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Japan's Aozora Bank Outlook Revised To Negative From Stable On Bond Losses; 'BBB+/A-2' Ratings Affirmed

  • Aozora Bank's profitability relative to risks, together with its loss absorbing capacity, is likely to remain under pressure due to lower tolerance to market risk taking.
  • Meanwhile, the bank maintains its profitability relative to risks of its operations other than its market segment.
  • We revised to negative from stable our outlook on the bank. At the same time, we affirmed our 'BBB+' long- and 'A-2' short-term ratings on it.

TOKYO (S&P Global Ratings) March 17, 2023--S&P Global Ratings today said it has revised to negative from stable the outlook on its long-term issuer credit rating on Japan-based Aozora Bank Ltd. We also affirmed our 'BBB+' long-term issuer credit and senior unsecured debt ratings and our 'A-2' short-term issuer credit rating on the bank.

The downward revision of the outlook reflects our view that reduced tolerance to market risk taking produces about a one-in-three chance that Aozora Bank will fail to maintain its risk-adjusted capital (RAC) ratio, as S&P Global Ratings defines it, above 7% in a stable manner for the next two years. It also reflects our view that it will not regain higher profitability relative to risks than its domestic peers during the same period.

We expect Aozora Bank to continue to suffer unrealized losses on securities holdings for the foreseeable future. The bank has written off large unrealized losses on foreign bond positions arising from a sharp rise in U.S. interest rates and other factors in fiscal 2022 (ending March 31, 2023). The bank has subsequently lowered the estimated earnings of its market segment for fiscal 2022. As of the end of December 2022, it had about ¥70 billion in unrealized losses on securities holdings on a pretax basis, equivalent to about ¥76 billion of consolidated gross operating profit that its market segment generated over the previous three years.

Nevertheless, the bank has already fixed and reduced its unrealized losses as well as its exposure to market risk using hedging (The bank estimates it will still have about ¥50 billion in unrealized losses at the end of fiscal 2022.). From March 31, 2022, to Dec. 31, 2022, the bank's market risk as measured by value at risk (VaR) declined to ¥2.6 billion from ¥8.8 billion, and the impact of a 10 basis point value (10BPV) rise in U.S. interest rates improved to +¥100 million from -¥2.9 billion.

Any remaining unrealized losses will likely continue to reduce the bank's tolerance to market risk taking and depress earnings, in our view. Furthermore, realization of losses on its securities, and also of its costs of foreign currency funding continuing to exceed investment returns on foreign bonds, may reduce the bank's profitability. Market operations had supported the bank's relatively high profitability. In the past three years, profit from such operations comprised about 26% on average of the bank's consolidated gross profit. However, Aozora Bank expects its market operations made ¥16 billion in losses in fiscal 2022, mainly due to realized losses from sales of bonds. Meanwhile, the bank estimates it will achieve ¥62 billion in overall consolidated gross profit.

We expect dividend payouts will remain high regardless of a decline in earnings capacity and slowing accumulation of retained earnings. On the other hand, we think the bank has no choice but to somewhat limit an increase in risk for now to maintain a certain level of financial soundness. We had previously believed Aozora Bank was highly likely to maintain higher profitability than other domestic banks, a certain size of earnings base, and adequate capital. However, a likely further decline in profitability will likely weaken the basis for such views.

Aozora Bank continues to conduct risk management and maintain profitability of business units other than its market segment, in our view. For instance, its corporate lending in the U.S. and its real estate nonrecourse loans have performed well. We will closely watch measures the bank takes to improve profitability relative to risks in its next medium-term management plan, due to be announced in fiscal 2023, and the feasibility of such measures.

We may consider downgrading Aozora Bank if any of the following cases emerge in the next one to two years:

  • We conclude the bank's profitability relative to risks and its stability are unlikely to exceed those of other domestic banks in the next two to five years;
  • The bank's RAC ratio stays below 7% continuously; or
  • The bank's funding capability declines, in our view, due to deterioration in its financial environment and other factors.

Conversely, we may consider an upgrade if we believe the bank's profitability relative to risks is highly likely to recover to its previous level of strong compared with peers and to remain stable and, at the same time, its RAC ratio is highly likely to stay over 7% consistently.

Related Criteria

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on S&P Global Ratings' public website at Use the Ratings search box located in the left column.

Primary Credit Analyst:Eiji Kubo, Tokyo + 81 3 4550 8750;
Secondary Contact:Chizuru Tateno, Tokyo + 81 3 4550 8578;

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