Business context and reporting period
Sumitomo Mitsui Financial Group, Inc. (SMFG), the Japanese banking and financial-services holding company, filed this annual report on Form 20-F for the fiscal year ended March 31, 2019. The requested “2018 Q4” period is not presented as a standalone quarter; the filing reports full-year results. Financial statements are consolidated, prepared under IFRS in Japanese yen unless noted otherwise.
Business spans commercial banking, securities, leasing, consumer finance, cards, asset management and related services. Japan generated 66% of operating income; foreign operations generated 34%, up from 30% in FY2018.
Key financial metrics
Amounts below are in ¥ billions unless stated otherwise. FY2018 comparisons were not restated for the April 1, 2018 adoption of IFRS 9 and IFRS 15, which affects comparability of some line items.
| Metric | FY2019 / March 31, 2019 | FY2018 / March 31, 2018 | Change |
|---|---|---|---|
| Total operating income | 3,202.4 | 3,812.3 | Down 16% |
| Net interest income | 1,304.5 | 1,410.1 | Down 7% |
| Net fee and commission income | 923.4 | 952.5 | Down 3% |
| Net trading income | 320.3 | 270.5 | Up 18% |
| Net investment income | 93.9 | 424.1 | Down 78% |
| Impairment charges on financial assets | 119.7 | 136.8 | Down 13% |
| Operating expenses | 2,291.0 | 2,605.9 | Down 12% |
| Profit before tax | 831.9 | 1,119.0 | Down 26% |
| Net profit | 647.6 | 889.6 | Down 27% |
| Profit attributable to SMFG shareholders | 541.9 | 760.0 | Down 29% |
| Basic EPS | ¥387.76 | ¥538.84 | Down 28% |
| Total assets | 195,503.6 | 192,175.6 | Up 2% |
| Loans and advances | 90,682.9 | 85,129.1 | Up 7% |
| Deposits | 134,404.7 | 128,461.5 | Up 5% |
| Total liabilities | 183,730.2 | 179,679.8 | Up 2% |
| Total equity | 11,773.4 | 12,495.8 | Down 6% |
Net interest income declined despite higher interest income (+12%) because interest expense rose 50%, mainly from higher foreign-office deposit funding costs. The net interest spread reported in the selected financial data was 1.24% versus 1.20% in FY2018. Net profit was approximately 20% of total operating income, calculated from reported figures.
Cash and cash equivalents were ¥56,716.5 billion at year-end. Cash flows were: operating activities +¥2,785.8 billion (versus +¥11,172.0 billion), investing activities +¥1,201.6 billion (versus −¥3,593.7 billion), and financing activities −¥731.4 billion (versus −¥360.8 billion). The filing attributes substantial cash-flow movement to balance-sheet items such as loans, deposits and securities; bank cash flows should not be read like those of a nonfinancial company.
Liquidity indicators were strong at the reporting date: deposits exceeded loans by ¥43,721.7 billion; the loan-to-deposit ratio was 67%; and the three-month average LCR was 131.4% for SMFG consolidated. The filing reports SMFG’s leverage ratio at 4.88%. Under Japanese GAAP regulatory measures, SMFG’s total, Tier 1 and CET1 capital ratios were 20.76%, 18.19% and 16.37%, respectively, above stated applicable minimums of 11.6%, 9.6% and 8.1%. These regulatory figures use a different accounting basis from IFRS equity.
Common dividends were ¥175 per share declared for FY2019; the filing also reports ¥180 per share paid in respect of the fiscal year. A ¥95-per-share year-end dividend was proposed after year-end and was subject to shareholder approval. The company repurchased ¥70 billion of shares during FY2019 and announced a further buyback authorization of up to ¥100 billion after year-end.
Material changes versus the prior comparable period
- Profit fell substantially as net investment income and other income declined. Management attributed much of the investment-income comparison to IFRS 9: disposal gains on certain equity instruments elected to FVOCI are no longer recognized in profit or loss. Other income fell 33%, principally because income and costs from leased-asset disposals were lower.
- Cost reductions partly offset revenue pressure: general and administrative expenses decreased 5%, and other expenses decreased 27%. The latter was largely due to lower leased-asset disposal costs and operating-lease costs.
- Loans grew, with increases in domestic corporate financing and foreign lending, particularly in the United States and Asia. Deposits also increased. Equity declined mainly because non-controlling interests fell following the SMFL transaction and redemptions, partly offset by retained earnings.
- SMFL ceased to be consolidated and became a 50%-owned joint venture on November 28, 2018. The transaction generated a reported ¥47.9 billion gain in other income. The filing’s segment presentation includes SMFL’s full-year results for management reporting, so it does not directly match IFRS consolidated results.
- Impaired loans were broadly stable: gross impaired loans were ¥882.0 billion versus ¥878.9 billion, or 1.0% of gross loans in both years. The allowance for loan losses ended at ¥605.0 billion, down from ¥651.6 billion at the beginning of FY2019; charge-offs exceeded provisions.
Outlook, management commentary, risks and unusual items
Management’s medium-term plan runs through March 2020 and emphasizes disciplined capital, asset and cost management; investment in selected domestic and international growth areas; and digitalization and group-wide efficiency. The filing provides no quantified FY2020 earnings guidance. Management described Japan’s economy as gradually recovering, while noting slower GDP growth, prolonged near-zero/negative interest rates and signs of global economic slowing. These conditions may weigh on domestic lending spreads and market-sensitive income.
A material regulatory development occurred after year-end: in April 2019, SMBC and its New York branch entered into a written agreement with the Federal Reserve Bank of New York to remediate deficiencies in anti-money-laundering and economic-sanctions compliance. SMFG said it consequently no longer met the requirements for U.S. financial-holding-company treatment and faced restrictions on certain new U.S. financial activities and acquisitions pending remediation. Failure to remedy the deficiencies could lead to further sanctions or divestiture requirements.
Other significant risks include deterioration in Japanese or global economies and markets; credit losses and borrower downgrades; equity-price and interest-rate volatility; foreign-currency funding and liquidity pressures; evolving capital, TLAC and other regulatory requirements; cybersecurity, operational and compliance failures; consumer-finance refund claims; litigation; and execution risks in overseas expansion, acquisitions and business alliances. Off-balance-sheet loan commitments and guarantees totaled ¥72,133.9 billion, up from ¥68,533.4 billion; nominal amounts are not equivalent to expected cash outflows, since commitments may expire undrawn and some may be cancelled or reduced under contract terms.
Unusual accounting and transaction items include the first-year adoption of IFRS 9 and IFRS 15 without restating comparatives; a ¥62.6 billion goodwill impairment, primarily relating to SMBC Nikko Securities; and a ¥25.7 billion loss on the BTPN step acquisition. Management reported effective disclosure controls and internal control over financial reporting, and the auditor expressed unqualified opinions on the IFRS financial statements and internal controls.
Most important facts for investors to verify
- Review the full IFRS 9 transition disclosures and distinguish accounting reclassifications from underlying operating trends, especially for investment income, fair-value assets and loan-loss allowances.
- Assess the sources and sustainability of FY2019 earnings, including the extent to which lower profit reflects recurring interest and fee pressure versus market-sensitive income, leasing disposals, goodwill impairment and transaction gains or losses.
- Track remediation progress and any further Federal Reserve action concerning SMBC’s New York branch, U.S. activity restrictions and financial-holding-company status.
- Verify capital and liquidity headroom against applicable regulatory requirements, including Basel reforms and TLAC, and assess foreign-currency funding costs and maturities.
- Monitor credit quality, especially growth in foreign lending, impaired-loan trends, charge-offs and the adequacy of IFRS 9 expected-credit-loss assumptions.
- Confirm the final FY2019 dividend approval and subsequent share repurchases, and compare shareholder distributions with sustainable earnings and capital needs.