Mizuho Financial Group Inc (MFG) 2018 Q4 法說會逐字稿

Thank you for the introduction.

As has been introduced, I am Sakai from Mizuho Financial Group.

I appreciate such a large turnout despite your busy schedules.

I would also like to take this opportunity to express my heartfelt gratitude to you for your patronage and support to our group.

This is my first time to present at a results meeting since I became the group's CEO in April.

I look forward to your kind attention.

Today, in the first half of my presentation, I will discuss the financial results for fiscal year 2017 as well as the plan for fiscal year 2018; and in the second half of the presentation, share my thoughts on our policy initiatives going forward.

Without further ado, allow me to start the presentation on the financial results for fiscal year 2017.

Please open to Page 5 of the presentation material.

On this slide, I will first provide an overview of the financial results for fiscal year 2017.

Consolidated net business profit was JPY 457.8 billion, down by JPY 205.5 billion year-on-year.

The factors behind that are as described on the right-hand side of the page.

The main reason was that although fee-related profit saw an increase for the full year after recovering in the second half of the fiscal year amidst a severe interest rate environment, net gains related to bonds and market-related profit declined substantially.

For credit-related costs, there was a net reversal of JPY 156.3 billion due in part to upgrades in internal credit ratings of large borrowers.

Net gains related to stocks amounted to JPY 272 billion, owing to steady progress in the sales of cross-shareholdings and profit from ETFs to offset the drop in consolidated net business profit.

As a result, net income attributable to the financial group, although it decreased year-on-year, met the target of JPY 550 billion, with an achievement ratio of 104%.

CET1 capital ratio stood at 12.49%.

The ratio after excluding net unrealized gains on other securities was 10.15%, attaining the medium-term business plan target of 10% in fiscal year 2017.

On this page, described is the net business profit and net income of each of our in-house companies.

First, retail and business banking company or RBC, under a very severe operating environment, where net interest income continue to decline, picked up momentum in the second half, centering mainly on noninterest income, by posting profit from the solution business offering client support for growth and business succession planning and fees from selling products such as investment trusts on the back of increased assets at Mizuho Securities.

Although with the shortfall vis-à-vis the target, net business profit of RBC increased year-on-year.

CIC or Corporate & Institutional Company turned around its net interest income after successfully implementing measures such as asset turnover and strengthening product-related lending.

Despite CIC's profit dropping year-on-year because of reduction in profit from M&A and ECM-related businesses, both its net business profit and net income exceeded the targets for the year.

Next, Global Corporate Company or GCC, amidst the rapidly changing business environment, it could not shift out from low-profitability assets to high-profitability assets as expected and had a decrease against the plan as well as last year's level.

By region, Americas had decreased income, mainly because solution-based deals, including M&A, could not be captured as much as planned.

But Europe, whose DCM business was robust, and Asia, where there was growth in transaction banking and non-Japanese customer business, both achieved increase in income.

Global Markets Company or GMC, because of tough market conditions, saw a substantial weakening of its profit from bonds-related business year-on-year but offset that by taking steps, for instance, to accumulate ETF positions by leveraging the trends in the equities market.

Against the full year plan, because GMC disposed of its unrealized losses, mainly from foreign bonds in the fourth quarter in an effort to bring its position to an appropriate level, ended up falling short of the plan.

Asset Management Company or AMC, operating in an environment where monthly distribution-type investment trusts continue to suffer an outflow of funds, achieved increasing gross profit by driving balance in asset formation-type products, amongst others.

With greater-than-expected progress in harvesting the fruits of consolidating Asset Management One, AMC secured increased income.

An overview of our profit and loss is given on Pages 7 and 8. If you could please review them later.

Next, I will explain the balance sheet on Page 9. There are 2 points to note here.

First, the current account of Bank of Japan for the 2 banks combined, in the lower-left side of the page, stood at JPY 32 trillion, which is a level that does not require negative interest rates to kick in.

The second point is the regulatory ratios in the lower right.

Our leverage ratio and liquidity coverage ratio were 4.28% and 120.1%, respectively, securing levels that are reassuring enough not to cause any concerns.

If you could please move on to Slide 10.

Of the consolidated gross profits we have earned, net interest income continued to slide, although the pace of decrease became slower compared to the preceding years.

That is because net interest income recovered to an increasing trend in the international operations despite its continued decline in the domestic operations.

I will provide more details on this later.

Please move on to Slide 11.

This is about consolidated gross profit excluding net interest income.

On consolidated gross profit excluding net interest, net fee and commission plus fiduciary income both grew, as is described on the left.

Further details on this will be discussed on the subsequent pages.

On the right-hand side of the page, net trading income and net other operating income are divided into market related and others.

For the market related portion, aside from net gains related to bonds contracting substantially, Mizuho Securities' trading gains also shrunk.

Please take a look at the next page.

This page shows the trends of net interest income by dividing it into domestic and international operations.

In the domestic operations, the funding cost was almost 0 while, due to a declining interest rates, carry from securities, which are mainly JGBs, dropped, and interest income from lending also slackened based on reduced spread.

In the international business, however, due in part to rising interest rates, net interest income from loans grew, although funding cost is also picking up.

But considering the balance between funding from deposits and funding from markets as we try to control the funding costs, overall net interest income exhibited an increasing trend.

I will explain about domestic loans on the next page, Page 14.

First, on domestic loans business, the balance of loans excluding those for governments and others were up by JPY 0.2 trillion from the end of March 2017 and were up by JPY 0.6 trillion from the end of September 2017.

Loan and deposit rate margin, as is on the right, overall, was on a declining trend, but the pace of decline slowed.

By segment, for middle-market firms and SMEs, the lending balance was moderately increasing, but the spread dropped, reflecting a harsh competitive landscape.

For large corporations, although the balance was more or less flat, initiatives including those to drive [up] product-related lending brought an increase in spread, albeit a slight increase, indicating that the spread was hitting bottom.

I would like to explain about the loan balance outside of Japan on the next page.

On loan balance outside Japan, it grew in all regions compared to September and 2017.

In comparison to March and 2017, Europe and Americas saw ups and downs depending on their business environment and asset turnovers.

Asia, on the other hand, kept on achieving steady growth consistently.

Thus, we were able to leverage the robust growth of the Asian economies.

On spread, although the competitive environment is becoming intense owing to measures including reduction in low-profitability assets, it increased slightly.

Next, on Slide 16.

The slide shows the status of our non-Japanese yen funding.

As is in the graph on the right, we continue to secure sufficient deposits as a funding source.

While being conscious of the costs, we continue to diversify our funding sources, and we believe we have established a stable non-Japanese yen funding structure that is not overly dependent on instruments such as currency swaps.

Please take a look at the next slide, Slide 17.

I shall discuss the situation regarding our noninterest income.

Noninterest income on a group aggregate basis rose by JPY 21 billion year-on-year.

Excluding the impact from the changes in the exchange rates, it increased by JPY 27 billion year-on-year.

Despite the sluggish first half, profit from solution, ForEx and settlement businesses and banking, alongside real estate-related profit from large deals, grew 2% increase year-on-year.

As is on the right, sales of investment trusts were brisk at Mizuho Securities.

The balance of investment products sold on a group-wide basis was also successfully accumulated.

As is on the lower right, our ranking in the league table for real estate-related business was #1, beating our trust bank competitors.

Next, on Slide 18, regarding general and administrative expenses.

G&A expenses went up by JPY 21.7 billion year-on-year.

To explain the breakdown, personnel expenses for Mizuho Bank and Mizuho Securities were roughly flat.

But because the number included amortization of unrecognized actuarial differences, when this was excluded, the expenses saw an increase.

The reasons behind this was increases in staffing in Japan and bonuses paid overseas.

With the impact of full consolidation of Asset Management One added on top of this, personnel costs increased by JPY 7.2 billion on a consolidated basis.

Non-personnel expenses also grew, partly because of IT-related cost expenditures at Mizuho Bank.

Again, with the addition of the impact of full consolidation of Asset Management One, it rose by JPY 14.7 billion on a consolidated basis.

During the current medium-term business plan, we strengthened our initiatives on operational excellence and made firm-wide efforts to suppress cost increases.

But our awareness is that this still remains a challenge, and therefore, we'll continue to be proactive in our attempt to control expenses.

On Slide 19, on the status of our bond portfolio.

Net gains and losses related to bonds were a negative JPY 20.7 billion, a major fall from the previous year.

The factor behind this was loss of volatility in JGBs caused by yield curve control in Japan.

This was also against the overseas background of accelerated speed of rise in the U.S. interest rates, making profit generation increasingly difficult.

Particularly, since the beginning of the new year, the pace of increase in rates quickened.

So to maintain the soundness of our portfolio, we disposed of the unrealized losses on our foreign bond portfolio.

And as a result, posted a net loss of JPY 56.3 billion for net gains and losses related to bonds in the second half of the year.

Despite U.S. TB rates approaching close to 3% at one time, these operations enabled us to maintain unrealized losses from foreign bonds as of end of March 2018 at a level approximately the same as that at the end of March 2017.

Moving on to Slide 20 to explain about securities or stock portfolio.

Net gains related to stocks were JPY 272 billion.

Of this number, JPY 70.1 billion (sic) [JPY 80.1 billion] was from the sale of ETFs, owing to the efforts by GMC to conduct agile portfolio management in view of the market trends.

As is on the right, in terms of reduction in cross-shareholdings, JPY 398 billion of cross-shareholdings were sold in the last 3 years, as is on the page.

Our progress rate in achieving the March end 2019 target of JPY 550 billion was 72%.

Our plan is to sell the remainder of JPY 152 billion by the end of this fiscal year.

Next, I would like to talk about our credit portfolio on the next page.

A reversal of JPY 153.2 billion was posted for credit-related costs.

This was attributed to reversals from large borrowings.

Given the favorable economic environment, even without these large reversals, there is an overall tendency of reversals occurring.

As is on the right, the balance of disclosed claims under FRA and the NPL ratio dropped to record lows.

Such improvement in the quality of credits also applied to overseas loans as well, as is shown on the next slide.

I hope you will take a look at it later.

Next, I would like to explain about our capital management policy.

If you could please skip to Page 23.

First, CET1 capital ratio excluding net unrealized gains from other securities was 10.15%.

We hit the target of 10% set forth in the medium-term business plan 1 year ahead of schedule.

On return to our shareholders, as is on the right-hand side of the slide, our policy to pay stable dividends and keep the dividend payout ratio of around 30% as our guide for consideration remains unchanged.

For fiscal year 2018 as well, our plan is to achieve JPY 570 billion, which is about the same as last year.

That means a dividend payment of JPY 7.50 per share, which, as forecast, be unchanged from last year.

Next, I will talk about the impact of finalization of Basel III on the next page.

As you all know, December 2017, BCBS or Basel Committee on Banking Supervision, issued a final draft.

According to the information made available to us, our CET1 capital ratio based on the new regulation as of end of March 2018, excluding net unrealized gains on other securities, is estimated to be above 8% and below 8.5%, which is lower by 2 percentage points or so than under the current regulation.

This suggests that our level will exceed what will likely be required under the impact of the finalized Basel regulation when it is fully enforced in 2027.

Alongside our discussion on the next medium-term business plan and also in view of the time line for the application of Basel III, we will consider to formulate a new capital management policy, taking into account the need for adequate levels of capital, growth potential and our future business and shareholder returns.

On the next slide, I will discuss the plan for fiscal year 2018.

Net income attributable to the financial group is planned at JPY 570 billion, the same level as last fiscal year.

As is shown at the bottom, with steady growth in customer groups and market-related businesses, our idea is to absorb the negative impacts of not having large reversals and credit-related costs that occurred in the last fiscal year.

I would like to note that the planned consolidated net business profit includes ETF-related gains and losses to be posted by the market group.

For the credit-related costs, because there will no longer be large one-off reversals this year, we expect it to be JPY 20 billion, down by JPY 176.3 billion year-on-year.

On net gains and losses related to stocks, we forecast it at JPY 190 billion, with our plan to continue to steadily advance toward the target of reducing cross-shareholdings.

Next, I will discuss the earnings plan for each of our in-house companies.

The plan for the net business profit is JPY 700 billion in total, up by JPY 160 billion compared to fiscal year 2017, with JPY 60 billion coming from 4 customer groups and another JPY 100 billion from GMC.

For the customer groups, we are to build on the recovering momentum that started in the second half of last fiscal year and mainly grow noninterest income.

But also, for net interest income as well, we will engage in more focused asset allocations and strengthen our risk-taking capabilities so that we can achieve an increase in income in the business in Japan and overseas combined.

The direction of our business transformation will be explained later.

For GMC, because their plan for growth is very large, I would like to explain the plan in detail by breaking it down to profit related to banking and profit related to trading.

The banking related profit will be driven by managing a portfolio mainly comprised of Japanese and foreign bonds as well as ETFs.

In view of the expectation that rate hikes in the U.S. will likely continue, we will ensure appropriate levels of allocations to ETFs, comprised of Japanese and foreign equities accordingly.

And once the rate hikes in the U.S. start to settle down, we will look to rebuild foreign bond positions to pursue carry and sales gains.

We are now able to respond to conditions in an agile fashion because this is going to be done against the background of our endeavors made last fiscal year to rightsize our bond positions, improve our risk-taking capabilities in foreign bonds and increase the scope of freedom in our portfolio management.

On trading, on the other hand, we will aim at capturing profit opportunities by leveraging rises in volatility and locking on to customer flows in the secondary markets through overseas derivatives business integration, integrated management between banking and securities functions and collaboration amongst customer groups.

I, so far, explained the results of fiscal year 2017, and the plan for fiscal year 2018.

Next, let me discuss the major policy initiatives for fiscal year 2018.

Slide 27 will take you through the policy initiatives for fiscal year 2018.

There are 3 pillars.

First is structural reform commencement and execution.

Second is accomplishing the medium-term business plan.

And the third is transition to the next-generation IT systems.

With these as the main pillars, we intend to turn around and go on the offensive this fiscal year.

Slide 28 is on structural reform.

This slide and the next slide are reprints from the last company briefing.

While detailed measures are being worked out in each field, overall direction such as time line and numerical targets have not changed from what we have announced already.

Please jump to Page 30.

Slide 30 describes the specific measures to be implemented in fiscal year 2018.

First, optimization of organization and personnel, approximately 1,300 people [worth] of efficiency.

The plan is to shift 600 people to front-office functions and reduce another 700 with controlled hiring.

We will start by consolidating back-office functions in and outside of Japan and optimizing head office operations and also conduct hiring with considerations for medium- and long-term goals.

Since we will be migrating to a next-generation IT system, realizing full-fledged efficiency of our staff will come a little later.

But without waiting for that, we shall start from where we can.

Second is structural reform of the IT system.

I'll come back again later to talk about transition to the next-generation IT systems.

In other areas, integration and consolidation of various IT systems and IT operation process reform will be implemented to seek efficiency.

Third is revisit channel strategy.

Reduction of branches will be in full swing after migration to next-generation systems.

We plan to reduce 19 locations cumulatively through fiscal year 2018 against the target of 100, a 20% reduction.

Pilot launch of hub-and-spoke model and collaboration with regional banks will also be promoted.

Lastly, strengthening earning power.

Structural reform for me is not only about cutting back on expenses.

It must also strengthen core earnings.

In order to strengthen top line, new businesses will be created or existing businesses will be drastically transformed.

These are some challenges going forward.

In fiscal year 2018, as shown in the slide, risk assets will be shifted away from streamlining areas to focus areas and invest JPY 1.8 trillion.

Slide 31 describes fiscal year 2018 business strategy by company, net business profits and risk-weighted assets.

The basic thinking is to take risk in a well-modulated, active and appropriate manner.

Risk-weighted assets shall be optimized where necessary.

Having said that, since there are signs of change in the world economy, risk control shall continue to be in place.

Slide 32 gives an update on the medium-term business plan, the second pillar.

As shown in this slide, we are generally on track, with expense being the only exception.

However, regarding expense ratio, achieving the gross profit level at the time of compiling the current midterm business plan appear difficult.

Unfortunately, fiscal year 2018 plan is in the higher 60% range, falling short of the original plan of approximately 60%.

Slide 33 is on the third pillar, transition to the next-generation IT systems.

Next-generation IT systems has been completed end of last year, and there has been ongoing effort for UAT and preparations for migration.

Migration will be conducted in phases based on branch groupings in order to diversify risk.

During the migration period, the current and next-generation IT systems will be concurrently operated to ensure safe and steady migration.

In the period immediately preceding migration, online services need to be suspended multiple times.

There will be days in which ATM service are not available.

We will be quick and attentive so that we can gain understanding of our customers in spite of the inconveniences we may cause.

Page 35 briefly illustrates Mizuho's thinking toward ESG.

As shown on the top of the slide, Mizuho will strive to further increase our corporate value by resolving social issues and contributing to the sustainable development of society.

As mentioned on the right, the ideal is for all our officers and employees to have the mindset to contribute to the sustainable development of society through our financial business.

Details are on the following slides, which I will omit for today.

Please jump to Page 41.

This section talks about my thinking as the new CEO on the direction of Mizuho's business transformation.

The course of action for transformation in my mind is, first of all, to leverage Mizuho's core competencies; and the other is to build an overwhelmingly strong business platform in areas of need in the coming era.

Competitive advantage shall be established through these 2 and, at the same time, establish a robust business portfolio in terms of stability and growth potential.

More than anything, we need to respond to the expectations of our investors by enhancing what I call core earnings, which is currently lower than our potential.

As shown at the top, there are 2 axis to the establishment of competitive advantage: customer and technology.

Firstly, on customer-driven business, Mizuho, to begin with, has a solid customer base.

The basic strategy for us has been to implement One MIZUHO strategy through banking, trust and securities and asset management for the customer base.

I think this approach has made some achievements so far but shall be further stepped up to bring ourselves to a level that will be unsurpassable by others.

We will advance One MIZUHO strategy and widely promote business-driven management.

In order to advance One MIZUHO strategy, business literacy shall be enhanced across the group and clarify or quantify strategies and initiatives.

I intend to run the business in a realistic and down-to-earth way to understand situation and to enhance core earnings.

Second is technology-driven business.

Potential for growth for financial businesses utilizing technology is very strong.

Therefore, in Japan, nearly all financial institutions are trying to incorporate technology into their business in one form or another.

Everyone is searching for a way.

In order to bring technology into our business strategy in a real sense and to turn it into a pillar, business side must enhance its IT literacy and IT side must enhance business literacy to accelerate the process.

Moreover, technology has just begun in Japan.

With the aim to establish an overwhelming strength in the area of need by customers, we will pursue new ways of doing business in finance that is highly convenient, effective and efficient in a speedy and thorough manner.

By contributing Mizuho's competitive advantages in these 2 axis, robust business portfolio shall be established.

Regarding business portfolio, business areas with high upside potential will be combined with stable revenue base while building on growth potential for the medium and long term in both.

Details are described on the following page.

To give you a sense of the overall picture, we have retail, which is stable revenue base but high fixed costs; and wholesale, which enjoys high upside potential but high revenue volatility.

The growth areas illustrated in the center of the page, namely securities, trust, asset management and the product access in area outside of Japan, mainly Asia as region access, are to be captured to promote business in line with the directions shown on the right-hand side.

Both retail and wholesale have their own challenges and positionings.

The group will be united in addressing them to complement each other and seek synergy.

This should be the source of differentiation.

Further collaboration between companies and units will be the driving force.

On Slide 43, I will start by retail, the retail segment.

I've already briefly mentioned Mizuho's competitive advantage, which is to have the bank, trust and securities functions in one group.

And by tapping into the fourth and fifth pillars of asset management, research and consultation functions, we are able to provide optimum consulting services in line with customer needs.

Thinking of the decline in birth rate and aging of the society and the future of individual financial assets, making greater use of customers' financial assets, an important area of growth, will be an important pillar in the retail segment.

Mizuho Securities is ranked #1 in the securities industry for 3 years in a row in net inflow of client assets.

By combining with increased users of investment products offered across the group, we intend to produce good results.

Future growth areas are mentioned on the right side.

It is quite diverse.

Technology advancement-led and social transformation-led restructuring of channels and settlement business is another big growth area.

Through creative initiatives in digitalization and cashless economy by leveraging technology, I see the need to significantly shift business resources going forward.

Next is on wholesale.

Mizuho's competitive advantages in wholesale is the strong customer base we have in Japan and overseas, including our investors.

I want to speak on 2 areas of growth: one is business expansion in global financial and capital markets.

As you know, looking at the size of the capital market in Japan, market size for bonds and stocks are, by far, greater in the secondary market.

While the bank has traditionally focused on primary markets, going forward, various functions under Mizuho will be utilized in the secondary markets to serve as an intermediary connecting investors in and outside of Japan, including individuals, to expand our revenue in the secondary market.

This is deeply related to utilizing individual financial assets that I talked about earlier.

An important point in establishing our competitive advantage is to increase our market literacy in doing business with issuers.

The second area of growth in wholesale is addressing customers' globalization activities.

Bottom left shows examples of investment banking business.

Bank, trust and securities working as one in Japan and overseas enables us to capture business from global multinationals and institutional investors in various fields throughout the value chain.

This is our strength.

As described at the top of the slide, Japanese banks, including Mizuho, when it comes to overseas business, have focused on supporting Japanese customers' overseas expansion or providing credit to non-Japanese customers by using the strength of our balance sheet.

Mizuho will continue to capture customers' cross-regional value chain business by leveraging our leading-edge presence in Asia and by supporting multinationals in the United States and Europe.

On the bottom right, you will see how successful we have been in transaction banking in this regard.

By capturing customers' trade flow and flow of capital, transaction banking ensures stable revenue flow.

It is a business that contribute from a foreign currency liquidity perspective as well.

In strengthening the noninterest business that we advocate, we have not only focused on investment banking with high volatility, but also on raising revenue from transaction banking from a revenue quality perspective.

Profitability from transaction banking in fiscal year 2017 increased 46% in 2 years.

After taking out the impact of the rise in dollar interest rate lately, increase was 30% in 2 years.

Continued focus will be given from an appropriate business portfolio operation perspective.

Here, I basically talked about the CIB domain.

This model is very much the same as the model I talked about earlier, being an intermediary, connecting investors and issuers to capture the value chain.

This will become an important axis of our competitive strategy.

I have come to the end of my presentation, but I'd like to say a few words before closing.

Today, I emphasized that the top priority at this moment is improving core earnings.

While there are various strategies and measures for that, the important assumption is our Mizuho corporate culture.

The banking industry has been prone to being on the defensive, prioritized not failing.

We cannot deny having such a side to our culture.

However, at a time when the financial business is in the midst of going through a large paradigm shift, we absolutely cannot survive if we continue such a stance and if we cannot improve our core earnings.

We announced our fundamental structural reform last November as part of our larger effort to be prepared for the new finance of the new era.

So that we can thoroughly carry out the plan, each and every officer and employee must use creativity to recognize their roles in the new era.

I want to make ourselves a financial group with people with such passion and motivation.

I am not calling to take risk blindly in a market environment in which credit cycle is peaking out, but I want to emphasize the importance of every one of our employees to have such motivation.

So that customers, investors and other stakeholders understand and sympathize with our vision and measures and so that our actions are seen to be reliable and dependable and so that we will be a need, more than ever, in the new era by our customers, we will be united to build a stronger and more robust financial group.

What I like to ask from you is to share with us frank and unreserved thoughts for Mizuho from the eyes of an outside person.

I will also engage in communication with you.

I will lead the group at the very front with the goal in mind.

Your continued support is greatly appreciated, from our investors and analysts.

And on that note, I'd like to conclude my presentation.

Thank you very much.