DBRS Updates Credit Quality of Sumitomo Mitsui Banking Corporation

DBRS has today updated the credit quality of Sumitomo Mitsui Banking Corporation (SMBC) based on its strong domestic franchise, liquidity and funding profile and reasonable asset quality. The intrinsic assessment for SMBC is A (low). The long-term rating of “A” incorporates the implied support of the Japanese government, adding one notch to the intrinsic assessment (based on the floor rating approach; refer to Rating Methodology on page 6). The ratings of SMBC are based on DBRS’s assessment of Sumitomo Mitsui Financial Group, Inc. (SMFG or the Group).

For the twelve-month period ended March 31, 2012 (FY2011), operating profit before provision for loan losses for SMFG fell by 2.5% from the comparable prior-year period. This recent result indicates that SMFG, like its Japanese banking peers, continues to face the following challenges, which have been reflected in the ratings for many years: (1) Domestic loan demand is weak, largely as a result of the still-weak domestic economy, competition and the rising value of the yen, which reduces foreign assets translated into yen. (2) Net interest margin remained low at 1.01% in FY2011. Other factors keeping net interest margin weak are competition among the banks for loans and Japan’s near-zero rate monetary policy.

Asset quality is not expected to emerge as a major issue for SMFG, based on (1) its relatively limited exposure to European peripheral countries; (2) no material credit risk associated with the earthquake that struck Japan in 2011 (the Group’s lending exposure to the region most affected by the earthquake is relatively limited, and direct exposure to Tokyo Electric Power Company, Incorporated (TEPCO) should be manageable); and (3) the emphasis on asset quality over the past decade.

Notes:
All figures are in Japanese Yen unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (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.