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Mizuho to book $6bn charge on pivot from physical banking

Profit warning comes amid rock-bottom rates, volatile markets and digital shift

Mizuho Financial Group trails Japan's other two megabanks.   © Reuters

TOKYO -- Mizuho Financial Group has sharply lowered its profit forecast for the year ending this month as it scales back the branch network that once formed a core part of its business but has become a liability as customers move to digital banking.

Japan's third-largest banking group on Wednesday said it will book a special charge of 680 billion yen ($6.1 billion) to write down the value of retail assets, such as physical branches, as well as foreign bond holdings. The bank intends to scale back its operations in the volatile bond market in a bid to achieve more stable revenue.

Mizuho said writing down the retail assets will ease the burden of depreciation expenses for its retail operations, which are costly to maintain and have barely been profitable. Much of the charge stems from new software systems that the retail business is in the process of implementing. This partly reflects a revaluation due to the strategic shift, but it is also intended to save the company from having to amortize the costs over five to 10 years.

Net profit is now forecast at 80 billion yen instead of the 570 billion yen previously projected.

The move suggests the bank sees few avenues for immediate profit growth other than tightening its belt, amid a global economic slowdown along with an aging and shrinking population and rock-bottom interest rates at home.

Demand for loans remains lackluster in Japan. The three top banks -- the other two are Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group -- currently use only about 60% of their deposits for loans, and have been looking abroad for profitable investments. But this strategy has been less effective since the U.S. central bank started raising short-term interest rates, thereby increasing the cost of investing in American securities.

"Mizuho Financial Group's profit warning highlights the key risks facing Japanese banks," said Tetsuya Yamamoto, vice president and senior credit officer at Moody's Japan. "Its restructuring costs for its domestic business show that branches are no longer valuable assets. Valuation losses on foreign bonds reflect the risk that Japanese banks take in investing overseas."

Yamamoto said the losses stem from "Mizuho's efforts in eliminating structural issues in order to reduce future downside risk," adding that "other Japanese banks will also face losses if they take similar actions."

The write-downs will be incorporated into a medium-term business plan to be unveiled in May. Mizuho President Tatsufumi Sakai called them "forward-looking write-downs to promote flexible and agile management."

"During the postwar high-growth period, we invested in retail networks to attract deposits and make new loans," Sakai said. "Such a business model no longer works because the population is declining. Our business plan cannot be predicated on the assumption that interest rates would someday go up."

Sakai intends to give up all performance-based compensation for this fiscal year to take responsibility for the heavy impairment loss. Other directors will also receive reduced or no compensation.

This is not Mizuho's first push to cut costs in a more challenging business environment. In 2017, it announced it would cut 19,000 jobs and 100 branches over the following 10 years and shift its focus to digital banking services, the rise of which has drawn customers away from bricks-and-mortar banks.

As part of this pivot, Tuesday's charge included 40 billion yen in write-downs on branches to be merged or shut down -- calling for several dozen more locations than the original plan covered. Meanwhile, Mizuho launched a new digital currency platform this month in partnership with around 60 other banks, taking advantage of direct connections to users' bank accounts to gain an edge over finance industry newcomers such as chat-app provider Line.

But Mizuho officials acknowledge it will likely take time for such efforts to boost the bottom line.

Mizuho's rival megabanks have been quicker to adapt to the digital shift. MUFG and SMFG wrapped up their branch-related write-downs by fiscal 2017.

Physical footprint reduction is a challenge shared across the industry, including among regional banks, said Katsuhito Sasajima, a senior analyst at Mitsubishi UFJ Morgan Stanley Securities. If Mizuho "had waited longer to write off stores and other fixed assets, it could have faced mounting costs for repairs and restoration," he said.

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