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Edited Transcript of 8303.T earnings conference call or presentation 30-Jan-20 1:00pm GMT

Q3 2020 Shinsei Bank Ltd Earnings Call (with Q&A session)

Tokyo Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Shinsei Bank Ltd earnings conference call or presentation Thursday, January 30, 2020 at 1:00:00pm 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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Conference Call Participants

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* Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager

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Presentation

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [1]

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Good morning, good afternoon, good evening. This is Ishii speaking. I'm GM of the Group IR CCD Division. So thank you for joining this conference call for third quarter fiscal 2019 Shinsei Bank's financial results announcement.

Here we have main speaker, Mr. Sanjeev Gupta, our Senior Managing Executive Officer. So Mr. Gupta will walk through the overview of FY 2019 third quarter financial results. After that, we will take any questions from you.

So I'd like to 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 [2]

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Hello, everyone. This is Sanjeev Gupta. Before I explain the third quarter financial results. Please allow me to cover certain media reports since January 27. According to the media reports, documents with falsified information were used at certain branches of Aruhi in loan applications for investment type apartment loans to APLUS FINANCIAL. Today, APLUS has issued a news release on this subject. We have also shared it on Shinsei Bank's website. I'll briefly explain it from now on.

Regarding the scheme of the apartment loans for investment purposes, APLUS' apartment loans for investment are available to customers of Aruhi nationwide. APLUS accepts loan application documents from Aruhi for its review. Loan applications are transmitted via a dedicated system to APLUS' review center after Aruhi receives the application form from a client who wishes to apply for a loan. APLUS then provides financing after a defined examination is performed such as assessment of the applicant's credit worthiness, judgment on the appropriateness of property prices through a third-party appraisal and confirmation of applicants in debt.

Flow chart of the scheme is also attached to our press releases. Regarding the current situation, APLUS is investigating the facts and the related information. While it is in the middle of investigation based on the information APLUS has obtained so far, it has confirmed that this issue is potentially concentrated with limited number of distributors. We will update you on this matter in a timely manner when the investigation progresses further, and the facts are clarified.

With regards to loan balances of APLUS apartment loan for investment purposes, please note total outstanding balance is JPY 155 billion, including JPY 14.8 billion of shopping credit. Out of the JPY 155 billion of total balance, the amount intermediated by Aruhi is JPY 143 billion, including $3.2 billion of shopping credit balance. Average loan balance is approximately JPY 12 million per application per customer.

Now I will explain the main points in the third quarter financial results. Slide 3. First, net income amounted to JPY 45.1 billion, up 9% from the same period of previous fiscal year, and now represents 85% towards the full year target. Second, full year net income forecast remains at JPY 53 billion. The progression rate of 85%, thus far, mainly reflects timely difference relating to fee income from new disbursements in structured finance, as well as lower expenses associated with IT and certain other projects and lower credit costs. Third point relates to the EPS growth. Our financial target in the medium-term management strategy is to achieve an average annual EPS growth rate of 2% or more without considering share buybacks. We achieved 8.5% EPS growth as of the end of third quarter. And with the share buybacks, we achieved EPS growth rate of 11.8%.

Slide 4. Total revenue grew 6% year-on-year, representing 75% of the full year plan, which is in line with our original expectation. Fee income from new disbursements in structured finance increased. In addition, a reduction of ATM transaction fees and gains on sale of securities contributed to the noninterest income.

Expenses increased 4% year-on-year, mainly reflecting new IT systems expenses. The overall expenses progress rate was 73%. Though the net credit cost grew 5% year-on-year, the progression to the full year target is 63%. It reflects improvement of credit quality as well as enhanced collection in unsecured loans business. As a result, net income was JPY 45.1 billion, up 9% year on year.

Slide 7. The net interest margin stands at 2.45%. Total yield on interest-earning assets remained stable at 2.71%, even in this low interest rate environment. The rate on interest-bearing liability declined mainly due to lower deposits-related funding costs.

Slide 10. In the unsecured loan business, net credit cost ratio declined to 2.4%, reflecting improvement in quality of loans, facilitating higher loan collections in the Lake business, including credit guarantees, coupled with sluggish loan growth from September to December 2019. APLUS net credit costs ratio is stable at 1.2%.

Slide 12. As depicted on the left-hand side graph, the number of disclosure claims has declined slightly. For Kabarai, Shinsei Financial showed a slight increase in third quarter, this was due to the Kabarai settlement's timing issue. The total Kabarai amount continue to show a declining trend. We have JPY 53.3 billion of Kabarai reserve on a group basis, with a coverage of well over 4 years based on the current run rate.

Slide 14 now, unsecured loans. Lake ALSA is the driver of loan growth for unsecured loans. It achieved JPY 5.8 billion of loan growth compared with March 2019. However, it was flat compared with September and due to weak cash demand as the third quarter is the bonus season in Japan.

Regarding its P&L, net interest income from Lake business was flat. Decrease in noninterest income reflects a decrease in credit guarantee fees from regional banks. While the net credit cost improved, OBP after net credit cost declined slightly to JPY 16.7 billion.

Slide 15. At Lake ALSA, in order to attract applications through digital channels, we have now converted the 60-day interest-free loan as a regular product feature for new applicants who apply via the Internet and smartphones. The number of applications increased 15% year-on-year and the number of new customer acquisition increased by 10% year-on-year. We continue to focus on improving the operating structure to further drive an increase in number of applications and number of customers to previously achieved levels.

Slide 18, structured finance. The operating asset balance of structured finance stood at JPY 1.880 trillion. Both operating assets and revenue of structured finance products have been steadily growing.

Slide 19. Project finance progress had been slow up until second quarter of this fiscal year, but the new commitments amount grew in third quarter as we recorded new commitments for renewable energy and infrastructure investment projects. In real estate finance, we provided new finance to office building projects and sizable logistic facilities incorporating sell-down structure in the third quarter.

Finally, just to summarize financial performance continues to be stable. In the area of business, we have started several initiatives for value co-creation in the area of small-scale finance and continue to work on productivity enhancement initiatives, such as consolidation of IT operations as well as physical branch and office locations consolidation. Lastly, we will have Shinsei IR Day on February 20, where our business heads will explain key business initiatives in detail.

This concludes my presentation, and we now open the floor for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [2]

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Hello, can you hear me?

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

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Hello?

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [4]

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Yes. This is Greg Brillaud, Point72. I have 1 question regarding the APLUS-Aruhi investigation. Do you -- how long do you think it will take? And do you plan to be able to disclose results for the IR Day on February 20?

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [5]

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Yes, thank you so much for your question. As I indicated earlier, we are currently doing our best to look at the situation. Whatever information we have been able to gather so far, it appears that it may be limited to a limited number of distributors. Having said that, as and when we have fresh information, we will be the first ones to be updating to all our stakeholders, including yourself. So we really don't have a feel for how long it will take, but we are doing it as a matter of priority.

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [6]

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And 1 follow-up, if I may. So you mentioned the total balance of investment related loans was JPY 155 billion for April. Is that right?

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

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Yes. And those are investment -- I mean, those are the investment-type condominium loans, which includes JPY 14.8 billion of shopping credit.

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [8]

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Yes. And out of that, you mentioned JPY 143 billion was business, which was brought to you by Aruhi?

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [9]

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Precisely.

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [10]

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And may I ask why such a high percentage of the total balance come from 1 specific financial institution? Why are you not diversifying or why isn't APLUS diversifying across several financial institutions? That seems very concentrated.

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [11]

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Yes. I mean, it is my understanding that Aruhi focuses on used condominiums and the business model or the product feature we have is this loans that we provide, the reason they are on average JPY 12 million per customer is partly because these are used condominiums, not brand new. And the agents, which Aruhi works with generally focuses on used ones. And I think the -- like the -- I mean, the features and all of that, that we've been working with them for many years now.

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [12]

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Understood. And just to confirm, how many Board members of APLUS come from Shinsei Bank?

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [13]

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How many Board members come from Shinsei Bank? Just 1 second, please. Okay, I'll come -- I mean, give us a minute, we'll come back to you. I think it's -- if I'm not mistaken 3, maybe 2, 3. Yes, we'll get that information in a minute. Yes. If you have any other questions, we would be very happy to take it at this point.

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Greg Brillaud; Point72 Asset Management L.P.;Portfolio Manager, [14]

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No, that's fine.

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [15]

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Okay. Yes. Just to answer your question about the APLUS' Board members, what's the composition of Shinsei Bank executives who are on the Board, there are total 8 Board members, out of which 4 are from Shinsei Bank. So 50% representation.

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Operator [16]

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(Operator Instructions)

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Sanjeev Gupta, Shinsei Bank, Limited - Senior Managing Executive Officer and Advisor to President & CEO [17]

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It seems that there are no more questions. So we would like to conclude our call at this point in time. Thank you so much for participating today. Thank you. Thanks a lot.