Aozora Bank : Transcript（376KB）

Online Investors Meeting "Business Strategy for FY2024"

(February 16, 2024) Transcript

Presenter: Kei Tanikawa, President and CEO

I'd like to thank you all for your time today.

Let me take this opportunity to express my appreciation your continued support for the Aozora Group.

On February 1, we made an announcement of our fiscal year 2023 third quarter financial results as well as revisions to our earnings and dividend forecasts for fiscal year 2023. We also announced a change in our executive leadership effective April 1, 2024.

We would like to again express our deepest apologies to our shareholders for the significant concerns that we have caused.

As we received many inquiries from our shareholders, mainly regarding our earnings forecasts for the next fiscal year, we've decided to hold another meeting at this time. We apologize for the short notice, but we would like to take this opportunity to explain our business performance for the next fiscal year and our future strategy at the earliest possible time directly from Oomi-san, who will succeed me as CEO. We hope that our comments today will help you gain a better understanding of our plans for sustainable business growth and stable dividends in next fiscal year and thereafter.

Before we get to Oomi-san's presentation on our plan for next fiscal year, let me first provide a brief update on our business performance.

Please turn to page 2 of today's presentation materials. These graphs on this page show our business-related profit for the first nine months of fiscal year 2023 by business segment. The business-related profits of the Institutional Banking Group, Structured Finance Group and International Business Group, all of which constitute an integral part of Aozora's Strategic Investments Business, continued to grow during the period and remain on track in the fourth quarter. Our fiscal year 2023 full-yearbusiness-related profit is expected to significantly exceed the previous fiscal year's results.

Please now turn to page 3. We've continued to closely manage our U.S. non-recourse office loan portfolio, and we don't expect additional losses nor have further significant concerns. The workout environment is gradually improving with signs of investors' activities

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returning. We're now seeing concrete progress in the workout process and may see the closing of a transaction by early next fiscal year.

Now I'd like to answer preliminary questions we received today about our U.S. non- recourse office loans.

[Please refer to Q1-5 of the "Q&A Summary" for the preliminary questions and answers regarding U.S. non-recourse office loans.]

I'd also like to add that our securities portfolio restructuring is progressing in accordance with our plan and liquidity reserves are maintained at a very strong level.

Next, Oomi-san, currently serving as Deputy President and Head of our Institutional Business Promotion Group, will further discuss our business performance.

Presenter: Hideto Oomi, Deputy President

Let me begin with a brief introduction myself. I joined the Nippon Credit Bank in 1989. My turning point at the bank was when the bank failed in 1998. At the time, I was in my ninth year with the bank and was stunned by the sudden turn of the events. However, the event triggered a series of significant changes, and through the various transitions I faced, I gained experience in all aspects of Aozora's history up to this point.

I first worked in our LBO business in 2001 and worked with individuals at private equity funds during the early days of the LBO loan market. Today, I'd like to talk about business, including my background like this.

Please turn to page 5 of today's presentation material. As you can see, Aozora plans to achieve a V-shaped recovery for the next fiscal year. I'm confident in achieving this goal through our customer-related business and GMO Aozora Net Bank, which I'll explain next.

Please turn to page 6. Net revenue from customer-related business increased significantly in this fiscal year and this momentum is expected to continue into the next fiscal year.

Our customer-related business focuses on Aozora's Strategic Investments Business, which should be thought of as a combination of highly specialized loans and investments in which Aozora has its strengths as we described in our Mid-term Plan "Aozora 2025."

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Please now turn to page 8. As you're all aware, the world is currently undergoing some major changes. Facing unprecedented heat waves and torrential rains, a transition to renewable energy is an imminent issue. An aging population combined with a declining birth rate and digitalization needs can trigger business succession as well as exit from a business and entry into a new field.

As was once the case with Honda and Sony, start-ups have the potential to transform social issues into growth engines and grow into companies that drive our Japanese economy.

Aozora's Strategic Investments Business is an initiative to proactively provide the funds needed for these social changes. Page 8 shows an example image of the company's growth curve, which has three phases where the amount of change is large.

The first phase is "Fostering" companies in their start-up stage.

Aozora is among the first to provide loans to start-ups that aim to go public (venture debt). Japanese banks have traditionally taken a passive stance towards loans to start-ups for reasons of their short business history and unestablished business base.

This has made it difficult for start-ups to expand their business by obtaining loans. To gain access to growth funds, they almost have no choice but to go public at an early stage prior to business expansion and this is one of the reasons why there are less successfully growing large-sized venture funded companies (unicorns) compared to the U.S. and China. Although we receive referrals from venture capital firms, only approximately 10% of them we consult with are approved for financing due to our credit screening process that we've developed through our corporate lending activities.

When making a loan to start-ups, in addition to interest on loans, borrowers basically grant us warrants and other securities from which capital gains can be expected when they are listed on the stock exchange. Even if their business doesn't grow as planned, the funds can be collected on the due date and we can avoid being left with an investment in a "living- dead" company.

It's been three years since we launched this business, and we're now expecting some of the start-ups we've invested in to go public in the next fiscal year with associated capital gains.

The second phase is "Change" at the peak of a companies' growth curve.

As I mentioned earlier, companies are actively restructuring their business through M&As in response to a changing society. With an increasing number of business successions by aging owners of SMEs and the privatization of listed companies, we expect the M&A market to continue to grow. LBO finance is one of the means of providing funds needed for

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these M&As.

Due to the change in management policies following a change in ownership, and increased borrowings as a result of additional financial leverage, it is necessary to forecast future performance rather than the past history in order to provide effective financing. This approach is different from traditional corporate loans focusing on historical financial statements. We've built this expertise since the early days of the LBO market and established a very strong relationship with private equity funds based on our long-standing track record of transactions and credibility.

LBO arrangers need to be able to conduct detailed credit analysis in a short period of time, considering a deal structure in light of the probability of repayment and exit plans and also prepare a large volume of contract documents and in turn receive arranger fees as consideration for their services. As more regional financial institutions have entered this area recently, we arrange syndicated loans and sell down some portion to these institutions as a way to diversify our risks.

The Aozora Group has subsidiaries that are engaged in this business, namely ABN Advisors that provides M&A intermediary services for SMEs, AJ Capital that makes investments through business succession funds and AZ-Star that runs a corporate investment fund. Coupled with capital gains from the Bank's investments in PE funds, we expect earnings to grow as our M&A businesses expand.

Next, I'd like to talk about the financial services required for a transition to a decarbonized society.

Following the government's introduction of the Feed-in-Tariff (FIT) system in 2012, a number of solar power plants were built across Japan.

The construction of power plants is financed by non-recourse loans through project finance, and Aozora has been a leader in this area since the early days of the market. Of note, we are recognized as a leading lender among financial sponsors or in the foreign-affiliated sponsors' projects.

When receiving a loan request, we begin with a field investigation and then verify the experts' report on power plant development to ensure that the ground has not been loosened by the development of the power plant and that it is not destroying nature. As we also have expertise in real estate appraisal, we know how to address the issue of unclaimed lands as well as examine surface rights and leasehold interests, and offer advice to investors as needed. We also assume the impact of typhoon and snow under extreme weather conditions and examine whether the proposed project responds adequately to water drainage and snow removal and is fully insured against such risks.

Once a power plant project finance is originated, we take risk control measures through the

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syndication of loans to local financial institutions. This is a good example of leveraging Aozora's network of regional financial institutions.

The third phase is "Recovery" at the end of this curve.

Our group company Aozora Loan Services (ALS) was launched in 1999. ALS, which is 20% owned by Shinkin Central Bank and 12.4% by Shinkumi Federation Bank, is a very unique entity in the industry as its main targets are claims held by financial institutions across the nation, not by its parent company Aozora Bank.

ALS works closely with the financial institutions' credit management division in charge of borrowers that are in danger of bankruptcy, receives updated information on them and sets a purchase price. If the proposed price is mutually agreed to, ALS purchases the claims and then conducts collection activities by leveraging Aozora's network of regional financial institutions.

The purchase price will vary because the specific collection strategy depends on whether the borrower holds real estate, whether it has another promising business and whether it has guarantors. ALS carefully performs collection activities after purchasing claims in cooperation with regional financial institutions, which has resulted in repeat business.

As I've discussed so far, the Aozora Group isn't large and doesn't have group companies like megabanks and we don't have that strong operating base compared to regional financial institutions. However, Aozora's Strategic Investment Business represents the Aozora Group's presence and it has key features that customers and the society require. Amid a significant change in society, I believe we're right on track to contribute to customers in each phase of "Fostering," "Change" and "Recovery" through Aozora's Strategic Investments Business, a highly professional area where we can leverage our strength.

This is one of the reasons why I'm confident in a V-shaped recovery for the next fiscal year.

Another reason is GMO Aozora Net Bank (GANB). Please turn to page 9.

GANB is an internet bank jointly operated by GMO Internet Group and Aozora Bank. Its distinguishing characteristic is that it produces all of its banking systems in-house, with the exception of its core banking system.

With its in-house production capabilities, GANB has become a cost-competitive bank that can build systems on its own. By leveraging this cost competitiveness, GANB is able to offer the lowest possible fees in the industry, such as a bank transfer available from a 129 yen fee.

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GANB also focuses on opening accounts for start-ups which other banks tend to stay away. For corporate customers that launched their business less than a year ago, GANB offers free transfers to other banks' accounts up to 20 times as well as a unique loan program that does not require submission of financial statements and only requires deposit/withdrawal data from the bank account. These benefits have gained support from other corporate customers, which eventually opened accounts like start-ups. As a result, the number of corporate accounts at GANB exceeds 110,000.

Fees are small, ranging from a few tens to a few hundred yen per transaction, but since corporates' transfer transactions take place repeatedly, as a result our net revenue will increase as the number of accounts grows, making it an attractive business.

GANB has other attractive features.

GANB's in-house system development enables it to support corporate customers' DX initiatives, leveraging API connections with corporate customers' systems.

For example, if you choose a payment via bank transfer for your online shopping, I think you'll need to leave the shopping website to sign in on your bank's website for payment purposes. Unlike retail customers, corporate customers require a number of payments through bank transfers but this process takes quite a bit of work each time. Their needs are to complete the process at one stop from purchase to payment, which can be available by the direct connection of the systems through APIs between corporates and a bank. GANB focuses on API connections and has already had a track record of more than 500 companies. Many customers have in-house system development and in that case they cannot easily shift to other banks.

API connection itself is free of charge and any customization is provided subject to fees. A system connection requiring large-scale customization is called BaaS (Banking as a Service).

In September 2023, GANB entered into a master agreement with Okasan Securities on systems development for the launch of Okasan Bank (tentative name). The reason why GANB can provide these kind of services is that GANB is a unique organization headed by Mr. Kaneko, who used to be responsible for banking systems at IBM, with engineers representing approximately 40% of the employees.

Today, I explained some of our unique businesses in greater detail, but this is only part of the story. I'm looking forward to talking about the rest with you on other occasions. Also, it's much appreciated if you could take a look at our annual report.

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Finally, please turn to page 7.

We expect to return to profitability next fiscal year, driven by our strong customer-related business. We intend to resume our dividend payment in the first quarter of FY2024 and increase the full-year dividend depending on our level of net earnings.

We will restructure our balance sheet through a review of our basic policy on risk appetite, taking into consideration future trends in the market and interest rates, and strive to achieve stable and sustainable growth at the earliest possible timing.

Thank you very much for your kind cooperation.

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