Mizuho Financial Group Inc (MFG) 2015 Q2 法說會逐字稿

Good afternoon. My name is Yasuhiro Sato, President and Group CEO of Mizuho Financial Group. I will speak today mainly regarding our interim financial results. Let's begin.

Please turn to page 3 of the materials. This page shows the highlights of the interim results for fiscal 2014. First, we recorded consolidated net income of JPY355.2b, which is 64% progress against our full-year plan of JPY550b. We also made steady progress in terms of capital adequacy, with our common equity Tier 1 capital ratio reaching 9.94%.

The interim period of fiscal 2014 marks the mid-point in our medium-term business plan. I'd like to make three points from this perspective. First, we stated that we would transform our profit structure to one that centered on the customer groups and I'm pleased to say that we are making excellent progress in this area.

Second, we plan to achieve JPY90b in One Mizuho Synergy over the three year plan period. And we are achieving this ahead of schedule at a remarkable pace.

And third, we transformed into a company with committees in June this year. And while completing construction of this corporate governance structure, we have also accelerated our integrated management between banking, trust and securities functions as One Mizuho.

I would like to move on now to explain our interim financial results. Please turn to page 6. Consolidated net income was JPY355.2b, as I mentioned a moment ago. Net business profits on a two-banks basis was basically in line with the plan. However, if you look at gross profits, as shown in the table on the left-hand side of the page, you can see that we achieved a year on year increase of JPY7.6b. Breaking this down, while the income from customer groups fell slightly year on year, that from trading and others exceeded this amount.

G&A expenses increased by JPY20.3b year on year. I will go into this in more detail shortly. However, while this increase included the effects of foreign exchange and an increase in consumption tax, we controlled other factors within the scope of the plan. Credit-related costs and net gains related to stocks were particular features this year and, as shown on the page, these both exceeded the plan significantly. These factors resulted in the level of consolidated net income that I mentioned a moment ago.

Mizuho Securities achieved year-on-year increases in terms of both net operating revenues and ordinary income. While net income was down year on year, I think it's fair to say that this was a good result when you consider the approximately JPY10b in positive tax effects included in last year's results.

As I mentioned in opening, our One Mizuho Synergy has progressed to 91% of the three-year plan and I believe it will be possible to achieve this fiscal 2015 One Mizuho Synergy plan during this year.

Please turn over two pages to page 8. This slide shows the progress against the financial targets in the medium term business plan. Our first-half results for consolidated return on equity, ROE, and consolidated net income on risk-weighted assets, RORA, both exceeded our planned levels for fiscal 2015. Nevertheless, we didn't achieve our fiscal 2015 targets in terms of expense ratios for the Group or for our banking businesses. We also still have some ground to make up in the ratio of our stock portfolio against Tier 1 capital with the current 27% falling short of the fiscal 2015 25% target.

Please turn to page 9. As I mentioned in opening, the medium-term business plan aims to transform our profit structure in terms of quality. In other words, we intend to reduce the degree of dependence on the trading segment, while increasing income from the customer groups, to create a stable and solid profit base. And, as shown on the page, we are making excellent progress towards achieving our objectives in this area.

Please look first to the table on the left-hand side. We said that we would strengthen income from the customer groups by JPY200b over the three year period to fiscal 2015. Having just passed the mid-point of the medium-term business plan, we have increased income by approximately JPY106b, which is basically in line with the plan. You can also see the breakdown between net interest income and non-interest income here.

The proportion of income from overseas customers and that of non-interest income from customer groups are also important indicators. As you can see in the two pie charts on the right-hand side of the page, we have reached a 32% proportion of income from overseas customers, which is good progress against the medium term business plan target of approximately 33%. Also in terms of the proportion of non-interest income from customer groups, we are aiming to reach approximately 50% in fiscal 2015 and we have made good progress by increasing this from 44% to 47%. I believe that this shows we are basically making solid progress toward transformation of our profit structure.

Please turn to the next page. Our target for One Mizuho Synergy effects over the three-year period to fiscal 2015 is approximately JPY90b and we accumulated approximately JPY82b or 91% progress against this target. We are realizing strong synergies from the merger and we will progress towards achieving approximately JPY90b within this fiscal year, a full year ahead of schedule. Page 11 outlines details of where and how we are achieving these synergy effects, so please take a moment to read this through.

Page 12 shows our achievements and progress against the main KPI items in the medium term business plan. There are a few gaps against certain items, but you will see that we are generally making progress in line with the plan for these KPIs.

I'd like to continue on now to discuss the details of individual items in the financial results. Please move to page 16. I'll begin here with net interest income from customer groups. On the left-hand side of the slide you can see that net interest income from customer groups in the first half of fiscal 2014 increased by JPY5.9b year on year. Breaking this down, overseas net interest income increased by JPY7b and net interest income in Japan decreased by JPY1.1b, which is basically in line with last year. Clearly our overseas businesses are a key driver in this area.

Please turn to the next page. As shown in the graph on the left-hand side of the page, the average loan balance in Japan, excluding loans to the Japanese Government, grew JPY500b compared to the first half of fiscal 2013, and JPY100b compared to the second half, which is basically a positive direction. Nevertheless, as you can see from the red line in the graph on the right-hand side of the page, the loan to deposit rate margin tightened by 5 basis points in the first half of fiscal 2014 compared to the second half of fiscal 2013.

The graph on the lower right-hand side of the page shows loan spreads in Japan for SME customers and large corporate customers. These both fell by 2 basis points. However, looking at trends, you can see that loan spreads are decreasing for SME customers in Japan. There are two factors driving this. First, and we see this as coming to an end, but the repayment of high-spread loan is not yet fully complete. And second, is the effect of excessive competition resulting from over-banking.

With large corporations, however, although there was a slight decrease, loan spreads are generally holding at a fixed level. Also considering current business conditions, we believe that we are maintaining profitability with large corporate customers. Further, while loan spreads are falling with SME customers, we intend to cover this with non-interest income through our One Mizuho model, which unifies our banking, trust and securities functions.

Please turn to the next page. Overseas loan balance increased by $13.7b year on year and by $6.1b compared to the second half of last year. Our overseas businesses are continuing to trend strongly. There was no significant drop in overseas profitability and we are maintaining certain levels, such as loan spreads, basically unchanged. In terms of liquidity, we have been steadily accumulating foreign currency denominated customer deposits and I believe that there are no major problems in overall funding.

Please turn over to the next page. Non-interest income from customer groups decreased by JPY19.2b year on year to JPY254.5b in the interim period. However there were particularly large special factors, which totaled approximately JPY27b, both in Japan and overseas, in the same period of last fiscal year. Excluding these factors, I believe that we generally maintained the growth trend in this area. Overseas non-interest income decreased by JPY8b year on year. However, JPY10b of the JPY27b in special factors I mentioned a moment ago are related to overseas business and, excluding these, we maintained growth.

Please turn to the next page. This page shows net gains/losses on securities and unrealized gains/losses on other securities. The graph on the top left-hand side shows net gains/losses related to bonds. You can see that we recorded trading income of JPY75b as we conducted agile operations around fluctuating interest rates. The graph on the right-hand side of the page shows unrealized gains on other securities, which increased by approximately JPY500b. This is due to an increase in unrealized gains on our stockholdings associated with rising stock markets.

Please move on to the next page. G&A expenses on a two-banks basis increased by JPY20.3b year on year to JPY444b. However, this result includes an increase of JPY5b due to the effects of the weak yen and a further JPY5b due to the effects of the increase in consumption tax. G&A expenses, excluding these factors, increased by approximately JPY10b. Of this JPY10b, just under JPY7b was strategic expenses aimed at increasing gross profits. Specifically, these expansionary expenses included increases in costs related to overseas personnel and advertising.

While we also made strong progress in reforming the cost structure, these forward-looking strategic expenses, the weak yen and the consumption tax increase resulted in the JPY20b increase in expenses.

Please turn to page 22. We recorded a reversal of credit-related costs of JPY75.2b. Approximately JPY52b of this was in Japan and approximately JPY23b was from overseas.

Please move on to page 23. Please look to the three strategies for enhancing business on the bottom right-hand side of the page. While the timescale for this is a period of our medium-term business plan through to fiscal 2015, we almost achieved the planned increase in assets under management of JPY3.5 trillion, recording an increase of JPY3.4 trillion in the period to the first half of fiscal 2014.

We also intend to acquire a 5% share of Japanese equities, although we only achieved 2.71% as of the end of the first half. We are still some distance from our target in this area. However, we will work towards gaining market share while aiming to strengthen our customer base.

I will go into more detail on our global debt capital markets business a little later on. However, this is a core foundation of our Super 30 strategy, and we are achieving growth in corporate bonds.

Please turn over to page 24. As you can see near the center of the page, we made no change to our initial estimate for consolidated net income. Breaking this down, however, we revised our initial plan for credit-related costs of JPY60b down to zero on a full-year basis. In addition, we revised the plan for net gains related to stocks to JPY50b, which is JPY5b up on the initial plan. These revisions are based on our results in the first half.

While these are positive revisions we did not make any change to the full year estimate for net income of JPY550b. The main reason for this is the potential decrease in corporate tax rates during the period of the plan and we have allowed approximately 3% for this. However, we have decided to leave the net income plan unchanged due to the negative effects this may have. Also based on the above, our dividend estimate is JPY7 per share, in line with initial estimate.

Let's move on now to discuss the key items in the balance sheet. Please skip four pages and turn to page 28. Allow me to begin with the credit portfolio. I mentioned a moment ago that we recorded a reversal for credit-related costs. The balance of disclosed claims under the Financial Reconstruction Act also continued to fall and the non-performing loan ratio dropped to the record low level of 1.05%.

Please move on to the next page. This page outlines our securities portfolio. I'll begin with Japanese Government bonds, where we maintained the existing situation this period. The balance was basically unchanged and average remaining period was 2.4 years. The graph on the right-hand side of the page shows our Japanese stock portfolio. While we reduced these stocks by JPY15.6b on a consolidated basis in the first half, this result was not satisfactory against our full-year target of JPY100b. The ratio against Tier 1 capital reached approximately 27% and we must further step up efforts towards cutting this to reach our target for the end of fiscal 2015.

I would like to explain our capital management next. Please turn to the next page. Our basic policy is to optimize the balance between strengthening of stable capital base and steady shareholder return.

Our common equity Tier 1 capital ratio on a fully effective basis was 9.94%. Even after deducting net unrealized gains on other securities, this figure was still 8.15%, which clears our target of 8% or higher under the medium-term business plan. And I believe this demonstrates that we are steadily enhancing capital adequacy. Having achieved this, we announced a consolidated dividend payout ratio of approximately 30% and we intend to realize payment of stable dividends going forward.

Please skip three pages forward to page 33. From here on I will explain our businesses. Further advancing our One Mizuho Strategy toward expanding the customer base and profit base basically means realizing a profit structure that can realize stable and sustainable growth centered on the customer groups and non-interest income, and building the balance sheet based on this. The strategy that we are aiming to advance involves adding a fourth pillar to our banking, trust and securities model by strengthening our asset management business, which I will touch on in more detail later on.

Please turn to the next page. Our collaborative strategy does not simply call for cross-selling across banking, trust and securities. It's actually about building a marketing business model that is capable of responding comprehensively to the needs of our customers irrespective of whether they are retail or corporate. In terms of the joint branch network, we widely expanded joint branches, with bank trust securities functions, bank trust functions and bank securities functions. We aim for expansion in profits based on advancing our bank trust securities business including this branch strategy.

I would like to speak regarding some specific examples in our retail business. Please turn to the next page. We are developing our business with individual customers in Japan based on the four themes of convenience, product quality, confidence and sense of value.

In terms of convenience, we have partnered with Aeon to develop the largest ATM network among the mega-banks with 6,500 installations. As recently reported in the media, we are also working with IBM to introduce face-to-face call center technology using the Watson Cognitive Computing System.

In terms of product quality, we are rapidly releasing new products, many of them first's among the mega-banks, such as loan products aimed at working women, reverse mortgages and home equity loans. And it is because of these actions that Mizuho was chosen as the number one bank in terms of enrichment of products in this year's Nikkei Veritas Retail Banking Survey.

Please turn over to the next page. As a result of providing these products and making use of our channels, we maintained growth in sales of bank trust investment products and we did so in a market environment that was far from favorable in the first half. Our balance of investment products also increased steadily.

Please move on to the next page. In our corporate customer strategy we aim to achieve sustainable growth in the profit base by advancing collaboration within the Group, and strengthening our frontline capabilities. This involves simultaneously increasing transactions with existing customers as well as expanding the customer base.

The number of new SME loan customers acquired in the first half increased by approximately 30%. We are not necessarily growing as strongly as we would like in terms of profit results given the spread issues at the moment, but it is definitely strengthening. Loans to SME customers are trending upward and we have also reached the high level of approximately 40% of non-interest income.

Please turn over to the next page. Here, we introduce six advance initiatives to establish new business foundations, each of which we are projecting to grow going forward over the medium term. I'd like to ask you to read through this later on. We are taking proactive steps in a wide range of fields to generate new loan demand ourselves by taking advantage of Mizuho's customer base, strong knowledge of industry and product's ability. We are also taking on risks proactively in certain fields, which we believe will lead to future profit.

We have prepared an example on the next page of the cooperative actions we are taking with the Gulf Investment Corporation, which is the sovereign wealth fund of the countries in the Gulf Cooperation Council.

This is a major project which was also reported in the media recently in which the Gulf Investment Corporation and Mizuho have come together to promote export of Japan's agricultural products to the GCC region. And it also involves food processing and logistics business in addition to construction of food processing facilities in the region. We have already signed a memorandum of understanding. And projects have also commenced with the cooperation of the Ministry of Agriculture, Forestry and Fisheries. Approximately 20 specific deals are already in progress.

Please turn to the next page. From here onward I will discuss the results of our overseas business. Gross profits in our overseas business increased by approximately 30% in the period from fiscal 2011 to fiscal 2013. Non-interest income from our overseas business grew at a pace of approximately 60% over the same period. The league table for syndicated loans on the bottom right-hand side of the page demonstrates Mizuho's strength in non-interest income. While there are Indian and Chinese banks above us, we maintained the number one position for Japanese banks for the past three consecutive years.

I would like to discuss our strategy on overseas non-Japanese customers next. Please turn over. I don't plan on repeating details of our Super 30 strategy here. However, I would like to make three points. One, profit is continuing to grow. Two, we are minimizing credit-related costs. And three, return on risk-weight assets is growing. This shows that we are continuing to achieve success with our Super 30 strategy.

In terms of our initiative to expand from Super 30 to Super 50, we have provided some specific examples on the bottom right-hand side of the page. The three companies on the left are Super 30 and the one on the right, Codelco, is a Super 50 customer. The key point to takeaway here is that with both Super 30 and Super 50 customers we are aiming to diversify into income sources other than loans, including non-interest income such as bond underwriting and arranging syndicated loans.

Just yesterday the media covered reports on the acquisition of Allergan by a major US pharmaceutical firm, Actavis. This is a giant acquisition deal totaling JPY7.7 trillion, and a bridging loan of JPY5.2 trillion was arranged by three banks, JPMorgan, Wells Fargo and Mizuho. It is extremely rare for a Japanese bank to be involved in an M&A deal on this kind of scale from the outset rather than just participating later on, and this is also one of the benefits achieved as a result of our Super 30 strategy.

And, on that note, please skip a page and turn to page 43. I would like to take a moment here to speak regarding management of our overseas loan portfolio. I'm pleased to be able to say that the quality of Mizuho's overseas loan portfolio is continuing to improve steadily. We are achieving excellent overall regional balance and also balance within the Asia and Oceania region. I want you to understand here the level of profits we are generating while still maintaining high quality loan assets and a sound risk management framework, including appropriate preemptive management.

Please turn to page 44. From here onward I will explain our asset management businesses. We are expecting the size of the market associated with household financial assets in Japan, particularly the markets for investment trusts and defined-contribution pensions, to expand by approximately three times by 2035. Basically we are projecting that assets currently held in cash and deposits will shift toward investment products.

Mizuho maintains a top-class position in this strongly growing market through DIAM, Mizuho Asset Management, Shinko Asset Management and, in the corporate pension field, Mizuho Trust & Banking. We intend to grow our asset management business substantially going forward, as the fourth pillar to our bank, trust securities model. We have outlined the significance of strengthening asset management here on this page and I firmly believe that Mizuho has major advantages over our competitor banks and above all over the other mega-banks.

Please turn over to the next page. This page provides specific details of Mizuho's competitive advantages and I believe that these competitive advantages in asset management lie in our ability to develop business fully in-house from product development right through to sales. On the product development side, both Mizuho Asset Management and DIAM have been selected by the GPIF as passive investment operators, which demonstrates the strengths that Mizuho already has in domestic asset management.

In terms of our competitiveness going forward, how we strengthen our Asian and global products will be of key importance. We believe that access to Japanese investors with global products is a weakness of each player in the market at the moment. We intend to strengthen this area as our target on the product development side, and then link this through to our distribution channels, which is where Mizuho has existing strengths. In doing this we will build structures that take advantage of and add value to our one-stop bank trust securities model. We are working toward making decisions regarding specific proposals within this fiscal year and discussions are already coming together.

We see growing Mizuho's asset management business into the leading investment institution in Asia while at the same time addressing some of the challenges facing Japan, such as vitalizing the JPY1,600 trillion in household financial assets and diversifying pension asset investment, as our next big challenge.

Now, if I could ask you to skip through to page 47, I will move on to explain regarding corporate governance. This page discusses our three initiatives in terms of improving the sophistication of our corporate governance and transforming our corporate culture. These are transformation into a company with committees, strengthening of the functions of the holding company and the ongoing challenge of corporate culture.

Please turn to the next page. You will already be aware that Mizuho has become a company with committees. However, our governance system also has other features such as the Chairman being an outside director, the nominating and compensation committees being made up completely of outside directors, and the majority of members of the Board of Directors being non-executive directors. This means that we have prepared in advance for the levels that will be required going forward by the Basel Committee and the levels required by the New York and Singapore stock exchanges.

Five months have passed now since we made the transition to a company with committees and we have held five meetings of the Board of Directors. Board meetings prior to this usually considered 15 to 20 resolutions and spent three to four hours doing so. However, operations have changed significantly since making the transition to a company with committees.

One of the key features of the shift to a company with committees is the delegation of authority to executive officers. Of the 15 to 20 items for resolution at Board meetings, for example the opening of a new office overseas, we are now able to make decisions under the authority of the executive line rather than having to resolve these items in the Board. As a result, matters requiring legal resolution by the Board have decreased by around 60% to approximately four per meeting. The time freed up because of this has enabled us to spend much more time debating more important issues, such as Mizuho's strategy and future vision.

An example from one of the meetings was when one of the external directors raised a discussion regarding whether our approach to risk overseas was too conservative. As President and Group CEO, I then spent 30 to 40 minutes answering with our approach to risk, including the economic environment, and debate on the topic then followed for a further 30 to 40 minutes. And this kind of debate has been happening at every Board meeting.

Whether or not this is happening because of the change to a company with committees is beside the point. The more important issue is being prepared to how to use governance for the management of the executive line. As of now, my personal evaluation of our governance as a company with committees is that things are working very well.

Please turn to the next page. I would like to continue on now to discuss our efforts toward strengthening the functions of the holding company. Mizuho adopts a corporate structure where units are established based on customer segment and the holding company conducts overall strategies across the Group. This structure enables us to implement smoothly the integrated strategy between banking, trust and securities functions, or One Mizuho Strategy across the Group, by integrating control tower functions at the holding company.

Another key point is that [GCBs] are expected to be thoroughly subject to in the discussions regarding risk appetite framework. With respect to risk appetite framework, we adopted the idea of reflecting risk appetite into our corporate management in order to manage risks and take necessary risks rather than controlling risks for hedging or mitigation purposes. Such an idea is widely needed now and thus the concept of line of business, which is already quite common among US and European financial institutions, will also be required for us as well. In other words, we will have to consider risk not on a legal-entity basis but on a line-of-business basis.

In this sense Mizuho's unit structure is a business operation policy that can fully respond to the concept of a risk appetite framework. We believe we can become a forerunner of what financial institutions should be by adopting the concept of a company with committees and management structure centered on the holdings company.

Please turn to the next page. Finally today I would like to discuss Mizuho's corporate culture. I would like to reiterate the Mizuho has completed various kinds of initiatives from different angles, as shown on this page.

Under the initiatives of the One Mizuho promotion project team, we are conducting a variety of activities. I am always using the phrase -- dive for the ball -- when it comes to corporate culture. The logo on this page does not illustrate the player who tries to catch the ball outside their range of defense, but the player who is failing to catch it. This represents a culture in which the player who dives bravely for their customers regardless of their range of defense is highly praised for their commitment. We give CEO commendation for players who took action to realize such a culture.

Although there is a long way to go and long-term efforts are required for the establishment of a robust Group-wide underlying culture, we will continue our efforts steadily.

This concludes my presentation and I would like to make some closing remarks. The medium-term business plan is progressing favorably as a whole. On the other hand, there remain some challenges, such as the reduction of the stock portfolio. In addition, new challenges have emerged, such as responses to new regulations and the slowdown of global economies. We are eager to get solid results by realizing sustainable growth through the enhancement of integrated management between banking, trust and securities as well as asset management functions and to fulfill our promises with investors steadily.

Please turn to page 51. This page illustrates the history of the financial industry and Mizuho's progress. Please take a look at Mizuho's progress shown on the lower part of this page. Mizuho was established in 2002 and the merger between Citicorp and Travelers, which was a forerunner of the era of big banks, took place around that time.

I was appointed as Group CEO of Mizuho Financial Group in June 2011. Since then the current corporate structure of One Bank and One Securities has been formed through, one, turning trust and securities subsidiaries into wholly-owned ones; two, substantive One Bank structure between banking, trust and securities subsidiaries since April 2012; three, the merger of securities firms in January 2013; and four, the merger of banking subsidiaries in July 2013. Moreover, we continue to pursue the strategy between banking, trust and securities functions including the transformation into a company with committees, and strengthening the functions of the holding company.

In light of these situations I would like to mention two points. First, we have dealt with these reforms since 2011 and spent a huge amount of energy in a series of structural reforms. We could not help spending a huge amount of energy not only on a management level but also on the frontline and planning sides. We are standing almost at the middle of the three-year medium-term business plan and would like to use our energy not for structural reforms but for earning revenues through fiscal 2015. I believe that the base for devoting all of our energies for growth has been established firmly.

Despite challenges we need to address such as new banking regulations, establishment of next generation IT systems and economic cycles, now we can use our energy, which has been used for structural reforms, for positive purposes. We are entering into a stage where all employees and management work together to take further advantage of our strategic edges and achieve actual results.

The second point is the direction in which Mizuho should proceed and what type of financial group Mizuho aims to be, both of which are already discussed with outside directors. One of the key characteristics I would like to deliver to you is that Mizuho pursues stable and sustainable development and growth.

Even if profitability might not improve in a short period of time, it is important to expand and strengthen our customer base, the enhancement of income from the customer groups going forward. As a result, we believe we will be able to realize steady and sustainable shareholder return, not by recording one-off profits, but by recording steady and sustainable profits. We have established a base that always enables us to realize gradual growth regardless of economic environment. This is the direction in which we proceed and the significant differentiation factor from other mega-banks.

Lastly I would like to express my deepest appreciation for giving us the opportunity to deliver our message. We will work together to try new challenges. Your continued support is very much appreciated. Thank you.

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.