestic banking market and (3) despite some improvement, a high level of exposure to equities through cross-shareholdings. While there has been some improvement in the quality of Mizuho’s capital, the bar has been permanently reset higher by the global financial crisis; large common equity issues by domestic peers have further eroded Mizuho’s trailing comparative position. An improvement in the intrinsic assessment will be a function of addressing these issues.

Earnings have been weak and volatile as a result of the global financial crisis and the weak domestic economy. On a quarterly basis, losses accelerated through 2008, peaking at ¥538 billion in the quarter ended March 31, 2009; after a small loss in the first quarter of the current fiscal year, the Group returned to profitability in the second and third quarters. The volatility was primarily related to equity losses and credit costs.

Like earnings, capital ratios were volatile over the period, driven by the loss in the March 2009 year and Tier 1 deductions for unrealized investment losses at that time, partially offset by the adoption of the advanced internal ratings based approach, which reduced risk-weighted assets. The subsequent improvement was a result of a return to profitability, a common equity issue of ¥529 billion, an absence of the net unrealized investment loss deduction due to improved equity market conditions and other factors.

In 2009, Mizuho adopted a prime capital ratio as a measure of quality capital, which is defined as Tier 1, less preferred securities and preferred stock (excluding preferred shares with mandatory conversion features), divided by risk-weighted assets. Mizuho’s prime capital ratio deteriorated from 5.0% in March 2008 (DBRS estimate; Mizuho did not have a prime capital ratio target at the time) to 3.1% in March 2009, but has recovered to 5.4% as at December 31, 2009 due to the same factors generating the improvement in Tier 1 capital as well as the conversion of some preferred shares to common.

Two aspects of its Mizuho’s financial risk profile proved to be positive factors for the Group during the global financial crisis: (1) a high level of on-balance sheet liquidity; and (2) the Group’s high level of deposit funding (relative to international peers) resulting in reduced reliance on wholesale funding.

Note:
All figures are in Japanese yen unless otherwise noted.
These ratings are based on public information.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations (January 14, 2010) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.