Aozora Bank, Ltd. (8304) Earnings Call Transcript & Summary

Welcome to Aozora's Fiscal Year 2019 Financial Results Conference Call. Before we go further, I'd like to review the safe harbor statement. Some of the matters that we will discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risks and uncertainties, and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements are valid only on the date on which they are made, and Aozora Bank undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. Please note that this presentation is not an offering of any securities of the bank and should not be so construed in any jurisdiction or for any purpose. Thank you. Hiroyuki Kajitani, General Manager, Corporate Communication division, will now provide you with a review of the FY 2019 financial results. Kajitani-san?

Thank you. Before we review the results, I'd like to take a moment to convey that our entire management team wishes to express our deepest sympathies to those families who have lost a loved one to COVID-19 as well as our hopes and prayers for those individuals currently undergoing medical treatment, while also acknowledging the adverse impact this pandemic has had on families and our communities. We'd also like to take a moment to extend our recognition and deep sense of gratitude to all of the medical professionals working in a determined fashion to care for the affected members of our societies and to limit the further spread of this pandemic. Turning now to our fiscal year 2019 results. While Japan's economy began the year with some positive momentum, the COVID-19 pandemic that soon spread across the world, created sharply elevated levels of volatility in most financial markets as well as sudden drop in global economic activity. The spread in severity of these events, in turn, created widespread concerns over a further deterioration in economic and market conditions. In the face of these challenges, for fiscal year just ended, Aozora was able to report net revenue of JPY 95.7 billion, above our original forecast, mainly due to a strong level of customer base transactions. However, net earnings for the year were only JPY 28.1 billion, below our original forecast, largely due to our decision to set aside a strong level of loss reserves against the potential adverse impact of COVID-19 on our customers' credit quality as well as on broader economic conditions. In consideration of the relative business performance achieved this past year, but while also recognizing our strong capital and financial position. For fiscal year 2019, our Board has decided to declare a full year dividend of JPY 156 per common share, equal to our original forecast, despite this past year's earnings falling before the original forecast. Our new midterm plan for 2020 to '22 entitled Aozora 2022, was also announced today and is the result of an internal review completed 1 year ahead of schedule in response to significant changes in the business environment. Looking ahead, you can expect that we'll remain committed to enhancing our business performance through the ongoing refinement of our business model based on our 6 areas of focus as well as implementing new initiatives for growth, established on a foundation of sound risk-taking and strong risk controls. On behalf of the management team at Aozora, at this time, I'd like to express our appreciation to all of our stakeholders for their understanding and continued support. Let me now turn to a more detailed discussion of our results for fiscal year 2019 by reviewing the breakdown of revenue and expenses included on Page 5 of today's earnings release. For fiscal year 2019, net revenue was JPY 95.7 billion, an increase of JPY 11.8 billion over last year. General and administrative expenses were JPY 53.3 billion, an increase of JPY 3.9 billion. And business profit was JPY 42.3 billion, JPY 7.9 billion higher than last year. Credit-related expenses were a net expense of JPY 11.7 billion, mainly due to loss reserves established during the fourth quarter as a result of the potential impact of COVID-19 on customer credit quality and broader business conditions. Gains and losses on stock transactions were a gain of JPY 11.6 billion, and taxes were a net expense of JPY 17.7 billion. As a result of the factors that I just touched upon, net earnings for the full year were JPY 28.1 billion, a decline of JPY 7.9 billion from last year. Next, let me touch upon several of the more significant items included in today's earnings release. Please now turn to Page 6. As you can see towards the top of this page, net interest income was JPY 48.7 billion, a decrease from last year of JPY 1.4 billion. Interest income decreased by JPY 2 billion, mainly due to a JPY 4.7 billion decline in interest and dividends on securities, which were -- which more than offset the JPY 2.2 billion increase we saw in interest on loans and discounts. Domestic loans increased, while at the same time, we were able to modestly expand our domestic lending margins primarily within our specialized finance area despite the sustained level of low interest rates here in Japan. The decline in interest and dividends on securities was largely due to a JPY 3.6 billion decline in gains from the early redemption of private equity investment trusts. For funding costs, interest expense decreased by JPY 0.5 billion from last year, largely the result of a decrease in foreign currency funding cost. While not specifically mentioned in today's release, excluding the impact of the lower level of gains from the early redemption of private equity investment trusts, net interest income would have increased by approximately JPY 2.1 billion. Within the yield on total investments, the yield on loans declined due to the lower U.S. dollar market interest rates, which offset the positive impact of higher loan yields we were able to achieve here in Japan. On our securities portfolio, the average yield on securities declined, which was the result of a lower level of realized gains from the early redemption of private equity investment trusts. Overall funding cost decreased compared with last year as both foreign currency as well as domestic funding costs trended lower. As you can see at the bottom of the table, the net interest margin narrowed by 11 basis points to 1.14%. While not included on this page, I'd like to add that excluding the effective gains from the early redemption of investment trust, the net interest margin would be at roughly the same level as last year. Please now turn to Page 7. As you can see in the table at the top of Page 7. Although net fees and commissions were down slightly to JPY 12.6 billion, loan-related fees remained relatively strong due to our ongoing success in delivering high value-added financing proposals to our corporate customers. For your reference, total earnings from the sale of investment products to our retail customers, including earnings from the sale of structured bonds included in net trading revenues, were JPY 8.7 billion, up JPY 3.1 billion when compared with last year. While gains from the sale of structured bonds remained relatively strong, earnings from the sale of both investment trust and insurance declined compared with the prior year. Net trading revenues were JPY 18 billion for the full year, an increase of JPY 9.7 billion. Including the previously mentioned gains from the sale of structured bonds, the increase was mainly due to a high level of gains associated with the sale of derivative related products to our corporate and financial institution customers. Our trading business also benefited and experienced a higher level of customer generated transactions compared with last year. Please now turn to Page 8 of today's news release. Gains and losses on bond transactions were a net gain of JPY 14.5 billion, an increase of JPY 9.6 billion versus last year. The level of gains was mainly due to gains recorded on the sale of U.S. government bonds and REITs in response to changes in market conditions. And other ordinary income, excluding gains and losses on bond transactions, was JPY 1.6 billion, down JPY 5.7 billion versus last year, mainly due to hedging costs in our financial markets business during the fourth quarter as well as being compared against the relatively large nonrecurring gains recorded last year. That being said, gains from limited partnerships were relatively strong at JPY 7.4 billion for the full year despite of the slowdown witnessed in the latter half of the fourth quarter due to deteriorating market conditions. As a result of the individual revenue items I've just touched upon, consolidated net revenue for fiscal year 2019 came to JPY 95.7 billion, of which noninterest income was JPY 46.9 billion, an increase of JPY 13.3 billion compared to last year as indicated on Page 5 of today's release. At the bottom of Page 8, you can see the general and administrative expenses were JPY 53.3 billion, up JPY 3.9 billion from last year and very close to the original full year plan. The increase in expenses was mainly due to incremental costs associated with GMO Aozora Net Bank as well as the launch of our new retail banking money service smartphone app, called BANK. Our overhead ratio or OHR was 55.8%. As a result of the factors I've just touched upon, business profit for the full year was JPY 42.3 billion. Please now turn to Page 9. Credit-related expenses for the full year were JPY 11.7 billion, largely due to loss reserves we established during the fourth quarter in light of the potential negative impact of COVID-19 on customer credit quality and overall business and economic conditions. This action more than offset the positive impact of the reversal of general loan loss reserves, reflecting our lower historical loan loss experience. Ratio of loan loss reserves to total loans remained relatively high compared with other major banks at 1.82%, an increase of 41 basis points compared to December 31, 2019. Gains and losses on stock transactions were a gain of JPY 11.6 billion and taxes for the interim period were a net expense of JPY 17.7 billion. As a result of all the factors I've just highlighted, net earnings for the full year were JPY 28.1 billion. In terms of our financial position, a summary balance sheet appears on Page 10 and a breakdown of the major balance sheet components is included on Page 11 and 12. Starting on Page 11. Total core funding, which includes deposits, negotiable certificates of deposit, debentures and bonds, was JPY 3.6 trillion, an increase of JPY 142.1 billion from March 31, 2019. As many of you are aware, through the years, we've prioritized the further strengthening and diversification of our funding base. Most recently, this work has included the launch of a new retail banking smartphone app, called BANK, which resulted in higher than originally expected growth in new customer based transactions. This has also contributed to a high level of retail funding, while the percentage of retail funding to total core funding was 57%. Turning now to the asset side of the balance sheet. Loans ended the quarter at JPY 2.9 trillion, an increase of JPY 174.2 billion from March 31. Domestic loans increased by JPY 181.8 billion during the fiscal year as we maintained our usual focus on striking the right balance between risk and return while also responding to our customers' financing needs. Our overseas loans outstandings were at JPY 7.6 billion lower compared with the start of the fiscal year primarily due to our intent this past year to selectively rebalance a portion of our North American corporate loan exposure in order to improve overall asset quality and reduce downside risk exposure. The ratio of overseas loans to total loans ended the year at approximately 37 point percent, down a bit from last year due to the growth in domestic loan balances, coupled with a lower level of overseas loans. For a review of our securities portfolio, please now turn to Page 12. The securities book totals just over JPY 1 trillion, a decrease of JPY 167.1 billion from March 31, 2019. The overall change was mainly due to a decrease in the balance of foreign bonds and ETFs. Total unrealized gains on securities were a net loss of JPY 18.6 billion as of March 31, 2020, mainly due to the decline in financial market valuations we observed towards the end of fiscal year. During the fourth quarter, we wrote off approximately JPY 500 million in impaired asset resulting from the sharp decline in market valuations. That being said, our current unrealized gains and losses position has returned to a net gain due to the subsequent recovery in market conditions. As always, we maintain our commitment and focus on disciplined risk management while carefully monitoring market trends and striving to ensure stable earnings through risk diversification. Please now turn to Page 13. Nonperforming claims were JPY 28.3 billion, an increase of JPY 12.7 billion from March 31, 2019. The increase here was largely due to the addition of JPY 4.4 billion in bankruptcy-related recovery finance investments, a long-standing line of business at Aozora. As a result of the increase, the FRL ratio increased by 0.4 points to 0.95%. On a preliminary basis, our consolidated capital adequacy ratio was 10.29%. Though we were subject to Japan domestic standard, for reference purpose, we also disclose our CET1 ratio, which is based on international standards. Our CET1 ratio as of March 31 was approximately 8.7%. For the fiscal year 2019 dividend payment, please now turn back to Page 3 of today's earnings release. As our CEO, Baba-San mentioned in today's earnings release, despite net earnings ending below our original forecast, which again was mainly due to our decision to provide a conservative allocation of reserves, and in view of relative business performance achieved this past year, and a strong financial condition, management and the Board have made the decision to declare a full year dividend of JPY 156 per common share for fiscal year 2019, equal to our original forecast. We'll continue to make dividend payments quarterly. And because total dividends per share for the first 3 quarters totaled JPY 117, the fourth quarter dividend per share will be JPY 39. This will take us to JPY 156 for the full year. Let me now turn to the fiscal year 2020 earnings and dividend forecast contained on Page 4 of today's release. For the fiscal year 2020 earnings forecast, net revenue is projected to be JPY 90 billion; business profit, JPY 34.5 billion; and net earnings, JPY 28.5 billion. As you can see, net revenue is forecast to be somewhat lower than this past year due to the risks and uncertainties within our operating environment as well as an anticipated increase in expenses mainly from strategic investments within our specialized areas, growth at our internet subsidiary as well as IT related investments. Our management is targeting net earnings somewhat above fiscal year 2019's level as we expect a certain level of equity-related gains. We plan to continue providing returns to our shareholders, primarily in the form of cash dividends based on our earnings results. Our intention is to deliver a cash dividend consistent with our earnings with a target dividend payout ratio of 50%. Our full year dividend forecast for fiscal year 2020 is JPY 122 per common share, and it's based on a net earnings forecast of JPY 28.5 billion with a payout ratio of 50%. For fiscal year 2020, the dividend policy based on a dividend payout ratio of 50% will be flexibly managed, along with maintaining our full year dividend forecast of JPY 122 in light of the uncertain economic environment. We do intend to continue our policy of paying dividends on a quarterly basis. In conclusion, we'd like to thank each of you for setting aside some time today and for your ongoing interest in Aozora Bank. As always, our management team remains committed to delivering products and services that meet the needs of our customers and achieving our financial targets while maintaining our ongoing focus on disciplined risk management. Your continued interest and support is greatly appreciated. Thank you for your time today. We hope that you, your family, friends and colleagues remain safe and healthy until we speak again. That concludes our call for today.