Full Year 2013 Shinsei Bank Ltd Earnings Presentation Webcast
May 12, 2013 AM EDT
8303.T - Shinsei Bank Ltd
Full Year 2013 Shinsei Bank Ltd Earnings Presentation Webcast
May 13, 2013 / 01:30AM GMT
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Corporate Participants
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* Shigeki Toma
Shinsei Bank Ltd. - Representative Director, President & CEO
* Shigeru Tsukamoto
Shinsei Bank Ltd. - CFO
* Toru Myochin
Shinsei Bank Ltd. - Executive Officer, Institutional Business
* Takashi Fujimura
Shinsei Bank Ltd. - GM, Healthcare Finance
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Presentation
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Shigeki Toma, Shinsei Bank Ltd. - Representative Director, President & CEO [1]
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Good morning, ladies and gentlemen. We'd like to thank you very much for having taken time out of your busy schedules to be with us today at this report of business and financial highlights. As Raymond Spencer has just explained, I will be giving a summary of the first medium-term management plan and then I'll talk about the second medium-term management plan.
With regard to the first MTMP, as explained before, in terms of revenue, goals and expenses or non-core assets reduction or capital adequacy ratio, these targets have been cleared across the board. We have fulfilled our targets. But as you know, the economic situation is still gloomy and there is an undertone of shrinking equilibrium and we understand that this may be a weak point. The top line is declining, and other expenses and credit costs, all of these have been reduced to achieve our budget.
So, what is remaining, the outstanding items? NPL ratio, 6.6% was what it was before. This term, this has gone down to 5.3%. So there is a slight improvement, but still 5.3% is a high number and that is our awareness. Of course, provisioning and other things that we could do we have done. Going forward, we will continue to work out. We don't believe there will be any extra issues, extra problems and extra Non-PLs, so we want to write off our NPLs quickly.
With regard to expenses, three years ago, JPY160b was the overall expense and I said that we would be reducing that to JPY140b. Now we've reduced to a level below JPY130b. In that sense, we have achieved success. But the overhead ratio, with the decline in top line, was in the higher 60s and it still remains at that level.
Megabanks, I don't intend to compete with the megabanks, but as a reference, to take their figure, their figure is about 50%. SMBC has gone under 50%. So, as a ratio, the number continues to remain high; that is a problem. Of course there's an issue of scale, so to reduce the number to a level which is the same as that of megabanks, perhaps that is not possible, but we want to achieve a better figure.
And the largest challenge -- this is something that I have continued to say -- Shinsei Bank, in terms of size it's middling and in terms of our strengths we don't have a strong marketing base, as is the case with regional banks. So how can we remain viable? How can we carve out a niche for ourselves and how can we establish a reason for being, a raison d'etre? This is something that I have talked about since before, but we have not accomplished final results yet concerning this point.
So with regard to the first MTMP, we have legacy issues which we have resolved. And in terms of numerical targets, we have been able to achieve them. If we are to give a grade or mark to ourselves, we would give 50 or 60 out of 100. That's satisfactory -- that's a satisfactory level. To improve this further is the challenge for us in the second MTMP.
A new business model is something that we would like to look for. We'd like to ask the world as to what our new goal should be and we want to increase the scale and improve the top line. By improving the top line, NPL ratio, we will of course work this out, but with the increase in universe the ratio will go down.
A typical example would be OHR. In the past three years, in the first MTMP we were very tight. We kept -- we were very stingy. But with regard to expenses and investment, and expenses will be more forward looking so expenses overall will grow. But with the increase of our top line, overhead ratio, OHR, we'd like to bring this down to the lower 50% level. That is what we want to do.
With regard to NPLs, we will be working at NPLs going forward. The 2% level is what we want -- are targeting at, and we would like to target a level which would not be a bad figure.
With regard to Institutional and Individual businesses, there are different goals. With regard to retail, consumer finance and non-bank entities, we want to become one with them. We want to enter into each other's business fields, do cross-selling. We're not at a stage where we're able to announce anything as to what we're going to do, but since last summer we have launched a project team within the Bank. And the nature of the team, or the members of the team are frontline -- as much as possible frontline young people and as much as possible we try to have women on the team.
And there are three teams, basically; firstly, to look at what the customer -- what kind of services the customers want and what services the customer consider to be good and what the customers are complaining about, to try to expose all of this as those in the frontline. And then, after having looked at the issues, we'd like to think about what to do about them, how to address them.
And then in the frontlines, in the financial centers -- and this is the second point -- in the financial centers there's private banking and a retail banking business that we are doing. What kind of problems, what kind of bottlenecks do we have? What can we make better so as to improve efficiency and to make the workplace an easier place to do work? And we have asked them to point out the problems and expose the problems.
And the second point, the IT technology is such that it advances from day to day, how to leverage the IT technology to make more efficient our retail business and to improve convenience. These are the three themes. So I've asked them to review with no exceptions, no exceptions, and the objective is rationalizing process and to expand the customer base.
Shinsei Bank, 13 years ago started operations and retail business was close to nil at the time. 10 years from then, we had customers to the tune of 2.5m. That is what I said three years ago. When I became President, people were impressed and I was impressed, but after having our business in the past three years, what happened to the 2.5m? From what I hear, 2.7m or 2.8m is the number, so there's only a marginal increase and it's saturated.
Our staff didn't feel this was a problem at all, and that is no good. That will not do at all. There's no expansion. When there's no expansion in business, there's no way we can make a profit. And then the demographic trend may be what is reflected in the numbers, but that is not to say we should be satisfied looking at the diminishing numbers. So there has been a strong awareness, a sense of awareness about the problem which I have tried to stress.
With regard to Shinsei Bank, I don't know what you are thinking, but it is my awareness that Shinsei has now a bad reputation. In the first years, the first five years, Shinsei was a brilliant bank. I was an outsider and I felt that Shinsei was a shining, brilliant existence. It was a newborn bank. But the freshness has been lost now and people are now looking at us as a stupid bank. Due to the bubble, we have been burnt badly and we're close to bankruptcy. Perhaps that's how people see us. And then a lot of people have a negative impression of us.
We have to dispel all of this and we have to regain our brilliance and our shine. For this, we have to gain a lot of fans. We have to have people who are willing to use -- who want to use Shinsei Bank.
So, on these two fronts, first of all, a banking model that does not grow will not do. And as for growth factors, we have APLUS and Shinsei Financial and such subsidiaries. And through cross-selling, what kind of new perspectives and synergy can we achieve? These are things that should be fully studied and this is what I am telling my people.
As soon as we are ready, in a short while, we'll be announcing different things. But when it comes to retail, 2.5m was the customer base. We want to increase this to 5m in the next three years. That is the perspective and projection which we'd like to keep in mind in developing our business and in formulating our business plans.
And with regard to Institutional, we'll be talking about medical and healthcare. Mr. Myochin and Mr. Fujimura will be explaining to you about what we're doing. But beginning with that, renewable energy and business incubation and business turnaround; unique services is what we want to undertake and provide. If you look at just this, you may think other banks are doing the same. Internally, even our own Bank employees talk about and ask what's the difference between our Bank and other banks.
And we don't intend to do anything strange, which would be a model that is bound to fail if we do something that is too out of the ordinary. We want to focus on areas which is necessary for all banks and which has potential for growth, but the way we approach it is different. We want to be proactive. A business participation model is what we're talking about.
If a customer has brilliant technology and if they approach it well, they may be able to sell products on a global level and explosive growth may be expected, and yet there may be different problems that they have. In that case, we want to aggressively participate and look for solutions. And if there are solutions, we want to execute and implement so that their potential -- their growth potential can be realized. That is the kind of business model we have in mind.
So, we want to put ourselves in the shoes of the customers and we want to co-work with them. And unfortunately, there are no such banks and this is what we want to do. We are a small bank, so what we can achieve in the next three years may be small. But we are serious and we are working with the stance which I described, which is welcomed by the customers, and in that sense I think we have a potential to grow.
And the other point, due to Abenomics, yen is depreciating and stocks are rising and there's a very tearful mood, ever since we've begun to formulate MTMPs at this Bank. It's the first time, however, where we're seeing bright signs emerging. Compared to the time that we formulated the plan, there are some doubts about the future. But in any case, it's a favorable wind that is blowing and we can turn this into a favorable environment, I think, and I have high expectations that this will happen. And if we can do that, as Mr. Tsukamoto will be explaining later, the MTMP figure is not an unachievable goal, so I think we can achieve.
So thank you very much.
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Shigeru Tsukamoto, Shinsei Bank Ltd. - CFO [2]
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This is Tsukamoto, the Chief Financial Officer, and I would like to explain mainly this first mid-term management plan, based on the material.
First, the points or highlights of the FY2012 results. In one word, this is already commented by the market. The financial result is with no surprise, because from the beginning of the fiscal year we have been explaining this, so the results were almost in line with such explanation. For the detail, there are some ups and downs, but as a result this is within our expectation.
And three points are highlighted here. I would like to note our number two. The non-recurring items, they achieved stable profit without large impact from such items. And number three, for NPLs, we're down by JPY53.3b and the quality of assets improved. So these are the highlights or the points I would like to emphasize.
Now I would like to go to the details. Please go to page six. So FY2012 financial results, by line item I will explain them. So here I would like to explain about FY2013 plan. The net income target is JPY48b, which is a decrease from last fiscal year. Actually, there was a derivative estimate. The estimation of the derivatives was changed this year. As a result, there's a reduction of JPY6b, so there is a downward change. Accordingly, with the same accounting standard as last fiscal year, the plan is about JPY53b -- JPY54b. So this is due to such change of the estimation.
Now, looking at FY2013, some of you may have noticed this, this is almost the same as FY2012. There are some changes, but mostly the same. Accordingly, once again, for this fiscal year similarly as last fiscal year, we have developed the profit plan. And my point is, as the President mentioned earlier, we would like to establish the base to increase top line and we'd like to increase or expand the business.
Also, OBP minus credit costs, this is not available on this table but FY2011 was JPY63b and FY2012 was JPY65b, and FY2013 plan is JPY60b. But as I said earlier, without the change of the estimation, the JP63b, although it slightly increases but it's almost flat. So, in these three years, on a top line level basis, with an impact on the one-time items, we are planning the same level of profit.
Now I would like to explain each item of FY2012 results. First, net interest income. As you see on this chart, from March 2010 it decreased by JPY96b. And the reason for the reduction is, first of all, the balance of the consumer finance declined and the real estate non-recourse loan balance also declined and the non-core assets were reduced. So, due to these three reasons, this net interest income declined.
However, for the last fiscal year, if you look at quarterly basis, net interest income is almost stable. So, going forward, I'm going to explain this later, and because the balance now starts to decrease so we are planning to increase net interest income going forward.
Next, page 10, non-interest income. It slightly increased from last fiscal year. Basically, the customer transactions or LM, including sale of JGBs, boosted the income. However, compared to the budget, again, we have largely missed the budget. And the biggest reason for this is that the structured deposits sales were temporarily discontinued in the second half last fiscal year. This is because of the deposit insurance. For about three months we discontinued the sales, and this is due to this. Another is foreign exchange. Because of the depreciation, the non-interest income decreased and we largely missed the budget.
So this fiscal year there was no such factors. Accordingly, we would like to really try to achieve a similar level of the plan which we established last fiscal year.
Next, expenses and credit costs. For expenses, we reduced by JPY40b in the last three years. However, going forward, for the strategic areas we would like to make investments, and also the investments on IT systems will increase. So, for these, we would like to make investments proactively, so rather the expenses will start to increase. This is about the mid-term management plan. Annually, we are planning to make about JPY15b investments, and JPY10b of the JPY15b will be IT system related investment. So, simply speaking, there's about JPY3b depreciation every year.
Net credit costs, the March 2013 it decreased significantly. One of the reasons is because of the way of -- there was a reversal of the reserves and the major written-off claims were recovered. Accordingly, our net credit costs improved. And for the net credit costs, under normal operations we are assuming about JPY20b, and I've been saying this, JPY10b for the Institution and JPY10b for Individual.
And for Individual, on a gross basis, with the written-off -- recovery of the written-off claims, including that it's about JPY10b. And actually, as written here, because of the improvement of the assets it's actually the credit costs about 70% of what we have assumed, however, because we are planning to increase assets going forward. So, for this fiscal year, we are planning about JPY20b.
This is the last page about the revenue related items, non-recurring items. For the March 2013 (sic - see presentation "2010") it was JPY150b again losses, but JPY26b, JPY49b and JPY12b. So to JPY12b this decreased. So the impact on PL has become limited.
That is all about explanation about the profit and loss. Next I'd like to move on the balance sheet, the loan balance. March 2012 was the bottom, according to this table or chart. So here at the bottom the balance started to increase, and for the last fiscal year the balance increased by about JPY150b by mostly housing loans, so housing loans increased by JPY150b. However, if you look at item, other real estate finance loans also increased by JPY60b, and consumer finance balance still decreased by JPY30b. And this will also be explained later. However, starting from January, the balance started to increase.
Next, net interest margin. As I've been explaining, the situation is the same. The old balance -- due to the decrease in the consumer finance loan balance, the yield has been lowering, so the yield on interest earning assets also declining. And on the funding side, the rate, because of the decrease of the market rate, it's been declining as well. And this net interest margin has been trending down for the last three years, but this may start to increase from this fiscal year. One of the reasons is that the consumer finance balance started to increase.
And I have been explaining this, but starting from the second half the high interest rate campaign deposits which we gathered four years ago will mature. But if we can roll it over with the current market rate, then the funding costs will go down drastically.
Next, housing loan balance. As I said earlier, housing loans are increasing steadily. On a yearend basis, it increased by JPY150b. And new disbursement and new origination was JPY290b, so it's growing steadily. So, I've been explaining this as well, for housing loans we do not intend to compete and go into the price war. So, although our housing loans are relatively expensive, more expensive than other banks, but this product is appreciated by our customers. Accordingly, the balance is increasing.
Next, consumer finance, Lake business. As I said earlier, balance on a yearly basis, it declined by JPY11b. However, if you look at it, from December the balance started to increase. And going forward, we are expecting or assuming this to increase.
This is consumer finance Grey Zone interest repayment. For Grey Zone interest repayment, we made a provision in lifetime provisioning in the last fiscal year, so for Shinsei Financial and SHINKI we believe that this is complete. We believe that we have the full or sufficient provisioning.
And for Shinsei Financial, in the fourth quarter the payout was JPY1b; on an annual basis, it's JPY4b. And currently we have JPY21.3b, which is equal to five year reserves. And for SHINKI and APLUS, they do not have such a large amount of provisioning, but it's JPY1.4b or JPY3.2b. These are the likely payouts on the annual basis. And the balance, JPY7.8b or JPY5b, so they have about a seven-year reserve level.
Next, real estate finance. Overall, balance declined by JPY19b. The real estate non-recourse loans decreased by JPY77b. On the other hand, for the other finance -- real estate finance, it increased by JPY58b. So in total the decrease was JPY19b. In other real estate finance loans, this is for the finance for the real estate agencies and the finance or loans to REIT, these are increasing.
Next, non-performing loans. Non-performing loans fell JPY53.3b on a year-on-year basis, and NPL ratio fell from 6.66% to 5.32%. Not only the decrease of non-performing loans themselves, the need caution assets, JPY196b but decreased by JPY100b. And in total, the quality of assets improved significantly. Furthermore, JPY53b of NPLs and the reduction of this, most of this is the real estate non-recourse loan. And therefore, the decrease in balance which I explained earlier is consistent with this.
Next I'd like to explain about the total capital adequacy ratio. 2013 March, the Basel II -- on a Basel II basis, 12.4% (sic - see presentation "12.24%") is the capital adequacy ratio, Tier 1 10.41%. So we have fully cleared the regulation. Medium-term goal on a Basel III basis, 11.6%. Common equity or Tier 1 ratio is 9.5%. So we have largely exceeded the medium-term target figures.
So I have been brief, but I'd like to conclude at this point. Thank you very much.
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Toru Myochin, Shinsei Bank Ltd. - Executive Officer, Institutional Business [3]
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Good morning. My name is Myochin, responsible for Institutional business. I'd like to explain about the healthcare sector and our approaches in this area, our actual track record and future business projections.
At the outset, Mr. Toma explained that starting April we started the second medium-term management plan, and as a bank we would like to stress our uniqueness during this term. And the healthcare business would be a major pillar in this effort, and we want to be positive about developing our business in this area. Our healthcare business, in a nutshell, is corporate loan and asset finance. We will not be sticking to this. We want to do integral business, incorporating all of this.
In the interests of time, I'd like to talk about the senior nursing business and senior housing business, finance to the seniors, and expanding this business. What would be a key to this business is the healthcare REIT, and so with regard to the start of the healthcare REIT I'd like to explain about our initiatives. Mr. Fujimura will be explaining the details of this.
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Takashi Fujimura, Shinsei Bank Ltd. - GM, Healthcare Finance [4]
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My name is Fujimura, from the Healthcare Finance Division. I'd like to talk about healthcare finance.
I'd like to talk about mainly three points. The first point is the following. Healthcare Finance, what kind of a market is it? And the environment of the market is what I'd like to explain. And secondly, with regard to this healthcare market, what approaches has Shinsei Bank taken? I'd like to talk about our track record. And thirdly, going forward, Shinsei's Healthcare Finance Division, to grow the market further, what do we intend to do? Our projections and strategies is what I'd like to address.
Firstly, let me explain about the market environment. Healthcare Finance, when you hear this you may have a vague image of what it is. We are focusing on the following two areas. That is what you find on the left, medical institutions, loans to the medical institutions. And on the right you have senior care facilities and senior housing market. Simply put, that's fee based senior homes and serviced housing; this is what we are talking about. And this is what we would like to focus on in terms of our loans.
If we compare the two in terms of growth, hospitals or medical institutions have a history of 100 years, and they are a mature industry. On the other hand, the nursing was such that since the nursing insurance system was introduced in the country it grew very rapidly, so it's a high potential for growth. And in terms of management, when it comes to hospitals, large hospitals, the hospitals are owned by the medical corporations. When it comes to senior housing, it's rental and the operators rent the housing, and so it's an off-balance item. So they manage without owning the housing, so there is a strong off-balance orientation.
So who is borrowing the money? In the case of hospitals, it's the medical corporations that borrow, on balance. When it comes to senior housing, it's separated. Those who need the money are the owners of the real estate or the properties and not the operators. And the owners are individual land owners and they do this as an approach towards resolving inheritance issues.
Who do we -- who is lending to whom? That is, in the case of hospitals, if it's a strong well-managed hospital they have a long history, so they rely on megabanks or the number one regional banks of the region. And they have a strong grip; these banks have a strong grip on hospitals. When it comes to the housing, it's individual land owners that rent these properties for inheritance purposes, and so it's the regional Shinkin banks or the agricultural banks, JA banks, that lend to the land owners who own these properties.
Now, what does Shinsei intend to do and what can Shinsei do? When it comes to hospitals, these hospitals that have turnaround issues, hospitals that have a problem, to these hospitals we want to help them out with their challenges. We want to provide solutions and work together to solve the problems. Business participation is the concept here. And we will be providing finance and other financial services.
When it comes to care facilities, senior care facilities, there are small -- these tend to be small facilities. The industry is growing, so there will be larger and larger facilities. And so lending to large facilities, using capital market money to promote this kind of business, that is what we want to focus on.
The next slide, please. What is the growth potential of this market? Let me explain. When you look at hospitals and senior care facilities, we are targeting both but we will be focusing more on the senior care facilities. There are two reasons for this. The banks are very few which are participating in the senior care facilities and the senior care market itself has a high growth potential.
If you look at the bottom, in the past five years we've seen how -- the transition of the facilities. In 2007, we had senior housing to the tune of 150,000. In 2012 this has doubled, 300,000 plus. Five years from now, what will happen? It's the government policy to increase this to 600,000. In the past five years it doubled -- in the next five years to double that again, to keep doubling.
So, if you look at the industries in Japan, it's a unique industry with very high growth potential, and the money which is required to finance this is shown here. If you look at the market valuation of the senior care facilities and housing, it's said to be JPY3 trillion. It's expected to double to JPY6 trillion. And that is the valuation.
Next, please. Shinsei Bank, to this bank -- to this market, how has it approached this market? We have, in a nutshell, created a new market. And what is our track record? This is what I would like to explain. A distinguishing feature of our approach can be summarized into the follow two. We have been a pioneer in this market. Secondly, the main product is not corporate finance any bank can do. The capital market and the nursing care market, to tie these two we have used a method of securitization, and that is a characteristic of the services that we have provided.
On a full scale, we have begun to participate in healthcare finance. In 2010, July, under the leadership of Mr. Toma, as a new management strategy we have set up the Healthcare Finance Division, and there are two targets we have set for ourselves in this division. We want to become the kind of existence where people associate Shinsei Bank with healthcare finance. We want to become number one in this business. And secondly, we want to launch Japan's first healthcare REIT. And we have worked on these two targets.
The first target, to become number one in the area of healthcare finance as a bank, what have we done in this connection? Specifically, if you can look at the right-hand side of this slide, first of all, cultivating new customer development, operator development; these are the two areas of development which we have worked in the past three years. We have worked on the ground in terms of marketing. We have developed relations with 100 companies. And when it comes to nursing care and medical institutions on the domestic scene, 50 companies we have established relations with. So, the two markets, how can we tie the two markets, how can we connect the two markets? That is the challenge which we face.
When it comes to specific projects that have materialized, there are two transactions which I'd like to talk about. Firstly, last year in December and this year in March, we have closed the following transactions. Healthcare Infrastructure fund, this is the project; the local small- and medium-size securities companies we have teamed up with and to retail investors a small logged investment has been promoted to fee based senior homes. And we have arranged it and we have planned it and we have provided loans to the fund.
Each loan is very small in size, but we have intentionally taken this up because in order to launch the REIT these investments into senior homes are such that we wanted to see how investors would react to this, the investors' response to this. That is what we wanted to know. The securities companies expected to do sales for about a month or so, but after a week they sold all. Per lot, it's about JPY2.5m. Amazingly, those who bought this were the seniors over 65 years of age; these were the investors. And we had hoped that we could really launch a healthcare REIT on seeing this development.
And the second point, a deal which we closed last month, this is an unprecedented transaction of unprecedented size. Singapore's Healthway Medical Development, this is a company that develops medical institutions. And with regard to 13 homes, an investment of JPY9.6b has been -- an investment of JPY15b has been made and we have executed JPY9.6b of non-recourse loans, and there was a mezzanine loan of JPY3.3b.
The second objective, that is, starting and launching a healthcare REIT. Healthcare REITs are such that the markets overseas and in Japan are as I shall be describing. In the United States, by far they are the largest in terms of healthcare REIT market. All of the REITs, more than 100 names are listed, and the healthcare exclusive specialized REITs are 11 names in all out of the 100. And there has been an increase so there are now 12 names, so there are 12 healthcare REITs which are listed and which has capitalized JPY7 trillion.
If you look at Japan, there are about 40 names -- 40 REITs which are listed and healthcare specializing REITs are 0; there are none. Among the existing REITs, there are those that hold healthcare institutions in small amounts, but the investment amount is a mere JPY40b so it's almost close to zero. That is the situation.
And the government felt, finally, that healthcare REIT is necessary in Japan, so MLIT and FSA and the Ministry of Labor got together and in last year, in September, they set up a committee to launch healthcare REITs. As a representative of the financial institution, I was invited to become a member of this committee. And for six months we've continued to discuss and the conclusion reached was as follows.
First, for Japanese society these healthcare REITs will be beneficial, and the government also would like to support the establishment of the REIT. So we agreed on that. And another point is now when are we going to establish the healthcare REIT? And the conclusion is we should establish now. Now is when we should establish the REIT.
I'd like to move to the next slide, so this is a highlight of today's presentation. As I said earlier, Japan has no healthcare REIT today. On the other hand, to support the Asian society in Japan for the senior care facilities or senior care housing are very important, or we can call it social infrastructure, so that is our understanding. So the establishment of a healthcare REIT for the -- not only for senior care business but for the real estate securitization business, for these two businesses or industries, these will be a long-time dream. So Shinsei Bank is going to involve in this dream project.
For Shinsei Bank, the establishment of healthcare REITs, you may feel a little uncomfortable for that. But first of all, what is the significance for Shinsei Bank to be involved in the establishment of the REIT? There are three significances.
One, the loan balance will grow steadily. So REITs are targeted to establish within two years, so in order to create REIT assets will be accumulated. There is a bridge period, and for the bridge funds [over the years] needs for the non-recourse loans. And once the REIT established, then there will be a corporate finance for REIT for more than JPY100b, so if the LTV is 50% that's going to be JPY50b. So JPY50b corporate loan, there will be a need for such corporate loans.
And once the healthcare REIT is established, then to these kind of assets the liquidity of the assets will increase drastically, so there will be more and more market participants, so more than today. The total market size will increase, so there will be more opportunity for finance.
And second point, in order to demonstrate our social raison d'etre, the brand value of the Shinsei Bank will improve. Normally, the major developers, they develop their own facilities and that will be transferred. In order for the transfer, the REIT is established and the general commercial real estate properties are moved to REIT. That is a typical business model, but what we are trying to do is a little different from that. The basic concept is different.
Which means, as I said earlier, healthcare real estate is a social infrastructure to support the aging society, and we are in a shortage of such infrastructure. So we need to organize or establish an infrastructure, and that needs the capital market funds, so we would like to give such opportunities. So, as a bank, or as a Japanese bank, we have raison d'etre.
And the third point is about the customer base, so we will be able to expand our customer base. In a process for establishing healthcare REIT, we need agreement of many investors. And also, the major senior care business operators or the others, we need the cooperation from such operators, as well. For the REIT concerned parties, with them, by establishing this business, we will be able to expand or create the customer base which was not existent in the past and not on surface, but based on the business participation we will be able to establish the deep relationship with them.
So this is about the concept of the healthcare REITs. So this is still a concept or plan. The Bank has many limitations under banking law. So we would like to proactively be involved in this, but in reality, how we will be able to be involved in this, that is currently in the middle of discussion or study. Anyway, Shinsei Bank is a little different from other ordinary banks, so we will be able to make the commitment on such niche markets. And as a frontrunner, we would like to create a market and develop the market. So such initiatives are difficult for the other Japanese megabanks to do, so this is an area that we will be able to demonstrate our uniqueness.
In order to support the aging society in Japan, what can we do as a Japanese bank? So, thinking that, we would like to continue working on the area of Healthcare Finance, and we would like to continue our effort and we appreciate your support. Thank you very much.
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Unidentified Company Representative [5]
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Now, we would like to move on to Q&A. If you have any questions, please raise your hand.
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Questions and Answers
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Unidentified Audience Member [1]
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I have two questions. One, you explained this, but for this fiscal year's plan, could you please give us a background of the reduction of the revenue and the estimate for the credit costs? The credit costs you assume to be increased, but are you expecting such an increase even with the increase in balance?
And the second question is about real estate market. Looking at the fourth quarter of last fiscal year, the real estate non-recourse loan disposal, you have booked the gain, so did you have any change in the market? And these gains or the recovery of written-off claims are likely to continue for this fiscal year, as well? These are the two questions I have.
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Shigeru Tsukamoto, Shinsei Bank Ltd. - CFO [2]
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Well, the reason for the lower revenue, I think you have asked for the explanation on that. The structured products, or structured deposit we sell which have derivatives, and traditionally, the way to book the revenues from the derivatives was done on one time, as upfront. However, depending on the period of the product, we will change the book -- the profit, and the impact of this is about JPY6b, annually.
And for the credit costs, as I say, we may be a little conservative. But as I said at the beginning of the presentation, the net credit costs under the same or normal operations is JPY10b for the institution and JPY10b on a net basis for the individual. For the institution, last fiscal year we had a few little credit costs, or rather we had the reversal of the reserves, but this is more than the one-time factor. Under the normal operations, we had about JPY10b credit costs, so we believe this is reasonable.
And for the individual group, the borrowers' quality is improving after the revision of money-lending business law, and going forward, the consumer finance balance started to increase. So we don't think that it will go back to the previous level immediately, but we have estimated in a little conservative manner for this fiscal year.
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Shigeki Toma, Shinsei Bank Ltd. - Representative Director, President & CEO [3]
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Now, for the real estate market, let me explain, or let me answer that question. Well, as I said earlier, thanks to the -- or due to Abenomics, the momentum of the economy is improving. And other than the Abenomics, overseas investors are paying attention or starting to pay attention on Japanese real estate market. And also, due to the weaker yen, it's become more active.
Now, the prices of the real estate themselves are increasing, but not exactly. Actually, they are still staying at the bottom. And there are some areas that even the real estate prices have not stopped to decrease, so there are differences in regions. But Japanese assets are staying at the bottom or hit the bottom.
Now, specifically for Shinsei Bank, what will be the implication for the market? First, transactions have become very active. So for the collateral properties that have stayed in our book, we have decided to dispose them since last fiscal year, so the non-performing loans need to be complete. We have to close the -- otherwise, we will not finalize the results, so that is the reason that we are seeing the decrease.
And of course there are some differences or decreases or increases. Some of them have profits and others of them do not have enough reserves, so it's case by case. But in general, if you aggregate total, it will be in a slight positive, or it has a small profit.
So, whether we will have more profits, for that we have to be cautious, and I don't have any information to answer your question. But, in total, it's a low figure, but the [revenue] is favorable because of the reversal, because we see more transactions, and it will be now easier for us to exit from the deals or dispose the assets.
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Unidentified Audience Member [4]
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With regard to institutional lending, if you look at the year just ended with regard to institutional, power utilities was the leading sector. Starting this fiscal year, do you think that institutional lending will really take off? What sectors and what deals can you give us? That's the first point.
And the second point is with regard to the healthcare finance market. In the ultimate end, with regard to contributions to revenue in the three years, what numbers are you looking at? And along with this, market share, as well. If you could comment on the market share, please do so.
And generally speaking, when it comes to medical institutions or senior houses, care facilities, if there are social issues it's difficult to exit. I think there are some inherent problems there in that regard. What scheme do you have in place to guarantee with regard to such phenomena? I'd like the persons in charge of the healthcare to respond to this question.
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Shigeki Toma, Shinsei Bank Ltd. - Representative Director, President & CEO [5]
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With regard to healthcare, I'd like to have the responsible persons respond, but with regard to institutional lending and projections for institutional lending, the existing sectors, corporate lending, for corporate lending, we did have a lot of lending to power utilities in terms of corporate loans. Issuing of corporate bonds is becoming very difficult, so a lot of power utilities turn to banks to finance, and there are different factors involved so it is very complex. But it is not necessarily the case that we have been very positive about working on the utilities, but that's not our stance.
We used to be a long-term credit bank, and because of our history, historically speaking, with the power utilities we have had a very close relationship. And in this context, since they are in difficulty, we want to do our commensurate part in terms of cooperating, and the resulting figures are a consequence of this.
So we're not trying intentionally to grow this or to promote this going forward. It wasn't intentional on our part. And what this means is that, in the ultimate end, corporate loans, the so-called corporate loan market is such that when the economy improves -- well, there has been an increase which is commensurate with the improvement in the economy, but there has been no growth above that.
As to what will happen going forward, I am not sure, but most probably we'll see increased sales in the export, and I don't believe that there will be demand related to increased operating or working capital. If the weak yen continues and if this is in line with government policy, there may be CapEx along with increased sales. Even if this happens in the next one or two years, companies will use their cash at hand -- cash on hand, and so a continued trend. In two or three years, if this becomes a continued trend, they will run out of cash on hand and they might resort to loans. That is what we think.
So, in the next one or two years, even if the economy improves, we cannot expect much growth in the coming one or two years. So when we think about projections, forecasts for corporate loan, most of the existing businesses, whether it's power utilities, automobiles or iron and steel, in these areas, we don't expect there will be a large growth.
So where should we look to grow our loans? As we have been mentioning, healthcare is one such sector, and renewable energy, we expect growth going forward. These new sectors are what we're looking at. Mr. Fujimura talked about the niche market, but it's not a niche market we're looking at. We're looking at new markets, emerging markets. That is what I want to say. And I believe that these markets have a high potential for growth, and that's where we see our opportunities and we hope to grow our loans there. Have I answered your first question?
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Toru Myochin, Shinsei Bank Ltd. - Executive Officer, Institutional Business [6]
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And let me speak about healthcare. In terms of contribution to profits, every year, corporate, non-recourse together total JPY20b to JPY30b in terms of assets we want to accumulate. And the fee, well, that would depend on the ratio, 100 basis to 200 basis of spread. That is what we're eyeing. And if you could calculate backwards, I think you have an idea.
With regard to market share, we don't know what the denominator is, so we can't say how much. As Mr. Fujimura explained, when it comes to non-recourse, not corporate -- non-recourse, we expect to be a frontrunner and we'd like to maintain our position as such. And when it comes to nursing facilities, care facilities, there are social improvements, there's abuse and so forth going on in this sector, and socially it's difficult. We will be checking on the operator. An operating change clause will be inserted. We want to be very careful about this sort of thing.
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Takashi Fujimura, Shinsei Bank Ltd. - GM, Healthcare Finance [7]
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Let me add, as you rightly pointed out, within -- in the healthcare sector, financing is such that there is always a reputation risk. It is often said so. How do we hedge the reputation risk? Therein lies the core of our financial technology. Largely speaking, you have corporate loans and hedging in this area, and then there is non-recourse loan asset finance hedging. The two are totally different.
In the corporate loan, the hedging is such that it's very difficult. The operators will have to take on the risk directly, but there's barriers to entry, and so simple bankruptcy does not happen in the area. There are important -- these are considered important infrastructures. So somebody takes over through an M&A and the possibility is very high that, through an M&A process, the entity will become very strong.
With regard to non-recourse finance, as Mr. Myochin has mentioned, replacing operators is what we are thinking of. And we'll always have substitute operators to replace and we're taking the necessary measures to do that.
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Unidentified Audience Member [8]
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The other, the need caution declined, the decrease of JPY100b, this is also a non-recourse loan, and this is a final disposal or the improvement of LTV, and could you please give us a comment on that?
And I asked this to Mr. Toma last time. The new business of JPY500b, you are planning to increase the balance, including healthcare finance. So could you please comment on the spread of the risk and return of this JPY500b?
And what is your estimate for the credit costs in non-healthcare? So you have given the plan for the balance of healthcare, but for the other non-healthcare, could you please give us your plan for this JPY500b?
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Shigeru Tsukamoto, Shinsei Bank Ltd. - CFO [9]
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Okay, so for the other need caution decline, the details of the decrease, there is little real estate. The general corporates have improved or have been upgraded from need caution to normal, so they're not disposal.
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Shigeki Toma, Shinsei Bank Ltd. - Representative Director, President & CEO [10]
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Let me add some comments on that. The yen has continued to depreciate, so the damage due to the FX has improved. That's one thing. And the general corporates, their performance is improving. There are some major such obligors whose rating improved. And for the real estate, actually, the so-called non-performing loans, those are worse than need caution. The disposal of such obligors proceeded. And for the JPY500b that we are accumulating in the corporates, but whether we are really sure -- because this may not be 100% zero, but whether it is fully correct or not, it appears that there is no such reliability.
So, going forward, how the emerging industry will be created, so that is so diversified, so we are not sure yet. So not only healthcare, but also like game industry or renewable energy or other raw material companies, or the processing companies using new technologies. So there are many different kinds of industry. So apple-to-apple comparison of the competitiveness, actually, there are many areas that it will be difficult to discuss. So with some discount, we are assuming approximately JPY500b.
And the details of this, they're not necessarily all loans. Actually, there are some equity investments as well, of course. Then an average risk/return, 1% or 2%; actually, it should be a little higher. Of course, compared to that, we have restrictions on equity investments, so just small, but if you can -- then, if it becomes a hundred times -- so if you add them all, the total return, even based on ROA, will not be 2% or 3%, but it will be higher, and we are targeting a little higher than that.
Sorry. Actually, it's meaningless to calculate exact percentage, but we are roughly estimating 1% or 2%, but in the last three -- next three years, how many of them will go public or how many can be exited is very difficult to forecast, so we have not made an accurate or concrete calculation. But, roughly, in a conservative manner, we're estimating JPY500b balance. And conservatively, we're estimating about 1% return, according to our calculation and under our plan. Sorry, did I answer your question?
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Unidentified Audience Member [11]
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I have one question. Page 10, the non-recurrent factors, you have said that you have taken all the measures. In the present budget, are there such non-recurrent factors still? And after this, do you expect a certain amount of factors which press down and depress profits? Should we expect that going forward?
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Shigeru Tsukamoto, Shinsei Bank Ltd. - CFO [12]
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Literally, non-current items is what this is, so in this fiscal year's budget, we haven't incorporated this. And whether there are downward pressure-exercising items, I think we should account for that. We should prepare ourselves for that. We have processed legacies and we have been very conservative, so there may be reversals. In our plan, we haven't factored these in. At least, in our plans, we haven't factored them in.
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Unidentified Audience Member [13]
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I have three questions. Number one, on page six, this fiscal year plan, non-interest income, the reason for the increase, if you have such a cause by group, could you please share it with us?
And the capital ratios increase, any plan for the return to the shareholders?
And for the retail banking, you're going to launch many initiatives. Do you have any time schedule, like within the first quarter or second quarter? Could you please share it with us as well? Thank you.
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Shigeru Tsukamoto, Shinsei Bank Ltd. - CFO [14]
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Let me answer the first question, the breakdown of the non-interest income by group. Actually, I would rather not to disclose it, because, as I said earlier, basically, it's the same as last fiscal year. The budget was JPY100b, but it ended up JPY80b. The biggest reason for the gap was the profit from the structured deposit sales. There was about JPY6b. So for the retail and global markets group, these are divided in these two groups. So the reason for the decrease in profit will have the 50% impact on each group.
And the reason or the impact of the weaker yen, in the disposal of this fiscal year, we are assuming or planning the reversal of the reserves. And for the individuals, of course, there will be the reversal in this group, so these are the major factors.
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Shigeki Toma, Shinsei Bank Ltd. - Representative Director, President & CEO [15]
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To your second question, the plan to return to shareholders, as you are aware, we have not repaid or we have not developed plans for the repayment of public funds, so like the dividends. Such a plan for the return to shareholders are operated in a restricted manner. It does not have to be JPY1 per share. However, rather, can we increase to JPY10 or JPY20 per share? Are we going to make such a dividend payout, or are we going to set a certain percentage payout ratio for the net income? For that, I'm very sorry, but we are rather negative. We have to say that.
And another point is that, going forward, because we are planning to expand the business or grow the business, of course there will be adding to the capital from the revenues, and of course the pace of the growth of the assets will not be in line with it. So without avoiding -- by avoiding the capital increase as much as possible, the asset accumulation, especially for Tier 1 increase, is very important. That also will be a negative factor for the return to shareholders.
And to your third question, the retail banking initiatives, we have many initiatives. For example, how are we going to use smartphones? And with smartphones, how can we simplify the processes? And we have such initiatives. And also, with the cooperation with third parties, how can we expand the business base? Or using third-party institutions, how can we reignite the banking business or reactivate the banking business?
So there are things that cannot be decided by ourselves. So how many we will have in the first quarter or second quarter, as Mr. Samejima says, we don't have any concretely schedule, but they may be launched earlier than expected, because there is an issue of technology. For example, for smartphones, with manufacturers the discussion how to use smartphones has already started, so this may launch quite quickly. Meanwhile, the cooperation with third-party entities may take some time. Sorry for not being able to give you a clear answer.
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Unidentified Company Representative [16]
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There is very little time remaining, so we'd like to entertain just one more question. No questions? If not, we'd like to conclude the business results presentation for FY2012.
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Editor [17]
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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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