Moody's sees risks in Sumitomo acquisitions

Moody's Investors Service has placed on review for possible downgrade various ratings of Sumitomo Mitsui Banking Corporation.

The ratings affected are its C bank financial strength rating or BFSR, A3 base line credit assessment or BCA, Aa2 senior long-term debt and deposit ratings, and other long-term subordinated debt ratings, including the A2-rated preferred securities issued by special purpose corporations of Sumitomo Mitsui Financial Group Inc.

Furthermore, the Aa2 long-term deposits ratings, Aa3 senior/junior subordinated debts ratings of Kansai Urban Banking Corporation and Aa2 long-term deposits ratings of Minato Bank, Ltd. were placed on review for possible downgrade. Both are consolidated banking subsidiaries of SMBC. However, their D BFSRs and Ba2 BCAs are not affected, and continue to carry negative outlooks. At the same time, Moody's affirmed the Prime-1 short-term ratings of SMBC, KUBC, and Minato.

Moody's rating action follows SMFG's announcement on 1 May 2009 that SMFG and SMBC have agreed with Citigroup and Nikko Citi Holdings, Inc. that SMBC will acquire all the operations of Nikko Cordial Securities Inc. and some other businesses, including the domestic debt and equity underwriting operation of Nikko Citigroup Limited which has a Baa1 with negative outlook. According to the announcement, the acquisition price is approximately JPY545billion, which is estimated at more than 10 percent of SMFG's Tier I capital as of March 2009.

The review for possible downgrade of SMBC was prompted by Moody's concern that SMFG and SMBC's capital and liquidity profiles will be adversely affected due to the need for capital and liquidity to be allocated to this significant acquisition.

In Moody's view, the decision to embark on such a large acquisition—against the backdrop of a challenging operating environment for banking as well as securities broking--may indicate the heightened risk appetite of SMFG management in view of poorly performing past significant investments in non-banking areas.

Despite the planned re-capitalisation of SMFG and the less capital-intensive nature of NCS's brokerage operations, this latest acquisition initiative would increase its group-based risk assets. Accordingly, in Moody's view, the expected benefits of the forthcoming re-capitalisation for SMBC's balance sheet risk may likely be diluted.

And for SMFG, Moody's notes that significant integration and co-ordination challenges may arise for its retail brokerage and investment banking businesses in view of SMFG's current strategic relationships with Daiwa Securities Group Inc. and Daiwa Securities SMBC Co. Ltd.

The review for possible downgrade of KUBC and Minato has been prompted by the review of SMBC's ratings. Moody's deposit and debt ratings for these two banks are heavily reliant on the very high probability of extraordinary support from SMBC in case of stress situations.