Japanese : Risks and Opportunities

Jonathan Cornish, Managing Director

19 September 2013 Agenda

Macro Environment Risks and Opportunities for Japan’s Banks Run-up in Advanced Economies’ Public Debt is Unprecedented in Peacetime Gross Public Debt (% of GDP) US UK Germany Japan 300

250 Japan-Russia Japanese Bubble War Bursts 200

150

100

50

0 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Napoleonic Wars American Civil War First World War Second World War

Source: IMF Public Finance Historical Dataset

www.fitchratings.com Debt Overhang to Weigh on Developed Countries

Rising DM Public Debt Burden Gross Debt Composition, 2012 DM EM Governments Households (% GDP) Corporates net external 120 China China 100 Germany 80 Australia Canada 60 France US 40 Italy UK 20 Spain Japan 0 1995 1998 2001 2004 2007 2010 2013f 0 100 200 300 400 (% GDP) Source: McKinsey & Co for Households, Corporates (Q212 or latest); Fitch for governments, net bank external debt (2012); Fitch est. for total Source: Fitch China credit end-2012

www.fitchratings.com Global Economic Outlook Weak Recovery; Growth Forecasts Revised (Down)

Global GDP Growth Growth Revisions Between 12/12 to 06/13 World Advanced 2013 2014 (pp) (%) Emerging Japan 10 0.50 8 6 0.25 4 0.00 2 0 -0.25 -2 -4 -0.50 -6 -8 -0.75 US 2000 2002 2004 2006 2008 2010 2012 2014 China Japan World BRICs Eurozone Source: IMF “World Economic Outlook” July Update Source: Fitch “Global Economic Outlook”

www.fitchratings.com Abenomics: Can Wages, Investment Grow Sustainably? Business Confidence Wages Growth

Sentix (LHS) Nominal Real (Index) Shoko Chukin (RHS) (Index) (% yoy) 30 55 2

20 50 1

10 45 0

0 40 -1

-10 35 -2

-20 30 -3

-30 25 -4 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/06 12/07 12/08 12/09 12/10 12/11 12/12

Source: CEIC, Fitch Source: CEIC, Fitch

www.fitchratings.com Changing of Competitive Landscape

• EU/US bank deleveraging • Political pressure to boost lending in home markets • Many of the more “international banks” have support-driven IDRs … • … but resolution regimes will lead to the erosion of sovereign support in the future • Anticipate further improvement in financial profiles - Capital now sound, but regulation driving even larger buffers - Profit still subdued • Selective pull-back or restraint (mostly by EU banks) from APAC markets so far … • … but expected to expand again in APAC over the medium term • APAC banks have been looking abroad in the region • Expansion organically and inorganically • Portfolio restructuring (expansion or divestment) • Interest also in new frontier EM countries • Varying degrees of financial capability and track record - Less attention on Basel 3 concerns, as the region is generally already compliant (or expected to be)

www.fitchratings.com Key Macro Prudential Risk Indicators for APAC

Country BSI Mar 07 Sep 07 Oct 08 Nov 09 Jun 10 Nov 10 Jun 11 Dec 11 Aug 12 Jan 13

Mongolia 3 3

China bb 1 1 1 1 3 3 3 3 3 3

Hong Kong a 1 1 1 1 1 3 3 3 3 3

Indonesia bb 1 1 1 1 2 2 2 3 3 3

Sri Lanka 1 1 1 1 1 1 1 3 3 3

Vietnam b 2 2 2 2 3 3 3 2 2 2

Australia aa 3 3 3 3 2 2 2 2 2 1

Korea bbb 1 3 3 3 2 2 2 1 1 1

Singapore aa 1 1 1 1 1 1 1 2 2 2

India bb 2 2 2 2 2 1 1 1 1 1

Taiwan bbb 1 1 1 1 1 1 1 1 1 1

Thailand bbb 1 1 1 1 1 1 1 1 1 1

Japan a 1 1 1 1 1 1 1 1 1 1

MPI: 3 = high vulnerability to potential systemic stress, 1 = low vulnerability BSI: Weighted average of Bank Viability Ratings in System Source: Fitch Macro-Prudential Risk Monitor

www.fitchratings.com Rising Credit/GDP Ratio in Most APAC Markets

Credit/GDP

(%) 1996-1998 peak Trough to 2005 2012 210 180 150 120 90 60 30 0 India China Japan Korea Taiwan Vietnam Thailand Malaysia Australia Mongolia Sri Lanka Sri Indonesia Singapore Philippines HongKong Note: China credit data excludes shadow financing Source: Fitch, central banks

www.fitchratings.com Agenda

Macro Environment Risks and Opportunities for Japan’s Banks Japan’s Mega Banks: What’s Driving the Ratings …

• Fundamental improvements led BTMU: VR = a; IDR = A LT SRF to VR upgrades A+ A • Further improvements expected A- (meeting future Basel 3 thresholds) BBB+ 2006 2007 2008 2009 2010 2011 2012 2013 • Standalone profiles not uniform SMFG: VR = a-; IDR = A- • Mizuho’s IDR still support-driven LT SRF A+ A • Stable Outlook predicated on… A- • Strong domestic franchises BBB+ 2006 2007 2008 2009 2010 2011 2012 2013 • Executing stated plans to de-risk Mizuho: VR = bbb+; IDR = A- • Pro-actively managing market risk • Moderate offshore expansion (no major increase in risk appetite)

www.fitchratings.com Abenomics: Major Uncertainties…

JPY

Asset Quality Trading Partners JGB Yields Competitive Ageing Corporate Population Sector Sustainable Direction of Economic Indices Growth Consumption Government & Corporate Debt Tax Inflation and Balancing the Investment Budget

Government Support prospects

www.fitchratings.com Japan: Trade Partners Reliance on China and Other China-Dependent Countries

Percentage of Trade Volumes

China HK Taiwan Korea Asia ANZ NA Europe Others 100%

80%

60%

40%

20%

0% Export Import Export Import

Dec 2010 Jun 2013 Source: JTIS

www.fitchratings.com Risk of JGB Holdings: Large Exposure Manageable

Government Bonds/Total Assets a Duration Control Mitigates Risk (%) (Yr) MUFG SMFG Mizuho 20 4 15 3 10 2 5 1 0 0 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 CA(a) ING(a) SG(a-) BoC(bb) MUFG(a)

SMFG(a-) AFS at Cost: Exposure to Stabilise (aa-) BBVA(bbb+)

Mizuho(bbb+) City banks' current a/c with BOJ (RHS) StateStreet(a+) UniCredit(bbb+) WellsFargo(aa-) Santander(bbb+) GroupeBPCE(a)

StChartered(aa-) MUFG (LHS) (% total SMFG (LHS) assets) (JPYtn) Mizuho (LHS) Fitch’s Stress Test Results 25 40 Mega Banks’ Average FCC Ratio Under Stress 20 30 Sep 12 (10yr FCC +50bp +100bp +150bp 15 20 JGB = 0.765%) average (1.265%) (1.765%) (2.265%) 10 10 Mega banking groups 9.3% 9.0% 8.6% 8.3% 5 0 a Japan banks at March 2013, other banks at December 2012. Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Source: JTIS

www.fitchratings.com Equity Investment: Further Reduction Limits Volatility • Abenomics has been positive so far! Exposure (at Cost) Declining Gradually (% FCC) MUFG SMFG Mizuho • Lower holdings, lower market volatility 120 100 • Reduction targets: 25% of Tier 1 80 • MUFG: 25.4% at end-March 2013 60 • SMFG: 24.0% 40 20 • Mizuho: 31.8% 0 Mar 10 Mar 11 Mar 12 Mar 13 Jun 13 Exacerbates Profitability Fluctuation… … and Volatility in Capital (JPYbn) PPOP Equity gains/losses (% RWA) MUFG SMFG Mizuho Recurring profit 5 1.5 4 1.0 3 2 0.5 1 0.0 0 -1 -0.5 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Jun 13 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Jun 13 Source: Banks, Fitch

www.fitchratings.com Domestic Landscape: Little Attraction for Banks

Lending has Ticked Upwards in 2013 Corporate Funds Flow Drives Loans FYE08 FYE09 FYE10 Change in capital Bond issuance (FYE08=1) LT debt ST debt FYE11 FYE12 FYE13 Internal capital generation Depreciation 1.1 (JPYtn) Net flow 120 1.0 80 40 0.9 0 0.8 -40 MUFG SMFG Mizuho FYE03 FYE05 FYE07 FYE09 FYE11 FYE13 Risk/Return Reward Evident in NIM? Fee Income to Supplement NIR (%) MUFG SMFG Mizuho (FYE08=1) MUFG SMFG Mizuho 1.5 1.1

1.0 1.0 0.9 0.5 0.8

0.0 0.7 FYE08 FYE09 FYE10 FYE11 FYE12 FYE13 FYE08 FYE09 FYE10 FYE11 FYE12 FYE13 Note: Figures are each group's consolidated figures. Source: Banks, Fitch

www.fitchratings.com Non-APAC Bank Deleveraging = Opportunities

Share of Foreign Claims: US Share of Foreign Claims: • Deleveraging confined Developed APAC * Foreign claim (LHS) Foreign claim (LHS) mostly to EU banks Japan (RHS) US (RHS) Europe (RHS) Europe (RHS) Japan (RHS) (USbn) (%) • Pronounced in most markets, (USbn) Australia, Korea and Taiwan (RHS) (%) 8,000 80 3000 60 but already tapering 50 6,000 60 2000 40 • US claims growth flat to 4,000 40 30 1000 20 2,000 20 modest 10 0 0 0 0 99 01 03 05 07 09 11 Q113 99 01 03 05 07 09 11 Q113 • Gaining share where foreign *Australia, Korea and Taiwan *Australia, NZ, Korea, HK, Macau, Singapore, Taipei claims are falling Share of Foreign Claims: Share of Foreign Claims: Developed Europe Emerging APAC * • Growing Japanese share of Foreign claim (LHS) Foreign claim (LHS) Developed APAC* (RHS) US (RHS) foreign claims Japan (RHS) Europe (RHS) Europe (RHS) Developed APAC (RHS)** (%) (USbn) (%) (USbn) US (RHS) Japan (RHS) 30 • Complement organic growth 20000 80 1800 60 2570 1500 50 15000 with stakes in higher-growth 2060 1200 40 ҂ markets in APAC… 10000 15 900 30 10 600 20 5000 • …but more patient in EU 5 300 10 0 0 0 0 99 01 03 05 07 09 11 Q113 99 01 03 05 07 09 11 Q113 Source: BIS, Fitch *Australia, Korea and Taiwan *Excl. Korea & Taiwan (DMs); **Austraila, Korea & Taiwan

www.fitchratings.com Mega Banks: Offshore Expansion

APAC: A Loan Growth Engine (% total loans) Others E. Europe W. Europe Latin America N. America Asia (ex Japan) 25 20 15 10 5 0 FYE10 FYE11 FYE12 FYE13 FYE10 FYE11 FYE12 FYE13 FYE10 FYE11 FYE12 FYE13 MUFG SMFGª Mizuho Overseas Loans: Enhancing NIM Overseas Loans: Fee Income Growth MUFG (Jp) MUFG (Ovs.) (FYE08=1) MUFG SMFG Mizuho (%) SMFG (Jp) SMFG (Ovs.) Mizuho (Jp) Mizuho (Ovs.) 2.0 1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0 FYE08 FYE09 FYE10 FYE11 FYE12 FYE13 FYE08 FYE09 FYE10 FYE11 FYE12 FYE13 Note: Figures are each group's consolidated figures Note: Figures are operating banks non-consolidated ª Sumitomo Mitsui Banking Corporation (SMBC) non-consolidated. Source: Banks, Fitch

www.fitchratings.com Competitiveness in Overseas Expansion: Pricing

Cheaper Funding (5-year bond spreads) Sound and Stable Asset Quality (bp) Global peers av. Mizuho MUFG SMFG (%) 5 yr ave. Latestª 200 4 150 3 100 2 50 1 0 0 2013 2012 2011 2010 MUFG Mizuho SMFG Global peer a End-March 2013 for mega banks. End-2012 for global peers ave. Satisfactory Capital Levels Lower Profitability Expectations (ROA) (%) FCC ratio Fully-loaded B3 CET1 ROA (%) Ave, Latest 15 1.5 12 1.0 9 0.5 6 3 0.0 0 -0.5 CS Citi GS SG MS CS SG Citi GS MS BAC UBS UBS BAC BNPP HSBC SMFG MUFG BNPP HSBC SMFG MUFG Mizuho Mizuho Barclays Deutsche Deutsche JPMorgan BNPP, HSBC and SG FCC ratios as of end-2012, 'Look-through' Basel III CET1 ratio Q113; B3 RWA not JPMorgan disclosed by all banks; FCC includes completed capital raisings

Sources: Fitch, Bloomberg, Banks

www.fitchratings.com Offshore Expansion: Non-Organic Growth

Date Name Country Stake acquired (%) MUFG Jun 2008 Dah Sing Financial Holdings Limited Hong Kong 15.0 Oct 2008 Morgan stanley US 21.8 Oct 2008 Aberdeen Asset Management UK 18.8 Nov 2008 UnionBanCal Corporation US 100.0 Apr 2010 Tamalpais Bank US 100.0 Apr 2010 Frontier Bank US 100.0 Nov 2010 The UK n.a. Apr 2011 SWS MU Fund Management Co.,Ltd. China 33.3 Dec 2012 Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) Vietnam 20.0 Apr 2013 PB Capital Corporation (sub. of ; U.S. commercial property loans) US n.a. Jul 2013 Bank of Ayudhya Thailand max 75% SMFG Jul 2008 Barclays PLC UK 1.4 Dec 2008 KB Financial Group Korea 1.1 Jan 2010 The Bank of East Asia Ltd. Hong Kong 9.5 Jun 2010 Ltd India 4.5 Jan 2012 Moelis & Company US n.a. Jan 2012 The Royal Bank of Scotland (aircraft leasing assets) UK n.a. Mar 2012 PT Indonesia Infrastructure Finance Indonesia 14.9 Apr 2012 China Post & Capital Fund Management Co.,Ltd China 24.0 May 2013 BTPN Indonesia 24.26 (max 40%) Mizuho Jan 2008 Merrill Lynch & Co., Inc ( converted to a stake in ) US n.a. Aug 2008 Evercore Partners Inc US 14.7 Nov 2010 BlackRock, Inc. US n.a. Aug 2011 PT Imora Motor/PT Balimor Finance Indonesia 51.0 Sep 2011 Vietcombank Vietnam 15.0 Jun 2012 West LB Brasil Brazil 100.0

www.fitchratings.com Japanese Banks: Challenges of Expansion

• Credit and operating risks • Limited track record in target markets • Limited funding ability (i.e. wholesale versus retail) • FX • Control and governance • Management resources • More aggressive expansion increases burden on management • Shareholder expectations – compromise prudence in return for growth • Increasing complexity • Compliance/reporting costs (regulatory frameworks differ across countries) • Cultural differences • Basel 3 • Full deductions for large minority stakes • What if impairments coincide with future target minimum capital thresholds?

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