Seven Bank Ltd

TSE:8410

Earnings Call Transcript 2019-Q3

[Hiroshi Takeuchi, executive]

Hello, everybody. I am Takeuchi of Seven Bank. Thank you for attending this meeting on Seven Bank's Financial Results for the Third Quarter of Fiscal Year Ending March 2019. Let me start the presentation to discuss the third quarter results using the presentation materials.

Please turn to Page 2, which describes financial results digest. In the third quarter of fiscal year ending March 2019, on a consolidated basis, ordinary income was JPY 111.4 billion, year-on-year increase of JPY 16.7 billion. Ordinary profit was JPY 32.1 billion, JPY 2.1 billion increase year-on-year.

On a nonconsolidated basis, ordinary income was JPY 91 billion, year-on-year increase of JPY 2.8 billion. Ordinary profit was JPY 34.2 billion, year-on-year increase of JPY 1.6 billion. We marked record-high ordinary income as well as ordinary profit for the third quarter.

On the other hand, net profit on a consolidated basis was only JPY 7.5 billion; and nonconsolidated basis, JPY 8.5 billion due to impairment done during the first half. However, we still aim to achieve the fiscal year 2018 plan and make endeavors steadily.

As I will explain in detail later, at this moment, we are in line with our initial plan for the full year result. As we are getting closer to the year-end, we make sure to achieve the target through steady efforts.

With respect to dividend, we increased the year-end dividend forecast from the current JPY 5 per share to JPY 6 per share; annually, JPY 11 per share.

Please see Page 3 to give you segment breakdown. As I commented in the beginning, both income and profit on a consolidated basis achieved positive year-on-year growth in the third quarter. Key driver for ordinary income growth of JPY 16.7 billion was the immediate impact of ATM operation installed at SEI in FCTI. Ordinary profit increase of JPY 2.1 billion was mainly contributed by profit from Seven Bank segment. Given that we are currently in line with our initial full year forecast, we may be able to slightly overachieve our target.

Next page onwards, I will discuss results of each segment of our business. Seven Bank also achieved income and profit growth year-on-year in the third quarter. Ordinary profit marked JPY 91 billion, JPY 2.8 billion increase year-on-year. In that, ATM-related fee income generated JPY 82.1 billion, JPY 1.8 billion increase year-on-year. Approximately 2% growth was achieved for the number of transactions, income and profit.

In the third quarter, there was some downward pressure on the number of transactions across banks as [indiscernible] banks started to charge fees for ATM usage. Starting from the middle of October, enhanced electronic money charge service was launched, and massive investments in advertisement were made for that. Transactions accompanying with the service seemed to make some contributions, which resulted in about 2% increase in our income.

Expenses grew year-on-year, partly due to increase in the number of ATMs installed. However, efforts are underway to continue to cut down on costs.

Ordinary profit was increased by JPY 1.6 billion to JPY 34.2 billion. We are currently in line with our full year forecast of JPY 42.5 billion.

With respect to the number of ATMs installed at end of term, we are slightly behind our plan. As there will be more 7-Eleven store openings in February, our assumption is that we are going to reach our target.

The table below shows daily average transaction per ATM and total number of transactions. Unfortunately, daily average resulted in slight decrease of 1.7. We may have to struggle a little due to some discontinuation of services during the new year in January, but we should be able to achieve our full year target.

Page 5 shows ATM platform business figures. These are quite self-explanatory. However, for the reported third quarter from October to December, daily average transactions per ATM was 93.5 despite being in the peak season. The result was in short of our expectation as it remained flat quarter-on-quarter. As for the number of ATMs, we continue to expect growth inside the 7&i Group.

Page 6 describes settlement and account business figures. We continue to make good progress in the number of individual accounts and balance of the deposits, as shown on the left. Especially for the number of accounts, it seemed to be benefited by advertisement on the ATMs and better awareness of Seven Bank.

For personal loan services, growth in the balance at the end of period was very small. We have been informed that our peer banks also have struggled, and we were not an exception here. We do not think that advertisement is the only solution, but we need to improve awareness or growth of the balance will be stopped. Therefore, we intend to find a good way to create an appeal. International money transfer services and debt services are in line with our plan and have made good progress.

Page 7 summarizes some topics on domestic business. As shown in the first bullet point, e-money charges service was enhanced on October 15. On top of conventional nanaco, charges on transportational e-money, such as Suica and PASMO, and Rakuten Edy are now available. As you may have seen, campaigns increased exposure of the service, and thankfully, that brought about a good start. We had talked about accompanying transactions with charges occurred in the case of nanaco. As with transportational e-money, such as Suica, even though the data is still preliminary and may not be fully accurate, there seems to be more tendency than nanaco where bank deposits are withdrawn and money is charged. Since it has only been 3 months since launch, and so it is not yet definitive, the service seemed to be very effective in terms of advertisement and driving customers to stand in front of our ATMs.

The second bullet point is about the announcement of a wide-area entrustment of ATMs outside branches of the Nanto Bank. They are the first regional bank to have ATMs fully entrusted to us. We have talked about this type of needs without being able to make concrete announcement. At last, we can communicate this great news. As many of you may know, the replacement will not be done all at once but only gradually starting from fiscal year 2019. Now we began to receive even more inquiries than before. We intend to further cultivate opportunities for entrustments.

The last point is about the investment in TORANOTEC. Yesterday, a press release was issued on the investment of about JPY 2 billion in TORANOTEC. The company is scheduled to become our equity method affiliate. TORANOTEC is a company that promotes small lot investments. They have a few peer companies, but we participated in the company's equity since its foundation and have been in discussion on the operations.

In the half-year financial presentation, we had explained that we could promote development of SEVEN PREMIUM financial version focusing on investment, insurance and credit. Finally, we are able to present a concrete example of what we had set to do. TORANOTEC is only a new startup, so it can be somewhat regarded as part of upfront investment. However, this investment should help expedite the rollout process incorporating with the group. So our company and TORANOTEC will continue to work together.

This was about our businesses in Japan.

Please see Page 8 to discuss FCTI, our overseas business. In the third quarter, income and profit increased year-on-year. Ordinary income recorded USD 183.7 million, which was a significant year-on-year increase. Ordinary profit was negative USD 10.5 million, even though it improved from last year. However, just looking at the third quarter, due to impairment, the result for the quarter was positive. While you can see the full year revised plan, the results may not have been positive for Q4 due to seasonality. However, on a full year basis, given the impact of impairment, we think we are prepared to turn around positively.

As you can find main ATM figures in the table, because installation at SEI is completed, the results are visibly different compared to last year. It was in line with our expectations that the number of ATMs installed grew largely from about 7,700 to 13,000 units.

Page 9 describes monthly average transactions per ATM installed at U.S. 7-Eleven. While we had to struggle during the first half of the year, the numbers have been hovering around 55 to 60 since May. December shows some decrease partly due to cold weather, but January started off at around 50, so the number should be able to stay at this range.

In light of cost reduction, contracts for ATMs installed outside of SEI were reviewed. For unprofitable ATMs, either revision of contract terms or exits were considered as options in order to reduce costs. We are going to pursue further improvement in operational efficiency to ensure profitable turnaround in the next fiscal year.

I have covered nonconsolidated and overseas FCTI results.

Lastly, please see Page 10 to discuss shareholder returns. Our policy is to target a minimum consolidated payout ratio of at least 40% through twice-yearly payments. At the same time, we have always aimed at steady dividend increase as well. Furthermore, our medium-term business plan mentions enhancement of shareholder returns. The third quarter results for nonconsolidated Seven Bank was good, and FCTI now has better visibility for turnaround. Given these factors, we intend to increase our year-end dividend per share by JPY 1. As annual dividends will amount to JPY 11 per share, the consolidated payout ratio would be 102.4%. However, this is considered as one-off event due to impairment, therefore, should not be an issue in light of financial soundness.

This concludes my presentation. Despite the media hype on potential increase in cashless during this fiscal year, our efforts resulted in steady growth in the number of ATM transactions. Seven Bank will continue to endeavor for the rest of the fiscal year to achieve our full year targets.

Thank you.