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

Welcome to Aozora's Fiscal Year 2021 Financial Results Conference Call. Before we go further, I'd like to review the safe 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 the 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. Masaharu Matsuura, General Manager, Corporate Communication Division, will now provide you with a review of the fiscal year 2021 financial results. Matsuura-san.

I want to thank everyone for joining us today for our fiscal year 2021 financial results teleconference. I'd also like to thank all of Aozora shareholders and analysts for their continued interest and support. Let me now turn to Page 1 of today's financial results overview to review the highlights for the fiscal year 2021, followed by a summary of our fiscal year 2022 forecast for earnings and dividends. For fiscal year 2021, net revenue was JPY 103 billion, business profit was JPY 47.8 billion and net earnings were JPY 35 billion. Each of these results was an increase year-on-year. As you may know, we upwardly revised our fiscal year 2021 earnings forecast on January 31, 2021, and our results also exceeded the revised forecast. Net interest income increased year-on-year mainly due to higher loan outstandings and noninterest income was also an important driver of net revenue growth. This reflected strong customer-related business. We are continuing to focus on our strategic investment business and Aozora's buyout finance and private equity businesses are expanding. Credit-related expenses were JPY 3.7 billion and represented approximately 10 basis points of our total loan outstandings, a level in line with the original plan. As a result, these strong results, we announced our full year dividend of JPY 149 per share. The full year dividend represents a JPY 25 increase compared to the fiscal year 2020 full year dividend of JPY 124. It's also JPY 21 higher than the original forecast of JPY 128 and JPY 4 higher compared to the revised forecast of JPY 145. I will now turn to the fiscal year 2022 earnings and dividend forecast contained on Page 2 of today's presentation materials. We expect customer-related business primarily focused on our active strategic investment business initiatives to continue its growth trend. However, we also expect a volatile financial market conditions to continue as a result of inflation and increase in geopolitical risk. As such, we are taking a cautious stance regarding securities asset management. Overall, net revenue is projected to be JPY 103 billion, on par with last year. Profit attributable to owners of parent is projected to be JPY 36 billion, a 3% increase compared to fiscal year 2021. The fiscal year 2022 dividend forecast is JPY 154 per share. Based on the total dividend amount, which is set at 50% of the net earnings forecast of JPY 36 billion. Our mid to long-term dividend policy is based on a targeted dividend payout ratio of 50%. The fiscal year 2022 full year dividend target of JPY 154 per common share will be flexibly managed on a quarterly basis in light of Aozora financial results. Let me now turn to a detailed discussion of our results for fiscal year 2021 by reviewing the breakdown of revenue and expenses included on Page 3 of today's financial results of our view. As I mentioned earlier, each of these results represented year-on-year increases and exceeded the higher revised 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 51.6 billion, an increase of JPY 1.5 billion year-on-year. As shown in the graph on the bottom right, while lending margin remained steadily, net interest income increased due to higher loan outstandings. Please now turn to Page 5. Noninterest income was JPY 51.3 billion, an increase of JPY 4.9 billion. Customer-related business revenue was strong throughout the fiscal year, resulting in overall increase year-on-year, excluding gain losses on bond transactions. The ratio of gains losses on bond transaction to net revenue declined to 4%. The bar graph on the right side of the page shows our noninterest income over the last 4 years. Customer-related business revenue, such as net fees and commissions, net trading revenues and gains from limited partnerships remained relatively stable. For a breakdown of noninterest income, please now turn to Page 6. Net fees and commissions were JPY 14 billion. This result was an increase of JPY 1.5 billion compared to the previous year as loan-related fee income increased by JPY 0.2 billion, mainly a result of increased buyout finance activity. Higher fee income from GMO Aozora Net Bank was also a contributing factor. Net trading revenue were a gain of JPY 16.6 billion, JPY 3.2 billion higher when compared to last year. Full year earnings from investment product sales to retail customers increased compared to the previous year despite some quarterly fluctuations. Gains from the sales of derivative-related products to our financial institution customers were also strong due to market trends. Please turn to Page 7. Gains/losses on bond transaction for the full year were a gain of JPY 4.5 billion. In the fourth quarter, we took JPY 1.3 billion net losses on bond transactions as a result of rebalancing our foreign government bond position in light of current economic conditions such as U.S. interest rate trends. When viewing gains/losses on bond transaction on a gross basis, they were an overall gain of JPY 4.5 billion due to the sales of REITs and investment trust despite recording losses of JPY 5 billion mainly on the sale of bonds. Net other ordinary income, excluding gains/losses on bond transactions, was JPY 16.2 billion. Gains from limited partnerships were JPY 9.1 billion, an increase compared to the previous year as distressed loan-related, and buyout venture-related gains were strong. As shown in the graph on the right-hand side, we continued our focus on our strategic investment businesses. This resulted in a significant increase in level of limited partnership investments, particularly buyout and venture-related finance. Please now turn to Page 8. Here, you'll see a breakdown of the gains and losses on equity method investments related to OCB, a midsize commercial bank based in Vietnam in which we made an investment in June 2020. You will also see here our gains/losses on stock transactions. Gains/losses on equity method investment for full year were a net gain of JPY 2.6 billion. 15% of OCB's full year net profit of JPY 21.1 billion was included in Aozora's fiscal year 2021 full year results. Gains/losses on stock transactions were a gain of JPY 2 billion. This included JPY 1.1 billion in gain from the sales of stock in the fourth quarter. Please now turn to Page 9. General and administrative expenses were JPY 57.7 billion, up JPY 2.8 billion from last year. The increase in expenses was mainly due to increased personnel expenses due to the hiring of additional staff in our business areas of focus. Increased IT-related expenses mainly for cybersecurity, infrastructure development and compliance regulations related to our market operations were also a factor. Our overhead ratio or OHR was 56% on a consolidated basis, an improvement compared to last year and reflected the higher level of net revenue. Please now turn to Page 10. Credit-related expenses were a net expense of JPY 3.7 billion. At the beginning of fiscal year, we expected credit-related expenses to be 10 basis points of total loan outstandings. And this result was in line with our original assumptions. Credit-related expenses were a net expense of JPY 2.4 billion in the fourth quarter. Provisions to general loan loss reserves were a net reversal due to improved borrower credit ratings, mainly the improved credit quality of overseas borrowers as we made provisions to specific loan growth results. As shown in the graph on the right-hand side, the ratio of loan loss reserves to total loans was 1.46% as of March 31, 2022, and remained at an adequate level. For your reference, the overseas loan loss reserve ratio fell from 2.2% as of December 31, 2021, to 1.9%. This was mainly due to the improvement in borrower credit ratings. Please now turn to Page 11. While we have traditionally disclosed FRL claims on a nonconsolidated basis, we have begun disclosing the FRLs on a consolidated basis in light of amendments to the Ordinance for Enforcement of Banking Act. However, there is no significant difference between our consolidated and nonconsolidated results. FRL claims decreased by JPY 5.9 billion to JPY 21.4 billion compared to March 31, 2021. The ratio of FRL claims to total claims was 0.63%, a decline of 28 basis points compared to March 31, 2021. I will now share some balance sheet highlights on the Page 12, which contains a general overview. Please now turn to Page 13. Loans increased JPY 368.3 billion from March 31, 2021. Domestic loans increased by JPY 192.9 billion mainly due to increased lending to borrowers with higher credit ratings and our focus on growing our LBO and project finance loan book. Please now turn to Page 14 for a breakdown of overseas loans. Overseas loans were JPY 1.19 trillion, an increase of JPY 175.3 billion from March 31 and an increase of $500 million on a U.S. dollar basis, representing a 5% increase. Loan outstands increased as we continued to originate loans with a favorable risk return profile. And as shown in the graph on the right-hand side, overseas lending margins remained strong. Please turn to Page 15 for more information on our North American corporate loan exposure. Our North American corporate loan outstandings increased by JPY 84.1 billion compared to March 31, 2021. We continue to originate new loans starting in the second quarter despite lower loan balances in the first quarter that were mainly due to prepayments. The share of loans rated BB or higher remained at 91%, a slight increase for the year with a large percentage of borrowers with relatively high credit ratings. Page 16 contains information about our overseas real estate nonrecourse loan portfolio. Overseas nonrecourse real estate loan outstandings were JPY 296.5 billion, a decrease of $9 million on U.S. dollar basis compared to March 31, 2021. Loan outstandings increased by JPY 18.5 billion, $4 million on a U.S dollar basis compared to December 31, 2021, as we continue to focus on the selective origination of new loans during the fourth quarter. Please turn to Page 17. Our domestic real estate nonrecourse loans were JPY 380.8 billion compared to March 31, 2021. While office loans decreased by 5%, the percentage of residential, logistics and retail loans increased during the same period. 98% of REITs LTV were below 50%. Real estate nonrecourse loans, excluding REITs with an LTV of 70% or below represented approximately 90% of the portfolio. For a review of our securities portfolio, please now turn to Page 18. Securities were JPY 1.48 trillion. We flexibly managed our U.S. government bonds and U.S. mortgage-backed security positions throughout the fiscal year in response to U.S. interest rate trends. This resulted in more than 10% decrease in total overseas securities investment over the prior fiscal year. As mentioned in the bottom-right section of this slide, as of March 31, 2022, approximately 30% of interest rate risk on our U.S. government bond position is hedged using derivatives, including future and put options. We have continued to flexibly implement our interest risk reduction operations through April 2022 onwards. Please now turn to Page 19. The number of new account openings for our retail Internet banking platform, BANK, continued to increase. The number of BANK customers reached approximately 400,000 as of March 31, 2022, leading to an increase in total retail deposit. Total core funding increased by JPY 830 billion and our retail funding ratio was 64%. Please now turn to Page 20 for an overview of our KPIs, which we set as a part of our midterm goal. Aozora's OHR and ROE for fiscal year 2021, both improved compared to the previous year as a result of strong earnings and our continued focus on cost control. In addition, all 3 KPIs exceeded the average of the major banks. For your reference, KPIs are set based on fiscal year 2022 earnings forecast as it is the final year of our midterm plan. Page 21 highlights Aozora's sustainability targets which were announced last September. Fiscal year 2021 show steady progress in all areas. Please now turn to Page 22 for a detailed explanation of our equity investment in Aozora strategic investment business. As shown in the table, equity investments increased by JPY 55.8 billion compared to March 31, 2021, mainly due to increases in the real estate-related equities and buyout-related private equity investments. Realized capital gains and other equity returns totaled JPY 12.3 billion and included gains from real estate-related, distressed loan-related and the buyout-related to limited partnerships. Please be aware that these results do not include our [ recruit ] stock for securities related to our market operations. Please now turn to Page 23 for more information regarding GMO Aozora Net Bank. As you can see, the number of corporate accounts, transfer transactions and API connection contract continued to grow. Net revenue decreased in the fourth quarter due to the impact from the reduction in transfer fees that began in October 2021. In addition to other factors, including changes in accounting method for the debit card [ cashback ] service. GMO Aozora Net Bank plans to achieve net revenue growth and attain profitability during fiscal year 2022 by further increasing the number of corporate accounts and transfer transactions, while strengthening its embedded finance services and promoting the use of its debit card. Please now turn to Page 24. On a preliminary basis, our consolidated capital adequacy ratio was 10.37% as of March 31, 2022. Although we are subjected to the Japan domestic standard, for reference purpose, we also disclose our CET1 ratio, which is based on international standards. Our CET1 ratio was approximately 9.3%. Please now turn to Page 25. As I mentioned earlier, we announced our fourth quarter dividend of JPY 45 per common share and a full year dividend of JPY 149 per common share. The fiscal year 2022 full year dividend forecast is JPY 154 per common share based on the target dividend payout ratio of 50%. This will be flexibly managed in light of our actual financial results. We will strive to achieve our earnings target for fiscal year 2022, the final year of the Aozora 2022 midterm plan. In conclusion, we'd like to thank each of you for setting aside some time for us today and for your ongoing interest in Aozora Bank. As always, our management team remains committed to delivering products and services that meet the need 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.