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. As we had an analyst call after the announcement of financial results, today, I would like to mainly explain our new midterm plan, which was recently announced. First of all, that last fiscal year was the final year of the midterm plan. And I'd like to make a few comments looking back over the 3 years. We recognize that the previous midterm plan period was a 3-year period marked by significant changes that will later be called a turning point in our history. During this period, we made steady progress in the reform profit and cost structure, which we had positioned as the main focus of the plan. And the core income, which we have been working with persistence, turned around for the first time in 12 fiscal years, followed by 3 consecutive years of profit growth. The increase in core income during the planned period was JPY 22.4 billion. In addition, we've been able to address and prepare for downside risks without delay, and we believe that this has increased our flexibility in subsequent strategic implementation. As a result, we were able to exceed not only the fiscal year guidance, but also the mid-term plan target of JPY 160 billion after factoring in the cost to restore the soundness of the securities portfolio. In addition, we have made progress in, qualitatively and quantitatively, strengthening our capital, which had been the issue for the Resona Group. And we will move into the capital utilization fees in the new midterm plan. Although the speed of change in the environment is rapid and there are some outstanding issues, in general, we believe that we were able to conclude the previous midterm plan in a good manner. Now I'd like to begin with an overview of the financial results on Page 4. On the right side is the profit and loss summary on Holdings consolidated basis, and on the left side explains key points. Net income attributable to owners of parent was JPY 160.4 billion, up JPY 50.4 billion or 45.8% Y-o-Y. Full-year target was JPY 150 billion. Therefore, the progress rate was 106.9%. Actual net operating profit was JPY 195.7 billion, up JPY 9.6 billion. I will touch on each item. First of all, the breakdown of gross operating profit of JPY 600 billion is as follows: Net interest income from domestic loans and deposits declined JPY 3.8 billion from the previous year, but is generally in line with the plan. Fee income was JPY 208.6 billion, up JPY 0.3 billion. It failed to achieve the plan, but again hit the record high for 2 consecutive years, driven by the growth in settlement-related real estate and insurance. Net gains on bonds including futures, improved by JPY 6.1 billion year-on-year to minus JPY 47.7 billion. It was mainly driven by our continuous initiative to restore softness of securities portfolio as well as the previous year. Operating expenses decreased by JPY 11.6 billion to JPY 404.7 billion. Personnel expenses decreased by JPY 4.7 billion due to the control of total personnel through the optimal staff allocation on a group-wide basis while improving the per capital compensation. Nonpersonnel expenses also decreased by JPY 4.5 billion as a lower deposit insurance premium rate and other factors offset the increased depreciation burden associated with the launch of new branch systems and other major projects. Net gains on stocks, including equity derivatives, amounted to JPY 53.9 billion, up JPY 6.7 billion. Credit-related expenses were JPY 15.9 billion. This point will be supplemented later. In addition, we have established a share repurchase program of up to JPY 10 billion at the same time as the settlement of accounts, and we are also forecasting JPY 1 hike per share in the dividend for this fiscal year. This is a review of the previous year and the previous midterm plan. As shown in the upper left, as I mentioned at the beginning, core income had increased for 3 years in a row. The bottom row shows a response to changes in the environment, and I'd like to make 3 additional points. The first is on the left side. We are formulating and executing various action plans while keeping an eye on monetary policy trends and market trends, both at home and abroad. Since the Silicon Valley Bank news in March, we've been receiving more and more questions about the yen bonds. But I'd like to emphasize that our ALM management is based on extremely stable retail deposits. With regard to the yen bond portfolio, the risk of negative spread is limited, and we believe we can continue to hold bonds from a mid- to long-term perspective, while allowing for some unrealized losses even in the event of interest rate hikes. In addition, we will take advantage of changes in the environment that may occur as a result of policy changes and work to secure the upside in earnings. In foreign bonds, we have already gained visibility for our soundness plan. Looking ahead, we are shifting to the phase of mid- to long-term portfolio restructuring to secure stable income while keeping an eye on the [ pickup ] phase of U.S. interest rates. Second, as shown on the lower right is effort to reduce policy-oriented stocks. The reduction on the book value basis amounted to JPY 22 billion. This is ahead of the average annual reduction pace of JPY 20 billion set forth in the reduction plan, and gains on sales amounted to JPY 50.4 billion. Third, below that is a response to credit risk. Credit-related expenses totaled JPY 15.9 billion, JPY 42.7 billion decrease from the previous year. Hence, the use rate against the annual plan was 41.9%. This was mainly due to the upward migration of some large customers and the reversal of gains on collections as part of the rehabilitation assistance. However, from the viewpoint of strengthening preparations for downside risk in anticipation of the new midterm plan, we are recording a nonconsolidated credit cost of JPY 15.1 billion in the fourth quarter, while full-year amount is JPY 15.9 billion. While the impact of COVID-19 is increasing, there are signs that the effect of weaker yen and the appreciation of natural resources are becoming apparent. We will continue to deepen dialogue with our customers, thoroughly manage the signs of future, including early identification of the actual situation; and further strengthen our customer support. Now let's proceed to Page 22 for an explanation of the new midterm plan. This is what the Resona Group should look like over the long term. Resona Group has reached a milestone of 20 years since the injection of public funds and the start of Resona's reforms in 2003. To date, we have been working on various Resona reforms under our DNA reforms in order to respond to the trust of our local communities and the retail customers and to achieve growth together with them. In 2015, we achieved full repayment of public funds. Over the 8 years since the full repayment, we have made progress in building capital, which had been our greatest challenge. Now, in both name and reality, we have entered a time of gear change, moving from the revitalization stage of the past to the new challenge of becoming Retail No. 1. Meanwhile, the business environment is at a major turning point. Mega trends, such as the information and industrial revolution and the decarbonization, are accelerating, and once-in-a-decade events are occurring more frequently than ever before. The social and industrial structure will change one day. The rules of game will change, and the customers' financial behavior will change. We believe that the needs of our customers will also continue to diversify, become more sophisticated and more complex. In this environment, structural changes are needed to eliminate the mismatch between now and the future. For the next generation, we must change our way of thinking and rethink earning power and earning methods. It is also essential to restructure the supporting structure mechanism, business processes and systems. This is why we are undertaking structural reforms. What will carry through the midterm plan? The new metro plan is CX corporate transformation. The new midterm plan is a reorganization of what Resona Group must do now in order to become the #1 retailer to be needed by customers more than ever and to make a significant contribution to the society. This is the group's conceptual structure that's been reorganized as a prerequisite for removing from the Resona rehabilitation to taking on the new challenges of realizing Retail No. 1 in both name and reality. Purpose is beyond finance for a brighter future, and the long-term vision is Retail No. 1. And the management philosophy, which we have cherished until now, will be passed on to the next generation word-for-word, unchanged as our management will in order to properly pass on the lessons learned from Resona shock. Under purpose, our management philosophy and the long-term vision, we intend to mobilize the collective strength of the group to take on the challenges of making new changes. These are the KPIs for the previous midterm plan and their actual results. In terms of earnings, we were able to achieve our goals in the final year of the midterm plan. KMFG, where integration synergies are steadily progressing, also achieved a profit growth for 3 years in a row, and its contribution to the group's earnings is on uptrend. We have made progress in building up equity capital, reaching a CET1 ratio of 10% and is looking to move into the capital utilization phase. ROE has not reached the target, but has recently recovered to 7.66%. We will aim for further improvement in the future, including the use of capital. This is the overall picture of the plan. This plan is positioned at the first 1,000 days of our long-term corporate transformation efforts. So there are 2 points. The first is to adapt to change quickly as the world reaches a major turning point. Second, while expanding upfront investments in human resources, IT and other areas, we will make steady progress in reforming our earnings and cost structure. To this end, we will strengthen our ability to create value, starting from customers' problems and the social issues as well as further enhance consolidated group management and next-generation management infrastructure in a single integrated manner. Here are the KPIs for the new midterm plan. From the above, as profitability indicators, we aim for net income attributable to owners of parent of JPY 170 billion, consolidated core income of JPY 180 billion and the consolidated cost income ratio in the low 60% range. And as for ROE on shareholders' equity, we continue to aim for 8% as a level that exceeds the cost of capital. As for the KPI related to capital management in the middle, I will explain later. And as shown at the bottom, to be selected as ESG index domestic stock by GPIF also remains as KPI. This is a roadmap for securing profits during the plan period. In the final year of the new midterm plan, we have set an increase of JPY 10 billion net interest income from the previous year. But for the time being, we have set a composition that focus on improving the quality of earnings. We will increase expenses by JPY 26 billion over the next 3 years by investing in human resources, IT and other areas in anticipation of the next generation to come. However, ultimately, we expect to absorb this increase in revenue, resulting in a JPY 17 billion in core income. In light of the possibility of changes in the interest rate environment, core income in the new midterm plan will include interest on yen-denominated bonds, whereas so far, core income consisted of interest income on loans and deposit, fee income and expenses. Interest on yen bonds, et cetera, will increase by JPY 6 billion. Interest income on loans and deposits were reversed and increased by JPY 10 billion, and fee income will increase by JPY 27 billion. Through these efforts, we aim to increase net income attributable to owners of parent to JPY 170 billion and achieve ROE of 8% on shareholder equity through expansion of inorganic investments and other measures. The new midterm plan assumes that the current interest rate environment continues. If monetary policy were to be revised in the future, our balance sheet, which is highly interest rate sensitive, is expected to show positive effect on earnings, mainly in terms of interest income on deposits and loans and interest and dividends on securities. Naturally, since there are many variables such as the timing, speed and depth of monetary policy changes and methods, the estimate of the earnings impact will vary greatly be dependent on the assumptions. If we were to make these estimates shown in the bottom row, we believe that the elimination of the YCC could lead to an upside of about JPY 20 billion, and the removal of negative interest rates could lead to an upside of about JPY 10 billion. And now about the strengthening of value creation capabilities as a concrete strategy. The core of the solutions that the Resona Group will provide in the future will be solutions to various needs derived from business and asset circulation and the transition of social structures, as described in the second item from the left. We will also provide new value by thinking about the business from the perspective of customers' problems and social issues and by combining this with innovation. This is, of course, the Resona Group's [ approach ] to sustainability management. Under these circumstances, we will focus on the business areas, as on the right side, with consulting capabilities and technology at the core. Let me touch on them one by one. This is the business for SMEs. The upper right-hand side is the goal for the period of MMP. This is the area where we have stepped up our efforts this time. We plan to increase the average balance of corporate loan by around JPY 2.5 trillion. As shown on the upper left, major mega trends and changes in social and industrial structures are sure to bring about new needs and customer issues. We will accelerate the expansion of high-quality loans to meet diversifying financing needs through the qualitative and quantitative enhancement of our strong network and consulting capabilities, especially in the 2 major metropolitan areas. It is also true that there are signs of latent needs emerging in the areas of SX and DX. In the capital utilization phase, one destination for capital is to strengthen high-quality loans. This slide shows the state of business and asset succession. We are aiming for an increase of around JPY 8 billion in succession-related income. Succession is a solution that supports the smooth transfer of businesses and assets to the next generation. It is not a onetime business opportunity, but a long, broad and deep connection, including transactions, that transcend generations after succession. Naturally, it encompasses a wide range of financial needs, including loans, trust and real estate-related investment and settlement. As shown in the top left, the aging of SME owners is one of the structural problems in Japan and has social significance. In addition, after COVID, we are beginning to see the emergence of specific needs. This is an area where the Resona Group can take advantage of our rare strengths as a commercial bank equipped with full-line trust banking capabilities. As shown in the bottom, we will continue to provide a variety of solutions on a one-stop basis. We are also investing management resources and recognize this as a major growth area. This slide is on cashless and DX solutions business. Top right, we target for an increase of about JPY 4 billion in settlement-related income. Top left, the cashless market is accelerating its expansionary trend after the pandemic. DX needs for business-to-business settlements also have great potential. Going beyond the existing framework, we will integrate the planning and sales functions that are disparate throughout the group as the group's settlement function. Then, we will expedite the expansion of settlement solutions in the context of individual household finance and corporate transactions. For example, debit cards, which are highly compatible with the Resona Group app, have already surpassed 3.15 million in issuance and have grown into a business with revenues exceeding JPY 5 billion. This is an area where continued growth is expected, including expansion of views in the corporate sector. Resona cashless platform in the B2C domain, such as retail, also continues to increase the number of stores that have introduced the platform. During the MMP period, we aim to surpass the JPY 2 trillion mark, based on the combined settlement transaction volume of issuing and acquiring. On the bottom left, Resona one-stop payment, which provides DX support in the B2B domain is another service with great potential. Last year, we entered into a capital and business alliance with Digital Garage. We have greatly expanded the quality and volume of our settlement business, including new areas. This page is on our asset formation support business. Upper right, we plan to increase the balance of investment trusts, fund wraps and insurance to JPY 7.5 trillion. Upper right, in the coming era of centenarians, it is extremely important for our country, for our people and for us as financial institutions to create a major shift from savings to asset formation. There is also a tailwind in the form of the new NISA system. We hope to create a stir in the field of asset formation by combining our investment capabilities cultivated through over 50 years of pension investment, our human resources and the power of technology. We are planning to incorporate a new asset formation support tool into the Resona Group app. We aim to significantly increase the number of users of funded investment trust through a scheme that integrates our asset management capabilities, technology and human resources. This slide is on the housing loan business. On the top right, we plan to increase the balance of residential housing loans by JPY 1 trillion. Although our group already has the largest balance of housing loans in Japan, we will take on new challenges, such as expanding transactions with end users. In addition, amid signs of change in the monetary policy, the number of customers choosing ultra long-term fixed interest rates is gradually increasing. We will appropriately respond to such changes and needs. In addition, we have begun reforming the housing loan process to achieve both convenience for our customers and greater efficiency on the part of the bank. Please look at the bottom of the page. In the past, contact with customers after the execution of housing loans had declined significantly. However, 90% of customers can now have by direction of communication via the Resona Group app. In fact, housing loan customers have always had a high degree of [ defs ] in transactions. We believe that we will be able to provide a variety of solutions to these customers throughout their lifetime and in accordance with their life events. Next is our financial digital [ trough ] platform. This is a new business area in which we have been planting seeds since the previous MMP. We believe we have created a prototype for a win-win ecosystem for all platform participants that can be utilized by various companies, including those from other industries. This section provides some specifics on current initiatives and directions. The upper part of this page is about our development for regional financial institutions. Currently, banking applications and fund wrap services are available at 6 banks and 5 groups outside of the Resona Group. Going forward, we aim to expand the scope of alliance partners on the vertical axis and enhance the content of the menu delivered on the horizontal axis, so that we can maximize the volume of transaction and AUM. At present, we have achieved 7.65 million downloads of apps and JPY 744.2 billion of fund wrap balance. In 3 years, we aim to reach the levels of 10 million downloads and JPY 1.4 trillion fund wrap balance. The bottom shows our expansion into other industries or sectors. Currently, we are pursuing strategic alliances with external parties in the fields of data, settlement and individual authentication. As soon as possible, we would like to expedite our development in new fields that are not limited to finance. This slide is on our inorganic strategy. This is an important point as we enter the capital utilization phase. The starting point is always, what value can we offer to our customers? Roughly, we have 3 directions in mind. The first is to enhance our customer base for further business growth. In other words, to access the customer base of the competitors. The second is to enhance our management resources. For example, acquiring a highly skilled professional talent isn't an option. The third is functionality. We have great interest in areas where there are synergies with existing banking operations and where new value can be provided to customers in society. We will consider a wide range of targets, including regional financial institutions in different industries without setting any restrictions. We also believe that masses can take various forms, including M&A, partial equity participation and strategic alliances through financial digital platforms. For now, I will explain the development of next-generation management platform. In this era of change, the starting point for everything is human resources. The overall vision of our human resource strategy is to realize value creation and well-being based on the 3 pillars of co-creation, professionalism and engagement. We expect to invest JPY 33 billion over the next 3 years in human resources to support this strategy. Please refer to the KPIs for the 6 strategic drivers later in your spare time. This slide shows the integration of real and digital channels, including reforming our customer contact points. The top figure shows the image of what we are aiming for. We believe that this is one of the fundamental elements supporting next-generation retail finance. The pillars of differentiation are digital connection with all customers, combined with face-to-face channels for specific types of issues. The shift to digital and data is clear in everyday financial services for both corporates and individuals. On the other hand, in order to accurately meet challenging financial needs, it is essential to provide deep sophisticated solutions centered on face-to-face interactions. In other words, the key is to combine different ideas and different organizational capabilities. The bottom figure shows our initiatives during the current MMP. In our real channel, through dismantling and restructuring of business processes, we will work to reallocate management resources and strengthen customer contact points. At the same time, we will redefine the meaning of having branches in each region and optimize the branch channel, thereby reducing the nonpersonnel expenses by JPY 1.5 billion. On the digital side, we aim to reach 10 million app downloads as a milestone. And with a view to moving away from dedicated terminals, we will first increase the ratio of branch-visiting customers who use Resona Group tablets to 50%. On the left-hand side, we have summarized the expansion of digital transactions. With apps becoming the largest customer contact point, various transactions are shifting to apps. The change in customers' financial behavior, this is a reality. In the upper right-hand corner, we aim to expand into nonfinancial fields stemming from the utilization of data. And the bottom right corner is about expanding and deep diving on the Resona loyal customers. Resona loyal customers. The details are shown on Page 68, or one of the customer segments based on the depth of transactions with Resona Group [ banks ]. More customers will be able to use our services for a longer period of time and with greater depths, based on their needs. This is the new value that we -- that will come from the integration of real and digital operations. Our goal is to maximize gross operating profit per customer. This section outlines the expansion of forward-looking investment for sustainable growth. As times change, the gaps between income and cost structures are widening. As further changes in the operating environment are expected, we must accelerate our efforts to overhaul business processes and change the mission of our human resources. This is the reason for the cost increase in the new MMP, but it is a forward-looking investment for the next generation and something we must engage now. This is one of the foundations that will eventually support sustainable growth. As shown on the right side of the slide, we expect a net increase of JPY 33 billion in human resource investment and JPY 40 billion in IT investment. From here, I will explain about capital management. The top part shows the direction of capital management in the new MMP. The new MMP will move from a focus on qualitative and quantitative expansion of capital to a phase of full-fledged utilization of capital. The upper left-hand corner shows the perspective of financial soundness. As of the end of March this year, we achieved the goal of a CET1 ratio of approximately 10% based on the full enforcement of the finalized Basel 3, which was set in the previous MMP. During the new MMP period, we will allocate capital to gross investment and shareholder return while keeping in mind that the CET1 ratio should remain in the 10% range. The top right shows our approach to gross investment. We will aim to improve returns by utilizing capital in both organic and inorganic areas. As for shareholder return, as shown in the center and the new MMP, we aim for a total shareholder return of about 50%, while continuing to pay stable dividends. The recent shareholder return initiatives is based on these ideas. The bottom part shows an image of capital utilization during the period of the new M&P. We intend to make an organic investment around JPY 240 billion, centered on loans. This is a 2.6-fold increase from the JPY 90 billion used in the previous MMP. In the previous MMP period, JPY 130 billion was used to improve the financial soundness. We hope to allocate a large portion of this amount to inorganic investment in the future. I would like to talk about our approach to improve corporate value, which is to obtain a market valuation of more than 1x the PB ratio. In order to improve PBR, it is important to take the approach of improving ROE and reducing the cost of capital, as shown on the top right. The bottom left shows a breakdown of our ROE components, based on the DuPont analysis. Since we are in the banking industry, we have used risk-adjusted basis figures with some adjustment. During the previous MMP period, ROE generally trended downward, although it picked up in the final year of the plan. We believe that there were 2 major factors behind this trend. The first was the pandemic, which led to a rapid expansion of the balance sheet and an increase in the volume of assets with low utilization. Further risk return improvement is needed through more proactive approach to risk-taking initiatives. The other factor is materialization of downside risks affecting PL via the recording of major credit-related costs and the measures to restore foreign bond portfolio soundness. We also believe that further upgrading of risk governance is necessary. Based on our recognition of these issues, we have organized the measures as we take during the MMP in the lower right-hand corner. In any case, as we enter the phase of capital utilization, we will make a firm commitment to improving profitability and asset efficiency through effective use of capital. As for our ESG initiatives, I would like to explain just one page. These are our long-term sustainability indicators. We have added the 3 items shown in yellow to the existing long-term sustainability targets. Specifically, the first is the value-creation capability index. We have added an indicator for providing a wide range of solutions to both corporate and retail customers. We are aiming to double the number of solutions provided from the current 10.5 million to 20 million in 2030. The second is a declaration of net zero greenhouse gas emissions in investment and financing portfolio towards the year 2050. We have also presented interim targets for the energy sector for 2030. The third is the well-being indicator. This is a ratio of positive responses and questionnaires regarding a sense of fulfillment felt in work and private life as part of the employee surveys. And we intend to increase the ratio from current 69.3%. This concludes my explanation. Thank you very much for watching.