RAM Ratings Assigns AAA/Stable/P1 Ratings to Mizuho Bank
RAM Ratings has assigned AAA/Stable/P1 financial institution ratings to Mizuho Bank, Ltd (the Bank) Japan.
The Bank is the core entity of Mizuho Financial Group, Inc (Mizuho FG or the Group), which ranks among the three mega-banking groups in Japan. Mizuho Bank accounted for a respective 83 per cent and 70 per cent of the Group's total assets and pre-tax profit in FY Mar 2016.
The ratings reflect Mizuho FG's strong domestic franchise, robust funding and liquidity profile and healthy loan quality. On the other hand, the ratings also incorporate the Group's weak profitability, higher exposure to market risks and moderate capitalisation. In addition, we believe that there is a high likelihood of support from the Japanese government, if required, given Mizuho FG's systemic importance. The Group has been designated as a global systemically important bank by the Financial Stability Board.
Japanese banks' credit fundamentals remain largely driven by domestic developments despite their expanding overseas portfolios. The subdued Japanese economy and apprehension over the effectiveness of government initiatives to stimulate economic growth (including negative interest rates and the most recent 'yield curve control' measures) have been elevating operational uncertainties for Japanese banks while their sizeable holdings of Japanese government bonds (JBGs) expose them to sovereign risk.
Mizuho FG's asset quality is solid; its indicators are expected to hold steady, supported by the stable credit trends in Japan. As at end-September 2016, the value of Mizuho FG's gross impaired loans (GILs) had declined to JPY0.8 trillion (end-March 2015: JPY 1.1 trillion). The Group's credit-cost ratio remained negligible and potential impairment charges should be comfortably absorbed by its pre-provisioning profit, which has been averaging JPY951 billion per annum (fiscal 2014-2016). Should oil prices remain sluggish, stress could stem from the Group's oil and gas (O&G) portfolio, as observed for certain Japanese banks. As at end-September 2016, O&G lending made up four per cent (JPY 3 trillion) of the Group's total lending.
Mizuho FG has strong deposit-funding capabilities, with its loans-to-deposits ratio standing comfortably at 61 per cent as at end-September 2016. Its substantial surplus funds were mainly held in cash or invested in JGBs, which had led to a solid average liquidity-coverage ratio of 137 per cent in 2Q FY Mar 2017. Despite reductions over the years, the equity and bond holdings of Japanese banks remain large. This results in higher market risks and introduces some volatility to earnings and capitalisation. Despite having benefited from the stock-market rally in FY Mar 2016-1H FY Mar 2017, Mizuho FG's annualised return on assets remained low at 0.4 per cent, mainly attributable to its thin margin of just 0.5 per cent.
Notably, Mizuho FG's fully loaded common equity tier-1 capital ratio is low relative to its global peers, including large domestic banks. As at end-September 2016, the Group's Basel III fully loaded common-equity tier-1 capital ratio, which fully accounts for unrealised gains on securities, stood at 11.0 per cent. Excluding the unrealised gains, which are subject to market fluctuations, this ratio would ease to a moderate 9.1 per cent.