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

I am Kamezawa. Thank you for taking time out of your busy schedule today to attend our MUFG IR presentation. Please turn to Page 6 of the material. I will start with an overview of the FY '22 financial results. In FY '22, Line 6, profits attributable to owners of parent was JPY 1,116.4 billion, achieving the performance target of JPY 1 trillion, and on par with FY '21, which was a record high. Line 1, gross profits increased by JPY 539 billion year-on-year to a record high of JPY 4,503 billion. Although we made progress in recording losses on sale of foreign bonds, the large increase was thanks to an increase of overseas interest income of loans and deposits due to global interest rate hikes and lending spread improvement, an increase in foreign loan-related fees as well as foreign exchange and trading income by capturing market fluctuations. Line 2, G&A expenses increased by JPY 161.4 billion year-on-year but decreased by around JPY 30 billion in real terms, excluding the impact of foreign exchange and other factors. As a result, Line 3, NOP was JPY 1,594.2 billion, up by JPY 377.5 billion, recovering to the level prior to the introduction of negative interest rates. Line 4, total credit costs increased by JPY 343.4 billion year-on-year. But in real terms, after adjusting for impact of valuation losses on loans held by MUB, credit costs decreased by JPY 50.5 billion year-on-year. Line 6, profits attributable to owners of parent achieved the performance target of JPY 1 trillion, and was on par with the record high level in FY '21, thanks to an increase in NOP, mainly in the customer segments, despite valuation losses of bonds held by MUB as well as foreign bond position rebalance and onetime expenses to mitigate future risks. Please turn to Page 8 on NOP by business groups. As shown in the step chart on the right, customer segments in total posted a significant increase of JPY 443.1 billion, while AM/IS decreased slightly due to the absence of large performance fees we had in FY '21. Other business groups enjoyed a profit increase, including higher net interest income from loans and deposits and foreign exchange-related income. In Global Markets business group, we made progress in recording losses on sale of foreign bonds, but on the other hand, sales and trading revenues from foreign exchange and interest rates grew substantially, which curbed the decline in profit. Please skip to Page 16, which shows our balance sheet summary. Loans in the upper right red bar graph increased by JPY 1.3 trillion in domestic corporate loans, and decreased by JPY 1.8 trillion in overseas loans. But excluding the approximately JPY 7.5 trillion decrease in overseas loans due to the sale of MUB, loans increased by JPY 5.7 trillion. In deposits, lower right, domestic deposits increased, while overseas deposits decreased. This was, again, due to the approximately JPY 12 trillion decrease in deposits resulting from the sale of MUB, and excluding this effect, overseas deposits increased by roughly JPY 5 trillion. Page 17 shows domestic loans. The deposit lending spread shown in the upper right red line graph expanded significantly in Q4 of FY '22, partly due to individual transactions, but the trend of expansion continues, even excluding this factor. Page 18 shows overseas loans. The upper right line graph shows the deposit lending spread of the bank and trust bank on a nonconsolidated basis. Despite a slight decline recently due to higher deposit rates, it has steadily expanded since FY '21. In addition, as shown in the lower left graph, lending spread is also increasing steadily. Page 19 is investment securities. Although unrealized gains and losses decreased from the end of March '22, partly due to rising interest rates overseas, overall, unrealized gains on available-for-sale securities amounted to JPY 1.4 trillion. Of this amount, unrealized losses on foreign bonds as of the end of March amounted to about JPY 1.1 trillion, but as shown on the lower right, it amounted to approximately JPY 0.7 trillion after taking into account unrealized gains from hedging positions, improving from the peak at the end of September '22. Please skip to Page 21 on non-Japanese yen liquidity. Although the current environment is uncertain, we are practicing stable balance sheet management. First, we cover loans with deposits and mid- to long-term market funding. We secure stickiness of deposits with regional and industry diversification, emphasize diversification of method and term of mid- to long-term market funding and possess high liquidity assets that can be quickly converted into cash in order to maintain a sound funding. Please jump to Page 23. As explained earlier, credit costs were JPY 280.8 billion, down by JPY 50.5 billion year-on-year in real terms. We expect credit costs for FY '23 to be JPY 300 billion, the same level as FY '22. Page 24 shows our capital status. CET1 ratio on the finalized Basel III reforms basis, excluding unrealized gains, remain adequate at 10.3%. Page 25 shows our performance targets for FY '23. Profits attributable to owners of parent is set at JPY 1.3 trillion, a record high. Although we expect a negative impact from the absence of NOP from MUB and the yen appreciation, we aim to achieve the financial target in the MTBP of 7.5% ROE by accumulating NOP in the customer segments. The business environment will continue to be difficult due to rising interest rates in Europe and the U.S. and concerns that the collapse of some overseas financial institutions will have a ripple effect on the real economy. But through the structural reforms undertaken to date, we have built a resilient business model in Japan and abroad and believe we can meet the needs of various customers on a group-wide basis, including our partner banks in Asia and Morgan Stanley. In FY '23, as the final year of the current MTBP, we will ensure that the effects of our past measures will lead to results and achieve the goals of the plan by all means. From Page 27, I will explain the progress of the MTBP starting from the progress of financial targets. ROE, which is positioned as the biggest commitment of the MTBP was 7.03% in FY '22, down year-on-year. But we are making steady progress towards achieving the MTBP target of 7.5%. The progress of the 3 drivers to achieve the ROE target, namely profits, expenses and risk-weighted assets, is shown in the bottom half. Lower left, NOP increased significantly from the previous year as a result of our efforts in line with our growth strategy. In particular, NOP in the customer segments increased by JPY 443.1 billion, and earning power is steadily improving. Profits attributable to owners of parent is also on track, achieving the MTBP target of stable net income of JPY 1 trillion or more ahead of schedule for 2 consecutive years. Expenses and risk-weighted assets, which will be explained later, are well under control in line with our MTBP policy. Page 28 shows the status lower initiatives to increase shareholder value. As shown on the lower right, we will continue to improve ROE through the strategies for growth, structural reforms and capital management initiatives set forth in our MTBP and aim to increase shareholder value sustainably. Please turn to Page 31, which is on the progress of our key strategies. First of all, the first pillar of corporate transformation is digital transformation. This page shows our efforts to optimize customer touch points using digital technology. As shown in the upper graph, we have been consolidating branches in response to the increasing number of customers choosing online touch points, such as Internet banking, but the consolidation phase completed in FY '22. Going forward, we will flexibly expand customer touch points to meet their diverse needs, both face-to-face and non-face-to-face, which includes considering new branch format. In addition, as shown in the lower part of the page, we will strive to improve convenience, both over-the-counter and online. Please turn to Page 32. Left side shows our efforts to expand new customer base. Top left, d smartbank launched with NTT DOCOMO last December is making progress in acquiring new accounts outside the 3 major metropolitan areas where account openings have been relatively low. Bottom left is on our acquisition of Kanmu, a company with strength in hassle-free deferred payment. The number of downloads of the VANDLE CARD application offered by Kanmu has exceeded $6 million, mainly among young adults. In the future, MUFG will work with Kanmu to add hassle-free deferred payment to our product lineup to increase the number of young customers in particular. These are all examples of expanding our approach to areas where we may have had shortfalls in the past. Right side shows our efforts for financial and digital platform operators. Money Canvas, our asset management platform, has been expanding its lineup to include products from other companies. Going forward, we will further enhance its asset-building functionality by expanding investment using points. Lower right is Progmat. Our digital asset platform. In addition to security tokens, we enhanced digital assets such as utility tokens, and the balance of assets managed exceeded JPY 40 billion as of this April. Based on the belief that unparalleled convenience through co-creation among network participants is indispensable for full-scale expansion of the digital asset market, we are pursuing our plan to make Progmat an independent company so that it can become a neutral cross-industry organization. Through these efforts, we will strengthen our position as a financial and digital platform operator. Page 33 shows our initiatives to meet digital financial needs in Asia. Left side shows our investment in digital financial players in Asia. In an countries, digital financial services utilizing data and AI technology are emerging. In order to capture these digital financial needs in Asia in a diversified manner, we decided to acquire Home Credit's operation in Indonesia and the Philippines and to invest in Akulaku and DMI Finance. In addition to these investments, we also made investments through funds and executed a total of 3 investments through MUFG Ganesha Fund, an investment facility for startups in India. We also established a new $100 million fund to invest in Indonesian startups. Right side shows our initiatives to expand our financial capabilities through open innovation. Mars Growth Capital, which started in Asia, is taking on the challenge of expanding its financial capabilities by developing AI-based financing model in fund structure to finance startups. Since its launch, it has steadily built a track record and increased its total fund size to $750 million in January. In addition, we decided to establish Mars Japan, which will provide loans to Japanese startups in order to leverage the knowledge that MARS has cultivated overseas to the development of venture companies in Japan. By providing growth capital to promising pre-unicorn companies in Japan, Mars Japan will help to create and accelerate growth of world-class unicorn companies originating in Japan. In addition, we plan to launch a fund for European start-ups and a new fund that utilizes NEXI's insurance scheme and will expand and develop Mars initiatives globally. We decided to invest a total of approximately JPY 200 billion in these initiatives during FY '22, which brings our cumulative total to over JPY 400 billion, including our investment in Grab and Mars. We will continue to consider strategic investments to capture diverse financial needs in Asia. Please turn to Page 34. Transformation of corporate culture is one of our corporate transformation efforts. We have been working to change the employees' mindset and provide opportunities to take on challenges so that challenge and speed take root in the behavioral patterns of each and every employee. As shown in the upper right, our score for challenge maintains a high level. We are receiving an increasing number of positive comments such as MUFG has changed. On the other hand, speed remains an issue, and we are moving forward with a drastic simplification to achieve speedy business operations. Page 35 is on our efforts to put the MUFG way into practice. Left side, in Spark X in-house new business incubation program, 3 projects that were selected via the final screening are moving toward commercialization with full management support. Next right side, the concept for MUFG headquarter building was decided based on free and active discussions among the working group members. We believe these discussions themselves have led to cultural transformation, and we'll continue the headquarter building project led by the second working group members. By encouraging employees to realize their purpose in My Way under MUFG purpose, we will work to create a work environment that provides a sense of excitement. Page 36 shows the progress of the strategy for growth and structural reforms. As shown on the left, strategy for growth aims to increase NOP by JPY 150 billion during the 3-year MTBP, which was achieved ahead of schedule in the 2 years up to FY '22 with an increase of JPY 400 billion. Right side shows the structural reforms, which has reached JPY 85 billion by FY '22 and is well on track to achieve the target of JPY 100 billion. The progress of each growth strategy is shown on Pages 38 through 42. But here, I will just give a brief overview. In Wealth Management on the far left, AUM is increasing steadily, thanks to an increase in cross transactions in inheritance and real estate through the use of digital platforms. Second from the left is approach of proposing solutions to customers' issues. We are steadily building up earnings while helping customers address social issues through enhanced risk taking and business investments with customers. Third is Asia business. Bank of Ayudhya or Krungsri is steadily capturing growth in Asia through inorganic strategies such as the acquisition of Home Credit. Bank Danamon struggled on the other hand, partly due to the prolonged impact of COVID-19, but we will continue to strengthen group-wide collaboration to build up earnings. Fourth is GCIB and Global Markets. In our key focus area of institutional investor business, we are steadily increasing earnings by strengthening our risk appetite and prioritizing highly profitable transactions. Finally, the fifth strategy is global AM/IS. In Global AM, NOP was negatively impacted by external factors such as AUM decrease from market decline, but in the alternative investment area where high growth is expected, we decided to acquire AlbaCore Capital. In addition, in Global IS, we grew our assets under administration significantly. We will continue to consider strategic investments to expand our capabilities and increase earnings. Please turn to Page 37. In light of the steady progress of our strategy for growth and changes in the environment, such as rising interest rates, we revised our NOP target by business group for FY '23. As shown on the right, JCIB and GCIB revised their NOP target upward, mainly due to the increase on non-Japanese yen loan and deposit interest income resulting from higher interest rates. GCB and Global Markets revised downward due to the impact of MUB share transfer and the changes in the market conditions, respectively. But overall, our policy to achieve the NOP target of JPY 1.4 trillion remains unchanged. Please skip to Page 43 on cost and risk-weighted assets control. Expenses are well controlled as we have been generating expenses for business growth by reducing base expenses. Page 44 is RWA. Excluding foreign exchange impact, we have been successfully controlling RWA at the same level as the end of March '21. We will continue aiming for higher risk return through disciplined RWA management. Page 45 is on our Americas strategy. As shown on the lower left, we completed MUB's share transfer last December. Going forward, we will concentrate our management resources on wholesale business where we can leverage MUFG's strength and aim for further growth and higher profitability in the Americas business through bank, trust bank securities collaboration and stronger partnership and alliance with Morgan Stanley. Page 46 is on Asia. In order to meet various financial needs in the expanding Asian market, we are investing in the digital financial service domain. In addition to our traditional commercial banking platform, by establishing a structure that can meet wide-ranging needs, such as fulfilling financial needs in off-line stores and online purchases, we will capture growth in Asia in multifaceted fashion. Page 47 shows the transformation of platforms in our business infrastructure and the evolution of our business operations overseas. We are promoting the efficient allocation of management resources through centralization and standardization of overseas operations, utilizing a subsidiary in India and optimization of our overseas office network as well as pursuing synergies and upgrading strategies by building an integrated management framework for CIB operations in Europe and the U.S. From Page 48, let me touch on some ideas for the next MTBP starting from environmental awareness. While the traditional megatrends of green and digital are accelerating further, the business environment surrounding MUFG has changed significantly since the start of the current MTBP. Last year, in particular, saw a series of historic events such as Russia's invasion of Ukraine, high inflation and shifts in monetary policy in Europe and the U.S. and credit insecurity over some Western banks. I cannot remember a year in which we have experienced such major changes in the environment. I attended the World Economic Forum in Davos this past January and felt the enthusiasm for normalization from COVID-19 and the transition to the next stage as well as the fact that we are in an era of division and decentralization at various levels, including national, economic and social as evidenced by the overall theme of the conference. On the other hand, the development of digital technology allows individuals and companies to be instantly connected beyond time and place. We are in an age of division and then connection. It is seemingly contradictory, but I believe this is the era we live in today. Please turn to Page 49. In such times, I believe that MUFG needs to strengthen and demonstrate its function to connect the world. Finance has the power to connect many things: settlement of funds connecting remote areas, financial intermediation connecting depositors and investors, M&A and investment banking services across nationalities between developed and emerging countries and asset management and succession connecting parents' generation with their children and grandchildren and what we connect our irreplaceable assets, business funds and personal and company data. Financial platform operators require a high level of trust, credibility and safety. And we, MUFG, have the strength to connect the world, including human resources, group capabilities, integrity and responsibility. In the last year of the current MTBP, we will further strengthen NFG's assets through human resources investment and risk-taking capabilities, in addition to the completion of the MTBP and further enhance our connecting functions to achieve further growth and gain greater competitiveness in the next MTBP. Please skip to Page 52. Let me explain our capital policy from here. In the current MTBP, we announced a target CET1 ratio of 9.5% to 10% as our capital management policy. Although the current CET1 ratio is above the target range, we need to assess the impact of the collapse of overseas financial institutions and other events on the real economy and on the regulatory environment. We believe that this is a phase where we need to operate with some capital buffer. Please skip to Page 56, which is on shareholder returns. In FY '22, we increased the dividend per share by JPY 4 and completed a share repurchase of JPY 450 billion, which was the largest ever. For FY '23, our annual DPS forecast is JPY 41, a record increase of JPY 9 in order to achieve the dividend payout ratio of 40% set forth in the MTBP. Although we decided to forgo the share repurchase this time given the current situation, we will consider share repurchase in a continuous and flexible manner in FY '23. Page 57 shows our equity holdings. As shown on the right side, we reduced JPY 154 billion on an acquisition cost basis in FY '22, bringing the total amount of sale since FY '21 to JPY 323 billion, and we are making steady progress toward our MTBP target of JPY 500 billion. Please turn to Page 59. From here, I will explain our approach to sustainability. First, let me touch on the progress of our efforts towards carbon neutrality. Since the MUFG carbon neutrality declaration in 2021, I think we have made significant progress in setting emission targets for our financed portfolio and our own operations as well as disclosing actual results. This year, MUFG plans to publish its own transition plan and will accelerate our initiatives toward Net Zero. Please skip to Page 61. Let me explain MUFG's approach to achieving carbon neutrality. As indicated in, 1, MUFG has been involved in rule-making by submitting policy recommendations in collaboration with industries and government agencies. This year, we plan to publish MUFG transition white paper 2.0 to list the technologies that will require financial support in the decarbonization of Japan. As shown in 2 on the bottom left, we also conducted engagement activities with 1,500 customers in Japan and abroad and provided solutions in line with our policies and strategies by collaborating with external partners. Furthermore, as noted in 3 on the bottom right, we are committed to working side by side with our customers in their decarbonization efforts in a responsible manner by strengthening our relationships, not only with our customers but also with local governments in Hokkaido and other regions and throughout Asia. Page 62 is on initiative to support decarbonization through financial services. Sustainable finance has steadily grown its balance to a cumulative total of JPY 24.6 trillion. In addition, as shown on the right side, a wide range of transition support cases are accumulating. Please turn to Page 63 on our initiatives to reduce GHG emissions. Top left. Regarding the GHG emissions from our financed portfolio, we are now considering setting new interim targets for auto, airline, coal and other sectors, in addition to the existing disclosure of interim targets and results. Lower left, as for emissions from our own operations, we have already shifted to 100% renewable energy for electricity procured by all domestic consolidated subsidiaries. Going forward, MUFG will continue to work to improve the credibility of our initiatives by obtaining third-party assurance while proceeding with initiatives in line with the newly disclosed road map. Upper right shows our initiatives as an asset manager to achieve NZAM's interim targets, we will further expand sustainable investments through the establishment of a new division among 5 MUFG asset management companies and the establishment of a sustainable investing policy. In addition, we will accelerate our engagement with portfolio companies to promote their transitions. Finally, lower right, we will take a lead to vitalize domestic and global carbon credit market through forest fund investments. Page 64 is on our initiatives for human capital expansion. MUFG's aim is to become a global financial group where each and every employee plays active roles lively and contributes to society and clients. As shown on the lower left, MUFG will further expand our investment in human capital by substantially raising wages and increasing training development in order to secure professionals. Upper right, in DE&I, we raised our target ratio of women in management by 2% as we did in FY '22 in response to the steady increase. We will continue to focus on the development of an HR framework that allows diverse talents to pursue professionalism and build their career autonomously as well as on initiatives that focus on employees' mental and physical health. This concludes my explanation. Under the purpose of committed to empowering a brighter future, we at MUFG will continue to vigorously pursue challenges and transformation as a group in order to become the power that moves all of our stakeholders forward, including society, customers and employees to the next stage of change. We would like to ask all of our investors and rating agencies for your continued understanding and support. [Statements in English on this transcript were spoken by an interpreter present on the live call.]