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Edited Transcript of 8303.T earnings conference call or presentation 14-May-20 1:30am GMT

Full Year 2020 Shinsei Bank Ltd Earnings Presentation

Tokyo May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Shinsei Bank Ltd earnings conference call or presentation Thursday, May 14, 2020 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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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [1]

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Thank you, and good morning. My name is Kudo of Shinsei Bank. Thank you for joining this online full year financial results presentation.

Before I go into the numerics, first of all, let me touch upon how we intend to battle against COVID-19, we've issued a management message. In early April, when we had a branch managers meeting, this message was announced to the group employees. We are in extraordinary circumstances. It is not business as usual. So in this context, we have tried to give the basic principles of how we will be chartering under such circumstances in the coming year.

Now going on to Slide #3, the first and second points require no explanation, but at the bottom, you see some supplementary explanation. As an emergency response measure in order to fulfill our social responsibilities, we are asking people assigned to essential task to still come to the office, but those are the only people who are working from home. But call center, operation center, they are manned at the minimum level. And according to our statistics, 80% of our employees are working from home. Further, there are some inquiries coming in from our customers. And we're not just passively responding to these inquiries. We're trying to provide proactive support to our clients by consulting such requirements with our outside partners. And some of the examples are listed on -- at the bottom of this page.

Now please turn to Page 4. We do not believe that COVID-19 will be so easily contained. Rather, we're thinking about our life with corona and that has more or less become the consensus of the general public that we would have to coexist with the virus. In this context, what can Shinsei contribute as a financial institution? As I said, we're not just trying to passively respond to the requests submitted by our customers. Many changes are occurring and the social activities have been completely stopped, which has led to the stagnation of economic activity. The current situation is not sustainable for the long run and that common sense is shared by the government and amongst the general public. So we have to be mindful of the fact that COVID-19 will continue to exist with us. And we must think about how we can embark upon a new normal in terms of the social economic activities.

So what would be the financial services that would be able to effectively respond to such new normal? That's what we need to design. And that would require ourselves to change. And in the backdrop, there would have to be an operational structure that would support our new way of life. And we cannot imagine all employees commuting to the office. So there has to be a system that would support our employees working from home. So there would be some tools that will only come in, in the long range, but we will have to develop more tools and cross-organizational task force is injecting efforts to establish such tools. And I will be revisiting this point later, but there's so much uncertainty in the single year business plan, there could be some reviews, but the midterm management strategy remains unchanged. Rather, our response to COVID-19 means that we will further accelerate the pace of implementation of the measures that we have set forth in our midterm management strategy. So I'm not just saying that we will simply follow the midterm management strategy that we have created. What I'm saying is that we're thinking how we can achieve what's indicated in the strategy in a shorter time span and that is one of the objectives of the cross-organizational task force.

Now from Page 7, let me give you the business highlights. There are 3 main points.

First of all, net income for fiscal year 2019 was JPY 44.5 billion (sic) [JPY 45.5 billion], a decrease of 13% year-on-year after incorporating the impact of COVID-19. But without the COVID-19 impact, it would have been about JPY 54 billion, which would have been plus 3%. The initial plan for fiscal 2019 was JPY 53 billion. So we would have outperformed the plan. On the other hand, the impact of COVID-19 on the net income was JPY 8.5 billion, half of which has already been hitting our P&L. And the remaining half is precautionary credit provisioning. In other words, this hasn't really hit our P&L at the moment, but this is the impact and follow-up from COVID-19 that we expect to experience in the coming weeks and months. So precautionary credit provisioning has been accounted for. But even in this harsh environment, we have sufficient capital and ample liquidity, both in terms of Japanese yen and foreign currency, and there is no uncertainty with regards to financing.

And then coming to the second point, net income forecast for fiscal year 2020 is yet to be determined. For your information, without the impact of COVID-19, we expect net income to grow by approximately 2% from the initial fiscal year 2019 net income plan of JPY 53 billion. Precautionary credit provisioning has been done for fiscal year '19 and will the impact be over and above the amount of provisioning? It's only been 1 month since this fiscal year began. So at this juncture, it is extremely difficult to obtain a reasonable forecast for the full year. So full year expectation is undecided, but after carefully examining the future economic conditions and their impact on our business activities, earnings forecast will be formulated and announced by interim financial results announcement.

Now the third point. Total shareholder return stands at minimal -- sorry, maximum of 50%. Total shareholder 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 the total shareholder return ratio of maximum 50% for fiscal year 2020 based on the net income of JPY 44.5 billion (sic) JPY 45.5 billion for fiscal year 2019. However, considering the extraordinary uncertainty due to COVID-19, the execution of the buyback program will be just in terms of the macroeconomic trend, the situation surrounding our customers, the equity market and the impact of such indicators and situation on our earnings and capital. The timing and the amount will be judged accordingly to evolution of situation. So there's a possibility that we may not fully execute the total amount of the buyback program.

Going on to Page 8. Page 8 illustrates funding, deliquency in terms of risk resilience and readiness for business opportunities. Funding is ample and stable. As you know, we have a huge amount of foreign currency denominated deposits from [DPO] and ample yen denominated deposits as well. 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 required as domestic bank. It's enough not just to fulfill the minimum regulatory capital, but it's ample to cover our business portfolio. On the right-hand side towards bottom, we have indicated the priority in terms of use of capital. Needless to say, in the midst of uncertainty regarding the future, credit costs could increase. And that's one risk that we need to be mindful. So we need to secure preparedness. And of course, there could be various requests from our customers for support, both from corporate and retail customers. And we have to be well prepared to respond to those requests. That would require buffer, a cushion.

And also on a more positive front, with this kind of dislocation, there is heightened volatility of asset prices. And nonorganic growth opportunities may emerge that would contribute to the growth of the group. And that kind of scenario is also being assumed. So we need to have capital to capture those opportunities. So making those assumptions even when taking into consideration various possibility, we think that there's ample capital and the share price is not necessarily fair that reflects our value. So that's the backdrop to which we have decided on the share buyback program.

Going on to Slide 9. I said the earnings forecast for this fiscal year is undecided, but I wish to offer you some of the factors that could lead to certain assumptions for fair disclosure. So we've added some qualitative comments on our earnings and those qualitative comments have been broken down into business lines. COVID-19 impacts are seen as indicated on this page and which are not so deviate from the basically of society, but let me briefly explain. Given the state of emergency retaliations removed, the so called 3 Cs of social distancing, for the people's travel restrictions, for moves will still be strongly restricted. On the other hand, just continuing that status in order to protect social life of the consumers or people will not be appropriate. That is the view. So how to recover the social life has started in many areas. And we would like to proactively support such initiatives. So it's not that just to be shrinking as the natural disaster and wait until things recover. But by making maximum business, how to support our customers will be a major initiative. And if I add, the real estate prices needs attention. And so far, hotels or commercial facilities, such specific asset types, their cash flow are seeing adverse impact. And if this will affect other properties, such as residences or others, how the impact will expand? The property prices have the major impact on the national economy. And also even for the management of financial institutions, it is an important factor. So this needs to be paid attention.

So I commented a lot of things, but the Lehman shock level stress, even that stress is given to our portfolio, we do not have major problem in maintaining profitability. The reasons for that is that first our business portfolio, for the core business, such as structured finance or unsecured finance for individual customers, these are core businesses. To some extent, if the social activities decrease, then business activities also decrease and then transaction decrease and the revenues will decline to some extent, that is expected. However, the interest income will not be so affected or will not change. And credit costs so far as far as we assume is unlikely to have the major impact. And for the latter, we are a niche financial institution unlike mega banks or regional banks, which are dependent on the particular regions or economies or which is strongly linked with the Japan's total GDP. So in that sense, we have a buffer, a cushion. So we get insulated from impact.

Next, please look at Slide 10. So I just mentioned the basic understanding of the environment. Now I would like to touch upon the impact on specific businesses. So we'll like to -- this slide comments for each business. I'm not going to cover everything, but I would like to make a comment on 2 major points. Total revenues, and overall, we have to be prepared for the decline of total revenues to some extent. But net credit cost, it attract attention. There are 2 points that need to be noted. One, the real estate finance. The real estate finance includes -- this is not for the individual customers, but for major institutional investors, such as REITs or private funds. So when they invest in properties, if there is nonrecourse finance or nonrecourse loans, and if the property prices decline significantly, the credit cost will increase.

So the targets are shown here (inaudible). If they decline to 30% to 40%, there is no major impact on the collection ability. Because our loan-to-value, loan amount to property value, so this loan-to-value and the conservativeness of property valuation, so these numbers are based on such factors. And another point is unsecured loans for individual customers. So when the economic activities are active, we have more new customers. And there is a possibility that the new customers will decrease. And net credit cost centered on those engaged in specific sectors, the net credit costs are increasing. As a result, the net credit costs may increase. And also the characteristics of this business is that if the loan balance growth slows down and the credit cost will decrease or be reversed, so these will offset the decrease of new customers. And other business are unlikely to have a major impact. So we'll like to skip explanations.

Now next, please move to Slide 11. So this slide explains about the total shareholders return. As I said earlier, so we have sufficient capacity, and our current stock price does not necessarily indicate the real capacity. So as shown on the -- based on the policy and the revitalization plan, we have set a share buyback program. So based on the current financial institution -- finance sector, the said total shareholders return ratio will be at a higher level, but attention is not required that we have the order of priority. So first, top priority is support customers. So we will examine how we will support a customer, then we would decide the share buyback. And so far, the Tokyo metropolitan area cannot even release the state of emergency. So it is very difficult to forecast the future, but we are setting the program. This shows the confidence of the management and the will of the management to maintain the total shareholders ratio at a high level.

So this concludes my presentation. And going forward, the summary of the financial results will be given by Mr. Hirano, Chief Officer, Group Corporate Planning and Finance.

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [2]

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This is Hirano. So let me explain the summary of financial results. First, please look at Slide 11 (sic) Slide 13. This slide covers the summary of the financial results of FY 2019.

First, total revenue, JPY 239.9 billion, so which increased from year-on-year. However, it did not achieve the initial plan. The breakdown, net interest income increased in -- there was no impact of COVID-19 in the institutional business compared to the increase on year-on-year, but the individual business, unsecured loans and APLUS did not grow. Noninterest income, in addition to institutional business and individual business, retail banking and APLUS saw an increase in net interest income on year-on-year. The COVID-19 impact due to the institutional investment, there is an impairment of the equity investment or there was unrealization of the profit expected. Expenses as expected, due to the release of the new system, the system cost increased. And so the expenses increased on a year-end basis. However, compared to the initial plan of FY '19, these expenses are well controlled. Expense-to-revenue ratio has improved to 62.3% from 63%.

Net credit costs. The special factors in 2018 disappeared and also due to COVID-19, there's a precautional provisioning. On a net basis, it increased on a year-end basis and compared to the initial plan, the net credit cost increased. For details, please, I would like to explain using the net credit cost page. As a result, the net income attributable to owners of the parent was JPY 49.5 billion (sic) [JPY 45.5 billion]. And without COVID-19 impact, it would have been JPY 54 billion.

Next, please look at Slide 15. Due to the decrease in funding costs, net interest margin improved to 2.47%.

Next, please look at Slide 16. Noninterest income saw an increase in APLUS installment revenues and specific transaction profit, trading, capturing, market volatility and service profit in retail banking and structured finance.

Next, please look at Slide 18. Net credit costs decreased in unsecured loans and APLUS, but increased in institutional business. The reason of the higher net credit costs in institutional business are as follows: first, the absence of the reversal gain of approximately JPY 6 billion due to the calculation of general reserves for loan losses which is JPY 6 billion which disappeared. Next, due to the COVID-19, there was additional provisioning of JPY 3.1 billion based on a forward-looking manner for the real estate finance and LBOs. Third, for the specific business portfolio that directly impact COVID-19, considering the future business perform deterioration for the institutional business, Showa Leasing and real estate finance, there was additional precautionary provisioning of JPY 3.9 billion. So these are specific sectors for this precautional provisioning for them.

Due to the self-restraint from going out, targeting such specific sectors, we set a higher reserve ratio for the general loan loss reserves. The institutional -- for corporate business was JPY 1.5 billion and real estate finance of JPY 1.4 billion and JPY 0.8 billion for Showa Leasing. So these are the amount of the provisioning. Unsecured loans will not -- due to the accelerated collection and slow growth of balance, so the net credit cost remained almost flat. The net credit cost rate increased 2.8%. Basically approaching the fourth -- yes, there was no such impact or the lower such impact on fourth quarter. In APLUS, there's a -- it was reflecting disappearing the impact of provision related delinquency loans. The net credit cost decreased. The net credit cost ratio remains low at 1.3%.

Next, please look at Slide 19. The common equity Tier 1 ratio stands at 11.3%. Risk-weighted assets increased, mainly reflecting asset growth in real estate finance and acquisition of Shinko lease.

Please look to Slide 20. Regarding Kabarai, for 2019, we reversed net of Kabarai reserve of JPY 2.6 billion. Breakdown, JPY 4.5 billion reversal in Shinsei Financial, JPY 1.7 billion additional provision in APLUS and JPY 0.1 billion provision in Shinsei personal loans. Kabarai reserve is at JPY 49.3 billion as of March 31, 2020, which represents close to 5 years of coverage.

This concludes my presentation regarding our financial results. Lastly, Mr. Kudo, our CEO, will explain the opinion of the Board of Directors on the agenda for the upcoming AGS (sic) [AGM] and the shareholders' proposal.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [3]

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From the perspective of corporate governance, one, I would like to refer to 1 agenda item of the AGM, which is the appointment of the directors and also touch upon the shareholders' proposal.

Please refer to Page 56 of the presentation material. And further, on the shareholders' proposal, it's been uploaded as of 13th of May on the website of Shinsei Bank. It's included in the press release dated May 13. I probably should explain the backdrop. In August 2019, exiting of the JCF Fund took place. And with that, Mr. Flowers resigned as an outside director. In the revitalization plan, the number of board -- the number of directors is set at 7, so there's 1 seat open as of today.

As indicated on Page 56, we are proposing the reelection of existing 6 directors and new appointment of 1 director. That will be proposed at the upcoming shareholders' meeting. The candidates have been diligently discussed in the Nomination and Compensation Committee by outside directors and reached a consensus at the Board. Mr. Higa, Mr. Makihara, Ms. Murayama and Mr. Tomimura have been notified to the TSE as independent directors. If Ms. Kawamoto is appointed, the bank will notify the Tokyo Stock Exchange of her as an independent director as well.

Dalton Kizuna Fund LP, our shareholder has submitted a proposal to appoint Mr. Rosenwald. And please refer to the press release, should you wish to be informed of the shareholders' proposal.

At the Shinsei Bank Board of Directors, discussions have been diligently and thoroughly conducted. And we object to the proposal due to the following reasons. First of all, governance by independent directors is sufficient. We have 6 directors for which -- who are independent outside directors, and our proposal to appoint Ms. Kawamoto, if appointed, will be another independent director. So then we will have 5 out of 7 directors as independent. So that ensures deterrence, surveillance and monitoring, and it will be a structure that would fairly reflect the interest of the shareholders. So there is very little need to add Mr. Rosenwald as another director. And the second issue is with regards to relevant expertise be held by the directors, if you could refer to Page 57.

Among the 7 candidates for election as directors under the bank proposals, 4 candidates have experience in company management and 5 candidates have expertise in finance. Therefore, the entire scope of Mr. Rosenwald's knowledge, as stated by Dalton, is significantly covered by the candidates under the bank's proposal. And accordingly, the election of an additional director is not meaningful. Let me touch upon another point. In the bank's proposal, 2 are female candidates out of the 7 candidates. We are trying to promote gender diversification in the Board portfolio. And from that perspective as well, we do not find any purpose of winning in the election of Mr. Rosenwald. The third point is with regards to director compensation structure. Alignment of interest of directors with those of shareholders. And we've implemented various measures to ensure that. First of all, executive directors in the AGM of 2018, myself and Kozano san. Against these 2 directors, restricted stock compensation plan was introduced. On top of that, to all executive direct -- executive officers, we have a compensation scheme with restricted stock compensation plan to all executive officers. Further, as a new measure for independent directors, we are also proposing introduction of partial restricted stock compensation plan. So by taking these measures, we are ensuring the complete alliance between the interest of the Board of Directors, executive officers and the shareholders.

The fourth point is with regards to the revitalization plan under the Act on Emergency Measures for early strengthening of financial functions. We are a bank with public funds injected. So revitalization plan has been submitted under the Act on Emergency Measures by early strengthening of financial functions. And we've provided 7 directors under the plan. And in order to comply with the plan, we believe that the 7 candidates in the next plan would form the best portfolio. And therefore, we do not feel any need to appoint Mr. Rosenwald as a director. And in the perspective of payment of public funds, we need to increase the share price. And as part of that, improvement of shareholder return is an important task ahead of us.

So from the nominal dividend of only JPY 1, where we used to be, total shareholder return ratio has greatly improved. And amongst our domestic peers, if we compare the total shareholder return, I think we would be ranking towards the very top. We have already been making maximum efforts what is possible under the law. JPY 45 billion of large-scale buyback is a proposal under shareholder Dalton and that would deviate from the scope identified in the revitalization plan and the act, and we do not believe that we should be accepting such a proposal.

Finally, on ESG. We're in the midst of this turmoil caused by COVID-19, which has weighed on all of our customers and society. And in light of our social mission, we have to protect our customers and provide smooth financial service, which is act upon us from the society. Mr. Rosenwald has a strong opinion of eliminating most profitable lending division off the (inaudible) balance sheet. Maybe that is not against the rules in the textbook, but is it appropriate to take such a short-term profit seeking measure? We do not think that, that is the right kind of corporate behavior that we should implement at this timing.

In conclusion, after careful discussion in the Nomination and Compensation Committee of the bank, the bank requests approval for the election of its proposed candidates for directors. Thus, our Board of Directors believes that our proposal will lead to the best Board structure and we object to the proposal from Dalton Kizuna.

This completes presentation regarding the agenda for the AGM and the Board opinion on the shareholders' proposal. Thank you for your kind attention.

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Questions and Answers

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Unidentified Company Representative, [1]

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Now we'd like to move to question and answers. So let me read the questions. First question, so the share buyback program. My question is regarding establish of the program. First, until making decision, what kind of discussions made an (inaudible), please give us a background. Next, under such unclear situation, what is the real intention of the management for deciding such a large amount share buyback program. So these are my 2 questions.

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

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So including the hidden, the real intention, I believe that I explained them, but since I received question, although some of them may repeat my earlier explanation, but let me answer the question. So dividend and the share buyback together to make 50% of the total shareholders return ratio as we have been seeing, repaying towards repayment of public funds. As a general discussion to corporate shareholders, the responsibility to them to give the reasonable shareholders return is important. And considering a good balance and also in reality, as stated in the revitalization plan, we have the certain scope of the return and so we have well to make the maximum shareholders return within the scope. That means we have sufficient capital. And even though under the unclear funding environment, unless there is some extraordinary factors unexpected, we believe that we have the capacity to give the return. So that is the background of setting the share buyback program. However, as written clearly, no one can tell the future of economy. The countries are moving towards the release of lockdown or the isolation, state of emergency so that to recover the economic activities. So such an effort to be made. On the other hand, the WHO is sending a very strong warning. So which are right? We don't know. But depending on behavior, the results will be different. So incorporated -- it's not that we have incorporated such unknown factors. So how are we going to allocate our capital?

So based on such order of priority we will support our customers. Also for the precautionary provisioning. So by examining such items, we will like to execute the share buyback. So such discussions were made at the Board of Directors by spending a lot of time. And also in the process, we also exchange opinions with concerned parties. Thank you.

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Unidentified Analyst, [3]

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To confirm the direction of credit costs. First of all, corporate business, institutional business. In Q4, what was the credit cost, including precautionary provisioning, JPY 7 billion has been provided for. But structured finance and institutional business, what's the increased risk of credit cost from March 2020, is the upside risk limited? In the retail business, consumer finance, delinquency since the beginning of this fiscal year. How has that trended? 280 basis points historically is extremely at low level, but you've been talking about 400 to 450 basis points. And what's the prospect of the probability of normalization to that level? And APLUS credit cost ratio, what's the risk of further increase? Is that risk limited?

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [4]

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First of all, let me take the institutional business and respond to that question. And on retail, I will ask my colleague, Mr. Hirano, to respond to the individuals business.

First of all, for the institutional business. There are a few areas that the so-called pure corporate world of corporate lending. I do not assume that there would be any significant risk in this area. If we take a look at our loan portfolio, the percentage accounted for by such corporate is significantly different from the mega or the regional banks. And our customers' sectors and sizes are also different. That taken into consideration, of course, we could participate in the request from large corporates to provide relief. So loan amount could increase, but that could be justified. Now in the area of structured finance, we expect no significant risk in project demands. Some ongoing development projects could encounter delay in construction work, but we do not believe that, that would impact the credit recoverability in the end.

And I forgot to mention this point. But in the corporate lending world, having said so, due to the restriction on various business activities, there are certain sectors that have been directly impacted like accommodation sector, restaurants and transport. And small and midsized or macro companies in those sectors. This is more or less the Showa Leasing business rather than the parent bank business, but depending on how the situation follows through, there could be some impact. These are lease assets. So it's different in nature from bank loans, but that should be monitored. And a final point on corporate sector. One important point is real estate finance. That was mentioned in the initial presentation. But as a salient nature of real estate nonrecourse loan, the devaluation, to a certain extent, like credit degrading and increased provisioning, that could be done. But that does not truly impact the final recoverability if the plunge is significant in value, then the loan could be below the real estate value and then that would increase the credit cost. And we are calculating the breakeven point. It depends on the asset by asset, but as indicated on this chart, 30%, 40% real estate devaluation would not have any significant impact to recoverability. I think that would be one of the key clues in getting foresight in our business. That's it with regards to the corporate business.

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [5]

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This is Hirano speaking. And let me take the floor to first respond to the delinquency, update on delinquency and consumer business since the beginning of this fiscal year. Borrowers from certain sectors have come up with requests for delay in repayment, but there has not been such a long time since the mobility restriction has been in place. And 280 basis points is low, historically low. What about our original plan of normalization to 400 to 450?

We will review the risk volume and also operation structure will be reviewed to respond to the various inquiries, and we will continue to put efforts in order to capture business opportunities through approval ratio. Now APLUS risk is -- the increase of risk probability is very limited. Since the beginning of this year, we haven't seen any difference, but there could be some tools on the merchants. So we will continue to vigilantly monitor the situation. Thank you very much.

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Unidentified Company Representative, [6]

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Let me read the next question. For 2019, in the fourth quarter, Shinsei Financial and APLUS FINANCIAL, both companies, their net credit costs exceeded JPY 5 billion. What is the background?

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [7]

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So this is Hirano, and let me answer the question. First, Shinsei Financial, as explained, in the third quarter is a bonus season. So there was more collection. So the fourth quarter, there was not such a factor. That's the reason. And APLUS FINANCIAL. In addition to balanced growth, for the reorganization of structure, we are reviewing some branches, and that is the reasons for the increase. Thank you.

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Unidentified Analyst, [8]

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The first question, Slide 10. Unsecured loan business. Here, you talk about delinquency risk. But have you already seen signs of increased delinquency risk? And if so, can you describe the trend? In other -- in your peers, from January to March, 1, 2 months arrears, there has been some disclosure that such borrowers has increased, but do you have any data on such trends for Shinsei? Next, in the mid- to high-income bracket in the future, if they drop to low-income bracket, credit cost increase could be controlled through lack of loan increase. Can you control credit cost by so doing? So those are the 2 questions with regards to unsecured loans.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [9]

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On unsecured loans, I have no detail numbers on customer trends at hand. But the number of inquiries or consultations we receive is gradually increasing, but the increase has not been as significant as we had originally expected. To speak of this from a different angle, we've shrunk our call center operations significantly. And -- but even then, the people are not kept so busy. So it's not as dire as the current social situation would lead us to imagine. And I will ask my colleague, Mr. Hirano, if he has anything to supplement.

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [10]

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This is Hirano speaking. With the slowdown of loan growth, can we control increase of credit cost and that could be -- could that offset the negative impact? That's one side of the story. And of course, in the total income ratio maximum loan rate, there's the risk of people's borrowings going over that threshold. So can reduction in loan volume cover the totality of the negative impact, we have to monitor situation very closely.

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Unidentified Analyst, [11]

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Regarding real estate finance, the LTV of the real assets, could you please disclose them?

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [12]

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Specifically, we do not disclose the loan to values.

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Unidentified Analyst, [13]

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So last question, regarding Slide 8. Regarding the use of capital buffer, centered on nonbank business, responding to the nonorganic business is considered. So when the business environment is changing, what areas are you expecting for such nonorganic business opportunities? Traditionally, in the consumer finance business, the high growth was expected in the Southeast Asia. And you said that you're going to focus in the Southeast Asia. Is there any change in views? Or is there any additional areas you're going to focus?

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

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Thank you for your question. The direction of nonorganic strategy, the direction itself has not changed. Basically, on a nonbank field, especially the small-scale finance will be the focus. So we will continue to work on the finance for individual customers and also for small- and medium-sized companies it can be seen. And of course, the impact of COVID-19 differs by country or by sector. So on individual case, how much downside risk we have, that needs to be examined to make the decision. But in any case, for the past several years, we have seen a lot of transactions, and there's some attractive transaction, but was too expensive. So there were many such transactions. And it seems that we have opportunity, but the investment fund bought the target company at a high price. So by not following such transactions, we have the excess or sufficient capital. So by selecting a good transaction, we would like to proactively utilize our capital.

And to the earlier questions, let me explain and give you a supplementary explanation regarding the LTV of the (inaudible) asset. The total portfolio's LTV is around 70%. Of them, hotels or the commercial facilities, this includes some of them, apparently the cash flow deteriorated. So we decreased the valuation. So we are seeing some slight increase of LTV. But so far, we have not seen major change in LTV.

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Unidentified Company Representative, [15]

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I will read the next question. In the midst of much uncertainty, what's the measure you have in mind of consumer business? Will you reduce advertisement and take a wait and see attitude? Or will you include -- inject more stringency in credit screening, evaluation criteria? Or do you have any measures other than those 2 in mind? Can you disclose such measures if there are, to the extent possible?

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [16]

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Thank you for the question. On advertisement, we are in a certain mood in terms of the general public and society, there's not any consumption boom. So we are not thinking of any aggressive advertisement measures. Credit model or credit control was another point in the question. In this business, change in credit screening model, credit model is done quite frequently. And as an outcome -- this is done as an outcome of the changes in growth perspective in the business environment. And we are dynamically adjusting the credit screening criteria. But the very basic tools are unchanged even in the midst of uncertainty. So if the credit risk increases, then we will monitor the trend of increase and if needed, change the model. And the final point was whether there are any other changes that you need to implement?

Well, not really changes that are necessary. But in terms of measures, in so many sectors, revenue has gone down. And as a result, those who are in that sector are losing income, which is extraordinary. On the other hand, each business is beginning to implement measures to recover the performance. So as a financial institution, we should have a longer-term, mid-term perspective to judge the financing requirement and the better visibility of each customer. So we rely not just on the internal data, but we have several alliances with external partners. And relying on such information, we are trying to offer credit to those customers. We've embarked upon such endeavor. And sectors -- some sectors have been heavily hit by COVID-19. And we want to gain precision in the creation of credit model for those sectors to gain the confidence of those customers. And we think that such measures by tapping on our partners' ability is very effective. So we will continue to implement those measures. Thank you for your question.

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Unidentified Company Representative, [17]

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Let me read the question. Regarding noninterest income, in the fourth quarter, there was JPY 1.7 billion -- a negative JPY 1.7 billion due to the novel corona impact. So based on the business impact on Page 10, comparing with other companies, I have an impression that you have higher volatility of the noninterest income, specifically, which areas you see major impact? Please share with us your current understanding -- your understanding regarding the current situation.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [18]

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In the fourth quarter, the minus JPY 1.7 billion. The breakdown includes the impairment and the delay of the recording of the expected revenues. These are the major factors. In the forecast, we are expecting unavailable exit for equity investments, so such delay on recording capital gains are expected. Thank you very much.

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Unidentified Company Representative, [19]

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We have gone through all of the questions that have been entered into. More than 1 hour have passed since the opening of this presentation. So we would like to conclude today's session at this juncture. Should you have additional questions, please contact the group IR. I now give the floor to Mr. Kudo for final comments.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [20]

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Thank you. I wasn't expecting to have to make a closing statement. But this time, we had a hard time deciding on what to disclose, how to disclose because in the midst of so much uncertainty, not knowing how the situation will unfold, what would be the best way for disclosure to the stakeholders and as a result, we did it in this fashion, and we didn't give the full year forecast, but to the extent possible, we offered qualitative factors for each business line, and we try to thoroughly explain our strategy and principle and what we need to watch for in terms of decision-making such as shareholder return. So I intended to have explained those important points thoroughly. I'm sure you would have additional questions, and we'd be most happy to respond to them if you can convey those to the IR and Communications division. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]