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 now A (high) and Mizuho's Long-Term Issuer Rating no longer benefits from uplift from the SA2 designation.

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 that the sovereign credit rating of Japan is A (high) with a Stable trend, there is currently no 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 revision of the IA to A (high) from `A' for Mizuho Bank reflects the Group's robust franchise and strengthened profitability over recent years. Morningstar DBRS expects Mizuho's profitability will continue to benefit from higher domestic interest rates, lending growth, a diversified business mix by geography with meaningful overseas operations across the Americas, Asia, and EMEA. Furthermore, benefits are also expected from the bank's focus on improving revenue generation through asset risk-return review, targeted cost reduction initiatives, and a low cost of risk. In addition, Morningstar DBRS considers that Mizuho has taken appropriate steps to address the IT deficiencies there were identified in 2021, given the good track record and no more negative impact on the franchise. Meanwhile, asset quality metrics are solid, including low non-performing loans (NPLs). The IA takes into account the Bank's material exposure to Japanese Government Bonds (JGBs), albeit declining, which expose the Group to interest risk. Furthermore, the IA incorporates a strong funding and liquidity position although the Group makes significant usage of non-JPY wholesale funding in its overseas operations. Lastly, Mizuho's IA considers Mizuho's improved capitalization levels with robust capital buffers supported by Mizuho's ability to generate recurring earnings. Mizuho's capital ratios, however, include volatile unrealised gains on available-for-sale (AFS) securities like its mega-bank domestic peers.

The Company's IA of A (high) has been assigned at the midpoint of the Intrinsic Assessment Range. We view Mizuho'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 Mizuho'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

Mizuho Financial Group is one of the three Japanese mega-bank groups with total assets of JPY 285.4 trillion at end-December 2024 (end-Q3 FY24) (approximately USD 1.875 trillion). The Group has a strong banking franchise in Japan as well as substantial overseas businesses, in the Americas, Asia Pacific, and EMEA.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
The Group reported profit attributable to owners of the parent of JPY 855.3 billion (approximately USD 5.6 billion) in 9M 2024, up 33% year-on-year (YoY) from JPY 642.3 billion in 9M 2023 (approximately USD 4.2 billion), and well above the JPY 820 billion outlook for FY24. The Group's return on equity (ROE) was approximately 9.5% in 9M 2024 (excluding net unrealised gains (losses) on other securities, preliminary figures), up from 7.4% in 9M 2023, well above the FY24 guidance of over 8%.

Mizuho's profitability significantly improved in 2024 mainly thanks to rising interest rates and lending growth in Japan, increased contribution of non-interest income, cost efficiency initiatives, and a minimal cost of risk. Morningstar DBRS considers the positive momentum has also been supported by the Group's strategy to improve revenue generation through asset risk-return review and reducing unprofitable assets. Loans outside of Japan have declined overall, particularly in EMEA and APAC. Despite external factors such as JPY depreciation and inflation, the Group was able to invest in growth areas and governance while maintaining its cost-to-income ratio broadly stable at 59.4% in 9M 2024, compared to 59.0% in 9M 2023, significantly decreasing from a much higher 78.8% in FY18 and below its cost-to-income ratio target of around 60% by FY25. Credit costs were marked by reversals from some corporates both in and outside Japan.

Going forward, the governor of the Bank of Japan (BoJ) indicated the BoJ could continue to increase its base rate if assessed as appropriate. Mizuho guided that each increase of 25 bps would represent a positive approximately JPY 120 billion per year net impact on the Group's net interest income based on the assumption the balance-sheet is unchanged.

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. Mizuho's non-performing loans (NPL) ratio, (based on the Banking Act and the Financial Reconstruction Act and when calculated on consolidated basis) declined to 0.98% at end-December 2024, down from 1.11% at end-December 2023.

Although trending down over the past three years, the Group is holding a relatively high amount of Japanese government bonds (JGBs), which expose Mizuho to interest risks. JGBs declined by 36% YoY to JPY 9.1 trillion at end-December 2024 from JPY 14.3 trillion at end-December 2023. These holdings represented 80% of Mizuho's Tier 1 capital at end-December 2024, significantly down from 258% of Tier 1 capital at end-March 2022. Furthermore, the Group has continued to reduce its exposure to Japanese equities, which expose the Group to market risk. Over the fiscal years FY15 to FY22, the Group reduced this portfolio by JPY 672.4 billion through sales, and JPY 211.1 billion since end-March 2023. The Group's new target is to achieve an additional JPY 300 billion reduction over FY22-FY25 on an acquisition cost basis.

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 56% at end-December 2024 according to Morningstar DBRS calculations. Meanwhile, Mizuho has relatively high usage of market funding in its overseas operations, particularly market short-term wholesale funding although it is to fund securities. At end-December 2024, non-JPY wholesale customer loans (USD 266.9 billion) were 74.8% funded by non-JPY deposits (USD 199.7 billion, of which 50% are Japanese clients) and the remainder by mid-long term funding, broadly unchanged compared to end-December 2023. The Group's average liquidity coverage ratio (LCR) was 130.0% in Q3 2024.

Capitalisation Combined Building Block (BB) Assessment: Good

Mizuho's improved capital position is supported by strong earnings and good access to capital markets. Including net unrealised capital gains on available for sale (AFS) securities (as all mega-banks report), the Group's Common Equity Tier 1 (CET1) ratio increased to 13.10% at end-December 2024 (11.89% at end-December 2023). This ratio represented a capital cushion of 510 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 increased to 10.4% at end-December 2024 (over 9.7% at end-December 2023).

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

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Social (S) Factors
 
The Social factor has changed from the prior credit rating disclosure. Morningstar DBRS no longer 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 2021 and 2022, which we now consider as legacy issues given the appropriate steps taken to correct the IT deficiencies and improve the Bank's risk management framework. The impact on Mizuho's reputation and franchise is no longer visible.

Governance (G) Factors

The Governance factor has changed from the prior credit rating disclosure. Morningstar DBRS no longer views the `Corporate Governance' subfactor as relevant to the credit ratings or trend assigned to Mizuho. This reflects stability in senior management and successful current Medium-Term Plan.
 
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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Japanese yen 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 Morningstar Inc. and Company Documents, Mizuho Financial Group Consolidated Financial Statements for Fiscal 2023, Mizuho Financial Group Consolidated Financial Statements for the Second Quarter and Third Quarter of Fiscal 2024, Mizuho FY23, FY24 H1 and FY24 Q3 Financial Results, Mizuho Investor Presentation for FY2023 and FY2024 H1, and Mizuho Supplemental Information: Interim Results for FY2024. 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://dbrs.morningstar.com/research/449445.

These credit ratings are 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: 4 January 2002
Last Rating Date: 07 March 2024

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