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
The confirmation of the ratings and the ‘A’ IA for Mizuho Bank reflect Mizuho’s strong franchise in Japan and meaningful overseas operations, which have enabled the Group to face the challenging operating environment with resilient earnings to absorb the increase in credit costs in FY20 driven by the COVID-19 pandemic. The IA also takes into account the Group’s strengthened capital position, which is now better aligned with its domestic peers, and the sound asset quality with low levels of non-performing loans (NPL), although these have slightly increased in FY20 reflecting the negative impact from COVID-19 on some economic sectors. Mizuho’s IA also takes into account the sizeable exposure to Japanese equities, as well as its meaningful concentration to Japanese Government Bonds, which has increased year-on-year. The IA also considers that the Group continues to make significant usage of non-JPY wholesale funding, particularly market operation funding and commercial paper and certificates of deposits, which are generally short-term in nature. In DBRS Morningstar’s view the significant usage of non-JPY wholesale funding exposes the Group to some refinancing risks.
RATING DRIVERS
An upgrade of the IA of the Bank would require a longer track record of improved profitability and evidence that the impact from the COVID-19 pandemic on the Group’s asset quality remains limited. Further improvement in capital ratios would also be viewed positively.

The Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign rating of Japan, and as a result, an upgrade of the Bank’s IA would only lead to an upgrade of its long-term ratings if the sovereign rating were also upgraded.

A downgrade to the Long-Term Issuer Rating could arise from a material deterioration in the Group’s asset quality and capital potentially as a result of the challenging environment driven by COVID-19, or from a downgrade of the Sovereign rating.

RATING RATIONALE
Mizuho Financial Group is one of the three Japanese mega bank groups with total assets of JPY 225.6 trillion (approximately USD 2,039.7 billion) at end-FY20 (March 2021). The Group has a strong banking franchise in Japan as well as substantial overseas businesses, primarily in Asia Pacific and the Americas.

DBRS Morningstar considers Mizuho’s profitability is improving, supported by the various strategic initiatives to optimize the cost base and its risk-return. Mizuho’s earnings generation ability has been resilient under the challenging COVID-19 environment although the Group’s results were negatively impacted by higher credit costs. In FY20, the Group reported profit attributable to owners of the parent of JPY 471.0 billion, compared to JPY 448.5 billion in FY19, largely reflecting strong performance in the Sales and Trading and Debt Underwriting businesses, along with higher profits from domestic and overseas corporates. The Group reported a return on equity (ROE) of 5.9% in FY20, similar to FY19. The Group seems to be on track in reducing operating expenses, with these being flat YoY, (excluding non-recurring losses that largely affected FY19 expenses), supported by the ongoing reduction of staff costs and additional cost initiatives and despite FX impact and higher compensation associated to the strong performance of the markets businesses and continued investment in its overseas businesses. Strong revenue growth drove an improvement of the cost-income ratio to 63.7% in FY20 from 68% in FY19. However, DBRS Morningstar notes that this was partly supported by strong revenue performance boosted by exceptional COVID-19 environment which may not be repeated to the same extend in the current year.

Mizuho has a good credit risk profile, with strong asset quality and low levels of non-performing loans, even though these have deteriorated in recent quarters in light of the COVID-19 pandemic. Mizuho reported a non-performing loans (NPL) ratio, based on the Financial Reconstruction Act and when calculated on an aggregate Mizuho Bank (MHBK) and Mizuho Trust & Banking (MHTB) basis, of 0.89% at end-March 2021. NPLs, however, were up 20% YoY, largely due to exposures in Japan, reflecting deterioration of some sectors impacted by the COVID-19 pandemic. At end-March 2021, the quality of the loan portfolio outside Japan remained sound, with an NPL ratio of 0.6% (figure on a MHBK basis, including banking subsidiaries outside Japan. GCC on a management account basis). Similar to its domestic peers, Mizuho has a large exposure to equity holdings, with these representing 12.0% of Tier 1 Capital at end-FY20 (on an acquisition cost basis) although these represented a more significant 14.1% of Tier 1 Capital at end-FY19.

Moreover, Mizuho also has a sizeable exposure to Japanese Government Bonds (JGBs), which increased materially in FY20 to JPY 20.9 trillion, and represented 215% of Tier 1 capital at end-FY20, compared to below 150% in the previous year. Whilst the majority of the increase related to short-term bonds, we view this exposure as sizeable, compared to most of Mizuho’s international peers.

Mizuho has a strong funding profile, underpinned by its large and stable deposit base in Japan which supports a sound net loan-to-deposit ratio of 55.2% at end-March 2021 . However, the Group’s usage of non-JPY market funding remained sizeable with total non-JPY non-deposit funding, as calculated for the Bank on a management accounting basis, representing around 55% of total non-JPY funding at end-FY20, having increased from 52% at end-FY19. Additionally, interbank funding, repos, central banks and commercial paper and certificate of deposits represented 37% of total non-JPY Funding at end-FY20, which we view as significant. Mizuho has a strong liquidity position, with a Liquidity Coverage ratio (LCR) of 136% and HQLA representing 32% of the Group’s total assets at end-FY20 (up from 29% at end-FY19).

Mizuho has strengthened its capital position in recent years through improved internal capital generation. However, regulatory capital ratios on a post-Basel III reforms basis continue to be at the lower end of its domestic peer group. Similar to its domestic peers, regulatory capital ratios incorporate significant unrealised capital gains from available for sale securities. Including the impact of net unrealised gains/losses on available-for-sale-securities, the Group had a Common Equity Tier 1 (CET1) ratio of 11.63% at end-March 2021, compared to 11.65% at end-March 2020, with this driven by higher risk-weighted assets. On a post-Basel III reforms basis and excluding the impact of net unrealized gains/losses on available-for-sale securities, the Group’s CET1 ratio stood at 9.1% at end-March 2021, which we view as weaker than its peers.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Mizuho Financial Results for FY20, Mizuho Financial Results for FY19 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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380497

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: April 1, 2002
Last Rating Date: June 24, 2020

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