Toyo Trust Assigned 'BBB/A-2'; Outlook Positive.

Business Editors

TOKYO--(BUSINESS WIRE)--Standard & Poor's

Dec. 13, 2000--Standard & Poor's today assigned its triple-'B' long-term and 'A-2' short-term counterparty credit ratings to Toyo Trust & Banking Co. Ltd. The outlook on the long-term rating is positive.

The rating on Toyo reflects the bank's good market position in trust banking and the expected benefits from its planned consolidation with Sanwa Bank Ltd. and Tokai Bank Ltd. Under the holding company to be formed by the three banks in April 2001, United Financial of Japan (UFJ), the banks' operations are expected to be closely integrated and consequently their credit profiles should converge. In addition, Toyo's risk assets are likely to be reduced through the transfer of its loan operations to the commercial banking vehicle of the holding company. Toyo's asset quality, although improving, remains pressured, while the bank's capital is weak.

Toyo has a strong market position in some trust-related services. The bank has a 25% share of the corporate agency market, comprising mainly blue chip companies, while its pool of investment trust assets under administration is the largest in Japan. Other trust banking services, such as pension-related asset management, have also seen steady growth. The contribution of Toyo's fee income to its gross revenue at 40% is the highest among Japanese major banks. While operating costs for such fee-based trust banking tend to be high, fee income should support the stability of its core profits.

Within the new UFJ group, Toyo will become the sole trust banking facility. The bank has already merged with the trust banking subsidiary of Sanwa, and Tokai's trust banking subsidiary will merge with Toyo in fiscal 2001. Under the consolidation plan for the UFJ group, Toyo will transfer its loan operations to a commercial bank vehicle of the group in 2003, from which time the bank will focus on trust banking.

The consolidation is likely to lower Toyo's stand-alone asset risk and should enable the bank to access large numbers of new customers, given the limited duplication of its customer base with the other entities, particularly Tokai. As a result, Toyo is expected to be in a better position to cope with the increasing competition in trust banking. Furthermore, as part of a group with shared economic interests, the bank will have access to the greater financial resources of the group, if required.

At the same time, however, Toyo's current financial profile is weak. Although credit costs are likely to decline in fiscal 2000, in the first half of the year they exceeded the bank's forecasts as well as its core profit for the same period. Toyo's core profitability has improved in the past several years and the bank has made progress in identifying problem assets and provisioning for them. Nevertheless, Toyo's large exposure to the risky real estate, finance, and service sectors in Japan leaves the bank vulnerable to adverse changes in the economy.

The level and quality of Toyo's capital is weak in light of the risk carried by the bank's loan and equity portfolios. While Toyo's Tier 1 capital stood at 8.6% at September 2000, about 50% of its Tier 1 equity is preferred shares mainly held by the Japanese government. Given the bank's current low net profit, it will be difficult for Toyo to replenish its capital in the near term.

OUTLOOK: POSITIVE

The positive outlook reflects the expected benefits Toyo should derive from its consolidation with Sanwa and Tokai. Combined, these two banks will have a stronger financial profile than Toyo. In addition, if Toyo's risk assets are reduced according to the group's consolidation plan, its stand-alone financial profile will improve in the midterm, Standard & Poor's said. ---CreditWire