OREANDA-NEWS. Fitch Ratings has affirmed Japan-based ORIX Corporation's Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'A-'. The Outlook is Stable. The agency has also affirmed the company's Short-Term Foreign-Currency IDR of 'F2'. ORIX's senior unsecured debt has also been affirmed at 'A-'.

Established in 1964, ORIX is engaged in a wide range of businesses including leasing, banking, life insurance, asset management, principal investments, real estate, and environment and energy-related business segments. It also has an extensive domestic and global operation network.

KEY RATING DRIVERS

ORIX's Long-Term IDR reflects its modest level of leverage, adequate liquidity position, and strong profitability, which are underpinned by the company's adequate risk management. The rating, however, is influenced by the degree of complexity of the business as it expands and shifts across sectors and geographies, as it tends to heighten the challenges in management and governance. ORIX's business mix and/or opportunistic nature also give rise to profit volatility, which is embedded in the company's strategic investments.

In Fitch's view, the Bank of Japan's negative interest rate monetary policy, which the central bank implemented in February 2016, will not have significant direct impact on ORIX's profitability, given the company's relatively high reliance on non-interest revenue sources, which are little affected by the policy. The policy's negative impact on ORIX's profitability will also be limited by the company's relatively small market risk-related exposure.

ORIX's leverage further improved to 1.9x at end-March 2016, non-USGAAP, and ORIX's management intends to maintain the current level of leverage in the short and medium term. Fitch expects the company to achieve this target due to its focus on the non-asset usage business, which reduces its reliance on external funding. ORIX's profitability was stable, with ROA at 2.3% for the financial year ended 31 March 2016 (FYE16). Thus, in Fitch's view, ORIX management has maintained good balance of between profitability and financial soundness.

Fitch expects ORIX's adequate capital retention through manageable dividend payout and consistent capital generation to provide a reasonable buffer against any future deterioration in the operating environment and/or increase in risks. Fitch sees some uncertainties in the operating environment for ORIX's overseas business.

ORIX's credit risk mainly lies in its corporate loan portfolio in the form of senior lending and non-recourse loans and in the form of finance leases. Due to its strategic focus on the middle-risk market, its ratio of non-performing loans to total claims (2.5% at end-March 2016) remained high relative to major domestic banks, whose exposures are more diversified by sector and to a lesser extent geography. Nonetheless, ORIX's overall asset quality is sound. Fitch expects this trend to continue, and for the company to continue to actively manage its asset quality through sales and disposals, as well as further diversification of its exposures in terms of borrowers, business sectors and size. Furthermore, ORIX's margins are likely to remain sufficient to provide comfortable cushion against any increases in impairment losses.

ORIX's liquidity is stable and adequate; its liquidity sources (cash and cash equivalents, liquid securities, operating cash flow and unused commitment line) are nearly 2.0x the company's debts maturing within one year. ORIX also has firm relationships with and credit lines mainly from domestic financial institutions. ORIX has been lengthening its debt maturities over the past few years to stabilise funding. That said, the reliance on wholesale funding may lead to less flexibility relative to the banking sector in an extremely stressed financial market environment.

RATING SENSITIVITIES

ORIX's IDRs would be affected by substantial changes in the company's risk appetite, capital and leverage policy, and liquidity position.

An upgrade of ORIX's Long-Term IDRs is challenging in the medium term, given the company's structural complexity, which may arise from opportunistic growth as ORIX is known to invest in businesses that have experienced adverse conditions but have scope for improvement. The IDRs may be positively affected if ORIX substantially reduces such risks and demonstrates greater improvement in profitability in a stable manner, although this scenario is unlikely given the company's business model and the sovereign's 'A' rating.

A downgrade of ORIX's IDRs would be considered if the company's risk appetite increases without a corresponding strengthening of capital buffers. This includes large-sized acquisitions that could lead to higher capital usage and/or re-leveraging. Also, an increased risk appetite hampering risk controls, and a substantial deterioration in the company's liquidity position due to internal or external factors, such as large cash usages or rapid deterioration in the funding market, could exert pressure on ORIX's IDRs.