Full Year 2019 Resona Holdings Inc Earnings Presentation
Tokyo Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Resona Holdings Inc earnings conference call or presentation Thursday, May 23, 2019 at 1:05:00am GMT
TEXT version of Transcript
* Kazuhiro Higashi
Resona Holdings, Inc. - President, CEO, Representative Executive Officer & Director
Kazuhiro Higashi, Resona Holdings, Inc. - President, CEO, Representative Executive Officer & Director 
Good morning, ladies and gentlemen. I am Higashi of Resona Holdings. Thank you very much for coming today to our meeting.
Although, the financial results are already announced, I would like to talk about the summary and overall strategies this morning.
Well, the previous fiscal year had a large event setup of Kansai Mirai Financial Group, which went as scheduled. But the environment surrounding financial institutions was even tougher with continued low interest rate and globally higher market volatility for us as an additional tougher environment. That was an environment for us for the last fiscal year.
Against such backdrop, as we mentioned at financial reporting as well, we took an initiative to broadly improve soundness of securities portfolio. And net income was JPY 175.1 billion against the original target of JPY 200 billion. While taking seriously the fact that our plan was underachieved, given the market environment, we consider that the initiative we have taken reduced downside risk in the mid to long term.
Income structure reform will be mentioned later more but our basic strategic plan and target has made a steady progress.
Contraction of loan to deposit spread came in line with the plan, while the fee income had grew especially for the -- fee income growth has landed at the record-high level.
We will refer to the cashless platform challenges and so on, later on more.
On April 1 this year, as was scheduled, Kansai Urban Bank and Kinki Osaka Bank merged and Kansai Mirai bank started its operation. And with the upcoming system integration, we shall continue to make a steady progress.
Now let me begin my explanation, the financial part summary will be covered briefly. So please turn to Page 4. This is the outline of financial results. Net income was JPY 175.1 billion, down by JPY 69 billion on -- year-on-year adjusted 5-bank basis. Except for the one-off income shrinkage deriving from management integration, the decline is mostly, by our measures, to improve securities portfolio soundness.
Down on the left, as it's going to be explained later, we announced share buyback up to JPY 10 billion and annual common DPS to stay at JPY 21.
Buyback will be the very first to take place since the inception of Resona Group.
Now please turn to Page 6. On this page, I would like to touch on only one point. Down on the left, in the red dotted line part, this shows recovery ratio. This indicates to what extent the decline of net interest income from domestic loans and deposits is recovered by the pickup in fee and commission income. Last year was 54.8%. This recovery ratio is hiking year-by-year. And we definitely shall seek to swing back to profit by having fee and commission income more than compensate for the failing net interest income from domestic loans and deposits.
Next page, please, for loans and rates. On the left-hand side, line one shows 2.89% growth of average loan balance on adjusted y-o-y basis, exceeding the original plan of 2.54% growth. Notable is the 3.89% growth of line four, corporate banking business unit, which served as a driving force.
Line two, loan rate was down by 6 basis points, finishing in line with plan. As down on the right side shows, the magnitude of contraction is getting less. The outlook for fiscal '19 is the average loan balance to go up by 2.08%, rate to be down by 4 basis points. And loan-to-deposit net interest income to be down only by JPY 8.4 billion, as you see on line 12 in the table.
Now please skip to Page 10. This is fee income. Consolidated fee income was 3.2% up on adjusted y-o-y basis, and as a ratio hit 30% even under 5-bank structure.
Insurance, fund wrap and housing loan-related fees drove the entire fee income.
Incidentally, fee income excluding fees from insurance and investment trust sales, which is below the black line, they increased by 5.4% on year-on-year basis. For FY '19, we plan to increase mainly on insurance fund wrap, and on the -- and settlement-related fees to deliver growth of 5.7% as a whole.
Cashless platform and other new domains are expected to grow. And Kansai Mirai Financial Group fee income is also expected to expand. At present, fee income ratio of Resona Holdings is 30%, while that of Kansai Mirai Financial Group is 21.3%, in that there's much room left to grow.
Now please look at Page 13. This is credit cost and NPL. Line one on the left-side chart shows consolidated net credit costs of JPY 1.3 billion from the reversal gain of JPY 10.1 billion the previous year. Fiscal '19 plan is JPY 22.5 billion or credit cost ratio at the level of 6.1 basis point.
Note that many large event seemingly are happening newly, but we make the plan by keeping in mind that the drop of reversal gain at present may continue as we have said, and that the credit cycle may turn around. So we shall seek to further reinforce screening and management system to have a firm grip on costs.
Now please turn to Page 14. Note, this is regarding the securities portfolio. Upper right shows JPY 22.7 billion loss, which was internally recognized as loss incurred from securities portfolio improvement. As a result, as is shown on the left-side chart of the thorough unrealized gains and losses, which is column D, the aggregate of 3 assets. Line 4 JGB, line 9 foreign bonds and line 12 domestic investment trust turned from JPY 32.1 billion loss in Q3 into gains at the end of the year.
Policy-oriented listed stocks held was reduced by JPY 11.6 billion. Resona has 2 guideposts in our reduction plan. One is the disposition of JPY 35 billion outstanding. The percentage of progress is 45%. The other guidepost is to reduce the balance to the range between 10% and 20% of CET1 capital and this was achieved. We shall continue further reduction through negotiation with clients in the respectful manner.
Page 15, please, for capital adequacy ratio. The top right line 9, international standard common equity Tier 1 capital ratio excluding net unrealized gains on available-for-sale securities was 9.3%, down by 0.2% from the previous term exceeding the midterm plan target at 9%. That drop compared with previous year was mainly due to the increase of risk-weighted assets by JPY 4.5 trillion, associated with the integration of Kansai Mirai Financial Group.
Down on the right, Kansai Mirai Bank and Minato Bank are planning to adopt F-IRB from June 2019. The impact from the finalized Basel 3 is assessed by just including the increase of risk-weighted assets and the actual result of March-end. And it suggest CET1 ratio to be around 8.8%.
Page 16, please. This page shows earnings target for FY '19. FY '19 consolidated earnings targets of the holdings is JPY 160 billion. On the right-top chart as shown, the target to grow nearly JPY 25 billion from the previous year, but excluding the one-off gains of JPY 39.8 billion from the last year result. Compared to midterm plan, this will be unfortunately JPY 10 billion downward. But it is due to lower dependence on the market division given the current market conditions.
Regarding total of group banks on the bottom chart, line one gross operating profit is expected to be JPY 616 billion. As for customer divisions, as was mentioned earlier, the JPY 8.5 billion decline of net interest income from loans and deposit shall be more than recovered by JPY 11 billion growth of fee income. As for markets, bond-related rebound gains is included at the amount of JPY 21.8 billion.
Operating expenses, which will be explained later more, shall be controlled to stay flat except for the JPY 3 billion of integration costs.
Line 7, net gains on stocks also include bounce-back gain from the previous term. Credit-related expenses is estimated to be JPY 17 billion.
This is the end of financial summary part. So from now on I would like to talk about growth strategy, so please turn to Page 20. First of all, this is about our management direction. We are trying to get #1 position in retail business, as mentioned in the current midterm plan. Here we mentioned SDGs management. As the industrial and social structure evolve, and there is social issues surface today, Resona shall utilize the strength and solve social issues through our core business, which is financial services to create values for customers. That eventually leads us to the #1 position in retail.
To make this poster clearer, we announced commitment to achieving SDGs last November. We place the focus on 4 social issues as priority themes. They are local communities, which is much more relevant to us; and low birth rate and aging society; environment; and human rights. From there, we shall develop business strategies. To work on those issues concurrently, we refer to Three Omni-Strategies. That is described at the center of the slide. So those are our strategies.
Next page is for omnichannel, especially digital. Regarding omnichannel strategy, we should hope to see the continued transactions by a wide range of customers through smart phones as a start point. So that our recurring fee business income will be bottom-up. The top-right chart is already used at the previous meeting, but -- which drive the income growth by JPY 10 per person per day, now it is JPY 3.5.
Outpacing the plan. Bottom left shows app release, which took place in February last year. As of the end of this April, the number of downloads topped 1 million. As seen on the user chart down below, you see that younger generation uses account for a large share, which makes us feel a good response for reaching out to new customers.
Among our potential customers, transactions coming from app are steadily increasing, contributing to bottoming up the income or almost doubling from JPY 18 to JPY 36 per person per day, this consists of fee incomes and net interest margin. In April this year, data science room was set up inside omnichannel strategy division to further build the structure for more sophisticated marketing. We shall continue to pursue better customer convenience.
Next page is about face-to-face channel. As the society gets digitalized, lifestyles are greatly changing. Under the low interest rate environment, we see some banks taking the direction to reduce the number of branches, but we see the branches as important contact points with customers. So we shall maintain our branches as much as we can.
By operational reform, we are forging ahead with digitalization. So the branches can operate in a flexible manner by downsizing or replacing or taking lunch breaks, for example, dependent upon characteristics of each branch so that we can simultaneously enhance both customer convenience and operational cost efficiency. The number of branches that operate on holidays, such as 7-Days Plaza, has expanded to 26 branches, including the 3 new opens in May.
Right-hand side illustrates the image of the features of new branch system, expected to launch at Resona bank since FY 2020. There'll be no back office space, nor dedicated back office staff. Integrated consolidation services and banking procedures become possible by the use of tablets.
For more complicated consultation, TV counters for consolidation services by professional staff at headquarter center shall respond to the calls. As a matter of fact, as for the prototype scheduled to start from FY '20, at lab branch, is already set up in this building for the purpose of examining the operation and accelerating the preparation.
Next page, please. This is about omni-regional strategy. We have broader alliances with regional financial institutions, which make it feasible for us to reach out to more customers. When we refer to business partners, it's not limited to regional banks who need to enhance functions, so in the middle you see 2 lines, basis and function. For basis refer to ties with regional banks and for functions, that's ties with other than regional banks.
For our nonfinancial institution business partners, it means wider variety of solutions, sophistication of back office and system and reduction of operational cost. Into the future, we would like to further make the ties stronger in the areas of especially international business and cashless domain.
Last year, in the international business, new business corporations on alliance with Bank of Yokohama and Daido Life started through Bank Resona Perdania. So many relationships are being made, or whichever the case is, with or without capital ties. Regardless of the capital ties, we shall build win-win relationship in the wide range.
Let's move on to the next page. This slide is about KMFG and aiming to realize synergies at the earliest possible date. As we already explained about KMFG, I will skip the details for this slide. We will continue to implement various initiatives regarding sales as well as in cost. In particular, we view that there are still many areas where we can grow, especially around fee income and cost structure reform, et cetera.
The next page is about the omni-adviser strategy. Developing people is something that takes time and is difficult to do. We are focusing the most on developing people who are able to think in the best interests of the customers. In addition to the measures we already implemented, we will open Resona Academy this fiscal year in July as a platform to develop specialists and strengthen our human resource development capabilities so as to establish a consulting-based sales team.
At Resona Academy, we will start a series of programs teaching IFA, independent financial advisory level knowledge and expertise. For employees, we will swiftly roll out a series of HR initiatives with the aim of raising employee motivation such as extending the retirement age to 70 years old as well as expanding the Teleworking program.
The right part of the slide shows customer-centric approaches. At Resona, a fiduciary duty action plan was established in March 2016. Sales targets for financial products were abolished as a matter of course and the focus switched to asset balance instead. We call this Resona style internally. And now we have made assessments by the customer are part of performance appraisals.
However, we were not able to include them for the first half of this fiscal year. It is because we are currently working to make appraisals more systematic, and we are trying to shift to a new way of obtaining customer assessments. This would include asking questions to the customer about their intent to refer Resona Bank to others after their experience and reflecting their response in to employee appraisals.
On the next page, Page 26. From here on, I'll talk about our key businesses. The performance of the 5 key businesses on a 5-bank total basis as well as the fiscal year 2019 plan are shown on this slide.
Please turn to Page 27, which is a slide on the asset formation support business. The level of cash and deposit still remains to be a large proportion of financial assets in Japan. In light of these trends, as a trust bank, we will strive to leverage our investment capabilities nurtured through the management of corporate pension funds.
Looking at the middle, investment trust AUM managed by Resona Asset Management grew steadily. Since its launch, about 2 years has passed for our key product fund wrap, which now has reached approximately JPY 350 billion in AUM. Many fund wrap customers do not have investment trust balance with us and half of the inflow of funds into fund wrap comes from our deposits and 40% comes from outside, which means a considerable amount of fund inflow is coming from outside of our group.
On the middle right, the performance of fund wrap is shown. You can see that when the global stock market was volatile at the end of last year, the NAV fluctuation for fund wrap was relatively smaller, proving that fund wrap is a relevant product which contributes to asset formation over the medium to long term.
Moreover, from January 2020, asset management functions will be consolidated into Resona Asset Management so as to strengthen our investment management capabilities and have better control over matters such as conflict of interest. The asset management team at our trust bank, in fact, is not permitted to manage investment trusts. So the aim of attracting new customers was another reason why functions were consolidated into Resona Asset Management.
Page 28 is about the settlement business. There is a plan to double the cashless rate in Japan to 40% from the current approximately 20% by 2025, the year when the Osaka World Expo is going to be held. The support measures accompanying the upcoming consumption tax hike, aiming to alleviate the impact will be a tailwind for the shift to cashless as well.
The Resona cashless platform, which we started to provide since November, but has started to become active since this year, has been well received by corporate customers due to its supportive multiple payment options with one single terminal.
We are making good progress in developing new merchants as well. As of end of April, approximately 90 companies have already signed up and the target for this year is 500 companies. The team working on cashless currently is short of people, and we have been adding more headcount recently. Together, with Resona wallet app that started services in February this year, we will aim to expand the business rapidly and monetize.
Debit card is a default standard with new retail accounts and continues to expand. It supports global contact less settlement standards and issuances have exceeded JPY 1.5 million cards to date. Payment amount and frequency are both growing.
The next page shows the outline of the Resona cashless platform. Please refer to it later.
Page 30 is about the succession business. In Japan, approximately 65% of household financial assets worth JPY 1,830 trillion are skewed towards the 60 and over age group. About 1/2 of SMEs have a management challenge of not having successors. Moreover, the inheritance tax law was revised in 2015 and many people are facing inheritance issues, especially in the urban areas.
Resona will leverage its strength as a commercial bank with trust banking functions in order to offer one-stop solutions. The middle left shows how trust products can lead to multilateral transactions, which contributes to higher profitability. Through trust banking services we will be able to understand our customers' asset profile, which will enable us to offer consultation and make proposals in various ways. We can propose products such as insurance as well as effective use of vital property as a way to prepare for inheritance. And when the inheritance process starts, we can also broker property transactions if there are needs to liquidate.
As you can see on the middle right, we're already seeing results at KMFG, which is the blue part, and we will expand this to more customers going forward. We are also increasing the number of sales offices with specialists that are called trust offices. Currently, there are 88 of them, and we are rapidly taking action to have more.
Page 31 is about the SME business. Labor shortages are a serious issue for SMEs. More than 60% of customers continue to have capital investment needs. On the middle left, you can see how CapEx related loans are increasing firmly. The graph shows the combined results for Resona Bank and Saitama Resona Bank. CapEx related loans excluding the real estate industry are continuing to increase at high levels, which was 5.4%.
The bottom left shows that business matching deals that utilize our 5-bank group network increased substantially by 34% year-on-year.
Moving to the middle right. Many SMEs do not have pension plans. However, it is becoming increasingly important for SMEs to have a good pension plan in order to hire people. iDeCo+, a scheme for SMEs to match up the contribution made by their employees to iDeCo is being talked about lately. We are currently in the process of promoting it. There is data saying that 80% of SMEs with 100 people or less do not have a corporate pension plan. We believe that the market opportunity is large.
And efforts around SDGs, that I talked about earlier, are being made mainly at large companies. But for SMEs that still have much to do, we will offer support through SDGs consulting.
The next page is about the international business. We cover Asia as well as the United States through partner banks. As mentioned earlier, last fiscal year, we started to work with Bank of Yokohama and Daido Life as our business alliance partners with their stake into Bank Resona Perdania. We will strive to provide meticulous services to more customers going forward.
Page 33 is about the individual loan business. Even though population may be declining, our view is that the market is fertile as Resona's franchise is concentrated in the Tokyo metropolitan and Kansai areas where there are major cities. New housing loan origination showed strong growth, up 18% year-on-year. As you can see on the right, as there are more inquiries about the soundness of apartment loans, this part was put together for your understanding.
Our basic fee on apartment loans is that it is an effective tool to deepen transactions with premier customers. Of course, we put importance on both the qualitative aspects of the borrower as well as the quantitative aspects, such as net assets.
We look at the P&L over the whole period based off the long-term rent prediction system and apply screening rates after stress testing before a decision is reached. We continue to engage in stringent screening. In the middle are some quantitative data points. You can see that our portfolio is comprised by high-quality claims. For example, looking at the borrowers' age, about 80% of customers are in their 60s or above and about 90% are 50 or above. They are mainly high net worth.
Looking at the breakdown by regions, about 85% of loans are for properties in the Tokyo metropolitan and Kinki areas that are defensive towards property market downturns with regards to occupancy rates and profitability. 94.9% of claims are normal claims, and the delinquency ratio is less than 0.1% at 0.09%.
Origination vintage years are not concentrated in recent years, and repayment is making progress with stringent collateral screening, the actual coverage ratio is increasing too.
The next page is about cost structure reforms. Ever since our company received the injection of public funds, we have conducted operational reforms and established a low cost management structure.
Total cost is increasing currently due to the integration of KMFG, but with strict cost control in place, we will continue to well control overall cost, including IT system integration cost. As for reduction in personnel and nonpersonnel expenses, in particular, which excludes integration cost, when you look at other financial institutions, you can tell the progress we've been making in reducing the total amount of cost.
As for branch operations, as mentioned earlier, we will strive to reduce cost even further. Personnel downsizing is also in line with plan as you can see at the bottom right. We have been able to realize downsizing through natural attrition and not restructuring.
The next page, Page 36, is the final page that covers direction of capital management. Regarding shareholder return, in fiscal year 2019 on top of common DPS of JPY 21 for the year, we will conduct a share buyback of up to JPY 10 billion. Based off current stock prices, we believe it is highly rational as a way to use capital. It also reflects the management's perspective on current stock prices.
Regarding the funding for the JPY 10 billion share buyback, equal weight allocation of the JPY 160 billion business target for March 2020 will be the base, but part of the funds will be in excess.
Together with the annual JPY 21 dividend per share, the total payout ratio for March 2020 is expected to increase to 36.7%. The announcement coincided with the expected achievement of the Common Equity Tier 1 ratio of around 9%, but the decision was made more because of the current stock price level.
As for the Common Equity Tier one ratio of approximately 9%, we set the target as one that could be achieved during the current medium-term plan. However, in anticipation of changes in the economic cycle going forward, we believe that further capital enhancement is necessary and important.
Regarding how medium-term shareholder return should be, we will look at factors such as sustainable profit levels, capital adequacy ratio and ROE targets in the next medium-term management plan.
A portion of bought back stocks may be utilized for granting the already announced PSU, performance share units. But that should be less than 10% of shares of the planned buyback. Our plan is to cancel out the rest of the shares at an appropriate timing.
I've run a little long but this concludes my presentation. Thank you for your attention.
Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.