Shinsei Bank Ltd
TSE:8303
Earnings Call Analysis
Q1-2024 Analysis
Shinsei Bank Ltd
BANKIT is spearheading the company's charge into the banking-as-a-service (BaaS) sector, with a strategic partnership with Kiraboshi Tech resulting in the creation of a new digital wallet, Lala Pay Plus. This addition is particularly significant as advance salary payment options, featured in the new wallet, have become a critical recruitment advantage. The company's local service initiatives, which include Japan's first AI facial recognition payment test, show promising potential for expansion through further collaborations with regional banks.
The Institutional Business sector is demonstrating robust growth with an emphasis on capital efficiency. This growth is attributed to a substantial rise in financing activities in both corporate operations and environmentally-centered real estate finance. The company sees the burgeoning portfolio of operating assets and net interest income as indicators of a solid upward trajectory.
Sustainable finance is experiencing a structural shift with a Q1 increase of approximately JPY 300 billion. The push forward includes the company's first climate transition financing and syndicated loans focused on decarbonization. The participation of regional banks in sustainable financing, notably in the transition linked loan for JERA, heralds a deepening network across the banking sector. Collaborative synergies with regional banks and SBI Group companies, like SBI Investment and SBI SECURITIES, are actively bearing fruit, evidenced by investments in both venture debt and project financing for developing ventures and listed entities respectively.
Showa Leasing is fortifying its role within the group by fostering partnerships with regional financial institutions, notably through joint real estate leasing ventures and the establishment of a ZEH fund. Meanwhile, UDC Finance, the foremost nonbank in New Zealand, continues to grow its asset base despite challenges from rising funding costs, underpinning an increase in ordinary business profits. Positioned against this backdrop, the Securities Investment division has realized a fourfold increase in gross business profit from the previous year, driven by higher stock prices and efficient diversification of investment portfolios.
Closing the presentation, the speakers did not delve into the company's anticipated schedule of forthcoming corporate events but underscored the diverse strides made across several business domains. The solid performance across the board, from digital banking and institutional finance to sustainable initiatives and international expansion, positions the company well amidst a dynamic market landscape.
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Allow me to begin the explanation. I will begin with an overview of the financial results. Net income for Q1 was JPY 13.1 billion, and we recognize that this was a good start toward achieving our full year management plan. Revenue for Q1 was JPY 67.3 billion, the highest in the past 10 years. Net income was JPY 13.1 billion, which is 29% of the 4-year plan. Some relatively large provisions were made in Q1. These negative factors were covered and this level was achieved. The balance sheet continues its upward trend with operating assets totaling JPY 10.7 trillion, a JPY 300 billion (sic) [ JPY 400 billion ] increase from the end of the previous fiscal year. Deposits were exactly JPY 10 trillion, an increase of JPY 100 billion from the end of the previous fiscal year.
Next, let's look closer to the results. Net interest income benefited from interest income due to an increase in the loan balance in the institutional business and higher dividend income from treasury securities investments. In noninterest income, revenues from the sale of Retail Banking asset management products and from the main businesses of APLUS increase. In the previous year, there was an impairment loss on Latitude shares.
As for expenses, nonpersonnel expenses, such as Retail Banking sales promotion expenses and IT system-related expenses increased. Credit costs increased in structured finance due to the absence of gains on reversals that we had in the previous year, and as mentioned earlier, due to provisions for individual deals. Net income is 29% of the full year plan. Since the previous fiscal year ended in a loss due to the impairment loss of Latitude, it is difficult to make a simple comparison, although we have also shown figures without the Latitude impairment loss. Both revenue and profit increased sufficiently even compared to those figures.
Next, we will look at individual business. Improved earnings from Retail Banking and increased earnings from APLUS also contributed to the profit increase. In noninterest income, margins improved mainly in foreign currency deposits in retail banking. Noninterest income also increased due to sales revenues from asset management-related products in retail banking and revenues from the main business of APLUS. Expenses also increased, including sales promotion expenses and APLUS point related expenses.
With regard to credit costs, the increase was due to the increase in the balance of APLUS operating assets. In Retail Banking, based on a review of the results of the previous fiscal year, we have focused on strengthening each sales channel and customer contact point and expanding our product lineup, which we feel is leading to offering products that meet genuine customer needs.
Next is our Institutional Business. The expansion of the balance sheet has resulted in a significant increase in revenue. Net interest income increased due to an increase in loan balances and in dividend income from VC funds. Noninterest income decreased due to changes in credit valuation adjustments, CVA or DVA, related to derivative transactions. But without this effect, noninterest income would have increased compared to the previous fiscal year. Credit costs deteriorated due to the absence of gain on reversals in structured finance and due to provision of reserves for individual deals. Looking at the overall results, revenue and real ordinary business profit levels have significantly exceeded those of the same period of the previous year. And we recognize that core earnings are steadily improving.
Next is Overseas Business, Treasury and others. The revenue increase here was due to higher dividends and interest income from marketable securities. The result was a significant increase in profit coming after an impairment loss on Latitude in the same period of the previous year. Net interest income increased due to dividends from investment trusts resulting from rising stock prices in the market for securities business as well as an increase in the investment funding margin and foreign currency-denominated assets in the treasury business. Noninterest income is as explained earlier. Credit costs also improved year-on-year due to reversals in overseas operations. In particular, we recognize that portfolio diversification has been effective as rising interest rates have been offset by rising stock prices.
Next, I would like to discuss the progress of the medium-term management plan KPIs. First is our financial targets. Consolidated net income shows progress towards the JPY 45 billion plan for this fiscal year. The medium-term plan set a target of JPY 70 billion. Although both operating assets and deposits have already achieved the targets of the medium-term plan, we will continue to control the pace of asset growth while giving due consideration to the sufficiency of capital, the progress of earnings and the accumulation of repayments resources. Please see the bottom section, which shows the number of accounts. Growth has been achieved along with the strengthening of securities cooperation. The CET1 ratio is 10.1%, which means that we are still managing with the aim of 10% of the total.
Next is operating assets and deposits. As you can see from the graph, the growth of operating assets has now caught up with the growth of deposits. We believe this is unavoidable to some extent, but we expect this trend to continue and our earnings will certainly catch up. With regard to deposits, we are executing controls with an awareness of personal deposits, which are set to be highly sticky.
The next slide is the business update on individual business. As you can see, these are the number of deposit accounts and balances in the retail area. In particular, the growth in the number of deposit accounts has accelerated since the simultaneous opening of account with SBI SECURITIES began in October of last year. Approximately, 60% of new customers are coming from SBI SECURITIES. By age group, about half are in the 30s or younger, indicating a market increase in the younger generation, which will form the core of our customer base in the future.
The overall percentage of customers in the 30s and older is 15.7%, while the percentage of customers in the 40s and older is still high. The percentage of affluent age group is still relatively high, which is one of the bank's current strengths, and the bank plans to fully cover this segment by utilizing joint branches.
This slide shows the advancement and the deepening of collaboration with the SBI Group. First of all, as for product, SBI Shinsei Connect was launched on April 1. The system automates deposits and withdrawals between accounts with SBI SECURITIES, and we have received 30,000 applications in about 4 months since we started offering this service. As for services, in addition to the simultaneous opening of accounts at SBI SECURITIES from October last year, simultaneous opening of SBI SECURITIES accounts from our bank is not possible. Through this, we would like to expand this new flow from savings to investment.
As for in-person channel, as we recently announced, we have opened our fourth joint branch at the Yokohama branch. Assets under management in our joint branches have reached JPY 100 billion in the first year of operation. Regarding this, we just issued a press release yesterday. We believe that the speed of progress at our joint branches has been quite robust, and the accumulation of the AUMs have been the largest out of any joint branch initiative of SBI MONEYPLAZA with the regional bank to date.
In addition, SBI Holdings recently announced an alliance with the Man Group, a leading alternative investment management firm in the U.K. In the future, we intend to develop simple and easy to understand alternative investment products for individual investors and offer them as investment products that contribute to growth of their assets in the long term.
In particular, these products tend to have low correlation with traditional investment products such as stocks and bonds as the mood of individuals to invest tends to decline with a decrease in stock prices. By offering a wide range of such products, we believe that we can gradually build a system that can contribute to shifting from savings to investment or creating such a trend. This will allow us to diversify our revenue sources and improve our customer satisfaction.
As you can see from this illustration, at the bottom is yen and foreign currency deposits, structured deposits, pension and insurance and loans, which are the bank's original main product offerings. Since joining the SBI Group, we have expanded our product offerings to include investment trusts, fund reps, IPO or PO stocks, corporate bonds for individuals, corporate and foreign bonds, small lot real estate trust and money trusts. In addition, we would like to add products that fully utilize the trust function, which is one of the features of our group, and we will strive to expand this product offering, including security tokens.
Next is housing-related loans. To strengthen our competitiveness, we plan to introduce AI screening. As you can see, we have secured competitiveness in interest rates, but in order for these competitive conditions to lead to the actual execution of loans, it is essential to speed up the response time in the screening process. To this end, we will soon start revising the current screen process and introduce AI to shorten the time required for screening. In cooperation with ARUHI, which has also joined the SBI Group, we have developed and will begin offering a floating interest rate product called [ YourSelect ]. In addition, we believe that the Flat 35 product will be reevaluated as long-term interest rates rise, which is expected to happen in the near future. So we will firmly promote our collaboration with ARUHI.
Next, we look at APLUS. Shopping credit has grown substantially. In particular, sales of high-end products such as auto leasing and luxury watches continued to be the driving force, resulting in substantial growth. In payments, the acquisition of new member stores for payment services via bank accounts have also been strong. As you can see from this graph, operating assets, auto credit, shopping credit transaction volume and payment transaction volume continued to trend upward.
Next, we look at BANKIT. Through BANKIT, we hope to contribute to the development of BaaS and DX improvement in local areas. Together with Kiraboshi Tech, a member of the Kiraboshi Bank Group, we will offer new digital wallet called Lala Pay Plus. This is a new digital wallet that links Kiraboshi Tech's advance salary payment service with BANKIT. Nowadays, advance salary payment is considered an essential factor when recruiting human resources. And without this advance payment function, it is difficult to attract people. We would like to develop a wide range of products through these activities.
In addition, we would like to collaborate with SBI NEO FINANCIAL SERVICES to create a regional super app. In particular, we see this initiative as our group's BaaS business with strengths in networking with regional banks. In addition to collaborating with regional banks, we have also started participating in demonstrations of AI facial certified payment as described in the lower right-hand corner of this presentation slide. BANKIT has been used as a tool for Japan's first AI facial recognition payment verification trial, which Marubeni Corporation is conducting with a transportation company in Nagano Prefecture and another in Toyama Prefecture. Although the activities are an accumulation of steady efforts, we have high expectation that this local service will expand through collaboration with regional banks.
Next is Shinsei Financial. Credit costs have declined due to the strengthening of credit collection management system. In addition to the result of strengthening credit collection management, the deterioration of the credit situation during the coronavirus pandemic is finally coming to a halt. And from here, we aim to reverse the trend of the decline in balance of operating assets and return to the pre-coronavirus level of earnings. The graph on the right shows a gradual decline in credit costs after peaking in Q4 FY 2021. From here, we intend to pursue further earnings growth, including an increase in the balance. We are making various preparations to further collaborate with the SBI Group, which we believe is a key factor.
Next is our Institutional Business. The balance is growing due to strong growth in financing for corporations and environmental-related real estate finance. The graph on the left shows the operating asset balance and net interest income of corporate business. The increase in the balance has led to steady growth in net interest income. The graph on the right show the balance of operating assets and net interest income for structured finance. The same trend is evident in the structured finance sector. We intend to further increase the balance as well as expand with an emphasis on capital efficiency.
The next page shows our Triangle strategy. Finally, our business has expanded to 93 of the 99 regional banks in Japan. In addition to doing business with almost all regional banks, we are also expanding business with major shrinking banks, which are not listed here. Specifically, we are engaged in projects such as a syndicated loan to a regional company arranged by a regional bank. So far, we have executed a total JPY 8.4 billion in loans for 18 companies.
The second point here is the participation of regional banks in the loan project that we arranged. The results of this for Q1 alone were participation by 33 regional banks to the tune of JPY 104.5 billion. In addition, the total number of regional banks we do business with is 78, and we believe that this network will continue to expand. In addition, we are further expanding our collaboration centered on sustainable finance. And in particular, we are providing information and know-how related to advanced initiatives and the number of trainees participating has been increasing significantly. The participation of our trainees in the program is beginning to help realize horizontal connections among trainees, or in other words, among regional banks. In addition, SBI Shinsei Bank Group companies are also providing their functions such as BANKIT, explained earlier, Shinsei Financial's guarantee business, and the development of leasing subsidiaries of regional banks with Showa Leasing are advancing very broadly.
Next is the structuring of sustainable finance. As you can see from the graph on the left, there was an increase of approximately JPY 300 billion during Q1. In addition to our existing Green Loans and Social Loans, we have also been focusing on the creation of syndicated loans for positive impact finance or transaction finance aimed at decarbonization. In April this year, our bank provided JERA with its first climate transition financing. Looking at the participation of financial institution in sustainable financing in Q1, JPY 5.4 billion out of JPY 8.4 billion came from regional banks. As I have just explained, this shows the execution of the transition linked loan for JERA. This is our first transition finance project, and we have arranged it with the participation of 9 regional banks. We plan to further expand our network with regional banks in this format. We have also started collaboration and joint developing products in the field of sustainable finance with Yamagata Bank.
In particular, it will become even clearer from now on that regional banks will fulfill this role as nuclears of the community. We are pleased to collaborate with Yamagata Bank on the development of a new sustainable finance product, the establishment of the system to promote it and the implementation of related measures to support the bank's corporate operations from the promotion of understanding of ESG and sustainability to the implementation of strategies.
Our collaboration with SBI Group companies in strengthening corporate business by providing finance functions is beginning to produce results. On the left is SBI Investment. We have invested in 1,156 venture companies so far, and we are actively developing venture debt to support the growth of these startup companies in particular. We would like to further expand venture debt in this area in cooperation with regional banks that have such needs.
On the right is SBI SECURITIES. SBI SECURITIES is helping listed companies raise funds through IPOs, POs, underwriting security talks, and so on. In addition to our direct loans to such companies, we have also been cooperating with SPCs to provide nonrecourse loans. And we have been providing project financing for development stage projects for which SBI SECURITIES has provided bridge loans. We believe that we can expect further expansion in this area. We see the realization of these synergies as the most obvious example. As a result, since we joined the group, we have made a total of 58 investments in loans and securitization totaling JPY 161 billion.
To give you a brief idea of our corporate business share, we have only about 6% of the total transaction pertaining to corporate customers. But for new transactions, about 14% of the transactions are related to SBI. In the project finance sector, the rate of transaction has been steadily increasing and is already at 23% of total transaction value.
Next, we will look at Showa Leasing. In particular, Showa Leasing is in the process of strengthening cooperation with regional financial institutions through joint efforts in the field of real estate leasing and establishment of a ZEH fund. In addition, we are working closely with the SBI Group's Tozai Asset Management Col to form a ZEH fund, and we believe that group synergies are being fully realized in this area as well.
In terms of initiatives with regional financial institutions, we sold JPY 4 billion in operating assets to 16 regional bank-affiliated leasing subsidiaries in Q1 alone. These results are steadily beginning to emerge, and we are gradually able to fulfill our function as a platform for regional bank-affiliated leasing subsidiaries. We are also planning to gradually expand the debt rental condominium development fund, which I mentioned earlier, from the Tokyo Metropolitan area to regional cities. And we expect that this kind of development throughout Japan will be enhanced through cooperation with regional banks.
Next is Overseas Business and Treasury. UDC Finance is the largest nonbank in New Zealand. Certainly and steadily, the balance of operating assets is increasing. Although the net interest margin has been declining recently due to the higher funding costs, the increase in operating assets has compensated for this, resulting in an increase in ordinary business profits. The area is expanding, and I think that explains what is happening. Following on from this company, we would like to nurture a second and third UDC or overseas vehicle. Due to rising interest rates, it is difficult for some companies to make a profit. So we would like to provide them with support they need. Next is Marketable Securities. Although the slide states that we have made progress in increasing the balance and diversifying our portfolio, we have not been able to increase the balance as expected due to the difficulty in judging the market. However, during this period, we have been steadily making preparations for diversification of portfolios and sophistication of operations, and we expect to be able to expand margins and profitability in the future.
As you can see from the pie chart on the right, we have included private placement investment trust as a new investment type that was not available a year ago. In Q1, due to rising stock prices, dividend gains on this private placement investment contributed significantly. In response to this market environment, we will build up the balance in a flexible manner and create a well-diversified portfolio. We believe that this area will be the key to the future. As a result, in Q1, the Securities Investment division achieved a level of gross business profit that was more than 4x higher than in the same period of the previous year. Although the outlook for interest rates is difficult to predict, we are determined to increase the balance of our loans to create a solid bottom line.
That concludes my explanation of our business. The rest of the materials are for your reference regarding the schedule and flow of events such as the upcoming extraordinary shareholders' meeting, delisting, reverse stock split, and so on. We will not be giving explanation on that. I will end my explanation here. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]