Mizuho Financial Group Inc (MFG) 2016 Q4 法說會逐字稿

Hello, everyone. Thank you very much for gathering in such a significant number today. Time is very limited, and therefore for my part I would like to talk about the results of 2015 results very briefly, and focus my explanation on the new medium-term business plan.

I would like to allocate the -- enough time for a Q&A. I would like to follow the materials that have been distributed to you.

Please refer to page 4 of the materials. These are the highlights of FY15. On the right-hand side, four items are listed here, and this is a brief summary.

Net income attributable to the financial Group was JPY670.9 billion. We have exceeded the plan. There are many factors contributing to this. First of all, there is a disposal of shares, which have made progress according to plan. In particular, Mizuho Securities showed a strong performance last year, continuing from the previous year.

The second item is the net business profits of the two Banks. In terms of net business profits there was a decline of JPY32.9 billion. The first half was favorable, but there was the deterioration of the environment in the third quarter and fourth quarter. Because of these environmental factors, we had posted a negative number [year on year].

The G&A expenses was flat because of the decline in the gross profits.

For the securities, as I mentioned, the net income was JPY61.1 billion. For two years continuing, the performance was very strong. Toward the fourth quarter there was impact for the securities business. However, there was profit accumulated up to the third quarter.

In terms of capital gains, I would like to elaborate further, but we have been able to maintain a sufficient level, and a cash dividend per share of common stock of JPY7.5, as planned.

Now let's move on to page 10, now going into the details. Now, net interest income, the domestic loan balance, as well as a loan and deposit rate margin, is shown here. In terms of balance, excluding the loans to the Japanese Government, we have increased by JPY800 billion. In terms of our loan-deposit rate margin, the trend has been maintained, [7 basis], a decline was seen last year.

For the domestic loan spread, for small and medium size as well as for large corporate customers, spread has been declining. This trend is continuing.

Please refer to page 11. This is net interest income for customer groups overseas.

Balances increased by $24.2 billion. But in terms of loan spread, a 2 basis point deterioration was seen; or a 6 basis point decline for the year.

We are lending to blue chip companies overseas. The competition is becoming fierce in this area. Foreign currency denominated customer deposit increased by JPY39.4 billion (sic - slide 12, "$39.4 billion"), and it is increasing by more than the balance of $24.2 billion. So it has been very significant.

So page 12. Non-interest income for customer groups on a annual basis increased by JPY30.4 billion; domestic JPY10 billion; and overseas JPY20 billion. But net of foreign exchange it is a decline of JPY7 billion.

Overall, 2014 was very high, so it is become slightly lower for 2015. Investment products sold is shown on the right-hand side. Insurance products increased, but investment trust has been impacted by the adverse market.

But in terms of commissions, other than brokerage we are seeing growth. Therefore, we can see that the security business is becoming stronger.

Next is the G&A expenses. JPY910.9 billion, so there is a slighter increase. Personnel for overseas personnel expenses increased JPY13 billion. For non-personnel, we have been creative to suppress this, but it has not decreased more than the premium of deposit insurance. Our foreign exchange [effect is] JPY10 billion, so net of foreign exchange it is a positive of [JPY2.6 billion].

Moving on to next page, which is the securities portfolio bond. Now, in terms of JGB, JPY17.2 trillion to JPY15.6 trillion, so it has gone down by JPY1.6 trillion. Average remaining period has been maintained below three years.

For the foreign bond portfolio, as mentioned here, there is no valuation change, and there is no significant change in terms of balance.

Please refer to page 15: securities portfolio stock. For a stock, in terms of reduction is JPY115.7 billion decline. Inclusive of impairment and reduction, the book value has decreased by the JPY115.7 billion. Therefore, a steadfast progress has been made. With this the stock portfolio has reduced a significant -- Tier 1 ratio is 22.1%, so significant decline has been seen.

Please refer to page 16: credit portfolio. A credit cost of JPY26.7 billion has been recognized. In terms of FRA-based disclosed means it is decreasing. Our NPL ratio has gone down as well. So it isn't as if there is problem in terms of asset quality.

Now, later on I will talk about China as well as resource-related portfolio, which is a matter of concern for everyone.

Please refer to page 17. I will briefly explain the profitability of Mizuho Securities. Regarding retail AuM, even under the current environment it has shown a steadfast growth. The retail AuM is mark to market, therefore was slight decline; but a net inflow has been successful.

We try to increase AuM by JPY3.5 trillion, but it ended at the JPY4.3 trillion. We wanted to achieve Japanese equity market share of 5%, but we did not achieve this level.

RBS has had a positive impact in terms of strengthening global DCM. In the US league table we are in the ninth position within the Top 10.

Next, moving on to talk about the four key focus areas. This is our commitment to you.

Overall, JPY60 billion was the target. In terms of the actual results for each of these areas, asset management was impacted by the environment effect. But otherwise we have been able to achieve or over-achieve. The achievements rate is 108% we have been able to strengthen the key focus areas.

Next page I will skip over, and move on to page 23. These are the overseas business results. I would just like to highlight the major points.

The Super 30 and Super 50 profitability is mentioned here. We have strengthened the Super 50 RORA; it is now becoming a Super 30 RORA. For Bank and security the collaboration is having a positive effect.

The US DCM ranking is Number 9. You can see this here. This is for non-interest income.

The next, page 24. This is the loan portfolio overseas; it is focused on China specifically. The balance between non-Japanese is such that Asia is 46%. Within Asia, China counts for 10%. And out of China 10%, Japanese is 43% and non-Japanese is 57%; and a little bit less than half is financial institution.

So out of the non-Japanese, Chinese is very limited. Even with the slow-down of the Chinese economy, the impact on our asset quality is limited.

Next on the resource sector. Overall, JPY102 trillion of loans outstanding. For resources sector we have JPY4.5 trillion. That's non-Japanese customers; Japanese, they are JPY1.5 trillion. So the breakdown of JPY4.5 trillion is here, energy, resources, you can find the breakdown.

NPLs. What's recognized as NPL is JPY0.04 trillion, very marginable; Very small.

Now from a different viewpoint, project finance that's affected by declining resources prices, that's about JPY600 billion, that's 0.6% of the total. So giving the total amount of loans, it's marginal as well.

With respect to the crude oil price, with the current crude oil price no new cost is expected to be generated. Now Japanese customers, 1.5 trillion. In terms of the amount, combined with this, it's roughly around JPY6 trillion, which is 6% of the total. So, given the total resource sector exposure, it's not that we have a major concern over it.

Now, Russia and Brazilian exposure is noted here. These are the levels. Public institutions lending, that accounts for the majority of exposure there. So exposure for Russia and Brazil is not a source of concern at this moment.

The following page, the next page shows the FY16 plan. For FY16 in terms of net business profit compared to last fiscal year it's going to go down by around JPY100 billion. That's because of the environmental factors, not just negative interest rate policy, we're also looking at the global factors. Unfortunately, net business profit plan is to go down year on year and our interest income decline, as well as foreign currency -- a funding cost rise, is also a factor; and our ultimate goal JPY600 billion.

Considering these factors, this is going to be a tough target, but we would like to work hard to attain it.

Now, our annual dividend. JPY7.5 per share based on JPY600 billion dividend payout ratio is 31.6%. As I have been saying, approximately 30% consolidated dividend payment ratio as a guide for our consideration and, therefore, JPY7.5 per share of dividend.

With respect to net business profits, since the start of this year we have introduced an in-house company system for each company we have targets set.

FY15, because we did not have a company system, it's hard to compare. But if we try to compare apple to apple this would be the comparison and, as I said, there are underlying factors that go into these numbers.

Page 27. Now this is the impact about the negative interest rate policy.

Overall, JPY40 billion or so of impact is expected for FY16 from the negative interest rate policy, and the breakdown is here.

Roughly speaking, yield curve is flattening because of that. The loan spread is going to go down and the market margin is also going to come down. That accounts for JPY45 billion.

Now deposit funding cost is going to be favorable, JPY20 billion and non-interest income, because of derivative transactions, is going to go down JPY15 billion. So in total JPY40 billion is going to be the net impact from the negative interest rate policies.

So that's about FY16. Now, I'd like to skip a few more pages.

Now, I would like to discuss the new medium-term business plan. If you could open to the cover page for that part of the presentation, the title is progressive development of one Mizuho, the path to a financial services consulting group and I would like to discuss the details.

Page 38. If you could please skip to page 38. In the last medium business plan, we've talked about this -- just briefly recap this.

In the last medium business plan, we have set the basic philosophy -- corporate philosophy and changing barriers of financial institution.

On top of that, we have looked at the history. Post-Lehman shock, what should a financial institution look like? We've thought hard: governance, corporate structure and corporate governance issues. We have worked upon them.

In phase IV a winning business model is to be built and we would like to come up with a solution to have a winning business model.

If you could please turn to page 39. I will not delve into details. In the next three years if we look at the environment, uncertainties in the world are increasing. Given that, we need to have robust balance sheet, and stable and sustainable profit structure, that's what's need to be built. That's going to be one of the major goals for the next three years.

You are already aware of the environmental factors; I won't delve into the details. But just to touch upon them, up until the middle of last year how to utilize excess capital? I think the focus of our discussion was on that. But since the end of last year into this year the environment surrounding us is changing drastically and negative interest rate policy was introduced.

So in the next two years what's going to happen? We have done a review and changed slightly our outlook, so that we can come up with a strong make-up for our organization in the coming two years.

Page 40. The regulatory environment surrounding us on top of the macro economic and competitive environment with respect to the regulatory environment, PLAC and IRRBB I think we're seeing somewhat of a conclusion. But when it comes to regulatory factors they are still uncertain to some extent.

So what's going to be their impact? We will have to take a look. In the next one year or so, I think these will become somewhat clear. But, at this moment, much of it is still unclear and uncertain.

With respect to our competition, especially inclusive of European financial institutions, what should be our business model? A lot of financial institutions are exploring the best business model that is the competitive environment and I think that's an advantage for Mizuho Bank.

Now, our thinking behind the mid-term business plan and our awareness about the environment, awareness of our history, external environment, competitive landscape, and the summary of the -- and the lessons of strength and weaknesses from the last plan. Based on all of that, we have set the risk appetite which is described here.

So what are the risk factors that could happen in the next three years? We have divided into business -- in terms of business strategies, financial strategies and management foundations.

I will not discuss each and every one of them. But the way in which the mid-term business plan is formulated, our awareness about the environment. We took a look at the risk appetite.

Our risk appetite is from the first layer to the third layer. First layer is something universal; the second layer the mid-term outlook; third layer is specifically for FY16. That's the make-up.

So we decided the risk appetite for the mid-term business plan and upon looking at the business portfolio analysis area to focus on, area to streamline, we have decided all of this.

Next on page 43. Based on the awareness that I talked about and the thinking we have come up with this summary of the new medium-term business plan.

We would like to become the financial services consulting group. We are not saying that we are to become a financial services group and there is a big meaning behind this.

But I think we need to further promote our banking, trust and securities, bank (inaudible). A bank alone cannot meet customer requirements. Banking, securities and trust are not enough either; we need to have asset management, research, check and consulting services, they all need to be brought in.

Regardless of whether the customer is institutional or individual, we need to meet the customer requirements and not just the challenges that the customers themselves are aware of. There must be potential challenges that the customers aren't even aware of. We need to help customers realize/detect them, so that we are able to provide the best solutions. We would like to become the best partner for our customers.

Post-Lehman shock, based on the real demand from our customers, that's how financial institutions should be operating: and client-oriented, a customer focus, a value that we've continued from the last mid-term business plan. This is something that we will be focusing upon, customer focus, and operational excellence, which is another pillar.

As many of you may know, operational excellence is the term that is used by western financial institutions. But operational excellence, the term they use basically is about enhancing cost efficiencies. In our case, in Mizuho's case, we have a broader concept. Excellent operational capability, that's what it's about and we're going to support this with five basic policies as well as 10 basic strategies.

Now, let me explain some of them individually. Page 44 is regarding operational efficiency. On the part of Mizuho, cost reduction as well as structural reform is not the only thing we are doing. A sustainable growth is a competitive advantage to enhancing added value of customer service is our focus.

Now, in terms of enhancement, there are some that we have to do immediately and they're what we are going to be pursuing in three years' time line.

So we have divided into six areas. In terms of technology innovation, optimal operation is very much related to FinTech. Using the FinTech, our operation will become enhanced so that customer services can be enhanced. This is in the context of operational excellence. This is different to the operational enhancement that is pursued by western peers.

As well, there are short term and also, mid-term. The five Company heads there will be a focus on this. There will be a work plan that will be established on a monthly basis. There are 100 items already identified. Over the three years, it will be implemented through the process of PDCA. An operational excellence, promotion committee will be established, which will be headed by yours truly and we will be pursuing our operational excellence with vigor.

Given the current environment, we have to become a lean organization. This is a road toward becoming winners in the industry. From this point of view, we will make full-fledged efforts in terms of pursuing operational excellence.

Next, I would like to talk about the five strategies that I mentioned earlier. We are introducing the in-house company system. We had 10 business units, which were divided by customer segments, and we have been pursuing this on a customer base, but this just was a temporary initiative.

Now, we have divided into five in-house companies and two units. Two units will support the five companies and we have already decided who will head up these in-house companies.

There are three objectives. By having 10 converted to five, by having belongingness to the in-house companies, we will be able to clarify the consistency of strategy. By having five in-house companies, we can speed up the decision-making process.

A headquarter organization will be reduced in size; front-line capabilities will be enhanced; and thirdly, these company heads will be responsible for ROEs.

In the past, it was based on gross profits, but they will be responsible for net income on the other hand. Therefore, this is an extremely challenging initiative for the companies.

Conventionally, we have been focused on gross profit, so expenses was not concerned. There was unclarity (sic) in terms of responsibility regarding expenses. But expenses will now be allocated and they will be responsible for the bottom-line profitability. Accountability will be clarified under the in-house company system.

Next, I'd like to talk about the selecting and focusing of business areas. Market attractiveness and in terms of competitiveness, we have divided into four dimensions. These are our focus areas and there are areas to streamline and revisit strategies.

We have clarified this. For example, for low profitability loans, there will be realignment taking place. Although it is not written here, the branches, as well as regional business promotion organization, will be included in this domain.

This cost basis, a JPY2.4 trillion reduction will be realized, and this will be reallocated to the focus area. There will be a rebalancing initiative implemented. JPY2.4 trillion will be allocated and a JPY4.6 trillion risk asset increase will be seen. That means that total wise, JPY2.2 trillion risk asset will increase, but JPY2.4 trillion will be reallocated to the focus areas.

There will be a shift of approximately 900 employees. This is how selection and focus will take place.

Next, I'd like to move on to talk about the financial structure. Regarding the financial structure, as mentioned here, we will be focused on the balance sheet in the input as well as output and we will set up a committee to strengthen this.

Non-interest income will be increased and cross shareholdings will be reduced. Cost structure reform, through operational excellence and capital management will become optimized.

Targets have been set for this purpose. From page 51, I will be referring to the financial structure breakdown. I am now moving on to page 49. In the interests of time, I am going to go through this very quickly.

This is relating to FinTech. Technological advances and settlement loans, as well as asset management, will be impacted by this. In the financial council, it has been discussed that the investment in such companies, as well as the operations of related companies can be organized under the holding company.

Taking all these into consideration, we will pursue this area. In page 55, I will talk about the details of what we are pursuing.

Next, I would like to talk about the active participation of our workforce to support a stronger Mizuho. Now, fundamental reform will be pursued in this area. I will not go into details, but this is something that has never been tried by other Japanese companies before.

The dealership program is where we are going to be focused on and [Jack Roaches] School has been established [IDE] for this purpose. Culture, communication is something that they're always mentioning, so I'm not going to go into details.

Page 52. Out of the 10 strategies, I would like to mention the non-interest income business model. Each of the companies have their own initiatives and in terms of targets, KPIs are shown here.

This is what we are going to be pursuing in terms of non-interest income. A comprehensive financial services group will be pursued. Using the appropriate pillars, the non-interest income will be increased going forward.

Next, I would like to talk about the next [wave] shift of from savings to investment, the fourth pillar. The Asset Management One will be integrated on October 1, 2016. By having these integrated organizations to the customers, the distribution size and the products side will be seamlessly integrated.

In terms of distribution, we have the strongest in Japan. We will bring to them technologies and have the entities work together to strengthen the distribution route.

Now, on the product side, by integrating this organization, we will have a better understanding of what the customers require. From the distribution side, they will capture information. We will capture information from the customers as well, so that Asset Management One company can drive the shift from savings to investment.

The relationship between the two is seamless, based on a fiduciary duty. This is going to be very important and be very effective in terms of promoting a shift from savings to investment.

The fifth pillar is research and consulting functions. We'll have One Think-tank. There are three areas to strengthen. Research and consulting will be one independent unit and it will work across the board -- across the Group. There will also be globalization of the think tank as well. Specifically, we will be able -- we will globalize research industry.

Now, there is also overlap in some areas, which will be subject to reorganization so that efficiency can be enhanced. Unfortunately, in Japan the number of think tanks that can be globally competitive is limited. Therefore, by consolidating this function, we are aspiring to become the largest and strongest think tank in Japan.

It will take more time to become a legal entity, like Asset Management One because Mizuho information -- Securities -- or Mizuho Research Institute is what we are considering in terms of how it can integrate. We'd like to integrate in the future, but for the time being we will have a virtual One Think-tank. The members will have stipulation of One Think-tank on their business.

I'd like to move on to FinTech. There are so many things that we can discuss on this, the global advisory; and in asset management a collaboration with Moneytree -- our collaboration with Money Forward. These are ongoing initiatives, as you all know.

The brand services using Pepper and Watson are already happening, and sending people to Silicon Valley. Every bank is doing that already. Incubation PT, we have an advisory committee for this, that's established, is one of the members.

So crowd funding and operational efficiency enhancement, as a specific model we would like to set up something by the end of the first half in these areas, so creating specific businesses; that's what we would like to attain. Just as studying and exploring will not be enough, we would fall behind. We need to come up with specific business areas.

Moving on to page 57, Area One MIZUHO Strategy, in the same area, banking trust and securities businesses are going to be integrated and PDCA will be implemented.

Page 58, balance sheet control strategies and cost structure reform, from the entry point to the exit, we will exercise this. Cost structure reform is part of the Operation Excellence reforms. We will be implementing this.

Next, cross-shareholding disposal, this is something that I've always talked about.

The next generation IT systems, I've discussed this.

Last but not least, I would like to discuss the financial targets or numerical target. In the medium-term business plan, we would like to achieve a CET1 capital ratio of approximately 10%. We would like to become a middle-ranked G-SIFI.

In terms of capital management policy, maintain an optimum balance between strengthening a stable capital base and steady returns to the shareholders. This remains unchanged. Through this, by achieving sustainable growth, we would like to raise CET1 capital ratio, so that we are able to keep this policy.

A consolidated ROE, a target of 8% excluding net unrealized gains on other securities; RORA approximately 0.9%.

With respect to Group expense ratio, in FY18 we will see a large investment into the next generation IT system. It will be 60%, but other than that, it will become 50%. By FY20, therefore, we would like to aim for the mid-50% range.

Cross-shareholding disposal target remains unchanged.

The roadmap for the next three years, the 10% CET1 ratio, ROE, RORA you will be able to calculate from these numbers.

In terms of net income attributable to FG, we would like to achieve in the order of JPY600 billion. There's a ladder chart, negative interest rate impact JPY50 billion. There are a lot of other environmental factors as well. With the strategies I talked about, we would like to overcome them.

For increased expenses, through operational excellence initiative, we would like to cut down on cost. On top of that, we will add credit cost and so forth so that we will be able to achieve an income of over JPY600 billion.

Now, regarding gross profit, we would like to increase non-interest income from 54% to 60%. In terms of net interest income, here in the domestic market the spread is going to continue to go down. In overseas, the spread is coming down, but there are areas where we can leverage our volume to increase profitability.

In terms of non-interest income, banking, securities and trust using the fourth and the fifth pillar as well as the three entities, there are areas where we can still grow so that non-interest income overall can be raised as well.

Last but not least, expenses. As I said earlier, with respect to expenses, as well as base expenses, taxes, ForEx impacts must be looked at as strategic expenses. In order to increase revenue, we have to spend certain expenses of JPY60 billion or so.

We would like to decide when to invest this. Looking at the timing, through operational excellence initiative, we would like to reduce expenses and achieve 60% level excluding next generation systems, and in FY20 for mid-50% range.

Lastly, about the capital management policy, as I just said, we would like to achieve approximately a 30% consolidated dividend payout ratio as a guide for our consideration and CET1 ratio of approximately 10%. These are our plan.

I conclude my presentation. But lastly, just one point about the negative interest rate policy; I gave you an analysis earlier. But more recently, negative interest rate -- because of negative interest rates there are certain businesses that can occur. For example, hardware finance is one such area.

Among the customers that we do business with, taking this opportunity, they are working to improve their financial structure and, therefore, interested in hybrid financing.

We are seeing asset management performance is also deteriorating. For example, the cost of provisioning retirement benefit obligation is deteriorating, although it's not reported by media reports.

The cost of provisioning retirement benefit obligation is rising quite substantially. Because of this, there are increasing number of customers who would like to review their pension plans, including DC and DB. These are the strongest areas for Mizuho Trust. Pension-related business is something where there is a chance for growing.

For over 30 items and areas, there are things that can be tapped into as a result of negative interest rate policy. It's true that our profitability may come down as a result of negative interest rate. But in terms of asset management and so forth, we believe that there are areas where we can overcome that.

Not everything is reflected in our mid-term business plan, but the question is how can we realize such opportunities? That's going to be the question that we need to address.

That's all from me. 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.