Mizuho Financial Group Inc (MFG) 2016 Q2 法說會逐字稿

I'm Yasuhiro Sato, President and Group CEO of Mizuho Financial Group. I'd like to begin by thanking you for taking the time to be here today. We really do appreciate your warm support and understanding of the Mizuho Group, and I'd like to take this opportunity to express my most sincere gratitude.

Today, I would like to explain three topics. The first is our financial results of this first half; the second, our progress regarding four key focus area; and finally, our plan for disposing of the cross-shareholdings.

Please allow me to move straight into today's presentation. If you could open the materials package to page 4, I'll start by summarizing the results for the first half of 2015.

Consolidated net income was JPY384.1 billion, an achievement rate of 60% against the fiscal year plan of JPY630 billion. I would like to emphasize four items here.

Firstly, our customer profits, especially non-interest income, continued to increase.

Secondly, Mizuho Securities recorded its highest net operating revenues ever in this first half, and its profit earning capability has been strengthened.

Thirdly, we promoted sales of our cross-shareholdings.

Finally, we maintained the good quality of our credit and securities portfolio.

I'd like to move on now to look at the fiscal 2015 first half financial results in more detail. Please turn to page 9. My explanation here is on a two-banks aggregated basis.

We achieved a year-on-year increase of JPY17.7 billion, to JPY366.3 billion in net business profit. Gross profit was JPY822.9 billion, an increase of JPY30.3 billion, JPY51.7 billion of which was in the customer groups.

As a result of the progress in the disposition of cross-shareholdings, as well as the sale of ETF, our net gains related to shares was JPY99.6 billion. The gains have already exceeded our annual plan of JPY75 billion.

Net income at Mizuho Securities was JPY38.7 billion, which is an increase of JPY15.4 billion on a year-on-year basis. As a result, net income on a consolidated basis was JPY384.1 billion.

We maintained our Common Equity Tier 1, or CET1 ratio at 10.82%, a sufficient level.

Please turn to page 12. This slide shows our state of progress against the key numerical targets we have set under the medium-term business plan.

This fiscal year was the final year of the three-year medium-term plan. The left column is our performance in the first half of FY15, and you can see that we have made strong progress in ROE, RORA and CET1 ratios, compared with the objectives we initially raised for the final year of the plan.

The expense ratio was short of the plan, but we still strive to achieve all targets, including this one, by the end of this fiscal year.

Please move on to page 13. This page shows three key indicators in terms of transforming our profit structure; income from customer groups, the proportion of overseas income, and the proportion of non-interest income.

Against our plan to increase income from customer groups by JPY200 billion over the three years of the medium-term business plan, we have already achieved an increase of JPY279 billion in the first 2.5 years.

As shown in the figure on the top right-hand side of the page, the proportion of overseas profit was approximately 37%, and achieved our target of 33%.

Likewise, the proportion of non-interest income was 49%, and we have almost achieved the 50% target.

As you can see clearly from these results, we are moving steadily forward, transforming into a stable and sustainable profit structure, centered on the customer groups, as we said we would in the medium-term business plan.

Next, I would like to explain the first half results in more detail. Please turn to page 19.

I'd like to begin here with an explanation of the loan balance in Japan. As you can see in the dark blue graph on the left-hand side of the page, the loan balance in the first half, excluding loans to the Japanese Government, increased by JPY1.1 trillion year on year. Compared with the second half of 2014, the amount remained constant.

Overall, the increasing trend of the domestic loan balance continued. Nevertheless, as demonstrated by the graph on the right-hand of the page, loan and deposit rate margins and spreads continue their decline.

Please turn over to page 20.

The overseas loan balance in the first half increased by $21.9 billion year on year, and $11.8 billion compared with the second half of FY14. Loan spreads, as you can see in the graph on the right-hand side of the page, declined. The decrease was due to the increase of loans to high credit corporations, and the competition in those high quality lending markets.

Looking now to the graph on the bottom right-hand side of the page, you can see that we have been achieving strong growth in foreign currency denominated customer deposits.

Please turn to page 21.

Non-interest income, on a two-banks aggregated basis, increased by JPY42.4 billion year on year to JPY294 billion. The increase in Japan was due to solution and settlement, and foreign exchange-related business. We also achieved a year-on-year increase of JPY28 billion overseas, centering around the US, partly due to the purchase of the RBS asset.

For your reference, we have included fee income from Mizuho Securities in the chart on the bottom right-hand side of the page. As you can see, growth is also favorable here.

Please turn to page 22.

General and administrative expenses increased by JPY12.5 billion year on year, on a two-banks aggregated basis, to JPY456.5 billion. The net increase was due to an increase in overseas personnel and non-personnel expenses. On the other hand, the deposit insurance premium decreased by JPY9.3 billion.

Please turn to page 23.

This slide outlines the situation of the bond portfolio. We have recorded gains of JPY76.9 billion, due to our flexible operations, despite the highly volatile interest rate environment.

The graph on the right-hand side of the page shows the outstanding balance of Japanese Government bonds. The balance decreased by JPY1.7 trillion to JPY15.4 trillion from March, 2015. The average remaining period was 2.6 years.

Please move on to page 24.

This slide outlines the situation of the Japanese stock portfolio. The graph on the left side shows the gains of JPY99.6 billion due to our proactive sales across shareholdings and sales of ETF. As a result of disposal in this first half, the balance of cross-shareholdings was reduced by JPY40 billion.

Consequently, the balance of the stock portfolio, on an acquisition cost basis, was JPY1.9 trillion. The proportion of acquisition cost against Tier 1 capital ratio was 23.9%. We have now achieved our target of 25% in our medium-term business plan. However, we will continue to dispose of our cross-shareholdings proactively further. I will explain our plan for cross-shareholding disposition later.

Please move to page 25.

The credit-related cost was almost zero on a two-bank basis. The balance of disclosed claims under the Financial Reconstruction Act, on the right-hand side, was JPY0.8 trillion, and the NPL ratio slightly decreased to 1.06%. We have been maintaining our credit quality.

Please go to page 26.

As shown in the graph on the top left-hand side of the page, net income as Mizuho Securities was JPY38.7 billion. The result included JPY12.8 billion of extraordinary gain relating to a law suit against the Tokyo Stock Exchange, but I think it is fair to say it is an excellent result even without that gain.

Mizuho Securities also recorded JPY211.9 billion of net operating revenue, which was the highest six month revenue in its history. In addition to the increased commissions and net gains on trading outlined in the graph on the bottom left-hand side of the page, Mizuho Securities is also making steady progress in increasing assets under management, as shown in the graph on the top right-hand side of the page.

It also ranked 10th in the US DCM league table after taking on the RBS loan portfolio.

I'd now like to ask you to turn to page 27.

As I explained, net income for the first half of FY15 was 60% of the target. However, due to the continuing uncertain economic environment in and outside Japan, such as the slowdown of the Chinese economy and the impact of a potential US interest rate rise on developing countries, we decided to maintain the current profit plan for FY15.

Please turn to page 28.

Our CET1 capital ratio as of the end of September, 2015, was 10.82%, which is higher than the target of 8% in our current medium-term business plan. The figure was 8.6% even after deducting net unrealized gains on other securities.

In terms of target levels for the next fiscal year and beyond, we intend to realize a CET1 ratio that will enable resilience to environmental changes, going forward, while paying careful attention to trends in the additional financial regulations that are currently under debate. I am hoping to present that target in our new medium-term business plan.

The right-hand side of the page discusses steady returns to shareholders and outlines our ongoing policy of a steady and sustainable dividend payout policy, with a dividend payout ratio of approximately 30% as a guide for our consideration.

We are forecasting JPY7.5 as an annual cash dividend per share of common stock and JPY3.75 as an interim cash dividend, no change from the original estimate. I will explain the results of each business segment and progress in the four key focus areas.

Please turn over now to page 32.

I would like to explain our results for individual business in Japan. The graph on the upper left of this slide shows the balance of investment trusts for individual customers. The balance was decreased slightly, due to the drop of stock prices from August onwards this year.

On the other hand, sales of publicly offered equity investment trusts at Mizuho Securities, shown on the right graph, increased on a year-on-year basis. Our service provision capability was highly evaluated by Nikkei Veritas and HDI, as shown on right bottom. We were also awarded an MCPC award for five consecutive years.

Mizuho has been enhancing its initiative, FinTech, in the retail area. We strive to strengthen our service capabilities through those initiatives.

Now, if I could ask you to turn to page 33, continuing on here to look at corporate business.

The trend in lending to SMEs customers turned upward in the second half of last year, as shown on the upper left of the slide. You can also see from the graph at the bottom of the page that acquisition of new SMEs borrowers maintained the level of 2,000 each six months. We are achieving a strengthening of the customer base.

Please turn over to page 34.

From here onward, I will explain regarding our overseas businesses. As demonstrated by the graph on the left-hand side of the page, we have increased overseas gross profits at an annual growth rate of 8% over the three-year period from FY12.

At the same time, as you can see in the graph on the top right-hand side of the page, we have increased overseas non-interest income at an annual growth rate of 11% for the same period. Those results were a clear outcome of our Super 30 strategy.

Our Super 30 strategy has other strengths too. The well-diversified portfolio across non-Japanese blue-chip corporations globally provides resilience against the global economic slowdown in terms of credit-related costs.

Please move to page 35.

I will explain our overseas loan portfolio. As you can see on the left of this slide, the proportion of investment grade in our loan portfolio was 75%, and the NPL ratio was further improved to 0.8%.

The bar chart, on the right-hand side, shows the proportion of loans by region. Asia represents about 50% of the total, but it was well diversified over a range of countries.

Since we are getting more enquiries regarding our loans in China, due to the recent economic slowdown, we have posted the details here. About half of our loans in China were to Japanese corporations and the remaining loans were mainly for large financial institutions and governmental institutions. The impact of the economic slowdown in China on our credit portfolio was limited.

Please move on to page 36.

As shown on the left, our exposure to non-Japanese customers, relating to natural resources, was about JPY4.5 trillion, which represents just 5% of total exposure. It includes approximately JPY600 billion of non-Japanese project finance related, which is exposed to commodity price fluctuation risk. Most of them were LNG related and resilient to price competition as a whole. I would say the impact from the drop in oil prices is limited.

Please move on to page 38.

Next, I would like to briefly explain the four key focus areas in FY15. In total, of the four key focus areas, we have achieved in total a JPY45 billion increase in gross profit, which is 75% progress against the annual plan of a JPY60 billion increase. From the next page, I would like to touch upon details of each focus area.

Please turn to page 39.

The first focus area is to establish a competitive edge for large corporate customers. In this area, we have marked a JPY130 billion increase in gross profits in the first half, almost reaching our annual target already.

Here, we have chosen approximately 40 super-large corporate groups, and have made thorough efforts to expand our business in banking, trust and securities areas in this first half.

As a result, we have achieved a 17.7% increase in gross profits, which is an overwhelmingly high increase compared with the other customers. Based on this success, we are currently planning to further expand this strategy to approximately 1,600 corporate groups. Please take a look at the successful case shown on this page.

Please turn to page 40.

The second focus area is to enhance an integrated approach to both SMEs and their owners. As mentioned on the page, we believe that Mizuho has competitive strength in this area. One notable initiative is the Area One Mizuho promotion project.

Here, we have further promoted the collaboration between banking, trust and securities functions on a same-area basis, especially in areas which other mega-banks are strong. We have intentionally allocated highly talented general managers and have thoroughly promoted this strategy. As a result, we are starting to see very good results.

Our network is as shown on this page and, with respect to human resources, we are continuously increasing the personnel exchange among the three functions. This is contributing to enhancing the skills of our employees and the sense of unity among banking, trust and securities functions.

For the first half of FY15, we are seeing favorable progress of a JPY7 billion increase in gross profits for this focus area, versus the annual target of a JPY10 billion increase.

Please take a look at the successful case shown on the lower right. Here, we have managed to enjoy multiple profits deriving from one client, including asset management.

Please turn to page 41.

The third focus area is the development of the Super 30 strategy. The key to success is the close relationship with top management, and this is very much tied to our credit quality issue, which I have mentioned earlier.

Worthy of note is the steady increase in Super 50 RORA. Although competition for Super 30 customers is starting to get tough, as Super 50 RORA is getting closer to the Super 30 level, it is contributing to improving the overall return.

On the other hand, as a result of the acquisition of the asset portfolio from RBS, Forbes Global 200 coverage ratio is now 80%, marking a 10% point increase. And we are now joining the top 10 financial institutions in the US DCM league table. Thus, both from organic and inorganic growth perspectives, we would like to further strengthen our Super 30/Super 50 strategy.

Please turn to page 42.

The fourth focus area is to make asset management the fourth pillar of our business. For the first half of FY15, we have marked a JPY3 billion increase in gross profits for this focus area, versus the annual target of JPY5 billion.

Our total Group-wide asset under management is JPY50 trillion. Moreover, with respect to GPIF assets under management, and the number of corporate-defined contribution-plan customers, Mizuho is at the top of the rankings; all showing that Mizuho has a very strong business space in this area.

And now, we have announced the integration of our entire asset management vehicles into a new company. Since our asset management operation already has alternative products, which are said to be promising in this area, in addition to passive and active products, we are now ready to compete globally in this area.

Please turn to page 43.

We believe the five significant keys for success in asset management business are; human resources, product lineup, sales channels, IT, and governance.

With respect to human resources, I am very happy to mention that we maintain a very strong talent base through the integration of the Group-wide asset management functions. In addition, as I mentioned on the previous page, we are capable of developing passive, active as well as alternative products.

Moreover, in terms of governance, we would like to build a new company, with due care to fiduciary duty. Although the new Company is one of Mizuho's Group companies, we are discussing making it a totally new type of company, maintaining independence.

In an attempt to further enhance our asset management function, we entered into a capital and business alliance with Matthews, which has a strong product base in Asia. Through this alliance, we will be capable to provide domestic pension, as well as individual customers, with access to Asian products.

With respect to BlackRock, which we have invested in, we have, for the first time, provided them with Japanese products to be distributed in Hong Kong.

Finally, yet importantly, through acquiring shares of Simplex Real Estate and REIT management companies, we aim to strengthen our real estate-related asset management capabilities.

Please turn to page 44.

This page explains enhancing our collaboration with Orient Corporation. As you may have noted, we have increased our voting rights ratio from 22% to 49% and now intend to utilize this strength to expand new businesses, not only in credit cards, but also in retail finance.

I believe the four focused initiatives, shown on the left-hand side of this page, can be realized in the near future. We would like to fully utilize our relationship with Orient Corporation, in addition to UC CARD and Credit Saison in this area.

Please turn to page 45.

This page shows our initiatives associated with FinTech. We have established the Incubation Project team, which is under the direct authority of the Deputy President, and have already stationed personnel in Silicon Valley.

Furthermore, some measures have been implemented already, mainly associated with artificial intelligence and robots, such as Pepper. I would like to emphasize that an asset management robot system, provided on the Internet, is one of the areas we should focus on. And I would like to collaborate with BlackRock, which is one of the largest asset management firms in the world.

In addition, although it is not mentioned here, we have implemented new systems, such as an application to check account balances using the Apple watch.

Please jump to page 49; brief comments related to our governance system.

1.5 years have passed after we have transformed into a Company with three committees. There are several positive effects I would like to highlight.

Firstly, separation of supervision and management has been secured, and management decision-making processes have been significantly expedited.

Secondly, the Board of Directors' meeting is now focusing on discussions from very broad perspectives. Within the three-hour Board of Directors' meeting, although we need to allocate one-third of our time to resolution of items, we are now allocating two-thirds of our time to discussing issues such as the ideal state of Mizuho.

Thirdly, as functions of the audit committee are strengthened, it is now effectively supervising the management.

Fourthly, transparency of governance, enhanced fulfillment of accountability, and strengthened commitment for achievement of the earnings plan, have very much improved, after we have transformed into a Company with three committees.

In addition, as our nominating committee solely consists of outside, independent directors, we are now able to maintain the right person in the right place style of human resource management.

Last, but not least, we have significantly revised our compensation program for the Group officers, based on the opinion of a third-party consultant. And we have now implemented various measures, such as deferred payments or claw back.

Please turn to page 50.

After conducting assessments on the objectives of holding each share, we have now moved on to start negotiations for disposal with respect to customers for which the total profit does not reach a certain level. The aggregation of the necessary reduction amount at Mizuho Bank, Mizuho trust and banking and Mizuho securities level, is approximately 40% of the total Japanese stock portfolio.

Within the three years of our next medium-term business plan, which ends at March, 2019, we intend to dispose of at least 70% of the necessary reduction amount. And, furthermore, we aim to dispose of 40% to 50% of that amount within FY16.

As we recognize that the risk of share price fluctuation is a significant challenge for Mizuho, we strongly intend to overachieve the disposal plan. And that is the rationale of the arrow placed in the right-hand diagram on this page.

Moreover, we have to pay attention to customers currently exceeding the hurdle rate as well. I believe some of our customers have needs, such as buyback or expansion of their shareholders' base to individual investors and so forth, related to its share. Those are the customer needs we will capture thoroughly in order to reduce effectively our Japanese stock portfolio.

Please turn to page 52.

Mizuho is very keen to expand our initiatives related to ESG. For example, we became a member of the Dow Jones Sustainability Indices. Related to E, environment, as a top runner in this area, we are not only aggressively participating in mega solar or geothermal power generation projects, but have been given the role of Chair of the Equator Principles Association for the first time as an Asian bank last fiscal year.

Please turn to page 53.

In terms of society, we are keen to foster industries that will be in the forefront in the future through investing in various funds, in addition to promoting CSR initiatives. Moreover, related to initiatives for diversity, we have been chosen as the number one bank in a survey on female workers' workplace opportunity by Nikkei WOMAN.

Please turn to page 54.

Let me briefly explain the transition to next generation IT systems. In line with the original schedule, we have finished the design and development stage and are close to finishing the tests for each system area. As a result, we are moving on to test the linkage between the systems of each area. We are now entering a critical stage to ensure quality. And, as we put significance on quality, we have decided to add a testing period and revise the testing schedule.

We will complete the system test by December, 2016. After that, we will take a sufficient amount of time for inspection by user divisions prior to the successive transition to new IT systems. We are currently considering the detailed schedule for the systems' transition.

Now let me give you my closing remarks.

Although we will make the maximum effort to achieve all targets we have set in the current medium-term business plan in the second half of FY15, we have already started discussions about the next medium-term business plan from this April.

The discussions on the next medium-term business plan are approaching their final stages, and we are pleased to inform you that we will disclose the concepts and ideas, including quantitative figures of the new plan, in March, 2016.

To sum up briefly, while Mizuho would like to maintain our position as a top runner in corporate governance, we strongly intend to disclose a new business model suitable for this changing environment.

I thank you most sincerely for your ongoing support and understanding of the Mizuho Group.

This concludes my presentation for today. 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.