DBRS Upgrades Mizuho to A; Trend Stable

DBRS Ratings Limited (DBRS) has today upgraded Mizuho Bank Ltd.’s (Mizuho or the Bank) Issuer Rating and Long-Term Deposits and Senior Debt to “A” from A (low). Concurrently, the Short-Term Instruments rating was confirmed at R-1 (low). The trend on all ratings is Stable. Mizuho’s ratings incorporate an intrinsic assessment (IA) of A (low), which is based upon the financial strength of the consolidated Mizuho Financial Group (the Group). See the full list of ratings at the end of the press release.

The rating action reflects the Group’s good market share in Japan and stable financial profile. Furthermore, the ratings take into account the Group’s good asset quality, relative earnings stability and solid risk profile. Although DBRS expects the Group to face some earnings pressure from the current challenges in the domestic and global environment, DBRS views the Group as well positioned relative to global peers.

The Bank’s IA is combined with a support assessment of SA2, which results in a one notch uplift to the final senior debt and deposit ratings for systemic support. The SA2 reflects the systemic importance of Mizuho to the financial system in Japan, and the generally supportive regulatory framework.

Further positive rating pressure could arise in the medium term if the Group further strengthens capital ratios and maintains a stable earnings profile through the cycle. Negative rating pressure could result from a significant increase in the Group’s risk profile related to its overseas activities.

As the second largest of the three Japanese mega-banks, Mizuho has a strong domestic franchise with an approximate 14% market share of domestic deposits and loans (based on statistics provided by the Bank of Japan as of end-March 2015). DBRS also notes the Group’s plans to strengthen its asset management business in order to make it a “Fourth Pillar” (after Mizuho Bank, Trust & Banking and Securities), and Mizuho’s overseas diversification accounting for 37% of net business profits at end-September 2015, up from 27% at end-September 2012.

The Group has reported steady earnings over recent years, as non-interest income and overseas earnings growth, along with low credit costs have offset the ongoing weak domestic loan demand and low interest rate environment in Japan. DBRS expects earnings to come under some pressure as the Group absorbs the impact of negative interest rates in Japan, lower growth rates in China, stress in the energy loan portfolio, and a return to a more normal level of loan impairments. However, DBRS expects the Group to remain well placed relative to global peers.

In DBRS’s opinion, Mizuho has a generally conservative risk profile supported by a cyclically low level of bankruptcies in Japan and a focus on blue-chip corporate lending. Total impaired loans as a percentage of gross loans were 0.97% at end-December 2015, as calculated on aggregate Mizuho Bank (MHBK) and Mizuho Trust & Banking (MHTB) basis, whilst the coverage ratio was 74.9% at end-September 2015. Although the Group’s commercial lending is well diversified by industry and geography, Mizuho had USD 3.08 billion of loan exposure in Russia (equivalent to JPY 368.83 billion) and USD 9.2 billion in China (equivalent to JPY 1.1 trillion) at end-September 2015. DBRS will continue to monitor the Group’s exposures given the respective stresses evident within each market, however DBRS also notes that Mizuho’s Russian exposure was down 13% in 1H15, and only a small percentage of the Group’s Chinese exposure is to Chinese corporates.

Mizuho’s funding and liquidity profile is solid, as a result of the Group’s significant liquidity reserves and stable domestic deposit franchise. At end-9M15, the net loan-to-deposit (LTD) ratio was 63.6%, driven by the Group’s surplus of domestic deposits, and lack of domestic credit demand. In the overseas operations, the LTD ratio was weaker at 124% at end-9M15, as overseas customer deposit growth has not yet covered the increased overseas lending in recent years. However, the Group is focusing on increasing corporate deposits in its overseas franchise.

Mizuho, as with other Japanese banks, holds a very large portfolio of domestic government bonds (JGBs) as a consequence of the surplus of domestic deposits and lack of demand for credit in Japan. Although Mizuho has reduced its JGB holdings from a peak in FY11 of JPY 32.7 trillion, JGB holdings still remain considerable at JPY 14.1 trillion at end-9M15 (or 178% of Tier 1 capital). The JGB holdings expose the Group to earnings volatility due to interest rate risk exposure and contribute to a concentration in exposure to the Japanese sovereign (rated A (high), Negative trend by DBRS).

DBRS views Mizuho as having built up a reasonable capital position, although its ratios remain weaker relative to domestic peers. At end-September 2015, the Group reported a fully-loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 10.8% (including JPY 144 billion of 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. DBRS does, however, note the implementation of the Japanese Corporate Governance Code in June 2015, which requires companies holding shares of other listed companies as cross-shareholding to disclose the reason for these holdings. The Group has announced its intention to dispose of approximately 40% of the total Japanese stock portfolio (as of end-March 2015).

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: William Schwartz
Initial Rating Date: 1 November 2000
Most Recent Rating Update: 20 February 2015

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