Top Message

Hideyuki Kudo

For the Sake of Staying Ahead of Change

There is a question I am often asked when I meet with stakeholders for a discussion. If Shinsei Bank Group is neither a mega-bank nor a regional bank, then what kind of financial group is it? Here is what I think about that. The Shinsei Bank Group goes beyond the boundaries separating the financial industry as a frontrunner in identifying and staying ahead of the trends that shape how finance will evolve from here. Thatís what we aspire to become both in terms of our asset scale and business portfolio, and at the same time we understand our stakeholders have high expectations for the Shinsei Bank Group in executing this role. Considering our unique standing, we view no other financial institution as a benchmark and recognize comparing the Group to industry competitors is difficult. Even so, we think this is a winning strategy given our view that the financial industry is poised to enter an era of sweeping, fundamental change.

Times when the prevailing order or paradigm wavers are threatening to established interests who are highly adapted to that environment but new opportunities also often emerge at such times. The foundation of the business model the Shinsei Bank Group seeks to construct lies in going beyond conventional industry boundaries in reconsidering the Groupís financial functions from the customerís viewpoint, unearthing genuine needs that customers were not even aware they had, and aiming to offer new businesses and services that transcend conventional thinking.

We see three key management issues for this business model to become reality and the Group to succeed as a new kind of integrated financial group. In the CEO message, I discuss initiatives and results in year one of the third Medium-Term Management Plan (Third MTMP) that address these management issues, and share with all our stakeholders what our future policies will be.

Three Key Management Issues for the Shinsei Bank Group

The three key management issues are: 1) the Shinsei Bank Groupís profitability; 2) our capability to respond to a changing environment; and 3) our capital policies and public fund repayment efforts.

The Shinsei Bank Groupís Profitability

From the early stages when we devised the Third MTMP we are now executing, we recognized the magnitude of our earnings volatility and the weakness of our core profitability as issues. The Shinsei Bank Group has so far been highly reliant on non-reoccurring forms of income such as gains on the reversal of net credit costs from drawing down reserves for loan losses accumulated in the past, and income realized by exiting investments and loans held by investment-linked operations. In conforming to the growth imperative by expanding our businesses in every direction, we have lapsed into a shortage of logistical support for each of our business fields, so in business fields where we ought to have grown, we could not fully realize our latent growth potential.
We need to add more heft to our core profitability while limiting factors that contribute to high earnings volatility to ensure the market properly assesses the Shinsei Bank Groupís corporate value. In the Third MTMP, we applied "selection and concentration" tests to our businesses in accordance with the Groupís strengths and expertise and the growth potential of each business, turning away from the all-directional expansion course we had been pursuing (for details, see the overview of our Third MTMP).
As a start, we are directing even more of the Groupís management resources into the unsecured loan business and structured finance as growth drivers. These businesses earn higher margins than other businesses and have growth potential, and, despite the stepped-up competition stemming from the Bank of Japanís negative interest rate policy, these businesses have developed into core sources of profitability where the Shinsei Bank Group can deploy the expertise and advantages it has harnessed for years.
In the unsecured loan business, with growth in the credit guarantee business that partners with regional financial institutions contributing, our unsecured loan balance grew at an 12% average annual rate in fiscal year 2016, outpacing the overall market. This was accompanied by steady growth in the number of customers at Shinsei Bank Card LoanóLake ("Shinsei Bank Lake"). The scale of the domestic unsecured loan market is about ¥8 trillion but in view of Japanís demographic trends,the market is unlikely to keep growing at the same pace over the next five or ten years. Against this medium-to-long-term outlook for a changing macro-environment, we see two solutions. First is to use artificial intelligence (AI) to expand loan applications and our unsecured loan balance. We plan to do the former by deploying AI to respond to the needs of prospective customers who so far have not been able to meet our standards. We plan to do the latter by harnessing AI to develop more detailed credit assessments of the demographic cohorts we are targeting as customers at present. Second is to deploy our systems and marketing expertise not only in Japan but also overseas, especially in small loan demand in Asia. I believe one way to do this for the Shinsei Bank Group, which does not have a customer base overseas, is to partner with local financial institutions that have a customer base. In February 2016, we began to supply the core systems the Group developed for consumer finance operations to a Thai company engaged in mobile phone sales and shopping mall management. In November 2016, we formed a joint venture with Military Commercial Joint-Stock Bank, a major private-sector bank in Vietnam, and began preparing the way to launch an unsecured loan business (for details, see Special Feature: Shinsei IR Day: Unsecured Loans).
In structured finance, we engaged selectively in real estate finance in view of possible overheating in some domestic real estate transaction prices. In project finance both in Japan and overseas, on the other hand, with project initiatives and syndications with regional financial institutions becoming more active, fee income from project originations and our operating asset balance trended steadily in fiscal year 2016. In domestic project finance, we have mostly focused on megasolar projects but with revisions to the feed-in tariff (FIT) system, we expect the importance of wind, geothermal, biomass and other forms of renewable energy as sources for electric power generation to grow. The Shinsei Bank Group will consistently offer new solutions as it strives to remain a pioneer in the project finance field, harnessing its capabilities in securing megasolar projects, assessing project risks, and partnering with regional financial institutions (for details, see Special Feature: Shinsei IR Day: Structured Finance).
One of the stable revenue areas is asset management consulting. I think this is the biggest challenge in the business strategy of the Third MTMP. Market turmoil stemming from factors such as the negative interest rate policy has sharply diminished the investment appetite of retail customers. Signs of recovery emerged in the second half of fiscal year 2016 but asset management consulting cannot be satisfied with a simple self-sustaining recovery in investor confidence as it has not yet addressed enormous untapped needs. It is thus no exaggeration to say this field is one of intense interest for the Japanese people but financial institutions have yet to fashion a genuine response to such needs. The Shinsei Bank Group sees enormous untapped business opportunities if it can go beyond its own network and collaborate with companies outside the Group and harness AI to ascertain the asset management needs of customers in the age 30-40 cohort who are ready to accumulate financial assets and savings. Leveraging AI, the Group is working on developing customer analysis models for marketing and providing customers with products that match their specific needs through channels that are convenient for them, and on renovating our customer relationship management (CRM) systems linking up multiple channels such as the internet, smartphones, branches and call centers (for specifics, see Special Feature: Shinsei IR Day: Retail Banking).
In fields we expect to deliver future growth and where the Bank looks to create customer value through groundbreaking innovation, we group settlement services, business solutions for SMEs, collaboration and alliances with regional financial institutions, and business succession finance in the strategic initiative area.
In settlement services, APLUS Co., Ltd. (APLUS) commenced offering a settlement agent service in Japan for Chinese mobile settlement service WeChat Pay, which is operated in China by WeChat, Chinaís largest SNS service. The Group is working to add more merchants accepting WeChat Pay and rapidly build out the WeChat Pay outlet network in Japan. In business solutions for SMEs, we launched a vendor leasing business as a collaborative venture between Showa Leasing Co., Ltd. (Showa Leasing) and APLUS. The latter is engaged in installment sales business for its member merchants and is responsible for credit decision functions. The former is responsible for the leasing and leased asset administration functions. The venture proposes leases as a form of finance to Individual business owners that are APLUS member merchants with plans to purchase equipment. For the Shinsei Bank Group, the venture is expected to offer a means to achieve stronger engagement and lock-in with a new customer base.
Even after the Bank of Japan introduced the negative interest rate policy, we have not sought to substantially alter the direction of the basic policies in the Third MTMP, and as a result of resolute efforts to improve our core profitability, the two businesses we identified as growth areas are steadily growing, and there are promising signs emerging in each of the businesses we classify as strategic initiative areas.

Our Capabilities to Respond to a Changing Environment

We believe the environment facing the financial industry is entering an era of sweeping, fundamental change. Considering the advance of financial technologies and entry of non-financial firms into the financial area, it is not important whether banks or some other kind of entity provide the products and services from the vantage point of customers. Companies that survive will be those offering more attractive products and services that customers prefer, regardless of the field from which they originate. The Shinsei Bank Group has a broad spectrum of business know-how and a customer base in so-called non-bank fields such as consumer finance and leasing that fall outside the conventional boundaries of banking, securities and trusts, and it is able to manage these in a coordinated manner. For the Group, an era of sweeping change is a welcomed entry point to new opportunities.
Upon reflection, we realized the Group was up against real limits in adapting to the changes reshaping the business environment if it stayed the course as a result of the growing tendency of the Groupís organizational management to create silos through the bundling of our Group-based organization structure and the erection of boundaries delineating fields of finance. As I mentioned at the start, we are a new kind of integrated financial group, so the Shinsei Bank Group needs organizational capabilities. Along with Shinsei Bank, it is vitally important that we encourage Group companies such as Shinsei Financial Co., Ltd., APLUS, Showa Leasing, Shinsei Trust & Banking Co., Ltd., Shinsei Securities Co., Ltd., and SHINSEI PRINCIPAL INVESTMENTS LTD. (Shinsei PI Group) to draw out the best from their human resources, business bases and product development capabilities so they can reinforce the appeal of their product lineups while reminding them to move with sufficient speed. This is a matter of high urgency for integrating the Group.
The key ideas for advancing Group integration are integrating operations, bringing our people together, and integrating our businesses (for details, see Special Feature: Progress Assessment of Group Integration). For starters, prime examples of integrating operations is the retirement of the Group-based organization structure we had used for many years along with the consolidation in effect of head-office functions of Group companies into the "Group Headquarters," which was established at Shinsei Bank in April 2017. The consolidation of Group company head-office functions has enabled us to streamline operations and improve productivity as well as work to improve our operational performance by providing high value-added services to business divisions and bolstering our capabilities for devising Group-based strategies. With the Group Headquarters now in place, what we aim to achieve next is the reorganization of the Groupís business structure according to each function provided to customers. We will start work on this from fiscal year 2017. Our goal is to construct an organization that optimizes the Shinsei Bank Group as a whole in ways that transcends boundaries splitting finance into different fields.
What we also need to achieve to lower barriers among fields is to bring our people together. What we aim for is not merely putting personnel together to exchange information and ideas or a policy of employee rotations. Our ambition is to strategically deploy human resources from the overall pool of Shinsei Bank Group employees from the perspective of what person is best suited to which business. It is our expectation that when human resources from a different field or corporate culture work toward achieving common goals within the context of a single organization, new points of focus and ideas will emerge that are a clean break from what had been the case before. The latent potential of the Shinsei Bank Group to become a driving force for identifying new focal points and proposing new ideas is enormous. Of the benefits we expect to derive from bringing our people together, this is one of the most important. To achieve this, the management team, including me, will be steadfast in communicating with Group employees and strive to develop organizational management and personnel systems from a Group-wide perspective.
Our efforts in bringing our people together will necessarily help integrate our businesses. The expertise and business experiences each of our employees possess will organically connect dots from which new businesses will emerge, and existing businesses will hit upon solutions they never even conceived of before that move them forward. As a mean for achieving this, we launched the "Cross-Company Business Unit" in April 2017. The unit is tasked with sharing information by transcending Group company boundaries in specific areasó business units aimed at corporate clients and financial institutions, structured finance, businesses aimed at individuals, and analyticsóas well as generating ideas that advance Groupbased businesses, with a particular focus on unit leaders, and examining whether organizational restructuring or function consolidation are necessary to move forward.
Through our efforts at integrating operations, bringing our people together, and integrating our businesses, I believe the Shinsei Bank Group has the organizational capabilities to adapt to all kinds of environmental changes.

Our Capital Policies and Public Fund Repayment Efforts

We recognize communicating with the market about our capital policies has become even more important in view of the progress we have made in accumulating capital that can be used for public fund repayments as a result of our booking of solid earnings in the past several years.
As a way of returning profits to shareholders, we announced a common stock repurchase plan with a maximum aggregate value of ¥10 billion in May 2016 based on our current level of capital accumulation to enhance per-share value. With regards to public fund repayments, given that the public capital supplied to Shinsei Bank has been converted to common shares, we are studying viable plans for repaying public funds in an effort to construct and execute such a plan.
We remain mindful of the need to secure earnings that can fund public fund repayments but also of the need to pursue a suitably balanced approach to capital allocation between deploying capital in our businesses and returning profits to our shareholders to enhance per-share value.

In Closing

We are resolutely pressing ahead with the three key management issues of our core profitability, our capabilities to respond to a changing environment, and our capital policies and public fund repayment efforts. We believe properly explaining the results of these initiatives to the market will contribute to enhancing the sustainable corporate value of the Shinsei Bank Group. We also think this will enable us to meet the expectations of all stakeholders connected to the Shinsei Bank Group.

Going forward, we hope to continue to seek the understanding and support of all our stakeholders.

July 2017
Hideyuki Kudo
Hideyuki Kudo
President and Chief Executive Officer

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