Koji Fujiwara – Chief Investor Relations Officer
Graeme Knowd – Morgan Stanley
Carl Hammond [ph]
Mizuho Financial Group, Inc. (MFG) F2Q2011 Earnings Conference Call November 14, 2011 8:00 AM ET
This is Premiere Global Services. Please stand by, we are about to begin. Good day everyone and welcome to Mizuho Financial Group’s Internet Conference Financial Results for the second quarter, first half of fiscal year 2011. For the duration of the presentation, all lines will be in a listen-only mode. Just a reminder, today’s conference is being recorded for replay purposes. If you have any objection, you may disconnect at this time.
Now, I would like to hand the conference over to Mr. Koji Fujiwara, Chief Investor Relations Officer of Mizuho Financial Group. Over to you, Mr. Fujiwara.
Thank you very much. Ladies and gentlemen, thank you for joining Mizuho Financial Group Internet Conference for fiscal 2011 interim results. My name is Koji Fujiwara, Chief IR Officer of Mizuho Financial Group. I will make a presentation for about 10 minutes, which will be followed by a Q&A session.
The major items covered will be our interim results for fiscal 2011, capital management, earnings plan for fiscal 2011, and our proposed merger of Mizuho Bank and Mizuho Corporate Bank, our two banking subsidiaries.
First, please turn to page 4, which shows our interim results. This slide covers the highlights of our interim results for fiscal 2011. Please take a look at on the table on the right. The 3 Banks’ gross profit amounted to 792 billion yen, a year-on-year decrease of 88 billion yen. This was mainly due to a decrease in income from trading segment. The gross profit from the customer group also decreased by 5 billion yen, despite an increase in income from robust business, particularly from Asia.
G&A expense decreased by 3 billion yen to 432 billion yen, mainly with our continued overall cost reduction efforts. As a result, the 3 Banks’ net business profit amounted to 359 billion yen, a decrease by 85 billion yen on year-on-year basis. Meanwhile, net credit cost amounted to a net reversal of 8 billion yen. Our net loss related to stock amounted to 67 billion yen. This was mainly due to a recordings impairment loss from the certain stock reflecting a decline in stock prices. As a result, the 3 Banks’ net income decreased by 202 billion yen to 152 billion yen.
Now, please take a look at on the table on the left which shows our consolidated results. With the 77.4 billion yen impact of turning the three listed subsidiaries into wholly-owned subsidiaries, our consolidated net income amounted to 254 billion yen as indicated at the bottom left. This is an achievement of about 110% against 230 billion yen, our planned net income for the first half and about 55% against 460 billion yen our planned net income for full fiscal 2011.
Please turn to page 5. This slide describes the trend of our loan balance and domestic loan and deposit rate margins. As shown in the bar chart, the 3 Banks’ average loan balance for the first half of fiscal 2011 was 60.8 trillion yen, a decrease over 0.3 trillion yen from the second half of fiscal 2010. This was due to a decrease in the domestic loan, particularly those two the Japanese government, despite an increase in overseas loans. The line chart at the top of the area shows the aggregate loan and deposit rate margin for domestic operations. The margin for the first half of fiscal 2011 was 1.32%, a decrease by 0.04% from that over the second half of fiscal 2010.
Please turn to our next page. This slide describes the status of our non-interest income. Non-interest income of the 3 Banks increased by 2 billion yen on a year-over-year basis. The main positive contribution came from non-interest income from overseas business, particularly in Asia.
Please turn to Page 7. This slide covers Mizuho asset quality. Firstly, as for the 3 Banks credit costs, we recorded a net reversal of 8 billion yen. This was primarily due to an improved obligor classification. Secondly, please take a look at the chart on the right. The balance of the non-performing loan was 1.1 trillion yen and our net NPL ratio also remained at the low level of 0.82%. Thus, we maintained a sufficient financial soundness as of the end of September.
Please turn to our next page. Our consolidated Tier 1 capital ratio was 11.89% and consolidated Capital Adequacy Ratio was 14.92% as of the end of September 2011. In relation to the capital regulation, our medium-term target is to increase our Common Equity Capital Ratio to the mid 8% level under Basel III as of the end of fiscal 2012. We believe that we will be able to sufficiently meet the new capital regulation by accumulating the retained earnings and improving asset efficiency. In terms of our dividend policy, our plan to make cash dividend payment of 6 yen per share of the common stock for fiscal 2011 has not changed.
Please turn to Page 9. This slide describes our earnings plan for fiscal 2011. Please take a look at the consolidated items shown in the table on the left. We now plan consolidated net business profit for the full fiscal year to be 770 billion yen, year-on-year increase of 28 billion yen. Please take a look at on the table on the right, which shows that the earnings plan for our 3 Banks, net business profit are planned to decrease on a year-on-year basis. Credit-related costs are estimated to be a cost of 63 billion yen considering the uncertainty over the global economy. We estimate that net gains related to stock to be 65 billion yen, mainly through our continuous effort to reduce our stock portfolio. Based on the above, we plan consolidated net income to be 460 billion yen remaining unchanged.
Now, I will briefly touch upon the transformation of Mizuho Group structure into one bank and merger between Mizuho Bank and Mizuho Corporate Bank of which details we announced earlier today. Please turn to Page 10. Today, we announced that Mizuho Bank and Mizuho Corporate Bank have signed an MoU about their merger in the first half of fiscal 2013 with a view to improve the customer service as well as strengthening Mizuho's integrated Group management and realizing group-wide optimization of the management resources. I will not enter the details of the merger which are put on the press release. We put to substantively transform into a one bank in April 2012 and then legally transform into one bank structure through the merger between Mizuho Bank and the Mizuho Corporate Bank in the first half of fiscal 2013.
Please go to our next page. Lastly, I will briefly touch upon the synergy effects to be achieved by integrated group management. The merger between Mizuho Bank and the Mizuho Corporate Bank is a core part over establishing the most effective and advanced groups management structure. Under this structure, we will pursue the synergies (inaudible). On the top line side, we will invigorate the business activity through the coordinated approach to the customer and the development over the financial know-how we see in the Group.
On the cost side, we plan to downside the personnel by 3,000 employees by integrating the Group's common trends around improving our productivity. Our provisionary category synergy effects of the merger is around 100 billion yen by fiscal 2015 on accumulated basis.
And this concludes my presentation. Thank you very much for your attention.
Thank you, Mr. Fujiwara. (Operator instructions) Our first question comes from Graeme Knowd.
Graeme Knowd – Morgan Stanley
Yes, your line is open. Please proceed.
Graeme Knowd – Morgan Stanley
Hi. This is Graeme Knowd here from Morgan Stanley in Tokyo. I wondered if you could explain what the unrealized losses on other securities are, they looked like large?
Thank you very much for your questions. And you indicated that our unrealized losses 145 billion yen as total. Also with this quarter, that 145 is coming from as you know other securities, which is including (inaudible) fixed income and ETF. And other part, 46 billion yen is a positive side from that – of domestic fixed income and 45 billion, the negative side is coming from domestic stock and equity. Thank you so much.
Graeme Knowd – Morgan Stanley
(Operator instructions) We will now move to our next question from Carl Hammond [ph].
Thank you for taking my question. It was relating to your capital position. You stated in your presentation that you are quite happy that through operational efficiencies and earnings, you will be able to improve your capital base to meet Basel III. I'm just wondering your content that, that factoring into all the global SIFI rules, and also the risks in terms of the overall global environment. You are happy that, that statement still stands, and I am just wondering what, if anything would change your mind on that?
Thank you very much for your questions. As I said that we are not going to increase capital raising in order to meet this capital regulation, even if we are designating as an G-SIFI, we will not change this policy. As of March 2011, our capital or Tier 1 ratio is around 7% under the Basel II base. After that, we could accumulate the 0.3% positive through the wholly-owned subsidiaries project.
Then, we are planning to accumulate the retained earnings up till fiscal year 2012 by 1.3% positive, and even though, that we are trying to convert from the Basel II to Basel III, that we are reaching to the Tier 1 capital ratio to mid 8%, including the mandatory conversion of the preferred stock, that is our plan. And if we reach to the mid 8% as of March 2013, this is under Basel III base, then we could confidently come up with this new capital regulation, if we designate it as G-SIFIs.
In fact, even though, we are designated as a temporary with G-SIFIs or financial institution that one of the 29 financial institution after the (inaudible) in November, there are two steps going forward. One step is that final decision-making will be at the timing of fiscal year 2014 and even if we are designated as the G-SIFI at this moment of time, most of our equity we are – not will be categorized as or higher baggage of descent surcharges. As you might know that the surcharge will be divided into five buckets from 1% surcharge to a 2.5% surcharge.
According to the information we got from market, the platform – I would say we will not go into the higher portion of the target. In that case or even if we are designated as G-SIFI, we will confidentially meet our new capital regulation. Result going for another round of global offering in order to meet this new capital regulation.
Thank you very much. That’s helpful.
(Operator instructions) We will now move to our next question from Carl Hammond.
Thank you for letting me ask another question. Just looking at your earnings in the first half and stripping out certain factors such as the negative goodwill, it implies perhaps the slight sort of improvement on an operational basis for the second half and is that a case on an underlying basis, and I am just wondering where you expect that to come from?
Yes, good afternoon. Thank you very much for your questions, again. And we will see that we could reach to 254 billion yen level on consolidated basis. When we take a look at the three-month basis, at 152 billion yen is abasement for the first half – bottom line over first half of 2011. When we reach to like 460 billion yen on a consolidated basis, we need only like 200 billion yen level, and we needed 180 billion yen level for our 3 Banks basis. So, how are we going to increase the 30 billion yen is one of the issue.
As you indicated that we are planning to reach this annual level over 460 billion yen, when we make 460 million yen annual budget, we revised certain items during our business plan. And I think the main driver to lift up our top line basis, the overseas branches, especially the Asia. The Asian business is in a very good track and we could increase by 1.2 trillion yen our loan balances compared with last year. That is one of the topic. And the second one will be that non-interest income, especially from the investment of Trust and the individual annuities, even though that we have suffered from the decline in the stock prices in the first half 2011, second half could be a little bit better than the first half we could expect. And I think that the most important thing is how to divide the securities company Mizuho Securities since it was recorded that net loss in the first half 2011, how to make it count price – in the second half is the key issue through the very tight restructuring plan that they have already announced that or a business restructuring plan in September, and they are waiting for the kind of merger between the Mizuho Securities and Mizuho Investor Security in the second half 2012.
Until this period that they have to make a best effort to improve their profitability, I think these are the three main issues. And in addition to these kind of things, I would say that credit cost estimation for second half 2011, it could be one of the buffer if there is no big one short time over the items in this line.
As you know that we recorded the reversal amount which is 13 billion yen on a consolidated basis for the credit cost and we estimate that the 20 basis points budget for second half 2011. That make up like 78 billion yen buffer for other credit costs. That is another item. And I would say through these kind of items, we could reach to 460 billion yen. Thank you very much.
(Operator instructions) It appears there are no further questions at this time. I will now hand the call back to Mr. Fujiwara for closing remarks.
Thank you very much for attending today's conference. As the last quick comment from my side, I would like to reiterate the three main points of today's message. One, Mizuho's consolidated net income for the first half of fiscal 2011 exceed the initial earnings plan.
Two, our asset portfolio remains sound and strong with limited exposure to GIPS or PIIGS countries. We believe we will be able to meet the new capital valuation. Three, we will continue to move forward with a strong commitment to accelerate and compete medium-term management policy, which is transformation program and make every single effort to complete our transformation into one bank as soon as possible. Your continuous support for Mizuho from the long-term perspective will be very much appreciated.
We are looking forward to exchanging view with you on a broad range of the issue in the future opportunity for meeting with you. Your valued questions and feedbacks are highly appreciated. Thank you very much for your participation. Good bye everyone. Thank you.
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