DBRS Morningstar Confirms Mizuho’s LT 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) with a 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

The confirmation of the ratings and the ‘A’ IA for Mizuho Bank reflect Mizuho’s strong franchise in Japan and meaningful overseas operations across Asia, EMEA and the Americas, as well as the Group’s strengthened capitalisation, strong funding and liquidity position as well as its sound asset quality. Mizuho’s IA also takes into account the sizeable exposure to Japanese equities and Japanese Government Bonds, which exposed the Group to some volatility in regulatory capital through unrealised market movements on these securities. The IA also takes into account that profitability remains pressured from low loan demand in Japan and higher credit costs, largely driven by an increase in non-performing loans (NPLs) in Japan from very low levels. The IA also incorporates the fact that the Group makes significant usage of non-JPY wholesale funding, particularly short-term funding. DBRS Morningstar has some concerns around the repeated IT failures that translated into the announcement of significant management changes, including the Chief Executive Officer. However, the Group seems to be taking steps to address the deficiencies and reports that the impact on the franchise seems to be contained to date.

RATING DRIVERS

An upgrade of the IA of the Bank would require a sustained improvement in earnings and capital position, whilst maintaining sound asset quality.

The Bank’s Long-Term Issuer Rating is already positioned at the same level as the sovereign rating of Japan. 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 of the Long-Term Issuer Rating could arise from a sustained material deterioration of the Group’s asset quality and capital, or if additional significant IT failures occur and this results in a significant reputational or litigation impact on the Group’s franchise. A downgrade would also be triggered by a two notch downgrade of the Sovereign rating.

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 237 trillion (approximately USD 1,946 billion) at end-FY21 (end-March 2022). The Group has a strong banking franchise in Japan as well as substantial overseas businesses, primarily in Asia Pacific and the Americas. Following repeated IT failures since February 2021 that led to some disruption for customers, the Group announced a remedy plan and significant corporate governance management changes, including the resignation of the Chief Executive Officer in February 2022, along with other senior management changes.

Earnings Combined Building Block (BB) Assessment: Moderate
DBRS Morningstar considers Mizuho’s profitability has improved in the last two years, partly supported by cost reduction initiatives and a focus on improving revenue generation through reviewing the risk-return of assets and reducing unprofitable assets. In FY21, the Group reported profit attributable to owners of the parent of JPY 530.5 billion, up 13% year-on-year (YoY), compared to JPY 471.0 billion in FY20 and JPY 448.5 billion in FY19. The higher net attributable profit largely reflects growth of revenues, largely from all business segments except Global Markets, as well as lower operating costs. The Group reported a return on equity (ROE), excluding net unrealized gain/losses on other securities, of 6.4% in FY21, slightly better than the 5.9% in FY20. Consolidated gross profits went up 2.5% in FY21 YoY. The Group's net interest income (NII) grew 10% YoY, supported by a combination of loan volume growth and a reduction in deposits costs outside Japan and significant growth of interest income from securities in its domestic operations. However, profitability remained negatively impacted by higher credit costs. Credit costs in FY21 totalled JPY 235.1 billion, significantly higher than the JPY 204.9 billion in FY20, and largely related to domestic exposures and Russian related exposures, as well as some forward looking provisions associated with Russian related exposures. The cost-income ratio as calculated by DBRS Morningstar and based on reported figures improved to 62% in FY21 from 64% in FY20, supported by the ongoing reduction of staff costs and additional cost initiatives.

Risk Combined Building Block (BB) Assessment: Strong/Good
Mizuho has a good credit risk profile, with strong asset quality. However, non-performing loans (NPLs) have deteriorated since the start of the COVID-19 pandemic, and were up 34% YoY at end-FY21, although the increase was largely associated with some borrowers in Japan. The NPL ratio, based on the Financial Reconstruction Act and when calculated on an aggregate Mizuho Bank (MHBK) and Mizuho Trust & Banking (MHTB) basis, was 1.15% at end-March 2022, slightly up from 0.89% at end-March 2021.

Similar to its domestic peers, Mizuho has a large exposure to equity holdings, although it has been successfully reducing this exposure YoY. These holdings represented 11% of Tier 1 Capital at end-FY21 (on an acquisition cost basis) reduced from 12% at end-FY20 and 17% of Tier 1 Capital at end-FY17. Moreover, Mizuho also has a sizeable exposure to Japanese Government Bonds (JGBs), which totalled JPY 25.1 trillion, having increased materially in the last two years to represent 258% of Tier 1 capital at end-FY21, compared to 215% the year before and 140% at end-FY19. DBRS Morningstar considers these expose the Group to valuation fluctuations, although we note this is similar to domestic peers.

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. Customer deposits, including negotiable certificates of deposits, totalled JPY 155.7 trillion at end-March 2022, having increased by 3.5% YoY, driven by growth of deposits in Japan. The Group’s net loan-to-deposit ratio was a robust 54% at end-March 2022. The Group makes significant usage of non-deposit funding in its non-JPY operations, of around 53% of total non-JPY funding at end-FY21, particularly short-term funding. Mizuho has a strong liquidity position, with a Liquidity Coverage ratio (LCR) of 136.5% and High quality liquid assets (HQLA), representing 30% of the Group’s total assets at end-Q4 FY21.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
Mizuho’s capital position has been supported by improved internal capital generation since FY19, and at end-FY21 regulatory capital ratios also improved through a significant reduction in risk weighted assets. Similar to its domestic peers, regulatory capital ratios incorporate significant unrealised capital gains from available for sale securities. Including the impact of net unrealised gains/losses on available-for-sale-securities, the Group had a Common Equity Tier 1 (CET1) ratio of 12.46% at end-March 2022, improved from 11.63% at end-March 2020. Excluding the impact of net unrealised gains/losses on available-for-sale securities, the Basel III CET1 ratio also improved to 11.52% at end-March 2022, from 10.46% the year before. This ratio is well above minimum regulatory capital requirements of 8%. On a post-Basel III reforms basis and excluding the impact of net unrealised gains/losses on available-for-sale securities, the Group’s CET1 ratio stood at 9.3% at end-March 2022, improved from 9.1% the prior year.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398643

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors

The Social factor is relevant to the ratings of Mizuho but did not impact the rating or trend assigned. ‘Data Privacy & Security’ is a relevant subfactor and is reflected in Group’s Risk Profile building block. This largely relates to repeated IT system glitches which created some disruption to customers in February 2021 and August 2021 as well as some Anti Money Laundering framework deficiencies that were detected in September 2021. DBRS Morningstar considers the Group is taking steps to correct those IT deficiencies and improve risk management, compliance and AML framework and considers the impact on the franchise to be contained. However, these deficiencies could potentially have a significant impact on Mizuho’s reputation and franchise if not remedied.

Governance (G) Factors

DBRS Morningstar views the ‘corporate governance’ subfactor as relevant for Mizuho’s ratings but does not impact the assigned rating or trend. This is reflected in the Franchise building block and is largely associated with the accountability of management after significant deficiencies in the Group’s IT systems were detected during 2021. Following these events, the Japanese FSA conducted an investigation and required the Group to implement the necessary improvements in the entire corporate governance structure and IT infrastructure. This led to the resignation of the Chief Executive Officer in February 2022, along with other senior management changes.

This G factor is new and was not present in the prior credit rating disclosure.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in JPY unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, Mizuho Investor Presentation for FY21, Mizuho Consolidated Financial Statements for Fiscal 2021, Mizuho FY21 Financial Results Presentation, Mizuho Supplemental Information: Financial Results for FY2021, Mizuho ESG Presentation for FY2021. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/398641

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

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: 04/01/2002
Last Rating Date: 06/23/2021

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