Mizuho Financial Group Inc (MFG) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. As has been introduced, I am Sato. Without further ado, let me start my presentation from the highlights on page 5.

As is described here, net income attributable to FG for the first half was JPY358.1 billion, a 59% progress against the FY16 plan of JPY600 billion.

Consolidated net business profit was down slightly year on year, but achieved 53% of the full-year plan, marking a steady result.

As I will explain later, due to the deferred tax assets posted for Mizuho Securities overseas reorganization, profit from Mizuho Securities contributed greatly to the net income attributable to FG this time.

On the strategic front, now that half of the first fiscal year in the medium-term business plan has passed, there are three points or characteristics that I would like to note at this moment, which have been verified to be effective. And I will mention them later again.

One is that the In-House Company System has accelerated the penetration of integrated management between banking, trusts and securities. Second, stronger control exercised over risk return and the balance sheet under the In-House Company System, and Company-specific ROE management.

Lastly, operational excellence, which is the base supporting the medium-term business plan, has started to show its effect.

Next page gives an overview of the financial results of the first half of FY16. As I have said, with respect to the consolidated net business profit, although the revenue environment was not necessarily favorable, we overcame negative factors by accumulating domestic non-interest income and conducting market operations in a flexible manner. Thus, the actual result of the consolidated net business profit is as I have just explained.

Although it is not written here, expenses went up by a total of JPY7.7 billion with the two banks combined. Considering the favorable impact of the strong [yen] by over JPY10 billon, the expenses did increase slightly but they were mainly costs that were strategic in nature.

Next on net income attributable to the FG, there were reversals on credit-related costs. For net gains and losses related to stocks, they declined at the usual cruising speed. For Mizuho Securities, both net business profit and ordinary profit posted, even without the tax factor, were solid, meaning that Mizuho Securities has finally become a major contributor to the overall financial results.

Common Equity Tier 1 capital ratio was approximately 11%. And it was 9.14% excluding net unrealized gains on other securities. We believe we are off to a good start in achieving a medium-term target of 10%.

Shown on this page are the key points of our financial results. There are four points. The impact of the negative interest rate policy in the first half was a little under half of the JPY40 billion we have planned and explained for the year. In other words, this is within the scope of our initial expectation.

Next on non-interest income, although the actual number may appear to have decreased, after adjusting for foreign-exchange fluctuations, there was an increase. So excluding the foreign-exchange impact, non-interest income was on an increasing trend.

As for the securities portfolio, net gains and losses from the JGB holdings and the gains on stock sales are described in this section.

As I will discuss later, the balance of JGBs was reduced by JPY5 trillion and their duration was kept within three years.

The sale of stocks yielded some gains but naturally the balance was dropping.

Unrealized gains have also slightly declined due to the sales of stocks but there are JPY1,400 billion, or over, of unrealized gains still being retained.

On credit-related costs, as I will explain later when I discuss the full-year plan, we are somewhat revising the initial annual plan of JPY80 billion, down to JPY60 billion for the full year. We believe that this is an indication that credit-related costs continue to be well managed.

Moving on to this year, the negative interest rate policy. This page explains our initial estimate of JPY40 billion from the impact. Our balance sheet includes items that are either negatively or positively affected by the policy but their net total impact was under JPY20 billion.

We had calculated the impact of the negative interest rate policy upon very close examination and yet, for the first half, the actual impact came out lower than initially expected.

As I will explain on the next page, this is testimony to the fact that we have been able to take quite effective measures against the negative impact of the policy.

The next page, as I said, is about the measures taken against the negative interest rate policy. The goal under our medium-term business plan is to become a financial services consulting Group and the concept is to pay close attention to, and to fulfil, customer needs by added the fourth and fifth pillars of business on top of the banking, trust and securities business that we have always offered.

Looking at the balance sheet, to give you a high-level summary of all the details that are written here, because of the negative interest rate policy there are emerging needs on the part of the customers to utilize their surplus funds.

The thinking that is beginning to prevail quite extensively among our customers is that low-risk asset management or cross-border M&As could be a good way to make use of their excess funds, and also to achieve steady shareholder returns. And that in terms of pursuing asset efficiencies, carving out unprofitable businesses, or putting other assets on sale, could contribute to restructuring the Company's balance sheet lighter.

Further to respond to the risk of market volatility, the negative interest rate policy environment is viewed as a tailwind for reducing cross-shareholdings as well.

On the funding side, triggered by the negative interest rate policy, total debt restructuring is underway, such as to switch from floating to fixed-rate borrowings, or to transfer from short-term to long-term funding.

Under such circumstances, in the first half, ultralong-term funding and subordinated debts were promoted actively. Pension strategies are now being reconsidered as a major challenge for corporations because of the burden of pension provisions. Pension plans, as well as investment strategies, are being reviewed as a result.

On capital strategy, as I said earlier, there is a stronger need to advance shareholder returns. Because there are no effective means available for investing assets, how to utilize excess cash on hand is a question that corporations today are increasingly debating.

I just talked about our corporate business and, as is shown here, all of what I have said is leading to new businesses for our banking, trust and securities, as well as asset management businesses.

Since much of the new business is related to trust banking and securities, One MIZUHO strategy, that we have been implementing, is now giving us a competitive advantage in this environment of negative interest rate policy.

On the retail side as well, individual customers are increasingly requiring low risk-type asset management strategies, or in some cases conversely, investment products that would meet their risk appetite.

In terms of retail loans, we are thinking of launching a new type of very cost-competitive lending business. And that has become a major priority consideration for management, specifically because of the negative interest rate policy. As such, many measures are taken to overcome the impact of the negative interest rate policy in a major way and that was what was exactly done in the first half this year.

Next I would like to draw your attention to the growth of our non-interest income from customer groups. It was down by JPY7 billion year on year compared to the first half of FY15. But without the impact from foreign-exchange fluctuations, it was up by JPY3 billion year on year. So its increasing trend year on year, compared to the first half of last year, is still intact.

This page explains the domestic developments with respect to non-interest income. If you could take a look at investment trusts and individual annuities, they declined by JPY7 billion and JPY2 billion respectively, year on year, being largely affected by market conditions.

Therefore, fees and commissions from the sale of investment trusts and individual annuities are certainly dropping. But the conditions are the same for our competitors. And in our case, we are offsetting this considerably with an increase in our solutions business, including syndicated loans, M&A deals, and securities-related fee income.

Our lower-profile business of settlement and foreign exchange also contributed. So in totality an increase in non-interest income was maintained.

Another point to note is, as is shown in bottom right, regarding the investment products, domestic bond sales also grew substantially. As you well know, this was because the bond market was very active, while the equity market was pretty sluggish or slow. So these conditions were adeptly captured to drive bond sales.

Next, regarding the securities portfolio; as I discussed earlier, gains on bonds including JGBs posted in the first half, were greater than half of what was achieved last fiscal year. I do not think the market environment was easy or friendly, but under the In-House Company System, because Global Markets Company, which cuts across Mizuho Bank and Mizuho Securities, shared and executed the same concept effectively in a setting we call one responsibility or a single leadership, Global Markets Company was able to ramp-up the gains on bonds, including JGBs extensively, despite the difficult environment.

On JGBs, as I explained, the balance was cut by JPY5 trillion, while duration was kept more or less the same at under three years. Within the declining overall balance, bonds with maturity of one year or less were largely reduced. So the duration has not changed very much; the total JGB balance is now much lower.

As a reference, our foreign bond portfolio and its unrealized gains and losses are shown in this section. The balance of foreign bonds stood at JPY8.6 trillion according to this table, but more recently, as might be discussed later, due to the election of Mr. Trump as US President, the balance is taken down to a much lower level, at least for the moment.

Next, regarding equities; net gains and losses or proceeds from sales were JPY65.3 billion compared to last fiscal year, when we secured considerable amounts of net gains. As a result of drastically reducing our cross-shareholdings, this year may appear somewhat slower. But, as is described here, so far we have cut the balance of our equity cross shareholding portfolio by a book value of JPY163.9 billion, which is solid progress against an annual plan of a JPY250 billion reduction that we have committed to.

According to our forecast, by the end of March next year, we believe that it is possible to achieve the promised target.

Moving on to the credit portfolio; I do not intend to say much here. There were reversals on the provisions; the balance of disclosed claims under the Financial Reconstruction Act was more or less flat or slightly down to under 1% in terms of the NPL ratio. In other words, we see no problem as far as credit control is concerned.

Next on the revised earnings plan for FY16. As I have just mentioned, since it became clear that credit-related costs were not going to reach JPY80 billion, it was slashed by JPY20 billion.

On the other hand, with respect to the consolidated net business profit, the exchange rate assumption of JPY115 to $1, underlined in the plan at the beginning of the year, overestimated the yen to be much cheaper than reality.

If we recalculate, based on the rate of JPY102 to $1 when the plan was drawn up, the target for consolidated net business profit goes down by JPY20 billion, cancelling out the positive revision of JPY20 billion for the exchange rate fluctuations.

The plan for the ordinary profit is revised down by JPY40 billion, and that is as a result of adding up a number of rather detailed items such as a provision for a subsidiary's derivative tradings, the amounts of which we think are reasonable.

The plan for net income attributable to the FG remains unchanged at JPY600 billion because we expect some reversals including tax effects from a UK subsidiary, as I said earlier. Consequently the amount of dividend we plan to pay for the full year remains unchanged from the initial plan as well.

The next page deals with the profit and loss of each of the companies we operate under the In-House Company System. Although not shown here on the page, for example Retail & Business Banking Company posted a loss of JPY28 billion in the first half, but their plan for the first half was a negative JPY10.4 billion to begin with. The Company fell short of the plan by JPY18 billion, which is mainly due to market conditions, our large drops in the sales of investment trusts, and individual annuities.

On the other hand, the plan for our business with large corporate and institutional customers was JPY102.5 billion, so an upside of JPY27 billion was achieved.

For Global Corporate Company, the plan for its services business was JPY70.8 billion, so here another upside of JPY6 billion was posted against the plan.

For Markets, the plan was JPY156.7 billion, which was overachieved by an excess of close to JPY90 billion. Because the combined plan for the companies initially was JPY320.5 billion, overall there was an upside of JPY100 billion realized in total.

The only issue therefore has to do with the downside posted by the RBC, or Retail & Business Banking Company, that is partly due to the arrangement where they must bear all the branch-related expenses, amongst others. Anyway, as far as the financial performance for the first half is concerned, RBC's shortfall against the plan is the challenge that remains to be addressed.

Next on page 17, under the heading of progressive development of One MIZUHO, the summary of the new medium-term business plan is provided. I do not think I need to explain this again.

Page 18 shows the progress, if I may focus on just four points. Regarding CET1, we are at 9.14% against the final goal of 10% to be attained in three years; that is the trend we see today.

I already explained about our cross-shareholdings and that our goal by March 2017 is to cut it by JPY250 billion, and ultimately JPY550 billion in the final year ending March 2019. I believe we will proceed successfully to achieve these goals, and we must reduce it by this much in two years' time.

The proportion of non-interest income in the first half of this fiscal year was 54%, unchanged from the 54% we saw in FY15. Our final target is to raise it to 60% for the first half. Although the absolute amount of non-interest income was growing as a proportion of the total income, because total income was also rising, it stood at 54%.

The expense ratio in the first half of this year rose by 2% due to the factors I explained earlier. The expense ratio plan for FY18 is around 60%, and it is to be brought down to the mid-50%s by FY20. But my awareness is that perhaps these numbers may have some problems.

Next regarding KPIs. Since there are so many of them, I would like to focus on the ones that were not met.

On the balance of investment products, we have not been able to capitalize on trends, partly due to market conditions. Publicly-offered investment trusts were down substantially too. Both of these KPIs were affected by the market environment.

By contrast, the area that performed much better than expected was M&A; the performance, both in terms of the volume and value of M&A transactions, was an overwhelming number one, far exceeding the targets set under this KPI.

The balance of foreign currency-denominated customer deposits also was above the target. US DCM, or Debt Capital Markets, is ranked ninth already, which became a strength for us this time.

Another KPI which may not stand out but is doing well was sales and trading profit with a progress of 58%. The sales and trading performance in FY15 was JPY300 billion which was achieved as a result of an effort to strengthen this business for the [proceeding] five years or so.

This year we are about to see an even larger number, indicating that the sales and trading business, vis-a-vis the customers in the market divisions, are starting to exhibit a positive trend. That is all for the KPIs.

Let us now take a look at the league tables, which are sort of like the flip side of what we saw on the previous page.

In syndicated loans we continue to be ranked number one as always, but our share was up overwhelmingly. We are at the top of the table in domestic bond underwriting as well.

For M&A, as I said earlier, both in terms of the number and the value of deals, we were number one. This is largely owing to SoftBank's acquisition of ARM, but even excluding that, we did very well.

In global syndicated loans we were the top player among the Japanese banks. In US DCM, our ranking was the ninth; and financial institutions who are above us are fairly limited. There will be some firms who will be falling in the rankings, so I think it's very important that we remain within the top 10 in this table.

Somewhat lackluster was our ranking in the total domestic and cross-border equities, including convertible bonds as well as REITs. And these were the reasons as to why we were ranked where we were. We would like to do a little better, and improve our ranking in this table too. That is all for the league tables.

Next let me talk about the effects of introducing the In-House Company System. It is difficult to explain what this In-House Company System is; but the effects of transition to the In-House Company System are shown here.

First, the conventional banking, trust, securities structure was unit system. So the focus was increasing gross profits. This time, the mission is to strengthen initiatives to improve risk return and cost return through the introduction of the in-house company ROE, to establish a structure that is responsible down to the bottom line, as shown here.

This allows the execution of strategies beyond boundaries among legal entities led by the heads of companies: in other words, the banking, trust securities structure. This cannot be done overnight. We transitioned to In-House Company System after promoting One MIZUHO banking, trust securities collaboration for three years. So the acceleration has been proven. In that sense, one and three are two sides of the coin.

In addition, the accelerated decision-making process through the transition from unit system to In-House Company System, and delegation of authority to heads of companies, is another effect of this -- the In-House Company System.

We are seeing some concrete progress in the first half of FY16. If I may touch on some of them. The market company I referred to earlier has extremely effective ALM management, as it has banking, trust securities operation. In balance sheet control, risk asset control is effective on the in-house company level, as they are responsible for ROE management.

Cross-shareholding disposal is mentioned in balance sheet control, which we have been conducting already. Heads of companies are responsible for the bottom line, so cross-shareholding disposal will be a bigger focus for them as a crucial issue.

The last point is operational excellence. Being responsible for ROE means responsible for the cost as well; and therefore we are seeing more discipline on cost. It has only been six months but we expect more effects going forward.

On the other hand, there are still a few remaining issues regarding the In-House Company System. For example, when it comes to personnel transfer between in-house companies, the issue of silo may occur, where companies try to retain capable talents within themselves. So as I will explain later, we have schemes in place to resolve such challenges regarding the In-House Company System.

Next, let me show you some initiatives of each in-house company, starting with retail & business banking company.

It is promoting joint branches in order to make branch and Group-wide integrated proposals. The current 189 joint branches will increase going forward. Human resources are being utilized effectively, as secondment of people across entities, from bank to trust, or bank to securities, for example, is working organically.

In product offering, trust, securities product offering to bank clients is going smoothly, for example, the new offering of testamentary trust to regional banks, that we announced the other day. We are seeing such effective utilization in this structure.

Furthermore, the number of investment customers, and balance of investment products, in other words, the asset that will be the basis of our future business, is increasing in retail & business banking company.

Next is fiduciary duty. We announced the policies regarding Mizuho's fiduciary duty, and are working thoroughly on the disclosed handling fees for life insurance and appropriate framework for performance measurement.

The last point is Area One MIZUHO. We divide the areas, calculate and compare ROE of each area, in order to decide on the optimum banking, trust, securities resource allocation in each area. This will function effectively going forward.

Next page is also on Retail & Business Banking Company. As shown here, we identify needs through business strategy discussions, and offer a consulting to strengthen financial and business succession business. The number of SME M&A deals, and real estate-related profits, increased significantly in the first half on a year-on-year basis. This shows that we are building our capability to identify and develop potential issues.

This is our support towards innovative companies. We incubate these early-stage companies, using our finance, or funds in some cases, in this membership service, in order to expand our client base.

We are top-ranked, among -- along with Daiwa Securities, in terms of the number of IPO arrangers; and also lead others in the number of IPO transfer agent. We are strengthening our support function, including such advisory for incubation companies.

Next is Corporate & Institutional Company's value chain. We are particularly focusing on post-merger integration. We are receiving high acclaim for demonstrating our strong advisory function.

In pension, decrease in return under the negative interest rate, and increase in PBO, are becoming financial problems. Our banking, trust, securities are approaching our clients, to review asset management; address unfunded obligation and improve net income, which is leading to non-interest income.

The next focus in Corporate & Institutional Company is hybrid finance. This is one example of total debt-restructuring I referred to earlier. In hybrid finance, where the issuers' and investors' needs are matched, Mizuho is the unrivalled market-leader, as you can see from the balance here. Global offering uses Recruit, as an example.

We started by providing advice on corporate governance code, and won the new status in their global offering, in exchange for the sales of stocks held. This cycle is working well. Our securities investor coverage is strengthening.

I touched on DCM earlier, but plan to raise our presence further in overseas ECM going forward.

Next is Global Corporate Company overseas. We are moving from the conventional Super 30/50 to Global 300. The objective remains unchanged. We will expand our transaction with credit-worthy clients from leading lending to non-interest rate business, by building close relationship with the management.

RORA is flat, although it is said to be declining; and gross profits maintained its upward trend. Major global M&A deal participation ranking is indicated. We are involved in most of them. 12 out of the top 20 deals. These are all based on Global 300 strategy.

Next is advisory and solutions business promotion. We are enhancing our global consulting function to expand globally.

The team supporting advisory and solutions business promotion is in New York and expanding into Europe and Asia as well. For example, our team in New York is focusing on key sectors globally, including media and telecom, healthcare and consumer in order to materialize the business.

Next is our US business. It is difficult to foresee what will happen but we established Bank Holding Company under which we will promote In-House Company System as a Group.

In terms of the number of top tier customers, the number of Global 300 level customers that Mizuho is targeting increased significantly after RBS acquisition.

The acquisition of approximately 100 personnel from RBS who ran the banking securities integrated business model at RBS is resulting in our increased presence in the US and at the same time, not only DCM but also our comprehensive solution providing capabilities, namely debt capital markets and M&A capabilities, are appealing to the US companies.

One example, Verizon, is shown here. We were the only Japanese Bank to be mandated as active bookrunner.

We are ranked ninth in DCM league table and slightly below 10th in ECM, as mentioned earlier, but hope to raise our position in ECM as well going forward.

Next is Asset Management Company. I already explained this earlier, so I will not say too much here. We started on October 1 and are number one in entrusted AMs from GPIF and also number one in AuM of the asset management companies in Japan.

As the direction of the business development, we will aim to become global top 20 in AuM from Asia No. 1.

We will leverage our strength and enhance our competitive advantage of having both asset management and sales by ensuring our fiduciary duty.

There is another page on Asset Management Company. I will be brief here, again. Individual-type defined contribution pension plan has expanded. We are already a leading Company in DC business, so we plan to capture the top position using our technology to address the expansion.

Next is providing solutions to address the negative interest rates environment where advisory is crucial. We will use Asset Management One and Mizuho Trust & Banking to provide comprehensive consulting so that we could address the individuals and corporates' asset management needs.

Next is Global Markets Company. As I explained earlier, banking, trust and securities held an integrated-company strategy meeting and decided their operational policy through One Responsibility structure. As a result, they successfully raised significant amount of profit, despite the difficult environment.

Next is sales and trading. This area is growing and will continue growing, as referred to earlier. We execute our market outlook and customer segment-based strategy across our banking, trust securities client base which is contributing to the strengthening of sales and trading.

Next is unit, starting with global products unit. These products are developed across our banking, trust, securities structure. One example is LBO value chain transaction through PE fund. We offer LBO finance to the supplier and use PE fund and exit with various non-interest rate business as a comprehensive business.

For prospective IPO companies, we have a business model that starts from consulting all the way to exit.

The other unit is research and consulting unit. We started One Think Tank. We speak at Nikkei 2020 Forum as One Think Tank and publish One Think Tank reports.

We were one of the first to publish a report on the impact of Trump administration on the day Mr. Trump won the presidential election.

We are also enhancing our membership function. The various membership service that Mizuho has had in the past will be integrated into One so that members can access industry research department reports, macroeconomic reports and equity reports.

In addition, membership site can offer comprehensive support, including business succession and business matching, among others. Research and consulting unit is preparing this brand new membership function in Japan which we plan to start from next fiscal year.

Next is on balance sheet control. Time is running out, so I will be brief.

This shows our individual balance sheet initiatives. What I want to stress here is that each in-house company takes action to improve risk return.

As a result of thorough ROE management, each in-house company controls the balance sheet as part of its autonomous efficiency improvement. This is a critical point.

We are also starting the business portfolio analysis toward next fiscal year. We are calculating ROE for each product, each customer and each area in order to take a three-dimensional look at ROE and analyze to see if there are any businesses to discontinue or reinforce.

Another page on balance sheet control. For example, with loans, we are rebalancing from low to high profitability assets and strengthening loan trading. With securities, we are decreasing JGB balance through effective utilization and disposing cross-shareholding.

With deposits, we addressed increased volatility through the increase in foreign currency-denominated customer deposits; and with other assets we are controlling deposits and assets effectively to avoid negative interest rate payments, which we believe will strengthen our balance sheet control based on ROE. Much of this is possible because we have the In-House Company System.

Next is foreign currency ALM. Swap rates are increasing, as shown here. Cost is rising but our foreign currency deposits are growing steadily and loan to deposit ratio is increasing, which offsets the cost increase.

US prime MMF raises concerns but Mizuho has had very limited funding from US prime MMF compared with other banks and thus not posing a big problem for us.

I will skip the next page on cross-shareholding disposal as I already explained it. Please turn to page 40 on operational excellence. I will not be too stereotypical.

Please look at the next page. Expenses will increase, as shown here, and we plan to realize operational excellence effects of JPY50 billion or over JPY60 billion by the end of FY18.

If you could back one page, we have already received approximately 200 concrete individual measures from in-house companies which already amount to over JPY50 billion.

These measures will be implemented going forward. However, these are measures for problem solving so we must implement measures for structural reform in a larger scale.

For example, integration of Group business by using the revision of Banking Act as an opportunity can cut costs significantly; big data, replacing routine work using AI; and a key factor is blockchain, which may reduce costs for overseas securities operation or syndication business down to 1/10 or 1/20. We plan to reduce costs significantly through structural form-type measures, including FinTech.

Next let me talk about next-generation IT systems on page 42. As I explained at the last financial results briefing, it is an extremely large-scale development to begin with and we added 24/7 functionality, which was not anticipated at the start of the development four years ago. And also added system development that can adjust to emerging trends, such as FinTech.

Therefore, the scale of the development is considerably bigger than originally planned. We said we planned to complete the development by the end of December but, unfortunately, some items may still be outstanding.

I must say that the financial completion of the development will be postponed by a few months. As I mentioned at the press conference, we think it is more important to take the time required to complete the development, rather than to stick to the deadline in order to ensure steady and high-quality release.

This will be followed by the transition, which we will thoroughly inform our customers so that they will not be concerned and make sure to take safe steps to prevent errors during the transitional phase, in order to complete the largest system project for Mizuho.

As the project term will be extended, the investment amount, currently estimated at higher JPY300 billion range may increase by approximately a few tens of billions of yen. I will accept this amount.

Page 43 and beyond is on financial innovation, which I already talked about.

Next is creation of new business. The left side of page 44 shows our joint venture with SoftBank. And the right side is cross-border settlement project with Fujitsu, utilizing blockchain, which is underway.

Page 45, I will not explain this page either. We are promoting a fundamental reform of HR management. And we have set the numerical targets for diversity and inclusion.

Lastly, capital management on page 47. The existing CET1 capital ratio of approximately 10% and a stable dividend payout policy with a payout ratio of approximately 30%, as a guide, have not changed at all. We will make our best effort until the end of the fiscal year, based on this policy. That concludes my presentation, 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.