Business context and reporting period
Sumitomo Mitsui Financial Group, Inc. (SMFG), a Japanese financial holding company with commercial banking, leasing, securities and consumer-finance operations, filed this annual Form 20-F for the fiscal year ended March 31, 2018. The filing’s financial statements are consolidated and prepared under IFRS, except where it identifies Japanese GAAP or regulatory measures. The requested “2017 Q4” is not a standalone quarterly report; the figures below cover the full fiscal year and year-end balances.
Key financial metrics
Amounts are Japanese yen; financial statement amounts are in billions unless stated otherwise.
| Metric | FY2018 / March 31, 2018 | Prior comparable period |
|---|---|---|
| Total operating income | ¥3,812.3 | ¥3,347.9; up 14% |
| Net interest income | ¥1,410.1 | ¥1,397.9; up 1% |
| Net fee and commission income | ¥952.5 | ¥884.8; up 8% |
| Net trading income | ¥270.5 | ¥184.0 |
| Impairment charges on financial assets | ¥136.8 | ¥213.0 |
| Operating expenses | ¥2,605.9 | ¥2,283.9 |
| Profit before tax | ¥1,119.0 | ¥880.4 |
| Net profit | ¥889.6 | ¥740.6 |
| Profit attributable to SMFG shareholders | ¥760.0 | ¥627.9 |
| Basic earnings per share | ¥538.84 | ¥458.56 |
| Return on average equity / assets | 6.6% / 0.4% | 6.0% / 0.3% |
Cash flow: Net cash from operating activities was ¥11,172 billion; investing activities used ¥3,594 billion; financing activities used ¥361 billion. Cash and cash equivalents increased ¥7,172 billion to ¥53,416 billion.
Balance sheet and funding: Total assets were ¥192,176 billion, total liabilities ¥179,680 billion and total equity ¥12,496 billion. Loans and advances were ¥85,129 billion, down 11%; deposits were ¥128,462 billion, down 1%. Borrowings were ¥10,652 billion and debt securities in issue ¥10,569 billion. The reported loan-to-deposit ratio was 66%, and deposits exceeded loans by ¥43,332 billion. Three-month average LCRs were 127.7% for SMFG consolidated and 131.4% for SMBC consolidated.
Capital and asset quality: SMFG’s Japanese-GAAP total, Tier 1 and CET1 risk-weighted capital ratios were 19.36%, 16.69% and 14.50%, respectively; its leverage ratio was 5.01%. Gross impaired loans were ¥878.9 billion, or 1.0% of gross loans, versus ¥1,228.7 billion and 1.3% a year earlier. The allowance for loan losses was ¥491.7 billion.
Material changes versus the prior comparable period
- Net profit rose 20%, supported by higher operating income and lower impairment charges, partly offset by rising expenses.
- Net interest income edged up despite a ¥231.6 billion increase in interest expense; overseas loan growth and improved foreign lending rates helped offset higher foreign deposit funding costs. The reported interest-rate spread narrowed to 1.20% from 1.22%.
- Other income rose 32% to ¥755.9 billion, including higher income from operating leases and disposal of leased assets. Other expenses increased 49% to ¥792.8 billion, mainly due to higher leased-asset disposal costs, lease costs and interest-repayment provisions.
- Impairment charges on financial assets fell to ¥136.8 billion from ¥213.0 billion, including a sharp reduction in available-for-sale asset impairments. Loan impairment charges were ¥126.6 billion, versus ¥141.5 billion.
- Loans and deposits declined in part because Kansai Urban Banking Corporation and The Minato Bank ceased to be consolidated subsidiaries and became equity-method associates. SMFL-related loans were reclassified to assets held for sale.
- SMFG reorganized its reporting segments into Wholesale, Retail, International and Global Markets business units, with comparative segment figures restated. Segment measures are prepared under Japanese GAAP and do not directly equal IFRS consolidated results.
Outlook, management commentary, risks and unusual items
- Management’s medium-term plan runs through March 2020 and emphasizes capital, asset and cost efficiency; digitalization; resource allocation toward more profitable and asset-efficient businesses; and growth in selected domestic, international and global product areas. No specific consolidated earnings forecast is provided in the supplied filing text.
- Management’s shareholder-return policy is a progressive dividend, with a target payout ratio of 40% of consolidated net profit under Japanese GAAP during the plan period. The filing reports ¥155 per share declared in FY2018 and ¥170 per share as dividends in respect of FY2018, including the proposed year-end dividend.
- The leasing partnership reorganization with Sumitomo Corporation is expected to reduce SMFG’s SMFL stake from 60% to 50%, making SMFL a joint venture rather than a consolidated subsidiary. Completion was tentatively scheduled for November 2018 to January 2019, subject to regulatory approval.
- SMFG estimated IFRS 9 adoption from April 1, 2018 would reduce opening equity by about ¥150 billion after tax, principally from expected-credit-loss provisions; it stated this would not affect CET1 capital calculated under Japanese GAAP. IFRS 15 adoption was expected to increase opening equity by about ¥15 billion after tax.
- Principal risks include prolonged low Japanese interest rates and competitive pressure on domestic lending spreads; market-rate, foreign-exchange and equity-price movements; credit deterioration; liquidity or rating pressure; regulatory and capital-rule changes; cyber and operational incidents; litigation; and risks from overseas expansion and acquisitions. The filing states Japanese equity securities were 3.0% of total assets and about 88.4% of that portfolio was Japanese equity. It also reports ¥8 trillion of Japanese government bonds in available-for-sale assets.
- SMBC disclosed Iran-related transactions under Exchange Act Section 13(r). For the year ended March 31, 2018, reported gross revenue was ¥10.9 million from trade-related services and ¥21.7 million relating to fees on performance bonds; the filing says these amounts were immaterial. The U.S. announced withdrawal from the JCPOA on May 8, 2018 and reinstatement of Iran-related sanctions after wind-down periods.
- Undrawn loan commitments were ¥60,107 billion and financial guarantees and other credit-related contingent liabilities were ¥8,426 billion. These are nominal maximum exposures, not expected cash outflows; many commitments may expire undrawn. Routine litigation was reported, with no material adverse effect expected, although outcomes cannot be assured.
Most important facts an investor should verify
- Confirm the full-year period and IFRS basis; do not treat the filing as standalone 2017 Q4 results.
- Reconcile the profit improvement to recurring performance versus lease-disposal income, investment gains, impairment changes and tax effects.
- Check the effect of higher funding costs on net interest income, particularly foreign deposit expense and Japanese lending spreads.
- Assess the loan and deposit changes after the subsidiary deconsolidations, SMFL held-for-sale reclassification and planned leasing partnership restructuring.
- Review capital and liquidity headroom against applicable Basel III, G-SIB and TLAC requirements, and verify the reported capital ratios and LCR definitions.
- Monitor consumer-finance refund provisions, deferred-tax-asset recoverability, market-sensitive equity holdings, Iran-sanctions developments and contingent credit exposures.