Q2 2013 Shinsei Bank Ltd Earnings Presentation Webcast

8303.T - Shinsei Bank Ltd
Q2 2013 Shinsei Bank Ltd Earnings Presentation Webcast
Nov 09, 2012 / 01:30AM GMT 

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Corporate Participants
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   *  Shigeki Toma
      Shinsei Bank Limited - Representative Director, President and CEO
   *  Shigeru Tsukamoto
      Shinsei Bank Limited - Senior Managing Executive Officer, CFO and Head, Finance Group
   *  Masayuki Nankouin
      Shinsei Bank Limited - EO and Head, Consumer Finance Sub-Group
   *  Andrew Hoshino
      Shinsei Bank Limited - General Manager, Lake Business Division

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Presentation
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 Shigeki Toma,  Shinsei Bank Limited - Representative Director, President and CEO   [1]
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 Good morning, ladies and gentlemen. This is Thomas speaking. Thank you very much for coming here, despite your very busy schedule. I will give you the overview of the first-half results, the prospects for the full year and the challenges ahead and strategies.

 First of all, you are probably well aware of the results. On consolidated basis JPY25.7b and on non-consolidated basis it was at JPY15.4b. And consolidated was 50% the full-year prospects and non-consolidated basis approximately 70% of the full-year forecast. There are several details that have led to these results, but very crudely speaking the non-consolidated revenue in generating power has improved quite significantly.

 Lendings balance. Putting aside the type of assets within our portfolio the absolute amount has gone up and finally we're seeing an upturn in loan balance. And we believe that this might become an endearing trend and we are feeling the strength of the increase in loan balance. As far as our Group is concerned there were a few bad parents and prodigal sons that were consolidated, but now the parent is also becoming more robust. That is our current feeling.

 So in that sense in the second half we don't see any significant negative factors. If Europe doesn't deteriorate any further, unless there is air bombing of Israel and further tension rising between Japan and China, then, barring those factors, we believe that we will be able to achieve the forecasted projections.

 And to speak about the projections, for the current fiscal year this will be the final year of the three-year, mid-term business plan that was launched after my appointment. And as we proceed in the final fiscal year, talking about the current 2012, we will be settling the legacy problems. And after those legacy problems are resolved we will be stabilizing revenues and profits.

 We will be departing from the structure whereby we'd be affected by detailed factors. We would have a strong platform in place to be able to generate stable revenues and income. That had been the objective that I had set forth upon embarking on this mid-term business plan and we feel that we have been able to achieve that goal to a certain extent.

 The situation was extraordinary and it's just about going back to normal. And with a little bit of muscle power, without using much brain power, we were able to do that and that's where we are today as we stand. So the difficulty lies ahead of us in the near future. And we're currently in the process of making the next business plan -- next mid-term business plan.

 And I've been saying this since my appointment as President. We are, in terms of size, smaller, one-tenth or one-twentieth of the mega, but at the same time we're not as agile as the regional banks. We don't have a local platform, or we have extraordinary strength, so we're rather in between, neither a mega nor a regional bank. And in the midst of numerous financial institutions how can we exert our raison d'etre? That had been our long -- that had been and that is our long-term challenge that we need to find a solution for.

 And this might be sounding too ambitious, but commercial bank, in essence, has to play a certain role, so we have to think about the essential role of a commercial bank. So by returning and focusing on those essential roles of commercial bank we want to offer a business model that is different from others. Can we do all of it in the next three years? No, probably not. So some issues will be left until the next mid-term business plan.

 But we're in the process of making the next mid-term business plan as a step towards the final goal. And the plan will be announced some time in the fourth quarter, but we will be factoring in a long-term horizon and, at the same time, trying to make robust the short-term platform as well for generating revenues and income. So the plan isn't fixed yet. We're not ready to make any certain announcements, but the orientation can be explained very briefly.

 Our business line can be divided into three categories. Institutional is one -- institutional business and individual and then global markets. So there are three major categories of business lines. And of the three the clear area of focus that we've decided on is institutional and venture banking initiative is the motto that we've introduced.

 In short, it's all about capturing business opportunities in the emerging market. And we will be taking proactive measures and be taking the primary law in supporting industries and offering suggestions for growth of individual businesses. And we will try to exert a competitive edge to help out those companies and industries.

 So who are the target companies and which are the target sectors? In fact, yesterday I did the results announcement to our employees and one of our employees asked the following question. Which sector are we going to be focusing on? I used to talk about nursing care, healthcare, renewable energy, or regional or economic development, but other banks will probably do the same thing. So what would be the uniqueness of Shinsei? That had been the question, which was quite a good question coming out of our employees.

 So I said -- we're not pursuing novelty. We're not pursuing, or want to become an avant garde, rather, we want to change the business model within our Bank. So what am I talking about? Traditionally in a traditional bank they were just sitting and waiting for customers to come to you. They come to you. I want to borrow money. I need money for working capital, capital expenditure, or acquisition. So banks used to just sit at the desk and wait.

 All right, then, we will study your application and then after much study we will respond back to you. That had been the typical business model of a traditional bank. You go to a restaurant, then you're offered menu A, B and C. Which one do you want? That had been the attitude of a traditional bank. But I've been seeing that that's not the right attitude.

 I'm not sure whether this is a good analogy or not, but even if you're dining at the same -- or having the same meal, I'm talking about cuisine educational institutions. I've never went to cooking school, but I heard that teachers are there, instructors are there and the students cook the recipe and they try that out. Now, regardless of whether there will be an instructor for cooking, but we're going to be cooking the meal along with our customers. Do we need more salt, pepper, or soy sauce?

 Well, those are the spices, but we also have to ensure good ingredients that will be delicious for me as well as for the customer. So we cook together and we also dine together with the customers, so that's the difference. That's the point and uniqueness.

 I've been talking about back to origin, back to the starting point. After the major restoration the national government took the policy of increasing wealth and militarization and promotion of industry. Putting aside militarization, those were just open after centuries of closure. No resources, no industry, no technology develop industry. Textile was probably the only sector that could have been called as industry.

 And industrialization began after the Meiji government took power and Shibusawa Eiichi, or Yataro Iwasaki, the founder of the Mitsubishi Group, had taken the lead to create the financial sector. And of course there had been the national government to support these prominent businessmen, but they were thinking about how they can develop the industrial sector themselves, how much capital would they need to inject and how much risk will they have to bear.

 But at any rate they were the promoters themselves. They were the ones that took the initiative. That's where we want to be, in other words, not passive but we becoming the actor ourselves. New business is fine, but if you do this and that in addition to what you're already doing you'll be much better. Would you like us to help you? That's the attitude we want to pursue.

 Of course, that's not -- that cannot be done overnight in just one great leap. We may not have that capacity. For example, say, steel, or iron, or automotive, or electric appliances, do we have the expertise and experience? Or have we accumulated as many failures to learn enough lessons? No, we have to build up from scratch.

 But fortunately these are unchartered waters and we're not navigating into chartered waters, but we're going to be navigating into unchartered waters. So there is no authority. There is no predecessor. There is no formula for success. Those are all the things that we are going to create from scratch.

 If I may give you one example, Fukushima fund was started up. The total amount is only JPY1b and as partners we invested JPY500m. NEC Solutions and another company had injected money. Yes, sponsor have been created into the affected areas of the earthquake so, again, another fund, you may think. But the other funds are there for recovery and reconstruction, just for recovery and reconstruction of the affected businesses. That's not the objective of this fund.

 Of course, they've been hurt, they need help, but that kind of help can be offered by regional banks as well as local financial institutions. They don't need us. Just a small bit of JPY500m and JPY1b is not going to be -- make any contribution for such reconstruction. That's not the nature of the fund we've established, rather, the objective is to attract new businesses to the Fukushima area.

 We established one company that will be in charge of medi care, healthcare, renewable energy. Fukushima prefecture wants to foster and invite those sectors. So first we establish core companies in those areas and we ask them to make investments and inroads into Fukushima. Of course, these are OEMs. They would require components and those components can be procured within the prefecture.

 And for local procurement there are some companies that also want to become a supplier in the peripheral prefectures, so we can invite those companies to invest into Fukushima. And the prefecture government is willing to subsidize and we want to attract as many such companies as possible for them to invest in Fukushima and create job opportunities in Fukushima.

 And then in a 10-year time span, if we think about a 10-year time horizon, we will be able to create a sectoral cluster for that specific target industry. So what's very different from other funds is that the objective and target is different.

 We're not talking about just reconstruction. We're talking about the promotion and facilitation of the local economy. And also we are a limited partner as we make investments. But at the same time general partner will be other businesses, but we will be also seconding our human resources to do a selection of investment destinations. And also, further, we will do some follow up.

 They would require working capital after they've established themselves, so we will consult with them and maybe provide the finance, of course, although they will be partly supported by regional banks. So we will be providing hands-on support so that those businesses can grow by themselves. So that's the objective.

 If you look at other companies, or -- this applies to our relationship with other businesses. We -- of course, we're not saying we won't lend to established companies. Of course, if -- in the case of a blue-chip company offering JPY10b, would they appreciate Shinsei? No. Because megas would be much better in doing that and other regional banks would offer such lending. Just because Shinsei offers [JPY10m] to a blue chip I don't think we'd be appreciated.

 So we'd be passive. Or, in other words, we will be providing such lendings, but that will not be our priority area. Rather, we want to support entrepreneurship, businesses start ups that new business people are starting up, or new industrial sectors, or SMEs that are in the process, still in the [naisant] process of development, companies that would truly appreciate the lendings that we may offer.

 And of course those companies would be ensured of managerial resources. They would of course be ensured of access to the financial market. The would be assured of distribution channels. So those are some of the areas where we may be of help. So we would be supporting, but we will be making investments and we will have a say.

 So that's the basic attitude. And another point is with regards to local economy promotion. If you look at Japan today, yes, demographics, ageing society, tax revenue is ensured. We're ensured of this and that. This is a problem. Healthcare, medi care, we're in problems. But the rural areas are in more serious problem. There are villages without any physician and there are rural areas where postmen have difficulties in delivering mail.

 So these villages exist in the rural and remote areas and those are the villages and communities that are most seriously suffering from the twenty-first century type of problems. So promotion of local economy is a must, or else there is no future to this nation. So this is another perspective that we are trying to capture. And I don't want to offend the remote villagers, but what are they doing to help themselves in their local communities? But I don't see any success stories.

 One Village, One Produce may have been a campaign that was, to a certain extent, successful, but other campaigns were not successful. Yes, you see department stores hosting events focusing on local producers, but those are one-time off events and aren't sustainable. There are many factors that have led to this and I have conversations with the CEOs of regional banks and they complain about that. But we have to come up with the right business model and formula for success.

 Back to Fukushima, if we're successful in Fukushima, then that could be transplanted to other prefectures, or even in Tokushima, or Oita, or Kagoshima, in Shikoku Island, or on Kyushu Island. So as long as we have a formula for success that could be transplanted to other localities. So that is my basic idea. And I will close my speech on institutional Group. But the problem lies in individual and global markets. Those are the areas where we face challenges.

 We don't have really have certain prospects for these two areas. So as far as these two areas are concerned, what would be the policy? What would be the strategy? Of course there are many items on the menu, but what would happen if we integrate all of these measures, especially in retail? Retail banking of the parent bank versus Shinsei financial or [Apalashoa] lease the subs offering services to individuals.

 After integrating the subs what -- how would the institutional -- or, rather, the individual services look like? We have to formulate a new strategy for the retail and that is going to be one of the major elements to be embedded into the next mid-term business plan. And to a certain extent we wish to come up with a certain solution.

 As far as retail is concerned, in 2000 we were reborn as Shinsei Bank and then the inaugural CEO, Mr. Yashiro, back then used to serve as the Chairman of Citibank and he introduced the Citibank retail model. So that's how this Bank began. Back then that was the starting point of Shinsei. There were many diverse human resources. So retail was non-existent under the days of a long-term credit bank.

 However, internet banking was started from scratch. This has become the norm today, but that was quite new back then, and innovative, which was a great success. And even today, although the effect has faded to a certain extent, we still have the image of being quite innovative.

 Yet, however, frankly speaking, thereinafter this business model we were negligent in making efforts to polish up the original business model. So the competitive advantage the Bank used to enjoy initially shrank very rapidly and we were overcome by runner ups.

 Unsecured consumer loans. Since one year ago -- and this will be explained in detail later on, but we've been trying to integrate all of these retail services. Then what kind of services can we offer to individuals, or in the current demographic structure which age bracket, or which layer of customers are in need of what kind of services? If you're newly grad and have started working; you reach 30 and you've got married; you build a house; and then you retire eventually. That's the typical lifecycle.

 So depending on each stage of the lifestyle -- lifecycle services were designed. I think that was the typical model in retail banking, although I'm not really well versed. But it seems that the lifestyle in itself is changing in nature and the substance of each stage of lifestyle is changing in nature.

 So this age bracket what kind of service do we offer? This is the approach we're taking to this age bracket, but is this the right service? I think that's where we need -- what we need to consider and that's exactly what we need to think about as we try to differentiate ourselves from other banks, to define what we want to do, which hasn't been defined yet.

 To give you just one example, I was born in 1948, I'm a baby boomer and they always say that baby boomers are now about to retire. And, for example, department stores -- you go to department stores, there are many products that are targeting the silver citizens, but there aren't any banks that are targeting specifically the baby boomers.

 I could be a great target customer. So if you think -- so I receive many brochures and leaflets from various financial institutions and I take a glance at them. This is the kind of financial product we offer. If you're thinking about inheritance we will have a workshop session. Those announcements are sent to me.

 Some people are representing Nomura. I don't mean any offence, but nothing strikes me as impressive, none of that. I try to think why none of those lines strike me. But after the collapse of the global economy people who went into panic made a great loss. From deposit to investment there had been a security boom, a real estate boom caused and people rushed to golf club ownership -- membership. Is it asset formation?

 At any rate, people were motivated by all those headlines and began making investments, but those who panicked after the collapse of the bubble made great losses, although there were many who made money. But many of them lost a lot of money after the collapse of the bubble. And we, the baby boomers, during the global economy had accumulated assets to a certain extent. We are a wealthy, relatively speaking, we were, and made great investments and great mistakes and made great losses, suffered from those losses. So you should just not touch them.

 And the retiree -- for retirees the biggest challenge would have been inflation, but we've been in deflation. The interest rate is 0.001%, is it? Peanuts. But purchasing power is going up. So we've experienced the suffering and thinking about where are today what's the right approach to retirees? That's something we need to think more seriously about.

 By the way, during the global economy I wasn't residing in Japan. I was struggling in the United States. So in that sense I didn't make any investments. I didn't purchase real estate. I didn't purchase golf club membership, no stocks, nothing in Japan. Rather, I had fun -- too much fun in New York losing money.

 So we had the employee stockholding association and I was able to sell my equity at the peak maximum stock price, so I made great money. But I think that's the kind of thing we need to think about. What are the demands of the baby boomers? The response so far has been a cookie-cutter response. None of these measures can be referred to as customer oriented. So that's what we want to do. This isn't any novel theory, but if there's no-one that's implemented such a theory then that would be an opportunity for ourselves.

 So once again we need to review those opportunities and think about those strategies. They may not sound novel to you. They may not sound innovative, but if we follow those opportunities and polish up the measures, and if we truly think about the quintessential role that banks ought to be playing, then I think we will be quite effective as we try to draft the next mid-term business plan.

 I was supposed to give you the first-half results. Sorry for deviating, but I wanted to give you a wrap up of the future orientation. Thank you for your kind attention.

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 Shigeru Tsukamoto,  Shinsei Bank Limited - Senior Managing Executive Officer, CFO and Head, Finance Group   [2]
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 This is Tsukamoto. So I'm going to give you the results of the first-half financial performance. I'd like to give some more details. First of all, the characteristics of the term, let me give you my personal view. And, as the president mentioned the first time, the difference between the consolidated and non-consolidated has shrunk.

 So the Bank on the earnings power increased. And our financial performance was pretty much reflected or influenced by one-time factors, but that impact has become small. So the operation, the result itself, was directly reflected to the performance. And, lastly, this has been continuing, but [either] the expenses of credit costs were well controlled. So these are the three characteristics.

 Now one by one I would like to explain each item, so please go to page five. This shows the net interest income, which is a component of our business profit. Compared to the last term it decreased by JPY5b and this is because the loan balance of consumer finance decreased. So the net interest income decreased.

 And this is not available on this chart. In the second half of the last fiscal year the net interest income also was JPY56.1b. That means the consumer finance balance was still decreasing, but in terms of a net interest income we were able to achieve our same level. So that is a figure for this term.

 And next please move to page six, non-interest income. On year-end basis this increased by JPY3b and the one-time factor is mostly reflected here. In terms of last fiscal year this is available on page eight. The one-off item was JPY2.9b. That was the negative factor last fiscal year. And this time is JPY900m -- sorry, last time was JPY1.9b and this time is JPY0.9b. So it increased to JPY3b, but [JPY1b] is because a decrease of the one-off items. So as a real profit earnings power we increased JPY2b.

 And comparing with the second half, the number is not available, but in the second half was JPY41b, so one-off item was about JPY2.6b. So if you look at the gap compared to second half the actual increase was JPY5b. And the reason for the increase, there are many reasons, but one of the reason is the [LM] operations the gains on sales of the [JVs] increased, or the sales of the credit trading the profit increased. Those are the factors.

 Please move to page seven. This page shows the expenses and credit costs. As I said earlier, these are well controlled. However, for the expenses there were system-related capital expenditure last time, so it's increased slightly. However, for the forecast going forward probably this will stay at this level. And credit costs, as shown here, mainly in the consumer finance business saw the decline in loan balance. And you had that -- and saw the improvement the quality of asset. So it improved by about JPY2.5b.

 In page eight, this is the details of the one-off items. So I would like to skip giving -- actually, that was page nine. And page 10 is about balance sheet. So loans JPY4.1 trillion last year, but now it's JPY4.2b (sic - see presentation "JPY4.2 trillion"), so it increased by JPY150b. And this is a little difficult to see, but the light blue is general institutional lending. This increased about JPY40b. And on top of that, next bar, JPY1.01 trillion --JPY101b (sic - see presentation "JPY1,019.8b), this is housing loans. So housing loan increased by JPY80b.

 In green, on top, the consumer finance, still the balance is declining. However, the place of the decline slowed, so this decreased by 2 -- nearly JPY4b. So in total, as I said at the beginning, it increased by by JPY150b. So the lending by the Bank is increasing, so that is reflected to the net interest income.

 Next, please move to page 11, net interest margin. On a quarterly basis, unfortunately, net interest margin declined slightly, to 2.04%. On a semi-annual basis it increased on year-on-year basis, but at the latest it declined slightly. The reason of the decline, basically, [the] yield on loan decreased. And another major factor is that in investment portfolio there were more interest-bearing securities. So the balance of the DGB increased. As a result, total yield was pressed down.

 And now for the funding side, as shown, the yield on deposit is declining. However, unfortunately the decline of investment -- the decline the fundraising on the deposit was smaller, so the total net interest margin decreased.

 And the yield and deposit this is edging down, but in the last -- second half from net year -- actually, three years ago we gathered deposits, the high interest rate deposits. They start to mature from the second half next year. So the second half [last] year we are expecting the major decline at yield for the fundraising.

 And next the retail housing loan, page 12. As I said earlier, the balance is JPY1.01 trillion, so it increased by JPY80b.

 In page 13, real estate finance. First, real estate non-recourse loan, there was a pressure on repayment, so it declined slightly. However, in total from JPY740b to JPY780b, so it increased by JPY40b. And on the right-hand side this is about the dispersement. It shows the number of transactions and value on a quarterly basis -- or semi-annual basis.

 The first half of FY 2011 there was [JPY11.60b] and second half of 2012 JPY42b and in this first half it's JPY10b and JPY34b. So we have been dispersing new loans steadily.

 Next, page 14. These are grey zone interest rate payment. First, the disclosure claims or requests this first quarter did not decrease much. I have that feeling. However, if you look at this July to September it still is in declining trend. In the long term you can see that this declining trend is continuing. And for the payout it's declining steadily.

 The biggest characteristic is shown at Shinki. On year-end it decreased by JPY1.5b, or 40%. And from July to September that was amount of payout. So on year-end basis, compared to JPY2.6b, this decreased drastically.

 In APLUS I said this last time as well, but this is a little different from other ordinary consumer finance company, so we have not fully captured its trend. So I think we should go down a little. But probably this will stay at this level for the time being.

 Next, non-performing loans, page 15. The balance is JPY270b. It decreased by JPY20b. However, in terms of NPL ratio the total loans -- so it was 6.1%, so it declined by 0.05 points. And this may be difficult to see from this table, for the other, Need Caution, also decreased by [JPY40b].

 And lastly, page 16, capital. Basically, the total capital ratio was 11.7% and tier-one ratio was 9.77%. So both improved by more than one point on year-end basis. The reason of this, the numerators increased and denominator decreased. So numerators increased, then the retained earnings there's JPY27b profit.

 And of a capital deduction for securitizing (inaudible) decreased by about JPY35b. That is the improvement of the deduction. And for regular capital basis total capital ratio improved by JPY60b. And risk assets decreased by JPY230b. Most of the decrease was the credit risk. So, as shown here, our assets -- the quality of assets improved. So the Need Caution recovered to normal, so our asset quality improved. So, with this, risk assets decreased. So this is a major reason.

 And for reference we have shown this. The number is based on Basel III. Tier one's 8.9% and the total capital ratio is 10.7%, and our target for the end of this fiscal year, which is 7% for tier one and 10% of the total capital ratio. So at this point those targets are met.

 So that concludes my presentation. Thank you.

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 Masayuki Nankouin,  Shinsei Bank Limited - EO and Head, Consumer Finance Sub-Group   [3]
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 This is Nankouin, Consumer Finance Sub-Group. And details will be given from Hoshino, of Lake Business Division. But before that, first of all, in overall Consumer Finance business the overview was given by Mr. Tsukamoto, the CFO, but, in total, for top line still the balance is continuing to decrease.

 However, the pace of decrease is slowing down and now we are eyeing the possibility of the reversal of the trend. And with the suspension of expenses -- the reduction of expenses and improvement in credit cost we have achieved this performance. And toward the final year of the mid-term management we have able to take these numbers.

 And for the Lake business on October 1 last year we gained approval of the -- from the FSA about the business transfer and this was a new business model. So we made a lot of trials and errors for the last one year. But we were able to capture our target customers to some extent. And now we have a good view that we will able to grow the business.

 And going forward, as the President mentioned, we would like to further promote the co-operation with the Retail Banking business to expand the business.

 So that's all from my end. So the details will be given from Hoshino. Thank you.

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 Andrew Hoshino,  Shinsei Bank Limited - General Manager, Lake Business Division   [4]
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 This is Hoshino of Lake Business division. So I'd like to spend more -- some time to review the Lake Business. First please look at page 18. The achievement in the last one year, this is a summary. Just one year ago, on October 1, we launched the business and the relatively growing market the bank loan for the individuals this market by using Lake's know-how, with the bank quality, the convenient and simple services were targeted to offer. And for the credit strategies we have been accumulating data and have been fine tuning the strategy.

 So in the last [month] based on the purpose of the money lending business control role we were able to establish the system for the smooth operations. And the strategy for the Lake business, first the bank Lake, the traditional personal loan customers, we will continue capturing such customers and building the base and we would like to explore new customers. That was the strategy.

 And for the credit strategies, in order to find and optimize the point we have been continuing fine tuning the strategy.

 Now the achievement of one year the acquisition of the traditional customers were stable and, as Toma mentioned, the co-operation with Retail Banking was promoted in order to acquire new customers. So we were able to develop and acquire some knowledge. Also in a flexible manner we were able to fine tune our credit strategy.

 In our credit guarantor company, Shinsei Financial, which is also a subsidiary, the last one year the know-how at the Lake business [division] was used. And mainly to regional banks the Company expanded the partnership with regional banks. And for the existing customers this Company continues servicing those customers.

 The strategy was to brush up the services to existing customers. In the tie up with divisional banks successfully we formed a tie up with six banks and now we are in the situation that we can have the partnership with major banks. And Shinsei Financial existing customers' retention rate also made a great improvement in the last one year.

 Next please go to page 19. This is the summary of the achievement of the last one year. As I said earlier, new customer acquisition has been stable, as shown on the right-hand side. Compared to Shinsei Financial era the acquisition is front loaded and faster pace.

 In the Shinsei Bank card loan Lake, and Shinsei Financial, the number of customers and balance if you total the two, this -- in September for the first time we were able to increase, as shown on the two charts in the left-hand side and then middle. It is still small, but now it has started to increase.

 Next, page 20. Now what marketing activities we have done in the one-year business summary? Basically, we operated based on three pillars. First pillar, recently customer needs are increasing, in a broad sense, net internet, including telephones or smartphones, so we have been expanding on enhancing the services.

 The second pillar, traditionally Shinsei Financial strength was the marketing, and using that know-how we fine tuned the advertisement as well and in October last year and in June this year we changed advertisement.

 The third pillar is the co-operation with Retail Banking. We have been promoting this and with mainly two pillars. One is advertisement to retail customers so that the retail customers would recognize our service and the services that would be appreciated by the customers to launch such a campaign.

 And as a result of these efforts, and on page 21, is actually the findings through those initiatives. First off, the application channel. By enhancing internet-related services the application through the internet increased in the last one year. It was 45% two years ago, but now it's increased to 53%. And for the cashing, the ATM, as shown on the right-hand side, two years ago 59% was the use of the ATM channel, but this into 72%. This is mainly the use at Seven Bank's ATM, our partner.

 And the Shinsei Financial era, the Retail Banking, the ATM of the Shinsei Bank was available but was not used at all, but although it was 0.5%, but now the customers are starting to use the bank's ATM. In total now we are showing the Bank brands, so now they are using our servicing, emphasizing or noting the Bank brand.

 Next, on page 22 we have summarized our initiatives with Retail Banking. The details I'm now going to skip, but they are mainly -- the first primary purpose is to have more increased understanding, recognition of the customers, so through the eDM, or other media are used.

 And to meet the customer needs of the Retail Banking customers we would like to offer the services, such as preferred interest rate or the free-of-charge fees are promoted. An achievement for the last one year our Retail Banking customers also at certain level and constantly are sending application for our loans and we -- those that are the findings through these initiatives.

 And the characteristics of the Retail Banking customers, as shown here, in one word they are quality customers. And the traditional Lake customer used to be young generation between 20 to 30s, but now we have better balance, so we have more -- see more expansion of the generation of the customers. So we have a great expectation so that these are the areas that we can promote the business as a new segment.

 As a result, going forward we would like to launch many initiatives. And in advance from, late November this is the initiatives that shall be launched, and this is shown on page 23.

 The first item is card loan. The application of the card loan customer is also expected to some extent. So we will revise the lower limit and upper limit starting from late November. The upper limit used to be JPY2m and the interest rate was 9% at the minimum. However, this will be reduced to 4.5% and the maximum credit line will be increased to JPY5m.

 And together with a revision of the product we are going to change the character of the advertisement. We used to use the [Yu Yamada], but especially focusing our volumes on the young male and Nanao San is popular to this generation. On the right-hand side this is a train advertisement. So from November -- late November we like to launch this advertisement.

 That concludes my presentation. Thank you.



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Questions and Answers
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Unidentified Company Representative   [1]
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 We now would like to move onto the Q&A. Those of you who have questions please raise your hand and wait until the microphone is brought to you by our staff. Please state your name and affiliation before going into the question.

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Unidentified Audience Member   [2]
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 I have a question, two questions on Consumer Finance and one question on lendings. Consumer Finance September loan balance turned -- was reversed to increasing; the trend was reversed. Do you think that this increase in trend is sustainable or not? That's the first point.

 Secondly, in Q2 Consumer Finance credit cost emerged. You used to reverse the reserves, but credit cost has become more normal, in other words, you are incurring credit cost. Do you think that in the future we should expect a credit cost to be recorded? So those are the two questions on Consumer Finance.

 One question on lendings in general. In addition to housing loans, other institutional lendings, real estate loans as well, seem to be increasing and after the second half of this current year what would be the trend for non-housing loan lendings? Thank you.

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Unidentified Company Representative   [3]
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 Then I should refer the Consumer Finance questions to them. But that's a simple question that even I can answer. Now it's only an order of hundreds of millions of yen, but it was the first time we saw an increase in six years' time, which was a surprise.

 What about October? It has declined slightly from September, so we're not in a situation where we can say that the growth would be steady and sustainable. But from one year ago we were beginning to feel that we've hit the bottom. So that still lies true. We don't expect any surge, but at the same time we don't expect a plunge.

 Credit cost. On credit cost true that in Q2 there was extraordinary change, but no change that qualitatively improvement is taking place. So on full-year basis I am sure that they will deliver -- the qualitative improvement will deliver results. But loan balance isn't declining, so there would be reversal of the general -- there used to be reversal of general reserve, but you can expect that in the future months.

 Now lending increase. Housing loans and real estate loans slightly increased as well. These are not non-recourse loans, but it is lending to realtors. But the remaining are loans to general companies. Public entities' loans declined because of repayment and because of loan sales as well. And what would be the trend or policy? I said that -- setting aside the substance of the portfolio, but, for example, utilities -- power utilities -- lendings to power utilities is increasing.

 As I said, it might not be a sector we're prioritizing as our primary target. In other words, we don't think that these loans are sufficiently profitable. Of course utilities are highly rated, so naturally high rating means lower spread. So in terms of risk return it's not that we're losing money, but we don't think that this demand can increase and be strongly profitable.

 Currently because of the accident at the nuclear power plant they can't issue corporate bonds, so there is demand for bank lending, but once the power situation stabilizes they will no longer need any lending, borrowing. So that's why I said there are some issues with regards to particular names in the portfolio. But when it comes to lendings to SMEs or lendings under VBI the sums aren't big, but steadily we are seeing increase in the number of loans.

 In the next three years can they become strong pillars to drive growth? No, they won't grow so significantly in the short run, but as a trend we're sure that these lendings will continue to increase.

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Unidentified Audience Member   [4]
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 I have two questions. One on page 16 shows the capital situation, and in the last financial result announcement, compared to then, the quality of assets improved significantly. Now, to the shareholders -- to return to the shareholders, what would be the impact?

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Unidentified Company Representative   [5]
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 You mean in the --

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Unidentified Audience Member   [6]
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 Return of the profit to the shareholder, for example, increase of the dividend, what is your view? And if the quality of the capital is improving, so the rating may improve as well. In such a case what would be the merit for you for the business? So that is the first question.

 The second question is about the Consumer Finance. Going forward you are going to tap in the bank card loan market. Traditionally you have shown the image of the loan balance so, for example, assume market size or the plan for the market balance. And since you are going to [capital] market the average interest rate may go down. Is that what you're thinking or assuming?

 So for example in Consumer Finance business in the next mid-term management plan any asset purchase or M&As, or you -- are you thinking such kind of asset expansion?

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Unidentified Company Representative   [7]
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 Well, I would like to answer the first question and the M&A related question, but the second questions I will answer as well. But could you answer the rest?

 Firstly, about the capital, it is true that the profit is accumulated and also the quality of the asset is improving, so the risk capital actually is decreasing, although the balance increasing. So from both sides we are seeing improvement. So in that sense we have been targeting this [from] initially. So as a result this is satisfactory. Or I cannot say it's satisfactory, but this is favorable for us.

 Now the return of the profit to the shareholders not drastically -- for example, to change NPL ratio to some percentage too, and by doing so to return the profit, it is -- honestly speaking, it is difficult to make such a comment. And now we are at the minimum, which is JPY1 per share, and the customer -- the shareholders are bearing with it.

 Increasing this to some extent is not -- is thinkable, but for example to increase to JPY10 or JPY20, that, at this moment I'm not thinking about it. Because the current conditions -- excluding Japanese banks the banks in the developed countries are in a capital shortage.

 And long time ago, in 1990s or late 1990s, all Japanese banks had a shortage of the capital and they didn't have the power for lending, therefore, the credit crunch [or the] selling other assets at a very low price. Actually, I was involved in that. And now they're in such a situation. So looking at the current trend, to have enough capital and to have the power to lending that means the banks are strong.

 So if the assets cannot be increased much, then there was a lot of room to consider dividend. But because of the current conditions, plus we are in the middle of the recovery, so the increasing in payout that is a little difficult to think. However, whether to increase from JPY1 to JPY2 that still has room to consider, but at this moment I have not decided anything.

 And the rating may be upgraded. In general Moody's has commented that they are going to review the rating of the overall Japanese banks. That is welcome for us. Especially Shinsei the old rating by Moody's is still BB and, personally, I think we should do something with it. So it is favorable for us that we will see the upgrade of the rating.

 But what positive factors the rating upgrade will give on us I cannot think anything immediate. But when we issue debt instrument, of course, price will go down a little and that will be favorable for us. But for others, if there are any other positive factors, I don't think there are particularly not positive thing to be noted. Because we are not seeing particularly negative factors either.

 So I cannot think about anything that will have immediate effect. But in general, as you are aware, we are a very notorious Bank. So we have to remove that image. So that is my sense of the problem. So (inaudible) to turn from black to white. That is not what I'm thinking. So this will increase gradually. So the image for Shinsei Bank, if it improves gradually, then that -- this will be one of such a factors.

 Lastly, for the technical part of the Consumer Finance business they are going to answer the question. But about M&A, if we have an opportunity, yes, we will do it. But whether there is such opportunity or not that is another question to me. But if there is opportunity we would like to do it, because we have the [Grazon] issues and the players are decreasing and probably there will be many players that disappear from the market.

 So I think there will be the opportunity. And [Shigeru] is sitting there, so I will be discussing with him and if we have any opportunity then we would like to consider proactively.

 Another question was about the target for the balance, or reducing interest rates, and the question about going to the bank customers and about the loan balance. We are in the middle of development of the next mid-term management plan and details will be put on the plan. And for the high-level target balance we have increased JPY37.9b in one year, as Hoshino mentioned.

 And the [Mitsui Sumitomo] Bank, or the other banks that are already engaged in card loan (inaudible), I think this is a reasonable number and we can refer to the other bank's figures. But we would like to consider well in development of the next mid-term management plan and we would like to make it aggressive.

 This interest rate level is very competitive; we are aware of that. Going to this market means, including Net banks, very [extensive] banks will be competing with those banks. So we don't think that we will become the volume zone immediately.

 First, we will offer to our retail customers and by acquiring competitiveness we would like to have the room for expansion. So this is an area that we would like to grow in the medium or long term. So to some extent the purpose is in some sense to try or tap into this market.

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Unidentified Audience Member   [8]
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 I have to questions. It relates to the last part you just touched upon, including Consumer Finance. How do you judge your cost competitiveness in terms of fund raising, especially the deposit? You said that in the second half of next year there will be quite a big reduction. So that's the first point.

 Specifically in the second half, could you be more specific how much yield drop are you expecting in terms of financing -- cost of financing? But the cost of finance is still high in comparison to others. But BOJ has most recently announced more easing and, although the details have yet to come to out with regards to the increase of lending, in what way do you think that [you] will also be able to rely on the support to be offered by the Central Bank? And do you have the will to depend on BOJ? And also if you have any plans to use those measures, could you be more specific?

 And slightly different subject, capital, common stock tier one at the bottom of page 16. What's your projection at the end of the current fiscal year? Especially with slight increasing risk asset what's your expectation on common stock tier-one ratio at the end of next March? Thank you.

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Unidentified Company Representative   [9]
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 First of all, deposits and what would be the yield. For the current fiscal year we are not judging that there will be any significant drop, although there will be slight decline. It will be after the beginning of the next fiscal year that we will begin to see serious decline. Five-year time deposit, a huge chunk of those deposits will mature next fiscal year, which will drop the yield, but not this current fiscal year.

 On BOJ measures, what did they call it, the new instrument or new regime? If there are opportunities to utilize those instruments then we wish to do so. But first and foremost what would be the amount of capital we would require for lending? What's the lending demand and to what extent can we cover with grant funding? And if there is shortage of coverage or funding to respond to the lending demand we would like to tap on those measures and instruments.

 Did we make projections on capital adequacy? Yes. At the end of the current fiscal year on Basel III basis -- we won't be forced to apply. But on Basel II basis, as indicated on page 16, common equity tier one 8 -- no, at the end of the first half it was 8.9% the projection at the fiscal year end. We think that it will slightly increase to beyond 9%, somewhere between 9.1% to 9.2%.

 Risk asset in the second half may increase slightly, but we will also be capturing revenue opportunities, so we think that we will see slight improvement in common equity tier one.

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Unidentified Audience Member   [10]
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 Your overhead ratio is about 60%. It is still a little high. [Aozora] is about 40%, so they are promoting cost cut to that level. There is a depreciation of the new systems, I understand, but for the next mid-term management plan just what's your view? To what extent you think that you will improve your overhead ratio, Mr. Toma?

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 Shigeki Toma,  Shinsei Bank Limited - Representative Director, President and CEO   [11]
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 Well, in the last one year since I joined the Bank before giving the ratio about JPY30b was reduced. And plus, as you've pointed out, the OHR exceeds 60%. The mega banks are about around 50%, so normally the 50% will become a target. However, one of the characteristics is that we have a variety of the products. So we have a huge amount of administrations and operations that needs to be supported by the system. So we are totally the opposite of the mega banks.

 So the cost structure itself is different. And also the 60% is not a cost itself. Of course, we have a lot of problems in costs, so we will continue efforts to reduce them, but the problem is because of reduction or the decline of top line. So for the OHR itself we will increase top line.

 What we have is set such a direction. So reviewing the cost itself, of course, we always have the system-related expenses so we need to refresh or renew the systems in plan, so this may increase. But mostly looking at OHR itself by increasing top line we will reduce OHR. So that's what we are planning.

 So if possible to the mid 50% we would like to bring the OHR to the level. I will now be satisfied with it. So we hope we can reduce this to less than 50%. But this is tradition since we were in the [outer CB], that still we have fewer -- less volume of the administrations. So the upper percent system the costs tends to be high, so please understand such a nature.

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Unidentified Audience Member   [12]
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 Mr. Toma, you gave us the orientation of the next mid-term plan. I am most appreciative. You mentioned the promotion of industrial sectors and promotion of rural economy, local economies. Those were the two key words. But on the balance sheet those would be more relevant to the asset side. But what about the funding side? You said that in fiscal-year 2013 that many of the high interest rate deposits will mature, but can you also give an overall direction in terms of the financing side? How much you will be continuing to rely on deposits?

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 Shigeki Toma,  Shinsei Bank Limited - Representative Director, President and CEO   [13]
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 I talked about the challenges ahead in the Retail business. Two and a half years ago when I was appointed it was 10 years after the rebirth of Shinsei Bank. And 2.5m was the number of retail customers, from zero to 2.5m, so on average that would have meant 250,000 customers per annum. But by the time I was appointed as President that came to a halt. And it's only gone up from 2.5m to 2.6m in two and a half years, only an increase of 100,000. So the number of customers remains stagnant.

 There have been various debates but, of course, the amount of investment is reduced and non-core assets have been sold off, so the level of assets has dropped. So if we continue to receive deposits we cannot make efficient investments. This is a challenge for all banks. But some people say that we won't be aggressively taking deposits because of that.

 So I said, no, what stupidity are you talking about? Just because your bank is in such a situation, is there a bank that says, no, we won't be taking deposits, so I've ordered them to take a different approach.

 But we also need to increase our customer franchise. So once again we have to review to the days when Shinsei originally started. In 10 years Shinsei was able to acquire as many as 2.5m, so of course that's doable in five years' time. So let's set a target of customer numbers to 5m. That's the kind of conversation we're having. So deposits will increase.

 And also credit rating was touched upon. Through increase of credit rating will there be any positive impact. That was the previous question.

 If credit ratings of Shinsei would go up, our image goes up, then deposit insurance covers up to JPY10m. So I will only have JPY10m of deposits at this Bank. They may begin to have a different attitude and begin to deposit more than JPY10m. That may prove to be favorable to us. So that's one potential area. But at any rate we want to expand the size of the Retail Banking business.

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Unidentified Audience Member   [14]
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 On page 13 of the presentation material show the Real Estate finance situation; the non-recourse loan, the competition, and of second half the pipeline or plan in terms of disbursement amount. If you have in your plan could you please share it with us?

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Unidentified Company Representative   [15]
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 Well, honestly speaking, the competition is very tough. Including mega banks, most banks are participating in this market and they are fighting and there is a price war. So I cannot generalize, but at least the Class S building in Tokyo Metropolitan area, the fund-raising amount is huge. But it's 50 basis or 40 base points for five years, which are extraordinary. So those are offered by mega banks as far as I heard. So it is very competitive. So it is difficult to increase loan balance.

 And our main field is not that market. Of course, we will examine one by one, so for Class A or a little lower, or Class B plus, those are the targets. Not only office, but also for retail properties, facilities or residentials, those will be our target as well. However, that said, of course we are invited to participate in the loan for Class S building. So if they meet our targets then we will include those as well. So looking at the total portfolio and return, the best equilibrium are sought today. So that is our current conditions.

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Unidentified Audience Member   [16]
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 Anything that you can share for the second-half disbursements?

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Unidentified Company Representative   [17]
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 Well, we are planning to disburse about JPY100b.

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Unidentified Audience Member   [18]
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 Two points. In the next mid-term business plan what kind of lending projection are you factoring in? In the two to three years' time at consolidated level per annum, 2%, 3% growth rate of loan balance, of course, putting together your subs and the parent?

 Second point, what's the biggest risk in the minds of the top management? Individual risk versus general risk, like international interest rates, global interest rates surging? Some losses are being incurred in certain specific sectors, so are you projecting NPLs to emerge?

 And also the price competition in housing loans is even more severe than non-recourse, so how are you judging housing loans?

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Unidentified Company Representative   [19]
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 First of all, loan balance increase. We haven't factored in any assumptions yet in terms of quantity, so I haven't seen any figures. We have to think about that in relation to the capital ratio as well as the market climate. So if we draw a general picture and do our calculation it will be easy to come up and pick a number, but we don't want to do that.

 So I don't have the ingredients yet to respond directly to your question, but of course we will increase our loan balance. In which areas? There are emerging markets in Japan where we expect loan balance increase, but it will mainly be South East Asia or Australia project finance or real estate finance. Those will probably be the hopeful areas where we can expect growth in loan balance. And I apologize I cannot give you a numeric response on the growth rate on risk.

 There are so many things I can say if I begin to talk about risk. Even in the first half that has just finished. Although I didn't mention Europe, or Iran -- air bombing against Iran, [Netanyahu] seriously implementing his strategy. What about this Sino-Japanese tension? What would happen to the Senkaku Islands? We did experience sleepless nights and, basically, the global situation remains unchanged. Tail risk; my biggest worry is that something that we don't think that would happen may happen.

 We've experienced the oil crisis in the past, in 1972, and we still have that clearly vividly in our memories, because that was extraordinary. But then in comparison to back then the energy situation or the energy geopolitics have changed, so -- but we don't know how the risk will prevail and realize.

 And, talking about Europe, we don't know what would happen. When I say we don't know, what if that scenario truly occurs and Spain defaults, or Italy follows suit? Then what kind of impact will we suffer from? What kind of impact could there be to the Japanese macro economy? We don't know. And in what pattern will those rippling effects be coming to Japan? We truly cannot project.

 So, frankly speaking, we can't prepare any measures against those risks. But one thing that could be said, one thing that gives us a certain assurance of safety as one specific bank is we've been trying to reduce non-core assets. Two and a half years ago there was JPY880b and by the end of this fiscal year this will be dropping to JPY350b, or slightly less than JPY350b. That's the plan for the current fiscal year. What would remain would be US corporate bonds or securities held to maturity. They are very highly rated, so all we need to do is just hold and wait.

 So what did we dispose of? European and US assets, especially European assets. We disposed of many of those non-core assets. I wouldn't say we currently have zero. There is slightly some remaining exposure, but exposure is extremely minimal. And in the midst of fiscal tightness of the Japanese government JJB holdings is very risky. Some people say so, but in the case of the JJB freehold, this -- it's just a tiny amount. So relatively speaking, of course, we do have some JJBs, but -- and if things happen we may be impacted, but the degree won't be big.

 We do come up with very stressed scenarios internally, but through various channels the adverse effect may realize through various channels, but it can only occur in a certain timeframe over time. But even if they all occur simultaneously, talking about our capital adequacy, we think that we have enough equity to absorb those risks. So as long as the risk remains within our worst-case scenario then I think we'd be safe.

 However, if that kind of scenario really occurs the impact to the economy thereinafter is going to be very serious and it will be difficult to make any forecasts. Of course we don't want that to happen, but that is my very strong desire, never to see such scenario from realizing.

 You mentioned housing loans. We aren't offering concessional rates. Thankfully our products are very attractive for re-financing, because when people re-finance housing loans they usually have to pay guarantee fees. But we don't charge that. And also even for repaying, even if they pre-pay, then the customers are not overcharged. So we may offer advantage.

 So we are not in price competition, but by taking these measures we are increasing loan balance. So in that sense I don't think there is a serious risk in our housing loan portfolio.

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Unidentified Company Representative   [20]
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 So that concludes today's financial result announcement of the first half of FY 2012.

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Editor   [21]
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 Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.




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