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Dec 27 -
Summary analysis -- Hokkoku Bank Ltd. ----------------------------- 27-Dec-2012
CREDIT RATING: A/Negative/A-1 Country: Japan
Primary SIC: Commercial banks,
Credit Rating History:
Local currency Foreign currency
08-Dec-2011 A/A-1 A/A-1
08-Apr-2008 A-/A-2 A-/A-2
The negative outlook reflects Standard & Poor's Ratings Services' view that the long-term counterparty credit rating on Hokkoku Bank Ltd., which incorporates one notch of government support, would be lowered, should the sovereign rating on Japan (AA-/Negative/A-1+) be lowered. The outlook on the long-term sovereign rating on Japan is negative.
We may also consider lowering the rating if the bank's stand-alone credit profile (SACP) is revised downward. We could lower the SACP if we see the bank's risk-adjusted capital (RAC) ratio fall due to increased NPLs and losses undermining the bank's capital base, or if a decrease in lending and interest margins significantly weakens its profitability. Conversely, we may revise upward our outlook should the outlook on the sovereign rating on Japan be raised to stable or the SACP be revised upward. We may revise the SACP upward if we lift our assessments of the bank's risk position.
Standard & Poor's bases its ratings on Hokkoku Bank on the bank's "adequate" business position, "strong" capital and earnings, "moderate" risk position, "average" funding, "strong" liquidity, as well as a "moderately high" likelihood of extraordinary government support in a time of need. Hokkoku Bank's SACP, which excludes extraordinary government support, is 'a-'.
Our bank criteria use our Banking Industry Country Risk Assessment (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 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 Hokkoku Bank's business position as "adequate." The bank holds a strong customer base in its home market of Ishikawa Prefecture. Its total assets amounted to JPY3.4 trillion as of Sept. 30, 2012. That is a moderate amount among 64 regional banks in Japan, but the largest among banks headquartered in Ishikawa Prefecture. It boasts a 44% share of loans and a 32% share of deposits in Ishikawa Prefecture as of the end of March 2012, far ahead of the bank with the second-largest shares. In addition, Hokkoku Bank has been endeavoring to lift its shares in the markets of neighboring Toyama and Fukui prefectures, by marketing loans targeted toward large corporations and midsize blue-chip companies and housing loans. On the other hand, seen from the perspective of the overall domestic financial market, Hokkoku Bank's customer base appears limited and its business franchise shows high geographical concentration. The bank maintains a prudent and conservative management policy as a regional bank, focusing on retail loans, including loans for small and midsize enterprises (SMEs) and housing loans.
In our view, Hokkoku Bank's capital and earnings are "strong." We expect the bank's RAC ratio to hover around 11.0%-11.5% in the next 18 months, which is high in an international comparison. We see a possibility that the bank's profitability may decrease slightly. In the first half of fiscal 2012 (ended Sept. 30, 2012), net profits increased significantly from a year earlier as profit contribution from its bond trading business increased and credit costs shrank. On the other hand, the bank's core net operating profit, which is an indicator of basic profitability, decreased, as interest income decreased. The smaller interest income was mainly attributable to declines in yield on lending and investment securities. Revenues from the bank's core deposit-taking and lending businesses may come under downward pressure, because the bank faces sluggish demand for bank loans as well as the possibility of interest margins shrinking further due to fierce competition.
Our risk position assessment for Hokkoku Bank is "moderate." We do not expect the bank's risk position and risk assets, such as loans, to change significantly over the next 12 to 24 months. The bank's ratio of net nonperforming loans (NPLs) stood at 2.3% as of Sept. 30, 2012. We view this as a manageable level, although it is slightly high among the rated regional banks. In the past five fiscal years, Hokkoku Bank's annual ratio of credit costs exceeded our normalized loss ratio in fiscal 2008 (ended March 31, 2009) and fiscal 2009 (ended March 31, 2010), after the collapse of Lehman Brothers Holdings Inc.
The Small and Midsize Enterprises (SMEs) Financing Facilitation Act, which has bolstered the credit quality of SMEs, is set to expire in March 2013. Given that loans to SMEs generally account for a high percentage of credit extended by regional banks, the banks' NPL ratios may increase to some extent, in our view. Our base-case scenario for Hokkoku bank incorporates the risk that the NPL ratio may increase about one percentage point, mainly due to the expiration of the SME Financing Facilitation Act. Under our base-case scenario, we believe that incremental credit costs will be limited, taking into account the bank's coverage ratio of NPLs. Nevertheless, the bank's asset quality could deteriorate further if growing uncertainties in the global economy significantly slows domestic economic growth and erodes the earnings of its corporate borrowers. In addition, the bank's interest rate risk volume relative to its Tier 1 capital and core profits is large compared with its international peers, given that, like its domestic peers, the bank increased its bond investments in recent years as deposits rose. This has made the bank's financial profile more susceptible to interest rate fluctuations, in our view.
Hokkoku Bank's funding is "average" and its liquidity position is "strong," in our opinion. The bank owns a stable core deposit base, which is diversified into small lots, backed by its strong position in the markets where it operates. Nevertheless, Hokkoku Bank's deposit and funding bases are weaker than those of the major banks, which have extensive operations in the domestic market. As such, Standard & Poor's considers Hokkoku Bank's deposit and funding bases as average among domestic banks, including megabanks. Conversely, we assess the bank's liquidity as "strong," as evidenced by its low loan-to-deposit ratio, standing at 78% as of Sept. 30, 2012. Furthermore, the bank's highly liquid assets, including Japanese government bonds, cash, and deposits, substantially exceed outstanding short-term funding.
The long-term counterparty credit rating on Hokkoku Bank is one notch higher than the SACP, reflecting our view that the bank is likely to receive extraordinary government support if necessary. Standard & Poor's determines the likelihood of government support based on the bank's systemic importance within the country where it is located, and the government's tendency to support private-sector banks. We assess Hokkoku Bank as one with "moderate" systemic importance in Japan, and we consider the tendency of the government as "highly supportive." As a result, we view the likelihood of government support to Hokkoku Bank as "moderately high," which is the second-highest assessment on a four-degree scale.
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
* BOJ kept policy steady this month, eyeing underlying inflation
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