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Edited Transcript of 8306.T earnings conference call or presentation 20-May-19 4:30am GMT

Full Year 2019 Mitsubishi UFJ Financial Group Inc Earnings Presentation

Tokyo Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi UFJ Financial Group Inc earnings conference call or presentation Monday, May 20, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kanetsugu Mike

Mitsubishi UFJ Financial Group, Inc. - President, Group CEO & Director

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Presentation

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Unidentified Participant, [1]

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Thank you for waiting. We will now begin the Mitsubishi UFJ Financial Group Fiscal 2018 Results Presentation. First, let me introduce our attendants: Mr. Kanetsugu Mike, member of the Board of Directors, President and Group CEO; Mr. Muneaki Tokunari, Senior Managing Corporate Executive, Group CFO. And I am today's facilitator, I am Makane from IR office. Now let me introduce today's program. First, we will be presenting the outline of fiscal 2018 results for about 30 minutes. After that, we would like to receive your questions.

Today, we have a total of about 1 hour and 15 minutes for the meeting. Now let us start with the presentation. Mr. Mike, please.

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Kanetsugu Mike, Mitsubishi UFJ Financial Group, Inc. - President, Group CEO & Director [2]

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Good afternoon. I am Mike, and I took the office of Group CEO in April this year. Thank you very much for coming to our results presentation despite your busy schedule.

Today, I'd like to briefly introduce the recent figures, including the fiscal 2018 results and then I will introduce our progress of medium-term business plan and capital policy and our ESG initiatives, including governance.

Please start from Page 8. Profits attributable to owner of the parent in fiscal year 2018 went down by JPY 116.9 billion from the previous year to the JPY 872.6 billion. This is below the full year target of JPY 950 billion. Achievement ratio to the target was 92%.

In addition to the decrease in net trading profits, with increasing costs with overseas business expansion and regulatory responses, net operating profits dropped by JPY 154.2 billion from the previous year.

Below net operating profits, there were improvements in credit costs and profits from investments in Morgan Stanley increasing, but there were losses with the revision of the Mitsubishi UFJ NICOS system integration plan.

I'd like to first talk about NICOS. Page 9, as you can see on top left, NICOS operating revenues, operating profits are firm. However, there were large losses at the results of previous year from the 3 factors indicated on the top right. Number one, there was additional provision for losses on interest repayment, securing 2.2 years' worth of reimburse claims of the previous year. Number two, we fundamentally revised the system integration plan which is now divided into 3 brands, leading to impairment losses on system integration-related assets at JPY 94 billion. Number three, for fixed assets such as existing system assets, we revised the future cash flow forecast, leading to an impairment of JPY 55 billion. The factors leading to this decision are 2: difficulty of system development and (inaudible) system vision changes based on the changes of the market environment. There are diverse credit card products and the system structure customized by product is very complex, which led to an increase of total development volume and the difficulty of development was greater than expected. In addition, the current payment environment is rapidly changing with the government's measures to promote cashless payment, diversification of payment means and development of technology. System needed in the future must be simple and compact, realizing low-cost operation and be able to flexibly respond to changes in the future business environment.

Based on such a situation, to optimize the project towards the future, we fundamentally revised the current plan to -- and we made a decision to realize a new system with high probability of completion. Next is Page 10. In the area of payments, we expect competition to get stronger in the future. Credit cards are firm because of its level of penetration and the feature of deferred payment. These will continue to be the main cashless payment methods.

As you can see on the bottom right, NICOS has a strong customer base of 1.3 million merchants and 17 million users. With this merchant network and the experience and knowledge on the area of payments that NICOS has accumulated throughout the years, it's indispensable for MUFG's payment business strategy. Going forward, we will use all of our group's capacity to strengthen NICOS competitiveness. In system integration, in the future, we will add project staff and establish a checking department and review and strengthen the project management organization. We would like to proceed so that we can present the timing of completing the new plan in the second half of the year.

Please turn to Page 12.

The situation of deposits and loans. As you can see on the graph on the right, overseas loans was JPY 42.8 trillion, a drop to a level close to the level 1 year ago. Overseas deposits was JPY 40.1 trillion, increase of JPY 1.5 trillion on real basis, excluding foreign exchange impact.

So non-yen loan deposit gap was reduced. Page 13, are domestic loans. The balance declined in housing loans and SMEs. The right on -- the graph on the top right for deposit/lending spread, we have continued an environment of low rate and easing of supply and demand for funds remains unchanged, and we expect a mild decline in the future.

Page 14, are overseas loans. As for balance, there was an increase to JPY 44.1 trillion in September last year. After that, we reduced nonprofitable assets in many regions. And in the end of March, this was reduced to JPY 42.8 trillion. On the top right, the deposit to lending spread of bank and trust bank together remains flat. Bottom right for currency, NIM improved with the increase of auto loans with good profit margin. On the other hand at MUAH, NIM declined with higher funding cost.

Page 15 is non-Japanese yen assets and funding. As you can see under number one, non-yen loans are steadily funded by number two, customer deposits and number three to five, medium to long-term funding.

For customer deposits, there was firm increase of non-yen deposits in the corporate banking business group from Japanese customers, and we're also promoting measures to gain deposits, such as strengthening transaction banking and providing appropriate incentive to our RMs. In the medium- to long-term funding, we are diversifying funding methods, such as issuing non-yen corporate bonds of an average duration of 7 years and collateralize the funding using yen-denominated assets, such as JGBs.

For yen-denominated investments, this is centered on mid- to long-term currency swaps and the rate is stable. In addition, we are engaged in controlling the asset side.

In fiscal year 2018, we reduced low profitability assets by $13 billion or JPY 1.4 trillion.

Page 16, are investment securities. Please look at the chart on top left. The balance on line 7, foreign bonds increased by JPY 4.1 trillion. On line 8, others increased by JPY 1.6 trillion with increasing investment trust and others.

For unrealized gains or loss, American interest rate dropped and on line 7, foreign bonds improved by JPY 310 billion (sic) [JPY 312.7 billion] and unrealized gain was JPY 170 billion (sic) [JPY 173.6 billion].

Page 17, are credit costs. In fiscal year 2018, there were large provision in reversals and the cost was at JPY 5.8 billion. In fiscal year 2019, in addition to the banks reversal of credit costs shrinking and consolidation of Bank Danamon and with the impact of expansion of business of domestic, overseas and consumer finance, we expect credit cost of JPY 230 billion.

Next is results by business groups, Page 22.

For net operating profit, in retail and commercial banking business group, there was a drop of JPY 57.9 billion from previous, but other customer segments increased and total for customer segment was an increase of JPY 6.9 billion. In the Global Markets Business Group, treasury profits dropped. There was a drop of JPY 88.3 billion from the previous year.

And the results of expense ratio ROE are shown here. ROE of retail and commercial banking business group is 1%. As you can see on footnote 2, if we exclude the impact of impairment of NICOS, it would be about 6%. For Asset Management & Investor Services Business Group as shown on footnote 3, if we exclude the impact of loss on sale of shares of Standard Life Aberdeen, ROE would be 18%.

Please skip to Page 30, financial targets for this year. Line one, net operating profit, this includes the drop of domestic loans and deposits profits and measures against regulations and systems-leading investment, which is a cost increase. And with a contribution to profit with consolidation Bank Danamon there's increase from previous at JPY 1.080 trillion. This would stop a trend of reduction of net operating profits that's continued for the last 4 years.

Line 2, total credit cost, as I've explained, we expect a large increase of expenses from the previous year. While there will be no impact of extraordinary losses of NICOS on line 4, profits attributable to owners of parent will increase at JPY 900 billion.

Now let me talk about the progress of medium-term business plan. Page 32 is a review of the first year of a medium-term business plan. Low interest rate is continuing in Japan and in Japan overseas [risk of] is surfacing in the major developed countries, there is a review of the monetary easing exit strategy, though we were prepared to this. The first year of a medium-term business plan is tougher than what we had assumed. And as for the net profit, with the system integration plan revision for NICOS, there are impairments posted and though we raised the target when we announced the interim results in November last year, it's regrettable that we had underachieved.

Now as for the first year of the MUFG Re-Imagining Strategy, which is group-wide effort, which we will be engaged for 6 years until 2023, there were some issues that were clarified, but in general, this is progressing smoothly. As for the group-based integrated management, we have implemented a functional realignment and integration of corporate loan-related business of the bank and trust bank. And for this RM-PO bank, trust Bank and bank and securities integrated management have been established, leading to large increase of group cooperation.

Eleven Transformation Initiatives to realize the reimagining strategy. Wealth management strategy and institutional investors business is showing delays in the progress compared to what we assumed but in other areas we are seeing steady progress. For strategic investment, we completed the investment into Bank Danamon. Australian major asset management company the Colonial First State Global Asset Management, for this, we are proceeding with the procedures aiming at completing the acquisition in the middle of this year.

Next is Page 33. MUFG's net interest income and net operating profits from customer segments. The turnaround of the net interest income is happening for the first time in 4 years since 2014 amidst a quantitive and qualitative monetary easing. On right-hand side, net operating profits from customers segments is also increasing for the first time in 4 years. In the current medium-term business plan first year is the year of decrease, second year is the year of turnaround, the third year is the year of progress.

The first year was a decrease as we had assumed, but we want to make sure that we'll be able to turnaround in 2019 and jump after that. To do that, we must implement the necessary measures with speed. We will continue to implement structural reform on a company-wide basis.

From Page 35, this is a progress of Eleven Transformation Initiatives. First is digital technology.

We established jointly with the American company, Akamai, the Global Open Network or GO-NET. This is a basis of a new blockchain technology and we are aiming at providing an open payment network not limited only to MUFG. We are planning to start service in the first half of 2020.

Please go to Page 36. We're creating a new channel for comprehensive service that will provide various services to our corporate customers online. We are planning to enhance the functions as we go, such as on-line data lending that conducts scoring based on account deposit and withdrawal data as well as financial data, such as financial results documents and others. Furthermore, as an initiative towards open innovation, we established a venture capital fund managing company, MUFG Innovation Partners, that will strategically invest in FinTech related startup companies. We have already started a JPY 20 billion fund and invested in several companies.

Page 37 is sales channels/BPR. Please look at the top left. We are upgrading functions on the smartphone app to accelerate shifting transactions from bank counter to online. For example, in the case of replacement of unusable cards, which was released last April, approximately 9% is shifting from bank counter to the app in the last year.

At the same time, we started our endeavors to provide lessons on how to use internet banking on the smartphones for those customers not so familiar with using smartphones. Through improvements of UI and UX and functionality enhancements, we are promoting customers to use direct banking.

Page 38 is about real channel. Please look at the top left. We have completed the installation of STM that will allow self-service transactions, such as tax payments and domestic transfers in conventional bank branches and links that will allow mortgage and inheritance handling through TV, phones in all branches.

At Gakugei-daigaku Akamai branch, which has been renewed as the first MUFG next branch, approximately 40% of the transactions at the bank counter were shifted to self-service transactions, such as STM and LINKS, and we are receiving quite favorable feedback from customers who actually used it.

As you can see, we are reducing the bank counter administrative work by moving forward and shifting channels while carefully confirming the acceptability of our customers.

Please go to Page 39. The left-hand side is wealth management. The number of group collaborations has largely exceeded the plan, and we are feeling a certain level of success. However, on the other hand, there is an impact of uncertain market environments, therefore the AuM growth is below plan.

In order to solve our largest issue of further strengthening individual customer referrals, we are drastically reinforcing our securities retail side through increasing the number of professionals. Moreover, as for real estate and inheritance, which are our strong areas, we are further strengthening them as well.

The right-hand side is showing RM-PO Model and real estate value chain. We have had a satisfactory start, such as the number of intergroup collaborations on real estate transaction information and this increased by 2.5x year-on-year as a result of restructuring of bank and trust bank by functions.

Moving forward, we aim to strengthen our matching capability through quality improvement of the information provided by corporate banking group and commercial banking office and increase the number of POs.

Please go to Page 40. Asset management on the left-hand side is successfully developing corporate customer base as seen in the accumulated investment assets.

From now onwards, we will aim to increase the AuM even in the individual market by moving forward the advancement of our business base, such as adding gatekeeper function in our product selection.

Institutional investors on the right-hand side, the market deteriorated more than expected, therefore sales and trading was below plan.

While streamlining part of the operation, we will reconcentrate our management resources to areas that MUFG has strength from the outset, such as FX and structured business. This selection and concentration will proceed in a speedy manner.

On the other hand, investor services is performing well in Japan and overseas. The asset management company's coverage that was spread across within the group is now centralized under the Trust Assets Business Group. Therefore, we will strengthen cross selling of our banking services that go with fund administration.

Page 41 is the Global CIB business model transformation. In fiscal year 2018, we reduced low-profitability assets by JPY 800 billion as well as re-examined transactions which RORA did not meet our internal standards. As a result of this, we improved the transaction profitability with 101 companies and dissolved transactions with 49 companies.

Within this fiscal year, we are planning to receive the transfer of the Aviation Finance business from DVB Bank of Germany. And with this, we will be able to add on a high-profitability asset of JPY 700 billion plus. As you can see, we are accelerating the portfolio recycle and steadily proceeding in product enhancements and O&D.

Please skip a few pages and go to Page 50. From here, it is about our major issue, which is expenses. First of all, I will explain the progress of the last year. Please look at the right-hand chart. The hill shaped line was the outlook for expense ratio announced last May. We planned forward-looking strategic expense allocation and regulatory costs in the first half of the midterm business plan, therefore expecting the situation to worsen. In fiscal year 2018, expense ratio was 71%. However, expense cutting efforts were put in both in Japan and overseas, therefore it is now trending lower than the initial midterm business plan.

Please go to Page 51. I will explain by each measure. And first of all, number one, as for BAU and regular businesses, both Japan and overseas mainly kept down their personal expenses and amortization expenses while we injected JPY 38 billion of strategic expenses into the growth area, such as Global Commercial Banking and consumer finance.

Number two, in addition to the increase of overseas regulatory costs, facility costs increased due to completion of constructing large buildings in Japan. Lastly, number three, structural reform effects gradually started to bear fruits, such as reducing -- reduction of workload through digitalization and achieved cost reductions by initiating group-integrated operations, which generated JPY 10 billion in fiscal year 2018 as a result of implementing measures.

We believe that this is a satisfactory start towards achieving JPY 50 billion in the last fiscal year of the midterm business plan. Let me look at these by business groups. Global Commercial Banking business group that is working towards business expansion is showing a large expense increase. However, on the other hand, corporate and retail business groups, which their main market is Japan and corporate banking business group are progressing in expense reductions as the overall picture.

Page 52 is showing the status of headcount and branches. Towards fiscal year 2023, we are planning to largely reduce the workloads in Japan through Channel/BPR and digitalization strategy.

Last May, it was said that we will reduce the banks workloads equivalent to the labor of 9,500 personnel. However, recently the fine tuning has been done, and now we have an outlook of reducing the workloads equivalent to the labor of over 10,000 personnel. As for headcount, it is declining more than the original outlook in fiscal year 2018 due to thorough control on hiring number and increasing retiring employees that joined the company during the mass hiring phase.

As for number of branches, we once again re-examined the branch network. Originally, we set to reduce 20% of branches in 6 years. However, we are going to accelerate that up to 35%.

The policy to reduce the conventional type bank counter branches by 50% has not changed. Please go to Page 55. From here, it is about our capital policy. This time, I have become the President and CEO, succeeding Mr. Hirano, therefore, for once again , I would like to confirm with you our way of thinking regarding basic policies for shareholder returns. We positioned returning profit to all of our shareholders as an important management issue. There are no changes in the basic policy of continuously seek to improve shareholder returns focusing on dividends and the pursuit of an optimal balance with solid equity capital and strategic investment for growth. First of all, we place dividends as our basic shareholder return and will stably and sustainably increase the dividend to achieve our target payout ratio of 40%, at the latest, end of fiscal year 2023.

Secondly, share repurchase will be conducted in a flexible manner as part of shareholder return strategies in order to improve capital efficiency. For this, 3 factors will be considered. First one is performance, progress, forecast and capital situation, second is strategic investment opportunities and third is market environment, including share price. Lastly, in addition to complying with capital regulations, we will confirm each time our outlook on whether we will be able to stably maintain necessary capital level to secure our rating of single A and above, continuing into future and then further enhance shareholder returns.

Next, Page 56 is about dividend. Unfortunately, we were not able to achieve our performance target of JPY 950 billion. However, year-end dividend will remain as announced last November at JPY 11. The annual dividend will be JPY 22, including the interim dividend of JPY 11 for fiscal year 2018, this is a JPY 3 increase year-on-year and the payout ratio has increased to 32.9%.

I would like to meet the expectations of our shareholders by realizing a payout ratio of 40% as soon as possible.

Considering that we saw our net business profit hitting the bottom and now recovering, we are going to set our dividend forecast for fiscal year 2019 to be JPY 25, which is a JPY 3 increase. Payout ratio as a result of this will be 35.9%.

Page 58 is about strategic investments. When this year started, we sold the shares of Dah Sing Financial Holdings and Standard Life Aberdeen. We will continue to seek optimizing our strategic investments.

Page 59 is regarding equity holdings. As stated on the right-hand side chart, fiscal year 2018 reduced equity holdings by JPY 127 billion in acquisition cost base, and we recorded JPY 115 billion of gains on selling these shares. As a result of the accumulated selling book values since the start of the selling plan is JPY 600 billion. Furthermore, the agreed amount is JPY 160 billion (sic) [JPY 164 billion]. In order to achieve the target of reducing our equity holdings to approximately 10% of our Tier 1 capital, towards the end of the midterm business plan, we assume that we need to sell around JPY 800 billion book value worth. The Tier 1, which is the denominator, is not accumulating profit as we originally assumed. Therefore achieving 10% is difficult. However, we considered this as the planned reduction of JPY 800 billion is becoming visible.

Lastly, I will explain about our initiatives towards ESG issues. Please look at Page 61. Social and environmental issues are global scale issues, and in order to contribute to the further understanding of it as MUFG, we have newly set a numerical goal of JPY 20 trillion for sustainable finance.

Page 62 is regarding the revision of the MUFG environmental and social policy framework. After this revision in principle, we will not provide financing to newly construct coal fired power generation projects. As a result of this, we expect the credit balance of coal fired power generation plant projects will gradually decrease in the mid- to long-term. In regards to restricted transactions forestry, palm, oil and mining (coal) were newly added.

Asset management businesses policy was newly created also.

Next Page 63 is about governance. At MUFG out of 16 directors, 9 are outside directors.

All of the chairpersons of all of the committees, including Nomination and Governance Committee are all outside directors.

As for the change of CEO this time, Nomination and Governance Committee chaired by Mr. Okuda started the discussions and review since last August and had total of 7 thorough discussions. Based on the criteria established beforehand, our several -- out of several candidates, I, Mike was selected.

Moreover, the succession of outside directors were also decided by the Nomination and Governance Committee. And as stated in the reference material, we are planning to propose partial change of outside directors at the Annual General Meeting of shareholders. We will continue to actively reflect the various feedbacks of our outside directors in our group management.

MUFG is in mid-way of aiming to recreate itself through business model transformation as one unified group. Business operating environment is difficult. However, under the slogan of, create a new trust, I intend to provide products and services that will meet our customers true needs and expectations. We will continue to aim to realize becoming a group that enjoys global trust and reliability and to have a presence that symbolizes innovation. Therefore we seek further understanding and support from our investors and rating agencies.

That is all from my side. Thank you very much for your kind attention.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]