DBRS Morningstar Confirms Mizuho Bank’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Mizuho Bank, Ltd. (Mizuho Bank or the Bank), including its Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). The trend on all ratings is Stable. The Intrinsic Assessment (IA) of the Bank, which is based on the financial strength of the consolidated Mizuho Financial Group, Inc. (Mizuho or the Group), is ‘A’. The Support Assessment is SA2, reflecting DBRS Morningstar’s expectation of timely systemic support in case of need, given the Bank’s systemic importance to the Japanese financial system. Given the sovereign rating of Japan is A (high), Stable trend, there is currently one notch of uplift to Mizuho Bank’s Long-Term Issuer Rating. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
In maintaining Mizuho Bank’s IA DBRS Morningstar recognises the strength of the Group’s core domestic franchise, its meaningful overseas operations, the strong asset quality, and the sound capitalisation, although the capital ratios do incorporate sizeable unrealised capital gains from securities. Mizuho Bank’s IA continues to take into account the challenges the Bank is facing to further improve profitability, particularly in its domestic market, as well as the progress made in implementing cost reduction initiatives. The IA also reflects the strong domestic deposit base and the sound liquidity position, despite the higher reliance on market funding in its overseas operations, as well as sizeable exposure to Japanese government bonds and equities.

RATING DRIVERS
Positive pressure on the IA of the Bank would require a longer track record of improved profitability, as well as further strengthening of the Group’s capital position, whilst maintaining a conservative risk-taking approach. Given the Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign rating of Japan, an upgrade of the Bank’s IA would only lead to an upgrade of its long-term ratings, if the sovereign rating had also been upgraded.

Negative rating pressure could arise from a material deterioration in the Group’s asset quality and capital. A sovereign downgrade would also have a negative impact on the ratings.

RATING RATIONALE
Mizuho Financial Group (Mizuho or the Group) is one of the three Japanese mega bank groups with total assets of JPY 204.72 trillion (approximately USD 1,894.0 billion) at end-September 2019 (1HFY19). The Group has a strong banking franchise in Japan and is also present overseas, primarily in Asia Pacific, and the Americas. In May 2019, the Group announced a new business plan for the next five years in which Mizuho aims to continue implementing structural reforms, including to significantly reduce expenses in its domestic operations, and establish a stable revenue base while continuing to invest in future growth.

The prolonged low interest rate environment and the modest loan growth in Mizuho’s domestic Japanese market has weighed on the Group’s domestic earnings. However, the Group is implementing a number of cost initiatives that are starting to show results. In FY18, the Group reported significantly lower profit attributable to owners of the parent of JPY 96.5 billion , as a result of one-off extraordinary costs of JPY 694.5 billion, largely associated to the impairment of fixed assets and the sale of non JPY denominated securities portfolios. In 1HFY19, Mizuho’s profit attributable to owners of the parents was JPY 287.6 billion, down 20% year-on-year (yoy), mainly due to the absence of net reversals as reported in 1H18 and lower gains from the sale of stocks yoy even though the Group managed to reduce operating expenses by 6.5% yoy .

DBRS Morningstar considers that Mizuho has a conservative credit risk profile with strong asset quality. Non-performing loans accounted for 0.74% of total loans at end-1HFY19, a level that has remained stable since end-FY17 (based on the Financial Reconstruction Act and when calculated on an aggregate Mizuho Bank and Mizuho Trust & Banking basis) . However, the Group has significant concentration to Japanese equities and government bonds, which, albeit reducing in the last few years, continue to present risk management challenges and expose the Group to the risk of valuation fluctuations. At end-1HFY19, Japanese Government Bonds (JGBs) totalled JPY 11.4 trillion and represented 124% of Tier 1 capital while equity holdings totalled JPY 1.38 trillion, based on an acquisition cost basis, and represented 15.1% of Tier 1 capital. As part of its new business plan the Group aims to further reduce equity holdings by JPY 300 billion by end-FY21, on an acquisition cost basis.

DBRS Morningstar views Mizuho as having a strong funding and liquidity position, underpinned by a large and stable customer deposit base in Japan. At end-1HFY19, the Group’s net loan-to-deposit (LTD) ratio, including negotiable certificates of deposit, was 57%. However, similar to its domestic megabank peers, the Group remains reliant on market funding for its overseas operations as recent growth overseas has not been fully matched with the growth of customer deposits. The Group’s net loan-to-deposit ratio in its overseas operations was 128% at end-September 2019 . Total wholesale funding (including short-term and medium to long-term funding, as calculated for the Bank on a management accounting basis) represented around 50% of total overseas funding at end-1H19 , which albeit still significant, is a lower proportion than the 56% at end-FY17. Furthermore, the strong growth of overseas deposits (up 24% from end-FY17 to end-1H19 ) also contributed to the overseas net loan-to-deposit ratio improving to 128% at end-1H19 from 137% at end-FY17.

DBRS Morningstar considers that the Group’s capital position has steadily strengthened in recent years, although regulatory capital ratios are at the lower end of Mizuho’s domestic peer group. At end-September 2019, including the impact of net unrealised gains/losses on available-for-sale-securities, the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio was 12.2% , up from 10.9% at end-FY15. On a post-Basel III reforms basis, when excluding the impact of net unrealised gains/losses on available-for-sale securities and including effects of partially fixing unrealised gains on stocks through hedging transactions, the Group’s CET1 ratio stood at 8.6% at end-September 2019 compared to a minimum requirement of 8%.

The Grid Summary Grades for Mizuho are as follows: Franchise Strength – Very Strong/Strong; Earnings – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Maria Rivas, Senior Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: November 1, 2000
Last Rating Date: January 29, 2019

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

For more information on this credit or on this industry, visit www.dbrs.com.