DBRS Morningstar Confirms Mizuho’s LT 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) with a 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 IA of ‘A’ for Mizuho Bank reflect Mizuho’s strong franchise in Japan and meaningful overseas operations across Asia, EMEA and the Americas, as well as the Group’s strengthened capitalisation, strong funding and liquidity position as well as its solid asset quality. Mizuho’s profitability has been benefiting from a focus on improving revenue generation through the review of the risk-return of assets, targeted cost reduction initiatives, and lower credit costs. Non-performing loans (NPLs) have remained low and are returning to pre-pandemic levels. At the same time, Mizuho’s IA takes into account their sizeable exposure to Japanese equities and Japanese Government Bonds (JGBs), which expose the Group to some market volatility, in particular in its regulatory capital through unrealised gains/losses on these securities. In addition, the IA incorporates the fact that the Group makes significant usage of non-JPY wholesale funding, particularly short-term funding.

Mizuho has experienced repeated significant IT issues that have translated into the announcement of significant management changes, including the Chief Executive Officer early in 2022. However, DBRS Morningstar considers that the Group is taking steps to address the deficiencies as outlined in its Business Improvement Plan, while the negative impact on the franchise seems to be contained to date.

RATING DRIVERS

An upgrade of the IA of the Bank would require sustained improvement in earnings and capital, whilst maintaining sound asset quality. The Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign rating of Japan. 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 of the Long-Term Issuer Rating would arise from a sustained material deterioration of the Group’s asset quality and capital, and/or if the Group were unable to complete the IT remediation plan to the Japanese FSA’s satisfaction and this results in a significant litigation or reputational impact on the Group’s franchise. A downgrade would also be triggered by a two notch downgrade of the Sovereign rating.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong

Mizuho Financial Group is one of the three Japanese mega bank groups with total assets of JPY 251 trillion (approximately USD 1,909 billion) at end-December 2022 (end-Q3 FY22). The Group has a strong banking franchise in Japan as well as substantial overseas businesses, primarily in Asia Pacific and the Americas. Following repeated significant IT issues since February, the Group announced a remedy plan and significant corporate governance management changes, including the resignation of the Chief Executive Officer in February 2022, along with other senior management changes.

Earnings Combined Building Block (BB) Assessment: Moderate

Mizuho’s profitability has improved due to a focus on improving revenue generation through the review of risk-return of assets, cost reduction initiatives, and more recently, a higher interest rate environment globally. The Group reported profit attributable to owners of the parent of JPY 543.2 billion in 9M 2022, up 13.5% Year-on-Year (YOY) compared to JPY 478.6 billion in 9M 2021, and just above the FY22 target of JPY 540.0 billion. The increase was mainly driven by lower credit costs and increased net gains related to stocks. The Group’s return on equity (ROE) was approximately 8.6% in 9M 2022, above prior years. Nevertheless, Mizuho is guiding for an ROE of 6.4% in FY22, below the FY23 target of approximately 7-8%.

Risk Combined Building Block (BB) Assessment: Strong/Good

Mizuho has a good credit risk profile, with strong asset quality and low levels of non-performing loans. The Group has a relatively high concentration of Japanese equities and government bonds, which in our view present risk management challenges and expose Mizuho to interest rate risks. Mizuho reported non-performing loans (NPL) ratio, (based on the Banking Act and the Financial Reconstruction Act and when calculated on consolidated basis), of 0.97% at end-December 2022, down from 1.15% at end-March 2022 but slightly higher than 0.89% reported at end-March 2021. The Group faces market risk as a result of its sizeable holdings of Japanese Government Bonds (JGBs), primarily interest risk-related risk, although Mizuho has hedged most of the portfolio at end-December 2022. After the Group’s JGBs reached JPY 25.1 trillion at end-March 2022, Mizuho reduced its JGBs to JPY 14.7 billion at end-December 2022 – a level closer to the JPY 12.6 trillion at end-March 2020. Nevertheless, these holdings are above Mizuho’s Tier 1 capital.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong

Mizuho’s funding position is strong supported by its large and stable deposit base in Japan. At end-December 2022, the net loan-to-deposit ratio was 56%. At the same time, Mizuho has relatively high usage of market funding in its overseas operations, particularly market short-term funding. Nevertheless, Mizuho’s policy is to fund 70% its overseas lending by overseas deposits. At end-December 2022, non-JPY wholesale customer loans were 76.2% funded by non-JPY customer deposits. The Group’s average liquidity coverage ratio (LCR) was 122.9% at end-December 2022, and its net funding stable ratio (NFSR) ratio was 118.3%.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

Mizuho’s capital position has been supported by improved internal capital generation since FY19. Including the impact of net unrealised capital gains on AFS securities (as all megabanks report), the Group’s Common Equity Tier 1 (CET1) ratio was 11.71% at end-December 2022, down from 12.46% at end-March 2022 mainly due to an increase in risk weighted assets, which were up by 9.5% to JPY 70,892 billion at end-December 2022 (vs. JPY 64,730 billion at end-March 2022), reflecting the impact of JPY depreciation. We also note reduced net unrealised gains on AFS securities. This ratio represent a capital cushion of 371 bps over the minimum regulatory capital requirements of 8%.

On a post-Basel III reform basis and excluding the impact of net unrealized gains/losses on other securities, the Group’s CET1 ratio was 9.5% at end-December 2022, just over 9.3% at end-March 2022, and within the Group’s target at the lower end of the 9-10% range.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410665

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors

The Social factor is Relevant to the ratings of Mizuho but does not impact the rating or trend assigned. ‘Data Privacy & Security’ is a Relevant subfactor and this is reflected in Group’s Risk Profile building block. DBRS Morningstar considers that the Group is taking appropriate steps to correct those IT deficiencies and improve risk management and compliance. However, these deficiencies could potentially affect Mizuho’s reputation and franchise significantly if not appropriately remedied.

Governance (G) Factors

DBRS Morningstar views the ‘Corporate Governance’ subfactor as Relevant for Mizuho’s ratings but does not impact the assigned rating or trend. This is reflected in the Franchise building block and is largely associated with changes in senior management further to the significant deficiencies in the Group’s IT systems that were detected during 2021. DBRS Morningstar considers the Group needs to establish a good track record in terms of operational risk.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

Notes:

DBRS Morningstar notes that this Press Release was amended on 9 March 2023 to include the full title of the principal methodology.

All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Mizuho Financial Group Consolidated Financial Statements for the Second Quarter and Third Quarter of Fiscal 2022, Mizuho FY22 Q3 Financial Results, Mizuho Investor Presentation for FY2022 H1, and Mizuho Supplemental Information: Interim Results for FY2022. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/410664

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 4 January 2002
Last Rating Date: 21 June 2022

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