Mitsubishi UFJ Financial Group Inc (MUFG) 2019 Q2 法說會逐字稿

We would now like to begin MUFG fiscal 2018 interim results presentation session. Let me introduce the attendees today. To your right, we have Mr. Nobuyuki Hirano, President and Group CEO. And next to him is Mr. Muneaki Tokunari, Senior Managing Corporate Executive and Group CFO. And I am [Hyunjo] from IR office. I will be serving as moderator today.

As for today, first, regarding 2018 interim results, there will be about 30-minute presentation initially, which will be followed by Q&A session. We expect the entire session to last about one hour and 15 minutes.

Now I would like to ask Mr. Hirano to start the presentation.

Thank you very much. This is Hirano speaking. Thank you for taking your time out of your busy schedule to come to MUFG fiscal 2018 interim results presentation session. As for the earnings results, Mr. Tokunari, our CFO, gave a presentation during the net conference, the other day. On my part, I would like to keep the earnings results part simple, so that I can spend more time on how much progress we are making in implementing the medium-term plan.

I will start from page 8. Fiscal 2018 interim results for profits attributable to owners of parent was JPY650.7 billion, up JPY23.8 billion year on year. This is 76% of full-year profit target of JPY850 billion. Based on the first half results, the full-year target was revised upward by JPY100 billion, from JPY850 billion to JPY950 billion.

Page 9 is income statement summary. Gross profits on line 1 was down JPY125.5 billion at JPY1.8825 trillion. Almost all of the decline is market-related, as shown on line 4. G&A expenses on line 6 is contained in domestic operations, but increased slightly overseas due to the expansion of overseas business and increase in cost to comply with regulatory requirements. As a result, net operating profits on line 7 were JPY568.1 billion, a decline of JPY132.6 billion from the same period, previous year.

Below net operating profits, there were reversal of credit costs, net gains on equity securities sold after the review of strategic equity investments, and increased profits from investments in Morgan Stanley. Profits attributable to owners of parent were JPY650.7 billion, JPY23.8 billion higher year on year.

Please go to page 11, which shows deposits and loans. As shown in the right graph, loans increased overseas. However, setting aside the domestic deposit for the moment, overseas deposits decreased, which is an issue, as I will discuss later.

Page 12 shows domestic loans. Housing loan and SME loan balance declined, but large corporate loan is showing an increasing trend. Right-top graph shows changes in domestic deposit/lending rate. In recent quarters, there are some slight fluctuations; but as the low interest rate environment continues, funding demand and supply condition remains saturated. Unfortunately, we expect the rate to continue to move down gradually for SMEs.

Next page, page 13, shows overseas loans. The balance increased, in particular mortgage loans in the United States, and auto loans in Thailand. The spread between lending and deposit rates improved on a nonconsolidated basis, mainly due to improved demand from Japanese corporate customers and rise in interest rates.

Page 14 is on the structure of non-Japanese yen funding. As I mentioned earlier, non-Japanese yen deposits from customers decreased slightly in the first half. But as shown in the right chart, they cover 60% to 70% of non-Japanese yen loans. As shown in left-bottom chart, we have increased collateralized funding, such as foreign currency denominated corporate bonds and cross-currency repos backed by JGB collateral. Average duration of corporate bonds is around seven years, which is quite long.

With diversification of funding, as indicated here, customer deposits, corporate bonds, and collateralized funding cover 85% of non-Japanese yen loans. The remaining 15% is covered by currency swaps. Despite the recent trend of rising dollar funding costs, the increase is moderate since the currency swaps are mostly medium- to long-term.

Next, please refer to page 15, investment securities. Please refer to the top-left chart. With the rise in interest rates, our realized losses of foreign bonds on line 7 rose to JPY275.7 billion, but they are more than offset by the unrealized gains of JGB on line 4; and others, under others.

Furthermore, our currency policy is to manage yen and non-Japanese yen together and to manage rates, equity, and credit in a combined portfolio. Although it does not appear here, dynamic hedging such as option IRS is used. Thus, it is not appropriate to discuss foreign bonds in isolation from others, but it goes without saying that this requires close attention.

Please move to page 16, credit costs. In the first half, mainly because of rating upgrades of large obligors, there was a net reversal of JPY117.9 billion in credit costs, resulting in lowering of total credit costs forecast for fiscal 2018 from JPY120 billion to JPY10 billion.

I would now like to discuss results by business group. Page 20 gives the summary, starting from May of this year. This is the summary, including return on equity and expense ratio of each business group. In a nutshell, net operating profits from global markets and retail and commercial banking declined, but rose for four other businesses.

Please go to page 21. First on retail and commercial banking, which does business for domestic retail and SME customers. Card settlement and consumer finance business grew. In addition, with the rising rates in the United States, deposit interest income from Japanese SME customers grew due to an increase in non-Japanese yen deposit margin. On the other hand, investment product sales were sluggish due to the market deterioration. This is a challenge to which I will come back later.

Next, page 22, turning to Japanese corporate and investment banking, which is a business with large Japanese corporate customers. Equity-related income, such as M&A and ForEx income, were strong. In addition, loan interest income increased, mainly due to an improvement of non-Japanese yen lending spread. In short, pricing renegotiations since last year were effective. Deposit interest income grew due to an increase in non-Japanese yen deposit volume and non-Japanese yen deposit margin increase.

Page 23 is on global corporate and investment banking. For non-Japanese large corporate customers, led mainly by Asia and Oceania that captured event finance and event lending opportunities, and the Americas, that saw closing of multiple large transactions, GCIB profits increased. Loan tenor shortening helped reduce non-Japanese yen mid- to long-term funding costs, which also helped push up profits.

On the other hand, improvement of the balance between non-Japanese yen deposits and loans remains a challenge. With appropriate incentives, both asset and funding side will be enhanced, including by increasing non-Japanese yen deposit balance and by strengthening origination and distribution business that minimizes loan kept on our balance sheet. I will back to this point again later.

Moving on to global commercial banking on page 24. First, MUAH, which is basically Union Bank, saw increase in mortgage loan balance and had a strong noninterest income performance in consumer finance and wealth management related business. Krungsri, or Bank of Ayudhya, is performing well, with increase in auto loan and corporate loan balance; interest income and fees related to retail and consumer business driving the growth.

Next is asset management and investor services on page 25. In absolute value it is small; but in terms of growth ratio, this group is reporting a substantial increase in profit. Overseas investors' services -- mainly deposit and actually non-Japanese yen deposit and fund finance -- led the growth in profits. In the domestic market, thanks to introduction of new products, sales of the investment products targeting domestic corporate investors performed well. Both IS and AM showed strong results.

Next, global markets on page 26. There was a significant decline in profits due to fall of gains on JGB sales in comparison to the previous year. This was already discussed in the beginning. This is according to our initial projection. But in anticipation of the future, there has been significant improvement or rebalancing of foreign bond portfolio. Losses on sales of foreign bond were booked. As a result, the results fell short of the plan.

I would now like to discuss the progress in Eleven Transformation Initiatives. Please move on to page 30. I would like to begin with digital technology. We have started collaboration with Akamai Technologies of the United States to develop new high-speed and low-cost payment platform in anticipation of increased traffic in the coming IoT era.

Page 31 shows information trust platform. This is also a new area. The plan is to start offering services next fiscal year with 10 supporting companies; PoC with 1,000 individuals started. These are efforts to address imminent cashless society and digital society. We will develop new business models.

Please move on to page 32. With digital technology, concrete measures are being implemented to reduce the volume of work by 30%. For example, in housing loan business, the Trust Bank stopped accepting new housing loan applications in March, and the business was integrated into the bank side. At the same time, the reform of entire business processes are underway, starting from initial loan application to final loan disbursement and management of outstanding loans.

We are already tying up with housing information site SUUMO, run by Recruit, and realizing reduction of as much as 15 minutes in preliminary credit assessment, using AI and RPA. At the same time, we will acquire new customers and new business channels, middle- and back-office paperless transition, and automation will be implemented as well.

Going forward, in other areas such as asset management and unsecured loans, we would like to implement similar process reform and streamline clerical work at the center to achieve reduction in work volume.

Please move on to sales channel strategy on page 33. First, in the virtual world, to improve customer convenience and to reduce the cumbersome process of having to visit the branch and have passbooks printed, we are improving smartphone applications. In the first half, card reissuance application and reissuance for lost card application were released. In the second half, we plan to release applications for biometric authentication and for viewing of transaction history over the past 10 years, for free, for the moment.

Through such improvements in UI/UX and enhanced functionality, we will encourage the users to migrate to direct banking and reduce volume of operations at the branch.

Starting from this page, major KPIs in each structural reform area will be shown. Interim target for fiscal 2020 and final target for fiscal 2023 are shown in gray and blue bars, respectively, to compare the current pace of progress and final target. We have received numerous feedback about the importance of making progress visible, since it is a long-term turnaround plan. Therefore, semiannually, we will keep track of these KPIs.

Page 34 is on brick-and-mortar channel. Next January, the first MUFG NEXT, a new type of branch making full use of digital technology, will open in front of Gakugei-daigaku Station. In October this year, with Mitsubishi Estate, MUMEC Visionary Design Limited was established. This is a company that will make use of human resources and know-how of Mitsubishi Estate to offer solutions on branch relocation and replacement to MUFG. The company will fulfill the role of supporting restructuring and reuse of branch real estate within MUFG.

Please turn to page 35, wealth management. As bottom-left graph shows, number of group collaborations from the Bank, Trust Bank, to the securities is increasing significantly, while asset under management growth is behind the plan. Transition from investment product sales model to asset management model and advisory model requires a platform.

We will steadily build business platform by increasing and developing senior wealth advisors, who can give sophisticated cross-advices for a wide range of needs, starting from succession to asset management and inheritance. We will also shift some personnel from the bank to the securities side; and introduce, steadily, gatekeeper function for product selection and sophisticated support system.

Page 36, new model for wholesale banking in Japan and real estate value chain. In April, the corporate lending business of the Trust Bank was moved to the Bank. The corporate banking groups of the Bank and the Trust Bank have been integrated and reorganized by industry sector. Dis-synergy, such as lending share adjustment, was very limited, and it was a smooth start.

Along with the newly integrated corporate banking group, the reorganization of product offices -- namely, RE, pension, and corporate agency -- was completed in October. RM, relationship managers, and PO, product offices, are now poised to cover customers in an integrated manner. Collaboration between real estate and pension is clearly improving, making RM/PO model unique to MUFG more visible, as targeted in the current midterm business plan.

Page 37, asset management business in Japan. This is mainly for Japan. The trust type credit investment product that we developed to meet the needs of corporate customers in the low interest rate environment posted an accumulated sales amount of JPY420 billion and has become a big hit product. This product is jointly managed specified money trust. It is a low-risk product and originated by putting together trust beneficiary rights, such as loan claims. We will continue to expand our asset management customer basis by accumulating successes like this one.

Page 38, institutional investors business. As of October 1, as part of our effort to reinforce sales and trading business, we set up a single global head position overseeing rates, credit, and FX, for example, both in Japan and overseas. At the same time, a total of 430 employees started their dual roles in the Bank and the securities in Americas, Europe, and Asia. This is an embodiment of our global One Team concept, and MUFG as a whole promotes cross-selling to institutional investors.

We are also working on policies for booking and credit management in order to challenge new businesses such as equity margin lending. Competition in this area, it's so intense that there should be an infrastructure to satisfy customer needs. In the first half, market condition was bad, and we made a start with losses. We will build an optimal business model to exercise our strength by bringing business scope more in focus.

Investors services, another focus area -- it's shown bottom-right of the page. As I mentioned earlier, global businesses inorganically built over the past years are beginning to be up and running, increasing profit significantly.

Page 39, global CIB and its business model transformation. As mentioned earlier, aiming at [sliding] off our loan-centric business model, we are working on product -- securitization, DCM, for example -- capability enhancement; O&D and replacement of low-profitability assets with high-profitability assets. It is a shift from volume focus to ROE focus approach. Although it will come with a temporary downward jolt on earnings, we must follow it through.

Skipping several pages, please turn to page 48. From this page on, I touch upon expenses, a big challenge for us. First, I explained about progress made over the first half of the year. Please look at the right-hand side graph. The thin solid line is the forecast of expense ratio announced in May. Mainly due to forward-looking strategic expense allocation and regulatory costs, the ratio is forecasted to aggravate on the first and second years of the MTBP. The first-half actual ratio at 69.8%, which is better than the original assumption, owing to better-than-expected top line and reduced expense level.

Page 49. Here I explain specific measures. First, point number one: for business as usual, BAU, we reduced expenses in the first half, mainly in the domestic customer segment. We also allocated strategic expense of about JPY20 billion for the growth of gross profit.

Point number two: facility-related expenses, including temporary ones, increased due to the reconstruction of a flagship building to make it more earthquake-resistant; as well as the construction of a BCP, business continuity plan, focused data center in Kansai. But these expenses are, of course, within the plan.

Lastly, number three: we are seeing progress with measures such as digital investment and group integrated operations, making, all in all, a good start to achieve the savings of JPY50 billion on the final year on the MTBP. That said, financial impacts are yet to be seen.

By business group, global commercial banking business group, which is expanding its business -- it's showing a big increase in expenses; while retail and commercial banking business group and JCIB, Japanese corporate and investment banking business group, are reducing their expenses as planned, or more than planned.

Page 50, headcount and branches. MUFG bank will reduce it headcounts by about 6,000 by FY 2023, as the employees hired during mass recruitment era retire, and the number of new hires are contained. Due to the increase in new hires in April, the number of personnel increased temporarily as of the end of September. But toward the end of the fiscal year, it will decrease as planned.

With respect to branches, reduction in the number of branches with bank counter and the branch consolidation are being executed as planned. In the first half, seven branches were consolidated. And in the second half, consolidation of four branches has been announced as of November 16, and more to come.

Lastly, please turn to page 53 for capital policy. Here we review again our basic policies for shareholder returns. First: positioning dividend as basis of shareholders' returns, MUFG aims for a stable and sustainable increase in dividends per share to achieve 40% payout ratio by fiscal year 2023.

Second, as to share repurchase, MUFG plans to flexibly repurchase its own shares as part of its shareholder return strategies in order to improve capital efficiency. And there are three factors to make a decision: first, performance progress/forecast, and capital situation; second, strategic investment opportunities; and, third, market environment, including share price.

And finally, in addition to complying with capital regulations, MUFG executes these shareholder return enhancement measures while confirming if its capital level remains stable, as required to secure single-A or higher credit rating.

Please turn to page 54. We have decided our shareholders' return this time based on policies not to accumulate capital more than necessary, and to operate capital tightly while maintaining financial soundness.

First, dividends. The interim dividend is JPY11, up JPY1 from the forecast at the beginning of the fiscal year. Combined with year-end dividend of JPY11, fiscal-year 2018 dividends are forecast to be JPY22 per share. As a result, the payout ratio will be 30.3%, even on the assumption of upwardly revised full-year net profit target of JPY950 billion.

As page 55 shows, we will repurchase our own shares worth JPY100 billion. And all the repurchased shares will be canceled in accordance with the existing policy.

Please turn to page 58, equity holdings. As shown in the table on the right-hand side, in the first half of fiscal year 2018, we reduced equity holdings by JPY43 billion on acquisition cost basis, booking JPY42 billion of net gains. From disclosing announcement, we disclose agreed amount to sell. As of the end of September, it stands at JPY150 billion. Including this amount, the ratio of equity holding over Tier 1 capital goes down to 12.9%.

In the first half, the reduction of equity holdings slightly slowed down. To be honest, there was an impact coming from the integration of corporate lending business of the Bank and the Trust Bank. But going forward, we will accelerate the process of the reduction as well as the accumulation of agreed amount.

Lastly, in August, we raised our stake in Bank Danamon to 40% and are currently working on a project to obtain its majority stake. Also, at the end of October, MUFG agreed with Commonwealth Bank, largest financial group in Australia, for the acquisition of their asset management company, Colonial First State Global Asset Management.

This deal is not about a simple expansion of asset management business. Rather, it is the first step to shift from minority investment to majority investment in AM business, as well, following the suit of investor services of AM investor services business group. In that sense, I believe it is an important move for the reimagining strategy.

As I explained, activities for transformation are beginning in all the business areas, and both inside and outside Japan. It is also true, however, that there are measures which are yet to be up and running, and areas where some issues are already emerging. We are resolved to execute our plan in a decisive and speedy manner, based on accurate grasp of our current situation to realize our management vision: be the world's most trusted financial group.

MUFG will rise to the current difficult situation. We would like to ask for continuous support and understanding from the investors and rating agencies.

Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.