Mizuho Financial Group Inc (MFG) 2021 Q4 法說會逐字稿

I am Sakai with Mizuho Financial Group. Thank you very much for participating in the earnings briefing for the financial results of FY 2020 despite your busy schedules.

First of all, I would like to offer my deepest apologies for causing great inconveniences on the part of customers, investors and the members of the relevant parties because of a series of IT systems failures that occurred at Mizuho Bank as well as a similar event at Mizuho Securities. For the systems failures at Mizuho Bank, we will make sure to conduct an in-depth investigation to get to the bottom of this issue and come up with a measure to make improvements. Upon receiving the results of the assessment and recommendation from the special investigation committee, we will be reporting to you on this at an appropriate timing.

Now allow me to start my presentation using the presentation material. Please have a look at Page 3. This is the executive summary of financial results. Consolidated net business profits rose to JPY 799.8 billion (sic) [JPY 799.7 billion], up by JPY 127.1 billion year-on-year. This is an overachievement over the revised annual plan of JPY 710 billion, which was developed as a result of reflecting the steady progress that we had made up to the interim.

It also exceeds significantly the JPY 700 billion target that was to be achieved in FY '21 under the 5-year plan and has done so a year earlier than initially planned. I will explain the details of the results of the market and customer groups and credit-related costs in the following pages.

On top of steadily reducing our cross-shareholdings, we eliminated the impairment losses from some of the names posted in the first half on the back of the recovery of the stock market and through various measures. But we're taking steps to eliminate the individual risks of impairment losses. The position of bear funds, which have come to whole valuation losses in light of rising stock prices, is being improved.

Net income attributable to FG was JPY 471.0 billion, up by JPY 22.4 billion year-on-year. In an uncertain business environment, although being helped by factors such as the change made to the pension plan and posting up extraordinary profits from the revision of stocks from the retirement benefit trust, we have been able to achieve robust results because we had a solid growth in our net business profits by making steady efforts to capture profit opportunities, both in markets and customer groups while posting forward-looking reserves. In that regard, this was quite robust results.

Please proceed to the next page. On the next 3 pages from this one, I would like to present the financial highlights of the year. First, on consolidated net business profits and net gains or losses related to ETFs and others. Once again, the consolidated net business profits were JPY 799.8 billion (sic) JPY 799.7 billion , an increase by JPY 127.1 billion year-on-year. To compare this with the results in the past, this year's net business profits exceeded the levels achieved prior to the introduction of negative interest rates in FY '15. It is a record high since the company system was launched within our group in FY 2016.

In terms of customer groups, as the deposit balance shrunk because of major reductions in overseas policy rates, including U.S. dollar interest rates, we ensured to capitalize on the funding needs of our clients under COVID-19. Increases in the loan balance, mainly in overseas where spreads were improving as well as the active primary corporate bond market, to steadily translate these activities into revenue.

With respect to markets, regarding banking, we accumulated carry mainly from foreign bonds and also improved the quality of the revenue. Regarding sales and trading, centering around the U.S., we captured customer flow when volatility rose under COVID-19. But then on the other hand, at the end of March, markets division posted trading losses in the U.S., which was around JPY 10 billion on the bottom line basis. The position is already unwound, and we have confirmed that there are no similar trading left on a global basis.

Second, with respect to loan balance and spread, in Japan, due to the support we provided to our clients to meet their funding needs under COVID-19, the average loan balance in the second half of FY '20 was up by JPY 4.3 trillion compared to the second half of FY 2019. Loan spread for large corporates improved. The loan spread for middle market and SME clients also rose by 2 basis points compared to the first half of FY '20, partly owing to growth in long-term funding. This is the first time since the second half of FY 2009 to see rebound in spread.

In overseas, in particular in the U.S., where there was a clear shift towards capital markets from funding, all regions, especially among non-Japanese clients, saw declines in the average loan balance of JPY 22.8 billion compared to the first half of FY '20. The loan spread outside Japan continued its upswing of around 10 basis points compared to the first half of the year as actions such as reviews of target customers and initiatives to improve spread bore fruit.

Please turn to the next page. Thirdly, regarding noninterest income in the customer groups. First, on RBC. Asset Management business for individual customers with a focus on long-term diverse diversification and continuity performed [briskly]. While corporate solutions business that have been struggling from sluggish corporate activities with the impact of COVID-19 began to recover in the second half to record JPY 407 billion with an increase by JPY 27 billion year-on-year.

CIC grew its revenue to JPY 293 billion, up by JPY 18 billion with rising loan balance brought about by funding support we provided under COVID as well as revenue from solutions business. For GCC, it increased its revenue to JPY 247 billion, up by JPY 22 billion, primarily from lending-related activities mainly in Europe and Americas and increases in the volume of capital market transactions.

Fourth, G&A expenses. Increases in expenses from investments into areas of focus, including performance-linked compensation, up JPY 20.2 billion year-on-year. And amortization of core banking systems in Japan and overseas was offset by expense reduction efforts through steady progress made in structural reform initiatives that brought the overall expenses down year-on-year.

Fifth, on Mizuho Securities. Mizuho Securities' ordinary profit on a simple aggregated basis, combining all the U.S. entities, came to a record high of JPY 157.9 billion. Both on an unconsolidated basis and on the basis of combining both Japan and overseas, it was ranked second in the securities industry. Retail CIB markets all performed extremely well.

Sixth, non-JPY funding. The balance of foreign currency customer deposits dropped because we had tighter controls around high-cost deposits in the face of declining loans. But the ratio of the total loan amount covered by customer deposits continued to be above the threshold of 70%.

Please turn to the next page. Seventh, regarding credit-related costs. Credit-related costs were down by JPY 204.9 billion. The split between Japan and overseas is such that 80% is for Japan and 20% overseas. In anticipation of prolonged impacts from the coronavirus, we additionally provisioned a forward-looking reserve of JPY 72.3 billion. We managed our finances so that credit-related costs could peak out in FY 2020 by moving up our expenditures for the credit-related risks in FY 2021 and onwards.

Eighth, regarding cross-shareholdings. Reductions achieved were JPY 252.1 billion against the target of reducing JPY 200 billion by the end of March 2022. Rate of progress is 84%. We shall first and foremost concentrate on meeting the target of JPY 300 billion and then continue to sell and reduce cross-shareholdings thereafter.

Net reductions or sales, excluding impairment, was JPY 219.4 billion, a progress rate of 73%. We will make sure to continue to negotiate with the issuers so that we can achieve a targeted JPY 300 billion reduction with the sale of the cross-held shares alone. CET1 ratio will be discussed later on a separate slide.

Please skip to Page 38. From this page onward, I will explain our management policy for FY 2021. First, as the impact from COVID-19 is prolonged, it is important for us as a financial institution to fulfill our social mission to run stable business operations and to perform financial intermediary functions.

At the same time, we would like to build partnerships with our clients and markets amidst the economic and social structural changes arising with and after the coronavirus and also in view of the global trends emphasizing sustainability. To this end, we must enhance and activate communication amongst all the executives and staff members of Mizuho and deepen our structural reform initiatives with the aim of transitioning into the next-generation financial services organization.

Please go on to the next page. This is about the economic outlook for FY 2021. The main scenario, which is represented in the bold line in the graphs below, in the far left, in Japan, because of downward pressure on the economy caused by delays in vaccine rollout and extension of the state of emergency, it will take until January through March period in 2022 for the economy to recover to pre-COVID-19 levels.

On the other hand, the sub scenario represented in dotted red line in the graphs suggests that in Japan, measures to contain the resurgence of COVID-19 failed and the highly transmissible variants prevail. As a result, this sub scenario assumes that the state of emergency will be declared multiple times in the second half of 2021. In this case, the economic recovery will be at an even more modest pace.

Please move on to the next page. This is about the evolution of consolidated net business profits. When we announced the 5-year plan, we explained that in the first 3 years of the plan, we will ensure to grow high-quality, stable revenue while cutting fixed costs. And in the last few years of the plan, to further realize our strategy in terms of gross profits to accelerate growth, so that we can achieve consolidated net business profits of approximately JPY 700 billion in FY 2021 and to further raise it to around JPY 900 billion in fiscal year 2023.

In fiscal year 2020, we overachieved this plan a year ahead of schedule. In particular, we did well in terms of stable revenue. So let me explain this. In fiscal year 2020, there was a strong impact from COVID-19, and we made a revision to the plan thereafter. And therefore, we achieved JPY 370 billion, far exceeding the revised plan of JPY 309 billion that we announced in November last year.

Next, on the plan for FY 2021. The plan is JPY 404 billion, which is lower than the initial plan of JPY 420 billion. But this target for FY 2021 means that we will most likely exceed JPY 380 billion, which we considered as stable levels of revenue before negative interest rates were introduced. And considering that we are also working to overcome the impact of U.S. interest rate cuts, which we had not assumed initially, our assessment is that we are steadily strengthening our stable revenue through lending and deeper structural reform initiatives.

On the other hand, the plan for upside revenue in FY 2021 is expected to fall somewhat year-on-year compared to FY 2020 because in FY 2020, we were able to seize revenue opportunities quite well under very active market conditions. But still, this is much higher than the initial plan. For banking account revenue, we will continue to operate with a focus on stable income from carry. It has become a stable source of revenue being larger than the initially planned level.

All in all, when seen as a revenue portfolio or revenue mix, we believe our business is gaining traction in that the quality of stable revenue base is being reinforced steadily, and the foundation to pursue upside revenue potential is also being developed.

Please proceed to the next page. On expenses, expenses are to be reduced to levels lower than in FY 2020 through responses to address the expense structure, although there are factors increasing expenses such as performance-linked compensation and foreign exchange rate fluctuations caused by good performance. For this FY, in view of the IT systems failures we suffered of late, we have set up an JPY 80 billion budget for strengthening the operations space, including nonrecurring expenses and a considerable buffer so as to ensure stable business operations.

Please go on to the next page regarding credit-related costs. If we look at how our actual credit-related costs would have changed, have we not applied our discretionary forward-looking provisioning practice, we realized that the credit-related costs would have hovered high at JPY 900 billion (sic) [JPY 90 billion], JPY 170 billion and JPY 190 billion in the years FY '19, '20 and '21, respectively.

What we did as part of the administration of our finances in FY 2020 was to provision for as much credit-related cost as possible that could be expected in FY 2021. And therefore, on a forward-looking basis -- thereafter, on a forward-looking basis, so the credit-related costs would peak out in FY 2020, we have, therefore, financially provisioned the reserve, but we expect the severe business environment to continue mainly here in Japan due to COVID-19. Hence, we will continue to thoroughly implement proactive credit management and prevent new credit-related costs from manifesting.

On to Page 43 regarding shareholdings. On the left, I shall skip this part about cross-shareholdings because I have already explained this earlier. On the right, this is about reduction of stocks in the retirement benefit trust that we focus on as part of our financial structural reform initiative in FY 2020, and let me explain about this.

Mizuho's retirement benefit balance sheet has surplus assets or overfunding that is deducted from CET1 capital, thus having a sensible impact of around minus 0.5% on the CET1 ratio, which is quite large. Through the reversion of part of the retirement benefit trust assets, we will reduce the surplus assets or overfunded portion to an appropriate size. This effort is already underway.

On top of our efforts to continue to negotiate the sale of our cross-shareholdings, separate from it, we will work to sell as much of the stocks held in the retirement benefit trust as possible as well. In FY 2020, sale of stocks in the retirement benefit trust amounted to JPY 180 billion.

As a result of these steps, in FY 2020, CET1 ratio improved by 0.1 percentage points or 10 basis points. There is further room to improve the ratio by another 0.2 to 0.3 percentage points.

Please proceed to the next page. Earnings plan. Based on what I have explained so far, our plan for the net income attributable to FG is JPY 510 billion, up 8% versus last fiscal year.

Page 46, please. Current CET1 capital ratio and future outlook will be explained here. First, the left-hand side, please. CET1 capital ratio, Basel III finalization basis, excluding net unrealized gains, losses on other securities, at the end of March 2021, it was 9.1%. That was up 0.9% versus March 2019 before the start of the midterm plan still improving and reached the lower 9% range, which is our target too.

The breakup of plus 0.9% is as listed. Profit accumulation and risk-weighted asset control, 0.5% breakup is as follows. Let me explain those, the breakup of 0.5%. Profit accumulation was up 0.6%. Risk-weighted assets reduction efforts, also up 0.6%. And on the other hand, basis lending increased minus 0.4%. And responding to COVID, minus 0.3%. As a result, it was plus 0.5%.

Moving on to the right-hand side of the slide. Going forward, we will further strengthen our stable profit base and continue to control RWA. At Page 39, I shared with you the sub scenario for the economic outlook based on which credit-related expenses, equity-related profits or losses and downward risk of the net business profits are considered in the sub forecast. Even in that case, we will operate to keep the target level of the lower 9% range.

Next page, please. Revision of our basic policy on capital strategy. CET1 ratio has reached the lower 9% range, which is taken into consideration with the outlook for the capital and earnings level. We have revised the basic capital policy to make a shift to the capital utilization phase where the optimum balance is pursued among capital adequacy, growth investment and the enhancement of shareholder return while maintaining capital sufficiency and a certain capital buffer under the stress.

Next page, please. Revision of our shareholder return policy. We've also revised our shareholder return policy as we have moved from the previous phase. On dividends, progressive dividends are explicitly shown at the same time to secure foreseeability. 40% payout ratio is shown as a guide based on the steadfast growth of our stable earnings base. We will curb dividend fluctuations owing to transient factors such as credit-related expenses.

Share buyback. As for share buybacks, unlike dividends that is paid on a continuing basis, we will consider our business results and capital adequacy, our share price and opportunities for growth investment in determining their execution. As for fiscal year 2021, we maintain the dividend estimate at JPY 75 for now given the uncertainty in the business environment owing to prolonged impact of COVID and extension of the status of emergency declaration. On the other hand, we will adjust FY 2020 and dividend estimates as and when appropriate, closely monitoring the likelihood of achieving JPY 510 billion, an estimate for the net income attributable to FG.

Next page, please. 2021 business operations. In our 5-year business plan, Mizuho puts sustainability front and center of our strategy. We do not see it just as a target of divestment. Rather, we intend to create business opportunities and risk management enhancement through engagement. We'll contribute to the sustainable development and prosperity of the economy, industry and society and the environmental conservation in Japan and abroad, in turn positively contributing to the achievement of the STGs.

Next page, please. Here, create -- on creating business and strengthening risk management through engagement. Let me share with you some examples of what we do. We place environment at the core of our strategy. We are not looking at the simple divestment model. Rather, we pursue the engagement model to encourage our clients to address transition as I have just shared with you. In so doing, we are offering financial and nonfinancial solutions to clients and creating Mizuho's business opportunities.

Regarding JPY 1.8 trillion exposure to high-risk areas in the carbon-related sector as it is disclosed now. Going forward, through engagement, we support clients to address transition risks and encourage them to transform businesses in lower-risk areas.

Next page, please. In-house company strategies, reflecting on the progress so far. I'll skip the detailed explanation on each company. But the strategies published in the 5-year plan have been progressing steadily from year 1. Amid unprecedented changes in the business environment, namely COVID, in the second year, execution strategy was accelerated, which resulted in much higher performance better than initially expected. To achieve greater growth in the FY 2021 and for sustainable growth, we will develop a deeper understanding of customer needs and further address structural challenges.

Next, Slide 52. In this year's in-house company strategies, first, on RBC Retail Banking, with branch reorganization, we boost the expertise, including HR development. The structure caters to the various customer needs, and we respond with our strength, One MIZUHO Group collaboration.

On retail, in-house consulting by One MIZUHO as a group through area-based management. On corporate, with detailed segmentation, family-owned companies, mid-tier SMEs and individual business owners, based on the segment, we have the structures and also established dedicated functions that cater to the needs and characteristics of each customer, including innovation firms, Japanese entities or foreign enterprises. Non-face-to-face enhancing financial services, convenience and monetizing existing products are issues that we recognize.

Next, on CIC. In addition to sophistication of the C-suite approach starts the industry group system towards strengthening of our proposal-making capabilities. 5 industry groups have now been established. Through this reorganization, strongly support clients' business structure transformation based on the post-COVID industry structure and SX will support them even more strongly.

GCC. On capital markets, constantly update G300 strategy with multilayer transactions and selective expansion of the client base, advanced capital markets business, transactional banking. In light of future interest rate hikes and the commercial flow of recovery, grants for changes in clients' commercial and capital flows triggered by COVID-19. In so doing, monetization will be difficult right now. But this foundation, we intend to strengthen the earnings platform.

Next on GMC. Banking, continue focusing on market -- mark-to-market P&L while paying attention to the balance between the accumulation of unrealized gains and realized gains. S&T established One Responsibility framework, where one head person supervisors in each region across the bank and the securities of a one-stop responses to customer needs to steadily grasp the revenue-generating opportunities. Asset management company enhanced profitability through product strategy, firmly grasping various needs such as asset formation and long-term investment initiatives.

Page 58, please. Going forward on corporate foundation supporting the promotion of sustainability. From here, let me focus on initiatives to reform the corporate foundation. First, boosting the foundation to support the promotion of sustainability. In light of the trend emphasizing sustainability, we revised our environmental policy clarifying support for the Paris Agreement as we intend to strengthen our response to climate change, also responding to environmental and social factors in the value chain, inclusive of suppliers in addition to investment and loans.

Next page, please. HR strategy. For Mizuho to grow, it's indispensable to grow employees with a higher expertise that can beat peers. When each employee is passionate and professional, that will gain trust both inside and outside the company, which should result in perceived growth and even more job satisfaction. That's exactly what we intend to do. And the results will be rewarded properly. From the viewpoint of promoting diversity and inclusion, we are planning to join 30% Club Japan pretty soon.

Next page, please. Operations framework enhancements in line with in-house company strategies. The left 2 shows unified bank office market operations across bank, trust bank and securities, which was completed in FY 2020. The right shows revisiting exchange operations at the front office. The front office specializes in reception, thus streamlining the work, while operation is concentrated in the back office. We are boosting functions here and pursuing the benefits of improved efficiency.

Regarding foreign currency exchange operations, consolidation was completed in FY 2020, covering all the branches. As for deposit and remittance operations, total 180 branches have been covered. Completion is estimated by FY 2023.

Page 61, please. Fusion of our strength in nonfinancial businesses. April 1, Mizuho Research & Technology, MHR -- was established and align MHRT with strategies of customer-facing companies. By combining financial and nonfinancial services catering to the various needs of clients, we create added values. In particular, know-how and the expertise of MHRT in DX and SX, a very useful edge in the nonfinancials. We are convinced of that.

So much for my explanation based on the materials, but allow me to say just a few words in closing. FY 2021 is a time of reckoning for economy, society and for financial institutions in responding to COVID-19. It was -- post-COVID era is an important year to achieve significant structural changes.

FY 2021 is also, for Mizuho, the third year of the 5-year business plan. To steadily evolve our past efforts to achieve sustainable growth, it's a year of significant importance. All the offices and employees of the group are committed to working together. We kindly like to ask for your continued understanding and support. Thank you so much for your kind attention.

[Portions of this transcript that are in English were spoken by an interpreter present on the live call.]