DBRS Confirms Mizuho at A (low); Trend Changed to Positive

DBRS Ratings Limited (DBRS) has today confirmed Mizuho Bank Ltd.’s (Mizuho or the Bank) ratings including its A (low) Long-Term Deposits and Senior Debt rating and its R-1 (low) Short-Term Instruments rating. The Trend on the long-term ratings has been changed to Positive from Stable, while the Trend on the short-term ratings remains Stable. Mizuho’s ratings incorporate an intrinsic assessment (IA) of BBB (high), which is based upon the financial strength of the consolidated Mizuho Financial Group (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 Mizuho 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 good market share in Japan and stable financial profile, and takes into account the challenges faced by Mizuho and its peers in the low-growth, low-interest rate domestic market. The ratings also reflect the Group’s good asset quality and solid funding base, as well as recognising the concentration risk posed by the Group’s very high level of domestic government bonds. The change in the Trend to Positive reflects DBRS’s view that the Group has improved its creditworthiness by streamlining its corporate structure, building up regulatory capital, and reducing equity investments.

The upward pressure on the ratings would be sustained if the Group is able to maintain earnings stability and a solid risk profile. Downward pressure on the ratings would be likely if there was any evidence of significant further weaknesses in controls and operational risk.

As the second largest of the three Japanese mega-banks, Mizuho has a solid domestic franchise, albeit more concentrated than peers towards corporate banking, asset management, and capital markets and securities activities. DBRS views positively the Group’s improved strategic focus in recent years, with the integration of the various Mizuho entities under the ‘ONE MIZUHO’ strategy, and implementation of the ‘Company with Committees’, which strengthened the Group’s governance by establishment of a new board of directors focused solely on supervising the performance and actions of its management.

In line with domestic peers, Mizuho’s earnings remain constrained by weak domestic loan demand and low interest margins. Mizuho has, however, reported solid income growth over recent years, supported by strong growth in overseas activities, solid investment banking returns and low impairment charges, with credit write-backs in the past 21 months (JPY 79.8 billion in 4Q12, JPY 113 billion in FY13, and a further JPY 31.7 billion in 9M14).

In DBRS’s opinion, Mizuho has a generally conservative risk profile supported by a cyclically low level of bankruptcies in Japan. Total impaired loans as a percentage of gross loans were 1.05% at end-December 2014, as calculated on aggregate Mizuho Bank (MHBK) and Mizuho Trust & Banking (MHTB) basis, whilst the coverage ratio was 73.5%. The Group’s commercial lending is well diversified by industry and performance. Operational risk has hampered the Group in recent years, with business improvement orders from the Japanese Financial Services Authority (JFSA) in May 2011, relating to a severe IT failure, and in September 2013 in relation to transactions with anti-social elements under a captive loan scheme. Although Mizuho has made efforts to mitigate these issues, with the establishment of a strengthened governance function and implementation of an IT project aimed at simplifying operations, DBRS will continue to monitor the Group’s progress.

Mizuho’s funding position is underpinned by a very strong retail deposit base in Japan, leading to a net loan-to-deposit ratio for the Group of 62.9% at end-December 2014. The loan-to-deposit ratio for the overseas activities is less balanced at 151% at end-December 2014. DBRS will continue to monitor how the growth of Mizuho’s overseas operations is funded, though DBRS expects the overseas funding profile to remain manageable. One consequence of the surplus of domestic deposits and lack of demand for credit in Japan has been that Mizuho, as with other Japanese banks, holds a very large portfolio of domestic government bonds (JGBs). At end-December 2014, the portfolio was JPY 20.8 trillion, equivalent to 346% of shareholders’ equity. The JGB holdings, which had a duration of 2.6 years at end-December 2014 calculated on a Mizuho Bank (MHBK) and Mizuho Trust Bank (MHTB) basis, are a source of liquidity. They can, however, also lead to earnings volatility due to interest rate risk exposure and contribute to a concentration in exposure to the Japanese sovereign (rated A (high), stable trend by DBRS). Following the recent extension of quantitative easing plans by the Bank of Japan, banks have reduced their JGB holdings, with Mizuho’s holdings decreasing 32.2% from end-March 2013 to end-9M14.

DBRS views Mizuho as having built up a reasonable capital position, although its ratios remain weaker relative to domestic peers. At end-September 2014, the Bank reported a fully-loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 9.9% (including JPY 277.8 billion of mandatory convertible preferred stock). Mizuho, like its mega-bank 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. Mizuho has reduced its Japanese equity investments based on the acquisition price from 57.3% of shareholders’ equity at end-March 2011 to 32.9% at end-December 2014, but unrealized gains remain significant. DBRS notes that Mizuho has taken a conservative approach and also monitors its capital ratios excluding the impact of net unrealized gains on securities available for sale (8.1% rather than 9.9% 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.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

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: 1 November 2000
Most Recent Rating Update: 19 February 2015

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.