Moody's Japan K.K. says that the upgrade of Suruga Bank's deposit rating on 29 January 2014 to A3 from Baa1 was driven by the company's high profitability from its unique business model. "The upward rating actions reflect the widening profitability gap between Suruga and its peers among Japanese regional banks, driven by its business model that focuses on a core product -- retail housing loans -- rather than a core geography," says Tetsuya Yamamoto, a Moody's Vice President and Senior Analyst. "As its focus on such loans has deepened, Suruga's profitability advantage has widened further, while asset quality has remained good," adds Yamamoto. Yamamoto was speaking on the release of a new credit focus entitled "Suruga Bank's Upgrade Reflects Strong Core Profitability from Focus on Housing Loans". Since 2009, Suruga's net interest margin has been consistently above 3%, while the net interest margin for Japanese banks as a whole has continued to decline. Suruga's focus on retail housing loans, particularly those not well served by other banks, has insulated it to a significant degree from the low interest-rate environment and intense competition in Japan. In addition, the development of its own sales channels, without reliance on real estate developers and brokers, contributes to its higher net interest margin. The Moody's report further highlights that Suruga has developed a proprietary scoring model for housing loan applications that helps it limit credit risk. At end-September 2013, the bank's consolidated NPL ratio was 2.07%. More than half of the bank's NPLs are from corporate loans, which account for only 15% of its total loans, as it shifts away from this segment to a deeper focus on housing loans. Furthermore, Suruga's limited holdings of Japanese government bonds (JGBs) make it less vulnerable to any sharp rise in JGB yields than many other regional banks. Suruga's holdings of JGBs were 3.8% of its total assets as of end-September 2013, much less than the average of 17.9% for all Japanese banks as of end-March 2013. Facing insufficient loan demand in the deflationary environment, many Japanese banks have gradually increased their holdings of JGBs and hence the sensitivity of their capital to any sudden increase in JGB yields. Because Suruga's business model has afforded it with adequate loan demand, the bank does not face this risk to the same degree. The vast majority of Suruga's housing loans are floating rate, so the risk would be to asset quality, not capital. Prudent loan-to-value limits should also limit the risks to asset quality in this scenario.