Morningstar DBRS Confirms Mizuho’s LT Issuer Rating at A (high), Stable Trend

DBRS Ratings Limited (Morningstar DBRS) confirmed the credit 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 credit 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 Morningstar DBRS’s expectation of timely systemic support in case of need, given the Bank’s systemic importance to the Japanese financial system. Given the sovereign credit 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 credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the credit ratings and the IA of ‘A’ for Mizuho Bank reflect Mizuho’s very 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 and its solid credit risk profile. Mizuho’s profitability has been benefiting from a diversified business mix by geography, a higher interest rate environment, a focus on improving revenue generation through asset risk-return review, targeted cost reduction initiatives, and a low cost of risk. Non-performing loans (NPLs) remain at a low level. At the same time, Mizuho’s IA takes into account the Bank’s sizeable exposure to Japanese equities and Japanese Government Bonds (JGBs), albeit declining, which expose the Group to some market volatility, in particular in its regulatory capital through unrealised gains/losses on those securities. In addition, the IA incorporates the fact that the Group makes significant usage of non-JPY wholesale funding in its overseas operations, particularly short-term wholesale funding.

CREDIT RATING DRIVERS

The Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign credit rating of Japan. As a result, an upgrade of the Bank’s IA would only lead to an upgrade of its long-term credit ratings if the sovereign credit rating were also upgraded. If Mizuho continues on its current positive performance trajectory, Morningstar DBRS sees the IA of the Bank moving into the next category over time.

A downgrade of the Long-Term Issuer Rating would arise from a sustained deterioration of the Group’s risk profile and materially lower capital levels. A downgrade would also be triggered by a two notch downgrade of the Sovereign credit rating.

CREDIT 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 270.4 trillion at end-December 2023 (end-Q3 FY23) (approximately USD 1,917 billion). The Group has a strong banking franchise in Japan as well as substantial overseas businesses, primarily in Asia Pacific and the Americas. Further to repeated significant IT issues that were detected in 2021, the Group announced a remedy plan and significant corporate governance management changes. We consider that the Group has taken appropriate steps to address the deficiencies as outlined in its Business Improvement Plan, published on a quarterly basis. In addition, as per instruction from the Japanese FSA, Mizuho will no longer be required to provide reports on the progress of the Business Improvement Plan. The negative impact on the franchise has been limited.

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

Morningstar DBRS considers that Mizuho’s profitability has improved thanks to the Group’s diversified business mix by geography, a higher interest rate environment outside of Japan cost reduction initiatives, a focus on improving revenue generation through asset risk-return review and reducing unprofitable assets, and a low cost of risk. The Group reported profit attributable to owners of the parent of JPY 642.3 billion in 9M 2023, up 18.2% year-on-year (YoY) from JPY 543.2 billion in 9M 2022, and just above the JPY 640 billion target for FY23. The increase was mainly driven by higher revenues due to loan growth outside of Japan, in the Americas, along with higher margins, as well as increased net fee and commission income and net trading income. Meanwhile, the Group remains focused on reducing operating expenses by maintaining a cost-to-income ratio target of around 60% by FY25. For comparison, the cost-to-income ratio was 59% in 9M 2023. Credit costs declined to a modest level just under 1.7% of income before provisions and taxes in 9M 2023 reflecting reversals on certain clients, offsetting an increase in forward looking reserves based on their macroeconomic model.

The Group’s return on equity (ROE) was approximately 7.4% in 9M 2023), in line with the FY23 target of approximately 7-8%. Going forward, Morningstar DBRS notes that, if the Bank of Japan increases its base rate from -0.1% to 0%, it would represent a positive net impact on the Group’s net interest income of approximately JPY 35 billion per year based on the assumption the balance-sheet is unchanged from end-H1 2023.

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. At the same time, the Group has a relatively high concentration of Japanese equities and Japanese government bonds (JGBs), albeit declining, which present risk management challenges and expose Mizuho to interest rate risks. Mizuho’s reported non-performing loans (NPL) ratio, (based on the Banking Act and the Financial Reconstruction Act and when calculated on consolidated basis), of 1.11% at end-December 2023 was slightly up from1.05% at end-March 2023 but below levels as of end-March 2022.

The Group faces some market risk as a result of its sizeable holdings of JGBs, primarily interest risk-related risk. Morningstar DBRS notes Mizuho has hedged most of the portfolio. JGBs declined to JPY 14.3 trillion at end-December 2023, from JPY 14.7 trillion at end-December 2022, and well below the peak of JPY 25.1 trillion at end-March 2022. We note these holdings represented 187% of Mizuho’s Tier 1 capital at end-September 2023, a much lower level compared to 258% of Tier 1 capital at end-March 2022.

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. The Bank’s net loan-to-deposit ratio was a low 55% at end-December 2023 according to Morningstar DBRS calculations. Meanwhile, Mizuho has relatively high usage of market funding in its overseas operations, particularly market short-term wholesale funding. Mizuho’s policy is to fund 70% its overseas lending by overseas deposits. Non-JPY wholesale customer loans were 75.8% funded by non-JPY customer deposits at end-December 2023. The Group’s average liquidity coverage ratio (LCR) was 127.3% in Q3 2023.

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

Mizuho’s improved capital position is supported by recurrent earnings and good access to capital markets. Including net unrealised capital gains on Available For Sale (AFS) securities (as all megabanks report), the Group’s Common Equity Tier 1 (CET1) ratio was 11.89% at end-December 2023, up from 11.52% at end-September 2023, and 11.80% at end-March 2023 in spite of an increase in risk weighted assets which mainly reflected the impact of JPY depreciation. This ratio represented a capital cushion of 389 bps over the minimum regulatory capital requirement 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 9.7% at end-December 2023, over 9.5% at end-March 2023 and 9.3% at end-March 2022, at the lower end of its domestic peer group.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/429061.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Social (S) Factors

The Social factor has not changed from the prior credit rating disclosure. Morningstar DBRS views the ‘Data Privacy & Security’ Social subfactor as relevant to the credit ratings or trend assigned to Mizuho. Mizuho suffered repeated IT system failures between 2019 and 2022. We consider there have been appropriate steps to correct the IT deficiencies and improve the Bank’s risk management framework, taking into account that the Japanese FSA will no longer require reports on the Group’s Business Improvement Plan. While the impact on Mizuho’s reputation and franchise has been limited, we would like to see a longer track record.

Governance (G) Factors

The Governance factor has not changed from the prior credit rating disclosure. Morningstar DBRS continues to view the ‘Corporate Governance’ subfactor as relevant to the credit ratings or trend assigned to Mizuho. This reflects changes in senior management in February 2022, which are still relatively recent. We acknowledge the progress made and we see stability in the new Medium Term Plan, and see the factor as becoming non relevant to the credit ratings or trend over time.

There were no Environmental factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 22, 2023), https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Mizuho Financial Group Consolidated Financial Statements for Fiscal 2022, Mizuho Financial Group Consolidated Financial Statements for the Second Quarter and Third Quarter of Fiscal 2023, Mizuho FY22, FY23 H1 and FY23 Q3 Financial Results, Mizuho Investor Presentation for FY2022 and FY2023 H1, and Mizuho Supplemental Information: Interim Results for FY2023. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at https://www.dbrsmorningstar.com/research/429062.

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings, Global Financial Institution Group
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 4 January 2002
Last Rating Date: 08 March 2023

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