Aeon Financial Service Co Ltd

TSE:8570

Earnings Call Transcript 2019-Q2

[Hideki Wakabayashi, executive]

Thank you for coming to our financial results briefing. I'm Wakabayashi, and I'm in charge of corporate management. Nice to meet you. I will talk about our business outline and results and our efforts for capital efficiency through securitization in the second quarter of the fiscal year 2018. First, let's talk about consolidated business outline. In Japan, transaction volume with external merchants grew due to promotional tie-ups with affiliated companies, resulting in credit card transaction volume up 8% year-on-year. As for cash advances, due to the increase in the number of cardholders, transaction volume was up 3.4% year-on-year, and the financial receivables increased JPY 11.7 billion from the start of the fiscal year. For housing loan, we had good feedback from our customers who had special shopping discount given at AEON Group stores as well as special interest rate plans that we offered, which resulted in the transaction volume of 7.7% increase from the previous year. Financial receivables, including securitization, increased JPY 83.3 billion from the start of the fiscal year. Globally, stable consumption in countries where we do business served as a tailwind, and credit card shopping and cash advance both grew in double digits. In Malaysia, as the country prepared for the shift toward a new consumer tax policy, a tax-free period was generated where the tax rate was actually 0%. We were able to capitalize on that demand for spending. As a result, transaction volume of installment sales grew positively, especially for cars and higher-end motorbikes. As for consolidated number of cardholders, we wanted to serve wide range of customers, including youth and middle to high-income segments, so we were able to acquire numbers through tie-ups with popular characters and prominent companies, which resulted in expanding our customer base. Next, let's go to consolidated and segment results on Page 3. Take a look at the right-hand side of the chart, which is consolidated total. The aggregate of the second quarter shows increase in income for 7 terms in a row. Ordinary income, ordinary profit and profit attributable to owners of the parent all show the highest ever results. In the domestic business, interest income and fees and commissions income grew, which were mainly attributed to credit card income. Ordinary income was up 8% year-on-year. On one hand, as we enhanced point program to increase transaction volume, advertising and promotion expenses increased mainly 4 points. We also needed to refine the criteria for measurement of allowance for installment finance receivables influenced by general industry trend of Titan credit requirements for bank-issued card loans as well as the change of external environment. We experienced rise in bad debt expenses. In addition, upfront investment costs, such as amortization and other expenses to streamline the process, increased to meet customer needs and to improve operational efficiency. Implementation of RPA and streamlining through consolidation of HQ functions, et cetera, allowed the personal expenses against the ordinary income ratio to improve 0.8 point to 16.1% year-on-year. Our KPI index for the year 2018 is set at 16%, and we are sure to achieve that in Japan. Globally, we were able to increase our top line and profits in local currency and in yen for all 3 areas, namely China, Mekong and Malay area. We were able to increase the top line while we reduce cost. So as you can see, both personnel expenses ratio and bad debt expenses ratio against ordinary income in each area improved year-on-year. Next, let's look at domestic and global segment results by graph on Page 4. It shows main reasons for increase and decrease of ordinary income. Please refer to this diagram for details. Next, let's look at consolidated balance sheet. For cash and deposits, we have implemented securitization near the end of the fiscal year, and it increased JPY 24.3 billion from the start of the fiscal year. As we add up the loan and bills discounted and accounts receivables for installment, it increased JPY 150.9 billion. The total assets were JPY 5,092,900,000,000, an increase of JPY 240.1 billion from the start of the fiscal year. For liabilities, as we observe the increase of credit card and debit card integrated tied bank cars, more customers started to use our service to several accounts. Thus, deposits, mainly ordinary deposits, increased JPY 270.5 billion and the total liabilities ended up JPY 4,669,100,000,000, an increase of JPY 254 billion from the start of the fiscal year. For allowance for loss on refund of interest received, we transferred JPY 500 million at the second quarter, so that compensated amount reduced JPY 700 million compared to the previous year and ended up at JPY 1.1 billion. As a result, the allowance balance at the end of the second quarter was JPY 2.5 billion, JPY 500 million decrease from the start of the fiscal year. Total equity is JPY 423.8 billion due to dividend payout at the end of the term, et cetera. It decreased JPY 13.9 billion against the beginning of the fiscal year. As a result, the shareholders' equity ratio by domestic standard was 8.31%, which was minus 0.02 point against the start of the fiscal year. Next, let me talk about capital efficiency by securitization, what measures we worked on in the first half. As I already told you, in order to deal with the expanding financial receivables, we have conducted securitization regularly to improve yield and duration gap between investment and funding and to reduce risk assets so that our capital is used more efficiently. AEON Bank securitized JPY 250 billion through low-yield, long-duration receivables, such as housing loans and by selling debt to external investors, we reduced funding and risk assets. Furthermore, with the fund raised, AEON Bank purchased securitized receivables of JPY 51.4 billion from AEON product finance and of JPY 13.3 billion from AEON housing loan service. And by investing them, we were able to improve yield of the receivables we own and also improve the duration gap through shortened investment period. AEON product finance and AEON housing loan service were able to raise funds at low interest rate by securitization to AEON Bank. On the other hand, the AEON Bank is able to increase profit through this. However, with this securitization within the group, we are not able to reduce consolidated risk assets. Therefore, we have securitized the auto loan worth of JPY 25 billion externally. In consideration of market interest rate situation along with the increase of the risk asset in total as well as yield of each product, finance receivables can be sold to external entities as well as securitize them within our group companies. As a result, impact on consolidated profits is what you see in the red dots formulating the square in the middle of page. The risk asset was to increase JPY 260 billion if it was not to be securitized. However, its effect was worth JPY 40 billion, and we were able to contain it to JPY 220 billion. So we were essentially able to maintain the net worth ratio. That's all for me. Thank you for listening.

[Unknown Executive]

Let me elaborate on this year's main initiatives for the fiscal year 2018 for both first half and the second. As you can see, this year, we promote [ new store ] shift and strengthened our efforts to meet our customers' needs. We also plan to speed up our growth of global business once again. That's how we've been doing. First, let's take a look at the initiatives for the first half of the year 2018. As for our domestic business, we are working on taking advantage of the fintech technologies. In our efforts to go paperless, we worked on making the e-statements available on our smartphone app called AEON Wallet as well as we distributed the coupons. Credit card statements available on the AEON Wallet contributes to the lessening of the burden on our environment. We are going to work on it from the second half toward the next year, taking it on the long clock. We are going to decrease our CO2 emission by 50,000 tons in the future. We also have adopted the system for housing loan contract to go paperless from pre-screening to the end. Through digitization of the documents and reduction of sending by post, we are working on simplifying our process and shortening the time it takes. Through making things more convenient, it is my understanding that AEON Bank's housing loan balance has increased dramatically. With our efforts to make it cardless, from this September, we started our service called smart ATM with which you can complete transactions at our ATMs by just scanning the smartphone. Also from last year, in the context of variety of settlement methods of our customers in recent years, we launched a cardless settlement system which uses palm biometric authentication technology. We have AEON employees to participate in the test conducted at some Ministop stores. Based on the results, we will start to consider implementing that for each AEON group company and for our affiliated merchants.

Next, let me talk about our new ATM function, repair of card magnetic stripe. Let me give you one example. This is a low key type of innovation. However, it is highly wanted by our customers. From this June, we have been providing a service to repair the magnetic stripe on the surface of AEON cards at 6,197 ATMs all over Japan.

In recent years, you have more opportunities to keep the credit cards close to highly magnetic devices like smartphones, causing more and more credit cards to suffer from magnetic stripe malfunctions. It takes about 10 days to reissue the card, but we always felt that it's inflicting loss and inconvenience to our customers. By introducing this service, as you can see on the graph, you can see the number of card reissuance and card inquiries decreasing. We also are able to reduce cost related to reissuance of cards. As you can see, we were able to cut JPY 30 million worth of reissuance fees from July to September. It does not include the time it takes to take the call asking for reissuance and personnel cost. They can be reduced as well. As it dramatically enhances convenience for our customers, it also reduces our cost at the same time. Though it is a very small investment, it has been quite effective. Next, let me elaborate on the transaction volume increase of AEON card as a result of making it to be our main card. The left-hand side slide shows the transactions inside and outside the AEON group stores. As you can see, the transaction volume within the group has steadily increased. At the same time, the transaction volume outside the group, which is indicated in the blue bar chart, shows that it grew because of promotional tie-ups with our partners. Next, let me talk about the bar chart on the right. It shows average usage per month. This also shows steady results as we worked on improving operation rate. We started the campaign to double points at AEON Group stores from June 2016. AEON Card is becoming a main card more and more, and we think that the usage frequency has increased inside and outside the AEON group. As you already may know, AEON Bank established in 2007 finally came in first out of 116 banks in the 14th Retail Banking Service Power Survey conducted by the Nikkei Japan economic newspaper. AEON Bank is traced back to AEON retailer, so AEON Bank members feel strongly that they are retail customer driven. We are fully aware of the importance of closer to customers, and we think that's one of the reasons why AEON Bank was highly regarded. We think other reasons of high appreciation AEON Bank include that AEON Bank has refined the branch structure by directly managing all agency branches and improved product lineup based on the customers' investment experience. We will continue to do our best for the service that suits customers' needs. Next, I will talk about our global business. Regarding the auto loan service utilizing IOT technology in the Philippines launched in July 2017, so far, in addition to tricycles, our service has been expanded to 4-wheel taxis and EV 3-wheel taxis. This expands our business. Furthermore, toward realizing a sustainable society, this service will be helpful for less credible people to buy a vehicle with a loan, and it is contributing to creating driving jobs for local people. Also in Cambodia, we started e-money business on a local currency basis, including QR code payment and remittance service. This leads to supporting the use of cashless payments to cater to the middle and lower income earners. We are proud that AEON Group has been able to provide service suitable for the needs of each country and region, and we will do our utmost to keep such service as long as there are needs. In global business backed by economic growth of Southeast Asian countries, the income level of people in the region is rising. In this situation, in Malaysia, we will make effort to acquire good customers by issuing AEON platinum cards for high-income earners, developing loan products with interest rates set based on risk level and strengthening to deal with local Japanese car buyers with less default risk. In Thailand, by having tie-up with Thai Airways, we are issuing AEON Royal Orchid Plus cards. We reduce credit cost by way of top line growth and achieving better credit quality through acquisition of customers from the high-income segment. Moving on, this slide shows ordinary income and number of cardholders in our global business. As you can see, by issuing co-branded cards with leading local companies and enriching privileges, the number of cardholders has been steadily growing. Besides, boosted by strong public consumption in Southeast Asia, the ordinary income is growing too.

The next slide shows our quarterly KPI figures from the first half of fiscal year 2016. While the top line progress is well through refinement of credit screening and credit collection policies and systems, as the line graph shows, bad debt expenses against finance receivables balance decreased from 6.5% to 5.5%. Toward achieving our plan, we will continue to work towards increasing the top line and improving cost control. In the next slide, I'm going to explain the progress of system IT investments, the plan for this fiscal year and the investment details of the first half. In this fiscal year, in order to grow digital products and services, strengthening credit management and back-office consolidation and automation, we plan to invest a total of JPY 35 billion. For the first half of this fiscal year, in Japan, we began the foreign currency deposit service, ATM card magnetic stripe [ repairment ] service, which I already introduced, and introduction of smart ATM in which ATM transaction can be done by smartphone. Besides, we launched a merchant network management system and development of database. So we made investment on strengthening service. And overseas, we developed our credit screening and credit management system and strengthened security. Thus, we invested in infrastructure development and the amount of consolidated investment was JPY 1.5 billion. Furthermore, since the introduction of RPA to our operations as part of the integration of headquarter functions project. The man hours. In terms of workload, our working hours shortened by 30% as compared to March 2017 when the project just started. We talked on this to you about a year ago. And although we think it will be some time before it has any effect, we are making steady progress. Now I would like to move on to the initiatives from the second half of fiscal year 2018 about domestic business to expand our customer base we're issuing new co-branded cards. From November 11, we began to accept applications of AEON NEXCO Nishi-nihon Cards. By this, from East Japan through West Japan, customers can use the cards at ETC service areas and parking areas countrywide. In November 13, we started to accept applications of AEON Card SKE48. To promote more downloads of smartphone app AEON Wallet, a new function was added where cardholders can select the card design on AEON Wallet featuring their favorite idols. Now for the next 30 seconds, please watch an ad video of SKE48 Japanese idol girl group. There might be fans of SKE48 here, so we do hope that especially SKE48 fans will become our SKE cardholders. Because this was not publicly announced yet, I refrain from the details. But within this month, we're planning to release a new card interface design. By issuing such co-branded cards, we hope to approach and acquire a new customer base. In this fiscal year, the issuance of especially co-branded and new cards was concentrated in the second half, and that is a point in need of review for us. But we can also say that we are pleased to report to you that we have managed to issue the cards within this fiscal year. I'd like to explain promotion of cashless payments in the domestic business. We are introducing contactless payment function to match international standards. We believe this will improve service for foreigners coming to Japan as we become closer to upcoming 2020 Tokyo Olympics. In response to recent demand for a wider range of payment methods, we will also shift toward cardless payments. In the second half of this fiscal year, in addition to in-app usage inquiry and coupon distribution function, we are also developing functions, including QR code payment by smartphone. Next, I will talk about our plan for the second half of the fiscal year and after. Regarding our initiatives making use of smartphone digital technologies in Malaysia in October this year, we began QR code payment service and accepting cardholder applications of Malaysian version of AEON Wallet smartphone apps with various advantages. With the apps in all AEON stores in Malaysia, namely AEON Malaysia and AEON BIG Malaysia, cardholders can pay by QR code. Starting with these, we are planning to expand our service gradually. In India, we launched instant credit screening app AEON Fast where applications are made paperless and where screening time can be shortened. The credit screening time was reduced from 3 hours to just 1 minute. This has substantially improved operational efficiency and good customers can be secured in advance. Therefore, enhancement of profitability is expected. Next, I will explain catering to various customers segments in global business. In Thailand, from this month, we started to issue J-Premier Platinum Cards. Cardholders have advantages mainly in AEON stores. The target group consists of higher-income earners who travel to Japan and young people. The card face design features luxury. In Hong Kong, like Thailand, we plan to issue AEON Card Premium targeted at wealthy people. The auto loan business launched in July 2017 in the Philippines, which I have been saying, will be launched in Indonesia in the second half of this fiscal year. Through these initiatives, we will work to provide financial services that match a variety of customer groups and needs. With regard to the business plan of fiscal year 2018, we will steadily implement the plans for the second half and introduce new products and services into the market. By doing that, we will achieve the annual target. Finally, concerning forecast of consolidated results for fiscal year 2018 and dividend forecast. There's no change from the numbers announced at the beginning of the fiscal year. In the second half, domestically, we will continue to strengthen credit card business. And in the banking business, by promoting asset building service and installment finance, we will achieve top line growth. Also, through promoting and shifting toward digitalization, including introducing RPA, we will make the total [ permeation ] of operational efficiency and improve productivity. In global business, we'll continue to control personnel and default costs. And by introducing new products, we will accelerate growth. Through steady progress of these efforts, we think we'll be able to achieve our forecasts. Regarding dividend forecast, because we will keep investing for growth, we forecast the amount of full year dividend is JPY 68. The payout ratio target is between 30% and 40%, as we have been saying. So our forecast is within the range. That's all. Thank you for listening.