Mizuho Financial Group Inc (MFG) 2011 Q2 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 our interim results for fiscal 2010.

Before starting my presentation, I will briefly give an overview of our business environment, mainly with regard to the economy and regulations.

The global economy has maintained its recovery trend so far, mainly supported by the growth in emerging countries, particularly in Asia, while the growth in advanced economies seems to have stalled, as the effect of economic stimulus measures has worn off.

Now, uncertainties around future prospects are increasing, as we face the recurrence of Sovereign debt problems in the EU; the tightening of monetary policies in emerging countries; and the potential side effects of additional monetary easing or QE2 in the US.

In Japan, it appears our economy has accelerated the pace of the growth, showing strong third quarter GDP growth. However, this result, largely due to a last minute surge in consumer durables demand doesn't seem to indicate the fundamental growth capacity of the Japanese economy.

The private business sector still remains bearish and there is little real sense of economic recovery in our market front line.

Furthermore, we continue to face concerns, such as sluggish exports due to the appreciation of the Japanese yen; a decline in domestic demand, as a counter reaction to the stimulus measures taken so far; and prolonged concern over deflation.

The Japanese economy appears to be in a stalling situation or no growth period.

Regarding the regulatory environment, FSB, the Financial Stability Board, reported the progress of their discussions regarding a comprehensive package of financial regulatory reforms in the G20 Seoul Summit.

Various details around Basel III were publicized, including the work schedule towards finalizing new regulations related to SIFIs, systematically important financial institutions. We are now seeing a shift of discussions from framework level to specific details level.

To respond to these changes, Mizuho announced its transformation program last May. We intend to make drastic changes in our strategic management issues and pursue sustainable growth through initiatives in three areas; profitability; financial base or soundness; and front line business capabilities.

We have put in a lot of effort to drive this program over the past six months. Today, I will report to you our interim financial results and capital management and also give you an update on the progress and some of the key issues related to the program.

Now, please turn to page five. First, let me briefly summarize our interim results. In short, the interim results demonstrate that we made a strong start to the fiscal year that largely exceeded the original plan, although there are still some areas we have to address further.

Firstly, as the table on the left shows, income from customer groups increased by JPY26 billion on a year-on-year basis, mainly driven by increased non-interest income from domestic and overseas business. Together with strong results from the trading segment, we reported consolidated net business profits of JPY464 billion, which is 62% of the full year estimate of JPY750 billion.

Secondly, credit costs amounted to a reversal of JPY8 billion. This was mainly due to the improved obligor classifications through our business revitalization support to corporate customers. Meanwhile, we incurred net losses related to stocks of JPY10 billion, mainly due to devaluation losses for certain stocks, which experienced declines in their stock price.

As a result, consolidated net income for the first half amounted to JPY341 billion. This progress represents 80% of the original full year earnings estimate. In light of this, we have made an upward revision to our full year plan. I will explain the details of the revision later in the presentation.

Lastly, we significantly improved both the quality and quantity of our capital, both through the issuances of common stock in July and recording net income. I would like to emphasize here that we will be able to sufficiently meet the new capital regulations by accumulating retained earnings and improving asset efficiency through the steady implementation of Mizuho's transformation program.

Please turn to the next page. On this slide, I will explain our interim profits and losses in more detail, referring to the historical trends.

Please look at the upper portion of the slide. You can see from the two charts in the center, the improvement of our non-interest income in customer groups and the significant profit growth in the trading segment. G&A expenses of the three banks decreased by JPY11 billion (sic - see presentation) on a year-on-year basis, which is line with the original plan.

Please take a look at the lower portion. I have already mentioned credit costs and stock related gains and losses. But you can also see that the total impact of the global financial market turmoil amounted to a gain of JPY2 billion during the first half. As a result, our consolidated net income amounted to JPY341 billion, with a significant increase on a year-on-year basis.

Please turn to the next page. This slide describes the line by line items of our interim financial results. As I have already covered the major points on the previous slides, I would like to simply move on to the next section.

Let me go to page nine. This slide shows loan and deposit balances for the three banks. As shown on the left, our average loan balance for the first half decreased by JPY2 trillion against the second half of the previous fiscal year. The major contribution factors were a decrease in loans to domestic large corporations, where weak credit demand persisted; and a slight decline in overseas loan balances, mainly due to the impact of foreign exchange translation, reflecting the appreciation of the yen.

However, as you can see in the table in the lower left, which shows the end balances of Mizuho's loan portfolio, the declining trend in our loan balances is slowing down. Our housing loan balances are continuing to increase steadily, despite adverse market conditions, which include slow growth in personal income and intense competition amongst banks.

Meanwhile, although our overseas loans decreased by JPY200 billion from the previous half, if we exclude the foreign exchange translation impact, the adjusted balance increased by JPY200 billion, mainly driven by the increase in the Asian region.

Shown on the right are our deposit balances. This highlights the continuously steady trend of the average domestic deposit balances.

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

The line charts on the left show that our domestic loan and deposit rate margins slightly decreased in the second quarter. This was due to the decline in return on loans and bills discounted that followed a fall in market interest rates, as a result of the Bank of Japan's financial policies. However, I would like to add that Mizuho's margins did not fall as much as the market rate did as we strenuously continued our efforts to improve our loan spreads.

Please take a look at the right hand side. As the bar charts show, our net interest income increased by JPY1 billion against the second half of fiscal 2009, due to increased income from international operations, despite a decrease in income from domestic operations.

Please turn to the next page. This slide covers non-interest income. In the previous IR presentation, I explained that the downward trend of our non-interest income bottomed out in the second half of fiscal 2009. The upward trend first witnessed in that period continued through the first half, where it increased by JPY31 billion on a year-on-year basis and almost returned to the fiscal 2008 level obtained, just before the Lehman shock.

The right hand side of the slide shows the breakdown of each item. You can see that non-interest income increased in all items, including strong income growth in investment trusts and individual annuities, international business and in trust and asset management business undertaken by Mizuho Trust & Banking.

In particular, the sales of investments trusts and individual annuities doubled on a year-on-year basis and have provided us a top class market share amongst major Japanese banks. I believe the fruits of our dedicated approach to customers and efforts to build a relationship of trust with our customers have finally materialized.

The boxes on the far right show that the upward trend continued in all items, even on a quarter-on-quarter basis.

Please turn to the next page. This slide shows the status of G&A expenses. As you can see in the graph, G&A expenses amounted to JPY440 billion, decreasing by JPY11 billion on a year-on-year basis. This progress represents approximately 50% of our annual reduction target of JPY22 billion. Together with the increase in gross profits, our expense ratio went down to below 50%.

The right-hand side of the slide explains the major contributing factors. Both non-personnel and personnel expenses showed declines.

Now let's move on to the next topic, reinforcing risk management. Please turn to page 14. The following two slides explain our credit costs. As shown in the graph on the left, credit costs of the three banks continued a downward trend from the first half of fiscal 2009 and recorded a reversal of JPY25 billion.

Regarding the breakdown by banking subsidiaries, as shown on the upper right hand graph, Mizuho Corporate Bank recorded a reversal of JPY23 billion. This significant improvement came mainly from overseas loans, through detailed credit control in both domestic and overseas markets.

Mizuho Bank, whose customer base mainly consist of SMEs that are more susceptible to movements in the macro economy, also recorded a reversal of JPY2 billion. This was mainly due to both a deeper analysis of the status of our customers and business revitalization support to corporate customers, amid a downward trend in corporate bankruptcies.

Please turn to the next page. The charts on the left show the historical non-performing loan balances. The balance of our NPLs remained almost flat at around JPY1.3 trillion. And the net NPL ratio also remained at a low left of 0.85%.

Please turn to the next page. The next two slides explain our securities portfolio. Firstly, as shown on the upper right of this slide, net gains related to bonds significantly increased to JPY126 billion, due to flexible and timely operations properly interpreting the trends of both domestic and overseas market interest rates.

Secondly, net losses related to stocks amounted to JPY15 billion. This was mainly due to devaluation losses, as I mentioned previously, despite recording gains on sales from the reduction of the stock portfolio.

Please take a look at the chart on the right. While unrealized gains on Japanese stocks significantly decreased, reflecting the decline in stock prices, unrealized gains on bonds amounted to JPY118 billion, which is twice as large as that of the end of last fiscal year-end. This shows that our securities position is still managed with sufficient allowance for market movements.

Please turn to the next page. As shown on the left side, we reduced the balance of our Japanese stock portfolio by about JPY20 billion on a net basis, but this includes the increase due to the impact of the IPO of a large account. On a gross basis, we sold approximately JPY90 billion of stocks.

The line chart shows the ratio of the balance of our stock portfolio against our Tier 1 capital, which has now declined to the 40% level, partly due to the increase of our Tier 1 capital.

In Mizuho's transformation program, we set a target to reduce the balance of our stockholding by JPY1 trillion in aggregate by the end of fiscal 2012. It is a challenging environment for us, given the weak stock market, but we will continue to carry on active negotiations with our customers and we are fully committed to the JPY1 trillion reduction target.

Our JGB portfolio, on the right-hand side of the slide, decreased by about JPY0.8 trillion from March end. The average remaining period of the portfolio was 1.9 years, which is slightly longer than at March end. But I believe this is well within a controllable level, given our flexible operations.

With the continuing appreciation of the Japanese yen, stock prices and interest rates also continue to move nervously. We include these factors into our risk assessments and maintain prudent risk management operations, so that we can cope with unexpected market events without incurring losses.

Now I will explain our capital management policy. Please go to page 19. Before going into Mizuho's capital management policy, it may be helpful to briefly recap the outline of the changes in the capital regulations for financial institutions, in particular the idea of common equity Tier 1 capital or CET1 capital. There are four key points; a) timing and required level; b) deduction items; c) risk-weighted assets; and d) SIFIs.

Firstly, the minimum standard in the new regulations and the timing of implementation; as you can see from the box on the top left, Basel III CET1 capital ratio implementation will start in January 2013. At that time, the minimum standard for CET1 capital will be 3.5%. The required ratio will gradually rise to 4.5% in 2015 and to the final required level of 7% in 2019, which will include the 2.5% capital conservation buffer.

Second, the deduction items; please note that deductions are not immediately applicable in January 2013 when the capital requirement implementation begins. The deduction is scheduled to be phased in after 2014, rising by 20% per annum until 2018 when all relevant items will be fully deduced from CET1 capital.

Third, risk weighted assets; Basel III will require regulated banks to revise the calculation method for risk weighted assets, which is the denominator in the capital ratio calculation. There will be many areas where revisions are required, such as credit valuation adjustment, CVA, on OTC derivatives counterparty risks. But detailed guidelines have not yet been finalized.

Analyst' estimates of the impact of Basel III on the risk weighted asset calculation for Japanese banks range from 5% to 10%. And I don't think their estimates are largely off the mark. The point is that Mizuho's risk weighted assets are not expected to suffer major impacts like our European and American counterparts do, partly because of differences in our business models.

Lastly, the additional loss absorbency capacity for SIFIs; discussions are ongoing among national regulatory authorities and there is little definitive information available, except for the documents released at the Seoul G20, which endorsed the framework of the new regulations. In any case, regardless of whether Mizuho is categorized as a G-SIFI or not, we do not expect any limitation to and any significant impact on Mizuho's international operations.

Now I'll move on to the status of Mizuho's CET1 capital ratio. Next page, please. On this slide you can see the number mid 8% at the center right of the slide. This is our preliminary simulation of our CET1 capital ratio as of March 2013. Now I will go through the assumptions on which this figure is based, step by step.

At the top of the chart, as of the end of September 2010, Mizuho's CET1 capital ratio was about 7%. The numerator is based on the new rule, which excludes preferred stock, while the denominator, or the risk weighted assets, is based on Basel II. No deduction items are included as the Basel III deduction will phase in only after 2014. This is the starting point.

Then we have changes in the risk weighted assets calculation and accumulation of retained earnings toward March 2013. Regarding the risk weighted assets there are still a lot of uncertainties regarding the calculation method for risk weighted assets under Basel III. However, analyst' estimates range from 5% to 10%; that range is incorporated into our estimates, giving the CET1 capital ratio a negative impact of 0.3% to 0.6%.

In order to mitigate the impact of this increase in risk weighted assets by the new rules, we plan to reduce our risk weighted assets by JPY1 trillion by the end of fiscal 2012. This will mainly be executed through rationalizing our non-customer related assets.

On the numerator side, we will accumulate JPY1 trillion of retained earnings by the end of fiscal 2012 through steady implementation of our program for improving profitability of Mizuho's transformation program. If you add the outstanding amount of our mandatory convertible preferred stock, which is JPY486 billion, to the numerator and calculate the CET1 capital ratio, the estimate is in the mid 8% range.

I expect you may also want an accurate projection beyond 2013, but the accurate estimation beyond 2013 is even more challenging. However, a rough estimate would be that our annual net income would exceed the annual deductions that will start in 2014.

To summarize, my main message here is that we will be able to sufficiently meet the new capital requirements without further issuance of common stock by enhancing our financial soundness through the steady implementation of Mizuho's transformation program.

Now I'll explain the disciplined capital management that Mizuho pursues; next page, please. Mizuho's basic policy on capital management has been to pursue an optimal balance between two principles; strengthening of stable capital base and steady returns to shareholders, in accordance with change in the business environment and our financial condition. This policy has not changed.

Regarding strengthening of stable capital base, we significantly strengthened our capital base both in quality and quantity through the issuance of JPY751.6 billion of common stock in July and the recording of net income in the first half of fiscal 2010. Accordingly, we believe we will be able to sufficiently meet the new capital requirements.

Regarding steady returns to shareholders, we plan to make cash dividend payments of JPY6 per share of common stock for fiscal 2011, unchanged from our estimate announced in May. This is in consideration of the need to maintain balance with our other key principle, strengthening of stable capital base.

Now I'll move on to the earnings plan for fiscal 2010. Please go to page 23. This slide describes our revised earnings plan for fiscal 2010. Please take a look at the consolidated items shown on the left.

In our revised plan we are planning for our consolidated net business profits for the full fiscal year 2010 to be JPY820 billion, reflecting our strong interim results. This is an increase of JPY70 billion over the original plan.

For credit costs we anticipate a loss of JPY85 billion for the full fiscal year, although we recorded a reversal of JPY8.5 billion in the first half. This reflects our conservative view on the future, given the current business environment.

We anticipate that net losses related to stocks will amount to JPY15 billion, which is a downward change of JPY80 billion from the original plan. Given the losses of JPY15 billion that we recorded in the first half, we anticipate the net gains and losses for the second half to net each other out.

In light of the above, consolidated net income is estimated to be JPY500 billion, an increase of JPY70 billion compared with the original plan. We plan to continue to make cash dividend payments of JPY6 per share of common stock for fiscal 2011, which is unchanged from our estimate announced last May.

Please go to the next page. Now I would like to explain the breakdown of our earnings plan by business segment. Firstly, please see our market assumptions at the upper right. We assume that interest rates will remain flat through the second half.

The charts on the left-hand side show the original plan and the revised plan. For customer groups we are planning net business profits to be JPY565 billion for the full year, unchanged from the original plan.

Net interest income, non-interest income, G&A expenses are also anticipated to be unchanged from the original plan, as is shown on the upper right box of the slide.

Although the trading segment recorded higher than expected income in the first half, we are only estimating net business profits of JPY205 billion for the full year in the Trading and Others segment, which is an increase of JPY105 billion over our original estimate. This is a rather conservative estimate, based on the interest rate scenario for the second half of fiscal 2010.

As to the differences between the consolidated and three Banks' figures, our estimate is JPY48 billion, a decrease of JPY37 billion from the original estimate.

G&A expenses are estimated to be unchanged from the original plan.

Now let's turn to the final topic, Mizuho's transformation program. Please turn to page 26. Next I would like to report the progress to date of Mizuho's transformation program that we announced in May. In short, let me just tell you that after the first six months of the program I feel confident about our abilities to successfully complete the program and I feel a Group-wide momentum developing.

Firstly, regarding the program for improving profitability, we made significant improvements in customer groups and developed our cost reduction initiative in line with the original plan. These results have boosted our confidence that our strategy was set in the right direction.

Secondly, regarding the program for enhancing financial base, we added a significant amount to our retained earnings by successfully raising capital in the market as well as recording JPY341 billion of consolidated net income. Although the details of the new capital regulations are yet to be finalized, these results have given us confidence that we will be able to sufficiently meet the new global capital regulations.

Thirdly, I will explain the program for strengthening frontline business capabilities. In our initiative to redeploy our personnel to strategic areas to strengthen our marketing capability, we have already redeployed 260 staff to frontline marketing, including to Asian offices, which is about one quarter of our target of 1,000 staff members.

We have also established a committee for strengthening frontline business capabilities, a committee for cost structure reform promotion and a committee for IT investment strategy. I expect them to lead steady progress across various initiatives.

Overall, I believe that we have made a good start to this mid-term program considering the short period of time since its launch six months ago. However, we fully understand that we still have a long way to go. Our challenges for real change have just begun. We remain fully committed to the Group-wide implementation of every single initiative of the program, to never slowing down and to the completion of all aspects of the program.

Now for the next slide; this slide shows the key target financial figures of the program in each of the three areas; profitability, efficiency and soundness. We have attached the actual results for the first half of fiscal 2010 for your reference. As I have already gone through the details of these results, I would like to skip making detailed comments on this slide. Please go to the next slide.

This slide shows our key benchmarks for measuring the progress of the program, with our plan on the left and the actual results for the first half fiscal 2010 on the right. As I mentioned earlier, we have already redeployed a number of staff members to strategic areas in frontline marketing.

As for gross business profits, it is not only the trading segments which are maintaining strong profits. As shown on the slide, our profits from strategically important segments are on a robust upward trend, which means that customer groups in general are making good progress.

Regarding the risk weighted assets; our risk weighted assets in Asia are steadily growing, supported by loan asset growth. However, the total risk weighted assets in our strategic areas decreased in the first half, mainly due to a decrease of domestic loans caused by weak credit demand from corporate customers.

Now I have gone through the main target figures of the program. In the next five slides I will explain the details around the program's current status. This is a summary of the progress of the program for improving profitability.

Our target is to increase our gross business profits by JPY100 billion by March 2013 by focusing on five strategic areas; a) Tokyo Metropolitan Area; b) large corporate customers; c) Asia; d) asset management business; and e) full-line services of banking, trust and securities functions.

As I have already said, we recorded strong gross profits in the first half of this fiscal year. On the cost side our plan is to reduce our expense ratio down to the lower 50% level by the end of fiscal 2012. This means we have to cut our G&A expenses by about JPY50 billion. In the first half of fiscal 2010 the expense ratio was below 50% due to cost reductions in line with the plan, as well as strong gross profits.

Please move on to the next slide. The next two slides explain initiatives and achievements in five focused business areas. First, I will comment on the Tokyo Metropolitan Area. We are promoting various initiatives for strengthening marketing in such areas as a) individual customers, b) corporate customers, and c) employees of our corporate customers by utilizing business relationships with Group corporate customers.

As shown on the chart on the right, we recorded strong sales of investment trusts in the first half of fiscal 2010 and we plan to strengthen further our marketing capability. You can also see that our housing loans balance shows a steady upward trend.

Regarding business with large corporate customers, as is shown on the right-hand side, we maintained an overwhelming market share in the domestic syndicated loan market. We were the only one of the three mega banks to increase its arrangement amount while the market as a whole contracted. We also kept our position within the top tier group in investment banking, such as in corporate bonds and equities.

With large corporate customers, where Mizuho has long retained a strong market position, we are now strengthening our support for an outward shift by Japanese corporate clients by leveraging our industry research function. We have also launched project-oriented cross-sectional taskforces in six business areas where the industry is experiencing strong growth or is about to take off.

Now here is the next slide. The upper left box explains our business in the Asian region. To respond to the accelerating moves by European and American corporate clients, as well as Japanese corporate clients, to develop their businesses in the Asian region, we are strengthening our global cooperation scheme.

As well as strengthening solution-related businesses for emerging Asian companies, we are now promoting a Group-wide business infrastructure, which we call the Mizuho Global Support Project. This is intended to support Japanese SMEs investing in the Asian region.

Mizuho is also expanding its network in the Asian region. We obtained a banking license in Malaysia, and we opened the eleventh branch of our banking subsidiary in China in Suzhou on November 1.

As shown in the chart on the right, our profit base in Asia is steadily expanding. We also continue to maintain a presence in Asian project finance business.

Lastly, I will touch on our Asset Management business. As we announced on November 12, we acquired about 3 million common shares of BlackRock in order to develop our strategy further in this area. As we combine Mizuho's solid customer base in Japan, our knowledge and network in the Asian market, with BlackRock's world-class capabilities in innovative product development and risk management functions, we believe that our business base will be further strengthened.

As an example we are aiming to further expand the sales of BlackRocks's global investment products to Mizuho's customers through our sales channels, as well as offering BlackRock's strong lineup of investment and risk management products to both individual and corporate customers, particularly in the Asian region.

In Asset Management we are also strengthening our approach to corporate pensions, as well as enhancing our product lineup, which has resulted in steady growth in that business base.

Now here is the next slide. This slide explains the progress of the program for enhancing financial base. In terms of strengthening our capital base, we have significantly improved our capital ratios, through the issuance of common stock in July, and the further accumulation of retained earnings.

As is shown in the chart on the right, our preliminary simulation indicates that a common capital equity ratio in the mid 8% range can be assumed as of the end of fiscal 2012 when Basel III will be implemented. We are confident that we will be able to sufficiently meet the new global capital regulations.

In terms of improvement of the asset portfolio, I admit that we have further work to do, and will continue to endeavor to reduce our stock portfolio.

Now, here is the next slide. Next, I would like to explain the progress to date of the program for strengthening front line business capabilities. Various initiatives of this program are making good progress, including the personnel redeployment to strategic front line businesses, as I touched on earlier.

We have started the process of consolidating and reorganizing corporate planning and management functions, as well as financial product functions, under the initiative of the Committee for Strengthening Front-line Business Capabilities, specifically for the following four areas; a) Human Resources, b) Administration, c) IT Systems, and d) Operations.

We have already started to integrate their corporate planning and management. We are also finalizing a detailed plan in the area of financial products, to reorganize M&A finance and some other functions.

In terms of improvements in the efficiency of our business infrastructure, we established a Committee for Cost Structure Reform Promotion to develop Group-wide cost reduction initiatives.

As to IT system unification, we established a Committee for IT Systems Strategic Investments, which leads initiatives to optimize our portfolio of IT systems investments. Specifically, they are tasked to ensure the proper integration of our investments across our next generation system, and across the entire IT system development plan.

We are also in the process of improving the efficiency of the operations of the three Banks. We are now transferring the operations currently undertaken by Mizuho Corporate Bank and Mizuho Trust & Banking to Mizuho Bank as much as possible, while we have already started the process of consolidating the three Banks' operational centers.

Last, but not least, we will consolidate the housing loan business of Mizuho Trust & Banking to Mizuho Bank, and are planning sharing ordinary deposit and ATM services between Mizuho Bank and Mizuho Trust & Banking.

This completes my report on the progress of Mizuho's transformation program.

I have summarized our interim results, which represent steady progress, in large part, towards the challenges we identified at the beginning of the term. However, we fully understand that it is still too early for us to conclude that Mizuho has really changed, and a lot more work needs to be done continuously.

We are fully committed to addressing our list of issues, and to giving every effort towards the achievement of Mizuho's transformation program.

The current business environment is rather challenging. However, this is when our commitment to the customer first policy is tested, and our value of customer oriented business model needs to be fully leveraged. We must push forward, firmly keeping to our corporate mission and vision. I will continue to lead Mizuho Group, and devote all my efforts to maximizing our Company value.

I would like to thank you for all your support for Mizuho, and its transformation. This concludes my presentation. Thank you very much for your attention.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.