RPT-Fitch affirms Daiwa Securities Group's IDR at 'BBB+'; outlook stable

Mon Mar 25, 2013 2:58am EDT

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March 25 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Daiwa Securities Group Inc.'s (DSGI) and its principal operating subsidiary Daiwa Securities Co., Ltd.'s (Daiwa) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+'. The Outlook is Stable. A rating breakdown can be found at the end of this rating action commentary. Key Rating Drivers - VRs, IDRs and Senior Debt The IDRs are driven by their Viability Ratings (VR) which, in turn, reflects the group's strong retail operations and franchise in Japan, supported by solid capitalisation, modest risk appetite and Daiwa's consistent - albeit modest - profitability. Liquidity is also considered adequate, with borrowings largely secured, in addition to Daiwa Securities having access to the Bank of Japan's discount window in case of need. Today's rating affirmation takes into account the restructuring DSGI is implementing, which should lower the cost base, allowing the group to remain profitable even in a stressed operating environment as experienced in FYE09. Among the restructuring initiatives was the merger of wholesale and retail businesses into Daiwa. The overseas operation of the wholesale unit had primarily been responsible for the group's weak performance, which was exacerbated by the turmoil in European financial markets. The unit is now directly under DSGI after having been significantly downsized in the wake of the merger. DSGI is expected to post a profit in FYE13, after a net loss in FYE12, on account of a recovery in the Japanese market, which started in December 2012, and ongoing progress in its restructuring. The IDR of DSGI, the group's holding company, and that of 99.98%-owned Daiwa are equalised, as the latter is the core operating subsidiary of DSGI. Double leverage is within 100%. Fitch sees no impediment to Daiwa upstreaming dividend payout to DSGI if required. DSGI also has a profitable asset management subsidiary. The Stable Outlook reflects expectations that the group will maintain its strong franchise and benefit further from ongoing restructuring, including boosting earnings opportunities, particularly when the domestic operating environment improves. Rating Sensitivities - VRs, IDRs, Senior Debt, Support Ratings and Support Rating Floor The VRs, IDRs and senior debt ratings are sensitive to a change in Fitch's assessment of the market outlook, the group's growth strategies or DSGI's risk appetite. Positive rating action is unlikely over the medium term unless there is material improvement in the market environment on a sustained basis or a successful execution of growth strategies while maintaining cost control. On the other hand, negative ratings action may result from a severe deterioration in the market outlook or from an increase in management's risk appetite without a corresponding increase in mitigating factors. These, however, are not Fitch's base case scenario. The Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's current view of limited state protection for DSGI and its subsidiaries. This may change once Japan's Financial Services Agency (FSA) has finalised a new resolution mechanism for Japan's financial institutions, including financial conglomerate securities companies such as DSGI. However, Fitch is not yet in a position to assess how the FSA will design the resolution mechanism and how it could alter Fitch's expectations around timely support being made available to senior creditors of the issuers. The rating actions are as follows: Daiwa Securities Group Inc. Long-term Foreign and Local Currency IDRs affirmed at 'BBB+'; Outlook Stable Short-term Foreign and Local Currency IDRs affirmed at 'F2', Viability Rating affirmed at 'bbb+', Support Rating affirmed at '5', Support Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'BBB+'. Daiwa Securities Co., Ltd. Long-term Foreign and Local Currency IDRs affirmed at 'BBB+'; Outlook Stable Short-term Foreign and Local Currency IDRs affirmed at 'F2', Viability Rating affirmed at 'bbb+', Support Rating affirmed at '4', Support Floor affirmed at 'B', and Senior unsecured debt affirmed at 'BBB+'.

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