Fitch Rates SMFG's USD Basel III Tier 2 Bonds Final 'BBB'

Fri Mar 28, 2014 12:13am EDT

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(The following statement was released by the rating agency) TOKYO, March 27 (Fitch) Fitch Ratings has assigned a final rating of 'BBB' to Sumitomo Mitsui Financial Group Inc.'s (SMFG; A-/Stable) USD-denominated Basel III-compliant Tier 2 subordinated bonds (Tier 2 bonds), which SMFG plans to issue on 2 April 2014. The USD1.75bn Tier 2 bonds carry a fixed coupon of 4.436% annually and are scheduled to mature on 2 April 2024. The Tier 2 bonds will constitute direct and unsecured obligations of SMFG and rank pari passu among themselves equally with all of its indebtedness which is subordinated to senior indebtedness. The proceeds will be used as a subordinated loan to its core banking subsidiary, Sumitomo Mitsui Banking Corporation (SMBC; A-/Stable). The Tier 2 bonds include a non-viability clause and will qualify as Tier 2 capital for SMFG. For SMBC, the subordinated loan from SMFG will qualify as Tier 2 capital. KEY RATING DRIVERS The Tier 2 bonds are notched twice from SMFG's anchor rating to reflect the prospect of full and permanent write-down of the securities upon SMFG reaching the point of non-viability (PONV). As SMFG is considered a systemically important financial institution in Japan, the anchor rating - which best reflects non-performance risk - will be the higher of its Viability Rating (VR) or support-driven Long-Term Issuer Default Ratings (IDRs). SMFG's Long-Term IDRs are currently driven by its VR, which reflects the group's sound asset quality, solid liquidity in yen and consistent improvement in the risk absorption capability. That said, the VR is presently at the same level as the Support Rating Floor (SRF) at 'A-'. No further notching for non-performance risk applies for the Tier 2 bonds in the absence of any more easily hit triggers that would result in coupon deferral. Under Fitch's methodology the instrument would not qualify for any equity credit. RATING SENSITIVITIES The rating of the Tier 2 bonds would be directly affected by changes to the anchor rating, the higher of SMFG's VR or support-driven IDRs. An upgrade of the VR of SMFG would result in an upgrade of the rating of the Tier 2 bonds. Any positive action on the VR of SMFG would likely stem from further structural improvement in the domestic operating environment leading to stronger loan growth, accelerated internal capital generation without a material increase in risk appetite, and higher absorption buffers. A downgrade of SMFG's VR would not affect the rating of the Tier 2 bonds because SMFG's IDRs would then be underpinned by its 'A-' SRF. Fitch believes that support can be factored into such instrument ratings because under Japan's Deposit Insurance Law, when a serious systemic disruption is anticipated, the government can pre-emptively provide financial assistance to a solvent bank holding company (Specified Measure 1 of Article 126-2, or Measure 1 of Article 102). The PONV trigger is fully contractual and explicitly refers to a particular event; when the authorities are required to take actions under Specified Measure 2 of Article 126-2 (financial assistance necessary for winding down an insolvent financial institution). However, changes in the resolution framework that increases the risk of the PONV being triggered or changes in assessment of SMFG's systemic importance that reduce the likelihood of pre-emptive support would lead to a downgrade of SMFG's SRF - and potentially the Tier 2 bonds. Japan's sovereign rating (A+/Negative) being downgraded to below 'A' would also result in a lower SRF. Contact: Primary Analyst Miki Murakami Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Secondary Analyst Chikako Horiuchi Director +852 2263 9924 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014 and "Assessing and Rating Bank Subordinated and Hybrid Securities Criteria", dated 31 January 2014, are available at www.fitchratings.com. Related Research "Applying Fitch's Criteria to Japanese FIs' Basel 3 Capital Instruments" (26 June 2013) Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Applying Fitch's Criteria to Japanese FIs' Basel 3 Capital Instruments here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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