DBRS Confirms SMBC at A; Trend Changed to Positive

DBRS Ratings Limited (DBRS) has today confirmed Sumitomo Mitsui Banking Corporation (SMBC or the Bank) including its “A” Issuer Rating and Long-Term Deposits and Senior Debt rating, as well as its R-1 (low) Short-Term Instruments rating. The trend on all ratings has been changed to Positive from Stable. SMBC’s ratings incorporate an intrinsic assessment (IA) of A (low), which is based upon the financial strength of the consolidated Sumitomo Mitsui Financial Group (SMFG or the Group). The IA is combined with a support assessment of SA-2, which results in a one notch uplift to the final rating from the IA. The SA-2 reflects the systemic importance of SMFG to the financial system in Japan, and the generally supportive regulatory framework. See the full list of ratings at the end of the press release.

The confirmation of the debt ratings reflects the Group’s resilient wholesale and retail domestic franchise, as well as the growing consumer finance and international lending businesses, which have helped to offset the challenges faced by SMFG and its Japanese bank peers in the low-growth, low-interest rate domestic market. The ratings also reflect the Group’s good asset quality, solid capital levels and funding base as well as recognizing the concentration risk and potential earnings volatility posed by the Group’s high level of domestic government bonds. The change in the trend to Positive reflects DBRS’s view that the Group has strengthened its financial profile by building up regulatory capital, continuing to diversify its revenue streams and reducing Japanese sovereign bond holdings.

Upward rating pressure could be sustained if the Group is able to maintain earnings stability while maintaining a solid risk profile. Downward pressure on the ratings could emerge if the Group increased the risk profile of its overseas expansion.

SMFG’s strong franchise in Japan, where the Group has an approximate 13% share of domestic deposits (as of end-March 2014), underpins the Group’s ratings. The Group has a strong presence domestically across its main business divisions: commercial banking, consumer finance, securities and leasing. DBRS also views positively the diversification provided by the growing operations in Asia and the Group’s recent acquisition of the private banking operations of Société Genérale and agreement to acquire Citibank Japan’s retail banking business. Overseas lending was 25% of lending at end-March 2014, compared to 17% at end-March 2012.

In DBRS’s opinion, SMFG has a generally conservative risk profile supported by cyclically low level of bankruptcies in Japan. Total impaired loans as a percentage of gross loans were 1.5% at end-September 2014 and the Group reported a credit writeback of JPY 46.3 billion in 9M14. The Group’s commercial lending is well diversified by industry and performance.

SMFG’s funding position is underpinned by a very strong retail deposit base in Japan, leading to a loan-to-deposit ratio for the Group of 65% at end-December 2014. The loan-to-deposit ratio for the overseas activities is also well positioned at 86% at end-March 2014. One consequence of the surplus of domestic deposits and lack of demand for credit in the domestic economy has been that Japanese banks have amassed large holdings of domestic government bonds (JGBs). SMFG has reduced its exposure to JGBs from a very high level of 475% of equity at end-March 2013, but this exposure remained elevated at 222% of equity at end-March 2014. The JGB holdings create a concentration in exposure to the Japanese sovereign (rated A (high), Stable trend by DBRS) and potential for earnings volatility in relation to interest rate risk.

DBRS views SMFG as having built up a relatively solid capital position. At end-September 2014, the Bank reported a fully-loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 10.7%. SMFG, like its peers, has a meaningful exposure to Japanese equities, which leads to some volatility in the P&L and capital ratios due to unrealized gains and losses. SMFG has reduced its Japanese equity investments based on the acquisition price from 30% of equity at end-March 2013 to 24% at end-September 2014, but unrealized gains remain significant and comprised 1.8% of CET1 at end-September 2014.

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Roger Lister
Initial Rating Date: February 13, 1987
Most Recent Rating Update: January 8, 2014

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