Oct 26 -
Summary analysis -- Chiba Bank Ltd. ------------------------------- 26-Oct-2012
CREDIT RATING: A/Stable/A-1 Country: Japan
Primary SIC: Commercial banks,
Mult. CUSIP6: 167071
Credit Rating History:
Local currency Foreign currency
19-Mar-2007 A/A-1 A/A-1
20-Jan-2005 A-/A-2 A-/A-2
The stable outlook reflects our projection that, under our base-case scenario, Chiba Bank will be able to manage its potential credit risk and keep its financial profile commensurate with the current ratings over the coming 18 months or so. Standard & Poor’s Ratings Services believes that the bank’s resilience against domestic economic volatility is relatively high, given its solid business performance in the past and leading position in its home market of Chiba Prefecture. Our base-case scenario for Chiba Bank incorporates the risk that its nonperforming loan (NPL) ratio could increase about one percentage point due mainly to the upcoming expiration of the government’s financial support measures for small to midsize enterprises (SMEs). On the other hand, we expect the bank’s profitability to remain moderately weak in the medium term as Chiba Bank’s interest margins are declining, along with those of other regional banks.
The outlook is stable because, under our rating criteria, if the likelihood of extraordinary government support is “moderately high,” the entity will not be directly affected by the negative outlook on Japan (AA-/Negative/A-1+) under a combination of ‘a’ stand-alone credit profile (SACP) and the current ‘AA-’ sovereign rating on Japan.
We may raise the SACP and thereby the ratings if our assessment of the bank’s capitalization or earnings improves. More specifically, we may consider an upgrade if we expect the bank’s risk-adjusted capital (RAC) ratio to steadily exceed 10% or if its profitability improves beyond our assumptions due to an increase in lending volume or wider interest margins. Conversely, we may consider a downgrade if we revise downward our assessment of the bank’s capitalization or risk position, although we see this is an unlikely scenario at this point. Specifically, for example, we may consider a downgrade if the bank’s RAC ratio falls below 7% or if its credit cost ratio rises far beyond our assumption.
Standard & Poor’s bases its ratings on Chiba Bank on the company’s “adequate” business position, “adequate” capital and earnings, “strong” risk position, “average” funding, and “strong” liquidity. The SACP on Chiba Bank is ‘a’.
Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank’s anchor SACP, the starting point in assigning an issuer credit rating (ICR). Our anchor SACP for a bank operating only in Japan is ‘a-'.
The BICRA score is first informed by our evaluation of economic risk. We view Japan as a developed and diverse economy with strong net external balance, which offsets the high level of government debt, and limited fiscal flexibility. With regard to industry risk, the banking sector is underpinned by a high and stable share of core deposits in funding and prudent regulatory monitoring. On the other hand, we consider the banking sector as fragmented with overcapacity, and those factors are evidenced by generally low earnings capacity.
Standard & Poor’s assesses Chiba Bank’s business position as “adequate.” The bank is supported by a solid customer base in its home market in Chiba Prefecture. Its total assets on a consolidated basis stood at JPY10.9 trillion as of March 31, 2012. That is the largest amount among banks headquartered in the prefecture, ranking the bank second among 64 regional banks in Japan (stand-alone banks, excluding bank holding companies). The bank has leading shares in both loans and deposits at 39% and 24%, respectively, as of March 31, 2011. Its share in loans, in particular, exceeds the share of the second-largest bank in Chiba Prefecture, whose prefectural GDP is almost equal to the GDP of Singapore, by a large extent. Meanwhile, as Chiba Prefecture adjoins Tokyo, major banks also aggressively promote their businesses in the prefecture, creating intense competition. The bank’s customer base is limited in comparison with the entire Japanese market, and its business franchise is highly concentrated geographically. The bank maintains a conservative management policy, focusing on retail loans to small and midsize enterprises (SMEs) and residential loans.
Chiba Bank’s capital and earnings are “adequate” based on our expectations that the RAC ratio will remain at about 10.0% over the next 18 months, which is average relative to its high ratings. Although an increase in its outstanding loan balance has pushed up the bank’s risk asset volume, Chiba Bank’s capital ratio is still improving, thanks to its efforts to reduce risk assets, such as domestic stocks, while accumulating profits. With respect to earnings, however, the bank’s net core operating profit--a financial measure to indicate its fundamental earnings capacity--may inch down in the foreseeable future. This indicates that the bank’s interest margins are declining due to fierce competition, despite its increasing balance of outstanding loans.
The SME Financing Facilitation Act, which has supported the credit quality of SMEs, is due to expire in March 2013. As loans to SMEs generally account for a high percentage of regional banks’ total lending, Chiba Bank’s NPL ratio may also increase to some extent, thereby pushing up the bank’s credit costs in the next 18 months or so. Our base-case scenario for Chiba Bank incorporates the risk that its NPL ratio could increase about one percentage point, mainly due to the expiration of the SME Financing Facilitation Act. Taking into account the bank’s high coverage ratio of NPLs, under our base-case scenario, we believe that incremental credit costs would be limited.
Nevertheless, Chiba Bank’s asset quality could weaken further. The earnings of its corporate borrowers could deteriorate if growing uncertainties in the global economy significantly slows domestic growth. In particular, Standard & Poor’s will closely monitor how changes in economic conditions would affect the bank’s asset quality. This is because SMEs are regional banks’ core customers and they are more susceptible to changes in economic conditions than big corporations.
Our risk position assessment for Chiba Bank is “strong.” We expect the bank to maintain a sound risk management system. The risk position and risk asset volume in its loan portfolio are unlikely to change materially for the next one to two years, in our view. The ratio of NPLs to total loans, net of loan loss provisioning, stood at 1.5% as of March 31, 2012, which shows the bank’s NPLs are manageable.
During the past five years, Chiba Bank’s credit cost ratios once rose beyond our normalized loss ratio in the period following the failure of Lehman Brothers Holdings Inc. (fiscal 2008, ended March 31, 2009). Nevertheless, its lending portfolio, which consists mainly of diversified, small-lot loans to SMEs and mortgage loans to individual customers, remains generally stable compared with major banks. The bank focuses mainly on the commercial banking business and its loan portfolio consists of diversified, small-lot credits, and thus, the degree of operational complexity is low. In addition, in an effort to curb stock price fluctuation risk, it has reduced the outstanding balance of stocks and equity-related investment trusts. We see this as a positive factor in our assessment of the bank’s risk position. In recent years, however, Chiba Bank’s bond investments have increased, along with rising deposits. As a result, the bank’s interest risk volume relative to its Tier 1 capital and core profits has become large by international comparison. This has made the bank’s financial profile more susceptible to interest rate fluctuations, in our view.
Chiba Bank’s funding is “average” and its liquidity is “strong,” in our opinion. The bank’s main funding source is its deposit base, which is diversified into small lots. It maintains a high level of deposits, backed by its strong customer base. All of its lending is funded by customer deposits, with its loan-to-deposit ratio standing at 78% as of the end of March 2012. As such, the bank is not directly affected by changes in the market funding environment. The outstanding balance of corporate bonds that the bank has issued for funding is limited at JPY40 billion, which is equivalent to about 0.4% of the total deposits. Its surplus funds have largely been appropriated to relatively highly liquid assets such as Japanese government bonds and local municipal bonds. Individual deposits, which consist of small-lot deposits from various customers, account for more than 70% of the total deposits, underpinning the stability of the bank’s deposit base.
Chiba Bank has “moderate” systemic importance in Japan, according to Standard & poor’s assessment. We assess the Japanese government as “highly supportive” of domestic private banks. Based on these, we assess the likelihood of the government providing Chiba Bank with extraordinary support in a time of need as “moderately high” (second in a scale of four).
Our assessment is based on the bank’s position in the domestic market, Japan’s legal framework of the government support for domestic banks, including the capital injection scheme, and the government’s track record of providing support for regional financial institutions. Nevertheless, the counterparty credit rating on Chiba Bank is ‘A’, which is on par with the bank’s SACP, even after factoring government support into the rating. This is because Chiba Bank’s current SACP is only two notches lower than the current ‘AA-’ sovereign rating on Japan, which leaves limited room for a notch-up for government support. Under our rating criteria, if the likelihood of extraordinary government support is “moderately high,” no notch-up is incorporated into the rating for a combination of ‘a’ SACP and the current ‘AA-’ sovereign rating on Japan.
Related Criteria And Research
Banks: Rating Methodology And Assumptions, Nov. 9, 2011
Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011