Q2 2014 Shinsei Bank Ltd Earnings Presentation Webcast

8303.T - Shinsei Bank Ltd
Q2 2014 Shinsei Bank Ltd Earnings Presentation Webcast
Nov 05, 2013 / 04:30AM GMT 

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Corporate Participants
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   *  Shigeki Toma
      Shinsei Bank Limited - President & CEO
   *  Shigeru Tsukamoto
      Shinsei Bank Limited - Senior Management Executive Officer & CFO

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Presentation
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 Shigeki Toma,  Shinsei Bank Limited - President & CEO   [1]
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 Thank you very much and good afternoon. My name is Toma of Shinsei Bank and once again thank you very much for coming here to the announcement of the interim results. I would like to give you the overview of the first half results and give you my perspective and then I will refer to the details to Mr. Tsukamoto.

 First of all, JPY27.2b was the final profit. There has been a slight increase of reported basis net income. The target for the full year is JPY48b, so 57% has been achieved. So progress rate is so and so.

 And also, JPY15.5b was the target and it's -- against the JPY26b full year target, this is 61% and, therefore, we believe that we are on target as we proceed to the full year targets. So income-wise we're doing quite well. However, I am frustrated by many points in this interim result.

 This year is year one of the three year business plan and healthy growth is our target. Bringing us back on the track of healthy growth was the primary goal. But, we haven't seen that happen in the first six months and there has been a slight decline in total revenues on top line basis.

 And credit cost against the budget was reduced, which is positive. But, the overall impression is that there is shrinkage in the business activities and we've not been able to depart from that tendency. So, from my personal perspective, I think we have much to do.

 So what needs to be done? As has been explained in the mid-term plan for both the institutional as well as individual business, we have to offer services different from other banks. And how we can form those new services is the mandate given to us. The frontline sales people and many divisions are conducting new trials.

 For example, even in the back office, in addition to the front office efforts, IT system renewal is being done. And, also, governance system improvement and the review of the human resources system and the organizational review are some of the efforts that have been launched.

 They were somewhat backfired because of the lower priority. Employees say that you're the President so you can say whatever you like for us to do, but we're the ones that need to do those priorities. But, I've been telling our staff that the pace of these efforts have to be accelerated and I have to motivate the people to work on those aspects as well. So those are some of the areas where more efforts would be required. And, until that happens, I will continue to experience sleepless nights. And, therefore, we are determined to continue our efforts. So, we truly would appreciate if you could watch closely and give us useful advices.

 Now I give the microphone to Mr. Tsukamoto for the details.

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 Shigeru Tsukamoto,  Shinsei Bank Limited - Senior Management Executive Officer & CFO   [2]
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 Now I'd like to start my presentation. This is Tsukamoto. Now, I would like to focus on numbers based on this presentation material. First, please look at page 5.

 FY2013 results financial summary. This shows in the first half -- in the second half of 2012 for three consecutive terms we have shown the data.

 In the first half 2013, revenue JPY100.2b. If you compare with the numbers next to it, the first half of 2012 and the second half, this is almost the similar number. Our target, toward the JPY215b, we are a bit behind, so the progress rate is 47%. So it's a little weak number.

 Now in the middle, the credit costs. Following the disposal of NPLs, there was a reversal of the reserves and improvement of quality in the consumer finance loans. Compared to JPY6.2b on a year-on-year basis it decreased significantly to JPY0.3b.

 And, also, the budget targets about JPY20b. At the beginning of the analysts' meeting I explained that originally it's JPY10b each for the institutional and individual group. But this is well below those numbers.

 As a result, net income was JPY27.2b and the progress rate is 57%. So looking at the bottom line only, this is reasonable.

 Now please move to slide 6. The details of the top line will be given.

 First, the net interest income. The real estate non-recourse loan decreased and consumer finance balance decreased. Accordingly, compared to JPY56.1b in FY2012 this decreased to JPY55b. But comparing with the second half of FY2012 which is JPY55.4b, this is almost flat.

 Consumer finance balance has started to increase from January this year and this contributed to the increase. So, net interest income is almost flat.

 And non-interest income, JPY47.9b was the first half in FY2012 and the current term is JPY45b. This is slightly below. But the second half of FY2012 was JPY39.4b. Compared to that, we saw an increase.

 Please move to page 7, expenses and net credit costs. Expenses, due to the rigid expense control and operation rationalization, on the other hand, for the focus area, we proactively decided to make an investment. And accordingly, the expenses increased by about JPY2b compared to the second half of the last fiscal year -- for the first half FY2012. And this increased by JPY1b for each group.

 And net credit costs, due to the NPL disposals, there was a reversal of the reserves. So, the net credit cost improved dramatically.

 As a result, please move to page 8. OBP after net credit costs, in the last fiscal term it was JPY34b and the OBP after net credit costs is almost a similar level as this. As explained, top line decrease and expense increase were offset by the decrease, significant reduction of the net credit costs.

 Next, I would like to explain balance sheet. Page 9, please.

 First loans. Loan balance for the retail, for the consumer finance and housing loans, these increased steadily. On the other hand, for the corporate, for the institutional business, because of the NPL disposals as well, the balance decreased.

 Deposits, the retail and corporate deposits both grew. The total balance was JPY5.7 trillion as of September end. So this increased by JPY300b from March. But of this JPY300b, JPY200b is because of suspension on the issuance of debentures. So, this is a transfer from the deposits. So the net increase is, or pure increase, is about JPY100b.

 Please move to page 10, net interest margin. As shown on the left-hand side it's 2.07%. So this has improved.

 The yield on investments and funding both improved. On a quarterly basis, this is shown. So, compared to the last quarter, we are seeing a sign of the improvement.

 Yield on funding. We took the high interest rate deposit five years ago and starting from September, these deposits started to mature. From the second half and onwards this will have the impact on yield. But, as of today, we have not seen that impact. The decrease of the funding is almost due to the decline in market interest rates.

 Now please move to page 11, consumer finance business performance.

 Consumer finance loan balance was JPY482b. Compared to March, this increased by JPY3b. Of this, Shinsei Bank Card Loan Lake and Shinsei Financial unsecured personal loan balance, the aggregated balance for the nine consecutive terms from January and also it increased in October as well. So it increased for 10 consecutive months. This is not a confirmed number, but as of the end of October, JPY344b which increased by JPY12b from March.

 Next, grey zone interest repayment. Please look at page 12.

 First, the table -- the number of disclosure claims and the repayment. For all three companies on a year-on-year basis the numbers decreased. First Shinsei Financial. Reserves as of the end of September was JPY19.1b. Now in the second quarter repayment is JPY1b. So on an annual basis it's about 4.8 years, the reserved [assistant].

 And Shinki, JPY5.3b reserves and payment was JPY1.1b in the first quarter. So on an annual basis, it's about 1.2 years.

 And APLUS is JPY4.1b and the payment was JPY0.8b, so it has sufficient reserves.

 Next, housing loans, page 13. As shown on the chart on the left-hand side, it increased by JPY60b from March. The market had the tough price competition. However, we decided not to compete on interest rates. However, we are seeing the strong growth, or steady growth. And the demand for refinance is slightly down. But there is the expected surge in demand before consumption tax hike, so we are expecting growth for the second half as well.

 Real estate finance, so, please look at page 14. Non-recourse loan for the real estate finance, the balance decreased significantly. This is due to the disposal of NPLs. This is mostly impacted by the disposal. The total balance decreased by JPY110b. For non-recourse loan only, the balance decreased by JPY130b.

 Now, the conditions of non-performing loans are shown on page 15. Compared to March end, this decreased by about JPY40b. The NPL ratio is improved to 4.76% from 5.32%. And the balance also decreased to JPY202b.

 The real estate non-recourse loans, this is for loans only. So if you compare with it the loan balance by industry is shown on page 9 and real estate non-recourse loan decreased by about JPY60b. Of this, NPL disposal was about JPY46b. So, the NPLs decreased by JPY40b. But, if you look at the non-recourse loans to real estate only, it decreased by JPY46b. That is all about the non-performing loans.

 And lastly, capital adequacy. Based on Basel II ratios, it's 14.12%. This is also improved significantly from March end. The reason for the improvement, the total asset decreased. However, risk assets decreased. But more than the reduction of the total assets, risk assets decreased. This is due to the disposal of non-performing loans. And this is not non-performing loans, but the need caution balance decreased. Accordingly, the risk assets decreased significantly.

 On the other hand, the numerator, in addition to the increase in retained earnings, the deduction decreased due to the disposal of non-performing loans. Accordingly, we saw the major improvement. So both the numerator and the -- both numbers improved.

 That is all from my end. Thank you.



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Questions and Answers
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Unidentified Company Representative   [1]
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 We will now begin the Q&A.

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Unidentified Audience Member   [2]
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 I have two questions. First of all, real estate non-recourse loan JPY46b non-performing loan reduction. The gain out of that reduction of NPL, how much proceeds has been gained from reduction in non-performing loans? According to where the market is today, to what extent can you reduce NPLs in non-recourse real estate further and how much gains out of the reduction of NPL in non-recourse can be expected? That's my question number one.

 And secondly, on a full year basis on the bottom line basis, you're doing quite well. But related to the first question, with non-recourse loans, non-performing loans progressing, are you thinking of outperforming the budget on full year basis? And European asset backed investment reserves have been provided in the first half and APLUS for grey zone reserves had provided for additional reserves or is likely to provide for additional reserves. So, will you be conducting defensive reserve provision? So do you think that the final full year profit will be in line with the guidance given by the Company so far? Those are the two questions.

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Unidentified Company Representative   [3]
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 First of all, with regards to non-performing loans how much proceeds or reversal has there been? JPY2b reversal, approximately speaking.

 And, speaking of the future, going ahead in the second half, there may be some measures we need to take that have not been factored into the budget. This will require scrutinization, but I talked about the increased provision of grey zone interest payment for consumer loans. Two years ago, lifetime provision had been done but the pace of reduction is slower than we had expected. In other words, the same situation continues to prevail.

 1.3 years' worth at Shinki and APLUS no lifelong provisioning has been done. So for APLUS, if required, we will have to provide for additional reserves. But for Shinki, we think that there is high likelihood for additional reserves being provided for.

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Unidentified Audience Member   [4]
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 And what about the full year guidance?

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Unidentified Company Representative   [5]
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 What we expect for full year basis, plus/minus on net basis, there are both positive factors as well as negative factors, one-time factors as well. And, as far as real estate non-recourse loans are concerned, we will be proceeding with the NPL disposals in the pipeline. But, our reserve may be slightly more conservative than the market, although it would depend on the timing. But, it would be the nature of the property as well as the location of the property. And, therefore, it's difficult to judge at this stage.

 However, as an intuitive impression, maybe there could be some room. But, at least we're not in a position where we will be incurring a huge amount of unexpected additional losses. So, if I try to look at how well we will perform in the second half it would depend on the progress to be made in the disposal of NPLs and various other factors. So I'm neutral on this point.

 And other negative factors may include Europe. And, as far as Europe is concerned, in the first half -- was it the first half? We provided for reserves. But the debtor, the borrower situation had changed and that was the reason behind the additional reserves. And, for other assets in Europe, unless something drastic happens we don't think that any additional losses will have to be incurred.

 And, Mr. Tsukamoto spoke of the grey zone provisions. So on one-time off event related issues, if we net out the positive and negative, then there could be some additional provisioning required. But, that will require scrutinization.

 And as for the core business, for the time being we're still rather fragile and bearish. And, in the first half, to a certain extent, progress was made. But, in the second half, of course, we've begun to inject our utmost efforts. But, we cannot be overly optimistic about the second half. That is how I see the current situation. I hope that responded to your question.

 Next question please.

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Unidentified Audience Member   [6]
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 I have two questions. One, the common equity Tier 1 ratio. If the risk assets accumulation continues as is, there will be -- the gap will widen compared with the budget. So, what is the accumulation of the risk assets? How are you going to accelerate it? And, about the capital policy, there is no change in the capital policies, correct?

 And the second question is about the consumer finance, about Lake and Shinsei Financial. The momentum for the balance increase, the current momentum, what's your view on the current momentum compared to the budget? And what is the cross-sell initiatives of the bank-wide basis? And when this is realized, how much can you accelerate the momentum for balance increase? So these are two questions.

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Unidentified Company Representative   [7]
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 Well, as for risk assets, in the next three years, on a book value basis, we are talking JPY2 trillion. So, that is the basic plan and this has not changed.

 And risk assets, I'll give you later. But the risk assets will also be increased and including all of them, the common equity Tier 1 ratio is targeted.

 However, if the risk improves, then it might go up than this. For three years, looking at the first half, we are a little behind, but from second half, second half and towards next fiscal year, of course, we are expecting acceleration of speed. So, the final number after three years will be slightly better than this and I hope it will be better than this.

 Accordingly, for the capital policy as well, basically the dividend requested by shareholders, and I understand the situation. However, basically, we will like to have the capital adequacy first. That is our top priority. So, for this, there will be no major change.

 And, for the consumer finance, the momentum from the balance increase, as Mr. Tsukamoto mentioned, starting from this year, on the monthly basis, every month we are seeing increase. So, that is the current conditions. So, monthly increase, and, of course, there's some busy time and not busy time, depending on months.

 For example, bonus payment month. Even today we saw a decrease, so that is the trend. But, now we are seeing an increase. This is too early to conclude, but the balance decreased more than expected or too much. So going forward, thanks to the economics and higher stock prices, the men who made trends strong, then this momentum will be sustainable and will be strong.

 And cross out the bank customers. Even today, we are promoting this proactivity. However, we have just started. And going forward, the behavior of customers needs to be watched and to study how to sell the product. That is our challenge.

 Specifically, I'm not sure if this is the right comment, but consumer finance is rather like a pawn shop, long time ago, to be reluctant, to be invisible, and to escape or avoid people with eyes. But this is such a convenient loans. So, I would like to appeal the attractiveness of products, also prices. And, by doing so, we will like to expand our customer base. And to do that, we need some more time. And risk assets, we are expecting an increase of JPY1.7 trillion, so that is the plan.

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Unidentified Company Representative   [8]
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 Did that answer your question? Thank you. Next question, please. The person in the center.

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Unidentified Audience Member   [9]
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 One big question. We've been talking about the size of the balance sheet, inclusive of the possibility of increasing loan balance. Your mid-term plan has just begun, but you're expecting maturity. What if they don't refinance? Then you want to invite those funds to the sale of investment products, so maybe the allocation of balance sheet is changing. Do you feel that the substance or the mix of the balance sheet is changing?

 And secondly, I apologize for being persistent, but non-recourse real estate loan, after disposal, previously against your face value, 10% premium was able to be gained for the collateral. But, at what price are you being able to dispose of those assets, at the moment?

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Unidentified Company Representative   [10]
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 Let me take the second question first. But what do you mean by what's the current situation?

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Unidentified Audience Member   [11]
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 When you sell off the collateral, I guess you estimate the collateral evaluation in a stringent manner. But against your evaluated value, at what premium or negative percentage are you being able to actually sell the asset?

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Unidentified Company Representative   [12]
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 To respond to your second question, our subsidiary does the appraisal and they say that we've been able to sell with a 20% or 30% premium. And also, the size of the balance sheet, currently speaking, JPY10 trillion, first of all, that would be the initial target for which we shall aim to build up the balance sheet. And, of course, high interest, five-year time deposit is coming into maturity. And there will be a reduction of such assets, by JPY800b towards next fall. So that would be the reduction of such assets.

 And, of course, yield will become positive. So will refinance be unnecessary? Then in order to assure stability of financing on long-term basis or we intend to increase our assets even further. So rather than refinancing, we want to increase the deposit base itself, both in terms of number of account holders, as well as the assets under management per account holder. So, the retail division is embarking upon such strategy, and I hope that answers your question.

 Next question, please.

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Unidentified Audience Member   [13]
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 JPY46b non-recourse loan were disposed and there was a JPY20b reversal and you've been able to dispose or sell the properties at 20% or 30% higher than your valuation. Could you elaborate more than that?

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Unidentified Company Representative   [14]
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 Well, JPY2b is on a net basis. So, some of them we were able to gain, and others were losses. Including all of them, among the credit costs for those that we had JPY2b gains from the disposal of the real estate properties. And we actually with -- in some cases, we added reserves. We net out.

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Unidentified Company Representative   [15]
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 Did we answer your question? No other questions? And the lady on the right-hand side.

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Unidentified Audience Member   [16]
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 I have a question on consumer loans. For new customers, if there is an application for Shinsei Card Lake -- I think that's the initial counter to which they apply. In the non-bank sector credit card business and cash advance business is being done by the non-bank subsidiaries. Some of the banking groups have done that. You have Shinsei Financial and existing customers there. So, are you taking measures so that they switch to bank parent products rather than Shinsei Financial, so that their assets at Shinsei Financial goes down and then you can increase the credit line if they are performing well? Could that be done?

 And if they start with Shinsei Financial as an account, I think your policy was to be conservative and not to offer bank products to those customers. But has your policy changed, and do you think that this is an opportunity to offer bank products to the Shinsei Financial customers?

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Unidentified Company Representative   [17]
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 Thank you. As you have rightly pointed out, existing customers, do we offer increased credit line or switch to the parent? Yes, of course, that's possible. But, for the time being, we still have those fences in-between. So, we would like to observe the situation for some time, until we make a decision.

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Unidentified Audience Member   [18]
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 Thank you very much.

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Unidentified Audience Member   [19]
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 I have two questions. First question, is the non-recurring item from the non-core assets, so you are planning to book additional reserves. But JPY1b in the first quarter I think you mentioned. On an annual basis, for example, JPY10b for last fiscal year, comparing with it, how much do you expect? Could you please give us your plan?

 And second question is that Mr. Toma said that growth is still weak and rather the institutional group is slightly behind than the plan. That is my impression. So, various initiatives, such as energy, or health, or business startup, support, in your mind, which is the area, if any, that is performing weaker than expected?

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Unidentified Company Representative   [20]
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 Well, to your first question, how much additional reserves are required for non-core assets, in first quarter, there was some asset deterioration, so we made additional reserves. But, basically, we are not expecting much reserves because the non-core assets decreased to JPY300b level and required reserves. If we are assuming that anything unexpected will occur in Europe, but in the current conditions, we are not expecting additional reserves.

 The credit cards target for this year is JPY20b. This is because the balance will increase, due to new disbursements and the general reserves will increase, accordingly. So in the normal business cycle, it's about JPY10b for institution group and JPY10b for individual group. However, as I've been saying, the actual balance is rather decreasing this fiscal year, so there will be no burden for the reserve booking and non-core assets or for legacy assets we have mostly completed provisioning. So if they have anything new, it's going to be very limited.

 And, to your second question, about the institutional group, there are many different types of businesses, for the business startups, or medical, or nursing care, or the renewable energy, so there are many areas. So those are more behind, more than expected. If you look at it more precisely, they may be such areas. But, in general, I don't think they are behind, compared to the moves in the society. But, actually realizing loans as profitable assets, we are a little behind than our schedule.

 So, pipelines include that actually we are having more in substance. And as ambassadors, we believe that this will be developed in a more sound manner.

 That the disposed JPY46b for the real estate non-recourse loan, but the gains of JPY2b, reverse of JPY2b, that appeared too small. But the JPY46b doesn't mean -- necessarily mean disposal. Of course, some of them were disposed, but there were some refinanced as well, and which were upgraded to normal. And, also, there was some balance reduction due to refinance as well. So, it's not necessarily all of them are disposal of the assets.

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Unidentified Audience Member   [21]
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 I have three questions. First of all, E-net partnership has been signed and with this alliance, your fee -- the fee would be reduced to zero. What is the negative impact? In the mid to long run, there will be more positive impact. But in the mid to long run, what kind of positive impact will there be? So, how would you net the negative impact versus the positive impact, expenditure and revenue?

 Second, five-year term deposit is arriving to maturity. What is the amount and where are they going towards after maturity? What products are they lured to?

 Thirdly, Taiwan Bank has decided to acquire Tokyo Star. And will this mean profit to you? And if that is true, will this be reflected in the three main accounts?

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Unidentified Company Representative   [22]
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 First of all, on alliance with E-net, third party cash dispenser alliance, we only have such alliance with Seven Bank. E-net net has Family Mart, and we've decided to strike an alliance with Lawson as well. There are several convenience store franchises, but we've been able to cover the three major convenience store franchises. And this has meant a significant increase on the part of the customers, in terms of convenience.

 What was the initial expense that we had incurred, and how much will be the total burden? And during the period of time, what would be our return? I have not been briefed, so later on, I would like to check. But to my understanding, in retail banking we are trying to expand the activities, as well as the customer base. And this is one measure to achieve those objectives.

 And further, our alliance with E-net is based upon a win-win relationship. And they, our counterpart, appreciates this. Not to say that our fees will be reduced because of that. But T-point campaign is being hosted by Shinsei. But E-net appreciates this kind of campaign very highly. And why don't we do a campaign where T-points would be offered to our customers if they use our machine? We want to host such a campaign. So can Shinsei collaborate? That kind of proposal has been made.

 So I think we've been able to launch a good start. And this will increase the convenience of the customers, so we're not expecting any complaints from the customers. So there will not be any negative factor from such perspective. But, of course, marginal fee might go up. But we think that it's worth incurring those expenses because of the attractive revenue we can expect.

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Unidentified Audience Member   [23]
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 No one from the retail division was in charge who can respond to the details?

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Unidentified Company Representative   [24]
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 No, so maybe I'll check on that later. And second question is the maturity of the five-year term deposits. And after maturity, I've been informed that about half are still with the bank. And it's going into the two-week maturity time deposit or ordinary deposits, so most of them are short-term funds. But one recent trend is investment trust. And some of those funds are going into financial products, including investment trusts, to a high degree. But we're still in the process of monitoring.

 But, based upon our past experience, half of the funds will remain within Shinsei. And what kind of products will they be switching towards? It would depend on the economic climate prevailing at that timing. At this time, structured deposits or investment trusts seem to be quite popular and that's probably because of the most recent market environment. Tokyo Star being acquired by China Trust, a Taiwanese banking group.

 The final details have yet to be decided upon. I'm not yet in a position to readily report to you what the results would be. But, if we assume a price level that's being reported, that is the level that we had assumed already. And in the future, it will be plus or minus neutral. In other words, we won't enjoy advantage. We won't suffer from disadvantage. But as a non-core, we would be able to dispose of the asset.

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Unidentified Audience Member   [25]
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 Thank you.

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Unidentified Company Representative   [26]
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 Any other questions? No questions? If not, I would like to conclude FY2013 first half, the analyst meeting.

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Editor   [27]
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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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