Special Feature: President and CEO ◊ Outside Director Discussion

INCREASING VALUE for stakeholders

We held the special feature program under the theme of "Increasing value for stakeholders".
Mr. Jun Makihara, Outside Director with extensive experience in finance both in Japan and overseas, and Mr. Hideyuki Kudo, Representative Director, President and CEO, had a discussion how to increase corporate value over the medium- and long-term.
This program was moderated by Mr. Yoshinobu Yamada, the banking sector senior analyst at Deutsche Securities Inc.

Special Feature : GROUP INTEGRATION

From left

Mr. Yoshinobu Yamada(Moderator)
Managing Director, Senior Analyst Global Markets Research Deutsche Securities Inc.
Hideyuki Kudo
Representative Director, President and CEO Shinsei Bank, Limited
Mr. Jun Makihara
Outside Director Shinsei Bank, Limited

The banking sectorís current state and future

Yamada:Can you share with us your current recognition of the banking model around the world?

Kudo:From a business standpoint for the Shinsei Bank Group, we see no need to stick with the banking model. To start with, commercial banking comes with various restrictions. These are not necessarily well aligned with the way society is changing and, in some cases, no longer match the needs of customers. In addition, when I think about the wide-ranging functions of Shinsei Group companies from the standpoint of providing value added to our customers, we do not necessarily provide our services as a "Bank."
In view of what Iíve said, one aspect that comes to my attention in looking at the situation facing commercial banking is the restrictions and hurdles posed by capital regulations and various regulations on operational execution. In particular, I think it is becoming a constrictive format for banks seeking to be responsive to diversifying customer needs. And while the situation in Japan and overseas markets differ somewhat, there is a recognition the value added from a simple lending business is growing extremely minuscule. There is little doubt the traditional business, where a bank is deemed eligible for the special funding method of accepting deposits and then lends out those funds, no longer generates substantial added value.

Makihara:As conventional loan-deposit banking became increasingly commoditized, banks sought to move into different fields but this came back to bite in the form of the global financial crisis. On top of the financial damage, many layers of regulations have been imposed on banks, so I think it has become exceedingly difficult to manage banks. On this score, I think the situation facing banks is similar in Japan and overseas.
Furthermore, it has become much harder to earn profits with a traditional banking model since the sector entered the current era of low interest rates, and banks are extremely hampered by regulatory costs. The banking sector in Japan is saturated, so the situation facing banks is one where there must be a sense of what businesses earn money, what businesses must be retained in the public interest and what else should banks do. I think these are the sorts of questions increasingly directed at the sector. What is happening now, moreover, is a wide assortment of ventures can tap into money flows through FinTech. I think this has led banks to feel regulation has swung too far toward strictness and prompted them to consider pursuing opportunities in new fields.

Yamada:In view of the current situation, please tell us what a sustainable business model looks like for a bank five or ten years from now.

Kudo:I donít think there is a single business model for the bank of the future. Our Group, for one, has identified a direction it seeks to go using the strengths and management resources we possess but looking at the banking sector as a whole, I do not necessarily think there are all that many commonalities.
I believe, for example, the world will clearly become even more digital. Even so, I think there are unique attributes to this trend in Japan such as a climate where high-touch customer services are oddly pursued to degree that is burningly fervent but are then only half-baked into the final product. In some ways, customers have become acclimated to this pattern. If you think this is a digital age, is it smart to simply try to put everything online? In my view, just putting services online or making them smartphone accessible does not make for good services. I think there is a need to create business models for Japan where services are not merely rendered into a digital format or made available online.

Makihara:Banks basically accept deposits, a function that comes with public interest obligations, and they must then put these funds to work for business purposes. The strenuous pursuit of cost cutting is a part of the work of conventional lending and deposit gathering. That said, I donít think it is necessary to compete solely by channeling enormous energy into cost cutting but banks cannot afford to stop doing it either.
The remaining businesses that can boost earnings are advisory. Such businesses include asset management, asset bequests and succession advisory for the elderly, and financial advisory for companies that require some degree of expertise. Another example is so-called investment banking. Putting aside the matter of whether or not Shinsei Bank will pursue such work, it is a business where risks can balloon to a gigantic scale unless management is paying sufficient attention to them.
What comes next is to ask whether to run a domestic business or to operate globally. Even if a bank thinks the domestic market is overcrowded and sought to grow globally, each country presents different cultures, regulations and risks to consider. What is really hurting U.S. and European banks is oversight from multiple regulators. Some regulations are even contradictory, and regulatory compliance costs are very high.
In many cases, banks are squeezed as regulatory authorities complete with each other. Regulators in Japan are fairly careful to avoid such contradiction among regulators, so the absence of that dynamic is one of the positives of doing business only in Japan in my view.
It is very difficult to envision what banks will become in five or ten years. To an extent, the best approach will likely be to keep costs as low as possible by using technology in commoditized businesses and to assemble and retain capable teams with expertise and specialized knowledge and pursue advisory work in customizable businesses.

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