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

Hello, ladies and gentlemen. This is Masahiro Minami, President of Resona Holdings. Thank you very much for taking time out of your busy schedule to participate in our IR presentation today. Following last year, we are presenting our financial results again in the conference call format. Thank you for your understanding. Looking at the COVID-19 situation, vaccine rollout will be one of the hopes to recovery, but we need to hammer out our business plan assuming that COVID-19 situation will stay in a state of flux for the time being. Resona Group continues to place the highest priority on fully supporting our customers by fulfilling our social mission as a financial institution through the provision of seamless and community-oriented financial services. I will now dive into the main presentation. Since we held the analyst call after the announcement of our financial results, I will focus on the strategic topics today. Please turn to Page 4. For Resona Holdings, the business marked a net income attributable to the owners of parent of JPY 124.4 billion, a decrease of JPY 27.9 billion year-on-year but exceeded the full year target of JPY 120 billion unbilled in May last year by 3.7%. Actual net operating profit declined by JPY 17.9 billion year-on-year to JPY 224 billion. Net interest income from domestic loans and deposits decreased by JPY 2.2 billion year-on-year. Excluding the loans to the Japanese government and others, average loan balance grew by 3.25% and the yield declined by 4 basis points. While the loan volume was robust, the yield trend was in line with the plan. Fee income increased by JPY 1.2 billion year-on-year. Although the business was slow at the start of the year due to COVID-19, fee income achieved year-on-year growth for the full year, which was one of the positive signs that we were able to observe. Operating expenses improved by JPY 1.6 billion due to a decrease in both personnel and non-personnel expenses. For the first time since March 2009 when net interest income started to decline, the drop in net income was offset by the growth in fee income and improvement in operating expenses. This is significant for Resona with a big exposure to housing loans in our loan book. Credit costs were negative JPY 57.4 billion, an increase of JPY 34.4 billion from the previous year. I will explain this point in more details later. KMFG was turned into a wholly owned subsidiary effective April 1 as scheduled, and we have started this fiscal year as a renewed Resona Group. In addition, as we have communicated from before, we are executing a share buyback program to offset the impact of EPS dilution from this transaction. I will elaborate on this topic later in the capital policy section. Please turn to Page 5. Pages 5 and 6 summarize the impact of COVID-19 on our business. Even with the ongoing battle against COVID-19, we have managed to continue our full-line service at all of our branches in Japan while taking all possible measures to ensure the safety of our customers and employees. We are also working to provide customer support including cash flow management, and we believe we have been able to augment our non-face-to-face channels. As shown at bottom left, average corporate loan balance, excluding the loans to holdings, grew significantly by 6.31%, owing to services such as supporting the customers' liquidity management. This marked the highest growth rate ever since Resona was established. The number of consultations related to COVID-19 reached 55,000, and the new loans extended related to COVID-19 increased to JPY 3.6 trillion, out of which roughly 40% were loans backed by guarantee from the Credit Guarantee Corporation. We have also strengthened our equity support mechanism by launching a capital support fund totaling JPY 31 billion. As illustrated on the right, newly originated housing loans for owner-occupied homes remained high at JPY 1.3 trillion, up 6.5% from the previous year. Net loss ratio continued to be muted and stable at a low level. Please turn to Page 6. You can confirm on the slide that the trend of the fee business is gradually recovering with time. On a full year basis, fee income from fund wraps, corporate solutions and settlement and other related businesses increased steadily, while fee from insurance products and real estate brokerage declined. Now I would like to make some specific comments using the subsequent slide. Please proceed to Page 9. The slide shows the average balance and the yield of the loan book. And I'd like to make one comment on the yield using the graph at bottom right. Generally speaking, the rate of the yield decline is moderating, and it's worth noting that for the corporate loans, yield has picked up in Q4. This was partly due to an increase in loans backed by Credit Guarantee Corporation, which has relatively high effective yield, and we will continue to strive to keep this trend. Please turn to Page 15. Consolidated credit cost for Resona Holdings were JPY 57.4 billion, higher than both the previous year and the plan. This was partly due to preventive provisioning, which I will explain using the upper right section of this slide. Amid concerns of a protracted impact of COVID-19, we took preventive measures provisioning JPY 24.3 billion in total for industries with potential materiality and credit risk. As shown at top right, JPY 8.6 billion was booked using the top-down approach as additional provisions for other watch obligors in specific sectors facing severe challenges from COVID-19. Such exposure was roughly JPY 510 billion in balance. Another JPY 15.7 billion was booked using the bottom-up approach. This was done within the scope of the existing rule, but following our policy for supporting companies trying to turn around their business, we took a more conservative view on their financial position and earnings prospects and provisioned for such exposures. As a result, we believe we have been able to reduce our downside risk to a certain extent. And for this fiscal year, we are projecting a consolidated credit cost of JPY 44 billion. This will translate into credit cost of 11 basis points versus the total loan book as we assume the environment to remain uncertain. Please turn to Page 16. The right side of the slide summarizes the status of the business-related holdings. Last fiscal year, we reduced the holdings of listed stocks by JPY 11.6 billion on acquisition cost basis, and the consolidated gains on sales were JPY 29.3 billion. We have partially revised our policy and strategically held stocks, so let me offer you some additional comments. In addition to clearly stating that the basic policy is to reduce the balance of the holdings, the policy is to state that if any increases we're holding is appropriate based on our risk return analysis, we may sell shares in consideration of market conditions, business management and financial strategy. We recognize the importance of being prepared for increased volatility in the financial market, and we will work to optimize our pure investment portfolio in light of changes in the environment while at the same time, steadily execute the current plan to accelerate the pace of reduction of business-related holdings. Please turn to Page 17. As shown at bottom right, under the midterm management plan, we are targeting for 10% common equity Tier 1 ratio, excluding net unrealized gains on securities on a finalized version of Basel 3. Our calculation for March end was approximately 9%. Now let me touch upon our growth strategies going forward. Please turn to Page 18. For this fiscal year, we have set Resona Holdings' consolidated net income target at JPY 145 billion, which will be up JPY 20.6 billion from the previous fiscal year. With KMFG's bottom line being 100% consolidated to the group's P&L from this fiscal year, KMFG will make a profit contribution of JPY 15 billion, a year-on-year increase of JPY 9.2 billion. We plan to pay an annual dividend of JPY 21 per share, which is a level unchanged from the previous year. The table at the bottom of the slide shows the aggregated figure of the group banks. Line item #6, the gross operating profit is projected to be JPY 599 billion, up JPY 16 billion year-on-year. We expect the net interest income to be down by JPY 3.7 billion, assuming a drop of 3 basis on loan yield and average loan balance growth of 2.39%. We do not expect loan demand to be as strong as in last fiscal year. Fee income is expected to increase by approximately JPY 17 billion, mainly from real estate, M&A and asset formation support. While making the improvement on the personnel cost, we will have some cost increase in the non-personnel expenses with some strategic investments such as IT investment for instance, and operating expenses are expected to increase by JPY 6.1 billion in total. In sum, we expect actual net operating profit to be up by JPY 9.9 billion to JPY 202 billion. Net gains on stocks, including equity derivatives, are expected to come down by JPY 10.4 billion. But mainly through the reduction of the strategically held stock holdings, we would like to achieve sales gain of JPY 30.5 billion. We project credit cost to be JPY 37 billion, which should translate into a profit improvement of JPY 15 billion year-on-year. In sum, we are guiding for a combined net income of the banks to be JPY 127.5 billion, an increase of JPY 12.2 billion year-on-year. Now please proceed to Page 22. I'd like to share some thoughts from the short-, medium- and long-term perspectives. First, starting with the long-term perspective. Resona's SDGs-oriented management starts with the idea of striving to think through what we can offer in our business by focusing on our customers' concerns and social issues. With COVID-19, as customers' concerns evolve and social issues change, we will adapt to the changes and grow with the society while leveraging Resona's underlying core competence. We believe that is the path in achieving our goal of becoming Retail No. 1. There are 2 key points under revision for the period from 2030 to 2050. The first point is that we want to be the financial services group that contributes most to the SX or sustainability transformation of our retail customers. We hope to present Resona's sustainable growth in the near future as well. Discussions are underway to support our customers, particularly the midsized companies, SMEs and individuals with an emphasis on the perspectives of financing service that supports customers' SX, carbon neutrality and corporate value creation by capitalizing on diversity. The second point is to steadily realize income and cost structure reforms. We would like to establish a system in which all employees can offer consultation service, transform our business process by implementing DX and build a co-creation type platform so that we can endeavor to generate sufficient fee income to cover for the operating expenses. Please turn to Page 23. Next, I would like to move on to the medium-term outlook. The current medium-term management plan calls for the establishment of the business model through the following concepts, further development, taking on new challenges and rebuilding our foundation. I will start with rebuilding our foundation and explain what we are aiming for. As the world changes and customers' financial behavior changes, we need to evolve the way we do business and the system itself that supports our business. There is a huge mismatch between the current level of top line and the structure that underpins it, and we must break free from the structure and deal with this mismatch. We will start with disrupting and bringing down the existing business process to rebuild this. If we can reengineer the business process, then the sales approach will change. That will be compounded by an evolution in the channel network. And finally, human assets and system components will be transformed. This is the overall flow that we are expecting. By taking the comprehensive approach, we will strive to evolve to a next-generation business model. This may take slightly longer than the duration of the mid-term management plan, but we want to execute this with strong resolve. Without doubt, the most important factor for the success of the reform is human assets. We believe that diversity and expertise are a few of the key driving process for innovation. And in April, Resona Group shifted to a new multipath HR system. With technology evolving at an overwhelming speed, we believe converging the human assets and technology will serve to be our strength to accelerate the transformation. Our previous strategy focused solely on the real physical channel but with 3.6 million downloads of our group app, we are finally at a point where we can envision a world where the real and the digital channels can be converged. In this non-face-to-face channel with over 3.6 million downloads will be a key competitive advantage, and we will continue to expand our customer touch points, both in terms of quality and quantity. Please turn to Page 24. Now I'd like to make some comments on the concept of further development and new challenges. Resona Group is a commercial banking group with a full trust banking capability, including trust functions, real estate service and pension management with a strong customer base cultivated over more than 100 years of specializing in retail banking. I believe that this in and of itself is a very unique proposition. Further development means that we intend to further refine this strength with a focus to solve customers' issues. For example, helping customers with succession and asset formation plans in a super-aging society is an area where Resona's strength can be best utilized. This will also contribute in solving the social issues for Japan as a nation. Since the so-called Resona shock in 2003, we carried out a wide array of reforms through which our DNA innovation has been cultivated. This is another source of Resona's strength , and we believe there's more room for further evolution. New challenges mean to leverage this DNA to have novel ideas and to open up to the outside world. Our aim is to create new chemical reactions by being connected with different industries and regional financial institutions for their various expertise, know-hows and customer base. We want to form a new ecosystem by building a win-win relationship that also encompasses our customers. Please go to Page 25. I would like to make some comments on the review of the last fiscal year and the outlook for the current fiscal year. In hindsight, I believe last year will be perceived as a historic year marking a major turning point. It was a year where conventional wisdom and values were shaken. Having said that, I believe that new social issues are not a setback but rather a great opportunity for our business. Due to the restrictions on face-to-face sales activities, M&A and real estate businesses were under pressure, especially in the first half of last fiscal year. But looking at the number of deals on hand, we can see that there is a higher awareness of preparing for the future and considering succession plans in Japan. This is also true for the asset formation support business. As a result of COVID-19, corporate customers' needs for liquidity management and strengthening their financial base have increased more than in normal market environment. In addition to the loan book growth, we have also been able to expand our customer base by starting business with customers who were totally new to us. With the adoption of new lifestyle, non-face-to-face transactions have also expanded significantly. We believe that we, as Resona Group, need to change as quickly as possible in order to take advantage of this once-in-a-lifetime opportunity. We have already begun to implement a wide array of reforms such as reviewing our branch operations, restructuring our business process and revisiting our HR system. We hope that we can continue to be a financial services group that is not bound by the conventional values of the bank, yet rather, thinks with the new ideas and takes on new challenges. Please turn to Page 26. On this page, we show the way we view this fiscal year, together with KPIs. Like I said at the beginning of my remarks, vaccines are promising, but for the time being, we need to operate our business on the premise that we will continue to experience ups and downs, and our targets for this fiscal year are based on this premise. On the other hand, vaccinations are underway in Japan, and if the environment improves, we can expect a rebound from extremely suppressed consumer activity and postponed capital investment demand and other factors. We personally need to change ourselves without hesitation and organize ourselves so that we can be both aggressive and defensive. Against this backdrop, we made the decision last year to make KMFG a wholly owned subsidiary. This fiscal year, we have started as the new Resona Group. We will continue to work to demonstrate our commitment to transformation. I have prepared slides for each business from the next page, and I will pick up some of the parts that are unique and comment on them. Please turn to Page 27. This is an initiative that focuses on individual customers. Seamlessly supporting customers' life design in the 100-year life era by making the most of our unique feature of being a retail commercial banking group with full-line trust banking capabilities is our strength. Please turn to Page 28. We will apply investment know-how for professionals cultivated through corporate pension management to retail customers. To that end, we recognize Resona Asset Management as a very good strategic subsidiary and we expect significant growth going forward. Fund wrap is growing steadily with the balance exceeding JPY 500 billion. There are various types of fund wrap products in the world, but the unique feature of Resona's fund wrap is that they are designed to have a high affinity with bank customers. As individual deposits have been increasing significantly, we will offer this product as a core investment product that contributes to long-term stable asset formation. I'd like to also mention that the balance of fund wraps has increased significantly at Kansai Mirai Bank and Minato Bank, which have started to offer the product accordingly. Also, from April, we have started to offer the product to customers of the Bank of Yokohama. Please turn to Page 29. Resona's balance of housing loans is the highest amongst banks in Japan, and we believe that we have strengthened this area historically. We maintained a high level of origination during COVID-19, and we put importance on this business as a starting point for multifaceted transactions. In addition to its cost advantage due to economies of scale, low and stable final loss ratio and low capital requirements, it is an extremely high-quality portfolio. We will continue to focus on this business, while we determine our customers' lifetime value. Please turn to Page 30. This page is about the asset and business succession business. We feel that customers' awareness towards preparedness is heightening. And as you can see in the data at the top left, there has been a large year-on-year increase in the amount of information and projects carried over related to M&As and real estate. The graph on the right shows the number of new asset succession-related contracts. As in the case of fund wrap, you can see that growth at KMFG is significant. We feel that through the integration, top line synergies are steadily materializing. Please turn to Page 31. I mentioned that our customer base is expanding earlier. As you can see in the top left graph, the number of corporate clients has increased by nearly 5%. The number of customers using the group as their main bank has surpassed that of some mega banks. The lower left shows the results of asking customers about their capital investment needs. Apparently, 60% or more of customers have pent-up demand for capital investments post COVID-19. The need for IT is also increasing, and we hope to capture new capital demand and consulting needs from customers, including new customers post COVID-19. Please turn to Page 32. I have prepared 3 slides regarding DX or digital transformation strategies, but I will make a few comments here. Please refer to the top right here. We are the only company in the banking industry to be selected as one of the DX Stocks 2020. We recognize that our ability to provide new value through the convergence of the real and digital world has been highly regarded, and we will accelerate this effort further. Please turn to Page 33. This page is about our omni-channel strategy. On the left is about the digital channel. The group app, which reached about 3.6 million downloads in March, is already the most used customer touch point by our customers, and usage continues to rise. In addition to the group's internal development, since March, we have also been providing this service to Ashikaga and Joyo Bank under the Mebuki Financial Group. We expect this to become a core part of the platform business that we will engage in going forward. On the right are details about the face-to-face channel. The idea is to enhance the added value of face-to-face interactions by converging with digital while also ensuring thorough low-cost operations. I will talk about this later in another slide. Please turn to Page 34. In light of COVID-19, cashless payment and the move to digitalization by the public and private sectors are accelerating. On the left, the number of debit cards issued increased by 420,000 in 1 year and income increased by 45%. We believe that we have been able to build a good base for a stock-based fee income model. On the right, the Resona cashless platform has increased to 16,000 stores with approximately 2,000 corporate customers that have already implemented or are about to implement the platform. Please turn to Page 35. On April 1, the conversion of KMFG into a wholly owned subsidiary was completed. In light of the fact that the reallocation of management resources is now possible without constraints and even with greater speed, we have sorted out and updated group synergies here. The major difference from previous disclosures is on the expenses side. In the past, we accounted for only the systems part of a cost, but now we have added the effects of channel optimization and human resources optimization, et cetera, that reaches cost synergies worth JPY 23 billion by March 2023. This level is expected to boost the group's actual operating profits by approximately 10%. We have explained that the use of Resona's differentiated products by KMFG's customers is increasing significantly. And the top line impact is already close to JPY 6 billion for the fiscal year ending March 2021. On the expenses side, in addition to the joint use of systems, we are making progress in optimizing our workforce, resulting in approximately JPY 9 billion worth of cost synergies. Also, now that KMFG is a wholly owned subsidiary, the number of joint branches will increase by about 30 more to about 120 locations. We will also streamline the workforce by reducing about 350 employees compared to their original plan. Our view is that we have been completing laying the groundwork successfully, and we will now move on to a phase where we will focus on generating results. Please turn to Page 36. From here on, I will talk about another new challenge, which is breaking free of the banking model. We are in the process of creating new businesses mainly through the cross-functional team that we launched last year. We will work swiftly to accelerate business process reforms and create new businesses. Please turn to Page 37. Another key pillar to breaking free of the banking model initiative is the open platform strategy to provide Resona's unique products and services as a platform to regional financial institutions, et cetera, while upgrading and expanding their functions through co-creation with fintech companies. A typical service menu is shown here, and the use of this service by regional financial institutions is expanding, including Mebuki Financial Group for the group app and the Bank of Yokohama for fund wrap. In addition, the Resona cashless platform is being used in Osaka Prefecture and Hanno City, for example, and we would like to expand the use of the platform centered on local public entities. Please turn to Page 38. Details about rebuilding our foundations is covered from this page. Regarding the human resources strategy, I'd like to make a few comments about the bottom half. At the end of the medium-term management plan, the number of employees is expected to be around 28,300 employees which is lower than 29,000, which was the original plan before the KMFG integration. Our view is that we are making steady progress to become leaner by leveraging digital transformation. The bottom right is an image of the reallocation of human resources in the current fiscal year. We will go one step further in redeploying employees across entities. Please turn to Page 39. Here, we talk about our channels. By reducing the number of personnel per branch at especially former Kinki Osaka Bank and former Kansai Urban Bank and promoting bank in banks, we will strive to reduce the number of locations, so as to improve customer convenience and reduce costs at the same time. Looking at the numbers at the bottom, the number of locations will be reduced by close to 20% over the 3 years of the medium-term plan by optimizing the number of branches in the group. At the same time, we will accelerate the promotion of area reorganization, optimization of branch missions, branch replacement and downsizing. Please turn to Page 40. We would like to strategically introduce tablets that have comparable maneuverability compared to our group apps. We'd like to establish a new sales style where customers can engage in consultations with us regardless of location by using tablet terminals. Resona and Saitama Resona will gradually switch over to the new branch office system accordingly. I'd like to also mention that by using low-code development tools, we were able to develop the new system in less than half the time it took in the past. Please turn to Page 41, this is regarding systems. While accelerating the speed of development through low-code and agile development, we will expand investment in strategic areas without significantly changing the overall system cost. We'd like to steadily promote this effort by using APIs so as to develop a general purpose, open and lean system. Please turn to Page 43. About capital management, the upper section explains the implementation of share buybacks to neutralize the dilutive effect on EPS from making KMFG a wholly owned subsidiary of holdings. The basis for calculating the number of shares to be repurchased is shown in the upper right. The EPS calculated based on this fiscal year's earnings forecast is JPY 57.8. EPS based on the stake in number of issued shares before the company became wholly owned was JPY 59.9. This year's guidance is lower by 3.5%, so the company will repurchase 88 million or 3.5% of the outstanding shares. We have already released that we have completed the purchase of approximately 62 million shares through ToSTNeT-3, and we are purchasing the remaining shares in the market based on the discretionary purchase agreement. The bottom half of the slide shows the direction of our capital management policy, which we have been presenting from before. There are no changes made. We will continue to strike a balance between financial soundness, profitability and shareholder return while aiming to further increase shareholder returns. While maintaining a stable dividend, we will aim for a total shareholder return ratio in the mid-40% range over the medium term. Please turn to Page 44. Lastly, I'd like to make a few comments on our ESG initiatives. Please turn to Page 45. We acknowledge that the stage we are in for this theme has changed significantly. This page is about the E part of ESG, the environment. Regarding the response to global warming and climate change, the group has specified environmental and social issues to be tackled as a priority on a group-wide basis. We will continue our efforts to realize a low-carbon recycling-oriented society by abstaining in principle from the extension of new loans to coal-fired thermal power generation projects, incorporating ESG into the investment process and offering a variety of environmentally considerate products. Whatever the case may be, we will ensure that we accelerate efforts through our core business. Please turn to Page 48. Next, with regard to S in ESG or society, I'd like to comment on the new personnel system that started this fiscal year as part of our diversity and inclusion efforts, which I touched upon earlier. It is a multitrack personnel system with 19 career courses so that everyone can strive to become an expert professional in a specific field. Another feature of the system is that it is not restricted by age. The system is designed to develop externally competitive expert professionals as well as to support a variety of work styles in accordance with work-life balance. In addition, changing subject, the ratio of female line managers has now exceeded 30%. Please turn to Page 49. Next is about governance, which we believe is one of our strengths. As you know, in 2003, we became the first Japanese bank to adopt the nomination committee system. The majority of the Board of Directors consists of independent outside directors, and all 3 committees are chaired by outside directors. We have continued to have a corporate governance structure that allows external views to be reflected in the management of our company and ensures high transparency and fairness. I ran a little long, but this concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]