Seven Bank Ltd

TSE:8410

Earnings Call Transcript 2019-Q2

[Yasuaki Funatake, executive]

This is Funatake of Seven Bank. Thank you for coming in large numbers, despite your busy schedules.

I'd like to explain the financial results for the second quarter of fiscal 2018. I'd like to explain following the presentation material.

First, this is financial results digest. As you can see, we have consolidated and nonconsolidated numbers on the left and right. On a consolidated basis, ordinary income was JPY 73.4 billion. Ordinary profit was JPY 20.7 billion. On a nonconsolidated basis, ordinary income was JPY 60.4 billion and ordinary profit was JPY 22.8 billion. Thankfully, we were able to end the quarter with year-on-year increases in both income and profit. This is the best interim result we have ever had.

However, as we have already announced in September, with drastic changes in the overseas operating environment, we reviewed our overseas operations and we have booked a loss for the overseas business. The losses were disposed of during this interim period. The amount was JPY 14.5 billion on a consolidated basis and JPY 21.8 billion on a nonconsolidated basis. When this is accounted for, consolidated net income was slightly in the red by JPY 0.2 billion. Nonconsolidated net income ended up at JPY 0.7 billion in the black.

From both the consolidated and nonconsolidated, net income declined, but in terms of dividends, there is no change from the plan made at the beginning of the fiscal year. Interim dividend will be JPY 5 per share, and for the year-end, at this point in time, we are scheduling JPY 5 as according to the plan. So that is a total of JPY 10 dividend payout that we are planning to make.

Next page. This is a consolidated income statement, which is, as I have already described.

Next page. On a nonconsolidated basis, I would like to explain about each of our businesses. On this page, you see the results for the Seven Bank. Near the bottom, you see the number of ATMs installed. It was 24,756 units, an increase of 883 units year-on-year, so it was 3.7% growth. The daily average transactions per ATM, on the other hand, was 93.7, declining about 1.6 transactions per day year-on-year, a decline of around 2%. Total number of transactions was 419 million, growing by about 10 million year-on-year, or about 3%. So the total number of transactions went up due partly to the increase in the number of ATMs. ATM-related fee income per transaction, on the other hand, was JPY 133. We had planned this to go down a bit further, but fortunately, it was unchanged at JPY 133. One reason was that the growth of consumer finance card users recovering. Another factor was Post Bank users. Since FamilyMart has installed Post Bank ATMs, we thought maybe transactions for Post Bank users will decline a bit. The result was actually, they increased steadily, so the transactions with relatively high fee per transactions showed relative growth, leading to the average fee being unchanged at JPY 133.

So all these things factored in, ordinary income was JPY 60.4 billion, ordinary expenses were JPY 37.5 billion and ordinary profit was JPY 22.8 billion, a year-on-year growth in both income and profit. Of the ordinary income, ATM-related fee income was JPY 54.4 billion. That means we had income other than ATM-related fees of around JPY 6 billion. Loans, international money transfer services, sales process deposits, ATM operation fees were strong. And so no ATM-related fees gradually increased to reach now the JPY 6 billion mark.

As for the full year outlook, we'd like to maintain the revised figures that we announced in September and work hard toward that goal in the second half.

Next, FCTI. The number of ATMs installed was 13,235, as can be seen in the bottom, of which 7,903 were installed in 7-Eleven stores. At the end of March this year, we finished installing to 7-Eleven stores, so the number of ATMs grew substantially. If you look at the daily average transactions per ATM, it was 34.5. At 7-Eleven stores, it was 48.1. Initially, it was in the 30s, but it has risen gradually to 48.1 by the end of the first half. And more recently, at the end of October, it has grown to close to 60 at around 57 or 58, so this has grown steadily. The total number of transactions was 81,915,000, also growing substantially. As a result, ordinary income was $119 million, and so it is steadily growing. But on the other hand, ordinary expenses also grew to $131 million, exceeding ordinary income. So regrettably, ordinary profit was still negative, a loss of $12 million.

After installing ATMs, expenses were necessary to stabilize operations, although that is gradually decreasing. And also, just in the U.S., we raised what amounts to JPY 100 billion, and interest rates are starting to rise in the U.S., raising our funding cost, resulting in expenses of $131 million. We would like to take measures to turn this profitable, but for fiscal 2018, because of this relatively large loss in the first half, as you can see in the revised plan column for the 2018 full year, we will still have remaining a small loss of about $14 million. In fiscal 2019, we are committed to making efforts to turn this into the black.

Next page is ATMi, which is Indonesia. There are about 103 ATMs installed in Indonesia. The number of transactions per ATM is increasing to close to 100. But as you can see from the results of the first half, expenses have ballooned. And so in terms of profit, it was a loss of JPY 33 million, and we also recorded a big loss for net income. After considering impairment, there was a big change in the environment, and we made various reviews, but with profitability not recovering, as we will detail later, we have resolved to withdraw from the Indonesian market for the time being and have now starting making preparations for withdrawal. When we first entered the market, we had plans to operate ATMs of other banks on consignment, utilizing infrastructure of our joint venture partner, ALTO NETWORK, to develop our business. And we also assumed the number of 7-Elevens would grow. But since 7-Elevens have totally withdrawn from the Indonesian market, and also our joint venture partner, ALTO NETWORK, had shareholder changes, and we decided it would be difficult to continue this business, so we have resolved to withdraw from the market. So we will withdraw. The book value of ATMi is around JPY 300 million. So after full withdrawal, please understand that will be the appropriate impact to earnings.

Going on to domestic subsidiaries. First BBF. We outsourced our administration center operations to them, so they have fixed income. But more than that, they are seeing brisk business from other banks for administrative outsourcing. They are especially getting many inquiries for money laundering-related services. And already, they got business from 4 banks, and many more are inquiring about services. As services become more convenient, safety and security are becoming more important. And next year, a major money laundering review by FATF is coming to Japan. So demand from institutions, including regional banks for services concerning crime prevention, including money laundering, is increasing rapidly. We'd like to capture this demand and capitalize it for our business. For the full year, as you can see here, we'd like to aim for about JPY 1 billion in income and JPY 35 million in profits.

There is also the Seven Payment Service, which handles the cash receipt service that started in May. As you can see here, ordinary income is JPY 4 million. To be frank, it has not reached a scale where we could call this a business. Our honest assessment is that it takes more time than we've thought to have a new service be recognized. However, we have already contracted more than 100 companies. So if recognition should spread, these numbers should come up.

We thought we would first start by handling returns for e-commerce. But once we started, we found that there were needs for peer-to-peer money transfer. With the advent of the sharing economy, needs to receive remuneration is increasing. And also there is a demand for payment services for canceled events and tickets. So broad range of needs are emerging, and contracts with such companies are steadily increasing.

The government is also promoting fund transfers that does not involve bank accounts, so business opportunities for this kind of cash receipt service or 7PS should increase. So in terms of results, the numbers are not great. But even if it takes a year or 2, we have expectations that this would grow into a big market.

Next page shows the balance sheet and shareholder returns policy. As can be seen, especially about the shareholder return, the basic policy has not changed. Due to the impairment that I mentioned earlier, net profit will decline significantly, so the payout ratio in fiscal year 2018 will be 93%-or-so, if things continue on course. But in terms of our basic shareholder return policy, we are planning to proceed with no major changes.

From here on, I would like to speak about the future, mainly the status of progress of our medium-term management plan and future developments. We are in the process of implementing the medium-term management plan. What we have as our slogan is to achieve growth in our main business, as we diversify our operations.

Our main focus will be to raise income and profit levels in the 3 years. Compared with fiscal 2016, we aim to add JPY 40 billion in ordinary income and JPY 8 billion in ordinary profit. And also, since the company is not going to end in 2019, we have to consider ways to diversify our operations even further into fiscal 2020 and beyond. We are implementing such measures to establish a foundation for long-term growth.

Let me share with you the progress of those measures. This chart shows that progress. First is the ATM platform in our domestic business. We have been able to achieve steady expansion of scale, and we took various measures to further improve quality. We took various measures, but in terms of the number of transactions, although it has steadily grown compared with a rather ambitious goal set forth in the medium-term plan, we have slightly underachieved those numbers.

Also we have been implementing several measures to create new styles of ATM usage. With Internet connections, we aim at having businesses with new fund settlement service providers, the number of such will be reduced. We assume we have businesses are increasing. We started cash receipt services. In that respect, we can say that we were able to steadily launch new services for the creation of new style of ATM usage. But as I said earlier, new market development tends to require more time than expected. So unfortunately, this is also short of our plan in terms of numbers.

As for settlement and account business, the number of accounts is increasing steadily more than initially planned. But regarding loan and international money transfer services, there is some adverse event in the environment, so the growth is slowing. As for bank loans, there are restrictions about advertisements. There had been the banking industry self-regulations to refrain from too much exposure, and we followed as well, so our growth here is slowing as a result.

With regards to international money transfer services, linking transactions with individuals' My Number card is turning out to be a burden. These are becoming a drag on our business. As you see that this is growing steadily, but the growth is long. On laying the groundwork for the group financial strategy, we have been working closely with a known banking segment of the group to contribute to a cashless society to expand their businesses. We are making solid progress in preparation.

In June this year, we newly established Seven Pay Co., Ltd. and preparing for the launch of services in around December of next year.

On the other hand, in our overseas business, we completed installation of ATMs at U.S. 7-Eleven stores and achieved stable operation. The number of transactions per ATM per day is about 60, so operation and the number of transactions are both expanding steadily. Having said so, sometimes, unexpected costs are being incurred and more expenses are needed for stable operation. And sometimes, fund procurement costs may be higher than expected, so the situation is still a little bit tough this year in terms of income. In Indonesia, as I mentioned earlier, we are preparing for withdrawal.

On the right, you can find our KPI review. This shows our progress against the medium-term management plan based on the assumption that we achieve our FY '18 year-end plan. So this is the progress in FY '17 and '18 combined in the 2 years out of the 3-year period. Our achievement rate is about 54% for ordinary income and about 40% for ordinary profit. Income-wise, the progress looks good at 64%, but the U.S. portion was added substantially this year, so I think it can be tough to achieve the remaining portion of over 30% next year in terms of ordinary income. The achievement rate is about 40% for ordinary profit. We will work hard to control our costs and achieve a plan by all means.

Regarding our outlook for the medium-term management plan, honestly speaking, the situation is getting tough, partly because the original numbers are rather aggressive. But still, we will continue to work hard to achieve our plan by all means.

Are there any changes to our medium-term management plan under these circumstances? We'd like to continue our strategy, at least, for the domestic business. There may be some delay in the launch of our new services, but there is no need to make major changes to our basic strategy, so we'd like to continue working on it.

As for overseas business, there have been some environmental changes, as I mentioned earlier. In the United States, we'd like to focus on turning the U.S. business to profit quickly. In Indonesia, we began preparations to withdraw. So in our overseas business, as a whole, our policy has changed a little. We'd like to first focus on turning the U.S. business to profit.

What about our specific future measures? For our ATM platform business, as you can find on this page, we will continue to increase the number of ATMs throughout the period of our medium-term management plan. We have 1.5 years to go. For 7-Eleven, we have a plan to increase the number of ATMs as the same speed as before, for the time being. In addition, outside of our group, luckily, there are also needs related to tourism and transportation until the Tokyo Olympic games in 2020, so we'd like to capture those needs as well.

Also this year, we have launched new services, including cash receipt service, partnerships in new categories with payment service providers and e-money charging. We started e-money charging of transportation cards in October this year. In the second half, we'd like to raise recognition in this area. We'd like to collaborate with our partners to engage in advertising activities in order to raise recognition and grow the services we launched to a certain level. As for settlement and account, the number of new accounts is growing steadily in loan and debit services, so we'd like to approach these new accounts, so that our new services will be used.

Regarding our international money transfer services, we need to link this with individuals' money number (sic) [ My Number ] card. Foreign labor is expected to increase in the future, as the Japanese Diet is starting to debate amending the Immigration Control and Refugee Recognition Act. This could bring great business opportunity for us.

In view of the growing market for foreign labor, we'd like to leverage our achievement, so far, to add to our new customers and expand our businesses.

As for our overseas business, we are focusing on the United States. We will increase the usage of ATMs installed at 7-Eleven stores. We will also promote an increase in the number of banks that use ATMs for their branding. Currently, there are about 5 such banks, and we're hoping to increase the number more and promote ongoing measures to raise recognition. We also would like to use ATMs second displays for ongoing measures to raise recognition steadily.

In addition, we will review our costs. We will optimize ATM cash replenishment. We have reduced ATM cash replenishment substantially since installation, but if we do so too much, then security operations costs would rise. We'd like to review those costs more meticulously to reduce costs where possible and minimize fund procurement costs. And partly because we installed new ATMs additionally, competition in the ATM market has intensified in the United States. Specifically, Caltronics is coming into the market with substantial dumping in order to recover the lost portfolio for 7-Eleven.

So the number of unprofitable ATMs is increasing for us. So far, we have maintained them to a certain extent. But we now think that we may be able to accept the expiry of agreement for these unprofitable ATMs, instead of working hard to maintain them. We'd like to place more importance on profitability and focus on increasing the usage of ATMs installed at 7-Eleven stores and providing new services.

Moving to the future. We have started the development of new fourth-generation ATM system, as you may be aware. We are hoping to proceed with new ATM installations next year. Are there going to be big changes in hardware? First, we'd like to include scanning functions, if possible. With technological advancement, the precision of camera is being enhanced, as well. So we'd like to leverage scanning functions and camera precision and gradually upgrade the system to realize the shift from the conventional cash settlement platform for cash deposit and withdrawal to an authentication and security platform, so that we can expand new businesses.

In settlement and account, the bank account environment has changed a lot. Most of the financial services are now possible, even without the bank account. New payment service providers and electronic payment agencies are entering the market now. How to work together with them is going to be also important for bank accounts in the future, so we'd like to view the foundation premised on external collaboration for accounts. Specifically, we'd like to realize a smoother link to APIs. We'd like to create new services and increase our accounts.

Also we'd like to introduce a financial version of the SEVEN PREMIUM. We are hoping to develop new financial product and services based on our customer base unique to our group. We will develop products in the fields of investments, insurance and loans, as described on this page. We have to decide in the future what they will be in detail, but something you can apply for easily and with convenience at convenience stores.

Now startup companies are thinking about these ideas, so we'd like to pursue collaboration with them, instead of just working on our own. Now it's becoming more convenient with the expansion of digital and cashless settlement, security and safety is being discussed as a hot topic recently.

New payment service providers in virtual or cryptocurrency operators have expanded their business very rapidly, but people want security and safety enhancement these days. Luckily, since we started creating bank accounts, we have spent time and efforts to expand our services meticulously in this area. We believe that there should be something we can leverage by utilizing our expertise, together with ATM data. As I mentioned before, we are supporting countermeasures against money laundering through BBF, or Bank Business Factory. There are also emerging need for outsourcing account monitoring and identity confirmation, as well. We'd like to collaborate with these startups to work on these as new business areas.

As for overseas business, we'd like to take a challenge on drastically reorganizing cost structures and adding new services, in addition to what I mentioned before. We want to reconsider fund procurement methods, but it can be difficult. Cash withdrawal is possible, but cash deposit isn't with our ATMs. Unlike Japan, depositing cash sales with ATMs cannot be done easily, but there is quite a lot of money at cash registers at 7-Eleven stores, so we are hoping to discuss with SCI members how to make good use of such money and reduce fund procurement costs.

Regarding our new services, we started new cash receipt services in Japan, and B2B money transfer is increasing in the United States. Our ATMs are available only for cash withdrawal, but we'd like to consider ways to use them to receive the transferred money, for example.

As for our capital policy, we plan to generate about JPY 80 billion to JPY 85 billion in profits over 3 years under our medium-term management plan. We decided to use half of that amount to make gross investments and strengthen our management foundation.

So we have invested in the development of new services and group financial strategy as is shown on this page. We have invested a total of about JPY 18 billion by now. We still have about JPY 20 billion to go against the total of JPY 40 billion after JPY 18 billion investments. We also used some of the JPY 20 billion for impairment. But on a cash flow basis, we still have half of the planned amount, so we'd like to allocate the money to create new businesses. For the other half, the remaining JPY 40 billion-or-so, we are considering shareholder returns. There is no change in our basic policy for stable and continuous increases in dividends with a minimum payout ratio of 40%. We will continue working hard to allocate about JPY 40 billion over the 3-year period to pay dividends.

This concludes my presentation on financial results for the interim period and the progress of our medium-term management plan. There's a lot of media coverage about cashless society and digital society almost every day. How to look at our interim period results under these circumstances? We believe that our ATM business itself is growing steadily and solidly, both in terms of the number of transactions and the number of ATMs. But we shouldn't be complacent. While our business is profitable, we should use these profits and work hard to create new businesses.

So we appreciate your continued support. Thank you very much.