The Nanto Bank, Ltd

NEWS RELEASE

Apr 09, 2020 R&I Affirms A-, Stable: The Nanto Bank, Ltd.

Rating and Investment Information, Inc. (R&I) has announced the following: ISSUER: The Nanto Bank, Ltd. Issuer Rating: A-, Affirmed Rating Outlook: Stable

RATIONALE: The Nanto Bank, Ltd. is a regional bank with a high market share in Nara Prefecture. The prefecture is an attractive operating region for retail transactions centering on investment product sales, given the fact that the savings balance per household is among the highest in the country. Meanwhile, its market size is small for business loans due to the small number of plants and offices. The bank therefore allocates management resources to Osaka Prefecture, which has a lucrative market. Its earning capacity is below what the rating suggests. Under the previous medium-term management plan, the bank aimed to strengthen investment product sales by capitalizing on its strong market position in the prefecture; however, its efforts have not delivered anticipated results. As the progress in cost reduction has not been enough to offset the decline in interest income, the earning capacity remains weak. In the face of the severe business environment stemming mainly from the continued low interest rate, shrinking population and cross-sector competitions, the bank has set goals to be attained in ten years: (1) contributing to a higher (real) gross prefectural product of Nara, (2) developing managerial talent, and (3) an ROA of 0.35% or higher. As an interim target for the next five years, the bank seeks to achieve an ROA of 0.25% or higher and turn customer-related services profitable. The initiatives will be driven by cost reduction efforts including consolidation of 30 offices, which are expected to increase the earning capacity to a certain extent. The bank has drastically changed the sales structure by introducing a "Block Area Business System". In order to continuously enhance its earning capacity to achieve the goals in ten years, the bank needs to make the most of the sales promotion framework. Eyes will be on the progress of the efforts. Risk resilience is somewhat low for the A rating category. The risk amount has been edging up, as the bank reinvests proceeds from redemption of yen bonds in investment trusts, among others. The amount of risk may rise a little further, because bond redemptions will likely continue for some time. The bank is facing the challenge of bolstering the earnings from customer-related operations, while reducing its dependence on securities investment. With conservative credit management in place, credit risk is small. Asset quality is also kept sound despite a slight increase in credit costs. Although market risk is large because of the bank's reliance on securities investment to cover its low loan to deposit ratio, no problem is found in the management of the risk. The spread of the novel coronavirus, which is causing damage across the globe, is affecting Nara Prefecture as well, especially through a decrease in tourists. If economic activities continue to be stagnant for a very extensive period of time, financial deterioration at customers and other adverse factors could weaken the bank's asset quality. R&I will pay attention to future developments.

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." and "Depository Financial Institutions". The methodologies are available at the web site listed below, together with other rating methodologies that are taken into consideration when assigning the rating. https://www.r-i.co.jp/en/rating/about/rating_method.html

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R&I RATINGS: ISSUER: The Nanto Bank, Ltd. (Sec. Code: 8367) Issuer Rating RATING: A-, Affirmed RATING OUTLOOK: Stable