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Edited Transcript of 8303.T earnings conference call or presentation 16-May-19 1:30am GMT

Full Year 2019 Shinsei Bank Ltd Earnings Presentation

Tokyo Jun 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Shinsei Bank Ltd earnings conference call or presentation Thursday, May 16, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hideyuki Kudo

Shinsei Bank, Limited - President, CEO & Representative Director

* Shouichi Hirano

Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance

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Presentation

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [1]

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[Interpreted] It's Chief Officer of the Group Corporate Finances, Hirano. Thank you very much for attending despite your busy schedule.

At the beginning, we have to make an apology. Yesterday, at 2:00, we announced our financial results and the business highlight regarding the share buyback. We made a comment on that. However, in the press release, because of the human error, we could not include the announcement of the share buyback which was announced 20-minute delay. And we apologize for causing a confusion.

So regarding this issue, to the Tokyo Stock Exchange, as of yesterday, we made a report. So before beginning the meeting, I would like to give an apology. So let us start giving the presentation based on FY 2018 full year financial results.

Firstly, there are 3 major points: first, the net income for the FY 2018 was JPY 52.3 billion, and which achieved our initial plan. The ordinary business profit compared to FY 2017 decreased by 5%, but net credit costs improved by 21% compared to FY 2017. As for per share value, in addition to the steady net income growth but with the share buyback of JPY 13 billion, it increased by 6%, EPS, or 2% excluding the impact of share buyback. And the BPS increased by 8%.

Second, the full year net income forecast for FY 2018 is JPY 53 billion. The ordinary business profit was expected to 7%, which is JPY 91 billion. And the expense-to-revenue ratio is expected to be largely flat compared to FY 2018.

Net credit costs compared to FY 2018 expect to 30 -- 19% at JPY 35 billion and mainly due to an absence of net credit recoveries recorded in the institutional business in FY 2018. And details will be given on the next page -- the later pages.

And third point is on the shareholders return for FY 2018. Year-end dividend for FY 2018 has been set at JPY 10 per share. And the share buyback program was approved at the Board of Directors meeting, JPY 23.5 billion as an upper limit. And the total shareholder payout ratio is 50%.

We aim to maintain but preferably improve the total payout ratio within the -- based on the weaker share price and does not reflect the total situation. So we will maintain the policy of [reducing] in the revitalization plan, which is in the normal within the payout ratio in the range average Japanese banks. And based on that, the maximum share buyback program amount was set. However, the shareholders return amount and payout ratio in addition to the share price but the capital situation and the market conditions will be considered and decided based on those factors. So the total payout ratio calculated this time will not necessarily mean the future payout.

Next, FY 2018 financial results summary will be explained. The average balance of the growth area due to the increase -- net increase -- increased by 4%, but the noninterest income due to mainly to the absence of gains on stock transactions. The total revenue decreased by 1% at JPY 229.7 billion. Total expenses due to the net score banking system related expenses increased by 2% at JPY 144.7 billion. Total revenue was below the original plan. So the expense-to-revenue ratio was at 63% from 61.5% in FY 2017.

Net credit costs due to the recoveries in the institutional business and the decrease in the balance of the unsecured loan decreased significantly. However, in APLUS, there was an additional credit provision. So the net credit costs decreased at JPY 29.3 billion. Kabarai was released reserve of JPY 2.3 billion; APLUS FINANCIAL, JPY 3.5 billion provision; and Shinsei Financial, JPY 5.6 billion reserved reversal; and Shinsei Personal Loan was a reversal of JPY 0.1 billion. Income tax returns decreased, reflecting the financial disposals of legacy assets. As a result, net income increased to JPY 52.3 billion.

Next, I would like to explain FY 2019 financial plan. Total revenue expect to be JPY 243 billion. This reflects the SHINKO LEASE, which was announced, and the Financial Japan, the new subsidiaries. So a contribution of those companies and of APLUS and retail banking and the global markets business expected to increase noninterest income.

For expenses, expected to increase by JPY 7.3 billion to JPY 152 billion. Similarly, SHINKO LEASE and Financial Japan, the new subsidiaries, expenses are expected. And there's an expected increase in the IT and the premises expenses.

Net credit cost expect to be JPY 35 billion. This mainly comprises of unsecured loans and APLUS businesses. For FY 2018, we expect the net credit cost to increase but mainly reflected asset growth in unsecured loans as well as an absence of net credit recoveries as recorded in the Institutional Business in the last fiscal year. As a result, we plan JPY 53 billion for net income for FY 2019.

Next, please go to Slide 6. This shows the operating assets and the productivity enhancement. From the medium-term management strategy starting from FY 2019, we will implement key initiatives in our focus areas in small scale finance and individual business and business with institutional investors. We will continue to drive productivity enhancement project and aim to achieve the JPY 6 billion in profit contribution over the next 3 years.

Next, Slide 7 illustrate the summary of the third medium-term management plan covering FY 2016 to 2018. We start selection and concentration of businesses and creation of value through group integration and has been focusing on increasing recurring profits. Due to the implementation of the net free interest rate policy, during the third MTMP, the business environment became tougher than we expected. However, unsecured loan business and structured finance are relatively resilient against the negative interest rate policy environment.

Accordingly, we believe that we have transformed our business model toward sustainable earnings base. So with the growth of these areas, this contributed to profit. So through the increase in the retail earnings has steadily contributed in capital accumulation over the years with facilitating commencement of the share buyback program. Hence, we have now improved the total payout ratio. And per share value has also been improving steadily.

Next I would like to skip some slides, and please go to Slide 17. This is about the business updates for the gross business areas which is the unsecured loans and structured finance. And we will -- followed by the Retail Banking business.

Page 17 relates to the unsecured loan business. Unsecured loan balance totaled JPY 509.9 billion, which decreased by JPY 9 billion -- decreased from March 2018. But the overall balance increased by 19% over the last 3 years and also, it achieved the 6% of the annual growth rate during the third MTMP.

The summary of the Lake business, there is an initial disruption during the initial marketing activity, so throughout the year, number of applications, which are the number of new customers acquired, improved. However, we had a disappointing performance which we did not achieve the balance planned. So using -- for the customers reaching the additional devices such as -- and we will expand the smartphone-based advertisement and improvement in UI/UX in smartphone transactions. And we'll also improve the contact rate by looking closely into credit quality of each customer.

The number of new customer acquisition increased to 33,000 from 23,000 in the first quarter. In the profit and loss, interest income was largely flat while the net credit costs decreased. So resulting in a significant increase in OBP after net credit cost of JPY 21.2 billion.

Next Slide 18. This is about structured finance business. Structured finance asset balance was JPY 1.6 trillion, which was -- grew by 18% compared to March 2018. And during the third MTMP, it increased by 39% and also, it achieved a 12% per annum growth. So in that past 3 years, the amount of the domestic commitment has increased and also the various types of energy projects has been diversified. In FY 2019, the network of the institutional investors, structural capacity, cash flow analysis, advisory and funding such as equity, mezzanine and senior loans will be focused so that we will offer the one-stop services.

In the PO -- on the net credit costs due to the increase in the project finance portfolio, the general loan loss reserve calculation was revised, so -- because mainly to this. We recorded JPY 2.1 billion net credit recoveries. As a result, OBP after net credit costs increased to JPY 12 billion. This increased significantly from the previous fiscal year.

Next, Slide 21. This summarizes the retail banking business. The retail banking business has been recording losses, but improving this earning structure was one of the most critical issues in our third Medium-Term Management Plan. So in order to improve this, we have been taking numerous initiatives such as rationalization of call centers and closure of our Takamatsu Financial Center and the Kanazawa Financial Center.

In FY 2018, we revised our customer loyalty program of Shinsei Step Up Program so that more customers can upgrade their status easily while some customers will be charged for ATM withdrawal fees. So various measures were taken. So for FY 2018, we were able to reform our earning structure.

So segment base the operation. In order to do it, we made a change of organization. And our individual business unit will work on initiatives to create values to customers and aim to improve profitability furthermore. So this concludes my presentation for FY 2018 finance -- full year financial results.

Thank you. Next, the medium-term management strategy, which was announced yesterday, will be explained by President Kudo.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [2]

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[Interpreted] Good morning. This is Kudo speaking. Thank you very much for coming. With many companies announcing their financial results, thank you for coming to our session and taking your valuable time out of your busy schedule.

By the way, this presentation is going to be rather long, so I think we should, first of all, have a Q&A for the presentation that was initially conducted. Isn't that a better idea? Or should we continue with the presentation? Is that fine with you? Thank you then.

Then let me begin. As indicated, we've chosen the title, Redesigning Finance: Our Innovation Stories. And yesterday, we disclosed our mid-term strategies. Those of you who are here were aware -- are aware of the business model and the core business model that we had applied to date. And I'm sure all of you here are all aware of the conventional model.

So at the beginning, let me broadly explain to you what the differences are between the conventional model versus the new strategies and give you the background or textbook-like explanation. Could you jump to Page 13, please?

What are we trying to do? This page gives you the list of what we intend to do. At the moment, Consumer finance and structured finance are our focus areas. Individual business and institutional business are written here. It's not that we're trying to do something completely different. We will leverage our strength and focusing on these areas. Small-scale finance includes consumer finance, and we will initially focus on small-scale finance. And using big data, credit screening and judgment will be delivered, and there's operation and IT and then the final stage would be collection. And that could be done by overlaying the Lake ground from the beginning to the end. And we're offering that on a stand-alone basis, which we think is an important business, and we will continue. But by offering functions to good parties, I think there's the probability or possibility of scalability.

To give you an easy to understand example, we already made an announcement, a partnership with DOCOMO. And DOCOMO is a company that already has a huge amount of customers. And this kind of alliance can be offered to offer financial services to their customers and here, you find the word ecosystem.

Foreign workers in Japan, visiting Japan or coming to Japan to work who may not be enjoying full range of financial services. Then we could strike alliances with various partners and offer packages. And in those packages, we can insert financial services. There are a few functions in consumer finance, but all of the factors can be packaged to be offered to those potential customers. And that's the center left.

And then on the center right, you see the box for Institutional business. And the same idea applies in alternative investment like real estate investment or infrastructure investment. Managers, fund managers, institutional investors -- we've been offering senior finance through institutional investors. Real estate, nonrecourse finance and Japanese project finance. So we already have an extensive network with institutional investors. And there aren't so many like us. So we want to leverage on this strength.

We began with focusing on asset owners, pension funds or life companies. And then at the back of them, there are the individual customers of those entities. Then these are the pension funds. Can't we offer debt finance instruments or various arrangements or advisory that is still lacking in the market? So those are some of the ideas we have.

Bottom left, on group organization. Again, jumping a few pages. Could you go to Page 16, please. No, no. Wrong page. No. It's right. Right. That's the right page. In the third mid-term management plan, we established the regional group headquarters for back-office function. Shinsei Bank, APLUS, Showa Lease, Shinsei Financial, these entities and functions were concentrated, and they are quite sizable entities. And we've centralized the indirect functions. And this has advantage. 15% FT reduction was caused through this initiative. That wasn't the end objective. When we offer services to end customers, the customer needs should not be divided between the bank or credit card providers. I think they would be better served by offering an integrated service of all of their financial needs. And that was the original concept based upon which we broadly defined individual customers and institutional services. And the entity names are indicated here, but our objective is to manage these entities in an integrated and unified manner.

Going to the next page, productivity enhancement. To date, we've conducted various initiatives under productivity reform, and the establishment of virtual group headquarters was one such initiative and call center efficiency improvement or loyalty program review were also done. And JPY 8 million of impact was brought about.

In the next 3 years, under the mid-term management strategies, the subjects on the right-hand side will be pursued. Now here you find the word branch. We don't have so many left, but there's the Shinsei Financial outlet as well. And with digitalization further making progress, we will review that network as well. And through the use of digital tools, productivity can be further enhanced. And other banking groups are already thinking about that but I think there is significant potential there. And we think that additional JPY 6 billion of cost reductions can be delivered through those efforts.

Back to the first page or the first page I talked about, which is Page 13. I described very broadly the 4 boxes. I hope that, that has given you a broad image. So based upon that broad image, I would like to, again, go back to Page 2.

We've been discussing simpler things on various occasions. But we think that in the financial sector, services to individuals are changing quite significantly. These are already well-known subject matters. So the mid-term strategies were created as follows: last year, we did this. So this year, we will do this and come up with such and such projects -- profits. And next year, the profits is forecasted to be this and this. We've stopped doing that. Backcasting has become quite popular. What will happen in 2030? So thinking about the profile of the society in 2030, we tried to go retrospectively, chronologically and do a reverse engineering to identify what Shinsei needs to do in the initial 3 years. And that's what we're talking about when we say the next mid-term strategies.

Now the third mid-term management plan was made and we executed the initiatives. So let me wrap up what we did. We've been talking about selection and concentration of business, 2 core business areas, and we think we were able to deliver results to a certain extent. In the area of structured finance or domestic project finance, the results were better than we had expected. And we were able to gain strong presence in terms of consumer finance.

In the interim, there was chaos because we shifted the business from the bank to financial, and the negative impact had been more than expected to be flat. But already the number of applications is back to normal. And with that, the approval is also going up.

Now approval rate isn't at a sufficient level. So as my colleague, Hirano-san, has said, we're currently reviewing the credit screening standards so that the approval rate itself can be brought back to the expected level. And the virtual group headquarters was already mentioned and operations -- lean operations and productivity enhancement. In all of these areas, we've done what we had embarked upon. That is our self-assessment.

Next page. Sorry, Page 6. So I've given you the broad picture at the beginning, but at the center is the business aspect, and on the right-hand side, what do we want to realize by applying that kind of business model? These are the values we intend to create. And I will come back to these values later on. And on the left, these are capabilities that will be focused in order to support the business model, which I will revisit later.

Please jump to Slide 9. So this is -- these are the business models. In Consumer Financial or small lot finance, first, Lake brand exists. And by using our regional brand, credit screening, judgment and collection is done in an integrated manner by the single entity, single-parent. And we've already achieved certain results and have a presence. So cash cards are being used -- this is a cash cow for the group, and we still think that there is more potential left. So we will continue to capture those opportunities. But on the other hand, market is going through transformation and this is mainly caused by digitalization. Nonfinancials are coming in and nonfinancial companies are trying to offer financial services as part of their package they offer to their customers. And some of them are close to unsecured loans or some are front-loaded payment or back-loaded payments or something closer to settlement services, and the market has become quite seamless. So rather than secluding ourselves to a narrow area of unsecured loans, we may be able to offer diverse financial services that also offers settlement functions, which can be factored into their packages offered by our partners.

And in that process, our partners have abundant data. And one big key would be how we can utilize their data, and this was touched upon in our presentation of the third mid-term management plan. Second side, our AI modeling company. And data modeling has already been established by one of our partners, so we also have already done the groundwork. And I touched upon our alliance with DOCOMO as one example, and that's a good example. And we're discussing with various potential alliance partners, and not just big players.

We're also talking with entities in order to co-create the ecosystem. So on the left-hand side, we will be delivering or generating cash. But then on the right-hand side, we think that there is huge potential for growth. So we will be seeking growth on the right-hand side. But what is the key is the strength on the left box, and the left box strength is going to be the advertisement or showcase to capture customers on the right-hand side. They will only come to us if we can show strength on the left-hand side. So these will be the 2 wheels of the car.

So in order to support these and other resources, focused resources are shown here. There are general ones, but the people, meaning the -- who need to promote the women's advancement and for senior and not only just younger employees but we need to utilize the senior employees. So that has become a major theme for us.

And for reorganization, which has already been explained, how -- from customers' viewpoint how are our services will be differentiated? From that viewpoint, we made reorganization. For the indirect functions, this is regarding productive reforms. But for the businesses, for the unified operations, that has not been done sufficiently yet by financial groups. So this is going to be our new initiative.

Operations are shown here and for capital. Later, financial explanations will also be provided. But as shown here, how effectively we should use our capital? That is very critical for us. We are a domestic standard bank but regardless of the fact, this CET1 -- we have a CET1 ratio which is comparable to the international standardized bank. So by using this, we need to give the sufficient return to our shareholders. So there is a nonorganic initiative here. So including such initiatives, we will be working on this optimal capital usage.

Next. Recently, there's the -- we have not -- we have to touch upon the [SDT] and the materiality for us. This is the total picture. So this is exactly what -- as explained in the business model. What we are going to achieve in our business model.

On the left -- top left, the access to finance. So underserved customers. We will offer services to them. This is not just a slogan. Like megabanks, the general or compensatory services will not be provided. So therefore, the bank in our scale, how are we going to differentiate ourselves? And how will we be considered useful for noncustomers? Considering that, these are such niche areas, which are not necessarily have the large customer base. But if you can have the great -- a large market share, they'll be useful and if there is potential we should enter in such areas ahead of others. So we will do things that have not been done by other banks. So through such initiatives, we'll differentiate ourselves. And second point, this considers renewable energy. So we'll be specializing in these areas.

And the third point, solution through integration with external services, which have already been explained. The services is connected with the other financial services. But that's still a -- it is under consideration, and we are in the middle of the initiative. So this is going to be general or common in the future.

So financial institutions will be a supporter -- will be invisible going forward. And various services are provided. But below there, you'll see small letters powered by Shinsei Banks, for example. The right-hand side and the bottom is pretty much straightforward. So I would like to skip my explanation.

Lastly, financial targets. Unlike traditionally, the bottom line profit target are not shown. For shareholders, we believe that the way we present this, this is more significant. The EPS growth rate, 2% or more. Institutional buyback is around 2%, and we would like to maintain this growth. And the details are shown on the right-hand side. So we will aim to increase the share of the core businesses. More explanation will be needed on the bottom 3.

The expense (inaudible) HR. This year, the core banking system was released and the depreciation of the system will start. So there is a hike of the expenses. But this is not a cash item, so we will reduce this. So our message is simple. For ROE, we will target 8% on the medium term, and CET1 ratio, at minimum, 10%.

So I hope -- we hope that we will read our message here. So 8%, as a business, this is the level requirement -- the minimum level required. We are a domestic standard bank. However, we have the high CET1 ratio. So we have quite a flexibility in terms of business operation. So related to the public funds interest repayment, they have already been transferred to ordinary shares, so we need to increase our per share value. Otherwise, there's no way for us to repay the public funds. So we need to utilize capital in order to achieve this.

So that concludes my explanation.

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Questions and Answers

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Unidentified Analyst, [1]

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[Interpreted] About yesterday's press release, I have 1 question and 1 request. First, this has not been explained for the business partnership with Shizuoka Bank. As far as we read the press release, more information expected to be provided. But just grasp a rough idea with unsecured loan and housing loans, business loans and businesses -- so the partnership in those areas. Specifically, what businesses are you considering? Partnerships means -- may include credit guaranteed business or others, so what specifically are you considering?

And my request is another press release regarding the share buyback. The amount and the percentage of the issued shares, that was disclosed. But issued shares, the percentage of issued shares and actual the disclosure of the market value would be different. So maybe the market value as of May 14. If you add such information as a footnote, that would be appreciated.

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Unidentified Company Representative, [2]

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[Interpreted] Regarding your second point, actually, I agree with you. So we will take that into consideration. And the first point, several days ago, at several media covered stories, and honestly speaking, I was confused because they created their stories without confirming with us. And the fact is what we have released in this press release yesterday. Today's Nikkei has been very precise, honest and manner they wrote an article. That is close to the actual situation. So we only concluded a basic agreement, and we consider several areas that we have the potential. And that is why we agreed to conclude the business partnership. But we have not done any in-depth discussions yet. There are a lot of things written in the news article, but when I read it, some of them were confusing, even to me.

For example, offering credit guarantee in an unsecured loan business or the criteria was quite different in housing loans, so the mutual referral, for example. For those, the customers who did not meet our criteria, we will refer such customers to them. So exactly what's written in the press release will be considered going forward.

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Unidentified Analyst, [3]

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[Interpreted] I have 2 questions with regards to the mid-term management strategies. EPS growth and value co-creation you showed a target of 2% or higher EPS. So how do you define 2%? Why isn't it 3% or 5% or 10% and 2%? So that's my first question. And when you say EPS growth, are you thinking of cash-based? Or do you include acquisitions or not? That's my first question.

Yes. Then I will cut that off here once. What does this 2% represent? This kind of financial target is being shown with a backdrop.

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Unidentified Company Representative, [4]

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[Interpreted] This is extension or extrapolation from our existing business. And we have shown a number that we can commit to. So it's not ungrounded.

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Unidentified Analyst, [5]

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[Interpreted] Does this include nonorganic factors?

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Unidentified Company Representative, [6]

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[Interpreted] No.

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Unidentified Analyst, [7]

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[Interpreted] Second question. On Page 10, you mentioned the value co-creation business model. How can you implement this kind of model? My point is Page 9, as you've shown on page 9, if it's just the function being offered by bank like retail function or you offer credit screening services to a telecom company. If it's just a function that the financial company offers, then there are ample examples. But you think that you participate and create value. You have a cycle in mind. So the bank understands the financial services well and then upon that co-creating value through doing business together. That's unprecedented because probably you're looking for more than just offering settlement service or credit screening service. Shinsei used to be quite innovative in the past. And -- but today, do you have the capability of applying both the blue model and orange model circulating the value created into yet further business expansion? What is needed in today's Shinsei to do this?

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Unidentified Company Representative, [8]

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[Interpreted] It might be difficult for you to obtain a clear image. The same applies to our partner, but some kind of form is necessary. So one entry point is something we're preparing at the moment. Something like a wallet, a digital platform. Through API, you can load something or change something. That's the kind of platform we are trying to build. And that in itself could become a product to be offered by the financial group. But that's not the end objective. We, rather than trying to sell that as a product, we want to use that more as a tool to offer to our partners. They might have customers they want to offer financial services, so this is a block we can offer. But that's invisible. It's difficult to understand. So if we can form something like a wallet and a settlement service is included in the wallet, that could be pre-exempted and explained that this is something we can do. And then they may say, "Oh, that's something we want." That would begin a conversation. And partners are mixed in terms of size. There are large ones, small ones. And if it's a really large and mature platformer, then all they need is certain loan or certain function or IT.

But in other examples, foreign workers, there's no mature platformer that offers those services. There are providers that offer piecemeal services, like guarantee when they rate housings. But individual company does not have the ability to create the whole ecosystem. So someone has to become the orchestra master in order to be the conductor to arrange all functions, then that's the role Shinsei can play. And of course, now financial services will be included or rather, now financial services may become the main service. And we may be able to do that through the establishment of a joint venture. So that's the kind of idea we have in mind.

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Unidentified Analyst, [9]

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[Interpreted] So generally speaking -- sorry to be so persistent, but from a retail or telecom company perspective, I don't think they are expecting banks to offer them platforms. They probably think that they are more advanced than the financial institutions. So if there could be a clue, maybe the foreign worker example may be viable or area's niche, where there is no well-established business model and you want to bring in platforms in those areas. Is that the image?

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Unidentified Company Representative, [10]

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[Interpreted] Yes. There could be both. Of course, super large giants in retail or telecom carriers, if they try, then they can do everything by themselves. And there are companies that are actually doing that. On the other hand, from their business model perspective, to what level should they internalize? What's the threshold of internalization? That's a challenge like ourselves. There are things they shouldn't be internalizing. Then that could lead to the possibility of alliance for those functions.

And going to a different page. The page before. At the center is a function that DOCOMO may want as a single-service line. Each function has its strength. Many people neglect collection, which is our strength. Fintech companies cannot do that. So if you have data, you may be able to come up with a credit screening model. But after credit screening, offering the credit, and then collecting the debt is something that cannot be done. So our sales outcome or promise would be the players that can do that. So that's the center circle.

And then ecosystem on the left-hand side. This is about the creation of market and doing that without a clear market leader. So who will take the leadership? Someone appropriate to play the role can become the leader. And I think there are areas where we can play that role.

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Unidentified Analyst, [11]

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First, once again, the recent shareholder's return, the policy on it. For the peers, it's 30% to 50%. So this is going to be the maximum return. Once again, could you please give us your policy regarding the dividend? Current PPR. I understand the buyback, but by receiving dividend, the customer or investor base will be increased. So what's going to be your future dividend policy? That's my first question.

And the second question is the share buyback, the amount is expanded. So what is the background of such a decision-making? For example, what discussions made at the Board of Directors meeting? So did you decide on -- base on the past buyback because there was the Dow Jones proposal? Do you have such pressure? Or did you negotiate with the JFSA and this was the time that you obtained their approval? So as far as it's available, could you please give us the process for the decision-making?

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Unidentified Company Representative, [12]

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[Interpreted] Well, the dividend policy, basically, it's based on the share price level. First, the total payout ratio, after deciding the ratio, the share buybacks and the dividend, the allocation of 2. So that's how it is decided. But based on the current share price level, rather than increasing dividend, the share buyback is definitely will be better in terms of a shareholder's return. But that is what the background of the constructor. But if the PPR increases as you pointed out, there are a lot of investors who prefer larger dividend that we hear in the market. So as PPR increases, focusing more on dividend, that is the general idea we consider. And how this was decided this time? We do not have any interesting information regarding it. We have a reasonable different position or different business model. Regardless of the fact, you have -- our valuation is the same with the others. That is not -- we're not satisfied with it. This can be said the total financial industry. Our PPR is extremely low. So in that -- but the industry, such a low valuation is questionable. So we -- although this is within the revitalization plan, but we wanted to do the maximum we can do. So that's the intention of the business execution of the management and the Board of Directors meeting.

So the process for realizing this, as you imagine, of course, we have discussions with various parties. But we believe that the oral argument was accepted properly. As a voice of the market, for example, Dow Jones made various proposals. And including such proposals, we carefully listen to various voices, including the investors we meet in IR activities. It's not all voices are increasing the share buyback. But the improving the shareholder's return is a majority of such voices. So based on such voices, we have made our decision.

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Unidentified Analyst, [13]

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[Interpreted] First of all, profit growth. And second, value co-creation. You showed financial targets and you came up the value co-creation concept and you said nonorganic isn't included. The bottom line, 2% from JPY 52 billion to JPY 55 billion, if you calculate that, that would give you moderate growth. What is the assumed tax rate or Kabarai reserve? Those are some of the technicalities. So after the credit cost moderates, what would be the OBP in order for you to achieve the organic growth? And in the next 3 years, for example, the guidance is JPY 13 billion OBP growth, and JPY 4 billion is probably inorganic. So JPY 9 billion is not just through unsecured loans because that's not enough. I cannot see how you can bring your growth to that level just through unsecured loans. So which area are you expecting as source of profit growth? That's first question.

And secondly, you mentioned the highlights of the strategy for value co-creation. Your explanation was clear. I got your point. And from JPY 52 billion to JPY 55 billion, that's the financial target. You said you -- nonorganic isn't included, but what's the time frame? 3 years? 10 years? And in the 3 years or 10 years, how much upside potential do you think there is? So those are my 2 questions.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [14]

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[Interpreted] For the first question, I have to check the detailed numbers. So I will leave that to Hirano-san to respond to the first question later. So let me take the second question first. Nonorganic elements that have not yet emerged, of course, are not included in the plan. I've been talking about the business model, but we're not just drawing that picture groundlessly. There are seeds, ongoing conversations that have not yet realized in the pipeline. But what would be the estimated market size? It's also an area where there's much uncertainty. You called out foreign workers coming to Japan to work, but how much revenue can we generate from them for financial services? The estimates are extremely crude and we're trying to prioritize sizable opportunities. Then in the next 3 years, will the size of revenue and profit be the equivalent of today? Not really. But as a general trend, as I touched upon slightly, the growth potential of stand-alone financial sector during service only on their own has its limits. So -- and also, partners are asking for cooperation, and that's where we see potential. How long will it take to bloom? Is it 3 years? 5 years? And how much percent can we grow our business? We really aren't sure when asked. If it's less than 10%, then we would not make that a big element of the mid-term strategy. So our ambition is higher than that level.

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [15]

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[Interpreted] To respond to your first question, not the bottom, rear bottom. But OBP, taking into consideration net credit cost. 2018 -- fiscal year 2018 in comparison to the year ended as we already announced, 2 acquisitions had, had an impact, so that made a difference. And in terms of OBP, we're assuming that there will be growth. On the other hand, expenses, as I said, originally, system-related expenses, it's -- expenses are designed so that the increased rate will mitigate. So rather than the very, very bottom, OBP after net credit cost is going to be higher than net profit because the amount of tax will increase. So I think the slope will be higher at the OBP level than net profit.

And may I add to your second question? Two business models and value co-creation is also part of the nonorganic growth. But there could be organic growth through value co-creation. Rather than commercial banking, we're thinking of nonbanking. But domestic business and in the Asian region, investment and acquisition opportunities are constantly being pursued. Most recently, SHINKO LEASE. We obtained 80% of their equity. And there are other examples, financial services to individuals. And we've begun such initiatives in Vietnam, in Asia, and we're looking for opportunities in other countries. So they could be tacked upon. And ROE 8% also takes those opportunities into consideration. Thank you.

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Unidentified Analyst, [16]

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[Interpreted] On Page 12, financial targets. Just briefly, I have 1 question. ROEs aim to increase from 6% to 8%, meaning even the capital does not increase, the profit will increase by 30%. In such a case, EPS is targeted 2%. So if this is a simple, the profit increase, it would take more than 10 years even if capital does not increase. So how are you going to fill the gap? Meaning -- so you're going to increase or grow or areas which hide their ROE or to acquire such businesses? Or how -- do you have simulation? I'm not sure whether you have such simulation, but could you give us -- tell us your policy?

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Unidentified Company Representative, [17]

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Well, of course, consistency between the numbers, we have consistency. But it's not that we have a very detailed simulation. For example, what if the numbers will be, if we buy this, for example. The EPS growth, without the share buyback and the nonorganic initiatives, they're not included. On the other hand, the 8% ROE for the controlling CET1 ratio, the other nonorganic initiatives, including the building of the ecosystems are included or simple acquisitions are also included. So that is realistic. Even the ROE not extremely high, we can be reasonably consistent.

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Unidentified Analyst, [18]

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It's a bit an ambiguous question, but in the mid-term management strategy, you talked about redesigning finance. And I think that's in response to transformation occurring in the financial sector. But in creation of those strategies, what different requirements do you think that is emerging from your potential partners? And how do you think that your competitiveness can respond to those new requirements?

Also you touched upon several of the salient points about what is the special area where only you can be competitive? And Page 17 talks about ecosystem, but sorry, it's really similar to what others are saying with regards to next-generation financial services. There seems to be much overlap. And even when I compare this with your conventional and existing strategy, it doesn't really give me the feel of a complete redesign, and it doesn't give me the image that it's going to be a great leap forward. So can you elaborate on this?

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Unidentified Company Representative, [19]

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[Interpreted] Thank you. Then let me use Page 16 to respond to that question. You said what is our motivation and ambition? Yes, some of this has factored in ambition. And we disclosed these strategies expecting that feedback that you really don't feel that this is a complete redesign.

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Unidentified Analyst, [20]

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[Interpreted] But what kind of customer change are we witnessing?

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Unidentified Company Representative, [21]

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[Interpreted] Financial sector have been fragmented back on the securities, consumer finance, credit cards. But that was not in line with what the customers were asking for. There had been division because partly of regulatory environment, and there used to be reasonable factors that supported or justified that fragmentation. But it's not like that anymore.

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Unidentified Analyst, [22]

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[Interpreted] Then do we have everything on the platform so that the customers can use all of those services at ease?

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Unidentified Company Representative, [23]

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[Interpreted] No. They aren't players. As such, there are interesting fintech companies emerging, but most of them are focused on single function. In the case of Alibaba and Tencent in China, they try to offer everything on the platform but so far, we've not seen anything like that in Japan. We don't expect that they would emerge in the short run. But at least we need to make an effort to offer a platform that doesn't offer just a single function. We are not an entity with a long customer list. And there are potential partners who are trying to do something similar who already have a gigantic platform. And I think there is room for striking alliance with those potential partners. I'm not really sure whether I've been able to respond to your question. But I've tried. In other words, it's not focusing on individual products or instruments but where are the customer needs? When you buy something, do you want to wire finance? Or do you want us to wait for 2 weeks? There's not a clear line in between those 2 options. And in fact, there is no service offered seamlessly. Shipment company or a credit card company or a banking company individually may offer different products. So to what extent can the service be customized or personalized depending on the customer needs? That could be the key to competitiveness. And in order to offer that, we have to have extensive cover to be able to accommodate all requirements. We have a group that can accommodate. So we want to tap on that. And also, there could be nonfinancial requirements. Then how could we offer even nonfinancial elements in a seamless manner? That would require a robust digital platform. So it will probably be like building an enterprise with our partner.

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Unidentified Analyst, [24]

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[Interpreted] I have 2 questions. First, to create this new business model, are you okay with the current framework? Don't you need to change anything? For example, to create the API that's usable so -- then in order to do it, you need the different type of human resources which you have hired. So the -- don't you have gap between the current, your current people? And I think you have the constraint as a bank. So based on this, you have established the virtual headquarters. The economic value -- or the half of the economic value you will lose if you do this through joint ventures. So regarding your organization, do have any challenges? So that's my first question.

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Unidentified Company Representative, [25]

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[Interpreted] Thank you. I think that is a good point. And for the -- the organic human resources, answer is yes and no. So for example, the AI area, we are really in the shortage of humans. It's very difficult to hire people. But for other areas, there are areas that we can outsource. For example, if you use AWS, just you -- so you're using just a cloud, there are a lot of different tools. So in that sense, somehow we can complement and we should be able to manage. And regarding our organization, yes, we have the restriction problem. Although we are aiming to have the unified operations, we can consider our strategies as one entity. But for the serving customers, we are also have the sharing information problem and the businesses will be divided by entity. That is in reality.

And we talked about the ecosystem to create the joint venture, for example, with different sectors. Of course, that will lead you to the issue of the share of the total profit. But we don't mind if it can make the success. And overall, it's not that we can -- we're not going to do this because we can just take a part of the share. So it's not that we are going to implement such initiatives. So based on the value, if you can create the framework for the profit sharing, we should do that so that will not be an obstacle for implementing initiative.

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Unidentified Analyst, [26]

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[Interpreted] My second question is regarding capital policy or the financial targets. So you set the targets for CET1 ratio and ROE which are reasonable. So normally, if you cannot increase risk assets then the E of the ROE should be controlled. And I think this is consistent. And in your case, you have public funds injected. So through share buyback, the control capital in such a scenario, if you have implement such a scenario, the ratio of the government and the shareholders will continue to increase. So don't you have any constraint?

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Unidentified Company Representative, [27]

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[Interpreted] I see. That is also another good question. But we have not faced that constraint yet. But it's not realistic that they'll continue to increase. But as you pointed out rightly, in order to achieve ROE, again, the E is a major factor. So we decided to do the maximum shareholder return. But we are considering the E in that sense.

Are there any other questions? We have time until 12:00. We have ample time to accept your questions. If not, then we adjourn the meeting. Thank you, again, for coming. Thank you for coming.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]