Sumitomo Mitsui Financial Group Inc
Annual Report 2021

Plain-text annual report

MISSION & VISION & FIVE VALUES “Our Group Mission,” which serves as the foundation for all of our corporate activities, portrays our mission toward stakeholders. “Vision” is our medium- to long-term aim for the Group. “Five Values” represent the core values we share with all SMBC Group employees. MISSION VISION FIVE VALUES We grow and prosper together with our customers, by providing services of greater value to them. We aim to maximize our shareholders’ value through the continuous growth of our business. We create a work environment that encourages and rewards diligent and highly-motivated employees. We contribute to a sustainable society by addressing environmental and social issues. A trusted global solution provider committed to the growth of our customers and advancement of society INTEGRITY As a professional, always act with sincerity and a high ethical standard. CUSTOMER FIRST Always look at it from the customer’s point of view, and provide value based on their individual needs. PROACTIVE & INNOVATIVE Embrace new ideas and perspectives, don’t be deterred by failure. SPEED & QUALITY TEAM “SMBC GROUP” Differentiate ourselves through the speed and quality of our decision-making and service delivery. Respect and leverage the knowledge and diverse talent of our global organization, as a team. 001 SMBC GROUP ANNUAL REPORT 2021Editorial Policy　 SMBC GROUP ANNUAL REPORT 2021 is designed to convey financial and non-financial information about the overall picture, business strategy, and cor- porate infrastructure of SMBC Group. It has been compiled with reference to the International Integrated Reporting Framework issued by the International Integrated Reporting Council (IIRC) in December 2013. The appendix in the back of this report contains more detailed informa- tion on the Group. Additional information on Sustainability activities can be found on the Company’s corporate website. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This document contains “forward-looking statements” (as defined in the U.S. Private Securities Litigation Reform Act of 1995), regarding the intent, belief or current expectations of us and our management with respect to our future financial condition and results of operations. In many cases but not all, these statements contain words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “probability,” “risk,” “project,” “should,” “seek,” “target,” “will” and similar expressions. Such forward-looking statements are not guaran- tees of future performance and involve risks and uncertainties, and actual results may differ from those expressed in or implied by such forward-looking state- ments contained or deemed to be contained herein. The risks and uncertainties which may affect future performance include: deterioration of Japanese and global economic conditions and financial markets; declines in the value of our securities portfolio; incurrence of significant credit-related costs; our ability to successfully implement our business strategy through our subsidiaries, affiliates and alliance partners; and exposure to new risks as we expand the scope of our business. Given these and other risks and uncertainties, you should not place undue reliance on forward-looking statements, which speak only as of the date of this document. We undertake no obligation to update or revise any forward looking statements. Please refer to our most recent disclosure documents such as our annual report on Form 20-F and other documents submitted to the U.S. Securities and Exchange Commission, as well as our earnings press releases, for a more detailed description of the risks and uncertainties that may affect our financial condition and our operating results, and investors’ decisions. Scope of Report Period covered: FY2020 (April 2020 to March 2021) Some subsequent information is also included. Organizations covered: Contents About SMBC Group 004 History of SMBC Group 006 Financial Highlights 007 ESG Highlights 008 SMBC Group’s Value Creation Process To Our Stakeholders 010 Message from the Group CEO 022 Message from the Group CFO 028 Round-Table Discussion with Outside Directors 032 Core Policy of the Medium-Term Management Plan (FY2020–FY2022) 034 Response to COVID-19 Business Strategies for Creating Value 038 Group Structure 040 Retail Business Unit 044 Wholesale Business Unit 048 Global Business Unit 052 Global Markets Business Unit 056 Special Features: Sumitomo Mitsui Financial Group and its subsidiaries and affiliates SMBC Group’s Digital Strategies Transcending Finance Published: August 2021 Corporate Infrastructure Supporting Value Creation “SMBC” has been designated as the corporate group’s master brand. All Group companies use the SMBC logo and promote the SMBC brand in order to enhance the brand power of the entire SMBC Group. Rising Mark The Rising Mark is the upward curving strip seen beside the letters “SMBC.” This mark indicates our desire for the Group to grow together with our customers, shareholders, and society by providing high-value-added, cutting-edge, and revolutionary services. Corporate Colors The fresh green color (color of young grass) of the Rising Mark symbolizes youthfulness, intellect, and gentleness while the trad green (deep, dark green) background presents tradition, reliability, and stability. 070 Corporate Governance 084 Initiatives to Realize Sustainability 096 Customer-Oriented Initiatives 099 Internal Audit 100 Risk Management 104 Compliance 106 Human Resources Strategy 110 IT Strategy 112 Communication with Stakeholders 114 Financial Review 119 ESG Information 002 003 SMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021 About SMBC Group History of SMBC Group Throughout the course of its history, SMBC Group has adapted to the changing needs of the times and shifted its businesses while enhancing the quality of its corporate infrastructure through environmental, social, and governance (ESG) initiatives. (cid:26)(cid:28)(cid:28)(cid:31)(cid:27) Birth and Growth of Comprehensive Financial Group 2001 Sumitomo Mitsui Banking Corporation formed 2002 Sumitomo Mitsui Financial Group established 2004 SMBC Consumer Finance became an equity-method affiliate 2009 SMBC Nikko Securities became a subsidiary (cid:31)(cid:30)(cid:29) (cid:24) 2002 Endorsement of United Nations Environment Programme Finance Initiative (cid:23) 2005 Establishment of Audit Committee (optional) (cid:24) (cid:22) (cid:23) 2007 Signing of United Nations Global Compact (cid:23) 2010 Listed on New York Stock Exchange (cid:31)(cid:30)(cid:29)(cid:28)(cid:27) Source of Management Enduring for Four Centuries 1590 Riemon Soga (brother-in-law of Masatomo Sumitomo) started copper refining business 1673 Takatoshi Mitsui opened Mitsui Echigoya Kimono Dealer 1876 Mitsui Bank established 1895 Sumitomo Bank established (cid:31)(cid:30)(cid:29) Predecessor of Sumitomo (cid:24) (cid:22) Predecessor of Mitsui (cid:22) 1673 Innovation of business practices (clothing sales) 1683 Important developer of financial infrastructure (money exchanging) Around 1600 Development of cutting-edge copper refining techniques 1894 Tree planting at deforested copper mine site (cid:24) 1998 Establishment of environmental policies (cid:26)(cid:28)(cid:31)(cid:26)(cid:27) Expansion of the Scope of Operations and Target Markets 20122012 SMBC Aviation Capital became a subsidiary 2012 SMBC Consumer Finance became a subsidiary 2013 SMBC Trust Bank became a subsidiary 2013 Bank BTPN became an equity-method affiliate 2015 The Bank of East Asia became an equity-method affiliate 2016 Sumitomo Mitsui Asset Management became a subsidiary (cid:31)(cid:30)(cid:29) (cid:24) 2015 First issuance of green bond (cid:23) 2015 Establishment of SMFG Corporate Governance Guideline (cid:22) 2016 Endorsement of Women’s Empowerment Principles (cid:26)(cid:28)(cid:31)(cid:25)(cid:27) Pursuit of Sustainable Growth through Utilization of Group Strength and Structural Reforms 2018018 Group business reorganization • THE MINATO BANK and Kansai Urban Banking Corporation deconsolidated • Sumitomo Mitsui Finance and Leasing deconsolidated and converted into an equity-method affiliate 2019 Sumitomo Mitsui DS Asset Management established through merger of Sumitomo Mitsui Asset Management and Daiwa SB Investments 2019 Bank BTPN became a subsidiary (cid:31)(cid:30)(cid:29) 2017 Release of Statement on Human Rights (cid:22) (cid:22) 2017 Release of Diversity and Inclusion Statement 2017 Endorsement of recommendations of Task Force on Climate-related Financial Disclosures (cid:24) (cid:23) 2017 Transition to Company with Three Committees Introduction of group-wide business units and CxO system 2018 Announcement of sector-specific financing policies (cid:24) (cid:22) 2019 Signing of Principles for Responsible Banking (cid:24) (cid:22) (cid:23) (cid:23) (cid:24) (cid:22) 2020 Revision of Our Mission Establishment of SMBC Group Statement on Sustainability (cid:24) (cid:22) (cid:23) 2021 Appointment of Group CSuO and establishment of Sustainability Committee 004 005 SMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021About SMBC GroupAbout SMBC Group Financial Highlights Profit attributable to Owners of Parent (Billions of yen) 1,000 500 0 512.8 ’16 ’17 ’18 ’19 ’20 (FY) ESG Highlights Return on Equity (ROE) (Calculated using stockholders’ equity as the denominator) Sustainability Key Performance Indicators (%) 10 5 0 5.4 % ’16 ’17 ’18 ’19 ’20 (FY) Environment Amount of Green Finance Green Bond Issuance A b o u t S M B C G r o u p Target FY2020 Result Target FY2020 Result ¥20 trillion (From FY2020 to FY2029) ¥2.7trillion One issuance or more/year One issuance Consolidated net business profit remained at the same level as FY2019 since the COVID-19 pandemic had both positive and negative effects. However, profit attributable to owners of parent decreased year on year due an increase in total credit cost. Overhead Ratio (OHR) ROE was at a lower level as profit attributable to owners of parent decreased due to the increase in total credit cost as a result of the COVID-19 pandemic. Common Equity Tier 1 Capital Ratio (CET1 Ratio) (Basel III fully-loaded basis) (%) 80 60 0 62.3 % ’16 ’17 ’18 ’19 ’20 (FY) (%) 20 15 0 16.00 % Mar.17 Mar.18 Mar.19 Mar.20 Mar.21 While allocating resources to overseas operations, OHR showed a year-on-year improvement as business expenses decreased due to the COVID-19 pandemic and group-wide cost reduction efforts. While risk-weighted assets increased from providing financial support to customers, we maintained our CET1 ratio higher than the required level due to the growth in net unrealized gains on other securities as stock prices increased. Dividend per Share of Common Stock Credit ratings (As of June 30, 2021) (Yen) 200 100 0 190 Holding company SMBC Long-term Short-term Long-term Short-term Moody’s S&P Fitch R&I JCR A1 A- A A+ AA- ’16 ’17 ’18 ’19 ’20 (FY) P-1 A1 P-1 A-1 F1 A A AA- a-1+ AA J-1+ — F1 — — Community Next Generation Retail Deposits in Asia Finance Education Target FY2020 Result Target FY2020 Result x3 of FY2019 (By FY2022) x2 (from FY2020 to FY2029) 132 thousand 1.5million Human Resources Female Managers Childcare Leave (Male)* Target FY2020 Result Target FY2020 Result 20 % (By FY2025) 15.8% 100 % 100 % * Figure is for SMBC. To enhance shareholder returns as we presented in the Medium-Term Management Plan, we increased the FY2021 dividend forecast by ¥10 to ¥200 per share. 006 SMBC GROUP ANNUAL REPORT 2021 007 SMBC GROUP ANNUAL REPORT 2021 About SMBC Group SMBC Group’s Value Creation Process SMBC Group’s Value Creation Cycle Definition of Sustainability Creating a society in which today’s generation can enjoy economic prosperity and well-being, and pass it on to future generations ④ Outcomes Impacts on stakeholders derived from our business activities Climate Change Demographic Changes Geopolitical Risks Changes in Consumer Behavior Creation of a society in which everyone can live with peace of mind Preservation of a healthy environment Fostering of people and industries that will shape the future Outcomes ③ Outputs Services and products supplied through our business activities ⑤ Impacts Changes in stakeholders inspired by value created by SMBC Group Business Activities / Models ② Business activities emphasizing three Materiality (“Environment,” “Community,” and “Next Generation”) 財務資本 人的資本 社会的資本 知的資本 ① Inputs SMBC Group’s intangible assets ⑥ Value Cycle Beyond the impacts, value returns to stakeholders by improving SMBC Group’s corporate value, as well as enhancing intangible assets that are a source of SMBC Group’s corporate value Cash settlements Wealth management Financial inclusion Renewable energy projects Green bond underwriting Employees Employees Impacts Society / Customers Society / Customers Shareholders SMBC Group’s Business Activities Creation and intermediation of value Business Units Retail Wholesale Global Global Markets Five Values Five Values Integrity Customer First Proactive & Innovative Speed ＆ Quality Team “SMBC Group” Three Priority Issues Environment Community Next Generation New business development Digital transformations Financial literacy education Outputs Sustainability management is the practice of continuously enriching the soil (an intangible asset) that we have inherited from the past and which is the origin of our corporate value. Human Capital On-the-ground capabilities (diverse and highly specialized human resources) Financial Capital Intellectual Capital History and brand Speed Spirit of innovation Social and Relationship Capital Domestic and international network Group strength Solid customer base Inputs Compliance Risk management Corporate governance 008 009 SMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021About SMBC GroupTo Our Stakeholders MESSAGE FROM THE GROUP CEO CONFRONTING STRONG HEADWINDS Jun Ohta Director President and Group CEO In a Calm Sea, Everyone Is a Pilot. 010 011 domestic economy that continues to suffer from years of anemic growth, a negative interest rate environment, and the COVID-19 pandemic. Furthermore, we are witnessing the increasing presence of new competitors in the financial sector and the increased unbundling and re-bundling of financial and non-financial services and products. Given this trend, while the need for financial functions such as deposits, loans, and settlements may remain, there is no guarantee that customers will select traditional players such as SMBC Group to provide them with those functions. J apan’s financial sector, our mother market, faces a challenging environment with accelerating population decline and aging, a To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CEO However, by no means does this breakthrough, the large-scale production of challenging business environment cause me those vaccines was realized. Furthermore, we to feel any pessimism. Rather, I have every confidence that SMBC Group will continue to grow as a global financial institution in a sustainable manner. What we must not forget is that were able to resume business activities at a level similar to that before the global health crisis through the use of web conferencing and other digital tools as we combated the spread of the virus by curbing our activities while we regardless of the business environment, there waited for the rollout of vaccines. Humanity will also be opportunities for growth. In recent was essentially powerless in its efforts to years, we saw a rapid acceleration in the pace combat past pandemics such as the Spanish of technological innovation and changing customer needs, for example the shift to Flu and SARS. Past efforts were limited to quarantining infected individuals and placing cashless payments in the BtoC sector and the restrictions on the movement of people, after global move toward electronic vehicles in the which there was no real effective means that automobile sector followed by advancements could be implemented other than to wait for toward the commercialization of self-driving the pandemic to run its course. As you can vehicles. At the base of such changes lie see humanity has made great progress in its irreversible megatrends with some examples ability to combat pandemics and other threats. being enhanced convenience due to the digital The COVID-19 pandemic continues to have a shift and increased expectations of society toward ESG. This being the case, I expect tremendous impact on the lives of people all over the world, and I sincerely wish nothing these trends to accelerate even further going more than to see this pandemic brought to forward. In such an operating environment, an end at the earliest possible date, but I am traditional industry status and sales networks also encouraged to see humanity pooling its will not always function as an advantage. In fact, they could hinder innovation due to wisdom and using innovation to minimize economic disruption while controlling the concerns regarding legacy and sunk costs. spread of the virus. However, I believe it is possible to realize “In a calm sea, everyone is a pilot.” This sustainable growth in a market such as Japan is the English equivalent of the saying “Shippu where growth in the size of the overall pie is not ni Keiso wo Shiru” from the Book of the Later expected if we can create alternative demand Han in China which illustrates that people and and other new needs while also building the organizations that remain like a Keiso (wind necessary platforms to address those needs. resistant blade of grass) stand out in the face Furthermore, advances in technology of Shippu (strong headwinds). SMBC Group have provided humanity with new ways of facing and fighting threats. For example, in terms of COVID-19, scientists from around the world worked to identify the underlying is facing a number of headwinds, and our true strength as a financial institution is being challenged. Having said this, I have no doubt that we will overcome these headwinds and virus and released the results of the genome realize sustainable growth through tireless sequence analysis online in January 2020, a time when the virus was still limited to parts of China. Effective vaccines were not only developed less than one year from this innovation and by finding new opportunities for growth. I will share the reasons for my confidence in a later part of my message. Commencing Our Journey in a Storm W e kicked-off our current Medium- Term Management Plan last spring during Japan’s first state of emergency. At our seven key strategies by leveraging online tools and enhancing marketing-related efforts in terms of both quality and quantity. While that time, we were not able to predict with any our consumer finance, aircraft leasing, and level of certainty how serious the impact of this Asia business suffered from a slowdown in the unknown pandemic would be. As such, we global economy and decreased consumption had to launch the Medium-Term Management due to the COVID-19 pandemic, we managed Plan in a volatile and highly uncertain business to generate consolidated net business environment with all SMBC Group employees profit which was close to the FY2019 figure having to display ingenuity on a daily basis to thanks to the strong performance of our carry-out their responsibilities. wealth management and overseas securities First, as part of the financial infrastructure businesses. In addition, our final credit cost on which retail and wholesale customers rely to was lower than initially anticipated due to support their daily business and nonbusiness government support and liquidity support from needs, we placed the highest priority on banks, and our bottom line, while not at a level providing undisrupted financial services. For that reflects our true capabilities, exceeded example, SMBC continued operating all of initial expectations by a substantial amount. its branches and ATMs while implementing Although the COVID-19 pandemic extensive safety precautions. Furthermore, the continues to reap havoc around the world, bank also enhanced online services to allow vaccinations are steadily progressing, and customers to perform transactions without customers and SMBC Group are using digital having to visit a branch. SMBC Group also technology to adapt our corporate activities strived to fulfill its social responsibilities as a to the current business environment. We also global financial institution by committing at its now possess a much clearer picture of the peak a total of ¥10 trillion to support domestic impact the global health crisis is having on our and overseas customers to overcome the financial results. While we will continue to see impact of the COVID-19 pandemic. volatility in the business environment, I believe In terms of business results, although immediate uncertainties have cleared. Now, I considered our progress in the first half of not only can we clearly see the path we must FY2020 as insufficient due to a slowdown in follow in the short-term, we can also see an business activities and in the execution of our end to the disruptions caused by the COVID-19 various initiatives, in the second half of the year pandemic. we were able to accelerate initiatives targeting While we will continue to see volatility in the business environment, I believe immediate uncertainties have cleared. 012 013 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CEO I have no doubt that we will overcome these headwinds and realize sustainable growth through tireless innovation and by finding new opportunities for growth. No Change to the Path We Must Follow T he path we must follow is none other than the path laid out in the current Medium-Term Management Plan that was boomed before we could strengthen our overseas securities business framework to the extent targeted in the Medium-Term established as the first step toward the Management Plan. For cashless payments, realization of our Vision: “A trusted global the base of user clients and participating solution provider committed to the growth stores expanded due to the growing popularity of our customers and the advancement of of online shopping and touchless payment. society.” The COVID-19 pandemic was an We will further accelerate the strategies we unexpected factor that was not reflected established in the Medium-Term Management in the original planning of the Medium- Plan targeting such business areas as we Term Management Plan, but certain trends expect them to continue growing in the we witnessed during FY2020 such as the medium- to long-term. acceleration of cashless payments, increased On the other hand, our consumer finance, momentum of ESG, and the deepening of aircraft leasing, and Asia business were forced geopolitical risks are trends that we had to operate under a challenging environment in identified prior to the COVID-19 pandemic. FY2020. However, there is no change to those What the global health crisis changed is the businesses’ medium- to long-term growth momentum and the applicable timelines of potential, and they retain their competitive and those trends. As such, there is no need to strategic importance in our overall business change the overall direction of the Medium- strategy. In FY2021 we will turn to the offensive Term Management Plan, and we will continue and proactively expand our activities in those to proceed with its execution with the utmost markets in light of the expected normalization confidence. of domestic consumption and the global Of course, we will finetune our strategies economy. in a flexible and precise manner based on the While we expect for FY2022, the final issues and strategies requiring acceleration year of the Medium-Term Management which became clearer due to our experiences Plan, to be impacted to a certain degree by during the COVID-19 pandemic. the COVID-19 pandemic I am confident that For example, if we look at our overseas we can overcome the negative impact by securities business, we can see that although accelerating the above strategies and focusing SMBC Nikko Securities’ gross profit for very closely on opportunities to reduce FY2020 was the highest since it joined SMBC costs. We will continue our efforts to realize Group, our competitors with more extensive sustainable growth and there is no change and established overseas securities business to our goal of generating bottom-line profit of operations were able to generate much larger more than ¥700 billion in the final year of the profits. The reason is that financial markets Medium-Term Management Plan. One Step Ahead of Customers’ Needs I have repeatedly stressed the need to adhere to three key themes if we are to realize sustainable growth. These themes are Advertising Business A tremendous amount of payment and credit data is accumulated in our banking, the result of repeated deliberations aimed securities, and consumer finance businesses. at identifying the role SMBC Group can play, In other words, you could say that we are one the strengths we can leverage, and whether large platform with finance at its base. We we can form partnerships with players from are currently contemplating a number of new outside the financial sector to address issues businesses which will allow us to leverage in a future when the needs of customers and this data, and in July 2021 we established society will undergo a substantial change from SMBC Digital Marketing, Ltd., a company the present day. that operates an advertising and marketing The first theme is data oriented. services business utilizing financial big Information and data are very valuable data. We will strive to create new value by assets that are not represented on a company’s developing a business that uses our platform balance sheet, and businesses around the to analyze customers’ needs and then transmit world, not only those in the financial sector, are information and advertisements that are striving to monetize these assets. believed to reflect those needs. Of course, any The second theme is to build platforms. concerns regarding the protection of personal In Japan, we provide services to 43 data and the implementation of necessary million individual customers and SMBC security protocols will be addressed first. extends loans to 80 thousand companies. By leveraging this robust customer base, SMBC Elder Business Group can become a platformer that uses its The SMBC Elder Program is a business financial capabilities as foundations to provide we launched as a result of thinking outside the a variety of services. traditional boundaries of the finance sector The third theme is to become a solutions in response to the ongoing diversification of provider. customers’ needs in Japan’s super-aging We can add value which truly enhances society. The concerns of senior citizens are not our customers business only if we look limited to securing sufficient funds to cover beyond immediate services such as loans living expenses following their retirement. and payments. We must identify the reasons Their concerns encompass a diverse range for customers engaging in those services and of matters such as inheritance, health and provide comprehensive, top-tier solutions by nursing care, housework, security, and their proactively collaborating with companies from relationship with family members. In order to outside the financial sector if required. offer a one-stop solution to such issues, we will These three themes are not independent develop a financial service focused platform of each other, rather, they are closely that also provides services that SMBC Group intertwined. While all the initiatives established does not offer, such as housekeeping and under the Medium-Term Management Plan security, by proactively collaborating with reflect these themes, I will take this opportunity players from outside the financial sector. to share with you three examples. 014 015 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CEO We made no change to the Multi- franchise strategy as we continued to search for seeds that had the potential to blossom into future platforms. Expanding Our Franchise in Asia entered into a capital partnership with Rizal Under our Multi-franchise strategy, we Commercial Banking Corporation, a mid-tier are devising and implementing initiatives commercial bank in the Philippines, while also based upon a time span of ten or twenty years obtaining a substantial retail finance platform in order to build a second and third SMBC in India, which is expected to become the Group in Asia’s developing economies. We most populous country in the world in the near made three commitments when formulating future, through our acquisition of Fullerton our Multi-franchise strategy, which are: “We India, a top tier nonbank that possesses a retail will become a full-line financial services and SME business network throughout the provider in the target market,” “The franchise country, as part of efforts to establish SMBC will have a strong home-market focus with Group franchises in each of those countries. its foundations firmly embedded in the local Our businesses in these countries have economy,” and “We will not retreat even traditionally involved the approaching of large when faced with changes in the business local and Japanese firms through SMBC environment.” As such, even after COVID-19 branches. The above deals allow SMBC spread throughout Asia, we made no change Group to expand into the mid-tier corporate, to the Multi-franchise strategy as we continued SME, and fast-growing retail sectors, and to search for seeds that had the potential to combined with our earlier acquisition of blossom into future platforms. BTPN in Indonesia move us one step closer to Such efforts allowed us to secure the achieving our goal of establishing full-banking opportunity to acquire a 49% stake in FE capabilities in Asia’s developing economies. Credit, a leading Vietnamese consumer We will continue to pursue high quality finance company. FE Credit has a robust retail inorganic opportunities in a disciplined manner business network and a highly competitive as part of efforts to realize sustainable growth business model, allowing us to obtain a while also enhancing shareholder returns, a 50% market share of Vietnam’s fast growing topic I will address later. consumer market sector. FE Credit has also maintained a high level of profitability with an ROE of more than 20% and is expected to continue experiencing robust growth in its assets and profits. Furthermore, we See page 051 for details. Initiatives in Growth Fields in Asia and Other Markets Passing On a Green Earth to Future Generations T here is a 460 meter “The Trails of the Earth” at Furano Field which represents the earth’s 4.6-billion-year history. Furano In order to pass on a green earth to future generations, SMBC Group established a long- term road map to enhance our climate change- Field is led by the screenwriter Mr. Soh related efforts. First, SMBC Group will achieve Kuramoto, and SMBC Group has extended our net zero greenhouse gas emissions by 2030. support since its establishment. How long do We will also execute ¥30 trillion of sustainable you think Homo sapiens’ 200 thousand year finance by 2030 to support customers’ climate history is in the “The Trails of the Earth”? change-related initiatives and their transition to A mere two centimeters. When we read a green business model. Furthermore, we will history books it feels that the birth of humanity commence efforts to identify the greenhouse took place a very, very long time ago, but gas emissions of our loan and investment the reality is, from the earth’s perspective, portfolio while engaging in discussions with the history of the human race is about the customers regarding the decarbonization same length as your fingertip. The 200 years of their business models as the first step to following the Industrial Revolution, a period realizing a carbon-neutral supply chain by which saw the start of global warming, is a 2050. However, the expectations of society mere 0.02 millimeters. “The Trails of the continue to grow even as we engage in such Earth” continues into the future and at its end efforts, and I believe that climate change has lies a stone monument with the words: “We the potential to become a game changer not are merely borrowing the earth from future only for the financial sector but for a wide generations.” I believe that Furano Field is range of business sectors. We will further trying to convey a very important message enhance our efforts while continuing to update through “The Trails of the Earth.” There is our decarbonization-related procedures and no special technique or method to realize action plans in a flexible manner. sustainability. Rather, there is an obvious In order to successfully enhance our solution, we must create a society in which climate change-related initiatives, I would the current generation can achieve happiness like to stress that we must also turn our and enjoy the benefits of economic growth attention to the short-term and conduct calm while also ensuring that we pass on the earth and objective analyses of the current status to future generations in a green, vibrant state. of business sectors and customers, after We must also accept that humanity, in return for enjoying the benefits of advancements in civilization, rapidly advanced global warming in a time frame that is only 0.02 millimeters of the earth’s total history. See page 084 for details. Initiatives to Realize Sustainability 016 017 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CEO which we would determine the best possible could we disrupt the steady supply of energy, course of action that can be executed in the we may also impede customers’ efforts to immediate future. The consistent execution develop technologies that could support the of such actions must be balanced with the decarbonization of their business models and pursuit of long-term goals. Given our global society. Together with our customers, we will relationships with customers from a variety of strive to realize the decarbonization of society business sectors, and our role as a supplier of while engaging in careful discussions with all finance, the lifeblood of the modern economy, stakeholders, paying close attention to the we must take great care in how we address the impact our efforts will have on businesses and issue of climate change. If we abruptly turn to to trends in energy transition and innovation. and proceed down the wrong path, not only A financial group’s most important resource is its people, and the workplace is an important stage where employees can grow and pursue their aspirations. A Work Environment Where Employees Can Realize Their Dreams A financial group’s most important resource is its people, and the workplace is an important stage where employees can grow The first is Midoriba, our internal SNS which we launched last year. More than 20 thousand employees at SMBC have joined the and pursue their aspirations. An important service with 6 thousand of those employees responsibility of a CEO is to prepare a stage being active users who regularly post a variety that is large enough for employees to truly of ideas and information. Promising business challenge themselves and to write a script ideas receive helpful advice and constructive that allows them to demonstrate their unique comments regardless of age or departments. potential, so that all employees can put on Online communities in which employees their best performance. support their colleagues in pursuing challenges In recent years, we have seen a material are naturally developing. A number of new change in employees’ mindsets, especially in business ideas have already been identified as our younger employees, with a growing number having the potential for commercialization. We of employees placing greater importance on plan on introducing Midoriba to other SMBC how their company contributes to society. All Group companies in the future. our employees possess various ideas and have The second is diversity and inclusion. the backbone to pursue new challenges. Ever Innovation that opens the door to the future since assuming leadership of SMBC Group, I is the result of employees with a diverse have urged employees to “Break the Mold,” range of characteristics such as gender, and I have supported employees attempting to age, and nationality coming together to pursue new challenges without being bound combine their uniqueness and varied views by precedent or fixed ideas. I have assigned while freely collaborating with players from management resources to employees who outside their business sector. SMBC Group is have stepped forward and established new comprised of companies that possess distinct companies for them to lead, even in cases characteristics, and its businesses are run by when the employee was of a junior or mid- more than 100 thousand employees coming level rank. So far, 10 companies have been from diverse backgrounds spread across 40 established through my “Producing CEO” countries and areas. We must not relax our initiative. The purpose of this initiative is to efforts to further accelerate our diversity- raise employees’ motivation by instilling a related initiatives given that customers’ needs “I can succeed if I try” mentality, and I look and businesses are becoming increasingly forward to seeing the new companies grow to diverse and global. We will strive to realize a stage where they can contribute to SMBC true diversity and inclusion through the Group’s profitability or to the enhancement of diversification of our senior management team, customer services. the empowerment of female employees, and I will accelerate the following two by supporting the balancing of professional initiatives so that this flow of innovation will responsibilities with life events. become even stronger, diverse, and sustained. Discussion with Mr. Soh Kuramoto, the founder of Furano Field 018 019 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CEO The COVID-19 pandemic has not changed our policy of focusing on the enhancement of SMBC Group’s corporate value on an ongoing basis and distributing profits to our shareholders. Maximizing Shareholder Value from Both Financial and Non-Financial Perspectives T he COVID-19 pandemic has not changed our policy of focusing on the enhancement of SMBC Group’s corporate opportunities for share buybacks in FY2021 while continuing to pay careful attention to the ongoing impact of the COVID-19 pandemic value on an ongoing basis and distributing and movements in overseas markets given profits to our shareholders. A progressive our discounted share price and the fact that dividend policy remains our principal approach we expect to be able to maintain our capital to shareholder returns, and our goal is to levels at sufficient levels even after factoring in realize a dividend payout ratio of 40% during investments in inorganic growth opportunities. the course of the Medium-Term Management Furthermore, in order to increase SMBC Plan. In FY2020 we maintained our dividend Group’s corporate value over the medium- to payment at ¥190 although we saw a substantial long-term, in addition to improving ROE and decrease in our bottom line. As a result, our other quantitative financial metrics, it is vital dividend payout ratio rose to 51% but by no that we also enhance the non-financial value means do we view this as having reached our of SMBC Group such as data, personnel, and goal. Our goal is to realize a dividend payout ESG which are not reflected on our balance ratio of 40% while achieving our target profit sheet. We will enhance our human capital, attributable to owners of parent of over ¥700 intellectual capital, and social capital by billion. As a first step toward realizing this goal accelerating sustainability-related initiatives we increased our dividend forecast for FY2021 and the creation of a work environment that to ¥200. allows employees to pursue their hopes and We will also pursue opportunities to dreams. We will maximize the disclosure of execute share buybacks as part of our efforts both financial and non-financial information to enhance shareholder returns. We decided and engage with all of our shareholders in an not to announce share buybacks when we appropriate manner to minimize information released our financial results of FY2020 in asymmetry and decrease the cost of May given the re-extension of Japan’s state shareholder’s equity so that we may realize the of emergency and other uncertainties in the sustained growth of SMBC Group’s corporate business environment resulting from the value. COVID-19 pandemic. However, we will pursue No Such Thing as Coincidence “H ave the heavens granted me this mission by coincidence? No, this is surely not the case.” This is an approximate is clearly the latter choice, we must continue to be the provider of essential functions without being bound by our past track record or the English translation of an excerpt from literature fact that we are a bank. In order to accomplish compiled during the Song dynasty in China the mission we have been granted by the and illustrates the importance of carrying out heavens, we must identify growth opportunities one’s duties, regardless of the circumstances. and tirelessly innovate so that we can Roughly 40 years have passed since I joined contribute to customers and society through the banking sector, and I have experienced our financial functions. firsthand many challenges such as the collapse Going forward, our world will change at of Japan’s bubble economy, Japan’s big bang an even faster rate, and our future will hold financial reforms, the Lehman Crisis, and both numerous opportunities and challenges. the current COVID-19 pandemic. However, I SMBC Group will strive to realize further growth never forgot the importance of carrying out my by driving our roots even deeper and wider as responsibilities regardless of changes in the we press onward. I would like to ask for the environment or the challenges I had to face. continued support and understanding of all our The same can be said of companies. Bill stakeholders as I will stand at the forefront of Gates’s quote, “Banking is necessary, banks our efforts to overcome the strong headwinds, are not” addresses the fundamental issue and SMBC Group will put forth a united effort of whether “banks” as a business format are to overcome the challenging environment. essential to society or whether finance as a “function” is essential. I view this is having its roots in the same concept as the pessimistic theory which argues that modern society does not require banks. However, since the answer I will stand at the forefront of our efforts to overcome the strong headwinds, and SMBC Group will put forth a united effort to overcome the challenging environment. 020 021 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CFO Supporting our customers, society, and the economy recover from the COVID-19 pandemic while allocating our capital in a manner that balances investment for growth and shareholder returns Toru Nakashima Group CFO Director Senior Managing Executive Officer FY2020 was a year in which the world was compelled to address the various social issues that arose due to the COVID-19 pandemic, the resulting changes in peoples’ mindsets and behavior, and fluctuations in financial markets. We at SMBC Group placed the highest priority on supporting customers, from both financial and non-financial perspectives, while at the same time taking the necessary steps to safeguard the wellbeing of our employees. Given this backdrop, as the Group CFO and Group CSO I paid close attention to the progress we were making in the implementation of the various initiatives established under the Medium-Term Management Plan which commenced in April 2020. In other words, I was attempting to determine whether the results we initially anticipated could be produced by the seven key strategies that were established under the core policies of “Transformation and Growth,” the cost control-related initiatives that were meant to expand our competitive edge in cost efficiency, and the leveraging of our strong capital base to pursue inorganic growth opportunities by measuring our progress according to the pace expected under the very challenging business Current Business Environment (1) Overview of FY2020 Financial Results Although we calculated that the COVID-19 pandemic reduced consolidated net business profit by ¥100 billion, we were still able to generate consolidated net business profit of ¥1.084 trillion, a result similar to that of FY2019. As we had anticipated at the start of the fiscal year, business sectors which we consider our strengths, namely credit cards, consumer finance, and aircraft leasing suffered due to the COVID-19 pandemic. However, in addition to the strong performance of our wealth management business and our overseas securities business due to heightened bond issuance needs, we also benefited from a fall in expenses which we had not initially foreseen. As such, the actual impact of the COVID-19 pandemic on consolidated net business profit was substantially lower than the environment brought about by the COVID-19 pandemic. The impact the COVID-19 pandemic had on our businesses became clear following our FY2020 financial results. While it was difficult to determine the impact that the Medium-Term Management Plan’s initiatives were having in terms of actual figures given the negative impact of the COVID-19 pandemic, FY2020 was a year in which we were able to strengthen the profitability of our businesses, the underlying goal of many of our efforts. It is very encouraging to see that SMBC Group was able to carry out its initiatives in a consistent manner, regardless of the challenging business environment, and produce concrete results. Accelerating this trend and proactively transforming the various changes brought about by the COVID-19 pandemic into business opportunities will allow us to not only further enhance our earning capabilities in a more robust manner in FY2021; it will also position us to accomplish the goals we have set out under the Medium-Term Management Plan in FY2022, the final year of the plan. originally forecasted amount of ¥170 billion. While credit cost increased in both domestic and overseas markets, thanks to the government support and liquidity support from banks, SMBC Group’s credit cost was ¥360.5 billion, approximately ¥90 billion lower than originally anticipated. As a result, we were able to achieve profit attributable to owners of parent of ¥512.8 billion although we proactively took steps to address future risks, for example, recording provision for losses on interest repayments of our consumer finance business. Once again, the COVID-19 pandemic’s actual negative impact of ¥190 billion was substantially lower than the initially anticipated amount of ¥310 billion. (JPY bn) Consolidated net business profit Total credit cost Profit attributable to owners of parent FY2019 Actual 1,085.0 170.6 703.9 FY2020 FY2021 Impact of COVID-19* Original forecast (170) +260 (310) Actual (100) +170 (190) Actual Impact of COVID-19* Forecast 1,084.0 360.5 512.8 (70) +100 (120) 1,120 300 600 * Impact of COVID-19 figures are rough estimates. 022 023 To Our StakeholdersSMBC GROUP ANNUAL REPORT 2021SMBC GROUP ANNUAL REPORT 2021To Our Stakeholders MESSAGE FROM THE GROUP CFO (2) Progress of the Medium-Term Management Plan SMBC Group focuses on business efficiency when conducting our business operations, and we selected profitability, efficiency, and financial soundness as three financial targets of the current Medium-Term Management Plan. In FY2020, although we had established a target of 8.5% for ROCET1, a metric we use to measure profitability, we were only able to achieve a ROCET1 of 6.9% due to a substantial decrease in profit attributable to owners of parent. On the other hand, we were able to decrease base expenses*1, a metric we use to measure efficiency, by ¥20 billion on a year-on-year basis due to cost reduction measures and restrictions placed upon our business activities due to the COVID-19 pandemic. Our CET1 ratio*2, a metric we use to measure financial soundness, for FY2020 was 9.8%, a figure which falls within the 9.5% (± 0.5%) range we established in response to the impact of the COVID-19 pandemic. *1 G&A expenses excluding cost related to investment for future growth, revenue-linked variable cost, and others. *2 Post Basel III reforms basis, excludes OCI Financial Targets ROCET1 Base expenses CET1 ratio 6.9% Mid 7% ≥8.5% JPY 1,530 bn FX

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