Dear Fellow Stakeholders,
We sincerely thank you for your continued support and patronage. We would like to present the initiatives we implemented in the first six months of fiscal 2012 (fiscal year ending March 31, 2013) and our management policies going forward.
In the fiscal first half, the global economy as a whole decelerated because of a combination of an economic slowdown in Europe triggered by the sovereign debt crisis and a substantial decrease in Chinese exports, especially to Europe, although the U.S. economy was in a gradual recovery trend. Meanwhile, in Japan, domestic demand steadily increased until the middle of the period due to the reconstruction demand and effects of policies such as eco-friendly car subsidies. Toward the end of the period, however, the Japanese economy weakened due to a decline in domestic production and exports affected by a decelerating global economy.
Against this backdrop, we dedicated ourselves to financially supporting our clients to help spur the post-disaster recovery. In addition, we further strengthened our initiatives on achieving the targets of our medium-term management plan – aiming for top quality in strategic business areas and establishing a solid financial base and corporate infrastructure to meet the challenges of financial regulations and highly competitive environment.
In the strategic business areas, we made progress in concentration and selection within the consumer finance business in order to enhance cooperation among group companies and to facilitate prompt and flexible decision-making. Specifically, we made Promise a wholly-owned subsidiary and renamed SMBC Consumer Finance; SMBC sold back its shares of ORIX Credit to ORIX; and SMBC Consumer Finance dissolved its joint venture with Mobit. We also made steady progress in our international business. We established marketing offices in emerging markets, mainly in Asia, and reinforced the HR system to train and promote overseas local staff. In addition, SMBC and Sumitomo Mitsui Finance and Leasing, on a joint basis with Sumitomo Corporation, acquired an aircraft leasing business from The RBS Group which commenced its operation as SMBC Aviation Capital. At the same time, in order to establish a solid financial base and corporate infrastructure, we further strengthened our group-wide compliance and control system.
In the fiscal first half, SMFG had favourable results due mainly to better-than-expected results on SMBC’s banking profit, as a result of recording of gains on bonds by successfully managing interest-rate movements and the further development of the international business, a decrease in total credit cost, and profit contributions from group companies such as SMBC Consumer Finance. As a result, SMFG posted consolidated ordinary profit of JPY 468.1 billion and consolidated net income of JPY 331.0 billion, exceeding the earnings forecast announced in May 2012 by JPY 8.1 billion and JPY 81.0 billion, respectively. Compared with the results for the fiscal first half of the previous fiscal year, consolidated ordinary profit decreased by JPY 78.3 billion and consolidated net income increased by JPY 17.2 billion. Consolidated ROE was 12.8%*1.
At the same time, we made steady progress towards achieving the financial targets of the medium-term management plan (Table 1).
We will continue to strengthen our initiatives in strategic business areas and to establish a solid financial base and corporate infrastructure.
We will further strengthen our initiatives in the five strategic business areas – financial consulting for retail customers; tailor-made solutions for corporate clients; commercial banking in emerging markets, especially Asia; broker-dealer/investment banking; and non-asset businesses including payment & settlement services and asset management.
Financial consulting for retail customers
We will continue to make every effort to strengthen our financial consulting capabilities for retail customers, whose needs are diversifying, through initiatives including expanding the product line-up of the securities intermediary business and reinforcing the insurance business of SMBC. We will further promote cross-selling between SMBC and SMBC Nikko Securities. For example, we launched an on-line account linkage service called “Bank and Trade” in October 2012. We will also enhance transaction services and consumer finance business on a group-wide basis. In addition, we will continue to promote collaboration between Middle Market Banking Unit and Consumer Banking Unit of SMBC in order to improve our capabilities to provide total solutions, including succession planning, to business owners and land owners.
Tailor-made solutions for corporate clients
Responding to the changing external business environment and other factors, an increasing number of Japanese corporate clients are considering business restructuring, including M&As and MBOs. To support corporate clients whose financing needs continue to diversify and become more complex, we will improve our solution providing capabilities by implementing a variety of initiatives, including optimizing staff allocation.
Commercial banking in emerging markets, especially Asia
In the emerging markets, we will capture business opportunities by reinforcing growth businesses including infrastructure finance and trade finance, as well as transaction banking services. We will do so by expanding our global network and promoting collaboration between domestic and overseas offices and business units. In addition, we will secure stable foreign-currency funding sources to accommodate the increase in our overseas assets.
Broker-dealer / Investment banking
SMBC Nikko Securities is the principal driver of our securities business and we will continue to expand its retail business by offering products accommodating the changing market conditions and investor sentiment, while further strengthening its investment banking business, including M&A advisory services. In addition, we will further promote collaboration between SMBC and SMBC Nikko Securities.
Non-asset businesses including payment & settlement services and asset management
We will flexibly accommodate the transaction services needs and accompanying financing needs of corporate clients globally, while devising integrated transaction services business strategies and managing settlement risk on a mid-to-long term and group wide basis. We will also expand our asset management business by promoting collaboration within our group and with overseas asset management companies.
We will further reinforce our corporate infrastructure in line with the expansion of our group-wide and global business operations. Specifically, we will further develop risk management systems primarily in the newly consolidated group companies in order to extend best practices in management throughout the group, and develop and promote human resources with international business capabilities. We will also continue to pursue operational efficiency through business process re-engineering and strengthen our group-wide compliance and control system to more effectively comply with the laws and regulations of the businesses and markets in which we operate.
In the medium-term management plan, we have set a Core Tier I ratio*2 target of 8% as of March 31, 2014. This means that we will aim to achieve a Core Tier I ratio of approximately 1 percentage point higher than the Basel III required level of 7% five years earlier than the Basel III full implementation deadline of March 2019. The Core Tier I ratio as of September 30, 2012 was around 7.5%.
Looking ahead, Global Systemically Important Financial Institutions (G-SIFIs) will be required to have additional loss absorption capacity in the form of a capital surcharge. We believe we will be able to secure a sufficient level of capital for this possible G-SIFI capital surcharge by implementing the initiatives in our medium-term management plan and maintaining our globally top-level operational efficiency, thereby steadily building up retained earnings and achieving our financial targets.
Meanwhile, SMFG's basic shareholder return policy is to secure a consolidated payout ratio of over 20% through the stable and consistent distribution of profit by achieving sustainable growth of enterprise value, while enhancing retained earnings to maintain financial soundness in light of the public nature of our business as a bank holding company.
For the full year ending March 31, 2013, we have upwardly revised the forecast released in May 2012, reflecting our results in the fiscal first half, and we now forecast consolidated ordinary profit of JPY 830 billion and consolidated net income of JPY 540 billion. Meanwhile, the annual cash dividend per share forecast for fiscal 2012 is ¥100, unchanged from the forecast released in May 2012 and the previous fiscal year, half of which, ¥50, was paid as an interim dividend. We have not changed our cash dividend forecast because we continue to focus on building up retained earnings to meet new global capital regulations and are confident of securing an appropriate consolidated dividend payout ratio.
The outlook for the Japanese and overseas economies remains unclear, uncertain, and unstable. However, we believe that we can meet your expectations by steadily implementing the initiatives we have described and focusing on the 3C Management Principles – cross-selling, credit control, and cost control. We hope that we can continue to count on your understanding and support in the years ahead.