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An Interview with Naoaki Chisaka of Mizuho Financial Group

An Interview with Naoaki Chisaka of Mizuho Financial Group

Michael Makdad: Hi, I'm Mike Makdad from Morningstar equity research. I'm here today with Naoaki Chisaka of Mizuho Financial Group. Can I ask you to just very basically describe me Mizuho, the Japanese bank, but also how it's positioned in the market or how it's maybe different than some of its competitors or similar to its competitors, just basically its market position?

Naoaki Chisaka: Thank you for having me today. So, just to briefly introduce what Mizuho is, we are one of the so called three Japanese megabanks along with other two peers. And horizontally, on a legal entity basis, our firm has a banking entity, a trust banking entity, securities entity and asset management entity as the core legal entities. And in addition to that we are cutting our firm in a line of business kind of way vertically and this is consisted of five client related in-house companies. Number one is RBC, retail banking, this is domestically Japanese; CIC, this is large corporate and financial institutions for domestic Japan; GCC, global corporate business; GMC market and treasury and sales and trading and AMC associated with asset management business.

And in addition to that, we have the supporting functions such as products as well as research and consulting which serves for all the five client-related in-house companies. Total asset size is about 200 trillion Japanese yen. It is roughly about $2 trillion. And we basically have – we currently set the capital target on Basel IV, so-called Basel IV CET1 ratio basis. We're aiming to have around the lower part of 9% as a mid-term target. We currently have 8.8% excluding the OCI to be conservative.

Makdad: You haven't done much in share buybacks. I mean, I think on the capital side, you've prioritized keeping that dividend, but is it possible on the upside, if your earnings – the earnings, you go well as we come out of this corona that you would do a dividend. Or would you think rather to try to see if you could even go above 75 yen per share dividend? So, kind of on the downside, what would it take for a cut? And on the upside, would you prioritize buyback first or would you really focus mostly on dividends?

Chisaka: So, let me start with the basic plan. So, currently, as I have mentioned at the very beginning, we are aiming about lower end of 9% to 10% range of Common Equity Tier 1 capital excluding the OCI on a fully diluted basis. So, prior to meeting that target, I think our main strategy is to be very stable in our dividend payout. So, in order to doing so, even actually, we, sort of like, experience a loss for one year, I think it is unlikely that we will decide to cut the dividend at that point. It is rather much more about how we will be able to obtain sustainable profit in the two, three-year kind of a timeframe rather than one-year one-time loss or something like that.

So, that being said, I think until we meet the capital target or until we are quite confident that we will be able to move into the lower end of 9% to 10% range, I think we will basically continue our current policy. But after going into that area which we named it as a capital utilization phase, after we move into that period, I think whether we choose additional dividends or buybacks will depend on the stock price at that point. So, I think it is very difficult for us to assume which way we are going to do, but obviously we will seriously think about additional capital return to the market.

Makdad: Then the next question is somewhat related and I think it's somewhat on track or it's set, but many foreign investors as well are often looking at the Japanese banks historically have had a lot of Japanese equity holdings on their balance sheet, kind of, cross shareholdings of corporates. That has been steadily decreasing for all three megabanks for a decade or so. And I think Mizuho has sold off – you may have started historically even with slightly more than some of your other competitors, but you've really reduced that and continue to reduce that number. But there are certain equity holdings that are very strategic or very tricky to sell and kind of how big they are. And then, also, right now I think you have about 1.4 trillion or so, I mean, maybe a little bit less as you continue to sell, in unrealized gains. But how much of these 1.3 million or 1.4 trillion yen of unrealized gains on equities do you think you can realize in the next 5 or 10 years? If we assume – I mean, it obviously depends on stock prices. But if we just assume stock prices were the same as now, how much of the unrealized gains do you think you can realize and turn it into real capital?

Chisaka: Roughly speaking, the amount of unrealized gains is roughly the same to the amount of acquisition cost basis. It's 1.2 versus 1.4, so slightly larger on the unrealized gain part. But roughly saying, it's 1 by 1. So, basically, the amount we sell will be we'll realize a profit. That actually is the basic thing we are currently seeing.

Going back to your first question, I think it is fair to say that it is unrealistic to assume that we go down to zero in terms of our cross shareholdings in the short-term time period. We currently have set the target of reducing 300 billion yen by March '22 as an initial target. But obviously, we are not thinking of stopping there. We would like to accelerate the process. We would like to further reduce the stock portfolio. But that will depend on how our negotiation with our client goes. But on top of that with regards to some clients, you know, looking at the client from the total profit base, some clients are performing very well even considering that 250 basis point risk weight for those stock portfolios. So, I think from the profitability point of view also, I think it is fair to say that not all stocks are going to be reduced from our portfolio.

Makdad: I wanted to move on to ESG or governance. Among the three Japanese megabanks Mizuho was the first – I mean, now all of the banks have done this, but Mizuho was the first to adopt the company with committee system, and I think generally you've been somewhat ahead in terms of moving to better forms or maybe better – basically strengthening your governance. And actually, Morningstar, our Sustainalytics business, also we – one of the things it's doing now with ESG is trying to rate all of the companies and stocks in terms of ESG risk. And actually, among the three Japanese megabanks Sustainalytics gives medium risk rating to your two competitors Mitsubishi UFJ and Sumitomo Mitsui. But actually, Mizuho's ESG risk Sustainalytics has rated as low risk. So, actually, it's a good point. But my question is, do you think ESG can become a point of differentiation for Mizuho? Investors are looking for dividends, but they're also – now we've seen with ESG that investors are looking for dividends, but they're also looking for other things. Do you think there's a potential to make this a kind of another point of attraction for Mizuho shares?

Chisaka: Yes, definitely, yes would be the answer from myself. And from the corporate governance point of view, we have tried to be the frontrunner other Japanese financial institutions. And as you have mentioned, in the past, we have moved onto much more westernize kind of a corporate governance structure, and I believe that is working quite well. For instance, the appointment of the CEO is now made by external directors, as a group of external directors. I think this is quite sort of like advanced as a Japanese corporation, especially as a Japanese financial institution. So, corporate governance basically is going to be a core thing.

And in addition to that, I think sustainability also would be a very important thing for us. For instance, we have set various measures in order to achieve a sustainability kind of target. And one of the most representative one will be our target to reduce outstanding credit balance for coal-fired power generation facilities to zero balance by fiscal '50. Although it seems very long, we would like to reduce it to 50% by fiscal '30 in comparison with fiscal '19. And I think we are quite confident that we will be further able to accelerate the process. So, this also would be one of the differentiation factors. And also, we are very eager to support a sustainable finance in the market. So, we currently have set a goal to have 25 trillion yen of sustainable finance arranged by fiscal '30 and among that 12 trillion yen shall be the environmental finance related transactions. So, those two are one of the two core things we came out as a sustainability factor for the market.

Makdad: Thank you very much for your time today.

Chisaka: Yeah, thank you for having me today.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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