Resona Holdings, Inc. (8308) Earnings Call Transcript

I am Minami from Resona Holdings. Thank you very much for taking the time today to listen to our IR presentation. Now let me get right into my presentation. First, a review of the first half of the year. We have 5 points that we'd like to share with you. The first point is the financial results. The progress rate against the full year target of net income attributable to owners of the parent was 55%, which is generally considered to be a solid performance. The progress rate against the full year target of core income, excluding the impact from the special factor was also 51.6%. And Core income is a sum of domestic interest income on deposits and loans, fee income and interest on yen-denominated bonds, et cetera, minus expenses and is used as a KPI in the medium-term plan to promote medium- to long-term reform of income and cost structure. Second, business development and preparations are underway in anticipation of rising interest rates in Japan. The upward trend in loans is accelerating, while interest on yen bonds, et cetera, is also increasing. Deposit and settlement-related businesses are also performing well through the integration of digital and face-to-face business. The third is to strengthen group governance. The merger of KMFG by Resona Holdings in April next year was announced at the same time as the financial results. The fourth is our inorganic strategy. We plan to make 2 decent companies consolidated subsidiaries as the first of such strategies. Fifth, we are expanding shareholder returns. At the same time, as the announcement of financial results, we also announced the establishment of a JPY 15 billion share repurchase program. As a result, the total return ratio for this fiscal year is expected to be 51.3%. Each of these will be supplemented later in a separate slide. This is a summary of the financial results. We have conducted an analyst call after the earnings announcement, so I will explain briefly. Net income attributable to owners of parent was JPY 82.5 billion. This represents 55% progress towards the full year target of JPY 150 billion. Looking at the quarterly results, the pace has increased from 23.6% in Q1 to 31.4% in Q2. I will comment on each item. Net interest income from domestic loans and deposits declined by JPY 2.7 billion year-on-year. Average loan balance and the loan rates were generally in line with the plan. Fee income was down JPY 2.9 billion year-on-year. Succession related and insurance revenues declined partly due to a pullback from the previous year, while settlement-related revenues remained strong. Overall, we are in line with the full year forecast. Net gains, losses on bonds was loss of JPY 7.5 billion, which was up JPY 32.2 billion year-on-year, driven by measures taken in the previous year to restore soundness on foreign bonds. Expenses increased by JPY 3 billion from the same period last year but were controlled within the annual plan. Net gains on stocks were JPY 21.9 billion. Although this amount is less by JPY 14.4 billion compared to the same period last year due to the sale of policy stocks with large unrealized gains in the previous year. It is still making solid progress against this year's plan. Credit costs were an expense of JPY 10.2 billion, representing 27% to the annual budget of JPY 38 billion. The full year target remains unchanged at JPY 150 billion. And the annual dividend per share is forecast to increase by JPY 1 to JPY 22 per share for the full year, both of which are unchanged from the initial forecast. From here, I'd like to explain our efforts to enhance corporate value, focusing on our growth strategy. First of all, this is our long-term goal. As part of the Resona Group's sustainability management, we aim to create and maximize customer value by thinking about the business from the perspective of issues confronting customers and society as a whole. And by making use of the group's inherent strength multiplied by innovation. Beyond that, we believe that our purpose Beyond Finance for a Brighter Future and our long-term vision, retail #1 can be seen. At the same time, the business environment surrounding us is at a historic turning point with trends such as SX and DX and the concerns of customers and the local communities are becoming ever-increasing diverse, sophisticated and complex. In this environment, it is essential for us to change and break away from conventional ideas and frameworks. Change always brings new opportunities and risks. It is up to us to respond to any situation and turn it into an opportunity. Structural reforms are definitely necessary to further solidify such sustainability management. That is why the medium-term management plan that we announced in May is designed to be the first 1,000 days to promote CX or corporate transformation. In the medium-term management plan, we have stated that we will strengthen our value creation capabilities and develop next-generation management platforms, and we have also indicated that we are in the phase of full-fledged utilization of capital as a key point. Some specific measures were put into action on this front in the first half. This section summarizes how our efforts, both financial and nonfinancial are linked to increasing corporate value. We present an approach from both sides, improvement in ROE and a reduction of capital costs. ROE is currently at 7.6%. But we will first aim for 8%, which is a target for the medium-term management plan. We will make effective use of capital to improve profitability and asset efficiency. Particularly during the previous medium-term management plan period, the balance sheet expanded rapidly in the face of COVID-19, which led to the decline in ROE. Looking ahead, it is important to restructure the best mix of income based on risk cost and return with an eye to change. At the same time, it is essential to review our cost structure by accelerating business process reforms, et cetera. By continuing these efforts, we aim to achieve a sustainable improvement in ROE. From the perspective of reducing the cost of capital, we recognize the need for further upgrading the risk governance. We are committed to managing risk appropriately and meeting the expectations of market participants by aiming at high-quality, stable profit structure. In addition, it is important that society at large recognizes that our group business model is one that develops in tandem with local communities. We will actively work to promote understanding of the sustainability of our group together with ESG-related initiatives. I will now explain our efforts related to strengthening value creation capabilities. As I mentioned earlier about medium- to long-term structural changes, various changes in the business environment are also taking place in the immediate future. The first is a transition from the long-lasting special world without interest rates to the normal world with interest rates. And the second is the reopening of the economy after COVID-19. We see both of these factors as tailwinds for our banking business, especially for our group who focuses on the domestic market. In the previous deflationary environment, we sold new avenues of activity in fee businesses as a medium- to long-term profit structure reform and have produced reasonable results. On the other hand, in the world getting out from deflation, we intend to expand our 2 businesses as a twin engine fee income, which has gained strength during deflation and interest income in which we have intrinsic strength. We have organized this section as balance sheet management in anticipation of rising domestic yen interest rates. If monetary policy were to be revised further in the future, we expect a positive effect on earnings from the balance sheet of our group, which is highly interest rate sensitive, mainly in terms of income from loans and deposits and interest and dividends on securities. Of course, we cannot control monetary policy itself, but we believe that preparation for change will make the difference between winning and losing afterwards. The entire group will work together to review our past ideas, values and actions based on the premise of our world without interest rates and strive to improve our [indiscernible] world with interest rates. From here, we will explain specific businesses. The first engine is the lending business. The upper section shows loans to SMEs. Top left, trends such as SX and the DX as well as changes in society and industrial structures will surely bring new needs enough issues for customers. Through a strong network centered on 2 major metropolitan areas and the qualitative enhancement of consulting capabilities, et cetera, the bank will accelerate the expansion of high-quality loans to meet diversifying funding needs. As mentioned at the beginning, the lending business has been strong, and this is partly due to the fact that loan demand for CapEx is on the rise. We have also seen a significant increase in the volume of retail transition finance, and we believe there are signs that means in this area of SX are emerging. During the full capital utilization phase, one destination for capital is to augment diversified high-quality loans. This is an area that we expect to increase significantly in the current midterm plan, and we intend to demonstrate a solid track record in this area. The bottom section of this page is on the housing loan business. We will continue to focus on this area as a leading housing loan provider. Although the housing market as a whole has softened recently due to elevated price levels and other factors, we are taking various measures to recover. In July, we launched a new web-based application system and are expanding our lineup of differentiated products to meet the needs of our customers. In addition, we are strengthening our response to fixed interest rate needs and reviewing our risk pricing strategy based on credit attributes with the aim of returning to an upward trend as soon as possible. In addition, many customers download the group's app. At the same time, they take out the housing loan from us, enabling timely proposals through the app even after the loan has been executed. This means that we are now able to offer a variety of solutions to meet the life events of our customers, which is a significant change compared to a few years ago. The second engine, the area of fee income is the asset formation support business. Japan too has begun to declare the start of journey as an asset management powerhouse and has begun to implement institutional measures such as the new Nissay. The inflationary phase also increases the likelihood of an acceleration of the flow from savings to asset management, how the more than JPY 2,000 trillion in funds lie dormant will be utilized and managed will be extremely important for the country, for the people living in the age of 100 years and for financial institutions like us. Resona Group plays the role of investment manager, trust bank and distributor. We intend to fulfill this mission while providing our retail customers with a professional investment management, we have developed in the corporate pension business over 60 years. It is an extremely important starting point for many customers who are not yet familiar with the world of asset management to first step into the world of asset management. With the keywords, integration of face-to-face and digital and the long-term accumulation and diversification, we will tackle new challenges. I'd like to explain one specific initiative we did in the first half of this fiscal year. As you can see on the top right of the slide, in August 2023, we launched a new asset building support tool called Tsumitate Box on Resona Group's app. We hope to significantly increase the number of users of savings-type investment trust. Next is the business and asset succession business. The aging population is a structural issue in Japan, and there is a definite need for succession. On the other hand, needs vary widely depending on the nature of the business and assets, family structure and other factors. Therefore, it's important to provide detailed tailor-made solutions. The Resona Group has the rare advantage of being a commercial bank that also operates as a trust bank and is committed to building long-term relationship with its customers. Customer awareness is changing after the pandemic and as we enter the post deflationary phase. Although income in the first half of this fiscal year declined year-on-year, we are feeling a great response from the perspective of deepening our understanding on customer needs and are seeing opportunities build up. We are also investing management resources in this area as we expect the business to be a fee income driver over the medium to long term, and we strive to further expand the business. The lower part of the slide shows the cashless and DX solution business. This is an area with great potential through the fusion of real and digital technologies. In response to changing customer needs, such as the expansion of the cashless market, improvement of productivity and compliance with the Electronic Books Maintenance Act, we aim to provide solutions that are deeply attuned to corporate business processes and the household finance of retail customers. In the first half of the current fiscal year, income remained strong, led by debit card income, which grew significantly by 18.1% year-on-year. Due to its strong affinity with the group app, substantial growth has been seen in the retail segment, but it's an area where continued growth is expected, including the expansion of use in the corporate segment. Regarding settlement and DX support services for corporate customers, as described in the lower right, the Resona cashless platform in the B2C area, such as retail is gradually penetrating the market and the number of stores that have adopted the platform is also on the rise. Resona One-Stop payment, which provides DX support in the B2B domain is compliant with the Electronic Books Maintenance Act. In any case, we believe there is great potential for DX for SMEs. Let me talk about our inorganic strategy. First, the basic concept of our inorganic strategy is to start from what value can we provide to our customers and then to strive to expand our customer base, management resources and functions. As the first project in this medium-term business plan, we have announced the consolidation of 2 equity method affiliated leasing companies, turning them into consolidated subsidiaries. This transaction is highly compatible with the banking business and will enable us to combine the leasing functions with the Resona Group's customer base of 500,000 customers. We are confident that this transaction will generate significant synergies for the future. We'll continue to identify and consider a wide range of high-quality projects based on our customers' problems and needs. We believe that there are many ways to partner, not only through M&A and equity participation. One of the ways is through our financial digital platform. We are aiming to build a win-win ecosystem for all participants while connecting with a wide range of companies, including those from different industries, without being overly constrained by conventional frameworks. We are working with IBM Japan and NTT Data in building this platform. The top right shows the status of deployment at regional financial institutions. Currently, banking apps and fund wrap has been rolled out to 5 groups or 6 banks. We will continue to expand the number of partners and the functions we provide. The lower right shows new business development. We have concluded capital and business partnerships with Digital Garage in the settlement field and Brain Pad in the data field, and they are providing us with knowledge and expertise that we do not have. As an example, we are planning to conduct a trial of a payment service for the medical industry with Digital Garage, and we hope to realize various benefits of this alliance in the future. I would now like to explain our initiatives for the next generation of our management base. To further strengthen the consolidated management of the group, Resona Holdings will merge with its wholly owned subsidiary, KMFG on April 1, 2024. As a result, the Resona Group will shift to a simplified governance structure and organizational structure with 4 distinctive banks operating side-by-side under Resona Holdings. The left side of this page looks back at the past, and we appreciate the significant role KMFG has played being the largest regional bank group in the Kansai region. Through synergies in terms of both top line and cost, KMFG's income contribution to the group expanded from JPY 6 billion in the first year to JPY 22.2 billion in the last fiscal year. On the other hand, the environment surrounding us continues to change at an unprecedented pace. Under these circumstances, for the Resona Group to adapt quickly to changes and achieve sustainable growth, we must for one, maximize the advantages of each group bank and also further evolve the group's consolidated operations. We have come to this decision based on our belief that it is necessary to take on the challenge to move to a new stage by reviewing the governance and organizational structure in a progressive manner. As described on the right, we will move forward to strengthening the group governance at once. We will realize efficiency by unifying backyard and indirect departments across the entire group, and we will also aim to establish a one-platform multi-regional strategy in which the 4 banks aim to provide the best solutions tailored to regional and customer attributes. This page is about initiatives to reduce policy-oriented stock holdings. As shown at the top, our basic policy is to reduce the balance. The appropriate risk of holding stocks is also determined by verifying the risk-return profile, including the feasibility of medium- to long-term business prospects. The actual reduction of policy-oriented stock holdings in the first half of this fiscal year was JPY 11.3 billion on a listed stock book value basis. On a consolidated basis, net gain on sale on a consolidated basis was JPY 21.7 billion. As shown in the lower part of the slide, we have announced a plan to reduce policy-oriented stock holdings by JPY 80 billion over the 4 years starting last year. We are working to fulfill this commitment through deep dialogue with our clients. This page is about human capital investment. I talked about human capital investment when we announced our medium-term plan in May. We are now presenting it here again, which includes our perspective. Regarding human capital, we have been promoting structural reforms to improve productivity. Specifically, while shifting personnel to strategic areas, we have reduced the total number of group employees by 3,400 over the 3-year period of the previous medium-term plan and have reduced headcount to the level prior to the KMFG integration. The management strength gained in this process has been partially reallocated to reinvestment in human resources and IT, and the goal is to further raise the level of the organization's capabilities for the next generation. I'd like to also add some comments about some developments over the 6-year period from the fiscal year ended March 2020. When the previous midterm plan started to the fiscal year ending March 26, which is the final year of the current medium-term plan. On the left, total group headcount is expected to decrease by 12.7%, while personnel costs are expected to increase by 2.6%. On the right, personnel cost per worker will increase by 17.6% during this period, but core income per worker is expected to increase by 42.6%, exceeding the increase in personnel costs. We will also increase the ratio of specialists and mid-career hires to approximately 40%. In times of change, we believe that the starting point for everything is human capital. We believe that the development of our employees into specialists is the key to the company's sustainability. This page is about our challenge to transform based on Resona's 20-year history. This year marks the 20th year milestone since the injection of public funds and the start of Resona's revitalization in 2003. In May, we established the purpose beyond finance for a brighter future. The question is how to ensure that the human talent and employees who support Resona recognize and deeply emphasize with our purpose and how to pass on the DNA of reform. This is an extremely important factor in continuously enhancing social and corporate value. As shown on the lower left, we're implementing a variety of measures, both inside and outside the company to promote our purpose. We believe that having 30,000 employees think about how can we enrich someone's future and act will be a great source of strength for the group. In September, we published the Resona Group's first corporate history book, which is shown at the bottom right. This is not an anniversary publication. Rather, it's a statement of our gratitude for the past and are resolved for the future. We hope that the Resona Group will learn from the past look out to the future and continue to apply the learnings from our experience to the future. This page is about IT investments. We plan to increase investment by JPY 40 billion during the medium-term plan period compared to the previous midterm plan. We will significantly expand strategic investments that will contribute to the enhancement of CX and top line. In the lower left, strategic investment will be expanded moderately over the long term, but we will fund the investments by controlling base costs. On the right side, we show you the various benefits of our investments to date. The reforms in clerical work, systems and processes are indispensable as it will not change the cost structure, but will also shift management resources and prepare a foundation for the fusion of physical and digital. Over the medium to long term, we believe that these reforms will change the customer experience and pave the way for providing you value and at the same time, lead to drastic cost reductions. We will fulfill our responsibility to explain our next-generation initiatives in the current medium-term plan, while delivering solid results. As the last slide regarding the development of next-generation management platforms, I would like to present our vision of the world we would like to realize. While we are digitally connected with all of our customers, providing special real life moments based on in-depth consulting is an indispensable trend for next-generation retail finance. The shift to digital and data will accelerate an everyday finance for both corporate and retail customers. On the other hand, to meet highly complicated financial needs, it is essential to provide in-depth solutions centered on face-to-face interaction, which we believe is the final pillar of differentiation. To enhance corporate value, it is important to approach it both financially and non-financially. These are the long-term sustainability indicators, which we reiterated when we formulated the medium-term management plan. We will aim to achieve this goal by fiscal year 2030 from various perspectives, including value for our customers, the environment, society and employees. Some of them are explained in detail in the latter half of this material. We hope you can take a look later. We define SX sustainability transformation as anticipating changes in the world towards a sustainable society and changing corporate business models and individual lifestyles. We are committed to ESG activities to support our customers' SX sustainability transformation by learning extensively and changing quickly. Lastly, I'd like to talk about capital management. The top shows the direction of capital management in our midterm management plan. We have moved from a focus on qualitative and quantitative expansion of capital to a phase of full-fledged utilization of capital. In terms of financial soundness, we are striving to reach a CET1 ratio, excluding unrealized gains and losses on securities and based on the finalized Basel 3 regulations in the 10% range, which was around 10.1% at the end of September that we show at the top left. At the top right, regarding growth investments, we intend to expand the use of capital in organic and inorganic areas, and we've made a certain amount of progress in the first half of the current fiscal year. In addition, as you can see in the middle, we will aim for a total shareholder return ratio of about 50%, while maintaining stable dividends. And in line with this policy, we have set a maximum limit of JPY 15 billion for share buybacks. The company's earnings and soundness are both trending firmly. So we've decided to take this action to set a clear course towards achieving the target of the total return ratio. As a result of this action, the total return ratio for the current fiscal year is expected to be 51.3%. The total amount of share repurchases, including the JPY 10 billion repurchase in May will amount to JPY 25 billion. This is the same amount as in the previous medium-term plan for 3 years. This concludes my presentation. Thank you very much for your attention.