Outlook On Shinsei Bank Revised Upward To Ratings Affirmed At #BBB+/A-2#

Stocks and Financial Services Press Releases Friday May 19, 2017 17:37
TOKYO--19 May--S&P Global Ratings

TOKYO (S&P Global Ratings) May 19, 2017--S&P Global Ratings today said it has revised its outlook on the long-term counterparty credit rating on Japan-based Shinsei Bank Ltd. to positive from stable. We have also affirmed our long- and short-term counterparty credit ratings on the bank at 'BBB+' and 'A-2', respectively.

The outlook revision reflects our view that Shinsei Bank's capital adequacy, relative to its risk-weighted assets, has continued to improve. This is due to the bank's steady accumulation of retained earnings and enhanced control over its outstanding balance of risk-weighted assets. The bank's risk-adjusted capital (RAC) ratio exceeded 10% as of the end of September 2016. Although it implemented programs of stock buybacks worth about ¥12 billion in fiscal 2016 (ended March 31, 2017), we expect the bank to maintain its RAC ratio at between 9.5% and 10.5% for the next two years. Accordingly, we see a growing likelihood that we could revise upward our assessment of the bank's capital and earnings to strong from adequate.

Public funds injected into Shinsei Bank have been converted into common shares, and government agencies-- Deposit Insurance Corp. of Japan and The Resolution and Collection Corp.--now hold about 18% of the bank's common shares. Because Shinsei Bank is partly owned by the government, it is required to stabilize its operations and expand and enhance its business franchise under its plan for restoring sound management. The bank has steadily accumulated retained earnings by reducing outflows of profit such as dividends, which has improved its capital adequacy. We expect this trend to continue.

Our assessment of Shinsei Bank's risk position is moderate, which incorporates the possibility that its RAC ratio could fall when it repays public funds. However, given the repayment schemes of other banks for public funds, we do not expect Shinsei Bank's repayment to drag its RAC ratio below 7%. Nevertheless, although the bank's asset quality is improving, our assessment of its risk position incorporates a certain risk relating to asset quality. The bank is exposed to structured finance and unsecured loans to individuals, which it targets as its growth areas. The exposure includes assets that are susceptible to deterioration in economic and market conditions. We believe such assets account for a larger portion of Shinsei Bank's total assets compared with its peers. Furthermore, even though Shinsei Bank maintains sufficient reserves for unsecured loans to individuals, we still see uncertainty over its long-term exposure to the risk of refund claims for overcharged interest.

We believe our 'a-' anchor for banks operating primarily in Japan is under pressure because we consider economic risk in the banking sector to be on a negative trend in our Banking Industry Country Risk Assessment (BICRA) for Japan. However, considering our overall view of the likelihood of an upward revision for the bank's stand-alone credit profile (SACP) and the probability of a downward revision for our anchor for banks operating in Japan, we see a more than one-in-three chance that we could upgrade Shinsei Bank in the next two years. (SACP is our assessment of the group credit profile, excluding the likelihood of extraordinary support.) We therefore revised upward our outlook on Shinsei Bank to positive. At the same time, we affirmed the ratings because we consider our assessments of other factors that could affect the SACP--including its moderate business position and its average funding and adequate liquidity--as relatively stable.

We may consider upgrading Shinsei Bank if we revise our SACP for the bank upward by one notch, which may occur if we revise upward our assessment of the bank's capital and earnings. Conversely, we may revise the outlook downward to stable if we lower our anchor for Japanese banks, or if we see a growing likelihood of Shinsei Bank's RAC ratio falling below 10%, which could be triggered by the introduction of a concrete plan for repayment of publicfunds.

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