Earnings Call Transcript - MFG Q2 2022

Naoaki Chisaka, IR Department Moderator

Thank you very much for joining us for this Earnings Conference Briefing for Fiscal Year 2021 First Half Financial Results for Mizuho Financial Group despite your busy schedules. We will be taking the form of net conference method using Webex. It will only be on audio. Therefore, please refer to the presentation material that is entitled Fiscal Year '21 H1 Financial Results from our website. My name is Chisaka of the IR Department, and I will be moderating today's event. Before we start the net conference, there are some announcements to make. Please note that any comments regarding future outlook at this time are subject to risk and uncertainty. Therefore, please be aware that actual results may differ from the forecast. The presentation will be given by the CFO, Umemiya. There will be an outline presentation for 10 minutes based on the presentation material, and 35 minutes will be allocated for Q&A. The overall meeting duration will be for 45 minutes. Mr. Umemiya, please.

Makoto Umemiya, CFO

This is Umemiya of the Mizuho Financial Group. Thank you very much for allowing us time today. First of all, I would like to sincerely apologize for the systems failures at the Mizuho Bank. I would like to take this opportunity to apologize for the inconvenience. Currently, in order to provide reassurance to our customers against the backdrop of recognition of the challenges that arose after August with the payers, we are now reviewing the latest event recurrence. After the review is completed, we will report back to you. Now I would like to give you the explanation of the first half of fiscal year 2021 financial results. Please refer to Page 3. First of all, this is the outline of the results. Please refer to the third line on the left, which is the consolidated net business profits and net gains related to equities and others. It increased by JPY40.9 billion year-on-year and JPY460.3 billion. Against the fiscal plan of JPY790 billion, we are at 58%. Strong results have been achieved, especially in the customer groups. Now in terms of the breakdown for the customer group, individual investment was strong. Non-Japanese loan deposits revenue increased as well. Therefore, there was a significant increase of JPY73.9 billion year-on-year. If we compare to the previous years, it exceeded 2015 before the introduction of the negative interest rate policy and also recorded four consecutive years of record highs since that in-house company was introduced. In markets, last year was very special. For this year, there was a decline in bonds and sales again, and in banking ST revenue declined because of stabilization of market volatility, decreased by JPY41.5 billion. For credit-related costs, the repurchase of JPY33.7 billion for forward-looking results ended at minus JPY49.6 billion, minus JPY31.5 billion year-on-year. With respect to net gains related to stocks, we sold shareholdings, but we also canceled bear funds, which was for the purpose of stabilizing the annualized changes on stock. We recorded minus JPY6.8 billion in capital increase and market increase related to cancellations. Compared to last year, the impairment of cost holdings increased by JPY43.6 billion. Net extraordinary gains declined by JPY18.4 billion due to the reaction decline of the extraordinary profit related to the pension system and revision of last year and return and benefit and trust; there was also a tax effect. Net income attributable to the financial group was JPY385.6 billion, an increase of JPY170.1 billion against the fiscal year plan, achieving a progress of 75%. Please turn to Page 4. This is looking into Company-based performance. For the customer group, I'm referring to the net business profit in the middle. For Retail & Business Banking, the individual business experienced successful trends, and there was also a significant increase in noninterest income for real estate-related activities, recording JPY35.9 billion more year-on-year. Corporate and Institutional experienced a reactive decline of large solution revenues. The loan balance increased year-on-year, with an increase of JPY8.2 billion reported from the global corporate company. The improvement in loan spread and reduction of high-cost deposits, capital market transactions, M&A, and other noninterest income increased even compared to a strong performance from last year; in Europe and the United States, we have observed increases of JPY24.5 billion compared to past NOPs. The Retail and Business as well as Corporate and Institutional and Global Corporate and Asset Management recorded record highs since the in-house company has been introduced. Please refer to Page 5. This is the balance sheet outline. Left-hand side is the total assets at JPY227 trillion, a foreign bond increase, which represented an increase of JPY1.6 trillion compared to the end of the last fiscal year. For loans, with the peak behind us for COVID-related financing, there was a demand for major companies for deposits, and negotiable individual deposits increased; however, the Company reduced cash in hand. Non-Japanese ye denominated loans and deposits. Non-Japanese yen customer loans declined by JPY2.2 billion due to the repayment of COVID-related loans and reduction of low-profit assets. Non-Japanese yen customer deposits also declined. Progress is made to control high-cost deposits, with a proportion of deposit to loan maintained at 70%. Going forward, the trend in deposits as well as the funding environment will be considered to achieve optimal non-Japanese yen funding management by combining customer deposits with long-term funding. Next, loans. The average balance of domestic loans paid in the first half of 2020 was on a declining trend, with JPY1.1 trillion in decline. Loans and deposits to rate margin in Japan increased by 1 basis point compared to the previous year. For small- and medium-sized companies as well as for larger corporations, loan spread improved because of the product loan execution as well as repayment of COVID-related loans, which is low spread. Now for loans outside of Japan, the average balance declined because of repayments made to COVID-related loans as well as non-COVID loans in the United States and Europe, which decreased year-on-year by JPY11.1 billion. For non-Japanese, loan spread increased by 5 basis points. Product lending has grown, and relative loan spread improvements have progressed in terms of spread improvement. On Page 7, please. This is regarding noninterest income for customer growth by in-house companies. As you can see on the left-hand side, the noninterest income increased by JPY34.5 billion year-on-year. Although there was an increase in corporate and institutional income, there was a transactional share decline recorded this year. However, retail and business banking has improved over the previous year. Please see Page 8. This explains the credit portfolio. Starting with the left-hand side, credit-related costs. In the second quarter, the Company recorded reserves from a forward-looking perspective of JPY33.7 billion to be prepared for the future, taking into account macroeconomic conditions and rising risks expected in the future, such as global supply constraints. As a result, credit-related costs incurred, but with reversals of forward-looking provisions made in prior years, RBC and GCC had reversals. In total, credit-related costs were minus JPY49.6 billion, achieving a progress of 49% against the plan of minus JPY100 billion. On the right-hand side, nonperforming loans based on FRA are stable year-over-year for both balance and NPL ratio. As shown bottom right, a low level is maintained from past years. Since the resurgence of COVID-19 and the prolonged impact of COVID on customers is expected, we will keep a close eye on credit costs. Please go to Page 9. Next is the securities portfolio. On the left, unrealized gains and losses on other securities. Valuation gain was JPY1.589 trillion, up JPY18 billion from March 2021, mainly owing to a rise in Japanese stock prices remaining at a high level. Bottom right, reduction of gross shareholdings against our target of reducing JPY300 billion by March 2022 in three years, we have made 97% progress with a total of JPY292.3 billion as of the end of September 2021, excluding the temporary increase due to the cancellation of employee retirement benefit trust scheduled by the end of the year. The sales amount, excluding impairment, is JPY258.3 billion, representing an 86% progress. We will continue to engage in close negotiations with customers to reduce holdings further. Please turn to Page 10. Basel regulatory capital. The CET1 ratio based on current regulation, shown in the center of the table, increased by 0.64% compared to March 2021 to 12.27%, mainly due to an increase in profit. We have an adequate level against other regulatory requirements as well. As shown on the bottom right, an important management KPI for the Company, which is the CET1 capital ratio based on Basel III finalization fully effective basis is 9.6%, excluding net unrealized gains and losses on other securities already exceeding the target set forth in our five-year business plan of 9%. Please turn to Page 11. This is a revised plan for fiscal year 2021. Consolidated net business profit revised up by JPY30 billion to JPY820 billion. Markets Group was revised down based on judgment to take a cautious stance in light of market trends, including interest rate outlook overseas. Customer group with strong performance in and out of Japan offset the drop. Credit-related costs remain unchanged from the original plan, as we continue to take a cautious approach in the second half. Net gains and losses related to stocks and others revised downward due to the execution of bear funds cancellation considering the increase in unrealized gains on cross-shareholding and capital accumulation. The plan has been revised downward by JPY60 billion to a loss of JPY10 billion, the same level as the first half results. In addition to the above and taking into account the positive impact of the tax effect associated with the capital optimization of subsidiaries recorded in the first quarter, the forecast for net income attributable to SG for fiscal 2021 has been revised up by JPY20 billion to JPY530 billion. With regard to the dividend per share of common stock, as shown in the bottom right table, taking into consideration the steady growth of the stable earnings base, mainly in the customer group and the dividend payout ratio of 40%, the interim dividend will be JPY40 per share, which is an increase of JPY2.5 from the initial forecast. The year-end dividend will also be JPY40 per share, an increase of JPY2.5 from the initial forecast as well. This is the first time in seven years since the fiscal year ended March 2015 that we have increased the dividend. With future capital policies, we intend to achieve an optimal balance between capital adequacy, investment in growth, and enhanced shareholder returns while continuing to fully demonstrate the financial intermediary function under COVID. We will continue to actively allocate management resources to human resources and IT and digital fields, which are cornerstones of further growth, and to return profits to shareholders based on progressive dividends. Page 12. This page describes the progress against the five-year business plan that started for fiscal year 2019, and Page 13 illustrates the progress against the fundamental structural reform plan. I will not go into details, but we are making steady progress at this point in time. This concludes my explanation of our earnings.

Naoaki Chisaka, IR Department Moderator

We would now like to proceed to the Q&A, but let me introduce the method of the Q&A. Please be informed that the questions will not be taken on the English channel. Please contact the IR department if you have any questions in English. Takamiya-san of Nomura Securities, you have the first question. You are breaking out. Yes, we can hear you now.

Ken Takamiya, Analyst, Nomura Securities

This is Takamiya of Nomura Securities. I have two questions. Regarding the system impact, please elaborate, as well as on the dividend increase. Regarding the system failure, please elaborate on the impact on your management performance going forward, as well as the impact on cost and expenses. That is the first question. And the second question is regarding the dividend increase. Now that you have disclosed the dividend increase before the end of the fiscal year, why have you announced this at this point in time? What is your intention? And what is the message for the market participants?

Makoto Umemiya, CFO

Thank you very much for your question. Regarding the system failure impact, in terms of gross profit, as well as expenses and investments, there will be some quantitative explanation. In terms of gross profit, in the revised plan, a JPY3 billion negative impact is assumed specifically on foreign exchange, as corporate transactions have declined, which are the major reasons. In terms of expenses, at the timing of May, I spoke about this point. The JPY10 billion in terms of other expenses, an increase to JPY8 billion has been earmarked in the plan for February and March due to the system failure. We wanted to implement various measures, hoping that it could be managed with JPY10 billion plus JPY8 billion. However, in August and September, there were other system failures occurring as well. Compared to February and March, in terms of hardware, especially for monitoring and the infrastructure-related revisions that need to be made going forward, there could be a need to increase expenses. I initially earmarked JPY10 billion for investment, increasing to JPY13 billion for expenses with extraordinary measures as well. The JPY8 billion earmarked has increased to JPY14 billion. So we want to earmark sufficiently in terms of costs, which is reflected in the guidance side. To your second question regarding the dividend increase, you asked why we announced it at this time. In May, I elaborated that the progressive payout ratio of 40% guideline had been presented previously. We changed the policy regarding dividends from the past. At that time, we highlighted JPY510 billion as the original guidance, and 40% of that is JPY80 billion, which was within visibility. At the time of May, emergency declarations were made, and there was uncertainty in terms of COVID-19 going forward. The guidance level of JPY510 billion had an enhanced probability of achievement. That was why we wanted to disclose our policy regarding shareholder returns. At this point, we feel confident about returning to normal. There are responsibilities of variability even as we see COVID's sixth wave and other issues which were not assumed in May, such as supply chain constraints and energy price increases, becoming more visible. However, even if we absorb that, we could still achieve around JPY500 billion plus, according to management's visibility. Therefore, with a 40% payout ratio as the basis, we announced the increase in dividends. That is all.

Naoaki Chisaka, IR Department Moderator

Thank you very much. Thank you for the question. Next question, Takai-san from Daiwa Securities.

Akira Takai, Analyst, Daiwa Securities

This is Takai. I have just one question. You revised the forecast for the full year. I'm on Page 11. Basically, credit-related costs or share-related costs are flat in the first half and second half. The second half you're expecting a decrease of about JPY100 billion. For credit-related costs, forward-looking provisions are included in the first half, which means that in the second half, you will also be including some reserves from that. The bear fund cancellation has also been conducted to a certain extent in the first half; is that why you expect credit-related costs and stock-related net gains and losses to be anticipated in the first half and the second half? Regarding your main business, there isn't much enhancement in the first half. What is the reason for the drop in business performance anticipated in the second half? If you could share that background, that would be much appreciated.

Makoto Umemiya, CFO

Thank you very much for your questions. So if I may share with you where we are coming from in terms of our earnings forecast. Regarding credit-related costs, as you correctly pointed out, the forward-looking JPY30 billion has been set aside, which is half of the JPY100 billion anticipated for the full year. In the second half, the forward-looking provision will be set aside in the same way as in the first half, depending on the situation going forward. The breakdown of how much will be forward-looking or how much will be the base is not the approach we are taking. We are taking into account the current situation. We feel that it is necessary for us to adopt a cautious approach at this moment. That is why we've decided to maintain our guidance given in May this year. Regarding net gains and losses related to stocks, in the first half, bear funds cancellation was implemented, which was explained in more detail during our corporate briefings. A balance reduction of about JPY200 billion from bear funds was conducted in the first half. For the second half, whether the same amount can be conducted will depend on market conditions. If robust share prices continue, we may execute bear funds cancellation to the same extent as in the first half. However, if the share prices decline, we will need to be prepared for risks, rather than conducting bear fund cancellation. So for the second half, gains from sales of cross-shareholdings will be the source of funding to unwind unrealized losses for bear funds. This has been the approach we want to take for the second half, focusing on funding through sales rather than outstanding balance gains. Regarding the drop in main business profits from the first half to the second half: in our revised plan, JPY30 billion represents an improvement compared to the original plan, with customer groups and market groups showing a difference. For the customer group, JPY60 billion upside is incorporated, whereas the market groups display a JPY40 billion decrease from the original plan. However, we must also account for forward-looking expectations. While there is a 30% improvement compared to the original plan, the markets group anticipates a decrease of around JPY100 billion in business profits. This is chiefly due to negative impacts from the markets group. We're uncertain if this will occur as expected, as it will depend on overall market conditions, and we are concerned with the rising inflation. The management of unrealized losses will also be key for us. Therefore, we shouldn't restrict ourselves from trying to realize gains; that is not an appropriate approach at this time. Although we believe we are taking a conservative approach, we must avoid large realized losses in net businesses. From an MTS perspective, we will take market conditions into account, and that has been reflected in our revisions this time. That is all from me.

Naoaki Chisaka, IR Department Moderator

Thank you very much.

Akira Takai, Analyst, Daiwa Securities

Just to confirm, consolidated, the JPY30 billion decrease in net profit, the JPY2 billion because on a consolidated basis, the tax effect is a plus. But for the two banks, there's an impact of tax and so forth, thus a negative impact of JPY30 billion on a consolidated basis. Is that a fair way to say it?

Makoto Umemiya, CFO

Yes. That is correct.

Naoaki Chisaka, IR Department Moderator

Thank you very much. Next on the telephone, we have 03625 is the telephone number, and that’s the way we received, so please state your name and affiliation for asking your question.

Shinichiro Nakamura, Analyst, Bank of America Securities

My name is Nakamura. I have two questions. First, regarding the bear funds, the hedge effect there is 9.4% is the prevailing level. How do you evaluate this in terms of capital? This is the first point. Second point is regarding additional shareholder returns. Is a share buyback a possibility or option that you will be considering? Please elaborate as far as you can at this current time.

Makoto Umemiya, CFO

Thank you very much for your question. First of all, regarding your first question on CET1 ratio, the valuation was questioned. As you mentioned, the bear fund hedge effect is around 20 basis points. Hence, 9.4% excluding that impact would serve as the basic guideline. On the other hand, we need to tackle COVID-19 and have been providing financing for this purpose since the first half of 2020, which was the peak. Currently, we are making progress in the repayment of COVID-related loans. However, the loan balance remains around 3.5%. If we revert to CET1, which has a negative effect of 20 basis points, this situation won't rectify immediately in the next fiscal year, but over a period of several years, it will continue to decline. Therefore, our target of over 9% is a level we can achieve. We want to enhance shareholder returns. Regarding the second part of your question, whether a buyback is a possibility we can choose depends on the scale of great investments and the timing we have to discuss fully, along with our response to current market conditions. We need to find a suitable balance between growth investments and potential buybacks. This is our intention moving forward, and we will continue to provide clarity to analysts and investors.

Naoaki Chisaka, IR Department Moderator

Next question, from Morgan Stanley MUFG, Nagasaka-san. Over to you.

Mia Nagasaka, Analyst, Morgan Stanley MUFG Securities

Morgan Stanley, MUFG Securities, Nagasaka is my name. I have two questions. First question, Page 4, retail business corporation. As you explained, the top line is growing. In the meantime, expenses have been suppressed. It's almost flat year-on-year, but G&A expenses control may be proving to be quite effective. However, how much room do you have in further improvements? That's my first question. My second question involves spread. Page 6 talks about loan spread. GCC stands at 1.06%, still at a high level. In the first quarter earnings, I think you said that challenges might arise in improvements going forward, but you've seen some improvements already. I would appreciate it if you could share your outlook for the future.

Makoto Umemiya, CFO

Thank you very much. Starting with the first question on RBC, especially in terms of cost control on expenses, G&A expenses, how we see the current situation and how much room do we have for further improvement? In terms of our impression, we see steady improvements. As for future improvements, we have indicated that with the COVID-19 pandemic, there has been an acceleration in the transformation of society. For instance, work from home is reducing the necessity for office space. Therefore, we see there is still further room for improvement. However, I should mention that earlier questions raised, the system failure, which isn't purely because of system failure; it's about being able to operate our business as a financial institution. Hence, we need to invest where necessary and moderate expenses to a degree, possibly leading to some increases that could offset further improvements. Overall, while I reiterate that we do see room for cuts in G&A expenses, regarding GCC overseas lending spreads, we've always been saying that we've peaked. We've seen month-over-month improvements. 1.06% is quite a high spread, and product credit is coming in recently, pushing it further. However, I believe the growth in loan spread is likely to stabilize going forward. We don’t anticipate a decline below 1% in the short term, but we believe there is a certain level of sustainability expected for the loan spread for GCC.

Naoaki Chisaka, IR Department Moderator

Thank you very much. We still have some time left. Are there any other questions, please? Jefferies Securities, Ban-san, please.

Hideyasu Ban, Analyst, Jefferies Securities

Regarding credit cost, I have a question. For the second half, you said it isn't necessarily just forward-looking. What about sectors? What are the macroeconomic assumptions? Do you believe that there will be increased credit costs in industries affected by COVID-19? Or do you have large customers that you have to be cautious about in terms of credit cost? Please elaborate further on credit-related costs regarding risk by industry and large exposures?

Makoto Umemiya, CFO

Thank you for your questions. It isn't that there is a significant customer we have to be concerned about; rather, generally speaking, we must remain vigilant and cautious in this area. This is a fundamental assumption we maintain. Especially for COVID-19 impacts, sectors like the resort business and transportation are showing gradual improvement after the lifting of the emergency declaration. However, I expect there will be lingering impacts as we look into the second half and next year. Moreover, supply chain constraints alongside rising energy prices could create unforeseen damages that we did not consider in the past. Thus, like in the first half where we set aside forward-looking credit costs at the end of September, we will need to evaluate whether our reserves are satisfactory as considering the demands of uncertainties in the second half.

Naoaki Chisaka, IR Department Moderator

Thank you. At this time, we would like to conclude this session. If there are any additional questions, the IR department will take your questions. Thank you very much for joining us in spite of your busy schedules today. We would like to conclude the net conference by Mizuho Financial Group. Thank you.