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

This is Kamezawa. Thank you for taking time out of your busy schedule today to attend our MUFG IR presentation. Since CFO, Togawa, explained the details of the financial results at the recent net conference, I would like to explain just the main points of the results and focus on the progress of the medium-term business plan. Please proceed to Page 6 of the presentation material. In the first half of FY 2024, net profit was JPY 1,258.1 billion, up 46% year-on-year, record high since MUFG's establishment and exceeding JPY 1 trillion for the first time in the first half. This represents 83% progress towards the performance target of JPY 1.5 trillion. Please refer to the chart on the right. There are 2 main drivers for the profit increase. First, a significant increase in profit due to strong performance in the customer segments; and second, recording of large net gains on sales of equity holdings with progress in reduction of holdings. Please turn to Page 7. The step chart to the right shows the factors contributing to the changes in NOP. While the Global Markets reported a lower profit due to deterioration in net interest income from the bond portfolio as a reverse yield environment continued in the U.S., the customer segment enhanced its earnings power and all business groups reported an increase in income due to higher deposit loan income and fee income, resulting in a steady increase in NOP. Page 8 shows the upward revision of FY '24 target, reflecting on the changes in the economic environment and the progress rate reaching 83%. The net profit target was raised by JPY 250 billion to JPY 1.75 trillion. This is up more than 20% compared to the previous fiscal year FY '23, which recorded highest net profit in the fiscal year. Using the chart on the right, I will explain the 2 factors for the upward revision. The first is that we expect the customer segments to maintain its strong trend shown throughout the first half and achieved strong growth for the full year. And the second is that we expect net gains on sales of equity holdings to be much higher than we expected at the beginning of the fiscal year due to strong progress in the sales of equity securities. Since the upswing in net gains on sales of equity securities is the realization of unrealized gains on securities, we are planning to utilize some of the gains to reconfigure the bond portfolio in order to improve the overall valuation gains/losses on securities. There will be gains and losses related to bonds as well as stock. Because of this technical issue, the NOP target remains unchanged. By achieving the revised target, the ROE target of around 9% in the MTBP will be achieved ahead of schedule in the current fiscal year, therefore, we expect ROE to exceed 9%. ROE, as defined by the Tokyo Stock Exchange, will also be within our sights at around 9%. Page 9 shows the results of shareholder return. In line with the increase in our profit target, we are raising our annual dividend forecast to JPY 60 per share, an increase of JPY 19 over FY '23 in order to secure a dividend payout ratio of 40%. This is an increase of JPY 10 from our initial forecast. We will continue to pay a progressive dividend through profit growth. In addition, taking into account the impact of capital expenditures and exchange rate fluctuations expected in the second half of the year, we have resolved to repurchase up to JPY 300 billion of own shares, bringing the total amount to JPY 400 billion for fiscal year 2024, which, together with dividends, is expected to exceed JPY 1 trillion and the total payout ratio of over 60%. Please turn to Page 10, increase target for reduction of equity holdings. As of the end of September, sold amount came to JPY 170 billion on acquisition cost basis. And if we add the agreed to sale balance, it comes to JPY 436 billion. At the beginning of the fiscal year, we set a target of JPY 350 billion as a minimum level of reduction during the MTBP period, but taking into account the progress in negotiations brought about with changes in the current environment, we have decided to double the target to JPY 700 billion. With this, we will aim to half the balance at the end of the 3-year period. We have also put forward the timing of reducing the ratio of market value, including deemed shareholdings to less than 20% of consolidated net assets, achievement expected during the current MTBP period. Please turn to Page 11. As I have explained so far, we have begun review of the financial targets for the current MTBP as achieving the targets of the current plan during FY '24 is in sight. There are 3 key areas for review. The first is to address changes in the business environment such as the impact from yen interest rate rise. The second is to further increase NOP against the backdrop of improved earnings power in the customer segments. And the third is related to raise target of the sales of equity holdings. We are considering setting our ROE target in accordance with TSE standards, as have been suggested by investors for some time. Please turn to Page 12, consideration of mid- to long-term ROE target. We have been upgrading our business portfolio with a set ROE target of between 9% to 10%. But since we are close to reaching that level, we will review our mid- to long-term ROE target in conjunction with the revision of the ROE target for the current MTBP. The key point to consider is how we, MUFG, can leverage our strengths to create corporate value that ranks among the global top tier. The portfolio in the previous MTBP had NOP of JPY 1.2 trillion and ROE of 5.6% in FY 2020, but in FY '23, we achieved NOP of JPY 1.6 trillion, an increase of more than 30%, and ROE of 8.1%, an improvement of 2.5%. In FY '26, the final year of the current MTBP, we have targeted NOP of over JPY 2.1 trillion, up twofold from 2020, and ROE of around 9%, which, as I mentioned earlier, we will consider raising to a higher level. We now have a very unique and competitive business portfolio on a global basis. In Japan, which accounts for 40% of our revenues, we have the largest customer base and balance sheet in size. And in addition, during the period of very low interest rates, we have significantly improved the profitability of our assets by completing cost structure reforms, including consolidation of branches, improving margins and strengthening risk-taking capabilities. In Asia, which accounts for more than 20% of our revenues, we have established the most dominant global positioning, expanding this platform from a commercial bank to a nonbank and digital financial player, building the MUFG economic sphere and capturing the high growth of ASEAN and India as a region. Finally, the Americas, which accounts for 30% of our revenue. With the divestiture of Union Bank and the concentration of management resources on wholesale banking, we continue to see both improvement in profitability as well as profit growth. Add to this, with the profit capture of our partner, Morgan Stanley, and expansion of our business through alliances, we are confident of owning the most sophisticated profit structure of any non-U.S. financial institution in the region. Based on this distinctive business portfolio, we will grow as a company with sensitivity and flexibility, capturing the growing global economy, which is a source of enhanced corporate value of MUFG. We will consider revising our mid- to long-term ROE targets with the aim of realizing corporate value comparable to the global top tier. Now please turn to Page 14 for the progress of our MTBP. First, the progress of our financials. ROE and CET1 ratio were high at 13.3% and 11.2%, respectively, at the end of the first half, partly due to the preceding profit in the first half of the fiscal year. Profit, lower left, shows that efforts centered on the growth strategy are steadily showing up in the figures. NOP in the customer segments increased by more than JPY 280 billion, and net profits also increased steadily. The status of expenses and RWA will be explained later, but both are well under control in line with the plan. Please proceed to Page 15, looking back at MUFG's EPS growth. EPS Growth rate after the Lehman shock or global financial crisis in FY 2010 up to last fiscal year was 9.2%. This is a very high level in comparison to global peers. On the right is a breakdown of this EPS growth rate into profit growth and share buybacks. You will see that we were able to achieve a 2.6-fold increase in net profits while reducing the number of shares outstanding by approximately 20% through share buybacks. By combining steady profit growth with disciplined capital management, we have achieved a high EPS growth rate. Starting from next page onward, we will look at profit growth, which has been a major contributor to EPS growth. Page 16 shows historical trends in net profit and components of gross profits. Non-Japanese yen net interest income, NII, orange line, and trust fees and net fees and commissions shown in purple have continued to trend upward. In addition, Japanese yen NII shown in red has been rising moderately over the past few years due to an improved spread despite the continuation of a negative interest rate policy, but have now recovered its earnings power significantly due to the recent yen interest rate hike. Such diversification of the earning structure has already resulted in the gross net profits in the bar chart to more than double the level prior to the introduction of negative interest rates. Please turn to Page 17, improvement of our earnings power. Our growth strategy is progressing well. And customer segments, NOP exceeding JPY 1 trillion, a significant increase of 2.5x compared to the first half of fiscal year 2020. Even excluding the impact of [indiscernible] and FX, this is a significant increase of over JPY 200 billion over the same period last year, and the improvement in earnings power is continuing strong. Please turn to Page 18 for the impact of rises in yen interest rates and finance demand. This year, the Bank of Japan raised interest rates for the first time in 17 years. We estimate the impact of a further rise in yen interest rates on our business performance to be JPY 180 billion increase in NII if interest rates were to rise at the 25-basis-point parallel shift as shown on the left. Coming out of a long-lasting deflation, a world with interest rates has arrived, and the Japanese economy is back on track and movements of money will begin in earnest. As the Japanese economy is now at a major inflection point, we at MUFG strongly believe that we, as a top bank, have a responsibility to create growth in Japan. As you can see on the right, the current demand for funds is strong. We will continue to meet our customers' demand for funds while leveraging their balance sheet, the largest in Japan. Please proceed to the next page. From here, I will explain the progress of each strategy, the 3 pillars of the MTBP. First, on expand and refine growth strategies. We are already 40% of the way to achieving our MTBP goal of JPY 135 billion in NOP growth. We are off to a very good start. In particular, our domestic business is beginning to grow significantly. In strengthening the domestic retail customer base, we have steadily increasing new account openings and the number of applications for the Mitsubishi UFJ card by launching various campaigns in an agile manner in order to realize our lifetime value strategy. In the corporate and wealth management combined business, by capturing customer needs, business succession related loans and profits from asset management are growing. Overseas, in addition to the steady growth of the GCIB, global market integrated business model, we worked on expansion of MUFG's economic sphere in Asia through new investments in Ascend Money in Thailand and Globe Fintech Innovations in the Philippines to strengthen APAC business and platform resilience. We are also working to create new businesses for our customers and for ourselves by contributing to the realization of making Japan an asset management nation, supporting the GX value chain and taking all the challenge to build new business portfolio. Please turn to Page 20, driving social and environmental progress. Top left, the results of financial support for the realization of a sustainable society increased by JPY 4 trillion in the first half, capturing the increase in demand for funds in Japan and abroad. Next, industry development and innovation support. In the first half, the bank entered into a business alliance with LayerX, a company that excels at improving operational efficiency through the use of cutting-edge AI technology. Through LayerX service, we will provide solutions to our customers' back-office operations while deepening collaboration in areas that are highly compatible with MUFG's business such as settlements, optimizing corporate value as together, we pursue solutions to social issues. Next, as shown top right, we released our Human Rights Report 2024 in June. In this year's report, we have newly compiled the results and specific examples of human rights due diligence. And in addition to strengthening our efforts to respect human rights, we are also proactively disclosing information. We have also published MUFG Sustainability Report 2024 this month, and I hope you will take a look at it for more details. To conclude, I would like to introduce our efforts to visualize the social impact of our business. In July, the Trust Bank published the Impact Book, which visualizes the path towards achieving social impact using a logic model. Next spring, we will disclose specific initiatives across the MUFG group to solve social issues and their impact on society and offer explanation to gain your understanding. Please turn to Page 21. This past September, we published a new Transition Whitepaper 2024. In previous white papers, with summarized the differences in the path to carbon neutrality and policies in each country and region and have been engaging in dialogue with various stakeholders. This time, however, through our discussions, we found that there are not only differences, but also common challenge faced by countries, that is the barrier to overcome the price pass-through of carbon-neutral technology. In this white paper, we have summarized the discussion points necessary to overcome this barrier and social implementation of technologies necessary to achieve carbon neutrality, ensuring economic viability of business, gaining appropriate public understanding of such technologies and advocating the necessity of international cooperation. And Nikkei, in collaboration with our customers, will continue to play a role in laying the groundwork for inter-industry collaboration, industry-government cooperation and domestic and international collaboration. Please turn to Page 22, accelerating transformation and innovation. I believe MUFG needs to awaken its full potential to become a group that embodies its purpose of committed to empowering a brighter future. To achieve this, it is essential to cultivate the culture in which each and every employee maximizes his or her potential, thinks independently, takes ownership of own decisions and taking actions without delay. In addition to holding townhall meetings for more than 4,000 management personnel in Japan and overseas and using internal media to strengthen communication to employees, we are increasing opportunities for dialogue and sharing among employees, especially in units that transcend the business segments to which they belong regarding their own ideas of the MUFG Way. Through such interactive mechanisms, we are working on cultural reform on a group-wide basis by promoting ownership of the purpose at the individual employee level. To the right is the acceleration of agility transformation. More than 500 general managers declare their own agility transformation actions for implementation and are also working to review complex internal procedures and rules. Specifically, more than 2,000 requests from employees were consolidated into 70 themes, and within 6 months of the start of the initiative, we have already formulated policies to deal with more than 70% of them. In addition, we have begun a trial of agile operation that will enable us to respond quickly. COE, or Center of Excellence teams, tryout agile operations in multiple areas and they are established with an aim of expanding them into different areas within the company. Page 23 is a strategy update on AI. We believe that generative AI will be a game changer for businesses. To this end, we are pursuing various initiatives to transform ourselves into an AI-native company that not only utilizes AI to improve operational efficiency, but also thinks with AI at its core. Specifically, we are examining and developing more advanced business use cases, conducting intelligence activities to grasp the latest technologies and trends and collaborating with advanced external partners with a focus on improving customer value proposition through data-driven approaches and reforming business models and by changing the way employees work. In addition, we are also working in earnest to strengthen experts that support these strategies. Page 24 shows cost control. While investing resources to strengthen our business and infrastructure, we have managed to keep the expense ratio below 60%, the target of the MTBP by disciplined control of the ratio and the amount. Page 25 shows RWA control. Risk return cautious business cooperations are spreading throughout the group as we make replacement with highly profitable assets. Currently, the reduction of RWAs is making headway of the MTBP target, thanks to the reduction of low profitability assets and accelerated sale of equity holdings. Page 26 shows evolution of retail business strategy. Retail business strategy aims to maximize lifetime value and customer foundation, working on various initiatives, including opening new pilot branches. Furthermore, to deepen group integrated operations, the decision was made to fully acquire au Kabucom Securities, and we branded this as Mitsubishi UFJ eSmart Securities Co., Ltd. It will be positioned as a core entity in online securities to accelerate group integrated operations by enhancing service coordination. And before the end of the fiscal year, Internet banking direct will be renewed to make possible seamless linkage of services of group companies to provide competitive services as a group. Page 27 is on further development of our business portfolio. With the approach for the co-creation of value, we aim to create future business opportunities for MUFG by capturing the expansion of new business domains, fostering industries and businesses together with our customers. Our initiatives go beyond the scope of our traditional activities and includes business co-creation investments, international advocacy activities and support for supply chain development. Overseas, we invested in the top players in the payment sector in Thailand and the Philippines in order to expand the muff economic sphere in Asia. India has become an important region for MUFG in terms of both enhancing profitability and improving the efficiency of overseas operations. In the area of IS, we will further expand our business by pursuing synergies through the provision of asset management services to overseas pension funds, et cetera, by utilizing the customer base of MPMS, formerly Link, which we acquired in May this year, and by improving operational efficiencies through the effective utilization of our back-office centers in India. Please turn to Page 29 for the status of our response to the administrative actions. In July, we formulated and submitted to the Financial Services Agency a set of improvement measures aimed at preventing a recurrence of the issue, centered on the 6 pillars and have steadily implemented measures to strengthen our internal control system. To be more specific, we have completed all of the measures listed on the left by October. The initiatives for penetration is listed on the right [indiscernible] future penetration and establishment. As a holding company, we will also continue to monitor the situation closely. Our Board of Directors have been involved in the formulation of this improvement plan and will continue to verify the status of implementation. We reported the details to the Financial Services Agency in October, and we will continue to report on the implementation status on a regular basis, and we will also keep you informed of progress as necessary. That's all from me. We are now entering a new phase of growth under the purpose of committed to empowering a brighter future. We want to awake the potential of MUFG as an organization and realize enhanced corporate value. We ask for your continued understanding and support to our investors and rating agencies, thank you very much for your attention.