Moody's Investors Service downgraded Shinsei Bank, Limited's (Shinsei Bank) bank financial strength rating (BFSR) to D+ from C-, base line credit assessments to Baa3 from Baa2, and long- and short-term senior unsecured and deposit ratings to A3/P-2 from A2/P-1. The bank's senior and junior subordinated debt ratings were also downgraded to Baa1 from A3, while the ratings on preferred securities were downgraded to Baa3 from Baa1. The outlook for the ratings is stable. The widening notch between the ratings for senior unsecured debt and preferred securities follows the guidelines of "Guidelines for Rating Bank Junior Securities," under which the notching differential for such Hybrid Tier 1 securities is set at three.
This action concludes the downward review initiated on July 14, 2008, following Shinsei Bank's announcement that it had reached an agreement to acquire GE Consumer Finance Co. Ltd. (GECF) for 580 billion yen in cash.
The rating action reflects Moody's view that Shinsei Bank's acquisition of GECF signals an increase in risk appetite in a challenging operating environment, given the state of Japan's consumer finance industry, the existing challenges in its non-bank consumer business, and the continued downward pressure on its institutional banking business. The action also takes into account the inherited risks associated with GECF. This transaction has led to an increase in the bank's risk assets, reducing the bank's capital adequacy, despite the immediate contribution to consolidated earnings.
Shinsei Bank acquired the total assets of the personal loan portfolio of GECF's Lake brand, as well as the credit card and mortgage businesses. The purchase agreement includes an indemnity clause from General Electric Company for gray zone interest payments on existing loans, which should provide protection against potential losses beyond JPY 203.9 billion.
With this acquisition, Shinsei Bank's overall position in Japan's consumer finance industry should improve notably, particularly in the personal loan market. The acquisition may increase the scale benefit of Shinsei Bank's existing consumer finance related businesses, including APLUS and Shinki. Moody's understands that the Lake brand is competitive and that its customer base is relatively solid. Moreover, the risk of incurring huge losses on legal claims for overpaid interest is largely mitigated by the indemnity clause, limiting potential negative earnings pressure arising from this issue.
Meanwhile, Moody's believe some integration risks will remain for Shinsei Bank in achieving the synergies it expects from the acquisition, particularly as the bank is still facing difficulties as it tries to stabilize the revenue from its own existing business lines (including institutional banking).
In addition, although Moody's considers that GECF's short-term earnings contribution will be relatively solid, there is still uncertainty whether Shinsei Bank can generate the expected revenue and profit from the consumer finance business over the medium term. In Moody's view, Lake's asset quality is slightly weaker than those of other rated consumer finance companies in Japan. As a result, Lake's cash flow over the medium term may be constrained in light of expected regulatory changes in the industry.
The acquisition will also negatively affect the bank's Tier 1 capital, since its Tier 1 ratio will be below 7%. (Its Tier 1 ratio was 7.4% as of FYE 3/2008.) Shinsei Bank expects to boost its Tier 1 ratio to higher than 7% by reducing risk assets and retaining profits in FYE 3/2009. As Moody's believes that the bank's profitability will remain under pressure due to intensifying stress from the global credit crisis and the weaker domestic economy, the rating agency will continue to monitor the bank's ability to strengthen capital by retaining earnings.
The stable outlook reflects Moody's view that Shinsei Bank may benefit from the profit contribution from GECF over the next two years, which may help offset the continued earnings pressure in its institutional banking businesses.
Positive rating action could emerge if Shinsei Bank can stabilize its financial performance and generate earnings by deriving synergies from the acquisition and managing earnings volatility in its institutional banking businesses.
Negative pressures on the ratings could emerge should revenues and profitability continue to deteriorate as a result of 1) another downward swing in its institutional banking businesses or 2) an unexpected rise in credit expenses in its domestic loan portfolio.
Shinsei Bank, Limited, headquartered in Tokyo, had consolidated total assets of JPY11.5 trillion as of March 31, 2008.
--www.theasianbanker.com (November 7 2008)--