FAQ
Financial Results for the 6-month period ended September 30, 2003
SMBC's Earnings Results for the 6-month Period ended September 30, 2003
- Q1.
- What are the resons for the year-over-year change in Banking profit?
- Q2.
- What is the progress in cost reduction?
- Q3.
- What is the progress in improving the loan spread?
SMBC’s Business Strategies
- Q4.
- Please explain your policy on increasing the loan balance and improving the loanspread in the 2nd half of FY2003.
- Q5.
- As for the favorably increasing the new unsecured loans to SMEs, what is the balance as of September 30, 2003 and the target amount of origination for FY2003?
- Q6.
- Please explain the difference between “N funds” and “BSLs”.
- Q7.
- Please explain the profitability of BSL.
- Q8.
- Mortgage loan origination is favorable. Please give the result for the 1st half and the projection for the full term.
- Q9.
- What is your strategy on expanding delivery channel?
SMBC’s Asset Quality
- Q10.
- Please give the reasons for and the breakdown of the JPY 60.0 billion increase in Total credit cost to JPY 359.4 billion, compared with the original plan of JPY 300.0 billion announced in May 2003.
- Q11.
- What are the reserve ratios for Substandard Borrowers and Borrowers Requiring Caution?
- Q12.
- What are the reasons for the decrease in Problem assets based on the Financial Reconstruction Law?
- Q13.
- What are the reasons for the decrease of JPY 877.6 billion in substandard loans as of September 30, 2003 compared with March 31, 2003?
- Q14.
- The amount of assets reclassified as doubtful assets or lower was JPY 669.8 billion in the 1st half, while off-balanced amount was JPY 1,186.9 billion. Please explain the factors for the increase. Do you expect a similar amount of asset deterioration in the 2nd half?
SMBC's Balance Sheet
- Q15.
- What is the situation for the balance of loans?
- Q16.
- Is the reduction of cross-shareholdings progressing? What’s your strategy hereafter?
- Q17.
- What is the amount of deferred tax assets? What is your policy in recognizing Deferred tax assets?
SMBC’s Earnings Forecasts for FY2003
- Q18.
- What is your forecast for the Banking profit for FY2003?
- Q19.
- Please explain the details of the plan to reduce annual expenses by JPY 52.0 billion to JPY 595.0 billion for FY2003.
- Q20.
- What is the plan for credit cost this fiscal year?
- Q21.
- What is the plan for the disposition of NPLs?
- Q22.
- Please explain your forecast for the amount of problem assets to be reduced and credit cost in FY2004, the second year of the "intensive resolution period"?
- Q23.
- What is the plan for the sales of problem assets to the loan purchase fund and credit cost related to the sales?
SMFG’s Earnings Forecasts for FY2003
SMBC’s Earnings Results for the 6-month Period ended September 30, 2003
- A1.
- Banking profit was JPY 499.3 billion, a year-over-year decrease by JPY 78.8 billion.Expenses fell by JPY 29.2 billion on a year-over-year basis to JPY 296.0 billion as a result of streamlining the workforce and so on, though Gross banking profit decreased by JPY 108.0 billion due to the drop in profit in the Treasury Unit, which was high in previous fiscal year due to effectively capitalizing on the decline in interest rates in the Japanese and overseas markets.
- A2.
- For this 1st half, Expenses fell by JPY 29.2 billion on a year-over-year basis to JPY 296.0 billion as a result of streamlining the workforce and completing the integration of branches and systems. On March 31, 2003, we almost reached our goal for the integration plan, and during the 1st half, we integrated 3 domestic branches and newly opened 1, having 435 branches in total at the end of the 1st half. We also streamlined the workforce as we originally planned: we reduced the total number of employees by 186 during this Six-Month period, having 23,838 employees at the end of the 1st half, while we hired 727 new graduates in April.
- A3.
- Since the beginning of FY 2002, we have put our efforts to improve loan spreads through reexamining our domestic lending practices. Although we successfully originated JPY 1,258 billion of unsecured loans to small- and medium-sized enterprises (SMEs) with relatively higher spreads, the loan spread for the Middle Market Banking Unit, in charge of loans to SMEs, at the end of the 1st half has remained slightly improved compared with the previous fiscal year end. The reasons are the severe competition in lending to clients with high credit ratings, and our progress in reducing loans to problematic borrowers whose loan spreads are relatively higher.
SMBC’s Business Strategies
- A4.
- Regarding the loan balance, we will continue to reduce problem assets as we did in the 1st half, and we do not expect a significant improvement in corporate clients' loan demand during the 2nd half either. However, we aim to increase the total loan balance in the 2nd half mainly by proactively originating new risk-taking loan products focusing on small and medium-sized enterprises (“SMEs”) and home mortgages to individuals. As for the loan spread, we aim to boost the spread for the Middle Market Banking Unit by approximately 10 bp in FY2003 by originating the new risk-taking loan products to SMEs with relatively higher spreads as well as negotiating with existing borrowers to increase the spread.
- A5.
- The balance of the new unsecured loans to SMEs as of September 30, 2003 was approximately JPY 1.6 trillion including approximately JPY 500 billion in Business Select Loans (“BSLs”) to SMEs with annual sales of less than JPY 1 billion, and approximately JPY 1.1 trillion in other new unsecured loans including “N funds” with a “check-list type approval system” or “standard judgment type approval system”. Our target for FY2003 is to originate JPY 2.6 trillion in new unsecured loans, an increase of JPY 0.3 trillion from the original plan of JPY 2.3 trillion.
- A6.
- Both loans are unsecured loans with appropriate returns derived using an upgraded credit risk control method and characterized by “unsecured”, “no guarantee by third party” and “speedy credit approval”. While the credit approval systems for N funds are of the simplified or standardized type based on the loan portfolio management approach, the credit risk management method for BSL uses the diversified loan portfolio method. The portfolio consists of loans to qualified SMEs with annual sales of less than JPY 1 billion, and the maximum amount is JPY 50 million. Moreover, BSL is a product with its own promotion activities and a unique integrated process covering all aspects of credit origination from credit approval and to credit monitoring.
- A7.
- BSL's average loan spread is more than 3%, based on the borrower's risk-return profile derived using our unique credit scoring model for SMEs. Additionally, various measures to keep down costs have been taken to assure profitability. An efficient promotion system, which utilizes corporate promotion offices (call centers), and an integrated process extending from automated credit approval to monitoring claims and disposing delinquent loans have been established, and the overall default ratio is kept within the expected level by quickly revising credit approval criteria according to the results of portfolio analyses, etc.
- A8.
- It was approximately JPY 960 billion in the 1st half due to the large increase in new loans at the “Loan Plazas”, the specialized office network for mortgage loans, and favorable demand for refinancing, mainly by long-term fixed interest loans. By expanding the number of Loan Plazas and the full-scale use of the automated approval system in the 2nd half, we aim to achieve approximately JPY 1.8 trillion in origination for the full term.
- A9.
- We are planning to change the strategy on office network drastically, from streamlining to expansion. For example, in order to expand SME business, we will establish 40 offices for SME business in the 2nd half, including five corporate business offices in areas where there are many SMEs with no SMBC accounts, and in areas where a sufficient number of companies is expected to relocate to, and 35 small and specialized channels such as corporate sales offices, and sub-offices of business support offices in areas with a sufficient SME-market size. Depending on their effectiveness, we plan to establish 30 more such offices in FY2004 and thereafter. On the other hand, we will establish six “SMBC Consulting Plazas”, characterized by special facility for financial consulting, and expanded business hours in weekdays and open in weekends, by revising existing offices in March 2004 (plan) in Tokyo and Osaka areas to meet the customers' needs more adequately. We plan to increase the number of SMBC Consulting Plazas to 100, mainly in branches close to train terminals in the suburbs in FY2004 onward (it may also be established in new branches).
SMBC’s Asset Quality
- A10.
- The Total credit cost for this 1st half increased from the original plan because we further accelerated the disposition of non-performing loans (NPLs), in order to achieve the goal of halving the problem asset ratio by the end of FY2004 from that as of the end of FY2001. Although we have tendency of improvement in the quality of our loan portfolio,such as, rising of the borrowers’ credit grading as we reinforced our initiatives to prevent further deterioration in the borrowers’ category, there were some cases of deterioration over our estimate under the ongoing deflationary macro-environment. We recognized approximately JPY 110 billion as cost for “off-balancing” and approximately JPY 250 billion as cost for reserves for deteriorated borrowers.
- A11.
- The reserve ratio of unsecured claims to all Substandard Borrowers was 30.5%,decreased by 3.2 % from the last fiscal year end, due to the progress in final disposition of claims that are relatively highly reserved. The reserve ratio of unsecured claims to Borrowers Requiring Caution excluding claims to Substandard Borrowers was 12.2%,decreased by 0.6 % from the last fiscal year end.
- Q12.
- What are the reasons for the decrease in Problem assets based on the Financial Reconstruction Law?
- A12.
- Total Problem assets based on the Financial Reconstruction Law as of September 30, 2003 amounted to JPY 3,866.6 billion, a decrease of JPY 1,394.7 billion, by half a year ahead of our original target of JPY 3,900 billion, through our continuous efforts for “off-balancing”, proactive engagement in revitalization of Substandard borrowers, and enforcing initiatives for preventing further deterioration of borrowers for the “intensive resolution period” of FY2003 and FY2004 under the recovering economic environment.Accordingly, the total amount of Bankrupt and Quasi-Bankrupt Assets and Doubtful Assets decreased by JPY 517.1 billion and the amount of Substandard Loans decreased by JPY 877.6 billion.
- A13.
- Substandard loans decreased by approximately JPY 1,180 billion on reclassification of loans to higher categories (due to improvement in borrower's financial condition) or lower categories (due to deterioration in borrower's financial condition), and increased by approximately JPY 300 billion on reclassification of loans from higher (deterioration) or lower (improvement) categories to substandard loans. Some of the substandard loans reclassified to lower categories were loans of borrowers with a certain amount of cash-flows but are difficult to revive quickly or loans of borrowers expected to take a long time in repaying the loan. In order to reduce future risks, such borrowers were reclassified to lower categories, and plans were made for disposal of collaterals and reserve provisions were made accordingly.
- A14.
- Assets deteriorated under the prolonged deflationary environment, which has not started to recover on a full-scale basis yet.Additionally, as mentioned above, the amount of newly deteriorated assets includes the amount caused by the downgrading of the borrowers' category and by substantial restructuring of substandard loans with the view of reducing future risks.We expect the amount of newly deteriorated assets to decrease in the 2nd half.
SMBC's Balance Sheet
- A15.
- The balance of loans as of September 30, 2003 decreased by approximately JPY 2.1 trillion from the last fiscal year end. The main factors of the decrease were as follows:the decrease in domestic loans by approximately JPY 1,700 billion because of corporate clients’ tendency to finance their capital investments within their own free cash-flows and of our aggressive progress in reducing problem assets, while we proactively originated new risk-taking loan products focusing on small- and medium-sized enterprises and home mortgages to individuals, and the decrease in overseas loans by approximately JPY 400 billion as a result of the yen appreciation and the continuous reduction in assets with low profitability.
- A16.
- We had approximately JPY 700 billion of stocks with clients’ consent to sell at the beginning of FY2003, and we sold the stocks by approximately JPY 560 billion on a book value basis in this 1st half. On September 30, we had approximately JPY 300 billion of stocks with customers’ consent to sell, and we will proceed with the sales,while trying to avoid negative impact on the stock markets. Our mid-term target is to reduce the book value of stocks within the half of the Tier 1 capital.
- Q17.
- What is the amount of deferred tax assets? What is your policy in recognizing Deferred tax assets?
- A17.
- The amount of Deferred tax assets as of September 30 was JPY 1,711.7 billion, a JPY 102.9 billion decrease from the previous fiscal year end, mainly because the Unrealized losses on “other securities” turned into unrealized gains for the term. We recognized the amount of the Deferred tax assets with a rigorous standard, in accordance with the Program for Financial Revival announced by the Financial Services Agency in October 2002 and the Policy Guideline issued by the Japanese Institute of Certified Public Accountants. Five-year accumulated future taxable income, which is the basis for calculating Deferred tax assets was estimated based on a conservative accounting standard, and takes into account the necessary stress scenario of estimated banking profit and credit costs for disposition of NPLs.
SMBC's Earnings Forecasts for FY2003
- A18.
- We forecast the Banking profit for FY2003 to be JPY 1 trillion, the same level as we initially announced in May 2003. We plan to cover the decrease in the profit of the Treasury Unit, which was rather high in FY2002 by the increase in the profit from marketing units, and to reduce Expenses by JPY 5.0 billion compared with the original plan. As a result, we forecast the Banking profit for FY2003 to be JPY 1 trillion for three consecutive years.
- A19.
- We will reduce personnel costs through continuing streamlining of the workforce and through a reduction of bonus payments. Moreover, we will reduce non-personnel costs through the following factors: the more efficient use of Group-wide IT systems through centralizing the IT systems function at Japan Research Institute, the integration of duplicated branches executed in FY2002 and the continuous efforts in space management, and reassessing the supplies procurement processes.
- A20.
- We revised our plan for the Total credit cost in FY2002 to be approximately JPY 700 billion, a JPY 50 billion increase from our original plan. It consists of approximately JPY 250 billion of conservatively estimated cost for “off-balancing” and approximately JPY 450 billion for a potential increase in reserve for work-outs of NPLs, under the unforeseeable macro-economic environment. We will continue our efforts to certainly achieve the goal of halving the NPL ratio by the end of FY2004 and to do it as quickly as possible.
<Chart: Total Credit Cost>
- A21.
- Although we originally planned the amount of the Problem assets based on the Financial Reconstruction Law to be JPY 3.9 trillion at this fiscal year end, the amount is already below JPY 3.9 trillion at September 30, due to our efforts to halve the NPL ratio as quickly as possible, in accordance with the Plan for Financial Revival. We plan to reduce the amount to approximately JPY 3 trillion by March 31, 2004, through measures such as investment banking approaches, in addition to the existing measure of “off-balancing”, under the recovering macro-environment with a declining tendency of borrowers’ deterioration ratio.
<Chart: Problem Assets based on the Financial Reconstruction Law >
- A22.
- We plan to reduce the total amount of Problem assets based on the Financial Reconstruction Law and the Problem asset ratio to approximately JPY 3 trillion and less than 5%, respectively, by March 31, 2004, and to approximately JPY 2 trillion and to the 3% level by March 31, 2005.Given the 1st half result, we expect credit cost to total JPY 700 billion in FY2003.Our projected total credit cost for FY2004 is approximately JPY 450 billion as we stated in the Plan for Strengthening the Financial Base.
- A23.
- The planned sales amount of problem assets to Japan Endeavor Fund, established by Goldman Sachs (Japan) Ltd., Daiwa Securities SMBC Principal Investments Co.Ltd., Development Bank of Japan and SMBC, is JPY 1 trillion as principal amount basis, mainly in Substandard loans. Sales of problem assets to Japan Endeavor Fund will become full scale in FY2004 and it will take more than a year to reach this level. We expect credit cost to total JPY 450 billion in FY2004 and believe this amount will be enough to also cover the credit cost related to the sales of problem assets to this fund.
SMFG’s Earnings Forecasts for FY2003
- A24.
- We forecast SMFG’s Ordinary profit to be JPY 320.0 billion and Net income to be JPY 230.0 billion on a consolidated basis, and on a non-consolidated basis, Operating income to be JPY 55 billion, Ordinary profit to be JPY 50.0 billion, and Net income to be JPY 50.0 billion.
<Table: Earnings Forecast for FY2003>(Announced on November 25,2003)
Sumitomo Mitsui Financial Group, Inc.
(Reference)
Sumitomo Mitsui Banking Corporation
Total Credit Cost = (Transfer to general reserve for possible loan losses) + (Credit cost included in non-recurring losses)
