Aozora Bank : Transcript（199KB）

FY2023 Financial Results Investors Meeting

Telephone Conference (May 22, 2024) Transcript Summary

Presenter: Hideto Oomi, President and CEO

Good afternoon, everyone. My name is Hideto Oomi, and I've served as President and CEO of Aozora Bank since April 1, 2024. Thank you very much for making the time to attend this meeting.

This is an investors meeting to discuss our fiscal year 2023 financial results, but I believe you're probably more interested in the capital and business alliance with Daiwa Securities Group Inc. ('Daiwa') we announced on May 13, 2024. Today I'd like to talk mainly about the background behind this alliance and its effect on our business results going forward.

To explain why we partnered with Daiwa, let me begin by briefly talking about my own career and background. I joined the then Nippon Credit Bank in 1989. At that time, I thought I'd pursue a career at this bank that continued contributing to Japan's economic growth through providing industrial finance as a long-term credit bank. However, in 1998, the bank failed and entered into special public management, which made me concerned. Our turning point came in 2000 when Aozora was reprivatized. One of the new shareholders once advised us, "Become an exciting bank. There're examples from Silicon Valley. It's where Japan will be in three years." Following this, we considered future paths for our business and came to the conclusion that we should bring something entirely new into Japanese finance from overseas. The first of these was real estate non-recourse loans. The second was business recovery finance. The status of creditors had been unstable under the Composition Act in Japan, but the enactment of the Civil Rehabilitation Act allowed for providing loans in the form of DIP finance. We also launched business recovery finance aimed to support borrowers' revitalization by purchasing NPLs, which has developed into the current business of Aozora Loan Services. The third area of focus was LBO finance. The activities of PE funds started in Japan in around 2000. As we had a track record in large sized LBO financing in the United States, by leveraging our overseas experience, we started this business in Japan in anticipation of an expansion in the domestic LBO finance market. I've been directly engaged in Aozora's LBO finance business for 11 years since 2000. These three areas of business grew into our present key strengths.

This past March, the Bank of Japan raised its policy interest rates for the first time in 30 years to overcome deflation. I believe that the current economic environment will work in

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favor of us.

Following the Tokyo Stock Exchange's revision to the "Corporate Governance Code" and request for "Action to Implement Management that is Conscious of Cost of Capital and Stock Price," our customers are increasingly reviewing their business portfolio strategies, which I believe will expand our opportunities to provide M&A advisory and LBO financing. With regard to real estate finance, there'll be financing needs created by the inflow of capital into Japan from overseas investors, while we'll need to closely monitor trends in property trading prices as yen interest rates increase going forward.

As for business recovery finance (investments in NPLs), the profitability of regional financial institutions is expected to improve following the eventual normalization of the negative interest rate policy in Japan, which in turn will allow them to make provisions to loan loss reserves and to accelerate the addressing of their NPL issues. I believe this development will expand our business opportunities.

We made additional provisions to our loan loss reserves for U.S. non-recourse office loans and restructured the securities portfolio in fiscal year 2023. Our capital remained within the target range, but we considered the need to further strengthen the capital in light of the potential volatility in our focus areas of business. While customer needs are becoming more diverse, we have strong skills in debt finance but there was some room for us to increase our knowledge in the equity business. To this end, we sought a partner that could enhance our accumulated strengths since last year with the aim to achieve growth beyond the limits of our own. Daiwa stood out as meeting these two requirements.

Mr. Ogino, President and CEO of Daiwa, and I both joined our respective companies in the same year and also happened to each serve as general managers of corporate planning/business strategy at respective companies around the same time. We've known each other long and I've learned a lot through my discussions with him. On the foundation of this relationship, our discussions on a proposed alliance proceeded rapidly and we entered into an agreement on May 13, 2024. Following this alliance, Daiwa will have a 15.5% stake in Aozora and we'll become an equity-method affiliate, and not a subsidiary. The alliance is based on the concept that we can create something new through complementing each other with the distinctive strengths of both companies.

As for specific effects from this alliance, we plan to announce them at a later date, after more specific estimates become available as a result of discussions at the Steering Committee.

The Committee will first discuss four areas of collaboration as shown in our presentation materials. The retail area (Wealth Management) is expected to contribute the most to Aozora. Unlike megabanks and regional banks, Aozora's main retail business is limited to

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savings and investment products. We're expected to benefit from this business alliance in terms of enhanced product offering to our retail customers, including financial products currently unavailable at Aozora such as fund wrap accounts.

Although we're unable to provide more detailed information on the synergy effect at this time, we plan to announce them by the end of this year in addition to other areas of collaboration that we'll study in the future.

The effect of this capital and business alliance hasn't been incorporated into our earnings forecast for fiscal year 2024. Our forecast for profit attributable to owners of parent is 18.0 billion yen. The expected recovery to 18.0 billion yen is based on the assumption that additional provisions to loan loss reserves for U.S. non-recourse office loans and the disposal of securities we experienced in fiscal year 2023 won't be required in fiscal year 2024. However, we'll need to take into consideration the potential impact of the U.S. presidential election going forward while also monitoring trends in U.S. interest rates and foreign exchange. That being said, we don't believe that Aozora will be significantly affected by the external environment compared to fiscal year 2023; rather, we believe that it's more important that business opportunities in our business areas of strength develop as expected.

In the unlikely event that the recovery phase of Japan's economy and economic growth comes to a halt, the outcome could well be different from our expectations. However, given the possibility that the Bank of Japan could further raise its interest rates earlier than the original market expectation, I believe that our earnings forecast for fiscal year 2024 is reasonably achievable.

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