AOZORA
BANK, L
TD.
Annual Report 2001
AOZORA BANK, LTD. Annual Report 2001 Year ended March 31, 2001
あおぞらBK AR E Cover Page 3 01.8.22, 4:01 PM Adobe PageMaker 6.5J/PPC PROFILE
(As of March 31, 2001 except number of branches at June 30, 2001) T
Established ...... April 1957 Capital ...... ¥419.8 billion Total assets ...... ¥6,174.9 billion Consolidated capital adequacy ratio (Domestic standard) ...... 15.13% Non-consolidated capital adequacy ratio (Domestic standard) ...... 15.10% Number of employees ...... 1,438 Branch network ...... Japan: 16 branches Overseas: 1 branch, 5 representative offices Head office...... 13-10, Kudan-kita 1 chome Chiyoda-ku, Tokyo Y 102-8660, Japan
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CONTENTSCONTENTSCONTENTS Annual Report 2001
President’s message ...... 2 Business strategy ...... 6 Banking operations ...... 9 Corporate organization and management system ...... 18 Financial information and corporate data ...... 31
Published: August 2001 Corporate Planning Division Aozora Bank, Ltd.
あおぞらBK AR E Cover Page 4 01.8.22, 4:01 PM Adobe PageMaker 6.5J/PPC The Nippon Credit Bank, Ltd. was renamed Aozora Bank, Ltd. on January 4, 2001.
Aozora, the Japanese word for clear sky, embodies our aspirations to attain the highest standards of compliance, transparency and fairness. As such, we decided to adopt Aozora Bank as our new name.
The bank’s logo represents a powerful stream rising into the sky, flowing into the future.
The blue diamond of our logo symbolizes intelligence and trustworthiness and the central white stream represents the driving force of hope for a better future.
Our logo symbolizes our firm commitment to enriching society by addressing new challenges and possibilities in the finance industry. We will do so by applying novel ideas and creativity that traditional banks cannot match.
The best is yet to come for Aozora Bank of the 21st century.
1 PRESIDENT’S MESSAGE
Aozora Bank started anew as a privately owned bank in September 2000. The bank’s shareholders consist of 105 domestic and overseas companies, including SOFTBANK CORP., ORIX Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and 93 regional financial institutions. The bank drafted and submitted a Business Improvement Plan to the Financial Reconstruction Commission (FRC). Following the approval of the plan by the FRC, the bank issued preferred stocks totaling ¥260 billion in October 2000, which were subscribed by public funds. I would like to express my sincere gratitude for the understanding and support for the bank shown by every one involved during this period.
Aozora Bank: A New Transformation The name Aozora Bank—aozora meaning clear sky in Japanese—embodies our commitment to ensuring that all aspects of our bank, including management, are transparent to all. Having made a fresh start at the dawn of the 21st century, we intend to play a distinctive role in the social and economic environment of the new era by offering a wide range of functions and services.
President and CEO Hiroshi Maruyama
2 At present, in such a severe economic environment, competition is intensifying among financial institutions the world over. With their very survival at stake, financial institutions are clarifying core competences and other traits, such as proprietary know-how and other competitive advantages, and are thus expected to become even more specialized. Moreover, the rapid pace of change today underscores the importance of swift decision-making and taking prompt action. We must squarely face the reality that without proactive self- transformation, we may not stay competitive. Even as society and the economy undergo remarkable changes, I believe that there are still plenty of roles for the bank to fulfill and many opportunities for growth. Why? From now on the quality of financial services will take precedence over business scale. And for this cause, we must be prepared to undertake substantial reforms. Distinctive competitive advantages and resources must be aggressively channeled into business areas with high growth potential. As such, foresight and courage are of paramount importance. While thoroughly implementing risk management, I am committed to realigning our operations to maximize profitability and to building a competitive business structure. To this end, Aozora Bank will provide financial services that leverage its distinctive expertise and maximize synergies with its shareholders. Our primary customers will be small and medium- sized enterprises engaged in the creation of new industries and those realigning their businesses so as to focus on high growth areas. For instance, we will introduce new methods of risk assessment, incorporating analysis of cash flows and business models, as well as novel financing methods for which our overseas business partners have successful precedents. In this way, we will work to propose creative solutions to a variety of issues faced by our customers. Another key focus is retail banking. We will continue to extend systems, products and services in this area. So far, we launched the sale of investment trusts in 1998, formed an online partnership with the postal savings system in 2000 and rolled out telephone banking services the same year. In April 2001, we launched “Aozora Super”—discounted debentures covered by Japan’s deposit insurance system. “Without being tied to the past, how will we achieve a change in our mindset and behavior in the conduct of new businesses?” This question is the essence of the bank’s reforms. My responsibility is to set forth a clear approach to this issue. Furthermore, I want to clarify two concepts that are important, in my view, in dealing effectively with clients: “In pursuit of specialization” and “In close touch with customer needs.”
In Pursuit of Specialization In regard to specialization, we must find answers to two questions. First, how can we most effectively and efficiently apply our core competencies and competitive advantages to the execution of operations? Second, to what extent can we enhance the abilities of our officers, and thus raise our ability to provide solutions that meet customer needs? The ability to provide quality solutions requires that each officer realize his or her full potential and achieve a higher degree of specialization. In particular, we must hone our techniques and expertise in fields that are attracting the interest of our customers, such as real estate financing, syndicated loans, structured finance, loan servicer operations and venture business support. To this end, the bank is introducing compensation systems grounded in basic policies that emphasize skills and ability as well as hiring people with specialized skills from outside the bank.
3 To achieve a transformation from within, it is essential to flexibly incorporate a wide range of new ideas and methodologies from outside the bank and enhance specialization in line with current market demands. Aozora Bank has built up long-standing relationships with financial institutions nationwide through the placement of debentures. At the same time, most of the financial institutions we serve are also our shareholders. Another characteristic of Aozora Bank is its network of shareholders from outside the financial services sector. As we move to enhance specialization, strengthening relationships with shareholders and creating synergies together is also paramount. A prime example of this is our support for Blue Planet Corporation, which provides a portal for financial matters using information technology. This project aims to provide a forum for an exchange of views among users, including regional financial institutions and their customers, and also to serve as a channel to provide financial services in cooperation with regional financial institutions. We will continue to concentrate a substantial amount of resources on regional financial institutions, and providing financial services that promote the development of local economies in cooperation with regional financial institutions.
In Close Touch with Customer Needs In order to support our clients with effective solutions, we must foster awareness and improve the ability of all employees in two respects. One is the importance of a precise understanding of customer needs, from their viewpoints. The other is meeting those needs directly by remaining in close touch with our customers. To accomplish this goal, we must become an organization capable of listening, thinking and taking action at the frontlines of our business, where we interact with customers and are closest to their needs. I am working to foster a strong awareness of this principle in all employees. In more specific terms, human resources from peripheral and highly specialized operations will be transferred to customer business divisions. We will seek to build a problem- solving, proposal-oriented organizations comprising employees from frontline business, head office operations, and specialized divisions. Moreover, we are set to upgrade our information systems in order to optimize the efficiency of in-house collaboration. Launched in April 2001, Aozora Club embodies these new principles guiding our activities. The goal of this club is to provide a forum for an exchange of information that can help companies grow. Targeted companies include not only existing customers, but also prospective customers, particularly small and medium-sized customers and new enterprises. Aozora Club project represents the very foundation for our own growth: a commitment to building lasting relationships with customers that support mutual growth and prosperity.
Strong Management, a Sound Asset Portfolio, and Further Rationalization Aozora Bank has instituted a new corporate governance system in which supervision and actual execution of business are clearly separated, to establish a sound management base and faster decision-making. External directors, including scholars and professionals independent from shareholders, compose more than half of the Board of Directors, which is responsible for supervising the execution of business strategies. The Internal Audit Committee, comprising independent directors and auditors, was established to provide a check on management practices that is completely autonomous of all shareholders. We have taken all possible measures to ensure that we do not become a captive bank for any single company—the Internal Audit Committee conducts strict audits of the bank’s transactions with parent companies, the Credit Committee, which I chair, sets rigorous credit limits, and transparent disclosure is maintained at all times.
4 We continue to pay close attention to the maintenance of a sound asset portfolio, which remains a very important issue for management. The establishment of a comprehensive credit risk management system also contributes to improved profitability. The bank is also working to reduce costs, another key management issue. We will quickly move to pare general and administrative expenses by reviewing branch operating costs and cutting the cost of computer systems by building these systems more efficiently.
Toward Re-listing of the Bank’s Shares For a period of seven months from September 2000 (when special public management ended) to March 2001 in the previous fiscal year, thanks to the dedicated contribution of everyone involved, the bank made a fairly good start in terms of performance and profitability. Nonetheless, Japan’s economic and financial environment will continue to undergo substantial changes. In this environment, I will establish a sound management base, giving precedence to improving the quality of financial services over expanding business scale. At the same time, the bank will make a concerted effort to achieve the goals outlined in the Business Improvement Plan by improving its financial strength and bolstering profitability. We will unite the organization toward completing needed reforms with a view to re-listing the bank’s shares as soon as possible. We respectfully ask for your continued support and understanding.
August 2001
Hiroshi Maruyama President and CEO
From bottom left, Chairman Kasai, President Maruyama From top left, Senior Managing Director Iwashita, Senior Managing Director Kajiwara
5 BUSINESS STRATEGY
In the years ahead, the quality of financial services will take precedence over scale, as banks compete for customers. As such, there are still plenty of roles for the bank to fulfill and many opportunities for growth. Aozora Bank aims to deliver quality financial services through the single-minded pursuit of excellence in all banking operations and by narrowing down busi- nesses to areas where client needs are greatest.
Quality Financial Services: Corporate Clients Aozora Bank aims to satisfy the needs of corporate clients seeking for business strategies that enable them to enhance competency in the market. The bank offers financial services as well as solutions on issues for both non-financial corporations and financial institutions. The bank not only provides corporate finance services to meet financing needs of corporate clients but is ready to hold a business relationships with new clients in sound financial conditions. The Bank offers a wide range of financial instruments and services, including solutions on investment and management strategy to clients from small-to-medium-sized enterprises, the engine of Japan’s economy, high-growth enterprises like start-ups and high-tech venture companies, to large corporations at the vanguard of Japan’s economy. The Bank is also prepared with a broad array of financial products and services for financial institutions, including tools for asset management, servicing, advisory on how to provide solutions for the their own customers, as well as Internet-related services.
Individual Clients The Bank maximizes customers satisfaction through enhancement of quality of asset manage- ment service lineups to match customers’ needs at various stages in life. Professional advisors are placed in every local branches to advise clients in person. The Bank has introduced new access channels including ATM alliances and telephone banking as a step for service quality improvement. One of the Bank’s current initiative is development of a new types of lending.
The Competitive Edge One of the Aozora Bank’s most distinguished business strength in providing customers its sophisticated financial services lies in the extensive network it has built over the years. The bank has formed a wide variety of business relationships in the course of its history—indeed, it is one of the core competitive edge. Firstly, Aozora Bank has built strong relationships with regional financial institutions through debenture issuance and offering of various financial services as a long-term credit bank. The strong relationship is an invaluable asset that plays an crucial role in achieving our strategic goals. Now, the new shareholders of the Bank, have now joined as new members of the Bank’s network and have become our business partners. We will collaborate with our shareholders in different business fields in developing our competency as a solutions provider, and create new business models. The accomplishment of strategic goals in retail banking hinges on targeted customers— most of Aozora Bank’s individual clients are comparatively wealthy individuals.
6 The financial environment surrounding individual clients is undergoing substantial changes, as exemplified by persistently low interest rates, commencement of the over-the-counter sale of investment trusts and insurance at banks, the introduction of Japan’s own 401k plan, and the government’s plan to limit deposit guarantees to ¥10 million per individual. In response, Aozora Bank offers not only bonds and deposits, but also provides new financial services and operations that foster long-term client relationships.
Strategies in Key Banking Operations
Aozora Bank will focus on highly specialized business areas, where client needs are high, such as investment banking and market operations and further strive to improve service quality. At Aozora Bank, divisions for customer relationships and divisions on specialized operations work in close collaborations in offering exceptional business solutions to clients tackling on issues such as corporate restructuring, concentration of management resources and asset improvement. The Bank offers a broad range of service lineups, in the areas of financial management, M&A, spin-off, overseas business operations, taking good advantages of alliances with our major shareholders. The Bank has a strong competence in problem loan disposals and real estate financing where it holds notable achievements, and M&As and loan syndications in which our network with regional financial institutions plays a pivotal role. Aozora Bank also assists customers on risk management by providing customized products for risk-hedging.
Aozora Bank will expand investment and lending to venture businesses, a promising growth area, under strict assessment on technological propriety and marketability of emerging companies’ business plans. Lending and investments are not only targeted to venture companies but also to early-stage companies newly established through spin-offs, downsizing and outsourcing of large corpora- tions. Aozora Bank works to bring our client’s visions to life, by providing exceptional business solutions to the truly important issues clients must resolve, which will be identified by the Bank’s feasibility studies on clients’ business plans and technological competency in fields of growth potential.
Internet businesses provide new opportunities to develop innovative financial services and greatly enhance our network of business relationships. Internet is offered as an unprecedented types of new financial services. Aozora Club (p.8) provides a virtual forum to exchange views and information among member corporations. It is by no means a vehicle for one-way communication from the bank to clients. We begin by asking the corporate members of this service about their financing needs. This stimulates dialogue, which we value above all else. We aim to create innovative virtual forums and systems that enable dialogue even among customers.
Retail banking services will be expanded by creating new marketing channels and introducing innovative financial instruments.
7 BUSINESS INITIATIVES
Aozora Club
Aozora Club was established in April, 2001, to commemorate the members to benefit from Aozara Bank’s alliance with Silicon bank name change on January 4, 2001. It provides companies Valley Bank, which specializes in financial services for emerging with exclusive information on corporate finance and management technology companies. Another available service includes ben- issues that relate to the bank’s diverse range of finance functions efit from the bank’s Internet projects, such as the public solici- via a members-only website. Information includes fund raising, tation through Aozora Bank’s website of business plans for asset management, balance sheet management and capital venture businesses. policy. Management issues such as extending marketing channels, Aozora Club provides a forum for an exchange of views and business alliances and M&As are also addressed. networking among corporations. The goal is to provide more As the issues faced by member companies become increasingly business opportunities and provide a network of partners, diverse and sophisticated, we aim to fine-tune our response to including the bank and all member companies, to help resolve their needs and to propose solutions. To this end, we will con- management issues. solidate in this club all management support services, including To attract new members, branches and business divisions those offered by overseas offices and group companies. At the invite their customers to join Aozora Club. In addition, we also same time, we will collaborate with our shareholders: SOFT- invite other corporations to join the club by registering on our BANK CORP., ORIX Corporation, and The Tokio Marine and website for an application form. Fire Insurance Co., Ltd. We will also provide opportunities for
Diagram of Aozora Club Aozora Club Website (https://www.aozoraclub.com/) Service began in July 2001
Members
Members
Management Members issues
Members • Aozora Club online services A virtual lounge for interaction with other members An information exchange Members service exclusively for Aozora Club members. Please send us information on prospective business partners and new business plans. Solution services for those seeking ideas on resolving management issues A menu of services provided by Aozora Bank and its business partners for the resolution of management issues. • Explore solutions to man- • Aozora Bank and its group Open entry services for venture businesses seeking assistance. agement issues through an companies provide information Here is a support desk for emerging companies with innovative business plans in exchange of ideas and ideas for resolving manage- areas including IT, biotechnology and manufacturing technology, seeking to • Create new relationships ment issues faced by member conduct IPOs. Please send us your ideas to this support desk. with businesses across companies. industries
8 BANKING OPERATIONS INVESTMENT BANKING
Real Estate Finance In recent years, real estate evaluation has been undergoing a period of transition. Cash flows generated by a property are assuming a greater degree of importance in the evaluation of real estate. Meanwhile, the number of investors seeking to invest in real estate capable of generating stable cash flows is steadily increasing. At the same time, emerging trends suggest that among businesses, property ownership is no longer a must. These circumstances have brought about asset-backed financing schemes that seek to procure working capital from investors by offering securities backed by real estate (or real estate Schematic Diagram of Real Estate Non-Recourse Loans collateral) capable of generating steady income. Schemes include the Sale of trust beneficiary rights securitization of real estate, as well (Fair value: ¥10.0 billion) Non-recourse Loan as real estate non-recourse financing. Special purpose Originator Bank company The bank has developed expertise Real estate in cash flow analysis based on experi- trust ence gained over the years as a long- Equity funding Trust bank Debt-equity (¥4.0 billion) term credit bank. We will provide an structure Lease extensive lineup of high-value services that meet the varying customer needs Tenants Investors concerning real estate by applying skills in the creation of cash flow manage- ment systems.
Non-Performing Loans Related Business Aozora Loan Services Co., Ltd. (Formerly NCB Loan Services Co., Ltd., renamed January 4, 2001)
Aozora Loan Services Co., Ltd., a loan servicer affiliated with the Aozora Bank, obtained a business license in September 1999 in accordance with the Special Act Concerning Management and Collection of Debt. This company assists financial institutions, non-financial corporations, and public bodies in the disposal of non-performing loans. Aozora Loan Services is already positioned as one of the leading players in the market for the securitization non-performing loans. For Japanese financial institutions, the full-fledged disposal of bad debt is a major issue. Aozora Loan Services meets with clients in the financial services industry and proposes a variety of ways to clear non-performing loans from their balance sheets. For instance, this company is prepared to purchase non-performing loans held by regional banks, second-tier regional banks, Shinkin banks, credit cooperatives, and their affiliated non-bank institutions. As one of Japan’s few bank-affiliated loan servicer agencies, Aozora Loan Services works to resolve important issues faced by each financial institution through accurate loan evaluation and the reliable execution of loan transfers. Aozora Loan Services also serves as a financial advisor for customers seeking to conduct an one-time sale of non-performing loans (“bulk sale”), helping clients do so in a reliable, fast and economically viable manner. The bank holds training sessions for credit management divisions and branch personnel covering such themes as “Customer Support and Loan Management,” “Customer Support from the Creditor’s Perspective,” and “Filing Petitions Under the Civil Rehabilitation Law by Corporations and Individuals and Its Effect on the Management of Financial Institutions.” These training sessions have all been well received.
9 Japanese law prohibits Aozora Loan Services from assuming and collecting non-performing assets held by non-financial corporations. However, the company can meet a wide variety of asset securitization needs, including the accurate evaluation of non-performing loans, brokering a sale of loans and advising on strategic planning related to the disposal of non-performing loans. In response to the needs of public and nonpublic corporations, a number of training sessions on themes such as “Initial Procedure for Indications of Bankruptcy and Payment Default” are held, and have been well received.
Structured Finance Aozora Bank arranges a wide range of financing schemes designed to meet ever diversifying funding needs of its clients. These include the arrangement of syndicated loans, and the securitization of assets including customers’ monetary claims. Syndicated loans constitute a lending method where multiple financial institutions agree to the same loan conditions and contract. As a relatively new means of funding in Japan, it has rapidly gained popularity in recent years. Syndicated loans allow customers to procure funds in an efficient manner, since negotiations and loan administration are centralized. Other merits include allowing customers to extend their funding base and benefit from favorable public relations. The bank conducts the arrangement of syndicated loans (“arranger”) and the subsequent administrative operations of these loans (“agent”). In this way, the bank links its business relationships with regional financial institutions to the funding needs of its customers. The securitization of monetary claims such as notes and accounts receivable, lease assets, and installment credit claims have grown to become just as common as bank loans and the issuance of corporate bonds as a means of funding. Securitization provides several key merits for custom- ers, including the diversification of funding sources, lower interest rates in funding achieved by leveraging the credit of the monetary claims, and the streamlining of balance sheets. The bank will endeavor to offer a broad range of securitization schemes so as to address these types of customer needs.
Aozora Trust Bank, Ltd. (Formerly The Nippon Credit Trust Bank, Ltd., renamed January 4, 2001) Aozora Trust Bank, formerly The Nippon Credit Trust Bank, Ltd., was established in February 1994 to offer innovative financial products through the effective use of trust banking functions. Ever since its establishment, the trust company has been a source of distinctive financial services centered on the securitization of monetary claims. The trust company provides beneficial rights to a variety of assets placed in trust accounts: notes and accounts receivable, loans, lease assets and a variety of claims that arise in the course of conducting business. Examples include claims to residential security deposits, remuneration claims and accounts receivable related to the sale of condominiums. While providing innovative fund-raising channels to corporations, these methods will also serve to streamline clients’ balance sheets and thus improve their overall financial position. Moreover, trust beneficiary rights are widely favored as investment products by institutional investors, principally regional financial institutions. Of the various types of assets held in trust, we are especially focusing on the securitization of aggregated receivables. Thus far, the securitization of small quantities of notes receivable, medical fee claims and loans has been considered difficult. We aim to amalgamate small-quantity receivables into a single trust. There is a significant need for this type of service, since it can substantially reduce each customer’s transaction costs. In addi- tion, we offer customer-segregated and general purpose money trusts.
10 We are committed to leveraging the agility that comes with being a trust bank that is a subsidiary of a bank, and the manifold possibilities of trust functions, so as to meet diverse customer needs. We will continue to provide innovative financial services unrestricted by any traditional business practice.
M&As The progress of globalization and deregulation has intensified competition, while selection and focus on core businesses and high growth fields has spurred even more corporate restructuring. Amid these developments, M&As have gained widespread acceptance as an effective way to optimize the allocation of corporate resources. Ever since the launch of M&A operations in 1988, Aozora Bank has handled a hundred and several tens of these deals. By maximizing its wealth of experience and expertise in this area, the bank offers advisory services on corporate mergers and the drafting of policies related to business alliances, and transaction assessment including pricing. In this way, the bank has assisted in expanding its customers’ business and improving their operating efficiency. To offer customers highly specialized services in an expeditious manner, the bank has established and maintains close ties with expert attorneys and accountants as well as external institutions such as regional financial institutions and local chambers of commerce and industry. The bank will apply its expertise to initiatives such as MBOs and business related to com- pany reconstruction, which have attracted wide interest as effective means to promote the revitalization of Japan’s economy.
Cross Border Operations The bank provides advisory services tailored to the overseas business of small and medium-size corporations, in areas including (1) establishing or withdrawing from overseas operations; (2) minimizing operational risk of existing or new businesses and conducting effective financial management. The bank also provides information required to resolve issues that emerge when expanding overseas operations, including information on foreign exchange, economic trends, and taxation and accounting systems of foreign countries, centered on the Asian region. This informa- tion is published in the monthly newsletter “Aozora Asia Business” and in various other reports. Advisory Services on Market Risk Management Changes in bank management techniques brought about by the advance of financial technology and the disclosure of financial inspection manuals have PFI (Private Financial Initiative) underscored the importance of maintaining sound risk management systems at The bank provides financial advisory services on PFI financial institutions. Accordingly, Aozora Bank and several regional financial utilizing its extensive expertise in overseas project institutions have entered into an “Advisory Contract Related to Market Risk finance. While being consulted by various non- Management.” Under this arrangement, Aozora Bank’s Risk Management Division helps customers improve market risk management systems. financial corporations interested in PFIs, the bank Aozora Bank’s involvement in risk management dates back to 1988. The also supports regional financial institutions seeking bank began market risk management by assessing maximum estimated losses, to become financial advisors on local PFI projects in using these figures to set limits on market exposure for the entire bank and a variety of ways. other risk controls. In particular, the early development of a value-at-risk management system utilizing proprietary PC software developed by the bank The bank is also actively engaged in project (patent pending) has been highly acclaimed. finance for those newly involved in the indepen- Aozora Bank has thus far entered into market risk management advisory contracts dent power generation business, a field that has with approximately 30 customers including regional banks, second-tier regional banks emerged in the wake of Japan’s liberalization of and Shinkin banks. the electric power market.
11 MARKET ACTIVITIES
Risk Hedging Tools That Utilize Derivatives In line with each customer’s stance toward market risks, Aozora Bank provides detailed and fine-spun advice about risk-hedging methods from medium and long-term perspectives. Financial instruments offered by the bank are intended to minimize and control the influence of fluctuations in foreign exchange rates, interest rates and other risk factors. Customers can thus shield operating results from market volatility or reduce their funding costs. New instruments are being added to cover more uncertainties. One is weather derivatives, which allow compa- nies to cover losses caused by unfavorable weather movements. Another being credit deriva- tives, which allow companies to cover losses caused by a default of reference entity in the investment portfolio. Bank divisions involved in market-related activities have two groups. One group supports business divisions and branches, and the other group develops new products that tap the latest advances in financial engineering. By working together, the two groups create a base for supplying customers with order-made financial products in a timely and effective way. The bank provides after-deal services such as market price information, information on outsorcing of backoffice operations for derivative transactions.
Sophisticated Financial Engineering Techniques and Market Information Aozora Bank provides customers with various market-linked products while using its sophisti- cated global dealer type risk management system to participate actively in the interbank market. The bank deals with interest rate derivatives, bonds, foreign exchange contracts and other products globally. This yields opportunities to develop new products, analyze various risks and seek gains through arbitrage trading. For customers, this breadth makes Aozora Bank a reliable source of advice on investments, hedging strategies and other critical subjects. Our analysts with each area of specialization supply customers with a wide scope of information required to make their savvy investment decisions. Reports extend from fundamen- tal analyses to outlooks for foreign exchange rates, interest rates, etc. Comments of analysts are made public through various media, earning the bank’s analysts a widespread reputation for their excellent work quality. Aozora Bank has now developed several system trading models utilizing artificial intelli- gence (AI). These models have already been applied to Japanese government bond futures and foreign exchange transactions. Results have been particularly strong in the JGB futures market. And efforts will continue to be made to upgrade these systems for the service of our customers.
Investment Trusts Distributed Through Private Offerings Aozora Bank has started offering quality and high value-added investment trusts mainly to financial institutions. The first trust was formed in January 2001: Aozora Japanese Stock Active Open (“Hit & Run”) a product of Aozora Asset Management Co.,Ltd. Next came in May 2001: Tokio Marine and Fire AM Long-Short Fund, a product of Tokio Marine and Fire Asset Management.
12 Aozora Asset Management Co., Ltd. (Formerly Nippon Credit Asset Management Co., Ltd., renamed January 4, 2001) This company was formed in August 1986 as Nippon Credit Asset Management Co., Ltd., which specializes in asset management. Primary activities are the investment management of entrusted securities for financial institutions and pension funds, and the establishment and management of investment trusts distributed through private offerings. In June 2001, Softbank Investment Group purchased a 70% stake in this company from Aozora Bank. Before this, this company was a wholly owned subsidiary of Aozora Bank. The purpose of this move is to strengthen its customer base by serving more investment needs through the development of new products, and to build up a closer connection to enhance the scope and quality of its asset management services, such as by taking on new investment assets to be managed.
FINANCING FOR NEW ENTERPRISES
Full-fledged Financing for New Enterprises What is vital for young venture businesses—newly established or in an early stage of their growth—is to draw up proper business plans and to secure needed funds based on those drafted business plans. Aozora Bank complies with their specific fund needs in the form of extending loans to them. In addition, Aozora Investment Co., Ltd., our venture capital sub- sidiary, assists their fund-raising activities in the form of investing in them. Two elements are essential to loan and investment schemes for new enterprises: First, the bank must conduct an accurate evaluation of the technical aspects of those companies and marketability of their planned products. Second, we must provide appropriate management advice to them to enhance their corporate value. By forming a wide range of alliances with venture capital companies, business incubators, universities, Online form for presenting business plans non-financial corporations, and auditors, the bank is well prepared to resolve (Aozora Bank’s website) (http://www.aozorabank.co.jp/) any issues faced by them. For instance, recent advances in the field of biotechnology are expected to widely impact industry as a whole—from medicine/pharmaceuticals, to foods, environment, chemicals, machinery and bioinformatics, a new disci- pline combining IT and life sciences. Focusing on this dynamic discipline, the bank will aggressively support venture businesses specializing in biotechnology, as we harness a network of experts in academia and business consultants as a source of expertise. The growth of biotechnology ventures depends even more so than other industries on strategic business alliances. As such, the bank will actively provide advisory services on business alliance-making. Aozora Bank has formed an alliance with U.S.-based Silicon Valley Bank (SVB) in a move to introduce SVB’s proven high technology finance methods to Japan and the bank aims to support Japanese venture businesses to establish an alliance with U.S. counterparts. The bank provides a contact point on its website that enables venture businesses to present their business plans over the Internet (pictured to the left). We are planning various new initiatives to support venture businesses. For instance, we arrange business presentations on venture businesses to our marketing staff so that they can support marketing efforts of venture businesses that the bank financed.
13 New Funding Schemes One example of the bank’s distinguished fund-raising initiatives for new enterprises is a finance scheme for companies engaged in franchising operations. In the first project, the bank and QB NET CO., LTD., a new-type hair salon chain operator (offering hair cut services at lower prices), created a joint investment fund to open and develop new “QB house” outlets. Under this scheme, funds required to open new franchised stores are provided from the investment fund, while the store operator is charged with staff recruiting, staff training, etc. Aozora Investment Co., Ltd. assesses growth potential of prospective new franchisees and authorizes funding. Besides investment funds for chain store operators, the bank has a proven record in investment funds arrangement for home video game software development. Our finance schemes are by no means limited to conventional forms of loans and investments. The bank will continue to offer a diverse range of financing arrangements for venture businesses.
Aozora Investment Co., Ltd. (Formerly NCB Private Equity Co., Ltd., renamed January 4, 2001) Aozora Investment Co., Ltd., a wholly owned subsidiary of Aozora Bank, Ltd, has enhanced its IPO support operations—its mainstay business for more than 10 years—and started anew in July 1999 a venture capital business in order to offer comprehensive support services for venture businesses. The Aozora Bank Group applies its expertise and business network to meet various needs of entrepreneurs planning for initial public offerings (IPOs). With a view to maximizing potential of emerging companies, Aozora Investment Co., Ltd. provides
Aozora Investment’s Website consultation services on drafting business plans that address issues faced by (http://www.aozora-invest.co.jp/) each customer and on venture capital fund-raising schemes. In addition, Aozora Investment Co., Ltd. is involved in equity finance such as underwrit- ing equities, warrant bonds and convertible bonds. In this way, we offer comprehensive supporting services to venture businesses. The company is deeply involved in the development of new schemes such as investments in specific projects, and providing support to business develop- ment through arranging funds. And, this is one of the Aozora Investment’s unique features as a venture capital. The company has been highly successful in arranging investment funds for companies expanding their franchised stores’ network and in arranging investment funds for home video game software companies. By harnessing the entire Aozora Bank Group’s expertise and its business network, Aozora Investment will continue to meet various needs of entrepre- neurs, to support the development of prospective venture businesses and help them make IPOs.
14 BUSINESS INITIATIVES
Alliance with Silicon Valley Bank
Silicon Valley Bank (SVB) of the United States has a clout in financing high-technology startup companies. In April 2001, (http://www.svb.com/) Aozora Bank and SVB agreed to collaborate in areas such as financing high-tech venture companies. Silicon Valley Bank Through this alliance, Aozora Bank aims to serve as a Silicon Valley Bank is a regional financial institution based in bridge between Japanese customers and Silicon Valley compa- the Silicon Valley region of the United States. SVB focuses on nies, providing an interface leading to new value creation. To high-tech venture companies. The bank enjoys a national this end, the two banks will be in full cooperation in providing reputation as number 1 bank in the U.S. for its excellence in services both in Japan and in the U.S. Specific steps include the field of financing start-up and early-stage companies. setting up of a “Japan Desk” at SVB to connect U.S. com- panies with Japanese companies. In addition, SVB’s website Established: 1983 contents will be available in Japanese on Aozora Bank’s Capital: US$684 million (As of December homepage. The two banks will hold joint conferences and 2000) seminars, that provide not only lectures on the latest themes, Total assets: US$5,627 million but also serve as forums for interaction with local businesses (As of December 2000) and venture capitalists. Branches in the U.S.: 25 Aozora Bank will attempt to absorb SVB’s excellent busi- Number of employees: Approximately 900 ness expertise in specialized fields of finance focusing on Number of customers: More than 9,000 companies, Silicon Valley companies, the epicenter of IT and life sciences centered on technology industries. To this end, we will dispatch our employees to SVB. Stock listing: Nasdaq (SIVB)
INTERNET—RELATED BUSINESSES
Features of Our Internet Business By using the Internet, the bank aims to create some new value added such as an improvement in customer convenience, new customer development, etc. In this day and age when the Internet is causing a cataclysmic change to Japan’s industrial structure, linking our principal shareholders’ expertise to the bank’s business resources in the area of the Internet, will provide the bank with countless opportunities to develop highly distinctive Internet businesses. Aozora Bank has received funds from 93 regional financial institutions, and they have strongly sought support from Aozora Bank in developing their respective Internet businesses on neutral ground. The bank will endeavor to meet their expectations and respond to their needs to the best of its ability. Internet businesses are vital to the bank’s business strategy. The bank aims to create new business models by realizing its full potential by the use of the Internet. The bank has invested in Blue Planet Corporation a venture established in April 2001 to support the design and operation of portal sites for regional financial institutions. This is an example of the direction in which the bank’s Internet business is headed. Furthermore, we are exploring Internet banking—offering various banking services online— from many angles, focusing on customer convenience and cost effectiveness and synergy effect with our shareholders.
15 Fusing Internet and Conventional Operations The bank’s Internet businesses are designed to complement conventional channels such as branches and business divisions, aiming to maximize synergy effects. For instance, Aozora Club (see p.8), established to provide a forum for an exchange of information or an interface among our corporate customers, and to provide a solution to various management issues on the part of our corporate customers, is providing a members- only website with proposals to resolve our customers’ management issues in addition to conventional services such as seminars, etc. The bank actively supports medium-sized and start-up companies with business plans for IPOs. The bank’s new website, created after the renaming of the bank, provides a virtual “business plan desk” where business plans and inquiries can be directed to the Aozora Bank Group. In other words, through this website the needs of various prospective customers can be heard by our staff in charge.
BUSINESS INITIATIVES
Investment in Blue Planet Corporation.
Blue Planet Corporation was established in April 2001 to provide Blue Planet Corporation. comprehensive support for regional financial institutions seeking Capital: ¥200 million to launch e-businesses. The venture was funded by Aozora Bank, Aozora Investment Co., Ltd., SOFTBANK EC HOLDINGS Shareholders: SOFTBANK EC HOLDINGS CORP. (34%) CORP. and F&M co., ltd. Blue Planet is scheduled to begin full- F&M co., ltd. (15%) fledged services from August 2001. Aozora Bank, Ltd. (5%) Blue Planet will back up the design and operation of portal Aozora Project Fund No. 1 sites for regional financial institutions. In addition, the company (General Partner: Aozora Investment will provide institutions with services, including administrative Co., Ltd.) (46%) support services and advisory services on subsidies, that the insti- tutions can offer their own customers over the Internet using Services: • Design and management of portal sites for their own names. At the same time, the company will provide an regional financial institutions using each online forum for an exchange of information among corporate institution’s brand clients from various regions. The bank aims to create an entirely • Services promoting regional information new business model by combining the financial service functions exchanges of its shareholders. Specifically these include SOFTBANK EC • Administrative support services HOLDINGS’s expertise in planning Internet businesses, F&M’s • Advisory servises on subsidies extensive contents and Aozora Bank’s vast network of close • Support for B2B e-commerce relationships with regional financial institutions and its financial • IT support services service providing functions.
Diagram of Blue Planet’s Services
Support services for small and Small and medium-sized Shinkin Bank B Use of services medium-sized companies SOFTBANK companies Support services for small and EC HOLDINGS Bank A Customer medium-sized companies Community services Customer Corporate information F&M Area newsletters Business networking Shopping mall
Customer Services for corporations Blue Planet
Advisory services Administrative Customer Various Information on subsidies contents Aozora Bank
Customer Management, Accounting Payroll calculation accounting, tax
Customer Legal consulting Others Purchase of E-commerce shops Outsourcing indirect materials Marketing support services
16 Addressing New Businesses Created by the Internet Thanks to the prevalence and development of the Internet, a wide variety of unprecedented businesses have recently been created. Addressing the needs of these new businesses is one of our critical tasks. C2C (consumer-to-consumer) Internet auction, which has grown rapidly over the last 1–2 years, is a case in point. A number of problems have emerged relating to ship- Site of “Net-Daibiki,” delivery and ments of goods and payments. The bank, in settlement services for online auction, collaboration with Nippon Express Co., Ltd., operated by Netrust, Ltd. (http://www.net-daibiki.com/) established Netrust, Ltd. Which provides delivery and settlement services for online auction called “Net-Daibiki,” servicing as a reliable intermediary. Aozora Investment Co., Ltd. is the principal shareholder and Aozora Bank provides relevant settlement function. B2B (business-to-business) e-commerce has drawn wide interest in recent times. The bank is taking the Lead in B2B e-commerce research and plans to add research service to its e-business service lineups for client companies. And, at the same time, we expect to develop the fruits of these efforts into other new services as well. The findings of our research have been widely acclaimed, and were published in “The Frontlines of B2B E-Commerce” in April 2001.
RETAIL BANKING
To serve individual clients’ various needs, Aozora Bank offers financial instruments such as time deposits, savings plans, and investment trusts which banks started dealing in December 1998. The bank is currently planning to provide new types of loans, such as innovative housing loans and credit card loans. The bank is putting stronger fucus on financial advisory services. For instance, licensed financial planners, tax accountants and attorneys are stationed at branches to offer consulting services free of charge on selected days. Internationally accredited, certified financial planners are at the disposal of customers seeking even more comprehensive and detailed financial advice. Meanwhile, the bank is aggressively moving ahead with the expansion of service channels and financial instruments. To bolster its branch network, Aozora Bank has entered into an ATM alliance with various financial institutions, including city and trust banks. Tele- phone banking was initiated in November 2000, and was followed by the successive launch of new services. For instance, “Aozora Direct Time Deposit,” a time deposit exclusively offered through telephone banking, was rolled out in April 2001. In this way, we will continue to enhance our menu of services so as to combine both benefit and convenience for customers and develop a rich variety of new financial instruments.
17 CORPORATE ORGANIZATION AND MANAGEMENT SYSTEM ORGANIZATIONAL CHART
(as of June 30, 2001)
Shareholders' Meeting
Corporate Auditors Board of Corporate Auditors
Internal Audit Committee Nomination and Board of Directors Remuneration Committee
Corporate Auditors' Division Executive Committee
Inspection Division
Banking Portfolio Management Division
Investment Banking Division Corporate Planning Division
Capital Investment and Finance Division Treasury Planning Division
Net Banking Division Accounting Division
Treasury Division Personnel Division
Financial Markets Division General Administration Division
Markets & International Operations Planning Division Administration Division
Banking Administration Division Marketing Division Systems Planning Division Retail Marketing Division
Computer Operations Division Corporate Business Division I
Corporate Business Division II Economic Research Division Corporate Business Division III
Corporate Business Division IV Credit Division
Corporate Business Division V Risk Management Division Corporate Business Division VI
Corporate Business Division VII Compliance Management Division
Corporate Business Division VIII
Corporate Business Division IX
Market Business Division
Public Institutions Division
Financial Institutions Division I
Financial Institutions Division II
Debenture & Deposit Division
Branches (Osaka, Nagoya, Fukuoka, Sendai, Hiroshima, Sapporo, Takamatsu, Kanazawa, Shinjyuku, Umeda, Yokohama, Kyoto, Shibuya, Ueno, Ikebukuro, Chiba, Grand Cayman)
Representative Offices (New York, Shingapore, Beijing, Seoul, Jakarta)
18 CORPORATE GOVERNANCE SYSTEM
Internal Management System For Aozora Bank, the establishment of a sound, transparent management system is an issue of paramount importance. With the launch of the new bank in September 2000, the bank has significantly upgraded its corporate governance and enhanced risk management and compliance setup.
Corporate Governance Effective September 2000, the bank implemented a new corporate governance system aimed at ensuring sound management and swift decision-making by separating the supervision and business execution functions. The three main points of the corporate governance reform are outlined below: • Delegating business operating function to Executive officers • Strengthening supervisory functions of the Board of Directors by the election of external directors • Establishment of the Internal Audit Committee and the Nomination and Remuneration Committee The bank’s Board of Directors has adopted a U. S. style corporate governance system. As such, external directors, including scholars and professionals independent from shareholders, from within and outside the financial industry, constitute over half of the Board of Directors. In line with U.S. practices, management policies are determined at meetings of the Board of Directors, while the day-to-day execution of business operations in line with those policies is conducted by in the Executive Committee, executive officers and its members. As the highest decision-making body for business execution, the Executive Committee makes decisions on critical issues of the bank. The bank’s system of checks and balances applicable to management includes audits conducted by auditors and the Board of Auditors, and Nomination and Remuneration Committee, which recommends to nominate and dismiss directors and determines the remuneration of directors and executive officers.
Measures to Avoid Becoming an Captive Bank The Board of Directors is organized with checks and balances so as to ensure that the interests of particular groups of shareholders are not given preference. In addition, the Internal Audit Committee was established to audit transactions between the bank and its three principal shareholders. The Internal Audit Committee is chaired by Director Kazuhito Ikeo, a professor at Keio University, and made up solely of independent directors and auditors. The application of these provisions to the organizational structure of the bank ensures that the bank avoids becoming a captive bank of any one shareholder, while maintaining the autonomy of management. Transactions between the bank and its three principal shareholders are disclosed in the materials provided with the bank’s earnings announcements and in annual reports.
Principal management conferences and committees Loans to parent companies (non-consolidated) (¥ million)
Management conferences Objectives and topics of discussion As of As of and committees March 31, September 2001 30, 2000 Meeting of the Determination of management policies; supervision of the Board of Directors performance of directors and executive officers Softbank No. of borrowers 1 1 Group Meeting of the Receive reports, deliberate, and resolve important matters Loan balance 164 166 Board of Auditors relating to audits Orix Group No. of borrowers 8 7 Executive Committee Resolve matters relating to the execution of business operations Loan balance 4,638 3,856 The Tokio Marine No. of borrowers ― ― Internal Audit Audit transactions between the bank and non-financial and Fire Committee parent companies so as to avoid becoming a captive bank Insurance Group Loan balance ― ― Nomination and Evaluation of the performance of directors and executive officers No. of borrowers 9 8 Total Remuneration Committee Loan balance 4,802 4,022
19 RISK MANAGEMENT SYSTEM
Risk Management Policies Risk management lies at the heart of reliable, sound bank management and the achievement of long-term earnings targets. Accordingly, the bank has drawn up a host of risk management policies, beginning with the “Master Policy for Risk Management,” to clarify the bank’s risk awareness, organizational stance and overall risk management system. The bank will regularly review these policies, and will constantly endeavor to establish an appropriate, effective risk management system.
Comprehensive Risk Management Risk Management Philosophy In the course of conducting business, banks are exposed to various risks. These include credit, market and operational and other types of risks. When these risks manifest themselves, losses will be incurred. In order to withstand losses, risk exposures must accurately be measured and understood to ensure that risks are comprehensively controlled and managed within acceptable, pre-defined levels based on a bank’s Risk Management Policies financial strength, as determined by its capital adequacy ratio, etc. At the
Master policies Master Policy for same time, proactive risk-taking—exposure to credit and market risks of Risk Management the customers—is an integral part of the banks’ income generation. Credit Risk Management Policy Thus, banks must secure returns commensurate with taken risks. Credit risk Guidelines for Credit Aozora Bank comprehensively manages two types of risks: those Business Operations required to be taken for income generation, such as credit and market Market risk Market-Related Risk Market liquidity risk Management Policy risks, as well as those that are associated with normal banking Funding Liquidity Risk operations, but should be minimized or eliminated as much as possible, Funding liquidity risk Management Policy such as operational risks. Against this backdrop, in September 2000, a Administrative Risk Administrative risk Management Policy comprehensive risk management setup combining risk management and
Systems risk Systems Risk internal capital allocation was introduced to optimize the bank’s income. Management Policy Banks are vulnerable to various risks, and each risk has its own characteristic. Therefore, each risk must be managed in each specific way. For this reason, at Aozora Bank, each specialized division manages each type of risk. However, should any risk manifest itself, its losses will affect the entire banking system. So, it is vital to comprehensively manage all forms of risks throughout the entire organization of the bank. In order to bolster risk management across the entire organization, the functions of the Risk Management Division have been strengthened. The Risk Management Division oversees risk management at other divisions to ensure that the overall risk management is consistent and well-balanced. The bank has established a system whereby the Risk Management Division is in charge of Risk Management Divisions
the quantification of credit risk as well Comprehensive risk management Risk Management Div. as the quantification of market risk to Credit risk (Overall) Credit Div. (Quantitative analysis) Risk Management Div. accurately grasp both types of risks Market risk Risk Management Div. comprehensively. Market liquidity risk Risk Management Div. Funding liquidity risk Treasury Planning Div. Quantification of Total Risk Administrative risk Operation Planning Div. Systems risk Systems Planning Div. In order to understand different forms of risks comprehensively, risks must be measured by the common yardstick. Aozora Bank employs VaR (Value-at-Risk) to calculate the amount of capital that should be set aside against particular risks. In this way, the bank comprehensively manages credit and market risks, etc. Moreover, risks for venture business investment and risks for investment banking business have also been incorporated into the risk management framework outlined above, being in line with its own business strategy.
20 The bank confines risk-taking to pre-defined limits set in accordance with its financial strength. Capital allocation is conducted on the basis of integrated, quantified risk measurement with the aim of promoting sound bank management.
Capital Allocation System At Aozora Bank, a system of capital allocation sets the amount of capital to be placed at risk by each business division based on risk tolerance and on expected income of each business division, according to management and business strategy. First, the bank sets aside the amount of capital required to maintain minimum adequacy capital and provisions for operational risks. And then capital is placed under business divisions in line with the requirements of management and business strategies. The amount of capital allocated to business sectors determines both market and credit risk limits at each business sector, respectively. Each business sector is responsible for conducting operations while ensuring that risks are confined to capital allocation limits. The observance of risk limits is strictly monitored by the Risk Management Division and reported to management. Return on equity (ROE) and risk-return profiles for each business sector are evaluated. This information is reflected in subsequent capital allocation and the formulation of management strategy, with a view to improving profitability and efficiency of the bank as a whole.
Credit Risk Management Credit risk refers to potential for losses arising from impairment of value of assets due to deterioration of borrowers’ ability to repay their debt as a result of their financial decline, etc. The nature of credit risk is becoming more complex, involving issues beyond those that accompany traditional lending operations. In particular, there is now considerable overlapping between a wide variety of risks, such as risks associated with derivative transactions and settlements. The bank aims to hold credit risks within the limits of its financial strength, and achieve a level of earnings in line with exposed risks. To this end, it will conduct strict credit screening and monitoring on individual transactions, and portfolio management aimed at decentralization of credit risks and securing optimal returns in line with exposed risks. In this way, the bank will continue to maintain a sound asset portfolio by means of tight credit risk management.
Capital allocation
Business sectors Risk management
Sector A Risk limits, etc. Credit risk
Allocated Sector B capital Earnings management
Bank Market risk • Earnings position capital Sector C • ROE etc.
Operational risk, etc. Retained capital Reserved capital for minimum capital adequacy
21 Credit Risk Management Framework The Credit Division, which is independent of business divisions and branches and marketing promotion operations, supervises credit screening, formulates basic credit policy and controls credit risks for the entire bank. Specific activities include assigning credit ratings to every customer and screening individual credit decisions. To ensure an appropriate system of checks and balances, the Risk Management Division quantifies credit risks and conducts portfolio management, while the Inspection Division conducts internal audits. The Credit Committee, consisting of representative directors and executive officers in charge of the Risk Management Division and the Credit Divisions, etc., approves major credit transactions and formulates guidelines for borrowers with large credit balances. At the same time, the Executive Committee deliberates important issues relating to risk management.
Guidelines on Credit Risk Management At least once every year, the Board of Directors updates the “Credit Risk Management Policy” and “Guidelines for Credit Business Operation,” which set forth fundamental guidelines for credit risk management and procedures for directors and employees involved in credit operations. The bank has also prepared “Credit Management Manual,” which contains examples of standard credit management procedures to be observed for credit transactions with the customers. The manual specifies information to be requested from borrowers according to credit ratings and procedures for assessment of a borrower’s operations and assets pledged as collateral. The bank conducts efficient, thorough credit risk management by adhering to this manual.
Credit Rating System The bank’s credit rating system dates back to 1991. Since then, a number of improvements have been made to the system. With the exception of certain housing loan customers, credit ratings of customers are determined based on quantitative assessments of financial conditions and income, as well as assessments of qualitative factors such as industry trends and the strength of operating bases. At the same time, credit ratings reflect the bank’s borrower categories scheme. Effective March 2001, credit ratings of Japanese non-financial corporations were divided into 15 categories. At the same time, the credit rating system for other customers was brought in line with ratings for Japanese non-financial corporations. This was accomplished by matching the default ratio (Note 1) for each category of the former with the latter. In this way, we
Credit risk management framework
Board of Directors
Executive Committee Credit Committee
Inspection Division Risk Management Treasury Planning Credit Division Division Division Assets Audit Department
・Capital allocation ・Credit screening ・Internal audit of credit processes ・Risk monitoring ・Assignment of ・Audit of credit ratings, ・Earnings management credit ratings self-assessment, write-off and reserve
Marketing Division Banking Portfolio Management Division
・Drafting of business plans ・Drafting of Portfolio ・Marketing management plans
Business divisions and branches
22 Major rules for credit risk management
Master Policy for Risk Management Basic guidelines applicable to the management of all types of risk
Credit Risk Management Policy Guidelines for Credit Business Operation Credit Management Manual Basic guidelines for credit Basic guidelines and procedures for directors Standard management procedure risk management and employees engaged in credit operations for individual credit accounts
Self-Assessment Standards System and procedure for self-assessment
Guidelines for Write-off, Depreciation, Amortization and Reserve System and procedure for write-offs, deprecation, amortization and reserves
Lending Regulations General lending rules Collateral appraisal method Procedure for submitting credit applications for approval Collateral management method Credit approval authority Collection and management of loans Terms and conditions of loan contracts Assignment of credit ratings to corporations
integrated the credit rating system for all borrowers, thus creating a framework for accurately quantifying credit risks. At the same time, we employ the common yardstick to judge and quantify credit risks associated with structured finance and other advanced financial technologies. The bank constantly reviews the consistency of its own credit ratings with those of external credit rating agencies and the evaluations by credit research firms. Credit screening is conducted in conformity with the New Basel Capital Accord (Note 2).
Note 1: The definition of default ratio is based on a broad interpretation of default that encompasses not only legal bankruptcy and delinquency, but also a wider range of circumstances and business conditions. Note 2: The New Basel Capital Accord is an agreement concerning the establishment of minimum capital requirements in a more risk-sensitive manner. In January 2001, the Basel Committee on Banking Supervision, established by the central-bank governors of G-10 nations in 1975, presented proposals to amend an earlier version of the accord of 1998. The new accord calls for the use of both external and internal evaluations of risk weightings to calculate assets subject to credit risks. As the standard method, rating agencies shall conduct external evaluations, while banks shall use their own credit rating system to conduct internal evaluations.
Credit rating system at a glance
Domestic Domestic Foreign Common External Credit Borrower categories non- financial Overseas Structured financial borrowers financial Countries finance, etc default rating research corporations institutions institutions ratio (%) agencies agencies
A1 F-A1 G-A1 GF-A1 AAA (note) ａ% … A2 F-A2 G-A2 GF-A2 ｂ% … … A3 … B1 Normal borrowers … B2+ Consistent Review … B2- … … … … … rating using consistency a common with external B3+ default ratio evaluation External External B3- rating evaluation Watch list borrowers C1+ (exclude special attention C1- … … … … … … borrowers) C2 Special attention borrowers C3 … Potentially bankrupt borrowers D1 … … … Substantially bankrupt borrowers D2 … … １００% Bankrupt borrowers E F-E G-E GF-E １００% “Note: Ratings in the structured finance category include pooled credit (P-A1), real estate securitization (CM-A1), pooled loan assets(PF-A1), project finance (PF-A1), and LBO/MBOs (L-A1).”
23 Credit Management Centered on Ratings At Aozora Bank, credit ratings are integral to credit management. Credit ratings affect credit screening procedures, and constitute one of many important criteria for credit approval, including criteria for interest spread and credit limits. Credit ratings are also used to conduct self-assessments and are employed as benchmarks to quantify credit risks. The following procedures are followed in assigning credit ratings. • Business divisions and branches conduct preliminary evaluations of borrowers. Subsequently, the Credit Division, which is independent of the former, is responsible for making the final decision, and to ensure sufficient checks and balances, the final assignment of a credit rating is reviewed by the Assets Audit Department and an auditor. • Decision-making authority is delegated based on a combination of two factors: credit ratings and credit exposure. • Credit limits for each rating are determined based on bank capital and credit costs for each rating. As such, ratings are a key indicator used to hold credit risks within appropriate limits. • In April 2001, the bank adopted credit ratings linked to certain financing schemes, such as structured finance, where collection is independent of a borrower’s ability to repay a debt. We will continue to refine credit rating systems. For instance, we will develop initiatives such as credit ratings for venture businesses based on evaluation of business models.
Credit Screening on Individual Transactions Credit ratings are nothing more than indicators for borrowers’ creditworthiness, based on default ratios. As such, actual credit screening must be conducted in such a way to evaluate borrowers and their credit requirements on individual transactions. Business divisions and branches are responsible for preliminary screenings. Subsequently, experienced analysts in the Credit Division conduct secondary screenings, which involves, in particular, a careful review of the business plans, the appropriateness of fund usage and its financial soundness. Analysts also give consideration to the future availability of funds for repayment, repayment methods, and the duration of the loan. Credit monitoring is conducted in accordance with guidelines stipulated in Lending Regulations and the Credit Management Manual. The bank carefully monitors the creditworthiness of borrowers and the value of collateral. In this way, the bank works to uncover problems at an early stage, with a view to preventing a possible occurrence of non- performing loans.
Portfolio Management To maintain the soundness of assets vulnerable to credit risks, the bank evaluates and manages risks associated with each borrower and loan application along with estimated earnings from the loan. At the same time, the bank analyzes and manages aggregate risks in the entire loan portfolio. In August 2000, the Risk Management Division was strengthened and improved. The division monitors portfolio from various angles, such as by industry, by internal credit ratings and by category of large borrower. The division regularly reports and puts forward recommendations to the Executive Committee and the Board of Directors. This allows the bank to avoid over- exposure in a single category, and thus promotes an effective control of credit risks involved. In this way, the bank is able to optimize a level of earnings in line with exposed risks. The bank has implemented a system whereby credit risks can be grasped on a consolidated basis including those of subsidiaries and affiliates.
Quantifying Credit Risk In May 2000, the bank introduced a new proprietary numerical model to quantify credit risks. With the use of this model, the bank calculates credit risks based on such objective data as credit ratings, default ratios, collection prospects, etc. concerning not only on-balance
24 transactions like loans, debentures, guarantees, etc. extended to domestic and overseas non- financial and financial institutions, individuals, etc. but also concerning off-balance transactions like swap dealings, etc. The quantification of credit risks refers to the application of statistical techniques to calculate potential losses that could arise from the failure of borrowers to fulfill their repayment obligations. Specifically, the bank uses Monte Carlo simulations to randomly construct a histogram of losses for a portfolio over a specified time horizon based on underlying default ratios for each credit ratings. The average value of that histogram represents expected losses. The bank then estimates maximum losses that could occur with a specified degree of confidence (99% in the chart). Expected losses should be covered by earnings as cost of credit. Cost of credit is used for loan pricing in line with risks and thereby set suitable interest spreads. The difference between estimated maximum losses (at a specified level of probability) and expected losses is defined quantitavely as the volume of credit risk. Under the framework of integrated risk management, the Board of Directors determines capital allocation for the entire bank and for each business division in line with potential losses, or credit risk. At the same time, the Board sets credit risk limits consistent with capital allocation. The volume of credit risk is managed so as to ensure that it remains within the limits of capital value. The status of credit risk is reported regularly to the Board of Directors and the Executive Committee and is maintained at appropriate levels. At the same time, the analysis of the relationship between credit risks and earnings after deduction of credit costs is used to manage ROE and allocate resources in an efficient manner.
Market Risk Management Market risk refers to the potential for losses due to fluctuations in the value of the bank’s assets and liabilities brought about by changes in market variables such as interest rates, stock prices or exchange rates. Market risks are not limited to financial instruments such as marketable securities, whose values are directly affected by market fluctuations. All assets and liabilities, including deposits and loans, are subject to market risks. For example, in the event that the bank procures funds through fixed-rate deposits, and should market rates subsequently fall, the bank will incur losses until those deposits mature because of the relatively high cost of those deposits.
Distribution of Losses of a Typical Portfolio
Expected losses Maximum losses at 99% probability
Frequency of occurrence
Credit cost Credit risk Losses
Covered by earnings, such as interest spread Controlled by within limits of capital allocation
25 Aozora Bank makes an analysis of all market risks expected to affect total assets and liabilities in order to suitably control market risks throughout the bank. As a financial institution categorized as global dealer type, the bank has developed a risk management system capable of addressing all aspects of market risks.
Market Risk Management System Within the framework of integrated risk management, the Board of Directors decides on capital allocation for the entire bank and for each business segment commensurate with exposed market risks. Market risk limits and loss limits (stop-loss rules) are set in accordance with capital allocations for each business segment. These limits are subdivided further into specific limits for each business division and section. The Risk Management Division, which is independent of front divisions, centrally monitors compliance with market risk limits and stop-loss rules, as well as market risk profile. The Risk Management Division reports to the Board of Directors and the Executive Committee on profit/ loss by market valuation, outstanding balances and interest-sensitivity of trading positions. The Market-Related Risk Management Policy sets forth procedures for setting various market risk and loss limits and action guidelines in the event that such limits are exceeded. And reporting procedures for risk/profit/loss situations are also set forth in this Market-Related Risk Management Policy. The bank’s risk management system is designed to control exposed risks properly based on management decisions and to prevent a possible occurrence of unexpected large losses.
Quantifying Market Risk Aozora Bank quantifies market risks by way of VaR (for trading activities) Parameters Value-at-Risk (VaR) method, which is to be used VaR calculation method: as a basis for setting market risk limits. VaR is a Variance – Covariance method statistical measure of estimating maximum Historical observation period: 482 days losses that could arise based on historical
market data. VaR serves as the common Confidence interval: 2.33 standard deviations yardstick to measure potential losses that could (Potential maximum losses with a 99% probability)
arise as a result of interest rate, stock price and Holding period: 1 day exchange rate fluctuations.
Backtesting
The bank conducts backtesting to verify Backtesting for Trading Activities (April 2000-March 2001) the reliability of VaR calculated using (¥ million) 500 statistical models, comparing daily 400 reported VaR with actual daily gains or 300 losses. As shown in the following 200 diagram, daily losses did not exceed Daily gains/ 100 daily VaR over a period of 246 business losses 0 days from April 2000 through March -100 2001, which does suggest the reliability -200 of this VaR model. -300 -400 050100 150 200 250 300 350 400 VaR
26 Stress Testing Stress test scenarios and results for trading activities The bank conducts stress tests regularly to (As of the end of March 2001) prepare for volatile market movements that could exceed statistical estimations. The Scenario 1: Eliminate the statistical correlation between financial products expected under normal conditions, bank calculates and analyzes potential losses assuming that such correlation could collapse. Scenario 2: Use the maximum change in interest rates in that could arise from dramatic changes in the past 15 years, assuming an extraordinary movement interest rates, stock prices and exchange in market variables. rates, or from a collapse of correlation Result (¥ million) between different risk categories. Normal VaR Scenario 1 Scenario 2 Andersen and Asahi & Co audited 165 222 1,480 Aozora Bank based on the secondary BIS Note: In addition to these scenarios, the bank regularly conducts regulations. And they have determined that stress testing using a variety of other scenarios. the bank’s market risk management is appropriate for its business strategies and trading policies.
Trading activities and market risk VaR for trading activities (From April 2000 through March 31, 2001) Value-at-Risk is affected by factors such as (¥ million) the bank’s risk-taking policies, market 350 Average Maximum Minimum trends and trade volume with our 300 customers. As shown in the following 132 308 52 250 chart, the average, maximum and minimum values for VaR remained largely 200 VaR unchanged from fiscal 1999. As of the end 150 of March 2001, the composition of market 100 risk by different risk categories was as 50 follows. Yen interest rate risk accounted for 74.9% of market risk, foreign currency 0 121416181101121 141 161 181 201 221 241 interest rate risk represented 13.6% and No. of business days exchange rate risk 11.5%.
ALM operations The ALM sector centrally manages all market Interest rate sensitivity of yen-denominated assets and liabilities risks associated with all operations excluding (As of the end of March 2001) (Unit: 100 million yen) trading activities. For instance, when a One year One to More than division extends a loan, the ALM sector Total or less five years five years supplies the relevant lending division with the same amount of fund with the same 10bpv 6 △21 △11 △26 maturity as a new loan. In this way, interest Note 10 bpv: For a 10bp (0.1%) change in interest rates, a positive change in the fair rate risks are effectively transferred to the value of assets and liabilities suggests that when the interest rate rises, fair value will increase. A negative change in fair value suggests that when the interest rates ALM sector, shielding earnings at lending decline, fair value will increase. divisions from interest rate fluctuations. Off-balance-sheet transactions are included. The ALM sector supplies and receives funds from other divisions in the bank, it sometimes makes a loan or an investment outside the bank directly with its excess funds or sometimes procures funds to cover any shortage in accordance with supply and demand situations. In addition, the ALM sector conducts derivative transactions such as interest rate swaps to control the entire market risk exposures.
27 Liquidity Risk Management There are two types of liquidity risks. One is funding liquidity risk, which refers to a risk that the bank is unable to raise funds needed for various fund settlements. The other being market liquidity risk, caused by the inability of the bank to unwind trading positions at reasonable market prices due to a variety of factors, including market confusions.
Funding Liquidity Risk Management The Treasury Planning Division centrally manages yen and foreign-currency denominated funds. The division works to ensure that the bank’s funding capabilities are sufficient to meet its contractual obligations. The Board of Directors and other bodies prepare monthly and semi- annual plans for the investment and procurement of funds. The Treasury Planning Division reports directly to top management on liquidity issues on a daily basis.
Market Liquidity Risk Management The Risk Management Division analyzes trading positions relative to market scale, and reports daily to top management on market liquidity risks. Close attention is paid so that trading positions may not become excessive.
Operational Risk Management Besides conventional credit, market and liquidity risks, the bank is also required to control “operational risk,” defined as “the risk of direct or indirect losses that may result from inadequate or failed internal processes, people or systems or from external events.” The bank is continually refining its operational risk management systems and processes.
Administrative Risk Management Administrative risk is defined as potential losses that may arise from the failure of directors and employees to handle clerical work accurately as well as from accidents or irregularities by them. In Aozora Bank, Administrative Risk Management Policy was approved by its Board of Directors. At the same time, the Operations Planning Division, independent of business divisions and branches controls administrative risks. The Operations Planning Division formulate clerical procedures and manuals tailored to each business operation. These clerical procedures are mandatory for all directors and employees to observe. The Operations Planning Division aims to enhance the reliability of clerical procedures by providing guidance on specific processes, holding training sessions and responding to inquiries regarding clerical procedures. And, the bank aims to establish a framework of clerical work processes where it can minimize human errors as much as possible by continuously reviewing and implementing automation and systematization of more processes and centralization of clerical procedures. We will continue to explore ways to quantify clerical risks so as to refine our risk management system still further.
Systems Risk Management Systems risk is defined as potential losses resulting from the failure of computer systems due to internal and external factors including shutdown, malfunction, inappropriate use of computer systems and computer viruses. With the advance in networking and diversification of bank operations, the social consequences of systems failures are becoming increasingly serious. At Aozora Bank, we believe that the entire bank must make a concerted effort to control systems risk. To this end, the Board of Directors has approved the Systems Risk Management Policy. The Systems Planning Division is making every effort to protect systems from natural disasters and other contingencies to ensure their stable operation. Indeed, the bank has taken various steps to protect computer systems from a wide range of natural disasters and criminal
28 activities and to protect sensitive information. The bank’s computer center has an earthquake- resistant structure with vibration-resistant floors, dual communications cables, a back-up power generator and strict access controls. Systems development (Systems Planning Division) and systems operation (Computer Operation Division) are clearly separated to ensure adequate checks and balances between the two divisions. The bank regularly conducts internal inspections of systems-related planning, development, maintenance and operation to ensure strict management of the computer systems.
Legal Risk Management Legal risk is defined as potential losses resulting from lawsuits filed against the bank by customers or other third parties for damage indemnification as well as other legal conflicts that could arise in the course of various banking operations. Legal risk also includes a situation where unforeseeable losses that arise from not illegal, yet inappropriate activities resulting in a breach of trust between the bank and its customers, as well as inappropriate contracts that require the bank to assume obligations that would be dispensable in the normal situation. At Aozora Bank, the Compliance Management Division supervises legal affairs and compliance, to prevent a possible occurrence of unforeseeable losses. At the same time, this division checks critical documents such as major contracts and confirms that all operations comply with relevant laws and other regulations to ensure that all operations are being conducted properly.
Settlement Risk Management Settlement risk management refers to potential losses arising from the failure to finalize settlements as planned. Settlement risk encompasses a wide range of risks, such as credit, market and liquidity risks. A prime settlement risk is caused by timing differences that arise between payment and receipt of funds. This type of risk is not limited to foreign exchange transactions, which arises from the timing of settlements across international time zones, but also occurs within domestic transactions in a variety of contexts. The bank is proactively taking steps to reduce settlement risks. We have set limits on settlement volumes for foreign exchange transactions by each customer. At the same time, the bank has adopted a policy of reducing settlement volumes by using netting techniques and is working to shorten time intervals between payment and receipt of funds. In participating in various settlement systems, the bank has utilized various risk reduction measures such as collateral-pledging, loss-sharing, etc. after a thorough understanding of the relevant rules of such settlement systems. And in addition to these risk-reduction measures, ever since the introduction of Real-Time Gross Settlement (RTGS) under the Bank of Japan Financial Network System in January 2001, the bank has been controlling settlement risks by monitoring actual settlement situations real time.
Internal Inspection and Audit At Aozora Bank, the Inspection Division, an autonomous body, assesses whether the bank’s risk management systems are functioning effectively. In this way, the bank maintains an appropriate system of checks and balances to secure sound, suitable banking operations.
New Financial Products and New Businesses As a rule, the Executive Committee authorizes all new products and new business initiatives, after thorough deliberations from compliance and risk management perspectives.
29 COMPLIANCE SYSTEM
The bank has established internal systems and regulations that ensure due compliance with all legal requirements and the conduct of all operations with perfect integrity. The bank works to foster a corporate culture that places priority on these goals.
Master Policy on Compliance The bank has instituted the “Master Policy on Compliance,” which sets forth internal systems and basic principles needed to maintain compliance with all legal requirements for all banking operations. In addition, the “Compliance Program,” which is updated every business year, specifies action guidelines and compliance standards. All directors and employees are required to have a thorough understanding of the contents of these documents.
Organization and System Primary responsibility for supervising compliance throughout the bank rests with the Compliance Management Division, which conducts compliance checks based on the relevant laws. The division provides internal legal consultations, making a review and a legal check of contracts, and formulates and monitors the internal regulations. Compliance leaders have been appointed at all divisions and branches. Their duties include consulting activities, as well as compliance audits and steps to promote awareness of compliance-related issues. In December 2000, the bank appointed Compliance Officer completely independent of the divisions and branches he/she oversees. Compliance Officers directly monitor compliance procedures and systems at business divisions.
Compliance Training and Promotion of Awareness Training sessions for compliance leaders are conducted annually, in order to ensure a thorough understanding of key compliance issues and promote awareness of the importance of legal compliance. After completing this session, compliance leaders then train staff at their respective divisions and branches. In this way, all directors and employees throughout the bank are thoroughly trained and updated in the current compliance issues. Training sessions for new employees and newly appointed section managers, as well as for all of the bank’s operations, also include compliance related themes. In March 2001, external specialists were invited to provide compliance training sessions for the bank’s directors who themselves are currently committed to the issue of compliance in a proactive way. On the occasion of enactment or amendment of the relevant regulations, the bank identifies key compliance issues as “Current Key Compliance Issues.” And centering around compliance leaders, bank employees discuss these current key compliance issues in their respective divisions, and branches to check whether these current key compliance issues are suitably addressed and observed.
30 FINANCIAL INFORMATION AND CORPORATE DATA
STEPS TOWARD A NEW BEGINNING...... 32 CONSOLIDATED FINANCIAL STATEMENT AND INDEPENDENT AUDITORS’ REPORT ...... 33 Independent Auditors’ Report ...... 33 Consolidated Balance Sheet ...... 34 Consolidated Statement of Income ...... 36 Consolidated Statement of Stockholders’ Equity ...... 37 Consolidated Statement of Cash Flows ...... 38 Notes to Consolidated Financial Statements ...... 39
CONSOLIDATED FINANCIAL DATA ...... 54 Consolidated Financial Highlights [Five-Year Summary] ...... 54 Consolidated Capital Adequacy Ratio (Domestic Standard) ...... 55 Consolidated Risk Kanri Saiken ...... 55
NON-CONSOLIDATED FINANCIAL STATEMENTS ...... 56 Non-Consolidated Balance Sheets (Unaudited) ...... 56 Non-Consolidated Statements of Income (Unaudited) ...... 58 Non-Consolidated Statements of Earned Surplus (Deficit) (Unaudited) ...... 59
NON-CONSOLIDATED BUSINESS RESULTS...... 60 Non-Consolidated Financial Highlights [Five-Year Summary] ...... 60 Profit and Loss ...... 61 Financial Position ...... 62 Non-Consolidated Capital Adequacy Ratio ...... 63 Disclosure of Asset Quality ...... 64 Summary of Disposal of Problem-Loans During the Fiscal Year Ended March 2001 . . . 64 Standards for Self-Assessment of Assets ...... 64 Write-Off and Provision Rules ...... 65 Disclosed Credit under the Financial Reconstruction Law ...... 65 Risk Monitored Loans ...... 66
NON-CONSOLIDATED FINANCIAL DATA ...... 68 Debenture Operations ...... 68 Outstanding Balance and Average Balance of Debentures ...... 68 Balance by Residual Period ...... 68 Deposit Operations ...... 69 Balance by Deposit Accounts ...... 69 Balance of Time Deposits by Residual Period ...... 70 Outstanding Balance by Depositor ...... 70 Loan Operations ...... 71 Outstanding Balance of Loans ...... 71 Balance by Residual Period ...... 71 Breakdown of Loans by Industry ...... 72 Breakdown of Loans by Collateral ...... 72 Securities ...... 73 Outstanding Balance and Average Balance of Securities Held ...... 73 Balance of Securities by Residual Period ...... 73 Capitalization ...... 74 History of Capitalization ...... 74 Major Shareholders ...... 75
CORPORATE DATA ...... 76 Corporate History ...... 76 Business Activities ...... 76 Office Directory ...... 77 Business Network ...... 78 Directors & Auditors ...... 79
31 STEPS TOWARD A NEW BEGINNING
For a period beginning December 13, 1998, the Bank came under special public management as specified by the Law concerning Emergency Measures for the Reconstruction of the Financial Functions (Financial Reconstruction Law). During that period, the Bank undertook measures to strengthen its balance sheet, conducted a thorough rationalization of its business and transfer of assets deemed “inappropriate” by the Financial Reconstruction Commission (FRC) of a total book value of ¥3,342.3 billion to the Resolution and Collection Corporation (RCC). The FRC selected the consortium consisting of SOFTBANK CORP., ORIX Corporation, The Tokio Marine and Fire Insurance Co., Ltd., and financial institutions as the wining candidate to acquire the Bank. The transfer took place based on a Share Purchase Agreement dated June 30, 2000.
●Process to end Special Public Management
Acquirement of Transfer of “inappropriate” Commencement of Announcement of Appointment of Financial the Bank’s stocks by Announcement of assets to the special public ➔➔➔➔“Management Advisor (FA) and signing ➔➔ the Deposit Insurance asset assessment results Resolution and Collection management Corporation (DIC) Rationalization Plan” of FA agreement Corporation (RCC)
Dec. 13, 1998 Dec. 17, 1998 March 1, 1999 May 24, 1999 June 15, 1999 November 22, 1999 Article 36 of the Law* Article 39 of the Law* Article 46, 47, 48,of the Law* Item 3,4 Article 72 of the Law* Article 72 of the Law* “Process up to Determination of Notification No. 2 of the Financial The Bank transferred majority of Special Public Management” Reconstruction Commission (FRC) assets deemed “inappropriate” to “Management Rationalization Plan” Holding assets determined based on the RCC. “Business Operations Standards” Asset Assessment Standards of the FRC
Selection of the most Application for Signing of Closing (Settlement); preferred candidate Signing of Start of business under recapitalization based on ➔➔➔Share Purchase ➔➔End of special public (Memorandum of Basic Agreement new management ➔ Financial Function Agreement management Understanding) Early Strengthening Law February 24, 2000 June 6, 2000June 30, 2000 September 1, 2000 September 4, 2000 September 5, 2000 Article 52, 62, 72,of the Law* Item 2, Article 4 of the Financial • Transfer of the remaining Function Early Strengthening Law** “inappropriate” assets to RCC. •Recapitalization (October 4,2000) (August 28, 2000) • Financial assistance provided by DIC for loss incurred. (August 31, 2000) * Law concerning Emergency Measures for the Reconstruction of the Financial Functions • Share purchase (September 1, 2000) ** Law concerning Emergency Measures for Early Strengthening of the Financial Functions
The period of special public management ended on September 1, 2000 upon the transfer of all shares to the consortium. Ending special public management, the Bank received ¥3,236.5 billion in the form of special financial assistance under the Financial Reconstruction Law to cover the loss arising from the disposal of inappropriate assets, etc. In addition, new shares were issued and subscribed by the consortium, 105 shareholders in all, including 93 regional financial institutions, raising ¥100.0 billion. Also in September, the Bank applied for an enhancement of capital in accordance with the Law concerning Emergency Measures for Early Strengthening of the Financial Functions (Financial Function Early Strengthening Law) and submitted a Business Improvement Plan. The FRC approved the Bank’s request to increase its capital by issuing preferred stocks totaling ¥260.0 billion to be subscribed by public funds. Recapitalization in October 2000 further strengthened the Bank’s capital base and financial position. It is our ongoing challenge to steadily proceed in accordance with Business Improvement Plan then disclosed, and to revive as a bank trusted by, and contributing to, the society.
● Business Improvement Plan (in 100 millions of yen) 2001 2002 2003 Result Plan Plan Plan Gross business profits* 568 559 684 765 General and administrative expenses* 400 423 453 451 Business profits before general loan-loss reserve* 168 136 231 314 Net Income after income taxes* 997 991 174 220 Loans and bills discounted (average balance)* 34,755 34,700 33,000 34,500 Total assets (average balance)* 69,076 71,000 49,400 52,300 Tier I ratio** 13.36% 11.79% 11.78% 11.55% Capital Adequacy Ratio (domestic standard)** 15.13% 13.43% 12.92% 12.33% * Non-Consolidated ** Consolidated
32 CONSOLIDATED FINANCIAL STATEMENT AND INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ Report
Tohmatsu & Co. MS Shibaura Building 13-23, Shibaura 4-chome, Minato-ku, Tokyo 108-8530, Japan
Tel: +81-3-3457-7321 Fax: +81-3-3769-8508 www.tohmatsu.co.jp
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of Aozora Bank, Ltd.:
We have examined the consolidated balance sheet of Aozora Bank, Ltd. (the “Bank,” formerly The Nippon Credit Bank, Ltd.) and consolidated subsidiaries as of March 31, 2001, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended, all expressed in Japanese yen. Our examination was made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly the financial position of Aozora Bank, Ltd. and consolidated subsidiaries as of March 31, 2001, and the results of their opera- tions and their cash flows for the year then ended in conformity with accounting principles and practices generally accepted in Japan applied on a basis consistent with that of the preceding year.
As discussed in Note 2, effective April 1, 2000, the consolidated financial statements have been prepared in accordance with new accounting standards for employees’ retirement benefits and financial instruments and a revised accounting standard for foreign currency transactions.
Our examination also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
June 22, 2001
33 Consolidated Balance Sheet Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) and Consolidated Subsidiaries March 31, 2001
Thousands of U.S. Dollars ASSETS Millions of Yen (Note 1) Cash and cash equivalents (Note 3) ...... ¥ 31,774 $ 256,455 Due from banks...... 635,300 5,127,526 Call loans and bills bought...... 386,263 3,117,545 Commercial paper and other debt purchased ...... 9,991 80,642 Trading account assets (Note 4) ...... 565,793 4,566,538 Money held in trust ...... 439 Securities (Notes 5 and 11) ...... 721,477 5,823,063 Loans and bills discounted (Notes 6 and 11) ...... 3,089,490 24,935,352 Foreign exchanges (Note 7) ...... 1,689 13,634 Securities in custody and other (Note 11) ...... 448,320 3,618,402 Cash collateral on borrowing securities ...... 457,678 3,693,931 Other assets (Note 15) ...... 101,768 821,378 Premises and equipment (Note 8) ...... 35,409 285,787 Deferred charges ...... 716 5,782 Customers’ liabilities for acceptances and guarantees (Note 9)...... 25,315 204,325 Deferred tax assets (Note 22) ...... 9,610 77,568 Reserve for possible loan losses (Note 10) ...... (356,838) (2,880,053)
Total ...... ¥6,163,766 $49,747,914
See notes to consolidated financial statements.
34 Thousands of U.S. Dollars LIABILITIES AND STOCKHOLDERS’ EQUITY Millions of Yen (Note 1) Liabilities: Debentures (Note 12) ...... ¥2,479,408 $20,011,369 Deposits (Note 13) ...... 1,771,373 14,296,797 Call money and bills sold (Note 11) ...... 143,000 1,154,157 Commercial paper ...... 10,000 80,709 Trading account liabilities (Note 4) ...... 183,161 1,478,304 Borrowed money (Note 14) ...... 55,548 448,330 Foreign exchanges (Note 7) ...... 224 Borrowed securities...... 416,664 3,362,906 Other liabilities (Note 15) ...... 601,478 4,854,551 Liability for retirement benefits (Note 16) ...... 15,881 128,177 Reserve for credit losses on off-balance-sheet instruments ...... 717 5,791 Other reserves ...... 4 Acceptances and guarantees (Note 9) ...... 25,315 204,325 Total liabilities ...... 5,702,552 46,025,444
Minority Interests ...... 338 2,728 Stockholders’ equity: Capital stock (Note 17): Common stock...... 147,745 1,192,454 Preferred stock ...... 272,036 2,195,610 Capital surplus (Note 17)...... 33,333 269,035 Earned surplus (Notes 17 and 25) ...... 6,457 52,120 Foreign currency translation adjustments ...... 1,303 10,523 Total stockholders’ equity...... 460,876 3,719,742 Total ...... ¥6,163,766 $49,747,914
35 Consolidated Statement of Income Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) and Consolidated Subsidiaries Year Ended March 31, 2001
Thousands of U.S. Dollars Millions of Yen (Note 1) Income: Interest on: Loans and discounts ...... ¥ 75,281 $ 607,600 Securities...... 16,320 131,726 Due from banks ...... 3,134 25,297 Other ...... 13,324 107,547 Fees and commissions ...... 3,336 26,928 Trading account profits-net ...... 3,141 25,354 Other operating income (Note 18) ...... 3,999 32,283 Other income (Note 19) ...... 165,629 1,336,801 Total income ...... 284,169 2,293,536 Expenses: Interest on: Debentures ...... 37,603 303,498 Deposits ...... 8,691 70,151 Borrowings and rediscounts ...... 3,906 31,526 Commercial paper ...... 94 762 Other ...... 6,553 52,892 Fees and commissions ...... 361 2,916 Other operating expenses (Note 20) ...... 5,136 41,459 General and administrative expenses...... 39,887 321,933 Other expenses (Note 21)...... 89,897 725,562 Total expenses ...... 192,131 1,550,699 Income before income taxes and minority interests ...... 92,037 742,837 Income taxes (Note 22): Current ...... 2,285 18,447 Deferred ...... (9,610) (77,568) Total income taxes ...... (7,325) (59,121) Minority interests in net income ...... 1,031 8,321 Net income...... ¥ 98,331 $ 793,637
YenU.S. Dollars Per share of common stock (Note 2.q): Net income ...... ¥35.80 $0.29 Diluted net income ...... 29.40 0.24 Cash dividends of the fourth preferred stock ...... 5.00 0.04 Cash dividends of the fifth preferred stock ...... 1.86 0.02
See notes to consolidated financial statements.
36 Consolidated Statement of Stockholders’ Equity Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) and Consolidated Subsidiaries Year Ended March 31, 2001
Thousands Millions of Yen Outstanding Number of Shares Foreign currency Common Preferred Common Preferred Capital Earned translation Stock Stock Stock Stock Surplus Surplus adjustments Balance, April 1, 2000 ...... 2,501,536 608,398 ¥ 235,790 ¥ 117,323 ¥114,047 ¥ (465,932) Transfer of capital surplus ...... (114,047) 114,047 Capital reduction without repayment ...... (560,254) (154,712) (105,287) 260,000 Exclusion of consolidated subsidiaries previously included in consolidated accounts ...... 10 Net income ...... 98,331 Issuance of common stock ...... 333,334 66,666 33,333 Issuance of preferred stock ...... 866,667 260,000 Net change during the year...... ¥ 1,303 Balance, March 31, 2001...... 2,834,870 914,811 ¥ 147,745 ¥ 272,036 ¥ 33,333 ¥ 6,457 ¥ 1,303
Thousands of U.S. Dollars (Note 1) Foreign currency Common Preferred Capital Earned translation Stock Stock Surplus Surplus adjustments Balance, April 1, 2000 ...... $1,903,072 $ 946,922 $920,481 $(3,760,553) Transfer of capital surplus ...... (920,481) 920,481 Capital reduction without repayment ...... (1,248,687) (849,779) 2,098,467 Exclusion of consolidated subsidiaries previously included in consolidated accounts ...... 88 Net income ...... 793,637 Issuance of common stock ...... 538,069 269,035 Issuance of preferred stock ...... 2,098,467 Net change during the year...... $10,523 Balance, March 31, 2001...... $1,192,454 $2,195,610 $269,035 $ 52,120 $10,523
See notes to consolidated financial statements.
37 Consolidated Statement of Cash Flows Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) and Consolidated Subsidiaries Year Ended March 31, 2001
Thousands of U.S. Dollars Millions of Yen (Note 1) Operating activities: Income before income taxes and minority interests ...... ¥ 92,037 $ 742,837 Depreciation and amortization ...... 1,171 9,459 Goodwill amortization and impairment ...... (65) (525) Decrease in reserve for possible loan losses ...... (767,666) (6,195,857) Decrease in reserve for losses on loans sold ...... (100,628) (812,172) Decrease in reserve for retirement allowances ...... (8,991) (72,569) Increase in liability for retirement benefits ...... 15,881 128,177 Decrease in reserve for losses on disposition of specific assets ...... (14,794) (119,406) Increase in reserve for credit losses on off-balance-sheet instruments ...... 717 5,791 Interest income ...... (108,061) (872,170) Interest expense ...... 56,848 458,828 Net gain on sales and maturities securities ...... (116,523) (940,464) Profit from money held in trust ...... (3) (28) Net exchange gains ...... (10,124) (81,712) Net losses on disposal of premises and equipment ...... 1,400 11,304 Net increase in trading assets ...... (347,164) (2,801,972) Net increase in trading liabilities ...... 46,576 375,922 Net decrease in loans and bills discounted ...... 1,027,269 8,291,118 Net decrease in deposits ...... (372,464) (3,006,167) Net decrease in negotiable certificates of deposit ...... (477,610) (3,854,802) Net decrease in debentures ...... (1,227,958) (9,910,880) Net decrease in borrowing (excluding subordinated) ...... (483) (3,903) Net increase in due from banks (excluding due from The Bank of Japan) ...... (561,563) (4,532,389) Net increase in call loans and bills bought ...... (322,368) (2,601,843) Net increase in collateral money for borrowed bonds ...... (455,423) (3,675,732) Net decrease in money and bills sold ...... (1,066,300) (8,606,134) Net decrease in commercial paper ...... (110,000) (887,813) Net increase in cash collateral on borrowing securities ...... 22,147 178,751 Net decrease in foreign exchange (asset) ...... 6,594 53,224 Net decrease in foreign exchange (liability) ...... (26) (217) Interest received in cash ...... 111,115 896,816 Interest paid in cash ...... (66,711) (538,429) Other—net ...... 401,555 3,240,965 Sub-total ...... (4,351,614) (35,121,992) Special financial assistance ...... 3,236,536 26,122,170 Payments of income taxes ...... (1,108) (8,951) Net cash used in operating activities ...... (1,116,186) (9,008,773) Investing activities: Purchases of securities ...... (4,556,530) (36,775,870) Proceeds from sale and maturities of securities ...... 887,587 7,163,745 Proceeds from redemption of securities ...... 4,119,758 33,250,676 Increase in money held in trust ...... (3,004) (24,253) Decrease in money held in trust ...... 4,728 38,167 Increase in premises and equipment ...... (1,029) (8,311) Proceeds from sale of premises and equipment ...... 8,475 68,407 Net cash provided by investing activities...... 459,986 3,712,561 Financing activities: Repayments of subordinated debt...... (107,650) (868,846) Payments for redemption of subordinated bonds ...... (14,200) (114,609) Issuance of common and preferred stock ...... 357,703 2,887,036 Dividends paid to the minority stockholders ...... (817) (6,596) Net cash provided by financing activities ...... 235,036 1,896,985 Foreign currency translation adjustment on cash and cash equivalents ...... (98) (791) Net decrease in cash and cash equivalents ...... (421,262) (3,400,018) Cash and cash equivalents, beginning of year ...... 453,037 3,656,473 Increase in cash and cash equivalents due to change in scope of consolidation ...... 114 Decrease in cash and cash equivalents due to change in scope of consolidation ...... (1) (14) Cash and cash equivalents, end of year ...... ¥ 31,774 $ 256,455
See notes to consolidated financial statements.
38 Notes to Consolidated Financial Statements Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) and Consolidated Subsidiaries Year Ended March 31, 2001
1. BASIS OF PRESENTING THE FINANCIAL STATEMENTS The accompanying consolidated financial statements of Aozora Bank, Ltd. (the “Bank” or the “Parent Company,” formerly The Nippon Credit Bank, Ltd.) and its consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Accounting Standards. The consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdic- tions other than Japan. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Bank is incorporated and operates. Japanese yen figures less than a million yen are rounded down to the nearest million yen, except for per share data. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥123.90 to $1, the approximate rate of exchange at March 31, 2001. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation— The consolidated financial statements as of March 31, 2001 include the accounts of the Bank and its consolidated subsidiaries, including Aozora Trust Bank, Ltd. (formerly The Nippon Credit Trust Bank, Ltd.), Aozora Loan Services Co., Ltd. (formerly NCB Loan Services Co., Ltd.) and 11 other subsidiaries (together, the “Group”). Under the control or influence concept, those companies in which the Bank, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influ- ence are accounted for by the equity method. The consolidated financial statements do not include the accounts of 6 subsidiaries, because the combined total assets, total income, net income and earned surplus would not have had a material effect on the consolidated financial statements. Investments in the remaining 6 unconsolidated subsidiaries and 1 affiliated company are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. A consolidated subsidiary uses a fiscal year ending on December 31 which is different from the Bank’s fiscal year. The consoli- dated financial statements include the financial statements of this subsidiary for its fiscal years after making appropriate adjust- ments for significant intercompany transactions during the periods from its fiscal year end to the date of the consolidated financial statements. The excess of the cost of an acquisition over the fair value of the net assets of the acquired subsidiaries at the date of acquisition is charged to income when incurred. On the other hand, the fair value of the net assets of subsidiaries acquired over the cost of an acquisition is charged to income as incurred. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. b. Cash Equivalents— Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include amounts due from The Bank of Japan. c. Trading Account Assets/Liabilities— Transactions for trading purposes (the purpose of seeking to capture gains arising from short-term changes in interest rates, currency exchange rates or market prices of securities and other market-related indices or arbitrage opportunities) are included in “Trading account assets” and “Trading account liabilities” on a trade date basis. Trading securities and monetary claims purchased for trading purposes recorded in these accounts are stated at market value and trading financial derivatives are at the amounts that would be settled if they were terminated at the end of the fiscal year. Profits and losses on transactions for trading purposes are shown as “Trading account profits—net” or “Trading account losses—net” on a trade date basis.
39 d. Securities— Effective April 1, 2000, the Group adopted a new accounting standard for financial instruments, including securities. The standard requires all applicable securities to be classified and accounted for, depending on management’s intent, as follows: (1) trading securities which are held for the purpose of earning capital gains in the near term are stated at market value, and the related unrealized gains and losses are included in earnings, (2) held-to-maturity debt securities which are expected to be held to maturity with the positive intent and ability to hold to maturity are stated at amortized cost, and (3) available-for-sale securities which are not classified as either of the aforementioned securities are reported at average cost or amortized cost as permitted by transitional accounting, although available-for-sale securities shall be stated at market value for the year ending March 31, 2002 in accordance with the new accounting standard. Securities included in monies held in trust on behalf of the Bank are stated at market value, and the related unrealized gains and losses are included in earnings. The effect of adopting the new standard was to decrease income before income taxes and minority interests by ¥977 million ($7,889 thousand).
e. Derivatives and Hedging Activities— Derivatives for purposes other than trading are stated at market value. The Bank has adopted so-called “macro hedging,” a strategy to employ derivative transactions and control interest rate risks arising from financial assets and liabilities, such as loans, debentures and deposits, etc. within a set range, with aims to reduce risk as a whole. This strategy is a risk management method of the risk adjustment approach prescribed in “Temporary Treatment for Accounting and Auditing of Application of Accounting Standard for Financial Instruments in Banking Industry” (Industry Audit Committee Report No. 15 of the Japanese Institute of Certified Public Accountants). The Bank adopts this risk adjustment approach as the temporary accounting prescribed in the above Industry Audit Committee Report No. 15 of the Japanese Institute of Certified Public Accountants.
f. Premises and Equipment— Premises and equipment are stated at cost. Depreciation of premises and equipment of the Bank and its consolidated domestic subsidiaries is computed by the declining-balance method at rates based on the estimated useful lives of the assets, while the straight-line method is applied to buildings. The range of useful lives is principally 50 years for buildings and from 3 to 15 years for other premises and equipment.
g. Software— The purchased software costs are depreciated over the estimated useful lives of the software (principally 5 years).
h. Deferred Charges— The Bank’s deferred charges are amortized as follows. Discounts on discount debentures are amortized by the straight-line method over the terms of the debentures. Debenture issuance expenses are amortized by the straight-line method over the shorter of the terms of the debentures or the 3-year period stipulated in the Commercial Code of Japan (the ”Code“). Stock issuance costs are charged to income as incurred. Subsidiaries’ deferred charges on issuance of debentures are amortized by the straight-line method over 5 years.
i. Write-off of Loans and Reserve for Possible Loan Losses— Write-off of loans and reserve for possible loan losses of the Bank are accounted for as follows in accordance with internal write- off and reserve standards. Loans to borrowers under legal proceedings, such as bankruptcy, and loans in similar conditions, are written off by the amount of loans exceeding the estimated realizable value of collateral and guarantees. The amount written off in the current fiscal year amounted to ¥126,396 million ($1,020,153 thousand). For loans to borrowers not yet bankrupt but likely to fall into bankruptcy, the necessary specific reserve amounts are provided for through an overall assessment of the borrowers’ ability to pay, after subtracting from the loan balance the amount collectible on disposal of collateral or execution of guarantees. As to other loans, the Bank provides for a general reserve by applying the historical loan-loss ratio determined over a certain period.
40 The Bank has also taken into account the precondition of exercise of the cancellation right in determining the necessary reserve amount. Under the clause of “Warranty of Loan Related Assets” described in the Share Purchase Agreement (see Note 17), a precondition of exercise of the cancellation right is the existence of a defect and a 20% deterioration of assets in value. All loans are subject to asset quality assessment conducted by the business-related divisions in accordance with the Self- Assessment Standards, and the results of the assessments are reviewed by the Asset Audit Division, which is independent from business-related divisions, before the reserve amount is finally determined. As to general loans, consolidated subsidiaries provide for a necessary reserve by applying the historical loan-loss ratio. For doubtful loans, consolidated subsidiaries provide a specific reserve in the amount deemed irrecoverable based on the individual loan’s assessment. j. Retirement Benefits and Pension Plans— Effective April 1, 2000, the Group adopted a new accounting standard for employees’ retirement benefits and accounted for the liability for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. The full amount of the transitional obligation of ¥6,356 million ($51,304 thousand), determined as of the beginning of year, is charged to income and included in other expense in the income statement. As a result of adoption of the new standard, income before income taxes and minority interests decreased by ¥7,361 million ($59,415 thousand). k. Reserve for Credit Losses on Off-balance-sheet Instruments— Reserve for credit losses on off-balance-sheet instruments is provided for credit losses on commitments to extend loans and other off-balance-sheet financial instruments based on an estimated loss ratio determined by the same methodology which is used in determining the reserve for loan losses. Effective April 1, 2000, the Bank changed its method of accounting for credit losses on off-balance-sheet instruments, especially commitments to extend loans, from providing the reserve for losses on loans extended after the exercise of such commitments to providing the reserve for credit losses on commitments to extend loans. The effect of this change was to decrease income before income taxes and minority interests for the year ended March 31, 2001, by ¥717 million ($5,791 thousand). l. Other Reserves— Other reserves include the reserve for securities transaction liabilities. The reserve for securities transaction liabilities is required to be provided under the Securities and Exchange Law of Japan. m.Lease Transactions— All leases of the Bank and its domestic consolidated subsidiaries are accounted for as operating leases. Under Japanese accounting standards for leases, finance leases that deem to transfer ownership of the leased property to the lessee are to be capitalized, while other finance leases are permitted to be accounted for as operating lease transactions if certain “as if capital- ized” information is disclosed in the notes to the consolidated financial statements. n. Income Taxes— Deferred income taxes are recorded to reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying currently enacted tax laws to the temporary differences. o. Foreign Currency Items— The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for stockholders’ equity, which is translated at the historical rate. Such differences are shown as “Foreign currency translation adjustments” in a separate component of stockholders’ equity in accordance with the revised accounting standard for foreign currency transactions. Assets and liabilities denominated in foreign currencies held by the Bank at the year end are translated into Japanese yen at exchange rates prevailing at the end of fiscal year except that certain special accounts are translated at historical rates. Accounts of the Bank’s foreign branches are translated into Japanese yen at exchange rates prevailing at the end of the fiscal year. Foreign currency accounts held by consolidated foreign subsidiaries are translated into the currency of the subsidiaries at exchange rates prevailing at the end of the respective fiscal year.
41 p. Dividends— Dividends are generally paid semiannually. Interim and year-end dividends are authorized subsequent to the end of the period to which they are related, and are reflected in the consolidated statements of stockholders’ equity when duly declared and authorized. No dividend was proposed for stockholders of common stock for the year ended March 31, 2001.
q. Per Share Information— The computation of net income per share is based on the weighted average number of common shares outstanding during the year. In arriving at the net income per share, preferred stock dividends are deducted for each year presented. Diluted net income per share of common stock assumes full conversion of the preferred stock. No cash dividends of common stock were declared.
3. CASH AND CASH EQUIVALENTS Cash and cash equivalents at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Cash on hand ...... ¥23,370 $188,624 Due from The Bank of Japan ...... 8,404 67,831 Total ...... ¥31,774 $256,455
4. TRADING ACCOUNT ASSETS AND LIABILITIES Trading account assets and liabilities at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Trading assets: Trading securities ...... ¥179,524 $1,448,944 Derivatives of trading securities ...... 168 1,358 Derivatives of securities held to hedge trading transactions ...... 34 279 Derivatives of trading transactions...... 170,603 1,376,942 Other ...... 215,463 1,739,015 Total ...... ¥565,793 $4,566,538 Trading liabilities: Trading securities sold in short ...... ¥ 8,286 $ 66,878 Derivatives of trading securities ...... 13 113 Derivatives of trading transactions...... 174,861 1,411,313 Total ...... ¥183,161 $1,478,304
5. SECURITIES Securities at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Japanese national government bonds ...... ¥456,962 $3,688,154 Japanese local government bonds ...... 30,448 245,752 Japanese corporate bonds ...... 82,401 665,066 Japanese stocks ...... 6,602 53,290 Other ...... 145,062 1,170,801 Total ...... ¥721,477 $5,823,063
42 The carrying amounts and aggregate market values of securities at March 31, 2001, were as follows:
Millions of Yen Unrealized Unrealized Market Cost Gains Losses Value Securities classified as: Available-for-sale: Japanese national government bonds ...... ¥456,951 ¥1,642 ¥1 ¥458,592 Japanese local government bonds ...... 30,448 1,139 31,587 Japanese corporate bonds ...... 70,696 1,356 72,052 Japanese stocks ...... 2,559 363 2,923 Other ...... 94,883 718 2 95,599 Held-to-maturity—Japanese national government bonds ...... 10 10 Total ...... ¥655,550 ¥5,220 ¥5 ¥660,766
Thousands of U.S. Dollars Unrealized Unrealized Market Cost Gains Losses Value Securities classified as: Available-for-sale: Japanese national government bonds ...... $3,688,066 $13,255 $11 $3,701,310 Japanese local government bonds ...... 245,752 9,199 8 254,943 Japanese corporate bonds ...... 570,591 10,944 581,535 Japanese stocks ...... 20,661 2,933 23,594 Other ...... 765,810 5,801 22 771,589 Held-to-maturity—Japanese national government bonds ...... 88 1 89 Total ...... $5,290,968 $42,133 $41 $5,333,060
In cases where available-for-sale securities have been evaluated at market value, the net unrealized gains (losses) after the tax effect were as follows:
Thousands of Millions of Yen U.S. Dollars Difference (market value minus book value) ...... ¥ 5,215 $ 42,092 Deferred tax liabilities ...... (2,187) (17,657) Net unrealized gains ...... 3,027 24,435
Available-for-sale securities and held-to-maturity securities whose market value is not readily determinable as of March 31, 2001, were as follows:
Carrying Amount Thousands of Millions of Yen U.S. Dollars Available-for-sale: Japanese corporate bonds...... ¥11,705 $ 94,475 Japanese stocks ...... 4,042 32,630 Other ...... 50,178 404,990 Total ...... ¥65,926 $532,095
Proceeds from sales of available-for-sale securities for the year ended March 31, 2001, were ¥17,928,599 million ($144,702,177 thousand). Gross realized gains and losses on these sales were ¥151,699 million ($1,224,369 thousand) and ¥21,408 million ($172,786 thousand), respectively.
43 The carrying values of debt securities by contractual maturities for securities classified as available-for-sale and held-to-maturity at March 31, 2001, were as follows:
Thousands of Millions of Yen U.S. Dollars Available Held to Available Held to for Sale Maturity for Sale Maturity Due in one year or less ...... ¥442,301 ¥10 $3,569,823 $88 Due after one year through five years ...... 148,843 1,201,316 Due after five years through ten years ...... 57,087 460,752 Due after ten years ...... 62,312 502,924 Total ...... ¥710,543 ¥10 $5,734,815 $88
The carrying values and valuation gain recognized in the consolidated statement of income of the trading securities which classified as trading assets at March 31, 2001, were as follows:
Thousands of Millions of Yen U.S. Dollars Trading securities: Carrying value...... ¥394,988 $3,187,959 Valuation gain (loss) included in the income (loss) before income taxes ...... 420 3,390
The above trading securities include negotiable certificates of deposits and commercial paper which were classified as trading assets.
6. LOANS AND BILLS DISCOUNTED Loans and bills discounted at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Bills discounted...... ¥ 3,713 $ 29,971 Loans on notes ...... 938,689 7,576,189 Loans on deeds ...... 2,046,987 16,521,286 Overdrafts ...... 100,099 807,906 Total ...... ¥3,089,490 $24,935,352
“Loans to bankrupt borrowers” are loans to borrowers who are legally bankrupt and amounted to ¥27,931 million ($225,438 thousand) as of March 31, 2001, “Past due loans” refers to non-accrual loans except for loans to bankrupt borrowers and loans to borrowers for which concessions on payments of interests were made in order to assist the reorganization of borrowers and amounted to ¥321,781 million ($2,597,103 thousand) as of March 31, 2001. “Loans over due for three months or more” refers to those loans for which principal or interest remains unpaid at least for three months, excluding loans to bankrupt companies and past due loans and amounted to ¥1,714 million ($13,840 thousand) as of March 31, 2001. “Restructured loans” refers to loans, excluding loans to bankrupt borrowers, past due and/or overdue for three months or more, for which agreement was made to provide reduction or moratorium of interest payments, or concessions in the borrower’s favor on interest or principal payment or to waive claims for the purpose of assisting the reconstruction of insolvent borrowers and amounted to ¥319,531 million ($2,578,950 thousand) as of March 31, 2001. The amounts referred to above are the amounts before bad debts are written off and specific reserve for possible loan losses are provided for.
44 7. FOREIGN EXCHANGES Foreign exchanges at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Assets: Foreign bills bought ...... ¥ 150 $ 1,211 Foreign bills receivable ...... 6 Due from foreign banks ...... 1,538 12,417 Total ...... ¥1,689 $13,634 Liabilities—Due to foreign banks ...... ¥2 $24 Total ...... ¥2 $24
8. PREMISES AND EQUIPMENT Accumulated depreciation at March 31, 2001, amounted to ¥20,027 million ($161,643 thousand).
9. CUSTOMERS’ LIABILITIES FOR ACCEPTANCES AND GUARANTEES All contingent liabilities arising from acceptances and guarantees are reflected in acceptances and guarantees. As a contra account, customers’ liabilities for acceptances and guarantees are shown as assets representing the Bank’s right of indemnity from customers.
10. RESERVE FOR POSSIBLE LOAN LOSSES Reserve for possible loan losses at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars General reserve ...... ¥190,559 $1,538,008 Specific reserve ...... 166,279 1,342,045 Total ...... ¥356,838 $2,880,053
11. COLLATERAL The carrying amounts of assets pledged as collateral and the collateralized debt at March 31, 2001, were as follows:
Thousands of Millions of Yen U.S. Dollars Securities ...... ¥ 51,500 $ 415,658 Loans ...... 50,516 407,720 Securities in custody and other ...... 22,800 184,019 Total ...... ¥124,816 $1,007,397 Call money ...... ¥110,000 $ 887,813 Total ...... ¥110,000 $ 887,813
In addition, the following assets were pledged or deposited as margin money with respect to foreign exchange settlements and derivatives at March 31, 2001:
Thousands of Millions of Yen U.S. Dollars Securities ...... ¥286,997 $2,316,367 Loans ...... 33,096 267,119 Securities in custody and other ...... 227,199 1,833,733 Total ...... ¥547,293 $4,417,219
45 12. DEBENTURES Debentures at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Interest Rates One-year discount debentures ...... ¥ 263,760 $ 2,128,818 0.27%–0.44% One-year coupon debentures ...... 1,168,400 9,430,186 0.30%–0.80% Two-year coupon debentures...... 354,700 2,862,793 0.90%–2.10% Three-year coupon debentures ...... 23,250 187,651 1.00%–1.25% Five-year coupon debentures ...... 662,413 5,346,352 0.50%–3.05% Subordinated step-up perpetual notes ...... 6,885 55,569 LIBOR + 1.15%– LIBOR + 2.65% Total ...... ¥2,479,408 $20,011,369
13. DEPOSITS Deposits at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Current deposits ...... ¥ 29,742 $ 240,056 Ordinary deposits ...... 91,622 739,484 Deposits at notice ...... 41,580 335,598 Time deposits ...... 1,230,314 9,929,899 Negotiable certificates of deposit ...... 372,820 3,009,040 Other ...... 5,293 42,720 Total ...... ¥1,771,373 $14,296,797
14. BORROWED MONEY The weighted averaged annual interest rate applicable to the borrowed money was 2.88% at March 31, 2001. Borrowed money includes subordinated borrowings, which amounted to ¥55,445 million ($447,498 thousand) at March 31, 2001. Annual maturities of borrowed money as of March 31, 2001, for the next five years and thereafter were as follows:
Thousands of Year Ending March 31 Millions of Yen U.S. Dollars 2002 ...... ¥ 2,253 $ 18,185 2003 ...... 3,000 24,213 2004 ...... 13,000 104,923 2005 ...... 14,000 112,994 2006 ...... 23,195 187,207 2007 and thereafter ...... 100 808 Total ...... ¥55,548 $448,330
46 15. OTHER ASSETS AND LIABILITIES Other assets and liabilities at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Other assets: Accrued income ...... ¥ 11,815 $ 95,361 Accounts receivables ...... 5,581 45,048 Investments in partnership ...... 17,673 142,641 Derivative financial instruments ...... 18,131 146,339 Financial stabilization fund ...... 32,628 263,341 Other ...... 15,940 128,648 Total ...... ¥101,768 $ 821,378 Other liabilities: Accounts payables: For trading account transactions...... ¥283,419 $2,287,488 Other ...... 138,065 1,114,331 Accrued expenses ...... 18,992 153,290 Collateral under securities lending transactions ...... 53,555 432,250 Other ...... 107,447 867,192 Total ...... ¥601,478 $4,854,551
16. RETIREMENT BENEFITS AND PENSION PLANS
The Bank has employees’ retirement benefits plans. Such retirement benefits are made in the form of a lump-sum severance payment from the Bank and annuity payments from trustees. Effective April 1, 2000, the Group adopted a new accounting standard for employees’ retirement benefits. The liability (asset) for employees’ retirement benefits plans at March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Projected benefit obligation ...... ¥ 34,529 $ 278,691 Fair value of plan assets ...... (17,686) (142,746) Unrecognized actuarial loss (gain) ...... (962) (7,768) Net liability (asset)...... ¥ 15,881 $ 128,177
The components of net periodic benefit costs of the employees’ retirement benefits plans for the year ended March 31, 2001, are as follows:
Thousands of Millions of Yen U.S. Dollars Service cost ...... ¥1,586 $12,802 Interest cost ...... 1,094 8,830 Expected return on plan assets ...... (578) (4,665) Amortization of transitional obligation...... 6,356 51,304 Others ...... 612 4,944 Net periodic benefit costs ...... ¥9,071 $73,215
47 Assumptions used for the year ended March 31, 2001, are set forth as follows:
Discount rate 3.3% Expected rate of return on plan assets: Approved retirement annuities 2.3% Fund of welfare pension 3.5% Amortization period of prior service cost Average remaining service period Recognition period of actuarial gain/loss 5 years or average remaining service period if less than 5 years Amortization period of transitional obligation 1 year
17. STOCKHOLDERS’ EQUITY (1) Capital Stock and Capital Surplus The authorized numbers of shares at March 31, 2001, were 5,189 million shares of common stock with a par value of ¥50 per share and 943 million shares of non-voting, non-cumulative preferred stock without par value. The Code requires at least 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital are credited to paid-in capital. The Code permits to transfer portions of additional paid-in capital and legal reserve to stated capital by resolution of the Board of Directors. The Code also permits to transfer portions of unappropriated retained earnings, available for dividends, to stated capital by resolution of the stockholders. On June 29, 2000, the Bank used capital surplus to reduce the deficit in accordance with the resolution of the stockholders’ meeting. On June 30, 2000, SOFTBANK CORP., ORIX Corporation, The Tokio Marine and Fire Insurance Co. Ltd., and other financial institutions (the “Consortium”), Deposit Insurance Corporation of Japan and the Bank signed the Share Purchase Agreement for the transfer of the Bank’s stock (the “Share Purchase Agreement”). On September 1, 2000, the Consortium purchased the Bank’s ordinary stock in accordance with the Share Purchase Agreement from Deposit Insurance Corporation of Japan, as a result, which terminated the Bank’s special public management. On September 2, 2000, the Bank issued 333,334 thousand stocks of common stock with a par value of ¥50 per share at the issue price of ¥300 per share to the Consortium. On October 3, 2000, the Bank made a capital reduction by the retirement of 560,254 thousand preferred shares and a decrease in the stated value of common stock. This capital reduction was made without repayment to stockholders; therefore, the corresponding amount was transferred to capital surplus from capital stock in conformity with the Share Purchase Agreement and decisions of extraordinary stockholders meeting held on August 31, 2000 and on September 26, 2000. On October 4, 2000, the Bank issued 866,667 thousand shares of preferred stock at the issue price of ¥300 per share to The Resolution and Collection Corporation (“the RCC”) in conformity with Financial Early Stabilization Law. Preferred stock consisted of the following: Thousands of Millions of Yen U.S. Dollars Preferred stock without par value— authorized, 76,144 thousand shares; issued and outstanding, 48,144 thousand shares of fourth preferred stock ...... ¥ 12,036 $ 97,143 Preferred stock without par value— authorized, 867,000 thousand shares; issued and outstanding, 866,667 thousand shares of fifth preferred stock ...... 260,000 2,098,467 Total ...... ¥272,036 $2,195,610
(2) Earned Surplus Under the Bank Law of Japan, an amount equivalent to at least 20% of cash dividends and bonuses to directors and statutory auditors must be appropriated as a legal reserve, until the reserve equals 100% of the Bank’s stated capital. A legal reserve amount is not available for dividends but may be used to reduce a deficit by resolution of the stockholders or may be capitalized by resolution of the Board of Directors. As of March 31, 2001, the Bank has not set aside the legal reserve yet.
48 18. OTHER OPERATING INCOME Other operating income for the year ended March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Other operating income: Gain on sales of bonds...... ¥1,501 $12,115 Gain on redemption of bonds ...... 1,235 9,968 Other ...... 1,263 10,200 Total ...... ¥3,999 $32,283
19. OTHER INCOME Other income for the year ended March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Gain on sales of stocks and other securities ...... ¥150,160 $1,211,948 Other ...... 15,469 124,853 Total ...... ¥165,629 $1,336,801
20. OTHER OPERATING EXPENSES Other operating expenses for the year ended March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Other operating expenses: Amortization of debenture issuance costs ...... ¥ 341 $ 2,758 Loss on foreign exchange transactions ...... 233 1,883 Loss on sales of bonds ...... 2,147 17,329 Loss on redemption of bonds ...... 1,812 14,630 Loss on derivatives ...... 413 3,335 Other ...... 188 1,524 Total ...... ¥5,136 $41,459
21. OTHER EXPENSES Other expenses for the year ended March 31, 2001, consisted of the following:
Thousands of Millions of Yen U.S. Dollars Provision for possible loan losses...... ¥ 2,460 $ 19,861 Provision for reserve for credit losses on off-balance-sheet instruments ...... 717 5,791 Write-off of claims ...... 35,641 287,663 Loss on sales of stocks and other securities ...... 20,660 166,750 Loss on disposal of premises and equipment ...... 570 4,604 Loss on transfer to the RCC of inappropriate assets ...... 1,021 8,247 Loss on special public management account ...... 7,537 60,839 Amortization of transitional obligation of employees’ retirement benefits plans ...... 6,356 51,304 Other ...... 14,930 120,503 Total ...... ¥89,897 $725,562
49 22. INCOME TAXES The Bank and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rates of approximately 41.9% for the year ended March 31, 2001. The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2001, were as follows:
Thousands of Millions of Yen U.S. Dollars Deferred tax assets: Tax loss carryforwards ...... ¥ 181,284 $ 1,463,150 Loss on devaluation of securities ...... 1,762 14,224 Reserve for possible loan losses ...... 189,789 1,531,799 Other ...... 10,982 88,640 Less valuation allowance ...... (374,208) (3,020,245) Net deferred tax assets ...... ¥ 9,610 $ 77,568
At March 31, 2001, the Bank and a consolidated subsidiary have tax loss carryforwards which are available to be offset against taxable income in future years. These tax loss carryforwards, if not utilized, will expire as follows:
Thousands of Year Ending March 31 Millions of Yen U.S. Dollars 2003 ...... ¥ 185 $ 1,496 2005 ...... 181,098 1,461,654 Total ...... ¥181,284 $1,463,150
A reconciliation between the normal effective statutory tax rate for the year ended March 31, 2001, and the actual effective tax rates reflected in the accompanying consolidated statement of income was as follows:
Year Ended March 31, 2001 Normal effective statutory tax rate ...... 41.9 % Expenses not deductible for income tax purposes ...... (1.2) Valuation allowance ...... (50.3) Other—net ...... 1.7 Actual effective tax rate ...... (7.9)%
50 23. LEASE TRANSACTIONS The Bank and consolidated subsidiaries lease certain equipment and other assets. Lease payments under finance leases for the year ended March 31, 2001, was ¥1,535 million ($12,391 thousand). Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligation under finance lease, depreciation expense and interest expense of finance leases that do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the year ended March 31, 2001, was as follows:
Thousands of For the Year Ended March 31, 2001 Millions of Yen U.S. Dollars Equipment Other Total Equipment Other Total Acquisition cost ...... ¥8,322 ¥43 ¥8,365 $67,168 $350 $67,518 Accumulated depreciation ...... 5,125 34 5,159 41,371 276 41,647 Net leased property ...... ¥3,196 ¥ 9 ¥3,205 $25,797 $ 74 $25,871
Obligations under finance leases:
Thousands of Millions of Yen U.S. Dollars Due within one year ...... ¥1,335 $10,781 Due after one year...... 1,869 15,090 Total ...... ¥3,205 $25,871
Depreciation expense under finance leases:
Thousands of Millions of Yen U.S. Dollars Depreciation expense ...... ¥1,535 $12,391
Depreciation expense is calculated using the straight-line method with zero residual value. The amounts of acquisition cost, obligations and depreciation expense includes interest expense portion, because of its immateriality. The minimum rental commitments under noncancelable operating leases at March 31, 2001, were as follows:
Thousands of Millions of Yen U.S. Dollars Due within one year ...... ¥121 $ 978 Due after one year...... 41 335 Total ...... ¥162 $1,313
51 24. DERIVATIVES a. Derivatives Transactions Derivative financial products dealt Derivatives involve interest rate-related transactions (such as interest rate futures, interest rate options, and interest rate swaps), currency related transactions (such as currency swaps, foreign exchange forward contracts and currency options), and stock and bond-related futures and options.
Policy and purpose to use derivatives Derivative activities are significant to business operations. The Bank has been using derivatives actively, while controlling the various risks of derivatives, such as market and credit risks. The purpose of derivatives is to offer customers products to hedge market risks such as interest rate risk and foreign exchange risk and to take the Bank’s own trading position by exploiting short-term fluctuations and differences among markets in interest rates, foreign exchange rates, securities prices and other factors. In order to stabilize and maximize earnings, the Bank also uses derivatives in ALM operations, maintaining interest rate risk and other risks of on-balance-sheet assets and liabilities at an appropriate level.
Risk associated with derivatives and risk management system for derivatives The two most significant derivatives-related risks are market and credit risks. Market risk can cause loss due to the volatility of markets such as interest rates and foreign exchange. Credit risk occurs when the counter-parties to a transaction fail to fulfill their obligations under a contract. It is the Bank’s policy to conduct comprehensive control of market risk and credit risk for on-balance-sheet and off-balance-sheet transactions, thereby maintaining a proper balance between risk and profitability. The risk management procedures are fully documented internally. Each business department conducts business operations and risk management in accordance with such procedures. Independently of business departments, the Risk Management Division monitors market risk and credit risk resulting from market transactions including derivatives, and submits regular reports to management. For market risk, the maximum estimated loss is calculated on a daily basis using the value-at-risk method and the result is monitored based on specified limits. If an actual loss exceeds a maximum estimate, causal analysis is conducted. During the 246 business days from April 2000 to March 2001, the actual value-at-risk figure in trading operations at the head office were estimated as follows:
Thousands of Millions of Yen U.S. Dollars Maximum ...... ¥308 $2,486 Minimum ...... 52 420 Average...... 132 1,065
As to credit risk, the exposure is calculated by the current exposure method, the sum of the replacement cost and the potential cost in connection with expected changes in market conditions, and is controlled together with credit risk related to on-balance-sheet transactions such as lending. These risks are managed in line with internal regulations. Credit risk equivalent amounts for capital adequacy ratio calculation purposes (based on a standard for domestic operations) as at March 31, 2001, were estimated as follows:
Thousands of Millions of Yen U.S. Dollars Currency related transactions ...... ¥6 $ 53 Interest rate related transactions ...... 222 1,799 Netting effect ...... (169) (1,365) Total ...... ¥60 $ 487
Supplementation to market-value calculation OTC derivatives in the trading account are valued in accordance with internal rules established in line with the Long-term Credit Bank Law Enforcement Regulations.
52 b. Market Value of Derivatives Transactions The Bank and consolidated subsidiaries had the following derivatives contracts, which were quoted on listed exchanges, outstanding at March 31, 2001:
Millions of Yen Thousands of U.S. Dollars Contract or Contract or Notional Notional Amount Fair Value Amount Fair Value Interest rate contracts: Futures written ...... ¥364,473 ¥365,428 $2,941,674 $2,949,385 Futures purchased ...... 288,327 289,233 2,327,094 2,334,414 Options written...... 163,900 8 1,322,841 67 Options purchased ...... 247,800 15 2,000,000 125 Bonds contracts: Futures written ...... 21,109 21,013 170,377 169,598 Futures purchased ...... 27,560 27,611 222,441 222,849 Futures options purchased ...... 28,667 68 231,376 552 Equity contracts: Futures written ...... 1,430 1,479 11,545 11,942 Futures purchased ...... 1,420 1,479 11,469 11,942
The Bank and consolidated subsidiaries had the following derivatives contracts, which were not quoted on listed exchanges, outstanding at March 31, 2001:
Millions of Yen Thousands of U.S. Dollars Contract or Contract or Notional Notional Amount Fair Value Amount Fair Value Interest rate contracts: Interest rate swaps: Receive fixed and pay floating ...... ¥8,067,419 ¥ 236,014 $65,112,343 $ 1,904,876 Receive floating and pay fixed ...... 8,418,733 (240,216) 67,947,806 (1,938,791) Other written ...... 268,459 2,166,743 4 Other purchased ...... 237,000 1,440 1,912,833 11,626 Foreign exchange—Currency swaps ...... 238,355 (1,541) 1,923,773 (12,440)
The contracts or notional amounts of derivatives which are shown in the above table do not represent the amounts exchanged by the parties and do not measure the exposure of the Bank and consolidated subsidiaries to credit or market risk. Derivative transactions for trading purposes are stated at market value in the accompanying consolidated financial statements.
25. SUBSEQUENT EVENT—APPROPRIATION OF EARNED SURPLUS The following plan of the Bank for the appropriation of earned surplus was approved at the ordinary stockholders meeting held on June 22, 2001:
Thousands of Millions of Yen U.S. Dollars Appropriations—Legal reserve ...... ¥ 370 $ 2,991 Year-end dividends: The fourth preferred, ¥5 ($0.04) per share ...... 240 1,943 The fifth preferred, ¥1.86 ($0.02) per share ...... 1,612 13,010 Total ...... ¥2,223 $17,944
53 CONSOLIDATED FINANCIAL DATA Consolidated Financial Highlights [Five-Year Summary]
(In millions of yen) 2001 2000 1999 1998 1997 Consolidated operating income 275,730 223,909 455,333 800,642 1,380,710 Consolidated operating profit 99,116 (112,592) (3,523,986) 19,559 (366,879) Consolidated net income 98,331 112 (469,252) 16,982 (376,724) Consolidated stockholders’ equity 460,876 1,229 1,503 503,973 139,849 Consolidated total assets 6,163,766 8,346,327 13,776,868 13,597,540 15,228,619 Consolidated capital adequacy ratio 2.99 (BIS international standard) (%) Consolidated capital adequacy ratio (Domestic standard) (%) 15.13 — — Notes: 1. With regard to the deferred tax and the scope of subsidiaries and affiliates in the financial statements ended March 31, 1999, Paragraph 2 of supplementary rules of the “Ministerial Ordinance to Partially Revise the Regulation concerning the Terminology, Forms and Preparation Method of Consolidated Financial Statements” (MOF Ordinance No. 136, 1998) and Paragraph 3 of supplementary rules of the “Ministerial Ordinance to Partially Revise the Regulation concerning the Terminology, Forms and Preparation Method of Financial Statements” (MOF Ordinance No. 135, 1998) have been applied. 2. Consumption taxes and local consumption taxes of the parent company and consolidated domestic subsidiaries have been accounted for according to the “exclusion method.” 3. Consolidated operating income represents consolidated total income less certain special income. 4. Consolidated operating profit (loss) represents consolidated operating income less consolidated operating expenses. 5. While the Bank employs the domestic standard, consolidated capital adequacy ratio has been calculated since fiscal year ended March 31, 1999 pursuant to the revision made to Article 14-2 of the Banking Law applied in the first half of Article 17 of the Long-term Credit Bank Law, in accordance with the enforcement of the law concerning improvements on legislation relating to the reform of the financial system. BIS’s international standard had been applied until fiscal year ended March 31, 1997.
54 Consolidated Capital Adequacy Ratio (Domestic Standard)
(In millions of yen) Item 2001 2000 Tier I Capital 419,781 291,290 Non-cumulative perpetual preferred stock 272,036 55,500 incl. Newly issued stock — — Capital surplus 33,333 — Consolidation surplus 4,499 (352,284) Minority interest in consolidated subsidiaries 338 748 Preferred stock issued overseas — — Net unrealized gains on securities available for sale — — Foreign currency translation adjustments 1,303 — Goodwill —— Amount equal to consolidation adjustments — — Total (A) 459,255 (60,244) Tier II Forty-five percent of the difference between fair value and book value in respect of land — — General reserve for possible loan losses 21,487 25,959 Subordinated debt 39,641 190,312 Total 61,128 216,271 Tier II capital qualifying as capital (B) 61,128 — Items deducted Intentional holding for the purpose of supplying capital (C) 130 — to other financial institutions Capital (A) + (B) – (C) (D) 520,253 (60,244) Risk-weighted assets Balance-sheet exposure 3,401,341 4,047,393 Off-balance-sheet exposure 36,620 106,083 Total (E) 3,437,962 4,153,476
(D) Capital adequacy ratio (domestic standard) = x 100 15.13% —% (E)
Note: The Bank employs the domestic standard. However, pursuant to a revision of Article 14-2 of the Banking Law used in the first half of Article 17 of the Long-Term Credit Bank Law, which results from changes to related laws to restructure Japan’s financial system, the Bank has calculated a consolidated capital ratio.
Consolidated Risk Kanri Saiken (In millions of yen) 2001 2000 Loans to bankrupt companies 27,931 353,892 Past due loans 321,781 638,298 Loans overdue for 3 months or more 1,714 7,271 Restructured loans 319,531 92,704 Total 670,959 1,092,167 Refer to pages 46 and 47 for definitions of “Loans to bankrupt companies” etc.
55 NON–CONSOLIDATED FINANCIAL STATEMENTS Non-Consolidated Balance Sheets (Unaudited) Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) March 31, 2001 and 2000
Thousands of Millions of Yen U.S. Dollars ASSETS 2001 2000 2001 Cash and cash equivalents ...... ¥ 31,772 ¥ 453,034 $ 256,434 Due from banks...... 635,062 75,783 5,125,602 Call loans and bills bought...... 386,263 72,411 3,117,545 Commercial paper and other debt purchased ...... 8,350 1,131 67,395 Trading account assets ...... 565,793 218,629 4,566,538 Money held in trust ...... 4 1,725 39 Securities ...... 727,758 1,135,653 5,873,755 Loans and bills discounted ...... 3,092,049 4,104,221 24,956,011 Foreign exchanges ...... 1,689 8,283 13,634 Securities in custody and other ...... 448,320 3,618,402 Cash collateral on borrowing securities ...... 457,678 3,693,931 Other assets ...... 100,076 3,399,687 807,724 Premises and equipment...... 34,217 44,550 276,171 Deferred charges ...... 716 688 5,782 Customers’ liabilities for acceptances and guarantees ...... 32,774 109,106 264,527 Deferred tax assets ...... 9,282 74,915 Reserve for possible loan losses...... (356,888) (1,124,539) (2,880,454)
TOTAL ...... ¥6,174,922 ¥ 8,500,368 $49,837,951
56 Thousands of Millions of Yen U.S. Dollars LIABILITIES AND STOCKHOLDERS’ EQUITY 2001 2000 2001 LIABILITIES: Debentures ...... ¥2,472,528 ¥3,684,002 $19,955,842 Deposits ...... 1,778,939 2,635,441 14,357,865 Call money and bills sold ...... 143,000 1,207,300 1,154,157 Commercial paper ...... 10,000 120,000 80,710 Trading account liabilities ...... 183,161 136,585 1,478,304 Borrowed money ...... 62,882 245,972 507,523 Foreign exchanges ...... 137 155 1,109 Borrowed securities ...... 416,664 3,362,906 Other liabilities ...... 598,713 237,609 4,832,232 Liability for retirement benefits ...... 15,673 126,502 Reserve for retirement allowances ...... 8,771 Reserve for losses on loans sold ...... 100,628 Reserve for losses on disposition of specific assets...... 14,794 Reserve for credit losses on off-balance-sheet instruments ...... 755 6,094 Other reserves ...... 1 4 Acceptances and guarantees ...... 32,774 109,106 264,527
Total liabilities ...... 5,715,231 8,500,368 46,127,775
Stockholders’ equity: Capital stock: ...... Common stock ...... 147,745 235,790 1,192,454 Preferred stock ...... 272,036 117,323 2,195,610 Capital surplus...... 33,333 114,047 269,035 Earned surplus (Deficit) ...... 6,576 (467,161) 53,077 Total stockholders’ equity ...... 459,690 3,710,176 TOTAL ...... ¥6,174,922 ¥8,500,368 $49,837,951
57 Non-Consolidated Statements of Income (Unaudited) Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) Years Ended March 31, 2001 and 2000
Thousands of Millions of Yen U.S. Dollars 2001 2000 2001 Income: Interest on: Loans and discounts ...... ¥ 75,048 ¥ 95,280 $ 605,716 Securities...... 18,406 20,785 148,556 Due from banks ...... 3,126 7,017 25,237 Other ...... 13,327 54,758 107,564 Fees and commissions ...... 3,368 3,503 27,191 Trading account profits ...... 3,140 628 25,349 Other operating income ...... 3,385 7,833 27,328 Other income...... 159,352 185,981 1,286,135 Total income ...... 279,156 375,789 2,253,076
Expenxes: Interest on: Debentures ...... 36,525 81,073 294,800 Deposits ...... 8,710 17,136 70,300 Borrowings and rediscounts ...... 5,802 12,599 46,830 Commercial Paper ...... 94 324 762 Other ...... 6,553 54,781 52,891 Fees and commissions ...... 358 622 2,890 Trading account losses ...... 724 Other operating expenses ...... 4,978 3,823 40,180 General and administrative expenses...... 40,025 42,651 323,047 Other expenses ...... 84,044 165,034 678,327 Total expenses ...... 187,092 378,771 1,510,027
Income (loss) before income taxes ...... 92,063 (2,981) 743,049
Income taxes ...... Current ...... 1,655 227 13,359 Refunded ...... 3,208 Deferred ...... (9,282) (74,915) Total income taxes ...... (7,626) (2,981) (61,556) Net income...... ¥ 99,690 Nil $ 804,605
YenU.S. Dollars PER SHARE OF COMMON STOCK 2001 2000 2001 Net income...... ¥36.31 $0.29 Diluted net income ...... 29.81 0.24 Cash dividends of the fourth preferred stock ...... 5.00 0.04 Cash dividends of the fifth preferred stock ...... 1.86 0.02
58 Non-Consolidated Statements of Earned Surplus (Deficit) (Unaudited) Aozora Bank, Ltd. (Formerly The Nippon Credit Bank, Ltd.) Years Ended March 31, 2001 and 2000
Thousands of Millions of Yen U.S. Dollars 2001 2000 2001 Balance at beginning of year ...... ¥(467,161) ¥ (467,161) $(3,770,475) Appropriation (Disposition) Transfer of capital surplus ...... 114,047 920,480 Capital reduction without repayment ...... 260,000 2,098,467 Net income...... 99,690 804,605 Balance at end of year ...... 6,576 (467,161) 53,077
59 NON-CONSOLIDATED BUSINESS RESULTS Non-Consolidated Financial Highlights [Five-Year Summary]
(In millions of yen) 2001 2000 1999 1998 1997 Operating income 270,720 219,956 409,474 644,508 1,206,668 Operating profit (loss) 98,971 (113,703) (3,560,709) 16,376 (350,155) Net income (loss) 99,690 — (467,161) 17,083 (285,248) Capital stock 419,781 353,114 353,114 353,114 177,792 Number of outstanding Common stock 2,834,870 Common stock 2,501,536 Common stock 2,501,536 Common stock 2,501,536 Common stock 1,735,497 shares (In thousands) The 2nd preferred stock — The 2nd preferred stock 102,000 The 2nd preferred stock 102,000 The 2nd preferred stock 102,000 The 2nd preferred stock 102,000 The 3rd preferred stock — The 3rd preferred stock 386,398 The 3rd preferred stock 386,398 The 3rd preferred stock 386,398 The 4th preferred stock 48,144 The 4th preferred stock 120,000 The 4th preferred stock 120,000 The 4th preferred stock 120,000 The 5th preferred stock 866,667 Stockholders’ equity 459,690 — — 467,161 99,434 Total assets 6,174,922 8,500,368 14,055,429 12,659,064 14,646,340 Debentures 2,472,528 3,684,002 4,206,525 5,346,174 8,335,741 Deposits 1,406,119 1,785,011 1,884,073 1,805,807 2,103,303 Loans and bills discounted 3,092,049 4,104,221 7,209,084 7,781,830 9,080,477 Securities 727,758 1,135,653 1,198,950 2,172,793 3,221,636 Equity per share (in yen) 61.95 — — 92.94 54.11 Dividend per share (in yen) Common stock — Common stock — Common stock — Common stock — Common stock 2.5 The 2nd preferred stock — The 2nd preferred stock — The 2nd preferred stock — The 2nd preferred stock — The 2nd preferred stock — The 3rd preferred stock — The 3rd preferred stock — The 3rd preferred stock — The 3rd preferred stock — incl. The 4th preferred stock 5.00 The 4th preferred stock — The 4th preferred stock — The 4th preferred stock — The 5th preferred stock 1.86 Interim dividend per share (Common stock —) (Common stock —) (Common stock —) (Common stock —) (Common stock 2.5) ( (in yen)) (The 2nd preferred stock —) (The 2nd preferred stock —) (The 2nd preferred stock —) (The 2nd preferred stock —) (The 2nd preferred stock —) (The 3rd preferred stock —) (The 3rd preferred stock —) (The 3rd preferred stock —) (The 3rd preferred stock —) (The 4th preferred stock —) (The 4th preferred stock —) (The 4th preferred stock —) (The 4th preferred stock —) (The 5th preferred stock —) Net income per share (in yen) 36.31 — (186.74) 7.39 (164.36) Dividend payout ratio (%) — — — — — Number of employees 1,438 1,582 2,050 2,290 2,526 Capital adequacy ratio (Domestic standard) (%) 15.10 — — 8.25 Notes: 1. With regard to the scope of the subsidiaries and affiliates in the financial statements for the fiscal year ended March 31, 1999, Paragraph 2 of supplementary rules of the “Ministerial Ordinance to Partially Revise the Regulation concerning the Terminology, Forms and Preparation Method of Financial Statements” (MOF Ordinance No. 135, 1998) has been applied. 2. Consumption taxes and local consumption taxes have been accounted for according to the “exclusion method.” 3. Operating income represents total income less certain special income. 4. Operating profit (loss) represents operating income less operating expenses. 5. Equity per share was previously calculated by dividing the term-end equity by the term-end outstanding shares. However, since the fiscal year ended March 31, 1998, it has been calculated dividing the term-end net asset less term-end number of preferred stocks times the issue price, by the term-end number of common stock issued. Since, however, term-end equity was zero in the years ended March 31, 1999 and 2000, it was calculated by dividing the term-end equity by the term-end outstanding shares. 6. Net income (or net loss) per share has been calculated by dividing the amount of net income (or net loss) less total preferred stock dividends for the term by the average number of common stock outstanding in the term. 7. Non-consolidated capital adequacy ratio (domestic standard) after fiscal year ended March 1998 has been calculated according to the MOF notice enforced from March 31, 1998 pursuant to the introduction of prompt corrective action based on Article 26 of the Banking Law applied in the first half of Article 17 of the Long-term Credit Bank Law. 8. From the fiscal year ended March 31, 2000 onwards, the number of employees includes overseas local employees and executive officers, and does not include seconded employees and non-regular staff and temporary employees. Until the fiscal year ended March 1999, the number of employees did not include non-regular staff, temporary employees, overseas local employees and executive officers, but included seconded employees.
Business Results (Highlights of the Fiscal Year) For the fiscal year ended March 2001, in addition to a substantial improvement in interest income, fees and commissions and trading revenue expanded. Business profits before general loan-loss reserve amounted to ¥16.8 billion, surpassing the target set under the Business Improvement Plan by ¥3.2 billion. General loan-loss reserve was reduced by ¥54.5 billion due to the decrease in the number of applicable loans and a drop in the historical default rate in accordance with average remaining loan period. As a result, business profits (gyomu jun-eki) for the year amounted to ¥71.3 billion. Disposal of problem assets during the period under review totaled ¥95.8 billion, principally from write-offs and provisions to the specific reserve for possible loan losses due to a deterioration in business conditions of borrowers and declines in the value of collateral. Ordinary profits amounted to ¥99.0 billion due to the Bank’s sale of a majority of its equity portfolio to the Deposit Insurance Corporation (DIC) at the end of special of public management. Net income totaled ¥99.7 billion, exceeding the target under the Business Improvement Plan, ¥99.1 billion. Despite recording a special loss for the current redeemable portion of special financial assistance received by the Bank, the deferred income tax adjustment resulting from the application of tax effect accounting produced an overall increase in net income. Cash dividends of ¥5.00 and ¥1.86 were paid to holders of the Bank’s 4th and 5th issues of preferred shares, respectively.
60 Profit and Loss
● Income Statement data (Non-consolidated) (in hundred millions of yen) 2001 2000 – Gross business profits 56,782 19,498 37,284 Net interest income 52,223 11,988 40,235 Net fees and commissions 3,013 2,888 125 Net trading revenues 3,140 (95) 3,235 Net other operating income (1,595) 4,716 (6,311) General and administrative expenses (39,987) (43,166) 3,179 Personnel (16,007) (16,229) 222 Property and equipment (22,566) (24,650) 2,084 Taxes (1,413) (1,572) 159 Business profits before general loan-loss reserve 16,795 (23,667) 40,462 General loan-loss reserve 54,546 54,644 (98) Business profits 71,341 30,976 40,365 Other income 27,629 (144,680) 172,309 Expenses of problem loan disposals (95,820) (74,410) (21,410) Gains on stock transactions 128,382 (72,133) 200,515 Other (4,932) 1,863 (6,795) Ordinary profits 98,971 (113,703) 212,674 Special income (6,907) 110,722 (117,629) Expenses of inappropriate loan disposals 6,731 (41,211) 47,942 Transitional expenses of retirement benefits (6,338) — (6,338) Special financial assistance (7,537) 149,735 (157,272) Income before income taxes 92,063 (2,981) 95,044 Current income taxes (1,655) (227) (1,428) Refunded income taxes — 3,208 (3,208) Deferred income taxes 9,282 — 9,282 Net income 99,690 — 99,690
Business profit (gyomu jun-eki) Business profits consists of revenues from net interest income, net fees and commissions, net trading revenues, and net other operating income less provision for general reserve for possible loan losses and general and administrative expenses. Net interest income amounted to ¥52.2 billion, improving ¥40.2 billion from the previous fiscal year due to a range of factors, including completion of the disposal of “inappropriate” assets, relatively favorable progress in extending new loans, and the conversion to bank debentures carrying lower interest rates. Net fees and commissions totaled ¥3.0 billion, consisting mainly of investment banking related commissions. Net trading revenues climbed to ¥3.1 billion in a robust market. Overall, gross business profits were ¥56.8 billion. Operating expenses declined ¥3.2 billion to ¥40.0 billion as a result of bank-wide efforts to cut costs. Consequently, business profits before general loan-loss reserve increased ¥40.5 billion from the previous fiscal year to ¥16.8 billion, exceeding the target set in the Business Improvement Plan by ¥3.2 billion. General loan-loss reserve was reduced by ¥54.5 billion due to the decrease in the number of applicable loans and a drop in the historical default rate in accordance with average remaining loan period. Beginning with the fiscal year under review, reserve for the credit risk represented by the unused portion of commitment line agreements is included in General loan-loss reserve, as Reserve for offbalance credit risk, ¥755 million. Business profits after general loan-loss reserve amounted to ¥71.3 billion. Ordinary profits (keijo rieki) Ordinary profits included business profits, bad debt write-offs, and gains or losses on equities. Bad debt write-offs amounted to ¥95.8 billion. The amount arose principally from write-offs and provisions to the specific reserve for possible loan losses due to a deterioration in business conditions of borrower and declines in the value of collateral. Equity-related gains totaled ¥128.4 billion due to the Bank’s sale of a majority of its equity portfolio to the DIC at the end of special public management. Other expenses were ¥4.9 billion due to expenses related to the increase in capital during the period under review and to the changing of the Bank’s name. Ordinary profits amounted to ¥99.0 billion. Net Income The Bank recorded a special gain of ¥6.7 billion on reversal from the specific reserve for possible loan losses in accordance with the second transfer of “inappropriate” assets to the RCC. A special loss of ¥6.3 billion was posted regarding the amortization of the difference occurring when converting to the new accounting method for retirement benefits. A special loss of ¥7.5 billion was taken for the redeemable portion of special financial assistance received by the Bank. Income before income taxes amounted to ¥92.1 billion. Based on the implementation of tax effective accounting, the Bank recorded a deferred income taxes adjustment of ¥9.3 billion, resulting in net income of ¥99.7 billion.
61 Financial Position
● Balance sheet data (Non-consolidated) (in hundred millions of yen) 2001 2000 – (Assets) Loans and bills discounted 30,920 41,042 (10,122) Foreign exchanges 17 83 (66) Securities 7,278 11,357 (4,079) Money held in trust 0 17 (17) Trading assets 5,658 2,186 3,472 Debt purchased 84 11 73 Bills bought — 87 (87) Call loans 3,863 637 3,226 Cash and due from banks 6,668 5,288 1,380 Other assets 10,061 33,997 (23,936) Premises and equipment 342 446 (104) Deferred discounts on and issuance cost for debentures 7 7 0 Deferred tax assets 93 — 93 Customers’ liabilities for acceptances and guarantees 328 1,091 (763) Reserve for possible loan losses (3,569) (11,245) 7,676 Total assets 61,749 85,004 (23,255) (Liabilities) Debentures 24,725 36,840 (12,115) Deposits 14,061 17,850 (3,789) Certificates of deposit 3,728 8,504 (4,776) Borrowed money 629 2,460 (1,831) Trading liabilities 1,832 1,366 466 Bills sold — 1,253 (1,253) Commercial paper 100 1,200 (1,100) Call money 1,430 10,820 (9,390) Foreign exchange 1 2 (1) Other liabilities 10,154 2,376 7,778 Reserve for retirement benefits (allowances) 157 88 69 Reserve for offbalance credit risk 8 — 8 Reserve for losses on loans sold — 1,006 (1,006) Reserve for losses on disposition of specific assets — 148 (148) Special statutory reserves 0 0 (0) Acceptances and guarantees 328 1,091 (763) Total liabilities 57,152 85,004 (27,852) (Stockholders’ equity) Capital stock 4,198 3,531 667 Capital surplus 333 1,140 (807) Retained earnings 66 (4,672) 4,738 Unappropriated profit at end of year 66 (4,672) 4,738 Net income 997 — 997 Total stockholders’ equity 4,597 — 4,597 Total liabilities and stockholders’ equity 61,749 85,004 (23,255) Assets Loans decreased ¥1,012.2 billion to ¥3,092.0 billion, primarily because of the second transfer of “inappropriate” assets to the RCC in the amount of ¥626.3 billion and direct write-offs, which the Bank began in the period under review, totaling ¥126.3 billion. Securities declined ¥407.9 billion, to ¥728.8 billion. With the end of the period of special public management, the Bank sold a majority of its equity portfolio to the DIC. Trading assets increased ¥347.2 billion, to ¥565.8 billion due to short-term investment of available funds in securities-trading and commercial paper. In Other assets, there was an increase in securities held in custody and in collateral for bond repo transactions because of the greater trading of bonds with repurchase agreements. On the other hand, the special public management account booked in the previous fiscal year was completely eliminated, offset by the special financial assistance received by the Bank. In total, Other assets decreased ¥2,393.6 billion, to ¥1,006.1 billion. Reserve for possible loan losses decreased ¥767.6 billion to ¥356.9 billion, because of the transfer of additional “inappropriate” assets to the RCC. Deferred tax assets amounted to ¥9.3 billion due to the application of tax effect accounting. Total assets at fiscal year-end declined ¥2,325.5 billion, to ¥6,174.9 billion. Liabilities The Bank put effort in efficient funding after receiving special financial assistance. Consequently, debentures decreased ¥1,211.5 billion, to ¥2,472.5 billion and deposits and certificates of deposit declined ¥856.5 billion, to ¥1,778.9 billion. Other liabilities increased ¥777.8 billion, to ¥1,015.4 billion because of an increase in the balance of borrowed securities in conjunction with the increase in bond repo transactions arising from the temporary increase in available funds. Total liabilities at fiscal year-end contracted ¥2,785.2 billion, to ¥5,715.2 billion. Shareholders’ Equity Shareholders’ equity totaled ¥0 at the end of the previous fiscal year, but after the end of special public management, a third-party allotment of shares to 105 companies led by SOFTBANK CORP., ORIX Corporation, and The Tokio Marine and Fire Insurance Co., Ltd. raised ¥100.0 billion in capital. Combined with ¥260.0 billion funded through the issue of preferred shares in return for public funds and a net income of ¥99.7 billion, shareholders’ equity rebounded to ¥459.7 billion at the end of the fiscal year under review. Loss carried forward was reduced by ¥114.0 billion through loss compensation in June 2000, and by a further ¥260.0 billion by capital reduction in October of the same year. With net income for the fiscal year under review, retained earnings amounted to ¥6.6 billion. 62 Non-Consolidated Capital Adequacy Ratio (Domestic Standard)
(In millions of yen) Item 2001 2000 Tier I Capital 419,781 291,290 incl. Non-cumulative perpetual preferred stock 272,036 55,500 Newly issued stock — — Capital surplus 33,333 — Legal reserve 370 — Voluntary reserve — — Profit (Loss) carried forward to next term 3,791 (352,647) Others 1,303 — Net unrealized gains on securities available for sale — — Goodwill —— Total (A) 458,580 (61,357) Tier II Forty-five percent of the difference between fair value —— and book value in respect of land General reserve for possible loan losses 21,508 25,986 Subordinated debt 39,641 190,312 Total 61,149 216,298 Tier II capital qualifying as capital (B) 61,149 — Items deducted Intentional holding for the purpose of supplying (C) — — capital to other financial institutions Capital (A)+(B)–(C) (D) 519,730 (61,357) Balance-sheet exposure 3,404,750 4,051,794 Risk-weighted assets Off-balance-sheet exposure 36,645 105,997 Total (E) 3,441,396 4,157,791
(D) Capital adequacy ratio (Domestic standard) = x 100 15.10% —% (E)
Note: The capital adequacy ratio has been calculated according to the formula stipulated in the MOF notice based on Article 14-2 of the Banking Law applied in the first half of Article 17 of the Long-Term Credit Bank Law. The Bank employs the domestic standard.
63 Disclosure of Asset Quality
1. Summary of Disposal of Problem Loans During the Fiscal Year Ended March 2001 Summary The Bank has continued to press forward with the clearing of problem assets off its balance sheet. During the fiscal year, the Bank carried out a self- assessment of its asset portfolio under internal self-assessment standards which are based on the Financial Supervisory Agency’s Financial Inspection Manual. Based on the assessment, the Bank disposed of a total of ¥89.1 billion in problem assets through sales, write-offs and provisions to reserves, which amounted to ¥89.1 billion in losses. In addition to the above, the Bank’s sale of assets defined as “inappropriate for holding” by the Financial Reconstruction Commission in May 1999 to the Resolution and Collection Corporation has effected a fundamental improvement in the quality of the Bank’s assets. 2. Standards for Self-Assessment of Assets The Bank carries out its own assessment of assets on a 6-month basis. In the assessment process, the business divisions and branches carry out the first assessment, which is followed by a second assessment by the Credit Division. The Assets Audit Department of the Inspection Division, which is independent of the sections involved in the original assessments, then examines whether the assessments have been made in compliance with the Bank’s self-assessment standards. In accordance with the Bank’s self-assessment standards, assets are classified into the five categories of normal, watch list, potentially bankrupt, substantially bankrupt, and bankrupt borrowers. The bank assesses the quality of assets under each borrower category takig into account underlying collatel and guarantees, if any, and classifies the assets into category I, II, III and IV. The definitions of the borrower categories and asset classification are as follows. (In millions of yen) 2001 2000 Write-offs 356 22 Provision to specific reserve 576 820 Loss from sales to CCPC — 0 Provision for contingencies on loans sold — 157 Provision for country risk reserve — — Loss from other sales of loans 25 2 Provision for contingencies on assets transferred — (38) Losses from disposal of inappropriate assets (67) 194 Total 891 1,156
Definition of Borrower Categories • Normal (Seijo saki) Business performance is strong and no special financial problems exist. • Watch list (Yo-chui saki) Borrowers that need to be monitored carefully because business fundamentals are weak and their future is uncertain or there is a financial problem. (special attention: borrowers for which monitoring is required because principal and/or interest payments have been in arrears for three months or more or payment terms have been renegotiated.) • Potentially Bankrupt (Hatan-kenen saki) Borrowers that are not currently bankrupt but have the potential to become bankrupt because they are having business difficulties and business reform plans are not progressing well. • Bankrupt (Hatan saki), Substantially Bankrupt (Jissitsu-hatan saki) Borrowers that are legally or practically bankrupt or effectively in the same situation.
Definition of Asset Classifications • Category I All credits to normal borrowers. Credits to borrowers other than normal borrowers which are secured by preferential collateral or guarantees, which bear no particular risk to incur loss. • Category II Credits to watch list borrowers and other than Category I. Credits to potentially bankrupt, substantially bankrupt, or bankrupt borrowers which are secured by general collateral or guarantees, such as real estate. • Category III Credits to potentially bankrupt borrowers and other than Category I and II. Difference between collateral’s assessed value and its disposal value in respect of credits to substantially bankrupt or bankrupt borrowers, which bears risk of collectability and is likely to incur loss. • Category IV Credits to substantially bankrupt or bankrupt borrowers other than Category I, II and III, which are assessed to be uncollectable and valueless.
64 3. Write-Off and Reserve Rules The Bank follows an internal set of rules on write-offs and reserves based on the results of its self-assessment of assets. During the fiscal year ended March 2001, the following rules were in place.
1. Normal borrowers Lump sum provision to the general reserve for possible losses based on the historical default rate in accordance with average remaining loan period. 2. Watch list borrowers Lump sum provision to the general reserve for possible losses based on the historical default rate in accordance with average remaining loan period. (Special attention borrowers and other watch list borrowers are treated separately) 3. Potentially bankrupt borrowers Necessary amounts for category III risk loans are calculated for each borrower and an provision is made to the specific reserve for possible losses. 4. Substantially bankrupt and bankrupt borrowers The full amounts of category III and IV credits are written off directly.
4. Disclosed Credit under the Financial Reconstruction Law Self-assessment, disclosed credit, write-offs and reserves (Non-consolidated; including partial, direct write-offs)
Disclosed credit Asset classifications for self-assessment Reserves as Borrower categories under the Financial Reserve, Coverrage for Credit a percentage of for self-assessment under the FRL Reconstruction Law Category I Category II Category III Category IV non-secured credit
Bankrupt borrower Collateral and guarantees Bankrupt and Secured by collateral or guarantees Partial, direct write-offs 437 similar credit (100.0%) 437 1,264 (Partial, direct write-offs) 437 Substantially bankrupt 1,264 borrower
Collateral and guarantees Potentially bankrupt Doubtful credit Secured by collateral or guarantees Provision to reserve 1,257 87.7% borrower 3,149 1,257 1,660 Reserve 1,660
Substandard credit secured by Collateral and guarantees Substandard credit collateral or guarantees 948 28.9% Watch list borrower 3,212 948 Reserve 655
Normal credit Normal borrower 24,558
Collateral and guarantees Sub-standard credit Reserves as a 2,642 and below percentage of substandard Reserves 6,798 credit and below 2,315 55.7%
(Reference) Partial, direct write-offs Total credit As of September 30, 2000 1,264 31,356 59.4%
65 Disclosure Pursuant to the Financial Reconstruction Law Under the Financial Reconstruction Law, the following types of credit* are classified into the categories of bankrupt and similar, doubtful, substandard, and normal credit and the amounts are disclosed per category. * Credits to be included: Securities loaned, Loans, Foreign exchange, Interest receivables and suspense payments included in Other assets, Customers’ liabilities for acceptances and guarantees
• Bankrupt and similar credit (hasan kousei saiken oyobi korera-ni junzuru saiken): Bankrupt and similar credit refers to credit of borrowers who are in a state of bankruptcy, corporate reorganization, composition, etc., and the equivalent thereof. • Doubtful credit (Kiken saiken): Doubtful credit refers to credit with serious doubt concerning the recovery of principal and receiving of interest as contract provisions, because the borrower’s financial condition and business results have worsened, although they have not reached the point of management collapse. • Substandard credit (Youkanri saiken) Substandard credit refers to loans in arrears for more than 3 months or with mitigated conditions. • Normal credit (Seijou saiken) Normal credit refers to credit possessed by borrower whose financial condition and business results have no particular problem, and which are not categorized in either of the above categories.
Coverage of Reserves and Amounts of Disclosed Credits (See previous chart) For the fiscal year ended March 2001, the amounts of credits to be disclosed pursuant to the Financial Reconstruction Law were as follows: bankrupt and similar credits, ¥43.7 billion; doubtful credits, ¥314.9 billion; and substandard credits, ¥321.2 billion. Total disclosed credits amounted to ¥679.8 billion, ¥486.1 billion less than in the previous fiscal year. The coverage by collateral, guarantees and reserves for the ¥679.8 billion in disclosed credits excluding normal credit amounted to ¥495.7 billion (¥264.2 billion in collateral and guarantees and ¥231.5 billion in reserves), representing a coverage of 73%.
5. Risk Monitored Loans ● Disclosed credit pursuant to the Financial Reconstruction Law and Risk Monitored Loans
Borrower categories for self-assessment Disclosed credit under the Financial Reconstruction Law Risk Monitored Loans
Loans Other credits Loans Other credits Loans Other credits
Loans to bankrupt companies Bankrupt borrower 279 Bankrupt and similar credit 437 Substantially bankrupt borrower Past due loans Doubtful credit 3,218 Potentially bankrupt borrower 3,149
Loans overdue for 3 months or more Substandard credit 17 Watch list borrower 3,212 Restructured loans 3,195
Normal borrower Normal credit (24,558)
Total disclosed credit (Excluding normal credit) Risk Monitored Loans Other credits 6,798 6,710 89
Note: Other credits include securities loaned, foreign exchange, interest receivables, suspense payments and customers’ liabilities for acceptances & guarantees
66 Independent from disclosure pursuant to the Financial Reconstruction Law, Risk Kanri Saiken (Risk Monitored Loans) is a form of disclosure that has been required by the Banking Law, and classifies problem loans into the four categories of loans to bankrupt companies, past due loans, loans overdue for 3 months or more, and restructured loans. For the fiscal year ended March 2001, Risk Kanri Saiken totaled ¥671.0 billion.
Risk Kanri Saiken • Loans to bankrupt companies Loans to bankrupt companies are loans for which interest in arrears has not been accrued because recovery or settlement of principal or interest is unlikely due to the prolonged delay in payment of principal or interest, (which hereafter shall be called “non-accrual loans.”) and whose borrowers are legally bankrupt (defined below), excluding the amount of write-offs. 1. Borrowers that have applied for commencement of company or financial institution reorganization procedures pursuant to the provisions of the Corporation Reorganization Law. 2. Borrowers that have applied for reorganization pursuant to the provisions of the Civil Reorganization Law. 3. Borrowers that have applied for bankruptcy pursuant to the provisions of the Bankruptcy Law. 4. Borrowers that have applied to commence liquidation or special liquidation pursuant to the provisions of the Commercial Law. 5. Borrowers with reasons equivalent to 1. to 4. above as defined by Ministry of Finance ordinances. 6. Borrowers who have applied for commencement of legal liquidation procedures pursuant to overseas laws, corresponding to those listed above. • Past due loans Past due loans refers to non-accrual loans except those for which concessions on payment of interest were made in order to assist the reorganization of bankrupt companies and loans to them. • Loans overdue for three months or more Loans overdue for 3 months or more refers to those loans, excluding loans to bankrupt companies and past due loans, for which principal or interest remains unpaid for at least three months. • Restructured loans Restructured loans refers to those loans, excluding loans to bankrupt companies, past due loans, and loans overdue for 3 months or more, for which agreement was made to provide reduction or a moratorium on interest payments, or concessions in the borrower’s favor on interest or principal payments or to waive claims for the purpose of assisting the reconstruction of insolvent borrowers.
The differences between disclosure pursuant to the Financial Reconstruction Law and Risk Kanri Saiken • Scope of credit subject to disclosure While the disclosure of Risk Kanri Saiken is limited to loans, the disclosure pursuant to the Financial Reconstruction Law includes loans, securities loaned, foreign exchange, interest receivables, suspense payments, and customers’ liabilities for acceptances and guarantees.
• Unit of Disclosure Risk Kanri Saiken (Risk Monitored Loans) disclosure is classified by loans; whereas disclosure pursuant to the Financial Reconstruction Law is classified by borrower, except for substandard credit, which is classified by loans.
67 NON–CONSOLIDATED FINANCIAL DATA Debenture Operations
Outstanding Balance and Average Balance of Debentures (In millions of yen) 2001 2000 Term-end balance Average balance Term-end balance Average balance Nippon Credit debentures/Aozora debentures 2,208,763 2,627,769 3,407,415 3,939,695 Discounted Nippon Credit debentures/ 263,765 268,879 276,586 323,872 Discounted Aozora debentures Total 2,472,528 2,896,649 3,684,002 4,263,567 Notes: 1. Debentures do not include debenture subscriptions. 2. As of March 28, 2001, “Nippon Credit debentures” and “Discounted Nippon Credit debentures” changed into “Aozora debentures” and “Discounted Aozora debentures,” respectively.
Balance by Residual Period (In millions of yen) 2001 2000 Aozora Discounted Nippon Credit Discounted Nippon Total debentures Aozora debenturesTotal debentures Credit debentures Less than 1 year 1,931,223 1,667,457 263,765 2,869,082 2,592,496 276,586 1 – 3 years 485,726 485,726 754,146 754,146 3 – 5 years 55,578 55,578 60,773 60,773 5 – 7 years — — — — Over 7 years — — — — Total 2,472,528 2,208,763 263,765 3,684,002 3,407,415 276,586 Note: As of March 28, 2001, “Nippon Credit debentures” and “Discounted Nippon Credit debentures” changed into “Aozora debentures” and “Discounted Aozora debentures,” respectively.
68 Deposit Operations
Balance by Deposit Accounts (In millions of yen) 2001 2000 Total Domestic International Total Domestic International operations operations operations operations Liquid deposits Average 165,573 165,573 — 187,602 187,602 — balance (%) (9.34) (9.57) — (9.05) (9.34) — Term-end 169,986 169,986 — 177,025 177,025 — balance (%) (12.09) (12.40) — (9.92) (10.23) — Interest Average 145,525 145,525 — 168,709 168,709 — bearing deposits balance (%) (8.21) (8.41) — (8.13) (8.40) — Term-end 139,661 139,661 — 136,631 136,631 — balance (%) (9.93) (10.19) — (7.65) (7.90) — Time deposits Average 1,595,971 1,563,632 32,339 1,857,303 1,819,753 37,550 balance (%) (90.04) (90.34) (77.37) (89.55) (90.59) (57.54) Term-end 1,230,624 1,198,989 31,634 1,580,442 1,547,647 32,795 balance (%) (87.52) (87.45) (90.22) (88.54) (89.46) (59.61) Deregulated Average 1,509,099 1,509,099 1,726,749 1,726,749 interest rate time balance (%) (85.14) (87.19) (83.26) (85.96) deposits (fixed) Term-end 1,177,442 1,177,442 1,473,247 1,473,247
Deposits balance (%) (83.74) (85.88) (82.53) (85.16) Deregulated Average 54,533 54,533 93,003 93,003 interest rate time balance (%) (3.08) (3.15) (4.48) (4.63) deposits (floating) Term-end 21,547 21,547 74,400 74,400 balance (%) (1.53) (1.57) (4.17) (4.30) Others Average 10,984 1,527 9,457 29,086 1,374 27,712 balance (%) (0.62) (0.09) (22.63) (1.40) (0.07) (42.46) Term-end 5,509 2,081 3,427 27,543 5,326 22,217 balance (%) (0.39) (0.15) (9.78) (1.54) (0.31) (40.39) Total Average 1,772,529 1,730,733 41,796 2,073,992 2,008,730 65,262 balance (%) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) Term-end 1,406,119 1,371,057 35,061 1,785,011 1,729,998 55,012 balance (%) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) Certificates of deposit Average balance 635,855 635,855 — 842,064 842,064 — Term-end balance 372,820 372,820 — 850,430 850,430 — Total Average balance 2,408,385 2,366,588 41,796 2,916,056 2,850,794 65,262 Term-end balance 1,778,939 1,743,877 35,061 2,635,441 2,580,428 55,012 Notes: 1. Time deposits (in general) = Time deposits Deregulated interest rate time deposits (fixed) = Deregulated interest time deposits for which the interest up to the due date is determined when the deposits are made. Deregulated interest rate time deposits (floating) = Deregulated interest time deposits for which the interest varies according to changes in market interest rates during the period of deposit. 2. Deposits = Deposits at notice + Ordinary deposits + Current deposits 3. Average balance of domestic offices’ foreign-currency denominated transactions in the international operations sector has been computed by the daily current method.
69 Balance of Time Deposits by Residual Period (In millions of yen) 2001 2000 Total Deregulated interest Deregulated interest Total Deregulated interest Deregulated interest rate (fixed) rate (floating) rate (fixed) rate (floating) Less than 3 months 594,361 574,631 19,730 879,042 872,432 6,610 3 – 6 months 110,018 109,318 700 263,567 259,924 3,643 6 months – 1 year 72,602 71,485 1,117 153,555 148,938 4,617 1 – 2 years 126,197 94,563 — 93,781 34,451 59,330 2 – 3 years 327,055 327,055 — 181,502 148,507 200 More than 3 years 388 388 — 8,991 8,991 — Total 1,230,624 1,177,442 21,547 1,580,442 1,473,247 74,400
Outstanding Balance by Depositor (In millions of yen, %) 2001 2000 Balance Share Balance Share Corporations 419,806 30.6 698,692 40.1 Individuals 529,512 38.5 447,638 25.7 Public sector 39,154 2.9 44,123 2.5 Financial institutions 385,268 28.0 552,368 31.7 Total 1,373,741 100.0 1,742,823 100.0 Note: The above balance does not include certificates of deposit, deposits at overseas offices and specific international financial transaction accounts
70 Loan Operations
Outstanding Balance of Loans (In millions of yen) 2001 2000 Domestic International Domestic International Total Total operations operations operations operations Loans on deeds Average balance 2,108,063 2,068,089 39,973 3,129,725 3,031,903 97,822 Ter m-end balance 2,047,572 2,018,644 28,927 2,373,831 2,308,403 65,428 Loans on notes Average balance 1,294,389 1,293,946 442 2,843,472 2,829,680 13,791 Ter m-end balance 940,664 940,169 495 1,658,824 1,658,399 424 Overdrafts Average balance 70,913 70,913 — 41,927 41,927 — Ter m-end balance 100,099 100,099 — 69,576 69,576 — Bills discounted Average balance 2,086 2,086 — 3,921 3,921 — Ter m-end balance 3,713 3,713 — 1,989 1,989 — Total Average balance 3,475,451 3,435,035 40,416 6,019,047 5,907,433 111,613 Ter m-end balance 3,092,049 3,062,626 29,423 4,104,221 4,038,368 65,853 Note: Average balance of domestic offices’ foreign-currency denominated transactions in the international operations sector has been computed by the daily current method.
Balance by Residual Period (In millions of yen) 2001 2000 Total Fixed interest Floating interest Total Fixed interest Floating interest Less than 1 year 1,365,320 2,019,879 1 – 3 years 582,509 518,483 64,025 776,825 695,731 81,093 3 – 5 years 678,442 526,032 152,409 752,743 672,189 80,553 5 – 7 years 195,466 163,519 31,947 187,755 163,630 24,125 Over 7 years 269,226 225,060 44,165 297,441 258,683 38,758 Indefinite period 1,083 — 1,083 69,576 — 69,576 Total 3,092,049 4,104,221 Note: No distinction has been made between fixed interest and floating interest, as to loans with a residual period of less than 1 year.
71 Breakdown of Loans by Industry (In number of borrowers, millions of yen, %) 2001 2000 Industry Number of Balance of Number of Balance of Share Share borrowers loans borrowers loans Loans from domestic offices (excluding special international financial 6,694 3,081,729 100.00% 7,346 4,086,150 100.00% transaction accounts) Manufacturing 502 466,498 15.14 531 493,689 12.08 Agriculture, forestry & fisheries 9 4,498 0.15 9 3,811 0.09 Mining 15 13,642 0.44 16 10,050 0.25 Construction 113 249,625 8.10 112 262,934 6.43 Financial & insurance 107 508,639 16.51 117 773,420 18.93 Wholesale & retail 385 241,920 7.85 355 235,693 5.77 Real estate 332 740,277 24.02 349 1,304,617 31.93 Transport & telecommunications 168 216,016 7.01 168 196,482 4.81 Utilities 28 40,516 1.31 29 43,080 1.05 Services 519 556,598 18.06 518 684,674 16.83 Municipalities 1 18 0.00 1 36 0.00 Individuals 4,492 26,391 0.86 5,105 31,783 0.78 Overseas yen loans by domestic offices 23 17,085 0.55 36 42,875 1.05 Loans from overseas offices, and special 12 10,319 100.00% 30 18,070 100.00% international financial transaction accounts Governments & official institutions — — — — — — Financial institutions — — — 6 1,649 9.13 Commercial & industrial 12 10,319 100.00 22 15,926 88.13 Others — — — 2 494 2.74 Total 6,706 3,092,049 7,376 4,104,221
Breakdown of Loans by Collateral (In millions of yen) 2001 2000 Securities 34,714 47,957 Claims 634,559 845,784 Merchandise — 252 Land & buildings 990,237 1,517,071 Factories 2,155 2,616 Foundations 275,371 296,018 Vessels 9,951 10,883 Others 717,705 878,917 Total 2,664,695 3,599,501 Guarantees 147,344 200,831 Credits 280,010 303,888 Total 3,092,049 4,104,221 Note: Includes loans reserved with conditions necessary for counteraction against a third party.
72 Securities
Outstanding Balance and Average Balance of Securities Held (In millions of yen) 2001 2000 Domestic International Domestic International Total Total operations operations operations operations Total Average 1,011,841 912,615 99,226 1,459,844 1,310,355 149,488 balance (%) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) Term-end 727,758 591,113 136,644 1,135,653 995,098 140,554 balance (%) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) National government bonds Average 566,941 566,941 — 489,602 489,602 — balance (%) (56.03) (62.12) — (33.54) (37.36) — Term-end 456,951 456,951 — 288,694 288,694 — balance (%) (62.79) (77.30) — (25.42) (29.01) — Local government bonds Average 35,130 35,130 — 32,644 32,644 — balance (%) (3.47) (3.85) — (2.24) (2.49) — Term-end 30,448 30,448 — 34,121 34,121 — balance (%) (4.19) (5.15) — (3.01) (3.43) — Corporate bonds Average 61,868 61,868 — 99,455 99,455 — balance (%) (6.12) (6.78) — (6.81) (7.59) — Term-end 82,241 82,241 — 92,271 92,271 — balance (%) (11.30) (13.91) — (8.13) (9.27) — Stocks Average 241,142 241,142 — 671,797 671,797 — balance (%) (23.83) (26.42) — (46.02) (51.27) — Term-end 12,974 12,974 — 512,569 512,569 — balance (%) (1.78) (2.20) — (45.13) (51.51) — Others Average 106,759 7,532 99,226 166,343 16,855 149,488 balance (%) (10.55) (0.83) (100.00) (11.39) (1.29) (100.00) Term-end 145,142 8,497 136,644 155,974 15,419 140,554 balance (%) (19.94) (1.44) (100.00) (13.73) (1.55) (100.00) Securities lent Average — — — — — — balance (%) — — — — — — Term-end — — — 52,021 52,021 — balance (%) — — — (4.58) (5.23) — Notes: 1. “Others” in total column represents the total of “Other” of Domestic operations plus that of International operations. 2. Average balance of Securities lent is classified and included according to type of securities. 3. Treasury stock is included in “Stocks.” 4. Average balance of domestic offices’ foreign-currency denominated transactions in International operations is computed by the daily current method.
Balance of Securities by Residual Period (In millions of yen) 2001 2000 National Local National Local government government Corporate Stocks Others Securities government government Corporate Stocks Others Securities bonds bonds bonds lent bonds bonds bonds lent Less than 1 year 370,015 88 44,426 27,764 — 246,538 1,722 47,895 20,822 7,198 1 – 3 years 74,801 5,193 7,310 26,390 — 14,626 234 34,635 27,245 — 3 – 5 years 1,158 11,378 10,604 11,951 — 5,250 12,689 2,527 4,468 — 5 – 7 years 1,024 1,014 1,197 5,830 — 1,028 8,755 179 747 — 7 – 10 years 9,951 12,211 18,703 7,054 — 21,250 10,154 7,033 3,433 — Over 10 years — 562 — 62,749 — — 566 — — — Indefinite period — — — 12,974 3,400 ————512,569 99,257 44,823 Total 456,951 30,448 82,241 12,974 145,142 — 288,694 34,121 92,271 512,569 155,974 52,021 Note: Treasury stock is included in “Stocks.”
73 Capitalization
History of Capitalization (In millions of yen) Month/Year Capital increases Capital thereafter Remarks Mar. 88 2,694 96,364 Conversion of convertible bonds (Nov. 2, 1987–Mar. 31, 1988) Oct. 88 2,321 98,686 Conversion of convertible bonds (Apr. 1, 1988–Oct. 31, 1988) Nov. 88 27,985 126,671 Compensatory public subscription 5,000 thousand shares; Issue price ¥11,194; Transfer to capital ¥5,597 Mar. 89 1,415 128,086 Conversion of convertible bonds (Nov. 1, 1988–March 31, 1989) Mar. 90 20,290 148,377 Conversion of convertible bonds (Apr. 1, 1989–March 31, 1990) Mar. 91 3,814 152,191 Conversion of convertible bonds (Apr. 1, 1990–March 31, 1991) Mar. 92 28 152,220 Conversion of convertible bonds (Apr. 1, 1991–March 31, 1992) Mar. 95 71 152,292 Conversion of convertible bonds (Apr. 1, 1994–March 31, 1995) Oct. 96 25,500 177,792 Compensatory private placement (the 2nd preferred stock 102,000 thousand shares); Issue price ¥500; Transfer to capital ¥250 Jul. 97 83,498 261,290 Compensatory private placement (common stock 766,039 thousand shares); Issue price ¥218; Transfer to capital ¥109 Jul. 97 61,823 323,114 Compensatory private placement (the 3rd preferred stock 386,398 thousand shares); Issue price ¥320; Transfer to capital ¥160 Mar. 98 30,000 353,114 Compensatory private placement (the 4th preferred stock 120,000 thousand shares); Issue price ¥500; Transfer to capital ¥250 Sep. 00 66,666 419,781 Compensatory private placement (common stock 333,334 thousand shares); Issue price ¥300; Transfer to capital ¥200 Oct. 00 (260,000) 159,781 Non-compensatory Reduction of Capital • Capital reduction of ¥105,287 million by redemption of the 2nd preferred stock 102,000 thousand shares, the 3rd preferred stock 386,398 thousand shares, and the 4th preferred stock 71,856 thousand shares • Capital reduction of ¥154,712 million exceeding face amount of common stock and transferred to capital Oct. 00 260,000 419,781 Compensatory private placement (the 5th preferred stock 866,667 thousand shares); Issue price ¥300; Transfer to capital ¥300
74 Major Shareholders (As of March 31, 2001)
Common stock Number of shares held Share of total outstanding shares SOFTBANK CORP. 1,385,548 thousand 48.87% ORIX Corporation 425,041 14.99 The Tokio Marine and Fire Insurance Co., Ltd. 425,041 14.99 Cerberus NCB Acquisition LLC 142,000 5.00 Pacific Capital Group/Colony Asia LP 113,600 4.00 Property Asset Management Inc. 71,000 2.50 Chase Manhattan International Finance Ltd 14,200 0.50 UBS Capital Asia Pacific Ltd 14,200 0.50 Silicon Valley Bancshares 7,100 0.25 Shinkin Central Bank 5,680 0.20 The Shinkumi Federation Bank 5,680 0.20 The Rokinren Bank 5,680 0.20 THE MICHINOKU BANK, LTD. 5,680 0.20 The Hachijuni Bank, Ltd. 5,680 0.20 THE SURUGA BANK, LTD. 5,680 0.20 The Bank of Kyoto, Ltd. 5,680 0.20 The Chugoku Bank, Limited 5,680 0.20 The Hiroshima Bank, Ltd. 5,680 0.20 The Yamaguchi Bank, Ltd. 5,680 0.20 THE BANK OF FUKUOKA, LTD. 5,680 0.20 THE NISHI-NIPPON BANK, LTD. 5,680 0.20 The Fukuoka City Bank, Ltd. 5,680 0.20
The 4th preferred stock Number of shares held Share of total outstanding shares Deposit Insurance Corporation 48,144 thousand 100.00% Total 48,144 thousand 100.00%
The 5th preferred stock Number of shares held Share of total outstanding shares Resolution and Collection Corporation 866,667 thousand 100.00% Total 866,667 thousand 100.00%
75 CORPORATE DATA Corporate History
April 1957 Established as The Nippon Fudosan Bank, Limited August 1994 Split ¥500 par value stock into ¥50 par value (capital ¥1 billion) in accordance with the Long- June 1996 Started issuance of one and three-year debentures Term Trust Bank Law. December 1998 Started special public management in accordance October Opened Osaka Branch with application of the Financial Reconstruction Law November Started issuance of debentures Terminated listing stocks on Tokyo Stock Exchange, September 1958 Started issuance of discount debentures Osaka Securities Exchange October Opened Nagoya Branch Office June 2000 Share Purchase Agreement regarding the transfer of July 1964 Started foreign exchange business as an the Bank’s shares is signed between DIC and authorized foreign exchange bank SOFTBANK CORP., ORIX Corporation, The Tokio September Listed stock in the Tokyo Stock Exchange Marine and Fire Insurance Co., Ltd., and other February 1970 Listed stock in the Osaka Securities Exchange financial institutions October 1977 Changed name to The Nippon Credit Bank, Ltd. September Ended special public management November 1989 Started issuance of two-year debentures January 2001 Changed name to Aozora Bank, Ltd.
Business Activities
● Debentures ● Brokerage business for securities futures Issuance of debentures and discount debentures Brokerage business for securities futures, option transactions, and forward rate agreement transactions ● Deposits Deposits ● Checking accounts, savings accounts, deposits at notice, time Domestic exchanges deposits, deposits at notice, tax savings deposits, non-residents Services such as money order between head/branch offices, and head/ deposits in yen currency, and deposit in foreign currencies branch offices of other banks Certificates of deposit Checking account payment, collection of bills Limited to national and local public entities,bond management firms ● and other specified customers Foreign exchanges Remittance to foreign countries and other foreign currency related ● Lending and guaranty of liabilities businesses Loans, discount on promissory notes, guaranty of liabilities for ● equipment funds and long-term operating fund services. Also, loans Other services for long-term funds (term exceeding six months ) other than Revenue agency for Bank of Japan and agency business for national equipment funds and long-term operation funds bonds Loans for short-term funds are (term of less than six months) limited Receipt of public funds of local public entities including Tokyo to the total amount of deposits or corresponding funds. Agency business for Japan Small Business Corp., Employees Discounts on promissory notes, guaranty of liabilities, and acceptance Retirement Allowance Corp., Environmental Service Corp., of promissory notes Government Pension Investment Fund Employment Promotion Corp., Oil Corp., and Social Welfare Medical Corp. ● Securities Safe-keeping deposits Security investment business Rental safe-deposit boxes Underwriting of public bonds Purchase of securities Over-the-counter sales of public bonds including national government Commercial paper bonds, and securities investment trusts Sales/purchase of security products Receipt of payment for stocks or corporate bonds, or payment of dividends Registration of public bonds as a registered institution under the Corporate Bonds Registration Law Consignment business for soliciting or managing public bonds Trust business for secured corporate bonds
76 Office Directory (As of June 30, 2001)
Overseas Network
● Branch Grand Cayman Branch Singapore Representative Office Seoul Representative Office General Manager Head of South East Asia Senior Representative Masaaki Kishinami Shinya Takahashi Masayuki Ohga
Deputy General Manager Address Address Kazuo Hoshino 6 Temasek Boulevard, #23-02 8th Floor Suntec Tower 4, Shinhan Bank Building 120, Address Singapore 038986, 2-ka, Taepyung-ro, P.O. Box 1040 Singapore Chung-ku, Seoul 100-102, West Wind Building Tel: 333-6781 Republic of Korea George Town, Grand Cayman Fax: 333-6807 Tel: 02-774-8121 c/o The Nippon Credit 02-774-8122 Bank, Ltd. Beijing Representative Office Fax: 02-774-8123 Head Office 02-771-7526 Telex: J26921 NCBTOK Senior Representative J28788 NCBTOK Kazuo Iwashima Jakarta Representative Office
● Representative Offices Address Chief Representative New York Representative Office 7th Floor Hiroshi Matsumoto Changfugong Office Building Chief Representative A26 Jianguo-Menwai Street, Address Akihiro Yamasaki Beijing 17th Floor, Jakarta Stock People’s Republic of China Exchange Building Tower II Address Tel: 010-6513-0683 Jl. Jend. Sudirman Kav. 101 East 52nd Street, Fax: 010-6513-9033 52-53, Jakarta 12190, 29th Floor, New York Indonesia NY 10022, U.S.A. Beijing Representative Office is scheduled to Tel: 021-515-5155 Tel: 212-751-7330 close at the end of August 2001. Fax: 021-515-5156 Fax: 212-751-0987 ● Subsidiaries The Nippon Credit Bank (Curaçao) Finance, N.V. Address Pietermaai 15, Willemstad Curaçao, Netherlands Antilles Domestic Network
● HEAD OFFICE Sapporo Kyoto 13-10, Kudan-kita 1-chome Chiyoda-ku, Tokyo 5-2, Ohdori Nishi 6-chome 394 Shimomaruya-cho 102-8660, Japan Chuo-ku, Sapporo 060-0042 Oike-sagaru Tel: 03-3263-1111 Tel: 011-241-8171 Kawaramachi-Dori Telex: J26921, J28788 Nakagyo-ku, Kyoto 604-8006 (General) Takamatsu Tel: 075-211-3341 NCBTOK 6-1, Bancho 1-chome Shibuya SWIFT: NCBTJPJT Takamatsu 760-0017 Tel: 087-821-5521 24-12, Shibuya 1-chome ● BRANCH OFFICES Shibuya-ku, Tokyo 150-0002 Osaka Kanazawa Tel: 03-3409-6411 2-4, Nishi-Shinsaibashi 1-chome 37, Takaokacho 2-chome Ueno Chuo-ku, Osaka 542-0086 Kanazawa 920-0864 Tel: 06-6245-2121 Tel: 076-231-4151 16-5, Higashi-Ueno 1-chome Taito-ku, Tokyo 110-0015 Nagoya Shinjuku Tel: 03-3835-7511 5-28, Meieki 4-chome 37-11, Shinjuku 3-chome Ikebukuro Nakamura-ku, Nagoya 450-0002 Shinjuku-ku, Tokyo 160-0022 Tel: 052-566-1900 Tel: 03-3354-1600 28-13, Minami-Ikebukuro 2-chome, Toshima-ku Fukuoka Umeda Tokyo 171-0022 Tel: 03-3988-0911 14-18, Tenjin 1-chome 47, Kakutacho 8-chome Chuo-ku, Fukuoka 810-0001 Kita-ku, Osaka 530-0017 Chiba Tel: 092-751-4261 Tel: 06-6315-1111 3-1, Fujimi 2-chome Sendai Yokohama Chuo-ku, Chiba 260-0015 Tel: 043-227-3111 6-1, Ichibancho 4-chome 48, Honcho 5-chome Aoba-ku, Sendai 980-0811 Naka-ku, Yokohama 231-0005 Tel: 022-225-1171 Tel: 045-212-3481 Hiroshima 7-37, Nakamachi Naka-ku, Hiroshima 730-0037 HOME PAGE ADDRESS http://www.aozorabank.co.jp Tel: 082-247-4301
77 Business Network March 31, 2001
*All companies listed below are consolidated subsidiaries.
Head office and branches Banking operations Main affiliates (Aozora Trust Bank, Ltd.)
Head office and branches Securities services Main affiliates Aozora Asset Management Co., Ltd. Investment management Investment trust management Aozora Bank, Ltd.
Trust services Main affiliates Aozora Trust Bank, Ltd. Trust services, Banking operations
Other operations Main affiliates Aozora Loan Services Co., Ltd. Distressed Loan Servicing Aozora Investment Co., Ltd. Venture capital investment Aozora Business Service Co., Ltd. Administrative services Financial Brain Showa-ota Inc. Systems development (FBO changed its name to “Aozora Information Systems Co., Ltd.” on May 1, 2001.)
78 Directors & Auditors (As of June 30, 2001)
DIRECTORS
Chairman Director Managing Executive Officer Kazuhiko Kasai Fumikatsu Tokiwa Naofumi Tokai Director Senior Advisor SOFTBANK CORP. Kao Corporation Managing Executive Officer Yuji Inagaki President & CEO Director Hiroshi Maruyama Kazuhito Ikeo Managing Executive Officer Professor Tomoaki Ishii Senior Managing Director Keio University Tomochika Iwashita Managing Executive Officer Director Shiro Nagaki Senior Managing Director Makoto Naruke Kenji Kajiwara President Managing Executive Officer Inspire Corporation Izumi Ogura Director Masayoshi Son Executive Officer President & CEO Yoshiyuki Kurihara SOFTBANK CORP. AUDITORS Executive Officer Director Ryoichi Kawai Yoshihiko Miyauchi Standing Auditor Ken Shigihara Chairman and CEO Executive Officer ORIX Corporation Hiroyuki Kimura Auditor Yoshio Nakanishi Director Executive Officer Koukei Higuchi Norimichi Kurakake Chairman Auditor Hideaki Kubori The Tokio Marine and Fire Insurance Executive Officer Co., Ltd. Tadaaki Satoyoshi Auditor Director Koichi Hori Executive Officer James Danforth Quayle Tetsuo Ninomiya Former Vice President of The United States of America Executive Officer Tadashi Tomozawa Director EXECUTIVE OFFICERS Thomas J. Barrack, Jr. Executive Officer Managing Partner Chief Executive Officer Pacific Capital Group Hiroshi Maruyama Yukimichi Nakatani Chairman and CEO Colony Capital, LLC. Senior Executive Officer Executive Officer Tomochika Iwashita Hirokazu Takino Director Michael J. O’Hanlon Senior Executive Officer Managing Director Kenji Kajiwara Lehman Brothers Japan Inc.
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Annual Report 2001
AOZORA BANK, LTD. 13-10, Kudan-kita 1-chome, Chiyoda-ku, Tokyo 102-8660, Japan Phone 03-3263-1111 URL: http://www.aozorabank.co.jp/
Printed in Japan
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