Mitsubishi UFJ Financial Group Inc (MUFG) 2021 Q2 法說會逐字稿

This is Kamezawa. Thank you very much for joining us for this MUFG briefing session out of your busy schedules. To prevent the spread of COVID-19 infection, we will once again hold this briefing in a non-face-to-face format, just like we did in May.

Please look at the material entitled fiscal 2020 first half IR presentation. Please go to Page 3.

I will cover the details later, but here, I'd like to highlight briefly some key messages. First, the results. First half net profit, the progress rate is 72.9% of our initial target. We made an upward revision of our fiscal 2020 target to JPY 600 billion. Second, update on strategic emphasis. The priority strategies I explained the May results briefing are making steady progress. Third, ESG. A program of sustainable finance toward our goal of JPY 20 trillion in 2030 is making sound progress. Fourth, capital policy. Dividend will be JPY 12.5 for the interim period. Annual forecast is kept at JPY 25. We project to maintain a sufficient level of capital.

Please go to Page 4. These are our main initiatives in the period of living with COVID-19. Let me touch upon 2 points. As shown in the upper left, to fulfill our responsibility to serve as financial infrastructure, we have disbursed about JPY 5 trillion of new loans related to COVID-19. In the group, as shown in the upper right, CxOs, including myself, have held web town hall meetings to enhance engagement with the employees, both in and outside of Japan.

Please go to Page 7. Our fiscal 2020 first half results and our full year targets. Starting with first half results. Please look at the column in the middle. Fiscal 2020 first half, line one, gross profits. Despite stagnation of economic activity due to the spread of COVID-19 and impact from market changes, we had increases in market-related gains. In addition, there are revenue increases due to the consolidation of Bank Danamon and FSI, an Australian asset management company. As a result, gross profits were up JPY 123.8 billion year-on-year at JPY 2.093 trillion.

Line 2, G&A expenses. Though there were increases due to the consolidation of 2 companies I mentioned just now, due to expense reduction efforts in the pandemic both in Japan and overseas, the increases in expenses were contained at JPY 10.5 billion year-on-year. As a result, net operating profits were up JPY 113.3 billion at JPY 740.4 billion. In lines below net operating profits due to increases in credit risk around the world due to COVID-19 as well as the impact of introduction of new calculating method called CECL at partner banks, credit costs increased by JPY 240.3 billion year-on-year.

Line 6, profits attributable to owners of parent due mainly to increases in credit costs. It was down JPY 206.1 billion at JPY 400.8 billion. But because of increases in net operating profits, the progress rate against the initial full year target is above 70%.

Please look at the column on the right, fiscal 2020 full year. Currently, it is difficult to project an early containment of COVID-19, but given the progress we made in the first half, we raised the full year target by JPY 50 billion to JPY 600 billion.

Page 8. Reasons for the revision of the full year targets. Based on the first half results, we have updated the projected impact of COVID-19 that we initially estimated. This is the basis for the upward revision in the full year targets.

Line 1, the COVID-19 impact on net operating profits. The various initiatives we have taken in response to the changes in the environment under the pandemic offset some of the negatives, and accelerated expense reduction has now been reflected and the impact amount was reduced from the initially estimated negative JPY 300 billion to negative JPY 200 billion.

Line 2, total credit costs. Given that in the first half, there were additional CECL provisions made at MUAH, we have taken a comprehensive view, including the risks associated with increasing uncertainties and the impact amount was raised from negative JPY 200 billion to negative JPY 250 billion.

Page 9, financial targets. Fiscal 2020 first half ROE was 5.83%. Expense ratio was 64.6%. CET1 ratio, including unrealized gains, on a finalized Basel III reform basis was 12.2%. With COVID-19, we find it difficult to achieve the financial targets for fiscal 2020, the final year of the current midterm business plan.

The outlook is still uncertain. But in the next midterm business plan period, starting from next fiscal year, we will continue to make insistent efforts to improve both the ROE and the expense ratio.

Please go to Page 11. Results by business group. As shown in the step chart on the right, due to lower U.S. interest rates and the impact of COVID-19, profits declined in RMC, JCIB and GCIB, but with profit increases at GCB, global commercial banking, accompanied by consolidation of Bank Danamon, customer segment's profit increased. As for the details of the results of each business group, they are carried in the appendix of this material, so please refer to them later.

Now please go to Page 13, the balance sheet summary. As the blue bar graph in the upper right corner shows, in terms of loan balance, domestic corporate loans increased, but overseas loans decreased by JPY 3.9 trillion. Overall, the balance was down JPY 0.7 trillion compared to March end.

On the other hand, the yellow bar graph in the lower right, deposits balance. Domestic corporate and individual deposits as well as overseas deposits grew by large amounts. The increase was JPY 14 trillion compared to March end.

Page 14, domestic loans. In the upper right-hand corner, the line graph showing deposit lending spread. As the low interest rate environment continues, moderate tightening is continuing.

Next, Page 15, overseas loans. The bar graph on the left, during the pandemic, overseas loans grew temporarily in March. But there was a shift to capital markets. And after a thorough management of the risk return profile, it decreased by JPY 4 trillion compared to March end. The line graph in the upper right-hand corner, the deposit lending spread on a sum of 2 banks basis, tightened as a result of lowering of market rates. But as for the lending rate, as a result of thorough management of the risk return profile I mentioned earlier, it improved by 6 basis points on a stock basis.

The line graph in the lower right-hand corner is the situation of NIM at our 3 partner banks. The top line in orange is Bank Danamon; the middle in yellow is Bank of Ayudhya. The NIM declined as a result of the impact of market rates, but the bottom one in Blue, MUAH, through rebalancing of the portfolio with higher-yielding assets and other efforts to improve the portfolio, their NIM increased.

Page 16, investment securities. Please look at the table on the left. Line 1, total increased by JPY 9.5 trillion. Line 4, Japanese government bonds, is the major reason for this increase.

Line 5, foreign bonds. As a result of flexible portfolio management, it went down by JPY 1.9 trillion. As for unrealized gains, line 5, foreign bonds gains decreased. But for total bonds, including domestic bonds, gains of more than JPY 800 billion are still maintained. Line 6, others. The increase is due to the improvement in unrealized gains from equity funds, backed by a stronger stock market and due to compression of hedge position in preparation for a rise in interest rates.

Page 18, risk-weighted assets. This is a step chart showing different factors of RWA increase and decrease on a finalized Basel III reform basis with provision of financial support. Number one, risk-weighted asset of domestic loans increased. But as shown in number two, overseas loans, which increased temporarily due to drawdowns of commitment lines at March end, have come down, and with RWA control. Through a disciplined risk return profile management and upgrading of the risk measurement method, overall, it is down by JPY 0.7 trillion compared to March end.

Page 19, non-Japanese yen liquidity. As we show on the left, with deposits and mid- to long-term market funding, non-Japanese yen loans are being covered stably. Please look at the red bar graph in the upper right-hand corner, historical loan-to-deposit gap. Since May, the blue line loans have decreased and yellow line, deposits, have increased. So the loan-to-deposit gap is on a constricting trend over the medium term.

Page 20, expenses. Please look at the red line graph on the left. First half expense ratio due to increases in the market-related gains, it was reduced to 64.4%. As for the full year of fiscal 2020, it is projected to be above the mid-term plan assumptions shown in the dotted line, but we want to keep it to levels under 70%.

Please look at the right-hand side. Expenses were up JPY 10.5 billion year-on-year, but excluding factors of consolidation of Bank Danamon and FSI with expense control, both in Japan and abroad during the pandemic, expenses were down JPY 40.5 billion.

Page 21, risk-monitored loans. As shown in the graph with the stagnation of economic activity, our credit portfolio deteriorated and the balance started to grow from the end of last fiscal year. But the risk monitored loan ratio, shown in the red line graph, is staying at a low level.

Page 22, credit costs. Credit costs for fiscal 2020 first half were at JPY 258.4 billion. As shown in the lower left, on a sum of 2 banks basis, credit costs were recorded in air transportation and personal consumption sectors. But in other areas, such as energy and mining, the credit costs incurred were limited.

In consumer finance, due to a decline in loan balance, credit costs were contained, and it was down year-on-year. But at overseas subsidiaries, due to additional allowances recorded through CECL, credit costs made large increases.

Lower right, full year forecast. Overall, there is no major change from the initial forecast. We have taken into account the fact that it will take some time for economic activity to recover back to pre-COVID levels. And taking a comprehensive view of further uncertainty and associated risks, we have revised upward our initial forecast by JPY 50 billion to JPY 500 billion.

Page 23, specific credit portfolio. Upper half of the page is partner banks overseas. As shown in the upper left bar graph, because of additional provisions made in the first half due to the introduction of CECL, second half credit costs are expected to be contained compared to the actual amount in the first half.

Lower left, energy and mining. In addition to reduction of risk portfolio with recovery in oil prices, credit costs posted in the first half were limited.

Lower right, air transportation credits. Due to depressed demand caused by travel restriction, overseas airlines results deteriorated, and credit costs were incurred in the first half. About 80% of our credit portfolio is with collateral or guarantees. Still, the air transportation industry is in a very tough environment globally. Therefore, we will continue to pay due attention.

Page 24, capital, lower left. Take a look at the CET1 ratio including unrealized gains on a finalized Basel III reform basis. It was 12.2% at September end, above 11% which is our midterm plan target. Even with financing support to our customers as well as the impact of downgrades and associated RWA increases, we project that we will be able to maintain a sufficient level of capital.

I will now provide an update on major policies. Please turn to Page 26. This page shows the management policy and strategic emphasis that I explained in the May earnings results briefing. There are 3 key words regarding the management policy, namely digitalization, business resilience and engagement shown in red letters. Based on this management policy, I explained that digitalization of domestic retail business, reshaping global strategy and business infrastructure, process innovation, are the 3 strategic emphasis areas that I myself would prioritize and would be spear-heading directly in a hands-on fashion. Right now, we are in the process of developing the next medium-term business plan, and I am not able to discuss it in detail. But I would like to update you on the progress made in strategic emphasis areas in anticipation of the next midterm business plan.

Please go to Page 27. First strategic emphasis, digitalization of domestic retail business. In July this year, digital strategy team that directly reports to me was established to develop digital shift strategy. It will drive with speed the digitalization of customer touch points, various channels and middle and back offices.

As an example of channel shift, at left top, the change in the use of non-face-to-face channel is shown. Smartphone app functions are enhanced, UI and UX are improved. And non-face-to-face channel is proactively used because of COVID impact. The utilization ratio of online banking and app by individual customers increased.

Shown at left bottom are some examples of digitalization initiatives. To improve online transactions interface, household bookkeeping app, Mable, was released in September. We are also shifting over-the-counter transaction to digital and placed tablets for customers at all bank branches.

Please look at the right side of the page. To further converge digital and business strategy, we are considering the establishment of new business group that will integrate the digital transformation function and a part of the customer segments. In this new business group, customers who use mainly non face-to-face transactions will be covered. Through expanding transaction -- through expanding digital transaction customer interface and enhanced UX, we plan to strengthen business competitiveness and broaden customer base.

Moreover, business flow will be simplified. Starting with the digitalization under the new business group, MUFG-wide digital transformation will be accelerated to solidly establish ourselves as financial digital platformer.

Please turn to Page 28, the second strategic emphasis, reshaping global strategy. Global business is one of the strengths of MUFG and will continue to be important. But the growth potential of each region and strength of MUFG must be clearly understood and managerial resources need to be allocated accordingly in an optimum way. As an example of the optimal allocation of managerial resources, as shown on the left, GCIB will put even greater emphasis on enhancing quality rather than quantity in its asset allocation.

As indicated at lower left, the profitability hurdles were gradually raised and account plans were monitored in a disciplined manner, client by client. We have reviewed our transactions to reduce low return transactions that do not meet certain criteria. We will continue to improve profitability and raise return on equity.

Please refer to the upper right of the page. With respect to the ASEAN partner banks, in order to enhance corporate value, we will create business synergies through promotion of digitalization, including financial services via collaboration with Grab and create synergies in risk management as well.

Regarding the U.S. regional banking strategy at right bottom, under a new head who has experience of turning around regional banks, leveraging the strong name recognition of the Union Bank and its branch network, back-to-basic strategy focusing on customers is implemented. Monitoring from Tokyo and governance structure are strengthened to reformulate the business.

Please move to Page 29. On the third strategic emphasis, business infrastructure, process innovation. Through more stringent control of resources including risk-weighted assets and expenses, resiliency will be enhanced, while at the same time, business process and work style will be reformed using digital to improve productivity. At top left, it gives the results of resource control via the reduction of risk-weighted assets.

Thus far, we have continued to sell low-return assets, equity holdings and strategic equity investments while reducing risk-weighted assets by upgrading risk measurement method.

At lower left is expense reduction. Cumulative effect of expense reduction during the current medium-term business plan through reduction of work volume and branch integration and consolidation should be around JPY 60 billion compared to fiscal 2017. Strategic procurement office was newly established to introduce stronger discipline in the procurement process.

Shown at right are smart work and facility. Customer touch points are diversified with the use of online capabilities. Infrastructure was developed to support a flexible work style to promote smart work. Satellite offices increased in number to 20. Employee work style is becoming more diverse, including working from home. So as to optimize the use of facilities, a part of the headquarter functions were moved from Marunouchi to Kojimachi in our effort to consolidate and improve the efficiency of the head office premises.

Please turn to Page 30, this is about the future direction of our major strategies. The business environment surrounding our group is changing in a major way at an unprecedented pace. I have a strong sense of crisis that we cannot thrive if we adopt the strategy of simply following the precedents. Right now, we are formulating the strategic substance of the next medium-term business plan with the keywords of digitalization, business resilience and engagement that we described as the management policy. These keywords used in the formulation of the strategy are shown on this page.

Positioned at the center is ROE-focused management. These are at the core of our strategy, under which we will create values, exceeding customer expectations and achieve sustainable growth of corporate value of MUFG.

I would now like to turn to the topic of ESG, starting from Page 31. Please go to Page 32. Top half of the page shows our initiatives to address ESG issues. In the next medium-term business plan, response to environmental and social challenges will be further integrated with business strategy to accelerate these initiatives. More specifically, the strength of each business group will be brought to bear to identify environmental and social challenges that can be addressed successfully. And measures to address such challenges and KPI should be incorporated in the business plan.

Please turn to Page 33. I would now like to explain some of our recent initiatives in addressing social and environmental challenges.

First, about environmental challenges, please refer to the top half. Leveraging our globally top ranking financing arrangement capabilities in renewable energy, we successfully concluded Japan's first project finance for offshore wind farm. We also launched first sustainability-linked loans in Japan, and our customers are already making use of them.

In terms of risk management, we announced in October the reduction target for our loan balance in coal thermal power projects. The balance will be reduced by 50% from fiscal 2019 level by fiscal 2030 and brought down to 0 by around fiscal 2040. As part of financial disclosure, mid- to long-term impact of transition risk and physical risk on credit portfolio based on scenario analysis was made public.

Next, please refer to lower half of the slide on social challenges. We supported the Kingdom of Thailand as an adviser in the issuance of sustainability government bonds through currency, utilizing our expertise that we cultivated from our experience of sustainability bond issuance in Japan. In ASEAN region, the collaboration between our partner banks and Grab has led to offering of financial services that contribute to the development of local community by promoting financial inclusion in innovation and by creating new employment.

In the area where it is difficult to contribute with financial services, new framework for social contribution was constructed. In the first half of the year, we provided support to the health care sector, students and art based on this framework. We will continue to make donations and combined with the donations we already made, consistently around 1% of net operating profits after deduction of credit costs will be used to make social contributions.

Please turn to Page 34, governance. As shown on left, external experts on environmental and social issues are invited to be our standing outside advisers. In addition, the post of Chief Sustainability Officer was created in May this year to strengthen the governance of sustainability promotion efforts.

Please go to Page 35. I would now like to discuss our progress in sustainable finance and enhanced information disclosure on ESG.

First, with respect to sustainable finance. In the first half of fiscal 2020, we underwrote JPY 1.8 trillion. In particular, underwriting of green bonds and sustainability bonds increased. On a cumulative basis from fiscal 2019, the amount reached JPY 5.5 trillion. This represents 27% of the target of JPY 20 trillion to be achieved by fiscal 2030.

As for the enhanced disclosure, last month, we issued our sustainability report. In addition to reduction target of loan balance for coal thermal power projects and expanded TCFD disclosure, we augmented our disclosure on human resource development and diversity.

I would now like to discuss our capital policy. Please move to Page 38. I will explain the actual capital allocation in the first half and outlook for the second half of fiscal 2020. Here, CET1 ratio change is given based on finalized Basel III reforms basis.

In the first half of the year, our priority was on supporting the cash flow of our customers, but efforts were made to maintain disciplined control of risk-weighted assets. Our realized gain on equity holdings and reduction of risk-weighted assets due to the adoption of upgraded risk measurement effort resulted in 0.5% improvement of CET1 ratio from the end of March to 12.2%.

In the second half of the year, in addition to the impact of the release of special treatment for investment in Morgan Stanley owing to the increase in lending to support the customer cash flow and rating downgrades of customers, risk-weighted assets may increase. But we will continue to apply strong discipline in managing risk-weighted assets with an emphasis on risk return.

Please turn to Page 40 on shareholder returns. Enhancement of shareholder return has been one of the most important priorities for the MUFG management. Based on the stable dividend policy, as initially forecasted, interim dividend per share is JPY 12.5, and forecast for annual dividend of JPY 25 remains unchanged. As for share repurchase, since we need to carefully assess the impact of COVID-19 on our earnings and capital, we will forgo the buyback again this time as we did in May. While we prioritize supporting customer cash flow, we will continue to apply stringent control on risk-weighted assets to maintain sufficient capital availability.

Please turn to Page 41, equity holdings. As shown in the right table, in the first half of fiscal 2020, equity holdings were reduced by JPY 50 billion on acquisition cost basis. Accordingly, net gains of JPY 46 billion was booked. As a result, since the start of the plan to sell equity holdings, cumulatively, JPY 783 billion in book value was sold. The value of equity holdings not yet sold but for which agreement to sell was reached, amounts to JPY 136 billion. We fully expect to achieve JPY 800 billion of sales in book value, which is the target for this year. The sale of equity holdings is recognized as a pressing matter that requires continuous focus even in the next medium-term business plan. We have yet to set concrete target. But as I explained on Investor's Day in September, we consider a minimum amount to be sold is JPY 100 billion per year and we'll continue the deliberation on the basis of JPY 300 billion over a 3-year period.

That concludes my presentation. We will continue to take on challenges to become MUFG which is trusted by customers and society at any time by overcoming social structural change that has significantly accelerated because of COVID-19 pandemic. I would like to ask for continuous understanding and support from our investors and rating agencies.

Thank you very much.

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