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

I am Kamezawa. Thank you very much for taking time out of your busy schedule today to attend our MUFG IR presentation. Please turn to Page 6 of the presentation material. I will start with an overview of the financial results for the first half of FY '22. Please look at the column that says FY 2022 H1 results in the middle of the slide. From the top, Line 1, gross profits increased by JPY 342.5 billion year-on-year to JPY 2,323.4 trillion, mainly due to the increase in net interest income from loans and deposits, thanks to the effects of higher overseas interest rates and risk return improvement measures as well as increase in foreign exchange and trading revenues, capturing market fluctuations. Line 2, G&A expenses increased by JPY 84.8 billion year-on-year, but excluding the impact of yen depreciation, which was about JPY 111.5 billion, it decreased by about JPY 27 billion. As a result, Line 3, net operating profit was JPY 895.2 billion, up by JPY 257.7 billion year-on-year, marking a record high level for the first half. Below net operating profits, Line 4, credit costs included JPY 231.9 billion in valuation losses of loans due to accounting treatment specific to U.S. GAAP following the decision to sell Union Bank or MUB. This resulted in a JPY 261.7 billion increase year-on-year. But excluding such valuation losses, expenses on a real basis were approximately JPY 12 billion, remaining at a low level. In addition, due to the same accounting treatment, Line 6, profits attributable to owners of parent was JPY 231 billion, down by JPY 550.3 billion year-on-year, mainly due to the recording of JPY 331.8 billion in valuation losses on securities held by MUB. However, most of the onetime losses from the accounting treatment I just explained will be recorded as extraordinary gains upon MUB's transfer. Therefore, on a real basis, after taking this into account, as shown on Line 7, profits attributable to owners of parent was JPY 679.2 billion, a strong progress ratio of 68% toward the full year target of JPY 1 trillion. Next, regarding the performance target for FY '22, we maintained the target of JPY 1 trillion for profits attributable to owners of parent announced at the beginning of the fiscal year. As for the breakdown, we revised our net operating profits target upward by JPY 200 billion in light of the strong progress in the first half. In addition, credit costs and ordinary profits were revised respectively, due to the accounting treatment for the sale of MUB, which causes some shifts between accounts. Please turn to Page 7, which shows the factors for year-on-year changes in the first half results of FY '22. As explained earlier, profits attributable to owners of parent decreased due to the impact of the accounting treatment in connection with our decision to sell MUB. On the other hand, the increase in net operating profits offset the impact of the absence of M&A-related extraordinary gains that were recorded in the first half of FY '21 and the lower gains on equity securities due to the impairment of shares in FY '22. Please turn to Page 8. Let me provide an overview of the sale of MUB. In October this year, we obtained all required regulatory approvals for the sale of MUB shares and related transactions. The closing is expected on December 1. We will announce again after the transaction is completed, but we expect the total gain on sale to be approximately JPY 120 billion, including the portion already recorded in FY '21 and to be recorded in FY '23 and onward. We expect the impact on CET1 ratio to be around plus 45 basis points. Please turn to Page 10, which shows net operating profits by business group. As shown in the step chart on the right, in customer segments, profits in AM/IS decreased slightly due to the absence of large performance fees we had in FY '21, but other business groups enjoyed a profit increase, including higher net interest income from loans and deposits and foreign exchange-related income, resulting in a significant increase of JPY 218.4 billion in total customer segments. Global Markets Business Group also posted an increase of JPY 64.1 billion in net operating profits as a result of portfolio rebalance with minimal financial impact by offsetting loss on sale of foreign bonds with gain on cancellation of bear fund as well as securing earnings opportunities through flexible trading that successfully captured market fluctuations. Page 11 shows net income results by business group. Profit declined in DS, digital service, due to stock impairment losses; GCB, due to the absence of reversal of credit costs in MUA as we had in FY '21; and AM/IS, due to the absence of performance fee that we had in FY '21. On the other hand, R&C, JCIB, GCIB, the entire customer segment as well as Global Markets reported higher profits. Please turn to Page 18, which shows the status of our balance sheet. Loans shown in the upper right red bar graph increased by JPY 9.3 trillion from the end of FY '21. Of this amount, JPY 6.6 trillion is due to yen depreciation. So on the actual basis, excluding foreign exchange impact, loans increased by about JPY 3 trillion due to an increase in overseas loans. The yellow bar graph on the lower right shows that deposits increased by JPY 6.6 trillion, of which JPY 6.2 trillion is again due to foreign currency effects. So excluding this impact, the actual increase is about JPY 400 billion. Page 19 is on domestic loans. The upper right yellow line graph, deposit lending spread, is improving steadily, thanks to the expansion of the lending spread for large corporations. Page 20 is overseas loans. The upper right yellow line graph, deposit lending spread is steadily increasing on a nonconsolidated basis, which is Bank and Trust Bank, thanks to higher overseas interest rates and improved lending spread. Page 21 is our non-Japanese yen liquidity. As shown in the left figure, foreign currency loans are stably covered by deposits and mid to long-term market funding. In addition, in view of the foreign currency deposits and loan balance, the transfer of transactions from MUB and uncertainties in the market environment, we have restored some of our mid to long-term market funding through appropriately controlled liquidity risk. Page 22 is on investment securities. Unrealized gains decreased from the end of FY '21, partly due to higher interest rates overseas. While unrealized losses on foreign bonds increased to approximately JPY 1.8 trillion, the actual unrealized losses, taking into account unrealized gains from hedging positions and other factors, is approximately JPY 1 trillion, as shown in the lower right. Please turn to Page 24. Let me explain our responses to rises in non-Japanese interest rates. We maintain the overall unrealized gains on available-for-sale securities, including equities and have also worked to curb the deterioration in unrealized losses on foreign bonds due to the rise in foreign interest rates. In addition to reducing the interest rate risk to the historical low level, we have been selling bonds with unrealized losses by utilizing hedging tools such as bear funds. After sales, we also recycle and reinvest in higher yield bonds in the held-to-maturity account. As shown in the lower left, we think we successfully controlled the deterioration of unrealized losses to a certain extent, amid the significant rise in interest rates. In the second half, we plan to control unrealized losses by continuing our prudent operations under strict control of the amount of interest rate risk. Please turn to Page 25. As explained earlier, credit costs, excluding the impact of the accounting treatment in connection with the decision to sell MUB, were JPY 11.8 billion in real terms, remaining at a low level. In addition, the balance of nonperforming loans in the right bar graph has remained almost unchanged from the end of FY '21, and the risk monitored loan ratio shown by the line graph also remains at a low level. Page 26 shows our capital status. The CET1 ratio on the finalized Basel III reforms basis, excluding unrealized gains as of the end of September on the bottom left, was 9.9%, which is close to the upper 10% target range in the medium-term business plan or MTBP and remains at a satisfactory level from the soundness perspective. From Page 28, I will explain the progress of the MTBP starting with the progress of financial targets. ROE, which is positioned our largest commitment was 2.91% for the first half of FY '22. But after taking into account the amount to be reversed when the sale of MUB is completed, ROE is actually around 8.4%, which is, we believe, is a reasonable level. The bottom half shows the progress of profits, expenses and RWA, risk-weighted assets, which we positioned as the 3 drivers for achieving the ROE target. In profits on the lower left, net operating profits increased substantially, thanks to strong customer segments earnings. Profits attributable to owners of parent is trending steadily on the actual basis. Expenses and risk-weighted assets, which will be explained later, are well under control in line with our policy. Page 29 shows the status of our earning power. The various measures set forth in the MTBP are making steady progress. And as shown in the left graph, customer segment net operating profits increased substantially by JPY 218.4 billion. Excluding foreign exchange effects, net operating profits increased by approximately JPY 110 billion. We believe that our earning power is steadily improving, thanks to improved spread, strong foreign exchange transactions and reductions in base costs. I will explain the progress of the main strategies of the MTBP from the next page. Please turn to Page 30, which shows the first pillar of our corporate transformation, which is digital transformation. On this page, I will talk about our efforts to improve convenience, both in branch and online. As shown in the graph at the top, we plan to consolidate more than 50 branches in FY '22. At the same time, we are promoting the digitalization of over-the-counter transactions so that our customers can transact with us comfortably. Since July of this year, we have been gradually introducing account opening using the over-the-counter tablets, and we'll continue to expand the number of transactions that can be self processed. In addition, starting this October, we are gradually introducing a new reception system that allows customers to check the waiting time at the counter on their own smartphone. Please look at the lower part of the page. Through continuous functional improvements of the app, online transactions are steadily increasing. In addition, we are also improving our system to meet investment consultation needs. Starting this November, for some of our products, customers will be able to complete the entire process from asset management consultation to execution online without visiting our branches. Page 31 shows the progress of our efforts to become a financial and digital platform operator. First is Busikul, a service for our corporate clients in the upper left. Busikul is a platform to help solve nonfinancial sector issues, such as DX and decarbonization and was rolled out across all branches in April this year. Currently, we are providing more than 100 nonfinancial solutions per month through this platform and are also strengthening collaboration with regional banks to expand beyond MUFG customers. Progmat, bottom left, is a platform to issue and manage tokens using blockchain technology. Starting with the first deal in July last year, we have steadily built up our track record and expect the balance of assets managed to exceed JPY 40 billion by the end of this fiscal year. We also plan to issue Progmat coin, a stable coin in FY '23. Top right is Money Canvas, our asset management platform. Since its release in December last year, it has been accessed by 1.45 million people and also offers a full lineup of insurance and other products. D-Canvas, on the lower right, is an app for defined contribution pension plan subscribers. We are continuously improving the UI/UX with the keywords, easy and convenient and employees of over 2,300 companies with defined contribution pension plan are currently using the app. Page 32 shows our open innovation initiatives. First is Mars Growth Capital, AI-based startup financing shown on the upper left. In January, we established the second fund for business expansion, which has been performing well. So we are considering further business expansion and new business development. Lower left is the MUFG Ganesha Fund, an investment facility for Indian startups. The first investment was made in September of this year, and the pipeline is steadily expanding with plans for second investment by the end of the year. NFT Web 3-related business is on the upper right. In August, we invested in Animoca Brands, a partner in the Web 3-related business. We aim to create a safe and secure trading environment and business opportunities through further collaboration with Animoca Brands. Lower right is our collaboration with Grab. In Thailand, Bank of Ayudhya is steadily accumulating small loans to drivers and food merchants and began offering loans to general users from June this year. In Indonesia, the number of co-branded credit cards issued with Bank Danamon is increasing steadily. Please turn to Page 33. One of our corporate transformation is transformation of corporate culture. In order to take action built on our purpose committed to empowering a brighter future, we have been working to nurture the sense of ownership in each employee. To strengthen this momentum, we launched MUFG Way Boost Project. By communicating good examples of employees embodying our purpose, both internally and externally, we will encourage more employees to put MUFG Way into practice. On Page 34, let me introduce our efforts to put MUFG Way into practice. In the Spark X new business incubation program on the left, 650 ideas were submitted, and the final screening session was held on November 7. The ideas selected for this program will be put into full-scale activities for commercialization in the future. In the MUFG headquarters project on the right, a working group across the entire group, bank, trust bank and securities, played a central role in determining the project concept and other details. I feel that this review process itself is serving as an opportunity to promote corporate culture reform and embody the MUFG way. The plans for the MUFG headquarters and temporary relocation are still under consideration but will be finalized and announced by the end of this fiscal year. Page 35 shows the progress of our strategy for growth and structural reforms. As shown in the left graph, we are targeting an increase in net operating profits of JPY 150 billion in strategy for growth and JPY 100 billion in structural reforms over the 3-year MTBP period, and we have already achieved steady progress, achieving JPY 215 billion in strategy for growth and JPY 65 billion in structural reforms. Right side is a summary of the progress of our strategy for growth and structural reforms. First is Wealth Management. Wealth Management revenues were strong, particularly in cross transactions, thanks to the increased use of proposals based on recommendations delivered to the staff from the Wealth Management digital platform. In addition, Mitsubishi UFJ Morgan Stanley Securities won first place in the Full-Service Securities category in J.D. Power's 2022 Japan Investor Satisfaction Study. Second is the approach of proposing solutions to customers' issues. JCIB achieved year-on-year growth in both gross profit and net operating profits, mainly due to improved lending spread while reducing risk-weighted assets. We are working to strengthen our risk-taking capabilities in real estate finance and other areas and to provide new solutions to encourage our large Japanese corporate clients to address environmental and social issues and help them grow over the medium to long term. Third is Asia business. GDP growth in both Thailand and Indonesia is solid in 2022, and both Bank of Ayudhya and Bank Danamon have steadily increased their ROE. Bank of Ayudhya is actively capturing growth in neighboring countries through its inorganic strategy. Bank Danamon is accelerating group-wide collaboration centering on the area of consumer finance. Fourth is GCIB and Global Markets. ROE improved as a result of strengthening highly profitable institutional investors finance and strong sales and trading activities while offsetting the sluggish corporate bond market by capturing loan demand in light of the recent changes in the market environment. Fifth is global AM/IS. Global AM continued to exceed its targets in terms of performance of assets under management, despite highly volatile market conditions. Global IS increased its funds under administration mainly, due to synergies from the combined provisions of higher value-added services such as finance and foreign exchange. Next, I will explain our progress in structural reforms. Please turn to Page 41, which shows cost and risk-weighted asset control. In expenses, we are making steady progress in reducing base expenses. Excluding the impact of FX fluctuations, the first half of this fiscal year, following last year, achieved year-on-year reductions, and we are pretty confident about the progress of our expense control. Page 42 shows risk-weighted asset, which increased from March 31, 2021 but decreased by JPY 3 trillion in real terms, excluding the foreign exchange impact, indicating our solid control. The risk return ratio has also improved as evidenced by an increase in the lending spread, and we will continue to ensure disciplined management of our operations. Please turn to Page 43. I will discuss our initiatives to enhance corporate value sustainably. This 4-quadrant map shows our approach to investment, risk-taking, alliances for growth and the overall picture, including what I have explained so far. In addition to taking on various risk-taking challenges in the upper left quadrant, existing business fields, we are actively investing capital and pursuing alliances, including nonfinancial areas in Asia and AM/IS in the upper right quadrant and digital in the lower right quadrant as our major growth strategies. Also, lower left is ESG and sustainability. For example, we are also pursuing investments and alliances in the area of green transformation in order to lead the response to climate change. Page 44 introduces examples of our most recent initiatives. As a new piece of information, we are taking on a challenge in new business fields and considering entering the advertising business in Japan, as shown on the upper left. In June, we also decided to acquire Capital Nomura Securities to strengthen our business in Asia. The initiatives in the 4 quadrants for growth include those undertaken by each business group, those that cut across business groups and challenges in completely new fields. We will continue to consider the use of capital and partnering with other companies to determine where and how to invest resources to achieve sustainable growth. Please turn to Page 47. From here, I will talk about capital policy. In the current MTBP, we announced that we will operate with a CET1 ratio target of 9.5% to 10% as our capital management policy. In line with this target range of capital management, we are considering capital allocations, including investments in growth and additional shareholder returns while taking into account the current capital position and future prospects. Please turn to Page 51, which shows our shareholder returns. Regarding dividends, we will pay an interim dividend of JPY 16 per stock as forecasted at the beginning of the fiscal year and maintain our FY '22 dividend forecast of JPY 32 per stock, an increase of JPY 4 year-on-year. Regarding the share repurchase, we resolved to repurchase JPY 150 billion. This is in consideration of the capital release effect from the sale of MUB, which is confirmed to be executed on December 1. In considering the amount of the share buyback, we decided on JPY 150 billion judging that it is desirable to hold capital buffer for the time being, given the increasing uncertainty in the outlook of the business environment, including global inflation trends, rising volatility in financial markets and heightened geopolitical risks. There is no change in our policy of disciplined capital management aimed at improving ROE. We will continue to consider implementing this policy flexibly while keeping a close eye on future changes in the situation. Page 52 shows our equity holdings. As shown on the table on the right, in the first half of FY 2022, we reduced our holdings by JPY 57 billion on an acquisition cost basis and recorded a gain on sales of JPY 117 billion. Please turn to Page 54. From here, I will explain our approach to sustainability, starting with our approach to carbon neutrality. Left side, sustainable finance is progressing steadily, reaching JPY 19.4 trillion as of the first half of FY '22 against our cumulative target of JPY 35 trillion by FY 2030. In addition, as shown on the right side, we are building up a track record of support for a wide range of financing, including renewable energy in Asia, Europe and the Americas. Page 55 shows the progress on supporting customers' decarbonization. On the left side, in the first half of FY '22, we proactively supported industrial transitions by serving as the lead manager for transition bond issuance for customers in various sectors. As shown on the right side, we are also making steady progress in providing decarbonization support services to customers through collaboration with other companies including 251 companies collaborating with Zero Board, a provider of GHG emissions visualization services. Page 56 is on rulemaking and communicating our view. We have been leading discussions on rulemaking in Asia and globally. And as an outcome of these discussions, we formulated and published the agent transition finance study group guidelines in September and NZBA transition finance guide in October. Furthermore, in October, we published the MUFG transition white paper with the aim of communicating the pathways for decarbonizing Japan's materials and electric power industries to financial authorities and government officials in Europe and the U.S. We also communicated this concept of transition at COP 27 in Egypt. Page 57 is on reduction of GHG emissions and organizational structure. Upper left, regarding net zero finance emissions, we plan to disclose new interim target for some sectors in the progress report to be issued next spring In addition to the results for the power and oil and gas sectors, where interim targets have already been disclosed. Lower left, for GHG emissions in our own operations, we shifted our domestic electricity procurement by all domestic consolidated subsidiaries, including NICOS and ACOM, in addition to bank, trust bank and securities to 100% renewable sources. Upper right shows the details of the NZAM interim targets for 2030, which we disclosed at the end of October as part of our efforts to decarbonize through responsible investment. Lower right is a description on enhancing our organizational structure. Mr. Fuma, an ESG management consultant has been newly appointed as an external adviser. In addition, Ms. Zeniya, who has deep insight into the field of sustainability, has been appointed as the full-time Chief Sustainability Officer and the Chair of Sustainability Committee to strengthen our structure. Page 58 is on our approach to natural capital and biodiversity. We recognize that loss of natural capital leads to increased risks in investment and loans while activities to preserve natural capital also lead to new opportunities for investments in loans. Therefore, we believe it is important to properly assess risks and opportunities associated with natural capital and are currently working on this initiative. In preparation for TNFD disclosure in 2023 and beyond, we joined the TNFD Forum in February and started a risk analysis based on the LEAP approach. We also participate in UNEP-FI's pilot program to analyze offshore wind power in Europe. Please turn to Page 59 on our approach to human capital investment. MUFG is developing and recruiting human resources in line with its management plan, while aiming to be a company where employees are empowered to work lively, making decisions and taking action autonomously, while taking advantage of their diverse values and strength. As shown on the lower left, MUFG is actively promoting systems that encourage employees to take on challenges and develop their careers such as the job challenge as well as training and hiring in priority areas such as digital. In inclusion and diversity on the right side, we are promoting various initiatives to increase the ratio of women in management in particular. We have especially strengthened our executive mentoring program where management provides support to women in resolving issues related to career development and have doubled the number of female employees in this program compared to FY '21. That concludes my explanation. We, MUFG, will uphold our purpose, committed to empowering a brighter future and continue to vigorously pursue challenge and transformation in order to empower all our stakeholders, including society, customers and employees who are in the process of transformation to move forward to the next stage. Let me sincerely ask all our investors and rating agencies for your continued support and further understanding. That concludes my presentation. Thank you for your attention.