Bank Tokyo-Mitsubishi Off S&P Watch Neg; Outlook Neg.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/30/98-- Standard & Poor's today lowered its long- and short-term credit ratings on Bank of Tokyo-Mitsubishi Ltd. (BOTM) and related entities to single-'A'-minus and 'A-2' from single-'A' and 'A-1', respectively (see list below for details). The ratings are removed from CreditWatch where they were placed on Sept. 16, 1998. The outlook is negative.

The downgrade reflects further pressure on BOTM's already deteriorated asset quality as Japan struggles to pull itself out of the current recession. Despite recent legislative initiatives, it will take time for the banking sector's asset-quality problems to subside and for confidence to return to the financial market. During this period, BOTM's credit quality will be constrained by its reduced financial resources and operating flexibility. Risks in the bank's overseas emerging market portfolio are also a concern, though to a much lower extent than domestic problems. Furthermore, the increasingly competitive environment will make it difficult for the bank to regain its financial balance over the medium term. BOTM's profitability and capital position remain weak by international comparison.

During this fiscal year, BOTM's asset quality has continued to slide, amid a weak Japanese economy and unstable financial system, which has lead to large bankruptcies, such as Japan Leasing. BOTM has been proactive by domestic standards in recognizing problem loans, but it will still take some time to completely resolve its asset-quality problems as new problem loans continue to emerge. Further, BOTM's plan to cope with the asset-quality problems of its affiliates will require more time than some of its peers because of lower provisioning. Despite the bank's conservative credit policy towards international lending business, the depressed Asian economies, particularly Indonesia, combined with the adverse global market environment, could further delay a resolution of asset quality problems.

The competitive environment has worsened due to a number of tie-ups among domestic players and the entry of strong foreign financial institutions, including the recent tie-up of a large domestic securities company with one of BOTM's international rivals. The bank currently benefits from its good reputation, especially in the domestic market, but it will be a challenge to maintain this position as the competition becomes more severe.

Like its domestic peers, BOTM's profitability is weak and pressured by large credit charges. While its capital ratios have been always weak by international standards, they recently started to compare less favorably with those of some domestic peers. BOTM's financial flexibility has been a major factor supporting the bank's ratings. However, unrealized gains in its listed stock portfolio have declined and, due to the unstable stock market, may not be the reliable sources of financial flexibility they once were.

OUTLOOK: NEGATIVE

Despite its strong franchise in the domestic market, BOTM's credit quality will remain under pressure until the financial system in Japan stabilizes and the economy recovers, Standard & Poor's said.---CreditWire