Mitsubishi UFJ Financial Group Inc (MUFG) 2018 Q4 法說會逐字稿

Thank you for the kind introduction. I'm Hirano. Thank you for taking time to attend the fiscal 2017 results presentation session. It's very hot today, so although I'm wearing a jacket, please feel free to make yourselves comfortable by taking off your jacket.

Now let me begin. Please find the Table of Contents on Page 4. Two days ago during the Net conference, Mr. Tokunari, our CFO, presented the financial results. Therefore, on my part, I would like to keep discussing only the gist of fiscal 2017 results and focus mostly on new medium-term business plan.

Please turn to Page 6. Profit for the fiscal 2017 was JPY 989.6 billion, up JPY 63.2 billion year-on-year and exceeded the full year target of JPY 950 billion. Morgan Stanley, which showed a robust performance, and all other major subsidiaries and affiliates, contributed to the profit as shown on right.

Next page, please. This is the income statement summary. Line 1, gross profits were down JPY 157.5 billion from the previous year at JPY 3,854,200,000,000 due to prolonged low-interest rate environment and resulting decline in domestic net interest income. On the other hand, Line 6, G&A expenses increased JPY 27.8 billion year-on-year mainly due to increases in overseas regulatory expenses and personnel cost. As a result, Line 7, net operating profits, were JPY 1,232,800,000,000, a decline of JPY 185.4 billion from the previous year. Below the net operating profits, there were declines as a result of one-time expenses due to structural reform, but thanks to improvement in credit costs, gains on sales of equity securities, and sustained high-level of equity method profits from Morgan Stanley, as shown on Line 17, profits were JPY 989.6 billion.

Next page, Page 10, shows loans and deposits. With respect to loans, overseas loans registered a slight increase, excluding the foreign exchange fluctuation impact. Deposits rose JPY 6,500,000,000,000 from the end of last fiscal year. In particular, overseas deposits increased JPY 2.3 trillion on a real basis, excluding foreign exchange impact showing greater growth than that of overseas loans, and I'm pleased to see this.

Next page. Lending spread. Changes in domestic deposit lending rate declined 3 basis points for the full year as low interest rate environment continued. There continues to be a slack in funding supply and demand. In particular, lending spread to SMEs continued to decline. Overseas spread is more or less unchanged.

Next, please turn to Page 13: Investment Securities. Please refer to the left top table. Unrealized gains for domestic bonds and foreign bonds both declined, but domestic equity market held steady. As a result, unrealized gains on securities available-for-sale of JPY 3,500,000,000,000 was maintained.

Page 14 shows expenses. In Japan, expenses decreased from the previous year on a net basis as both personnel and non-personnel expenses were reduced, which was good. However, overseas expense ratio deteriorated to 68% overall because of higher regulatory cost and rising personnel expenses due to base salary increase and increase in headcount.

Please turn to Page 15. Credit costs for the year were JPY 46.1 billion. Mainly as a result of a reversal of bad loan provisions, there was an improvement of JPY 109.2 billion year-on-year.

Next, please turn to Page 18. Financial target for this fiscal year is shown. Target profit is JPY 850 billion, taking into account decline in domestic loans and deposit profits, overseas ALM or banking profits and increase in digital-related cost and regulatory cost.

Those are my comments on fiscal 2017 financial results. I would now like to discuss the new medium-term business plan. Please turn to Page 20. I would like to begin by reviewing the last medium-term business plan. We had some key achievements. For example, establishment of foundations for commercial banking in Southeast Asia with what we call our partnership banks. But fell short of achieving financial targets such as ROE and expense ratio, except for the financial strength indicator CET1 ratio. While it is certainly true that we encountered strong headwinds including the implementation of negative interest rate policy by Bank of Japan, slowdown in Chinese and Asian economies and sharp fall of commodities prices midterm, but we feel that we should have done a better job of quickly responding to these changes in the environment.

Please move on to Page 21. Going forward, we believe that low-interest rate environment will inevitably be prolonged. With the conventional commercial banking business model centering around deposits and loans, we cannot expect to achieve growth at least here in the domestic market. Furthermore, big techs and digital players as exemplified by Google and Amazon are changing at speed and scale unimaginable before and the general trend of digitalization is about to significantly change the society and industry, including our financial sector. In order to respond to these structural change flexibly and speedily and to make sure that we will be securely back on track for growth, MUFG Re-Imagining Strategy announced May last year was fleshed out and new midterm business plan was developed. Under the new midterm plan, through simple, speedy and transparent group-integrated operations, we will strive to deliver the best value to all stakeholders. To achieve this, we will be making a major shift from the group-based collaboration in the past to group-based integrated management. Through functional reorganization, each entity's mission and roles are more clarified. The functions of each entity will be further strengthened and will be mobilized across the group dynamically.

Please turn to Page 22. For 3 years under the new medium-term business plan are positioned as the period of transformation to ensure sustainable growth in the years ahead. Managerial resources will be invested in a concentrated manner. After 3 years, we would like to make sure that we have solid results. And by the end of next midterm plan in 6 years, we would like to have established a new growth model for MUFG's domestic and overseas operations.

Next page, Page 23 shows financial targets. Targets for the final year of the medium-term business plan, fiscal 2020, as well as mid- to long-term targets are determined. To be more specific, the targets in the final year of the midterm plan in 3 years is 7% to 8% of return on equity and improved expense ratio from the actual of 6% to 8% in fiscal 2017. In conjunction with what is achieved through MUFG Re-Imagining Strategy, over the medium to long-term, target ROE is 9% to 10% and target expense ratio is around 60%. The target CET1 ratio is 11% based on finalized Basel III reforms as of the end of December last year to retain adequate and sound capital as AG -- as G-SIB.

Please turn to Page 24. MUFG plans to implement reorganization on July 1st this year to achieve the medium-term plan. Specifically, to offer optimum solutions to customers, there will be a business group in each of the 4 quadrants of a matrix based on Japanese and non-Japanese and large corporates and retail and SME customers, serving as an interface with customers. There will be 2 additional business groups, Asset Management and Investor Services and Global Markets, which are functional business groups, to make it 6 business groups. Global banking will be abolished.

Page 25 shows target net operating profits, expense ratio, and return on equity for each business group. This is shown for the first time today. All groups plan to achieve growth in profit 3 years from now.

Next page, Page 26, shows 11 transformation initiatives adopted in the medium-term business plan. Firstly, these initiatives all have strong potential in the future. Secondly, they are expected to realize the full potential of MUFG. And thirdly, will be the core business of MUFG in the future. Initiatives in such areas were selected.

Please turn to Page 27. I would now like to discuss net operating profits planned under the new midterm plan. During the 3 years under the new midterm plan, it is expected that NII from Japanese Yen loans and deposits will decline due to persistent low-interest rate environment. Furthermore, expenses are expected to rise due to regulatory and system costs and investment of resources necessary for structural reforms. These declines in profits will be offset by growth in global commercial banking, including at MUFG Union Bank in the U.S., Bank of Ayudhya in Thailand and Bank Danamon of Indonesia in which MUFG made equity investments recently. In addition, by steadily implementing 11 Transformation Initiatives, we expect to achieve additional JPY 250 billion in net operating profits.

Starting on Page 28, I would like to discuss 11 Transformation Initiatives. First, about digitalization, channel strategy, and BPR. Digitalization is a strong pillar applicable to all 11 initiatives. Diverse range convenient transaction channels will be offered to enable customers to make the optimal channel selection. At the same time, we plan to achieve substantial and bold improvement in productivity by reducing the work volume, through an increase in online transaction and creation of new businesses, top line is to be enhanced.

Next page, please. Functions such as biometric authentication and access to past 10 years of transaction history will be made possible on the app to improve UI / UX at an accelerated pace. In addition to new account opening function already available on the app, functions, such as change of address will be enabled to offer more location-free services. In other words, customers do not have to come to the branches. With these improvements and functional enhancements of UI / UX, we plan to triple the number of transactions on and number of customers using Mitsubishi UFJ Direct, our online banking service for retail customers.

On the other hand, as shown on Page 30, we plan to have transactions at bank counters. Please refer to the top right chart. First, there will be a shift to the direct as mentioned earlier, which is a shift to online transaction. Secondly, real channels will continue to evolve through integration and diversification of branches. Thirdly, new ATMs called STM, that can handle tax payment and utility bill payment will be installed in all branches to reduce high counter transactions. Fourthly, terminals called LINKS, that can handle consultation related to mortgage and inheritance will be placed in all branches to reduce low-counter transactions. Fifthly, FX and loan operations will be concentrated to a center. With increased use of digital technology, center operations will also be streamlined.

Please turn to Page 31. As regards top line measures, corporate settlement revenue will be enhanced by revamping online banking for corporate customers. Market transaction digitalization will be advanced including through the use of trading AI to increase trading profit. At MUFG AI studio or AIS, which was newly established within Japan Digital Design, our unique AI model will be developed, researched and implemented, while utilizing outside expertise as well. With respect to MUFG Coin, internal pilot is ongoing toward commercialization. At the same time, efforts are made to increase the use cases. In addition, in the payment area, we have much expectations about the use of blockchain technology.

Page 32 is about wealth management strategy. With an integrated approach between corporate and retail, and integrated approach encompassing banking, trust banking and securities, stable revenue structure will be rebuilt towards high-end customer segment. Professionals from banking, trust banking and securities will come together to offer diverse solutions in a one-stop fashion. In this way, wealth management business model unique to MUFG will be constructed.

Please turn to Page 33. The new team that was born as a result of corporate lending business integration between banking and trust banking and functional realignment of the group will discover and identify business challenges of customers, as MUFG RMs, PO or product office will become more specialized to increase capabilities to respond to customer needs. In April, real estate, pension and corporate agency project -- product offices of trust bank were relocated to this building on a floor adjacent to corporate RMs and are now closely collaborating with RMs. The evaluation system is changed, which is important to MUFG consolidated profit-based system, to enable entity product-neutral cross-selling. In real estate business, the strength of having the trust bank within the group is leveraged to the maximum extent. Not only a mere brokering but various business opportunities available on the value chain will have continuous involvement of the group in an integrated manner to maximize profit. Corporate real estate is a typical example.

Please move on to Page 34. This is Asset Management business. First, we will enhance products. We will newly establish an Investment Products planning division in the holding company to develop competitive products and expand the lineup. And we will develop human resources supporting this. We will actively promote digitalization such as the use of AI. Number two, in the area of distribution, we will strongly use the customer base and relations held by MUFG. At the same time, we will further strengthen cooperation on customer needs from the sell-side to the manufacturing side to lead to timely product development.

Next is Page 35, Institutional Investors business. Institutional Investors segment, which is represented by people like you, will be repositioned as the fourth customer segment next to Retail, Japanese Corporation and non-Japanese Corporates. Product, service and customer relations were fragmented between bank securities, trust bank and business groups, but these will be integrated under the MUFG to make maximum use to promote group-wide referral and cross-sell.

Next is Page 36. Global CIB business model transformation. In this area -- this was driving the overseas business but we've strengthened international regulations on capital and liquidity and higher foreign currency funding cost. It is necessary to greatly change the model of the business management centered on building lendings, portfolio recycling by selling low profitability lendings, and also revenue risk takings in the growth areas as you can see on the material. There'll be a shift from quantity to quality by accelerating O&D and improve the deal's profitability.

Next is Page 37. On the left, overseas Operations. The global banking business group will be reorganized from region and legal entity-based organization to a customer and business-based organization. Overseas branch network will be optimized, operations and systems will be enhanced and fixed expenses will be reduced. Next we will move to human resources. Business strategy and human resources strategy are the 2 sides of the same coin. It is essential for transformation to transfer personnel among companies, and to re-skill and raise the skill level of employees. And to do so, it is necessary to enhance the capacity and skill as professionals and to have consistency among the group companies. We will review the company's HR system to have the right person in the right place in the group, and have job posting system within the group. We will newly establish an MUFG University to develop future group executives. Lastly is Corporate Center Operations. Corporate Center function will be transformed to integrated MUFG Corporate Center Operations, to make effective use of management resources and realize low-cost operation.

On Page 38, this is the actual image of overseas branch network enhancement and optimizations that I mentioned earlier. As you can see on the left, in the Americas, EMEA and Asia, we took approaches to optimize branches and operations. And with a new medium-term business plan in accordance with the features of each branch. As you can see on the right-hand side, operations will be shifted to hub branches and operational center. For example, recently in Manila, group operations center was established, and also we made a press release of operation transfer of Singapore, Sydney, Auckland and Taipei branches, which is #1 centralized operations. Also, we made a press release of changing the status of Santiago branch, Buenos Aires branch and Karachi branch to representative office, which is under #2 centralized booking functions, to reduce booking office. We will optimize the operation of overseas branches and control the cost of system operation and compliance to develop a sustainable overseas branch network.

Please move on to Page 39. Now I would like to talk about the new business group, Global Commercial Banking. This is not included in the 11 Transformation Initiatives. The 11 initiatives is transformation, but this is a new business area. So this is separate. We have been focusing on the world's largest market, The United States, and rapidly growing ASEAN to deploy retail business and commercial banking business to the local companies under a strategy of capturing the economic growth of these countries. Last fiscal year, total asset on a consolidated basis was about JPY 12 trillion and net operating profits about JPY 200 billion. This has become a big business portfolio. So we will raise the value by positioning as a business group. This is constituted. We've consolidated Union Bank of United States, Ayudhya Bank of Thailand, in addition to VietinBank of Vietnam, Security Bank of Philippines, and Bank Danamon of Indonesia, to which we started investment last year. On the left as you can see, the 5 countries have large population and GDP. As you can see on the top right, high economic growth continues. As you can see on the bottom left, bank service penetration is low, so I am looking forward to future potential.

On Page 40, these 5 partner banks are all near the middle to the top ranking position. These are the banks that we have targeted. So we can look forward to the growth in their respective countries. We will share best practice, pursue synergy and aim at wealth enhancements through enhanced internal control.

Next is Page 46, our largest issue, Expenses. Please look at the graph on the right. With forward-looking strategic expense allocation and regulatory costs in the first and second year of MUTB, unfortunately, expenses will increase. But after that, with the effect of transformation initiatives and growth of gross profit of global commercial banking business, expense ratio will improve and the mid-to-long-term, the target is 60%. Cost reductions through transformation, as you can see on the left, is expected to be more than JPY 110 billion for over 6 years, but this is not sufficient. Further cost reduction is necessary.

Please move to Page 47. If a bank with retirements of employees hired during the mass hiring period and control of new hirings, we expect a headcount decrease of about 6,000 people. At the same time, the personnel and time generated through reduction workload will be used to strengthen contact with the customers and in the growth areas. Training will be improved, and we will provide opportunity to re-skill. Human resources working in routine work could be transferred to more creative and high-value-added work. This will be the driving force of MUFG Re-Imagining Strategy.

Next, Page 48 is channel transformation. As I mentioned, by enhancing operability and function of an Internet transaction, we will shift from branch to Internet channel. In the branches, the addition to integration of some branches with #1 in the MUFG NEXT, which stands for New EXperience Together, provide a new customer experience, and #2, consulting office specialized in consultation, and #3, group co-located branch, MUFG Plaza, will lead to major changes in the channel.

Next is Page 51: Capital policy. The concept of the capital triangles that you are familiar with, will not change under the new medium-term business plan. But as shown on Page 52, we newly decided a basic policy for shareholder returns. Number one, for dividends, we will aim for a stable and sustainable increase in dividends per share through profit growth, with a dividend payout ratio target of 40%. Number two, for share repurchase, we plan to flexibly repurchase our own shares as part of our shareholder return strategies in order to improve capital efficiency.

Please move to Page 53. For year-end, dividend will be increased by JPY 1 from the initial forecast to JPY 10 together with interim dividend of JPY 9. For FY 2017, annual dividend will be JPY 19. In fiscal year 2018, with a tough environment of forecast of dropping profit. Based on the new basic policies for shareholders' returns, the dividend forecast for fiscal year 2018 will be JPY 20 per year, JPY 1 increase from fiscal year 2017. As you can see on next page, share repurchase will be JPY 50 billion and all of our newly repurchased shares will be canceled.

Please move to Page 56. For a strategic investment, we will slowly continue to implement a disciplined capital management. In September last year, all of the shares of Malaysia CMB was sold at an amount equivalent of JPY 68 billion and April this year, half of our shares held at Brazil Bradesco bank were JPY 45 billion was sold. We will continue to optimize strategic investment.

Next Page 57: Equity Holdings. As you can see on the right-hand side, in fiscal year 2017, on acquisition cost basis JPY 201 billion was reduced. With that, there was a net gain of JPY 117 billion. Going forward, by having good discussions with our counterparts, we will accelerate the reduction of equity holdings.

Next is Page 59. Lastly, ESG, Environment, Social and Governance Initiatives. Please look at Page 60. We identified several environmental and social issues as priority initiatives of MUFG. Each of these will be included in the strategy of business groups and promoting their measures. Environment policy and human rights policy and the supporting procedure, environmental and social policy framework was developed. Operation will start from July.

Page 61 is on governance transformation. We have been trying to enhance governance by moving into a company with 3 committees and last year, 2 foreign directors were appointed. Number of directors will be reduced from 18 to 15, with outside directors being the majority. As you can see on the bottom right of the next page, the existing Senior Adviser System of the bank, trust bank and securities will be abolished, and we will have a new Senior Adviser System.

Page 63. We revised the compensation policy for individual officers. ROE and expense ratio, which is a big homework to us, will be included in the evaluation of our stock compensation and officers' bonuses. Also, performance-based compensation proportion will be raised to have more harmony with the shareholders' interest. As I have explained, at MUFG, we are looking at the changes of a business environment, and we are accumulating steady efforts such as strengthening governance and reconstructing a sustainable business model through future-oriented transformation, to be the world's most trusted financial group as indicated in our corporate division.

Going forward, I hope we will be able to continue to have the understanding and support of investors and rating agencies.

This concludes my presentation.