Message from the Group CFO
Financial management principles amid an unprecedented crisis
The spread of the novel coronavirus (COVID–19) has halted the movements of people and goods on a global scale and is having a drastic negative impact on the global economy including severe deterioration of consumer demand. Now, as the world faces this unprecedented crisis, there are strong expectations for financial institutions to respond to the rising financing needs of customers and fulfill our financial intermediary functions to enable a swift recovery for society and the economy.
We expect that the next one to two years will bring a challenging earnings environment for Mizuho as well. Our first objective is to reinforce our defenses and ensure disciplined control of Credit–related Costs and expenses, and I believe it is important to conduct proactive fiscal management that preempts changes that could be on the horizon, just as we recorded additional reserves for possible losses on loans in our fiscal 2019 financial results.
As global markets undergo structural changes due to megatrends including declining birthrate and an aging population, digitalization, and globalization, we must implement structural reforms at Mizuho giving additional consideration to the impact of COVID–19. We will steadily advance the transition to the next generation of financial services through measures including revising our business portfolio and reallocating corporate resources.
Overview of fiscal 2019
In fiscal 2019, as the result of strong performance in both customer and markets divisions, we achieved Consolidated Net Business Profits (including Net Gains (Losses) related to ETFs1 and others) of JPY 672.5 billion, for a year–on–year increase of JPY 264.2 billion. Even after adjusting for losses recorded due to restructuring our securities portfolio last fiscal year, this still represents an increase of JPY 69.4 billion.
We recorded JPY 171.7 billion in Credit–related Costs including JPY 80.4 billion in additional reserves for possible losses on loans from a forward–looking perspective in light of the impact that COVID–19 may have on our finances and based on the future outlook of certain loans. As for Net Gains (Losses) related to Stocks (not including Net Gains (Losses) related to ETFs1 and others), due to a drop in stock prices we posted JPY 39.4 billion in unrealized losses on securities (with readily determinable fair values), but recorded a JPY 126.5 billion gain mainly due to steady progress on reducing cross–shareholdings.
As a result of the above, we achieved Profit Attributable to Owners of Parent of JPY 448.5 billion, reaching 95% of our initial fiscal year estimate of JPY 470 billion, an increase of JPY 352 billion compared to last fiscal year when we recorded impairment losses on fixed assets.
We are also making good progress on the financial targets and other objectives outlined in our 5–Year Business Plan, which we launched in fiscal 2019. As of the end of fiscal 2019 our Common Equity Tier 1 (CET1) Capital Ratio was 8.8%2 on a Basel III fully effective basis, and is increasing steadily toward our goal of the lower end of the 9 – 10% range. Also, regarding the reduction of cross–shareholdings, through diplomatic discussions with clients we successfully reduced JPY 147.8 billion in cross–shareholdings compared to the end of fiscal 2018, marking 49% progress on our target of reducing JPY 300 billion in cross–shareholdings over the three years to fiscal 2021. Additionally, as a finance structure reform initiative we are reducing the scale of our workforce, the number of branches and offices in Japan, as well as expenses, and currently each of these plans remain unaffected by the COVID–19 pandemic, with progress on workforce and expense reduction in particular exceeding the fiscal 2019 targets.
By reallocating the corporate resources secured through these initiatives to new business domains, business outside Japan, transaction banking, and other focus areas, we aim to improve risk & return and cost & return and accumulate stable revenue streams as the foundation for steady dividend payouts.
Net Gains (Losses) related to ETFs (aggregate for Mizuho Bank and Mizuho Trust & Banking) ＋ Net Gains on Operating Investment Securities (Mizuho Securities consolidated).
Excluding Unrealized Gains (Losses) on Other Securities
Progress on the 5–Year Business Plan
|Consolidated ROE1||5.8%||7 – 8%|
|Consolidated Net Business Profits2||JPY 672.5 billion||approx. JPY 900 billion|
|March 31, 2020||–|
|CET1 Capital Ratio3||8.8%||Lower end of the 9 – 10% range (target)|
|Reduction of cross–shareholdings4||Reduction of JPY 147.8 billion||Reduction of JPY 300 billion
(end–FY2018 to end–FY2021)
- Excluding Net Unrealized Gains (Losses) on Other Securities
- Including Net Gains (Losses) related to ETFs and others
- Basel III fully effective basis. Excluding Net Unrealized Gains (Losses) on Other Securities
- Acquisition cost basis
|Consolidated Net Business Profits1||JPY 672.5 billion||JPY 570 billion|
|Credit–related Costs||－ JPY 171.7 billion||－ JPY 200 billion|
|Net Gains (Losses) related to Stocks2||JPY 126.5 billion||JPY 80 billion|
|Ordinary Profits||JPY 637.8 billion||JPY 400 billion|
|Net Income Attributable to Mizuho Financial Group3||JPY 448.5 billion||JPY 320 billion|
- Including Net Gains (Losses) related to ETFs and others
- Excluding Net Gains (Losses) related to ETFs and others
- Profit Attributable to Owners of Parent
Outlook for fiscal 2020
At present we are unable to accurately predict how widespread the impact of COVID–19 will be or for how long it will pose a serious threat. With this in mind, we have formed our fiscal 2020 business plan based on a scenario which assumes that the economy will bottom out in the first half of fiscal 2020, and enter a gradual recovery lasting until the end of 2021.
The negative impact of the pandemic will be particularly severe this fiscal year, and we estimate earnings of JPY 570 billion in Consolidated Net Business Profits (including Net Gains (Losses) related to ETFs and others*), a reduction of approximately JPY 100 billion year–on–year due to the impact of interest rate cuts outside of Japan and a reduction in retail investment business, among other factors. We expect that the impact in terms of Credit–related Costs will be JPY 200 billion, and as a result, Profit Attributable to Owners of Parent is anticipated to fall about JPY 130 billion year–on–year to JPY 320 billion.
The total amount of Credit–related Costs stemming from the COVID–19 pandemic is estimated at JPY 335 billion, with JPY 135 billion recorded in fiscal 2019 and an additional JPY 200 billion estimated for fiscal 2020. The JPY 135 billion recorded in fiscal 2019 includes approximately JPY 55 billion in reserves for possible losses on loans which were recorded as a preventative measure within the scope of existing rules mainly due to concerns regarding the deterioration of primarily Japanese clients' financial performance, plus about JPY 80 billion in reserves for possible losses on loans recorded from a forward–looking perspective based on the future outlook of certain credit exposures.
The estimated total of JPY 335 billion in Credit–related Costs is equivalent to only about 60% of those recorded in fiscal 2008, when we recorded Credit–related Costs of JPY 536.7 billion at the peak of the financial crisis. As mentioned in the message from the Group CEO, the reason for this is that compared to the 2008 crisis which was financial in origin and had a severe downward effect on the real economy, the soundness of the financial system has been maintained throughout the current pandemic and the smooth provision of financing is underpinning the real economy, plus, the soundness of Mizuho's credit portfolio has been greatly improved since the financial crisis.
Here, I would like to explain the current status of our credit portfolio. For loans to corporate clients, risk tolerance has improved considerably due to clients accumulating capital and liquidity. Additionally, our structured products portfolio, which sustained a large loss during the financial crisis, is now much more robust as we have revised management policy and strengthened our risk management framework. For instance, the ratio of loans which are equivalent to investment grade for real estate– and resource sector–related lending is high at about 80% for each portfolio, and we have greatly reduced the underwritten amount of LBOs compared to the time of the 2008 financial crisis.
Also, regarding securitization products, we are significantly improving the soundness of our portfolio through measures including limiting securitization products to those for which risk can be controlled to an adequate degree.
* Net Gains related to ETFs (aggregate for Mizuho Bank and Mizuho Trust & Banking) ＋ Net Gains on Operating Investment Securities (Mizuho Securities consolidated).
Total for corporate clients
Based on exposure according to internal rating
For oil and gas companies which are most vulnerable to impact from a drop in oil prices
Loans with residual value risk
External ratings from S&P
Capital management policy
Cash dividends per share of common stock were JPY 7.5 for fiscal 2019, matching our estimate at the beginning of the fiscal year. Despite falling just short of our estimate for Net Income Attributable to Mizuho Financial Group for fiscal 2019, based on our shareholder return policy of maintaining the current level of dividends for the time being while aiming to strengthen our capital base further to enhance returns to shareholders at an early stage, we set the dividend amount in anticipation of maintaining a certain level of profits, despite our significantly lower earnings estimates for fiscal 2020. We took into consideration that if not for the forward–looking reserves for losses on loans recorded in light of the COVID–19 pandemic we would have achieved our earnings plan, and the fact that we exceeded our CET1 capital ratio target for the end of fiscal 2019, allowing us to start fiscal 2020 with a buffer.
Dividends for fiscal 2020 will be maintained at JPY 7.5 per share of common stock, unchanged from fiscal 2019. We anticipate that our CET1 capital ratio will fall temporarily as risk–weighted assets increase due to increased lending as we continue to fulfill our financial intermediary functions amid the COVID–19 pandemic, and due to the falling credit ratings of clients, but this will not have any impact on our shareholder return policy. We will maintain the current level of dividends while accumulating capital and aiming to enhance returns to shareholders at an early stage.
Outlook for Common Equity Tier 1 (CET1) Capital Ratio (Basel III fully effective basis)
In April of this year, we established a Tax Policy, which sets forth a group–wide, uniform approach to tax matters to ensure the appropriate fulfillment of tax liabilities, which is one of our corporate social responsibilities, and to sustainably increase corporate value by establishing and enhancing our credibility and reputation in the eyes of shareholders, investors, and all customers across the globe.
Specifically, in addition to complying rigorously with the tax laws of applicable countries and international tax rules such as the Action Plan on Base Erosion and Profit Shifting*, we endeavor to manage our tax costs appropriately by utilizing tax incentives and other systems. We seek to build good relationships with tax authorities through constructive dialogue. Furthermore, we will take thorough internal measures to ensure we do not provide customers with products and services where the sole aim is to achieve tax avoidance and income shifting which are against the spirit of tax laws.
*Base Erosion and Profit Shifting (BEPS): Tax planning strategies utilized by multinational companies to leverage gaps in national and international tax rules and artificially shift their profits to avoid taxation.
|Interim cash dividend (estimate)||JPY 3.75|
|Fiscal year–end cash dividend (estimate)*||JPY 3.75|
|Fiscal year dividend (estimate)||JPY 7.5|
※The fiscal year–end cash dividend amount shown here does not take into account the share consolidation planned for October 1, 2020. This amount will be JPY 37.5 following the share consolidation.
Enhancing engagement with shareholders and investors
In recent years, the relationship between companies and their shareholders and investors is changing, with the interests of shareholders and investors expanding to include not only business strategy and capital management policy, but also the sustainable improvement of corporate value from a broad range of perspectives such as environmental sustainability. In light of this, we at Mizuho are making efforts to enhance engagement as well as our disclosure.
As one part of these efforts, at the Ordinary General Meeting of Shareholders held in June of this year, we resolved to conduct a share consolidation as well as amend the Articles of Incorporation regarding organizations that decide dividends from surplus. This share consolidation will enable us to set the amount of dividend per share more precisely, which will also enhance the flexibility of dividends and our capital management, and furthermore aims to enhance constructive dialogue with shareholders and investors so that we can gather opinions with regard to dividend decisions.
Also, from the perspective of enhancing engagement opportunities with investors, in addition to holding presentations on our financial results for institutional investors, IR Day, which is a briefing about the business strategies of each in–house company, and IR Select, which is an event covering specific strategic topics, we have also continued holding presentations for individual investors via online video linkup since 2015.
We will continue striving to enhance our disclosures while proactively engaging with shareholders and investors.
Based on feedback from institutional investors and analysts, we are working to enhance disclosure of information including in–house company data for financial results presentations and the impact of COVID–19.
We have also disclosed information on our strengthening of sustainability initiatives, which are of increasing interest to investors.
We have also created a "Financials and Presentations" section on our website to make it easier for shareholders and investors to access a library of our financial results and IR materials.
Initiatives pertaining to the General Meeting of Shareholders
As the General Meeting of Shareholders is an important engagement opportunity to hold dialogue directly with shareholders, we at Mizuho are driving various related initiatives.
In particular, in addition to enhancing communications including providing the convocation notice earlier and providing a video feed of the meeting including the question and answer session, we are also implementing measures such as enabling the exercise of voting rights via mobile devices. Also, due to the COVID–19 pandemic this year we implemented an online video feed in addition to the on–site meeting.
The year in engagement