(The following statement was released by the rating agency)
Aug 29 - Standard & Poor’s Ratings Services said today that the ratings on Aozora Bank (A-/Stable/A-2) would not be immediately affected by the bank’s recapitalization plan--including installment repayments of public funds--which the bank announced Aug. 27. Aozora Bank intends to implement the plan, which includes repurchasing its common shares and increasing its dividend payout ratio, on the premise that the bank will obtain approval from relevant authorities and its shareholders at an extraordinary shareholders meeting scheduled in September.
Aozora Bank intends to first create a distributable amount that is sufficient for the full repayment of public funds. It will do this through capital reduction, which is to transfer capital to other capital surplus. The bank plans to make a partial JPY22.7 billion repayment of public funds (as preferred shares) within fiscal 2012 (ending March 31, 2013). It will do this after extending the conversion period of the preferred shares with a book value of JPY179.4 billion to June 2022. The bank plans to make annual installment repayments of public funds through an annual super preferred dividend payment of about JPY20.5 billion. The dividend payment will be paid from other capital surplus. It will be treated as a return of capital made by the issuer, and regarded as a repayment of public funds in Japan’s financial system. In addition, as measures to improve its stock valuation, Aozora Bank plans to repurchase 20% of its outstanding shares and, at the same time, raise the dividend payout ratio for common shares to 40% of its consolidated net income.
Standard & Poor’s usually regards Aozora Bank’s preferred shares as shares with minimal equity content. When we calculate Aozora Bank’s risk-adjusted capital (RAC) ratio, which we value for our rating analysis, we do not include such shares into its total adjusted capital (TAC), which is the numerator for calculating the RAC ratio. This is because we believe Aozora Bank is highly likely to repay the public funds, given that the bank considers the repayment of public funds as an important corporate imperative and it maintains a high Tier 1 capital adequacy ratio, which was 19.4% as of March 31, 2012.
Although we believe a repurchase of common shares and an increase in its dividend payout ratio may lower Aozora Bank’s RAC ratio, we still expect the bank to maintain its RAC ratio at over 7% in the next two years in our base-case scenario. Based on this, we take the view that the planned repurchase of common shares and dividend payout ratio hike do not have an immediate impact on our “adequate” assessment of Aozora Bank’s capital and earnings.
On the other hand, the ratings on Aozora Bank would be adversely affected if we see: a further decline in its equity capital due to an increased purchase price for its common shares, in tandem with a surge in its stock price; signs of difficulty for it to restore its capitalization in a short period, given that it is unable to accumulate retained earnings to its assumed level due to lower profitability; and a substantial decline in its capital level if its full repayment of public funds is completed earlier than planned.