ORIX CORPORATION
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
ORIX's Short-Term IDR is the lower of two options mapped to the Long-Term IDR as the company's funding and liquidity factor score does not meet the minimum requirement of 'a' to assign the higher of the two options.
Key Rating Drivers
Business Strength; Structural Challenges: ORIX's Long-Term IDR reflects its strengths, including its longstanding, strong company profile and sound liquidity position. The rating also takes into consideration pressure on profitability, the complex business portfolio and
Stable Operating Environment: Fitch expects
Diverse Business Model: ORIX's diverse business portfolio supports earnings stability while its complex business model and organisational structure pose challenges to the company's risk management and governance as it expands across sectors and geographies, which is one of Fitch's ESG factors. We expect ORIX to continue investing as opportunities arise with discipline in maintaining its balance-sheet strengths.
Sound Management: ORIX's management has a high degree of depth and experience in the industry through economic cycles and has managed the recent pandemic-driven crisis by taking swift action to control risk, including a more selective lending approach immediately after the Covid-19 breakout. The company has a good record of meeting its profit targets with clear strategies for continuous growth.
Adequate Risk Control: Fitch expects ORIX to continue to enhance risk management and governance, which is being challenged by the company's expansion across sectors and geographies, increasing the complexity of its business model and organisational structure.
Stable Asset Quality: Fitch expects ORIX's asset quality to remain sound, reflected in our stable outlook on the 'bbb+' factor score, aided by the gradual economic recovery, although remaining weaker than pre-pandemic levels. The quality of ORIX's corporate loan portfolio and finance leases is weaker than that of major domestic banks because of its strategic focus on the middle-risk market. However, we expect the impaired-loan ratio to remain at around 2% with its seasoned risk control and monitoring.
Profitability Under Pressure: We expect ORIX's profitability to stabilise at lower than pre-pandemic levels in light of the uncertain operating environment globally, reflected in the 'bbb' factor score, a downward revision from the 'bbb+' previously, with a stable outlook. The company's diversified business mix will continue to support stability in the earnings profile, while capital gains or losses on principal investments will continue to add to volatility. We estimate the four-year average pretax profit/average asset ratio to remain at around 3.0% in FY23.
Fitch's assessment of leverage would be also sensitive to asset-quality impairment risks and ORIX's growth strategy. ORIX's capital policy is to maintain adequate capital, although without a specific target ratio, ensuring its growth strategy such as investments for inorganic growth does not impose a substantial burden on the balance sheet and cash flow.
Sound Liquidity: ORIX's liquidity sources, cash and cash equivalents, liquid securities and operating cash flow, cover 3.1x debt maturing within one year. Its reliance on wholesale funding is mitigated by its diversified funding sources and firm relationships with domestic financial institutions, as well as lengthened debt maturities and adequate committed credit lines.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A structurally weakened operating environment, manifested in a lower Japanese sovereign rating (A/Stable), would lead to a lower tolerance for leverage, resulting in a downgrade of the rating.
A rise in leverage, with its debt and deposit/tangible equity ratio materially above 3.0x on a permanent basis, or a combination of a deterioration in the asset quality, with a non-performing loan (NPL) ratio above 3.0% on a sustained basis, and lower profitability, with pretax profit/average asset ratio consistently below 3.0%, would pressure its ratings.
A substantial deterioration in the company's liquidity position due to large cash usage or rapid deterioration in the funding market that increases dependence on secured funding with the unsecured debt/total interest-bearing liability ratio below 70% would also be negative for ORIX's IDRs.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive action on the IDRs may be taken if ORIX substantially simplifies its business structure while maintaining solid profitability (pretax profit/average asset ratio sustained above 3.5%), with sound asset quality, such as an NPL ratio below 2% (
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
Ratings on ORIX's senior unsecured notes are aligned with its Long-Term IDR because the notes constitute the company's direct, unsubordinated and unsecured obligations and rank equally with all its other unsubordinated and unsecured obligations.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The rating on the notes will be downgraded if ORIX's Long-Term IDR is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The rating on the notes will be upgraded if ORIX's Long-Term IDR is upgraded. However, prospects for an upgrade of ORIX's IDRs are limited in light of the company's structural complexity and business model.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
ORIX has an ESG Relevance Score of ?4' for Group Structure due to its complex organisational structure with different business lines operating globally, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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