Special Feature : President's Conversation with Investors

We invited Mr. Hideichiro Nishimura from Nomura Asset Management Co., Ltd. and Mr. Hiroyuki Hanaoka from JPMorgan Asset Management (Japan) Ltd. to discuss with Mr. Shigeki Toma, President & CEO of Shinsei Bank, the Shinsei Bank Group's growth strategy, development of products and services unique to Shinsei Bank, and the capital and shareholder return policies. Mr. Toyoki Sameshima of BNP Paribas Securities (Japan) Limited, a banking sector analyst, participated in the discussion as the moderator.

Special Feature : President's Conversation with Investor

Growth Strategy

Sameshima:Exactly four years have passed since you took the helm of Shinsei Bank in 2010 President Toma, and you have completed the First Medium-Term Management Plan ("MTMP") and the first year of the Second MTMP. What progress have you made so far?

Toma:When I joined Shinsei Bank, the first thing I had to do was to "put out the fire." In other words, I had to dispose of the legacy assets which the bank had invested in in the past and to bring the Bank back to the way it should have been in the first place, and I think we achieved this at the end of the previous term (which ended March 2014). For example, we disposed of nonperforming loans so that they would not place downward pressure on our profits, and we set aside additional reserves for greyzone losses in our consumer finance business. We have thus cleaned up our legacy issues. However, now what we really have to do is develop the raison d'etre of Shinsei Bank. There are so many banks in Japan. We are not a megabank or regional financial institution, and as such, we need to figure out how we can demonstrate our value proposition.

Hanaoka:Having resolved the legacy issues, your growth strategy is very important in order to create new value in the future, and differentiation is an aspect of your strategy. However, unless you are constantly differentiating yourself from your competitors, larger companies will often emulate what you have started and penetrate into the market. What is your view on the creation and promotion of a structure for maintaining differentiation efforts within the Bank?

Toma:Instead of fighting megabanks on an equal footing, we began by changing our target markets and our approach to them. For example, we became a trailblazer in the area of Internet banking services in our retail banking business. We had a new concept, not charging fees and offering services 24 hours a day, seven days a week. Our online banking services were derived from an outsider's idea and was not an idea coming from the traditional banking business. In the traditional banking business, many banks close their branches at 3 p.m. and are not open on Saturdays or Sundays, and of course charge fees for their services. We changed all of this, and as a result, we enjoyed much support from our customers. It was a huge success as the number of retail accounts increased dramatically in the beginning. We intend to differentiate ourselves from our competitors by constantly implementing these kinds of initiatives. In terms of the internal structure, we are bringing together staff members who have contact with customers at branches and ask them what customers want and what difficulties the staff members have in their duties and discuss these issues in depth.

Hanaoka:In order to accumulate growth assets, you need to take some risks at some stage, but you have had the experience of taking on too much risk in the past. Do you have a framework to keep you from taking on too much risk?

Toma:We of course take risks. But we take risks based on careful assessment. To do this, we try to get to the bottom of the risks we are taking to find out what they actually are. However, while new technologies and cutting edge approaches will keep developing in the future, we may not have professional expertise in these areas. To accurately judge their real growth potential, we have created networks with technological experts,entrepreneur groups and universities,and we often utilize their inputs in our decision making. We take risks taking into account information from these networks. One thing that is completely different from the way we did things in the past is that we have a credit limit for each transaction. We establish credit limits depending upon internal ratings. For instance, entrepreneurtype companies which just started their business tend to have the highest level of risk, so the maximum we will lend to such borrowers would be 100 million yen. The primary job of a bank is to take risks, and we have therefore begun brushing up our risk assessment abilities in order to identify the risks we can take, the risks we should not take, and the risks we should take.

Nishimura:Shinsei Bank's strategy under the Second MTMP is to proactively increase expenses in order to expand the customer base. If this doesn't work as planned and your revenues don't increase, what will your next actions be?

Toma :We are going to increase personnel related expenses including expenses for professional development and IT system expenses. For our bank to grow significantly in the future, we have to shift our "typical Japanese style" bankers into attack mode. Practical training is essential for this and we will actively promote it. Outsiders have said that our top-line revenue target in fiscal year 2014 plan is too aggressive. However, what underlies our bank's long-term value is our differentiation strategy. We are confident that an impact from this will emerge in the form of support from our customers, and I believe that our top-line revenue will increase as a result. This is why we have a plan with strong top-line revenue and conservative cost targets.

Hanaoka:As an investor, given the quality of your bank's earnings, we are now just waiting for your efforts to yield fruits. While it may take a little more time for top-line revenue to start increasing, are there any indicators we should look at to be reassured of the coming success of your differentiation strategy?

Toma:We have set qualitative targets as Key Performance Indicators (KPI). For instance, in the individual business, this includes the number of customers, deposit balance, and so on. If you look at these indicators, you will understand that volumes are expanding. With respect to the number of customers, we aim to increase the current 2.5 million to 5 million. At the moment, the number of young customers is increasing. However, because young people don't have many assets, they open accounts in order to benefit from convenient account features such as free remittance fees. This means we incur a loss per account. However, if we fail to capture these customers, there is no future growth for us. These accounts do not lead to short term earnings, but will lead to future growth. For the institutional business, for instance, the balance of loans to smalland medium-sized companies and the number of companies that have transactions with us should be the key indicators.

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