Full Year 2014 Shinsei Bank Ltd Earnings Presentation Webcast

8303.T - Shinsei Bank Ltd
Full Year 2014 Shinsei Bank Ltd Earnings Presentation Webcast
May 09, 2014 / 01:30AM GMT 

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Corporate Participants
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   *  Shigeki Toma
      Shinsei Bank Ltd - President and CEO
   *  Shigeru Tsukamoto
      Shinsei Bank Ltd - Senior Managing Executive Officer and CFO
   *  Sanjeev Gupta
      Shinsei Bank Ltd - Senior Managing Executive Officer and Head of Individual Group

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Presentation
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 Shigeki Toma,  Shinsei Bank Ltd - President and CEO   [1]
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 (Interpreted). Good morning ladies and gentlemen. Thank you very much and thank you for a kind introduction. I am rather aged and therefore allow me to remain seated. Once again I would like to thank you very much for coming to this presentation despite your busy schedule. At the beginning I would like to give you the overview and then thereafter Mr. Tsukamoto will give you a presentation on retail.

 First of all, the year ended March 2014 overview will be given. The net income of JPY41.3b. JPY48b was the original forecast so we underperformed. And JPY51b was the year before so the standards are rather different but the net income had dropped year on year. However, as is well known, gray zone provisioning had to be added on and provisioning against the gray zone JPY15.6b was provided for and that was another factor that had driven this year-on-year decline.

 As far as other factors are concerned, there has been some progress against the plan. First of all, the second mid-term plan, first year was the previous year and the second mid-term business plan had the characteristics as follows, as has been explained to you.

 We will be promoting growth of the core business. Unless there is the growth of our sales, there would be no future for Shinsei Bank and that had been the biggest priority challenge. And I will be elaborating on this later, but we're still midway and we've not yet been able to deliver results. However, it's already been three years since these activities have been launched so in that sense we've been able to gather several potential deals in the pipeline. And the loans and transactions that had the potential have been realized so we're now beginning to see some signs of future growth.

 The more we continue on this strategy, the more deliverables will be generated. But when will be the timing? In the current fiscal year we will be focusing on these areas in order to put Shinsei Bank on the track of growth.

 The major themes for the year ended will be delivered by Mr. Tsukamoto. There were two big goals. One is the loan portfolio and the quality of the assets had improved quite significantly. Non-performing loans disposal was accelerated. And the NPL ratio used to be 7% historically, but finally we've been able to bring this down to the [30%] range. And in the near future we will probably be able to reduce this further to the 2% range. So for some time we'd suffered from the NPL and, as I will repeat, we've already been able to resolve this issue. And this has already become something of the past.

 Total loan assets may appear not to have changed; it's JPY4,300b. And it's been sustained at somewhere around that level, but if you look into the quality of the portfolio, the non-performing loan or lowly-credited loans or non-revenue-generating loans have been reduced. Since the term that I was appointed, in the four years it's dropped by JPY900b including the non-core assets.

 On the other hand, we are currently targeting high-net-worth individuals, housing loans and consumer loans, mainly for retail. And of course the consumer loan portfolio has dropped, but our core assets has increased at the same level -- by the same level as our non-performing assets have dropped. So it doesn't appear in the total asset numbers, but we are proud that we've been able to improve the quality of the assets, if you look into the substance of the portfolio.

 Another topic is something that we had announced last February, so this is well known to you, and that is with regards to the GE indemnity of the gray zone. And this indemnity was terminated, but in exchange JPY175b of cash was received by ourselves and this in totality will be -- has been additionally provided for as gray zone reserve. So at the current run-rate of gray zone claim we now have enough reserves worth five years of the current run-rate.

 In comparison to our peers, who only have reserves of more or less two years, are more than sufficiently provided for. And of course we're talking about the future and we have no guarantee that this is 100% enough, but internally we think that this is enough and therefore in that sense we think we've been able to provision enough for any negative issues concerning consumer loans.

 And also as indicated on this top page we've been able to increase revenue quite healthily and therefore we are well-capitalized. We are a domestic bank, but even if we apply the Basel standards for international banking institutions and even without grandfathering, CET 1, Common Equity Tier 1 is 9.2%. So we're sufficiently capitalized. And our biggest challenge is asset growth, as I have repeatedly been saying. But we do have enough capital in order to enable us to do that so all we need to do is to wait for growth to come.

 And let me slightly touch upon the most recent things that we're doing and the deals that we are pursuing. As I've been saying, the survival route of Shinsei is different from the mega bank. We don't have any intention to go into head-on-head competition with the mega banks. So we're going to be pursuing areas that they aren't cultivating and areas that we would be cultivating and developing by our own. And Sanjeev will be mentioning this later. But we're targeting various individuals and small-sized businesses.

 For example, in the retail business, and this will be elaborated by Sanjeev so I will only just do the overview, but in the area of housing loans for example, price competition is very intense, so much so that there's hardly any margin enjoyed in the housing loan business. You hear about that. But in our case, I've told the retail people not to become involved and dragged down into price competition in the housing loan area.

 So with what do we compete? It's the characteristics of the products and the uniqueness of the product offering. As far as the term that just ended is concerned, we provided for ladies only housing loans. So we're trying to cultivate new markets and compete by quality of the products and not by price-down.

 And this strategy has been progressing quite smoothly. But the channel of acquisition of housing loans, there used to be many who wanted to refinance to Shinsei because they don't want to pay the high interest rates that they had contracted for before, but this kind of assets has reduced. They're still there, but the growth rate of these refinancing assets have slowed down. Rather, we're trying to acquire more customers that are attracted to Shinsei because of the characteristics of our housing loan products.

 Now our consumer loans. Finally we've been able to see the signs of bottoming out of the assets. And in the term that ended -- or at the end of calendar year 2013 we've begun to see signs of steady growth of total assets, which is positive. Now these loans are being sold through the back channel and we will continue to enjoy this advantage as we strive to increase share.

 Another noteworthy trend is the Culture Convenience Club, T Point, and comprehensive partnership with T Point. If a deposit account is opened or Shinsei is used, T Point will be given. This may be very primitive, without any ingenuity, but that's not what we are trying to aim for.

 T Point active account holders is the biggest in Japan, 50m, and this is the cluster we are targeting and we're thinking about how we can approach this cluster. And with [Setaya] we're trying to come up with innovative financial services, targeting these people and to hook these people with greater traction. And also there are merchants of the T Point system and this merchant network should be tapped upon. How can we take advantage of the merchants' network and also how can we also approach the merchants so that we can contribute to the merchants also increasing their customers? So how do we collaborate with these merchants and [Setaya], this is one of the key strategies for this current year.

 So our objective is not just to increase T Points. There are some companies, other peers, that are trying to target the T Point customers, but our idea is bigger than that. It may be more time-consuming, but our vision is more grand and how can we make use of this relationship in order to expand our own customer platform? Of course Bank's mission is how we can increase the accounts and housing loan customers because we are a banking institution. But that's not the only thing we're doing. We are thinking that there could be a more effective approach or effective service that would be attractive to the customers. Those are the some of the things that we will be developing.

 And another key is the improvement of convenience, convenience store ATM collaboration. So far we had a relationship with Seven Eleven, but Family Market, Lawson, we've struck a partnership with these convenience franchises, so convenience has improved on the part of the customer.

 Family Market, this is part of our T Point relationship. Through T Point, we are collaborating with Family Market. If the customer uses an ATM at Family Market, T Point will be given. That's the marketing strategy o Family Market and we've become part of that.

 Now that we have this relationship with the Family Mart franchise, let's think about new things we can do together. That's what we are talking about. For example, and by the way this is only what we're thinking about in our minds, but for example, Family Mart employee account opening or account opening by franchisees, such kind of enclosure of customers could be considered as part of our relationship with Family Market. And therefore this could be part of our retail business.

 Talking about our business customers, a newspaper article was published most recently, but since three years ago we've been doing a project on healthcare REIT and finally the market will begin to operate. Asset management company has been established. Kenedix, Mitsubishi Trust are our partners and with these partners we've established a REIT asset manager, AUM JPY100b. Fujimori-san is the head of this project. And JPY100b is this doable? We don't know yet, but that is the goal and by fall of this year we are trying to bring this asset manager to the market.

 And this was launched three years, immediately after my appointment to Shinsei. But non-recourse real estate finance was being done by Fujimori-san. He proposed this project to me right after my appointment. And I asked him is that going to be profitable and he says it won't generate so much profit. So I said then don't do it. But he said this is good for the society and the market is going to expand so I really want to do it. So I said, okay, if you want to do it so much, then do it on your own. So it's been close to four years, but finally it's become true.

 And his dream has come true. So he became the president of the asset manager and he left Shinsei, which is good, but of course he is seconded informally from Shinsei.

 But if you ask me whether it's going to be profitable, it's not really going to be profitable. The asset manager company is not going to be a significant profit contribution to Shinsei. So it's not going to be much of a return. If you ask me then why do we do it, I think it's worthy that we can show that we can do this to the analysts as well as our employees.

 And also formal IT sales and consulting company. It's listed on the second section of TSE and Okubo-san is the owner/founder of this entity. And SME, it's part of the TSE, Tokyo Stock Exchange, SME Promotion Council. He is anyway chairman of some organization as such. The Ministry of Economic Trade and Industry and Kanagawa Prefecture, Saitama Prefecture, these municipalities or (inaudible) have made requests to Okubo-san.

 And he's begun a project or initiative to promote pilot projects by Japanese companies outside of Japan. In Vietnam, Myanmar, offices have opened there and they're involved in the promotion of industrial complexes and making equity investments and then inviting Japanese SMEs to the constructed industrial complexes. These are SMEs. They don't have the ability to do any market research. They don't know what government procedures are necessary for permits and licensing. They don't where they should be constructing plants. So this is a consulting company that offers help to those SMEs.

 That kind of initiative existed and we decided to take part in that project. Of course that requires investment. So we felt that we may be useful to provide finance to these projects. So we tied up with this company and we'll be hosting seminars targeting SMEs to deliver presentations on going overseas and then providing one-stop shopping for consultancy services of the required local government procedures like licensing. And later this month the first seminar will be held in Tokyo. But this is part of our CSR activities and it's going to be quite meaningful. So we're very much looking forward to what outcomes will be delivered.

 And project finance overseas, UK PPP or domestic mega solar projects. Not just solar power generation, but wind or geothermal power generation venture company assistance or entrepreneur type new material company, these are some of the areas that we are helping out.

 And underserved SMEs, how shall I put it? SMEs who don't go into the radar of the ordinary banks, who don't have so much skills and technology, those are some of the ones that we are targeting to provide services. Of course it's not that we're not going to be involved in simple banking. If we are asked to lend, it's not that we would be rejecting simple vanilla lending, but those are some of the areas that we may be able to differentiate ourselves from our peers and create demand.

 Last but not least, and this will be touched upon by Mr. Tsukamoto later, but how do we plan for the current business year. And we've announced our forecast but from my perspective we're rather bullish on the top line but on the cost side, including credit costs, we may be rather on the conservative side. So as a result JPY55b is the target for the current year at the bottom line and I think this is quite comfortably achievable or certainly achievable.

 Then why did we aim for a bullish top line by which we may end underperforming? This is the third time I say this, but the avenue of survival for Shinsei in the next decade or two would be only expansion. And what do we mean by expansion? This would apply to both individuals and businesses but financial services including lending is attractive to the customer. That's the kind of business we want to expand upon. This is what we need and this is the most important challenge. So constantly our goal has to be rather overstretching. So I told our working level people to come up with targets that may be a bit stretchy.

 So for the time being this will probably be the way that we will be making business plan year after year, but in a few years we will certainly achieve growth. The results may not come out this fiscal year, but eventually we will certainly deliver results.

 And I apologize for the crudeness of our presentation, but this concludes my presentation and thank you for your attention. Now I would like to give the details of the financial results from Mr. Tsukamoto, the CFO.

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 Shigeru Tsukamoto,  Shinsei Bank Ltd - Senior Managing Executive Officer and CFO   [2]
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 (Interpreted). This is Tsukamoto. Let me sit down throughout my presentation. Based on presentation material I would like to share the financial results starting from page 4.

 First, the overview of the FY2013 summary of financial results. The net income, JPY41.3b, which is JPY9.7b down from the previous fiscal year.

 And if you look at details, first the net interest income was JPY1.1b down from the FY2012. And the reason for this is the net interest margin itself has improved by 5 basis points. However, the biggest reason for the decline of net interest income, although the funding increased, but the assets for the investment did not grow. As a result the gap between the investment and funding increased which is about JPY500b or more on year-on-year basis. As a result the funding burden increased. As a result the net interest income was down JPY1.1b. That is the details of the net interest income.

 And non-interest income, this was JPY5.1b up from the last fiscal year. Principal transactions and credit trading business or at individual group the results of the investment products, the fee income steadily grew. And APLUS, our subsidiary, the shopping credit volume increased as well. So with these factors, it was by JPY5.1b on a year-on-year basis.

 And expenses, under the first mid-term management plan we have been reducing the expenses. However, starting from the second mid-term management plan, as Mr. Toma mentioned, as those expenses required for the business expansions, we gave the policy to expand expenses. So compared to FY2012 the expenses increased by JPY4.2b. Let me give the breakdown. It's JPY1.3b for personnel costs and JPY2.9b from the non-personnel cost.

 And net credit costs, this was also covered a little later -- earlier. Because of the progress of our NPL proposal, there was a reversal of reserves. As a result was JPY0.2b, which is JPY5.2b improvement from the last fiscal year. I will like to give you details later.

 At the beginning of the fiscal year I said that our credit cost about JPY20b, JPY10b for the individual group and JPY10b for the institutional group. And for the individual group mostly it was almost in line with our forecast. It declined slightly but was almost at this level.

 And institutional group, instead of incurring a JPY10b credit cost, there was a reversal. Effectively this is our credit cost was zero. Also it was JPY0.2b, but it is almost zero so that was caused by the reversal of the reserves. Unfortunately in FY2013 the assets heavily missed our target. As a result the reserves of provisioning decreased. And, second point, NPL disposal proceeded. So there was a reversal more than we expected. So these were the two factors for the major improvement of the net credit costs.

 Now please move to page 5 for the forecast for the FY2014. This ladder shows, on the far left shows FY2013 consolidated net income and on the far right it shows JPY55b, which is FY2014 net income projection. And between the two there's a one-time factor or through the sales efforts the expected increase are shown.

 Starting from the left hand side, first the gray zone costs, JPY15.6b. This cost occurred in FY2013, but there is no such cost so this going to be a positive factor. And next to it the expected improvement in funding cost, JPY10b. As I've been repeating, the high interest rate deposits, which gathered five years ago, starting from September last year and into June this year they will mature and the funding cost will decline according to this. That is about JPY10b.

 And next to it, JPY27b, this is the area that we need to work hard through our sales effort. Like to give the breakdown. Net interest income, this is JPY10b and total is JPY14.5b, so excluding JPY10b it's going to be JPY4.5b. So the JPY4.5b is increased through the asset growth, through the sales efforts. And non-interest income, JPY22.5b increase. This JPY22.5b, of this the one-time loss is about JPY7b and not having this we can recover or improve JPY7b. So on a net basis we need to increase JPY15b.

 There are various areas that we need to increase such as credit trading or dealing revenue in the global markets group and at the individual group the fee income, at APLUS or the investment products sales fee at retail banking group.

 And in the FY2014 plan, there is some increase of costs. This is JPY38.9b. This is the increase on a year-on-year basis. And the details of the JPY38.9b are JPY25b credit costs and JPY13b for the general expenses approximately -- JPY14b. So we're expecting such increase. And for the credit costs, as I said earlier, and as Mr. Toma mentioned that we are looking conservatively JPY6b for the institutional group and for individual group JPY19b. Mr. Gupta is going to mention about this a little later, but this is also a little conservative. However, the consumer finance balance is likely to grow and we are planning to grow it. So more than JPY10b, we are expecting a slight increase.

 That is all about the FY2014 forecast or the breakdown of the forecast.

 Next I would like to move on to the fiscal year 2013 key topics. The overview was already given by Mr. Toma, but this includes the gray zone situation and details about the portfolio. Please look at slide 8. I would like to explain starting from the gray zone issue.

 First, on the far right shows the actual, the payments for Shinki and Shinsei Financial together for the April 2013 to March 2014. That is JPY43b. This includes the GE indemnity asset and those that we paid by ourselves. This is a total of the two. And reserves, JPY203b. So the reserve amount or level is about five years or 4.7 years. The industry average is about two years so we are well above that level.

 And due to the termination of the GE indemnity contract we received JPY175b and this was provisioned as one-time reserves in order to cover the future gray zone risk. And also, for the funding cost decline, this will also be contributed to the decline of the funding cost and the improvement of the liquidity sub effect.

 Now please move to page 9. This shows the details of our loan portfolio, or the transactions of the loan portfolio. On the far left, it shows the loan balance. As of March 2011 it is JPY4.29 trillion. In March 2014, the balance was JPY4.3 trillion. So the increase is only JPY30b -- JPY300b.

 However, at the bottom of the bar chart this is JPY87b (sic - see presentation slide 9 'JP870b'). So it decreased by JPY900b from JPY1.7 trillion to JPY870b. JPY17b (sic - see presentation slide 9 'JPY170b') from NPLs and from the need caution -- non-performing loans JPY170b and need caution loans is about JPY320b.

 In other non-core assets includes in the first mid-term management plan, the assets of the areas that we decided not to do proactively. We told you that we are going to reduce them. And also unprofitable assets are included here.

 On the other hand, the balance has not changed much. However, our focus, or core assets grew from JPY2.5 trillion to JPY3.4 trillion, increased by JPY950b. So the loan balance has not changed much. But the portfolio improved significantly. So that is shown, is indicated from this chart.

 That is all for the major topics for this FY 2013. Now for each item, or details of the financial results details for FY 2013, I'd like to give you some more details.

 Net interest income, so let me give you the number by group.

 Individual group net interest income increased from JPY84.4b to JPY85.3b. This is due to housing loans, or Shinsei Bank Card Loan Lake. Due to the increase of non-bank loans, the net interest income grew as well.

 On the other hand, at the institutional group because of the NPL disposal, the assets did not grow as expected. As a result it declined on a year on year basis. So the balance was JPY27.6b. So it declined by JPY20b -- sorry, JPY2b. The decrease is JPY2b from JPY29.8b to JPY27.6b. So the decrease is slightly more than JPY2b.

 And the non-interest income, it is shown on the right-hand side,

 First, the individual group. The non-interest income, as I said earlier, due to the steady growth and investment products sales, so the fee income grew. All the APLUS shopping credit volume increased and with this it increased by more than JPY2b from JPY42b to JPY44b.

 And institutional group, the non-interest income, the principal transaction business grew steadily. So, on a year on year basis, it had a significant growth to JPY41.8b.

 But the global markets group, or the market transactions did not grow, which was unfortunate. So this portion declined by about JPY4b. So that is about the details of the non-interest income.

 Next, expenses and credit costs. Please go to slide 12.

 Expenses JPY132.8b, which increased by JPY4b. The major increase were due to the headcount increase which is JPY1.3b. And non-personnel cost is JPY2.9b and this includes -- the system-related costs are the major component.

 We are using very old systems so we are currently replacing those systems so the systems related costs increased. And another factor is at the consumer finance business, in order to expand the business proactively, we have increased the advertisement expenses.

 And net credit costs, on the right-hand side, compared to FY 2012 and FY 2013, it improved by JPY50b. It's JPY5b on a year on year basis because the NPL disposal proceeded more.

 But, in total, the reason why it reached to the level it's almost zero, the individual group is almost in line with expectation and the institutional group made improvement by more than JPY20b. Actually, we was expecting the provisioning. However, actually we had a reversal.

 Next the balance sheet, page 13, loans.

 While we worked on NPL disposal, the housing loan increased steadily, or the consumer finance loans which used to be declining, but with December 2013 as a bottom, that started to increase. So although slightly, but as of March 2013, it increased by JPY30b to JPY4.319 trillion.

 On the other hand, deposits. The past deposits, the high interest rate deposits which I mentioned earlier, starting from the September last year to June this year, about JPY460b will mature. By responding to this and for the retail deposits, it increased by about JPY300b.

 And for the institutional deposits, it's slightly down. But both the retail and the institutional deposit balance increased by about JPY400b.

 Next page 14, net interest margin.

 Net interest margin has been declining for three consecutive years. But it improved to about 5 basis points to about 2.07% and the reason for the improvement is shown on the right-hand side.

 First, the yields on loans, the decrease has shrunk and the reason for this, the biggest reason is the consumer finance balance stopped declining. And interest on deposits increased.

 And then funding cost improved by 8 basis points from 43 basis points to 35 basis points. As I have been repeating, most of them is due to the maturation of the high interest rate deposits. As a result the net interest margin improved by 5 basis points.

 Page 15, non-performing loans.

 First, on the table on the right-hand side, JPY164.7b was the balance on the March 2014, which has declined by JPY77b. And other need cautions also decreased by JPY87b to JPY108.8b. And as a result, NPL ratios was 3.81%, which improved by 1.51 percentage points. And as we mentioned in FY2014, this ratio is likely to decline to around 2.5%.

 Lastly, last page, page 16, capital adequacy.

 Based on the Basel III domestic standard, core capital adequacy ratio was 13.58%, the required percentage -- which is well above the required ratio. And our target in the mid-term management -- on the fully loaded Basel III international standard basis Common Equity Tier 1, our target is 7.5%. But our ratio is 9.2% which is well above this target of 7.5%.

 That concludes my presentation. Thank you.

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Unidentified Company Representative   [3]
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 (Interpreted). Now there will be a presentation on the overall situation of the individual business update by Mr. Sanjeev Gupta using the supplementary material.

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 Sanjeev Gupta,  Shinsei Bank Ltd - Senior Managing Executive Officer and Head of Individual Group   [4]
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 Morning. Please allow me to speak in English. So channel 2 is for English -- sorry, channel 1 is for Japanese, so if you would like to hear in Japanese.

 On slide 19 -- before I go on slide 19, just a few overall comments about the individual group for fiscal year 2013. We believe that in the first year of the second medium-term management plan, we made reasonable progress. And we made progress in terms of asset growth. We made progress in terms of having various tie-ups to grow the customer base and grow the loan book as well as we introduced new products and services in the individual group which are all towards meeting the third year of the second medium-term plan goal of 5m retail or individual banking customers.

 Now on slide 19, some key financials. As CFO Tsukamoto just mentioned about the deposit balance of close to JPY5.1 trillion, we are able to maintain the JPY5.1 trillion of deposit balance despite having JPY450b of high cost retail deposits. What it means is that our customers, our loyal customers have been able to retain their deposits with us, roll over their deposit with us with a much lower or the current prevailing deposit rates. So that's a very good sign.

 And as you also saw on the cost of deposit basis, the funding cost has come down from 43 basis points to 35 basis points. As more of those deposits roll over in the first quarter of this fiscal year, we expect, or we believe, our funding cost will continue to come down as well.

 Now talking about the key operating assets in the asset section, in all our three key businesses, retail banking, Lake business and APLUS we were able to grow our core loan assets.

 In the retail banking, our housing loan assets grew to JPY1.184 trillion. I will go over in detail what are the initiatives we have taken in the housing loan area to grow the loan books.

 And in the unsecured personal loan market we continue to maintain our market share. We continue to offer innovative products. We continue to look at and fine-tune our credit scorecard to maintain the market share and grow the loan book in this space.

 And in the APLUS area, in the installment receivable area, we continue to add new merchants for our installment receivable business. And that is reflected in the asset growth from JPY218b to JPY263b.

 Our growth in asset is reflected in our revenue increase. Our revenue grew by about JPY3b to about JPY129b.

 Our expenses and credit costs also increased vis-a-vis prior year. That is the expenses grew because we are investing in the new businesses. Whether it's systems or marketing, we continue to invest to build the franchise, to build the base to grow the business. As well as credit costs partly reflect the growth in the asset in all the key businesses that we have just -- which I just talked about.

 So now moving on to slide 20. Slide 20 is a key slide which really sums up the essence of our medium-term management plan. As a group, as an individual group, we have 10m customers, but we only have to start with 2.5m core customers who do -- who buy banking products with us. So how do we go from 2.5m banking customers to 5m customers? We have embarked upon various new initiatives in fiscal year 2013.

 First and foremost is an alliance with the parent company, CCC, the T Point franchise of CCC, Culture Convenience Club to have a tie-up on the retail banking side. As you know, we already have -- we have a T Point tie-up in our APLUS subsidiaries with CCC, so we want to leverage that and expand that to our retail banking customers.

 As President Toma mentioned the key is not what we do with the existing customer. What is most exciting is that T Point -- there are 48m T Point members. How do we -- not all 48m obviously will be our customer. What kind of target marketing do we do vis-a-vis these 48m and in the pool of 48m T Point member and have them engage with Shinsei Bank is going to be the key challenge for us and the most exciting part in order for us to really leverage this tie up going forward.

 We have also, and it was covered earlier by President Toma, we also have now a tie up with the Lawson and Family Mart and substantially increasing the customer convenience when they withdraw money or deposit money with us. And I'll talk about all of these in a little bit more detail as we go along in the presentation.

 And so I think basically the new initiatives that we have embarked upon in fiscal year 2013 will not only help us grow the new customers, it will definitely help us deepen the relationship with our existing customers because the customers who already are, of our 2.5m customers, who are already T Point members of that 48m membership I think it will help them. It will sort of promote them to do more banking with us because they can earn points. And banking transactions generally tend to be higher amount transactions. So the higher the amount, generally the larger number of T Points that you can accumulate.

 So I think this will help not only with the new customers but also deepen relationship with our existing customers as well as it will also help us cross-sell with our APLUS because there are already 5m credit card customers who are already T Point members. So we can cross-sell banking products to APLUS customers as well.

 Slide 21, I think I sort of covered some of the points I just mentioned in the previous slide. Slide 21 basically highlights the power of the T Point program franchise, i.e. 48m members and we're already having in APLUS 5m to 7m customers who are already T Point members. And, with retail banking now entering into T Point program for account opening, for buying yen time deposit, for purchasing housing loan, so I think all of this is going to really make our cross-sell much easier between the two entities. And repeating myself, doing target marketing for the 48m customers.

 In fiscal year 2013, we already did some pilots regarding the marketing vis-a-vis the T Point and the early signs are that we are seeing really customers who are really interested in accumulating T Points. So these are the customers who wouldn't have come to us had we not had the T Point tie-up. So I think -- these are still early signs, but I think this is a very good development, if you will, in fiscal year 2013.

 On slide 22, so I mentioned about the Family Mart and Lawson. So all of a sudden with these two tie-ups we have increased the number of ATM touch points for our customers from 15,000 to 38,000. So now customers, not only is it convenient for them and it also increases the Japan-wide coverage because Seven Eleven was not everywhere. But having Family Mart and Lawson pretty much covers us or covers our customers. They can visit in any regional area and find either Seven Eleven, Lawson or Family Mart and do their daily transactions. And with Family Mart because Family Mart also awards T Points, if our customers transact through Family Mart, they can earn T Points as well.

 If I move to slide 23 and talk a little bit about housing loan. We entered at a full scale about 10 years ago in the housing loan business. As President Toma mentioned, we are not the cheapest in the market when it comes to the interest rate we charge to our customers, as laid out in the bottom right-hand section. What we do is we focus on the product features. We focus on the services we provide to our customers and let me elaborate on that.

 As you know, from the inception, we had the zero early payment fees, no guarantee fees and Shinsei Bank was paying for the Group life insurance. What have we done recently to improve the proposition for our customers without compromising on the interest rate that we charge to our customers?

 We continue to expand and, as it was covered earlier, the refinance market which was our main market earlier is on a declining trend. So how do we get customers who are purchasing new homes? What we have done in the past couple years is we have done tie-ups with various developers who -- with the housing loan developers and we now have more than 60 developers who we have tie-up to promote the housing loan.

 And we also have -- we are increasing our housing loan centers all over Japan. So we now have eight housing loan centers where customers can come, discuss, consult, do the loan contract. So we are making it easier for our customers. Now, that's on the channel side and providing service side.

 Now, what are the new product features that we have added? Earlier we were not providing loans -- if someone is buying a used house we were not providing or supporting the renovation part of this used house purchase. But we have added that as a feature that we will provide loan for the renovation as well.

 And we have added -- this is mainly for the working female. We have added child care support. We have added house care support for the working women so it helps them really come to us and get housing loan. And I think in this area also, we are seeing a lot of pick-up. We are getting a lot of enquiries and customers are coming because women customers are finding these features attractive.

 So, in a nutshell, the summary is that we want to still earn a reasonable return on risk asset. Most of our loans are with LTV below 100% so the risk weight is 35 basis points. So, as our three year medium-term plan depicts that we want to achieve about 1% RORA, so this is towards that goal also that we don't want to compromise on the pricing but we want to provide features. So we develop, or we generate reasonable return on the portfolio that we put on the balance sheet.

 Slide 24. As you would observe from the graph on the left-hand side that the unsecured personal loan balance bottomed out in March of 2013. Since then every month, every quarter we see a constant growth in the loan book. So the overreaction, if you will, of the new money lending business law and the balance continued to shrink not only for us, but the market in general. I think that is a thing of the past and I think the loan balance are consistently growing now.

 In fiscal year 2013, we saw a growth of 6.4% increase in our loan balance in the bank Lake business. At the same time, our new Lake customer number grew by 9.4%.

 And in terms of our strategy going forward, we are striking a balance between marketing and being more efficient. Now, more and more applications are coming through the smartphone and Internet. 60% of our applications now come through either Internet or smartphone. The point being is that we have fewer unmanned branches [merchant tempo] than our competitors. But what we are doing is we want to be efficient and because the smartphone -- and we're spending money and advertising money as well as the functionality on the smartphone and Internet as opposed to just focusing on the unmanned branches.

 By doing all that we are still maintaining our market share. Our market share continues to be in par with the -- we have not -- despite having fewer branches our market share hasn't gone down.

 Just on the right-hand side, if I may spend some time on the approval rate, you would observe that our approval rate is hovering around 37%, 38% for the last one year. But some of our competitors have higher approval rate.

 We believe this is partly due to using a different denominator. We count all the applications we receive from our customers, whether these customers already had an account with us or whatever. But we believe some of our competitors reduce the denominator for some of those things. So I think we are not comparing apples to apples.

 Having said that, our number -- we are very prudent in terms of our credit. Our lending is largely to lender exchange, LE 0, LE 1 which is [Tashakkori Rekinsu] 0 or 1. And so again just like housing loan we don't want to compromise on the credit quality. What we do is we provide features. We provide -- we want to be more efficient. And even in terms of marketing we are not solely focusing on TV. In this industry there is sort of a bias of just doing the TV ads. We want to strike a balance between TV, train, magazine, Internet, affiliate channel, YouTube, SMS, EDM whatever. So we are tapping into various channels as more and more customers are coming through smartphone and Internet. So TV media is used for the brand recognition primarily, but the other channels are used to acquire customers and applications.

 Finally on the APLUS. As we know, APLUS has three distinct businesses which is shopping sales credit, credit card and settlement business.

 On the graph on the right-hand side you see the shopping credit and the credit card loan balance are continuing to increase for past couple of years. You also see a decline in the auto credit and card loan area.

 In the auto credit area we also focus on again return on risk assets. So we've been rationalizing some of our partners who do not provide us adequate return. So the decline in the auto credit business is partly due to rationalization of certain partner who -- from whom we don't earn adequate return. And card loan is really the reduction in the unsecured personal loan balance as that's not the main business of APLUS.

 So if I were to just summarize the key takeaways, in the individual group in fiscal year 2013, we had several new initiatives to grow our customer base such as T Point, Lawson, Family Mart. We introduced several new products and services and we grew our loan balance in the key business areas.

 Our funding cost on the deposit continues to come down and it will continue -- it will come down in future as well. And we have fully resolved, if I may say so, our gray zone exposure. So I think we are in a very good spot right now to grow the customer, to grow the loan book and to grow the profitability of this business.

 This concludes my presentation.



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Questions and Answers
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Unidentified Company Representative   [1]
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 (Interpreted). Now we'd like to start Q&A session. (Operator instructions).

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Unidentified Audience Member   [2]
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 (Interpreted). My first question is about expenses. And the second question is about the credit costs of the institutional group.

 Now, the expenses. In the mid-term management plan, this increased by JPY5b to JPY140b. So which area and which are the reasons for the gap?

 And this JPY145b target, if top line was not achieved, then can we assume that the expenses will not be achieved or will be lower than this as well? And your target is JPY145b, so are you expecting the increase in expenses for the next fiscal year as well? So my first question is about your view about expenses.

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Unidentified Company Representative   [3]
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 (Interpreted). Let me answer your question. Well, compared to mid-term management plan, the areas that expenses increased, personnel cost, JPY2b approximately. Remaining are the non-personnel costs. And to your question, what if the business does not spend as expected, there are some fixed portions, such as system-related costs regardless if this is expansions. Those costs will increase to some extent. But for others, naturally it will change according to the business expansion.

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Unidentified Audience Member   [4]
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 (Interpreted). How about next fiscal year?

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Unidentified Company Representative   [5]
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 (Interpreted). You mean FY2015? Well, for FY2015, well, we are still maintaining our numbers of the mid-term management plan. And, of course, the next fiscal year, we're looking at the progress of FY2014 for expenses for FY2015.

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Unidentified Audience Member   [6]
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 (Interpreted). Thank you. My second question is about the credit cost of institutional group. So you are expecting JPY25b and JPY60b for institutional group and JPY19b for the individual group. So is the JPY60b, how much reversal are you expecting in the JPY60b? And are you expecting the NPL ratio to go down to 2% level, that you are assuming that there are more progress on NPL disposal? And what is the impact on NPL disposal for both NPL for the top line?

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Unidentified Company Representative   [7]
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 I think they will be both positive and negative impacts.

 Well, for the reversal, actually we are not expecting much reversal. So the JPY60b is simple addition of the credit cost.

 And the NPL disposal expected to go down to 2% level of NPL level of NPL ratio. We are not assuming reversal. There may slight but it's going to be only several or hundred millions yen.

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Unidentified Audience Member   [8]
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 (Interpreted). I have two questions. First of all, the indemnity termination. Will there be any change to the management or operations? And also, what's the trend in terms of claims applied by legal counsel and lawyers?

 And secondly, financing. The financing quality has increased. And are you thinking about shareholder benefits, such as possibility of increase of dividend? Those are the two questions, thank you.

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 Sanjeev Gupta,  Shinsei Bank Ltd - Senior Managing Executive Officer and Head of Individual Group   [9]
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 With regard to would there be any change in terms of now there is no indemnity for gray zone, I think that's your question. I think the kind of change that I would expect is that now we have our smaller entity called Shinki, and Shinki also has similar operations. So we can now leverage the best practices of the both entitles in terms of gray zone operations, which should yield even better grace on results, meaning lower gray zone cost is what we envision. Because when we had the indemnity, we were doing things prudently, but at the same time, we had to do things in line with the agreement that we had with GE. So it confined us to some extent to do certain things. Now we have free hand, and it helps us somewhat to do things in a seamless manner and do the best practices of both areas.

 Now, the second question on the disclosure claims, have they been coming down, and I think that's your question. I think overall, I think the disclosure claims are coming down, simply because of the fact that there is a 10-year statute of limitation, and this thing has been going on for six, seven years. Just simply for that fact, there are a lot fewer customers who can file for gray zone. So I think that will continue to bring the gray zone cost down, everything else -- assuming everything else being equal, yes. But in general, it's coming down.

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Unidentified Company Representative   [10]
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 (Interpreted). On the financing and capital strategy, let me try to respond. I'm part of the Executive Officers' Stock Association and we've been purchasing stocks partly because of the cheapness of Shinsei stocks. And this is disclosed on the occasion of the Annual General Meeting of shareholders. 120,000 or 130,000 is in the employee Stockholding Partnership. So I, as a shareholder, think that there isn't enough shareholder benefits being returned. And also the stock price isn't going to go up so attractively. So it's rather awkward for me to say this, but I'm not satisfied as a shareholder either. So I do share your sympathies, and I sympathize with your emotions as such. But, as I repeatedly have said, our lifeline is growth in the future, and, therefore, non-interest income increase.

 Yes, we hope so, but loan book is the core. For both institutional and retail we have to ensure our loan book and assets in the loan book. So, that being the case, as I said, at this time capital adequacy ratio, equity ratio has gone up. But is this enough for the future?

 We're not still there yet in terms of capitalization either. So for a bit longer time, I apologize, but please be generous. JPY1 dividend is the minimum. I know that this isn't enough. So, we're endeavoring to increase the dividend even at a small degree. So we'll try to be well capitalized, which means more revenue and profits, and also, at the same time, we hope to think about shareholder benefits. And in the near future we'll make efforts so that we can do that in the near future. Thank you.

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Unidentified Audience Member   [11]
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 (Interpreted). I have two questions. One is about the challenges for growth. And the second question is how to increase loan balance. The challenges for growth, my first question. You've been repeating that your lifeline is growth. So based on the current conditions, in order for Shinsei Bank to grow, what are the challenges? What are things that you have to do? What's your current sense of problem? So please share them with us. That is my first question, your challenges for growth.

 And the second question is how to increase the loan balance. For FY2014 and for the medium- and long-term perspective, how are we going to grow the loan balance? In which areas? And with what measures are you going to increase loan balance? Those are the things I'd like to know.

 Also, based on the fierce competition, without compromising or sacrificing a spread in price for, can you increase your loan balance? So my second question is how to increase loan balance.

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Unidentified Company Representative   [12]
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 (Interpreted). Well, firstly, our challenge is for growth. What is our view? This may sound strange, but Japanese commercial banks, what is their mission? I always start from that point. Japanese banks, this may be interpreted as criticizing others, and it may criticize ourselves, but in one word, there's no spirit of risk-taking. Recently, even by FSA we are said -- we are told that we should take risks, and that is a shame. So, including differentiating from others, what banking do we need to do and that needs to be deliberated.

 What are the challenges that the Japanese economy is facing today? We need to change the structure of the Japanese industry. We used to focus on manufacturing by importing raw materials and produce products and export them such as in the cars or machinery. But in the 21st century we have to go to the niche or the special areas, such like the special material or smartphones, green materials such cutting edge areas. For those areas, we need to maintain competitiveness. But for other areas, for the commodity, we will lose. So it is in such special areas we need to make investments, or we need to shift our industries. So that is the challenges that face -- a lot of Japanese companies are facing. And this is often common to Japanese car-makers to go abroad to produce and consume in their local market.

 So now, what are we going to do in Japan? And to this issue, my view is again we need to develop our technology, and also focusing on such cutting edge or special raw materials.

 And another point is that what is your role of Japan in the 21st century in global society? That is the question. So just making goods will not be sufficient. It will just shrink if we continue doing it. Then what do we need to do? My personal opinion is in the 21st century, although there were a lot of reviews, but the United States will serve as a police. That will not change much.

 Now how about Japan? Probably Japan will be fire-fighter. So if there is any disaster, then we will solve it. So we can be a fire engine.

 So what I'm saying is one, is there is the PM2.5 issues, and we are advanced in areas. We had such environment. We used to have the environment problem but we solved this. We have experience in environment problems. And we can offer our know-how to China and other countries, and we can do business in that area. And after the oil shock we've been saving energy, and we are also well advanced in that area.

 And third, the nuclear power incident. The Fukushima power plant had the disaster and we will solve the problem somehow.

 Just to heavily criticizing TEPCO and doing then normal -- go to such Fukushima area and I suppose that, I anticipated that there are less, fewer and fewer applicants who wants to work for the nuclear or the power engineering, but we need to go to that area to find solutions. So after establishing solutions, then we will export together with nuclear power plant or generation, or ageing or the regional development.

 And the disaster area in Tohoku, now the reconstruction is under progress. It's not the reconstruction or recovery. Even if we store an original state, there is another local, the society that will deteriorate. So while Tohoku has traditionally been poor? I'm sorry to say to these people from Tohoku because they were taken by other areas. So we shall not go back to that time. We need to vitalize Tohoku. So fewer population or regional development, of course those will be challenges as well.

 So, I would like to focus on those issues. What can we do for regional development? And it may be, what we can do may be limited, but together with regional banks we would like to enter or tap into those areas. Thinking that way, Tokamya-san, still there will be more areas that the Japanese commercial banks need to do. And there are some credits that we can take and credits that we cannot take. But they are the credit we have to take. If we were asked to offer JPY100b then we will fail, so this is going to be our answer, it would be no thank you. But even is the offer JPY5b and JPY10b, then we can offer it because we have not come up with the actual specific solution for them. So we have to think about those solutions. But those are areas we will like to do. And by doing such a business we believe that their evaluation for our services will increase.

 And another point is about your loan balance. So, for example, the domestic project finance, major banks are doing the project, dealing with the projects for -- done by major companies. For example, solar panel, putting on the solar panels on top of the plants. So those are willing to make investments because those deals are corporate risks, so they can easily grant JPY5b or JPY10b. But the returns are small for those deals. But those are not deals we are targeting. We are targeting real project financing and we will look at the real capability of operators, and it's JPY42 so anyone can make money. But we'll examine the business and examine the quality or the panels, whether they can really make money.

 And many of them are the SMEs who do not have proven track record. So we meet the President and management, and also we almost no collateral, and with no collateral, looking at purely the business risk we are studying to grant loan. And we are taking the several hundred base points of return.

 The characteristics of Shinsei, it's a tradition from the former LTCB. This is project finance. We have a good track record. And we have been working hard on non-recourse loans. For the cash finance we have expertise. And together with them, putting them together, there is one area that we are good at and this is about the institution business. And for either SMEs, for individuals, they have been underserved by banks. So to those, what services or solutions are required and what are their needs? We need to carefully examine them, and to individuals as Mr. Gupta mentioned so far we have not demonstrated our characteristics or strengths yet. But we'll demonstrate it by implementing IT technologies or in a personal loan business different from the traditional personal loan business, to offer more, much more convenient personal loan services. Those are the areas that we will like to develop.

 We are struggling although we are seeing a growth, but still we're struggling because these are new areas. So it's time consuming, until we get customers' good understanding. And also we, including myself, used to be a banker, so it is -- it takes time for it to change our mindset. But we will continue doing this as long as I'm here. Sooner or later we strongly believe that we can develop or establish such a bank

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Unidentified Audience Member   [13]
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 (Interpreted). The first question is with regards to balance sheet. Cash JPY1.4 trillion, JPY9.3 trillion total assets. So you have abundance of cash at hand. How do you intend to use this cash on the asset side and liabilities side? How will the balance sheet look like in six months or 12 months? That's my first question.

 Secondly, since we have the blessings of Mr. Sanjeev, Lakes customers, Shinsei Ginko Lake customer profile demography, could you inform us on those aspects?

 Lastly, another question to Mr. Sanjeev Gupta. According to what we heard from your presentation, are you -- I think it more would be efficient and effective if you establish independent Net Bank separately. Do you have any ideas as such? Thank you.

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Unidentified Company Representative   [14]
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 (Interpreted). Deposits, JPY1.4 trillion, so how will we be using this? Of course we will be increasing loans. So there will be less. JPY800b for JPY430b increase took place last fiscal year. That's partly because of the increase in the BoJ current account. So if loans increase, this portion will decline. And in this business year's plan there we plan for increase by JPY800b. So this year's increase, most of that will be used for loans if the loan portfolio grows as planned.

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 Sanjeev Gupta,  Shinsei Bank Ltd - Senior Managing Executive Officer and Head of Individual Group   [15]
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 [Saimishma]-san, I think your question was for Lake business demographics. I think, as I mentioned earlier, in terms of the Lake customers, predominantly is male. And I guess we have branches all over Japan, so it's not just concentrated in contour, concept areas. So our customers touch any and they'll come to us across Japan. But, of course, there is a heavy weight in the [Canto] area, that's very true. And in terms of the gender, I think 80% of our customers are male and I think 80% to 90%, and then 10% female.

 I think what for us, you know the key proposition is we want to always come up with a product proposition which is not offered by our customers. Whether it's a 30-day, no interest loan, up to JPY50,000, whether it's charging no ATM fee which others are doing, and leveraging retail customers. If Lake customers have an account with retail banking, automatically they get upgraded to gold customers. So these are the kind of things.

 I think earlier there was a question about how are you going to grow over loan balance. Everybody's doing the same thing, but what we want to do is we want to be different. And I think to some extent, if I may say so, Shinsei is known for being different. Shinsei is known for coming up with things which other banks have not done. So I think we spend time on being innovative and come up with new things, so we attract at least a segment of the customers which -- who find us appealing.

 And I think your second question was establishing Net Bank for the Lake business?

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Unidentified Audience Member   [16]
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 No. So in order to attract new customers. So seeing your strategies in retail banking. The new independent Net Bank will be a good entity to attract customers rather than in addition to the existing.

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 Sanjeev Gupta,  Shinsei Bank Ltd - Senior Managing Executive Officer and Head of Individual Group   [17]
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 My personal opinion, I don't know if this is a view of the bank, but my personal opinion is I think we are serving. We are achieving both goals through physical presence as well as net, because I think our call center and the Internet presence and the recently -- I mean it started smartphone banking for retail business. And, in the Lake business, as I mentioned earlier, smartphone advertising, YouTube and the application, everything is already very advanced. So I think just solely having a net bank, that purpose has already been served through our two-pronged approach, if you will.

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Unidentified Audience Member   [18]
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 (Interpreted). On that point, if I may add, do we have any plan to establish a network?

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Unidentified Company Representative   [19]
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 (Interpreted). That never occurred to me so I was in a way quite attracted to that idea. But as Sanjeev said, for one thing, we already do banking via the net. Rather from the customers' perspective, they consider Shinsei, some of them at least consider Shinsei Bank as a purely Net banking entity because we were the first one to begin Internet banking. That was already back in around 2000. So we may be closer to that category as a banking institution. But do we want a pure Internet banking? If we do so, what would be the advantage, in addition to what we already do? Manned branch, the number is limited but we have manned branches.

 This isn't really about convenience. Rather, say someone wants to purchase an investment product, professionals would probably purchase an investment product over the net. We have a certain tier of customers who are well versed with investments, but overwhelmingly, the majority aren't people like that. So they want to consult to someone if they are going to invest their own money. Who do they want to seek for advice? It's not machinery, but people. So human-to-human, face-to-face consultation would be preferred.

 And myself included, baby boomers will be coming into their retirement age. And overwhelmingly, the majority of the baby boomers haven't really experienced really good experiences in investments because they lived through the bubble. So they may have made money during the bubble, but they lost a lot after the collapse, and they aren't financially literate. We are one of those old aged people in the historical age. So what do they do, the baby boomers? We receive the retirement benefit and we receive pension. So they don't know what to do with it, all that money at hand.

 I used to work for a manufacturer outside the financial sector. And I experienced many security brokerages in banks approaching me to open accounts. And I listened to them, but none of those sales pitch rang a bell. And Japanese security brokerages and banks all only recommend what they want to sell. They never recommend what I want to buy. They only recommend what they want to sell. That's partly because Japanese people don't want to purchase products that would -- which they would have to pay a fee. So Swiss-like private banking will never take root in Japan, people say.

 So, what do we need to do in order to have sound and healthy private banking operations, like the ones that exist in Switzerland? Domestically, talking about the domestic market, investment consultancy may be a key, and assign people who can do that in each of our branches. That's one thing we are thinking about. So in that sense we have the benefit of Net Bank, and at the same time, although the number is limited, we do have manned branches on physical bases so maybe we are better than just a pure Internet bank.

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Unidentified Company Representative   [20]
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 (Interpreted). Well, I assume there are more questions, but the scheduled time is already passed. So we will like to conclude today's conference. So if you have any additional questions, please let the Shinsei Bank Investor Relations team. And please fill your questionnaire. Thank you very much for your attendance.

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Editor   [21]
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 Portions of this transcript that are marked (Interpreted). were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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