DBRS : Downgrades Ratings of SMBC to ‘A’, Stable Trend Post Sovereign Downgrade

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Date of Release: January 30, 2017

January 30, 2017

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DBRS Ratings Limited (DBRS) has today downgraded the ratings of the Sumitomo Mitsui Banking Corporation (SMBC or the Bank), including its Long-Term Deposits & Senior Debt rating to 'A' from A (high), and its Short-Term Instruments rating to R-1 (low) from R-1 (middle). The trend on all ratings is now Stable. Concurrently, DBRS has maintained SMBC's intrinsic assessment (IA) at 'A', along with its SA2 support assessment, which indicates an expectation of timely systemic support in case of need. However, with the current rating of the Japanese sovereign at 'A', which is equal to the IA of SMBC, there is currently no uplift to the Bank's ratings. SMBC's IA is based upon the financial strength of the consolidated Sumitomo Mitsui Financial Group (SMFG or the Group). See the full list of ratings at the end of the press release.

This action follows the downgrade of the Japanese sovereign to 'A' from A (high) in December 2016. SMFG has a solid and growing level of international diversification of revenues, however given its high level of interconnectedness with the Japanese sovereign, its ratings remain correlated with the sovereign rating. In maintaining SMBC's IA at 'A', DBRS recognises the Group's strong domestic wholesale and retail franchise, along with its growing international and consumer finance operations, which have helped offset the profitability challenges present within the Group's domestic market. The ratings also incorporate the Group's solid capital levels, good asset quality and strong funding and liquidity profile.

SMFG has reported relatively resilient earnings over recent years, as strong overseas earnings growth, along with low credit costs, have helped to offset the ongoing weak domestic loan demand and low interest rate environment within Japan. With domestic challenges unlikely to abate in the short-to-medium term, DBRS also views positively SMFG's solid cost control, with the Group reporting an efficiency ratio of 62.2% in 1H16.

DBRS views SMFG's credit risk profile as generally conservative. The performance of the Group's loan book remains strong, with non-performing loans (NPLs) accounting for only 1.03% of total claims at 1H16, and a coverage ratio of 79.3% at end-1H16. DBRS also notes that the Group's lending exposure to sectors and geographies, which are currently more susceptible to increased volatility, such as resource-related sectors, China and Russia, appears well managed. At end-1H16, exposure to Russia, at USD 3.2 billion, accounted for only 0.3% of the Group's total exposure, whilst the majority of the Group's Chinese loan exposure, which totalled JPY 0.8 trillion, was to borrowers with no lower than a satisfactory certainty of debt repayment. Despite signs of stress in certain portfolios, the general performance of the Group's non-Japanese resource-related portfolio, which totalled USD 59 billion at end-1H16 also remains strong, with NPLs accounting for only 1.7% of drawn amounts at end-1H16.

DBRS does, however, note that SMFG's overseas lending, specifically to non-Japanese corporations, has undergone significant growth in recent years, with a 34% increase in total overseas loan balances from end-FY12 to USD 201 billion at end-1H16. Whilst credit quality remains generally strong, DBRS is cognisant of the risks related to swift loan expansion and so will continue to monitor closely the Group's loan growth, especially in the Americas, which has experienced a 60% increase in loan balances, excluding the impact of foreign currency changes, from end-FY12 to USD 75 billion at end-1H16.

The Group's Japanese equities and government bond holdings present certain risk management challenges. Despite progress in reducing its Japanese Government Bonds (JGB) holdings in recent years, the Group's JGB portfolio remains significant at JPY 8.0 trillion at end-1H16, equivalent to 90% of Tier 1 capital. As a result, the level of interest-rate risk remains high, especially in light of the extended duration of the portfolio in recent years, to 2.8 years at end-1H16. SMFG also faces market risk from its considerable exposure to Japanese equities, which has the potential to lead to both P&L and capital ratio volatility as a result of unrealised gains and losses. DBRS does, however, positively note the Group's commitment to reduce the ratio of domestic listed equities to fully-loaded Basel III Common Equity Tier 1 (CET1), excluding net unrealised gains on other securities, which stood at 27% at end-1H16, to approximately 14% over the next five years. The Group has made gradual progress against its stated aim in 1H16, with the sale of approximately JPY 40 billion of listed stock, and agreements in place with clients for a further JPY 100 billion.

SMFG's funding position is underpinned by a very strong retail deposit base in Japan, leading to a loan-to-deposit (LTD) ratio, excluding negotiable certificates of deposits (NCDs), for the Group of 68.6% at end-1H16. With an overseas LTD ratio of 123% at end-1H16, the Group's overseas operations rely on a larger proportion of market funding. Although the cost of foreign currency-based funding, particularly that of USD funding, increased noticeably in 2016, driven in part by regulatory changes, DBRS notes positively that short-term funding, in the form of CD and CP, remains low. The Group's liquidity profile also remains solid, with SMFG reporting a Liquidity Coverage Ratio (LCR), on a transitional basis, between July and September 2016, of 118.7% at end-1H16.

SMFG maintains a solid capital profile, with a fully-loaded Basel III CET1 ratio (including net unrealised gains on marketable securities) of 11.9% at end-1H16, and a transitional Basel III leverage ratio of 4.7%. Although SMFG's fully-loaded CET1 ratio drops to 10.0% at end-1H16 when excluding the impact of net unrealised gains on marketable securities, DBRS notes that it remains above both the end-2019 regulatory minimum and the Group's internal CET1 target. DBRS also views the Group as well positioned to meet minimum future Total Loss Absorbing Capacity (TLAC) requirements, having already issued approximately USD 14.25 billion and EUR 2.0 billion of TLAC-eligible debt by January 2017.

Concurrently, DBRS has withdrawn its ratings on Sumitomo Mitsui Banking Corporation of Canada, the Canadian subsidiary of SMBC, and its BDN programme. The decision to withdraw the ratings of the Canadian subsidiary was made following SMBC's establishment of a BDN programme at SMBC, Canada branch in November 2016.

RATING DRIVERS
Positive rating pressure could result from further sustainable diversification of revenues and strengthening of profitability, whilst maintaining a strong, conservative risk profile. An upgrade of the sovereign rating would be positive for the Bank's ratings.

Negative rating pressure could result from a significant deterioration in the Group's asset quality as a result of its overseas expansion, or from a further downgrade of the sovereign.

Notes:
All figures are in JPY unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, the Bank of Japan, the Japanese Financial Services Authority and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS's outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority ('ESMA') in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG & Sovereign Ratings
Initial Rating Date: February 13, 1987
Last Rating Date: February 18, 2016

DBRS Ratings Limited
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31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [e-mail].

Ratings

Issuer	Debt Rated	Rating Action	Rating	Trend	Notes	Published	Issued
Sumitomo Mitsui Banking Corporation	Issuer Rating	Downgraded	A	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation	Long-Term Deposits and Senior Debt	Downgraded	A	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation	Short-Term Instruments	Downgraded	R-1 (low)	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation, Canada Branch	Long-Term Deposits & Senior Debt	Downgraded	A	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation, Canada Branch	Short-Term Instruments	Downgraded	R-1 (low)	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation, Canada Branch	Short-Term Instruments - Bank Deposit Note Programme	Downgraded	R-1 (low)	Stb		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation of Canada	Long-Term Deposits and Senior Debt Guaranteed by SMBC	Disc.-W/drwn	Discontinued	--		Jan 30, 2017	EU
Sumitomo Mitsui Banking Corporation of Canada	Short-Term Instruments Guaranteed by SMBC	Disc.-W/drwn	Discontinued	--		Jan 30, 2017	EU

US = USA Issued, NRSRO CA = Canada Issued, NRSRO EU = EU Issued E = EU Endorsed
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