Mitsubishi UFJ Financial Group, Inc. (8306) Earnings Call Transcript & Summary

Thank you very much for waiting. We would now like to start the MUFG Fiscal 2019 results briefing net conference. I will serve as the MC today. My name is [ Kanye ] from the IR Office, Financial Planning division. As for the proceedings, our Senior Managing Corporate Executive Group CFO; Tetsuya Yonehana will give a briefing on the results for about 15 minutes, and then we will take questions. The total time for this conference is 50 minutes at most. Before we start the briefing, let me give you some reminders. In the briefing, we may make future forecasts based on current outlook, but they are all accompanied by risk and uncertainty. Please be aware that the actual results may differ from the forecasts. Now we will start the results briefing, turning it over to you, Mr. Yonehana.

I assumed the office of group CFO this past April. My name is Yonehana. I value constructive dialogue with our shareholders and investors, and I thank you for the relationship. Thank you very much for joining us for this MUFG net conference. Please look at the material entitled financial highlights under Japanese GAAP for fiscal year ended March 31, 2020. Please turn to Page 1. Let me give an overview of our 2019 financial results and shareholder return policy. The first bullet point at the top, net operating profits, which is profits from our main business, it was up JPY 105.8 billion year-on-year, making a first turnaround of net operating profits in 5 years. Next, profits attributable to owners of parent. There was an increase in credit costs arising from the absence of write-backs of loan loss reserves booked last year as well as posting of provisions in light of the impact of COVID-19. There are also net extraordinary losses resulting from onetime amortization of goodwill of our overseas consolidated subsidiaries. As a result, profits attributable to owners of parent was down JPY 344.5 billion year-on-year at JPY 528.1 billion. On shareholder return, in line with the forecast announced in May of last year, annual dividend will be JPY 25 including a JPY 12.5 interim dividend, up by JPY 3 over the previous year. As for fiscal 2020, currently, we cannot foresee when COVID-19 will be contained, and the scale of its impact on the real economy continues to be uncertain. But by making certain assumptions on the business environment, we have set a target of JPY 550 billion for the profits attributable to owners of parent. As for our dividend forecast, based on the same business environment assumptions we made in our profit forecast, we set it at JPY 25 for the full year. The plan is to keep it at the same level as fiscal 2019. Let me now talk about the progress of our main initiatives. Please look at the bottom of Page 2. In our digitalization strategy, we have concluded a strategic alliance with Grab, a major super app player in Southeast Asia, and we are aiming to provide new next-generation financial services. As for our resource control, our overseas expenses increased due to the consolidation of Bank Danamon and FSI, but as a result of expense controls in Japan, our expense ratio improved compared to the year before. Our risk-weighted assets are also down through steady sale of our equity holdings as well as employment of a more sophisticated risk measurement method. On strategic investment, we have completed our program of investments and consolidation into our group aimed at capturing market growth. We are progressing steadily to develop governance systems post investment and we will continue to try to maximize synergies within our group. Lastly, our programs on ESG in arrangement of finance-related to renewable energy, we are maintaining our top position globally. In the underwriting of green bonds publicly offered in Japan, we are maintaining our top position in Japan. We will continue to work on investment in loans that takes ESG into consideration to contribute to the realization of a sustainable society. Please go to Page 4. I will go over the details of the results. First, income statement summary. In the table on the left, line one, gross profit was up JPY 260.5 billion year-on-year. Let me give you the breakdown, line 2, net interest income due to lower interest rates in the U.S. and a squeezing of spread between long and short-term rates, it was down by JPY 29.8 billion year-on-year. Line 3, trust fees and net fees and commissions, the so-called fee revenue, with the consolidation effect of Bank Danamon and FSI, it was up by JPY 42.7 billion year-on-year. Line 4, net trading profits and net other operating profits amidst lower interest rates and shrinking spread between long and short-term rates, especially in the fourth quarter, net gains on debt securities increased greatly. A big factor pushing up the gross profits in line 1. Line 6 G&A expenses. Domestically, we continue to cut expenses, but due to the effect of consolidation of Bank Danamon and FSI as well as higher regulatory costs overseas, total expenses were higher by JPY 154.7 billion. As a result, net operating profits in line 7 was up JPY 105.8 billion at JPY 1,184.4 billion. The expense ratio at the bottom of the table in line 20 was lowered to 70.2%. Net operating profits increased year-on-year for the first time in 5 years. Next, the items below net operating profits. Line 8, total credit costs. In addition to the absence of reversal gains booked in the year before, we made a provision of about JPY 50 billion in light of the impact of COVID-19. As a result, credit costs increased by JPY 217.1 billion year-on-year to JPY 222.9 billion. Line 9, net gains on equity securities. There was a sudden drop in the stock market in the fourth quarter, resulting in increased write-downs of equities, and the gains were only JPY 31.3 billion. Line 12, equity in earnings of equity method investees. Mostly through a profit contribution for Morgan Stanley, it was a gain of JPY 277.2 billion. But compared to the year before, it was down by JPY 7.1 billion. Line 15, net extraordinary gains or losses. As we announced in our press release issued at the end of March, we took a onetime amortization of goodwill of Bank Danamon and the Bank of Ayudhya, this is the main factor behind the extraordinary loss of JPY 406.3 billion. As a result, line 17, profits attributable to owners of parent was down by JPY 344.5 billion year-on-year at JPY 528.1 billion. Next, please go to Page 5. The graph in the lower left-hand corner shows the change in net operating profits by business segment. In GCB, which is covering overseas SMEs and retail clients, as a result of consolidation of Bank Danamon, profits were up by JPY 25.7 billion year-on-year. In other customer segments, in R&C, covering domestic retail customers and SMEs, profits decreased, mainly due to a drop in asset management revenue. In JCIB, covering large Japanese corporates as well as GCIB covering large global corporates, due to foreign exchange translation, profits declined year-on-year. In Asset management/Investor Services, due to the impact of a review of our stake in an investee company, profits declined. But for the sum of all the customer segments, profits were marginally higher year-on-year. In Global Markets, a flexible portfolio management in the rate declining phase led to increases in treasury income, resulting in large gains in profits. Next, balance sheet summary. Please go to Page 6. The graph on the right-hand side at the top, the loan balance was JPY 109.4 trillion. Overseas loans increased on a net basis by JPY 2.9 trillion from the end of the previous fiscal year, excluding the foreign exchange impact. On the lower right-hand side, deposits were JPY 187.6 trillion. Overseas deposits increased by JPY 2.8 trillion, excluding the foreign exchange impact. So the deposit increases were in line with the amount of loan increases. Next page, Page 7 shows the changes in deposit lending rates yield. The left side, second line from the top graph is showing the changes in the domestic deposit lending rates. As the low interest rate environment holds, it continues to gradually become lower. The right-hand side line graph shows the changes in the overseas nonconsolidated deposit lending rates yield. The very bottom line represents the differences in yield between lending rate and deposit rates of Bank & Trust Bank calculated together the third line from the bottom, representing the interest margin of Bank of Ayudhya. Both of the lines are showing a decline due to the impact of low interest rates in the market. On the other hand, the second line from the bottom represents the net interest margin of MUAH in the United States due to efforts of improving the portfolio, it has increased. The very top line shows the net interest margin of Bank Danamon in Indonesia, and it has resulted in an increase due to reduction in funding costs. Please go to Page 8. The left-hand side, risk monitor loans shows an increase year-on-year due to the acquisition factor occurring from consolidating Bank Danamon. However, as shown in the line graph, risk monitored loans ratio remains at a low below 1% level. As for the right-hand side, credit costs, MUFG total is JPY 222.9 billion. Nonconsolidated continues to record reversal of credit costs. This is due to the increased factors such as reaction to the large reversal recorded in fiscal year 2018 as well as provisions of an approximate total of JPY 50 billion was recorded in light of the impact of COVID-19 and overseas Bank Danamon being consolidated. Please look at Page 9. I will explain the situation of our investment securities, such as equity securities, Japanese government bonds and others. First of all, as for the domestic equity securities shown on the second line from the top in the left top chart, unrealized gains decreased by JPY 600 billion plus year-on-year due to the drop in share prices towards the fiscal year-end. On the other hand, foreign bonds on line 7 increased its balance within a flexible operation of the portfolio grasping lowering interest rates as well as increasing unrealized gains by approximately JPY 560 billion. The overall unrealized gains for bonds, including domestic bonds was JPY 900 billion plus. Page 10 shows the capital adequacy. As stated in the middle part, at the left-hand side of this page, common equity Tier 1 capital ratio on a finalized Basel III reform basis was 11.7%, thus continuing to secure sufficient level from a continuing sound perspective. Please go to Page 11. Though it is as explained at the beginning, I would like to elaborate more on the fiscal year 2020 targets and dividend forecast. First, regarding the top left fiscal year 2020 targets. Most recently, as for COVID-19, we cannot see at this point when the situation will converge. Therefore, it is also still not clear how widely the impact will spread over the real economy. Moreover, it is expected to have further impact on our business as economic and corporate activities deteriorates and the financial market remains volatile. In the midst of such situation, we are placed in an extremely difficult environment to set business performance targets. However, we have set targets based on a scenario we have created, referring to IMF's global economic outlook baseline scenario released in April. Specifically speaking, as stated in the middle part of the presentation material, from the second quarter of fiscal year 2020, we assume that economic activities will gradually resume as the spread of COVID-19 declines and that economic conditions will recover to the level of calendar year 2019 around the end of calendar year 2020 globally and around the end of calendar year 2021 in developed countries, including Japan, therefore set our fiscal year 2020 profits attributable to owners of parent at JPY 550 billion. At the bottom part of the presentation material impact of the COVID-19 pandemic on MUFG business is stated. We have set an aspirational plan for fiscal year 2020 as the final year of the midterm management plan. However, as COVID-19 spread, rapid changes occurred in the market, such as declining interest rates and share prices. Customer companies experience a decrease in business transactions due to the stagnating economy and restrictions applied on our sales activities as well. Therefore, based on the scenario mentioned previously compared to the net income before income taxes, net operating profit will be negatively impacted approximately by JPY 300 billion and items below net operating profit, such as credit costs and others will be negatively impacted by approximately JPY 300 billion as well. Therefore, we are expecting a total negative impact of around JPY 600 billion. As for the dividend per share, shown on the top right chart, based on the assumption of JPY 550 billion as a business performance target from the perspective of maintaining stable dividend payment, fiscal year 2020 dividend forecast is JPY 25 per share, unchanged from fiscal year 2019. Please go to Page 12. The economic environment outlook, which is the base of our assumption explained previously, is shown in the chart here. On the right-hand side shows the 4 key assumptions. In order to foresee the business impacts due to the spread of COVID-19, these 4 points. First, depth of decline of economic activities; second, longevity of deterioration of economic activities, third recovery pattern; and fourth, timing of recovery becomes important. If there are differences between our scenario and actual timing of COVID-19 conversions or its impact on economy, there is a possibility that the performance target level will largely change. We will carefully keep an eye on the timing of COVID-19 to converge as well as the degree of its impact to the actual economy and final markets and promptly disclose if any revisions will be made to our performance targets. This concludes my explanation. Now we would like to take your questions.

First question is from Nomura Securities, Takamiya-san.

Takamiya from Nomura Securities. I have 2 questions. The first question is how you feel about the level of capital, whether there is excess or shortage? The second question is how to fill the gap with the ROE target of the midterm business plan? As for the first question, based on the business environment that you can assess at the moment, the level of capital, do you think it is in excess or in shortage? How do you see it as the group CFO? I would like to hear your views. The second question is the gap with the ROE target in the midterm business plan. This fiscal year's net income is forecasted to be lower than the traditionally expected levels. I can understand that in some respects, it cannot be helped. But on the other hand, when you think about ROE, selling equity holdings, controlling risk-weighted assets, adjusting the level of shareholders' equity, cutting costs, I feel that there are things that you can do outside of the environmental factors. The company has now developed its plan but based on the fact that it is greatly deviating from the ROE target of the midterm business plan as the management of the company, will you be making efforts to try to fill that gap or not. Can you talk about your thoughts?

Thank you very much. Let me answer them in turn. The first question. I believe, was about my sense of the level of capital, whether it's in access or in shortage. But before I address that question, let me talk about our understanding of the current environment. As you know, the spread of COVID-19 is having an impact on the real economy. So in this environment, what is it that we should work on? Well, we are now being approached for financing from our customers, corporates or individuals. The social mission that we are to perform is to provide financing to meet their needs, we believe. And even in the process of COVID-19 being gradually brought under control, we believe that we can be useful. That is what we believe. And in terms of meeting financing needs of corporates, as a financial institution, we need to maintain soundness of our capital. That is the basis. And based on that premise, the question of whether there is excess or shortage of capital. In the course of this year, as we will be meeting a certain level of financing needs, we are assuming that our loan balance will go up. We have not made any concrete estimates of that amount, but we are conducting simulations to see how much risk-weighted assets will increase as a result of how much growth in loans. Still, we believe that we can meet financing needs to a certain extent. And from that perspective, in terms of my sense of whether there is access or shortage of capital, we feel that we have reasonable headroom. What I mean by saying we have a reasonable headroom is we have been saying from the past that we will maintain a certain level of capital. And even if risk-weighted assets are increased, the lower range of that level may be maintained. So this is the answer to the first question. Now to the second question. As you pointed out, the ROE target in the final year of the midterm plan was 7% to 8% and our financial target this time is JPY 550 billion. So the calculation tells us that we will not be reaching the ROE target that we set in the midterm plan. And the question was about filling that gap. Obviously, as we show our net income forecast of JPY 550 billion, risk-weighted asset controls is something that we have been working on for some time. And even in the process of meeting financing needs of our customers, we will continue to try to control risk-weighted assets. And as for sale of equity securities, we have been reducing the outstanding balance so far, and we will continue to try to reduce that balance further. Of course, that doesn't take us all the way to fill the gap, but we will continue to make efforts to raise our ROE as much as possible. We would like to take the next question.

The next question is from Mr. Nakamura from Goldman Sachs Securities.

I'm Nakamura from Goldman Sachs. I have 2 questions. At first, I would like to confirm about your credit cost plan of JPY 450 billion. If possible, I would like to know the breakdown of this plan, such as by entity or by business categories, if there are any. Moreover, the preventative provision of JPY 50 billion that was recorded in fiscal year 2019. If possible, I would like to know what is the positioning of that going to be. This is my first question. My second question is in regards to this fiscal year's net operating profit. It's about a negative JPY 135 billion year-on-year. The breakdown of this. How are you looking at the breakdown of the top line revenue consisting factors in terms of increasing or decreasing? And also what is your assumption in regards to expenses? These are my 2 questions.

Thank you. Your question was regarding fiscal year 2020 credit cost of JPY 450 billion. This JPY 450 billion was estimated based on the scenario explained to you previously. In the process of reaching this total of JPY 450 billion, we have analyzed in detail the impact on each business category company with a top-down approach and compiled this JPY 450 billion. Within this, the impact of COVID-19 for fiscal year 2020 is about JPY 200 billion out of the JPY 450 billion. In fiscal year 2019, approximately JPY 50 billion provision for COVID-19 impact was made. Therefore, additional provision made for COVID-19 for overall fiscal year 2020 will be JPY 250 billion in total. As for the breakdown by entity, we cannot disclose it. However, within the additional provision made, the overseas portion is relatively large. One cause of this is as disclosed as additional information, results of MUAH in the United States, Bank of Ayudhya in Thailand and Bank Danamon are incorporated into MUFG consolidated basis under U.S. GAAP. Thus, there is the impact of CECL, current expected credit loss model, which records expenses, including the future expected expenses. Therefore, the total credit cost of JPY 90 billion for the first quarter of the 3 banks total were incorporated into our first quarter numbers. This is included as one of the breakdown factors for the JPY 450 billion, large part of the overall additional costs will be from overseas businesses. Next will be regarding your second question about net operating profit. First, regarding net operating profit. If you look at Page 11 of the highlights of the material, you will see here items that are expected to impact the net operating profit. First item is declining interest rates. Especially declining U.S. interest rates impact and share prices impact, especially Trust Asset Business Group is assumed to be most impacted by the decrease of assets under management. In addition to this, as said in the scenario explanation previously, noninterest income will be impacted by the deteriorating economic activities. The total of these is JPY 300 billion. Efforts to reduce expenses will continue. However, it is flat from the original plan. Is this all right?

So the rough image that I should have is that, though, it may be difficult to answer, but the market business is there a downward pressure on the market business or flat? I would like to know something about this.

When you say market business, you mean Global Markets business group?

Yes.

As for the Global Markets business group, there are various factors involved. So it is difficult to answer. However, unrealized gains of both domestic bonds and foreign bonds in total is over JPY 900 billion. On the other hand, there is almost no difference in U.S. long-term and short-term interest rates, though Japan didn't have any differences from the beginning, U.S. long-term and short-term interest rate difference is becoming smaller, thus getting difficult to gain carry income. These are the 2 factors. And as for the treasury income, we are expecting it to be as originally planned.

Next question is from Mizuho Securities, Matsuno San.

Matsuno from Mizuho Securities. I have 2 questions. The first question is about credit costs. Of the credit cost target of JPY 450 billion this fiscal year, how have you factored in the exposure to resources as well as aviation finance risk. If you have sensitivity analysis of oil prices, could you tell us about that? The second question is about future risk. The remaining impairment risk of goodwill of FSI and MUAH, can you comment on this?

Thank you for the questions. The projected credit costs for fiscal 2020. The question, I believe, was how we are looking at resources, energy and aviation finance. Earlier, I explained how we estimated this amount of JPY 450 billion. Allow me to say this again. Based on the scenario that we developed, by industry, we have reviewed individual companies, and we added them up. And on top of that, we took a top-down approach to come up with the final credit cost number. And in that process for resources, energy and the air transport industry, including aviation finance, we have estimated a certain level of credit cost. Now the components of JPY 450 billion. There is JPY 200 billion that is COVID related this fiscal year, plus JPY 50 billion from last year. This total of JPY 250 billion, this includes credit cost for resources, energy and aviation finance. The answer may not be detailed enough, but our approach is to examine the situation by industry and by company to make estimates and adjustments. We did look at such risks to a certain level to arrive at this amount of credit costs. The second question about impairment risk of goodwill. First, the remaining balance of goodwill at the end of March, it was JPY 283.6 billion. Of which large ones are, as you pointed out, FSI, which was acquired in 2019 and MUAH most recently, impairments have not been recognized for them. But with the unprecedented changes in the economic environment, we need to closely monitor the situation. Since we had amortization of goodwill, in 2019, we want to be very vigilant.

Next, Citigroup Securities, Mr. Niwa.

I would like to know about CET1 ratio and dividend? Can you hear me?

Yes, we can hear you.

My first question is regarding CET1 ratio. If you have any target figure for CET1 ratio during this fiscal year 2020, I would like to know and also within that, by how much will risk-weighted assets increase? If I can receive our comments, I would like to know. That is my first question. The second question is from the perspective of stability of dividend. And I'm looking at Page 12. The premise for your fiscal year 2020 target is that at some point of time, the economy will recover. However, if deeper and more serious than the scenarios economic deterioration continues, is it possible to continue a payout ratio around 60%. I would like to know about this point.

Thank you. Your first question was with regards to CET1 ratio. We do have certain internal plans for our CET1 ratio and capital. However, recently, capital demand from our customers is increasing. Thus, we think that there may be a gap between the plan and the actual operation. As for risk-weighted assets, it is as explained before, internally, we conduct various simulations as well as calculate what the CET1 ratio will be like and estimate how much we can respond to our customers' capital needs and how much of an increase will there be in terms of risk-weighted assets? Therefore, we conduct simulations as well as control our risk-weighted assets. By control, we mean that we also review in what form can the loan be provided. Through these efforts, though there may be partial ups and downs against the plan at times, however, we would like to maintain a controlled operation. As for your second question, I understand it was regarding stability of dividend and its relevance to the performance. For fiscal year 2020, based on the scenario explained previously, we set our performance target at JPY 550 billion and dividend forecast has also been set at JPY 25, which is same as fiscal year 2019. Of course, if the surrounding environment changes, the target will also change. And as you pointed out, if the performance continues to deteriorate this fiscal year and further deteriorates next fiscal year, meaning if the conversions of COVID-19 is slower or the depth of the spread is deeper and longer, in other words, if there is a delay in the recovery from COVID-19, we will need to consider the matter in a comprehensive way based on the way we think of our capital, the capital triangle that consists of dividend, how much of risk-weighted assets we should accumulate and shareholder return. Based on the current scenario and simple calculation, temporarily, the payout ratio is at a high level. However, if we take the stance that the economy recovers based on the previously mentioned scenario that leads to our revenue increase we would like to maintain a stable dividend payment in the mid and long term.

Next question is from JPMorgan Securities, Nishihara San.

Nishihara from JP Morgan. I just have 1 question on credit costs. JPY 450 billion in fiscal 2020. This is twice as large as the traditional normalized level. It is a very large amount. And your provisioning method is you look at names individually and also take a top-down view of the scenario. That is what you explained. Now how much would you say has been provisioned already? You make big credit cost estimates in 2020, and as a result, the profit levels are greatly lowered. Under the Japanese GAAP, have you been able to make maximum provisions allowed as much as you wished? And how much will still remain in 2021? On Page 12, you are showing your outlook of GDP for fiscal 2021. With the second quarter of 2020 as the bottom, GDP will be making a gradual recovery, but until it goes back to the level of the first quarter of 2019, your projection is that it will take until the end of 2021. I would suppose that there is a time lag for credit costs to be recognized. So I would like to ask that in fiscal 2021, how much additional credit costs will there be compared to a normal year?

Thank you for that question. I am not sure if I can answer your question in full. Credit costs for 2020. Let me try to give you a sense of that level. The approach to estimating the credit cost of JPY 450 billion is, as you said. We have conducted comparisons and validations because this COVID's impact on the economy, it's very difficult to make projections at this point in time. So it is difficult to make assessments of future credit costs. So as I said, based on the scenario, we estimated credit costs, and we made comparisons to the Lehman crisis. Back then, the peak was in 2009. Back then JPY 760 billion of credit costs were incurred. Against that, this time, we are estimating JPY 450 billion. So in that sense, the level of the estimate is lower than back then. Because our loan portfolio is greatly different from what it was back then. That is one factor. If you look at the areas where there were large credit costs, they are business loans, which were based on model credit screening, real estate and exposure to overseas financial institutions. These were the areas where the bank incurred credit costs. But if you look at the portfolio of today, the quality has been improved. As for financial institutions, this time, the crisis is not originating from the financial sector. And be it the business loans or the real estate industry, our portfolio quality has been improved. So it is better now. Also, back then, it was the timing when our consumer finance subsidiaries were applied regulations to limit the total amount of loans to customers, and large amounts of credit costs were incurred at these consumer finance subsidiaries. Today, we don't find ourselves in that situation. So that is another difference. So we made estimates by adding them up, and we also made comparisons to the Lehman crisis to do a back testing of sorts and came up with an estimate of JPY 450 billion. Another thing I forgot to mention in terms of how it is different from 2008, 2009. Our overseas exposures are increasing. So we have made additional estimates of credit costs. Another difference from the past. I don't believe I have answered your question 100%, but that is my explanation of how we arrived at this JPY 450 billion.

We are getting close to our scheduled ending time. Therefore, we would like to conclude this Q&A session. Before we close this meeting, Mr. Yonehana, would like to make some closing remarks.

Thank you for asking many valuable questions today. The briefing session for investors is scheduled on the 20th is also planned to be held in this net conference format. Therefore, I feel bad that the situation of not being able to directly exchange greetings with you is continuing, under the circumstances of COVID-19 pandemic and many unclear parts remain in our business outlook. As the Group CFO, I will place importance on having dialogues with our shareholders and investors as well as putting efforts in conducting a stable and sustainable financial and capital operations. Moreover, we will continue to work on measures responding to issues that MUFG faces such as profitability improvement, expense control and risk-weighted assets control in order to improve business management efficiency. I continue to seek your understanding and further support. Thank you very much for today.

Mr. Yonehana, thank you. With this, I would like to conclude Mitsubishi UFJ Financial Group financial highlights for fiscal year ended March 31, 2020. Thank you very much for participating despite the late hours. [Statements in English on this transcript were spoken by an interpreter present on the live call.]