Q1 2019 Shinsei Bank Ltd Earnings Call

8303.T - Shinsei Bank Ltd
Q1 2019 Shinsei Bank Ltd Earnings Call
Aug 01, 2018 / 07:30AM GMT 

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Corporate Participants
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   *  Hiroshi Ishii
      Shinsei Bank, Limited - Head of IR
   *  Shouichi Hirano
      Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance

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Conference Call Participants
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   *  Akira Takai
      Daiwa Securities Co. Ltd., Research Division - Chief Analyst
   *  Shinichiro Nakamura
      SMBC Nikko Securities Inc., Research Division - Senior Analyst
   *  Yoshinobu Yamada
      Deutsche Bank AG, Research Division - MD and Senior Analyst of Banking

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Presentation
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 Hiroshi Ishii,  Shinsei Bank, Limited - Head of IR   [1]
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 This is Group Corporate Planning and Investor Relations. My name is Ishii. Thank you for attending our conference call today.

 As usual, first at the beginning the IR Director, Mr. Hirano will give you the overview of the financial results based on the presentation material followed by your questions.

 So let's begin. So Mr. Hirano will give you the overview of the financial results using the presentation material.

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [2]
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 This is Hirano of the Shinsei Bank Group in charge of investor relations. Thank you very much for attending our conference call regarding our first quarter financial results. The FY 2018 first quarter results will be explained based on presentation material. And the presentation will be followed by your questions.

 First, please go to Page 3 of the material. First radio point -- there are 3. First, ordinary business profit or OBP totaled JPY 22 billion. Over the -- toward the annual target, the progression is 24%. We recorded JPY 56.9 billion total revenue and the JPY 34.8 billion of total expenses, both are at the 24% progression toward full year projection, which made a good start. Expense-to-revenue ratio improved to 61.2% and which declined from -- on [year-on-year] basis. The revenue from the core business performed steadily.

 Second, net income was JPY 9 billion, which is 17% progression towards full year net income forecast. This includes the net credit cost which is a 18% increase, which is JPY 10.7 billion. The details of the net credit cost is explained later. It includes some onetime factor. Toward the full year target, the progression rate was high. However, this is almost in line with our expectation. The 17% progression of net income was due to the net credit cost which, I've explained. JPY 34 billion for net credit cost projection as well as the JPY 52 billion for your net income projection, we do not expect material impact on them.

 Third is regarding Lake ALSA. The number of new Lake ALSA customer acquisition was 23,000 and approval ratio was 28.9%. Lake ALSA faced the necessity of distinction between Lake ALSA and old Bank Lake as well as challenges in navigating new customers to the new website, which invited fewer applications and the lower credit score applicants. Various measures are being taken to fully bring out the potential performance of the Lake brand, so we are expecting a recovery going forward.

 Next slide, Slide 4. This slide shows a summary of the FY 2018 first quarter financial results. So please take a look at this slide later.

 Next, please go to Slide 5. This is regarding net interest income and noninterest income. Net interest income was JPY 33.4 billion, which increased 5% on year-on-year basis. Net interest income from unsecured loans increased 4% to JPY 17.5 billion.

 Noninterest income was JPY 23.4 billion, which declined by 10% on year-on-year basis. This mainly reflects lower derivative-related income in institutional business and low equity-related income in the principal transactions.

 Slide 6. This is about the net interest margin. Improvement in yield on loans primarily contributed to increase in yield on total interest-earning assets. So the interest margin was 2.74%, which rose by 6 basis points.

 On the funding side, for the -- as foreign currency assets have been growing, we increasing foreign currency funding through currency swaps in order to immunize themselves from maturity debt risk. So the rate on interest-bearing liability increased by 1 basis point to 0.27%, as a result, net interest income improved by 5 basis points to 2.47%.

 Next, please go to Slide 7. This is regarding expenses. Both the personnel and nonpersonnel expenses declined, resulting JPY 34.8 billion. Expense-to-revenue ratio continuously improved to 61.2%.

 Please go to Slide 8. Slide 8, this is regarding net credit cost. Net credit cost on year-on-year basis increased by 18% to JPY 10.7 billion. As explained and key points. Structured finance net credit cost increased. This is from the real estate finance and shipping finance. This is due to the disbursement of new overseas loans, accordingly with provision in general reserve for those loans.

 Increase in APLUS FINANCIAL net credit cost. This is due to the -- in addition to the positioning, there is a bulk sales of delinquent claims. So the net credit cost ratio increased to 1.8%. However, if you exclude this, the ratio would have been 1.2%.

 On the other hand, net credit cost ratio of unsecured loans decreased to 3.6%, resulting from decline in net credit cost related to decrease in unsecured loan balance from March 2018.

 Please go to Slide 9. This slide explains capital adequacy. On a fully loaded international basis, common equity Tier 1 ratio was 12.3%.

 Please go to Slide 10. This slide explain the Kabarai or excessive interest repayment. The number of disclosure claims and the actual repayments slightly increased from the latest quarter ended March 31, 2018, due to some advertisement of some law firms. However, the overall trend continue to decline.

 The total green zone reserve is JPY 70.9 billion worth -- 4.8 years' worth of coverage ratio. We believe this is sufficient.

 Lastly, business overview covers the unsecured loans and structured finance.

 Please go to Slide 12. This is regarding unsecured loan business. Unsecured loan balance increased 4% from June 2017. However, loan balance of Lake business slightly decreased from March 2018, influenced by slow start of new customer acquisition of Lake ALSA. The loan balance of Lake ALSA on a standalone basis stood at JPY 4.6 billion.

 On the P&L, the interest income increased and due to decreased net credit cost, the OBP after net credit cost was JPY 4.6 billion which is up 171% from first quarter 2017. In the business performance, the number of new customer acquisition was 23,000 and approval ratio was 28.9%, a slower growth rate as compared to the last fiscal year.

 As I explained in key points, Lake ALSA felt a necessity of distinction between Lake ALSA and old Bank Lake and challenges in navigating new customers to the new website, which invited fewer applications and low credit score applicants. And various measures are being taken to fully bring out potential performance of Lake brand, such as reviewing website content to smoothly navigate new customers and further enhancement of advertisements to improve situation.

 Please go to Slide 13. So allow me to explain about the structured finance business. Structured finance asset's balance increased to 7% from June 2017. As for P&L, decrease in OBP after net credit costs reflects an increase in the net credit cost related to overseas new transactions in real estate finance and shipping finance.

 In terms of the business performance among some new commitments in project finance increased, reflecting ongoing momentum in the domestic renewable energy projects area. In real estate finance, the amount of disbursement decreased in the first quarter of fiscal 2018 compared to the same period last year due to absence of sizeable deals as concluded in the first quarter 2017, but we continue prudent operation considering market, risk-return of individual deals and diversification of -- in the real estate finance.

 This concludes my presentation of the first quarter results.

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 Hiroshi Ishii,  Shinsei Bank, Limited - Head of IR   [3]
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 Thank you very much. So from now on, we would like to entertain questions from the investors.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Question please.

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 Shinichiro Nakamura,  SMBC Nikko Securities Inc., Research Division - Senior Analyst   [2]
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 SMBC Nikko. My name is Nakamura from SMBC Nikko and I'd like to ask 2 questions. First is about the credit cost that you mentioned that is in line with the plan. The 32% increase in the first quarter as they progressed and as compared to last year. Although could you please explain a little bit more about the progress, because structured finance balance and reserve ratio is very stringent, so by reduction such the reserve, will there may be some reversal in the second quarter? And also, the consumer financing, their balance is expected to increase in the future, so the equity balance -- the balance of the increase may not be in line with the plan, so including the structured finance as well. Could you please add a little bit of more explanation about these points? That's number one. And number two, as much as you can provide information to us, first quarter, new customer acquisition in the first quarter, this is, as you had mentioned, the 23,000. So the -- it is slower as compared to last year, but on a monthly basis, April, May, June, what's the trend of new customer acquisition? Just the image is okay, if specific numbers are difficult to disclose. So I would like to get a sense. And in July, if possible, just the image is okay or the roundpark or the broad figure is okay, but what is your understanding about the July situation? So these are 2 questions.

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [3]
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 Thank you very much Mr. Nakamura for your questions. So you asked 2 questions. First of all, the credit cost. Progress is 32%, but the full year plan, are we able to achieve the full year plan with this progress as of the first quarter, so that was your point about the first question. Structured finance business in the area and overseas, their projects and reserve for that, originally the number of projects was not very large or high, that was the second point. So as a result as compared to domestic transactions, so we tended to be more conservative when it comes to reserving for the overseas project. Well, the -- we are rebuilding the expertise, experience with overseas projects and we hope to be more accurate in provisioning the reserve for the overseas projects, that's what we are doing right now. And another point about that was in the first quarter this year -- the factors were not conducive during the first quarter, so this is the official factor which is the one of the element. So they really have one of factor included in the (inaudible) reserve in the first quarter. And secondly, by the trend of the new customer acquisition -- so active numbers, specific numbers, I -- well, we are not disclosing it and I hope you understand. But in April-May, the number is increasing, new customer acquisition. As for June, it is the time of bonus payment, so the -- it is not that we will see significant jump in June. But from the second point, that we see the general constant trend in the -- of increase in terms of the new customer acquisition. Did I answer your question? So the credit cost once again, I would like to confirm, so APLUS business JPY 2 billion, [fee simulation] JPY 2 billion, so that's one-time factor. So if we deduct that, then JPY 8.7 billion or so that is the remainder.

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 Shinichiro Nakamura,  SMBC Nikko Securities Inc., Research Division - Senior Analyst   [4]
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 That much I understand. But I'd like to ask you is -- so the execution, the balance is going to increase in the consumer financing business towards the end of the year and is the current progress sufficient in terms of the full year. Also you mentioned that it is okay, you are in line with the plan and the execution this year is different from what we experienced last year.

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [5]
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 Yes, of course, your analysis is correct. And also structured finance part, it is within our expectation and anticipation -- within the scope of our original expectation. And we can say that we -- that it is okay to go ahead with this geared towards the achievement of our full year plan. But the overseas projects and the reserving for that we are -- right now we are studying the accuracy of the reserve before the overseas structured finance.

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 Shinichiro Nakamura,  SMBC Nikko Securities Inc., Research Division - Senior Analyst   [6]
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 And consumer finance also even if there are new business increases, it is within the scope of your plan on a full year basis?

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [7]
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 Yes, we are in line with the plan, but with the potential increase in mind. Next question please.

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Operator   [8]
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 Yamada of Deutsche Securities.

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 Yoshinobu Yamada,  Deutsche Bank AG, Research Division - MD and Senior Analyst of Banking   [9]
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 I have 2 questions. Sorry for asking frequently but the cost of finance in overseas, if you think normally, you said that this is going to improve the estimation, so why you take such risky loans. Total structured finance, revenues declined. So going forward in overseas for the credit method, what's your policy on credit for the overseas structured finance? And second point is regarding Kabarai or excess interest really. So you said that there is increase for -- at particular law firm, does that apply for this quarter only or that you expect an increase going forward or the repayment? The borrower industry -- it is the impression that it has hit the bottom, but do you expect any increase going forward?

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [10]
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 Thank you very much Yamada San. The first question is regarding the project finance in overseas. If you look to close to large amount of the reserve such as profitability, I think that's a question. Rather than the profitability declining, originally where we grant new loans, we have very conservative reserve positioning. So it doesn't mean that we are doing bad ones. Normally expertise and track record until we accumulated them, we are responding in a conservative manner. And to your second question, the 2 law firms -- to trend at that the 2 law firms. It's not that they are increasing significantly. So the market responses weak and we believe that the impact on us is weak. Thank you very much.

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Operator   [11]
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 (Operator Instructions)

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [12]
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 If there is no more questions...

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Operator   [13]
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 Please wait a moment. It seems that we received a question. (Operator Instructions) Next question please.

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 Akira Takai,  Daiwa Securities Co. Ltd., Research Division - Chief Analyst   [14]
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 My name is Takai from Daiwa. As the core business, the derivative related institutional business or structured finance derivative related businesses seem to be a little weak -- weaker. And what do you think is the background of that weakness of those institutional businesses? That's number 1. Number 2, a little technical matter, but the subsidiary dividend payout was lower, so the profitability of the nonconsolidated -- the other part of the business seems a little weaker. Of course, this is the -- it is up to you to decide the level of the dividend from the subsidiaries. But are there any technical reasons for that? So these are 2 questions I want to ask you.

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [15]
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 Thank you very much, Ms. Takai. First of all, derivative -- the income seems to be a little weaker that's your question number 1. So the institutional business in the foreign exchange derivatives and the transactions that were the -- is the driver of the income. And in the first quarter market was not moving very dynamically and there wasn't much interest on the -- among the clients or the customers. However, so the influence of the pipeline, we have ample in the business in the pipeline. So I think it's just a matter of timing. And the structured finance business, interest rate swap, for example. The structured finance -- the project, they will bring about such businesses. So in the second quarter this year, we expect and the income from that source as well. So first quarter -- looking at the just the first quarter, it looks a quite apparent that we are not a very concerned about the future prospects. As for the second point, the nonconsolidated -- the business performance. Just like the consolidated performance, the progress seems a little slow.

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 Akira Takai,  Daiwa Securities Co. Ltd., Research Division - Chief Analyst   [16]
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 But nonconsolidated -- will be a dividend from a subsidiary. So there any reason for this slower payment from the subsidiaries?

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [17]
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 No, not so. Well, this will be the nonconsolidated the other financial performance and the -- in our revitalization plan we do not have a concern about the progress of nonconsolidated business.

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Operator   [18]
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 (Operator Instructions)

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 Shouichi Hirano,  Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance   [19]
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 Since we do not have any more questions, so please -- thank you very much for attending our conference call regarding our first quarter financial results announcement. Even if you don't have a question now, individually please send us or contact the Group Investor Relations too, if you have any questions. Thank you very much for today.




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