Acom Co Ltd

TSE:8572

Earnings Call Transcript 2019-Q2

[Shigeyoshi Kinoshita, executive]

I'd first like to extend my heartfelt appreciation to all of you for your kind support to and understanding of our company. I'd also like to extend my sincere thanks to you all for taking the time out of your busy schedules to attend this presentation.

In my presentation I will touch on items numbers 1 to 4: Business environment, trend of the personal car loan market, financial results summary, a segment breakdown; item #5, loan and credit card business; item #7, guarantee business; item numbers 9 and 10, target markets and overview of overseas financial business; item #15, progress made in the current midterm business plan; and lastly, dividend policy and the current dividend payouts.

Later, Mr. Okamoto, Chief PR and IR Officer will go over some of the highlights of the parent company outcome, together with interest repayment, credit cost and financial expenses. Please go to Page 3 of the presentation.

During the first half under review, the Japanese economy showed a recovery with improved corporate earnings and employment as well as recovery in personal consumption, thanks in part to the government's economic policies.

While the Japanese economy is expected to continue to recover, it still could be adversely affected by economic uncertainty outside Japan and volatility in financial and capital markets as well as a series of natural disasters, which we have suffered recently.

In Thailand, where we operate, the economy has posted real GDP growth of over 4%, with robust export and expansion in consumption, in tourism and the private sector coupled with increased production in the agriculture sector.

In Indonesia, on the other hand, domestic demand has been growing, driven by personal consumption and in fact, the GDP growth in the second quarter far exceeded market projections. Rising export -- import prices, resulting from the depreciation of its currency however, could dampen economic growth.

In Japan, as shown on the bottom left, in the consumer loan market, the nature of competition continues to involve players from different business areas beyond the tradition bank and nonbank markets. The markets served by banks have slowed down as they introduced voluntary measures in response to a new policy, which the Japanese Bankers Association announced in March of last year. The nonbank market on the other hand, has experienced a steady decrease of requests for interest repayment. However, as request for interest repayment are susceptible to changes to the external environment, we need to continue to closely monitor their trends.

In Thailand, while the personal loan market continues to show steady growth as personal consumption drives the economy, the Thai Central Bank introduced new regulations for consumer lending and credit cards back in September amid concern about growing household debt.

In this operating environment, we will continue with our effort to grow receivables and gain market share in the consumer and car loan markets. In the 3 core businesses, namely the loan and credit card business, the guarantee business and the international operations, while at the same time trying to contribute to the healthy growth of the overall markets.

Please turn to Page 4. On this page, you can find the past evolution of the size of the personal card loan market. As the left graph shows, according to preliminary data from June, the total market grew by 1.5% to JPY 10,620 billion, showing continued growth with a recent trend of some slowdown.

Looking at subsegments of the market. The bank market shown at the top right grew year-on-year by 1.6% to JPY 6,380 billion in June. The bank market however, contracted compared to where it was in March, partly because banks have adopted voluntary measures to respond to the Japanese Bankers Association's agreement issued back in March of last year. We, however, expect the market to show modest recovery going forward. While the nonbank market shown at the bottom right, had continued to shrink for long time, it grew 1.3,% year-on-year to JPY 4,230 billion in June showing continued moderate expansion. The markets served by consumer finance companies within the nonbank market on the other hand grew to JPY 2,490 billion in June, showing steady expansion. With a magnitude of impact from interest repayment becoming less significant. This market is expected to post sustainable growth down the road. For these reasons, while we anticipate the personal card loan market to post continued moderate growth, we will closely monitor its trends.

Please turn to Page 5 for an overview of our financial results. Receivables in the loan and credit card business shown at the top grew by 3.7% to JPY 871.4 billion. Thanks to steady growth both in loan and credit card receivables. Guaranteed receivables increased by 2% to JPY 1,207.3 billion. Receivables of our offshore financial businesses grew by 7.2% to JPY 213.5 billion, thanks to the growth of EASY BUY's receivables. As a result, the total receivables grew by 3% to JPY 2,302.7 billion.

Operating revenue in the loan and credit card business grew by 3.7% to JPY 72.2 billion, thanks mainly to the growth of interest income in the loan business and credit card revenue. Operating revenue in the guaranteed business increased by 8.9% to JPY 34.3 billion, mainly thanks to the growth of guaranteed receivables and increased revenue associated with regular revisions to guarantee fees.

Operating revenue of our overseas financial businesses increased by 13.3% to JPY 27.8 billion due to growth of EASY BUY's receivables and the cheaper yen against the Thai baht. As a result, the total operating revenue increased by 6.5% to JPY 137.3 billion.

Consolidated operating expenses decreased by 1.4% to JPY 89.3 billion. This is thanks to a combination of 3 different factors. Financial expenses dropped 4.2%, thanks to further improvement of outcomes funding environment. Provision for bad debt booked came down by 3.1% due to dropping additional provision booked while bad debt expenses increased with the expansion of the core businesses. Other operating expenses grew 0.6%, resulting from a reduction and control of various expenses through improved operational efficiency. As a result, the total operating expenses dropped by 1.4% to JPY 89.3 billion. This resulted in consolidated operating profit of JPY 47.9 billion or a profit of JPY 48.2 billion, and profit attributable to the shareholders of the parent company of JPY 39.8 billion. We made good progress towards meeting the full year consolidated target by achieving 50.9% of the operating revenue target, 62.1% of the operating profit target, 62% of the owner profit target and 62.6% of the target for net income attributable to the shareholders of the parent company.

We, however, have kept our initial targets intact since we still cannot rule out the possibility of having to top up the reserve for loss on interest repayments.

Please go to Page 6. Looking at a breakdown of receivables among different business segments. As is illustrated by the chart at the top left, the loan and credit card business accounted for 37.8%. The guarantee business representing 52.4% and overseas operations, 9.3%.

The split of operating revenue illustrated by the chart at the top right on the other hand, is the loan and credit card business accounting for 52.6%, while the guarantee business representing 25% and offshore operations, 20.3%.

Please find the past trend of operating profit before interest repayment expenses by segment at the bottom right. The loan and credit card business accounted for 53.5%, with JPY 25.6 billion, while the guaranteed business and overseas operations represented 25.5% and 20.2% with JPY 12.2 billion and JPY 9.6 billion each.

Please go to Page 7 for an overview of the loan and credit card businesses. As is shown on the top left, the combined receivables of the loan and credit card business grew by 3.7% to JPY 871.4 billion, with the loan business representing JPY 813.6 billion and the credit card business accounting for JPY 57.7 billion, the number of accounts for the loan business shown at the bottom left increased by 3.4% to 1,513,000. All these are on track to achieve the full year targets.

Operating revenue shown at the top center grew by 3.7% to JPY 72.2 billion, largely because of the growth of interest income in the loan business and revenue from the credit card operations. Operating profit shown at the top right grew 4.7% to JPY 25.6 billion. The average loan yield shown at the bottom center stood at 15.11% in the combined loan and credit card businesses, while it was 15.21% in the loan business.

Later, Mr. Okamoto will go over what's behind the higher average loan yield and the increased bad debt expenses.

Please turn to Page 9 for an overview of guaranteed business on a consolidated basis.

In the first half, we continued with the effort to enhance our relationship through close communication with our partner banks in the guaranteed business. Guaranteed receivables shown at the top left were JPY 1,058.2 billion for Acom and JPY 149 billion for MU Credit Guarantee with 2% year-on-year growth and 0.6% half-on-half growth of combined guaranteed receivables to JPY 1,207.3 billion. Following the Japanese Bankers Association's policy, however, our partner banks have controlled advertisements and promotion, which lack consideration for customers and improved their underwriting process. Since the second quarter of last fiscal year. These voluntary measures have led to continued slower receivable growth. We will continue to closely monitor our trends since the pace of growth of guaranteed receivables is likely to stay low. Combined operating revenue shown at the top center grew by 8.9% to JPY 34.3 billion, JPY 29.1 billion for Acom and JPY 5.2 billion for MU Credit Guarantee, while operating profit shown on the top right, grew 75.9% to JPY 12.2 billion. Operating profit growth was more significant than operating revenue growth of 8.9%, thanks to reduced provision for bad debt.

Again Mr. Okamoto will go over what's behind the drop in provision for bad debt. As the magnitude of impact from legal changes and request for interest repayment becomes less significant among nonbanks, we anticipate the overall market to post a moderate recovery despite some implication from FSA's interim report on banks card loan lending and fact-finding survey among banks. We will continue to promote close communication with our partner banks and promote a proposed sales initiatives.

Please turn to Page 11. This page shows target markets for our overseas business and an overview of our operations in each country. We have pursued aggressive business promotion in our offshore operations for further expansion. EASY BUY, which operates loan business in Thailand, has continued to steadily grow the number of new customers with aggressive promotion of its Umay Plus brand and its effort to improve its brand equity and expand new customer acquisition. The company continues to enjoy the #1 position in the nonbank industry in that nation and as a leading company has built-in competitive advantage in brand equity and customer traffic.

In Indonesia, Bank BNP has worked to maintain and improve the quality of its loan asset and to enhance its internal control.

In the Philippines, Acom Consumer Finance Corporation started personal lending business in the Metro Manila area in July of this year as planned and will promote aggressive sales activities. Drawing on the experiences we have built in personnel -- our personal business in Japan and Thailand as well as in our offshore operations, we will endeavor to contribute to further development of the rapidly growing nation through financial services to meet demand for personal loans. We are still waiting for a review of our application for license in Vietnam, while we continue with research activities where we analyze various regulations, risks and the market itself.

Please turn to Page 12 for an overview of our international operations. Receivables of our 2 overseas financial subsidiaries shown at the top left were JPY 166.9 billion for EASY BUY, and JPY 46.5 billion for Bank BNP. Combined receivables grew by 7.2% to JPY 213.5 billion. The magnitude of currency impact as is shown below the bar graph was a positive JPY 1.8 billion for EASY BUY, resulting from the cheaper yen against the Thai baht and a negative JPY 3.7 billion for Bank BNP, resulting from the stronger yen against the Indonesian rupiah. The net impact was a decrease of JPY 1.9 billion in combined receivables. As is shown at the top center, operating revenue for EASY BUY was JPY 24.3 billion; JPY 3.5 billion for Bank BNP, with combined operating revenue increasing by 13.3% to JPY 27.8 billion. Combined operating profit on the other hand, grew 44.9% to JPY 9.6 billion as is shown at the top right.

In the center, please find EASY BUY's receivables revenue as well as profit on a local currency basis. Its receivables outstanding shown on the left grew by 6.8% year-on-year or 0.4% half-on-half to THB 50.1 billion. Operating revenue shown at the center grew at 9.2% to THB 7 billion, while operating profit shown on the right increased by 33.3% to THB 2.9 billion. The growth of operating profit was more significant than the operating revenue growth of 9.2%, thanks to decline in provision for bad debt and better control of other operating expenses.

The company's marketing strategy including its aggressive sales activities, advertising strategy as well as its brand strategy are paying off with a steady growth in new customer acquisition. Its additional lending is declining, however, due to the new lending regulation introduced in September of last year. We'll continue to monitor trend closely as the growth of its receivables slows down. The company will continue with its aggressive sales activities while focusing on the improvement of the quality of its loans as its top priority.

Please find Bank BNP's receivables, operating revenue and operating profit in local currency at the bottom of the page. While its receivables grew by 13.8% to IDR 6,049 billion. Its operating revenue increased by 6.5% to IDR 445.9 billion. And its operating loss was IDR 18 billion. The company will continue with its effort to improve its loan portfolio.

Please turn to Page 17. Next I'll touch on the progress we've made in the current midterm business plan. On this page, we compare the current midterm business plan ending this fiscal year with the progress we made in the first half. While we continue to be hit by impact of banks' voluntary measures in response the Japanese Bankers Association's new policy and the new regulation introducing Thailand, neither of which were anticipated in the process of developing the current midterm business plan. We, however, believe, we have made good progress in the business plan.

By business line, in the loan and credit card business, we're on track to achieve midterm receivables targets thanks to the steady growth of loan and credit card receivables.

We are also on target to achieve the operating revenue target, thanks to the steady growth of receivables, and on track to achieve the operating profit target due to a reduction and control of various expenses. As for the guaranteed business, we have revised down our receivables target for the year ending March 2019, reflecting an impact from a bank's voluntary measures respond to the Japanese Bankers Association's new policy. While we continue to find ourselves in the challenging operating environment, we will do utmost to grow guaranteed receivables. Operating revenue continues to be strong on the back of receivable growth and regular revisions of guaranteed fees, operating profit also remains good with a reduction in provision for bad debt.

Last but not least, as for our international businesses, we have downgraded our receivable target for the year ending March 2019, reflecting an impact from the new lending regulation in Thailand. Impacted by the new regulation, the rate of growth of receivables of EASY BUY has slowed down. The Thai business, however, will promote aggressive sales activities in its effort to achieve its target while it continues to focus on the improvement of the quality of its loan asset as its top priority. Operating revenue of our international operations continues to grow, thanks to the growth of receivables of EASY BUY, while its operating profit has grown due to a decline in provision for bad debt. While Bank BNP finds itself in a challenging situation, it will continue with its effort to improve its loan portfolio by responding to -- while responding to changes during economic environment, regulations and policies with flexibility.

Please go to Page 18. Lastly, I will touch on our dividend policy and our current dividend payment. Our base dividend policy is the one where we try to have a stable and sustainable return to our shareholders and improve it, while we look at current business condition, our equity and our operating environment.

In the first half, our operating revenue and operating profit steadily grew with the growth of receivables in the 3 core businesses. The equity to asset that we target in the current midterm business plan is 20%, including the assets we guarantee in the guaranteed business in the total consolidated asset. The current equity to asset ratio 14.4% is still below that target.

The number of requests for interest repayment is coming down as we initially expected. And with this, we believe the risk of equity impairment has disappeared. We, however, cannot rule out the possibility of another reserve top up, so we will continue to closely monitor our trends. In this environment, we pay -- we will pay JPY 1 per share for the first half as we initially expected, and we will pay another JPY 1 per share for the second half, bringing the total dividend per share to JPY 2 annually.

This will do for an overview of our financial results for the first half for the year ending March 2019. In our effort to live up to expectations of investors, we will endeavor to become a corporate group which maximizes its corporate value through sustainable growth and contributes to the society in various areas while keeping close communication with MUFG. I would like to end my presentation by asking for your continued support and guidance to our firm. Thank you very much for your attention.

[Takashi Okamoto, executive]

I'm going to spend the next 15 minutes to go over loan business, guaranteed business, interest repayment, provision for bad debt and lastly, financial expenses by focusing mainly on Acom and some of its highlights.

Please turn to Page 8 of the presentation. I'm going to go over Acom's loan business by focusing mainly on its receivables. Loan receivables shown on the top left grew by 2.3% to JPY 813.6 billion, mainly thanks to an increase in the number of accounts driven by new customer growth. Receivables in the mainstay and secure lending business increased by 2.5% to JPY 808 billion.

Operating revenue shown at the top center grew by 2.5% to JPY 68.2 billion, mainly thanks to an increasing interest income of the loan growth. We are on track to achieve the full year targets. The average loan yield shown on the top right in the overall loan business increased by 4 basis points to 15.21% and it was 15.24% in the unsecured loan business, partially because the proportion of loan asset represented by interest rates of between 15% and 18% increased on the back of new customer growth. The number of accounts in the loan business shown at the bottom left grew by 3.4% to 1,513,000 and it's also on track to achieve the full year targets. While the personal card loan market continues to post moderate growth, a competitive environment is changing in the loan and credit card business is represented by a slowdown in the bank markets. We, on the other hand, had promoted strategic marketing initiatives including interest-free lending service to drive customer traffic and an ad program emphasizing our competitive advantage and improved Internet and website functions. Thanks to these measures, the number of new customers shown at the bottom center grew by 4.2% to 125,000 and is on track to achieve the full year target of 242,000.

We will continue to further improve our services to gain more customers. The ratio of bad debt expenses shown on the bottom right increased by 15 basis points to 3.16%. This is mainly because the increase in the proportion of newer customers, with the growth of receivables, and also due to an increase in general bad debt expenses with a decline in the number of requests for interest repayment, which has continued since last year. This means we have good control over the quality of our loan asset.

Please turn to Page 10 for an overview of our guaranteed business, where I mainly focus on guaranteed receivables.

Firstly, guaranteed receivables shown at the top left, grew by 1.1% year-on-year or 0.2% half-on-half to JPY 1,058.2 billion. As Mr. Kinoshita mentioned earlier, our partner banks have introduced voluntary measures in response to the new policy, the Japanese Bankers Association announced in March of last year.

Looking at a quarterly trend of guaranteed receivables growth. The rate of growth has slowed down from 5.1% in the fourth quarter of last fiscal year to 2.6% in the first quarter and 1.1% in the second quarter of this fiscal year. We will continue to closely monitor trend since this suggests that the rate of growth of our guaranteed receivables will stay low.

Operating revenue shown at the top center, grew by 8.4% to 29.1 billion, thanks mainly to the growth receivables and the increased guarantee revenue following a regular review of guarantee fees. Operating profit shown at the top right on the other hand, grew 86.2% to JPY 10.6 billion. The growth of operating profit was more significant than the 8.4% operating revenue growth because of a decline in provision for bad debt. I'll come back to this point with greater details when I talk about provision for bad debt later in my presentation.

Receivables for claim shown at the bottom center, increased 17.7% to JPY 51.6 billion. The proportion of newer customers has increased with the growth of receivables, which continued until last year and a recovery period has lengthened as a result of long-dated installment payments, which we agreed to with those customers in a settlement process. These are the reason behind the increase in receivables for claim. With a more recent slowdown in the growth of guaranteed receivables, however, the proportion of newer customers is coming down and the rate of increase in receivables for claim is also slowing down. The ratio of bad debt expenses shown at the bottom right increased by 17 basis points to 2.46% with the growth of receivables over the years. New customer acquisition is slowing down as our partner banks introduced voluntary measures in response to the Japanese Bankers Association's new policy. As a result, the proportion of newer customers is coming down. This in turn, should help to control bad debt expenses and stabilize the ratio of bad debt expenses. With the intention of the agreement in mind, we'll carry out underwriting while keeping close communication with our partner banks, and we believe this should help to stabilize the ratio of bad debt expenses.

Next, please go to Page 13 for interest repayment. As shown on the right, claims for interest repayment in the first quarter declined by 27.9% year-on-year while debt dropped by 17.3% in the second quarter. The total number of claims declined by 23.2% to 14,200, which showed a similar rate of decline to our initially projected dropoff between 20% and 25%. The pace of decline in the second quarter, however, slowed down Q-on-Q.

We plan to announce the number of requests for the month of October, on the 12 of this month. Given the trend up until mid-October, the number of requests is likely to be around 2,500, suggesting a further slowdown in the rate of a decline. While we anticipate the number of requests to trend down, we'll closely monitor trend as it is susceptible to changes in external factors such as advertisement activities of certain law firms.

Next, please go to Page 14. I would like to talk about the trend of loss on interest repayment here. We took out a total of JPY 20.8 billion, JPY 18.5 billion for interest repayment and JPY 2.3 billion for principal write-offs, from the JPY 104.4 billion outstanding results from the end of last fiscal year. After this drawdown, the total reserve sitting on the balance sheet at the end of the second quarter is JPY 83.1 billion. The total drawdown in the first half came down by 36.2% year-on-year, mainly due to a decline in request for interest repayment, lengthening of settlement negotiations with certain law firms. With the number of requests trends now, we have continued to settle unsettled claims this fiscal year. And with the increase in settlements through litigation, the value per claim is on the rise.

Given the strength, the rate of decline in annual drawdown from the reserve is likely to be close to the initial projection of 25%. We believe the risk of equity impairment has disappeared as drawdown from the reserve has come down with a declining number of requests for interest repayment. We, however, cannot rule out the possibility of another top up, as the rate of decline in the number of requests have slowed down. We'll continue to examine the difference between our initial projections and actual claims every quarter to see if we have a reasonable and sufficient level of reserve sitting on the balance sheet.

Please go to Page 15 for provision for bad debt. Consolidated provision for bad debt shown at the top left, decreased by 3.1% to JPY 38.3 billion, mainly due to drop at Acom. Provision for bad debt on a nonconsolidated basis at Acom shown at the top center, came down by 4.6% to JPY 28.9 billion. This is because while bad debt expenses increased JPY 2.4 billion on the back of expansion of loan and credit card receivables and guaranteed receivables, additional provision booked for loan and credit card operations dropped by JPY 2 billion and additional provision for the guaranteed business came down by JPY 1.8 billion.

Now I'd like to go over positive and negative factors behind provision for bad debt. Bad debt expenses increased by JPY 2.4 billion. JPY 1.2 billion of that increase is because of the growth of receivables and decline in request for interest repayment in the loan and credit card business. The remaining JPY 1.2 billion is due to the growth of guaranteed receivables in the guarantee business. The factors behind the JPY 2 billion decline in additional provision booked include slowdown in the rate of increase in receivables for claim in the guarantee business and an increase in the proportion of settled claims whose reserve ratio is lower. The factors behind the JPY 1.8 billion decline in additional provision booked in the guaranteed business include a JPY 1.1 billion increase due to a rise in the ratio of bad debt expenses on the back of half-on-half growth of receivables in the second quarter last fiscal year and JPY 700 million decrease in the second quarter of this fiscal year due to flattish receivable growth half-on-half with slightly lower ratio of bad debt expenses. The total NPLs shown at the bottom center, increased by JPY 1.3 billion to JPY 58.1 billion on the back of growth of receivables with flat NPL ratio of 7.14%.

Please go to Page 16. Last but not least, I will go on financial expenses. In the first half, in a low interest rate environment, we tried to secure cheap and stable funding. Given BOJ's monetary policy and our operating environment, we tried to further control our financial expenses by using cheaper commercial paper. We also tried to bring debt duration to our optimum level and realize evenly distributed maturity. As a result, consolidated financial expenses shown on the top left came down by 4.2% to JPY 5.9 billion, mainly thanks to better funding environment for Acom. Non-consolidated financial expenses at Acom, shown at the top center, dropped by 7.5% to JPY 2.9 billion, while outstanding debt shown at the top right increased by JPY 37.5 billion to JPY 640.2 billion on the back of the growth of receivables in the loan and credit card business. The average borrowing costs came down by 12 basis points to a stable 0.96%, as is illustrated by the line graph.

The pie chart at the bottom left shows funding sources and their proportions. The split between direct and indirect funding is 36.1% and 63.9%, with funding from MUFG representing 32.9%.

In a low interest rate environment, the proportion of fixed-rate funding is 81.9% while long-term funding is 93.7%.

This will do for details of our first half financial results for the year ending March 2019. I would like to conclude my presentation by asking for your continued support and guidance to our firm. Thank you very much for your kind attention.