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

Hello, everyone. I am Minami of Resona Holdings. Thank you very much for taking the time today to listen to our IR presentation. The last fiscal year was indeed a turbulent one with the market modulating in the second half, the lingering COVID-19 and the geopolitical risks rising all at once. We must continue to operate on a contingency basis this year, but we will always look forward to changes and pave the way for new revenue opportunities. Due to the current environment and industry demand, we are again holding the presentation online this year. I will now begin my presentation, but since we had an analyst call after the earnings announcement, I will focus on the strategic aspect of the company's business today. So please go to Page 4. It is our outline of financial results. Net income attributable to owners of parent was JPY 109.9 billion, down JPY 14.5 billion or 11.6% from the previous year and below the initial target. We made steady progress through Q3, but missed our target as in Q4, we restored a healthy securities portfolio and recorded credit costs in connection with revising down the obligor categories of certain corporate borrowers. Based on the speed and depth of changes in the environment, we reassessed the inherent risks from a mid- to long-term perspective and took early actions without unduly postponing losses. On the other hand, core income increased by JPY 13.6 billion. This section is supplemented on the next slide. I will now provide an item-by-item explanation of the profit and loss situation. Net interest income from domestic loans and deposit was down JPY 2.3 billion year-on-year. Average loan balance increased 2.42% and the loan rate was down 3 basis points, almost in line with the plan. The decline in yields was only modest and was largely offset by the volume of loans. Fee income was up JPY 16.8 billion or 8.7% year-on-year to JPY 208.3 billion, reaching the highest level since Resona was founded. Operating expenses were JPY 416.3 billion. Although property and equipment expenses increased due to the introduction of a new branch system, the steady progress in cost reduction at the Kansai Mirai Financial Group resulted in an increase of JPY 0.8 billion on the group consolidated basis from the previous year, while expenses were held down compared to the plan at the beginning of the fiscal year. Net gains on stock transactions totaled JPY 47.1 billion, an increase of JPY 9.8 billion year-on-year. Progress in the disposal of policy-oriented stock contributed to this increase, and I will explain these stock-related gain losses and the credit cost later. This slide is a review of the previous fiscal year's results and a summary of the outlook for the current year. The main point is the core income on the upper left-hand corner, which is the sum of net interest income from loans and deposits, fee income and operating expenses. The growth was recorded for 2 years in a row and last year, we were able to show a strong growth of JPY 13.6 billion or 11.7%. We believe there are 3 main reasons. The first is the evolution of KMFG as described in the lower left-hand corner. As you see here, we have delivered synergy both in terms of fee income and expenses. Second, the consulting-based business which is centered on face-to-face service is growing steadily. AUM-related income and real estate business income have recovered significantly, while M&A income has also achieved historical heights. And the third point is that business that have been planted since the previous midterm plan period have grown as pillars of earnings, Group Apps, fund wraps and debit cards each achieved historical heights and drove significant fee income. Now let me skip a few pages and go on to Page 15. This page is about credit costs. Holdings consolidated credit costs were JPY 58.7 billion, an increase of JPY 1.2 billion from the previous year. This was mainly due to the revision of debtor classification of some large borrowers in Q4. Excluding such clients, new loans have remained at a stable level compared to the previous year, the year before and the initial plan. The overall quality of loan assets has not worsened. Although the group has no direct exposure to Russia and the Ukraine, we are keenly aware of the risk factor that the rapid weakening of the yen, rising resource prices and the prolonged supply constraints are likely to affect our customers' businesses through various channels. By deepening the dialogue with customers, we will strive to strengthen predictive management of credit risk and the support business improvement, including early identification of actual conditions. This section focuses on the initiatives to restore securities portfolio soundness. On the right side of the document, please. Since the beginning of the year, inflation has accelerated in the U.S. And with the assumption of rapid policy rate hikes, U.S. long-term interest rates have surged causing falling bond portfolio valuation losses to increase. The losses were realized through sales of selected stocks that have a high risk of having their funding costs exceed their investment yields as interest rate continue to rise. And also, those stocks which are less likely to recover the price due to a large gap between market value and book value. Through these actions, we have thought to ensure soundness in preparation of further interest rate hikes and to improve flexibility in the management of our securities portfolio from the fiscal year onwards. With respect to the soundness of the foreign debt portfolio, we plan to take some additional measures mainly in Q1, and the required costs have already been incorporated into the targets for this year, which will be explained later. Through this series of actions, we expect to build a foreign bond portfolio that can avoid negative spread even in the event of interest rate hike to a level above the U.S. neutral rate. The next is about policy-oriented stock holdings. The basic policy is to continue to reduce the balance, and during the last fiscal year, we reduced by JPY 19.3 billion on the listed share and book value basis, with gains on sales on a consolidated holdings basis totaling JPY 45.8 billion. As a result, we achieved JPY 30.9 billion in 2 years, 1 year ahead of schedule compared to our original plan of JPY 30 billion reduction in 3 years from April 2020. So this time, a new plan is released. The contents of the lower part is that plan. the pace of annual reduction is moving faster from JPY 7 billion in the previous plan to JPY 10 billion in the current plan, and this further doubled to JPY 20 billion in the new plan. The plan is to reduce JPY 80 billion on the acquisition cost basis over a 4-year period. Based on the current acquisition cost and the market value ratio of our entire portfolio, this translate into the reduction of about JPY 250 billion on a market value basis. We will continue to engage in dialogue with our customers as we move forward with our plan. Now lower right, please. In the midterm plan, the CET1 ratio excluding unrealized gains and losses on securities and on the Basel 3 finalization basis, is targeted at 10% but the estimated figure at the end of March is around 9.3%. For FY 2022, we have set a full year consolidated earnings target for the holdings of JPY 150 billion, which is JPY 40.1 billion increase from the previous year. The annual dividend forecast per share is JPY 21, the same level as the previous year. The following page explains the composition based on the total of group banks shown at the bottom. Gross operating profit on the total of group banks basis is expected to be JPY 577.5 billion, an increase of JPY 32.7 billion year-on-year. Of this amount, net interest income from domestic loans and deposit is down JPY 4.4 billion. Fee income increased approximately JPY 10 billion on the group total basis. The increase in other operating income is mainly due to the impact from the healthy portfolio of securities. The expenses will be reduced by about JPY 8 billion, so based on the above, we aim to achieve actual net operating profit of JPY 196 billion, an increase of JPY 40.9 billion or 26%. Net gains and losses on stock transactions, including futures are JPY 11 billion below previous year. Although we will drive the reduction of policy-related stocks, we have factored in a partial impact of the large disposal of stocks with unrealized gains in the previous year, which would not recur this year. Credit costs are expected to decrease by JPY 30.2 billion due to the impact of large customers in the previous year. The midterm plan called for a consolidated profit of JPY 160 billion for the current fiscal year, so the figure on the far right is the target which is revised downward by JPY 10 billion. This is due to the consideration of additional cost to restore soundness in the market sector and the earnings impact of the immediate risk control policy. Although there will be a partial upfront cost to incur, we will work to recover throughout the year and achieve our performance targets. These are the KPIs for the midterm plan. In addition to changes in the environment, including the COVID impact, which were not included when the midterm plan was made, we have taken into account the cost required to address issues in the current fiscal year, which is the final year of the plan. Although we are yet to reach our targets in several items, while adapting to changes in the business environment, we hope to achieve results in the final year of the midterm plan. I will now begin to explain our growth strategy. As I have explained in the past, our starting point is to think through our business from the customers and the societal issues. We believe that retail number one lies in growing together with society and our customers by solving the customers' issues and social issues as well while leveraging the strength of the Resona Group. This is our mid- to long-term goal. We have 2 major points to make in order to achieve this. The first is the reform of our income and cost structure. This is the main point of our goal, and I am confident in telling you that we are making steady progress. And over the long run, we would like to aim for a change in our profit structure, whereby free income can cover total costs. The key is adapting to changes. I will add to this later. Second point is that we aim to become the financial services group that contributes most to retail customers SX. We see this as a once-in-a-lifetime growth opportunity. All companies are now making public statements about sustainability. We believe that seriousness and speed will make the difference between winning and losing in the future. It is important that we move faster than anywhere else, learning as we go and changing as quickly as possible. We, too, would like to harvest fruits over efforts while improving our consulting and finance capabilities. On the right below, by adapting quickly to these changes in the business environment, we aim to increase profitability and further improve ROE. At the same time, we will continue to demonstrate that we can effectively manage a wide variety of risks, including environmental and other issues and have others understand our company's sustainability so that we can reduce our cost of capital. Our customers' issues are changing on a daily basis. The business environment, the rules of the game and the sense of senders required are changing at a faster-than-expected pace. In general, one of the reasons why a company loses its competitiveness lies in its inability to break away from the way of doing things that was fit for the times before the world changed. That is why we will aim for new growth together with society and our customers by adapting ourselves to changes as quickly as possible. In this section, we present our approach to profit and the cost structure reform and an image of our progress. The apparel is the profit side. We have been working ceaselessly to understand our customers better and to develop solutions based on issues, while at the same time, sowing the seeds of new businesses and cultivating them into new profit pillars in anticipation of changes in our customers' financial behavior. Here, we have examples of businesses that continue to dig deep to become profit pillars, businesses that have been planted and are growing into new profit pillars and the businesses that are in the process of planting seeds to meet the next profit pillar. We will continue to aim to be a financial group that does its most to solve customers and the social issues without wavering. The bottom row is the cost side. We believe it necessary to break the mismatch between the current earning power and the mechanism processes and the cost structure that support it, and we are building the foundation for this purpose. This figure is an image of our cost structure. We are moderately cutting down overall expenses by holding down base cost but expanding strategic investments. I would now like to discuss individual strategies. First are the businesses that have been seeded and grown into new earnings pillars in recent years. We will first discuss the integration of face-to-face and digital channel. Today, the sales branch channel remains the core of customer contact, but now that the number of Group App downloads has exceeded 5 million and another pillar has been established. We are finally beginning to see the new world view we are aiming for. As noted at the bottom of the page, we are the only company in the banking industry to be selected as a DX issue for 2 consecutive years. We believe that we have been recognized for providing new value through the integration of face-to-face and digital channel, and we will continue to accelerate this trend. Here, we show the data of our digitally connected customers. Top left, now overtaking ATMs, Group Apps are the most used channel. Bottom left data shows that the number of customers who use the app on a daily basis, specifically, those who use it 3 or more times per month, is growing rapidly. On the top right, these frequent users also have an advantage in terms of profitability. Gross operating profit per customer is 2.2x that of other customers. And the advantage is confirmed for all age groups. In the bottom right, you can also see from this data that the utilization rate of remittance in debit cards which are highly compatible with the app has increased dramatically, and that the app has significantly reduced savings account dropout rates. The increase of digitally connected customers will also lead to a fundamental change in cost structure. For example, allowing customers to complete transactions via an app not only changes the customer experience, but also drastically reduces the number of personnel and time-consuming paper-based procedures for processing, resulting in a reduced investment burden on future branch systems and a shift in management resources. This is the evolution of KMFG and progress in group synergies that I mentioned at the beginning of this presentation. In the previous year, we were able to realize synergies of JPY 20.8 billion compared to the year ended March 2019. For this year, we target JPY 25 billion, about JPY 2 billion more than the initial plan. As noted in the lower left, the profit contributed to the holding consolidation increased 2.9x from JPY 5.8 billion to JPY 17 billion due to the consolidation as a wholly owned subsidiary in April last year. On the right, we present quantitative data on the base results of revenue increase and cost reduction. The deployment of the group's proprietary products and know-how is progressing as expected. Next slide is on cashless payment. Top right, debit card income is up a significant 27% over the previous year. In the middle section, the number of debit cards issued increased by 470,000 during the year, up 19% year-on-year. Transaction volume was also up 29% year-on-year. The rollout to KMB has also contributed to this growth, and MB has also started handling debit cards since February of this year. This slide relates to asset formation support business. In the top right, fund wrap income is up 47% from the previous year, a significant increase. In the middle section, fund wrap balance, which marked 5 years since the product was launched in February grew to JPY 756.8 billion. While there are a variety of fund wrap products in the market, the key differentiator of Resona's fund wrap is that it is designed to be highly compatible with the bank's customers. Since April last year, we have been offering our products to customers of the Bank of Yokohama with a total of JPY 40.8 billion in 1 year. And we are planning to start offering them at Keiyo Bank in June and have been begun discussions with The 77 Bank as well. We believe that there is still much room for growth. Next slide explains our succession business. In the upper right, you can see strong growth in M&A and real estate income. Bottom left, we show the status of M&A advisory contracts and the number of leads for real estate-related deals. The potential needs are great, and the transfer of businesses and assets to the next generation is a large business opportunity. From here, we will discuss businesses that are in the process of planting seeds for the next stage of growth. This slide relates to the financial digital platform. Through our API and digital infrastructure, we aim to provide an open platform that can be used by a variety of companies without being bound by conventional frameworks. Examples of efforts are shown on the right side. Collaboration with regional financial institutions, different industries is progressing toward realization of the concept. We aim to build and expand a win-win ecosystem with all platform participants. Customers and end users can receive a variety of advanced services through the financial institutions they use on a regular basis and through their dealings with companies. Other participants as seen in the bottom of Page 34, namely corporate users, function providers can enjoy the benefits as described here. In addition to the benefits of user companies and function providers, Resona also enjoys the benefits of being a platform operator. We would like to grow the platform as a business place where recurring income can be secured through involvement in a variety of iterative and ongoing transactions as companies participate in the platform have a win-win relationship with each other, the platform is based on social needs and problems, and participating companies can immediately utilize the quality functions and the already established customer base. As an example, our fund rep balance is JPY 756.8 billion, and income is JPY 8.2 billion. JPY 756.8 billion includes, of course, JPY 40.8 billion sold by the Bank of Yokohama, which means that the income we share with them are already factored in the JPY 8.2 billion. In the future, as the number of alliance partners increases and the balance grows, it will become a new type of revenue source for us. With new ideas and approaches, we aim to develop new businesses that go beyond the traditional banking framework. Below right, we have established several new companies to support customers' DX, and solve region-specific issues. We are taking on the challenge of entering new fields while also using the framework of advanced banking service company under the banking app. One of our long-term sustainability goals announced last June is retail transition finance against a target of JPY 10 trillion transaction volume by FY 2030, JPY 845.8 billion was transacted in the first year. Our main customers, SMEs account for 99% of the total number of enterprises, 70% of the total number of employees, and 53% of the total value added in Japan. SMEs are essential for the nationwide realization of SX. It is true that there is still a great deal of variation and efforts towards SX, but that is why it is of utmost importance to stay close to our SME customers, consider opportunities and risks together from their respective positions, and provide support in a companion manner with specific initiatives. We believe that it is Resona's mission to help our customers maintain and improve their competitiveness and turn their strengths into a significant social impact. Last year, we started a dialogue about SX with about 31,000 customers. Although numbers do not necessarily tell the whole story, these efforts and the information stocked will eventually become a great asset. In addition, as noted on the right, we have been expanding new products and services that assist our customers. This slide explains the state of carbon neutrality. Currently, we are targeting to reach net zero by FY 2030 and Scope 1 and Scope 2. But now we naturally have in mind the development of a net zero target encompassing Scope 3. In addition, to stating our goals, we believe that it is important to make plans and deliver results for CO2 emission reduction. To do so, given the fact that our group portfolio constitutes mainly of SME customers, it is necessary to pave the way for measurement of the greenhouse emission gas of our investment and loan portfolio. Against this backdrop, last year, Resona Bank participated in a project supported by the Ministry of the Environment to calculate Scope 3 for our portfolio. There are still challenges, but we will make progress toward realizing them one by one. I would like to talk about appointment and advancement of women. The ratio of female line managers already exceeds 30% which is one of our strengths. But we believe that diversity will lead to further flexibility and resilience of the company and we will further refine the strengths. Most recently, in the middle of the bottom row, Resona Bank was ranked second in Nikkei Woman's 100 Best Companies where women play active part in 2022, up 1 place from last year's third place. We're also accelerating our efforts in terms of human resource investment. Last April, we revised our personnel system for the first time in 13 years with diversity and specialty as keywords. In times of change the most important factor is human capital. We will continue to actively invest in the human resources that will support Resona's sustainable growth. We are also accelerating downsizing and reallocation of human resources to focus areas. As we continue to improve efficiency through DX, we will expand our workforce in the strategic areas and streamline our total workforce to a level below the 29,000. That is the level before the KMFG integration by the end of this fiscal year. In order to shift the branch mission from clerical work to the provision of solutions. We aim to provide the added value that only face-to-face interactions can offer, starting with business process reform. On the other hand, in addition to business process reform through DX we will reduce the number of personnel per branch and downsize to lower the breakeven point. Also by reducing the number of locations, mainly through group joint branches, we will maintain those customer contact and low-cost operations. The number of group locations will be reduced by just short of 20% over the 3 years of the MMP. We are reforming our system structure for the next generation while keeping an eye on the evolution of technology. On the left, low code and agile developments are accelerating the speed of development, leading to accelerated investments towards strategic areas, thus increasing its ratio within the system-related investments. On the right is the state we aim towards. We will promote generalization, openness and streamlining. This slide explains the cost structure reform. Since 2003, we have been establishing low-cost operation through operational reforms, and by March 2018, prior to the KMFG integration, we had achieved a cost reduction of approximately 30%. Currently, we are striving to further reduce costs by shifting Resona's operational reform know-how to KMFG and utilizing DX. As an example of our current efforts, we have put in place a mechanism to reduce system-related costs, which account for about 40% of nonpersonnel costs. In system renewals, we are working to reduce base costs by 30% for the previous renewal and to invest the reduced portion in growth areas such as DX. Last year's renewal projects reduced base costs by approximately 21%. Finally, let us share with you our capital management policy. There has been no change in our approach of aiming to further increase shareholder returns while maintaining a balance between financial soundness, profitability and shareholder return. While maintaining stable dividends, we will aim for a total return ratio in the mid-40% range over the medium term. We are aware of the high expectations of the market for shareholder returns, and we are committed to providing a solid road map for achieving our goals. The implementation of the share buyback for the purpose of returning profits to the shareholders last November is also based on this approach. We will continue to work to meet the expectations of our shareholders in the current fiscal year as well as we begin to see the progress of our business performance. This concludes my explanation. Thank you for watching. [Statements in English on this transcript were spoken by an interpreter present on the live call.]