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Morningstar | Mizuho's Cost-Cutting Plans Look Laudably Aggressive, but May Not Come Soon Enough. See Updated Analyst Note from 23 May 2019

We lower our fair value estimate for no-moat Mizuho Financial Group to JPY 175 from JPY 199 as we roll our model forward and incorporate information from the new five-year business plan.

Mizuho on May 22 held a briefing to discuss the plan, aimed at first stopping and then reversing the trend of declining profits that has affected it even more severely than other large Japanese banks. Like megabank rivals Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, Mizuho’s net interest income in Japan is falling steadily owing to extremely low Japanese interest rates and limited loan growth. Mizuho is under particular pressure because it has had less capital than MUFG and SMFG to pursue acquisitions of overseas financial businesses that support profits at MUFG and SMFG and because its retail business in Japan earns almost no profit at all, owing to Mizuho’s lack of a profitable credit card business or high-margin consumer-finance subsidiary like MUFG's Acom or SMFG's Promise.

This weakness has led to more urgency at Mizuho toward aggressive restructuring than has been the case so far for MUFG, in our view, but Mizuho’s challenges are still growing more quickly than the group’s ability to respond to them. The biggest challenge has been stubbornly high fixed costs, both for personnel, given Japan’s traditional lifetime employment system for career-track staff, and nonpersonnel costs for large and cumbersome legacy IT systems. In comparison to MUFG, which this week expanded its March 2024 target for branch closures from 20% to 35% (close to 100 additional branches), Mizuho’s new plan only adds 30 branches to its explicit target for fiscal 2024 (which rises from 100 to 130), but its targets for preprovision operating profit imply that it plans to reduce more costs more quickly than had been the case in November 2017, when it delivered the initial shock of its plans for long-term retrenchment and staff reduction.

Mizuho is targeting preprovision operating profit to rise by around JPY 100 billion from current levels by the year ending March 2022 and by around JPY 300 billion from current levels by the year ending March 2024. Of the JPY 300 billion, half would come from the retail segment, whose preprovision operating profit is projected to expand 16-fold from JPY 10 billion in the just-ended year to JPY 160 billion. Although the J-Score joint venture with Softbank may generate some revenue upside for the retail segment, realistically speaking the expected increase can only come from cost reductions rather than revenue expansion. This means that Mizuho plans to remove JPY 150 billion in annual costs from the retail segment within five years at the latest, which we view as a positive surprise. Mizuho now plans to have consolidated 100 branch locations by March 2022, double the 50 locations it had previously suggested to be achieved by that date.

In our view, the new cost-cutting targets are appropriately aggressive and could drive a recovery in Mizuho’s profit if nothing else in the environment were to change. However, we are not confident that credit costs--which have been so low that the aggregate of the past nine fiscal years is negative (net write-backs)--will remain so benign for another five years, or that the erosion of traditional retail banking prompted by smartphones will not accelerate when 5G telecom networks are launched. Mizuho’s cost-cutting is positive, but we fear that it may not come soon enough to reverse the trend of declining profits.