Mizuho Financial Group Inc (MFG) 0 Q0 法說會逐字稿

Ladies and gentlemen, my name is Takashi Tsukamoto, President and CEO of Mizuho Financial Group. It is my great pleasure to have this opportunity to present to you the interim results of fiscal 2009.

Today, I would like to report the progress to date we have made towards the goals set at the beginning of this fiscal year under the new management. I will also explain the management challenges going forward.

Please turn to page five. First, let me briefly summarize our interim financial results. In the first quarter results announced right after our common stock offering in July, we recorded net losses and ordinary losses. These were brought on mainly by valuation losses related to credit and equity derivative transactions entered for hedging purposes. We understand that this has caused concern among our investors, but let me emphasize we covered these losses in the second quarter.

Although we already canceled the equity derivative exposure positions, we reported losses of about JPY76 billion from credit derivative transactions for the interim period. As a result, our consolidated ordinary profit came in below our earnings estimate. Nevertheless, at the bottom line profit level, we reported net income of JPY87.8 billion reflecting a recovery of our securities subsidiaries. This was higher than our JPY70 billion original estimate.

In terms of our top line revenue, consolidated net business profit reached about 50% of the full-year estimate. As for credit costs, on a consolidated basis, we recorded about JPY160 billion. This was less than half of our full-year estimate thanks to our focus on deliberate credit management and restructuring of our borrowers in a less volatile economic environment.

Also, turning to our capital management, as shown on the right-hand side, through capital raising and the recovery in the stock market, we have steadily enhanced our capital base, which we had identified as one of our mid-term challenges.

Specifically, we have achieved a BIS capital ratio of 12.92%; Tier 1 capital ratio of 8.71%; and a prime capital ratio of 5.37%. Each represents more than a 2 percentage point improvement in the first half, and as of September end, exceeding the levels we targeted.

Please turn to the next page. In this slide, I will explain our interim result by showing performance trends. As you can see on the upper side of the page, our consolidated gross profits were JPY359 billion, up JPY42 billion year-on-year. Driving this increase were increased interest income derived from our trading segment, recovery in our securities service area's profitability, and Group-wide cost reduction efforts, despite a continuous decrease in non-interest income from the customer groups.

Let me turn to the items below net business profit, shown on the lower side of the page.

Although we recorded about JPY100 billion of valuation losses related to our credit and equity derivative transactions, net gains and losses related to stocks, which was one of the most significant risk factors for the last year, recovered to net gains of JPY24.1 billion.

Additionally, credit costs also largely decreased year-on-year, and the total P&L impact on our Group of the global financial market turmoil for the first half, through losses related to securitization products, was limited to a loss of about JPY3 billion. By significantly mitigating such risk factors, we became profitable, posting consolidated net income of JPY87.8 billion.

Please turn to the next page. I will now focus on our asset quality and capital base. Although the economic environment continued to be tough in this interim period, we maintained financial soundness. First, we managed to maintain a low balance of non-performing loans, despite a slight increase in our net NPL ratio due primarily to a larger decline in our loans such as those to the Japanese government. Therefore, we believe that our overall asset quality has not changed substantially.

Regarding our stock portfolio, we worked proactively to reduce the balance as promised. We were successful in selling roughly JPY150 billion of stocks held by the three banks. Together with an increase in our Tier 1 capital, the percentage of our stock portfolio to Tier 1 capital decreased significantly to 51%.

Additionally, as shown on the lower left of the slide, unrealized losses on other securities has turned to net gains. This was driven by the improved market conditions, especially the stock market.

Lastly, as shown on the lower right, consolidated Tier 1 capital reached JPY5.1 trillion thanks to the civil factors, including our common stock offering, unrealized losses on other securities becoming unrealized gains, and the effect of the merger at Mizuho Securities.

Accordingly, the level of our Tier 1 capital, as well as prime capital ratios, increased steadily, leading to further improvements in both quality and quantity of our capital. For a definition of our prime capital ratio, please refer to the footnote on this slide.

Please turn to page nine. This slide gives you line-by-line items for the interim results for your reference. I have already covered the major points of the results, therefore let me go to the next page.

The slide shows you our consolidated net business profit by breaking the results down between the customer groups and the trading segment of the three banks.

First, net business profit for the customer groups decreased by JPY70 billion. Breaking this down, net interest income decreased by JPY43 billion as a result of a decline in deposit income, reflecting the negative impact of BOJ's policy rate cuts in the last year, a decrease in dividend income received on equity investments, and a decrease in overseas net interest income.

Non-interest income also declined by JPY34 billion year-on-year mainly due to economic stagnation. Meanwhile G&A expenses decreased by JPY7 billion as our across-the-board costs reduction efforts fully offset an increase in expenses associated with employee retirement benefits.

Next, net business profits for the trading and others segment increased significantly by JPY99 billion. To clarify, please remember that this increase of JPY99 billion includes about JPY45 billion in cash dividends from SPCs, which were eliminated on a consolidated basis as explained in the box on the right. Even excluding this impact, the trading and others segment still recorded a JPY54 billion increase from flexible and timely operations in the trading segment.

Please turn to page 11. This slide shows loans and deposit balances for the three banks. As shown on the left, our average loan balance for the period increased by JPY0.9 trillion year-on-year, reflecting the increased domestic loans. On the other hand, if compared with the second half of last fiscal year, our average domestic loan balance decreased by JPY1.6 trillion.

This was partly due to a decrease in loans to corporate customers under the persistently severe economic condition, and the rebound of a one-time increase in demand for bank loans from corporate customers. More significantly, our loans to Japanese government decreased by JPY1.1 trillion.

For overseas loans, mainly those to non-Japanese customers, the average balance after adjusting the currency impact, decreased by JPY0.8 trillion as a result of our deliberate credit management. Under these circumstances however, our loans to individuals, especially housing loans which we have been focusing on, increased steadily.

Deposit balances are shown on the right. As you can see from the graph above, the average domestic deposit balance steadily increased by JPY1 trillion. This was backed by a steady increase in individual deposits.

Please turn to the next page. On this slide, I would like to explain interest margins and net interest income.

Please look at the line graph on the left. Our domestic loan and deposit rate margins have decreased by 3 basis points year-on-year, and by 5 basis points compared with the second half of last fiscal year. This was largely attributable to the impact of the BOJ's rate cuts in the last year, despite our efforts to achieve an appropriate level of spreads under severe competition in the domestic lending market.

In this regard, however, as shown on the lower left, the loan and deposit rate margin for Mizuho Corporate Bank showed a year-on-year increase of 15 basis points.

On the right half, I will briefly explain the figures shown below the bar chart.

Net interest income from our domestic deposit and loan business turned to a decline because of slower growth in loan balances and narrower margins. However, net interest income as a whole increased by JPY48 billion due to improved income in the trading segment, including profits from the bond portfolio and interest rate swaps given the global decline in short-term interest rates.

Please turn to the next page. This slide covers loan interest income. Given the aftermath of financial market turmoil and weaker business activities, the first half results continued to be severe as shown on the graph. All the categories declined year-on-year. As a result, the aggregate non-interest income decreased by JPY34 billion.

However, there have been signs of a gradual recovery in certain business areas. For example, in the second quarter, fee income associated with sales of investment trusts and individual annuities showed an increase compared with the first quarter. We intend to increase our non-interest income by further strengthening initiatives to leverage our customer base.

Please turn to the next page. This slide shows our strenuous efforts to reduce G&A expenses. As you can see in the graph, the aggregate G&A expenses of the three banks decreased by JPY4 billion, despite an increase of JPY18 billion in those associated with employee retirement benefits due to a decrease in the expected return on plan assets. Excluding the JPY18 billion of such expenses, as shown below the bar chart, the G&A expenses would have been reduced by more than JPY20 billion.

Now let's move on to the next topic, reinforcing risk management. Please turn to page 16.

The following two slides summarize our asset quality. Shown on the left of this slide are our credit costs. The aggregate net credit costs of the three banks during the first half of the year amounted to JPY116 billion. However, as shown in the box, this figure includes a JPY26 billion impact from a review of that calculation method for provisions by the Mizuho Bank's credit guarantee subsidiary. Excluding this impact, credit costs would have been JPY143 billion, or a credit cost ratio of 40 basis points. This amount is slightly less than half of our estimated JPY310 billion for this full fiscal year.

The chart on the upper right shows that credit costs of each of the three banks decreased significantly compared with the second half of the last fiscal year.

Please turn to the next page. As shown on the left, the NPL balance and the net NPL ratio remained at low levels of JPY1.4 trillion, and 0.84% respectively. As a result of the conservative measures, as of the end of September 2009, the reserve ratio against normal obligors stayed at 0.23%, almost twice as high as that in fiscal 2007, and even higher than March 2009.

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

Please turn to the next page. First, in this slide I'd like to explain our stock portfolio. Having recognized the risks involved in holding stocks after incurring significant losses during the last fiscal year, we have focused on reducing risks of holding stocks, and sold about JPY150 billion of stocks during the first half of the year.

Together with the effect of the increase in Tier 1 capital, the percentage points of our stock portfolio to Tier 1 capital decreased sharply to the 50% level. However, we will continue to work hard to further reduce the balance of stock portfolio.

As shown on the right, unrealized losses on other securities in March turned to unrealized gains of JPY160 billion in September, backed by the stock market recovery, and a decrease in long-term interest rates.

Please turn to the next page. The graph on the upper left shows that our JGB portfolio increased by slightly over JPY5 trillion compared with the March balance, due to the increased balance mainly consisting of medium to long-term bonds with relatively short durations. As a result, the average remaining period of our JGB portfolio was slightly shortened to 1.8 years.

The right-hand side summarizes the balances and increased unrealized net gains of other securities with fair values for your reference purposes.

Please turn to the next page. This slide summarizes securitization products and the status of credit and equity derivative transactions. As indicated in the upper left, the P&L impact of the global financial market turmoil on Mizuho was limited to a loss of about JPY3 billion in the first half. As shown in the lower left, there have been no significant changes in the balances and fair values of our securitization products.

Please take a look at the right-hand side. As I already explained, the sharp tightening in credit spreads, particularly in the first quarter, brought a loss of JPY105 billion for the first half in relation to hedging transactions. However, the present value of our CDS transaction for hedging loans has decreased substantially to about JPY14 billion and we had already terminated our equity derivative transactions during the first half. Therefore, we believe that further downside risk should be limited.

The next subject I would like to cover is strengthening business base. Please refer to page 22.

Our highest priority under a bleak business environment is to steadily promote our business strategies based on the strength and basics of the business model that leverages Mizuho's solid customer base.

First, taking the Global Retail Group shown on the left, it aims to return to the basics of a commercial banking business model by setting the basic policy to achieve a reputation as the best partner growing along with SMEs and their owners and individual customers. The Group particularly focuses on increasing loans to corporate and individual customers. It also intends to reduce credit costs by means of thorough credit management.

Second, taking the Global Corporate Group shown on the right, it aims to become the leading player in corporate finance by integrating and strengthening commercial banking and traditional investment banking operations. This allows the Group to provide cutting edge financial solutions to customers.

Specifically, the Group provides various financial solutions that address customers' management challenges and new businesses as the global economy, the financial environment, accounting systems and other factors face drastic structural changes.

In addition, the Group further pursues collaboration between the banking and securities businesses, in light of the revamp of domestic firewall regulations in June.

As for the overseas business, it continues strict monitoring of credit to prevent asset quality deterioration, while allocating resources to Asian countries, such as China and India.

Third, turning to the Global Asset & Wealth Management Group shown at the bottom. Mizuho Trust and Banking aims to increase its gross profits through enhanced synergies and to implement further cost reduction initiatives.

Please turn to the next page. Another strategic priority for deleveraging our customer base is the pursuit of Group synergies. This slide shows you how we enhance Group synergies. By having the Banking Trust and Securities subsidiaries work closely together to provide specialized services that address our customer needs, we aim to boost our top line profits.

The following slides give you updated information about the latest results and progress in the implementation of strategic measures in each business. Due to time constraints, however, I will skip these and would like to move on to an explanation of earnings estimates for this fiscal year.

Please skip to page 31. This slide covers the key figures of our consolidated earnings estimates for fiscal 2009. As shown on the left, there are no changes on a consolidated basis, except for ordinary profits. In other words, consolidated net business profits and consolidated net income are estimated to be JPY720 billion and JPY200 billion respectively.

As for dividends, we estimate JPY8 per share of common stock, as shown in the bottom right box.

Please turn to the next page for a breakdown of estimated net business profits for the three banks. Here, I would like to explain the breakdown by business segment of the three banks. Let me begin by clarifying that the breakdown figures are based on JPY622 billion of net business profits. This represents a year-on-year increase of JPY45 billion. The JPY622 billion excludes JPY78 billion of cash dividends from SPCs, which will be eliminated on a consolidated basis.

At the upper right, you can see our interest rate assumptions. We assume that both long-term and short-term interest rates will remain flat through the second half. For the customer groups, as shown on the right, we estimate a JPY63 billion decrease from original estimates, based on the first half results and the trends, mainly due to a decline of net interest income.

On the other hand, reflecting the higher than expected income from the trading segment in the first half, we estimate an increase of JPY63 billion in the trading and others segment, compared with our original estimate, thus offsetting the aforementioned decrease.

Accordingly, the estimate for trading and others is a year-on-year increase of JPY83 billion, which takes into account such factors as the absence of the JPY90 billion losses on credit investments incurred in the second half of the last fiscal year.

For your reference, as shown on the bottom left, we estimate a JPY15 billion reduction in G&A expenses. This is unchanged from the original estimate, which was based on the fact that Group-wide cost reductions in the first half exceeded an increase in expense associated with employee retirement benefits.

Now let's turn to the final topic, capital management; please turn to page 34. This slide shows the status of our consolidated BIS capital and its movement in the first half. As shown in the bottom right box, both our BIS capital ratio and Tier 1 capital ratio improved. These improvements were mainly attributable to the first half common stock offering and absence of unrealized losses on other securities.

On the next page, we will explain the status of Mizuho's prime capital. Next page please. At Mizuho, we refer to prime capital as common stock plus other Tier 1 capital components that have particularly high loss absorption capabilities. This is shown in the red box on the left.

As you can see, prime capital has significantly improved from the March end, rising to 5.37% at the end of September. For your reference, regarding the mandatory convertible preferred stock, which we include in prime capital, 37%, or about JPY350 billion, has already been converted to common stock by the end of September, in part reflecting the margin price being adjusted downward in July.

As a result, the outstanding balance of convertible preferred stock at the end of September has decreased to about JPY590 billion.

Please turn to the next page. This slide summarizes our disciplined capital management. To prepare for further deteriorating business environment, and in light of ongoing global discussions on capital, we have been prioritizing the strengthening of a stable capital base from the second half of the last fiscal year.

The box on the left shows the recent actions we have taken. As shown on the right-hand side, we have demonstrated steady progress to achieve our two medium-term targets as of the end of September. These are increase our Tier 1 capital ratio to the 8% level and maintain our prime capital at a level of more than half of our Tier 1 capital.

In accordance with changes in the business environment, our financial condition and other factors, we continue to pursue an optimal balance between strengthening stable capital base and steady returns to shareholders as our disciplined capital management. Moreover, we also consider taking various measures in anticipation of a globally agreed division of capital regulation.

Let's move on to page 38. I have summarized our interim results, which largely represent steady progress towards the challenges we identified at the beginning of the term. Here, I'd like to briefly address our initiatives and actions going forward in relation to the major challenges we face. In the three boxes on the far right of the slide are our initiatives going forward for the remaining half of the fiscal year.

First, with regard to managing risks, we aim to continue to improve asset quality, given the persistent domestic and global economic uncertainty and to further reduce our stock portfolio.

Second, we will strengthen our capital base by pursuing an optimum balance between the two pillars; strengthening of stable capital base and steady returns to shareholders. We will do this while considering measures in anticipation of a globally agreed revision of capital regulation.

Third, we aim to enhance profitability and we recognize that we are still halfway through that process. There is no instant solution with immediate effects. We believe that the most appropriate way to achieve our future top line growth is to focus on a customer orientated business model that leverages our solid customer base.

We will also pursue Group synergies among banking, trust and securities to address customers' needs.

Additionally, we must strengthen our front-line business capability and maintain control over G&A expenses.

The recent financial price triggered structural changes in the world economy and is leading to proposals for new business frameworks, including financial regulatory regimes.

The management of Mizuho is determined to bring the Group Companies together, lead them and make utmost efforts to overcome these challenges. We look forward to reporting to you again on our progress in this regard.

This concludes my presentation. Thank you very much for your attention.