Aozora Bank : Q&A Summary（312KB）

FY2023 Financial Results Investors Meeting

Telephone Conference (May 22, 2024)

Question & Answer Summary

Q1: Regarding the upside and downside of your FY2024 earnings forecast, do you think that the upside is greater due to reasons such as the effect of collaboration with Daiwa Securities Group, accelerated pace of risk-weighted asset accumulation, a reversal of U.S. non-recourse office loans, or rising yen interest rates? And even if there's an upward swing, do you think it won't reach a level that will allow you to accelerate disposal of securities with unrealized losses? Please give me some color to the outlook.

A1: While we do believe that there's a reasonable amount of room for some upside in FY2024, the environment remains uncertain in light of factors such as the U.S. presidential election in November and geopolitical risks. On balance, we believe that a bottom line of 18 billion yen is an appropriate level at this time.

Q2: Regarding the dilution of earnings per share from the capital and business alliance with Daiwa Securities Group Inc., you explained in the conference call following the announcement of financial results that you'd like to achieve earnings results to the extent that you'll be able to recover the impact of dilution within three years. Do you still hold to that idea after beginning the process of elaborating the synergy effect of the alliance? Also, you explained that you'd like to disclose specific directions regarding the effects of the alliance by the end of this year; can we reasonably expect disclosure at the timing of this year's interim financial results announcement?

A2: Although we haven't yet finalized our estimate of the time required to offset the dilution, I personally believe that it would be too much to ask our shareholders to wait three years given that earnings per share will be diluted by over 18%. We're discussing this and other issues with our Steering Committee. With regard to the effects of the alliance, we intend to disclose some general outlines of the alliance, most likely at the time of our interim financial results investors meeting, and we'd like to proceed with discussions on this timeline.

Q3: Aozora's strength is in structured finance, particularly LBO finance for M&A. Is there any concern that specialized key personnel may leave the Bank due to the announcement of a net loss or the capital and business alliance this time?

A3: While it's true that there've been multiple surprise announcements from our employees' perspective, such as the announcement of revisions to our earnings forecast with an expected loss in FY2023 on February 1 this year, the reversal of deferred tax assets, and the capital and business alliance with Daiwa Securities Group Inc. Recognizing this situation, on the day of the announcement I personally sent a message to all of our employees discussing in detail the background and purpose of our alliance. I also personally visited each of our branches in order to be able to engage in direct conversations with all of our branch staff members. I believe that the alliance has gotten off to a good start by bringing together the mutual strengths of Aozora and Daiwa, and I also believe that our employees now understand and are starting to view the alliance from a positive perspective. I also believe that this sentiment will be sustained.

Q4: Do you intend to change the target levels of the CET1 ratio and capital adequacy ratio following the capital increase through the capital and business alliance?

A4: At this point, we don't anticipate changing the target level for our capital adequacy ratio. The current target was set prior to the recent capital increase, based on our analysis that the level was adequate as we've retained earnings on our own.

However, as the economy has begun to show signs of expansion and we'll have more opportunities to play an active role, we made the decision to increase our capital this time because a timely capital increase will create more business opportunities for us and, consequently, add to our ability to contribute to society.

Q5: In the past, I think there was a strong incentive for you to maintain the dividend amount even if the payout ratio became higher, but with the capital increase through the capital and business alliance, I think it's okay not to stick to the dividend amount during a period of time to build up risk-weighted assets in order to become a more profitable bank again as you were in the past. What are your thoughts on this?

A5: We haven't yet made a decision on our dividend policy at this time. With Daiwa Securities Group as our new partner and the additional capital, we believe that this is one of the issues that needs to be discussed as we review our plans going forward.

Q6: Daiwa Securities Group Inc.'s stock price has fallen since the announcement of its investment in Aozora, which may be due to concerns among their shareholders or market participants about your U.S. non-recourse office loan exposure. Some investors say that the Bank's reserve ratio for loans with LTVs less than 90% isn't as high as those of U.S. banks. Please explain again the adequacy of the current level of reserves and the appropriateness of the estimated 3-4 billion yen in credit-related expenses for FY2024.

A6: As an example of one of the reasons we're confident that the current level of reserves is sufficient is our experience in April of collecting two loans at amounts above our book value net of reserves. We were able to achieve this even though U.S. interest rates remained higher for longer than we expected and a downward adjustment of cap rates hadn't yet begun. As the number of loans with LTVs of 90-100% has slightly increased, and limited progress has been observed in company return to the office policies in the U.S. and an increase in occupancy rates hasn't yet happened, we therefore cannot yet say that the market has fully bottomed out and is in a recovery phase. In addition, due to the specific characteristics and location of each property, the experience has been mixed. That being said, we don't believe that the assumptions used in assessing the provisions that we made in the third quarter are significantly different from the current situation.

Q7: Are the two cases of U.S. non-recourse office loans in which reserves were reversed due to collections relatively unique among the overall work-out cases, or are they universal?

A7: The two collections aren't especially unique. We used the same basic methodology for all 21 loans in the "In Danger of Bankruptcy" category and all were reserved using the same criteria. We'd like you to appreciate the fact that we were able to recover two of them thus far.