Mizuho Financial Group Inc (MFG) 2009 Q4 法說會逐字稿

Ladies and gentlemen, my name is Takashi Tsukamoto, President and CEO of Mizuho Financial Group since April this year. It is my great pleasure to have this opportunity to present to you the financial results of fiscal 2008. Before I start with the presentation, I'd like to make a few observations on how I see the business environment today.

Obviously, the global financial environment faces an extremely challenging situation. The financial sector is in the grips of enormous difficulties stemming from the rapid deterioration in the business environment, and the global financial crisis on a scale unwitnessed since the Great Depression has seriously damaged the real economy, but there is some glimmer of light in the darkness.

There are signs that the economic situation is gradually changing for the better, both at home in Japan and overseas, sustained by the strenuous efforts for structural adjustment by the private sector and a series of government initiatives. However, the crisis is not over yet.

It is my mission to lead the management team of Mizuho Financial Group to take this challenge head on using this opportunity to take a step forward for future growth. Now let me give you a quick overview of the last fiscal year.

Please turn to page five. Please look at the top left of the slide. The 3 Banks' gross profit decline mainly due to a decrease in non-interest income from customer groups and losses on credit investments in the trading segment. However, as demonstrated by the next two graphs, in the second half, net interest income increased compared with the previous half and there was a shallower decline in non-interest income. These are signs that the rate of decrease in income from customer groups is slowing down.

In addition, G&A expenses increased primarily due to a spike in those associated with employee retirement benefits. As a result, net business profit, shown at the top right, declined to JPY576 billion.

On top of that, as shown at the bottom, the 3 Banks recorded significant losses due to devaluation of stocks and increased credit costs, especially in the fourth quarter and the continued impact of the global financial market turmoil. As a result, we recorded consolidated net losses of JPY588 billion.

Please turn to the next page. Despite such tough results, we have maintained the financial soundness of both assets and capital by controlling risks amid the drastic changes in the economic environment. As shown on the upper left, although the NPL balance at the end of March has increased on year-on-year basis, the net NPL ratio has dropped by 0.1% to 0.73% due to sufficient provisions.

On the other hand, however, unrealized losses on other securities, as shown on the upper right, amounted to over JPY500 billion due to the significant decline in the stock markets.

As shown on the lower left, a combination of net losses and significant unrealized losses on other securities, pushed down our consolidated Tier 1 capital by about JPY1.1 trillion. However, our Tier 1 capital ratio and BIS capital ratio were maintained at sufficient levels of 6.38% and 10.55% respectively, including the effects of the decrease of risk-weighted assets due to the introduction of the advanced internal rating space approach or AIRB.

Another factor contributing to capital soundness was the issuance of non-diluted Tier 1 preferred debt securities and Tier 2 subordinated debt as shown on the lower right. Moreover, we decided to suspend share buybacks for the second half.

Please turn to the next page. We have designated this fiscal year as a year to solidify our foothold for a leap forward in light of our earnings situation and a severe economic environment. We will review our business strategies and pursue the three themes shown on the right side of the slide.

First, it is my firm belief that there is nothing more important for us to do than to use this situation to capture maximum business opportunities by fully utilizing our significant customer base and our sufficient capabilities to provide a broad range of financial services developed to date.

Mizuho Bank and Mizuho Corporate Bank will focus on strengthening their core businesses, which are commercial banking and corporate finance, based on their strong customer base. In addition, we will seek Group collaboration to maximize synergies among the banking trust and securities functions.

Second, we will further strengthen risk management such as credit management and, in particular, at a holding company level, we control management resource allocation through a selection and focus approach.

Third, we will remove as many risk factors as possible, including stockholdings and securitization products. At the same time, we will focus on enhancing the quality and quantity of capital, so as to establish a solid financial base in preparation for further adverse changes in the economic environment.

In the next section, I would like to explain the financial results in more detail. Please turn to page nine. This slide gives you a more detailed summary of the financial results. The figures in the table left show our consolidated results as well as the 3 Banks.

The box on the right explains the analysis of major changes to the consolidated results. I would like to skip this slide due to some overlaps with what I have explained in the previous pages.

Please go to the next page. On this slide, I would like to explain briefly the financial results of major Group companies other than the 3 Banks. You will see on the left that despite Mizuho Securities' improvement from significant losses in the previous fiscal year, each Group Securities company recorded net losses owing to weak commission and trading businesses resulting from the global financial market turmoil and a stagnant bond and stock market.

On the other hand, as shown on the right, the variance in net business profits between the consolidated and the 3 Banks amounted to JPY45 billion, the majority of which was contributed by the steady results of Mizuho Corporate Banks' overseas subsidiaries, mainly in the US and Asia.

Next page please. The following two slides give you the financial results of each global group by business segment. Due to time constraints, I'll only give you a brief overview as in the top right box on the first slide.

First, net business profits for customer groups decreased by JPY163 billion year-on-year, mainly driven by a decrease in non-interest income.

Second, net business profit for the trading and others segment significantly decreased by JPY122 billion year-on-year. Profits from trading segment decreased largely due to JPY89 billion of losses on equity investment trusts and other credit investments, despite a solid ALM performance, particularly in foreign currency operations.

Please skip the next slide and turn to page 13. On this slide, you can see the state of the loan and deposit balances of the 3 Banks. As shown on the left, the overall loan balance increased by about JPY2 trillion. This reflects our proactive response to the domestic funding needs of SMEs and the increased needs for bank loans by large corporations in Japan due to the loss of normal function in the capital markets since the collapse of Lehman Brothers. In addition, our loans to individuals, especially housing loans, which we have been focusing on, increased steadily.

On the other hand, as a result of our stringent selection of transactions, the average balance of overseas lending increased relatively slightly if compared with the previous years.

Shown on the right are the deposit balances. As you can see from the graph above, the average domestic deposit balance increased by JPY2.7 trillion. As for the breakdown, the graph at bottom right shows that corporate deposit increased significantly by reflecting steady increases in corporate cash reserves and that individual deposits continued to increased steadily.

Next page please. Here I would like to explain the interest margins and net interest income. Please look at the line graph on the left. Our domestic loan and deposit rate margins, shown by the bold line in the middle, improved by 2 basis points in the second half compared with the first half, primarily due to improvement at the Mizuho Corporate Bank. This was attributable to our efforts to improve loan spreads as well as the moderate lowering pace of market interest rates, despite the Bank of Japan's rate cuts.

Taking the right half, as shown below the bar chart, net interest income in our international operations has increased by JPY18 billion due to the contribution of loan interest income. As for our domestic operations, despite a JPY10 billion increase in loan and deposit businesses, net interest income has slightly declined due to a decrease in dividends received.

Next page please. This slide covers non-interest income. With the worsened business environment, non-interest income decreased by 21% year-on-year. However, the results in the second half remain at almost the same level as the first half, partly due to an increase in solution business related fees such as domestic syndicated loans despite the severe environment.

Next page please. This slide shows G&A expenses. As you can see in the graph, there is a spike in the aggregate G&A expenses of the 3 Banks of JPY49 billion mainly due to those associated with employee retirement benefits.

Although we continue to allocate management resources proactively in focus business areas such as retail banking, non-personnel expenses dipped slightly as a result of a Group-wide cost cutting campaign.

Now I'll explain our risk management. Please turn to page 18. This slide shows asset quality. First, you can see in the graph on the left that the aggregate net credit costs of the 3 Banks during the last fiscal year amounted to JPY539 billion or a credit cost ratio of 69 basis points.

In the first half, it was the domestic real estate and construction sectors that were primarily impacted by the economic downturn. However, since the second half, the impact has spread to all types of businesses regardless of size, and the number of bankruptcies has increased.

Moreover, our overseas customers were adversely impacted by the global economy, which has taken quite a dive. As a result, net credit costs of all 3 Banks have increased.

Second, the upper right box gives a summary of our conservative measures for strengthening credit management such as downgrading internal credit ratings for customers and increasing estimated loss ratios mainly for borrowers with low internal credit ratings, assuming the stagnant economy will continue for the time being. As a result, net provision for general reserve or possible losses on loans amounted to over JPY100 billion as indicated in the bottom right table.

Considering these factors, for this fiscal year, we estimate net credit costs of JPY310 billion for the 3 Banks, or 40 basis points of credit cost ratio.

Next page please. As shown on the left, the NPL balance remained at a low level of JPY1.3 trillion and the net NPL ratio decreased to 0.73%. As a result of the conservative measures as of the end of March 2009, the reserve ratio against normal obligors was 0.21%, almost twice as high as that in the previous year, or even higher than the level of fiscal 2002, when we recorded credit costs of more than JPY2 trillion.

For your reference, the graphs on the right show the breakdown of NPLs of both Mizuho Bank and Mizuho Corporate Bank.

Next page please. This slide summarizes our securities portfolio. As shown on the upper left, net unrealized losses on Japanese stocks amounted to JPY183 billion as of the end of March.

In addition, we recorded a significant devaluation of our stocks. As a result, the fair value of the Japanese stock portfolio, as indicated in the middle box, was JPY2.6 trillion which was a decrease of JPY1.2 trillion since last September.

Having reconfirmed the risks involved in holding stocks, we will continue to tackle the issues by reducing the balances. Meanwhile, as you can see on the right, the average remaining period of our JGB portfolio has been maintained at about two years, despite a JPY2 trillion increase in the balance.

Taking the floating rate JGBs as shown on the same bar chart below, we have applied reasonably calculated prices for the fair value of them since last December, posting minimal unrealized gains.

Next page please. This slide summarizes the P&L impact of the global financial market dislocation on Mizuho during fiscal 2008. As you can see on the left, we recorded losses of JPY135 billion, JPY119 billion from the banking subsidiaries and JPY16 billion from Mizuho Securities, although the amount declined significantly from JPY645 billion recorded in the last fiscal year.

The right half of the slide provides the relevant information to each P&L line item. More detailed explanations are included in the supplemental materials starting from page 51, but let me take you through a couple of key issues here.

First, as indicated under item one, the total outstanding balance of foreign securitization products for the 3 Banks decreased to JPY540 billion. And, as shown under item four, almost 50% of the related credit exposures are hedged through our CDS securitization schemes.

Second, as shown under item five, Mizuho Securities further reduced the relevant balance to JPY39 billion as we conducted the sale of those products especially during the first quarter.

Finally, for the loans held for sale, as indicated under item two, the total outstanding balance decreased to about JPY100 billion reflecting the effect of reclassification of about JPY350 billion of such loans.

You can see at the bottom of this item the amounts, which would have been recorded if we had continued to classify the aforementioned loans as loans held for sale at the end of March.

Please turn to the next page. This slide briefly summarizes the changes we have implemented during the last fiscal year to our fair value calculation methodology for securitization products and floating rate JGBs as well as the reclassification of part of the loans held for sale. We are short of time, so I will not go into detail. However, the P&L impact of these changes are as shown on the slide. Please turn to the next page.

In this slide, I'd like to touch upon Mizuho's integrated risk management. The left hand side shows the allocated risk capital for each of the Group's risk categories. Dealing with the recent economic and market environment, we increased the total allocated amount especially those to credit risk as well as the stock price risk.

The upper right part demonstrates the initiative we have implemented, such as risk capital allocation and others as part of our strengthened risk management. I'd like to move on to the next theme, strengthening our business base. Please turn to page 25.

I am convinced that Mizuho's strength lies in its solid customer base. This slide summarizes Mizuho's advantageous positioning relative to the other major banks in the Tokyo Metropolitan area, where we expect relatively higher growth than other regions. Mizuho's challenge going forward is to enhance top line earnings by leveraging its solid customer base with our unique 2 Banks model. Please turn to the next page.

The new management team have designed a new strategy for each Group, in order to counter the extremely severe business environment. Taking the Global Retail Group shown on the left first. Based on the policy, return to basics of commercial banking business model, the Group intends to achieve positive net business profits after credit costs under such a bleak economic environment. It will aim to increase both the quality and quantity of the assets, and enhance profitability by enhancing marketing efforts in its business with individual customers. And providing highly specialized solution, as well as meeting the financial needs of our SME customers.

Second, taking the Global Corporate Group, shown on the right. This Group is committed to strengthening its traditional Corporate Finance function. It will respond fully to diverse customer needs, such as non-core business divestment and M&A, by fully utilizing its highly sophisticated know-how and research capabilities.

In addition, the Group will further pursue collaboration between the Banking and Securities businesses in light of its experience from US FHC business, the new Mizuho Securities and the revamp of domestic firewall regulations. As for the overseas business, it will continue strict monitoring to prevent asset quality deterioration while allocating resources on Asian countries, such as China and India. Please turn to the next page.

Another focused area to leverage our customer base is pursuit of Group synergies. This slide shows you how we will enhance Group synergies further by having the Banking Trust and Securities Services areas work closely together to cross-sell products and services which best fit our customer needs.

The following slides give you updated information about the latest development in each business. However, I'll skip these, due to time constraints and would like to explain earnings estimates for this fiscal year. Please jump over to page 40.

This slide covers the key figures for our consolidated earnings estimate for fiscal 2009. We estimate consolidated net business profits to increase to JPY720 billion, a year-on-year increase of JPY97 billion.

We estimate JPY330 billion of credit costs, despite remaining uncertainty of other economic environment, considering the effect of conservative measures we took in the last fiscal year, the establishment of new divisions, specializing in corporate revitalization and workouts, and various government initiatives.

We conservatively estimate net gains related to stocks to be JPY50 billion, in light of the effect of reduced book values of our stock portfolio and the recent stock market trends. As a result, we estimate consolidated net income of JPY200 billion.

As for dividends, while anticipating a severe business environment for the foreseeable future, we estimate JPY8 per share of common stock, a decrease of JPY2 from the previous fiscal year. Also, from the standpoint of providing stable dividends. Please turn to the next page.

You can see a breakdown of net business profits for the 3 Banks. To begin with, let me show you our interest rate assumptions. As shown on the upper right, we assume that 'BOJ's policy rates will remain unchanged and that short term interest rates will decline slightly, while long term rates will remain flat.

Now let's look at the left half. As you can see on the upper part, although the aggregate net business profits are estimated to be JPY700 billion, the figure would become JPY622 billion, or a JPY45 billion increase from the previous fiscal year, if we deduct an extraordinary factor of JPY78 billion in intra-dividends received from SPCs, as mentioned in note four. However, there were a couple of major factors which should be noted behind the JPY45 billion increase.

As I have already explained, we recorded nearly JPY90 billion of one time losses associated with credit investment in the last fiscal year. And we assumed the absence of this negative effect in this fiscal year. On the other hand, however, we estimate our interest income in this fiscal year will be adversely affected by about JPY80 billion, due to the 'BOJ's policy rate cuts in the last fiscal year.

Contemplating such positive and negative factors, which will largely offset each other, we estimate that the remaining other factors to achieve the JPY45 billion of increase, such as moderate growth in domestic loan volume and improvement of margins, as well as a reduction of G&A expenses. The breakdown of the estimate by business segment is briefly described on the right half of the slide. We estimate a JPY15 billion reduction in G&A expenses, even after considering a continued increase in employee retirement benefits, as we intend to reduce overall expenses by 5% by making various efforts to strengthen our low cost operations.

Now, let's turn to the final topic, Capital Management. Please turn to page 43.

Mizuho has conducted a disciplined capital management, focusing on strengthening of capital base and returns to shareholders. Shown on the left are examples of the action taken during the last fiscal year. I'd like to mention specifically our efforts to strengthen our capital base by issuing Tier 1 preferred debt securities, both in Japan and overseas; and Tier 2 subordinated debt in the domestic retail market.

With respect to returns to shareholders, we made stable cash dividends and conducted repurchase and cancellation of our own shares of approximately JPY150 billion in the first half. As a result, we maintained our Tier 1 capital ratio at a sufficient level of 6.38%.

However, as you can see on the upper right, both the quality and the quantity of our capital base were affected by the decline in stock prices and increase in credit costs.

On the next slide, I'll explain Mizuho's capital management in light of such situation. Please turn to the next page.

Our basic policy remains unchanged. That is, to pursue disciplined capital management, consisting of two disciplines. Namely, strengthening of stable capital base and steady returns to shareholders. However, for the foreseeable future, we will continue to put more priority on strengthening our stable capital base in order to prepare for a further adverse business environment.

As shown on the left, in May we announced the shelf registration for the issuance of common shares of up to JPY600 billion, together with the issuance of non-diluted Tier 1 preferred debt securities. There are still uncertainties over the economy. So the common stock issuance is aimed at securing a solid and sufficient capital buffer, in preparation for a further adverse business environment, and ensuring flexibility to capture business opportunities, leading to our future growth and respond to customer needs.

Through these measures and steady accumulation of bottom line profits, we will aim to achieve a Tier 1 capital ratio at around 8% in the medium term and increase the level of our prime capital ratio.

As for returns to shareholders; as shown on the right, we will suspend conducting common shares buybacks, which have been implemented to offset the potential dilutive effect of convertible preferred shares since fiscal 2007 until our capital base is further strengthened.

On the next page, I'd like to explain what Mizuho refers to as prime capital. At Mizuho, the concept of so-called prime capital is common stocks plus other Tier 1 capital components with particularly high loss absorption characteristics. More specifically, the definition of prime capital is as follows.

Tier 1 capital minus preferred stocks, excluding those with the features of mandatory convertible to common stocks, minus preferred debt securities. In other words, in the calculation prime capital, only bond time or non-convertible preferred stocks are excluded from the total preferred stocks. At the prime capital ratio, the ratio calculated as prime capital divided by risk-weighted assets, was 3.12% as of the end of March. The ratio will increase by approximately 1% if we assume a common stock issuance of JPY600 billion, the maximum amount in the shelf registration.

Now, at the end of my presentation, I'd like to conclude by providing a brief explanation of my vision for the future of Mizuho. Please turn to page 47.

As I have mentioned several times so far, I believe that Mizuho's strengths lies in its solid customer base. And as the Group's new CEO, I'd like to use this opportunity to realize the true value under Mizuho's business model, based on this solid customer base. I understand the establishment of the new Mizuho Securities complete the enhancement of functions to provide various financial services necessary for realizing the true value.

Under the business model, the operating subsidiaries will aim to win customer oriented business by leveraging their respective strength and expertise, while promoting collaboration among the Banking, Trust and Securities operations.

I believe that the three concepts, customer oriented, frontline oriented, and future minded are the keys to win the trust of our customers, both in Japan and overseas, and enhance our presence.

The holding Company, which I serve in my capacity as CEO, will support the effort of its operating subsidiaries and pursue further value creation through the achievement of an optimum balance in the business portfolio; dynamic management resource allocation, as well as risk control and strong corporate governance. I will also do my best to achieve greater transparency for the benefit of our shareholders and other stakeholders.

Given the current difficult environment, it is important to stand firm, keep pushing on forwards steadily, and pursue sustainable growth, with an appropriate risk return profile, instead of seeking large, one-time gains.

I believe it is my mission to establish a stable earnings base, supported by various revenue sources, for the years to come. As I mentioned at the beginning, I am fully prepared and plan to move forward steadily in the current crisis, to capture every new opportunity one at a time, with a new perspective.

Finally, I would like to ask our shareholders and investors for your continued support, as the new management team and all employees work together steadfastly, to get through the current uncertain and difficult environment, and to realize Mizuho's true value.

Thank you for your attention.