Forecasting in credit analysis, May 14–15

ACRA affirms AAA(RU) to AO Mizuho Bank (Moscow), outlook Stable

The credit rating assigned to AO Mizuho Bank (Moscow) (the Bank) is based on the very high likelihood of extraordinary support from its parent entity with high creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is moderately high in view of its strong capital adequacy, adequate risk profile, adequate funding and liquidity, and medium business profile assessments.

As of February 01, 2019, the Bank ranked 78th in terms of assets and 58th in terms of equity among Russian banks. The beneficiary owner of 99.9% shares in the Bank is Mizuho Bank, Ltd. (the Supporting Organization), a key entity of Mizuho Financial Group Inc., one of the largest financial institutions in Japan and the world. The Banks business includes integrated and lending services to large international companies operating in Russia and certain Russian blue chips, as well as interbank market investments.

Key rating assessment factors

Very high likelihood of extraordinary support from the key shareholder. ACRA is of the opinion that, in case of need, the Supporting Organization can provide the Bank with short-term and long-term funding and capital injections. ACRA assesses the country risk of the Supporting Organization's jurisdiction (Japan) against the country risk of Russia as strong. The Supporting Organization's creditworthiness is also determined by ACRA as strong.

The degree of integration between the Bank and its key shareholder is assessed as strong in view of the following:

  • There is a pronounced operational integration between the Bank and the Supporting Organization;
  • The Bank services the Supporting Organization's clients operating in Russia who are strategically important for Mizuho Financial Group Inc.;
  • The Bank’s Board of Directors consists of members who represent the Supporting Organization;
  • Mizuho Bank, Ltd. is an important funding source for the Bank and provides guarantees for a substantial part of loans issued by the Bank.

Taking into account the small size of the Bank against its Supporting Organization and possible high reputational risks for Mizuho Bank, Ltd. in case the Bank goes bankrupt, the credit rating of the Bank is determined on par with the Russian Federation.

Adequate business profile assessment stems mainly from the Bank's capital positions among Russian banks and a weak diversification of its operating income (which includes interest income from deposits in other banks and corporate lending services).

The Agency notes that the loan portfolio of the Bank has grown in 2018. It is in line with the Bank's strategic goal to ensure proper conditions to maintain and expand the Russian client base of the Bank and Mizuho Financial Group Inc. through additional products and services and higher service quality. The Bank's services include lending, trade finance, deposits, foreign exchange transactions, etc.

The Bank management quality matches its business scale; the ownership structure is clear and transparent.

Strong capital adequacy assessment is evidenced by regulatory ratios (N1.2 = 56.1%, N1.0 = 59.45% as of February 01, 2019). The current capital adequacy allows the Bank to withstand the increase of credit risk by over 500 bps.

The performance indicators are stably positive: the ACGR reached 291 bps over the period from 2014 to 2018, the average CTI was about 35% over the period from 2016 to 2018, and the NIM was about 4%. Current dividend policy of the Bank includes no dividend payments.

Adequate risk profile assessment stems from the high quality of the loan portfolio and the adequate risk management quality.

The risk management system is transparent and characterized by high underwriting standards, high integration with general group approaches, and close control on the part of the parent bank.

According to the IFRS financial statements as of July 01, 2018, the Bank had no impaired loans, which is a result of its lending policy. Most loans are guaranteed by Mizuho Bank, Ltd. or borrowers' parent companies, which further mitigates the credit risk accepted by the Bank. The risk profile assessment is impaired by the very high concentration on top 10 groups of related borrowers (over 90% of the portfolio).

The creditworthiness of the Bank's counterparties under contingent liabilities is also acceptable. The Bank's transactions in the interbank market mainly include deposits with the Bank of Russia and banks with a high creditworthiness.

The operational risk accepted by the Bank does not affect the final risk profile assessment. The Bank holds virtually no investments in securities; therefore, the market risk is minimal.

The "funding and liquidity" factor is assessed as adequate. The Bank demonstrates a surplus of short-term liquidity in the base case scenario and a slight shortage (not more than 2% of liabilities) in the stress scenario of ACRA. The position on long-term liquidity is assessed as strong, which is mainly due to the short-term nature of lending transactions of the Bank and the long-term structure of its funding base. In case of need, the parent bank may provide the Bank with a significant amount of funding under open credit lines. The funding assessment is restricted by the concentration on the funds of the parent bank and large corporate clients (as of January 01, 2019, the share of the largest creditor amounted to about 33% of liabilities and the share of the top 10 lenders was 71%).

Key assumptions

  • Mizuho Bank, Ltd. will retain its shareholding and operating control over the Bank;
  • The Bank will follow the current business model and maintain the high quality of loan portfolio.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Loss of shareholding and operating control on the part of Mizuho Bank, Ltd.;
  • A substantial deterioration of the financial status of the Supporting Organization;
  • A substantial decline in the Bank’s performance and asset quality.

Rating components

SCA: a+.

Adjustments: none.

Support: on par with the RF.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating assigned to AO Mizuho Bank (Moscow) was first published by ACRA on March 27, 2018. The credit rating of AO Mizuho Bank (Moscow) is expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by AO Mizuho Bank (Moscow), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of AO Mizuho Bank (Moscow) and the financial statements of AO Mizuho Bank (Moscow) drawn up in compliance with Bank of Russia Ordinance No. 4927-U of October 08, 2018. The credit rating is solicited, and AO Mizuho Bank (Moscow) participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by AO Mizuho Bank (Moscow) in its financial statements have been discovered.

ACRA provided no additional services to AO Mizuho Bank (Moscow). No conflicts of interest were discovered in the course of credit rating assignment.

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