Resona Holdings, Inc. (8308) Earnings Call Transcript & Summary

Good morning, everyone. I am Masahiro Minami of Resona Holdings. Thank you for taking time out of your busy schedule to participate in our IR meeting today. As we did in May, we will be holding this IR meeting through this conference call, and we thank you for your understanding. Although the outlook on the resolution for COVID-19 remains unclear, we are putting importance on extending firm support to customers as a financial group that is driving to become the #1 retail bank. I will now move on to my explanation. Since there; was an analyst call after the announcement of our financial results already, I will focus mainly on the strategic aspects today. Please turn to Page 3. Here are the highlights of the 3 points that I'd like to share with you today. The first point is the summary of first half results. Net income attributable to owners of parent was JPY 56.3 billion, but the progress rate was 46.9% against the full year target. The progress rate for actual net operating profit on a group bank total basis was 51.1%, which was broadly in line with plan. In the wake of COVID-19, we were able to operate in a way that supported customers, whilst we maintained a sound financial position. Overall, Q1 was a very difficult quarter for our business as we were focused on crisis response, but it has been on a recovery trend since Q2. The second point is about our growth strategy, accounting for living with COVID or after COVID-19. As we come into contact with our customers increasingly diverse or changing issues due to COVID-19, we feel that we are on the right track regarding the direction set in the medium-term plan, which are: further development, new challenge and rebuilding our foundation. However, we also feel a stronger need to accelerate the speed of realizing the strategies. It is in this context that the decision, to make KMFG a wholly owned subsidiary was made. We also believe that it is a strategy that will contribute to increasing shareholder value. The third point is that there will be no change in the direction of our capital policy and strengthening of shareholder returns in our medium-term management plan. Please turn to Page 5, where I will explain first half results. Looking at the third row on the left, the progress rate of net income attributable to owners of parent increased from 18.1% in Q1 to 46.9% in the first half, recovering back to a level that is broadly in line against plan. Net interest income from domestic loans and deposits were down JPY 3 billion year-on-year. Excluding loans to the Japanese government and others the average balance was up by 2.68%, and the yield was down minus 4 basis points. Balance growth was on an increasing trend, reflecting demand for funds, mainly from corporate clients, while yields were generally in line with plan. Fee income declined by JPY 4.5 billion year-on-year due to the constraints of face-to-face sales, especially in Q1, but has been on a recovery trend from Q2, like I mentioned earlier. Net gains on bonds were up by JPY 5.3 billion as there was a buildup in trading profits, capturing rate declines in a timely manner. Operating expenses improved by JPY 1.7 billion as both personnel and nonpersonnel expenses decreased. Credit-related expenses increased by JPY 12.7 billion year-on-year to JPY 23.1 billion. Expenses increased partly due to a precautionary approach in Q1, but conditions have settled down since Q2. The company is keeping its full year net profit target of JPY 120 billion and dividend forecast of JPY 21 unchanged from the beginning of year forecast. Next, Pages 6 and 7 are slides showing the impact from COVID-19. First on Page 6 on the left. Under the state of emergency, the number of customers visiting branches decreased by about 25%. On the other hand, the number of non-face-to-face transactions increased significantly. Funding needs, especially among corporate customers, expanded in a prominent way. This was a major trend during the first half. The bottom half shows the medium to long-term perspective. Due to COVID-19, we felt that there is a growing need amongst customers to prepare for the future and to respond to digitalization. I will talk about this later when I talk about our business, but we recognize that there are many areas where we can take advantage of our strengths. We will continue to provide fine-tuned solutions that are unique to Resona. Please turn to Page 7. On the top left, you can see that during the first half of the year, corporate customers' funding needs expanded significantly. There were approximately 41,000 COVID-19 related consultations with a cumulative total of approximately JPY 2.3 trillion in loans originated. Now as funding needs have settled down for the time being, we will continue to support our customers in strengthening their financials from an equity perspective accordingly as we continue to live with COVID 19. Next on the bottom left, residential housing loans remained at a high level in response to growing demand for detached houses in the suburbs and other factors. On the top right, in the fee businesses, overall income declined due to difficulties in the insurance, M&A and real estate businesses as face-to-face sales were quite restricted, while sales of loan-related corporate solutions and settlement services were brisk. A recovery in the insurance and real estate businesses that were underperforming has become prominent since the second quarter. Credit costs are shown in the diagram on the bottom right. Credit costs have returned back to being in line with expectations. Next, I will cover some points that have not been mentioned so far in the following slides. Please turn to Page 17. I would like to comment about the right-hand side of the slide regarding the status of policy-oriented stocks held. The disposal in the first half of the year was JPY 2.8 billion on a listed and book value basis, and net gain on sale was JPY 2.4 billion on a consolidated basis. We have no concerns about reduction in the second half as negotiations are making steady progress. We are working to reduce our holdings by JPY 30 billion over the 3 years from the current fiscal year to reach a CET1 ratio of about 15%. Although there has been various constraints due to COVID-19, we are determined to make efforts to achieve our plan. Please turn to Page 18. Please look at the bottom right. In the medium-term management plan, we are targeting a 10% CET1 ratio, excluding unrealized gains and losses on securities on a Basel 3 finalized basis, and the trial calculation figure for the end of September was about 9.1%. From here on, I would like to explain our growth strategy. Please turn to Page 23. Regarding the current midterm plan, the starting point of thinking through our business is to be customer and social issues oriented. As our customers' issues are changing in the wake of COVID-19, we will adapt to changes and grow together with society by leveraging Resona's fundamental strengths. Please turn to Page 25. The decision to make KMFG a wholly owned subsidiary announced on November 10, was made in the midst of significant changes in the business environment. And increased uncertainty due to COVID-19. As you can see on the top left, turning KMFG into a wholly owned subsidiary is scheduled to be completed on April 1, 2021. Kansai Mirai Financial Group, which is currently listed on the first section of the Tokyo Stock Exchange, will be delisted. Looking at the top right, based on our desire to gain continued support of KMFG's shareholders, we have paid maximum attention to preserving capital in order to support our customers in mid COVID-19 and protecting the value of our shares. This scheme was put together as a result. There are 3 points that I would like to mention that are stated on the bottom half of the slide under Increase in Shareholders' Value: First, regarding the CET1 ratio, which is a KPI in the medium-term management plan, we will ensure that it will not change significantly before and after the implementation of the scheme, therefore, our policy of increasing shareholder returns over the medium-term will not change either; secondly, if EPS is diluted, our policy is to neutralize the impact through share buybacks; third, the difference between the net asset value of KMFG and the acquisition price will result in an increase in capital, and therefore, BPS is expected to increase. In light of the above, we believe that this is an initiative that will help increase the value of holdings shares. Please turn to Page 26. I would like to discuss the background and purpose of making KMFG a wholly owned subsidiary. The world is still in the midst of a battle against COVID-19, and unprecedented monetary easing policies, which have made the environment of ultra-low interest rates is expected to be even more prolonged, and competition is intensifying, including competition from other formats of businesses. In light of these dramatic changes in the business environment, the company reached this decision based on the 3 points outlined here. The first is further commitment to the Kansai region. By fully committing Resona's management resources, we will contribute more than ever to the development of the Kansai region, which is expected to see increased economic activity. The second point is to make the group's fundamental strength even stronger. We will put in place a structure to provide stronger support to customers in the Kansai region and curb the outflow at KMFG, so as to increase the capital base. In addition, while KMFG's balance sheet is fully consolidated at present, only 51% of its income is captured. After the completion of this transaction, ROA will increase as income contribution on a consolidated basis will be 100%. The third point is the acceleration of integrated group management. This transaction will help eliminate the risk of conflict of interest inherent in the parent subsidiary listing structure. By reallocating management resources without constraints and doing this in a speedy manner, we will accelerate efforts to achieve further synergies. In this challenging environment, KMFG's progress in terms of financial performance is still midway, as some people say. But for example, we have seen a significant increase of KMFG customers, investing into Resona's differentiated products, such as fund wrap and investment trust products. In addition, we have already integrated back offices and IT systems at KMB and booked a certain level of expenses related to structural reform last fiscal year, such as impairment charges associated with the consolidation of our branches so we are quite prepared in laying the groundwork for future synergies. By steadily rolling out a variety of measures across the group, we will strive to raise the probability of achieving JPY 11 billion in group synergies that we have set forth in the midterm plan. In addition, as an additional measure, I would like to explain what we are currently envisioning. We will accelerate personnel reallocation that goes beyond entities. We think that as a first step, 200 people can be reallocated from streamlining the administrative structure and about 300 by streamlining headquarter functions. We will also accelerate the optimization of our channels. We believe that we can consolidate nearly half of KMB's offices, while increasing customer convenience by utilizing banking bank and other methods in a larger way. We will work quickly to set up a management council to swiftly move forward with group-wide discussions in order to carry out specific measures. Now let me explain the key points of each business. Please turn to Page 27. First, I will explain the field of further development and the asset and business succession business. We have confirmed that customer awareness towards being prepared for asset and business succession has been materializing due to COVID-19. As you can see on the left, according to interviews with corporate clients, that were conducted on a large scale. We have learned that approximately 80% of them were considering some form of business succession with around 20% considering succession to outside of the family, through M&A or other means. Real estate was sluggish in the first half of the year, but real estate information is on the rise, mainly related to property for sale. As you can see on the right, on our part, we are increasing the number of specialists and embracing more of digital technology to meet customer needs. As for the bottom right, we also plan to establish an investment dedicated subsidiary this fiscal year to manage buyout funds. By acquiring a majority of shares of our clients, the company will build a structure that supports smooth business succession for small and medium-sized companies. Please turn to Page 28. In an unstable market environment, customer need for stable asset management is increasing. Looking at the middle left of the slide, in January this year, the company consolidated its asset management functions into Resona Asset Management. The company will provide retail clients with professional asset management services which have been developed in the corporate pension fund business that has more than 50 years of history. Regarding the middle right, with the integration of its administration and systems in October last year, the former Kansai Urban began offering fund wrap, which boasts a stable track record. The balance of fund wrap at KMB has grown dramatically which reinforces our belief that the product is a good fit for retail and community-based banking customers. From October, Minato Bank, that doesn't use the same IT system, has begun offering the product fund wrap through API integration and is off to a good start. The platform for API integration has already been built. So going forward, we view this as a model case for future provision to customers of regional financial institutions. Please turn to Page 29. I'd like to briefly touch upon our SME lending in the international business. In the wake of COVID-19, SME customers are facing more diverse challenges, such as the need to fundamentally overhaul their business structure as well as to stabilize their cash flow and strengthen their financial base. Resona Group serves 68,000 SME customers as their main bank, catering to a wide customer base comparable to that of the mega banks. On transaction basis, we serve 500,000 customers and provide various and thorough solutions for a wide range of customers' issues. This is going to be a critical point for Resona Group, and it will determine if we can remain competitive in the market. As I mentioned earlier, bottom half of the slide illustrates how we are catering to the customers' urgent need for liquidity. We have extended approximately JPY 2.3 trillion in COVID-19 related loans leading up to October. We are also building our solutions for capital enhancements, such as providing subordinated loans, and we will continue to extend the strong support for our customers. Please turn to Page 30. The balance of the newly originated housing loans remained high despite COVID-19. As shown on the left, although the new condo sales struggled due to the closure of model rooms due to the whole nation being placed under the state of emergency and more people working from home. The sales of detached housing in the suburban area remained firm, partly driven by more companies adopting remote working style. We believe that we've been able to exert our strength to meet these needs in the market. Bottom right illustrates that Resona Bank is rolling out e-contract service to other branches. Not only does it help to improve the convenience for customers in the environment with COVID-19, but the shorter processing time is also helping to increase the multi-facility transactions. Please turn to Page 31. Now I'd like to talk about initiatives under the concept of further development amplified by new challenges, starting with our strategy on omnichannel. While the need for non-face-to-face transactions is growing with COVID-19, we believe there is also a greater need for in-depth consultation stemming from customers' anxiety over the future. This exactly coincides with the concept that we are pursuing, which is the convergence of the physical and digital channels. As you can see on the left, we are emphasizing the power of face-to-face business for the convenience of our customers, and we intend to maintain our branch network as much as possible. At the same time, we believe it's imperative for us to significantly lower the breakeven point through business process transformation and aim for a new branch operation, where both consultation and transaction process can be provided in an integrated way. For the digital channel, we are striving for the ultimate level of ease of use with the group's smartphone app, and the app has now reached 3 million downloads. We were the only name from a backing industry to be selected as a constituent of the DX Stock 2020. And we believe that this is the recognition of our near value preposition through the resonance between face-to-face in the digital channels. Please turn to Page 32. As you can see on the left, in the face-to-face channel, we will further develop the area operation to maintain and expand the overall touch points with the customers. While steadily lowering the breakeven point for each branch. At the same time, we are accelerating our initiatives to reorganize the area management and optimize the mission and staffing of each branch in line with the respective market characteristics. In October, Resona Bank reorganized 260 branches in the Tokyo metropolitan area in Kansai and completed the mission optimization for authority branches as the first step. Cost reduction through branch downsizing and replacement is predicated on cost reduction for sure as well as operation with pure headcount through DX. Furthermore, we will pursue channel optimization with greater speed on a group basis. We plan to increase the number of banking bank branches among group banks in addition to branch and branch operations, by mainly integrating the consumer bank basis into the adjacent group bank branches. The mid-term management plan called for the consolidation of about 90 branches, but we hope to expand this to nearly half of consumer bank spaces by making KMFG a wholly owned subsidiary, further accelerating the process. The right-hand slide shows that the main digital channel is the group app. During part 2Q '19, the number of downloads was posted to reach over 3 million downloads, as I mentioned earlier. The app has outgrown the ATM usage and has already become the touch point and channel that's used the most. In June, we signed a strategic business partnership with Mobility Financial Group in the digital field. And we plan to expand similar opportunities to other regional financial institutions using open APIs. Now please turn to Page 33. COVID-19 has accelerated digitalization across the public and private sectors, with a shift toward cashless payments in non-face-to-face transactions. In terms of initiatives for retail customers, the number of debit cards has grown significantly. In the past 6 months, the number of cards issued has increased by more than 200,000 and related income has grown by 48% year-on-year. Resona's cards platform is starting to gradually penetrate among the corporate customers. Although there were some delayed installment due to COVID-19, the number of customers we plan to introduce our CP has steadily increased to 1,500 customers or to 15,000 points of sales, and we expect more growth to come in the future. We are also preparing to provide services for the B2B cashless settlement from next fiscal year. Please turn to Page 34. From this slide, I will talk about the initiatives of new challenges, starting how we are accelerating our move to break free of the banking model. Cross-functional team across operating entities and organizations are moving into full swing with the aim of creating new businesses and rebuilding our foundations, including business processes and systems. The cross-functional team was formed in April 2020 and has since then, being expanded to about 30 people through internal recruitment and inviting people from outside. In September, we started Resona garage, an open innovation co-creation base where cross-functional team members are engaging in their activities. The goal of this initiative is to create new value with flexible and innovative ideas under a new work style that includes a large floor space without walls, free dress code and getting rid of the fixed line telecommunication. Please turn to Page 35. Our initiative to walk away from the conventional banking model also aims at co-creation through a broad relationship. We aim to expand our customer base by providing Resona's unique products and services as a platform to the regional financial institutions. By leveraging on the so-called API economy, we like to form a win-win relationship. In addition, as customer needs become more diverse, sophisticated and complex, we will make efforts in building an ecosystem and compassing players from outside of the banking industry. This is aligned with our desire to be open to the outside for collaboration as stipulated in our midterm management plan. The slide illustrates many of typical services that are already launched. We intend to expand our offerings further in the future. Please turn to Page 36. I'd like to give you an overview of what we mean by rebuilding our foundations. We've been working on various new forms to date. But we believe that we need to take major steps to address the mismatch between our current profit structure and cost structure, amidst the protracted ultra-low interest rate environment and intensify competition, including the players from other industries. We must face this challenge upfront to solve this mismatch, and we must not leave any stones unturned. We see one of the most important tasks for the group is to reengage in rebuilding the foundation of the bank itself to change the structure. The first task is to strengthen the qualitative and quantitative aspects of our human resources. We will turn down and transform the conventional business process so that measure mandated to individuals can be redefined and adjusted. The second task is to reform our business processes in order to improve the customer convenience in the bank's productivity, so that, ultimately, these initiatives will lead to transforming our sales approach as well as a channel network. The third task is to transform the various system that supports these processes. All based on ideas that go beyond the conventional framework. I would elaborate on each point in the following pages. Please turn to Page 37. As the top half of the page indicates, our HR strategy will focus more than ever on developing specialized professionals as well as the omni advisers or professionals who can think and act in the best interest of customers, which is something that we've been working on under the previous midterm management plan. It is important to create a mechanism for this. And on that note, we will start the multipath personal system next fiscal year, which will embrace both professionalism and diversity. We will move forward in phases to adopt the job description-based recruiting. The bottom half shows the headcount changes under the midterm management plan which is the same as the one presented in May. The plan is to slim down the organization to about 29,000 people over the course of 3 years by natural attrition while redeploying the human resources. As we indicated in our midterm management plan, we will reduce the group's overall headcount by about 10% and by roughly 20% for KMFG alone over 3 years. Then this will be through natural attrition. We believe that the pace is on par with other financial institutions. By making KMFG a wholly owned subsidiary, we intend to redeploy human resources across the group more quickly and with a more material approach. Please turn to Page 38. There are no major changes in the concept from what we have explained in our midterm management plan. I'd like to point out that next year, we will at later to roll out self-serving tablets in the branches so that consultation and processing transactions can be carried out in an integrated way. The tablet would have a great user interface with good operability which will be comparable to the group app. This will mark our full swing transformation on the sales approach. I'd also like to make one additional comment on this topic. As stated at the bottom of the slide, just like our HR strategy, we will further accelerate the overall group optimization by making KMFG a wholly owned subsidiary. Page 39, please. Here, I'd like to comment on the progress of Minato Bank's [indiscernible] system integration, which is illustrated at the bottom. As I explained earlier, as the first step in October, Minato Bank started to offer a fund wrap, which is a product positioned as a strategic offering at Resona. The initiative will be a model case of API collaboration with other regional financial institutions in the future. And we are making a good progress. Please turn to Page 41. A few words on our capital policy. Again, the event of KMFG becoming a wholly owned subsidiary will have little, if any, impact on the common equity Tier 1 ratio, which is the KPI under the midterm management plan. Therefore, our policy of enhancing shareholder return or balancing softness in profitability as well as taking into account opportunities for growth investment in full remains unchanged. While maintaining stable dividend stream, we aim to achieve a total shareholder return ratio in the mid-40% range over the medium-term as stipulated in the medium-term management plan. Please turn to Page 42. Last, but not least, I would like to make a few comments on our ESG efforts. Please turn to Page 43. First, on environment. Resona Group has identified the response to the global warming and climate change as one of the environmental and social issues to be prioritized by the group as a whole. We will continue our efforts to achieve a low-carbon recycling-oriented society through the suspension of new loans to qualified thermal power plant projects in principle, the incorporation of ESG into the investment process, and the provision of a variety of environmentally friendly products. Now please turn to Page 45. This page is about social. We are position initiative in solving social issues for core business and innovation as a primary goal, and we emphasize the idea of collaboration with society. On the next page, I'll talk about our programs around diversity. Please turn to Page 46. Diversity management is the basis of our HR strategy, which allows all employees to play an active role regardless of gender, age or type of job, and the personal system is based on equal work, equal pay. We are also working on work style transformation to achieve flexible and productive work styles, such as the introduction in 2015 of a smart employee system that limits the scope of working work hours. Furthermore, the ratio of women in line management positions reached their target of over 30% in April. Please turn to Page 47. This is our governance structure. As you know, we adopted a committee based corporate governance structure as the first bank in Japan to do so back in 2003. The majority of the Board of Directors is composed of outside directors and all 3 committees are cured by outside directors. The company continues to have a governance system that fully utilizes outside perspectives and ensures the high degree of transparency and fairness in management. To top it off, high execution capability is assured in business management. Please turn to Page 49. I'd like to make one last point. One of our KPIs under the midterm management plan is to be the constituent of the ESG indexes that are adopted by GPIF. Currently, we are included in all 4 indices shown here and we will continue to endeavor to ensure that this position is maintained going forward. With that, I'd like to conclude my presentation. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]