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.
- 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
Challenges and Initiatives the Shinsei Bank Group must address to realize corporate value over the medium- and long-term
Yamada:What should the Shinsei Bank Group do to increase corporate value as it looks down the road at the bank of the future sketched out above? Alternatively, what and how do you think about the risks attendant with such endeavors?
Kudo:Going back to what Mr. Makihara touched on earlier, it is important in services to separate the customer interface piece from the back-office ce operation piece. In the latter, there is little choice but to improve productivity as much as possible. I think the technologies applied to that end can be applied over and over again.
In contrast, figuring out how to build in the customer interface piece in ways that creates a value-added experience for customers is the essence of design itself. That is where I think uniquely Japanese ingenuity is necessary.
What I donít think we necessarily need to do, for example, is to strive on our own to advance a basic technology such as Blockchain, even though it will undoubtedly find its way into the financial business. As de-facto standards emerge, we naturally expect to apply those to our operations. That said, Blockchain is not an area where we intend to play a leading role in technology development.
While vaguely dropping the term "FinTech" into discussions, we need to ask ourselves two separate questions when considering this trend. Do we really need to channel our efforts into such ventures? Is it enough just to keep up properly with changes in society? I would like us to focus our energies on our customer touch points.
Yamada:With financial institutions around the world moving in more or less the same direction on how to apply artificial intelligence (AI) and FinTech, what are your thought on the Shinsei Bank Groupís unique attributes, strengths and points of differentiation versus other banks?
Kudo:Technologies are something any financial institution can adopt. In the initial phase after a technology is adopted, this can be a source of appeal but I do not think staying at that level is a source of lasting differentiation. In the end I think what is important is the kinds of products and services you can provide via the application of technologies. I see two entry points in thinking about deploying technologies.
First, the current boundaries that separate the financial sector are not necessarily consumer oriented. A sector structure where banks and card issuers exist side by side, each with separate regulatory systems, will undoubtedly erode and crumble. From the standpoint of putting the consumer first, the current sector structure is certainly strange. As the boundaries segmenting the financial sector dissolve, we intend to be a frontrunner in what we see as a natural process of financial institutions providing more integrated services from a customer standpoint. We think it will not be easy for other banks to mimic our approach to this opportunity. Each of our competitors is already large, so copying us will be easier said than done. The Group is moving forward on many fronts but even at our smaller scale, reorganizing around such initiatives within the Group is no easy task and we doubt other banks will be able to easily replicate our approach. In that sense, we think our hard-to-mimic approach to this opportunity is a source of differentiation.
The other entry point is the substantial differences in how we deploy technology, and here in turn is precisely how we build up customer interfaces and how we apply design ideas and specifications. We think design will become an especially important matter in the years ahead. This is the case in ensuring pages can be viewed on a single screen on a smartphone, for example. I think the difference between us and our competitors will come from whether we can build interfaces by remaining aware of the user experience.
yamada:My impression of President Kudoís core message in what he shared just now is that the high convenience, one-stop component is important for individuals. As for corporations, responding to various problems in a tailor-made manner is important. To move in that direction, what are the problems that must be addressed here today?
Kudo:Thank you for bringing up the distinction between individuals and corporations. Even among companies, we think we can build models for smaller enterprises from the enormous data flows we process, like we do for individuals. For enterprises with greater scale, we need to have a structure that is useful in addressing problems they face so they feel we add value. Given the Shinsei Bank Groupís smaller scale, we need to develop genuine niches and fields of strength rather than attempt to do everything relying on intuition. Outside of real estate finance and project finance, for example, we need to decide on several fields such as business succession, support for closing down or restructuring small businesses, and health care. While those are just examples of what we could pursue, we need to decide on several fields and dig deeper.
Makihara:There are not any companies or people without relationships, so providing new services to our existing customers is fine but in developing new customers, there will always be competitors. It is next to impossible to stand out from the crowd and offer something new without seeing who the competition is. There are teams with skillfully constructed capabilities who grasp that at Shinsei Bank Group but they need to be nurtured and tested to grow. It is a truism for any company that managementís most important tasks are to foster outstanding teams, provide them with incentives, and point them in the right direction.
Kudo:In essence, the direction we will likely go is to identify targets our competitors are unlikely to pursue and seek niches within those targets based on a granular understanding of them. Our approach will be to use the fields where we have already built top-notch teams as a point of departure to venture out into other areas. As I mentioned earlier, in the field of structured finance, for example, despite some missteps, our teams have learned a lot and individual members have grown. I think we are now able to add new human resources in such fields and expand the size of our teams while training new people, and then expand outward from there. I believe we are ready to do this in several fields.
makihara:For example, consider asset management products. I doubt there is anyone who is entirely satisfied with the products available now. Yet there are clearly unmet needs. Rather than source only in Japan, I think one potential growth field is to bring in overseas asset management firms and offer their funds through alliances with regional financial institutions. But is it actually possible to do that? If such partnerships were easy to launch, I think many others would have already done it. Sizing up and identifying a good asset management firm, sealing an alliance, and then building a good marketing network is an enormous undertaking. I think this is an example of something the Shinsei Bank Group is well placed to pursue.
Yamada:In pursuing expertise, I think the most important point is cost. In the startup phrase, upfront investments are invariably necessary. In terms of increasing overall corporate value, how one thinks about cost management is important.
Kudo:In fields where existing businesses are proceeding with current operations, managers have little choice but to be thoroughgoing in their focus on improving productivity. I think we need to continue to seek to find any points of entry that enable us to pursue productivity gains but this would mean forming new habits of the mind. Some Japanese manufacturers are able to improve productivity in such ways but financial institutions do not have such cultures. The mindset that seems to invariably prevail at financial institutions is pursuit of the lockbuster deal. That said, in the years ahead, especially in the case of commercial banks, chasing such "whales" is unlikely to be fruitful. In operational functions, banks must seek openings anywhere they can be found to pursue comprehensive productivity gains. As a starting point to achieve this, building such mindsets will be important in my view.
On top of that, for many things to be substantially altered, investments will be necessary, as Mr. Yamada mentioned. For justifying each investment, I think what matters is the degree to which the underlying "big picture" story is convincing. If management is able to make a powerful case, investors with medium- and long-term horizons will be convinced. To the extent management achieves that, I think some level of investment is possible. Of course, we in management think about singleyear earnings performance and balancing that against capital levels but these depend on the viability of balanced decision-making and the importance of the big picture narrative and its viability.
Yamada:With regards to how profits are allocated, a normal non-financial company chooses between forwardlooking investments and returning profits to shareholders but in the case of banks, a third option is regulatory response. Getting the balance right on the three options is very difficult. What sort of balance do you think is likely to be sought in the coming five to ten years?
Kudo:With regards to the third option, we naturally need to respond but we are a bank subject to domestic standards. There are others in the industry that must meet regulatory capital requirements even sooner. Fortunately, we have a good overall grasp of the direction this issue is going. Our approach will be to minimize regulatory costs and focus instead on the two remaining options for profit allocation.
makihara:Shinsei Bank is a public fund injected bank. The Japanese government is one of our shareholders and we are required to build up retained earnings as a source of public fund repayment. In returning profits, we must take into account how to build up our capital base in the future even as we execute policies to return profits to shareholders. Even more than normal regulatory compliance, it is a major burden to always be thinking about the public capital we received.
Yes, the three options are forwardlooking investments, repaying public funds, and returning profits to shareholders. These are the choices all banks face. Within the forward-looking investment bucket, the biggest is IT investment. At Shinsei Bank, we must actually allocate funds to operations and upgrades and just as we feel relieved when those funds are at last deployed, then something like a cyber attack requires a response. At such times, it always feels to me like IT is a potentially unlimited reservoir of needs. Navigating in such situations is very challenging. One of our outside directors is an IT expert, so we tap into his knowledge.