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

Hello, everyone. I am Minami of Resona Holdings. Thank you very much for joining our IR session today despite your busy schedules. So let us start. Let me go through today's points. I would like to talk about how Resona Group evolves and grows towards next generation. Specifically, there are 3 points to mention. First is to revive our earnings capability. In a world with interest rates, we are leveraging our strength, our highly interest rate-sensitive balance sheet. And as a result, our net interest income is steadily increasing. Even under negative interest rates, we have confidence in the fee income we have honed. And this time, we aim to achieve a record profit for the fifth consecutive year. For the full year, top line growth will be driven by these 2 engines, bringing us within reach of the JPY 800 billion mark for the first time in 19 years. In the first half, we achieved the highest profit since Resona Group was founded in 2003, exceeding JPY 400 billion for the first time. The second point is growth potential through structural reforms. With the integration of Minato Bank operations and systems in January, the foundation for one platform multiregional structure has been completed. Going forward, we will advance business process and unify the middle and back office systems across each bank. At the same time, we will rapidly modernize our business infrastructure and standardize Generative AI across all operations. As the business environment changes at an unprecedented pace, the key is whether we ourselves can adapt and change. The third point is accelerating capital circulation to enhance corporate value. We have stated that under our current midterm plan, we have entered a phase of active capital utilization with the profits exceeding our midterm plan and increasing capital flows, we are focusing on high-quality lending as the monetary policy gets normalized while working on growth investments for the next generation and shareholder return. The chart below shows the trends in OHR and ROE. We believe our potential is higher, and we are deepening discussions toward formulating a new midterm plan to aim higher. Now I will explain following the agenda. First is the first half financial results. We have already had an analyst call, so I will briefly touch on the highlights. On the left, the core net operating profit is JPY 171.8 billion, up JPY 41.5 billion or 31.9% up year-on-year. The progress rate against the full year target is 51.3% achieving over JPY 170 billion in core net operating profit in the first half is the first time in 17 years since fiscal March 2009. In the center, net income attributable to owners of the parent is JPY 142.8 billion, up JPY 28.6 billion or 25% up Y-o-Y. The progress against the full year target of JPY 240 billion is 59.5%. This is due to credit cost remaining low and the steady progress in reducing strategically held stocks, resulting in smooth gains on stocks. As a result, as on the right, ROE is 10.2% or up 1.9 percentage point year-on-year. This is the trend in top line and the net profit since the establishment of Resona Group. In the upper section, the current year top line target is JPY 800 billion range, the first time since March 2007. Net profit for a few years since the inception of group increased significantly due to some factors such as tax effects. The planned net profit of JPY 240 billion for this year is the highest since March 2013. Now I will discuss the key 3 points. The first is the revival of our earnings power. This shows the balance sheet as of the end of September, along with loan-to-deposit and securities-to-deposit ratios as well as the moving of ROA. In the lower left, the loan-to-deposit and securities to deposit fell to 77% by the end of March 2022 amid quantitative and qualitative earning, but now is around 90%. ROA is at 0.37%, as you see on the lower right. We are still on the path to recovery, so we will continue to actively take risks and enhance ALM to further improve ROA. From here, I will discuss 2 engines of our business model, net interest income and fee income. First, let's look at deposits, which support our indirect financing operations. The top left chart shows the trend in deposits, which have increased by 18.5% since March 2020 before the pandemic. Both corporate and personal deposits have grown with the total balance now exceeding JPY 62 trillion. Below that is the comparison of our deposit composition with that of all Japanese banks. One of our strengths lies in the volume of personal deposits and liquid deposits, which are considered sticky. We continue to maintain a favorable balance sheet structure, preserving a strong deposit base without placing excessive pressure on funding costs. At the bottom left chart, well, 2 years ago, under negative interest rates, our deposit yield was 0%, but now it is 17 basis points. Our current beta or the rate of pass-through to the policy rate of 0.5% is 34%, which is below our assumed level of 40%. Next is at the right-hand side, the key to acquiring stable and sticky deposits lies in the strong connections with households and commercial flows. Here, we highlight the strength of the Resona Group. We position our group as the retail #1 bank, focusing on convenience through the integration of physical and digital channels. For example, we have 760,000 housing loan customers closely tied to individuals main bank accounts with outstanding balance exceeding JPY 14 trillion. We serve as the main bank for 69,000 corporate clients, surpassing one of the mega banks and ranking third nationwide. The number of debit cards issued, which are often linked to main bank account usage has reached 3.35 million. In an aging society, inflows, including the funds transferred from regional areas to inheritor accounts continue to expand. However, from a macro perspective, deposit growth is slowing and the various pressures on deposits are likely to persist. We shall continue to enhance our ALM by closely monitoring trends at peers and the changes in customer financial behavior. The first engine in our dual engine business model and the center of net interest income is lending. As we enter a phase of fully utilized capital and interest rates begin to recover, our operations are naturally focused on the smooth provision of funds. Based on fertile markets centered around Japan's 2 metropolitan areas, we have steadily enhanced our consulting capabilities in addition to our strength in full-line trust banking functions and the customer relation building. This enables us to take on more complex and proposal-driven projects. On the demand side, we are expanding high-quality lending to address a wide range of customer needs, including increased working capital driven by moderate inflation, CapEx to strengthen supply capabilities, business restructuring and succession, customer experience and digital transformation and responses to structural changes such as labor shortage. The top right chart shows the Y-o-Y changes in net interest income from domestic deposits and loans. Negative interest rates since its beginning have been a factor of over JPY 75 billion negative effect on earnings on a cumulative basis. However, we finally saw a turnaround starting last fiscal year. The profit increase has expanded further this year. We also placed strong emphasis on lending quality and our RORA is steadily improving. The bottom right chart illustrates the respective conditions for corporate and retail segments. Since the beginning of the fiscal year, TIBOR has gone above the policy rate and with the interest rate revisions, lending linked to short-term prime rates have progressed smoothly, leading to higher yields on corporate loans. Loan volume in the meantime, has continued to grow steadily, maintaining an increase of nearly 6% Y-o-Y. At the start of the fiscal year, some companies held off on CapEx due to uncertainty over future tariff impacts. However, the situation has since stabilized, and we aim to capture future funding demand effectively. On the right-hand side, regarding housing loans, yield revisions on the existing book began in Q2. 6 months after the January rate hike and yield improved. Further increases are expected in the second half. New loan originations reached JPY 660 billion, marking a strong 11% Y-o-Y increase and setting a record high for the first half. This is an update on the impact of interest rate hikes on earnings. Excluding changes in balance, we have quantified the increase in NII since the fiscal March 2024 when interest rates were negative and described it as the effect of interest rate fluctuations. The second column from the left shows the actual results through the first half, totaling JPY 50 billion. This represents a JPY 39 billion Y-o-Y increase in gross operating profit. To the right, the estimated upside in earnings expected within this fiscal year is around JPY 105 billion on a cumulative 2-year basis with a projected Y-o-Y increase of JPY 72 billion for this year alone. For the next fiscal year onward, assuming full year contribution of interest income following rate revisions, we estimate a cumulative top line increase of JPY 113 billion based on a 50 bps hike from the current policy rate as shown in the rightmost column. Should rates go by up to 75 bps, an additional JPY 54 billion upside is expected, bringing the total projected increase to JPY 167 billion. Based on the current capital level, 10% ROE, which the Tokyo Stock Exchange uses as a benchmark is within reach. This estimate does not include fluctuation in the balance of the impact on fixed rate loans with maturities exceeding 1 year, suggesting there may be further upside. We hope this serves as a useful reference for your sensitivity analysis of top line performance. Next is related to the fee business, which is the second engine of the 2 income sources. We aim to build a broad base of recurring and stock-type fee income by continuously introducing new businesses while refining our traditional strength in areas such as trust, real estate, succession planning, corporate solutions. The upper section is just one example, but it demonstrates the steady expansion of foundation for stable revenue streams for the next generation. The number of users for investment trust, fund wrap and insurance has surpassed 1 million. The number of debit cards issued has increased to 3.35 million, a 2.2-fold increase compared to 6 years ago. App downloads, we used to be less than 1 million have now surpassed 12 million. The number of companies using financial digital platforms has expanded to 9 financial groups and 10 banks. One characteristic of these businesses is that once they accumulate beyond a certain volume, they generate significant impact on the income and high stability. For example, the upper right shows the trend in debit card income. Income 1 year after release reached JPY 700 million. 6 years later, it reached JPY 2.3 billion. Meanwhile, income today, 11 years later with transaction volume significantly accumulated stands at JPY 7.6 billion a year. It should exceed JPY 10 billion soon. The lower section is a conceptual diagram, but steady and diverse efforts in both B2B and B2C areas will gradually develop into new income opportunities over time. The strengthening of our capital and business alliance with Digital Garage implemented in the first half of the year is also an investment in sowing new seeds. In other words, an investment to provide new value to our customers. We have maintained a long-standing collaborative relationship with Digital Garage. This time, we increased our ownership stake in its common stock to 30.9%, making it an equity method affiliate. We project ROIC for this matter to reach 10% plus alpha by the fiscal year ending March 2030. Digital Garage is already one of Japan's largest payment platforms and a growing company supporting Japan's payment infrastructure. We aim to capture cash flow generated from Digital Garages established business models while also promoting DX solutions for Resona Group's 500,000 corporate clients. Furthermore, we seek to jointly develop next-generation payment methods and new financial services for both B2B and B2C markets by combining the strength of our company and Digital Garage. In any case, for banks to adopt to changing times and secure competitive advantages, it is essential to transcend conventional thinking and integrate with outstanding external expertise, know-how and talent. Now let me move on to the second point, growth potential through structural reform. This is a conceptual diagram of the structural reform as we are currently undertaking. Frontline reform, middle and back office reform, investment in human capital and work style reforms. Through the series of reforms, we will rebuild the foundation for the group's next-generation growth and aim to overcome the high-cost structure inherent in retail operations. The first half OHR stands at 57%, but we aim to achieve a rate in the 40% range within 5 years through future income growth driven by 2 income sources and efficiency gains from various reforms. I'll add a few comments about each reform. First, frontline reform and transformation of customer touch points. The diagram above illustrates the concept of next-generation retail finance. The concept is to make special in-person moments that require deep consulting as the pillar of differentiation while connecting 100% digitally for everyday financial services. As you see on the middle left, we released the group app in February 2018. Today, approximately 70% of our customer interactions occur through the app. For individuals, excluding cash transactions, app and tablet usage has expanded to cover 70% of transactions. The middle right section shows an example of the effect that the app delivers. The graph shows that the growth rate of assets under management per person has approximately doubled for those with the app versus those without. The number of cross-sell products is also approximately 1.6x higher. Focusing on in-store administrative reduction driven by apps, the number of slips requiring dedicated terminals has decreased by 40% over 5 years. Tax and public fund payments have decreased by 30%, significantly contributing to operational efficiency. Furthermore, as shown in the lower left, the insights and know-how gained from the group app have significantly contributed to the development of corporate apps and in-store group tablets. On the right bottom, the group app, which has delivered various benefits up to this point is currently undergoing development for the next-generation iteration. We aim to release it to the world as soon as possible. Now moving on to middle and back office reforms. With the completion of Minato Bank's operation and system integration in January this year, the foundation has finally been established to accelerate the shift to a single platform for the group. We are working to integrate the operation to streamline the middle and back-office functions within the group. Below, we have once again outlined our one platform multiregional strategy. As shown at the bottom, integration synergy between KMB and MB have already been significantly realized before the normalization of monetary policy. This stems from synergies such as top line growth and cost reductions achieved through the integration. Going forward, the income for both companies will further increase through rising interest rates and the full utilization of functions across the entire Resona Group. Moving on to workstyle reforms. This fiscal year, we will drive a renewal of our internal operation infrastructure and the standardization of Generative AI. We will break away from familiar business processes, eliminate sacred calls and streamline operations to fundamentally transform how work is conducted. In May, we signed a strategic framework agreement with Microsoft Japan, and we are driving this initiative through both infrastructure reform and human resources development. Beyond reforming the work size of 30,000 employees, efficiency improvement and improving quality and quantity of output, we will aim to create new customer experiences and value offerings by embedding Generative AI into our operations, products, services and functions going forward. And under AI governance, how far can we leverage AI in decision-making, how far can we expand revenue opportunities using data as our weapon, how far can we transform our organizational culture, we aim to take on those new challenges. In any case, we aim to become one of Japan's top AI utilizing companies. Next is about investment in human capital. As you see in the middle left section, the total group headcount was reduced by 3,400 over the 3 years of the previous midterm plan, while shifting personnel to strategic areas are falling to pre-KMFG integration levels. Under the current midterm plan, we are expanding our investment in human resources by enhancing compensation, developing talent and strengthening recruitment, all while leveraging the management strength gained through these processes. As you see in the lower right, our employee survey indicates that enhancing job satisfaction and motivation will be crucial in moving forward. Third point is accelerate capital circulation to enhance corporate value. Once again, this is the direction of capital management under the current midterm plan. As we enter the phase of fully leveraging capital, our fundamental policy to expand growth investment and shareholder returns while maintaining soundness remains unchanged. The upper section revisits and organizes the approach to shareholder returns. While aiming for a total payout ratio of around 50% regarding dividends on the left side, we will pursue sustainable dividend growth based on the DOE target. Last year's DOE performance was 2.1%, but we will raise this to around 3% by fiscal year 2029. Furthermore, as you see on the right side, we will conduct share buybacks depending on our performance. The return actions for this period based on this approach are listed below. First, in May, the full year dividend forecast was increased by JPY 4 year-on-year to JPY 29. In addition, a share buyback program of JPY 30 billion was established and completed by July. And last week, at the time of the interim results announcement, we released an additional action of share buyback program with a maximum limit of JPY 35 billion. This means that we are allocating 54.6% of the JPY 240 billion guidance based on forecast and total payout ratio through those actions. This page shows the trend in shareholder returns. This fiscal year, we have increased dividends by JPY 4 and expanded share buybacks to up to JPY 65 billion for the year. This shows the trend in ROE number of shares outstanding and EPS. Regarding ROE, we will pursue further increases while driving structural reforms amid the ongoing normalization of monetary policy. On the right side, the level of total shares outstanding remains an issue considering the need for flexibility in future capital policy. We will continue to focus on achieving sustained growth in EPS through expanding earnings and optimizing the number of shares outstanding. This is the image of capital allocation and utilization during the midterm plan period. The upper section reflects assumptions made during the midterm planning stage. The lower section represents the results of the first 2 years of the current midterm plan and this fiscal year's plan based on the results during the interim period. While capital flows have exceeded the plan due to earnings surpassing the midterm plan, alongside expanding returns to shareholders, we are increasing growth investments to strengthen high-quality loans as a natural approach amid rising interest rates. Regarding the inorganic domain, we made Digital Garage our equity method affiliate during the current interim period, but this investment falls within the allocation set by the midterm plan. The CET1 ratio, excluding valuation adjustments on other securities based on full Basel III implementation at the end of September continues to be close to the midterm target. Going forward, we intend to demonstrate sustainable growth by expanding returns while maintaining high financial soundness, by driving capital utilization in both organic and inorganic growth areas. Now on to policy-oriented stock holdings. The reduction achieved during the current interim period amounted to JPY 11.1 billion for listed stock on acquisition cost basis, while consolidated gains on sales totaled JPY 33.4 billion. We started the reduction plan last fiscal year that goes on to the end of March 2030. At the midpoint, 1/4 of the plan period has elapsed. Cumulative reduction based on acquisition cost stands at JPY 45.6 billion with a progress rate of approximately 26%. During the same time, market value decreased by JPY 118.5 billion and sales reduced the holdings by JPY 166.2 billion, but the market value increase added JPY 47.7 billion. We will continue to drive reductions while engaging in dialogue with our customers to achieve our goals. This concludes my explanation.