Morningstar DBRS Confirms SMBC's LT Issuer Rating at A (high), Stable Trend
Banking OrganizationsDBRS Ratings Limited (Morningstar DBRS) confirmed the credit ratings of Sumitomo Mitsui Banking Corporation (SMBC 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 Sumitomo Mitsui Financial Group (SMBC Group or the Group), is A (high).
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. However, given that the sovereign credit rating of Japan is also A (high), Stable trend, there is currently no uplift to SMBC's Long-Term Issuer credit rating. See the full list of credit ratings at the end of this press release.
KEY CREDIT RATING CONSIDERATIONS
The confirmation of SMBC's IA at A (high) reflects the Group's strong domestic franchise in retail and wholesale banking with strong competitive positions in certain specialised lending areas globally such as aircraft leasing. SMBC's IA also considers the Group's business diversification and strong asset quality, which are supportive of recurrent and strengthening earnings. SMBC's profitability levels have benefited from rising rates in Japan and strong loan demand, which Morningstar DBRS expects to continue in 2025. Whilst SMBC's funding and liquidity position is strong, supported by a very large and sticky customer deposit base domestically, Morningstar DBRS also notes that the Group's overseas business operations make significant usage of wholesale funding, particularly short-term wholesale funding. The IA also considers a solid capital position with large capital cushions offsetting the potential negative impact of material exposure to Japanese Government Bonds and Japanese equities, (although they are hedged and declining) but add volatility to regulatory capital ratios through mark-to market valuations.
The Company's IA of A (high) has been assigned at the midpoint of the Intrinsic Assessment Range. We view SMBC's credit fundamentals and performance as commensurate with those of similarly rated peers.
CREDIT RATING DRIVERS
Given the SA2 support assessment, an upgrade of the Bank's Long-Term credit ratings would require an upgrade in the sovereign credit rating while maintaining or improving current financial fundamentals.
A downgrade of the sovereign credit rating would lead to a downgrade of SMBC's credit ratings. Absent any change to the sovereign credit rating or to the Support Assessment, a downgrade of the Bank's Long-Term Issuer credit rating would require a two-notch downgrade of the IA. Downward pressure on the IA would likely be driven by a sustained weakening of the Group's profitability, capital levels, and/or risk profile.
CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
SMBC is one of three large Japanese mega-bank groups with total assets of JPY 310.9 trillion (approximately USD 2 trillion) at end-December 2024 (9M 2024). The Group has a strong retail and wholesale banking franchise in Japan while it has a strong presence in specialised lending areas globally. This includes aircraft leasing through its subsidiary SMBC AC. The Group is also present in Asia, in particular Indonesia, India, Vietnam and the Philippines, with a multi-franchise strategy.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
The Group reported profit attributable to owners of the parent of JPY 1,136.0 billion in 9M 2024 (approximately USD 7.4 billion), up 43% year-on-year (YoY) from JPY 792.8 billion (approximately USD 5.2 billion) in 9M 2023, very close to SMBC's full year of JPY 1,160 billion that had been revised positively by 100 billion during half year results. The Group's return on equity (ROE) strengthened to 13.8% in 9M 2024, up from 10.1% in 9M 2023.
This was achieved mainly due to improvement in interest margins as a result of rising rates in Japan, as well as growth in both domestic and overseas lending, good performance in Wealth Management, Payment and Consumer Finance, and an increase in fee income in domestic wholesale business.
Going forward, Morningstar DBRS notes the governor of the Bank of Japan indicated it would raise rates further if appropriate. SMBC guided that every 0.25% increase in JPY interest rates is estimated to represent a positive approximately JPY 100 billion net impact on the Group's net interest income in the first year based on the assumption that the balance-sheet is unchanged. [9M, Slide 6 and 15]
The Group's cost-to-income ratio was 56.1% in 9M 2024 as calculated by Morningstar DBRS, down from about 60% in 9M 2023 and 61.6% in FY22. The increase in revenues in 9M 2024 was higher than the increase operating expenses, which were up by 15% (or by about JPY 308 billion) since 9M 2023 mainly due to inflation, higher marketing costs, and negative foreign exchange effects. Credit costs increased to JPY 158.0 billion in 9M 2024 from JPY 134.7 billion in 9M 2023 driven by overseas banking subsidiaries and large borrowers overseas (JPY 111 billion in 9M 2022, which included reversals of JPY 58 billion; and JPY 158 billion level in 9M 2021 which was driven by some large corporate borrowers). Credit costs represented about 11.4% of the Group's IBPT in 9M 2024.
Risk Combined Building Block (BB) Assessment: Strong/Good
SMBC Group's asset quality indicators are solid. The Group's NPLs, as per the Financial Reconstruction Act, increased to JPY 911.3 billion at end-December 2024 from JPY 985.1 billion at end-December 2023, and below JPY 1,157.6 billion at end-March 2022. The NPL ratio declined to 0.68% at end-December 2024 from 0.81% at end-March 2024, 0.80% at end-March 2023, and 1.08% at end-March 2022.
Like its domestic mega-bank peers, the Group has a relatively high, although declining, concentration of Japanese equities and Japanese government bonds (JGBs). These holdings present risk management challenges and expose the Group to market risk fluctuations. In terms of JGBs, the Group's available for sale (AFS) JGBs holdings were approximately JPY 9.1 trillion at end-December 2024, slightly up from end-March 2024, but lower than a much higher JPY 15.8 trillion at end-March 2022. These represented 67% of the Group's Tier 1 Capital at end-December 2024, down from 71% at end-December 2023, and much improved from 141% at end-March 2022. The Group's Japanese equity holdings decreased to JPY 0.89 trillion at end-December 2024 down by JPY 122 billion in this fiscal year.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
The Group's net loan-to-deposit ratio (excluding negotiable certificates of deposit (NCDs) stood at 65.9% at end-December 2024 (60.2% including NCDs) from 63.4% at end-December 2023 (58.5% including NCDs). Total deposits increased to JPY 172 trillion at end-2024, up 5.8% from JPY 163 trillion at end-December 2023, and JPY 156 trillion at end-December 2022, mainly driven by an increase in deposits in Japan. SMBC's average Liquidity Coverage Ratio (LCR) was 135.0% for the period October-December 2024. The Group's Net Stable Funding Ratio (NSFR) for the period October-December 2024 was 116.3%.
Overseas loans are financed with non-JPY deposits and mid-long term market funding. The Group's strategy is to fund interest earning assets (mainly loans) by deposits and mid-long-term funding; however, Morningstar DBRS considers the usage of non-JPY wholesale funding is significant, representing about 47% of total non-JPY funding at end-December 2024 ; although down from 56% at end-December 2023. The Group's medium- to long-term market funding in its overseas operations is well diversified by instrument, including currency swaps and corporate bonds.
Capitalisation Combined Building Block (BB) Assessment: Good
SMBC has a sound capital position, supported by organic capital generation thanks to a reasonable dividend payout ratio policy, and good access to capital markets. Including the impact of net unrealised gains on available-for-sale-securities, the Group's fully loaded Common Equity Tier 1 (CET1) ratio was 12.59% at end-December 2024, down from 13.18% at end-September 2024 mainly due to dividends and share buybacks. However, this ratio represented a comfortable capital cushion of 459 bps over the minimum regulatory capital requirement of 8.0%. The Basel III leverage ratio was 5.03% at end-2024 broadly unchanged from end-2023 (regulatory minimum of 3.7%).
Like its Japanese mega-bank peers, the exposure to JGBs and Japanese equities add volatility to regulatory capital ratios through mark-to market valuations. On a finalised Basel III basis and excluding the positive impact of net unrealised gains on available-for-sale securities, the CET1 ratio was 10.3% at end-September 2024, compared to 10.0% at end-2023, 10.1% at end-March 2023, and a Group's target on CET1 ratio of c. 10%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/449438.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Governance 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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781
Notes:
All figures are in JPY unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (04 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 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 these credit ratings include Morningstar Inc. and company documents. Other sources include Sumitomo Mitsui Financial Group Inc. Consolidated Financial Results for the six months ended September 30, 2024 and the nine months ended December 31, 2024, SMBC Overview of Q3 FY3/2025, SMBC Overview of H1 FY3/2025, SMBC Data Book H1 FY3/2025, SMBC Key Capital Metrics Q3 FY3/2025. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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's trends 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/449437.
This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Vitaline Yeterian, Senior Vice President, Sector Lead
Rating Committee Chair: William Schwartz, Associate Credit Rating Officer, Credit Practices Group
Initial Rating Date: 26 September 2001
Last Rating Date: 07 March 2024
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