DBRS Morningstar Confirms Mizuho Bank’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the 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 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 DBRS Morningstar’s expectation of timely systemic support in case of need, given the Bank’s systemic importance to the Japanese financial system. Given the sovereign rating of Japan is A (high), Stable trend, there is currently one notch of uplift to Mizuho Bank’s Long-Term Issuer Rating. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

In maintaining Mizuho Bank’s IA at ‘A’, DBRS Morningstar recognises the strength of the Group’s core domestic franchise and its meaningful overseas operations, as well as the improvements in cost management that are helping offset the ongoing revenue pressure from the low interest rate environment in Japan. DBRS Morningstar considers that the Group‘s recent progress in strengthening profitability, its low levels of NPLs, and strengthened capitalisation should help Mizuho cope with the economic and market disruption caused by the Coronavirus disease (COVID-19) pandemic. The IA also reflects the sound funding and liquidity position, despite increased usage of market funding for its overseas operations, as well as the sizeable exposure to Japanese government bonds and equities, which continue to add volatility to earnings and capital.

As the impact of the COVID-19 outbreak unfolds in the coming quarters, DBRS Morningstar will continue to monitor its potentially adverse impact on the Group’s profitability, asset quality and capital levels.

RATING DRIVERS

Given the scale of the economic disruption caused by the COVID-19 outbreak, an upgrade of the Long-Term Issuer ratings is unlikely. An upgrade of the IA of the Bank would require a longer track record of improved profitability, along with further strengthening of the Group’s capital position, and no material deterioration in asset quality.

The Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign rating of Japan, and as a result, an upgrade of the Bank’s IA would only lead to an upgrade of its long-term ratings if the sovereign rating were also upgraded.

A downgrade to the Long-Term Issuer rating could arise from a material deterioration in the Group’s asset quality and capital, potentially as a result of a prolonged adverse impact of COVID-19 or from a downgrade of the Sovereign rating.

RATING RATIONALE

Mizuho Financial Group is one of the three Japanese mega bank groups with total assets of JPY 214.7 trillion (approximately USD 1,994.9 billion) at end-FY19 (March 2020). The Group has a strong banking franchise in Japan and is also present overseas, primarily in Asia Pacific, and the Americas. As part of its current business plan, the Group is implementing a number of cost cutting initiatives in its domestic operations, and endeavours to grow certain businesses, both domestically and overseas.

Mizuho made good progress with profitability in FY19, however, DBRS Morningstar considers the COVID-19 situation will likely translate into additional profitability pressure, as a result of higher loan loss provisions and lower revenues, particularly in Japan. The Group reported net profit attributable to the owners of the parent of JPY 448.5 billion, compared to JPY 96.5 billion in FY18 which was affected by meaningful one-off losses related to the impairment of fixed assets and the restructuring of the securities portfolios. However, FY19 results were impacted by higher loan loss provisions Year-on-Year (YoY) primarily reflecting the impact of COVID-19. Gross business profits showed strong growth YoY however, this benefited from growth in income from market operations which may not be repeated in coming quarters. These fully offset the ongoing revenue pressure in the Group’s domestic operations. Mizuho seems to be on track in reducing operating expenses, with these 3.7% down YoY, as staff cost reductions as staff cost reductions and structural reforms of IT costs more than offset the continued investment in the overseas businesses and elevated regulatory costs. The Bank’s cost-to-income ratio was 68% at end-2019 (2018: 78.8%).

Mizuho has a conservative credit risk profile and strong asset quality with low level of Non-performing loans (NPLs) to date. NPLs, based on the Financial Reconstruction Law (FRL) and when calculated on a consolidated basis (including Trust Account), accounted for 0.75% of total gross loans (FY18: 0.70%). At end-FY19, Japanese Government Bonds (JGBs) represented 140% of the Group’s Tier 1 Capital and equity holdings represented 14.1% of Tier 1 Capital. based on an acquisition cost basis. The latter suffered from significant market price decline in Q4 2019 and continue to present risk management challenges as they expose the Group to market value volatility impacting both revenues and regulatory capital ratios. DBRS Morningstar expects asset quality will deteriorate as a result of the COVID-19 environment and will continue to monitor the pandemic’s economic impact in coming quarters, particularly considering the strong loan growth experienced in FY19 both domestically and overseas. Moreover, the Group has exposure to sectors that could be potentially negatively affected by the challenging economic environment, including natural resources (JPY 6.4 trillion and real-estate amounting to approximately JPY 13.2 trillion).

Mizuho has a strong funding profile, largely underpinned by the strength of its customer deposit base in Japan. At end-FY19, the Group’s net loan-to-deposit (LTD) ratio, including negotiable certificates of deposit, was 58%. However, Mizuho continues to make meaningful use of market funding and Group’s net loan-to-deposit ratio in its overseas operations was 134% at end-FY19. Total non-deposit funding, as calculated for the Bank on a management accounting basis, represented around 52% of total overseas funding at end-FY19. Moreover, the Bank has increased the usage of market operations (including repos, interbank and Central banks’ funding), with it accounting for 25% of total overseas funding, up from 19% at end-1HFY19. However, we also view that Mizuho’s liquidity position is strong, as indicated in a Liquidity Coverage ratio (LCR) of 137% and highly liquid assets (HQLA) representing 29% of the Group’s total assets at end-FY19.

Mizuho’s capital position has strengthened, albeit DBRS Morningstar notes that the Group’s regulatory capital ratios are at the lower end of its domestic peer group. Similar to its domestic megabank peers, regulatory capital ratios incorporate significant unrealised capital gains from available for sale securities. At end-FY19, and when including these unrealised gains, Mizuho’s fully-loaded Common Equity Tier 1 (CET1) ratio was 11.7%, slightly down YoY. This was due to lower unrealised gains as a result of the significant equity market price decline that occurred early in the calendar year 2020 driven by market volatility. On a post-Basel III reforms basis, when excluding the impact of net unrealised gains/losses on available-for-sale securities and including effects of partially fixing unrealised gains on stocks through hedging transactions, the Group’s CET1 ratio stood at 8.8% at end-FY19, improved from 8.2% at end-FY18. This compares to a minimum requirement of 8% and to the Group’s target for a CET1 ratio in the lower 9-10% in the coming years.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

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

Notes:
All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Mizuho’s FY2019 Results Presentation and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363008

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

Lead Analyst: Maria Rivas, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: April 1, 2002
Last Rating Date: January 29, 2020

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