U.S. Markets close in 2 hrs 12 mins

Edited Transcript of 8306.T earnings conference call or presentation 18-Nov-19 1:00am GMT

Q2 2020 Mitsubishi UFJ Financial Group Inc Earnings Presentation

Tokyo Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi UFJ Financial Group Inc earnings conference call or presentation Monday, November 18, 2019 at 1:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kanetsugu Mike

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Unidentified Company Representative, [1]

--------------------------------------------------------------------------------

Thank you very much for waiting. We will now start the IR presentation for Fiscal Year 2019 First Half Results for Mitsubishi UFJ Financial Group. I would like to first of all, introduce the speakers to you: Kanetsugu Mike, Group CEO; Muneaki Tokunari, Group CFO. My name is [Kanye] of the Investor Relations office. I will be serving as the emcee. In terms of the schedule, we will present the fiscal year 2019 first half results and major initiatives. The explanation will be for 30 minutes. After that, we will be taking questions from you. Overall, the time scheduled for this meeting is 1 hour and 15 minutes. We will now start. Mike-san, please?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everyone. This is Mike speaking. Thank you very much for attending our IR presentation despite your busy schedules. Without further ado, I shall start.

Please refer to Page 3. This page outlines the 3 key messages. First is our performance. The net profit for the first half was a 67.8% progress for the fiscal year '19 target. Fiscal year '19 target will be maintained at JPY 900 billion given the uncertain business environment. Second is shareholder return. Fiscal year dividend will be JPY 25 per share, up by JPY 3 compared to fiscal 2018. And the share buyback, up to JPY 50 billion, will be implemented. Third is the initiative to achieve the financial targets. We will promote top line growth in Japan and globally and control costs, and the risk-weighted asset details will be explained later.

I would now like you to refer to Page 6. The financial results will be explained in terms of gross profit. Based on the global markets, revenues increased by JPY 90.7 billion to JPY 1,973.3 billion. G&A expenses have been suppressed domestically. However, because of regulatory cost increase as well as business expansion overseas, it increased JPY 27.5 billion year-on-year. As a result, our net operating profit increased by JPY 63.1 billion year-on-year at JPY 631.3 billion. For this fiscal year, we have been trying to reverse the trend in the net operating profit, which has been declining since the introduction of the negative interest rate policy of BOJ. But we have been able to increase the core business for the first time in 4 periods. And the net operating profit has been increasing.

Expense ratio increased -- decreased by 1.8 point -- at 68.0%. Below the net operating profit, there was a reversal of loan-loss reserve. Net profit decreased by JPY 40.8 billion at JPY 609.9 billion. Net profit had a significant upside compared to the original forecast. The progress against our fiscal year target exceeded 60%. However, against the backdrop of additional rig count in the United States, we will maintain a net profit target of JPY 900 billion to consider a possible downside risk.

Next, I would like to explain the results by business groups. And please refer to Page 9. The customer groups came in negative, except for the Global Commercial Banking. On the other hand, Global Markets increased on the back of the increase in treasury revenues. As for corporate banking and Global CIB, on a constant currency basis, revenues increased. Asset Management & Investor Services had a temporary decline because of increased expenses as a result of the acquisition of the asset management company in Australia. However, the main business remains strong. As for details of the performance, please refer to the appendix of the materials.

Please proceed to Page 10. Loans and deposits will be explained. The right-hand graph shows that the loans overseas on a constant currency basis increased by JPY 1 trillion. The impact of the consolidation of Bank Danamon was JPY 1 trillion, therefore, existing business was flat. Overseas deposits, on a constant currency basis, increased by JPY 1.8 trillion. Even without the Bank Danamon consolidation, it increased by JPY 0.9 trillion. The deposit loan gap in foreign currency decreased by JPY 0.9 trillion.

Page 11 is domestic loans. Right-hand top of the graph shows the deposit lending strength. A low interest rate environment continues. Easing of supply and demand for funding continues, therefore, gradual decline is expected going forward.

Page 12 is overseas loans. Right-hand top, the combined deposit lending spend for the commercial bank and trust bank was impacted by the lowering of interest rate in the market, showing declines. The NIM of the 3 partner banks have declined because of funding cost increase.

Page 13 is the non-Japanese yen loans and funding. Customer deposits and mid- to long-term market funding covers the foreign currency loans. Loan balance is now to be referred to, and we have been increasing loan balance overseas. But as a result of the reduction of low-profit loans as well as monitoring our low-profit customers, the -- we have enhanced the loan balance control. Deposit balance is shown on the other side. Transaction banking has been strengthened, leading to increase in sticky deposits. Foreign currency deposit loan gap is declining as a result.

Right-hand bottom is mid- to long-term market funding. The foreign currency-denominated corporate bonds with average tenure of 7 years as well as secured dollar-denominated funding utilizing JGBs have led to diversification of the funding. Currency swap are mainly mid- to long-term currency swaps. Deposit loan gap is being funded in a stable manner.

Page 14 is investment securities. Please refer to the table on the left-hand side. The outstanding balance decreased by JPY 2 trillion because of declines in JGBs. With respect to valuations, we have been able to realize unrealized gains in the first half. However, with a low interest rate in the United States, foreign bonds improved significantly, with unrealized gain of JPY 540 billion. Together with the domestic bonds, we have JPY 900 billion of unrealized gains.

Please refer to Page 16. Asset quality will be explained. As you can see on the right-hand side, on the back of the rating upgrade of the major companies, credit costs still remained at JPY 18 billion.

Please refer to Page 19. Major initiatives will be explained. Before explaining the major initiatives, let us confirm the financial targets. As of end of September, ROE was 8.84%. Expense ratio is 68.0%. And CET1 ratio on a finalized Basel III reforms basis was 12.1%. In the first half, there were one-off factors. Results were fair, but further initiatives will be required to achieve the budget for fiscal year '20 as well as the midterm financial targets. In particular, for ROE and expense ratio, we must remain vigilant.

Page 20. Initiatives to achieve the financial targets are explained. From here, top line, cost control and risk-weighted asset control will be explained.

First of all, the top line. And please refer to Page 21. These are the commercial banks in Asia. Currency of the Thai has been increasing loans successfully, and the NPL ratio is stable at low levels. It has been designated as D-SIBs in Thailand. The driver of this growth is synergies being harnessed, with a focus on the value chain.

Page 22, the trend of net income for Krungsri is shown here. After our investment, CAGR has been exceeding at 10%. It is clearly showing growth different to other local banks in Thailand. This success model will now be deployed in Bank Danamon by capturing the growth of the Indonesian market. And by harnessing synergies with MUFG, Bank Danamon's growth will be further accelerated.

Page 23, Global Asset Management & Investor Services will be explained. As you can see here, the ROE for this business group was 20%. It is an asset-light fee business. Our strategy is to expand this business so that ROE for MUFG overall can be improved. In the asset management industry, subject to intensifying competition, we will aim to become a player with global presence.

In August of this year, we have completed the acquisition of an asset management company in Australia. In September, a new globally uniform brand of the First Sentier Investors will be introduced. PMI is proceeding successfully. From 2020, it will contribute to the consolidated revenues of MUFG in a full function manner. In Asset Management, we will aim for the global top 15 position. For Investor Services, through acquisitions, we have been focusing on fund administration, which is an alternative investment growth area. And through the expansion of the customer base and expansion of services, we will aim for global top 5 in the alternative space.

Page 24, the Global CIB business will be explained. Left-hand side should be referred to. In fiscal year 2018, we have been reviewing low-profit transitions in the monitoring area. We will accelerate this process in fiscal year '19. Specifically, we will raise the profitability threshold for taking up transactions. And the number of -- monitoring the customers that do not meet the criteria will be increased from 370 to 600. By so doing, we will aim for improved profitability as well as ROE.

Please refer to the right-hand side, we have acquired the Aviation Finance business from the DVB Bank in Germany. The lending portfolio transfer will be completed soon. With this acquisition, we will have Aviation Finance become the third pillar of our business, which will follow Project Finance, which is global #1, and securitization, globally #4. The new lending margin for Aviation Finance is 2x that of the Global CIB. And the global demand for the aviation market is strong against the downturn in the economy. Future growth is expected. With this acquisition, we will obtain a team that is strong in terms of valuation of the aircraft for Aviation Finance as well as disposition in addition to the lending assets. Therefore, it is very significant for our business going forward.

Page 25 is wealth management. Japan is unique, that there is uneven distribution of work among the elderlies, one of the highest-interest inheritance tax in the world and corporate owners accounting for a majority of high net worth people. Therefore, in the wealth management business, it is important to meet needs, not only in investment management, but also asset disposition as well as business succession. We need to provide advice-type business administration, inclusive of real estate and equity. Therefore, we will create the business opportunities, taking into consideration the customer base as well as comprehensive financial functions. We will also harness the expertise of Morgan Stanley in terms of wealth management.

Please refer to Page 26, the consumer finance business in Japan. In the prolonged low interest rate environment, one the few businesses that is growing is consumer finance. Left-hand side is the combined unsecured loan and guarantees, inclusive of the commercial bank, on NICOS and ACOM, continuing to increase. The right-hand side, bad debt expense ratio is stable at a low level. Risk will be monitored and continue to capture the market growth in this area.

Page 27 is treasuries. On the back of flexible portfolio management to the changes in the environment, unrealized gains for the global market business group increased to JPY 900 billion. We shall continue a stable portfolio management in the mid- to long term.

Page 28. From here onward, I will explain the cost control and risk-weighted asset control identified as 2 major challenges of the MUFG as observed by the investors. First, cost control. Please refer to the graph on the left-hand side. This is the expenses in the midterm for fiscal year '19. The curve on the left shows the outlook of expense ratio announced in May of last year. As you can see, the expense ratio is below the assumed level of the midterm business plan, due to the increase in gross profit and efforts to suppress expenses in Japan and overseas.

Please look at the upper-right chart. I will explain by measures. Mainly on the Japan domestic side, cost reduction has progressed due to transformation initiatives such as reduction in HR expenses and depreciation and workload reduction from digitalization. On the other hand, in addition to increase of regulation response expenses, we have invested over JPY 50 billion as strategic expenses in growth areas such as Global Commercial Banking and consumer finance. Approximately half of this strategic expense is from consolidated Bank Danamon.

If we look at this by business group, as you see on the bottom diagram, Global Commercial Banking, which is seeking expansion of operations, shows an increase. However, on the other hand, retail and commercial banking business groups that has Japan as their main market has progressed in cost reduction.

Page 29 is showing the outlook for expenses in MUAH and bank. First of all, please look at the left-side pie chart. The consolidated expenses of MUFG in fiscal year 2017 was JPY 2.6 trillion. 60% is comprised by bank and MUAH expenses. Other than bank and the United States, such as Southeast Asia, Asset Management & Investment Services and domestic consumer finance are assuming an increase in expenses in response to the gross profit growth. Therefore, in order to reduce the group-wide expenses, the most important point is how we are going to reduce the actual expenses amount of bank and MUAH.

The dark gray bar graph are the main factors of increases. From the left, advanced investments in growth areas such as digital. Next is overseas, then taxes and other factors. These will be offset by measures 1 through 3 in the red colors, which are domestic workloads, facility and purchasing system, which means compressing the actual expense amount in the next midterm plans, final fiscal year, fiscal year 2023, to the level of our previous midterm plans. Final fiscal year, fiscal year 2017 is my grand design and will as CEO.

Fiscal year 2020 and the following next midterm plan will be established from now onwards. However, there are many measures that will take time to express its effects. Therefore, in order to realize thorough cost reduction, currently, we are reviewing specific measures to enable us to establish some parts of the midterm plan in a front-loading manner, especially as shown in the graph. As for the overseas operations, if we just leave it as it is, cost of the larger increase due to responding to regulations as well as inflations, therefore, the direction is to consider additional measures for Americas to minimize the net increase of expenses.

Please look at Page 30. I will explain specific contents of cost control. First of all, as for the domestic workloads, by thoroughly digitalizing our processes and channel as well as BPR strategies, we will reduce the workloads that is equivalent to the labor of 4,000 personnels by fiscal year 2020 and 10,000 personnels by fiscal year 2023. As for facility costs, we expect an increase due to onetime relocation expenses and initiatives to respond to the business continuity plan. However, in addition to the reduction of branches and ATMs as well as consolidating the headquarter functions spread in the marine, RV and automotive areas, we are planning to achieve a reduction that will exceed the incremental costs. As for purchasing and system costs, it will be reduced by optimizing quality as well as negotiating with suppliers to improve unit prices. And outsourcing costs will be reduced by optimizing the relevant costs. Moreover, system costs will be reduced through controlling the total investment amount, consolidate products and services as well as streamlining IT assets.

Lastly, it is regarding expense control for overseas, which has the most issues. In the Americas, we will proceed in controlling HR expenses, reduce purchase and outsourcing costs, relocate some resources to lower-cost locations and reexamine the branch network.

As for Europe, we will review the branch network in addition to HR expenses control. We have made the press release the other day that we will consolidate the booking accounts of Spain and Vienna branches.

In Asia, we will be working on streamlining the operations and systems.

Page 31 shows the situation of the domestic headcount and branches. Headcount decreased at a faster pace than what we have originally expected due to controlling the hiring side and increasing retirement of employees hired during the mass hiring period. Branches are steadily reviewing the network.

Please go to Page 32. I will explain about the other management issue, risk-weighted asset control. From the past, we have been growing our loan balance mainly in overseas and increasing risk-weighted assets. However, we think of non-Japanese yen liquidity or restrictions on capital and risk-weighted assets. I thought that this pace is not sustainable. In order to effectively utilize valuable capital and non-Japanese yen moving forward, our policy is to have a more thorough risk-weighted asset control. When we do so, what is most important is the steady efforts taken by the business groups and sales front. We have been already managing our risk return through RORA in quite other granularity. However, we would like to take another step forward and build a framework that business groups can reduce the total amount in a self-sufficient way.

As part of this initiative, we have been working on the reduction of low-profitability assets, mainly in corporate banking and Global CIB since last fiscal year. We are also reviewing our business portfolio as well. In addition to optimizing our strategic investments, we are reviewing measures under the lead of corporate center by looking at the future finalized Basel III reform basis. With these efforts, we are also having dialogues with the regulators in a respectful manner while putting efforts in continuously advancing and refining risk measurement methods, risk-weighted assets control and improvement of capital efficiency. I actually feel that the awareness of the 2 at the field level is steadily increasing. We'd like to maintain this momentum and thoroughly consider the impacts towards the top line as well as to our customers and proceed in it with a strong will.

Please go to Page 35. From here, I will explain the digitalization, which is an important pillar throughout the midterm management plan. First, a shift of sales channel. In recent years, we have been putting efforts in enhancing the function of smartphone apps, improving the user interface and user experience and installing new-type ATMs. And the positive effects of these efforts are starting to become visible. For example, in fund transfers, which have -- which we have approximately 46 million in a half year, the percentage of it being done through Mitsubishi UFJ Direct or apps has gone up from 39% to 42%. As for pay tax and utility bills, pay at branch largely decreased from 15% to 9%, and there was an increase through STM or the Internet. For a change of address or replacement of unusable cards, also, there is a large increase of it being done using apps.

Please look at Page 36. As a result of what was mentioned, the usage of our Internet banking for individual users, Mitsubishi UFJ Direct has steadily increased, and the transactions at the bank counter are steadily decreasing.

Please go to Page 37. This is Global Open Network, GO-NET, which we have co-established with Akamai in the United States. This August, we have welcomed Mr. Tokunaga from Akamai's Japan local subsidiary as our GO-NET Japan CEO and steadily preparing for the operation start. We are proceeding in the development to start the service for credit card businesses in the first half of 2020. After that, we are planning to expand the service-to-payment business, such as prepaid cards, e-money and award points.

Page 38 is about the smartphone app, MUFG Wallet. We, for the first time in Japan, have adopted Visa touch payment and released an app this October that can be used in 200 countries and regions around the world.

Page 39 shows the case of streamlining operations, utilizing new technology. The left side shows streamlining the call center operation, utilizing AI. We have implemented AI chatbots responding to 12,000 referrals a month from customers as well as reducing the number of calls to the internal help desk by approximately 20%. The right side is streamlining operations of direct debit application. 8 million application forms per year need to be processed. However, by having AI read the forms, it is contributing to the reduction of workloads.

Page 40 is showing what we have said in the press release the other day, the next-generation financial transaction service, which utilizes Blockchain technology. By utilizing the Blockchain technology, we aim to provide a platform where security settlement and fund settlement can be executed automatically in a centralized manner and preserve the investors' rights. Towards the realization of this, we have established a security token research consortium with collaborating companies.

Please go to Page 43. From here, I will explain the capital policy. First of all, I will explain the first half capital allocation results and the second half outlook. Here, we are showing you the CET1 ratio changes on the finalized Basel III reforms basis. In the first half, we have utilized our capital for 2 major acquisition deals, namely Bank Danamon and First Sentier Investors. However, as I have explained at the risk-weighted assets control page, we were able to largely reduce risk-weighted assets by strengthening risk-asset management and advancing risk measurement methods. As a result, CET1 ratio, on a finalized Basel III reforms basis, has improved by 0.7%.

In the second half, the CET1 ratio will decrease due to the impact of release of special treatment of Morgan Stanley's investment. In addition to this, the growth investments shown in blue, which are acquisition of Aviation Finance business and expansion of overseas business, mainly in commercial banking, is expected to increase risk-weighted assets. We would like to offset this increase by strengthening the risk-weighted asset control, which I mentioned previously.

Please go to Page 45. This is regarding dividend and share repurchase. No change in the policy of putting efforts in enhancing shareholder returns having dividend as a base. At the latest, by the end of fiscal year 2023, we aim to increase our payout ratio up to 40%. Dividend per share at the interim period will be JPY 12.5 as originally forecasted. The -- and the annual dividend of JPY 25 will be maintained. We have also decided to conduct JPY 30 billion of share repurchase. All of the repurchased shares will be canceled. We will continue to truly maintain our capital soundness.

Page 46 shows the history of strategic investment in overseas. First, the top-blue layer. Since 2012, we have been investing in commercial banks in Vietnam, Thailand, Philippines and Indonesia in order to capture growth in Asian markets. Moreover, as shown in the blue bottom layer, in order to expand the fee business that does not require assets, we have also been investing in overseas asset management and investor service-related companies. On the other hand, we are regularly reviewing our strategic investments from a strategic investment profitability and capital efficiency perspective. As shown in the orange layer, we have had 4 divestments. Moving forward, we will continue to proceed in the optimization of strategic investments.

Next, on Page 47, shows our equity holdings. As you can see on the right-hand side, fiscal year 2019 first half reduced the equity holdings by JPY 52 billion on an acquisition cost basis. From this, we have recorded JPY 41 billion of gains on sale. As a result of this, the accumulated selling book value from the start of our selling plan is now approximately JPY 646 billion. Moreover, a great amount has increased to JPY 213 billion, and we expect to fully realize the sales of 5 years' accumulated book value of JPY 800 billion by our targeted end of fiscal year 2020.

Business environment remains to be severe. However, we would like to promptly respond to issues and surely realize a leap from reversal. We will continue to aim for the realization of to have an existence that is really light and trusted globally and symbolizes innovation. Therefore, we seek further understanding and support from our investors and rating institutions.

That is all from my side. Thank you very much.