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

Welcome to Aozora's Fiscal Year 2020 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 Communications Division, will now provide you with a review of the fiscal year 2020 financial results. Kajitani-san?

Thank you. I want to thank everyone for joining us today for our fiscal year 2020 financial results teleconference. I'd also like to once again thank all of our shareholders and analysts for their continued interest and support. Let me now turn to a detailed discussion of our results for fiscal year 2020 by reviewing the breakdown of revenue and expenses included on Page 3 of today's financial results overview. For fiscal year 2020, net revenue was JPY 96.5 billion, an increase of JPY 0.8 billion from last year. Business profit was JPY 42.6 billion, an increase of JPY 0.3 billion, and bottom line net earnings were JPY 28.9 billion, an increase of JPY 0.8 billion. In addition to the year-on-year increase, each of these results represented progress with more than 100% of the full year forecast. Next, let me touch upon several of the more significant items included in today's earnings release. Please now turn to Page 4. Net interest income was JPY 50 billion, an increase of JPY 1.2 billion from last year, mainly due to improved lending margins and lower foreign currency funding costs. Turning to Page 5. As you can see at the bottom of the table, our net interest margin narrowed slightly by 4 basis points to 1.1%. The main factor was a lower level of dividends, mostly as a result of rebalancing our foreign currency ETFs. On the other hand, lending margins expanded by 10 basis points compared to the previous year, mainly due to lower basis swap spreads related to foreign currency funding. Please now turn to Page 6. Noninterest income was JPY 46.4 billion. Despite the negative impact on certain business areas in the first quarter, we experienced a recovery in customer-based transactions from our retail and corporate and financial institution customers from the second quarter onwards, which led to the stronger results. For a breakdown of noninterest income, please now turn to Page 7. Net fees and commissions were JPY 12.4 billion. Loan-related fees for the full year saw a relatively strong performance, on par with recent years, mainly due to a higher level of LBO finance activity. Net trading revenues were a gain of JPY 13.4 billion. Starting from the second quarter, we saw an encouraging level of recovery in transactions from our retail and corporate and financial institution customers, which also led to strong results in our trading business. Earnings from the sale of investment products to retail customers, mainly in the sale of structured bonds, increased starting in the second quarter, leading to a strong full year result. Please turn to Page 8. Gains and losses on bond transactions for the full year were a gain of JPY 8.1 billion. During the fourth quarter, we rebalanced our U.S. government bond, mortgage bond and foreign currency ETF positions in order to secure future income. Gains and losses on bond transactions were only 8% of net revenue for the full year. Please now turn to Page 9. Net other ordinary income, excluding gains and losses on bond transactions, was JPY 12.4 billion. Gains from limited partnerships increased by JPY 0.8 billion to JPY 8.2 billion. Excluding limited partnerships, in the fourth quarter, we recorded approximately JPY 4 billion in recoveries of write-offs related to past hedge fund investment. Please turn to Page 10, where you'll find a breakdown of gains and losses on equity method investments related to OCB, a midsized commercial bank based in Vietnam, in which we made an investment in June 2020. You'll also see here our gains and losses on stock transactions. Gains and losses on equity method investments for the full year were a net gain of JPY 1.1 billion and included contributions from OCB's net profit from the July-December period in 2020. Gains and losses on stock transactions were a gain of JPY 2.3 billion, which included gains from the sale of foreign equities in the first quarter and third quarter in comparison to a gain of JPY 11.6 billion in the previous year. No gains and losses on stock transactions were recorded in the fourth quarter. Please now turn to Page 11. General and administrative expenses were JPY 54.9 billion, up JPY 1.5 billion from last year. The increase in expenses was mainly due to expenses associated with the commencement of operations at our New York-based U.S. subsidiary last September as well as other system-related investments. G&A expenses were 98% of the full year budget of JPY 56 billion as we continued our focus on cost control. The overhead ratio, or OHR, was 57% compared to a full year forecast of 62%. On a nonconsolidated basis, the OHR was 50%. Please now turn to Page 12. Credit-related expenses were a net expense of JPY 4.3 billion. Additional provisions were made to loan loss reserves in order to cover borrowers with a higher potential for delayed business recovery in light of the impact of COVID-19. In addition, conservative allocations were made to the bank's credit portfolio in the fourth quarter of fiscal year 2020 against overseas real estate nonrecourse loans, mainly office buildings. Full year credit costs were 15 basis points against the initial estimate of 10 basis points, mainly due to the actions I've just mentioned. Full year credit costs for fiscal year 2021 are estimated at 10 basis points. The ratio of loan loss reserves to total loans was 1.72% as of March 31, 2021. For your reference, the overseas loan loss reserve ratio was approximately 2.7%. Please now turn to Page 13. FRL claims decreased by JPY 2.6 billion compared to March 31, 2020, and the ratio of FRL claims to total claims was 0.86%. I'll now provide some highlights on our balance sheet, starting on Page 15. Total core funding was an increase of JPY 554 billion from March 31, 2020. The increase was mainly due to our Internet channel retail banking smartphone app, which was an important driver behind the further expansion of retail customer deposits. In addition, we issued our first U.S. dollar-denominated green bond in March 2021 as a way to diversify foreign currency funding as well as promote sustainability. Please now turn to Page 16. Domestic loans increased by JPY 65.5 billion compared to the previous year, mainly due to the origination of LBO loans. Lending margins expanded compared to March 31, 2020, as a result of the origination of high value-added financing transactions. Please now turn to Page 17 for a breakdown of overseas loans. Overseas loans decreased by JPY 70.8 billion from March 31, 2020. This was mainly the result of rebalancing the bank's North American corporate loan exposures in the first half, along with the scheduled repayment of overseas real estate nonrecourse loans. The percentage of overseas loans to total loans was 34.4%. Please turn to Page 18 for more information on our North American corporate loan exposure. As you can see in the chart on the bottom right-hand side, the quality of our loan portfolio improved with an increase in the share of relatively higher credit ratings in the portfolio as a result of the aforementioned rebalancing. In addition, loan prices recovered and exceeded pre-COVID levels. We resumed our policy of selective origination in the second half and will continue to accumulate higher quality investments. Page 19 contains information about our overseas real estate nonrecourse loan portfolio. Loan balances decreased by JPY 17.1 billion as we continue to focus on disciplined risk management. The commercial real estate portfolio had an average LTV of 76% as of March 31, 2021, based on our internal appraisal, reflecting current market trends and outlook. LTVs continue to be more than adequate to provide a strong measure of credit quality protection. In addition, as previously explained on Page 12, we made conservative allocations to loan loss reserves in the fourth quarter, which we believe allows us to absorb a certain level of possible further decline in real estate collateral values. We currently expect that the cash flow of our U.S. office building loan portfolio will maintain its recovery trend due to encouraging signs, such as the rollout of COVID-19 vaccinations. While we recognize that demand remains uncertain, we will continue to pay close attention to the trends in the U.S. office market over the long term, and we intend to continue to improve the monitoring and our focus on disciplined risk management. Please turn to Page 20. In Japan, most real estate nonrecourse loans are office, residential, warehouse buildings focused mainly in the Tokyo Metro area. Real estate nonrecourse loans, excluding REITs with an LTV of 70% or below, represented approximately 90% of the portfolio. We'll carefully manage each of these portfolios while continuing to monitor rental market trends. For a review of our securities portfolio, please now turn to Page 21. Securities were an increase of JPY 319.6 billion compared to March 31, 2020. Total unrealized gains were JPY 42.8 billion, an improvement of JPY 61.4 billion from March 31, 2020. Please now turn to Page 22. While our VaR increased due to higher market volatility, securities-related gains and losses, which is a sum of realized and unrealized gains, improved overall. As always, we'll continue to strive to ensure stable earnings through risk diversification. Please now turn to Page 23. GMO Aozora Net Bank's corporate account openings increased at a strong pace, while API connection contracts increased significantly. As you can see in the left-hand graph, GMO Aozora Net Banks's quarterly net revenue continued to expand, and business profit for fiscal year 2020 saw higher-than-expected results. We'll continue to expand GMO Aozora Net Bank's business and accelerate the growth of its profitability through the active development of products and services aimed at small businesses and startups as well as fostering of alliances with other companies. Please now turn to Page 24. As mentioned on Page 10, Aozora took a minority investment in OCB. Since that time, we've established a Japan desk at OCB, which provides support to Vietnamese-based Japanese corporations, while promoting multiple business endeavors, including the M&A business throughout Vietnam. Please now turn to Page 25 for an overview of our KPIs, which we set as part of our midterm goals. Aozora's OHR, business profit ROA and ROE for fiscal year 2020 all exceeded the average of the major banks. Our management will strive to further improve profitability and efficiency in order to meet our midterm goals. Please now turn to Page 26. On a preliminary basis, our consolidated capital adequacy ratio was 11.03%. Although we are subject to the Japan domestic standard, for reference purposes, we also disclose our CET1 ratio, which is based on international standards. Our CET1 ratio was approximately 10.5%. Please now turn to Page 27. As I mentioned earlier, as a result of our favorable business results, we announced a full year dividend of JPY 124 per common share, JPY 2 higher than our full year dividend forecast of JPY 122 per common share. As previously noted, we'll continue to make dividend payments quarterly. And because total dividends per share for the first 3 quarters totaled JPY 90, the fourth quarter dividend per share will be JPY 34. Let me now turn to the fiscal year 2021 earnings and dividend forecast contained on Page 2 of today's presentation materials. For the fiscal year 2021 earnings forecast, net revenue is projected to be JPY 97 billion; business profit, JPY 42.5 billion; and net earnings, JPY 30 billion. As you can see, net revenue is forecast to be somewhat higher than this past year. Business profit is expected to be in line with last year, primarily due to an anticipated increase in expenses, mainly from strategic and growth investments within our specialized areas. Our management is targeting net earnings 4% above FY 2020's level. Our full year dividend forecast for fiscal year 2021 is JPY 128 per common share and is based on a net earnings forecast of JPY 30 billion, with a payout ratio of 50%. The dividend policy, based on a target dividend payout ratio of 50%, will be flexibly managed, along with our full year dividend target of at least JPY 128 in light of future economic conditions and Aozora's financial results. 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 sitting aside some time for us today and for your ongoing interest in Aozora Bank. As always, our management team remains committed to delivering the 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.