Aozora Bank : Quesition & Answer Summary（318KB）

FY2021 Interim Financial Results Investors Meeting (November 19, 2021)

Question & Answer Summary

Q1: You had very strong net earnings that represented progress of 65% of your full-year forecast and indicated a possibility of an upward revision of your full-year earnings forecast following the announcement of your 3rd quarter results. That being said, when looking at next year's operating environment compared to this year's, there is some degree of uncertainty. As I understand that your intention is to steadily increase both your net earnings and dividend based on a target dividend payout ratio of 50%, am I correct in understanding that you are not considering an aggressive upward revision at this time?

A1: Our progress through the interim period was relatively strong, largely in customer- related revenue, which is also continuing to perform well heading into the 3rd quarter. As we shared at the start of this fiscal year, we saw increased market volatility arising from higher U.S. interest rates as one of this year's key risks. We believe we're currently managing the situation quite well and have worked to maintain our unrealized gains. We hope that we'll be able to provide you an updated FY2021 full- year forecast sometime around the release of our 3rd quarter results. Our plan for FY2022 will be developed on the basis of FY2021 earnings, taking into consideration expected returns from our Strategic Investments Business, which is likely to start generating returns in FY2022 and FY2023, rather than this year. This will enable us to enhance our earnings growth momentum including our bottom-line net earnings in a stable manner.

Q2: Your ROE for the interim period was 7.7%. In light of strong core net income, what are your thoughts on the likelihood of achieving your mid-term KPI of 8% or higher? Are you considering realizing a certain amount of unrealized gains in order to meet this target?

A2: ROE of 8% or higher refers to the target in our Mid-term Plan which ends in FY2022, and our ROE, business profit ROA, and OHR are all getting closer to those target levels. Our intent is to fully achieve the KPIs included in our Mid-term Plan. We'll develop our next Mid-term Plan during FY2022, but as for ROE, one of the important factors will be the level of returns on equity investments related to Aozora's Strategic Investments Business. Also, we'll flexibly consider our dividend payout ratio in terms of our FY2022 plan and next Mid-term Plan, by taking into consideration a broad range of factors.

Q3: In light of the fact that sudden changes in the market environment resulted in lower bottom-line net earnings and reduced dividend payments in the past, my understanding was that your dividend forecasts have tended to be somewhat conservative. That being said, given the current situation where your business portfolio and earning potential have improved, do you still think it's necessary to be so conservative in setting your dividend forecasts?

A3: As shown on page 24 of today's materials, this year's dividend will be flexibly managed in light of our financial results. Against downside risks, we've maintained unrealized gains in our securities portfolio, while our upside potential depends on the extent of future returns from our Strategic Investments Business. The market's expectation on shareholder returns are changing, and we think it's also important to keep that in mind.

Q4: Regarding the timing of any possible upward revision to your full-year earnings and/or dividend forecast, suppose if you were to announce a revision sometime around the 3rd quarter results release before developing your plan for FY2022, and then your FY2022 earnings forecast turns out to be lower than the current fiscal year, your dividend forecast would also be lower based on your target dividend payout ratio of 50%. Based on this assumption, wouldn't the timing of any upward revision of your full-year earnings forecast at around the announcement date of your 3rd quarter results be too early? Or would you instead adjust your 50% dividend payout ratio to avoid a dividend cut? Please tell us your thoughts about the relationship between the timing of an upward revision to this year's full-year earnings forecast and avoiding a lower FY2022 dividend payment.

A4: Any upward revision of our earnings forecast will first take into account our full-year results for FY2021, and our dividend forecast for the current year will be determined based on a dividend payout ratio of 50%. On the other hand, as market expectations on shareholder returns in general is changing, we think it's necessary to review our current dividend payout ratio of 50% and reach a well-considered outcome when developing our plan for FY2022. That being said, as our current strategy involves making ongoing equity investments with a primary focus on engagement, we don't believe it's desirable to keep raising our dividend payout ratio.

That being said, our fundamental aim is to produce even higher bottom-line growth next year compared to this year, which will also contribute to stable growth in our dividend.

Q5: One attractive aspect of Aozora's stock has always been its high dividend payment. However, as of right now, Aozora's dividend yield isn't that high compared with other major banks, and as such, may be losing its primacy in that area. What other factors would you appeal to in order to preserve interest in your stock outside of an attractive dividend yield?

A5: When we develop our plan for FY2022, we'll also take our next Mid-term Plan into consideration, with ROE being one of the most important components. Our dividend policy will be set after considering the level of optimal retained earnings.

Q6: There have been periods in the past where you achieved net earnings of around 43 billion yen, but more recently, that level has been 28~30 billion yen. What will be your net earnings level given the past performance? Do you think you will be able to return to your previous level of over 40 billion yen, or has the situation changed since back then? If you don't think you will be able to do so, what are some of the factors contributing to that?"

A6: Starting with our top-line net revenue, our full-year goal is to reach 97 billion yen, which would be the highest level in the recent history. Our customer-related business is on track at this point, and we'll keep focusing on its growth. On the other hand, factors below the top-line, such as the level of reversals in credit-related expenses and taxes, have changed considerably in recent years. As we moved into this new phase, we're focusing on our new growth areas, such as GMO Aozora Net Bank and our Strategic Investments Business. As such, our goal is to achieve steady bottom- and top-line growth each year rather than simply compete with our past results, and eventually return to our previous level of earnings.

On a related point, as you can see on page 9 under "gains/losses on stock transactions", we didn't depend on gains on stock transactions to augment our interim results and were able to avoid tapping our unrealized gains. While we have only just begun making equity investments with a primary focus on engagement in our Strategic Investments Business, we have already been gradually seeing exit returns starting in the 3rd quarter. This is not a traditional profit-making structure of realizing unrealized gains but is gradually reflected in gains/losses on stock transactions, and we believe this will become one of our main areas of focus and a major driver of revenue in the future.

Q7: Your capital adequacy ratio is currently 10.9%, but in light of the finalization of the Basel III standard, what is your realistic assessment of the Bank's level of excess capital? Also, are you planning to deploy said excess capital for equity investments with a primary focus on engagement and/or organic growth?

A7: Our mid-term capital adequacy ratio target is 9.5%, and we are currently not fully utilizing our accumulated capital. We plan to make equity investments primarily focused on engagement as well as limited partnership-related investments, which includes distressed-loan, real estate, and buyout-related investments, at an annual basis of tens of billions of yen, in order to utilize our full investment capacity. We have a balance of unrealized gains and we plan to carefully manage the balance and quality of our portfolio. We believe that we currently have a good deal of investment capacity even when viewed on the basis of Basel III standard finalization.

Q8: On page 29 of today's presentation entitled "Aozora's Sustainability Targets", it shows that the Bank is aiming for a total of 100 equity investments with a primary focus on engagement over five years. What are the amounts of these investments? Over the past few days, one other bank has announced a similar plan, but should we consider these initiatives to be fundamentally the same? In the banking sector, do you think that the topic of sustainability will contribute to the growth of the equities market going forward? Related to that, do you think Aozora will widen its sustainability-linked investment targets in the future? I'm mostly asking in terms of your expectations regarding market size.

A8: While we only announced the number of transactions, we've already made 12 equity investments primarily focused on engagement during the interim period. Though the amount of each investment was relatively small, we're selectively originating each investment while working closely with investees to determine what kind of support Aozora is able to provide. As I explained earlier, there is considerable investment capacity, which means there is also a fair amount of latitude regarding the overall size of investments, but at the moment we're focused on relatively small-scale projects.

In discussing market size, while page 29, "Aozora's Sustainability Targets", only shows the targets we've established for "equity investments primarily focused on engagement", these aren't our only equity investments. If you turn to page 8, you can see the total of all of our traditional investments, including our real estate, distressed loan, and buyout/venture-related limited partnership positions. The overall market size is quite large, and we believe that we have an opportunity to make a significant level of new investments. However, as of right now, the period for distressed loan and business recovery-related investments appears to be pushed out by six months to a year from our initial assumptions. We expect market size to expand even further once this investment activity begins in earnest.