(The following statement was released by the rating agency)
Aug 31 -
Summary analysis -- Daiwa Securities Group Inc. ------------------- 31-Aug-2012
CREDIT RATING: BBB/Negative/A-2 Country: Japan
Primary SIC: Holding
Mult. CUSIP6: 234064
Credit Rating History:
Local currency Foreign currency
11-Sep-2009 BBB/A-2 BBB/A-2
07-Sep-2005 BBB+/A-2 BBB+/A-2
Standard & Poor’s Ratings Services’ ratings on Daiwa Securities Group reflect the group’s solid customer base and diverse revenue sources in Japan’s retail and wholesale securities markets. They also reflect its adequate capitalization and good-quality capital, as well as a sound level of risk assets in relation to capitalization. On the other hand, the ratings are constrained by a lack of stability in the group revenue base, which is vulnerable to fluctuations in the domestic securities market, and continued weakness in its profitability due to a cost structure that fails to maintain stable profits.
In recent years, Daiwa Securities Group’s earnings have been weak. We hold the view that it is key for Daiwa to maintain stable profits that are resistant to market volatility. Daiwa Securities Group posted consolidated net losses in fiscal 2010 (ended March 2011) and in fiscal 2011 (ended March 2012). The group engages in the retail, wholesale, asset management, and investment banking businesses through its operating subsidiaries, including its main operating subsidiary Daiwa Securities Co. Ltd.(Daiwa Securities; BBB+/Negative/A-2). On a consolidated basis, the group is the second-largest among Japanese brokerage firms in terms of customer assets under management. Nevertheless, we have seen fluctuations in the group’s earnings because they are susceptible to volatility in the securities market, especially in the wholesale business. The earnings are also exposed to high correlation among its core businesses. The group, in particular its wholesale business, has been struggling after the global financial crisis, and it has posted losses due to weak revenues. It has implemented a plan to cut costs by JPY60 billion and increase revenues by JPY40 billion by the end of fiscal 2014 (ending March 31, 2015). It aims to bring its cost structure in line with its revenues. However, the outlook for securities markets remains unclear, in our view, and markets are likely to take time to fully recover. Therefore, securing stable profits is likely a key factor for the group to maintain its current level of credit quality.
In Standard & Poor’s view, the group’s major market and credit risks include those related to its trading and underwriting businesses, principal investments, and shares that Daiwa Securities Group Inc. holds for strategic investment purposes. The majority of the group’s trading and underwriting exposures consist of intermediary services for clients, which are mainly short-term holdings. Structured bonds issued for the purpose of retail sales are exposed to risks related to counter positions against currency and interest rate fluctuations, sometimes for relatively long periods of time when such bonds are held by customers. The group has generally hedged its exposure to intermediary services for clients. However, risks partly emerged after the financial crisis in late 2008, as the group was unable to effectively exercise hedges while volatility rose above expectations, or because hedging costs sharply rose. The positions that were not hedged are now subject to direct risks relating to currency and interest rates. As such, risks will emerge when market conditions turn negative in relation to the group’s positions.
The group maintains an adequate level of capitalization, in our view. Its consolidated Tier 1 capital ratio, under Basel requirements, stood at 25.4% as of March 31, 2012. Its asset quality is high, as it does not issue preferred securities.
The counterparty credit rating on Daiwa Securities is one notch higher than its stand-alone credit profile (SACP) of ‘bbb’. Based on our assessment, we believe that there is moderate likelihood that Daiwa Securities would receive extraordinary support from the government by means of special liquidity injections under the Bank of Japan (BOJ) Act or through other tailored assistance in an event of distress.
The rating on Daiwa Securities Group is one notch lower than the rating on its core subsidiary, Daiwa Securities, reflecting the holding company’s structural subordination. If the financial conditions of Daiwa Securities deteriorate--for example, if its regulatory capital adequacy ratio falls below required levels--regulators may restrict the dividend payments that the subsidiary can make to the holding company.