Top Message

To Our Shareholders, Customers and Employees

[Left] Thierry Porté, President and CEO 　[Right] Junji Sugiyama, Chairman

A Time of Challenges and Opportunities

Fiscal year 2006 has been a difficult and challenging year. We have responded swiftly and decisively to significant changes in our business environment and have taken some bold and progressive actions that should position us well for renewed profitable growth in fiscal year 2007. To establish ourselves as a truly successful financial services group in a highly competitive environment, we must continue to differentiate ourselves by leveraging the rich diversity of skills and experience that have been fundamental to our transformation and growth over the past seven years. We believe that our strategy remains sound and through our continual focus on surpassing the expectations and needs of our customers, we will convert our challenges into opportunities.

The year commenced in a climate of reduced expectations of interest rate increases with strong competition for loans in a highly liquid market resulting in compressed loan margins. Financial market activity in both the institutional and retail sectors was also dampened by market volatility. As the year progressed, the legislative and market changes taking place in the consumer finance industry were to have a significant impact on the Bank’s business and financial performance. We made deliberate efforts to respond in a decisive and timely manner to these changes by implementing a number of measures which included accelerating the consumer finance business transformation process; prudent provisioning; and recognizing substantial write-offs of investments, goodwill and intangibles. We believe these measures will ensure the viability and profitability of this business from fiscal year 2007 onwards.

Despite the impact of the changes on the consumer finance business, we continue to maintain a strong balance sheet and benefit from a sound business model, which is based on our three business pillars of Institutional Banking, Consumer and Commercial Finance, and Retail Banking. Our disciplined risk management capability, advanced information technology systems and best in class corporate governance and compliance structure are fully integrated into our wide range of products that serve all our customer segments. We have also clearly demonstrated over the past few months that we remain committed to the highest level of transparency to provide our stakeholders and the market as a whole with timely information on our performance and results.

Fiscal Year 2006: A Challenging Year

For the fiscal year ended March 31, 2007, on an operating basis, consolidated total revenue was ¥268.3 billion, a decline of 2.0% over fiscal year 2005. General and administrative expenses increased from ¥135.9 billion to ¥149.9 billion due mainly to increased product and customer support required for further expansion of all three business pillars. Consequently, the expense to revenue ratio increased from 49.7% to 55.9%.

Net credit costs increased to ¥51.9 billion mainly due to higher credit provisions in APLUS relating primarily to delays in collections, a stricter credit reserve policy and other losses. Impairment of goodwill and intangible assets relating to APLUS, net of tax benefit, amounted to ¥78.8 billion. As a result, Shinsei Bank recorded a consolidated net loss for the year ended March 31, 2007 of ¥60.9 billion, compared to a net income of ¥76.0 billion in the previous fiscal year. Excluding goodwill and intangible asset impairment and amortization, net of tax benefit, consolidated cash basis net income for fiscal year 2006 was ¥35.3 billion, compared to ¥101.9 billion for fiscal year 2005.

The impairment of investments and valuation allowances in our consumer finance business resulted in a non-consolidated net loss for the year ended March 31, 2007 of ¥41.9 billion, compared to net income of ¥74.8 billion in the previous fiscal year. Consequently, the Bank did not meet the target set in its revitalization plan agreed upon with the Japanese Government.

During fiscal year 2006, Shinsei Bank’s consolidated loans and bills discounted balance increased 25.9% from ¥4,087.5 billion to ¥5,146.3 billion and total deposits grew 33.1% from ¥4,071.7 billion to ¥5,420.9 billion. As of March 31, 2007, Shinsei Bank’s Tier 1 and Total capital adequacy ratios, Basel II basis, were 8.1% and 13.1%, respectively.

Leveraging the Three Business Pillar Strategy through Working Together

We continue to expand our businesses and broaden our customer base through our three business pillars: Institutional Banking, Consumer and Commercial Finance and Retail Banking. A significant development during the year was the growing interaction between the various businesses within each pillar and among the pillars themselves, which has led to a substantial increase in synergies both in terms of business cross-sales and referrals, joint business ventures and cost saving opportunities.

In Institutional Banking, product specialists and relationship managers worked closely together to increase products per customer. Our corporate lending increased as customers provided us the opportunity to offer them new solutions. Our relationships with regional banks and other local financial institutions, with whom we work as partners, continued to strengthen. We have also forged long-standing relationships with our real estate customers. Going forward, the Japanese public sector shows great potential as we offer innovative solutions.

In Consumer and Commercial Finance, our consumer finance subsidiary APLUS is developing closer and profitable ties with key merchant customers and establishing highly productive partnerships. Our leasing subsidiary, Showa Leasing, is deepening relationships with small and medium-sized enterprise (SME) customers by offering additional products.

Retail Banking has continued to expand its product range in an effort to improve upon consultation services for retail customers as well as work closely with Institutional Banking to better serve the needs of our high net worth individuals. Furthermore, Retail Banking and APLUS are working together to offer new products and services such as the new Shinsei VISA Card launched in March 2007.

Our Banking Infrastructure Group not only works closely with our businesses to support and improve their product and service offerings, but also works in direct partnership with some of our customers. In this way, Shinsei Bank is providing technical support and expertise that promotes our customers’ business growth.

A Different Kind of Japanese Bank

We look forward to fiscal year 2007 with confidence, focused on profitability and growth. We are committed to transforming our consumer finance business model to one that is profitable and sound. We will focus on delivering the right solutions to our growing retail customer base to restore our Retail Banking business to profitability. We will further strengthen our Institutional Banking business to develop sustainable and recurring revenue streams. We strive to continually improve our risk management, compliance, corporate governance and technology functions in order to remain a high performance organization. We must continually work to create an integrated, high performance, transparent and universally understood Shinsei culture by ensuring that our employees embrace and live our vision and values internally and when meeting the needs of our customers.

The environment that we operate in is constantly changing and our competition is intensifying, all of which underlies our need to lead the market through innovation. We are always seeking new opportunities on how to better serve our customers, which drives us to find optimal ways to interact with them and improve their experience with us. We believe that delivering value that exceeds our customers’ expectations will lead to a more loyal and profitable customer base. To achieve this, Shinsei Bank will continue to find cutting-edge, tailored solutions for all our customers in all three business pillars while leading the market to position ourselves as the “bank of choice.”

At this time, we would like to sincerely thank our customers for their continued business, our shareholders for their generous support and guidance, and our employees for their unwavering commitment.

We recognize that our results for fiscal year 2006 were not acceptable. We are committed to creating sustainable value for all our stakeholders and confident of our capabilities and strategy to realize our business and financial targets for fiscal year 2007.

June 19, 2007

Thierry Porté President and CEO	Junji Sugiyama 　　Chairman

Latest Revision: June 26, 2007

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