DBRS Upgrd Mizuho Corporate Bank to A from A(low),Trd Stable

Dominion Bond Rating Service (“DBRS”) has upgraded the long-term ratings of Mizuho Corporate Bank, Ltd. and related entities outlined above to “A” from A (low). The short-term ratings are confirmed at R-1 (low). The trends are Stable. The report and analysis are based on the consolidated Mizuho Financial Group, Inc. (“Mizuho”).

Factors leading to the upgrade include the following:
(1) Mizuho has continued to benefit from a broad recovery of its credit quality, as its non-performing loan ratio has improved favourably to 2.16%, and is now the lowest of the big four Japanese banks. This is in line with expectations, and with reasonable reserve coverage of problem loans, future credit costs are expected to consume a lower level of operating profits. Consequently, the credit quality problems of the past decade have finally been overcome.
(2) Reflecting strong retained earnings growth of the past year (partially reflecting a large tax settlement), Mizuho’s capital position has recently improved further. Management is working to restore the quality of Mizuho’s capital structure, by fully repaying the government preferred equity by the end of March 2007 with retained earnings. The Tier 1 capital ratio of 6.2% consists largely of preferred equity from the government – considered relatively weak quality capital. In addition, the deferred tax asset is gradually declining. The ratio of deferred tax assets to Tier 1 capital is the second lowest among the major banks at 24%.
(3) Mizuho’s financial flexibility and liquidity have continued to improve, supporting overall credit protection. In fact, with deposit growth exceeding loan growth, liquidity is excessive, as greater loan growth is needed to boost net interest margins. Securities now account for one-quarter of balance sheet assets. This introduces increased interest rate risk (mostly marked-to-market portfolios) as interest rates start to rise. DBRS notes that the U.S. bond portfolio is relatively small for Mizuho.

With the loan quality problems now in the past, management faces a more difficult challenge to improve Mizuho’s core profitability and earnings stability. Differentiating its business strategy from the other major Japanese banks and converting this into greater earnings will not be easy given the structure of banking in Japan.

Management’s current business plan includes expansion in a number of areas, including private banking alliances with several leading U.S. banks, as well as a focus on lending to small- to mid-sized enterprises, residential mortgages, credit card alliances with Credit Saison and non-interest income sources such as syndicated loans, securities activities, and investment trusts.

DBRS’s rating continues to emphasize the implied support of the Japanese government. However, reliance on this support will decline going forward as Mizuho’s financial position improves and the government funding is repaid.