Mizuho Financial Group Inc (MFG) 2009 Q2 法說會逐字稿

Good morning and afternoon, all sites. Welcome to Mizuho Financial Group's fiscal year 2008 interim results Internet conference. (Operator Instructions)

I would like to hand over to Mr. Takayuki Yokota, Chief Investor Relations Officer of Mizuho Financial Group. And I will be standing by for the question and answer session. Over to you, sir.

Hi. Good morning and good afternoon and good evening to everybody wherever you are. Welcome to the Mizuho Financial Group Internet conference call for fiscal 2008 interim results. I am Takayuki Yokota, Chief Investor Relations Officer of Mizuho Financial Group. We thank you very much for joining today's Internet conference.

I'd like to go through some brief presentation material for the interim results for about 20 minutes first and after that, we'll be glad to take your questions. For your reference purposes, the presentation material I'll be using will become available for printing after the conference. At this time let us turn to page five of the presentation material.

In this section I would like to show you a brief overview of our interim financial results. In October, we have regrettably revised down our earnings estimates for this fiscal year as shown in the announcement. Our consolidated net income for the first half amounted to JPY94b, a year on year decrease of JPY232b.

In order to show you a clear picture about the major factors for the downward revision I would like to start with the results of the core three banking operations. Please have a look at the bottom half first. The three banks' gross profit decreased by JPY83b to JPY765b year on year reflecting a major decrease of non-interest income in customer groups for the first half in the challenging business environment.

In addition, G&A expenses amounted to JPY456b, increased by JPY21b from the same period of previous fiscal year. This was mainly due to an increase in expenses related to employee retirement benefit to reflect the lower expected return -- level of return on pension assets.

As a result, the three banks' net business profit decreased to JPY309b. In addition to such decrease of net business profit, there were three major factors that pushed down the three banks' ordinary profit. They are one, devaluation of securities. Two, credit related costs. And three, losses on securitization products due to the global market dislocation. I'll give you more details of these points later.

On top of those three factors, the Group's securities companies such as Mizuho Securities and Mizuho Investors Securities negatively contributed to the consolidated results primarily due to the decline in the both stock and bond markets.

As a result of these factors, our consolidated ordinary profit for the first half, shown in the top table, decreased by JPY342b to JPY56b. As for the bottom line profit, we managed to achieve JPY94b of net income on a consolidated basis even under the recent tough environment.

As for our regulatory capital, our Tier 1 capital ratio and BIS capital ratio became 7.36% and 11.45% respectively as of the end of September. Next page, please.

Here I will cover more details of the three major factors for the negative impact on our earnings results. First, as shown in the left graph, devaluation of stocks for the first half amounted to JPY95b. It was mainly because of large declines in the domestic stock market and the continued turmoil surrounding the financial markets and uncertainty over the global economy.

Please look at the right graph. This shows increased credit costs of the three banks. The credit cost for the first half amounted to JPY130b with an increase of JPY76b on a year on year basis. However, the cost would have been about JPY90b excluding the losses related to the collapse of Lehman Brothers. The main reason for the increase was sudden bankruptcies of the domestic real estate related borrowers and contractors in the SME sector. In fact, Mizuho Bank, our retail bank, reported JPY115b of net credit cost in the first half. And credit cost ratio on the three banks basis was 34 basis points, or 23 basis points if we exclude Lehman factors.

We believe that level of cost was relatively lower compared with our peers and it reflected our Group wide efforts to strengthen credit management since last fiscal year. Please turn to the next page for the third factor.

Now please first take a look at the left part of this slide. The total impact of the global dislocation on our Group's profit for the first half was a loss of JPY72b. As shown in the middle, the major contributing factors were related to Mizuho Corporate Bank. JPY59b losses were incurred on foreign currency denominated securitization products and others.

As for Mizuho Securities, trading losses on foreign securitization products for the first half was approximately JPY13b compared with over JPY400b of losses incurred in the last fiscal year.

The top right table shows changes in the balance of foreign currency denominated securitization products on a fair value basis from March to September. As for the three banks, [net] Bank balance on the fair value basis has decreased to JPY693b in September as a result of sales, provisions, and devaluation. Out of this exposure, approximately 50% was hedged with a CDS securitization scheme.

Mizuho Securities reduced the balance to JPY40b with marks of only 12% in September through a continuous effort for sales and markdown. We believe that Mizuho Securities has already entered the final stage in resolving issues related to securitization products.

The bottom right table shows the three banks' aggregate balances of loans held for sale associated with overseas LBO and other transactions and the relevant reserve ratios. The balance in September amounted to JPY618b, a decrease of JPY188b from March through sales of loans mainly in Japan.

The reserve ratio was 8.7% in September, increasing from 6.3% in March. Please refer to appendices for further details about the impact of the market dislocations later. Next page, please.

This slide summarizes the financial results of the Group's securities subsidiaries. As shown on the left, Mizuho Securities recorded JPY16b of ordinary losses. Although the Company's domestic bond trading performed well even under such a tough market environment, the positive effect was fully offset by the trading losses mainly associated with the domestic stock trading as well as overseas securitization business. Because of the substantial losses that Mizuho Securities recorded in last fiscal year, I would say the Company has already started to move towards recovery.

As shown on the right, the performance of both Mizuho Investors Securities and Shinko Securities was disappointing, mainly due to the severe market environment for the stockbrokers in Japan. For your reference, both Mizuho Securities and Shinko Securities are proceeding towards the planned merger, which is scheduled in May next year.

Now let me take a moment to walk you through some of the key aspects of the Group's core businesses. Please turn to page 10. I will start with our net interest income.

As shown on this page, the three banks' average loan balance for the first half increased by JPY1.5 trillion from the second half of the previous fiscal year. While our domestic loan balance increased only at a slow pace due to intensified competition among banks, the increase in the total balance was mainly attributed to the increased overseas lending.

However, the growth in overseas loans became slower in the first half as we implemented a selective and prudent lending policy to choose high profile deals given the increasing pressure on the economic environment, especially in the US and Europe. Next page, please.

The line graph on this page shows the aggregate domestic loan and deposit rate margins of Mizuho Bank and Mizuho Corporate Bank. The margin in the first half decreased by 3 basis points compared with the second half of the fiscal 2007 reflecting pressure from intensified competition in the domestic loan businesses. As for the future, the loan and deposit rate margins could become even narrower mainly due to Bank of Japan's recent policy -- rate cut by 20 basis points which was announced in October.

Please look at the right chart. Aggregate net interest income for the three banks slightly decreased on a year on year basis but net interest income from our international operations increased by JPY13b due to increased overseas lending. Next I'd like to move on to loan interest income. Please turn to the next page.

As shown on the slide, net fee and commission income of the three banks for the first half was JPY146b, very disappointingly a year on year decrease of JPY32b. In our business with individual customers, fee income associated with sale of investment trusts and individual annuities for the same period decreased year on year. This was mainly due to turmoil in financial markets especially in the stock market.

As for our businesses with corporate customers, fee and commission income associated with domestic syndicated loans increased with number one domestic lead arranger status. However, that from solution related business for SME, foreign exchange business, and overseas business decreased. Profits from trust and asset management business of Mizuho Trust and Banking also decreased, mainly due to a decrease of the real estate deals reflecting the domestic market conditions. Please turn to the next page.

The graph on this slide shows a snapshot of our G&A expenses on the three bank basis. G&A expenses increased by JPY21b on a year on year basis mainly due to a JPY21b increase in the expenses related to employee retirement benefits. As a result, combined with the decline of gross profit, expense ratio for the three banks went up to 59.6%. We will promote a Group wide cost cutting campaign.

In the next section, I'd like to cover more details on our asset quality. Please turn to next page, page 15.

First, about our NPL and credit costs. Please look at the left graph first. The three banks' credit cost for the last six months amounted to JPY103b, increased by JPY77b on a year on year basis, largely due to the sluggish economic environment such as the increasing number of bankruptcies particularly in the domestic SME sector.

As for the breakdown among the three banks, please look at the table below the bar chart. Mizuho Bank recorded JPY115b of net provisions, while Mizuho Corporate Bank and Mizuho Trust and Banking recorded net provisions of JPY5b and JPY9b respectively, partially due to the net reversal of reserves. Please take a look at the right graph.

While the credit cost increased, the three banks' non-performing loans or NPLs slightly decreased to [JPY1.13 trillion]. Consequently, our NPL ratio decreased to a 1.50% level. Next page, please.

Shown on the left are unrealized gains and losses on our securities portfolio. Net unrealized gains on other securities decreased to JPY125b. Decreasing net unrealized gains on Japanese stock was mainly attributed to the declines in the stock market in September and to sale a portion of our equity portfolio so far.

As for Japanese bonds, the unrealized losses widened mainly due to the increase in long term interest rates and substantial price fluctuations of the floating rate JGB. The unrealized losses on the other increased mainly because of those related to [bank] bonds and securitization products. Please look at the right half.

Our net PTA, preferred tax assets, are increased to JPY0.843 trillion mainly due to reduction in net unrealized gains on other securities despite recording of taxable income of JPY190b. As a result, the ratio of net PTA to Tier 1 capital has increased to 17.7%.

Next, I'd like to explain briefly our earnings estimate. Please turn to page 18. As shown on the left, our consolidated net business profits for this fiscal year are estimated to be JPY780b, an increase of about JPY270b from last fiscal year results. For this figure, we assume Mizuho Securities recovery from the significant losses of above JPY420b in the previous fiscal year.

Our underlying assumptions in the estimates are one, NIKKEI lose between and JPY9,000 and JPY10,000. Two, continuation of the current policy rate of Bank of Japan. Our consolidated credit cost and net losses related to stocks are estimated to be JPY250b and JPY110b respectively mainly in light of the recent developments in the corporate performance and in the stock market. As a result, we estimate consolidated net income to be JPY250b, a decrease of JPY61b on a year on year basis.

Meanwhile, we plan to make cash dividend payments of JPY10,000 per share of common stock for the fiscal year ending March 31, 2009, unchanged from our plan announced in May this year. We plan to make dividend payments on preferred stock as prescribed.

Now, for the final topic of today's conference, I would like to share with you our capital management. Please move on to the page 20. On the left half of the slide, we summarize measures implemented in relation to our capital management for the first half. I will not go through details but I'd like to touch briefly upon only key elements.

In July, we successfully issued JPY303b of non-dilutive Tier 1 preferred debt securities through private placement to domestic qualified institutional investors. We also exercised call options and redeemed approximately JPY379b equivalent of Tier 1 preferred debt securities in June. As for returns to the shareholders, we paid JPY10,000 of increased cash dividends per share on common stock as planned in June.

In July, we repurchased approximately JPY150b of our common shares and in September, cancelled those shares. It was conducted as a preemptive measure to address the potential dilutive effect in relation to about JPY940b of convertible preferred shares issued to the private sector. Please have a look at right graph. As a result of those measures, both the quality and quantity of our capital base were improved ensuring the financial soundness at the sufficient level of Tier 1 of 7.36%. Now, let's move on to the next page.

On this slide, I would like to cover briefly our capital management policy and the future actions announced today. As far as share repurchases are concerned, given the importance of capital under the recent circumstances and the earnings trend, we will put more focus on strengthening our capital base in this second half rather than on share buyback. Of course, from the management perspective there is no change in our basic policy to continue to address the potential dilutive effects by means of future share buyback. Please move on to the right graph.

As a concrete action to strengthen our capital base, today, we decided to establish a SPC, special purpose corporation, to issue non-dilutive Japanese yen denominated Tier 1 preferred debt securities through placement to domestic qualified institutional investors in the relatively stable domestic market. The aggregate issue amount hasn't been fixed yet but it is expected to enhance our Tier 1 capital by up to about JPY300b level. Next page, please.

At the end of this presentation, I'd like to summarize briefly our key messages. As I explained, in October, we regretfully revised our earnings estimate mainly due to three major factors - devaluation of securities, increasing credit cost and the continued impact of the global financial market dislocations. All of these factors reflect the current management environment issues to be tackled.

However, we would say that all of these factors are, from the medium to long term perspective, rather extraordinary ones that can be mitigated if we take appropriate action. As you've seen, we've already started to take the necessary action for enhancing our capital base which should provide a sufficient capital buffer to absorb the impact of further downside risk scenarios without even any dilution.

We will continue to make progress for a stronger domestic customer base and pursue investment banking business through selection and focused approach while keeping stability of our earnings even in the global turbulence for the time being.

Well, this concludes my presentation. I thank you very much. And my IR team and myself are happy to respond to any questions you may have. Thank you for your attention. Thank you.

Thank you, Mr. Yokota. (Operator Instructions)

Miss Barlow, you make ask your question.

Yes, thank you. I just had a question with respect to capital. I know that it improved, at least duration has improved, but the actual level of capital fell. This is presumably based on a significant reduction in your risk weighted assets. I'm hoping to find out what the rationale was behind that significant drop for risk weighted assets.

Secondly, just wanted to get some sense from you as to whether you're considering raising equity at some point in the future as well.

Hello?

Hello?

Hi.

Hi.

Sir, did you hear my question?

Can you just repeat your question one more time especially the second one? I think I had a hard time to have your question.

Okay. Sure. The first question was with respect to your Tier 1 ratios. They improved but it looks to be completely related to your risk weighted assets. I wanted to find out why there was such a significant reduction in your risk weighted assets.

The second question was whether you intend to raise equity at some point in the future along the same lines with what MUFG has announced?

Well thank you very much for asking questions. First of all, clearly I think the -- our improved Tier 1 ratio is related to the reduction of risk weighted assets by about, if my memory is correct, by about JPY1.4 trillion base. And well, certainly I would say this is really due to some of the reduction of the exposures in securitization nature and also some reductions in the market risk. As you know, we have gone through a major restructuring and reduction of risk weighted assets in Mizuho Securities.

And clearly, given the lower profitability we had, I think this contributed a little bit to reduction of operational risk as well.

And as far as the exposure related to lending business, we have plus and minus because of the developments, increased exposure in overseas market and reduction in some areas in the domestic business, especially in SME. All in all, I think we really were able to realize reduction of the risk weighted assets under the method of Basel II.

Now, as far as the capital level we're talking about at this point in time, I think probably if we were able to obtain, let's say, JPY100b level of Tier 1, it will probably be contributing to additional 0.15% of increase of Tier 1. And we certainly had the assumption to look at the downside scenario and clearly I think a capital raising at this time of the JPYY300b makes sense for us in terms of making some cushion and buffer in preparation for the downside of the equities market in Japan.

So I'm not really comparing anything apple to apple with the MUFG but -- because we haven't made any big investments in these days and I think we have been streaming down our risk weighted assets and managed them successfully. So I would say this time around, as I mentioned earlier, at this point of time, given the potential buffer I would like to have for the preparation for the downside, we basically determined today to have an issuance of Tier 1 debt instrument without any dilutive nature to existing shareholders in the range of JPY200b to JPY300b. We hope to conclude to reach to the level of close to JPY300b.

Thank you very much.

Thank you.

There appear to be no questions at this point in time. (Operator Instructions) I have no other questions at this time. (Operator Instructions)

[Miss Tu], you may ask your question.

Hi. I have a quick question. I'm just wondering on how comfortable you are with your loan provision level given that the economic situation in Japan is not very good currently?

Hello?

Hello. Yes, sorry to have kept you waiting for so long. Well, first of all, I think that this time around we have experienced further downside of exposure to SME credits in Japan and I think we have identified the areas to be protected. In some cases, we have already gone through the restructuring those borrowers' credit with the budget we have established and partially using the provision.

At this time, as you have seen, our NPL itself has not been substantially increased because of our acceleration of taking care of the problem borrowers preemptively. So I would say that although the reserve ratio itself declined slightly on our total exposure, I think the fundamental issue we are facing is more concentration of certain issues in Mizuho Bank's operations who takes care of the business with SME credit. And I think for those credits, at this point in time, we have identified areas of the problems whereas the corporate bank business of corporate nature customers has been performing well. And in fact, we've been still experiencing some write backs as a result of I think the -- they've stayed with very lower credit cost.

Thank you.

Thank you again. (Operator Instructions)

Hello again. This is Takayuki Yokota speaking from Mizuho Financial Group. I think just to respond to your previous question related to the credit cost issue, just one additional comment from my end is as you have seen, we have already increased the level of the credit cost, even the expected level credit cost for this fiscal year especially for Mizuho Bank's operations over 83 basis points which is substantially high increase from the original 20 to 30 basis point forecast.

So I think that probably tells you the further protections we'll be taking for this second half in preparation for additional portions of the downside after we took care of some of the initial problems -- problematic borrowers that we were able to identify.

Well, at this time if you have any further questions, we are more than happy to respond to you.

Thank you and over to you, Mr. Yokota.

Thank you very much. It sounds like there isn't any more questions from your end. So as a last comment to conclude this meeting or conference, I would like to just give you three points for -- from the management perspective for Mizuho Financial Group.

While certainly in face of the challenging business environment we will concentrate our management effort addressing the three major priorities. First, clearly in response to the financial challenges, we will make focus on strengthening our core capital base under the solid capital management policy as I mentioned while at this time we'll be tapping the domestic market because of the stability and depth of the market for raising capital for Tier 1. We will further continue to have efficient and effectual management of risk assets emphasizing risk/return profile.

In the second, we will continue to enhance our risk control capability for responding to the market risk and other risk factors arising from global financial market dislocation. And certainly we will strengthen our credit risk management in view of the sluggish domestic economy and we will take the necessary additional provisions to counter those additional risks especially in small and medium size credit.

And the third, we will further strengthen our core businesses. We will re-establish and strengthen our business base by continuously pursuing investment banking business through the selection and focused approach. And clearly, our key focus still at this point of time is to continue to enhance the domestic retail business infrastructure and promote Group synergies. By doing that, we will be hoping to achieve the stability of our earnings even at this difficult time.

We sincerely thank you very much for your attention and we hope to have another contact in anywhere. We are very much open to your any questions or any dialog which you would like to develop with us.

Well, thank you very much and probably good night from Tokyo. Thank you.

This concludes today's conference call. Once again, on behalf of Mizuho Financial Group, we would like to thank you all for your participation and thank you for using Verizon Business.