Mitsubishi UFJ Financial Group Inc (MUFG) 2018 Q2 法說會逐字稿

Thank you very much for waiting. We would like to start the fiscal 2017 interim results presentation of Mitsubishi UFJ Financial Group. First, let me introduce the participants today. Nobuyuki Hirano, Director, President and CEO and Group CEO; Muneaki Tokunari, Director, Senior Managing Executive Officer and Group CFO. I am [Hyunjo] from IR office and will serve as the moderator.

We will do a presentation on fiscal 2017 interim results using the presentation material for about 30 minutes, followed by a Q&A session. The entire session is scheduled to be about 1 hour and 15 minutes, so we would like to start the presentation. President Hirano, please.

Good morning, I am Hirano. Thank you very much for taking time out of your busy schedule to attend our interim results presentation today. Please take a look at Page 6 of the presentation material, which shows the contents I will explain today. The outline of the results was explained by Mr. Tokunari in the net conference the other day, so I will just highlight the outline of the results in the first half of the material and mainly focus on the progress of MUFG Re-Imagining Strategy.

Please turn to Page 8. Profits attributable to owners of parents were JPY 626.9 billion, up JPY 136.4 billion from the first half of fiscal year 2016. Progress rate was 65.9% of JPY 950 billion annual target. Looking at the breakdown by subsidiaries and affiliates, Morgan Stanley with solid results as well as MUAH and Krungsri, contributed to our profits.

Please turn to Page 9, our income statement summary. Please look at the right table. Line 1, gross profits were JPY 2,008,100,000,000, up JPY 38.7 billion year-on-year, thanks to approximately JPY 71 billion from the depreciation of Japanese yen against other currencies despite the decrease in net income, interest income in Japan due to the prolonged low interest income.

Line 6, G&A expenses increased by JPY 63.3 billion, reflecting higher regulatory costs and personnel costs overseas in addition to the currency impact of around JPY 39 billion. As a result, line 8, net operating profits were JPY 700.7 billion, down JPY 24.6 billion year-on-year, which was a decline of JPY 57 billion, excluding the currency factor.

Line 9. Total credit costs improved by JPY 60.7 billion year-on-year. Line 10, net gains on equity securities increased by JPY 10.9 billion. Line 13, profits from investments in affiliates increased by JPY 21.7 billion, thanks mainly to Morgan Stanley's strong results. Line 16, net extraordinary gains and losses improved by JPY 60.7 billion, mainly due to JPY 48.6 billion gain on share exchange from the merger of Aberdeen Asset Management, our equity method affiliate, and Standard Life.

As a result, the first half progress to annual target exceeded 60%, but net operating profits declined for 2 straight years and were supported by one-off profits, including yen depreciation, improvement in credit costs and gain on sales of equity holdings, full year target of profits attributable to owners of parent for fiscal year 2017 remains unchanged at JPY 950 billion.

Please turn to Page 12. Let me explain the status of loans and deposits. In loans, domestic corporate decreased due to fewer number of event finance, including M&A, but overseas loans is increasing gradually. Deposits increased by JPY 1 trillion from end of March 2017, thanks to the increase in individual and overseas. Overseas deposit, in particular, increased by JPY 700 billion on real terms, excluding the currency impact, exceeding the growth in overseas loans, which is a good news.

Please turn to Page 13, which shows our spread situation. Please look at the upper left graph. Domestic deposit lending spread shrunk by 4 basis points from a year ago. The impact from negative interest rate policy is starting to run its course, but demand for funds has not tightened at all, and lending spread continues to decline, mainly in loans to small and medium-size enterprises. Deposit lending spread is expected to shrink slowly for a while.

Please turn to Page 15, which shows our status in investment securities. Please look at the upper-left graph. Regarding balance, Japanese government bonds, line 4, decreased by JPY 3.4 trillion from end of March '17, while foreign bonds, line 7, increased by JPY 2.5 trillion. Regarding unrealized gains, JGB decreased by about JPY 100 billion, but thanks to the strong domestic stock market, the total unrealized gains from securities maintained a high level of around JPY 3.6 trillion.

Please turn to Page 16, which shows the expenses. Expenses declined year-on-year in Japan due to restrained personnel and nonpersonnel expense but increased overseas due to continued increase in system infrastructure and regulatory costs, and expense ratio was 65%. In order to reduce our operation costs, we are relocating part of our back office function in the U.S. from New York, Los Angeles and San Francisco to Phoenix, Arizona, and 750 staffs have started working in Phoenix.

In Asia, we are planning to consolidate to Manila, Philippines. In Europe, a plan is underway to integrate the management function and administration and system in BTMU's London branch and MUS's local subsidiary in London. Furthermore, in the next midterm business plan, we will strive to restrain the cost increase by reviewing the bank's overseas network, especially focusing on the reduction of booking basis. In Japan, the manual work remaining in counters and administration centers will be automated and simplified in order to improve the efficiency of labor-intensive tasks and internal management tasks. I will explain the detail in the second half of my presentation.

Please turn to Page 17, which shows our credit costs. Credit costs for the first half of fiscal year '17 were net reversal of JPY 3.1 billion thanks mainly to the decrease in balance of large, lower rated borrowers and stabilization of energy-related sector compared with the same term last year. Therefore, the total credit costs forecast for fiscal year '17 has been lowered to JPY 80 billion from JPY 160 billion.

Please turn to Page 26. Let me now explain our progress of MUFG Re-Imagining Strategy. But before that, I will talk about our positioning once again. As shown in the left graph, over the 10 years since the establishment of MUFG, domestic operating profits in Japanese corporate and retail banking have decreased by approximately 30%. We must be prepared for the population decline and the continued ultra-low interest rate policy by BOJ for the foreseeable future. In addition, global markets and global banking that have led the profit expansion for the past few years will face foreign currency liquidity as well as capital or risk weighted asset constraints, and find it more difficult to keep the same pace of volume expansion going forward.

Please turn to Page 27. Taking this situation seriously, we felt we must promote a future-oriented structural reform with our own will, enhance our profit generating capability, improve our productivity and maintain a sustainable growth. This led to the launch of project Kuyari. In the middle of last year, as you are aware, and following the intensive top management discussion at the beginning of the year, we announced MUFG Re-Imagining Strategy in May. MUFG Re-Imagining Strategy is not a one-off restructuring plan but aims to dramatically transform our business structure. So the effect will start emerging in full scale in the next, next midterm business plan.

Until then, we will be spending upfront costs in digital investment and branch network restructuring in Japan and abroad. Therefore, the 3 years in the next midterm business plan starting next fiscal year is expected to be extremely difficult, but this is a time of ordeal we have to overcome with strong commitment. In order to pave the way for a solid future beyond this ordeal, we must pursue a concrete and detailed structural reform for the next 6 years. The top management of the holding company bank securities and trust are holding intensive discussions to flesh out the measures, consisting of 11 key items toward next April. Let me introduce some of them today, although they are still work in progress.

Please turn to Page 28, which shows our wealth management strategy. First, customer segments will be integrated in the group. Of the approximately 8,500 high-end customers with total asset of over JPY 2 billion, 5,000 are company owners. Therefore, corporate ownership succession and asset inherent in service through the integrated approach to corporate and owner, shown on the right side, become the key. In the new organization, we plan to reorganize the existing retail banking business group and corporate banking business group and establish retail and commercial banking business group, which is still a tentative name. This will allow us to seamlessly offer the optimal service to the corporate owners, who tend to be buried or invisible between business groups. Specifically, more than 100 high-end staffs in bank, securities and trust called senior wealth advisers will be gathered during the next midterm business plan period in order to develop business, utilizing a new service brand.

In addition, we will enhance profiling and our capability to adjust the customer's mid- to long-term challenges and needs according to their life stages and deploy the know-how and expertise acquired to semi high-end and affluent segments, which are bigger groups, so that we can develop the wealth management business into a stable profit pillar of MUFG. We have high expectations for the support by Morgan Stanley, which has successfully established wealth management as their core business over the past few years.

Please turn to Page 29, which shows the framework to promote business with large corporate customers. The integration of corporate loan related business of BTMU and MUTB is underway, and approximately JPY 12 trillion of loan asset will be transferred from MUTB to BTMU on April 16 next year. We started briefing to around 2,600 applicable customers in September, and we'll start the handover of staffs from December. RMs in BTMU will move to a mixed team, consisting of staffs from BTMU and MUTB, and work as MUFG RMs. Taking full advantage of all PO functions of MUFG, including trust products to meet the needs of the customers that previously fell between the cracks and generate a more competitive, comprehensive value propositions.

In order to ensure such behavioral principal, we will shift to entity-neutral and product-neutral performance evaluation system based on MUFG consolidated profits, so regardless of where it is booked or what products are used.

In addition, MUTB product office for real estate, pension and security transfer agent will be reorganized into a mirror organization with corporate banking group, so that trust solutions can be offered effectively and efficiently through collaboration. In terms of location, total 730 in MUTB, including approximately 600 POs, will move into this Marunochi headquarters for a complete integration of corporate loan related business.

Please turn to Page 30. Our global business will also shift drastically from a region-based approach to a business-based global segment approach and shift to an integrated operation in Japan and abroad for large Japanese corporates and large global corporates. As a result, global banking business unit will be dissolved. We will also promote the integrated operation between banking and securities business.

In sales and trading, we already completed the integration of the dealing room of banking and securities last year. And the integrated banking and securities operation started on a full scale, including the unification of investor sales contact and consolidation of position flows. In addition, integrated banking and securities operation is progressing in the overseas primary domain, including underwriting and loan. The integration of loan syndication, DCM and securitization that started in the Americas last year was extended to Europe and Asia in July this year.

Please look at the right side. In IS/AM business, the domestic investment trust's capital relationship are integrated, and BTMU's yen custody business is integrated into the IS/AM business unit as part of our functional reorganization. By integrating our custody business operation under a unified brand, MUFG Investor Services, we aim to improve the efficiency through the cross utilization of our human resources, know-how and systems and offer a comprehensive investor service to the growing customer base.

Please turn to Page 31. I will talk about business transformation through the use of digital technology from now on. Today, I will focus on number 1 through 4: channel, process, Japan Digital Design and blockchains.

Page 32. First, I will discuss channel strategy. The number of customers who visit bank branches has decreased by approximately 40% in the last decade, while the number of customers who use online and the mobile banking has increased by approximately 40% over the last 5 years. As young people's IT literacy and their preference for mobile is increasing, we believe this trend will further prevail going forward.

On the other hand, though this may be peculiar to Japan, there is still a strong need for physical channels. Many retail customers come to loan counters for applications for new bank accounts or change of address. When they are asked about reasons why they use bank counters, over 60% of them responded, "I want to avoid a mistake," and 30% to 40% of them said, "I want to complete transactions at once." At high counters for utility, tax, domestic payment services, corporate customers account for more than 50%. Their predominant reason for using physical counter was to pay taxes.

Given this situation, we will enhance user interface or user experience of digital channels and eliminate needs to visit branches for customers to promote shift from physical channels to virtual channels. On the other hand, physical channels or branches will focus on services such as consultation, which entail human contact, so that they can be dedicated to a role as face of MUFG, offering sense of security and trust for midsized companies, high-end customers and customers who want us to help them make their life plans.

We have a policy to rebuild our overall customer touch points, combining physical and virtual channels that are optimal for individual customers and allow us to realize high productivity based on measures for upgrading digital channels and enhancing the quality and efficiency of physical channels.

Please turn to Page 33. Let me give you concrete examples. For digital channels, we will significantly increase the number of transactions completed within applications by enhancing UI or UX. For instance, we at MUFG started to provide services employing Amazon's smart speaker ahead of peers as their launch partner in Japan, and are proactively working to expand voice-based services. Unleashing from keyboard, will be a breakthrough for digital divide, particularly among older customers.

In addition, services that can be traditionally handled only at branches, such as replacement of bank card and bank book, change of address, will be introduced as features on mobile or online channel. Together with group companies providing services only via mobile channels, such as kabu.com Securities and at Jibun Bank, we aim to create the most advanced digital channels.

Please turn to Page 34. As for physical channels, 70 to 100 branches out of 516 branches in Japan will be transformed into tentatively named fully automated branches by fiscal year 2023, the last year in the next, next midterm plan. We plan to successively introduce self-service terminals, such as SDM, which will handle services that have been only dealt with at bank counters such as payment of taxes and utility bills, and the LINKS, a new terminal that connect to operational center via TV for consultation by experts related to inheritance and mortgages. We aim to introduce them at all branches by fiscal year 2023. This may be transitioned to ultimately virtual channels, but we will automate physical channels in the meantime.

Please proceed to Page 35, application of robotics process automation or RPA. We started to apply RPA in a full-fledged manner since last fiscal year, and we plan to apply it to approximately 80 business processes, which is equivalent to approximately 160,000 hours per year, thus leading to improved efficiency accordingly. We will accelerate its introduction to over about 2,000 business processes.

Please turn to Page 36. We established the Japan Digital Design in October. On top of activities of innovation dev, which have been started and expanded as an internal organization, we are hiring outside engineers and collaborating with 32 regional financial institutions to develop innovative user experience and to reduce social costs through, for example, promotion of digitalization of municipalities' public funds handling.

Page 37. Given the digitalization of settlement, we at MUFG are conducting a variety of researches and POCs, proof of concepts, based on various assumptions of use cases from daily payments to B2B transfer and interbank settlement. For instance, 1 example for the former is MUFG Coin and 1 for the latter is our participation in consortia such as Ripple, at home and abroad, and the participation in the POC for international interbank settlement using virtual currency called USC, or utility settlement coin. These are all based on blockchain technology. In order for such a new mechanism to be widely used as payment infrastructure and a platform, it is, of course, important to design products based on user's perspective, cooperate widely with other industry sectors such as distribution, or coordinate in the industry concerning platform building and standards. At the same time, we need to think about how to build a profit model for financial institutions thoroughly. I think this is the key. Then, we would like to discuss with various stakeholders how to utilize these technologies.

Please turn to Page 38. To enhance capital efficiency as for strategic investment, if we judge that the initial strategic important has lowered, we will exit even when ROI is above target in order to shift capital to more strategically important investments or proceed with collection based on viewpoint of capital efficiency, even when strategic importance stays unchanged to thoroughly implement disciplined capital management. Please understand that recent sale of stake in CIMB, one of the largest financial groups in Malaysia, in the amount of approximately JPY 68 billion was one of such initiatives.

Page 39. As I said earlier, we will review the current customer segments of retail banking, Japanese corporate banking and global banking and restructure them into retail and commercial, Japanese CIB and global CIB, though all of these named are tentatively. Internal administrative function in global banking is to be transferred to corporate center, and the departments in corporate center will be consolidated and globalized in Tokyo.

The current headquarters, which are operated for the holding and banking entities, will be expanded to cover the entire group. More specifically, all the corporate center functions will be placed under integrated management of MUFG, BTMU, MUTB and MUS and co-located. That is to say, their locations will be consolidated to enhance the effect. In addition, the headquarters will have lean organization with reduction of headcount through simplifying the structure and enhancing efficiency and processes through working style reform.

Please turn to Page 40. This is an example from a commercial bank. We expect the employee headcount at the bank to decrease by about 6,000 by an increase of retirees among those employees who were hired in mass hiring period and controlling the number of hiring. At the same time, we are going to reduce about 30% of total workloads, which is equivalent to the labor of 9,500 people by fiscal year 2023 by introducing digital technologies in a series of business processes from front to back office. This was announced in May.

On the other hand, we intended to allocate extra workforce and time generated through reduction of workloads to enhance contact points with customers in growth fields. We will upgrade the staff training system and provide reskilling opportunities for reassigning those innately excellent talents who had to be engaged in routine work, to take on more creative and high value-added work. This can be done, and I believe this will be the driver for MUFG Re-Imagining Strategy.

Please turn to Page 42. I would like to discuss capital policy from now on. We checked each of the 3 items on this well-known triangle. And given several options proposed by the Secretariat, we have active discussion on capital policy in the Board of Directors' meeting. Discussion has started on capital policy under the next midterm business plan. Based upon various opinions from investors, we would like to have deeper discussions at BOD meetings, including those on the new policy so that we can publish it in May.

Next, Page 43. As you know, this is the forecasted dividend for this fiscal year. Interim dividend is JPY 9, and the forecast full-year dividend remains unchanged at JPY 18 per share.

Please turn to Page 44. As another measure to enhance shareholder returns, we resolved to repurchase our shares in the amount of JPY 100 billion for the seventh straight term. In line with the policy released in May this year, we are canceling all the shares to be repurchased at this time.

Next, Page 45. Let me speak about reduction of equity holdings. Since we announced a policy in November 2015, that we aim to reduce our equity holdings to approximately 10% of our Tier 1 capital towards the end of 5-year term, equity holdings have been reduced at a high pace. As you can see in the table on the right, we reduced equity holdings by JPY 71 billion on an acquisition cost basis in the first half of fiscal year 2017, which led to JPY 47 billion recorded as net gains. The balance of which an agreement to sell has been reached, is steadily increasing, which indicates that the project's ongoing steadily, but we have internally shared a policy to accelerate this further.

Page 46. Let me now explain capital constraints due to regulations and our view towards the next medium-term business plan. The chart at the top summarize 3 capital constraints, namely: Basel regulation, TLAC requirements, and the termination of exceptional treatment for investment in Morgan Stanley. The majority of the investment in Morgan Stanley was granted exceptional treatment by the JFSA and exempted from double gearing upon international consensus. But from March 2019 onward, the size of the amount subject to such exemption will decrease by 20% per year, which is publicly known. We estimate that CET 1 ratio will decrease by 0.8 percentage point when the full amount is no longer subject to the exemption. This will be amortized over 5 years.

In order to continue to grow in such situation, we will put greater emphasis on capital efficiency under the next medium-term plan, optimize strategic investments and promote origination and distribution for more appropriate control of RWA, or risk-weighted assets, and put focus on improving asset profitability through strengthening noninterest business and advancing profitability management. We are currently working to flesh out such measures.

In conclusion, the environment surrounding us is very tough, and we need transformation. It is not easy at all to change the existing business models or organizational structure, but I would like to develop MUFG as a company which continues to take on challenges with a future-oriented mind to open up its future on its own.

Toward our management vision, be the world's most trusted financial group. We will work hard to overcome this difficult juncture. We would like you to -- we would like you, as investors and the rating agencies, to give us further understanding and support. This concludes my presentation.