Resona Holdings Inc

TSE:8308

Ladies and gentlemen, I'm Kazuhiro Higashi of Resona Holdings. I would like to express my heartfelt appreciation for joining our first half financial results meeting today despite your very busy schedule.

Let me first highlight the major event that happened during the first half. After Kansai Mirai Financial Group established last year, Kansai Urban Bank and Kinki Osaka Bank merged effective April 1 this year to mark our new start as Kansai Mirai Bank. This was the first major milestone event for us at the outset of the year. Following that event, 6 months later, on October 15, the system integration was completed successfully. With that, Resona Group and Kansai Mirai Financial Group jointly marked a new start. In that context, the group has made a significant leap during the first half of the year with its business structure.

I will now dive into the result presentation but will be brief since the financial results were already explained at the conference call. Please turn to Page 4. I would like to first summarize the first half results by just referring to the single slide of Page 4. The bottom line for the first half was down 36.9% year-on-year due to the absence of a onetime profit of approximately JPY 40 billion, including the negative goodwill related to the previous year's KMFG integration. When adjusting for the onetime profit of roughly JPY 40 billion, the profit decline would have been 6.3% year-on-year. Our target for the first half was JPY 76 billion for profit. Bank's operation recovered from the severe second half performance of JPY 53 billion last year, and we ended the first 6 months 1% ahead of the first half target.

Please turn to Page 5. I'd like to explain how we have prepared ourselves in the first half against the medium- to long-term changes in the business environment. We have yet to reach a satisfactory level, but our initiatives in the first half refers, to a certain extent, in terms of making efforts in adapting to medium- and long-term environmental changes under the medium-term management plan. I will explain this in 2 parts. First, as you can see at the top half, we made progress in transforming the revenue and cost structure on the back of the low interest rate environment.

I would like to stress 3 points. While turning to more quality-oriented lending operation, we continue to grow the loan book while mitigating the rate of yield decline. Secondly, we continue to grow the fee income that does not depend on the sales of investment trusts and insurance products. Thirdly, we also continued to curtail cost by focusing on reducing personnel and other expenses through promoting digitalization. So these are the 3 points that I wanted to stress.

The other aspect is the progress on the balance sheet reform are in the potential shift in the credit cycle. Here, I would like to emphasize 2 points. In the market division, both earnings and valuation gains and losses recovered due to the measures taken last year to improve the soundness of the securities portfolio. We plan to speed up the sales of business-oriented stock holdings. Secondly, regarding credit costs. We took preemptive measures for some exposure in the apartment loan portfolio while managing the loan book with focus on quality. In sum, these are the 5 key highlights from the first half.

Now please skip to Page 20. Now I'd like to move on to talk about our business. Responding to the medium- to long-term changes in business environment is the most important point in our business strategy. Let me elaborate.

Page 21 is the page taken from the integrated report included in your package today, presenting our thought process in striving to become the #1 retail banking group.

Please move on to the next page. Page 22 shows our strength and positioning of the main strategies in the current- and medium-term management plan under our overarching value creation business model focusing on SDGs. We aim to evolve to be the next-generation financial services provider that is not bound by the framework of a banking entity by paying close attention to the medium- to long-term changes in business environment as well as the issues and customer challenges that may arise in the future.

The following pages are details on specific strategies. Our strategy is to contribute in building a sustainable society to move forward together with the society as a result of developing a solid profit and financial base as well as achieving growth through innovation regardless of the external environment.

Please turn to Page 23. The current- and medium-term management plans stress to us the importance of building business resiliency against the low interest rate environment. To that end, we've been working on transforming the profit structure. Specifically, we have focused on growing the loan book and recurring fee income while trying to mitigate a decline in the loan yield. The midterm management plan calls for an annual loan book growth of 2%, and so far, we have been able to deliver to a certain extent. More recently, we are increasingly focused on the quality of the assets and the return generated, keeping in mind the possibility of a change in the credit cycle.

We assume the average loan yield to come down by 7 basis per year during the midterm business plan. However, we were able to contain the decline to 5 basis points in the first half, not solely by the change in the business environment but thanks to the internal efforts that we made.

Resona bank's managerial figures show a turnaround of 5 basis points year-on-year improvement on the [indiscernible] new corporate loans made in the first half. On the fee business, we will further accelerate the growth of recurring fee business. We will also continue to expound the business platform such as Group Apps and payment services, tackle new business areas, work on quick monetization schemes as well as facilitate collaboration on service offerings from Resona Group and Kansai Mirai Financial Group.

On Page 24, we show you the progress of cost structure reform. Since the establishment of Resona Group, we have worked on operational reforms. And in that sense, we have already achieved low-cost business model. We are accelerating the reforms through digitalization under the current medium-term management plan as well. As you can see at upper left, the consolidated cost income ratio is about 60% or 62.8%. Resona Bank and Saitama Resona Bank combined stand at around 58% in terms of cost income ratio, which is already in the range of the target level under the midterm business plan. Although Kansai Mirai Financial Group is still in the upper 70% range, the business process and the system integration was completed for Kansai Mirai Bank in October, as I mentioned earlier, and we will pursue cost synergies, working together with Resona Group with integrated efforts.

Bottom half is the trend in personnel and nonpersonnel costs. We continue to reduce expenses while absorbing one-off costs associated with the integration. Upper right is the headcount reduction, which is making faster progress vis-à-vis the midterm plan. But this is not simply about reducing the number of employees. In Japan, the working age population is already declining and anticipating more difficulty in securing talents with declining population. We shifted our management style so that the operation can be managed by fewer people. We will continue to accelerate digitalization to achieve low-cost operation while enhancing the service capabilities.

Despite the incremental costs stemming from extended branch hours with branches opened until 5 as well as with Seven Days Plaza, we have been able to absorb such costs and have achieved the current cost structure. That is a point where I would like to draw your attention.

Please turn to Page 25. This is our omni-channel strategy. I'd like to cover our 3 omni-channel strategies, starting with the digital strategy. We intend to grow the recurring fee business and recurring fee income by leveraging on the Group App. The number of users, usage rate, the multifaceted transactions will be important factors. As you can see on the left, as of the end of October, the number of downloads exceeded 1.6 million. In addition to the outstanding design and user-friendly features, which is simple to use, we have made more than 600 updates since the service launched in February 2018. And our customers continue to highly value our offering. We like to make continuous improvement.

As you can see in the center of the slide, as a result of those efforts, the Group App has already outgrown our Internet banking channel. Upper right, for instance, the multifaceted transactions are steadily expanding. For instance, of an improved debit transaction by customers and our potential customer category doubled compared to before the app was introduced.

If you look at the bottom right, you can see that we are aiming for an annual profit contribution of JPY 10 billion as our immediate goal. Currently, the number of users is increasing faster than planned.

Next page is about our face-to-face channel. The customer needs at the bank branches have changed significantly due to a single society and changing lifestyles. The number of customers coming to the branches on weekdays for services like wire transfer is decreasing, while the need for face-to-face consultation for asset management and inheritance is increasing.

In the branch, we aim for 0 administrative procedures and shift our focus on consulting services. At the same time, we will improve both customer convenience and low-cost operation through flexible branch management, including downsizing and relocation. We increased the number of branches that are open 7 days a week such as Seven Days Plaza by 6 in the first half to a total of 30. These branches are intended to increase the opportunities for touch points with customers who have worked during the weekdays. In addition, the number of branches operated with fewer headcount is steadily increasing, and this will also be rolled out at our Kansai Mirai Bank.

On the right is the concept of the next-generation branch operation system to further reduce the administrative procedures and enhance service capabilities. This will be rolled out in phases at Resona Bank and Saitama Resona Bank from fiscal 2020.

We'd like to achieve various features, including location-free customer service using tablets, self-serving terminals where user experience will be similar to that of the Group Apps and an operational style that eliminates back-office space and allows everyone to face customers.

Advanced consultation needs will be handled by the digital service office or DSO over the TV monitor screen. The system has already been installed in some branches and will be expanded to 45 branches during the current fiscal year.

Please turn to the next page. This is your omni-regional strategy. Through a broad range of collaboration with regional financial institutions, we aim to provide our service to more customers and make new value propositions. We will also build a win-win collaborative relationship with business partners in a wide range of business domain without being bound by the capital relationships. But the upper half of the slide illustrates unique products and services as some examples of what Resona can provide to regional financial institutions as a platform.

Regional financial institutions have high interest in Resona Asset Management's fund wrap and other investment products or a Group App and cashless platforms, among others. As you can see, the collaboration has steadily expanded, but in the first half of the year, we were able to further deepen the relationship.

The bottom half of the slide indicates the expanded service offerings. Our aim is to create new value by collaborating with fintech companies and by going beyond the boundary of the banking industry. Collaboration with start-ups is also expanding.

Now please turn to Page 28. This is about the synergy with Kansai Mirai Financial Group. Mr. Kan will make additional comments later. I wanted to mention that having completed the business process since we made a version of Kansai Mirai Bank, we will accelerate our efforts in realizing the synergies as quickly as possible.

Please turn to Page 29. This is about our omni-advisers strategy. With aging population, the importance of face-to-face capability is increasing. I strongly believe that it is extremely important to develop talent who can put themselves in the shoes of the customers. Nurturing such omni-advisers will be vital as critical piece in differentiating strategy would be human assets.

Specifically, the omni-adviser growth project, which consists of various programs, is being implemented. As you can see on the left, Resona Academy, which opened in July, will start their private banking and corporate banking professional courses with the highest level of skill sets, in addition to their retail banking professional course that has already started. Also through OJT led by the Academy alumnus, we will improve the proposal capabilities on a company-wide basis.

Here at the bottom, you can see the customer-oriented initiatives. As a premise to think in the shoes of the customers, Resona was an early adopter in the industry in abolishing sales targets for financial products and switching to a performance assessment based on AUM growth, driven by medium- to long-term diversified investments. Lower right, you can see that Resona customers' holding period for investment trust is relatively long, improving the effectiveness of our early initiatives.

Please turn to the next page. Customers increasingly value our service. As a reflection, banking entities in Resona Group were ranked first, second and fifth in the Nikkei Veritas retail banking service survey in September this year. Going forward, we'll continue to enforce our principal philosophy of customers' joy is Resona's joy.

From the next page, from Page 31, I would like to go through the key businesses. Page 31 shows the results and FY '19 forecast for the 5 key businesses. Please turn to the next page.

First, let me talk about the asset formation support business. As you can see at the upper left, despite this idea of era of 100-year life expectancy, cash and deposits still account for a high proportion of household financial assets in Japan. Customers are increasingly concerned about how to manage their financial assets over a long time and looking for more solutions to secure sufficient retirement fund. As you can see at the bottom left, under these circumstances, Resona will capitalize on its strength as Japan's largest commercial bank with full trust banking capabilities to respond to customer needs.

As you can see at upper right, during the first half of the year, 10 out of 83 asset management companies achieved growth in investment trust AUM every month. Resona Asset Management was one of those 10 with the third largest increase in AUM. In January next year, we'll consolidate the asset management capabilities to Resona Asset Management. The AUM is expected to go up from roughly JPY 2.6 trillion today to around JPY 17 trillion. Fund wraps, which offer stable performance replicating the bank customers, and the balance has increased to approximately JPY 380 billion in roughly 2 years and 6 month from the product launch.

As you can see at bottom right, iDeCo and NISA, designed to steadily build up the assets over a long period, are also growing nicely.

Please turn to Page 33. Here, I will comment a bit about the characteristics of fund wrap. As you can see on the upper left, we introduced a welcome plan that can be used from JPY 300,000. It only charges a performance fee with a 105% profit locking point. 1/4 of customers have reached this level.

Going to the upper right, more than half of the customers who invest into fund wrap had no investment trust balance previously. Also, there's a feature that 50% of the funds are shifted from deposits, and 30% are inflows from outside. Moving to the lower left. At the end of October, 99% of customers had a positive return on investment.

And as you can see on the lower right, even when the market declines, the fluctuation of fund wrap standard prices is relatively smaller. And you could see that it has good product properties that contributes to medium- to long-term asset formation.

Page 34 talks about the settlement business. On the upper left, the cashless payment ratio in Japan is lower than in other countries, but the government's basic policy aims to double the level by 2025. Looking at the lower left, as there is a cashless payment rebate program underway accompanying the consumption tax hike, the QR code cashless payment rate has tripled and continues to expand rapidly. As you can see on the upper right, with the Resona cashless platform at the core, the company is offering multiple proposals and IT support to corporate customers in accordance with their business processes.

The Resona cashless platform will be introduced at about 11,000 stores, at about 600 clients. Low introduction cost and the ability to handle multiple payment methods with a single terminal is well received, and we are getting good responses from customers.

We plan to expand this to Kansai Mirai Bank in the second half. In addition, the business domain itself will be expanded by actively building B2B platforms and using settlement data.

The lower right shows that personal debit cards continue to expand with more than 1.7 million users. The usage amount has also increased by 1.4x year-on-year. We aim to expand further, including the rollout at Kansai Mirai Bank.

On Page 35. This is an overview of the Resona cashless platform. I won't go through the details, but we will strive to improve customer productivity and convenience in various ways.

Turning to Page 36. Here, we talk about the succession business. The upper left shows that SME owners are aging, and over 50% of them are likely to not have successors in 2025. On the other hand, elderly people with dementia and an increase of scams targeting elderly people have become a social problem. And the bottom left shows that under the circumstances, the number of occasions where Resona's strength of being a retail-focused commercial bank with full line trust capabilities is utilized will continue to increase. As you can see on the upper right, many M&A needs have been confirmed in a survey of our corporate clients. So we have doubled the number of M&A personnel from 2 years ago.

As you can see on the bottom right, we also have a system in place to meet the diverse needs of individual customers. Products such as My Trust and Heart Trust responds to the need to protect customer assets from dementia and fraud, and business has increased significantly.

As a response to spend needs, for example, in fund wrap, which was explained earlier, fund wrap periodic receipt services started in May. A will trust is a product that meets customer needs to succeed assets. Trust transactions are the starting point for multifaceted transactions because they can grasp the customers' asset background and enable various consulting services. In fact, the balance of insurance, investment trusts and fund wrap increases significantly before and after the will trust agreements are concluded.

Turning to Page 37. Here, we talk about the SME business. On the left side, major management issues for SME customers are sales growth, labor shortages and associated capital investment shortages. Towards these management issues, by taking advantage of Japan's largest network, we can provide one-stop commercial and trust bank solutions.

Looking at the upper right, the group-operated business plaza has been expanded to 5 locations in October, with the addition of Kobe and Biwako in Otsu City on top of our locations in Tokyo, Osaka and Saitama, increasing the ability to provide business-matching opportunities.

Excluding the real estate business, CapEx-related loans grew steadily at 2.2% year-on-year. Pensions and real estate solutions are Resona's strength. While 80% of SMEs do not have a pension system, the number of defined contribution pension customers increased by 10% year-on-year.

In real estate, CRE-related earnings increased 1.9x compared to the previous year. In addition, we will continue to provide support for a wide variety of challenges such as support for start-up companies funded by investments, SDGs, consulting and IT through the Resona cashless platform.

Turning to Page 38. Here, we talk about the international business. Regarding the international business, we're covering the entire Asia region and the United States through partnerships with overseas basis. Meticulous support in Japanese are provided to SME customers by appointing expatriates and dispatching personnel to partner banks. In October, Kansai Mirai Bank employees were dispatched to Hanoi to BIDV joint stock commercial bank for investment and development of Vietnam.

Looking at the upper right, as for developments in the first half, investments by Bank of Yokohama and Daido Life in Resona Perdania Bank was completed in July. Business collaboration is progressing, with customers from both companies participating in customer exchange events held by the financial institutions that are part of the capital tie-up. Moreover, in Singapore, Resona Merchant Bank Asia conducted a capital increase.

Please turn to Page 39 where we talk about the individual loan business. Resona's operating franchise is a fertile market for promoting the loan business as households are concentrated and increasing. Looking at the lower left, residential housing loans are characterized by being linked to lifelong multifaceted transactions through the creation of an individual main account.

Looking at the right side, questions may be asked from the viewpoint of profitability, but as shown here, it continues to be a focus area. The first reason why is the advantage in terms of volume enhancement. Resona's unique efforts such as being open on weekdays and holidays and high value-added original products are highly regarded by customers.

Second is multifaceted transactions. The average number of products cross-sold to housing loan customers is 1.7x that of customers who do not have a housing loan with us.

Third is cost advantage. In addition to economies of scale, digitalization is being promoted further. In addition, the subrogation payment ratio is extremely low, and the capital charge is small.

Finally, for the direction of capital policy, please turn to Page 41. Finally, the direction of capital policy, the CET1 ratio, excluding unrealized gain on available-for-sale securities at the end of September, was 10.27%. The current midterm plan target of 9% was achieved ahead of schedule.

On the other hand, taking into account the finalization of Basel 3 and the possibility of economic cycle change that should be envisaged in the future, we acknowledge that capital enhancement will continue to be an issue.

In fiscal year 2019, in addition to continuing to pay a dividend of JPY 21 per share, the company has implemented and completed a JPY 10 billion share repurchase as additional return. As a result, the forecast total return ratio for this term is expected to rise to 36.4%.

Some shares acquired this time may be used as PSU, a performance share unit plan, but at most, that would be less than 10% of the number of shares acquired. And the rest will be canceled at an appropriate timing.

Regarding midterm shareholder returns, we will look into how it should be in the future based on, number one, sustainable earnings levels; and number two, capital adequacy ratio targets; and three, ROE targets.

This concludes my explanation. Thank you for your kind attention. I would like to now invite Mr. Tetsuya Kan, President of Kansai Mirai Financial Group, to speak as well as he is here with us today.

Hello. I am Kan from the Kansai Mirai Financial Group as introduced. I'll mainly talk about Page 28 in the presentation today. But before I go to the slide, I would like to inform you about 2 things that are not on the slide. The first is about a topic that came up earlier. The system of a former Kansai Urban Banking Corporation was successfully integrated to Resona system as of October 15. The process is now completed. Going forward, we will ensure that we deliver services and solutions to the customers in an integrated manner together with Resona.

The second point is also not on the slide. Regarding first half results, net operating profit declined year-on-year due to the decline of top line, mainly deposit and loan net interest income and fee income, mainly investment trust fees, were down. We were not able to offset the decline with net gains on bonds or expenses.

However, against plan, we have been trending positively. When you account for extraordinary gains and losses, credit expenses and debt gains on stocks, we are trending positively year-on-year against plan.

Now moving on to the slide. There is a part that says products and services in the middle of the top half. The details show products and services that are synergy-generating and can nurture our future customer base. For example, will trusts, a state division or corporate business matching are mentioned here. I believe we did a good job on engaging in these initiatives.

One thing in particular that I'd like to note is personnel exchanges that's shown at the top. We have been active in promoting this with the Resona Group, and from both sides, a total of 190 people have been participating.

Human resource development is a key area that will continue to be a focus for us. As a result, you could see some numbers on the top left. This fiscal year, as you can see at the top, we plan to generate JPY 3.8 billion worth of synergy. JPY 1.4 billion or 37% of plan was achieved in the first half. With the system integration now completed, we will strive to catch up and make more progress in the second half. As for integration costs in the row below, obviously, the less the progress, the better. There are some items that have been pushed back to the second half, but overall, integration cost is in line with plan.

Looking out into the second half, please refer to the bottom half of the slide. The part that says income growth and enhanced services is basically talking about us being able to roll out the same services throughout our branches now as the system integration has been completed, for example, carrying forward bank books handling various notifications and so forth. As mentioned earlier, we will also be able to start offering Resona services such as debit cards, fund wrap or even the cashless platform.

We are also in the process of considering the extension of operating hours of our branches to 5 p.m. We would like to reach a conclusion that will enable us to be increasingly proactive in our business. In addition, as you can see on the bottom, we will also work on higher productivity. We will leverage the benefits that the system integration brings about.

Specifically, we will further accelerate integrated management of the group and introduce an area system and converge loans so as to increase the number of salespeople.

Also, as already announced, we will promote branching branches and banking banks that breaks down the walls between banks within our group. This will enable us to increase more salespeople.

As shown in our plan on the left, we plan to cut head office staff by 220 people this fiscal year and allocate 80 people as branch sales staff. Overall, we are expecting a decline of 270 people.

We have went through the integration last year, and the merger took place in April this year, followed by the conclusion of the business process system integration in October. We engaged in these various events with speed. Going forward, we will strive to leverage the advantages we have as a member of the Resona Group that other regional banks do not enjoy: to deliver great services and solutions to the customers.

And with that, I'd like to ask you for your ongoing support and cooperation. Thank you very much.

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