TEXT-S&P Revises Outlook On Japan's Shinsei Bank To Stable
(The following was released by the rating agency)
-- Standard & Poor's sees an improved balance between Shinsei Bank's risk volume and capital and earnings, thanks to accumulated retained earnings and reduction in risk assets.
-- The bank's revenue base has been stabilizing as its risk of incurring a large amount of nonrecurring losses arising from its consumer finance and real estate nonrecourse finance businesses has been receding.
-- We are revising the outlook to stable from negative and affirming the long-term counterparty credit rating on the bank at 'BBB+'.
-- We are raising by one notch to 'BB+' the debt rating on the bank's perpetual subordinated bonds and upgrading its preferred securities by three notches to 'BB'.
TOKYO (Standard & Poor's) Dec. 14, 2012--Standard & Poor's Ratings Services today revised to stable from negative its outlook on the long-term counterparty credit rating on Shinsei Bank Ltd., following our revision of the bank's stand-alone credit profile (SACP) to 'bbb'.
The SACP excludes the likelihood of government extraordinary support. The SACP revision is based on our view that the balance between the bank's risk volume and capital and earnings has improved, thanks to a reduction in risk assets resulting from improved asset quality and accumulated retained earnings.
At the same time, we raised the debt rating on the bank's perpetual subordinated debt by one notch to 'BB+' from 'BB' and upgraded the preferred securities by three notches to 'BB' from 'B'. In addition, we affirmed the 'BBB+' long-term and 'A-2' short-term counterparty credit ratings on Shinsei Bank, the 'BBB+' debt rating on its long-term senior bonds, and the 'BBB' debt rating on its dated subordinated bonds.
Our outlook revision is based on a change in our assessment of Shinsei Bank's capital and earnings to "adequate" from "moderate" and an upward revision of the bank's SACP to 'bbb' from 'bbb-'. Previously, the outlook on the long-term counterparty credit rating on the bank reflected that on the long-term sovereign rating on Japan (AA-/Negative/A-1+).
However, with Shinsei Bank's current 'bbb' SACP and our assessment of its "moderately high" likelihood of extraordinary government support in a time of need, the outlook on the bank is not directly affected by that on the sovereign rating on Japan. The long-term counterparty credit rating on the bank is one notch higher than the SACP because it takes into account the likelihood of extraordinary government support.
For the past several years, Shinsei Bank's revenues were squeezed by credits costs due to factors including weak real estate market conditions and deterioration in the consumer finance industry. However, we believe the bank's revenues have become more stable and it now faces a lower risk of incurring material losses. The consumer finance market has also shown signs of stabilizing and the bank has made progress in disposing of nonperforming loans.
In the first half of fiscal 2012 (April 1 to Sept. 30, 2012), Shinsei Bank posted a JPY4.7 billion nonrecurring loss arising from impairment losses on real estate nonrecourse finance and other factors. The losses, including refunds of overcharged interest in its consumer finance business, have decreased substantially from a half-year average of JPY30.9 billion for the past two years.
In addition, the balance between its risk volume and capital and earnings has been improving due to a reduction in risk assets, such as securitized products, in our view. We expect the bank's risk-adjusted capital (RAC) ratio, which we view as a key indicator of credit quality, to be at mid-7% in the next 12 to 18 months.
We upgraded Shinsei Bank's preferred securities to 'BB' from 'B' because we revised upward the SACP and narrowed the degree of notch-down in the rating on the preferred securities from the SACP to three notches from five notches. This was based on our view that the bank now faces a lower risk of running short of distributable reserves to make dividend payments, thanks to accumulated profits and a lower risk of losses.
Previously, the degree of notch-down in the rating on Shinsei Bank's preferred securities from its SACP was greater than that of the general preferred securities issued by other Japanese banks because Shinsei Bank's distributable reserves, which could be a trigger to defer its dividend payments, were limited. Meanwhile, the notch-down in the rating on the bank's perpetual subordinated debt remains unchanged.
However, we raised the debt rating on the perpetual subordinated debt to 'BB+' from 'BB' in tandem with the upward revision of the SACP. The stable outlook reflects our view that the bank will maintain its credit quality at a level commensurate with the current rating in the medium term. We may consider lowering the ratings if the bank's risk assets increase at a faster pace than our assumptions and the likelihood of the RAC ratio falling below 7% heightens due to a delay in capital accumulation through earnings.
If we see a higher likelihood of deterioration in the bank's financial performance that exceeds our assumptions due to material losses from worsening business conditions, that could also be a downgrade trigger for the bank. Conversely, we may upgrade the bank if we believe it has further strengthened its capitalization, which could be indicated by a rise in its RAC ratio to over 10%.
We may also consider an upgrade if it improves its risk position. Specifically, the ratings may get a boost if the bank's credit concentration continues to improve while its credit costs continue to fall below the normalized losses that Standard & Poor's has calculated in its RAC framework.