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RPT-Fitch Affirms Japan's Shizuoka Bank at 'A'; Suruga Bank at 'A-'
July 22, 2014 / 6:52 AM / 3 years ago

RPT-Fitch Affirms Japan's Shizuoka Bank at 'A'; Suruga Bank at 'A-'

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July 22 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Japan-based Shizuoka Bank, Ltd.’s (Shizuoka) and Suruga Bank Ltd.’s (Suruga) Long-Term Issuer Default Ratings (IDR) at ‘A’ and ‘A-', respectively. The Outlooks are Stable. A full list of the rating actions is provided at the end of this rating action commentary.

KEY RATING DRIVERS - VIABILITY RATING (VR) AND IDRs

The IDRs of Shizuoka and Suruga are driven by their VRs. Like major banks in Japan, most regional banks remain exposed to a challenging operating environment with uncertainties over the sustainability of Abenomics. Nevertheless, the Stable Outlook for both banks’ IDRs reflects their resilient financial profile underpinned by adequate risk controls.

Shizuoka’s VR (‘a’) reflects its sustained strong capitalisation (Fitch Core Capital ratio of 17.3% at end-March 2014), leading franchise in the regional economy of Shizuoka Prefecture and potential buffer against credit risk through a high level of guarantee/collateral coverage, including public guarantees. Suruga’s VR (‘a-') continues to factor in decent profitability by Japanese standards (ROA at 0.7% compared with mega banks’ average of 0.5% for the year ended March 2014) and consistent internal capital generation.

Funding and liquidity remain key positive features of the Japanese banking system and also are the major drivers for the two banks’ ratings. Constraining factors for Shizuoka’s ratings include its limited options for diversification in its revenue base, which currently relies on lending in the Shizuoka Prefecture.

Suruga’s ratings are constrained by a lack of diversification as a result of concentration in retail lending and its small asset size (consolidated total assets of JPY4trn compared with Shizuoka’s JPY11trn at end-March 2014).

RATING SENSITIVITIES - VR AND IDRs

A positive rating action for Shizuoka is unlikely given Japan’s sovereign rating is at ‘A+', with a Negative Outlook.

For Suruga, positive action would likely stem from further structural improvement in the domestic operating environment leading to stronger loan growth and faster internal capital generation without a material increase in risk appetite. However, Fitch believes such structural improvement to be remote. For both banks, substantial deterioration in the operating environment resulting in greater volatility in performance, including through taking more risk to offset the impact of the operating environment, could exert negative pressures on the VRs and IDRs. This would include larger exposure to market risk, which is currently viewed as manageable.

KEY RATING DRIVERS -SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

Both banks’ SRs and SRFs are affirmed on the basis that the Japanese government’s propensity to support the domestic banking sector remains unchanged.

Shizuoka’s SR and SRF reflect Fitch’s belief that the government’s propensity to support, if necessary, is strong. On the other hand, the propensity to support Suruga may be limited given the bank’s marginal systemic importance within Japan’s financial system and its small operational size.

RATING SENSITIVITIES - SR AND SRF

Shizuoka’s SR of ‘2’ and SRF of ‘BBB-’ are sensitive to changes to Japan’s sovereign rating, which underlines its ability to support the bank. Fitch expects the bank’s SR and SRF to be maintained, even if the sovereign’s rating is downgraded to ‘A’. This is based on Fitch’s belief that the government’s propensity to support Shizuoka, if necessary, remains strong. On the other hand, Suruga’s SR and SRF are not immediately sensitive to the sovereign rating, given the limited probability of support.

FULL LIST OF RATING ACTIONS

Shizuoka:

- Long-Term Foreign and Local Currency IDRs affirmed at ‘A’; Outlook Stable

- Short-Term Foreign and Local Currency IDRs affirmed at ‘F1’

- Viability Rating affirmed at ‘a’

- Support Rating affirmed at ‘2’

- Support Rating Floor affirmed at ‘BBB-’

Suruga:

- Long-Term Foreign and Local Currency IDRs affirmed at ‘A-'; Outlook Stable

- Short-Term Foreign and Local Currency IDRs affirmed at ‘F1’

- Viability Rating affirmed at ‘a-’

- Support Rating affirmed at ‘4’

- Support Rating Floor affirmed at ‘B’

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