Q2 2017 Shinsei Bank Ltd Earnings Presentation

8303.T - Shinsei Bank Ltd
Q2 2017 Shinsei Bank Ltd Earnings Presentation
Nov 04, 2016 / 01:30AM GMT 

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Corporate Participants
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   *  Hideyuki Kudo
      Shinsei Bank - President and CEO
   *  Masayuki Nankouin
      Shinsei Bank - CFO

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Conference Call Participants
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   *  Yoshinobu Yamada
      Deutsche Securities - Analyst
   *  Ken Takamiya
      Nomura Securities - Analyst
   *  Shinichiro Nakamura
      SMBC Nikko Securities - Analyst
   *  Takashi Miura
      Credit Suisse - Analyst
   *  Katsunori Tanaka
      Goldman Sachs - Analyst
   *  Akira Takai
      Daiwa Securities - Analyst
   *  Rie Nishihara
      JPMorgan - Analyst
   *  Katsuhito Sasajima
      Mitsubishi UFJ Morgan Stanley - Analyst

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Presentation
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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [1]
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 Good morning, ladies and gentlemen. Kudo of Shinsei Bank speaking. It's very nice to meet you. Now we are to deliver the presentation on the business and financial highlights of the first half of fiscal year 2016. First of all, please take a look at page 3 of the handout, the slides.

 The details of the performance will be given to you by Mr. Nankouin, our CFO. But let me take this opportunity to give you the key points.

 First point, how do we evaluate our first-half results? Growth areas have been defined under the third midterm management plan, and let me first of all report to you how we did in those growth areas. Please take a look at the center of the page. In unsecured loans, the average growth rate per annum had been targeted at 10%. Against March 2016, there has been an increase of 12% on an annualized basis. On the other hand, structured finance balance, against 9% targeted average growth rate on annualized basis, the actual performance in comparison to end March was a minus 7%, so this difference will be explained to you later in detail.

 As far as unsecured loans are concerned, last fiscal year there had been a decline in the number of new customer acquisition and the approval rates. However, we've been taking some measures to resolve these issues, and we've begun to see some signs of improvement. And in the guarantee business, the total balance has grown quite significantly, so those are the key factors behind the actual results.

 On structured finance, the balance declined, and that had been driven by a few factors, one of which was overseas assets. Because of the exchange rate, they appeared to be smaller, and domestic real estate finance has a unique feature. Customers are investors who have begun to exit from this market, so there had been prepayments. Prepayments had increased, and as a business strategy of Shinsei, vis-a-vis regional financial institutions, we are increasing our sales, because they're finding it difficult to find the destinations of their investments.

 Distribution business therefore has grown quite significantly. So you call it structured finance balance by bundling all of those different business pieces, but as far as domestic real estate is concerned, as I said, there has been prepayment because of the exiting of investors. And because of distribution, there has been a decline in balance and overseas assets. They appear to be smaller because of exchange rates, but other than those two business lines, we have seen growth.

 So it's not necessary to just look at the total balance of structured finance, and new transactions is increasing quite steadily. The next bullet point is with regards to the introduction of the negative interest rate policy, and yes, there has been some impact, but interest income is as planned.

 On the other hand, non-interest income, what was different from our assumption is retail customers and the sales of investment products. Asset management products had been slower than we had expected.

 Last fiscal year, towards the end of last fiscal year, this trend had already begun to show signs. However, the trend had been longer than we had expected. More recently, however, we've also begun to see some signs of improvement, and therefore this may become one of the key factors of injecting efforts hereinafter.

 Retail banking asset management products sale dipped slightly, and in global markets, non-interest income such as derivative sales was slow. And that had been offset by JGBs and gains on bonds, so that is where we are. And as a result, JPY24.9 billion was the net income and the progress rate against full year expectation is 48%, so the bottom line is proceeding steadily along with the plan.

 And stable revenue areas, JPY23 billion, 18% of the total. This was higher than we had assumed, but when we explained this concept previously, NPL disposal reversal was included in significant amounts, and asset management business exit or investors' exit, had been included.

 So those one-time-off factors had been included in a lump sum, so there was a need to divide recurring business versus the one-time-off business. So that was the origin of why we are showing these numbers as they are. But by chance, because of bond-related gains, was significant, mainly treasury transactions, that portion is included by definition.

 So I'm not saying that we don't appreciate that, but if you could keep that in mind, that much of this also includes the gains from our treasury transactions, mainly on bonds. The second point on key points, what are the challenges and initiatives as we proceed into the second half?

 When we look at the environment, financial market, especially the new measure introduced by BOJ in September and the change of framework, as far as treasury transactions are concerned, we cannot expect the first-half gains on bonds and treasury in the second half. And therefore, as I mentioned, non-interest income, retail customers, asset management products, will be focused and derivatives to our institutional customers will serve as keys.

 The investment sentiment is still uncertain on the part of our customers, and especially with the US presidential election and other events upcoming, there are some factors of uncertainty. However, in the first half, we were probably at the bottom and we've exited form that very worst scenario. Numerics wise, we've begun to see some pickup.

 So taking advantage of these trends, the retail group is taking various measures in order to meet the demands of the customers. And also this is something that I've been talking about from some time ago, but we are engaged in productivity enhancement projects. This is not really a singular project, but it is a general term that is given to a few measures, and we are going to provide a summary by the end of this year, which was committed to you in the previous quarter performance announcement.

 And in January, when we announce the third-quarter results, we will probably be able to communicate to you the highlights or the summary of the project. So that's the timeline, so it will only be after fiscal year 2017 that we'll begin to see some specific deliverables in terms of numbers, but we are making Group-wide efforts to enhance productivity under this project.

 Because of these efforts, at the moment, we don't see the necessity to have to revise the full-year guidance. Please now proceed to slide number 4.

 Here, we're talking about the progression on overall strategy against the third major management plan in more detail. There are some overlaps between this page and what I've already explained to you, but as far as growth areas are concerned, as indicated on the right-hand side, unsecured loans will be the focus, and there's been improvement in approval rates, which we intend to continue and various policies are underway.

 New commercials have been introduced, which have proven to be quite popular, and based upon these strategies, brand signification and convenience improvement is being pursued. There are a few small measures aiming towards these goals in order to increase the new customer acquisition.

 In structured finance, project finance and real estate finance, new transaction is steadily increasing, and in second half, syndication with regional banks as well as an increase of sourcing capabilities will be pursued. In stable revenue areas, asset management and the trends thereof have already been explained.

 We have to define where the demands are, and small loans or cumulative products, these are some of the areas that we meticulously would like to define the demands and offer products that would meet those requirements on the customer side. Housing loans, refinancing requirements are there and business is quite healthy.

 It's about time we begin to see some deceleration, but so far, the sanguine situation remains in this area, and on the other hand, lendings to corporates. To begin with, we hadn't been really doing this on a nationwide level, and we were not the number one player on a nationwide basis, so that nimbleness, we want to take advantage of that smallness. And by being selective in transaction and focusing on profitability and risk-return, we've been picky in transactions, and we don't think we need to increase this business just for the sake of showing high numbers.

 Strategic initiative areas, settlement. New initiatives have been launched, and we're seeing results from these initiatives, and partnership with regional institutions in business, consumer finance guarantee and real estate to corporate or corporate business, distribution side, there has been a significant improvement in the business environment in these areas.

 And more of a short-term -- or rather than short-term profitability, there is some improvement in SME business, although this will not lead to short-term profit increase. From October, APLUS and Showa Leasing have gotten together and the resources have to be linked, but vendor lease business has been launched by these two Group entities.

 And at the bottom, Group management infrastructure is the expression used, although this is a bit abstract. But this is about productivity enhancement, which I spoke of in the previous page. As one of a relatively new idea on consolidated basis at the Group level, we're trying to increase the productivity on a Group-wide basis.

 I've been explaining that from before, but in the case of mega bank, they're only focusing on bank securities and trust bank, but we have Shinsei Bank card and lease business entities, and those entities included the integration of the systems or operations and the administrative systems integration. These are underway. In order to make such integration truly effective, there has to be the effort to break down the walls in the emotions and mentalities of the people, because people integration is necessary to support productivity enhancement.

 So that's another area we're injecting much efforts into. And in growth areas, we've carved out consumer finance, and let me touch upon consumer finance, which was one of the growth areas on page 5.

 This is the market-wide indicator, 2014, began to see positive growth in 2014. 8% has been the market growth, and the breakdown is indicated on the right-hand diagram. Bank lenders most recently has achieved 10% against that non-banks. Although the growth rate has declined, but it seems that their decline has bottomed out and non-banks are enjoying a growth rate of about 3%.

 And against that, what about Shinsei, on page 6, against those market trends? So if we overlap Shinsei's unsecured loan balance growth rate against market average, each year we've been obtaining 9% growth, and in the first half, this has accelerated to 12% per annum growth.

 So where are our strengths? Take a look at the middle column. If I may add to what is already written here, accumulation and analysis of customer data. In this business, the credit cost is relatively high, and that has to be well managed. So those are the skills that are necessary. It's truly the non-banks that have innately been strong, like Promise or Shinsei Finance that runs Lake, and these are the entities that have the repository of such expertise.

 But fintech ventures -- second -- we established a second site joint venture with a fintech venture that is an entity to use transaction data and AI. In other words, we're trying to introduce a new methodology of credit screening and management. By tapping on such new methodology, we think that we will be able to increase our business in consumer finance from a completely new angle to capture new business opportunities.

 And when we talk about customer base of Shinsei Bank Group, in retail, we have certain customers that are buying our asset management products, but a slightly different customer platform exists, for example, in APLUS, and we've not fully been able to tap into this customer group, which is an area of further improvement. And a third point, I've not explained to you in full our IT platform so far, but we believe that this is one of our biggest strengths.

 Core system was proprietarily developed, and expandability and flexibility and nimbleness of our system is quite different from others. So as one of the competitiveness to increase our business in Thailand, there's a group called Jay Mart, and we are offering systems. That's the only business we do with them. Of course, maybe in the future we will be able to diversify our business relationship with this entity, and we're talking about that. But that's one key as we try to enter into new markets and make inroads into new markets.

 Then let me hand over to Mr. Nankouin, CFO, who will give you more details with regards to the first-half results. Thank you for your kind attention.

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 Masayuki Nankouin,  Shinsei Bank - CFO   [2]
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 This is Nankouin. Nice to meet you. So following by the President's relation, I would like to go through the handout to give you some more details.

 Firstly, please look at the financial summary on page 7, so by line item I'd like to give you some information. First, net interest income. The impacts of the negative interest rate policy was within our expectation, and loans and bond investment, the new transactions, because of the tighter competition, the spreads tightened, but that is also within our assumptions.

 So towards -- on a year-end basis, JPY60.4 billion, which is slightly below than on a year-end basis, and this supported the unsecured loan strong performance. Next, now on the interest income. The number of 7% growth on a year-end basis, it appears to have performed strongly, but there are ups and downs in this line item.

 First, there's a negative part, as the President has mentioned. Due to the negative interest rate, the asset management product demand decreased, so this portion of revenues declined, and this is prolonged than we expected, so it was underperforming our expectation.

 However, the treasury business performed well, which partially offset this. And one of the unique performances was there was the fund revaluation, so the non-interest income for the last year was smaller. And because of that, this non-interest income grew by 7% on a year-end basis.

 Next line item, expenses, JPY71.3 billion, progression was 50%. So we are performing in line with our full-year plan. I have only two comments on this. Compared to last fiscal or last term, these expenses increased, because in growth areas, we spent for advertisement. So in the growth areas, we decided to make investment.

 As a result, expense to revenue ratio was 63%. This is on the same level as last term, so this would be observed -- was observed by the total revenue and was at the same line as last term.

 Net credit cost. We explained previously on this, JPY15.9 billion is increased on a year-end basis, because last year there was the special factor. The factor for last year is the increase of the reserves from the NPLs, because there was a lot of reversals.

 With this, this term it appears that net credit cost increased. However, the unsecured loan, which performed strongly because of the increase of the balance and as explained in the first quarter, because of the renewal of the write-off ratio, there was a technical increase. So from the second quarter, most of them are dissolved, so on a full-year plan it's 53%. So on a full-year basis, this will be within our budget.

 Next, for the others, minus JPY2.1 billion. The progress, 30% for the full year, most of that in corporate tax. It's a large amount in the first quarter, but we started to normalize, and this is almost within our expectation. In the second half, there are some technical factors, so it may go up or go down, but at this moment, we assume that this will perform within our plan.

 So this concludes my explanation regarding overall numbers. Now I would like to go to the individual items. Please go to page 8, net interest income.

 So most of this was explained earlier. I discussed the amount of JPY60.4 billion. My point is on the left-hand side, unsecured loans represent this portion of unsecured loans increasing steadily, which represent 53% to JPY31.7 billion. So this is one of the supporting factors.

 Next, please move on slide 9. This is regarding net interest margin, or NIM. First, please look at the chart on the far left. NIM is 2.41%, which was higher than on a year-end basis. One of the factors is on investment side, relatively low-yield JGBs, the amount of the securities decreased. The yield on the securities, as shown on the column or chart in the middle, the low-yield ones decreased significantly.

 And the yield on interest-earning assets decreased, softened, and on looking at the funding side, corporate bonds, as shown on the far right, from 2.20%, it went down to 1.12%, which declined significantly. So the funding cost including this decreased significantly.

 The yields on loans, because of the base rate decline in a negative interest rate policy and the spread contracted, and with this, it declined to 2.75%. But this is within our expectation. Next, I'd like to talk about the non-interest income on page 10.

 Non-interest income was JPY52.7 billion. The factors to this has already been repeated, which is retail banking and the global markets business' weak performance was offset by treasury business, so the non-interest income trend, as shown on the left-hand side, treasury, JPY13.1 billion and shortly APLUS stably, the installment revenues is supported in non-interest income.

 So JPY22.5 billion was the non-interest income for this portion, which continues the trend safely. Next, please go to page 11. This is regarding expenses. Expenses totaled JPY71.3 billion, which increased JPY0.5 billion, and this expense to revenue ratio was 63%. So far, for expense management, we are operating in a more rigid manner, and we are working on additional expense reductions.

 But in terms of being selective, for the growth areas which will contribute to our top-line revenues, we will continue investments. Next, please go to page 12.

 Net credit costs. Net credit cost totals JPY14.7 billion. For the individual businesses, at the lower part, unsecured loans was JPY10.1 billion and APLUS FINANCIAL's JPY4.7 billion. If you take a look at the right-hand side, net credit cost of unsecured loans was 4.6%.

 We explained the first quarter because of the renewal of the vital ratio for the unsecured loans, so this is the cost of the increase, but this was assumed on a full-year basis, this is still within our expectation. Next, page 13.

 Page 13, I explain asset quality. This is quite straightforward. The left-hand side shows your NPL ratio. This is almost flat, 0.78%, and the non-performing loans also is JPY34.8 billion. It's almost at the low level. Next, please take a look at the right-hand side.

 Risk-monitored loans. Also the ratio is 2.05%, which is at the low level, so asset quality is improving. Please go to the next slide. It's capital ratios.

 Basel III CET1 ratio is 13.1%, as you see on the dotted line. In May this year, the Board resolved the purchasing of treasury shares or share buyback, which was completed in August. So we purchased JPY10 billion of treasury shares, and also there was a redemption for subordinated bonds.

 So domestic standard basis, our core capital ratio declined slightly. Next, I'd like to please move to page 16. From here, I would like to talk about the segment P/L. This shows revenues and OBP after net credit cost by business line. In the Shinsei Bank Group, the chart on the right-hand side, OBP after net credit cost, total is JPY27.1 billion, but the growth areas as President's mentioned, the revenues from the growth areas represent 35% of the JPY27.1 billion, and the breakdown is shown here.

 From the large ones, the second line from the top, Shinsei Financial, the unsecured loans is a growth area, is JPY3.9 billion. This is 14%, and the structured finance, JPY5.7 billion, 21%. So the total, 35% is coming from the growth areas.

 Next, please move to page 18. So I would like to catch up on the key business areas. First, unsecured loans. The total picture was given earlier, but I would like to give some more details. The balance of unsecured loans, as shown on the bar chart, is JPY454.6 billion. Compared to March end, this increased by 12%.

 In the Shinsei Bank Lake, interest income on a year-end basis increased by 21%, as shown on the chart in the bottom. So the interest income increased by 21% on a year-end basis. For the lending rate shown on the right top, because of the negative interest rate environment, even so, this tells that it has not changed much.

 Next, Lake, customer acquisition and approval rate is shown on the next chart. The approval rate, as explained, we have taken a lot of measures, which is represented here. Total is 33.3%, so we have started to see effects, results, and we'll continue taking initiatives. This chart tells that we are starting to see improvements, such as new commercials or opening of new branches.

 In October, with Yucho Bank, we also partnered ATMs, so we are starting to increase already the ATMs. Next, please go to page 19. This is related to structured finance. Balance is shown on the bar charts, JPY1.1397 trillion. It decreased from March, but as the President explained earlier, one is because exchange rate, and also there is early redemptions and also we promoted distributions.

 Business itself, new originations are performing strongly. Project finance, in the first half, the commitment amount was around JPY90 billion. The cash flow analysis was enhanced by the mega solar and -- for wind and biomass in others. We are switching to other power sources, so we are diversifying the business areas. In going forward, even after the mega solar ran its course, we are working to stabilize our revenues.

 Real estate non-recourse finance, JPY130 billion was the actual in the first half. Domestically, office storage and hotels, we are quite selective in picking the transactions. On the other hand, real estate price, as you know, has become a bit overheated, and there are many uncertainties in the domestic economy. So we will continue to monitor very closely the risk-return as we make decisions on whether we take interest actions or not.

 Please turn to page 20, on retail banking. As far as asset management products are concerned, in the first half, there has been some sluggishness, so how do we foresee the future? More recently, we've begun to see some improvements. In Q2, if we look at the three months' period, sales was JPY40 billion. Year-on-year basis, there has been a dip, but in comparison to Q1, there has been an increase about JPY4 billion -- by about JPY4 billion, so more recently we've begun to see some recovery.

 The balance in itself is flat in comparison to end of March, and as a result of the non-interest income, the proportion of asset management products was down by JPY3.6 billion at JPY5.6 billion. On the other hand, real estate loans are doing well, and as you can see on the diagram, JPY1.294 trillion as of September.

 We've been able to capture the refinance opportunity, so there has been an increase by 5% in comparison to March. The interest income coming out of this business in comparison to the previous term, this has increased to JPY5.4 billion. Retail deposit balance by product, it appears small, but retail foreign currency deposits is quite a significant business opportunity at the very top, JPY358.1 billion. There has been an increase in this category. In comparison to March, there has been an increase by 13%.

 Partially due to exchange rate in yen-denominated terms, it's negative, but on a local currency basis, there has been sound growth. But even when translated to yen, there has been significant growth. If we skip ahead to page 23, which is on grey zone repayment.

 On the right, the amount is indicated, JPY111.5 billion, and at Group companies, although the situation is mixed, if we look at the Group total, we maintain a sufficient level. The actual repayment done was flat in Q1. On the other hand, disclosure claims has gone down quite significantly.

 The number of disclosure claims and the actual repayments will continue to be monitored closely, but as a long-term trend, we think that the overall orientation is downward. That concludes my presentation on the interim results. Should there be any questions, please go ahead.

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Questions and Answers
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 Yoshinobu Yamada,  Deutsche Securities - Analyst   [1]
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 This is Yamada from the Deutsche Securities. I have two questions. First, expense ratio on page 11, 63%. Compared to other banks, it's slightly higher. Compared to regional banks, not so high. For the productivity enhancement project, in that project, are you -- do you have a plan to fundamentally review the total absolute value of your expenses? Or do you plan to increase the total efficiency? So could you please give us your basic idea?

 Next question is regarding unsecured loans on page 10. A new theme for the consumer loan or personal loan is that fintech could be a new idea. On the other hand, big data use only in the current loan personal business, it is slightly different from the traditional personal loan business. So such a new move, what is the impact of such news on the Lake business? Or please tell me your policy on this. Thank you.

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [2]
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 Thank you for your questions. First, regarding expense to revenue ratio and the productivity enhancement project, yes, rather, the project is centering on the controlling expenses. This is the collective name of the several projects is ongoing. For example, for the controlling non-personnel expenses, the Group-wide basis, and more specifically the integrating old functions, such as call centers.

 At APLUS, Shinsei Financial and the Bank, many institutions have the businesses that need call centers, so we have been running these call centers and the locations, but we are planning to integrate them. Also for the finance or the personnel or HR or the legal, energy, they were a lot of the indirect functions, and those also are in each company, but we are trying to consolidate it -- them.

 So through the efficient -- more efficient operations, we can use fewer people. We can reduce human resources, so naturally we are expecting the direct impact on expenses, but this does not mean that we are simply going to reduce people. So the highly skilled people can be transferred to other businesses, and during the consolidation, the governance of the Group as a whole will be enhanced. That is also the purpose of the project.

 On your second questions, the promotion using fintech, in the consumer finance, the relationship with the consumer finance, which enjoys a high profitability, this is my view, but there are both opportunities and threats. Of course, if we use fintech, who has data and can we access the data? So that will be a key. So the retail players will become very strong competitors, or if it can have a good partnership, we can be strong.

 And direct use of fintech, for example, credit screening using AI, but for this in the Group as I touched upon, we have started to implement initiatives. Originally, consumer finance business processes a lot of the statistical data, and this has been our traditional strengths. So regarding using AI, we believe that we can utilize it. And next, the alliances with the data holders also needs to be considered. That, we believe that we can demonstrate a strong position in this area.

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 Ken Takamiya,  Nomura Securities - Analyst   [3]
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 Takamiya of Nomura Securities. I have two questions. First of all, the change of environment and the necessity of structural reform in the banking sector, and secondly, capital policy.

 First of all, when you look at the environment of the banking sector domestically and overseas, what is your perception, Mr. Kudo, and the midterm management plan is underway. And based upon the changes in the environment, do you find some areas that would need to see acceleration of the pace of the initiatives? That's my first point.

 And secondly, on capital policy, based upon your current situation of capital adequacy, which are the areas that you will be using the capital? And what's the mid to long-term approach for the repayment of public funds? And in that context, what are your thoughts with regards to share buyback in the future? And in the first half, you conducted share buyback, and what's the self-evaluation of the first-half share buyback? Those are my questions. Thank you.

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [4]
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 First of all, how do we view the climate and how are we responding to the changes in the environment surrounding us? Very recently, at the Board meeting, we talked about the mid to long-term strategy. Yes, there has been transformation of the environment. Can we just be assured that the current strategy is right?

 There was a big debate. We concluded that the major trend that we indicated in the current midterm management plan still applies, but the environment has become harsh, which means that the competitors have become more particular about competition. So there is the higher possibility of our strength being eroded by our competitors and therefore there are areas where we need to speed up our efforts. So in short, that is my take on the current environment.

 And on capital policy, necessarily, this is very closely related to how we consider the methodology of payback of public funds. Public funds are currently in the form of common shares. That taken into consideration, at any rate, we need to make efforts to increase the share price. This is a sheer fact that we face, and we are thinking of this matter from three directions.

 First of all, the absolute amount of profits have to be increased, which needs not to be mentioned, but what's the business model that could be more highly evaluated, straightforwardly? What's the business model where we can increase the multiples and shift our focus to such business models? Thirdly, one of the draggers of share price to date was probably the level of return to shareholders being extremely low, so those are the three angles from which we are thinking about this matter.

 As far as share buyback is concerned, that is considered in the context of the third axis, and when do we buy back, how many or how much? We can't say that, but we do consider this to be one of our most important agenda items, so we will continue to consider this matter and capture the right timing to implement this initiative. How do we evaluate the most recent share buyback? It was a limited amount of JPY10 billion, so that in itself hasn't transformed the situation. But in terms of the impact to share prices, although we were below the index, share prices have recovered. So to a certain extent, I think there has been certain positive impact in terms of the recovery of share price. So we will continue to consider and implement these initiatives. Thank you.

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 Shinichiro Nakamura,  SMBC Nikko Securities - Analyst   [5]
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 Nakamura of SMBC Nikko. I have two questions. First, on page 23, the grey zone repayment in actual cash flow -- cash out, the difference between the two, the number of claims is down by 21% on a year-end basis, and I think this is reasonable, even compared with the money lenders. But the cash out has not decreased much. This applies to total industry.

 So how this gap will decrease and when this cash out started to decrease, do you have any view on that? Next is the interest income trend on page 8. The others on this sheet are -- I think this is inclusive of these both transactions and the treasury, which are the large decrease. This has more than 3% -- JPY30 billion decrease, and I think this is dragging you.

 So first, because of these portions is decreasing, so probably the decrease will stabilize and purely we will start to see the increase of consumer finance. Is my understanding correct? And in the case of consumer finance, so OBP after net credit, when will it turn positive? So these are my questions. Thank you.

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [6]
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 Well first, on your first question, it's difficult to quantify, but it's a grey zone issue, is the group of the processing of the one -- each transaction. So speed may not match the performance, but first, we are strategically working in this area. So just simply because we've increased on a cash basis, you do not necessarily interpret that is bad.

 Rather, you're just seeing the decreasing trend, and that shows the actual conditions. Do you have anything to add?

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 Masayuki Nankouin,  Shinsei Bank - CFO   [7]
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 As the President mentioned, they show the actual condition, and the processing of the grey zone is progressing smoothly, so the processing amount is almost flat or is showing a slight decrease. But trend wise, number of the claims has a time lag to impact the actual processing amount.

 And regarding the interest income, yes, what we are doing today is shifting to the higher profitable areas, which are consumer finance and structured finance. On the other hand, in this negative interest rate environment, for example, the spread was only 30 basis points, and now it is 10 basis points. Then we should discontinue this, so those are approaching. On the surface, we are reducing such businesses. So as I said, the shift trend will be strengthened or expanded going forward.

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 Takashi Miura,  Credit Suisse - Analyst   [8]
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 Miura of Credit Suisse. About investment in marketable securities, you sold your JGB holdings, and -- you sold JGBs with lower yields. On the other hand, when we look at your balance sheet, the current account at BOJ accounts for much of the deposits, and we've seen an increase. Can't you use this for better investment purposes? And realized gain was enjoyed.

 On page 3, in the challenges for the second half, you mentioned that you cannot expect capital gains to be as high as first half. And I think that's an issue of whether you realize or not, and unrealized has only declined by JPY2 billion. So if you write this intentionally, does that mean that you are thinking about carry towards the future and your intention is not to realize?

 As you proceed into the second half, how do you view the capital gains and how do you think you will be steering the investment of your cash?

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [9]
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 If we exit at the timing we should be exiting, we realized gains, and that gain or proceeds was deposited to the BOJ. There has been significant decline in our JGB holdings. This might not be a preferred expression, but of course tradings could go up and down, and we looked at the timing and closed some of the deals.

 Of course, if there are opportunities, we can tolerate such movements to a certain extent, but long-term interest rate is not moving, fluctuating so much, so I think it would be safer to consider that there will be fewer opportunities. Do we intend to keep the unrealized gains unrealized or realize the gains? We don't think along that line.

 In this kind of business, we have no intention whatsoever to try to depend on this operation in generating profits. Rather, we want to have a bank that doesn't have to rely on these operations to generate profits. So this is like an add on to our profits. So that is the intention behind we say that we're not expecting much in the second half.

 So how do we manage our cash? The deposits to BOJ, there is no deposits that are -- where minus interest rate applies, so the amount of deposits is only reasonable. In consumer finance and structured finance, there are areas where we are seeking growth, and we think that it's very healthy that we spent money on those growth areas. And balance at the end of September, because tentatively the reduction in our JGB holdings had been translated into the increase in deposits at BOJ.

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 Katsunori Tanaka,  Goldman Sachs - Analyst   [10]
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 This is Tanaka at Goldman Sachs Securities. I have two questions. One is regarding the structured finance. The repayment, I think it's easy to understand in this environment, but rather the new disbursements, which areas you're having these disbursements? And currently project finance and non-recourse finance, what's your policy on LTV and what's your view on LTV or interest rate? Who are the borrowers and what is your competition among lenders?

 So could you please give us your comment regarding competition environment? Another question is regarding retail business. The segment disclosure in the retail shows that the loss increased. It's because of the base rate or it's not the problem of base rate, but first of all, this business is a loss-making -- then how much loss can you accept and what is the timeframe you are thinking?

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [11]
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 Thank you. First, regarding structured finance, the new disbursements, well, we used the expression that is relatively performing strongly, but the trend wise actually declined on a year-end basis. All customers in case of a real estate non-recourse finance, so relatively with the high risk and return, such as the opportunity funds.

 So in the current market environment, yen, they have decided it's time to exit. So that's which we are seeing a lot of exits, but whether they don't invest at all, of course, it depends on asset type. The trends differs. So whether it's office building or hotel or the distribution facilities, so looking at the details of the assets some investments are made.

 So unlike the previous cycle, we are not going to too much on the deeper portion, so the spreads are shrinking, some of them -- many of them actually less than 100 basis points, but we are doing the business in a selective manner. And also, we are also accelerating the distributions. That's why the balance is decreasing.

 So assuming the current real estate market, this is quite a natural move, we believe. So balance decrease itself is not a concern, and new disbursements -- it's not that we are doing something there problematic. And in terms of competition environment, other than some banks are actually slowing down, it appears.

 Well, I'm not going to give the specific name of some banks, but the -- actually there are fewer very aggressive banks. And the funds from outside, targeting quality ones, such as core funds, there are quite a large number of such funds, but those targeting capital gains are actually decreasing, we think.

 And regarding the loss at retail business, this is a combination of several factors. One, as you pointed out, the managerial accounting, the setting a base rate has some impacts. First of all, the market rate is extremely low, so what is our internal -- correct internal base rate? It's difficult to set such a rate, so a real funding cost and market rate, the relationship between the two are different from normal times. So whether there should be a base rate, honestly we are still exploring the correct base rate, so the losses does not necessarily show our real power.

 Based on the real power in the retail business, one of the large pillars of the profit is investment products, or asset management products themselves. This is the area that we need to improve.

 Compared to the terrible times several months ago, it is unlikely that we are going to that area, so in that sense, we believe that we are on an improvement trend. But including the FSA, a lot of reforms are being implemented. For example, for the disclosure of the fees, so the profitability per transaction is likely to decrease.

 So we have to stably making necessary initiatives, and of course, we need to improve our core profitability. And another aspect is that the operational efficiency needs to be improved. This is extremely important. As I said earlier, the reforms of the call centers is one of such initiatives, and for example, in the case of retail, the channel's use. The physical, the -- apparently it is not realistic to increase the physical branches, and we do not have many branches, so the -- using video or the virtual branches, how to increase productivity, as such initiatives also needs to be taken in parallel.

 So what's a timeframe to solve this problem? I don't have the clear answer on it, because the funding at retail is the core funding method of the Bank, so in reality, there is no option for us to abolish such option. So through the combination of the initiatives I mentioned, we'll need to improve profitability.

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 Akira Takai,  Daiwa Securities - Analyst   [12]
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 Takai of Daiwa Securities. There are two questions that would go into details. Sorry about that. First of all, full-year guidance, in comparison to the first and second halves, in the first half, the bond gains will be dropped. And also, you cannot expect much gains from securities transactions, and yet in comparison to the first half, you're expecting net profit to increase in the second half, to recover.

 So to the extent possible, you mentioned the performance of each segment. On page 16, you have a segmented breakdown, but if we use this segmentation, where are the segments where you are expecting how much recovery? Can you give the ranking or priority and the top areas in the order where the segments are that you are expecting recovery in the second half? That's my first point.

 And secondly, sorry, again this is a detailed question, you've announced 100% subsidiary of Showa Lease, and on a consolidated basis, you can expect a tax effect from making Showa Leasing 100% subsidiary, but how much tax effect can you expect?

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [13]
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 Thank you very much. The second question will be responded by Mr. Nankouin later, but on your first question, let me try to take that question. Where, in which area, how much recovery are we expecting? It's very difficult to answer that question, but where are the areas we are expecting growth? Then, for one thing of course, retail banking, and Shinsei Financial. And we don't know clearly yet, but if we think about structured finance, structured finance outside of real estate finance is an area where we are expecting growth. So crudely speaking, those are probably the main areas where we are expecting growth, and depending on the market, the market's operations.

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 Masayuki Nankouin,  Shinsei Bank - CFO   [14]
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 Let me take the second question, and as you have rightly pointed out, at consolidated basis there would be tax effect when it's made 100% subsidiary. And in the midterm management plan, this had not been factored into the current fiscal year. it will only be from next fiscal year. If we can make it 100% subsidiary early December then, that will be the timing when the tax effect will take effect, but I will not mention any comments with regards to specific numbers, because it relates to the value of Showa Leasing.

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 Rie Nishihara,  JPMorgan - Analyst   [15]
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 I have two questions. This is Nishihara for JPMorgan. First is regarding the capital policy. You mentioned that the three initiatives need to be taken to increase the earnings and also the business market participation and the shareholders' return.

 Some investors had expected the buyback shares announcement, and once six months is the shown on the other banks' case. So you have just completed share buyback after announcing May. After normalizing situation, it's going to be once a year or -- so after normalizing your business operations, do you have any idea on the share buyback or the shareholders' return? So that is my first question.

 And my second question is regarding page 6, the unsecured loan, which is your driver for growth. So you grow by 12%, which is higher than the market average. It's 9%. So in your explanation, your strengths was explained because you have the know-how of the personal loan companies, but on the macro basis, card loans is increasing and consumer loans is 3%. Why is that?

 And this 12%, which is higher than the market level, is it sustainable? Should we consider that this is sustainable? So these are my two questions. Thank you.

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [16]
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 First, regarding capital policy, because of its nature, share buyback in a medium run is not something that you can announce in a fixed amount or the timing. So yes, we are paying attention to it, but at this moment we cannot say more than that. Once we've decided, we would like to make announcement.

 The policy on the capital management we are discussing internally. As a public fund injected bank, we need to accumulate resources for payment, but because of such a high capital ratio, how we're going to boost our share price and increasing cash return to shareholders and what large acquisitions considered and we are actually discussing internally, the capital to support the business and the capital to be used for the public funds repayment and also capital to be used -- or can be used in a more flexible manner.

 These, after developing a lot of frameworks, for the reasonability, we need to gain consensus of the concerned parties, and such discussions are made internally. I hope I answered your question.

 And regarding the consumer finance, it is true that if you look at the breakdown, the bank loans are making significant growth, but this is stabilized currently, but the personal loan companies started to pick up after the big dip. But the level wise, the loans from the bank is increasing. That has not changed.

 But this industry, whether we offer the money directly or we give the credit guarantees separate from that, the basic skills, the several personal loan companies have such skills, and because we are doing this as one entity, so we are proving -- and that is a know-how that we have accumulated.

 So a lot of the reasonability and merits of doing this as a combination, it is difficult to clearly define them now, but I think we are seeing a lot of such effects.

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 Katsuhito Sasajima,  Mitsubishi UFJ Morgan Stanley - Analyst   [17]
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 Sasajima of Mitsubishi UFJ Morgan. On page 18, Shinsei Ginkou Lake's new customer acquisition numbers are plotted. At a glance, there seems to be some seasonality where the number dips in the quarter between October and December. If you divide back, you will probably be able to get the number of applications, but is there seasonality?

 If there is, then are there measures to offset such seasonality? Yes, please.

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 Hideyuki Kudo,  Shinsei Bank - President and CEO   [18]
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 Seasonality, same applies to December, but in June, the quarter where there is a bonus, consumers tend to become cash rich, so that leads to a decline in lending, and this is something basic. So it's very difficult to keep these quarters at the same level as other quarters.

 Rather, we should be focusing on capturing the cash requirements of our customers. As a strategy, that's a more important factor.

 We have passed the scheduled time, so we'd like to conclude today's analyst meeting. Thank you very much for attendance despite your busy schedule.

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Editor   [19]
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 Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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