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Principal Initiatives in the First Six Months

During the fiscal first half, the global economy continued to show moderate growth; however, downside risk emerged toward the end of the period due to increasing concerns about the U.S. budget deficit, European sovereign debt crisis and slowing growth in emerging markets. In Japan, production and exports briefly plunged due to supply chain disruptions, electricity shortages and consumers refraining from spending following the Great East Japan Earthquake in March 2011, but then recovery momentum set in, with overall production returning to pre-disaster levels. Against this backdrop, we dedicated ourselves to facilitating financing to clients and ensuring the smooth operation of our payment and settlement platform to help spur post-earthquake recovery. In addition, in May 2011, we announced our medium-term management plan for the three-year period from FY3/2012 to FY3/2014 and moved confidently ahead into the second decade of our business operations since the establishment of SMBC in 2001. Under this plan, which comprises the twin management targets of achieving 1) top quality in strategic business areas, and 2) a solid financial base and corporate infrastructure for the new regulatory and competitive environment; we are committed to realizing well-balanced and steady improvement of financial soundness, profitability, and growth by implementing and executing strategic initiatives.

In the fiscal first half, SMFG posted consolidated ordinary profit of JPY 546.5 billion, exceeding the initial earnings forecast announced in May 2011 by JPY 146.5 billion, and consolidated net income of JPY 313.8 billion, JPY 143.8 billion higher than the forecast. This increase was due mainly to:
- an increase in SMBC’s banking profit as a result of higher gains on sale of bonds by successfully managing interest-rate movements,
- a decrease in total credit cost through tailored assistance to clients to improve their businesses and financial condition, and,
- profit contribution of major Group companies such as Sumitomo Mitsui Card and Sumitomo Mitsui Finance and Leasing. Additionally, we made steady progress toward the targets of the medium-term management plan, and are more confident about their achievement.

Turning to business strategy, we moved forward for further growth driven by global expansion and synergies between SMBC and SMBC Nikko Securities. At the same time, we aim to strengthen our position in the consumer finance business. To this end, we reached a basic agreement for making Promise a wholly owned subsidiary.

Initiatives Going Forward

We will continue our drive for top quality in strategic business areas, a solid financial base and corporate infrastructure for the new regulatory and competitive environment, and well-balanced and steady improvement of financial soundness, profitability and growth, thereby becoming a top-tier global financial services group.

Top quality in strategic business areas

Our two main initiatives that drive the growth of strategic business areas on a group-wide basis are global expansion and synergies between SMBC and SMBC Nikko Securities.

Global expansion

We aim to increase our overseas banking profit ratio to 30% in FY3/2014 by capturing growing business opportunities in overseas markets, mainly in Asia, while sustaining and further strengthening our robust business operation in Japan.

To this end, we will strengthen our business operations mainly in Asia by enhancing our channel network; allocating human resources; further strengthening our globally competitive products, such as cash management services (CMS), trade finance and project finance; and expanding the collaboration of business between SMBC’s domestic and overseas offices, thereby enhancing our capabilities to better serve our clients. We established the Transaction Business Planning Department within SMFG and SMBC in October 2011 to devise long-term, integrated business plans and strategies in order to accommodate a broader range of CMS and other transaction banking needs of clients. In infrastructure projects, which are increasing mainly in Asia, we have been involved in projects on a group-wide basis from the initial stages, providing solutions such as research and advisory services for business planning and funding structure. Through such initiatives, we will fully understand our clients’ needs and enhance our globally competitive products. We are also pursuing secure stable sources of foreign currency funding.

Synergies between SMBC and SMBC Nikko Securities

We have brought leading companies with a different client base from SMBC into our Group, including SMBC Nikko Securities. We will expand the market share of each Group company by seamlessly providing optimized products and services from our group’s wide-ranging product lineups to clients with varying needs. In particular, we are further pursuing synergies between SMBC and SMBC Nikko Securities as a growth driver in the medium-term management plan: in other words, SMBC Nikko Securities, our core securities company, will intensify its collaboration with SMBC and other Group companies.

In the retail securities business where we are strong, we will constantly strive to meet the growing asset management needs of individual clients in Japan. To this end, we have been enhancing the financial instruments intermediary service of SMBC, promoting the banking agency business of SMBC Nikko Securities, and strengthening the private banking business for high net worth clients jointly operated by SMBC, SMBC Nikko Securities and Barclays Bank PLC.

In the wholesale securities business, we have been strengthening SMBC Nikko Securities’ capabilities and collaboration with SMBC and other Group companies. Specifically, SMBC Nikko Securities has established an underwriting and sales platform for accommodating our Japanese corporate clients’ global equity offering needs. We have also been intensifying the collaboration between SMBC and SMBC Nikko Securities, as clearly evidenced by the steady increase in the number of referrals of corporate clients from SMBC to SMBC Nikko Securities. While strengthening cross-selling between SMBC Nikko Securities and other Group companies, we will continue to enhance the capabilities of SMBC Nikko Securities to meet our corporate clients’ funding and M&A needs, and improve its sales and trading capabilities for institutional investors.

Consumer Finance Business

The consumer finance business generates steady and stable profit with relatively higher margins in the medium to long term; therefore, we have been focusing on this business as part of our retail business line-up that supports personal consumption.

Meanwhile, at Promise, one of our core entities in the consumer finance business, the number of interest refund claims has clearly entered a downtrend and there are also signs of recovery in new loans. In light of these factors, we decided that the timing was right to start moving forward again and make Promise a wholly-owned subsidiary in April 2012. Going forward, we will pursue synergies between Promise and Group companies to better meet the sound borrowing needs of consumers in Japan and overseas.

Solid financial base and corporate infrastructure

With our operations expanding on both a Group and global basis, we will reinforce our corporate infrastructure by further strengthening our group management. We will also enhance human resource development and credit management for our global expansion.

Capital and shareholder return polices

In the medium-term management plan, we have set a management goal of achieving a Core Tier I capital ratio* of approximately 8% as of March 31, 2014. This means that we will aim to achieve a Core Tier I capital 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 capital ratio as of September 30, 2011 was slightly higher than 7%.

Looking ahead, Global Systemically Important Financial Institutions (G-SIFIs) may be required to have additional loss absorption capacity (capital surcharge). We believe we will be able to secure a sufficient level of capital for the possible G-SIFI capital surcharge by implementing the initiatives in our medium-term management plan and maintaining and improving our globally top-level operational efficiency on a Group-wide basis, thereby steadily building up retained earnings.* Calculated based on the definition under Basel III full implementation in 2019; all regulatory adjustments are deducted, excluding net unrealized gains (losses) on other securities (SMFG consolidated).

Meanwhile, SMFG’s basic shareholder return policy is, 1) to sustain a consolidated payout ratio of over 20% through the stable and consistent distribution of profit, while enhancing retained earnings to maintain financial soundness in light of the public nature of our business as a bank holding company and, 2) to achieve sustainable growth of enterprise value. Enhancement of shareholder return will be considered taking into account factors including the equity capital level, payout ratio and dividend level.

For the full year ending March 31, 2012, we have upwardly revised the forecast released in May 2011 for consolidated ordinary profit to JPY 900 billion and for consolidated net income to JPY 500 billion, reflecting our higher-than-expected results in the fiscal first half. Meanwhile, the annual cash dividend per share forecast for FY 3/2012 is JPY 100, unchanged from the May 2011 forecast and previous fiscal year, and the half of which, JPY 50, was paid as an interim dividend. We have not changed our cash dividend forecast because, although we are confident of securing an appropriate consolidated dividend payout ratio, we are focusing on building up retained earnings to meet new global capital regulations.

The economic outlook in Japan and overseas remains unclear, uncertain, and unstable. However, we believe that we can meet your expectations through these initiatives. We hope that we can continue to count on your understanding and support in the years ahead.

February 2012