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Edited Transcript of 8303.T earnings conference call or presentation 14-May-20 12:00pm GMT

Full Year 2020 Shinsei Bank Ltd Earnings Call

Tokyo May 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Shinsei Bank Ltd earnings conference call or presentation Thursday, May 14, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hiroshi Ishii

Shinsei Bank, Limited - Head of IR

* Sanjeev Gupta

Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO

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Presentation

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Operator [1]

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The conference is now being recorded.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [2]

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Hello, everyone. Thank you for joining the conference call for fiscal year 2019 full year financial results of Shinsei Bank.

Here we have an speaker, Mr. Sanjeev Gupta, Senior Managing Executive Officer of Shinsei Bank. Mr. Gupta will walk through the presentation that is posted on our website. You can check out our website and corporate IR, and then please download our presentation. Mr. Gupta will walk through the presentation, and then we will open to questions from you.

So I would like -- hand this mic over to Mr. Gupta.

Mr. Gupta, please go ahead.

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [3]

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Hello, everyone. This is Sanjeev Gupta speaking.

I'll go over the key points for fiscal year 2019 full year financial results now. Shinsei Bank announced its fiscal year 2019 full year financial results yesterday. On today's call, we will cover key financial results for fiscal year 2019 and our approach towards fiscal year 2020 earnings forecasts.

Page 2. I would like to start off with the management message to address the COVID-19 issue. This is the same message that our CEO sent to all employees. We believe that this message is consistent with our corporate objectives from mid- to long-term perspective.

Page 3. As to our resolve to fight COVID-19 situation, a strong defense is our first and foremost priority. We will ensure safety of all our stakeholders, including our employees and their families, customers, partners and shareholders; and also fulfill our responsibilities as a financial institution to ensure our contribution to customers and the society. For our employees, office work focuses on important tasks to ensure our responsibilities. Since the declaration of a state of emergency all over Japan, approximately 80% of our bank employees are working remotely. We also started some initiatives to support customers' businesses and activities through value co-creation with our partners, including utilizing our know-how in the unsecured personal loan business.

Page 4. We have to move ahead to capture business opportunities considering longevity of this crisis. Our purpose as a financial institution is to provide value to customers and the society. On the premise that the emergency situation continues longer, we need to accept the situation as new normal. In addition to supporting customers who are suffering from this crisis, we are positively embracing the changes in order to capture new business opportunities. In addition, advancement in technology will further support our current approach. On the other hand, there might be some businesses which may become obsolete in the mid to long term. Leveraging our organizational capabilities and to make the new normal sustainable, we will further accelerate our business operations through digitalization and stable business processes. It should be noted that the strategies as outlined in our medium-term management strategies remain unchanged.

Now I would like to explain highlights of financial results and key businesses from Page 7.

There are 3 main points on Page 7. First, net income for fiscal year 2019 was JPY 45.5 billion, a decrease of 13% year-on-year after incorporating the impact of COVID-19. We would like to stress that, without the COVID 19 impact, the net income would have been JPY 54 billion, and we would have exceeded the fiscal year 2019 initial plan by approximately 2%. The impact of COVID-19 on net income was JPY 8.5 billion, which includes a precautionary credit provisioning of JPY 3.9 billion. Deposit-based funding, both Japanese yen and foreign currency, is ample; and liquidity has been secured.

Second, net income forecast for fiscal year 2020 is yet to be determined, as the impact of COVID-19 needs to be examined carefully. Without the COVID-19 impact, we expected fiscal year 2020 net income to grow approximately 2% from fiscal year 2019 net income plan of JPY 53 billion. We need to closely monitor the sufficiency of the precautionary credit provisioning recorded in fiscal year 2019. It is difficult to make a reasonable full year financial outlook at this point as we have just entered the current fiscal year. After carefully examining the future economic condition and its impact on our business activity, earnings forecast will be formulated and announced by the interim financial results announcement.

Thirdly, total shareholders return stands at maximum 50%. We have announced a share buyback program of JPY 20.5 billion. With the dividend, total shareholders return would amount to JPY 22.8 billion or 50% for fiscal year 2020, based on the net income of JPY 44.5 billion of fiscal year 2019.

Page 8, please. Page 8 illustrates funding and capital adequacy in terms of risk resilience and readiness for new business opportunities. Funding is ample and stable. Yen-denominated deposits stand at JPY 5.4 trillion, and foreign currency-denominated deposits are at JPY 500 billion. At the same time, liquidity coverage ratio stands at 159%.

CET1 capital ratio of 11.3% demonstrates enough capital in light of our business portfolio as well as minimum regulatory capital requirement as a domestic bank. Our capital buffer will be of benefit in case of an increase in credit costs from existing loans. It will also facilitate increase in asset growth in corporate businesses responding to needs for finance in future as well as nonorganic growth opportunities, mainly in the nonbanking business areas.

Page 9. Page 9 summarizes our approach to fiscal year 2020 earnings forecast.

Our assumptions for COVID-19 impacts are as follows. First, even after the state of emergency is lifted, the situation requiring maintenance of social distancing will be prolonged, and business activities will only begin to recover from second quarter. Additionally, it will take time for the inbound-related industries such as hospitalities, restaurants, and other service industries to recover; as well as for the disrupted supply chain to resume. And credit condition of related SMEs and individual customers is expected to deteriorate.

Second, in the process of recovery, not all will be restored, but irreversible changes will occur, such as changes in the consumer mindset and behavior, the transition to a decentralized society, acceleration of digital investment, review of supply chains as well as review of physical space utilization, et cetera. Third, regarding real estate prices, the search for new price levels based on COVID-19 experience will continue, but the extent of the adjustment by asset type is expected to be disproportionate.

At this point in time, net income forecast for fiscal year 2020 is yet to be determined. However, profits will be ensured even after applying a stress test scenario similar to the one we applied during the global financial crisis.

Regarding earnings power, revenue from many existing businesses, including core businesses such as real estate finance and unsecured loan business, are expected to decline and to a certain extent, as business activities are to be subdued. However, we do not think a sharp decrease would happen, as needs for new finance and new businesses would emerge. Regarding risk profile, in comparison to other financial groups, our business portfolio is not directly linked to macroeconomics of Japan as a whole or a certain region. In addition, portfolio reallocation and strict risk management have been strengthened since the global financial crisis.

We plan to disclose fiscal year 2020 earnings forecast, as I mentioned earlier, by the time of our interim financial results announcement.

Now moving to Page 10. This page covers business segments which we will be closely monitoring. While degree of the impact differs across businesses, we are watching real estate-related and unsecured loan-related businesses closely.

In the real estate finance, we may see a large decline in new originations, which will result in lower fees. Net credit costs may increase due to a decline in real estate prices. However, its negative impact will be limited, unless major asset prices such as offices and residential drop significantly. We believe there would be no significant impact on our ability to collect even if real estate asset prices were to drop by 30% to 40%. In unsecured loans, we may see lower interest income due to slight downturn in growth of new customers. Net credit costs may increase due to an increase in delinquencies of lower-income segment customers. However, increase in net credit costs due to bad debts might be partly offset by decrease in net credit costs resulting from lower loan growth.

Page 11, please. This page covers total shareholders return. Considering ample capital adequacy, current share price does not reflect our fair corporate value. The share buyback program has been determined considering the total shareholders return policy as outlined in the current Revitalization Plan.

Page 13 provides an overview of fiscal year 2019 financial results.

Total revenues are at JPY 239.9 billion, grew year-on-year but slightly below the initial plan. Net interest income increased in Institutional Business year-on-year but were flat in unsecured loan business. Noninterest income, on the other hand, increased year-on-year in institutional businesses as well as in Retail Banking and APLUS businesses.

Expenses increased year-on-year, mainly reflecting expenses associated with acquisition of Shinko Leasing as well as Financial Japan and depreciation expense on new systems. Strict expense control continues, with expense-to-revenue ratio improving to 62.3%.

Net credit costs increased year-on-year, reflecting several factors such as absence of credit recoveries in Structured Finance business which we recorded in fiscal year 2018; additional provisioning of JPY 3.1 billion in the real estate finance and LBO portfolios, considering apparent impact from COVID-19; as well as additional precautionary provisioning of JPY 3.9 billion in Corporate Business, real estate finance business and Showa Leasing business, considering anticipated deterioration in financial position of borrowers due to COVID-19. I'll elaborate on it in a further slide later.

As a result, net income attributable to owners of parents was JPY 45.5 billion. Without COVID-19, it would have been JPY 54 billion.

Page 15. Net interest margin improved to 2.47%, 247 basis points, reflecting lower funding costs for this fiscal year.

Slide 18. Net credit cost increased in Institutional Business but decreased in unsecured loans and APLUS businesses. The reason for higher net credit cost recorded in Institutional Business is as follow: as I mentioned briefly earlier, first, absence of credit reserve reversal of approximately JPY 6 billion due to [revision] of general reserve in fiscal year 2018 in the project finance business; second, additional provisioning of JPY 3.1 billion in real estate finance and LBO portfolios in -- due to COVID-19. Thirdly, additional precautionary provisioning of JPY 3.9 billion was taken as we applied higher reserve ratio than the regular general reserve ratio to categories such as restaurants, retail industry, such as hospitality and entertainment, anticipating deterioration in financial position of these type of borrowers in future due to COVID-19. The precautionary provisioning includes JPY 1.6 billion in Corporate Business, JPY 1.5 billion in real estate finance and JPY 0.9 billion in Showa Leasing business.

Net credit cost in the unsecured loan business remains almost flat, reflecting sluggish loan growth and enhancement of collection activities. Net credit cost in APLUS remains flat at 1.3%.

Slide 19. CET1 ratio stands at 11.3%. Risk-weighted assets increased, mainly reflecting asset growth in real estate finance, APLUS finance and assets related to acquisition of SHINKO LEASE.

Slide 20. Regarding Kabarai, we reversed net reserve of JPY 2.6 billion in fiscal year 2019. This includes JPY 4.5 billion reversal in Shinsei Financial, partly offset by JPY 1.7 billion additional provisioning in APLUS and JPY 0.1 billion provisioning in Shinsei Personal Loan. The overall Kabarai reserve is now at JPY 49.3 billion, and it now represents close to 5 years worth of coverage.

This concludes my presentation regarding our financial results. I will now open the floor for question-and-answer.

Thank you so much.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [4]

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Thank you, Mr. Gupta.

Now we'll be glad to take any questions from you. (Operator Instructions)

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Operator [5]

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(Operator Instructions)

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [6]

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(Operator Instructions) We are very happy to take any questions from you.

There is no questions from anybody, and then so we would like to conclude this conference call.

Mr. Gupta, please make concluding comments.

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [7]

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Thank you so much for participating on today's call. If you have any question later, please -- we are available anytime. Please send us an e-mail or reach out to us. We'll be happy to talk to you at any point in time. Thanks again.