Fitch upgrades viability ratings of Japanese megabanks

Upgrade reflects sustained improvements in the banks' risk absorption capability.

The affected banks are MHFG, Mizuho Bank, Ltd. (MHBK), Mizuho Trust & Banking Co., Ltd. (MHTB), Mizuho Corporate Bank, Ltd. (MHCB), SMFG and Sumitomo Mitsui Banking Corporation (SMBC), Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), Mitsubishi UFJ Trust and Banking Corporation (MUTB).

The improvements, which exceeded Fitch's earlier expectations, are most evident in capitalization (including internal capital generation) for all megabanks.

For MUFG and SMFG in particular, their capitalization now compares favorably with that of many global peers. Despite solid improvements in MHFG's capital ratios, they remain somewhat lower than the average of 'bbb+' rated peers.

The upgrade incorporates Fitch's expectation that Mizuho group's internal capital generation will improve further from additional cost reductions through their ongoing group restructuring.

Fitch expects MHFG's Basel III-compliant common equity tier 1 ratio (on a fully implemented basis) to reach 8% by end-March 2016, from around 7% currently. The upgrades also reflect reduced equity exposure, gradual earnings diversification and sound asset quality.

Fitch believes these improvements will be sustained. This is because of the banks' risk-averse nature, which in part contributes to modest core profitability, their moderate offshore expansion, and a likely less negative but still challenging, domestic operating environment.

The affirmation of the VR for SMTB reflects its strong liquidity, modest risk appetite and solid asset quality consistent with its trust banking model, limited interest rate risk and adequate capitalisation. Prospects for improving its core capital are less relative to its peers while its smaller franchise than the three mega banking groups' also constraints the ratings.

Fitch believes it will take time for synergies from the merger between Sumitomo Trust and Banking Co., Ltd. and Chuo Mitsui Trust and Banking Company, Limited in April 2012 to improve SMTB's internal capital generation to levels comparable with higher-rated banks.

Viability ratings are designed to be internationally comparable and represent Fitch's view as to the intrinsic creditworthiness of an issuer. The VR is a key component of a bank's Issuer Default Rating.