Moody's affirmed the ratings of the three Japanese megabanks and placed on review for downgrade MUFG Bank Ltd.'s "a3" baseline credit assessment and adjusted baseline credit assessment.
Moody's said Aug. 28 that it affirmed the A1 long-term senior unsecured debt and deposit of the three megabanks — Sumitomo Mitsui Financial Group Inc., Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. The affirmations reflect Moody's assessment that the Japanese government will provide support to the banks in times of stress given their importance to Japan's financial system.
However, there are challenges facing the three banks. Net interest margins will remain pressured amid the country's ultralow interest rate environment. The three megabanks' profitability will also remain negatively affected by investment in technology and process re-engineering, Moody's said.
MUFG Bank's BCA and adjusted BCA were placed on review for downgrade because its core earnings profile may no longer be consistent with its current BCA. The bank has not been building its capital as rapidly as its competitors.
Moody's affirmed the Sumitomo Mitsui Banking Corp, Mizuho Bank Ltd., and MUFG Bank's A1 long-term and Prime-1 short-term deposit ratings, with stable outlooks.
The three megabanks' ratings are unlikely to be upgraded as they are already at the same level as the government's sovereign rating. The rating review will focus on MUFG's plan to boost earnings streams. A BCA and adjusted BCA is likely if Moody's believes it will be difficult for the bank to stabilize its earnings without material reliance on realized gains from its equity holdings.
The ratings of Mizuho and SMFG could be downgraded if the banks undertake acquisitions that increase their overall risk profile or if the core profitability continues to decline. A ratings downgrade may also occur if Japan's sovereign rating is downgraded or if there is a reduction in Moody's assumption of government support.
