Aozora Bank Ltd

TSE:8304

Earnings Call Transcript 2023-Q2

[Jaimee Rhodes, executive]

Welcome to Aozora's Fiscal Year 2022 Interim Financial Results Conference Call. Before we go any 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. Masaharu Matsuura, General Manager, Corporate Communication division, will now provide you with a review of the fiscal year 2022 interim financial results, Matsuura?

[Masaharu Matsuura, executive]

I want to thank everyone for joining us today for our fiscal year 2022 interim results teleconference. I'd also like to thank all of Aozora's 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 first half of fiscal year 2022. For the first half of fiscal year 2022, net revenue was JPY 43.3 billion. Business profit was JPY 15 billion and profit attributable to owners of parent was JPY 15.3 billion. Customer-related business for the first and second quarter were strong, and net revenue from customer-related business during the interim period increased by JPY 1.1 billion compared to the previous year. However, net revenue from financial market-related business declined by JPY 10.2 billion as we continue to perform risk-reduction operations on our securities portfolio. As a result, net revenue decreased by JPY 9.1 billion and profit attributable to owners of parent decreased by JPY 4 billion during the interim period compared to the previous year.

We announced our second quarter dividend of JPY 38 per common share.

Approximately 25% of the full year dividend forecast of JPY 154, while profit attributable to owners of parent for the second quarter was just under 25% of the full year earnings forecast. We have decided to set a quarterly dividend payment equivalent to 25% of the dividend forecast as customer-related business remains strong, and there will be no change to that full year earnings forecast.

Let me now turn to a detailed discussion of our results of the interim period of fiscal year 2022 by reviewing the breakdown of revenue and expenses included on Page 2 of today's financial results overview. For the first half of fiscal year 2022, net revenue was JPY 43.3 billion, a decrease of JPY 9.1 billion compared to the previous year. While net interest income increased by JPY 2.5 billion, mainly due to higher loan outstandings. Noninterest income decreased by JPY 11.6 billion due to a lower level of gains from our market-related business and the sale of structured bonds. As you can see in the table at the bottom of the page, net revenue, excluding financial market-related business increased by JPY 1.1 billion compared to the previous year.

As overall customer-related business, including environmental finance and gains from limited partnerships was relatively strong. General and administrative expenses increased by JPY 1.1 billion compared to the previous year, mainly due to increased personnel costs, which were in line with our original 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 27.2 billion, an increase of JPY 2.5 billion compared to the previous year due to higher loan outstandings, the impact of a weaker yen and gains on the cancellation of investment trust. While both the yield on total investments and yield on funding increased as a result of higher overseas interest rates. The net interest margin was 98 basis points, almost the same level as last year.

Please now turn to Page 4. I Noninterest income was JPY 16 billion, a decrease of JPY 11.6 billion, mainly due to a lower level of net trading revenues and gains on bond transactions. As you can see from the graph on the right-hand side of the page, noninterest income, excluding financial market-related business was relatively strong.

For a breakdown of noninterest income, please now turn to Page 5. Net fees and commissions were JPY 5.7 billion, a decrease of JPY 1 billion compared to last year. This was mainly due to a decrease in loan-related fee income, reflecting the impact of a specific large loan closed last fiscal year, though the level of fee income remained stable. Net trading revenues were a gain of JPY 1.8 billion, JPY 6.1 billion lower than last year. This was mainly due to continuing our policy of restricting the sale of structured bonds. And as a result of earnings from the sale of structured bonds decreased by JPY 2.6 billion compared to last year, in addition to generating lower trading profit. Regarding the sale of investment products to retail customers last year, we positioned the expansion of investment trust assets under management as one of our key performance indicators and began proactively developing initiatives. Retail investment trust AUM balances steadily increased as a result of investment products sold by both Aozora and our affiliated regional financial institutions.

Please turn to Page 6. Gains/losses on bond transactions for the interim period were a loss of JPY 2.3 billion. No significant gains/losses on bond transactions were recorded during the second quarter. I will discuss a bit more about the risk reduction measures taken on our securities portfolio in a few moments.

Net other ordinary income, excluding gains/losses on bond transactions, was JPY 10.8 billion. Gains on financial derivatives were recorded as a result of the risk reduction measures that we performed on our securities portfolio. Losses on equity derivatives were also recorded as a result of risk reduction actions, the amount of which is shown for reference at the bottom of the table on this slide. Gains from limited partnerships were JPY 4 billion, a slight decrease compared to the previous year but representing steadily progress.

Now turn to Page 7. gains losses on equity method investments for the first half were a net gain of JPY 0.8 billion. ACB's results during the April to June period remained approximately the same as during January to March, mainly due to losses recorded on the sale of bonds associated with the reduction in size of its bond portfolio in response to increased interest rate in Vietnam. Gains/losses on stock transactions were again of JPY 4.5 billion. Approximately 40% of this gain was due to Auzora's strategic investment business. The other 60% was from the sale of recruit shares.

Please now turn to Page 8. General and administrative expenses were JPY 29.1 billion, up JPY 1.1 billion from last year. The increase in expenses was mainly due to increased personnel expenses due to pay scale increases and personnel system reform in addition to the hiring of additional staff. General and administrative expenses represented 49% of the original forecast as we maintained our focus on cost control.

Please now turn to Page 9. Credit-related expenses were a net reversal of JPY 2 billion. Credit-related expenses in the second quarter were a net expense of JPY 1.1 billion due to additional provisions made to our general loan loss reserves, mainly due to higher overseas loan outstandings as a result of weaker yen. Our ratio of loan reserves to total loans was 1.15% as of September 30, 2022. The ratio of loan loss reserves to overseas loans remained adequate at 1.7%, the same level compared to June 30, 2022.

Please now turn to Page 10. NPL increased by JPY 3.1 billion to JPY 22.3 billion compared to June 30, 2022. The ratio of NPLs to total claims was 0.57%. I'll now share some balance sheet highlights starting on Page 11, which contains a general overview.

Please now turn to Page 12. Loans increased by JPY 531.6 billion from March 31. Domestic loans increased by JPY 276.1 billion, mainly due to our forecast on environmental finance and increased lending to borrowers with strong credit ratings.

Please now turn to Page 13 for a breakdown of our overseas loans. Overseas loans were JPY 1.44 trillion, while overseas loans only increased by 3% on a U.S. dollar basis. Overseas loans on a yen basis increased significantly due to the impact of a weaker yen. While overseas lending margins contracted in the second quarter compared to the first quarter, this was mainly due to the increase in overall foreign currency funding costs.

Please turn to Page 14 for more information on our North American corporate loan exposure. Our North American corporate loan outstandings remained stable compared to March 31, 2022, totaling JPY 4.0 billion on a U.S. dollar basis. We continue to selectively originate high-quality loans amid unclear market conditions. As a result, while certain segments of the low market have experienced significant declines in bid prices, we've been able to maintain our portfolio with relatively high risk tolerance and only saw comparatively gradually decreases in average bid prices.

Page 15 contains information about our overseas real estate nonrecourse loan portfolio. overseas real estate nonrecourse loan outstandings were approximately $2.6 billion on a U.S. dollar basis, an increase of more than $200 million compared to March 31. While logistics and multifamily loans remained strong. Demand for office loans in the U.S. market is currently experiencing a somewhat slow recovery. The loan refinancing market has become more selective in terms of quality based on the property condition and sponsor quality. And as loans continue to be polarized based on local market conditions, we've maintained our cautious stance.

Please turn to Page 16. Our domestic real estate nonrecourse loans remained stable and were JPY 393.1 billion compared to March 31, as we continued our policy of selectively originating new high-quality NRL loans, mainly in the area of logistics.

For a review of our security portfolio, please now turn to Page 17. Securities were JPY 1.42 trillion, while the change partly includes the impact of a weaker yen, overall balances decreased as we continued to perform risk reduction measures on our securities portfolio. Unrealized gains/losses, including unrealized gain/losses on hedging instruments were a net loss of JPY 80.7 billion.

Please now turn to Page 18. As I'll discuss a bit more about the risk reduction measures we took on our securities portfolio during the interim period. We reduced our level of risk by half during the first quarter and further reduced the level of risk as we continue these operations into the second quarter. As a result, we reduced our VAW from JPY 8.8 billion as of March 31 to JPY 4.9 billion as of June 30 and further reduced the level of risk to JPY 3.7 billion as of September 30. We also reduced our U.S. dollar interest rate risk, 10 basis point value from JPY 2.9 billion as of March 31 to JPY 0.8 billion as of June 30 and further reduced the level of risk to JPY 0.5 billion as of September 30.

Both of these results represented significant reductions. While we flexibly manage our position in line with market trends, unrealized losses in the second quarter increased by approximately JPY 30 billion compared to June 30 due to higher-than-expected interest rates. Further hedging continued into October. And currently, all of our U.S. government bonds and 90% of our mortgage-backed securities are hedged. While we don't expect unrealized losses to increase any further at this moment. We'll continue to perform risk-reduction operations on our securities portfolio, while closely monitoring market conditions.

Please now turn to Page 19. Total retail deposits for our retail Internet banking platform, Bank continued to increase. Total core funding increased by JPY 387 billion to JPY 5.42 trillion. Our retail funding ratio was 66%.

Please now turn to Page 20 for an overview of our KPIs, which we set as part of our midterm plan. Our HR business ROA and ROE for the interim period all declined somewhat compared to the full year results from the fiscal year 2021 due to lower earnings compared to last year.

Page 21 highlights on Aozora's sustainability targets, which were announced last September. We saw steady progress in all areas as of September 30, 2022.

Please now turn to Page 22 for a detailed explanation of our equity investments in Aozora's Strategic Investments business. Equity investments increased by JPY 33.9 billion compared to March 31, 2022, as a result of increase in real estate-related equity funds due to the impact of yen depreciation in addition to buyout-related private equity investments. Realized capital gains and other equity returns also increased compared to the previous year. This increase was due to the exit transactions on domestic equities in addition to realized gain from real estate-related equities and buyout-related investments.

Please now turn to Page 23 for more information regarding GMO Aozora Net Bank, GANB. While the number of corporate accounts increased significantly, net revenue for the second quarter increased only slightly compared to the first quarter as the number of transfer transactions and revenue from debit card payments fell below planned levels. Because of the delay between acquiring new accounts and is producing revenue has tended to be longer than originally planned, GANB reviewed its midterm plan and a capital increase was underwritten by our Aozora's GMO Internet Group and GMO Financial Holdings. GANB is now aiming to achieve profitability during fiscal year 2024. I -- in addition, as we announced on October 25, we recorded JPY 9.9 billion as losses on the valuation of equities of subsidiary and affiliates related to GANB stock. In its fiscal year 2020 to second quarter non-consolidated financial statement.

Please now turn to Page 24 for a more detailed outline of GANB's new midterm plan ending in fiscal year 2025. The new plan is based upon increasing net revenue by strengthening GANB's core business through online marketing while preserving its current 3 mid to long-term strategies.

Please now turn to Page 25. On a preliminary basis, our consolidated capital adequacy ratio was 9.79%. Although we are subject to the Japanese domestic standard, for reference purpose, we also disclose our CET1 ratio, which is based on international standards. Our CET1 ratio was approximately 7.3%.

Please now turn to Page 26. We announced our second quarter dividend of JPY 38 per common share, approximately 25% of full-year dividend forecast of JPY 154. While net earnings for the second quarter were just under 25% of the full year earnings forecast as a result of risk reduction operations. performed on our securities portfolio. We've decided to set a quarterly dividend payment equivalent to 25% of the dividend forecast as our customer-related business remains strong, and there will be no change to full-year earnings forecast.

In conclusion, we would 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 needs of our customers and achieving our financial targets while maintaining our ongoing focus on the disciplined risk management. Your continued interest and support is greatly appreciated. Thank you for your time today.