NEWS RELEASE. R&I Affirms Ratings: Sumitomo Mitsui Financial Group. Rating and Investment Information, Inc. (R&I) has announced the following:

Transcription

1 Oct 27, 2017 R&I Affirms Ratings: Sumitomo Mitsui Financial Group Rating and Investment Information, Inc. (R&I) has announced the following: SEC. COMPANY NAME CODE 8316 Sumitomo Mitsui Financial Group, Inc Sumitomo Mitsui Banking Corp SMBC Nikko Securities Inc Sumitomo Mitsui Card Co., Ltd SMBC Consumer Finance Co., Ltd. * Please refer below for rated bonds, etc. RATIONALE: The Sumitomo Mitsui Financial Group (SMFG) is a leading financial group in the world, particularly in commercial banking, and is one of Japan's three mega-banking groups. It also has a high market position in securities brokerage, investment banking, credit card, leasing, consumer finance and asset management, among others. Its domestic franchise is extremely strong in both the corporate and individual sectors. In overseas markets as well, SMFG has several products with competitive advantages and has been gradually solidifying its position as a "core bank" for global companies in recent years, supported by enhanced competitiveness. With an aim to become an Asia-centric global financial institution, the group is concentrating management resources in the Asian region from a mid- to long-term perspective. Integrated group management has been strengthened, and this effort will likely accelerate under the group-wide business units introduced in FY2017 (the year ending March 2018). Its earning capacity is slightly low for the rating and requires improvement. Earnings sources have been somewhat diversified by business line and geography, and SMFG still has higher earning capacity than the other two mega-banking groups thanks to its strength in the retail sector and the efficiency enhancement measures taken ahead of them. Nevertheless, the earning capacity has been affected mainly by higher foreign currency funding costs and slower growth in overseas operations, which had been driving overall growth, as well as by the negative interest rate environment in Japan. The new medium-term management plan for a three-year period from FY2017 calls for cost savings of 50 billion yen (nearly 3% of operating expense in FY2016) through digitalization and other initiatives, and a profit boost totaling 100 billion yen (an increase of around 7% compared to FY2016) across business units. With respect to cost savings, the group also targets 100 billion yen over several years. Furthermore, it plans to reduce less profitable assets and shift to growth areas and high margin fields by transforming its business/asset portfolios and the quality of the earnings base. Over the medium term, integrated group management and productivity enhancement would help bolster SMFG's earning capacity, though their effectiveness will vary depending on the external environment and the timetables of such efforts given the challenging earnings climate. R&I is paying attention to the potential risk of the earnings environment deteriorating owing to a slump in the global economy or financial and capital markets that may be caused by a substantial slowdown in China's economy, global imbalances associated with surplus funds, or other factors. R&I considers SMFG's risk appetite to be high compared to the other two mega-banking groups, but not particularly high when viewed globally. Its business portfolio focused on commercial banking is stable. Moreover, some geographical diversification is underway in tandem with the expansion of overseas operations, especially in Asia and North America. However, eyes should be kept on the fact that risks inherent in emerging markets, such as vulnerability to changes in the financial environment and a higher probability of large shifts in political and regulatory regimes, are growing primarily in Asia.

2 As regards the risk profile of SMFG's assets, credit concentration in large Japanese borrowers is comparatively high. Even so, concern is limited at this moment, because many of them are companies with high ratings. Given that the risk associated with cross-shareholdings is also relatively high, its assets are susceptible to financial and capital market volatility. SMFG plans to reduce acquisition cost-based cross-shareholdings to 14% of Common Equity Tier 1 (CET1) capital (on a fully-loaded basis, excluding net unrealized gains on other securities) by This will likely help improve its risk profile. SMFG's risk resilience is commensurate with the AA rating category. This is mainly attributable to the fact that interest rate risk is low and capital is becoming stronger in both quality and quantity terms, though large-borrower concentration risk and equity holding risk are somewhat high. The CET1 ratio is comparatively high at 12.54%, and 12.6% (10.3% if net unrealized gains on other securities are deducted) on a fully-loaded basis, as of end-june Furthermore, SMFG may see an increase of basis points in the CET1 ratio by converting its consolidated regional bank subsidiaries into equity-method affiliates in the future. Although the authorities are expected to continue to tighten risk-weighted asset measurement rules, the ratio will likely remain above the minimum required capital ratio that takes into account a capital conservation buffer, a capital surcharge for G-SIBs (Global Systemically Important Banks), etc. Should the risk associated with Japan's sovereign materialize, the group's risk resilience would be greatly affected, which warrants attention. Asset quality is sound. Credit costs are stable at low levels, and the ratios of net risk monitored loans and Other Watch Obligors are also low. This is primarily because the balance sheets of large Japanese companies are generally solid, and SMFG adopts a stricter provisioning policy, which is reflected in a higher provision rate through the application of a discounted cash flow method to large problem borrowers. The quality of credits to mid-tier firms, small and medium-sized enterprises (SMEs) and individuals is at adequate levels as well. R&I is mindful of a likely increase in credits to local companies and individuals overseas, especially in Asia, over the medium and long term. At present, however, overseas borrowers are mostly highly rated, so the quality of overseas assets is sound. SMFG has sufficient liquidity thanks to its huge yen deposit base in the domestic individuals segment and low loan-deposit ratio. Concern about foreign currency liquidity is limited because the group has expanded customer deposits along with growth in overseas lending. Given that foreign currency-denominated assets are expected to continue to grow albeit at a slower pace, it will be important to further strengthen the capability and structure of raising funds in foreign currencies. The liquidity coverage ratio for 1Q FY2017 was comparatively high at 125.3%. Sumitomo Mitsui Financial Group, Inc. Sumitomo Mitsui Financial Group, Inc. is the holding company of SMFG. Based on the strong cohesiveness of the group, the rating reflects the entire group creditworthiness. However, the rating is one notch lower than those of the group's core companies because of the structural subordination inherent in a holding company, among other reasons. Sumitomo Mitsui Banking Corp. Sumitomo Mitsui Banking Corp. (SMBC) is the core commercial bank of SMFG. Since it accounts for the majority of the group's customer base, earnings and risks, the rating directly reflects the entire group creditworthiness. SMBC has a well-balanced and strong customer base consisting of large corporations, mid-tier firms, SMEs and individuals. The bank plans to reorganize its retail branches by, for example, completing the introduction of next-generation branches at all domestic retail branches by FY2019 and digitalizing operational processes. SMBC Nikko Securities Inc. SMBC Nikko Securities Inc. is the core securities company of SMFG. Based on its cohesiveness with SMFG, the rating directly reflects the entire group creditworthiness. In the domestic retail business, the company has a solid franchise. By enhancing the wealth management business through

3 bank-securities integration, it is expanding the franchise. In the wholesale business, which was restructured after SMBC Nikko Securities joined SMFG, the business framework is being put into place. The company has a competitive advantage especially in Japanese yen bond-related operations. Because the cost structure has somewhat deteriorated due in part to increased headcount, cost control is a challenge for the company. SMBC Nikko Securities and SMBC Friend Securities Co., Ltd. are scheduled to merge in January R&I will keep an eye on progress in creating a business framework toward the merger and discussions on various initiatives, to see whether SMBC Nikko Securities is able to reap benefits from the merger at an early stage. Sumitomo Mitsui Card Co., Ltd. Sumitomo Mitsui Card Co., Ltd. is the core credit card company of SMFG. It is well known as the pioneer in the issuance of the Visa Card in Japan. Although SMFG's stake in the company is 66%, Sumitomo Mitsui Card is strategically very important for the group as a provider of consumer credit and settlement services, one of the group's core businesses. The rating therefore directly reflects the entire group creditworthiness. The number of merchants and cardholders and the volume of transactions are among the top in Japan. Since the company also has a robust franchise in contracted services for other companies' cards, its franchise value is high. The shopping transaction volume has increased steadily, thus leading to growth in revolving card balances. Fees for acquiring merchants and processing are also expanding firmly. Operating revenues are expected to remain solid. Along with growth in the transaction volume, credit costs and transaction costs will rise gradually, while the upgrade of the existing core systems will increase the burden of depreciation. Despite such profit squeeze factors, R&I expects the company to maintain the ability to absorb costs with basic profits at the level commensurate with the rating. Credit management is prudent, and asset quality is sound. Thanks to ample capital, risk resilience is also at the level corresponding to the rating. Funding sources are stable, consisting mainly of SMBC. SMBC Consumer Finance Co., Ltd. SMBC Consumer Finance Co., Ltd. is a leading consumer finance company and a wholly-owned subsidiary of SMFG. With the "PROMISE" and "MOBIT" brands, it plays a key role in the group's unsecured consumer finance business. Because of its strategic importance for the group, the rating for the company is two notches below that for SMBC, the group's core bank. Operating revenues are rising, supported by steady growth in the loan balance and the expansion of the loan guarantee business. Although revenue/expenditure, as measured by the comparison of expenses incurred in the current fiscal year with pre-provision income, is balanced at present, profitability will likely improve given a sharp decrease in interest repayment claims seen in FY2017. To improve the rating, however, the company needs to make a certain level of profit contribution, which will take some more time. Asset quality is maintained. Even so, attention should be paid to multiple loans and delinquencies that are attributable to bank card loans. Risk resilience is commensurate with the level required for the BBB rating category. Thanks to the tax benefits associated with the implementation of the consolidated corporate-tax system by SMFG, capital recovered substantially in FY2016 after being eroded in the previous fiscal year. With interest repayment expenses falling, profit accumulation is expected to drive steady improvement in capital. Since SMBC provides necessary funds for the company, there is no particular concern about liquidity. The primary rating methodologies applied to this rating are provided at "R&I's Basic Methodology for Corporate Credit Ratings", "Shared Rating Approach for Financial Institutions, etc.", "Depository Financial Institutions", "Securities Firms", "Credit Card and Credit Sales", "Leasing", "Consumer Finance", "R&I's Analytical Approach to Financial Groups" and "R&I's Analytical Approach to Regulatory Capital Instruments and Financial Institutions". The methodologies are available at the web site listed below, together with other rating methodologies that are taken into consideration when

4 assigning the rating. R&I RATINGS: ISSUER: Sumitomo Mitsui Financial Group, Inc. (Sec. Code: 8316) Non-viability Write-off Clause Sep 12, 2014 Sep 12, 2024 JPY 100,000 No.1 Non-viability Write-off Clause Sep 12, 2014 Sep 12, 2024 JPY 35,000 No.2 Non-viability Write-off Clause May 29, 2015 May 29, 2025 JPY 42,000 No.3 Non-viability Write-off Clause May 29, 2015 May 29, 2030 JPY 33,000 No.4 Non-viability Write-off Clause May 29, 2015 May 29, 2025 JPY 20,000 No.5 Non-viability Write-off Clause Sep 28, 2015 Oct 15, 2025 JPY 99,000 No.6 Non-viability Write-off Clause Sep 28, 2015 Oct 15, 2025 JPY 81,000 No.7

5 Non-viability Write-off Clause Jun 03, 2016 Jun 03, 2026 JPY 10,000 No.10 Non-viability Write-off Clause Jun 03, 2016 Jun 03, 2026 JPY 20,000 No.11 Non-viability Write-off Clause Jun 13, 2016 Jun 15, 2026 JPY 55,000 No.8 Non-viability Write-off Clause Jun 13, 2016 Jun 15, 2026 JPY 65,000 No.9 Non-viability Write-off Clause Sep 12, 2016 Sep 15, 2026 JPY 59,000 No.12 Non-viability Write-off Clause Sep 12, 2016 Sep 15, 2026 JPY 41,000 No.13 ISSUER: Sumitomo Mitsui Banking Corp. Shelf Registration (Bonds) ISSUE AMOUNT (mn): JPY 1,000,000 ISSUE PERIOD: From Jul 08, 2016 to Jul 07, 2018 (Preliminary) Unsec. Str. Bonds No.58 Issue Date Maturity Date Issue Amount (mn) Apr 25, 2013 Apr 20, 2018 JPY 50,000

6 Unsec. Str. Bonds No.59 Issue Date Maturity Date Issue Amount (mn) Apr 23, 2014 Apr 19, 2019 JPY 50,000 Unsec. Sub. Bonds No.11 Issue Date Maturity Date Issue Amount (mn) Dec 20, 2007 Dec 20, 2017 JPY 80,000 Unsec. Sub. Bonds No.17 Issue Date Maturity Date Issue Amount (mn) Feb 12, 2009 Feb 12, 2019 JPY 21,500 Unsec. Sub. Bonds No.20 Issue Date Maturity Date Issue Amount (mn) Jul 24, 2009 Jul 24, 2019 JPY 73,000 Unsec. Sub. Bonds No.22 Issue Date Maturity Date Issue Amount (mn) Sep 28, 2010 Sep 28, 2020 JPY 100,000 Unsec. Sub. Bonds No.23 Issue Date Maturity Date Issue Amount (mn) Dec 17, 2010 Dec 17, 2020 JPY 50,000 Unsec. Sub. Bonds No.24 Issue Date Maturity Date Issue Amount (mn) Jun 01, 2011 Jun 01, 2021 JPY 40,000 Unsec. Sub. Bonds No.25 Issue Date Maturity Date Issue Amount (mn) Jun 01, 2011 Jun 01, 2026 JPY 30,000 Unsec. Sub. Bonds No.27 Issue Date Maturity Date Issue Amount (mn) Nov 02, 2011 Nov 10, 2021 JPY 40,000 Unsec. Sub. Bonds No.28 Issue Date Maturity Date Issue Amount (mn) Dec 20, 2011 Dec 18, 2026 JPY 30,000 Unsec. Sub. Bonds No.30 Issue Date Maturity Date Issue Amount (mn) Jan 29, 2013 Feb 28, 2023 JPY 100,000

7 SUPPORT: ISSUER: Short-term Debts a-1+, Affirmed Commercial Paper Unsecured a-1+, Affirmed SMBC Nikko Securities Inc. Commercial Paper ISSUE LIMIT (mn): JPY 1,000,000 SUPPORT: Unsecured a-1+, Affirmed Euro MTN Prog. ISSUE LIMIT (mn): JPY 1,000,000 SUPPORT: Keepwell agreement SUPPORTED BY: Sumitomo Mitsui Financial Group, Inc. Sumitomo Mitsui Banking Corp. ISSUER: Sumitomo Mitsui Card Co., Ltd. Commercial Paper ISSUE LIMIT (mn): JPY 200,000 SUPPORT: Unsecured a-1+, Affirmed ISSUER: SMBC Consumer Finance Co., Ltd. A, Affirmed A preliminary rating is assigned when a provisional credit rating is needed for an individual obligation on which final terms have not been determined. A credit rating finally assigned may differ from the preliminary rating depending on, among others, the details of the actual contract of the individual obligation. A credit rating for a medium-term note (MTN) program is assigned to the program and not to individual notes issued under the program. The credit rating of individual notes is generally the same

8 as that of the program. As regards credit-linked notes, index-linked notes or other notes, however, there are some cases where the rating on each note will not be on par with the program or no rating will be assigned, depending on the details of the individual note contract. Upon the issuer's request, R&I may assign a credit rating to individual notes issued under the program.