Ratings On Japan Post Bank Outlook Remains Negative

Stocks and Financial Services Press Releases Wednesday May 30, 2018 16:59
TOKYO--30 May--S&P Global Ratings

TOKYO (S&P Global Ratings) May 30, 2018--S&P Global Ratings today said it has affirmed its short- and long-term issuer credit ratings on Japan Post Bank Co. Ltd. The outlook remains negative. At the same time, we have affirmed our short-term issue rating on the bank (see list below).

The negative outlook on the long-term issuer credit rating on Japan Post Bank reflects an at least a one-in-three chance that we may revise downward the bank's stand-alone credit profile (SACP) in the next two years, which could result in a downgrade. Such a revision could be triggered by downward pressure on factors comprising our Banking Industry Country Risk Assessment (BICRA) for Japan, which is currently on a negative trend; or it may also occur if the weighting in Japan Post Bank's asset portfolio for overseas exposures that we consider as having higher economic risk than Japan increases at a faster pace than our expectations. Either one of these two factors could lead us to revise downward by one notch the anchor we apply for Japan Post Bank, the starting point in determining its SACP. We might also consider revising downward the SACP of Japan Post Bank if we see an increase in the bank's risk volume relative to its capitalization and earnings capacity. This could happen if, for example, growth in Japan Post Bank's risk-adjusted assets--the denominator in calculating the risk-adjusted capital (RAC) ratio--outpaces capital accumulation and leads us to see a stronger likelihood for its RAC ratio to fall and remain below 10%.

Over the past several years, Japan Post Bank has been actively shifting its investments from relatively low-risk assets, typically Japanese government bonds, to assets with comparatively higher risk-weights. These assets are primarily corporate bonds but also include alternative investments such as private equity and real estate funds. With rising deposits and continuing redemptions of comparatively high-yielding assets in the low interest rate environment, we expect the shift of investments to continue. Japan Post Bank has a large share of low-risk assets and a high expense ratio (ratio of expenses to gross profit; expenses include outsourcing fees paid to Japan Post Co. Ltd.), making the bank's profitability weaker than that of other domestic banks. We expect this weakness to remain, and its capital accumulation will likely be slow to compensate for the growth of risks in its asset portfolio, in our opinion.

We might also consider downgrading Japan Post Bank if we see that the Japan Post group's policy role of providing universal service has become less important, or if we determine that Japan Post Bank's link with the group will weaken. This could happen if, for example, Japan Post Holdings Co. Ltd.'s equity stake in the bank falls to or below 50% from the current 74% (89% on a voting right basis). Although legislation requires a full divestiture of Japan Post Holdings' ownership of Japan Post Bank shares, in our base-case scenario, we anticipate that Japan Post Holdings will hold the majority of Japan Post Bank's shares in the outlook horizon.

Because our ratings on Japan Post Bank are currently at the same levels as our sovereign ratings on Japan, we are unlikely to upgrade the bank unless we upgrade Japan. Our outlook on the sovereign rating on Japan is positive, indicating the possibility of an upgrade; with everything else being equal, if we raise the sovereign rating, we will upgrade Japan Post Bank. Nevertheless, we view that the bank's SACP is under increasing stress, which offsets the likelihood of an upgrade. We may consider the SACP of Japan Post Bank to have stabilized if: The bank's asset reallocation stabilizes; we see an increased likelihood for the RAC ratio to hold steady above 10%; and we see less pressure on the factors comprising the BICRA for Japan.

RATINGS LIST
Ratings Affirmed
Japan Post Bank Co. Ltd.
Issuer credit rating A+/Negative/A-1
Euro CP Program A-1

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