DBRS Confirms Mizuho at ‘A’, Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Mizuho Bank, Ltd. (Mizuho or the Bank), including its Long-Term Issuer Rating of ‘A’ and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings remain Stable. Concurrently, DBRS maintained Mizuho’s Intrinsic Assessment (IA) at A (low) and notes that the current level of the IA is based upon the financial strength of the consolidated Mizuho Financial Group, Inc. (MFG or the Group). The Support Designation remains at SA2, which indicates an expectation of timely systemic support in case of need. Given the current level of the Japanese sovereign rating at ‘A’ there is currently one notch of uplift to the Bank’s final long-term ratings. See the full list of ratings at the end of the press release.

In maintaining Mizuho’s IA at A (low), DBRS recognises the strong domestic franchise along with the sizeable overseas operations. The current level of the IA also incorporates the pressure faced by the Bank on both the revenue and cost sides, as well as the conservative risk profile, the strong funding and liquidity profiles and the improving capitalisation levels.

MFG, one of the three Japanese mega-banking groups, offers a wide range of products in its domestic Japanese market, while its international network extends to 38 countries and regions, primarily in Asia and Oceania, and the Americas. Mizuho’s earnings remain under pressure due to the low interest rate environment, the weak domestic loan demand and continuation of the competitive environment, while non-interest income remains pressured both domestically and overseas. Similarly, elevated personnel expenses in Japan and increased expenses in the overseas operations due to JPY depreciation have added pressure to the Group’s cost base with MFG reporting a statutory efficiency ratio of 76.4% in 1H17. On a management account basis efficiency ratio was marginally lower at 72.4% in 1H17. However, this level is significantly higher than the target of approx. 60% by the end of FY18 and of mid-50% by end-FY20, as set out in the Bank’s medium term business plan. DBRS will continue monitoring developments in cost management, given a number of cost saving initiatives to be implemented in the short- and medium-term, alongside other strategic initiatives announced in the longer-term “Fundamental Structural Reform”. These include organisation and staffing, reforming IT systems, restructuring branches, and strengthening earnings power by increasing the proportion of non-interest income and overseas gross profits.

Mizuho has a conservative risk profile with a non-performing loans ratio, calculated on an aggregate Mizuho Bank (MHBK) and Mizuho Trust & Banking (MHTB) basis, of 0.70% at end-September 2017. The Group, however, faces certain challenges through its large holdings of Japanese Government Bonds (JGBs) and Japanese equities. Although declining, MFG’s JGB holdings remain sizeable and totalled JPY 9.6 trillion, or 107% of Tier 1 capital, at end-September 2017; nevertheless, this level is significantly lower than the peak of JPY 32.6 trillion, or 510% of Tier 1 capital, at end-FY11. Moreover, DBRS notes that the average remaining duration, excluding floating-rate notes, has been low in recent years; it was 2.5 years at end-1H17 when calculated on a MHBK and MHTB basis. The Group’s Japanese equity holdings totalled JPY 1.6 trillion, based on acquisition cost basis, and stood at 18% of Tier 1 capital at end-September 2017; DBRS considers that MFG is on track to reduce these holdings by JPY 550 billion on a cumulative basis by end-FY18, with the additional JPY 58.1 billion disposals in 1Q17 and 2Q17 bringing the total disposals during the period April 2015 to September 2017 to JPY 333.4 billion.

As a result of the Group’s stable deposit franchise in Japan its funding profile is robust with an overall net loan-to-deposit ratio of 58% at end-September 2017. Concurrently, Mizuho has made progress in recent years in improving its overseas deposit franchise. Even though the Group’s operations outside Japan still make greater use of market funding, the Group has reduced the net loan-to-deposit ratio over the past few years to 130% at end-September 2017. Liquidity is solid with a liquid asset portfolio, net of collateral deductions, of JPY 69.3 trillion at end-FY16, which compares to wholesale funding liabilities of JPY 35.0 trillion at end-September 2017. The Group reported a consolidated liquidity coverage ratio (LCR) of 126.1% for 2Q17, well above the regulatory minimum of 100% to be introduced as of January 2019.

The Group’s capital position has improved in recent years. At end-September 2017 the Group reported a transitional Common Equity Tier 1 (CET1) ratio of 11.80% and a transitional Basel III leverage ratio of 4.14%. The Group’s fully effective CET1 ratio was 11.85% at end-September 2017, although this declines to 9.56% when adjusting for the net unreleased gains on other securities. The Group targets a Basel III fully effective CET1 ratio, excluding net unrealized gains on other securities, of approximately 10% by end- FY18. Future challenges include the implementation of the latest Basel III reforms. With an estimated TLAC ratio of 19.3%, including the 2.5% contribution of the Deposit Insurance Fund Reserve (Japanese deposit insurance scheme) and 2.6% TLAC eligible debt, DBRS views that the Group should be able to meet future minimum TLAC requirements.

RATING DRIVERS
There could be positive pressure on the IA, if the Bank is able to both increase its fee income revenues and reduce its cost base in order to improve profitability. As the Bank’s issuer and senior debt ratings are already positioned at the same level as the sovereign rating of Japan, an upgrade of the Bank’s IA would only lead to an upgrade of its issuer and senior debt ratings, if the sovereign rating were also to be upgraded.

Negative rating pressure could arise from a material deterioration in the Group’s asset quality indicators or funding profile as a result of the overseas expansion, or from further deterioration in cost efficiency. A sovereign downgrade would also have a negative impact on the ratings.

The Grid Summary Grades for Mizuho Bank, Ltd. are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: November 1, 2000
Last Rating Date: July 14, 2017

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