Full Year 2015 Shinsei Bank Ltd Earnings Presentation
May 12, 2015 AM EDT
8303.T - Shinsei Bank Ltd
Full Year 2015 Shinsei Bank Ltd Earnings Presentation
May 13, 2015 / 01:30AM GMT
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Corporate Participants
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* Shigeki Toma
Shinsei Bank Limited - President and CEO
* Masayuki Nankouin
Shinsei Bank Limited - CFO
* Hideyuki Kudo
Shinsei Bank Limited - Managing Executive Officer
* Sanjeev Gupta
Shinsei Bank Limited - Advisor to President and CEO
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Presentation
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Shigeki Toma, Shinsei Bank Limited - President and CEO [1]
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(Interpreted). Thank you for the introduction. My name is Toma of Shinsei Bank. Thank you very much indeed for coming here to join us for this briefing. I would like to talk about the financial results of the last fiscal year. I would just like to give you a summary. I hope that you will allow me to speak while being seated.
Fiscal 2014 results. The details will be explained later. But in terms of profits, JPY67.8b was the net income. Compared to the year before it is up by JPY26.4b, from JPY41.3b. So in terms of net income level, it was very strong.
But in the third quarter, when the third quarter was over, we made an upward revision. But our results was even higher than that. So in terms of the guidance that we provided, it wasn't very good. And internal control-wise, how was it? There are some issues remaining. But in any case, profits, the bigger the better. So in that sense we're very happy.
Now as for the content of these results, noteworthy are, first of all, our target areas. Loans into target areas are going up. Non-performing loans have been disposed. It's down by about JPY100b. Absorbing that and our outstanding loan balance is up by about JPY140b. So net-net, JPY200b plus is the increase in our balance in the target areas.
Consumer finance, housing loans, these are the main loans to individuals, as well as project finance, buyout finance, ship finance or real estate finance. These are the so-called cash flow finance, looking at the business viability to make a decision in providing finance. These are the ones that are growing.
Of course we don't satisfied with this current level. But the efforts that we have been making over the past few years are now bearing fruit. So we believe that the financial results for 2014 would be a very good start for this fiscal year, a very good base for this year.
I talked about non-performing loans. The rate is now 1.42% NPL ratio. So at last we have been able to reduce this level comparable to good peers. And the remaining is about JPY60b or so. But the provisions have been already set aside. So this is not going to be a burden for us in the future.
And consumer finance-related gray zone interest repayments, that's the issue. But this issue has already been covered. JPY170b is the amount that we have provided for in terms of reserves. Coverage is 4.2 (sic - see slide 4 "4.3") years so we believe that we have been able to cover for this sufficiently. So there are no cause for concern into the future.
So the legacy issues that we had difficulties handling have all been dealt with. So in that sense, negative carryovers into the future do not exist anymore. We have been able to dispose of them.
Now capital ratio, shareholders' equity ratio, we have been able to accumulate retained earnings solidly. And the asset growth has not been so fast. So compared to our expectation, it's going strong. Basel III core tier 1 ratio, without transitional measures, how much was it? 11.9% is the level of common equity tier 1 ratio. This is sufficient capital that we have been able to secure.
So we have been able to secure sufficient capacity for us to grow into the future. So as for this fiscal year, we are targeting at JPY70b. This year or 2014 was JPY67.8b. So it's only going to be a growth of about JPY2b. So you might wonder should that be a target at all. But one-time temporary gains, well these are called temporary gains. But this is from core business, so this is not just [flock]. But revenues that we are not able to recognize this fiscal year did exist in the past fiscal year. So as for recurring items, replacing them with recurring items to achieve JPY70b, that is the plan. So in terms of the shape of our profit, it's very good because this is going to be sustainable. Sustainability is going to be confirmed.
Mr. Kudo, who will speak later, the young management, this is the challenge that the young management will be taking care of. So in terms of achievement of the results for this year, I am quite confident that we will be able to achieve these targets.
And this fiscal year is going to be the final year of the three-year mid-term management plan. The new mid-term management plan, that will start from the next fiscal year. We have already started planning for the next mid-term plan. The announcement will come sometime later. But in this period we would like to paint the future picture for the Bank, how we are going to grow in the future.
We hope to be able to make an explanation of our future vision in a simple-to-understand fashion. That is going to be the major responsibility, the primary responsibility of the next mid-term management plan. But in any case, things are going strong now. There are no cause for worry. That is where we stand as we closed our books for 2014.
From 2010 I was in charge for five years. And in June, when there is going to be an AGM, I will be stepping down. And Mr. Kudo, next to me, the past five years was a period when there were many factors. And we believe that we have done what we could. But there are certain things that have been carried over.
Sustainable growth, that's the challenge. Currently we still have not been able to realize an established sustainable growth. There are -- there was much progress but there are still things that could be done because of the shortage of my capabilities. So this is going to be handed over to the new management.
But as President, this is going to be my last opportunity to give a financial results briefing. I'd like to take this opportunity to thank you for your guidance, your support and your understanding. And with that statement of gratitude, I would like to conclude my remarks. Thank you very much for your support over the past five years.
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Masayuki Nankouin, Shinsei Bank Limited - CFO [2]
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(Interpreted). Now moving on. My name is Nankouin. Let me continue with the presentation. Allow me to be seated while I speak. Please take a look at page number 6, starting with the major features of the financial results. And then let me cover each item.
Page 6 gives you an overview of the financial summary. A major noteworthy feature is the revenue, the top line. Compared to the year before it was up 16% at JPY235.3b. So it was quite strong. A major factor behind this is that net interest income funding cost made an improvement greatly. Another component is that there was a very large chunk of dividend income. So these are the main factors.
As for non-interest income, market-related revenues were strong and APLUS and other shopping credit sales were strong. I will cover them later in more detail.
Another component, credit cost. Initially we were expecting some amount of credit cost. But in actuality, the amount was much lower at JPY11.8b. We were planning -- compared to the initial plan it's down by JPY13b. As a result, the bottom line was JPY67.8b, as Mr. Toma said. Even after we made an upward revision at JPY63b, it was even higher than that level.
Going to the next page, page 7, here I will talk about net interest income. If you look at the bar graph, in the middle, the second column from the right is one-time gain factors. Normally net interest income -- well, accounting-wise, this is an item that will be recorded as net interest income, for example, large chunk of dividend income. So the way that we present to you, we should present to you excluding this one-time gain factor. JPY117.2b should be considered as our core net interest income. So we compare this number with last year. But still there was a growth of about 6%. So we believe that we were able to secure growth in our core numbers.
Now the major factor behind this improvement in net interest income, there are two factors. One is that in the past we raised funds with high interest rate retail time deposits. But they are maturing one after another. So there was an improvement of funding cost by JPY9.7b.
And also Lake-related business, unsecured loan business, the balance is going strong. So this was a positive factor of JPY3.4b to net interest income. So we would say that our fundamental earnings power in net interest income has been established. So on top of this base, we hope to be growing soundly into the future.
Now page 8. Here I would like to talk about our net interest margin. Looking at the line graph, this high-interest-rate retail time deposits were rolled off. So the total funding cost itself, the bottom line, 0.44% was last year and it has been lowered to 0.3%.
As a result of this, if you look at the top of this chart, here is the net interest margin. I talked about one-time gain factors, but after excluding this one-time gain factor, it's still at 2.25%. So since 2010 we are at the highest level. This is the middle line in this line graph. So this is where we stand in terms of net interest margin.
Now moving on, deposits. Deposit balance is the next item that I would like to cover, on page 9. If you look at this chart, take a look at the left-hand graph. This is average balance of the deposits. Overall balance as well is at the bottom. In blue, what we show here in the blue is the so-called high-interest-rate campaign time deposits, which has been rolling off and coming down over the years.
In line with this, if you look at the graph on the right-hand side, here is interest and funding cost. In parallel to the graph on the left-hand side, funding cost has been coming down. And the interest paid on deposits has also been coming down. Average balance still remains, but these high-interest-rate retail time deposits, all of them have been redeemed and matured in 2014 -- fiscal 2014.
Please go to page 10. Here we are talking about our loan assets. Basically average balance of our loans are shown in the chart on the left-hand side. And on the right-hand side, you have the interest and yield on loans and bills discounted.
Overall loan balance, of which, if you look at the green portion at the bottom, these are total loans in Shinsei Financial and Shinsei Bank Card Loan Lake. If you take a look at this you will see that in fiscal 2012 it hit bottom. And from fiscal 2013 it has been going up. And this upward trend is now being maintained in line with this if you look at the graph on the right-hand side.
As for interest income on these loans and bills discounted, from 2014 it is showing an upward trend. If you look at the bar graph for fiscal 2014 on the right-hand side, against the interest income, Lake accounts for a little more than 40%.
Let us go to page 11. I have been talking about interest income thus far. But from here on I would like to be talking about non-interest income. The bar graph -- I think it's easiest to look at this bar graph. From fiscal 2013, which was JPY92.5b, it's gone up to JPY108.8b. The factors include income from sale of JGBs, JPY6.6b; increase in Global Markets business up by JPY5b; and APLUS shopping credit is the business that they do. And the balance has been growing soundly. So this was up by JPY3b. So this past fiscal year, these numbers have been growing soundly.
Moving on to page 12. Here we talk about our expenses. As I said just now, the top line is growing. In order to grow our top line, we have been making expenditures, personnel, as well as non-personnel expenses. If you look at the left-hand chart, you'll be able to recognize that both of these items have grown.
Expense-to-revenue ratio is shown in the line graph on the right-hand side. So far in fiscal 2014 it stands at 60.2%. Our final target for the mid-term management plan, it was between 50% and 60%. So for fiscal 2015 we would like to make efforts so that we will hit our target.
And next, please refer to page 13. This is concerning the balance sheet. As Mr. Toma already mentioned, the asset quality is shown here. Left-hand side shows the non-performing loans which have been disclosed and the percentage thereof.
What can be interpreted from this graph is that in terms of NPL, more than JPY200b have been disposed of. And as a result, the NPL ratio, which was close to 7%, has gone down to 1.42%. This is a major improvement. And in addition to this, the right-hand side shows the net credit cost. Credit cost is normalizing. Of course there were ups and downs, but it is nearing a normalized number.
Next slide, please. The next slide shows capital. As I have already stated, the -- our performance was quite good so we've been able to accumulate retained earnings. And NPLs have gone down. And therefore risk capital has also decreased. As you can see here, first the core capital adequacy ratio, domestic standard grandfathering, with grandfathering was 14.86%, a major increase compared to the previous year.
And as was mentioned by Mr. Toma earlier on as well, the common equity tier 1 ratio international standard fully loaded is 7.9%. So both are sufficient and this is the capital.
Next, page 15. I will be discussing this in more detail later. This is our balance sheet. Loans and bills discounted and deposits and NCDs, I would like to focus on these items from the following pages.
Asset -- total asset is JPY8.8 trillion. It has reduced somewhat, but loans are increasing, which I would like to explain to you.
Slide number 16. This is concerning loans, loans and deposits. Left-hand side shows loans. As you can see, last fiscal year end, it was JPY4.4 trillion. From fiscal 2013 in terms of the loan balance, it's increased, housing loan and card loan Lake, as was mentioned, are specialty finance-related. We have seen growth in these areas, as you can see on this graph.
The right-hand side shows deposits. Fiscal 2015 -- March end 2015, JPY5.4 trillion. Compared to the previous year there's been a decline. But, as mentioned, the high-interest time deposits matured. That was about JPY800b. And we prevented runoff. And also some were re-deposited into lower-interest deposits. And that is why balance has gone down but funding cost has also gone down.
Page 17. This is by segment. And this page shows -- I will talk about the individual segments later on. But we would like to show you here that in all segments we have seen increased revenue. So all the groups were doing well.
And I will go into detail from page 18 onwards. The individual business -- I have several slides on individual business. What is shown on slide 18 is Shinsei Financial and Shinsei Bank Lake unsecured loan business. The left top graph, this is the number of acquired customers. Very steadily -- this is by quarter. If you look at 15.1-3, 42,000 has been acquired. And the result of that, if you look at the bottom, the total number of customers compared to the previous year has been up by 6%, 723,000.
And the breakdown is the breakdown between Shinsei Financial number of customers and Shinsei Bank card loan Lake number of customers. A steady increase is showing. And the balance is shown on the right-hand side.
Last fiscal year, compared to then, there has been an increase by 8% in terms of loan balance, JPY334b. And the growth rate has also increased compared to the year before. And the profit and loss is shown on the bottom in result of operations. Funding cost is normalizing, so the bottom line, the revenue -- the OVP may appear to have gone down. However, ROA still is at the 3% level, so high ROA is being maintained.
Next is the individual business, slide number 19, housing loan and others will be explained. First, housing loans. This shows the balance. The balance has been growing steadily. And APLUS financial shopping credit and credit card business is shown. And, as shown, there has been steady increase here as well. So we are seeing a steady increase in our businesses that we focus on.
And slightly different is the bottom graph. This is concerning the gray zone repayment. The gray zone, this is shown by quarter. But, as you can see, the trend is downwards. So the total Group basis, as shown, JPY170b we have reserves for. So this was mentioned by Mr. Toma that the coverage ratio is about 4.3 years. Compared to our competitors, it is about double. So concerning this, we believe this is sufficiently adequate.
Next is institutional business. Now concerning institutional business, we would like to differentiate between institutional business and structured finance. Institutional business, as you can see, loan balance is shown, ultimately JPY1.486 trillion. We have seen steady growth here as well. And as a result, and concerning revenue, on a gross margin basis we have seen increase compared to the previous year.
Structured finance, NPL disposal is included here as well. So compared to asset increase it may appear at one class, as if it's not grown. However, we were disposing of NPLs while, at the time, increasing balance. So as a result of that, the bottom graph shows -- highlights net credit cost. And there is some reversal from the NPL disposal as well.
And concerning specialty finance, on the graph it is the lower part, the red part. We're seeing growth here as well. So compared to the previous year, of the total of JPY120b increase, JPY70b increase domestic and JPY40b increase overseas.
Slide 21. Of the institutional business, principal transaction and global markets are shown. Concerning principal transactions, please refer to the revenue. Major increase is shown. This is mainly due to the large dividend, as was explained earlier on. Compared to the previous year it increased by JPY0.2b to total JPY26.2b.
And concerning global markets, this also has been mentioned. The loan balance has been increasing and the global markets business has been doing very well. So revenue has increased to JPY15.9b.
And that is all concerning the business for this fiscal year.
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [3]
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(Interpreted). Now my name is Kudo. I'd like to explain about the plan for fiscal year 2015. Allow me to be seated. Fiscal 2015, as you may be aware, this is the final year or the completion year of the second MTMP. So in terms of the major framework, as Mr. Nankouin, CFO, just explained, we've seen businesses that have been steadily growing. And we will be reflecting those as well into our plan. We are in a process of planning this.
And in terms of expense, of course we are doing the review. So these would be the assumptions for this plan. At JPY70b bottom line is what we are still forecasting, which is net income forecast for fiscal 2015. The breakdown is shown, net interest income. Last year there was a once-off increase. Of course this will go down compared to last year.
One is consumer finance business increased. We saw major growth, as was mentioned. And also funding cost, that was improved. So that is why -- so there would be some offset. And also for non-interest income, which is the individual business, investment products have sold very well. And also this is concerning affiliate but shopping credit business also increased. And also there was increase of property and global markets business as well. So we are expecting increase.
And concerning the net credit cost, concerning institutional, there will be some NPL -- further NPL disposal where we can see some recoveries. However, concerning consumer finance, with the increase in balance, we will have to increase our reserves. So there will be plus/minus.
But as you can see, it is being controlled at the level that is shown on the chart. So as a result of that, as Mr. Toma mentioned, last fiscal year, JPY67.8b was the net income. So comparing against that, the incremental increase may not be that large. However, if you look at the content, things are stabilizing. So we believe that the quality of the profit has improved considerably.
And one more point, if I may add concerning IR activities going forward. I will be the main player, of course. But sitting next to me, Mr. Nankouin, CFO, and concerning overseas investors, Senior Managing Director Gupta will be responsible. So we will -- the three of us will be the main players going forward in terms of IR activities. Thank you very much.
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Questions and Answers
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Shigeki Toma, Shinsei Bank Limited - President and CEO [1]
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(Interpreted). Thank you very much. We would now like to open the floor for questions.
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Unidentified Audience Member [2]
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(Interpreted). I have two questions. First, page 5 of the material. Here is a dashboard for financial soundness. Common equity tier 1 ratio, it's going up. And it's now -- it looks as if it's going into the yellow zone. Am I correct in understanding and how I should be reading this dashboard? It's now entering into the yellow zone? Am I correct?
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Shigeki Toma, Shinsei Bank Limited - President and CEO [3]
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(Interpreted). Well yellow -- the color yellow doesn't have any specific meaning. It's not that this is meant to signify a warning sign. It's just -- we just colored this so that it would be easy to understand this. The color doesn't signify any meaning.
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Unidentified Audience Member [4]
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(Interpreted). Okay. Now upon understanding that, the target for the Company is 7.5%. I believe that the target was 7.5%. But do you intend to bring this ratio to an appropriate level? And if you have such an idea, what would be the timeline? What would be the measures that you intend to take to get closer to the target level of 7.5%? That's my first question.
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [5]
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(Interpreted). Allow me to answer that question. I'm Kudo. As you might know, there are two important points. The first one is obviously we need to secure returns to an appropriate level of ratio. So shareholder return we consider to be very important. As you know, we have been injected public funds, so we have to consider repayment of those public funds. To do so, we need sustainable stable earnings so that our corporate value could be enhanced and our share price could also go up.
And we also need to accumulate our capital, which is going to be the source of funds for repayment. All of these would have to be considered in good balance so that in the consideration of everything, we need to be thinking about the financial soundness for the Bank as a whole. There are various stakeholders and we need to be discussing various matters with different stakeholders.
But the point that you have raised, controlling this number at a reasonable level, when we do so we are mindful of the considerations that I talked about.
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Unidentified Audience Member [6]
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(Interpreted). So can I take it that you are talking with various stakeholders of these issues?
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [7]
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(Interpreted). Well there are confidentiality obligations so I could not be too specific. But internally in the Bank, as well as with various stakeholders, we have already started talking. We're about to start talking about these matters.
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Unidentified Audience Member [8]
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(Interpreted). The second question. This is also a question for Mr. Kudo. With the current Shinsei Bank, what are the strengths and weaknesses? What are the challenges for the management, for Shinsei Bank?
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [9]
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(Interpreted). Your question is about, I believe, how are we going to develop the next mid-term management plan. I think it's closely related so I would like to answer your question from that light. Mr. Toma's five years, initial two or three years, it was a very terrible situation. But now he has been turning around the Bank to make it a stable Bank. And we now have that within sight so that we need to be thinking about our business model. Where are our strengths? Which areas should we grow?
We have been exploring these ideas over the past few years. And as a result of that exercise and also at the same time, there were favorable elements in the marketplace. And that is why we have been able to produce the numbers that we have just done.
With the new management team, we have already started discussing about the next mid-term management plan. And there's a number of points there. We have been trying in different directions, but by business line, by product and by service, we would like to conduct a review so that how much capital is to be used or what kind of resources are being used to raise what kind of returns and what are the risks.
We want to conduct a whole review so that our business portfolio of the Bank could be reshuffled and rebalanced. If we decide that this is not to be our focus, those would be removed so that we would consider what is our business model. That business model is going to be more clearly delineated. That is the exercise that we will be engaging in over the next few months.
Another big factor is expense-to-revenue ratio improvement. We're not trying to aim at a balance, a shrinking balance. We have various resources, including money and people. But as we conduct a review of our business lines, we would like to think about how effectively can we do this. And obviously as we do this and consider these different resources, using the expenses that we do and using the people that we have, we want to have more efficiency to raise the revenue, the top line. And as a result, if the expense ratio could be lowered, that is something that we would like to realize.
As for the content of the next mid-term management plan, we are in the midst of our discussions now. So I don't think it's appropriate for me to talk about specifics about the next mid-term plan. But where we recognize our strengths, for example consumer finance, stable revenue as well as growth in the balance of consumer finance loans or investment products, as we see a shift of our custumer from savings to investments or institutional business, in that area there are various types of products, such as structured finance and cash flow finance. We have strength there in the niche areas. Obviously we will continue to inherit such strong areas. Thank you.
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Unidentified Audience Member [10]
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(Interpreted). Yes. I have two questions. My first question is you mentioned shareholder return. Maybe there would have been overlap. And in terms of enhancing our shareholder return, the common equity tier 1 ratio will improve the 11.9%. However, dividend remains JPY1, no change. What is the background to that? How should we interpret that?
Rather than small dividends, maybe you are thinking of fundamental return or you cannot pay any more -- you cannot afford to pay any more than JPY1, or maybe the government has a very stringent stance. As much as possible, can you share with us the information related to that? That's my first question.
And my second question is concerning the net interest income planned for this fiscal year. If you look at page 7, if you exclude once-off effect, the JPY9.8b I think is what you plan for increasing net interest income. So the deposit funding cost and Lake and others, if you divide all of this off, you're JPY9.8b, which will increase. What is the breakdown? And also the rationale, especially for the other non-interest income, the negative is not diminishing. So if this -- the other net interest income, how are you going to improve that?
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [11]
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(Interpreted). Concerning the first point, let me explain. And then the second point will be explained by my colleague. Currently you asked a very pointed question. There are two things we can say. One thing is that concerning shareholder return, we are seriously thinking about it. We're not saying that we have to -- we are thinking that we can only return in large terms. We would like to increase as much as possible, steadily and gradually.
And also this will be a repetition of what I've already said. But concerning the details, we cannot disclose. But of course, together with the relevant parties, we need to discuss. And we have not been able to realize as of yet, but we are making efforts in that direction.
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Masayuki Nankouin, Shinsei Bank Limited - CFO [12]
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(Interpreted). Concerning your second question, now concerning this, it is true, there was once -- a one-time gain. And as mentioned, to make up for this one is the increase in balance of consumer finance, about JPY5b or so we should be able to increase.
And for the large time deposit is -- has been reduced, the big ones. However, we have campaigns, one-year/two-year campaigns with high interest rate and these are being redeemed. Since these are maturing, about JPY4b or so in total that would comprise. So maybe with this we will be able to make up for it.
And as for the negative factors, concerning institutional, for example, the loan spread is becoming lower and lower. We don't want to be caught up in that kind of competition. So this negative portion, we probably will not have to focus on that. And that is the main reason why we are forecasting flat.
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Unidentified Audience Member [13]
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(Interpreted). I also have two questions. Shareholder returns again. In the past, factors why you were not able to make shareholder returns, JPY1 dividend is still a low level, even amongst the banks that have been injected the public funds. Is it -- does it have to do with the shareholder equity ratio or volatility of earnings or internal control governance issue? What is the factor behind this low level of shareholder returns? JPY1 dividend, which was the case in the past, what is your view as to what was the cause for this low level of shareholder returns?
My second question, in the next mid-term plan your expectations, JPY70b of net income for this fiscal year. In the next mid-term plan you want to raise the probability of securing JPY70b. Is that the intention of the next mid-term plan. Or are you expecting large upside to JPY70b in the next mid-term plan? If you could let me know what your view is.
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Shigeki Toma, Shinsei Bank Limited - President and CEO [14]
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(Interpreted). As for the past, let me try to address that question. There are many elements, but when I assumed the office of President, obviously there were legacy issues and there were losses. So there was the question of whether do we have enough shareholders' equity. There were big concerns. So in that period I thought that there were no dividend payments. We didn't have enough shareholders' capital. That was the biggest reason why we were not able to make dividend payments.
In the next year, we were able to make JPY1 dividend payments. And since it's been kept at that level. In the third -- until the third year, there was the big capital adequacy issue. That is the primary reason why dividend was kept at a low level at JPY1. Of course we need to enhance our shareholder returns. Obviously we always think about that, but we started to clearly recognize this need in the fourth year and the fifth year, last year and the year before. That is when we were very mindful, cognizant of that. After the first mid-term-plan period is over, we started to think about how should we be making returns to our shareholders. That became very clear in our minds.
For the most recent period, capital adequacy, we may have sufficient capital, or given the current growth rate, it could be that we could even conduct a share buyback. So we don't have any more concerns about our capital adequacy. Then what should we do? What should we be doing? That's our attention now.
But as we have said, there are three considerations. Shareholder returns has to be at an appropriate level. And now that megabanks -- well, we have investors who are buying our shares rather than other megabanks'. We need to provide something that is favorable to them. But we also have to repay public funds. We need to accumulate surplus funds. So what to do about that is another consideration. And as we have been saying, for our growth in the future, we need to have sufficient capital for us to grow. So these are the three considerations that we need to balance.
But the government is a large major shareholder and this is something that we have to consult with the government. So that -- the process has begun at last. What are the problems and issues that would have to be cleared? We are now entering into a stage where such discussion is to take place. So please give us a bit more time. But it's not going to be too long. We don't intend to spend too much time on this.
But on the other hand, Mr. Kudo will talk about the third mid-term management plan. And in that period we want to be appreciated by the market participants. We need to come up with something that is clear, easy to understand, for example, raising our stock price. We want to develop the right environment for our share price to go up. And we also want to accumulate sufficient and ample surplus funds.
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [15]
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(Interpreted). Let me address the second question of yours, whether the probability of achieving this number is to be enhanced in the next mid-term management plan or are we going to really grow the number. Well it's not either/or. Over the past few years there were one-time gains and reversals of credit cost. These are non-recurring items that constituted our profit numbers in the past. So we want to raise or reduce the proportion of such items. So as a result, we want to enhance our stability of our profit numbers. Obviously that is something that we will be aiming at.
And our business can be classified into those that use assets and those that do not use our assets. As for the ones that use assets, because of the nature of that business, it's not going to be growing double or triple. So, for example, consumer finance business, the market has bottomed out. The balance is going up.
And now there is industry reorganization and we are one of the players that have survived that consolidation and realignment. So we believe that we will be able to roll out this business at an advantageous position. We will be able to enjoy some benefits of doing this business. But whether it's going to grow by several multiples, that will not be the case.
As for other businesses where we are strong, where we have strengths, we want to make use of that. Obviously asset efficiency and profitability will be raised. And associated with that, stability would also be enhanced.
So your question about the precision or accuracy or probability and stability of the profit numbers, we want to raise this obviously. But to what extent are we going to make a big leap in the profit numbers in the next mid-term management plan? Well obviously we'll try to grow, but not at the sacrifice of the stability. We're not aiming to do something risky. Obviously it's going to be within a certain range that we will be aiming at our growth. Thank you.
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Unidentified Audience Member [16]
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(Interpreted). I have two major questions. My first question this is -- this is related to the next mid-term management plan as well. By hearing your talk, the revenues will not make a major jump. So that would mean that expenses will not rise all that much either. However, I believe that systems investment will be required. So in the mid to long run, the necessity for systems investment and other challenges, can you share with us your views on that? That is my first question.
And my second question is concerning the growth in assets. Concerning Lake, we see growth but your plan has not been achieved. And how are you going to grow further? With the probability, can you mention on that? And also principal transactions, the balance continues to go down. So are there any signs of change? These are my questions. Thank you.
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Masayuki Nankouin, Shinsei Bank Limited - CFO [17]
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(Interpreted). Concerning your first question, expenses, as Mr. Kudo mentioned already concerning expense, we have to take into consideration OHR and we need to control it. However, necessary expenses will have to be spent.
And concerning systems investment, which was mentioned, this is one of the necessary expenses because this will be the foundation for various businesses. And if we want to grow our business, we need to have a sufficient robust systems infrastructure, so we will spend money on that.
So in terms of expenses, we need to be flexible. If it is necessary, we will spend. But we also have to be mindful of the expense ratio as well. So just because we can expect a revenue increase does not mean that we're going to unlimitedly spend expenses. So where we need to, we will. But otherwise we will curtail expenses. So for systems investment, it is required so we will spend.
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [18]
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(Interpreted). And also concerning Lake business, it is true, as you mentioned, we have not achieved our target. But this is because we have formulated a very aggressive plan because we identified it as a target or a focal area. So in terms of trend, it's on track.
There is a brand issue in the industry, the brand image issue and also our customers have changed. So by improving our image, how can we improve our top line and control credit cost? So we're making these efforts all in one. Going forward, in terms of the direction of our efforts, that will remain unchanged. But where we are behind, we hope to be able to catch up going forward.
And principal transactions, it is true that the balance has gone down. But because of the nature of its business, there are ups and downs and it is natural that it is volatile. So there is timing for investment. The original portfolio is -- there were huge amounts of non-performing loans. And because of the improvement in the market, there were times when we exited. And it's very important to exit in a timely manner. So our existing investment, we've been able to exit in a timely manner.
But, as you say, we have not been able to increase new investment as much as we had expected, but not due to the [disposal] of financial institutions as in the past. But there are various issues that -- by corporates that needed to be resolved. So various measures have been taken and we are waiting for progress. Thank you.
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Unidentified Audience Member [19]
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(Interpreted). If I may be persistent, I think that this will be finalized later. But, for example, IT-related major investment or fundamental reform, do you have any plans? Is it going to be in the next MTMP, do you think?
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Shigeki Toma, Shinsei Bank Limited - President and CEO [20]
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(Interpreted). In terms of system update investment, this is underway. So of course cost and investment return, of course, will need to be scrutinized during the next MTMP period. And in terms of cost, that's already factored in. So, as you have said, it is not as if this kind of investment is going to continue to grow. It's all visible. So, for example, for this fiscal year, in the investment budget it's all included. So there are not many uncertainties concerning that.
What we need to think about going forward is, with the update and renewal of IT system, what kind of cost efficiency can be gained from the cost performance perspective. What kind of efficiencies can we further pursue is what we need to focus on. From OHR perspective, of course in the long run it will go down.
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Unidentified Audience Member [21]
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(Interpreted). I have two questions. The first one, other people have already asked this question, maybe repetitive, but it has also to do with shareholder returns. Mr. Toma, the President, has said that there is discussions are underway. But in the end he talked about confidentiality, not being able to share much information. But how far have you come? As you have talked with various stakeholders, how far have you come?
I think this discussion arose after the half-year results were out. Has there been progress or has it started but stopped and not much progress has been made? You don't have to go into specifics, but you also said that you don't intend to spend a lot of time. So if you could be more clear, let us know -- have a sense of how it's going.
The next question is page 19, gray zone repayments. APLUS made JPY4b of additional provisions and coverage is 4.3 years now. How much do you have to do this? The actual payments did not surge. Of course there was some increase in the fourth quarter. So where would be the appropriate level? Is that in sight? If there isn't some surplus amount, this JPY170b, is there any chance of this being released and reversed? If you could give us your outlook about this.
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Shigeki Toma, Shinsei Bank Limited - President and CEO [22]
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(Interpreted). Because this has to do with the past developments, let me try to address that question about shareholder returns. 50% or 80% or -- the progress in numbers, quantifying the progress will be quite difficult and could be misleading. So I would like to refrain from giving you a number to indicate our progress. But it's not the case that it has -- the discussion started but stopped.
How can we enhance our shareholder returns? On that topic, from that perspective we are discussing what should be done now and what is going to be the schedule of the repayment of public funds. We are having a comprehensive discussion of these different matters so it's rather complicated. That is something that I would like you to understand. But because this didn't work well, we would like to pursue this avenue. This doesn't work well, so we go to the other option. That's not the case. It's -- in terms of our values, we are in alignment. In terms of the direction we should be headed, we also are in alignment.
The share price is JPY200 plus so the government's expectations are very high now. So overcoming that is the difficulty because of the nature of this topic. But unless there is sufficient surplus funds, we would not be able to make shareholder returns. But on the other hand, if the share price goes up, the bridge is going to be very low. So how do you coordinate and adjust these conflicting movements?
And into the future, if the situation -- is there any risk that the situation could change? Those are the things that we have to consider and discuss. So there are complexities involved. So I am not very clear-cut. I'm sorry about this. I cannot be more clear than this.
Now as for gray zone repayments, nobody knows. What will be the appropriate level? Nobody knows. We don't know. But our competitors, their coverage is about two plus -- two years plus. According to J-GAAP, that is considered as appropriate. So based on that standard, our coverage is very high. That's one thing.
And the other thing is that so far this gray zone burden has not bottomed out. We were expecting a more rapid decline in gray zone claims in the industry as a whole, including us. But that didn't happen. This is because, as you might know, law firms and people who are in the business of doing this, judicial scriveners, they are going around Japan, trying to cultivate demand for their services. And that is why these gray zone claims have stayed at a relatively high level.
But the statute of limitation is 10 years after the last transaction. So this deadline is nearing for sure. Gray Zone Act was enacted in 2006. So it's already been -- it is going to be 10 years since that enactment. So the time is approaching near. So as we go into the future, the amount is going to come down. And at a certain point in time, it is going to be insignificant. This is for certain.
Whether there's going to be some surplus of these provisions or is there going to be a shortage, we don't know. I can't say. But given this trend, personally speaking, we believe that the current level of coverage is sufficient. That's the only answer I can give you. Was that satisfactory? Thank you.
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Unidentified Audience Member [23]
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(Interpreted). Concerning the individual business, individual Group, core customer increase I think was one of the objectives of the mid-term management plan. By looking back over the last fiscal year, the increase customers or trend, can you share with us information on that?
And my second question is concerning retail banking and individual business last fiscal year. This year incurred loss once again. So what is the cause? Is it too costly? Have you spent too much or is it due to the number of customers or balance, volume is insufficient? What is your view? And how are you going to sustainably turn around and make profit?
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Masayuki Nankouin, Shinsei Bank Limited - CFO [24]
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(Interpreted). Concerning core customers, let me respond to that first. Concerning core customers, 5m people, that was our target. Rather than just the number of accounts, we want to enhance cross-selling within the Group companies. Concerning this, I would like to ask Mr. Gupta, who was Head of Individual Business until very recently, to respond.
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Sanjeev Gupta, Shinsei Bank Limited - Advisor to President and CEO [25]
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(Spoken in Japanese). Nankouin-san mentioned that our original target of 5m customers, that target is still intact. Basically the objective of achieving 5m customers is partly cross-selling to our Group company customers, and largely that comes from the credit card customers of APLUS. So that effort is continually being worked on.
But what we have done in the fiscal year 2014, if we talk about that, the Lake customers, the new Lake customers are all in the Bank. So we are selling the Lake unsecured lending business not only to the pure unsecured customer, but to the banking customers as well.
And in the retail banking business as well, we continue to acquire close to 10,000 customers every month. So the customer momentum is there. Maybe it's not as high as we had originally anticipated. So I think we are on track to grow the customer base further as we enter into 2015.
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Masayuki Nankouin, Shinsei Bank Limited - CFO [26]
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(Interpreted). Now concerning the last on the retail business, I think what you saw was the numbers by segment. And the biggest is, as you may be aware, the interest rate level is very, very low. That is the biggest cause. And concerning this, going forward, of course, we want to increase top line. And if the low interest rate environment is going to continue for some time then, based on that, we may need to once again rethink our structure. As Kudo-san mentioned, in the mid-term plan the profitability of each business line and how much that can be improved will be discussed and reviewed. So we will discuss doing those efforts.
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Shigeki Toma, Shinsei Bank Limited - President and CEO [27]
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(Interpreted). If I may -- if I may add, the reason for the loss is as Mr. Nankouin mentioned. But concerning individual business, in terms of profit, we have been suffering. However, concerning this as well, traditionally speaking, the Bank, inclusive of securities companies, meaning financial institutions in Japan vis-a-vis individual customers had not been providing full-fledged services in the past. There's been improvement recently but not sufficient yet.
So based on that, concerning our retail bank, how we can [polish] it? Shinsei Bank's retail bank, how can we differentiate? That kind of project has been underway for the past three years, inclusive of the branches. And some ideas that have been identified, for example enhancing smartphone banking. Now everyone is doing it now, but allowing account opening through smartphones, I think we were one of the early adopters. And housing loan can also be applied for through smartphones and also investment trust as well. So we are trying to further enhance convenience.
And not only that, the housing loan design, we want to focus not only on interest but on other factors as well in order to differentiate. And what we call NISA Plus, the other competitors have NISA. But in our case if customers apply for NISA, then they will be able to receive preferential treatment for fees, not only concerning JPY1m targeted for NISA but for other products as well.
And the foreign currency conversion fee has been reduced as well. And as a result, the number of customers have dramatically increased. So these are all seeds. But gradually these seeds will grow and bear fruit. So I think that is one major flow or direction.
And together with the people at the branches, we are making efforts. We have project teams. So the motivation of the people in branches has risen considerably. One impressive point was from the people in the branches. This is not imposed by us but from bottom up. Shinsei Bank like hospitality or Omotenashi. It is now being provided from their initiative to provide hospitality services to customers.
A lot of banks are talking about this. But I don't think -- not one of these banks are really doing it true to form. So that is why people don't like banks. But from this perspective, our retail bank is trying to change. And we are changing, which will lead to differentiation. And I have high expectations for this. So I hope you will be watchful of our change. So by doing so, we would like to overcome our loss. Thank you.
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Unidentified Audience Member [28]
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(Interpreted). Page 4, this chart, this trend, given this trend, for the stock price to go up by JPY130, retained earnings, you need about JPY100b or so. Any change in the way you evaluate this? Is there going to be a breakthrough to put a gearing on this? Do you have any such image?
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Shigeki Toma, Shinsei Bank Limited - President and CEO [29]
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(Interpreted). Share price is something that is very difficult for us to comment on. Yes, it's true that the retained earnings or, sorry, accumulated net income, if they are -- move in parallel with share price, that may be the case. But as somebody who is managing the Company, from my viewpoint, the point -- direction that we are -- we should be headed and the actual services that we are providing to our customers, our core business, we want the market to appreciate and recognize the services that we are providing so that the multiples will be raised or our growth potential to be appreciated. That may be possible.
Of course the shortest path is to accumulate our profits. EPS to be raised would be the shortest cut. That's the golden path for higher share prices. But I think the way that market appreciates and recognizes what we do would also help.
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Hideyuki Kudo, Shinsei Bank Limited - Managing Executive Officer [30]
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(Interpreted). Let me just make some additional comments. I think what you wanted to ask is that rather than going at this pace, [PER] -- [PBR] multiples, is there any chance that those numbers would grow by leaps and bounds? Any such triggers? That was, I think, your question. Unlike megabanks, we're not leading the Japanese economy. So we will be focusing on areas where we have strength. And obviously higher-added-value areas is where we provide services and products to our customers.
So because of this nature, even -- we believe that we could be assigned a higher multiple given the nature of what we do. But if the earnings are highly volatile then the discount rate may be higher. So in that sense we want to enhance our stability and we want to increase the component of our profit that is sustainable and recurring. And by focusing on higher added-value areas, we want to realize higher multiples. That is what we can say. Thank you.
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Unidentified Company Representative [31]
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(Interpreted). Thank you very much. With this we would like to end the Shinsei Bank financial results report for fiscal 2015. Thank you very much for attendance.
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Editor [32]
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Portions of this transcript that are market (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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