Mizuho Financial Group Inc

TSE:8411

Earnings Call Transcript 2023-Q2

[木原 正裕, executive]

My name is Masahiro Kihara, President and Group CEO of Mizuho Financial Group. Thank you for taking the time off your busy schedules to attend today's investor presentation. Allow me to direct your attention to Page 2, which contains today's agenda. And I believe you already have had the opportunity to go over financial results of the first half of fiscal year 2022 and are generally familiar with it, we won't to be spending too much time on the summary of it but I would like to start with this. Then this will be followed by a brief review of the achievements and the challenges to date within the scope of the 5-year business plan as once again, I believe you are already familiar with most of this information.

Next, with 1 year remaining on the 5-year business plan, I will be going over my thoughts on the future of Mizuho. Lastly, we will talk over the capital policy.

Please turn to Page 4. As previously announced consolidated net business profit and net gains or losses related to ETFs and others for the first half of the fiscal year stood at JPY 449.4 billion for a year-on-year decrease of JPY 10.8 billion. This represents a progress of 52% towards the fiscal year 2022 plan despite weak performance from banking in GMC on account of a challenging market environment. On the other hand, our performance in other segments allowed us to offset some of this, limiting the year-on-year decrease in net business profits to approximately JPY 10 billion. Ultimately, net income attributable to the financial group stood at JPY 333.9 billion, which represents over 60% of progress towards the fiscal year 2022 plan. There was a year-on-year decrease of JPY 51.6 billion. However, it should be noted that tax effect factors raised profits last fiscal year. So this is partly a reactionary decline stemming from the fact that such extraordinary gains did not recur this year.

While the depreciation of the Japanese yen had the effect of lifting revenue, conversely, this also led to an increase in risk-weighted assets. This, in turn, translated into a slight year-on-year decrease in the common equity Tier 1 capital ratio on a Basel III finalization basis, excluding net unrealized gains and losses on the securities, which stood at 9.2% as of the end of the first half.

Next, about dividends. As announced at the start of the year, the plan was to announce the increase in annual cash dividend payout once the net income attributable to the financial group target of JPY 540 billion is in sight. Since the target is indeed now in sight, we decided to raise the dividend forecast to JPY 85 per share for an increase of JPY 5 per share versus the original estimate.

Please turn to Page 5 for an overview of the results on a per segment basis. This page divides consolidated net business profits into 3 parts: stable revenues, upside revenue and the banking. First, stable revenue marked a year-on-year increase of JPY 67 billion, of which positive foreign effects accounted for JPY 41 billion. An interest rate hike made a significant increase in deposit and loan profits, primarily outside Japan. Additionally, in terms of transaction banking, we were able to secure both liquid deposits and foreign exchange business.

Secondly, upside revenue marked a year-on-year decrease of JPY 18 billion despite positive foreign exchange effects. This decrease was due to a significant weakness in the capital markets business, both in Japan and outside Japan, and the weak performance from the domestic asset management business on account of slumping stock prices.

Lastly, net business profits from the banking decreased by JPY 63 billion year-on-year. Please turn to Page 6. Shown here is the fiscal year 2022 outlook. The fiscal year 2022 outlook remains unchanged from the initial plan at JPY 860 billion in consolidated net business profits. While there is impact by foreign exchange and other factors, as I have mentioned on the previous occasions, we have unfortunately made the GMC banking position neutral, and I believe we need to keep things this way for the foreseeable future. Therefore, we don't expect profit contribution from the GMC banking part, which is expected to result in a decrease in net business profits of JPY 59 billion versus the initial plan. On the other hand, for a stable revenue, we expect an improvement of JPY 80 billion, of which positive foreign effects are expected to account for JPY 14 billion. Despite signs of a gradual recovery in capital markets and in real estate, we nevertheless expect results from upside revenue to fall short of the initial plan by JPY 21 billion. Putting it all together, the overall consolidated net business profit plan remains unchanged at JPY 860 billion.

Please turn to Page 8 for a brief review of achievements to date. The fiscal year 2022 outlook is JPY 860 billion in consolidated net business profits compared to JPY 408.3 billion back in fiscal year 2018. It should, however, be noted that fiscal year 2018 results included special factors. Risk returns and cost returns have picked up during this period, while the expense ratio also improved by cost optimization. In terms of consolidated ROE, while we are not yet at the target level, we have seen an improvement as we expect 6.4% for the outlook of the fiscal year 2022. With that being said, there is still much to do. I will be discussing this in greater detail later on when going over our approach to the business portfolio.

The outlook of common equity Tier 1 capital ratio on a Basel III finalization basis, excluding net unrealized gains and losses on the securities in fiscal year 2022, is 9.2%, which meets the target level of the lower end of the 9% to 10% range. Lastly, we are targeting JPY 450 billion in the sale of cross shareholdings over a 5-year period, and this amount stood at JPY 334.9 billion at the end of the first half. We have received ample feedback on the topic of cross-shareholdings and against this backdrop, we would like to formulate a plan to further expedite the process of selling these cross-shareholdings.

Please turn to Page 9, which discusses asset management. As you are aware, we have been expanding asset management business through our global equity strategy. As of September 2022, the equity investment's trust balance had increased by JPY 1.7 trillion compared to March of 2019 and stood at JPY 5.8 trillion. We consider this business is not turning over a business and the average holding period for our clients is 5.6 years, which is longer than the industry average of 4.3 years. We believe we are making good progress towards the operation of an asset management business responding to our clients' need. I will be going over the topic of alliances separately later on in this presentation.

The next item is value co-creation. Following business structural transformation, the idea was for us to sell our cross-shareholdings over time and at the same time, shift the capital in taking some risks together with our customers in the businesses of mezzanine capital, preferred and subordinated debt, et cetera, which we call as strategic investment. Through this, we have been co-creating value with our customers and balance of mezzanine capital, preferred and subordinated debt having grown by 50% compared to March 2019 levels.

Next is global in which we worked towards profitability improvements. When putting together the 5-year business plan back in fiscal year 2019, former Group CEO, Tatsufumi Sakai, placed heavy emphasis on profitability improvements. And ever since, we have been working to improve this metric with each passing year. Against this backdrop, we established and expanded our CIB business model primarily around DCM, ECM and M&A in the Americas. Additionally, since this is a CIB model, we have expanded our secondary business through the integrated management of primary and secondary business. As a result, gross profit's outlook in fiscal year 2022 in America and overseas increases 80% and 50%, respectively, compared to fiscal year 2018. Regarding the topics of sustainability and digital transformation in corporate culture and HR, we will be discussing these later on in today's presentation.

Please turn to Page 10, dealing with the topic of alliances. I am sure you have numerous questions on this front such as the progress in terms of our alliance with SoftBank or our alliances outside Japan, et cetera. Here, we evaluate the progress made in each alliance. The first item is PayPay Securities, which is an online securities platform we operate together with SoftBank. Users receive a certain number of points every time they make cashless payments with PayPay, and these points can then be used to invest in a number of financial products. More than 7 million users make use of this initiative. We are currently in the process of attracting new users who invest real cash. This process is ongoing so I am not able to disclose specific figures. But despite a slight delay, things are progressing at a good pace.

Next, PayPay Asset Management is a new initiative so it's too early for us to make a progress evaluation.

Third, we have line credit, which has been making good progress and now boasts a loan balance of approximately JPY 50 billion. By combining credit history with an analysis of activity data on the app, LINE, we have made good progress when it comes to this business.

Next is LINE Bank Preparatory Company, which we evaluated with the triangle icon as there will be a need to review the opening schedule. This is the type of project which needs to be operated with full care so that people can use this service safely and securely. And therefore, to this end, we want to carry out thorough tests and other preparations with taking more time and are, therefore, in discussions with LINE to revisit the opening schedule.

Next is J.Score for which scaling has been a challenge. We are currently in discussions with SoftBank to review the strategy going forward.

J-Coin isn't an alliance initiative, but we decided to include it here. Things haven't progressed as we had planned originally for J-Coin, although we are gradually making business by providing this platform to the number of merchants and institutions.

Outside Japan, we have MoMo and Tonik, which have been doing well. Although these businesses haven't yet generating enough profitability, the number of users continues to grow according to plan.

I would now like to direct your attention to the right-hand side of the page, pertaining to our strategic alliance with Rakuten Securities Holdings. We have received various inquiries from stakeholders pertaining to the nature and objective of this alliance. This alliance consists of both short-term and medium- to long-term objectives. Over a short-term horizon, we can enjoy benefits to provide our products on the Rakuten Securities platform. Additionally, Rakuten Securities has done a good job in attracting high net worth individuals to their platform. Rakuten Securities extends its users to use IFAs. But one of the objectives of this alliance is for us to open our platform to those Rakuten Securities users so that we can offer asset management consulting services to them.

The second prong of this strategy is a longer-term horizon of around 20 years. Mizuho Securities' main age demographic is people between the ages of 70 and 79, and the number of accounts has stagnated at around 1.8 million accounts. Within the asset management business in Japan, seniors hold a disproportionate percentage of all financial assets. So in that sense, this distribution isn't, by itself, all that problematic.

However, the next 10 or 20 years will see this generation leave their money to their children through inheritance. I therefore believe that a pertinent topic of discussion here is where and for what purpose this money will be put to use. There is no guarantee these funds will remain with Mizuho Securities. So we believe there is a need to diversify and create a number of different customer channels.

This is one of the purposes behind our alliance with SoftBank. Additionally, Rakuten Securities' main demographic is users between the ages of 30 and 50 individuals who will be in their 50s, 60s and 70s 10 or 20 years from now. And nowadays, the number of individuals with financial assets above JPY 100 million is on the rise. So we believe there is the opportunity for us to provide comprehensive asset management consulting services to these types of individuals, this is therefore a medium- to long-term objective.

Please turn to the next page, which shows our sustainability initiatives. Mizuho Financial Group has been carrying out a number of initiatives on this front. More and more, we believe the idea of transition finance towards the transformation into a carbon-neutral society will increasingly become part of the mainstream. We therefore believe in the need to establish specific criteria and targets, which we have formulated within the scope of our transition strategy, allowing us to more easily track our progress. Additionally, at the start of the year, we set up equity investment facility in transition areas totaling over JPY 50 billion, and we have since then received over 170 inquiries and consultations from our customers.

Out of these inquiries, around 5 or 6 of these, we have started to put into our internal process, upon which we would like to carry out demonstration experiments alongside with our customers. Additionally, we are the first Japanese financial institution to issue a human rights report. And furthermore, I view diversity as being extremely important. Naturally, we intend to promote diversity across the board but one of the initiatives within the promotion of diversity is strengthening career development for women management leader candidates. And to this end, we have begun executive mentoring. Please turn to Page 12, which discusses the initiatives regarding J-Coin and FT and RT, which stands for Mizuho-DL Financial Technology and Mizuho Research & Technologies. Financial Technology has data-driven expertise while RT consists of the implementation of IT consulting, more specifically focused on the natural environment and research. By integrating these 3 factors, we carried out and continue carrying out a number of projects and initiatives like turning Hachijojima into a smart island or integrating J-Coin Pay payment functionality for use at Panasonic's EV charging infrastructure.

Please turn to Page 13. Allow me to direct your attention to the bottom of the page where it says HR Shown here is an initiative to create a team of experts in order to have comprehensive discussions with SMEs about matters pertaining to sustainability. We established a certification program and have put together a team that currently consists of approximately 1,000 professionals. As it pertains to RT, we also have 130 consultants in the environment and energy fields, currently operating at full capacity to offer a variety of consulting services. Regarding FT, we have put together a team of over 100 professionals with PhDs or masters, including in the field of data analytics. This is a very unique endeavor, and we are gradually seeing a new business in a field completely unrelated to finance being born.

Against this backdrop, Page 13 contains an overview of our progress in sustainability and digital transformation on the part of Mizuho Financial Group. With our scope 3 GHG emissions reduction goals, we have set targets for the electric power sector and will shortly be announcing our reduction targets for emissions from oil and gas.

In terms of providing sustainable finance, Mizuho Financial Group ranks high both among Japanese banks and also globally. We carried out new initiatives, for example, in the form of Mizuho Securities acting as the structuring agent for the issue of Blue Bonds by the Maruha Nichiro Corporation. And additionally, we offer sustainable finance geared toward SMEs.

The right-hand side of the page shows our digital transformation initiatives. And within this context, I believe many of you are curious about progress in terms of our strategic alliance with Google. An important objective behind this partnership is leveraging our data in order to offer personalized marketing solutions in the world of retail. Progress has been made within the scope of this alliance, and we expect to be able to release a prototype in the first half of 2023.

Lastly, shown here on the right, are initiatives leveraging the J-Coin platform; namely, digital merchandise coupons to revitalize local economies, local currencies and providing digital transformation support to municipalities.

Please turn to Page 15, where I will be discussing the future of Mizuho. We are seeing seismic changes in the environment surrounding our operations at Mizuho. It's not just a relationship between the United States and China as other countries are in a similar situation, not to mention the ongoing situation between Russia and Ukraine. These geopolitical tensions and conflicts have led to soaring food and energy prices, while at the same time, the trend has been towards greater awareness of sustainability issues.

Against this backdrop, issues of economic security have taken center stage in recent times. Just recently, there was the announcement of the creation of the new chipmaker, Rapidus, with the objective of shifting to and revitalizing the semiconductor industry in Japan. I therefore believe efforts like these fall within the scope of enhancing economic security. As we wrote here at the bottom, I believe the current environment to be a very good opportunity to stage a recovery and reclaim some of the past glory of the Japanese economic miracle. We believe this to be an excellent opportunity, although while putting behind Japan the backing of the global economy. In fact, I believe this is literally Japan's last chance to accomplish this recovery of its former status.

Another area that requires earnest efforts is global sustainability. Against the backdrop of the 5-year business plan, unfortunately, we faced issues with our IT system infrastructure, and these issues caused concern for stakeholders. However, we did undergo a significant evolution in terms of the business, giving us earning power on the global stage. I therefore believe it to be crucial for us to utilize this earning power on the global stage, while at the same time to support Japan as a bank with a deep-rooted connection to this country. Given this, I believe there is a need for us to reformulate our growth strategies and corporate identity on the basis of the current environment surrounding Mizuho.

Please turn to Page 16. I believe there is a need for us to re-recognize the origin of Mizuho, our corporate DNA, if you will, within the process of reformulating our growth strategies and corporate identity. Mizuho has inherited its corporate DNA from its predecessors, Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan coming together. Against this backdrop and as shown here, our corporate identity includes a desire to pursue to bring fruitfulness by reading ahead of one's time from a fair and open standpoint. By bringing fruitfulness, I believe we are referring to social contribution.

What people like Shibusawa Eiichi, Founder of Dai-Ichi Kangyo Bank; Yasuda Zenjiro, Founder of the Yasuda Zaibatsu; and Toyotaro Yuki and Sohei Nakayama, who headed the Industrial Bank of Japan, focused on was building a robust foundation for industry and business in Japan. It is this philosophy that constitutes our corporate DNA. So this is something we wanted to re-recognize. Not just that, but the name of Mizuho refers to a bountiful harvest of rice and symbolizes Japan as a fruitful and prosperous country.

While we do indeed have a global presence, I believe we should never turn our back on Japan. Against this backdrop, we are now thinking about our future and what Mizuho wants to be 10 years from now. We believe there is no need to drastically change our corporate identity but we would like to reframe our purpose, re-recognizing our corporate DNA and deciding what course of action to take over the next 1 or 2 decades and what entity we want to become. We will envision what Mizuho wants to be 10 years from now. While over the short term, over a 3- to 5-year period, there is a need to revisit the business portfolio, the allocation of resources and to define focus business areas.

Please turn to Page 17, pertaining to the business portfolio. The portfolio does admittedly appear to be somewhat lopsided. But naturally, we analyze the portfolio and make decisions based on a more granular version of the information presented here. As you can see, the vertical axis represents risk return, while the horizontal axis represents the growth potential. In light of this, we should be targeting the upper right quadrant here. And as we move further to this quadrant, we intended to actualize the potential contained within our corporate DNA. Conversely, we believe there is a need for us to enact changes to realize improvements in the lower left quadrant.

I believe the correct and necessary approach here as it pertains to individual retail customers and SMEs is to pursue improvement through digitalization. Additionally, mortgages still offer high risk returns, but this is only because the portfolio contains existing mortgages loan balance, while the new recent ones have a much less attractive profitability. As such, there is a need for us to adopt a slightly more passive approach on this front.

Another aspect that needs to be taken care of is the thorough sales of cross-shareholdings. Right below the cross shareholdings text box is another box referring to the EMEA business, which is characterized by low returns. We offer loans in this region, but in some cases, we hardly see any meaningful returns. With that being said, EMEA is ahead of the curve when it comes to sustainability. So this fact makes it necessary and beneficial for us to continue having a presence and relationships in this region. As such, going forward, we will be operating the EMEA business with a new focus on sustainability. Other areas we need to pay attention to are asset formation in Japan and the domain of medium-sized companies and innovative companies. It is these innovative companies that will become a driving force propelling Japan into the future. We want to offer support to these through business succession and by identifying attractive technologies and products that can be sold internationally.

Another important growth area for us is naturally large corporations in Japan. Regarding global non-Japanese clients, we will be focusing on expansion in North America and Asia. Against this backdrop, while shifting resources from EMEA, we nevertheless intended to carry out efforts in earnest in EMEA's sustainability business. In doing this, we would like to further improve our risk return.

On the topic of risk return, these range from an upper bound of around 20% in net business profits, ROE, to a lower bound of around 10% or slightly less. As such, raising the lower bound will allow us to increase overall profitability.

Page 18 pertains to inorganic growth strategies. Here, we list some strategies, but naturally, this list is by no means meant to be exclusive. A noteworthy target area here is asset formation. Here, we need to strengthen investment banking functions so that we can improve capabilities in the alternative asset management business. This refers to structuring capabilities, so we believe these to be necessary Additionally, the second text box from the top shows the target areas of global sustainability and innovation. Within this scope, we will pursue the thorough strengthening of the CIB business both in and outside Japan. Furthermore, in the context of innovation, we will continue carrying out initiatives together with innovative Japanese companies and continue making a contribution to growth in Asia.

And here, it says digital transformation Naturally, we intend to carry out collaboration and alliances with companies capable of enhancing our capabilities regarding proposals related to sustainability and digital transformation.

Another crucial aspect is carrying out innovation from the inside, and I believe this is an area Mizuho had fallen behind on. Group CDIO, Makoto Umemiya, has been considering optimal innovation frameworks and organizational structures and has made considerable progress on this front, allowing us to execute these initiatives. Another important topic here is the establishment of a new dedicated investment vehicle licensed under the Banking Act, which is expected to take place soon.

Allow me to give you a brief overview of Page 19. As I just discussed, we will be directing management's resources to the business areas of asset formation, asset management, business/asset succession, sustainability and innovation and the global CIB business, although we are yet to settle on the specifics.

Please turn to Page 20, which details our channel strategy. Within the scope of the 5-year business plan, we sought to improve customer convenience, among other measures. However, I believe we have fallen considerably behind when it comes to customer convenience across the various channels and that consequently, there is the crucial need to expedite efforts in this area. More specifically, some services still require customers to visit bank branches in person. And there's still an element of branch staff taking time, if you will, and going through each process step by step. There is, therefore, a need to improve the online banking infrastructure to make it more convenient for individual retail users as well as businesses.

Additionally, the introduction of table type devices at our branches allows for providing a variety of services, which we intend to expand the scope of this functionality. Against this backdrop, we would like to make the purpose of visiting bank branches being in the context of consultations and not for commoditized service. As we wrote here at the top, the plan is to carry out approximately JPY 100 billion in digital investments over a number of years. Of this amount, we plan to invest JPY 40 billion on upgrades of the existing systems and JPY 60 billion for new digitalization.

Please turn to Page 21, which discusses reform to our corporate culture, an initiative we consider to be of the utmost importance. As CEO's most crucial functions are formulating and executing the business strategy and improving corporate value and the corporate culture at the company, over the months, I have had various opportunities to deepen dialogue with employees in a variety of settings. We go over this in other aspects of corporate culture reform, so we invite you to peruse the contents on Page 21 at your convenience later on.

Please turn to Page 22. Additionally, there has been a significant increase in proactive employee proposals recently with the creation of an employee-driven work group in April 2022. This was the result of the spontaneous initiative of approximately 140 employees who put together and submitted various proposals in late September. Many more proposals have been put forth, but allow me to go over two, in particular.

The first is redefining the corporate identity. This is an area management also felt needed to be revisited. And this impression was shared by employees who also stressed the need for the whole company to re-recognize Mizuho's corporate DNA.

In terms of corporate culture as well, initiatives need to be done on a permanent basis. So we decided to appoint Natsumi Akita as Group Chief Cultural Officer, responsible for promoting various initiatives to enhance communication. Ms. Akita joined us this May, prior to which she was at Adobe and will be incorporating outside knowledge and perspectives to further improve Mizuho's corporate culture, which is something the company needs.

As announced in the newspapers, we want to make changes to human resources to become an organization where all employees can be yourselves. This new HR initiative has been named CANADE. The name means to play in harmony in Japanese and underscores the fact that this is an initiative created together by employees and the company. The complete transition to CANADE is only expected to take place in fiscal year 2024.

Allow me to direct your attention to the colored stripe corresponding to fiscal year 2024. As we wrote here, we want to unify the HR framework among FG, BK, TB, SC and RT. And additionally, we want to support career design, which is necessary in order for employees to pursue a career identity corresponding to who they are as individuals.

In terms of job positions, this will be a system of compensation by job classification.

Lastly, I would now like to discuss the capital policy on Page 25. As of September 2022, common equity Tier 1 capital ratio on a Basel III finalization basis, excluding net unrealized gains and losses on the securities, stood at 9.2%, which is in line with the forecast, which called for levels in the lower end of the 9% to 10% range. These are satisfactory levels as even considering stress events at the maximum extent, such as a severe recession, we are capable of providing sufficient financing function. Against this backdrop, going forward, we will be balancing, on the one hand, the capital ratio, and on the other hand, measures like growth investment and shareholder returns.

Human capital is extremely important, meaning, there is a need for us to invest in human resources, and we would like to carry out investments in initiatives contributing to growth, such as further strengthening of existing businesses and addressing new business areas. Additionally, we are estimating a dividend increase for the second consecutive fiscal year.

Please turn to the next page, which shows the company's shareholder return policy. Our policy of the distribution of progressive dividends, coupled with flexible share buybacks, remains unchanged.

Page 27 deals with the progress of the business improvement plan. As I believe you are familiar with this information, allow me to skip this page. I will hear and answer any questions you might have later on.

Lastly, I forecast a very challenging business environment ahead of us. So allow me to direct your attention to Pages 52 and 53. Shown here is our loan portfolio to countries and regions outside Japan. More specifically, China, Hong Kong and Taiwan on Page 52 and the Americas, also including LBO finance, on Page 53.

We have an extremely limited exposure to real estate loans in China. And furthermore, LBO financing only accounts for 4% of total client exposure in the Americas. In light of this, I believe I can say this is a rather conservative portfolio. With that being said, we may face a number of risks, so we will be keeping a close eye on the situation.

Please turn to Page 83, which deals with the verification of the significance of cross-shareholdings, a topic which has garnered great interest from stakeholders. We received feedback from stakeholders asking for more disclosure and transparency on this front. As such, in order to address those requests, we now show our approach and the way we carry out this verification as well as the risk return profile. Approximately 40% of the company's cross-shareholdings portfolio was below the profitability criteria. We then ran these through our proprietary formula and evaluated the potential risks and returns. The results reveal that, indeed, many of these cross-shareholdings don't meet the hurdle rate of 8% after income taxes. Negotiations remain a challenge, but ultimately, either this hurdle rate is met or we have to go through with the sale of these holdings. We have, therefore, revealed this information in the name of transparency and also as an admonishment for myself personally.

This concludes today's investor presentation. Thank you for your time.