Mizuho Financial Group Inc (MFG) 2006 Q4 法說會逐字稿

All sites welcome to the Mizuho Financial Group fiscal year 2005 results Internet conference call. For the duration of the presentation all lines will be in listen-only mode. And I would like to hand over the call to Mr. Yokota, Chief Investor Relations Officer of Mizuho Financial Group. And I’ll be standing by for the question and answer session. Over to you, sir, you may begin. Thank you.

Thank you. Good morning, good afternoon, good evening and [inaudible] from Tokyo. Welcome to the Mizuho Financial Group financial results for FY 2005 net conference. I am Takayuki Yokota, Chief Investor Relations Officer of Mizuho Financial Group.

Please turn to page three of our presentation material. The page lists the agenda for our presentation today. I would like to go through these for about 20 minutes and then go on to the question and answer session. Let us jump into section one, page four, please.

After entering a new phase in our management strategy, the management focus for FY 2005 was to increase the top line profits along with disciplined capital management. Today I am pleased to report to you that, with the turnaround of our retail business and enhanced Group synergies, our objective was achieved and reflected in today’s announced figures.

Please go to page five. Our consolidated gross profit, namely the top line figures, were JPY2,002b for fiscal 2005, a small increase of JPY9b compared with the last fiscal year. However, if you recall the announcement we made in March, we decided to record JPY138b in disposition of unrealized losses on the bond portfolio in light of rising long-term interest rates to reflect recent BOJ’s change of easement policy. Therefore, if we exclude this effect from our top line figures, consolidated gross profits have increased by JPY147b or 7.4% compared with the previous fiscal year.

I will give you more specific analysis of the contributing factors for the increase in gross profits in a moment. Our G&A expenses increased by JPY3b on a consolidated basis, only reflecting rapid growth of operations by our securities subsidiaries. As a consequence, our consolidated net business profits amounted to JPY922b. Due to continued reversal of reserves for possible loans on -- for possible losses on loans and net gains related to stock, we recorded JPY649b net income, which exceeded our revised earnings estimate of JPY630b.

Our BIS capital ratio was maintained at the sufficient level of 11.63%. And our Tier I capital ratio was 5.89%, even after acceleration of repaying public fund.

Next page please. In order to show the breakdown of the increased gross profits, this page six gives you an analysis of the major components. First, net income -- net interest income decreased by JPY43b, mainly caused by declining margins of the loans due to severe competition in the domestic market. However, due to the recover of Japanese economy, the domestic loan balance already hit the bottom in the second quarter.

Very notably, net fee and commission income increased by JPY83b, mainly due to the increase in fee income from the sales of investment products to our individual customers, and from our solutions and overseas businesses with our corporate customers. Our securities subsidiaries also contributed to this increase as well.

Net other operating income decreased by JPY85b, which was a reflection of JPY138b disposition of unrealized losses in our bond portfolio.

Please turn to page seven. I’d like to give you more clear trends and highlights of our earnings situation by business nature. On the left of this page we provide aggregate net business profits of our three banks, Mizuho Bank, Mizuho Corporate Bank and Mizuho Trust, which are the major components of our Group’s operations.

First, an aggregated of net business profits, excluding special factors, showed a clear turnaround during FY 2005 even on three banks’ basis. Moreover, as you can see here, the key driver for the growth was Mizuho Bank, our retail wing, demonstrating Mizuho’s fight back of our retail business. We believe our retail business continued to grow as the domestic economy continues to recover with the increased trend in shift of deposits to investment trusts.

On the right of this page we provide the trend of the profitability of our Group subsidiaries, and an enhancement of the Group’s synergies was another factor for growth. Those three subsidiaries in trust asset management, retail brokerage and investment banking increased their profits in the last fiscal year through enhancing Group synergies in each business area.

Next page please. The following section will cover the trend analysis of our steady top line growth and expense reduction. Please take a look at page nine.

As for loan balance, there was a turnaround in our domestic loans and they continued to increase. Our overseas loans also continued to increase. The key drivers for the increase in the domestic loans were both loans to SMEs and loans to residential housing, and they offset the decrease in loans to large corporations. However, on your right, our loan and deposit rate margin of domestic operation decreased compared with the previous fiscal year, due to tougher competition in lending business and reduction in loans to other [inaudible] who carry higher loan margins.

Please move on to the next page. Here you can see in the lending business area, despite tough competition, our retail business started making a steady comeback as we continued to invest in such focus business as residential mortgage loans and loans to SMEs.

At this time, let’s have a look at the current major drivers of our growth, namely non-interest income business. Please move on to the next page.

Our net fee and commission income increased by JPY63b, or 20%, in FY 2005 on three banks’ basis. In individual business areas, the key driver for this growth was the increased sales of investment products through an enhancement of consulting functions at Mizuho Bank. In the business with corporate customers’, fees from solutions businesses, as well as income from foreign exchange and overseas, showed solid growth for the trust and asset management business of Mizuho Trust.

Net fee and commission income on a consolidated basis increased by JPY83b compared with the previous fiscal year, reflecting an increase of fee income from our securities subsidiaries, such as Mizuho Investors Securities, through Group synergies.

Next page please. This is a snapshot of our G&A expenses on a three-bank basis. Our base expenses or recurring expenses decreased by JPY52b, mainly through the reduction in IT systems expenses, about half of which was a cost-saving effect of IT systems integration at Mizuho Bank. On the other hand, we incurred JPY33b strategic expenses into the areas of growth, such as retail business, to further enhance our top line growth. As a result, net G&A expenses decreased by JPY18b.

Please go to the next page. In this section I would like to spend a moment to walk you through with our continuous financial soundness. Please move on to the next page.

Our non-performing loans, or NPLs, decreased to JPY1 trillion at the end of March 2006. Our NPL ratio is 1.4% and our net NPL ratio further decreased to only 0.47%. Since we kept sufficient reserves for NPLs and claims for other watch-type borrowers, we even recorded JPY63b of gains of credit costs due to the reversal of reserves for last fiscal year.

Next page please. Our net deferred tax assets, namely net DTAs, declined to JPY0.29 trillion by recording taxable income and increase in valuation allowance in accordance with our conservative accounting practices. As a result, the ratio of net DTAs to Tier I capital stood at 6.4% at the end of March.

Next page please. Our unrealized gains on stock portfolio increased by JPY1.3 trillion to JPY2.4 trillion, reflecting good performance in the stock market. Our unrealized losses on bonds and other securities increased to JPY260b, due to the increase in long-term interest rates, even after a total of JPY223b disposition of unrealized losses on the bond portfolio.

And for JGB bond portfolio, we have been reducing the balance and shortening the duration in preparation for interest rates hike. Our average period to maturity in our JGB portfolio declined to about two years.

Next page please. In this section let us talk about our capital management very quickly. Page 18, please. In addition to the reported high bottom line profits, our capital quality was improved through our major actions. The first was acceleration of repaying public funds. During fiscal 2005 we repurchased and cancelled JPY866b preferred shares of public funds. The outstanding balance of public funds decreased to the current JPY600b, and they are all non-convertible type and redeemable at par.

Today we announced a proposal of repurchase authorization of these pref shares. We will consult with the regulatory authorities in order to carry out the repurchase of all the remaining public funds preferred shares as promptly as possible after obtaining the approval at Annual General Shareholders’ Meeting scheduled at the end of this June.

The second action was capital raising. In November last year we conducted a global offering of Treasury stock held by our subsidiary company called Mizuho Financial Strategy, which was formerly known as Mizuho Holdings. We sold 763,000 shares and the aggregate sales price was JPY531b. We also issued about JPY140b Tier I preferred securities in March this year to increase our Tier I capital for future growth. As a consequence, if you can look at the graph on your right, our Tier I capital increased to about JPY4.5 trillion and its quality also improved significantly.

Next page please. This page highlights priorities in our capital management and dividend policy going forward. As for capital management, our first priority is a full repayment of public funds, as I explained. Next is to deal with the remaining Treasury stocks held by Mizuho Financial Strategy. We will repurchase and cancel these shares periodically after the full repayment of public funds.

The third is convertible pref shares of about JPY1 trillion issued to the private sector. We will consider eliminating dilutive effects after the commencement of convergence period from July 2008.

As for returns to shareholders, including dividends, we will review our policy in view of global banks balancing -- pursuing further opportunities for growth. In other words, we will flexibly make dividend payments and conduct share repurchases, while aiming for a medium and long-term target for Tier I capital ratio of 7%.

Please go over to the next page. Let me share with you our earnings estimate for this fiscal year, page 21, please. Consolidated net business profits are estimated at JPY1.2 trillion, an increase of JPY277b from fiscal 2005, mainly due to an increase in profits from customer groups as we continue to strategically allocate our management resources to growth areas and enhance comprehensive capabilities of the Group.

Credit costs are estimated conservatively at JPY90b, despite the continued improvement in our asset quality. Net gains related to stocks are also conservatively estimated at JPY40b. As a result, consolidated net income is estimated at JPY720b, an increase of JPY70b, or over 10%, from fiscal year 2005, another record high for Mizuho for the consecutive fiscal years.

As for dividends for the fiscal year ending March 2007, we plan to pay dividends of JPY4,000 per common share.

Next page please. Very lastly, as closing remarks I will highlight Mizuho’s focuses for this fiscal year. Clearly, we will take advantage of current business environment and focus on retail business as a primary strategic targeted area and further strengthen Group synergies. In fact, by March 2008 we plan to add 100 retail branches in domestic market to enhance consulting sales.

Second, with a sustainable growth and increasing profitability at the bottom line, Mizuho will further pursue disciplined capital management following the full repayment of public funds.

In addition, we will enhance risk controls and internal controls as we step into the new requirements under both Basel II and the rigid rules for New York Stock Exchange listing procedures. We are currently in the process of completing our application of New York Stock Exchange listing and strengthen internal control and increase the transparency.

Now, this concludes my presentation. Thank you very much for your attention. If you have any questions, my IR team and myself would like to welcome and respond to you at this time. Thank you very much.

Thank you, sir. Thank you, Mr. Yokota. [OPERATOR INSTRUCTIONS]. Our first question is coming from Matt Pickering. Please go ahead.

Hi. It’s Matt Pickering from Institutional Capital. Thank you very much for holding this conference call. It makes it a lot easier for U.S. investors. One or two quick questions, please, if you don’t mind.

My first and most important question, I guess, is on the domestic lending outlook for the year to March 2007. Are you seeing any signs that, while competition probably remains difficult, either balances or margins might be getting a bit better? Or is it fair that, within the Group, consolidated total lending growth should continue to come more from overseas lending than from domestic lending?

And then my second question related to costs. Besides your strategic cost investment, your underlying base costs were down, but I was curious if you felt the investment to open 100 retail branches by March 2008 would have any significant impact on your retail banking cost/income ratio? Thank you very much.

Thank you very much. I will go through one by one your questions.

First of all, about the domestic lending business activities here in Japan, as you pointed out, major drivers for the increase of lending exposure from our Bank in the last fiscal year was driven by the overseas business activities. In fact, we had a small increase of lending balance by about 0.33 in the domestic market, whereas in overseas we increased our exposures over JPY2 trillion. So, clearly overseas demand was much, much higher than the domestic demand.

However, as I mentioned earlier, we have seen already a big comeback of the demand, generalized in the domestic market. I will give you more specific figures here in terms of domestic lending business. In last fiscal year, over a 12-month period, still the large corporate in our records shown has contracted its lending business by over JPY1 trillion, whereas loans to SME increased by JPY1.3 trillion. And we had a small increase of housing loans, as we mentioned in our presentation.

So, there has been a sign of recovery of lending business in SME lending business, whereas large corporates still tend to repay their total debt from the bank -- borrowing from the bank.

So, having said that, going forward we assume there is still very heavy competition in the market in Japan among banks, because banks tend to have more deposits than loans. That means everybody wants to make a good business in lending. Therefore, there will be always very tough competition with the decreased demand of borrowings among large corporates. So, we anticipate still a very weak demand of large corporates, but increasing demand of SME credit.

So, in this fiscal year we assume domestic loans to SME credit will be expanded, but margins would almost stay flat or a slight decline even over a 12-month period. So, that would be our current forecast for the lending business at this time. However, as you know, because of the rise in the interest rates, the deposits business will start paying more. So that means, in terms of total net interest income, for this fiscal year we anticipate there will be a positive growth of the total profitability of this net interest income.

Now, when it comes to your second question, which is about the cost issue, as we have stated in our medium-term business plan, we are spending strategic cost -- or strategic expenses in the area of the growth. We are forecasting that we’ll be spending a total of JPY103b -- I’m sorry, JPY107b in this targeted strategic area up to fiscal 2007, whereas we continue to reduce the base expenses by almost same amount of JPY103b. So, that’s the type of analysis we are exploring at this time.

In fact, even for this fiscal year strategic expense, well, we certainly would allocate a small portion of it to increasing branch network. These days branch networks in Japan doesn’t cost so much, because of the cheaper leasing arrangements. But, nevertheless, we’ll be spending close to JPY65b of strategic expenses for this fiscal year, whereas we’ll be making a cost saving of about JPY200b at the same time. So we will be -- still continue to save the money on ongoing base expenses, whereas we will be certainly spending more money in order to increase the top line growth in certain targeted business areas.

Okay, thank you very much.

Thank you, sir. This does conclude your question?

For now, yes.

Thank you for your questions. Our next question is coming from the net conference, and the question was what is the outlook for net interest margin.

Okay. Well, as I have already explained in the previous question, but our outlook for the level of net interest income, well, clearly last year we still recorded negative -- about negative JPY40b for the year. We would start probably recording positive figures, especially with our expectation of increased margins on deposits, thereby bringing about JPY70b increase of the profitability of the deposits business per se, although still we anticipate a small decline in profitability of lending business still, because of the weaker demand that I have mentioned. But we will be certainly better off in the total profitability of net interest income business. Thank you.

Thank you Mr. [Wellesley]. Do you have any further questions, sir?

Well, I actually asked that question before he answered the previous question, but if you could possibly just also run through your further assumptions in your estimate of JPY1.2 trillion net operating profits for this fiscal year and, in particular, roughly how you expect that to break down on the non-interest income side?

Okay. Well, as we make a forecast, or earnings estimate, on a consolidated basis of net business profits, we are targeting JPY1.2 trillion on the net business profit on a consolidated basis. Now, this figure, if you could recall, the losses we took in the previous fiscal year of recording losses on our bond portfolio of about JPY138b, if we include that effect in the previous year, year-on-year basis we are anticipating about JPY140b in growth from the previous year’s level to lead to this JPY1.2 trillion net business profit.

So I will go through very quickly what would be the major components of our assumptions to reach to this growth of JPY140b approximately. Now, on the three-bank basis, our core business banking entity, we are expecting to have a growth about JPY110b from the previous year’s income level actual performance.

In here, we are forecasting there will be a top line growth by JPY150b, and this one should come from two major components - increased profits from the customer group by about JPY180b and somewhat declining factors from the markets, because of the rising interest rates. Now, in terms of increase of customer profitability, out of JPY180b about JPY130b is coming from the increase of non-interest income, namely fees and commissions.

Remember, we had recorded a growth close to JPY90b, this figure in last fiscal year. So we assume continued strength of our increasing top line figures or fees coming from the customers. On top of it, we’re expecting about JPY50b increase of the profitability related to interest income margins, with the reasons I quoted. One is from increase of the deposit profitability, with a decrease of net income from the lending business in the domestic market, but with the increase of the interest income from overseas investment -- overseas lending activities.

All with that, with the assumption of expenses that I have went through, just a slight increase close to about JPY40b increased result, that makes almost -- about JPY110b net growth on a year-on-year basis from the previous year. And we also, in addition, anticipate there will be increased profitability from our securities companies and other subsidiary companies we have. So that would make the total growth, net growth, of about JPY140b on a consolidated basis to reach to JPY1.2 trillion net business profits. I hope I can make clear delivery to you about these figures. All these are assumptions, by the way. Thank you.

Thank you very much.

Thank you, sir, for your questions. Our next question is coming from the Internet, and the question was what was the income statement impact of the J-COM Trading error. Are there any further potential impacts in the current fiscal year? Thank you.

Well, as you know, our subsidiary company, Mizuho Securities in Japan, unfortunately made a mistake of its operations. And, as you know, there had been erroneous orders that they placed in conjunction with the J-COM Trading.

As a result of that erroneous error transaction, clearly we made a loss of about JPY40b. And this one had been recorded in profit and loss statement for Mizuho Securities as the special loss, or extraordinary losses on their bottom line figures. So this has been already booked and recorded in our total consolidated profitability. That means our JPY649b total profitability does include that negative factor as well.

And, as far as your second question is concerned, is there any further potential impact in this current fiscal year, quite frankly at this point I have no clear picture about what’s going to happen on this. But certainly, as you know, this erroneous order issue had been in the public market and public notice that this issue needs to be resolved between Mizuho Financial Group and Tokyo Stock Exchange, or other related parties again.

So we will be going through more clear resolution among related parties. And clearly, we had already taken a loss already in the previous year, so there is nothing to lose any more. In other words, if we start gaining some recoveries on this discussion among parties, clearly, well, there will be additional positive factors going forward. But I certainly don’t know when it’s going to happen on this.

But clearly, all the procedures we’ll be talking should be transparent because everybody -– it’s caught everybody’s attention, not only here in Japan but everybody all over the world. We apologize for this inconvenience, representing all the employees out of Mizuho Financial Group.

Thank you, sir. [OPERATOR INSTRUCTIONS]. We have a follow-up question from Julian Wellesley. Please go ahead.

Yokota-San, can you give us some detail about the composition of overseas loan growth last year and what kind of growth you’d expect from overseas lending for this year, please?

Well, as I mentioned, we had about JPY2.1 trillion net increase in overseas lending business. Obviously about 20% are related to our exposures to Japanese corporates, or Japanese customer-related businesses. That means the remaining 80% had been served to the customer needs for non-Japanese customer transactions.

And because of the -- all the sudden growth in the overseas market, well, certainly we certainly care about returns relative to the risks we’re taking. So we will be certainly anticipating there will be a still expanding business of lending business in overseas markets. But with the effective use of syndications or other mechanisms we have, we try to diversify our risk exposures of our total composition of international business. So we anticipate still a slight increase of overseas exposure for this fiscal year as well.

Thank you.

Thank you, Mr. Wellesley. This does conclude your question, sir?

It does, thank you.

Thank you, sir. We have a follow-up question from Matt Pickering. Please go ahead.

Yes. I just wanted to clarify one point. When you were kind enough to answer my earlier question, you were commenting about how deposit rates would start to rise this year and how that would be a benefit to your net interest income. Maybe it’s just still too early in the morning for me here in the U.S., but I would think that if you had to pay higher deposit rates, that would be a detriment to your net interest income. So I just wanted to make sure I understand your expectations on the deposit side of your business, given that your loan to deposit ratio is still obviously way below 1. Thank you.

Okay. Well, I’d like to just make it clear. Because of the departure from zero interest rate policies taken by current BOJ, we anticipate there will be widening margins of the deposit business, because here in Japan at this point deposits make unfortunately nothing, no profits for our business, because of the zero interest rate policies. And rather we have to pay the premium of insurance to maintain deposit insurance [system].

And, as you know, most of the deposits, especially in the retail base for Japanese banks, customers just think they tend to make a deposit and less sensitive to the rates market in the -- rates movement in the market. So that means, if the interest rate goes up in the market, we’re not going to pass on the full amount of increased level of increased margins back to the depositor. So we would certainly anticipate there would be increased profitability of deposit business.

For example, at the end of March in Mizuho Bank, as our retail wing, we have over JPY52 trillion worth of deposits, of which about 60 -- more than 60% are what we call liquid deposits, like ordinary deposits or checking accounts or saving deposits. People tend to make these deposits just mainly for the purpose of daily settlements, so the money sits there. But we can enjoy, hopefully, more ordinary course of commercial bank business, earning more widening spreads on the deposit business. That’s what I have meant for the increased profitability of the deposits.

So, in our case, we can assume the three-month TIBOR, short-term rates in the market, will reach to about 0.5% at the end of this fiscal year. So we can certainly enjoy the -- I’m sorry, over 0.5% of three-month TIBOR. So that means we can certainly enjoy a partial percentage of this increased margin on the deposit business. Thank you.

Thank you, sir. Does that conclude your question?

Yes, it does. Thank you.

You’re welcome, sir, thank you. [OPERATOR INSTRUCTIONS]. We have a follow-up question from Julian Wellesley. Please go ahead.

Hi. Can you give us some more detail on your retail branch expansion program? How many of the sites have been found? How easy is it to find new sites to open bank branches? What kind of payback period are you expecting for new branches?

Well, clearly, we have identified some areas already. And one big example -- one good example is we already opened up a new branch in [inaudible], which is a very busy street of Tokyo Metropolitan area and one of the probably modern -- most modern business building complex. And we are targeting more rich people among younger generations in the Tokyo Metropolitan area.

But, depending on the area we’re talking, for example there are more affluent areas of the business for elder citizens, so that we might just simply open up a branch only for the consulting business. In other words, we are targeting more [legal] branch only for passing on just retail consulting.

In Japan, typically, we used to have a lot of branches. These branches are typically designed to serve both corporate customers and individual customers, and other -- all kinds of customers. So we are changing that concept, more focusing on the retail customers in reflecting the characters and the level of targeted business in certain designated areas. So I think we’ll be expanding these retail business outlets only for the consulting business purposes by 100. That’s the sort of announcement we have made in last year, and we continue to realize this desired target. Thank you.

Okay, thank you.

Thank you, sir. Does that conclude your question?

It does, thank you.

You’re welcome, sir. Thank you. [OPERATOR INSTRUCTIONS]. Our last question is a follow-up question from Mr. Julian Wellesley. Please go ahead, sir.

Could you tell us a little bit more about the joint venture with Credit Saison?

Okay. Well, as you know, we made an announcement of forming a joint venture with Credit Saison. This is a part of our program -- membership program for Mizuho Mileage Club, in order -- this is really a unique membership program where the members can enjoy ATM card with the credit card function, just on a single bank’s ATM card.

In Japan, before we launched this product, everybody had to carry two different cards, ATM card and credit card, and we just provided most of the convenience and the brand of Mizuho. And in order for us to enhance its function of MMC, we decided to increase our capabilities and strengthen our brand name from Credit Saison. That’s why we made a tie-up for this credit card business support.

And the joint business, we had launched the joint product both from Mizuho and Credit Saison. And MMC, the number -- the total number of the MMC members, had gone up to over 1.5m customers -- members at this point. I do not have a specific figure to how much the specific -- the results of the tie-up mainly coming from this joint venture business from Saison and Mizuho Mileage Club.

However, in terms of card-issuing business, we had already shifted our operations of card-issuing business to Credit Saison, and Credit Saison will transfer their processing function to Mizuho Financial Group. So we have already had a comprehensive strategic alliance with them, and we are enhancing this business further at this point. Thank you.

Thank you, Mr. Wellesley. Does that conclude your question, sir?

It does, thank you.

Thank you for your questions, and I would like to hand the call over to Mr. Yokota for the closing remarks. Please go ahead. Thank you.

Well, thank you very much for your very positive questions, and if you have any further questions please do not hesitate to email or phone us. Our Investor Relations team will be lined up for your questions. I think I hope you have enjoyed this program.

We plan to have an Investor Relations meeting on May 31 in Tokyo. After that, we will post the more detailed disclosure information on our website in both Japanese and English. I hope you have a good day today, and now I will have a good sleep, as it’s midnight in Tokyo. Sayonara from Tokyo. Bye-bye.

Thank you. That does conclude today’s conference call. On behalf of Mizuho, we would like to thank you all for your participation. Thank you for using Verizon Conferencing. All lines may disconnect now, and good day to you all. Thank you.