Mizuho Financial Group Inc (MFG) 2014 Q4 法說會逐字稿

Ladies and gentlemen, I am Yasuhiro Sato, Group CEO of Mizuho Financial Group. Firstly, I would like to take this opportunity to express my deepest appreciation to so many of our investors taking the time to attend today's meeting.

As introduced, I would like to explain the financial results of FY13, the earnings plan for FY14, and the directions of our strategies.

So now, I would like to begin my presentation. Please proceed to page 3 of the presentation.

This page shows the three points I would like to convey today. First, we have achieved record high consolidated net income of JPY688.4 billion, especially as explained later on page 11.

Transformation in quality of profits structure, which is one of the objectives of our medium-term business plan, i.e., the shift to a stable and sustainable profit structure centering on customer groups, overseas business and non-interest income has progressed favorably.

In addition, steady development in capital adequacy has led to a realization of a base for returns to shareholders in the consideration of payout ratio.

Second, as mentioned on page 8, our strength, integrated strategy between banking, trust and securities functions, has steadily permeated through the Group and borne strong results.

This is represented by the synergy effects that have outperformed our plan under the One Mizuho structure, which fully started with the merger of former Mizuho Bank and former Mizuho Corporate Bank which took place last July.

Third, we have steadily enhanced the Group governance system and prepared to transform into a system which realizes swift decision making and corporate management, through transformation into a Company with Committees and strengthening of holding company functions.

Also, we have made strong endeavors in order to realize the transformation of corporate culture, i.e., establishment of a solid Group-wide underlying culture. I would like to touch on this issue in further detail later on.

Please proceed to page 5.

Consolidated net income for FY13 was JPY688.4 billion, which was an increase of JPY127.8 billion year on year, achieving a significant increase.

Net business profits on a 2 banks' basis were JPY642.6 billion, while income from customer groups increased by JPY82.2 billion year on year centering on domestic non-interest income and income from overseas.

Income from trading and others decreased due to a decrease in net gains related to bonds and so forth.

G&A expenses increased by JPY24.5 billion. However, through promoting cost structure reforms while making strategic expenses, it was slightly below our original plan.

One Mizuho synergy of JPY90 billion was planned for the three years of our medium-term business plan, and the plan for FY13 was JPY33 billion.

The result for FY13 showed favorable progress and was JPY56 billion, which was 170% achievement against the plan. We will make efforts to achieve the target plan ahead of schedule within FY14.

Consolidated net income for Mizuho Securities increased by JPY25.2 billion year on year to JPY51.2 billion due to the steady realization of synergy effects.

There was an increase in consolidated net income for two consecutive years. As a result, our common equity Tier 1 capital ratio on a fully effective basis was 9.08%, showing steady progress in capital adequacy.

Please jump to page 10. This page shows the progress with respect to the numerical targets of the medium-term business plan.

FY13, the first year of the medium-term business plan, was very favorable. Both ROE and RORA were above the plan for FY15, and the common equity Tier 1 capital ratio improved to 9.08%. Consolidated net income well over-achieved the plan and was JPY688.4 billion.

Although Group expense ratio and ratio of stock portfolio slightly missed the plan target, we aim to achieve the plan by the end of the current medium-term business plan.

Please turn to page 11. On this page, I would like to present the FY13 results of the transformation in quality of profit structure that I mentioned in the beginning.

First, as you will notice from the diagram on the left of the page, income from customer groups grew significantly to JPY116 billion.

Second, the proportion of net business profits from overseas customers against total net business profits increased by 5 points from 24% to 29%.

Third, the proportion of non-interest income from customer groups on a gross profits basis increased by 2 points from 46% to 48%.

We aim to further develop this transformation in profit structure in FY14 through promoting the One Mizuho strategy of banking, trust, and securities functions.

Please refer to the next page with respect to the progress in the key performance indicators.

Please turn to page 15. This slide explains net interest income.

As shown in the graph on the left, net interest income from customer groups for FY13 was JPY770.8 billion, which was a JPY29.4 billion increase year on year.

Please take a look at the right side of the slide. With respect to overseas, as shown in the upper half, average loan balance increased by $14.2 billion mainly in Asia.

Overseas loan spread decreased by 2 basis points, mainly due to a repayment of a large loan in Europe. However, if you deduct that, loan spread remained almost flat in overseas.

With respect to domestic, if you deduct the loan to Japanese Government, average loan balance increased by JPY800 billion.

As shown on page 17, although we expect the lowering trend of domestic loan and deposit rate margin to continue for the time being, we aim to increase the loan balance through enhancing our risk taking capabilities in order to achieve a steady increase in net interest income.

Now please turn to page 18.

Non-interest income was JPY534 billion, an increase of JPY52.8 billion year on year, which was a growth of more than 10%.

Domestically, fundamental earning capacity was enhanced steadily. Solution business-related, which maintained its strength from last fiscal year, was JPY95 billion. And income associated with sales of investment trusts and individual annuities to individual customers grew by nearly 30%.

With respect to overseas non-interest income, both Japanese and non-Japanese transactions showed growth in income, such as arrangement fees from syndicated loan transactions, with depreciation in yen having some positive impact.

Now please turn to page 19. This page shows net gains/losses on securities.

Firstly, as shown in the upper left, net gains/losses related to bonds decreased to JPY33.9 billion, partly reflecting our conservative management of the JGB portfolio. On the other hand, net gains/losses related to stocks amounted to gains of JPY57.6 billion, mainly due to the recovery of the market.

Next, please take a look at the change in unrealized gains/losses on other securities on the right side of the page.

Unrealized gains on stocks increased significantly, and the total amount of unrealized gains/losses on other securities as of March 2014 was approximately JPY1.1 trillion, an increase of JPY212.1 billion year on year.

Now please turn to page 20.

G&A expenses of 2 Banks were JPY864.2 billion, an increase of JPY24.5 billion year on year. The main reasons for the increase were, one, approximately JPY20 billion increase from the release of common operational infrastructure of the new IT systems platform; and, two, approximately JPY9 billion increase [effected] by the depreciation of the yen.

Although we deployed some strategic expenses, increase in G&A expenses was kept at JPY24.5 billion, mainly due to the effects of our continued cost structure reforms.

Expense ratio was 57.3%, mainly because of the decrease in gross profits as a result of a drop in the level of income from trading and others. However, we aim to achieve the target set in the medium-term business plan, which is the lower 50% level on the 2 Banks basis, through a steady increase in income from customer groups, as well as continued cost structure reforms.

Next, I would like to explain the earnings' plan of FY14. Please proceed to page 23.

FY14 plan for net business profits is JPY850 billion, an increase of JPY105.7 billion year on year. We plan growth, both in income from domestic and overseas businesses, including the One Mizuho synergy; and we plan income from trading and others to be the level assumed in the medium-term business plan.

Although we will continuously promote cost structure reforms, we plan an overall increase in G&A expenses, mainly due to effects from strategic expenses, with an aim to enhance gross profits; and effects from the hike in consumption tax.

We plan 6 to 7 basis points credit cost ratio based on recent economic trends, which is roughly half the initial plan of FY13, and the 10-year average of 15 basis points. As a result, planned credit costs are a cost of JPY60 billion.

With respect to net gains related to stocks, we plan gains of JPY45 billion through a reduction of the stock portfolio. As a result, consolidated net income is estimated to be JPY550 billion.

Although this is a year-on-year decrease, mainly due to a decline in special causes seen in FY13 such as a reversal of credit costs, we plan to build up JPY100 billion of net business profits.

Furthermore, annual cash dividends per share of common stock are estimated to be JPY7, which is an increase in two consecutive years.

Next will be the overview of balance sheet. Please jump to page 26. This slide explains the four major points of Mizuho's balance sheet which are credit portfolio, securities portfolio, funding structures, and capital.

Please turn to page 27.

Both domestic and overseas disclosed claims under the Financial Reconstruction Law decreased, with a balance under JPY1 trillion at JPY0.9 trillion, and with a record low NPL ratio of 1.21%.

The overall NPL ratio, including overseas, decreased significantly. You can see the breakdown between domestic and overseas on the upper right side on the page.

Please move on to page 28.

With respect to the JGB portfolio shown on the left, we decreased the balance by JPY8.7 trillion year on year, and shortened the average remaining period by 0.1 years year on year to 2.4 years, maintaining the level of about 2.5 years. We will basically continue our conservative JGB portfolio management in FY14.

With respect to the Japanese stock portfolio shown on the right, reduction of book value in FY13 was only JPY62.1 billion. Although the ratio of acquisition cost against Tier 1 capital improved to the level of 28%, it was an insufficient result.

Reduction of risk of holding Japanese stock is one of our top priorities and we will continuously make efforts to achieve the medium-term business plan target of reducing the Japanese stock portfolio to approximately 25% against Tier 1 capital.

Please turn to page 29. I would like to explain about our capital management on this page.

With respect to capital management, our basic policy has been to continuously pursue optimal balance between strengthening of stable capital base and steady returns to shareholders in accordance with changes in the business environment, our financial condition, and other factors.

In our medium-term business plan, we aim to increase the BIS capital ratio to a level that enables us to secure stably common equity Tier 1 capital ratio of 8% or higher by March 2016.

Based on the favorable results of FY13, our common equity Tier 1 capital ratio as of March 2014 with 9.08%. And even if we deduct the positive effects of net unrealized gains on other securities, we have achieved nearly 8%.

Accordingly, the level of capital for FY13 reached a decent level, and we believe that to secure stably common equity Tier 1 capital ratio of 8% by the final year of the medium-term business plan is adequately in sight.

Regarding our dividend payment for FY14 and after, we have newly incorporated the idea of dividend payout ratio into consideration while maintaining the basic policy, and have moved towards steady dividend payout policy with a dividend payout ratio on a consolidated basis of approximately 30% as a guide for our consideration.

Annual cash dividends per share of common stock for FY14 are estimated to be JPY7, which is equivalent to 31% dividend payout ratio.

In the next chapter, I would like to touch on the progress of One Mizuho and our business strategies using the screen. Here I will introduce the business space that sustains integrated management between banking, trust and securities functions.

Business infrastructure across entities within the Group, such as joint branches and collaboration between relationship management divisions, is one of the key points for Mizuho's integrated strategies between banking, trust and securities functions.

Based on such business infrastructure, and with Mizuho Bank bearing the core role, we are seamlessly providing services to customers. Steady results in the area of banking and trust as well as banking and securities collaboration, are shown in the lower part of this slide.

This page explains the outline of the domestic business results for FY13.

As you can see on the left-hand graph, in FY13 domestic customer groups managed to increase net interest income, even under tough competition and a low interest rate environment. More importantly, this is the result of the integrated strategy between banking, trust and securities functions. Domestic loan balance is on an increasing trend, as I explained.

As shown in the upper right-hand graph on page 34, since M&A needs for Japanese corporations are increasing, and as the production equipment of corporations is aging, those and other factors have become the background for an evident change in the trend of capital expenditure.

As a result, we see substantial room for expansion in the areas such as loans and non-interest income, and we are planning to allocate our resources in these areas.

Please proceed to page 35. Here I would like to explain about the expansion of our business base in the field of domestic individual customers.

The key issue here is to expand our profit base through strengthening both the number of customers, i.e., quantity, and the range of services we provide, i.e., quality.

The basic strategy in expanding the quantity is to increase the number of main settlement accounts. For instance, as our ATM network has expanded to a formidable number through the strategic alliance with AEON Group, our customer base is being reinforced.

Moreover, business promotion to employees, etc., of large corporations, or medium to small enterprises, which started as a result of collaboration between former Mizuho Bank and former Mizuho Corporate Bank, has expanded significantly.

With respect to the range of transactions shown on the horizontal axis, for example NISA accounts, we have achieved about 500,000 applications, of which approximately 160,000 accounts are from Mizuho Bank, and approximately 340,000 applications are from Mizuho Securities.

Since only 16% of these customers, mainly Mizuho Bank customers, have progressed to open investment trust accounts, we see room for further expansion here.

We have started to provide several products targeted at NISA accounts, and as a result of our strategic alliance with BlackRock, we have released 22 new products in order to provide a wide range of products.

We are aiming to expand our profit base, both from the quantity and quality perspectives, through utilizing our product providing capabilities.

Please proceed to page 36. This slide explains our strategies for domestic corporate customers.

The key issues here are expansion of customer base and cultivation of the need for solutions. The number of corporate customers to which loans were newly executed increased by 17% year on year in terms of expansion of customer base.

However, I believe this level is not sufficient. Since the number of our SME customers decreased from 2006 to 2007, I believe there is room for further cultivation of customers, even if only through recovering the clients we had lost.

Thus, with respect to the vertical axis which indicates quantity, even if the market does not expand, we believe the room for growth and expansion should be large enough for us to recover the customer base.

Simultaneously, we are introducing some attempts to expand our solution-related business through providing the various products shown on the right.

The Growth Business Assistance Fund is funded by the Bank of Japan, with Mizuho having JPY1 trillion amount of the facility. In addition, we have our original JPY100 billion Mizuho Growth Support Fund which provides strategic lending to SMEs. Moreover, Mizuho Growth Support Fund does have private equity-like characteristics with the aim of supporting SME customers.

Additionally, we provide financing schemes such as special policy financing for the metropolis of Tokyo, and we aim to expand our profit base, both through expanding the multiplier of the vertical and horizontal axes I have explained.

Please proceed to page 37. Next I would like to explain about our overseas business.

Overseas loan balance has grown approximately 1.5 times in the past three years, with gross profits growing approximately 1.7 times. If you focus solely on non-interest income, it has shown a favorable expansion of 2.4 times in the past three years.

Please proceed to page 38.

With respect to Super 30 strategy, as I have mentioned in the past, RORA for Super 30 customers is higher than that for ordinary non-Japanese customers.

Compared to the ordinary lending, RORA is 0.3% to 0.4% higher in this case. And as I have mentioned in the past, expansion of profit resources, utilizing our balance sheet as an entrance tool, has clearly materialized explicitly. Now we are right in the middle of a process of expanding this approach from Super 30 to Super 50.

Please skip one page, and proceed to page 40.

With respect to foreign currency funding, while overseas loans are expanding, you may be interested in the state of our funding. Our foreign currency denominated customer deposits showed a steady increase from $93.5 billion to $105.7 billion year on year. The steady increase of customer deposits shown here would be significant from a liquidity perspective.

In terms of our portfolio, our portfolio is well diversified, according to country. One of the results of our portfolio management is an extremely low NPL ratio; and there is no cause for concern about our Super 30 strategy, as it seems to be resilient toward future market volatility, geopolitical risk or recession.

Now please skip one page and proceed to page 42. I would now like to return to domestic business. I would like to touch on some specific examples of our efforts to create loan demand.

We regard ourselves as a primary front-runner in turning the agriculture, forestry and fisheries industry into the sixth industry. And with respect to the sixth industry funds, through cooperation with regional financial institutions, a lot of funds have been launched, as shown on this slide.

I want to emphasize here that some of the projects shown here have actually been invested and started their business since FY13. Moreover, there are many other sixth industry projects in progress from which we expect accompanying loan or fee income. We have shown two specific examples of such investment deals on this slide.

Moreover, as shown on the lower left of the slide, a project that promotes exports of Japanese agricultural products to the Gulf nations in collaboration with the Gulf Investment Corporation is progressing favorably, and I hope I will be able to explain about the deal with more clarity in the near future.

Page 43 shows some examples of our risk taking capabilities in order to create funding demands besides those related to agriculture such as mega solar funds, investment in Cool Japan Fund, infrastructure fund targeting public-private partnership, and Medical Device Incubation Fund in collaboration with Innovation Network Corporation of Japan on this slide.

In addition, worthy of special attention is the Mizuho ASEAN PE Fund which has been established to support Japanese companies, such as SMEs, overseas expansion, by investing in local companies in the ASEAN region.

More than 120 deals are being considered, and among those, actual investments have been undertaken in three deals which are a restaurant franchise, renewable energy business and fitness club, and have resulted in connecting Japanese SMEs with local companies in the ASEAN region, with the fund supporting the equity.

We are conducting this through the fund established in Singapore, and since the number of potential deals is increasing, even though we are considering those prudently, I believe this to be a very promising fund.

For your reference, page 44 shows two examples of geothermal power plant projects. Overall, we are making proactive efforts in order to develop loan demand, and I hope it will bear fruit through realizing actual net interest income, and/or non-interest income in the future.

From this point, I would like to explain about enhancement of governance system and attempts to transform our corporate culture. Please take a look at page 48.

Since I took office as Group CEO, I have dealt with the development of our Group governance in the belief that it would be a differentiation strategy, with other mega banks, i.e., an offensive strategy, not defensive. What the administrative orders in 2013 keenly reminded me was that my attempt to enhance and reform Mizuho's governance is still underway. On the other hand, it provided a significant impetus in order to lay the foundation to further enhancing the governance system.

What we are working on as the most significant tasks are the following three issues.

One; transformation into a company with committees. Two; strengthening of the functions of the holding company; and, three, transformation of the corporate culture.

I would like to explain the differences between one and two.

Mizuho will be the first Japanese bank to be a company with committees, subject to approval at the ordinary general meeting of shareholders in June. And as the Group unified as one, we will promote the three most important tasks taking the lead myself.

I would now like to present four points with respect to our new governance system.

First, we will thoroughly ensure the separation of supervision and management as a company with committees.

Second, as a result, we aim to realize further swift decision making in business execution by sufficiently delegating decisions on business execution.

Third, through every committee, meaning legally required committees as well as voluntarily established committees, we will establish a framework for the effective supervision of management, and to secure transparency and fairness in the decision-making process.

Page 51 briefly outlines comments and discussions at the Basel Committee on Banking Supervision, and requirements to various foreign laws and regulations.

With respect to Mizuho's new system, we have attempted to meet those requirements, as much as possible. For instance, regarding the Basel committee principles, as increasing number of banks require the chair of the Board to be a non-executive, our Chairman will be an outside Director.

As shown on page 50, we have been strongly conscious of the level of governance required from a global perspective as we have developed our governance system.

Please go back to page 48.

Now that we have designed the new governance system, we aim to make constant efforts to enhance its effectiveness from a practical standpoint.

Fourth, with respect to the strengthening of the functions of the holding company, this is to make the holding company that acts as the control tower of our Group-wide plans and strategies in order to develop integrated strategic plans.

This is consistent with our existing structure where we have explicitly established units and groups across banking, trust and securities functions. And then place the key senior executives from the holding company in each of those units and groups with the intent of conducting Group-wide strategies and plans in an integrated manner at the holding company level.

At the same time, since the appraisal of each board of directors, managing directors or above will be conducted at the holding company level. The control tower function of the holding company will be strengthened significantly.

I believe this is necessary to specifically manage our Group in a truly integrated manner, meaning not only collaboration to realize the final picture of One Mizuho. We have already made this change in April.

Please proceed to page 49. This page illustrates my explanation in the form of a diagram.

The left-hand side shows our old system, which is a company with auditors. Here, I am the chairman of the Board of Directors, and the ratio of outside and internal directors is three to six people.

When we move on to a company with committees, the chairman will be an outside director; and since there are five internal directors, it would be eight outside to five internal directors, with a total of 13 directors.

And as the deputy chairman and one non-executive officer are internal, the ratio will be six outside to seven internal directors. As a whole, the majority will be internal.

However, if we divide this into non-executive to executive, it would be eight non-executive to five executive officers, and the majority would be non-executives.

Moreover, the chairman is an outside director, and both nominating and compensation committees are chaired by and consist solely of outside directors.

With respect to the audit committee, since it is a committee strongly tied with our banking operations, it would be chaired by an internal non-executive director, but the majority would be held by outside directors.

The audit committee has significant authority where it has monitoring and inspecting rights towards banking, trust and securities entities.

With respect to the strengthening of the functions of the holding company, which I touched on a while ago, where the board of directors will supervise business execution, each unit and group will have a head at the holding company level; and they will manage the overall strategies through a horizontal, powerful organization, cutting the overall strategies horizontally.

As a result, although presidents and CEOs of Mizuho Bank, Mizuho Trust & Banking and Mizuho Securities will have responsibility for business execution of each of those entities, they will be responsible for executing business based on the strategic plans established by the holding company.

Moreover, since presidents and CEOs of Mizuho Bank, Mizuho Trust & Banking and Mizuho Securities are not the executive officers of the holding company who will have responsibility for representing the Company, this reform in governance is not simply about moving on to a company with committees, but to explicitly representing integrated management, putting the holding company at the center.

I would now like to briefly touch on corporate culture as a final part of my presentation. Various attempts to transform our corporate culture are shown on page 52.

Transformation of corporate culture cannot be achieved overnight. For instance, regarding the off-site meeting of general managers, there are approximately 1,000 domestic general managers Group-wide, and they mingled together and discuss the nature of Mizuho for more than three months last year.

I intend to continue this process. Medium-term business plan is a top down measure from management to business front lines, but since it might bear a sense of passivity, we have decided to ask all banking, trust and securities branches and divisions to create their own branch division vision.

How should your branch be? What would be the three-year vision of the branch or division? As all members were asked to discuss the state of their branch or division, there were truly interesting discussions, and communication has been strengthened significantly.

Since initiative is highly valued by our employees and part-time staff, I intend to continue this as well. In addition, not only myself, but deputy presidents and managing directors have visited all branches and divisions and held discussions on how to establish a strong Group-wide culture.

The lower right shows some initiatives to cultivate the sense of unity. In the near future, we will again hold a public viewing event of the football match between The Ivory Coast and the Japan national football team; and since family members are invited this time, a huge amount of people are expected to join.

Although these are rather inconspicuous initiatives, as we keep One Mizuho as our slogan, not only strategies or tactics, but these rather grass roots initiatives are necessary to develop the underlying culture of One Mizuho, and thus, we would like to continue with these.

The core values Mizuho aims to realize regarding corporate culture are perhaps sense of independence and communication. I believe the underlying culture of One Mizuho is about all management members and employees responsibly thinking on their own; having in-depth discussions and then acting independently. And I would like to aim at these.

Now I would like to wrap up my presentation.

We, Mizuho Financial Group, will fully commit to the development of regional economy and the restoration of the Japanese economy. And no matter whether the customer may be an individual customer or a corporate customer, we will sincerely try to address our customers' needs and challenges, making every endeavor to provide solutions with the aim of being the most reliable financial group.

We make our very best efforts, and we very much appreciate the continuing support of the investor community.

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.