Edited Transcript of 8308.T earnings conference call or presentation 18-May-20 10:59am GMT

Fee income is projected to grow by roughly JPY 2 billion, mainly driven by settlement in asset and business succession services. Net gains on bonds are expected to be down by JPY 5 billion from a very accurate level last fiscal year. Top line is projected to decline by roughly JPY 24 billion, out of which approximately half is due to COVID-19. While personnel expenses would improve, nonpersonnel expenses, mainly IT costs, are expected to go up, resulting in the overall operating expenses to increase by approximately JPY 4 billion. Net gains on stocks are projected to grow by about JPY 5 billion, mainly driven by improvement on ETF investments, for which the performance last year was rather weak.

Credit-related expenses will be a cost of JPY 42 billion. I will give you more details later using a different slide. In sum, the aggregate net profit for order back is expected to be JPY 107.5 billion, down by JPY 35 billion year-on-year.

Please turn to Page 17. I’d like to make a few comments on the impact of COVID-19. In the previous fiscal year, the direct impact was estimated to be approximately JPY 14 billion, mainly on the market-related activities, and the impact on the credit cost was limited. Observing the most recent business trend, corporate customers are making use of the current trend for liquidity and front-loading the funding activities, which are resulting in a significant loan book growth as well as increased number of inquiries for commitment lines. On the other hand, due to restrictions on face-to-face sales and marketing activities as well as uncertainty over the future, real estate transactions and M&A deals tend to be slightly pushed back. This is having a record effect on our retail banking services, including asset formation support business and mortgage loan business.

At the bottom right corner of the page, we’ve highlighted the business outlook post COVID-19. Taking into account the medium to longer-term changes we are observing with the customer’s mindset triggered by this pandemic. Measures to cope with these changes will be increasingly critical in the future. For example, even under the current circumstances, inquiries for commitment line are considerably strong in non-face-to-face transactions using the app to open new account have doubled. This trend may favorably drive the business that we intend to focus in our — in the medium-term management plan, which I will explain later.

Please turn to Page 18. I’d like to make some additional comments on the credit cost. Even before COVID-19, Resona had a history of preemptive provisioning by conservatively calculating the loan loss ratio for general reserves in order to be prepared for the occurrence of certain stress events. In that sense, we have not made any preemptive provisions, specifically for COVID-19 in the year that just ended. On the other hand, we are assuming a certain impact on credit costs this year.

For Resona Holdings on a consolidated basis, we are projecting JPY 50 billion of credit cost, which is 13.4 basis versus the total loan book or 2.2x higher compared to the previous year. We picked up the sectors that are likely to be hit severely by countermeasures taken to prevent the pandemic to estimate the downside risk of the borrowers business. And with an assumption that COVID-19 could last for a long time, we budgeted for the credit cost reflecting some preventive measures.

This slide illustrates how the quality of our credit portfolio has improved dramatically in comparison with the time of the Lehman Crisis. Compared to the time, the proportion of the highly rated normal obligors in the current loan book has increased, and we have also made progress in diversifying the loan portfolio to an increased number of smaller loans, whereas at the time of Lehman Crisis, our loan book suffered from growing credit costs caused by large borrowers. In addition, government is coming up with generous measures to support the corporate sector to deal with the current challenges. And the system to support corporate cash flow management is being built by both the public and the private sector.

Resona Group intends to fully serve the social mission and control credit costs at the same time by extending thorough funding support to our customers in an agile and flexible manner.

Please proceed to Page 21. Now I’d like to switch gears and talk about the 3 year medium-term management plan, which have started from this fiscal year.

Please turn to Page 22. In all our business, we start from helping to customize and society of the issues and challenges they face. By leveraging on a competitive strength to create value for the customers, we aim to achieve our goal of becoming the #1 retail financial services group. Under the new medium-term management plan, for capitalized Arizona’s strength, including extensive manned branch network in Greater Tokyo area and Kansai market, corporate and retail customer base and full-line trust making capabilities in order to establish the Resonance Model under which we aim to provide new value to the customers with a novel way of thinking.

Resonance originally comes from Latin, and this is also where we got the group name from. Resona Sustainability Challenge 2030, which is our commitment towards achieving the SDGs in 2030. Subsequent existence of sustainable society and sustainable growth of Resona Group as a goal. 3 years under the new mid-term management plan is positioned as a period to realize that vision.

Please turn to Page 23. In the Resonance model, we aim to rebuild the business foundation that supports the current banking operation as a starting point to pursue the idea of further development and new challenges. By implementing the drivers for innovation, namely digital and data design based thinking and the idea of being open, we want to create a variety of resonance and through multiple touch points, continue to provide new values to the customers.

Please turn to Page 24. This page illustrates the concept of further development, new challenges and rebuilding our foundations. Under the concept of further development, we’ll fully capitalize on the retail platform and sophisticated trust banking capabilities to focus on asset and business succession service and the asset formation business, among others. As part of the overlap between the concept of further department and new challenges, we’ll make further evolution on the omni strategy, which is something that we focused on in the previous midterm management plan and pursue synergies for the Kansai Mirai Financial Group. With the idea of new challenges, we aim to provide new value to customers in society through novel ideas and a wide range of touch points, while expanding the scope of business as Resona Group and diversifying the profit opportunities. And to realize the concept of further development and new challenges, we’d like to rebuild our business foundations as we deem this to be one critical initiative. We will augment the sales and marketing capabilities and improve productivity so that we can overcome the high cost nature of the retail financial services and appropriately allocate the managerial resources.

Page 25, please. Let me make a quick comment on our achievements and challenges from the previous midterm management plan. Under a severe business environment, we go short over financial KPIs. However, I believe that we made some progress in our earnings and cost structure reform under which we make efforts to offset the decline in net interest income by growing the fee income and lowering the operating expenses. More specifically, we focus on asset quality in lending operations. And we were able to mitigate the rate of spread compression, which was better than what we had planned for. Recurring fee business grew, and we overachieved the plan for reducing headcount through digitalization. The lower half of the page outlines the 3 omni strategies that we focused on under the previous midterm management plan. New initiatives are making solid progress, such as the Group App, Resona Academy, Resona Cashless Platform and the formation of KMFG. Going forward, we need to further accelerate these efforts to monetize on the opportunities.

Please turn to Page 26. Here are the KPI targets under the new medium-term management plan. The target for FY ’22, our consolidated net income of JPY 160 billion. Fee income ratio of over 35% and cost income ratio of approximately 60%. The target for ROE is 8% level. And common equity Tier 1, excluding the unrealized gains on securities in line with Basel 3 on a fully loaded basis, is roughly 10%. I will elaborate later using the slide on capital management. In addition, as a KPI related to the realization of a sustainable society, we also set our goal to continue to be selected for all the ESG indices adopted by GPIF. We would like to accelerate your business strategy focusing on SDGs with our core business and aim to solve social issues.

Page 27, please. This page highlights the factors behind our earnings outlook for achieving our KPI targets. Assuming that the low interest rate environment will continue, we set the net interest income target for the final year, FY ’22 at JPY 160 billion. We intend to offset the decline in net interest income by growing the fee income and bringing down the operating expenses. As indicated by the first red arrow from the left, loan yield is expected to decline by roughly 3 basis per annum. But by growing the average loan balance by 1.5% per year, we aim to mitigate the decline of the income from loans and deposit over 3 years to roughly JPY 16 billion in aggregate. Given that we expected a profit decline of JPY 60 billion in the previous midterm management plan, the rate of decline is moderating. In addition, other net interest income is projected to be down by approximately JPY 8 billion partially due to the redemption of the held-to-maturity securities, mainly the JGB Holdings. We plan to offset the net interest income decline by growing the fee income by JPY 40 billion, mainly driven by the JPY 19 billion from asset and business succession services and JPY 14 billion from the settlement-related services reaching a consolidated fee income ratio of over 35%. Furthermore, we aim to reduce the personnel and non-personnel expenses, excluding the integration cost by roughly JPY 8 billion to reach a consolidated cost income ratio of roughly 60%. This will be achieved through initiatives such as enhancing the productivity through digitalization, optimizing the branch network and streamlining the headcounts.

Page 28, please. I will now dive into the key highlights of our respective business, starting with the asset and business succession service. The graph in the upper right corner illustrates how the SME business owners are aging, and that more than half of them do not have a successor for their business. By leveraging on the competitive advantage of platform and function as Japan’s largest commercial bank with full trust banking capabilities. We will strive to solve customers’ challenges and at the same time, grow our business. As shown in the middle of the page, we’d like to grow the asset and business succession related fee income from JPY 19 billion in March ’20 to JPY 39 billion in March 2023. We also aim to double the transaction volume for M&A deals and real estate brokerage service through such means as augmenting the talent with special expertise, collecting data and information and collaborating with external partners.

We are targeting to increase the new contract through a wide range of succession related services, including low trust among others, by 60%, reaching 10,000 contracts. Please refer to the following pages on the details of asset formation support business, SME and international business and loans for individuals later at a convenient time.

Please proceed to Page 32. Now I will talk about the omni-channel. There were lots of people saying that bank apps are unfriendly to users. But as the graph on the top right shows, the app channel is the largest customer touch point now. The number of downloads of the Group App has increased to 2.2 million, but we will strive to reach 5 million during the course of the midterm plan. As you can see in the middle of the slide. Earlier, I talked about design thinking as a driver for innovation. To this end, our app has earned a solid reputation as we have thoroughly applied a user point of view and designed the app based off our understanding of the customer. As we expect needs for non-face-to-face transactions to further increase due to COVID-19, we will continue to expand the app’s functionality while thinking about ease of use for the customers.

Please turn to Page 33. Here, I will talk about the settlement business. As shown in the middle, our goal is to increase settlement related income by JPY 14 billion to JPY 80 billion. Post-corona, we expect digitalization trends to accelerate amongst SME customers. As of March 2020, a total of 1,100 companies or 14,000 stores have already implemented or is scheduled to implement the Resona Cashless Platform. We are striving to acquire 4,000 companies in the final year of the midterm plan. Following the Resona Cashless Platform in the B2C area, going forward, we are considering on providing the settlement platform in the B2B area as well and support customer digitalization. As you can see on the bottom right, for individual customers, we will continue to provide cashless services through the integrated debit card with cash card. The number of cards issued have already exceeded 2 million and we target approximately 2.55 million by the fiscal year ending March 2023.

Please turn to Page 34. Kansai Mirai Financial Group also announced a new medium-term management plan at the same timing as our company. A summary of the plan is shown here, including KPIs and other factors. As the progress made against the previous plan was under expectation, KMFG has shown a stronger determination to achieve the new medium-term plan. In terms of business, Resona’s functionalities products, services and know-how will be leveraged thoroughly. And in terms of cost, about 90 branches will be consolidated by applying the BNB branch-and-branch method. And we will engage in structural reform by reducing headcount by about 1,700 people, although this will not be through layoffs. PMI is progressing as planned since the establishment 3 years ago, including KMB’s business processes and system integration. As impairments were recognized in the previous fiscal year for channel reform, we believe that the base needed for generating synergies is now in place.

Please turn to Page 35. Regarding group synergies specifically, we aim to grow gross profits by approximately JPY 7.5 billion. Trust and real estate functions, omni strategies, unique differentiated products and utilization of group information networks, et cetera, will be the source of growth. In terms of cost synergies, we expect around JPY 3.5 billion, mainly coming from IT systems. The system integration for Minato Bank, which was scheduled for the second half of fiscal year 2021, has now been changed to a 2-phased implementation. There are 2 reasons why we are doing this. The first reason is scalability and applicability, by utilizing the API base, we will strive to flexibly share Resona’s advanced products and services that are provided to customers as soon as possible. We view this as a test case of the Resona open platform strategy, which will be deployed to regional banks and others going forward. The second reason is cost advantage. While enabling the cost curve to flatten out, total costs can be brought down.

Please turn to Page 36. This page is about breaking free of the banking model. We will strive to create innovative services beyond the conventional bank framework. In terms of expanding our customer base, we will provide other financial institutions with Resona’s strength, namely IT systems, group apps, the Resona Cashless Platform, fund wrap, et cetera. We will take advantage of Minato Bank’s 2 phase system integration in providing services to customers regarding enhancing our services and functions, for example, we will establish new marketing methods, utilizing bank information assets and technology from FinTech companies. As well as engage in digitalization support for SMEs so that indirect back-office work can be increasingly efficient. As we’re creating new businesses, we have set up a cross functional team, which will consider new businesses with a new approach. Under this initiative, we will strive to provide new values to customers, including the utilization of our position as an advanced banking service company and working together with other industries. We will mobilize the cross-functional team, not only in our business fields, but also for business process, IT system reform and other areas.

Please turn to Page 37. I will talk about rebuilding our foundations from this page. The 5 areas of the rebuilding process will be one of the key areas as we head towards the next generation. Regarding the human resource strategy, we aim to build a human resource portfolio focused on diversity and expertise. By migrating to a multipath personnel system, we plan to introduce tasks in which everyone can strive to be a professional and also implement an optional retirement system, which enables all generations to continue to work. We will also train people to become digital and IT specialists and hire or collaborate with specialized professionals.

Moreover, we will continue to develop omni-advisors, building off the results of the previous medium-term management plan. As you could see at the bottom half, we will downsize total group headcount by 3,100 people in 3 years from the current 31,800. Through natural attrition, we aim to bring down headcount to around 29,000, which was the level prior to the integration of KMFG. In the previous midterm plan, the plan was to downsize by 3,000 over 3 years on a former bank basis, but headcount increased instead due to the integration. However, we reduced headcount by more than 4,000 then after, as shown. Across the group, between even holdings and KMFG, we will reallocate human resources in a bold and flexible manner. In fields such as succession, omni, digital and IT, we will allocate more human resources to strengthen the businesses. For example, our target is to have 1,000 digital IT human resources.

Please turn to Page 38. Regarding business processes, we will thoroughly review work conducted at our branches as well as corporate and loan-related business processes. We would like to bring the concepts behind our Group App into our branches. We will take advantage of the cross-functional team that I mentioned earlier under new challenges, so as to speedily enable mindset change and digitalization. As for sales approach, we will create a mechanism that can be shared from any channel in real-time with high-quality data coming from face-to-face engagements as well as high frequency, wide range customer digital data. In addition to a sales approach that is backed by experience and intuition, we will improve communication, quality and volume by sharing findings and changes of the customer by taking a closer look at the real customer.

In the channel network, under the notion that a branch is a place where important communication with local customers take place, we will further develop area operations and work to maintain and strengthen the manned channel network. We will also integrate and consolidate branches that overlap as well as optimize brand specifications. In particular, we will reorganize around 90 Kansai Mirai Bank run branches by creating branch in branches as well as convert approximately 10 branches between Resona Bank and KMFG into joint bank in banks.

Please turn to Page 39. Finally, I’d like to talk about IT systems. By transforming to open systems from core banking, accounting related systems we will be able to make existing systems leader, reduce maintenance costs in existing areas significantly and expand strategic investments. We will also expand agile development to enable significantly faster development and also improve the flexibility of the system through APIs as we transform to an open system. The lower half of the slide is a conceptual diagram of the system before and after the transformation. 3 key points are mentioned here. The first is migration from dedicated devices to tablet devices. The second is separating business applications from core banking accounting related systems and converting our platform into an API-based open platform while promoting agile development. This accounts for future alliances with regional financial institutions, as mentioned earlier. The third point is to leave bank ledgers and settlement book camping in a robust core banking accounting related system and to simplify the system as much as possible. By implementing these measures, we will be able to turn the IT system division into a profit center from a call center, which will be a key factor going forward.

Please turn to Page 41. Next, I’d like to talk about the direction of capital policy. Our basic policy continues to aim for an optimal balance between financial soundness, profitability and shareholder return. Regarding financial soundness at the top left, we aim for a common equity Tier 1 ratio of about 10%, accounting for the finalization of Basel 3, and excluding unrealized gains on available for sale securities. Regarding profitability, at the top right, we will continue to have ROE as our KPI, and we will strive to exceed 8%. Even in a challenging external environment, we will continue to manage our financials, focusing on risk return and cost return so that our ROE has an advantage within the Japan banking center. Finally, regarding shareholder return, we will aim to further expand shareholder return while considering balance between financial soundness and profitability and the opportunity of growth investment. Specifically, while maintaining stable dividends, the medium-term target ratio for total shareholder return is the mid-40% range.

Please turn to Page 42. We prepared some slides, which talk about our ESG efforts from this page. As we have said from before, our basic policy is to solve social issues through our core business.

I will now go through details, but Page 43 is about efforts around the environment. Regarding climate change issues, in principle, we will suspend extending new loans to coal-fired power generation projects as well as incorporate ESG into investment processes. By offering various types of environmentally conscious products, we will continue to engage in efforts, leading to the realization of a low-carbon recycling based society.

Next, please turn to Page 45, which is about governance. As you know, we shifted to a committee based corporate governance structure in 2003, which was the first for a Japanese bank. The majority of Board of Directors are outside directors and all chairpersons of the 3 committees are also outside directors. The outside perspective is being fully reflected into our management, and we have continued to uphold a corporate governance system that has high transparency and fairness.

This concludes my explanation. Thank you for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]