DBRS Downgrades Mizuho Bank, Ltd.’s Short-Term and Long-Term Ratings to R-1 (low) and A (low)

Note: This rating did not include issuer participation and is based solely on publicly available information.

DBRS has today downgraded the Issuer Rating and Long-Term Deposits and Senior Debt of Mizuho Bank, Ltd. (MB or the Bank) to A (low) from “A,” with Stable trends. In addition, DBRS has also downgraded the Short-Term Instruments rating of the Bank to R-1 (low) from R-1 (middle), with a Stable trend. These rating actions conclude the review initiated on October 9, 2013, which is related to the impact of the removal of the rating floor in Japan for critically important banking organizations (CIBs). The intrinsic assessment for MB remains unchanged at BBB (high) and the long-term ratings of A (low) incorporate the implied support of the Japanese government, adding one notch to the intrinsic assessment (refer to Support Assessment).

DBRS removed Japan’s “A” and “R-1 (middle)” rating floor on October 9, 2013, following an assessment of the applicability of the rating floor for CIBs in Japan. Previously, the long-term ratings of MB incorporated two notches of uplift from the intrinsic assessment of BBB (high), with one notch of this uplift resulting from the application of the rating floor. Furthermore, the short-term ratings of the Bank also benefited from a one-notch uplift, from R-1 (low) to R-1 (middle), as a result of the rating floor in Japan. Following the removal of the Japanese rating floor, the short-term ratings of the Bank have been downgraded to R-1 (low), returning to its rating prior to the one-notch uplift. Also, DBRS continues to incorporate one notch of uplift into the long-term ratings, in line with other systemically important banks in Japan, reflecting the challenges that would face the authorities in the resolution of the three mega-banks and the financial safety nets that have been established.

The ratings of MB continue to be based on DBRS’s assessment of Mizuho Financial Group (Mizuho or the Group) as a whole and underpinned by the Group’s strong domestic franchise, reasonable asset quality and strong liquidity and funding profile. As the second-largest bank of the three mega-banks, Mizuho has a strong domestic franchise and plans to establish itself as a one-stop financial services firm through its One MIZUHO strategy. On the other hand, the Group’s international presence remains fairly limited, with operating income from Japan accounting for approximately 78% of the Group’s total operating income during FY 2012, and the Group has targeted the international segment as an area for growth.

In addition, the intrinsic assessment for Mizuho of BBB (high) reflects weaker capital ratios relative to its domestic peers. Mizuho’s Tier 1 ratio as at September 30, 2013 (H1 FY2013) was 11.7%, while the other two domestic peers have over 12%. Also, Mizuho’s intrinsic assessment continues to be hindered by its weaker management quality. This has been demonstrated by the continued internal restructuring at Mizuho and the recent penalties for the Group’s management relating to anti-social (yakuza) transactions. Should the Group successfully improve its capital ratios, realize meaningful synergistic benefits from the merger of its banking divisions and implement stricter corporate governance policies, positive rating action could be warranted.

Mizuho’s reasonable asset quality and strong liquidity and funding profile continued to support its current ratings. The Group’s non-performing loans to gross loans ratio remained strong relative to its global peers at 1.71% during H1 FY2013, decreasing from 2.24% during the year ended March 31, 2010. In addition, the Group maintained a highly liquid balance sheet with liquid assets representing 56.7% of total assets as of H1 FY2013, while deposits remained well in excess of the Group’s loan book.

Similar to its peers, the Group’s relatively weak earnings profile continues to be a key challenge for its rating. The combination of Japan’s weak domestic loan growth, intense competition and low prevailing interest rates have led to weak net interest margins. During H1 FY2013, the Group’s net interest margin remained low at approximately 0.68%, while its domestic loan balance contracted by 0.3%.

Nevertheless, the Group has been able to remain profitable and strengthen capital levels through sustained organic capital generation. As of H1 FY2013, Mizuho’s Basel III Tier 1 ratio improved to 11.7% from 11.0% as at March 31, 2013. While the Group’s capital ratios are relatively weaker than its domestic peers, its current capital levels provide the Group with reasonable loss absorption capacity and it should be able to attain the requirements under Basel III.

SUPPORT ASSESSMENT (SA)
DBRS has assigned a support assessment of SA-2 to Mizuho, which reflects the expectation of systemic and timely external support by the government of Japan (rated A (high)). The Japanese government supported the large domestic banks through their difficult period with the injection of public funds, the establishment of a number of schemes to deal with non-performing assets and the support of mergers among the large banks. While the government funding has been repaid by each of the three mega-banks, the SA-2 support assessment reflects DBRS’s expectation of further support, should it be required. As a result of the SA-2 support assessment, the Group’s intrinsic assessment of BBB (high) receives a one-notch uplift for a final rating of A (low).

Notes:
This rating did not include issuer participation and is based solely on publicly available information.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website under Methodologies.