Shinsei Bank Ltd

TSE:8303

Earnings Call Transcript

[Unknown Executive]

Good evening, everyone. Welcome to Shinsei's Third Quarter Earnings Conference Call. I'm joined this evening by our Head of IR, Mr. Hiroshi Ishii.

Before we start, I'd like to remind you that the presentation and the supplemental materials have been available since earlier today on investor website. Please note that the Q&A session follows our results presentation.

Now I'll turn the call over to Mr. Ishii. Please go ahead.

[Hiroshi Ishi, executive]

Thank you. Hi, everybody. So we supposed to have Mr. Sanjeev Gupta to be hosting this conference call, but unfortunately, he got flu and then so I will take care of this conference call instead of him.

First of all, I'd like to walk through the -- our financial results presentation, which was posted on our website. So Page 3 -- Slide 3 provides key points of fiscal year 2018 third quarter financial results.

First, net income totaled JPY 41 billion (sic) [ JPY 41.5 billion ], 80% progression to the full year forecast. OBP after net credit costs was JPY 45.1 billion, 73% (sic) [ 78% ] progression. Net credit costs were below our original plan, totaling JPY 21.1 billion. This resulted from lower unsecured loan balance than expected and better collection from written-off portfolio in unsecured loans as well as larger credit disbursals in structured finance compared to the original plan. We have made solid progress towards achievement of JPY 52 billion of the fiscal year 2018 full year net income forecast.

Second, I would like to explain per share values. EPS increased by 22% to JPY 167.32 per share and bps also increased plus 9% to JPY 3,597 per share. These per share values improved significantly compared to a year ago.

Third, we would like to touch upon the next midterm management plan. Please note that next medium-term management plan, which starts from fiscal year 2019, will be announced on the same date as fiscal year 2018 full year financial results announcement.

Next, Page 4. Slide 4 shows a summary of table fiscal year 2018 third quarter financial results. I have explained the key points in the Slide 3. Please let me move on to the next page.

Slide 5. Slide 5 covers net interest income. Net interest income increased 4% to JPY 100.1 billion, which was driven by interest income from the growth businesses: unsecured loan and structured finance. Right-hand side graph illustrates year-on-year changes of net interest income since the introduction of the negative interest rate policy. Our net interest income continues to show positive growth every year even after the introduction of NIRP.

Slide 6. Slide 6 relates to the net interest margin and yield. Net interest margin continues to increase and now stands at 2.45%, resulting from our increase in loan yield [ sensitive ] average loan balance growth in unsecured loan and structured finance as well as low funding costs.

Slide 7. Slide 7 covers noninterest income. Noninterest income decreased 7% to JPY 72.7 billion, while fee income from Retail Banking increased. There was decrease in derivative-related income and the absence of large equity-related gains in the insurance businesses in the same period a year ago.

Slide 8. Slide 8 shows expenses. Expenses slightly declined from a year earlier to JPY 106.6 billion. Right-hand side graph shows a trend of expense-to-revenue ratio after the introduction of NIRP compared to fiscal year 2015. Our expense-to-revenue ratio has improved 5% compared to the fiscal year 2015 by bringing the total expense under control in the severe business environment.

Slide 9 explains the net credit costs. Net credit costs decreased 29% to JPY 21.1 billion. This increase JPY 2.9 billion of net credit recoveries recorded in second quarter due primarily to calculation of general reserve for loan losses in accordance with growth in structured finance portfolio, including project finance transactions, et cetera.

APLUS FINANCIAL recorded JPY 10.9 billion of net credit costs, increased from JPY 8.9 billion in the same period a year ago, as we provisioned credit costs related to a broad -- bulk of delinquent loans in first quarter. Unsecured loans decreased net interest costs compared to the third quarter of fiscal year 2017 thanks to credit recoveries from former Lake portfolio in addition to improvement of collection from written-off portfolio and lower loan balance than expected.

Net credit costs ratio of unsecured loans was down to 2.7%. The ratio, excluding the credit recovery former-Lake portfolio, was at 3.0%.

Slide 10. Slide 10 covers capital adequacy ratio. We maintained unparallel common equity Tier 1 ratio at 12.4% on fully loaded international basis.

Slide 11. Slide 11 highlights trends of excess interest repayment or Kabarai. While the number of disclosure claims has once increased in this first quarter due to resumption of advertisement activities by certain legal firms, it returned to the downward trend. There was no release of the grey zone reserves in this third quarter, although in the second quarter Shinsei Financial and Shinsei Personal Loan partly released their grey zone reserves, amounting to JPY 1.7 billion. Total grey zone reserve is now at JPY 62.1 billion, over 4 years' worth of coverage ratio as of December 2018. We believe it is sufficient from a group-wide perspective.

Next, Slide 13 relates to the unsecured loan business. Unsecured loan balance totaled JPY 509.8 billion, decreased 1% by JPY 3.2 billion from December 2017.

Lake ALSA loan balance stood at JPY 17.5 billion on a stand-alone basis as of December 2018. In terms of profit, OBP after net credit costs increased plus 78% year-on-year basis due to lower loan balance than original plan in addition to improvement of collection from written-off portfolio and credit recovery from former Lake portfolio.

New customer acquisition has been steadily improving as number of new applications and approval ratio continued to improve. Going forward, we will aim to further improve approval ratio by introducing the new initiative, including various credit assessment measures.

Finally, Slide 14. Slide 14 explains the structured finance business. Structured finance asset balance totaled JPY 1,546,900,000,000, 10% growth from December 2017. While expenses increased due to increase of indirect expenses corresponding to the operating asset growth, JPY 2.9 billion of net credit cost recoveries were recorded as a result of calculation of general reserve for loan losses in accordance with growth of portfolio.

OBP -- net credit -- after net credit costs totaled JPY 10.2 billion, plus 96% increase compared to the same period a year ago. In the business performance, the amount of new commitments in the project finance increased due to domestic mega solar project as well as overseas wind power projects and so on.

In real-estate finance, the amount of new disbursement decreased as we concluded [indiscernible] release in the previous year. We have been selectively conserving market situation, beta -- risk beta of individual deals and diversification of portfolio in the real-estate finance.

Finally, I would like to touch upon the Retail Banking business. Please turn to Page 17. This slide explains the Retail Banking business. I would like to highlight impact of the Revised Step Up Program. Deposit balance, as our funding base showed no material impact from the revision of ATM fee table, was lower. Time deposit reflects redemption of matured campaign product.

As you see, the upper right graph illustrating deposit balance by customers' [ theta ]. Customer under term [indiscernible] and gold [ theta ], who are not charged ATM fees, covers 97% share of the deposit balance.

In the operating performance, we expect a decrease JPY 1.5 billion to JPY 2 billion of annual ATM fee -- annual ATM transaction fee borne by Shinsei as an effect of Revised Step Up Program.

In addition to this, increase in deposit-related interest income and recovery of asset management products has helped improve earnings structure of Retail Banking.

As that concludes my presentation on the third quarter of fiscal year 2018, I'm very happy to take any questions from you. Thank you.

[Operator]

[Operator Instructions] The next person will now ask a question.

[Unknown Analyst]

This is [indiscernible]. I have one question on Lake ALSA. So from what you're describing regarding the loan balance and the credit costs coming down and comparing the growth of the business, it seems that Lake ALSA continues to lose market share compared to other nonbank finance. So I wanted to confirm if that was indeed the case. And also, the approval rate is going back about 30%, but still relatively low at 30%. What are the steps being taken to kind of ensure that this number goes up in the future?

[Hiroshi Ishi, executive]

So regarding Lake ALSA, as you know, we've taken our starting point of Lake ALSA from April. And then so we implemented lots of measures how to back our new customer acquisition through the normalized revenues as much as possible. But up to December 2018, so we see an improvement over last 9 months. However, it is still lower than our original approval ratio, around 35%, something like that. And also, December is a very weak season for unsecured loan business, as most of Japanese companies pay bonus to their employees. So seasonally -- so historically, it's -- third quarter is very weak quarter in -- for unsecured loan business. So we will continue to implement other various kinds of measures to boost up our new customer acquisition and, hopefully, rebound our loan balance in total of our unsecured loan business. So we will try to summarize our measures and then results at the timing of our full year financial results announcement because we would like to see the full year result from April 2018 to March 2019. So we'll continue to improve our unsecured loan business, but we will summarize our results at the timing of our full year results. Is that an answer to your question?

[Unknown Analyst]

Yes. And one follow-up question, please, on the solar business. With the -- up until now, solar and wind power financing has been very good business for Shinsei. But with the feed tariff coming down quite a bit for solar next year, are you confident that you can continue to generate such current level of structured finance business for wind and solar financing?

[Hiroshi Ishi, executive]

Yes. So because we are very confident to improve -- grow. Not only for our business, but also the project finance as a whole going forward because in the domestic market, though, we made a lots of new commitments, but we will see loan growth over the time because customers will go down from such commitments. So we have a good pipeline for the future loan growth from -- our now current commitment. And also, we have a lot of potential pipelines for the next 1 to 2 years. So we can grow this business. And also, we have to diversify our focus in terms of not only in the solar, but also the wind power or DSM or something like that as well as diversifying kind of financing schemes, something like that. So we are now developing such kind of diversification over financing schemes and -- as well as solar -- power sourcings. And then -- so we are very confident to grow this business going forward.

[Operator]

[Operator Instructions]

[Hiroshi Ishi, executive]

I'm very happy to -- any questions from you and then so -- but we don't see any question comes up from you. So if you don't have any questions at this point in time, I would like to conclude my conference call and then -- but I'm very happy to [ take ] any questions from you after this conference call via e-mail or phone call. So please feel free contacting our Shinsei IR team. Thank you for joining the conference call for our fiscal year 2018 third quarter financial results. I would like to conclude conference call. Thank you.