DBRS Downgrades the Short-Term Ratings of Sumitomo Mitsui Banking Corporation and Related Entities

DBRS has today downgraded the Short-Term Instruments rating of Sumitomo Mitsui Banking Corporation (SMBC or the Bank) to R-1 (low) from R-1 (middle), with a Stable trend. In addition, DBRS has confirmed the Issuer Rating and Long-Term Deposits and Senior Debt of SMBC at “A,” with Stable trends. 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 SMBC remains unchanged at A (low) and the long-term ratings of “A” incorporate the implied support of the Japanese government, adding one notch to the intrinsic assessment (refer to Support Assessment).

On October 9, 2013, DBRS removed Japan’s “A” and R-1 (middle) rating floor following an assessment of the applicability of the rating floor for CIBs in Japan. Previously, the short-term ratings of SMBC benefited from a one-notch uplift, from R-1 (low) to R-1 (middle). Following the removal of the Japanese rating floor, the short-term ratings of SMBC have been downgraded to R-1 (low), returning to its rating prior to the one-notch uplift. On the other hand, the long-term ratings of SMBC continue to incorporate a one-notch uplift from its intrinsic rating, in line with other systemically important banks in Japan. Also, the ratings of SMBC continue to be based on DBRS’s assessment of Sumitomo Mitsui Financial Group, Inc. (SMFG or the Group) as a whole and reflect the Group’s strong domestic franchise, reasonable asset quality and strong liquidity and funding profile.

SMFG’s strong domestic franchise, especially in the Tokyo, Osaka and Kobe regions, continues to be a key rating strength. The Group provides an extensive range of consumer and corporate banking services in Japan and wholesale banking services overseas. Similar to its domestic peers, SMFG has relatively low international exposure (18% of operating income during the fiscal year ended March 2013 (FY 2013)) and has focused on increasing its international business. Since April 2013, the Group expanded its banking network by opening representative offices in Perth (Australia), Santiago (Chile), Chonburi (Thailand) and Ulaanbaatar (Mongolia), and obtained financial holding company status in the United States to further expand its business in the U.S.

In addition, SMFG’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 its global peers at 2.39% in H1 2014, decreasing from 2.96% for the year ended March 31, 2012. Furthermore, SMFG sustained a highly liquid balance sheet with liquid assets representing 45.4% of total assets, while deposit levels remained in excess of its loan book.

However, the Group’s relatively weak earnings profile continues to be a key challenge for its rating. Japan’s weak domestic economy, near-zero rate monetary policy and intense competition have led to weak domestic loan growth and weak net interest margins. While the Bank’s international loan portfolio increased by 7.1% during H1 2014, domestic loans only grew by 0.4%.

Nonetheless, the Group continued to remain profitable, resulting in organic capital generation and improvements in capital levels. As of H1 2014, SMFG’s Basel III Tier 1 ratio improved to 12.1% from 10.9% as at March 31, 2013. SMFG’s current capital levels and prudent liquidity management provide the Group with reasonable loss absorption capacity and SMFG remains well positioned to attain the standards under Basel III.

SUPPORT ASSESSMENT (SA)
DBRS has assigned a support assessment of SA-2 to SMFG, 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 A (low) receives a one-notch uplift for a final rating of “A.”

Notes:
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 the 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.