Mitsubishi Ufj Financial Group Inc Q4 FY2022 Earnings Call

Thank you very much for waiting. We will now begin the online conference on financial highlights for the fiscal year ended March 31, 2022, of Mitsubishi UFJ Financial Group. I am Takahashi from the Investor Relations office, Financial Planning division, and will serve as the moderator for today's session. Tetsuya Yonehana, Group CFO and Senior Managing Executive Officer, will give a 15-minute presentation on the financial results summary followed by a Q&A session. We will use the remaining 35 minutes for Q&A. The entire session is expected to be approximately 50 minutes. Before I begin, I'd like to make a few remarks. In this presentation, we may refer to forward-looking statements based on current expectations, all of which are subject to risks and uncertainties. Please be aware that actual results may differ materially from those discussed in the forward-looking statements. We will now begin the presentation of financial results. Mr. Yonehana, please.

This is Yonehana. Thank you very much for joining MUFG's online conference today at this late hour. Please look at the document titled Financial Highlights under JGAAP for the fiscal year ended March 31, 2022. First, let me explain our financial results for FY 2021 and then discuss our performance targets and shareholder return policy as well as the progress of our medium-term business plan and our sustainability initiatives. Please turn to Page 5. I will begin with the income state summary. In the left table, line one, gross profits increased by ¥43 billion year-on-year. As for the breakdown of gross profits, line two, net interest income improved, thanks to the improvement of lending spread in Japan and overseas. And line three, trust fees and net fees and commissions increased, thanks to the increase in revenues from the domestic and overseas asset management business. On the other hand, line five, net gains and losses on debt securities decreased by over ¥250 billion year-on-year, mainly due to loss on sales of foreign bonds in the fourth quarter when US interest rates rose, as a result of portfolio realignment to improve profitability in the following fiscal years and beyond. Next, line six, G&A expenses increased by ¥74.6 billion year-on-year but decreased in real terms excluding foreign exchange effects. As a result, line seven, net operating profits were ¥1,216.7 billion, down by ¥31.6 billion. Line eight, total credit cost was ¥331.4 billion, an improvement of ¥184 billion year-on-year, mainly due to the reversal of the allowance for loan losses at MUFG Union Bank. In the fourth quarter, we recorded an allowance of approximately ¥140 billion related to Russia. Next, line nine, net gains and losses on equity securities increased by ¥184 billion year-on-year, thanks to sales of equity holdings under steady stock markets. And line 12, equity in earnings of equity method investees increased by ¥119.8 billion year-on-year, mainly thanks to Morgan Stanley's strong performance. Lastly, line 15, net extraordinary gains and losses as reported in the second quarter financial results briefing, an extraordinary loss of ¥129.7 billion was recorded in the fourth quarter due to the implementation of new methodology of impairment loss recognition linked to fixed asset allocation of each segment, resulting in a full year loss of ¥47.7 billion. As a result, line 17, profits attributable to owners of parent were ¥1,130.8 billion, up by ¥353.8 billion from the previous year, the highest profits in MUFG history. Please turn to Page 6. The lower left graph shows the change in net operating profits from the previous year by business segment. In the customer segment, GCB Business Group, which includes overseas banking subsidiaries that were affected by the decline in consumption due to COVID-19 and lower interest rates, faced a profit decline. But other business groups enjoyed higher profits, as the growth strategy set forth in the medium-term business plan made steady progress resulting in a significant increase of ¥170.8 billion for the customer segment. On the other hand, as I explained earlier, profits in Global Markets Business Group decreased, mainly due to the loss on sales of foreign bonds in the fourth quarter, but was partially offset by gains on equity securities that are not included in net operating profit. Please turn to Page 7. The right side shows changes in net income by business segment. In addition to the changes in net operating profit, the decrease in credit costs and other factors resulted in an increase in profit with the exception of Global Markets Business Group. Please skip a page and go to page nine, which shows the summary of the balance sheet. Left table, Line 2 loans and below increased by ¥3.9 trillion from the end of the previous fiscal year. ¥3.3 trillion of this increase was due to the weaker yen, so the loan growth increase was small excluding this foreign exchange impact. In addition, Line 12, deposits increased by ¥3.9 trillion, mainly due to a ¥3.4 trillion increase in domestic individuals on Line 13. Next, page 10 shows the status of domestic loans. The lower right graph shows the trend of the domestic corporate lending spread. Lending spread for small and medium-sized enterprises is bottoming out, excluding the impact of the timing of the collective recording of interest received via the subsidized payment program. Lending spread for large corporates continues to improve steadily. Page 11 shows the status of the overseas loans. The graph bottom right shows the trend of the overseas lending spread, which has been steadily improving, as has been the case with loans to large domestic corporates. Please turn to page 12. Although the nonperforming loan balance, the bar graph on the left has increased slightly from the end of the previous fiscal year, the NPL ratio of the line graph is still at a low level. Page 13 shows the status of the investment securities including equity securities and bonds. Unrealized gains and losses shown in the upper left table decreased from the end of the previous fiscal year, partly due to higher interest rates in Japan and the United States. The bottom right table shows the selling amount of equity holdings. In the previous fiscal year, we accelerated sales and the acquisition of agreement for sales in light of the fact that the actual sales exceeded 50% of the target amount in the midterm business plan; we have decided to revise the target amount from ¥300 billion to ¥500 billion. Page 14 shows the capital adequacy. The CET1 ratio on finalized Basel III reforms basis excluding net unrealized gains on AFS securities was 10.4%, exceeding the target range of the MTBP, continuing to secure a substantial level from the perspective of soundness. That is all for the part on the earnings results. Now, please turn back to page one. Now, I would like to explain the FY '22 targets. We aim to increase net operating profits in order to steadily improve performance towards fiscal year '23, the final year of the MTBP. We expect credit cost to be almost the same level as in fiscal year 2021 taking into account factors such as decreasing gains of equity securities as the recording of valuation losses on bonds related to the sale of MUFG Union Bank, we have set a target of ¥1 trillion as profits attributable to owners of parent. In the current fiscal year, we will continue to face an uncertain and challenging environment with lingering concerns against the COVID-19 pandemic, heightened international and geopolitical risks, and fluctuations in interest rates and exchange rates. But we will continue to meet the challenges of our medium-term business plan that is to become a company which constantly earns ¥1 trillion of profits attributable to owners of parent. Next page shows the progress on the MTBP and the shareholders' returns measures. The left side shows the progress of the MTBP. Net operating profits in customer segments was up ¥170.8 billion year-on-year and the profits attributable to owners of parent reached a record high. We have also been able to firmly control expenses in RWA, and we are feeling a certain level of response in this respect. On the right is our shareholder returns policy. The dividend forecast for fiscal year '22 is ¥32 per share, a year-on-year increase of ¥4 in order to achieve a dividend payout ratio of 40% during the current MTBP period. Aiming for a progressive increase in the dividend per share, we have resolved to repurchase up to ¥300 billion of own shares, taking into consideration the level of common equity Tier one ratio which is above the upper limit of the target range. Next page is the progress of the key strategies of MTBP. The current MTBP is positioned as three years of new challenges and transformation. We are making steady progress in the three main strategic pillars of corporate transformation, strategy for growth, and structural reforms. As for digital transformation as shown, during the past year, we have made steady progress in new initiatives to update ourselves into a financial and digital platform operator as well as in open innovation and exploring new fields. As described on the bottom right, the closing of the sale of MUFG Union Bank was scheduled to take place between January and June 2022. However, due to the ongoing approval process by the relevant authorities, we have decided to change the closing date to the second half of 2022. Other processes are progressing smoothly and we will make an announcement as soon as the approval process is completed and the planned closing date is set. Next page, this is our approach to sustainability. The left-hand side shows the progress made since the MUFG Carbon-Neutral Declaration was made in May last year. We have been working on this initiative by establishing the promotion system on a group and global basis. In April, we compiled and published the MUFG progress report. The outline is summarized on this page. We will continue to make every effort to realize a decarbonized society. On the right is human capital investment. Through continued investment in human capital, we will continue to build a virtuous cycle in which each and every one of our employees by engaging in business activities that empower our stakeholders to move forward accumulate MUFG’s financial capital which in turn enables us to invest in human capital. Thank you for your attention.

This is Takamiya of Nomura Securities. I have two questions. My questions are about the implications of the ¥300 billion share buyback and the risk of foreign bond holdings carried over to this fiscal year. The share buyback amount is double this year from last year's ¥150 billion. Is this to return fiscal year 2021 profit this year or buyback of profit amount that exceeded the FY 2021 plan, or are you considering the released capital on the sale of MUB? In addition, I would like to understand your interpretation of the language on hedging in the press release. My second question is on the risk of foreign bond holdings carried over to FY 2022. Do you expect to incur a certain amount of loss on sale of foreign bonds during this fiscal year? And while it may be manageable within the overall unrealized gains on securities, how do you consider the risk of incurring additional losses while holding ¥850 billion unrealized losses on foreign bonds? I would like to know from the perspective of whether positive carry is possible even with a certain rise in short-term dollar interest rates?

Thank you for your question. I would like to talk about the positioning of the ¥300 billion share buyback. First to answer your question, profits attributable to owners of parent for the fiscal year ended March 31, 2022, was ¥1,130 billion. We originally announced ¥850 billion in May and ¥1,050 billion in November and ended at ¥1,130 billion for fiscal year 2021. As a result, the CET1 ratio as of March 31, 2022 was 10.4%. We decided on ¥300 billion share buyback given the FY 2021 profits and CET1 ratio. From that perspective, we did not assume this in FY 2022 profit, nor did we take into account the capital and other assets to be freed up by the sale of Union Bank. So that is my answer to your first question. We believe that the biggest commitment of this medium-term business plan is to achieve the FY 2023 ROE target of 7.5%, which naturally means growing profits in the numerator and managing capital in the denominator. So the key objective is achieving the ROE target of 7.5%. The language on hedging in the press release was discussed internally. We assume that we will promptly place the order and complete the repurchase of all ¥300 billion. However, in light of the current uncertain situation in Russia and Ukraine, we never know what will happen. The repurchase period is set at six months. And we cannot rule out the possibility of tail risk during the six-month period. In such a case, we understand that it is important to stop and think and therefore, have included this in the disclosure material in advance, from the perspective of dialogue with the market. However, when we decided to repurchase ¥300 billion of shares, we confirmed that there will be no problem with the capital adequacy ratio even under certain stress. Basically, we do not expect such a situation to arise where we pause halfway through the process. The hedging statement may be a bit wordy, but please understand that it is included for the sake of dialogue that we are aware of such risks. That is all for the first question. Regarding the second question, the risk of foreign bonds. We had unrealized loss on foreign bonds of ¥850 billion on an MUFG basis at the end of March, which will be carried over and managed in FY 2022. First, let me explain the figures. The upper left graph on Page 13 of the financial highlights shows the unrealized gains and losses. The unrealized loss of ¥850 billion in foreign bonds and as noted in the others, during the fourth quarter when the interest rates were rising, we managed the risk by purchasing funds in addition to hedging derivatives. The others show an increase of approximately ¥211.8 billion in unrealized gains from the previous year, which is almost entirely due to the acquisition and holding of bare funds. So minus ¥850 billion and plus ¥210 billion, the gap is approximately ¥640 billion on net. In addition, unrealized gains on hedge accounted swaps in the deposit and loan or banking account also increased during the rising interest rate. Including these unrealized losses on foreign bonds and unrealized gains on bare funds and hedges are expected to cover half of the ¥850 billion. And how we manage it, this fiscal year will be important. Swaps where hedge accounting is applied will make a positive contribution to interest income. So it will partially compensate for it. In the current fiscal year, we will continue to apply the policy we announced in the fourth quarter for a while, and we will respond by combining hedge derivatives and bare funds while monitoring the interest rate fluctuation. We are utilizing unrealized gains on bare funds to address unrealized losses in foreign bonds in April and beyond. Although there are products with positive return, we still carry large unrealized losses, so we want to manage them appropriately. From this perspective, the global markets business group plans for profit increase in FY 2022, but slightly lower than in the past as fiscal year 2021 had an unplanned loss of about ¥140 billion on foreign bonds and approximately ¥25 billion to ¥30 billion loss in sales and trading in overseas securities subsidiaries. That is all. Thank you very much.

Next is Mr. Nakamura of BofA Securities. Please.

This is Nakamura of BofA Securities. I have two questions. Please give us the breakdown of the ¥83.3 billion increase in consolidated net operating profit for this fiscal year. To what extent do you estimate the negative impact of the sale of Union Bank? What is the projected amount of actual profit increase for the customer and market segments respectively taking into account the gain on sale of Union Bank? That is my first question. My second question is you have set a target of ¥1 trillion in profits attributable to owners of parent for fiscal year 2022, but I think there are many special factors in this fiscal year's plan below net operating profit. So what does it look like based on your true capability? Looking at the bar graph on Page 2 for the final year of the medium-term business plan, it seems that you are aiming for around ¥1.1 trillion. So please share with us your projection.

Thank you for your questions. Let me elaborate on the first point, the ¥83 billion increase in net operating profit. First, the impact of the sale of MUB is expected to be minus ¥30 billion. We assume six months' worth of that amount to be recorded this time. The closing date is pushed back, so there may be a slight change, but not large since it will be within minus ¥30 billion. GCB Business Group will start with a net operating profit of minus ¥30 billion. Since net operating profit for the entire customer segment is expected to increase by ¥50 billion year-on-year, the plan aims for an increase of ¥80 billion after taking into account the impact of the sale of MUB. Next, the market segment is expected to increase profit by ¥100 billion. I explained the special negative factors earlier and this is a ¥100 billion increase from that starting point. In headquarters and others, we factored in some costs related to the sale of MUB that are not part of the net operating profit of MUB itself. Your second point is our true capability vis-à-vis the plan of ¥1 trillion in profits attributable to owners of parent. As you rightly mentioned, there are special factors below net operating profit. So let me explain that though it may be a bit lengthy. The biggest variables are related to the sale of MUB. In the footnote on Page 1 of the financial highlights, it is stated in small letters, approximately ¥270 billion of unrealized losses associated with securities and loans to be sold will be recorded for the first quarter in FY 2022, as other non-recurring losses, etc., which are not included in net operating profits. However, of the ¥270 billion, ¥120 billion at the end of Q1 related to the valuation loss of securities and loans held to maturity by MUB will be returned at the time of the transfer of MUB shares. So it will be accounted for as an extraordinary gain. MUFG treats MUAH and MUB based on US GAAP. So it is valued as assets to be sold at the lower of cost or market basis after the decision to sell is made. Of the ¥270 billion including securities to be sold and held to maturity, ¥150 billion is a valuation loss of available-for-sale securities. This was recorded as a valuation loss of US treasury bonds in MUAH's Q1 results at the end of March. MUB's original plan is to leave a certain amount of equity and pay the remainder to MUAH as an advance dividend at closing. This is how the procedure will proceed. But from an accounting perspective, the amount of the advance dividend will be smaller due to the valuation loss incurred. The decrease is reflected in the P&L at this point. On the other hand, since MUB's net assets do not shrink with the held-to-maturity securities, MUFG will record the amount as a negative figure in the P&L, but it will be returned at the final close. The fact that this structure appears in the current year's financial statements makes it difficult to understand. I am sorry for the long introduction. But for the ¥300 billion total credit costs below net operating profit in fiscal year 2022, the loss on valuation of loans related to the sales of MUB business is expected to be approximately ¥40 billion. Therefore with the negative ¥270 billion on P&L and ¥40 billion credit costs for the loans, a negative ¥230 billion will be posted in ordinary profit. If you add this it will come to ¥270 billion. Thus the ordinary profit will decline by ¥287.6 billion year-on-year. Other factors include gain on sales of equity shares, which is estimated to be at an equivalent level from the previous year. But in the fiscal year 2021, we were able to sell equity shares with a large difference in market and book value which comes to approximately a decline of ¥100 billion. In addition, I mentioned earlier about the risk of increased unrealized losses of MUB investment securities, but the cost related to its sales is included here. Profits attributable to owners of parent including ¥120 billion for those held to maturity and unrealized losses of loans are reversed in the P&L. All these are considered to reach the decision of setting the target at ¥1 trillion. As for special factors, ¥150 billion of other investment securities the unrealized gains losses passing through the P&L may be considered. Therefore, if we do a back calculation, it will come to ¥1,150 billion. We believe this is a challenging target for the group. But in the previous fiscal year, despite a number of special factors, we realized ¥1,130 billion. With the increased net operating profits of the customer segments compared to the past, profit attributable to owners of parent is increasing, reflecting our true capabilities—giving us a target of around ¥1 trillion. I'm sorry to have gone on and on. And also, on your question about the final year of the MTBP, of course, we must first do the calculations for fiscal year 2022. But as we are targeting to be a company which constantly earns ¥1 trillion of profits attributable to owners of parent, we will continue with our efforts with a focus on the plus alpha portion above ¥1 trillion. Thank you very much.

Next is Mr. Takai from Daiwa Securities.

I'd like to ask two questions. I'd just like to confirm on the point you have just made. For fiscal year 2022, ¥150 billion is a pre-tax amount. So we can assume that it will come to ¥100 billion after tax. So in consideration of the group's true capabilities, I think it will be close to ¥1,100 billion. Is this the correct assumption? I do understand that there were a number of special factors in fiscal year 2021 to give us ¥1,130.8 billion. But if we exclude all that, what do you think the actual results have been, reflecting the ability of the group? Second, on the capital, your foreign currency translation adjustment had increased to reach ¥734.5 billion at the end of March. My understanding is that there is a three-month time lag. So if it was already ¥734.5 billion at the end of December when the yen was already lower, in June the yen would have depreciated further by ¥6. Considering the current exchange rate in September, it would depreciate by a further ¥6. So in the next June to September period, ¥700 billion of foreign currency translation adjustment may actually come to ¥1.5 trillion. So if so, your ROE target includes foreign currency translation adjustment. So, even with the repurchase of own shares, the capital is going to continue to increase with the up to ¥300 billion of stock repurchase with a due date in November, giving us hope that another stock repurchase may take place in the midterm. What I am trying to say is that, for the year that has just ended, the profit exceeded the plan and the ¥300 billion of the repurchase of own stock is commensurate of each other. Making explanation easy, but even when the profit does not go up and risk assets do not decline as much, would you conduct substantial stock repurchase in order to raise the ROE going forward? Is this thinking correct? That is my question.

Thank you very much for your questions. As for your question on pre-tax and after-tax impact at MUB, there is a lot of net operating loss carried forward. And so there will be a ¥150 billion impact when it comes to tax. As for your question on ¥1,130 billion in fiscal year 2021, the special factors vary in nature. Under the extraordinary losses with impairment of fixed assets, it came to ¥130 billion. There were M&A-related factors as well such as Morgan Stanley, Queensway, NTN sales and gain on sales are part of the businesses of MUB, all canceling each other out. As we continued with sales of equity holdings, the level of stock prices and differences in market and book value and gain on sales of shares is reflected. This year we have set the target of ¥100 billion, and we believe that on ability basis we have exceeded ¥1 trillion. That is a sense that we have achieved. Thank you very much. And as for your question on foreign currency translation adjustment, I think this question was asked before. So we did some estimation, and with the yen depreciation, the denominator of the ROE increases but the numerator, which is a profit, increases in part as well. Therefore, we can say that they almost cancel each other out. This does have a positive impact on the CET1 ratio but impacts the denominator of the ROE. Therefore, we need to carefully monitor the situation going forward. As for the ¥300 billion stock repurchase conducted, with a due date in November, we will be able to take a pause midterm to consider the capital situation then, to make a decision about the future. As for the utilization of the capital available, of course, one would be to consider shareholders' returns. The other is to invest into growth further beyond the current medium-term business plan period that becomes an important option as well. And that position has not changed. Starting with the current MTBP, we are providing target range management, and within that management achieving the target ROE for fiscal year 2023. And toward the target of mid-to-long-term growth of MUFG, we want to pave our way forward while maintaining a good balance between the two. So shareholders' return to fulfill one of our targets of achieving the ROE target is considered an important factor by the group.

It's my understanding that there is a three-month delay with foreign currency translation adjustment with the biggest impact on the yen-dollar translation correct?

Yes, the impact is largest with the dollar-yen translation.

Thank you very much.

Next is Mr. Matsuno from Mizuho Securities.

Thank you very much. I would like to ask two questions, please. My first question is on the footnote four on the first page about the accounting treatment of sales of shares of MUB. Can you explain this in more detail, please? ¥270 billion of others and ¥120 billion of extraordinary losses for fiscal year 2022, are they definitive? After March, the U.S. interest rate will be rising. If the market value evaluation is based on the U.S. interest rate, is there a possibility that this number may change? The special gain on sale of ¥90 billion for MUB, that is ¥150 billion minus ¥60 billion, what will happen to this ¥90 billion? My second question is on Russia. Out of ¥140 billion, ¥35.2 billion is for allowance for credit to specific foreign borrowers and ¥99.6 billion for allowance for a specific portfolio. Thank you very much.

Your first question about accounting treatment, yes, the ¥120 billion will fluctuate. We will record the unrealized loss of investment securities at the end of March associated with MUB, and it will be reflected in the P&L of the group in the first quarter, but it is subject to change up until the closing. If there is less unrealized loss, it will be reversed back in the second quarter. It will be finalized with the interest rate at the time of the closing. Therefore, the answer is yes, it will fluctuate. About your question on the gain on sales as you have indicated, we had originally disclosed it at ¥150 billion. Looking at the upper side of the sinking there was a ¥60 billion reversal gain of the allowance for doubtful accounts with ¥90 billion remaining. To explain what constitutes the number, I think it will be confusing just to take out the gain on sales, so the held-to-maturity securities, unrealized losses associated with securities and loans mentioned earlier are recorded in the P&L as reversal gains of ¥120 billion. At the end, there is that difference of ¥150 billion. Taking away ¥60 billion will give us ¥90 billion. This may be a difficult explanation to follow, so I'm sure this is very confusing. So, if we start with ¥90 billion, including all the costs associated with the sale of MUB, there were some technical factors involved that showed gains to appear in the preceding financial results and other factors such as write-off of assets of MUB. The cost related to structural building post-sale, we have made an assumption that this ¥90 billion will be offset. Therefore, the special gain will come back as ¥120 billion accounting-wise, but as for the ¥90 billion, part of it will be deferred. Considering the technical factor and other MUB asset management and costs related to post-sale organizational building are the areas in which they will be appropriated. That is a plan we have at the moment. And as for your question on Russia, the allowance for credit to specific foreign borrowers, as I have explained, is done automatically to a degree with the downgrading of the country rating of Russia. As for the allowance for specific portfolios, it will be considered as allowance for a broader impact. As stated in the highlights of the results, our CEO Kamezawa mentioned during the press conference that basically, when it comes to loans for Russia, those loans which we have not been able to recognize individual data rating downgrades, we recognize them as one portfolio from preventative aspects as well. Upon conducting different simulations, we made recordings upon discussion with our auditors. Basically, the transfer risk of assets of our debtors were taken into account to build it as a specified portfolio to accumulate allowance.

Thank you very much for the explanation.

We don't see any other questions. If not, with that, we would like to close this Q&A session. I'd like to ask Mr. Yonehana to give us a closing remark.

Thank you very much for your valuable questions today. I have explained the results of the first year of our medium-term business plan. We'll continue to focus on dialogue with our shareholders and investors, as we pursue financial and capital management aimed at sustainable enhancement of shareholder value. I would like to thank you for your continued understanding and support. Thank you very much for your time today.

With that, we will close this conference for today. On the company hotline, we will archive it until May 23.