Mitsubishi UFJ Financial Group - Earnings Call - Q4 2025

Transcript

Moderator (participant)

Thank you for waiting. We will now begin the online conference call on financial highlights for year ended March 31, 2025, of Mitsubishi UFJ Financial Group. I am Okamoto from Investor Relations Office, Financial Planning Division, and will serve as the moderator today. Jun Togawa, Senior Managing Corporate Executive and Group CFO, will give a 15-minute presentation on the financial highlights for FY24, followed by a Q&A session. The entire session is scheduled to be about 50 minutes. Before we begin, let me read the disclaimer. In this presentation, we may state forward-looking statements based on current expectations, all of which are subject to risks and uncertainties. Please be aware that actual results may differ materially from these forecasts. We will now begin the financial results briefing. Mr. Togawa, please begin.

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

Good evening. I am Togawa, Group CFO of MUFG. May I thank all the investors, shareholders, and rating agencies for joining MUFG's online conference call today, despite the late hour. Please look at the material titled "Financial Highlights Under JGAP for the Fiscal Year Ended March 31, 2025." First, let me explain our FY24 financial results, followed by FY25 performance targets, shareholder return measures, and the status of administrative actions. Let me start from the income statement summary on page 9. For FY24, we included 15 months' worth of profits for Krungsri in Thailand due to the change in the equity method accounting date. The impact of this change for Krungsri is summarized on page 14, so please take a look at it later. FX impact is stronger yen against the dollar compared to the end of FY23, but weaker yen in our U.S.

Subsidiary with changes in the financial results closing date and weaker yen against the Thai baht. Weaker yen had a major impact on gross profits and expenses, where Krungsri accounts for a large portion, and stronger yen had impact on net income, where Morgan Stanley accounts for a large part. As a result, the FX impact on net income is almost flat this time. Line 1 in the left table, gross profits increased by JPY 86.7 billion year-on-year. Line 2 and below shows the breakdown of gross profits. Both net interest income and fee income increased steadily thanks to the impact of the increased net interest income with improved margins by capturing the impact of yen interest rate hike, growth of fee businesses in Japan and overseas, such as Solutions Wealth Management, AMIF Business, as well as Krungsri impact mentioned earlier, and M&A impact, mainly in Asia.

On the other hand, we accounted net losses on debt securities of around JPY 780 billion realized through rebalance of the bond portfolio, which leveraged the one-time gain on sale of equity holdings and the reversal of large credit costs. Therefore, total gross profits increase was marginal. Next, line 6, G&A expenses increased by JPY 339.3 billion year-on-year due to Krungsri impact, the impact of overseas acquisitions, as well as investments for the growth and effects of inflation. Expense ratio increased significantly as gross profits decreased through the rebalance of bond portfolio. However, as shown in 2 on the right and footnote 3, excluding this impact, it improved year-on-year thanks to successful expense control combined with the increase in gross profit. As a result, line 8, net operating profits was JPY 1 trillion 591.1 billion, down by JPY 252.5 billion.

Excluding the impact of the bond portfolio rebalance, as I explained earlier, it increased significantly by JPY 327.4 billion year-on-year, as shown in line 9. Next, line 10, credit costs was down significantly by JPY 389.1 billion year-on-year. I will explain this in a separate slide later. Line 11, net gains on equity securities increased significantly thanks to the progress in the sale of equity holdings. As a result, line 17, profits attributable to owners of parent was JPY 1 trillion 862.9 billion, a record high for two consecutive years. As shown on line 18, excluding the impact of the change in the closing period for Morgan Stanley in FY 2023 and Krungsri in FY 2024, profits increased by JPY 434.1 billion. Pages 10-13 show the performance by business group.

I will not go into detail, but page 13, global markets profit decreased due to recording of losses from bond portfolio rebalance. While in customer segments, all business groups steadily increased their net operating profits thanks to increases in net interest income from loans and deposits and fee income. On the other hand, net income decreased due to global markets and retail and digital business group with MUFG NICOS system impairment and the increase in ACOM's provision for loss on interest repayment and GCB and AMIS with the goodwill impairment of investees. However, these are all one-off events that will lead to the accumulation of future profits. Please turn to page 15 on balance sheet summary. The diagram on the left shows the overview of our balance sheet. Loans on the upper left increased by approximately JPY 4.5 trillion from the end of FY2023.

This is due to an increase in government loans in Japan, but it is a transfer from short-term JGB for ALM purpose, as I mentioned in the first half results. The balance of overseas loans decreased thanks to credit management focusing on profitability. Page 16 shows the status of domestic loans. The left graph, changes in the period and balance, shows that large corporates decreased by JPY 1 trillion, while SMEs increased by JPY 1 trillion compared to the end of March 2024. However, due to the definition of the graph, loans to SPCs such as LBOs and real estate non-recourse loans are counted as SMEs, so by market, both the large corporates and SMEs markets remained flat as profit management continues to be tightened. The graph on the bottom right shows the trend in domestic corporate lending spreads.

The red line for large corporates is currently flat due to the timing of repayments for large LBO transactions, but the uptrend continues, along with the orange line for SMEs, thanks to the success of profitability improvement measures. Next, page 17 shows the status of overseas loans. The bottom right graph shows the trend in overseas lending spreads. While the balance is decreasing, lending spreads continue to expand as profitability improvement efforts have been successful, just like in Japan. Please turn to page 18 on asset quality. Non-performing loan balance shown in the left bar graph decreased in Europe and the U.S. following a significant increase at the end of March last year. As a result, NPL ratio, the line graph, also declined. The bottom right graph shows the breakdown of year-over-year changes in total credit costs.

On the bank non-consolidated basis, there was a large increase in provisions last year, mainly overseas, but credit costs decreased significantly this year due to reversal of large credit costs. On the other hand, credit costs increased at overseas subsidiaries due to the impact of business expansion of subsidiaries acquired in the Asian partner bank domain and the economic slowdown in countries around the world. However, this is within our expectations. In addition, we recorded the impact of recent trade policies in major countries on credit costs to a certain degree in our FY 2024 financial results based on reasonable estimates at this time.

Please turn to page 19. The status of investment securities such as equities and government bonds. Left top table shows unrealized gains and losses.

The valuation gain on domestic equity securities in the third row decreased by JPY 1.3 trillion compared to the end of March 2024 due to progress in reducing equity holdings and year-on-year decline in stock prices. On the other hand, the valuation loss on foreign bonds shown in the eighth row has been largely eliminated due to the rebalancing of the bond portfolio, as explained earlier, although some valuation losses related to bonds subject to regulations on collateral remain. Additionally, as shown on the lower left bottom graph, the valuation has turned positive at the end of March 2025 on a net basis after considering unrealized gains and losses from hedging positions. There are no valuation losses when considering hedging positions at the end of April either on an approximate basis.

Regarding domestic bonds shown in the upper graph, the estimated unrealized valuation loss after reflecting hedging positions at the end of April remains at JPY 0.2 trillion. Regarding the reduction of equity holdings shown on the right, we sold JPY 276 billion of equity at acquisition cost basis in FY2024, which is 40% progress against the target of JPY 700 billion. The agreed amount to be sold also exceeds 70% against the target. Please proceed to page 21 for capital adequacy. The CET1 ratio based on the finalized and fully implemented Basel III and excluding net unrealized gains on AFS securities was 10.8%, primarily due to the larger foreign currency translation reserve due to yen depreciation recognition delay.

While we should aim to be within the target range, given the current dollar-yen exchange rate, the excess portion is already diminished, and we expect a return to the target range by the end of FY2025, considering the increase in risk-weighted assets. The capital allocation results are shown in the lower right. We will continue to manage capital with a focus on balancing shareholder returns and growth investment. Next, FY2025 financial targets. Please kindly turn back to page 3. On the left side, profits attributable to owners of parent, FY2025 target is to reach JPY 2 trillion, the first time since the establishment of MUFG, despite the high level of uncertainty in the current business environment with JPX basis ROE target of 10%.

As shown in the chart on the lower left, although there will be some impact from the one-off gains and losses recorded in FY2024, continued profit growth in the customer segment, and the improvement in accrual interest income resulting from the rebalance of bond portfolio were the main drivers of profit growth. The assumptions for the business environment are that trade negotiations between major countries will progress to a certain extent and that the global supply chain will not be significantly disrupted. Please refer to the financial indicators shown below the table. If these assumptions change significantly, we will consider review of our financial targets during the fiscal year. The right side shows shareholder returns.

We will continue to aim for the dividend payout ratio of approximately 40% while considering the optimal balance between capital soundness and growth investment and strive for a sustainable increase in dividends per share based on profit growth. For FY2025, the annual dividend forecast is JPY 70 per share, an increase of JPY 6 from the previous fiscal year. Additionally, we have resolved share repurchase of up to JPY 250 billion in the first half of the fiscal year today. Please turn to page 4 for the impact of the new U.S. trade policy and our medium-term financial targets. As you are aware, the global economy is facing increased uncertainty due to changes in the trade policies of major countries.

We have established a cross-functional project team to follow up on the potential negative impact of these changes on various aspects of our business, including the macroeconomy, financial markets, and on our customers. Under these circumstances, it is currently difficult to assess the FY 2026 business environment and impact on our business performance. Therefore, we have decided to reassess and announce our financial targets for FY 2026 after thoroughly assessing the environment. However, if the changes in the business environment remain within the current assumptions outlined here, we aim to achieve sustainable profit growth in FY 2026, exceeding FY 2025 levels with net income over JPY 2 trillion and ROE based on JPX basis of over 10%. For now, we will focus on the FY 2025 results, continue to place emphasis on ROE, and leverage our group's comprehensive capabilities and resilient and diverse business portfolio to respond flexibly to the changes in the environment.

Our CEO, Mr. Kamezawa, will provide more details at the investor briefing on the 19th. Please proceed to page 5. Despite the current uncertain environment, our policy of increasing ROE over the medium to long term remains unchanged, as shown here. Since achieving the previous target of 9-10% in FY2024, we have adopted the JPX definition and set the new target as approximately 12%. This is almost on par with the major financial institutions in Europe and the U.S., and after achieving this target, our ultimate goal is to become a global top tier in terms of profitability and corporate value. Lastly, page 8. In FY2024, we caused concern and inconvenience to our customers and stakeholders due to the business improvement orders related to inappropriate collaboration between banking and securities operations, as well as an incident involving the theft of customer assets from the safe deposit box.

We once again sincerely apologize for this. In addition to thoroughly implementing measures to prevent recurrence, we will continue to make relentless efforts to enhance governance, striving to restore the trust and confidence of our customers and society. MUFG is committed to empowering a brighter future, even amidst the heightened uncertainty of recent times. We look forward to your continued understanding and support. This concludes my presentation.

Moderator (participant)

Let me introduce the first questioner, Mr. Takamiya of Nomura Securities. Please go ahead.

Ken Takamiya (Analyst)

I am Takamiya of Nomura Securities. I have one question. Please share with us the internal discussions leading up to the decision on the amount of share buyback, the key discussion points, and the message you want to convey as management. The JPY 250 billion this time appears to be sizable under the current uncertain environment.

The amount of share buyback over the past two years was around JPY 400 billion a year. Half of that is JPY 200 billion, so it seems like a considerable amount this time given the uncertainty. On the other hand, considering that the total payout ratio is within the conventional range of 50-60% for the conservative guidance of JPY 2 trillion, I think this amount of buyback is reasonable even with a conservative assumption and the irregularities of FX impact, given that your CET1 ratio is above the target range. I would like to ask you about the internal discussions that led to the decision on the amount of share buyback, the points of discussion, and the message that the management wants to convey to stock market participants in deciding this amount of share repurchase at this timing. Thank you.

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

Thank you very much for the question.

First of all, before the trade policy issue arose at the beginning of April, we had said that we would aim for profits attributable to owners of parent of around JPY 2 trillion in FY 2025 and announced that our financial target for the final year of the MTDP is to exceed FY 2025, although the amount was not quantified. In that sense, the underlying premise was that the amount of buyback should be commensurate with the higher profit. On the other hand, as the uncertainty in the world increased, we debated internally whether the full year amount should remain unchanged at JPY 400 billion or increase in line with profit growth.

Since we need to assess and ascertain this uncertainty, we cannot commit to a full year amount at this time but have decided to increase the amount to JPY 250 billion, up from JPY 200 billion, which is JPY 400 billion divided by 2. If JPY 250 billion can be repurchased in the first and second half of FY2025, it would mean that total payout ratio for JPY 2 trillion net income is comparable to the previous levels and can also expect to raise EPS by around 2%. That is why we have decided on JPY 250 billion.

Ken Takamiya (Analyst)

Understood. Thank you very much.

Moderator (participant)

Thank you very much. Next, BofA Securities, Nakamura-san, please.

Shinichiro Nakamura (Research Analyst)

Thank you. I have two questions. First is on how the guidance was issued.

The MUFG that I knew would have issued a conservative guidance like the other mega banks, reflecting the impact from the trade policies on the business impact. SMBC says bottom line impact JPY 100 billion and Mizuho JPY 110 billion. Of course, you did provide FX and Nikkei average assumptions but did not provide the impact on financial performance. Why did you not? What changed from the traditionally conservative MUFG approach? Also, if you were to provide guidance on the business impact, like the other mega banks, such as credit cost and slower loan growth, how much of a downside risk do you think exists? That is my first question. My second question, and it is fine if you do not have an answer today, is on the mid to long-term ROE target of 12%. Under what kind of conditions will we achieve this mid to long-term 12% ROE target?

For example, interest rate, dollar-yen exchange rate, and how low gains from equity sales would be at that time, and overall timeline, and so forth. You may not be able to provide such details now, but I would appreciate some color on this topic.

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

Thank you very much for the question. Regarding the business impact, frankly, we think that there is a possibility of both upside and downside impact. If that trade policy impact is under the expected environment outlined on page 3, and we have also provided financial indicators for our annual guidance, we assess that there will be a certain level of impact regarding interest rate, FX, and stock price leading to interest income reduction. However, for the business impact, we drew no conclusions.

In that sense, it is a different approach, as what Kamezawa-san was looking for was the most likely and also aggressive plan. If these assumptions completely change, then we will consider whether the guidance needs to be revised. On the mid to long-term target of ROE 12%, we may have mentioned this at the interim results briefing, but we have been discussing at length the mid to long-term ROE target when there is no contribution from the sale of equity holdings. In this discussion, compared to the group of U.S. banks with the very high ROE and PBR, there is a gap in the absolute value of interest rate in our mother markets. While on the other hand, we are more leveraged comparatively, so considering the positive and negative factors, we arrived at 12% as the mid to long-term target level to pursue.

Now, in order to achieve ROE of 12%, we would need to change our risk appetite, which means that we would probably have to go beyond the current CET1 range of 9.5-10.5%. During this medium-term business plan, we will maintain this 9.5-10.5% range. Now, in this beginning of the fiscal year, with the lingering issue of uncertainty, we would like to be above the target range. Thank you very much. The management does understand the expectations of the market and have discussed and produced guidance that is aggressive to some extent. I look forward to the company's performance. Thank you.

Moderator (participant)

Next, Mizuho Securities. Mr. Matsuno, please.

Maoki Matsuno (Senior Equity Analyst)

This is Matsuno from Mizuho Securities. Thank you very much for today. I have two questions. First question is on capital on page 21.

Your CET1 ratio was 10.8% at the end of March, which is above the target range. I think you also assume yen to appreciate. Please explain your view on 10.8% and the FX sensitivity of the current CET1 ratio. This is my first question. My second question is about the background behind your decision to increase the credit cost guidance by JPY 241.3 billion to JPY 350 billion in your targets for FY2025. Is this a conservative level taking into account the impact of trade policy negotiations? Could you elaborate on your thinking on the credit cost of JPY 350 billion?

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

As mentioned earlier, yen was quite weak, 158 yen against the dollar at the end of December 2024.

As yen appreciated toward the end of March, CET1 ratio is already being pushed down by about 35 basis points due to the recognition delay of foreign currency translation reserve. Looking at the current dollar-yen rate, this factor is now gone, so this was the biggest impact. So far, one-yen depreciation has had the effect of pushing up the CET1 ratio by one to two basis points. As you have pointed out in the past, we recognize FX impact on CET1 ratio as an issue to be addressed. We started some hedging this month, which we wanted to do in FY2023. We believe we can reduce volatility going forward. To your second question, the average credit cost after the acquisition of Krungsri and Bank Danamon was about JPY 320 billion.

On the other hand, in FY2023, excluding the reversal of large credit costs, the actual amount was less than JPY 300 billion. Therefore, we forecasted JPY 350 billion, taking into account last year's actuals, the past average level, and the reversal of large credit costs and provisions, as well as the impact of trade policy. However, we think it may fluctuate if uncertainties increase and the environment changes significantly.

Maoki Matsuno (Senior Equity Analyst)

Thank you very much.

Thank you. Next, JPMorgan Yano-san, please.

Takahiro Yano (Equity Research Analyst)

Thank you. This is Yano from JPMorgan. I also have two questions. My first question is regarding investment securities, treasury business. As shown on slide 20, from the end of Q3, you have increased the balance of JGBs over 10 years. Since April, there have been significant increases in interest rates 10 years and above, like 30 years.

How has this impacted Q1 results or FY2025 full year results for treasury operations? I'd like to know if you have any thoughts regarding negative implications from the rise in long-term interest rates. My second question, and this is from the media reporting, as your competitor has issued a press release regarding India's Yes Bank, for MUFG, there have been reports on some negotiation with the same Indian company, I presume, a year ago, as well as currently. I'd like to ask how far the discussions progressed and what prevented the deal from happening. If you could kindly give some color on this topic. Thank you.

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

Thank you very much. For your first question, last fiscal year, we rebalanced our bond portfolio by JPY 780 billion and almost completely eliminated our negative carry positions. This alone boosts our treasury interest income by JPY 100 billion.

That is the first point. Now, while we do see future rate hikes in the future, and we have been increasing the balance of long-term JGBs, there is a lack of visibility when it comes to interest rates. We are taking a very cautious approach in increasing our balance. At the minimum, I am factoring in the growth in interest income of JPY 100 billion from the rebalancing of our bond portfolio. Now, on your second question, India, while we have made various studies, the local regulations do pose difficulties, and we are not moving ahead with any negotiations at this time.

Takahiro Yano (Equity Research Analyst)

Thank you very much.

Moderator (participant)

We still have some time left, but there seems to be no further questions. We would like to close the Q&A session here. Lastly, Togawa-san, please make closing remarks.

Jun Togawa (Senior Managing Corporate Executive and Group CFO)

Thank you very much for your questions and comments.

Today, we talked about the details of the financial results for March 25. On the 19th, at the investor briefing, our President, Kamezawa, will share more details on his thinking and views on the current environment. We look forward to your continued support and understanding. Once again, thank you very much.

Moderator (participant)

This concludes MUFG online conference on financial results for the fiscal year ended March 31st, 2025. Thank you very much for your participation.