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

Welcome to Aozora's Fiscal Year 2021 Interim 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 fiscal year 2021 interim financial results. Kajitani-san?

Thank you. I want to thank everyone for joining us today for our fiscal year 2021 interim fiscal results teleconference. On behalf of our management team at Aozora, I'd like to express our appreciation to all of our stakeholders for their understanding and continued support. Aozora is pleased to report that net revenue, business profit and bottom line net earnings in the second quarter of fiscal year 2021 continued to show solid performance following the first quarter and represented over 25% of the full year forecast. As a result, our results for the first half ended strong, both compared to the previous year and the full year forecast. We continue to focus on our strategic investments business with an aim of supporting our customers' business growth and recovery, amid a historic turning point in the industrial structure as well as more broadly making a contribution to society. I'd like to highlight that noninterest income increased significantly compared to last year and was a major driver of net revenue growth during the first half. Strong earnings were generated mainly from buyout finance and private equity, both supporting the business restructuring of our corporate customers. GMO Aozora Net Bank's performance also remained on track. Let me now turn to a more detailed discussion of our results for the first half of fiscal year 2021 by reviewing the PL summary included on Page 2 of today's financial results overview. For the first half of fiscal year 2021, net revenue was JPY 52.4 billion, an increase of JPY 7.3 billion from last year. Business profit was JPY 25.7 billion, an increase of JPY 6.6 billion from last year, and net earnings for the first half were JPY 19.4 billion, an increase of JPY 4.3 billion from last year. Interim results were relatively strong compared to the previous year and represented over 50% 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 3. Net interest income was JPY 24.6 billion, a decrease of JPY 0.8 billion year-on-year, mainly due to lower interest and dividends on securities as a result of lower level of foreign currency ETF investments associated with last year's portfolio rebalancing. That said, compared to the first quarter, net interest income in the second quarter increased by JPY 0.9 billion, mainly due to higher loan outstandings, which were largely driven by domestic LBO finance as well as higher yields on securities. While the net interest margin narrowed by 12 basis points year-on-year, as shown on the table on the right-hand side, as you can see in the graph on the bottom of this page, it increased by 3 basis points in the second quarter compared to the first quarter. Please now turn to Page 4. Noninterest income was JPY 27.7 billion, an increase of JPY 8.1 billion year-on-year. Net fees and commissions, net trading revenues and net other ordinary income, excluding gains and losses on bond transactions, all increased year-on-year, mainly due to strong customer-related transactions. As shown in the graph on the right-hand side, noninterest income for the interim period even exceeded the level we were at prior to the COVID-19 pandemic. For a breakdown of noninterest income, please now turn to Page 5. Net fees and commissions were JPY 6.7 billion, an increase of JPY 1.8 billion compared to the previous year. As shown in the bar graph on the upper right-hand side, loan-related fee income increased significantly in the second quarter, mainly as a result of LBO finance activity. Other net fees and commissions were also strong mainly due to increased GMO Aozora Net Bank and M&A-related fee income. Net trading revenues were a gain of JPY 8 billion, JPY 5.7 billion higher when compared with last year. While earnings from investment product sales in the second quarter decreased compared to the particularly strong first quarter, the overall results for the interim period was an increase of JPY 3.1 billion year-on-year. Please now turn to Page 6. Gains and losses on bond transactions were a gain of JPY 5.4 billion, mainly due to strong gains from the sale of investment trusts as a managed securities portfolio in consideration of U.S. long-term interest rate trends compared with a gain of JPY 10.9 billion in fiscal year 2020, which was mainly realized under a declining U.S. interest rate environment. The ratio of gains on bond transactions to net revenue for the interim period fell to 10% compared with 24% in fiscal year 2020. Net other ordinary income, excluding gains and losses on bond transactions was JPY 7.4 billion, an increase of JPY 6 billion year-on-year. Gains from limited partnerships were JPY 5.3 billion, an increase of JPY 2.2 billion compared to the previous year as a result of strong distressed loan-related and buyout related gains. As shown in the graph on the right-hand side, limited partnership investments, largely buyout and venture related grew as a result of our increased focus on strategic investments business. Please now turn to Page 7 for more information regarding our equity method investment, a 15% ownership stake in Orient Commercial Joint Stock Bank, a commercial bank located in Vietnam, as well as gain and losses on stock transactions. Gains and losses on equity method investments were a net gain of JPY 1.2 billion as 15% of OCB's net profit for January to June 2021 was included in our interim earnings. No significant gains and losses on stock transactions were recorded in the first half of fiscal year 2021. Please turn to Page 8. General and administrative expenses were JPY 27.9 billion, an increase of JPY 1.8 billion year-on-year, mainly due to increased expenses related to the commencement of operations at our New York-based subsidiary, as well as IT-related expenses, largely focused on our retail and financial markets areas. This result represented 49% of the original full year budget of JPY 56.5 billion as we continued our focus on cost control and remained within budget. Reflecting the strong level of net revenue, in addition to the results of our cost control measures, our OHR was 53% on a consolidated basis, a significant improvement from the result of 58% in the previous year and 50% on a nonconsolidated basis. Please now turn to Page 9. Credit-related expenses were a net reversal of JPY 0.4 billion for the interim period. In the first quarter, our general loan loss reserves were a net reversal mainly as a result of improvements in the credit ratings of previously need attention overseas exposures and the repayment of overseas real estate nonrecourse loans associated with a recovery in the U.S. real estate market. While credit-related expenses were a net expense of JPY 1.5 billion in the second quarter, mainly as a result of incremental provisions to general loan loss reserves due to a higher level of loan outstandings, including LBO finance transactions, they were a net reversal of JPY 0.4 billion on a 6-month basis. As shown on the table on the right-hand side, the ratio of loan loss reserves to total loans remained adequate at 1.54%. For your reference, the overseas loan reserve ratio was approximately 2.3% at the end of the quarter. Please turn to Page 10. Financial Reconstruction Law or FRL claims were JPY 18.8 billion, a decrease of JPY 6.9 billion compared to March 31, 2021, mainly due to progress in the workout of nonperforming loans. The ratio of FRL claims to total claims was 0.6%, a decrease of 0.26% from March 31, 2021. I'll now move on to a more detailed explanation of our balance sheet. A summary can be found on Page 11, and I'd like to make a few comments regarding the information presented on Page 12. Overall, loan balances were an increase of JPY 195.9 billion compared to March 31, 2021. Domestic loans increased by JPY 183.3 billion during the same period. While overall domestic loan lending margins have been on a slight narrowing trend, the margin for the second quarter was maintained at the same level as the first quarter as we continue to proactively originate high value-added financings, primarily LBO finance and project finance. Please now turn to Page 13 for a breakdown of overseas loans. Overseas loans were JPY 1,026.8 billion, an increase of JPY 12.6 billion from March 31, 2021. Overseas loans increased by JPY 41.5 billion from June 30, 2021, which was an increase of JPY 259 million on a U.S. dollar basis as a result of the origination of new loans in the second quarter. As shown in the graph on the upper right-hand side, overseas loans lending margins have continued to improve since fiscal year 2020. Please turn to Page 14 for more information about our North American Corporate loan exposure. While loans decreased in the first quarter mainly due to prepayments, we continue to originate new loans during the second quarter. As a result, our North American corporate loans outstandings were JPY 424.5 billion an increase of JPY 32.5 billion compared to June 30, 2021, and JPY 22.6 billion compared to March 31, 2021. From a credit quality perspective, the share of BBB and above rated loans was 34%, an increase of 3% compared to March 31, 2021, following a recovery in economic and financial conditions. Page 15 contains information about our overseas real estate nonrecourse loan portfolio. While overseas real estate nonrecourse loans experienced an increase in repayment activity during the first quarter, in large measure due to a recovery in U.S. real estate markets. In the second quarter, we continued to focus on the selective origination of new loans while closely monitoring overall market trends. Please now turn to Page 16. Our domestic real estate nonrecourse loans were JPY 357.6 billion, an increase of JPY 14.7 billion compared to March 31, 2021. While the percentage of office and hotel loans was down compared to March 31, 2021, logistics loans increased by 3%. Please now turn to Page 17. The securities portfolio was JPY 1,347.1 billion. Securities decreased mainly U.S. government bonds and U.S. mortgage-backed securities, resulting in an overall decrease of JPY 46.2 billion compared to March 31, 2021. Annualized gains, including annualized gains and losses on hedging instruments were a net gain of JPY 58.6 billion, an increase of JPY 15.8 billion compared to March 31, 2021. Taking into consideration future U.S. interest rate trends, we took actions to reduce our U.S. dollar interest rate risk, which declined by JPY 0.9 billion at an interest rate sensitivity of 10 basis point value compared to March 31, 2021. As always, we'll continue to strive to ensure stable earnings through risk diversification. Please turn to Page 18. New account openings for our retail Internet banking platform also continued to grow, leading to higher retail deposit balances. Total core funding increased by JPY 326.2 billion from March 31, 2021, and our retail funding ratio was 64%. Please now turn to Page 19. Our OHR and business profit ROA both improved compared to the previous year. ROE also exceeded the previous year's results due to strong net earnings. We will continue to focus on further improving our efficiency and profitability. Please now turn to Page 20 for more information regarding GMO Aozora Net Bank. While quarterly net revenue in the second quarter decreased somewhat compared to the very strong results in the first quarter, both business profit and net revenue for the interim period were higher than expected. The number of corporate accounts and API connection contracts has grown as GMO Aozora Net Bank continues to leverage its technology knowledge base to deliver new product and services. Please now turn to Page 21. On a preliminary basis, our consolidated capital adequacy ratio was 10.94% as of September 30 remaining at an adequate level. 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 10.8%. Lastly, please turn to Page 22. We announced the second quarter dividend of JPY 32 per common share, equivalent to 1/4 of our full year dividend forecast of JPY 128 per common share. I'd like to conclude by saying that 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.