Moody's lowered the outlook on Chugoku Bank Ltd.'s deposit and issuer ratings to negative from stable.
The rating agency said March 14 that the lowered outlook on Chugoku Bank's ratings reflects the risk of a further decline in its capitalization as a result of continued growth in risk-weighted assets, which could potentially weaken its financial profile.
Meanwhile, the rating agency affirmed the bank's long-term issuer rating at A1, as well as its long- and short-term bank deposit ratings at A1 and P-1, respectively. The bank's baseline credit assessment and adjusted baseline credit assessment were also both affirmed at "a3."
The rating agency said the ultralow interest rate environment has resulted in negative pressure on the bank's profitability, prompting the lender to rapidly increase loans and reduce investments in Japanese government bonds.
As risk weights assigned to loans are higher than the risk weight assigned to Japanese government bonds, the bank's tangible common equity-to-risk-weighted assets ratio declined to 10.3% as of the end 2017 from 11.0% at the end of March 2016, Moody's said.
The rapid increase in loans is credit negative and could undermine the bank's historically strong asset performance track record, the rating agency said. It added, however, that to date, the bank's asset-risk profile remains strong despite the high loan growth and there are currently no signs of asset deterioration.
The rating agency said that an upgrade of the bank's ratings is unlikely given the negative outlook and the fact that the lender's long-term rating is at the same level as Japan's sovereign rating.
The outlook on Chugoku Bank's ratings could be raised to stable if it can preserve its current capitalization, while also maintaining its asset quality and solid liquidity profile.
A downgrade of the bank's ratings could result from failure to maintain a tangible common equity-to-risk-weighted assets ratio of 10%, signs of asset-quality deterioration, a sustained deterioration in the bank's profitability and a downgrade of Japan's sovereign rating, Moody's said.
It added that a weakening of the bank's liquidity profile through increased reliance on market funds or investments in less liquid assets could also lead to a downgrade.
