Mitsubishi UFJ Financial Group Inc (MUFG) 2022 Q2 法說會逐字稿

Thank you for waiting. We would now like to start the MUFG Net conference on the interim financial results for fiscal 2021.

I will serve as the emcee. My name is Takahashi, from the IR office, financial planning division.

We will have Senior Managing Corporate Executive and Group CFO, Tetsuya Yonehana, to take you through the outline of the financial results for about 15 minutes. And then we will take your questions. The total time for the conference is to be about 50 minutes.

Before we start, I'd like to make some reminders. In the briefing, we may make some forward-looking statements based on the current forecast, but they all have risks and uncertainties, so please be aware that the actual results may differ from our forecast.

We will now start the briefing. Mr. Yonehana, please.

I am Yonehana.

Thank you for joining us for the MUFG Net conference. Please look at the material entitled financial highlights under Japanese GAAP for the second quarter of fiscal year ending March 31, 2022. First, I will discuss the fiscal 2021 first half financial results. And then I will cover our revisions to our targets and our policy on shareholder returns in this interim period and our progress on our medium-term business plan as well as our carbon neutrality declaration.

Please go to Page 5, Income statement summary, the table on the left, line 1, gross profits. It was down by JPY 76.9 billion year-on-year. To break it down: Line 2, net interest income, was higher due to improvements in lending margins both in Japan and abroad. Line 3, trust fees and net fees and commissions also grew year-on-year, owing to higher revenues in domestic as well as overseas asset management business. However, as for net gains on debt securities, in line 5, due to the absence of the large profits from the sale of bonds in the treasury business that we enjoyed in the declining U.S. interest rate environment in the first half of last year, it was down by more than JPY 130 billion year-on-year.

Line 6, G&A expenses, it was up by JPY 25.9 billion year-on-year. The expense ratio was 67.8%, as shown in line 20. We channeled our resources into high-performing growth areas while reducing our base expenses mostly in Japan. Excluding the foreign exchange translation, G&A expenses are mostly in line with the previous year's level. As a result, net operating profits, in line 7, was down JPY 102.8 billion at JPY 637.5 billion.

Next, line 8, total credit costs. There were portfolio improvements at the bank and lower loan loss provisions at MUFG Union Bank resulting from improvements of U.S. economic indicators. As a result, it was better by JPY 276.3 billion, ending with a reversal gain of JPY 17.9 billion. Line 9, net gains on equity securities, backed by strong stock prices, it was up by JPY 101.7 billion year-on-year.

Line 12, equity in earnings of equity-method investees, by incorporating the strong performance of Morgan Stanley, among others, it was up by JPY 65.1 billion year-on-year. And lastly, line 15, net extraordinary gains, with gains from changes in equity in Morgan Stanley and the gain from a sale of equity in an affiliate, at currency, it was better by JPY 87.5 billion year-on-year.

As a result, line 17, profits attributable to owners of parent was up JPY 380.6 billion at JPY 781.4 billion.

Please go to Page 6. The graph in the lower left-hand corner shows the changes in net operating profits by business segment.

In customer segments, Digital Service that includes our consumer finance business, which was hit by a decline in consumption due to COVID-19; as well as Global Commercial Banking, which had a decline in the lending balance in the overseas consumer segment and was also hit by lower interest rates, these 2 segments posted declines in profits, but other business segments compensated for that with steady progress in the growth strategy of the medium-term business plan, generating higher profits. And the total for the customer segments was higher by JPY 45.9 billion. On the other hand, in Global Markets, as I explained earlier, mainly due to the absence of profits in the treasury business of the previous year, the profit was down year-on-year, but in Global Markets bonds and equities are managed in an integrated fashion. And net gains on equity securities, which is not included in net operating profits in the accounting treatment, secured a profit increase of JPY 72.5 billion which is reflected below the line.

Please go to Page 7. On the right-hand side, we show changes in net income by business segment. In addition to the changes in net operating profit, with declines in credit cost, all business segments, except for Global Markets, posted higher profits.

Please skip one page and go to Page 9, the Balance sheet summary; the table on the left, the loans shown in line 3 and below. For domestic corporate loans, with repayment on maturity of large-sized COVID response financing, it was down by JPY 1.6 trillion from the previous fiscal year-end. Overseas loans also declined, by JPY 900 billion, so overall loans were down by JPY 2.9 trillion.

Line 12, deposits. While domestic corporate deposits declined, individuals deposits grew by JPY 1.5 trillion, so the balance was up by JPY 700 billion from the previous fiscal year-end.

Next, Page 10. I will discuss deposit and lending rates and the trend of lending spreads. Bottom left shows domestic corporate lending spread; and bottom right, the overseas lending spread. The downward trend for the domestic small- to medium-sized enterprises seems to have bottomed out, and steady recovery is seen in both domestic large corporate and overseas lending spreads.

Please turn to Page 11. The balance of risk-monitored loans, on the left, has decreased slightly from the end of the last fiscal year, while the risk-monitored loans ratio, shown by the line graph, is maintained at a low level.

Page 12 shows the current status of the investment securities including equity securities and government bonds. Unrealized gains and losses, shown on the table, top left, with the rise in the interest rates, was lower, except for the domestic equity securities, line 2, but domestic bonds, line 3; and others, which include foreign equity securities and hedge trading, line 5, an unrealized gain exceeding JPY 300 billion is being maintained.

Page 13 shows capital adequacy. CET1 ratio on the finalized Basel III reform basis, excluding the impact of net unrealized gains on available-for-sale securities, was 10.4%, securing an adequate level in terms of soundness.

That is all for the interim results. Please go back to Page 1. I would now like to continue and explain the upward revision of the fiscal year 2021 targets, with the profits attributable to owners of parent coming to JPY 781.4 billion. As you can see on the right, the fiscal year target has been revised upward to JPY 1.050 trillion.

Next page showed progress on medium-term business plan and measures related to shareholder return. Net operating profits increased in customer segments by JPY 45.9 billion year-on-year, showing steady results being achieved mainly in growth strategies outlined in the MTBP. Expenses and RWA are well controlled, giving us a positive feeling.

Right side of the page shows shareholder returns. With the progress in the profit in the first half, in alignment with shareholder returns and capital management policies, the decision has been made to revise upward dividend per share by JPY 1 from the May announcement to JPY 28 and conduct share repurchase of an aggregate amount of up to JPY 150 billion.

Next page showed progress in the first half of the key strategies outlined in the MTBP. I would like to focus on one of the key strategic pillars, namely digital transformation, one of corporate transformation initiatives; and the sale of MUFG Union Bank as part of structural reform.

As for DX. As shown, in the 6 months period, a number of achievements have been made, including enhancement of new services and contact points via collaboration with external businesses, efforts to become a financial and digital platform operator and acceleration of open innovation with companies both domestic and overseas.

Regarding the sale of MUB, as was explained at the time of announcement in September, as part of reviewing our business portfolio, the decision was made, but the importance of -- MUFG places on the U.S. market post sales of Union Bank remains unchanged. And we will continue to focus on large corporate transactions through collaboration among the bank, the trust bank and securities as well as the strategic alliance with Morgan Stanley. As for capital release from the sale, it will be utilized to increase shareholder value through shareholder returns and strategic investments.

Next page is Progress on MUFG Carbon Neutrality Declaration. Since its announcement in May, we have advanced initiatives [with building of a system] group-wide and on global principle.

Toward net 0 GHG emissions in its investment and loan portfolio by 2050, we firstly measured the current emission of one of the high-emitting electricity sector. And we are now working towards disclosure of interim targets for 2030 for electricity, oil and gas sectors in the spring of 2022. We believe it's important to support decarbonization measures of our customers to achieve net 0 in our finance portfolio. And as stated on the right, we will advance our dialogue with our customers, enhance solutions and deepen our engagements and activities further.

Thank you very much for your attention.

Thank you. Now we will take your questions. The first question is from Mr. Takamiya from Nomura Securities.

I am Takamiya from Nomura Securities. I have one question. It's about the share repurchase and the dividend increase, your announcement this time around. One, why did you choose this timing? Two, why did you decide on these amounts? Based on your projection of the capital ratio and your assessment of your capital position, can you discuss them, please?

Thank you for the question. Our shareholder return policy this time on the share repurchase and the dividend increase was the question. The dividend increase of JPY 1 is our forecast. In May, we raised it by JPY 2 from JPY 25 in 2020 to make a forecast of JPY 27. First, dividend: In the medium-term business plan, our policy on shareholder returns and our dividends, in the final year of our medium-term plan, which is fiscal 2023, we are aiming at a payout ratio of 40% and net income of JPY 1 trillion and more. They are our targets. As we aim at the dividend per share in fiscal 2023, we wanted to take steady steps toward that level. We feel that is necessary. So that is our basic thinking. In May, JPY 850 billion was the financial target. So based on that, JPY 27 was the forecast we made. At that point in time, the dividend payout ratio was to be 40%. This time in this interim period, we raised our forecast of our year-end dividend by JPY 1. In response to the performance in the first half, we made an upward revision to our full year target and set it at JPY 1.050 trillion. So based on that, as I said earlier, toward fiscal 2023, we wanted to make steady steps to raise the level. And that is why at this timing we made the forecast of JPY 1 increase in dividend, making an upward revision.

As for share repurchase. We made a decision of JPY 150 billion this time. In May, when we announced our results, we felt we needed to assess the impact of COVID-19. And therefore, we decided not to do a share repurchase, but this time given the outlook for our full year results and even after considering the need to maintain our soundness for the stable provision of financial functions, we decided that there is no problem in terms of adequacy of our capital. Our target range of our capital is between 9.5% and 10%. At September end, it was at 10.4%. And toward the year-end, there is going to be the phased deduction of JPY 300 billion for the emergency equity investment in Morgan Stanley, but even after considering that, based on our projection of our capital ratio at the year-end, we decided to do a JPY 150 billion share repurchase. And we decided that the amount will be JPY 150 billion. As for our CET1 ratio projection, we are estimating it to be about 10% or so at the end of March. That is our projection, which includes this JPY 150 billion. The level of our capital ratio at March end has been taken into consideration in deciding this amount of JPY 150 billion.

Does this mean that JPY 200 billion was not possible?

The difference of JPY 50 billion, in terms of the capital ratio, it's a small difference, so whether JPY 200 billion was impossible or not, in terms of the level itself, the difference is small. So if the question is was it impossible, well, the answer is it is not impossible, but this time we decided at JPY 150 billion.

Next, from BofA Securities, Mr. Nakamura, please.

Yes. This is Nakamura from BofA. I have 2 questions. My first question is why the payout ratio and the dividend was kept low at 34% and JPY 28, respectively. It seems that you have taken a conservative look [as if] the net profit excluding onetime gains and losses at JPY 900 billion, taking into consideration the ability of the group. Please explain the background or the construct of the net profit and whether you see this as reflecting the ability of the group. And my second question: The CEO earlier said in a press conference that the CET1 ratio is expected to go up by 50 basis point with the sale of Union Bank. And the surplus capital will be divided into three, to gross investments, shareholder returns and U.S. Bancorp investment. Based on the statement, if we do a simple calculation, JPY 150 billion plus accumulated profits for the next fiscal year will come to a level of approximately JPY 250 billion for the share repurchase. What is your thought on allowing this high expectation? And is there any factors that may change this expectation?

Thank you very much for your question. As for the first question of why the dividend per share was revised upward by JPY 1, as I mentioned earlier, we would like to steadily make progress towards fiscal year 2023, the final year of the MTBP, by progressively increasing dividend payment. That was a decision behind the increase of JPY 1. There was a onetime gain in the first half, but instead of excluding it and work on the payout ratio, our focus was for an incremental increase of dividend towards 2023, thus an increase of JPY 1; and against fiscal year 2020, an increase of JPY 3.

As for your second question, regarding the buyback amount for the next fiscal year. First of all, let me put MUB on the side. When we announced the new MTBP in May, we explained the importance of recognizing the capital management for the 3-year period. I believe that we need to consider share buyback to a degree in the fiscal years of 2022 and 2023. With that, with planned closing next fiscal year of sale of MUB, the impact of capital release is expected to be around JPY 400 billion to JPY 500 billion. The basic idea is that this will be [recorded] as an add-on. I think it's too early to talk about the amount of buyback for the next fiscal year now, but if we follow our assumption of the MTBP explained earlier, I feel that share buyback of a proportionate amount will be considered.

To avoid too much an inconsistent expectation toward share buyback, do we need to think that investment into growth will increase more than expected? Or do we not have to worry about that?

Yes, thank you for your question. What has changed from the MTBP announced initially is the decision to sell Union Bank. And accordingly, the revenue will come down, so consideration of investment into growth to recover the decline has gained more significance compared to May. However, having said that, I don't think it implies a -- large investments to be made going forward.

The third question is from Mizuho Securities. Mr. Matsuno, please.

I am Matsuno from Mizuho Securities. I have 2 questions. First is about your projection of your credit cost in the second half. In the footnote of your summary results, it says there is a reversal of about JPY 30 billion at overseas subsidiaries, which means that in other areas there is about JPY 200 billion of credit costs to be expected in the second half. It appears that you are being conservative. Can you talk about your approach to credit costs? That is my first question. The second question is about regulation and CET1 ratio. According to the draft notice announced the other day, reserves for risk assets can be taken into consideration in the process of calculating the capital floor. If possible, can you quantify that impact? And also talk about the possible use of that capital, if there is any.

Thank you for the question. Our credit costs projection for the second half was the question. Now let me first give you the overall picture. In the first half, we had the reversal gains at the bank. And at MUAH, because of CECL impact, there were reversals. The entities that will have credit costs on a recurring basis will be Krungsri of Thailand, Bank Danamon of Indonesia and the 2 domestic consumer finance companies. They incur credit costs on a constant basis. As for NICOS and ACOM, about 40 billion is projected in the second half. As for Krungsri and Danamon, it is about 60 billion plus. At the bank, in the first half, there were reversal gains, but in terms of the underlying trend, we are projecting credit costs to be incurred. COVID has been subdued temporarily, but we cannot afford to be relaxed. Also there are supply constraints, supply chain issues and a surge in resource prices, so the economic trends in developed markets, among others, do not allow us to be optimistic. So right now we feel we need to be cautious in our projections, so at the bank level, based on those factors, we're projecting that there is to be credit costs and decided on this level.

The second question, on regulation and CET1 ratio. The draft notice has been issued. Still this is in the draft form, so we have not incorporated that yet. In terms of our pro forma calculation, we are expecting an improvement of about 20 basis points, but as to what timing we are to incorporate that, we suppose it will be when it is formally introduced.

Next question is from Mr. Takai of Daiwa Securities.

[Yes, sir]. This is Takai from Daiwa Securities. My question may be redundant with Mr. Matsuno's question earlier, but the outlook for the second half seems to be very conservative looking from the outside. The profit for the first half came to JPY 637.5 billion, and forecast for the full year is JPY 1.150 trillion, a projected decline of more than JPY 100 billion. Total credit cost seems very conservative as well, as with net gains of equity security. What is the reason for this conservative outlook? Please explain the reasons for the decline. And also, I am sorry to be very picky, but as for ordinary profits, it is forecasted to go up by JPY 400 billion, but profits attributable to owners of parent is revised only by JPY 200 billion, which suggests that a special loss of certain amount is being considered. Please comment further on the second half construct.

And my second question is, as Mr. Matsuno-san said earlier, for the third quarter, JPY 30 billion of reversal of allowance is expected. As for KS and DBI (sic) [BDI], you said expenses will be incurred; and furthermore, sizable gain on reversal can be expected. Please comment including references to the technical factors.

Well, thank you very much for your question. The first question, on the second half outlook in line with the difference from the first half to the second. First, on the bottom line, it was JPY 781.4 billion in the first half, with fiscal year target of JPY 1.050 trillion, giving us JPY 270 billion for the second half, a difference of JPY 500 billion between the 2 halves. In the first half, there was reversal of credit costs as well as Morgan Stanley's related profits from sale of Union Bank. And with increases in net gains of equity security, there were upside in the first half. Considering all those factors, the first half was stronger by about JPY 200 billion on the bottom line. With a revised profit target of JPY 1.050 trillion, the difference between the 2 halves will come to JPY 500 billion. Excluding the onetime factors in the first half, the actual difference would be around JPY 300 billion; and we need to consider credit costs, equities and special losses as factors on the net operating profit. The net operating profits difference between the first half and second half is -- as you correctly pointed out, is approximately JPY 100 billion. Instead of forcibly recording revenue from the treasury operations in the market in the second half, with expected tapering to start in the U.S. and interest rate hike expected next fiscal year, in order to secure mid- to long-term sustainable revenue, we believe it important to focus on [position] management with certain degree of control. And this is being incorporated into the outlook. The same goes for equity securities. What is being managed in the markets as treasury operations, including ETFs? Instead of recording gain on sales here, controlled management is called for, and downward revision of JPY 100 billion is included for the treasuries in the second half.

As for others. In net operating profits, initial targets remain unchanged. To touch on the technical aspects: In AM/IS, there was a special factor. FSI fund performance was quite strong in the first half, with strong performance fee reflecting this investment return, so this will drop in the second half. So consideration of special factors resulted in a difference of JPY 100 billion from the first half to the second half. As for net operating profits, the only revision made is with treasuries related to equity. As for the credit costs, as explained earlier, we believe that we need to take a cautious view for the second half; and this amount reflects our stance. And also, for special gains, it is stated on the first page of the presentation material as well as the disclosure documents that it is under consideration towards the end of the fiscal year with a possibility of impairment loss of fixed assets following the implementation of new methodology on recognition of impairment loss, consistent with the enhancement of business management framework. Allow me time to describe what it means in detail.

We have been working on enhancement of business management framework of business groups, which may be considered within the framework of management accounting. As for this medium-term business plan, we are working on allocating majority of RWA to business groups to be controlled autonomously. We believe it is important that resource management be conducted in an effective and efficient manner under the responsibility of each business segment, if needed, expanding the scope to other assets, including expenses for systems and facilities. We believe this is just a starting point. As for the system or the framework of the bank, we have started since the beginning of this fiscal year to allocate budget for new system investment to each of the business groups to enhance autonomous management, so we will be transitioning toward achieving consistency with impairment of fixed assets. To be more specific: Impairment recognition related to digital currently include land, building, heavy equipment and software which are recognized as impairment within the profitability of the whole group. From this standpoint, each business group will take responsibility of its own assets. And for shared assets with expenses attached, they are allocated to each business group, with impairment recognition made accordingly. So this is one of our considerations, and in the trial calculation, there is a possibility that approximately JPY 150 billion of impairment loss may be recognized. Although it is only a possibility at this stage, through dialogue with the market, it was incorporated into the revision we have made to the forecast. We will continue discussing the matter with the auditing firm to move this forward. This is just a trial calculation and the number may change, but we have set it at JPY 150 billion to start with.

So that was [all] the special factor of the difference of ordinary profits and net profit. I'm sorry to be taking so long to explain, but I'd like to answer the next question, on the credit costs of MUAH. With our decision to sell, technical factors are generated in the accounting. To be more specific: Under U.S. GAAP, with the decision to sell, for the business results at the end of September for MUAH, the JPY 6 trillion of loan assets to be transferred to U.S. Bancorp will be regarded as held-for-sale assets in accounting terms. And with that, lower of cost or market will apply. With that, reversal of the provision of doubtful accounts will occur, and instead, lower of cost or market will apply. The reversal gain of the held-for-sale asset at the end of September came to $550 million or JPY 60 billion. This is included in the total credit costs outlook of JPY 150 billion for the full year. So that was a special factor.

But if that is so, the profit for the market segment will decline in the second half, but the head of the segment will not be held accountable. But it will be regarded as a group-wide policy to reduce profit of the market segment. Is that the correct interpretation?

Yes, that is correct.

The fifth question is from JPMorgan Securities, Ms. Nishihara.

This is Nishihara from JPMorgan. I have one question. Until now, your stance has been conservative in that you have been raising your target profit level gradually over time, but this time with the reversal of credit cost and Morgan Stanley's Eaton Vance being onetime elements, you raise it to JPY 1.050 trillion, which is quite aggressive in our view, so I suppose that the management has confidence in the profit level of next year and beyond. In fiscal 2022, there will be the sale of UB, but in fiscal 2023, because of the sale of UB, ensuring the path to JPY 1 trillion-plus may become a high hurdle, I would think, so based on that, I have 2 questions. First one, on growth investment, compared to the time before deciding on the sale of UB, I suppose you have a higher budget. Asia, AM/IS and digital, in these areas, when will it be? Will you raise the speed? I want to ask for your thoughts on that.

And the other question is on DX, digital transformation. This time, you have money canvas, where Mr. Kamezawa's flavor is coming out. What kind of targets do you have in terms of expansion of customer coverage or a PL impact? Can you talk about that, please?

Thank you for the question. The first question, about growth investments, this is something we are considering all the time. Obviously, with the decision to sell MUB, we are intensively studying in what areas there may be potential for our investment. This is not just limited to growth investment. Even [in organic] growth, including things that we have not been able to do, so far, how do we go about risk taking, how to use our capital, we are accelerating and intensively discussing this internally. So AM/IS, digital are growth areas, as we have been saying. Investment into these areas is something that we have been looking at from before. If you ask whether we are speeding up because of the MUB sale, well, that is not necessarily the case, but it's ongoing. In any case, we must first have an investment target, so we will raise our awareness level and that is being shared among the management.

Your second question, on DX. We have been working on a number of programs, and the P&L impact was your question. As we work on these initiatives, what kind of financial contribution will there be in the future is something we always look at as we go. In terms of numbers, we would have numbers where some amount of capital is used. For example, on Page 3 we talk about accelerating further our open innovation efforts. There is the AI-enabled start-up financing called Mars. Here financing is to be provided to start-ups. And it's the bank that provides the fund, so in terms of return, we are expecting reasonable levels of returns, but as for the platformer initiative, I suppose this is an area where we have to take time to monetize over time. That is the time horizon we have.

About the first point, on growth investment. With the UB sale there is the capital release, which I think is positive in the short run, but the profit contribution from UB will no longer be there, so in terms of the ROE impact, it may not be so straightforward right now. So I feel that you may need to speed it up. That is the observation I have looking from a market perspective. Obviously you cannot say when, but you may need to front-load your efforts to do this right away. I would suppose that is what is expected. This is just my comment.

Thank you. We are aware of that and we are having intensive discussions internally as well.

We have about 5 minutes left. Next is Mr. Niwa from Citigroup.

This is Niwa from Citigroup. I hope you can hear me.

Yes, we can hear you.

I would like to ask 2 questions, please. I'm sorry to be very specific, but my question is on [global CIB] and expenses. On Page 6 of the presentation material, JCIB segment seems to be very strong. What was behind the improvement of lending spread? And what is the outlook for the second half, factors for increase of commission and outlook for the second half and beyond? If you have analyzed by regions or products, please share as well. My second question is on expenses, on Page 2, bottom left. Sizable investments into growth seems to have been implemented. In the MTBP, it was around JPY 50 billion, so the impact was also sizable. Areas of growth seems to be aligned for sizable expenses to be incurred as well. Please comment quantitatively, and give us some comments on the scope as well.

Yes. Thank you very much for your question. As for the first question, the increased profit for JCIB. Profits related to increase in loan deposit interest income on gross profit base and with replacement of low-profitability deposit to high-profitability deposit is showing progress. And net interest income increased both for loans and deposits. Commissions for project finance and financing for funds increased in the first half. Fund financing and noninvestment-grade deals are some of the areas in which MTBP strategy impact is being seen. As for the second half, I think this trend will be maintained. The first half was very strong, but similar levels of pipelines are available in the second half, allowing us to maintain the first half level. And as for your question on regions, profit in the Americas was very big.

And your second question, on expenses. If we look at the breakdown by investment for growth and base expenses, only a bar graph is shown on this page, but the investment for growth was up JPY 14 billion. And base expenses was down JPY 13 billion. These expenses is coming down consistently. And JPY 10 billion out of the JPY 14 billion is invested into global AM/IS. I said earlier that FSI was strong in the first half with good performance of funds, especially the infrastructure fund, increasing the performance fee accordingly, in turn increasing the personnel costs. They're all incorporated in the JPY 10 billion. Of course, they may be onetime factors in nature, but as gross profit increase, investments into growth will increase accordingly, so there is relevance between the two. With increased gross profit, investments into growth and personnel costs increased also.

There are no other questions, but before we close, we would like to ask Mr. Yonehana to say a few closing remarks.

Thank you very much for your valuable questions today. Today, I have explained the progress of the new MTBP which started in April of this year. We will continue to focus on dialogue with our shareholders and investors and put the efforts into financial and capital management towards sustainable improvement in shareholder values. We ask for your continued understanding and support.

Thank you very much for your time today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]