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Non performing loans (referred to as problem assets) increased to 2.42% as of June 30, 2009 from 2.28% as of March 30, 2009. The significant losses were counter-balanced by the reduction in RWA (risk weighted assets) and, consequently, as of 31st March ’09 the Capital I ratio stood at 8% as opposed to 7.08% in September ’08. a. It is worth noting the aggressive stance taken by the management towards reduction of risky assets. b. While loans/deposits leverage has decreased from 86.2% to 84.0%, profitability went down too due to yield spread shrinking to 1.65% from 1.77%. c. Net trading income for 1Q09 has gone back to positive: JPY 49.3bln vs. – JPY 9.1bln (1Q08). P/L on bonds also went back to being positive: JPY 40.5 bln vs. JPY -30.3bln

Both senior and subordinated debt have been downgraded one notch (respectively to A and A-) by Fitch on May 15th 2009, as a result of a weaker capital position and worsening operating environment. It is worth noting that such move represents a realignment with S&P rating A/Stable, which has not changed and has not been revised since 2007. d. A key driver of the downgrade was the sizeable credit cost related to provisions.

Sumitomo Mitsui Banking Group’s 5Y senior CDS trades among the lowest level within the reference universe of banks we follow. In effect, only Intesa and BNP (the most solid credit-wise throughout the crisis), Rabobank (the only bank within EU and US rated AAA by both S&P and Moody’s) and HSBC trade lower. This coupled with the fact that the 1-5 year slope is the second steepest one, suggests that the short-term risk on the name is deemed as very low by the market (Table below).

Within the G7, Japan is only second to Germany as far low household leverage. In this sense, these two represent the only two countries to have experienced a downtrend since 2000 (fig. 1). While the overall figure for Japan stops at 2007, the loans’ component (to which it is highly correlated) has kept going down even in 2008 and so far in 2009 (fig. 2). We also note the pick up in consumption this year, after the correction of 2008 that interrupted years of consistent uptrend. Beside the stabilization of world economy that has already started, this also suggest at lower (at least gradual) impact of NPL on the group’s profitability. Rating Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Citigroup Morgan Stanley Merrill Lynch IXIS RBS Lloyds Goldman Sachs UBS Deutsche SocGen Unicredit ABN Amro Barclays Santander Dresdner Fortis Mizuho Credit Suisse Commerzbank JP Morgan Nordea ING Sumitomo HSBC BNP Rabobank Intesa Moody's A3/STA A2/NEG A/STA Aa3/STA A1/NA NA/STA A1/NEG Aa2/WN A+/NEG Aa2/NEG Aa3/STA WR/NA NA/STA Aa2/NEG Aa3/NEG NA/NA A/NEG Aa2/NEG Aa3/NEG Aa3/NEG Aa2/STA A1/WN NA/NA Aa2/NEG Aa1/NEG Aaa/STA Aa2/STA S&P A/STA A/NEG A/STA A+/STA A/STA A/STA A/NEG A+/STA A+/STA A+/STA A/STA NA/NA A+/NEG AA/NEG NR/NA NA/NA A/STA A/STA A/NEG A+/NEG AA-/STA A/STA A/STA AA-/NEG AA/NEG AAA/STA AA-/NEG 1Y 169 163 108 114 85 83 82 77 59 60 50 59 52 43 49 NA NA 58 42 56 56 50 29 38 33 36 22 CDS Spread 5Y 178 151 125 121 104 103 97 89 85 78 73 73 73 72 69 68 68 68 68 67 66 65 55 53 53 52 45 Slope 6% -7% 16% 6% 22% 24% 18% 16% 44% 31% 48% 22% 38% 69% 41% NA NA 18% 61% 19% 17% 29% 88% 40% 62% 46% 104%

fig. 1


120 100

80 2000
Germany Canada Italy Japan





USA France UK




fig. 2






3000 2000 2001 2002 2003 2004 2005 2006 2007 2008
Loans (000's) Total Debt as % Disp. Income (R.H.SCALE)


We note that on a single A basis, Sumitomo 1Y and 5Y CDS are trading significantly lower than peers. Also, while the 1-5 year spread followed the collapse and then rebound of capital markets with significant volatility, the 5-10 year one has remained confined within a fairly narrow range. This hints at a more serene perception by credit market of the company’s financial resiliency in the mid term. At the same time, the pick up in Sumitomo’s CDS in the past two weeks is eye catching.

Sourc e: T homs on Datas tream



fig. 3
180 160 140 120 100 80 60 40 20 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

fig. 4
80 70 60 50 40 30 20 10 Sep-08 (10) Dec-08 Mar-09 Jun-09 5-10 year spread Sep-09

Sen. 1Y

Sen. 5Y

Sen. 10Y

1-5 year soread

o Subprime related exposure is limited at JPY 0.2bln. On the other end, other significant exposures to structured products include JPY 4.0bln in credit cards (BBB rated, thus risky), JPY 4.9 in CLO of which 99% sits in senior tranches (AAA rated for what it’s worth), and JPY 37bln between CMBS (AAA and BBB rated) and other SPV securitized assets (no rating provided). The exposure has not changed materially since the previous quarter and we note that 100% of these exposures are overseas. No geographic breakdown has been provided at this time. National residential mortgage securitization exposure amounts to JPY 255.6bln. However, the default rates on such mortgages are very low. GSE (Government Sponsored Entities) exposure stands at JPY 97.3bln, a significant one, although way lower than the JPY 275.2bln as of March 30, 2009. These exposures are AAA rated. Monoliners’ CDS exposure stands at JPY 97.8bln, down from JPY 132bln in March ’09 and JPY 520.7bln in June ’08. While no rating is provided, we deem such exposures as risky. Leveraged loans exposure is much bigger and stands at JPY 751.9bln. Only 15.5% of these credit lines have remained undrawn so far, down from 18.5% last March. With a shareholders’ fund totaling JPY 4’611bln, SMFG’s risky exposures worth being considered in our opinion represent 14.4% (assuming no severe economic deterioration materializes).

o o o o o

Equity: The negative impact deriving from the collapse in the stock market seen during last quarter ’08 and part of first quarter ’09 (the last two ones of SMFG Fiscal Year) has been replaced by a marked improvement of net gains on the asset class. A significant part of such investments are made within the Nikkei which has been lagging other major world indices. Nonetheless, the market is giving signs of stabilization. While we do not see the probability of a reversal-trend as material as before, should it be the case the impact shall be more limited. Bonds: Also, most of the company’s investments are oriented towards bonds that have been benefitting from the ease of the credit-crunch

Given the still currently adverse environment, shareholders friendly measures have been greatly reduced. A plan to bring common equity to JPY 861bln has been announced, as well as the commitment to keep Tier I ratio above 8%, a level of due respect among predominantly retail oriented banks. Also, management expects continuation of the severe business environment.

Overall I think there could be some more pressure on the company deriving from continued economic deterioration or slower than expected recovery. Nonetheless, the management looks committed to take any necessary and additional steps to preserve the capital integrity of Sumitomo. I would recommend a prudent exposure to the issuer.