Earnings Call Transcript - MFG Q2 2024

Orita Natsuki, Moderator

We will now start the investor presentation for fiscal year 2024 first half for Mizuho Financial Group. Thank you very much for joining us in spite of your busy schedules today. I'll be serving as the moderator. My name is Orita of IR Group. The English line is held in webinar format. Before we begin, let me introduce the speakers for the presentation and Q&A. To your left, President and Group CEO, Mr. Kihara. Senior Executive Officer and Group CFO, Mr. Yonezawa. Disclaimers before we begin. The presentation contains forward-looking statements based on current outlook of the future. These statements are subject to risks and uncertainties. Please be aware that actual results may materially differ. Let me explain today's proceedings. Group CEO, Kihara, will give a presentation following the investor presentation for FY 2024 first half document for about 30 minutes, covering earnings and strategy. After which, Mr. Kihara will be joined by Group CFO Mr. Yonezawa for Q&A for about one hour.

Masahiro Kihara, President and Group CEO

Thank you, ladies and gentlemen, for joining us today. Allow me to start my presentation. The cover page, I think you are familiar with this. If you could please move on to page 3. We have just completed the first half of the medium-term business plan. In terms of financials, the final target for FY 2025 was exceeded ahead of time. In terms of strategy, we are focusing on sustainable growth in five areas, making growth investments in Greenhill, Rakuten, Golub Capital, and Rakuten Card, which we announced the other day. The environment surrounding us is difficult, so we need to strengthen our infrastructure and raise efficiencies. Cost reduction is important, and our products and services need to be reinvented. That is what we're continuing. We have learned lessons from system failures that we should never forget, ensuring operational stability. We need to raise the motivation of our employees through a new HR framework, CANADE. We have completed this transition and we're starting to fine-tune the system. We started this purpose initiative in March 2023, and we are trying to embed this and reform our culture. This year, CEO and heads of departments conducted 416 town hall meetings, visiting 322 sites in one and a half years. Page 4 shows that there are still remaining challenges. PBR, as of end of October, is 0.79, currently around 0.86. We need to continue with our solid growth to ensure market trust, stability of revenue, and competitive edge. These need to be communicated to our stakeholders, maintaining an optimal balance between growth investment and shareholder return. I would like to explain four things. Number one, solid financial progress and medium-term business plan. Number two, to achieve stable growth, we have pursued a distinctive business portfolio. Number three, initiatives to enhance our competitive edge, progress and challenges. Number four, effective use of capital. Moving on to page 6, this is something that we show every time, so no need for detailed explanation. On to page 7, achieving steady profit growth. We believe we have been successful in that area, with revenue from banking and a focus on solid growth. We forecast net business profit for FY24 of ¥1.17 trillion, which is up ¥100 billion. Key progress areas include AUM and increasing consulting capabilities, which are steadily rising through an expanded product lineup. We made additional investments in Rakuten Securities for the future. We also recognize a major shift in the corporate sector mindset in Japan, indicating a strong need for growth. This trend necessitates responsiveness to TSA reforms. For both large companies and SMEs, we must capture corporate action needs. Additionally, we are focusing on profitability and diversifying our revenue streams. Completing the acquisition of Greenhill last December has opened new opportunities for synergies and collaborations. On to page 8, regarding asset profitability improvements, we've seen steady progress, as demonstrated on the right-hand side. We have reduced low-profit deals by ¥1.1 trillion and increased high-profit business by ¥1.6 trillion. As a result, RORA has improved from 3.1% to 3.3%. We’ve executed a ¥300 billion reduction in cross-shareholdings over three years, culminating in ¥183.3 billion in reduction for the first half. We are on track to meet our targets early. On page 10, discussing cost expenses and governance, expenses have inevitably risen. As discussed later, product and service renewals are ongoing, and we are continuously engaged in cost curtailment and reduction. We must also invest in human resources as wages are rising, necessitating alignment with market trends. Next, on distinctive business portfolio, page 12 outlines our overall business portfolio. We're showing this again for review. On the left-hand side is the breakdown of net business profits, highlighting a reduced reliance on banking revenue. Our portfolio is now centered around customer business. The exposure in customer business for both Japan and overseas shows that most of our business is investment-grade. In Japan, controlling large transaction and credit governance remains crucial as some companies have improved substantially in this regard. We'll continue collaborating cross-regionally in this effort. Page 13 illustrates diversifying core business profits, emphasizing non-interest income both domestically and internationally. Moving on to page 14 regarding Japan's business portfolio, I'm sharing explicit details for the first time. Currently, 70% of our domestic business focuses on large corporations. Non-interest income, sales and trading, interest, and diversified sources contribute to stable income, with large transactions accounting for a mere 5% annually. Thus, we've built a very stable revenue structure. Page 15 analyzes overseas operations in terms of regional breakdowns. Wallet share is maximized in the Americas, but we are achieving efficient operations in EMEA. The right-hand side shows our balanced structure regarding interest and non-interest income as well as secondary sales and trading components, indicating we're not solely dependent on any one revenue stream. Page 16 elaborates on our bond portfolio management. Our conservative approach to managing Japanese government bonds (JGBs) sees us maintaining a duration of 0.6 and remaining cautious regarding interest rate projections. We have increased our balance of foreign bonds slightly in FY23 while ensuring the structure mitigates the impact of external rate movements. Our portfolio remains strong. The summary on page 17 reiterates that the majority of our business is investment-grade, with diversified revenue sources and a focus on non-interest income under negative interest rate policies. Lastly, we have a positive outlook abroad, centered on market-specific initiatives, notably engaging in more personalized corporate client relationships to address their needs effectively. Our competitive edge lies in tailor-made solutions benefiting from synergy across diverse initiatives, capitalizing on Greenhill's expertise. We remain vigilant of the evolving U.S. economic climate and its potential impacts on our strategies. Thank you.

Orita Natsuki, Moderator

We now would like to proceed to Q&A. This English line cannot accommodate questions in English due to facility constraints. If you have a question, please send us an email to mizuho.ir@mizuhofg.co.jp. I am repeating this English line cannot accommodate questions in English due to facility constraints.

Operator, Operator

Yano-san, J.P. Morgan, please go ahead.

Takahiro Yano, Analyst

My name is Yano from J.P. Morgan Securities. I have two questions. Question number one. Looking from the outside, integration with Greenhill is in a full-fledged manner. So CET1 ratio, 10%, you have HR, a system that's renewed. So you have entered a new phase for the first time in several years. You have solid business here in Japan and overseas, Americas included. So what are the next challenges for you? What is your number one priority focus area? So domestic mass retail, overseas Asian mass retail, or large corporate business? What are you paying attention to? You spoke about large transactions which seem quite solid, but is there anything you are closely monitoring? That's question number one. Number two is about collaboration with Rakuten Card. It seems you are competing over Rakuten Card with Rakuten Bank. Seen from the outside, what is the relationship, and is there any cannibalization occurring?

Masahiro Kihara, President and Group CEO

That is something I tell everyone repeatedly. There could be various factors behind this: systems failures, cyber risks, geopolitical risks. With the possibility of inflation rising due to President Trump’s actions, we must consider if our Americas portfolio will sustain this. Challenges in our business, as I mentioned earlier, revolve around asset and wealth management. It isn't progressing as well as expected, so we are breaking away from the product-out approach. We must truly understand our customers' needs and provide the most suitable products and services. However, we have more work to do in achieving that objective. Compared to Nomura or Daiwa, we still see a significant gap. In addressing large corporate management, we must be mindful of any signs of potential issues to ensure proper debt governance. The collaboration with Greenhill has enhanced inter-regional cooperation, enabling true collaboration across regions. Regarding Rakuten Card, I don’t see it as competition but shared interests which could facilitate mutual growth.

Operator, Operator

Goldman Sachs, Kuroda-san.

Makoto Kuroda, Analyst

I also have two questions. My first question is on long-term ROE. My second question focuses on risk asset investment. Regarding long-term ROE, from a profitability or shareholder return perspective, Mizuho seems to have entered a new phase. What do you expect the long-term ROE to be in the next midterm plan? Is it increasing?

Masahiro Kihara, President and Group CEO

Our long-term ROE trend is upward, and we aim for 8% this year. Looking for higher is a priority. In terms of assets, we must ensure that returns are generated effectively, especially regarding average annual balances.

Operator, Operator

Next, Matsuda-san of Daiwa Securities, please go ahead.

Ken Matsuda, Analyst

I have two questions. Firstly, about page 37 concerning capital allocation, the second about Rakuten Card. Regarding capital allocation, the right side of the chart reveals a notable gap. Could you elaborate on why you’ve modified your capital allocation strategy at this point? Also, concerning the Rakuten Card alliance, with ITOCHU selling shares in Greenhill, any anticipated changes in capital partnership?

Masahiro Kihara, President and Group CEO

We have indeed entered a different phase regarding capital policy. Previously, Mizuho's capital position was weak, restricting growth investments. However, now with a CET1 ratio at 10.5%, we're enabled to balance both growth investments and shareholder returns effectively. As for the partnership with Rakuten, our collaboration is in its second year, with plans to deepen the alliance, explore new goals, and continuously evaluate our KPIs.

Operator, Operator

BofA Securities, Nakamura-san online, please go ahead.

Shinichiro Nakamura, Analyst

I have two questions. First is regarding page 9, reduction of cross-shareholdings. With ¥180 billion over three years, what is the pace for this fiscal year and any insights on existing companies? Second, regarding collaboration with Rakuten Card, what areas do you see contributing to profitability?

Masahiro Kihara, President and Group CEO

For cross-shareholdings, we are refining current market perspectives and determining a target for the next three years. The CFO is leading that discussion, and we’ll assess if we can expedite the pace. On Rakuten Card, I am optimistic about various areas collaborating towards profitability.

Koichi Niwa, Analyst

I have two questions. First is about cross-shareholdings. What will be the allocation of generated profit and capital policy approach? Second, I'd like to know your insights regarding the non-bank strategy.

Masahiro Kihara, President and Group CEO

Regarding cross-shareholdings, profits gained will adhere to our capital policy. This year, we observed ¥30 billion in gains from sales of assets. In terms of non-bank strategy, we respect the leasing companies’ insights while focusing on expanding Mizuho Lease alongside our real estate pursuits.

Unidentified Participant, Analyst

I have two questions. Firstly, regarding consumer credit, what position does Mizuho Group hold, and has this changed with additional investments in Rakuten? Secondly, in terms of global CIB strategy outside the Americas, how do you allocate resources and define performance?

Masahiro Kihara, President and Group CEO

Our stance on consumer credit, particularly housing, has been consistently focused on maintaining growth in strategic areas without engaging in excessive competition. With our collaboration with Rakuten, we see a potential to strengthen card loans. On the global CIB model, regions have their distinctive features, and we’ll continue to enhance cross-border collaboration for M&A financing.

Shinichi Tamura, Analyst

On page 45, could you provide targets per sector? Which areas are strong or lacking growth potential?

Takefumi Yonezawa, Group CFO

Page 45 outlines our financial results by in-house company and future forecasts. We're on-track with expenses, with upfront investments planned. Key areas include RBC, CIBC, and overall banking sectors, where growth is anticipated amid careful economic management.

Masahiro Kihara, President and Group CEO

Ladies and gentlemen, thank you for attending today. We have entered a different phase, and while we've made significant progress, we must remain vigilant to avoid past pitfalls. Our performance gives us confidence, but we must exercise caution. Japan’s corporate landscape is evolving, and we aim to leverage that by making proactive proposals, especially in the mid-market SME space. Asset and wealth management present substantial growth opportunities, which we must capitalize on. Thank you again.

Orita Natsuki, Moderator

We would like to close the meeting. Thank you for your attendance and participation.