Outlooks On Sumitomo Mitsui Financial Group And Operating Banks Revised To Ratings Affirmed

Stocks and Financial Services Press Releases Tuesday November 29, 2016 16:40
TOKYO--29 Nov--S&P Global Ratings

TOKYO (S&P Global Ratings) Nov. 29, 2016--S&P Global Ratings today said it has revised the outlooks on its long-term counterparty credit ratings on Sumitomo Mitsui Financial Group Inc. (SMFG) and its core banking subsidiaries, including Sumitomo Mitsui Banking Corp., to positive from stable. At the same time, we have affirmed our counterparty credit and debt ratings on these entities (see list below). As a result of the positive revisions to the outlooks on our global scale ratings on these entities, we have raised our long- and short-term Greater China regional scale ratings on Sumitomo Mitsui Banking Corp. (China) by one-notch to 'cnAAA/cnA-1+' from 'cnAA+/cnA-1'.

The outlook revisions reflect our view that SMFG will continue to improve its capital level relative to risk-weighted assets (RWAs) over the medium term. We see a one-in-three chance of raising our ratings by one notch in the next two years, primarily owing to an upward revision of our assessment of SMFG's   capital and earnings.

The group's risk-adjusted capital (RAC) ratio stood at 7.3% as of end-March 2016 and has steadily improved from less than 6% five years ago, mainly due to accumulation of retained earnings. The group is currently aiming to moderate the growth of assets by reducing its strategic shareholdings by ¥500 billion over the next five years and strengthening its capability to conduct syndications of overseas assets with other financial institutions. We also expect SMFG to grow RWA modestly because of constraints from Basel banking regulatory requirements and SMFG's limited capacity to take on foreign currency funding.

On the other hand, we see some risk factors constraining the group's credit quality, such as a downward pressure from economic risk in Japan's banking sector and SMFG's large amount of market risk relative to global peers. If we revise Japan's economic risk score in our Banking Industry Country Risk Assessment (BICRA) of the country's banking sector, SMFG's RAC ratio, and those of its domestic peers, would likely deteriorate as a result of our application of higher risk weights for domestic assets. The amount of SMFG's RWAs may also fluctuate due to the group's exposure to stock price volatilities, because the group's market risk, including equity exposures in the banking book, comprises more than 20% of its overall RWAs. In addition, our assessment of the group's weighted-average economic risk may worsen if it increases its exposure to countries and regions with higher economic risk than Japan.

We would upgrade SMFG and its core banking subsidiaries as a result of revising our capital and earnings assessment upward if we believe the group will maintain an RAC ratio of 7% or higher by increasing total adjusted capital and managing its RWAs over the medium term, despite some downside risk factors. On the other hand, we could revise our outlooks on SMFG and its core banking subsidiaries downward if we see the above risk factors reach certain thresholds, or if we revise our anchor for Japan's banking industry downward.

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