Management's Discussion and Analysis
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Management’s Discussion and Analysis Overview In fiscal 2007, the year ended March 31, 2007, Orico implemented an aggressive sales strategy by promoting original B2B2C business models among the Company, affiliated stores and customers, and by taking full advantage of alliances with the Mizuho Financial Group and the ITOCHU Corporation. These are both key strategic points in our businesses, based on DASH 2008—our three-year medium-term plan that started in April 2005. Pursuant to the succession of the credit business department from Rakuten KC Co., Ltd., through an absorption-type company split in November 2006, we continued to strengthen our sales and customer foundations, especially in the Kyushu region. As a result, operating revenues increased 5% from the previous fiscal year. Our mainstay auto loans business performed well. We expanded auto loans to new automobile dealers, the Japan Used Car Dealers Association (JU) and the All Japan Lotus Club (Lotus), by actively using Captive Loans, which were developed with Mizuho Bank and sold via Orico’s affiliated stores. Moreover, the succession of the former credit business department from Rakuten KC Co., Ltd., in 2006 had a positive impact. We strove to utilize large affiliated stores and the development of co-branded cards with large-scale companies by making the most of our unique strengths—namely, our alliances with Mizuho and ITOCHU. We also endeavored to increase the number of co- branded cards through enhanced alliances with local affiliated stores. Moreover, we continued to encourage the use of credit card settlement services—for example, Three-Way Service, which is a credit card settlement service for house rent—as well as for activities closely related to daily lives such as various public utilities fees, electronic toll collection (ETC) fees for the use of expressways and mobile phone charges. To enhance our operations, we promoted downsizing and efficiency improvement using business process reengineering (BPR) for office duties. To streamline our infrastructure, we operated a new collection system to improve efficiency in this area. This system includes the utilization of all the necessary information relating to credit management from the early reminder stage to the write-off stage. In addition, Orico joined with Credit Saison Co., Ltd., and UC Card Co., Ltd., to establish a new-generation, shared backbone and authorization system. We also investigated possible participation in a common processing corporation. These measures are part of our efforts to pursue optimization and further efficiency improvement in operating departments. As for compliance initiatives, Orico conducted thorough training based on the Company’s code of conduct, The Orico Group Code, to ensure Companywide understanding of it. Moreover, in September 2006 we obtained the Privacy Mark certification to strengthen personal information protection, and in November 2006 we established the Credit Countermeasures Committee as a deliberating and decision-making organ for important matters related to fair and reasonable credit and to reinforce affiliated store management to take more rigorous countermeasures. Despite these measures, the balance of outstanding loans was sluggish, primarily affected by revisions to the regulations for the loan business—including the Moneylending Control Law (“the Law”) in December 2006—and an increase in expenses to cope with claims for interest repayments. Billings for shopping credit decreased 7.9% year over year, owing partly to a review of transactions with member merchants taking into account the relevant provisions of the Specific Business Transaction Law. Meanwhile, after carefully examining the content and purpose of the revisions to the Law, as well as the underlying trends in several judicial precedents, management lowered its actual credit rate of interest even before the enforcement of the Law. As a result, we decided to reverse ¥97.7 billion from deferred tax assets in anticipation of a large decline in future profit. Furthermore, in anticipation of an increase in the future financial burden due to the increasing number of claims for interest return, management recorded a ¥140.7 billion provision for loss reserve for interest repayments as an extraordinary loss by maximally estimating the risk of expected claims for interest return ahead of the complete enforcement of the Law. In addition, given the possible deterioration of our loans receivable due to the credit crunch in the consumer credit market along with the revisions to the Law, we rigorously reviewed the allowance for credit losses with the aim of restructuring an efficient collection system amid the Credit Card Holders Consumer Finance Revenues/Consumer Credit Revenues/Credit Card Service Revenue (Including Gain on Securitization) Shopping (Including Gain on Securitization) (Millions) (Billions of yen) (Billions of yen) (Billions of yen) 20.4 20.9 19.3 11.3 301.6 307.7 294.7 10.5 10.6 52.3 42.8 37.3 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 10 deteriorating collection environment. Thus, we posted a ¥171.2 billion provision for allowance for credit losses as an extraordinary loss. Meanwhile, as part of our restructuring efforts we recorded extraordinary losses, including ¥8.2 billion in premium severance pay for recruiting the voluntary retired, etc., and a ¥39.8 billion valuation loss of tangible assets related to plans to sell real estate such as the head office building, in association with the reorganization of offices and branches nationwide. The number of applicants for voluntary retirement (with the retirement date to be June 30, 2007) was 472 versus the planned solicitation of 350 employees. In fiscal 2007, as a result of these factors, operating revenues declined 5.1%, to ¥312.8 billion, ordinary income dropped 68.7%, to ¥16.7 billion, and a net loss of ¥461.3 billion was recorded. Regrettably, management decided not to distribute dividends for the year under review. Revenues and Expenses Consumer financial service revenue decreased 4.2%, to ¥294.7 billion. Non-consumer finance service revenue surged 376.3%, to ¥11.6 billion. Consolidated operating revenues, which also include other revenues, decreased 5.1%, to ¥312.9 billion. Consolidated operating expenses rose 7.2%, to ¥296.1 billion. Consumer Finance Services Consumer finance service revenue, which amounted to ¥294.7 billion, consisted primarily of three consumer finance businesses. Consumer Credit and Guarantee and Loan Agent Services In the consumer credit and guarantee and loan agent services category, we continued to expand our earnings foundation with an increase in the number of merchants principally for the mainstay auto loans business, partly due to the effect of the succession of the former credit business department from Rakuten KC Co., Ltd., on November 1, 2006, through an absorption-type company split. In the mainstay auto loans business we endeavored to solidify our superior position in the credit world by establishing a low-cost network in association with community-based sales activities through the effective utilization of Orico Auto agencies. For the shopping credit service, we continued to focus efforts on promoting the enhanced use of the “Electrification Reform Loan” via alliances with eight electricity companies throughout the country and the development of Reform Loan products through alliances with leading gas companies and gas equipment manufacturers. We also concentrated on product development that matches the affiliated shops’ needs by supplying affiliated automobile dealers nationwide with “Orico Plus,” an ASP software with such functions as the listing of stock information, loan simulations and credit administration available on the Internet, and the similar “moto Orico Plus” for motorcycle dealers. We strongly promoted the guarantee and loan agent services to financial institutions as an important strategic business category. To that end, we endeavored to expand sales volume not only by reinforcing the alliance with the Mizuho Financial Group but also by providing valuable solutions to other affiliated financial institutions. Moreover, we have started new initiatives in new fields by capitalizing on our credit and collection function such as the extension of guarantees through alliances with leasing companies. As a result, consumer credit revenue declined 12.8%, to ¥37.3 billion, whereas revenue from guarantee and loan agent services increased 4.5%, to ¥82.0 billion. Credit Card Shopping In the credit card shopping category, we began issuing a social contribution-type co-branded card with a settlement function for monthly tuition fees and teaching materials fees, through joint development with GAKKEN CO., LTD., as part of specific alliance Revenues/Direct Cash Loans Revenues/Guarantee and Net Loss/Income Net Loss/Income (Including Gain on Securitization) Loan Agent Services per Share (Billions of yen) (Billions of yen) (Billions of yen) (Yen) 168.0 82.0 161.9 78.5 150.0 6.7 15.0 60.3 1.0 1.4 –461.4 –542.5 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 11 measures with ITOCHU. In addition, we issued the official credit card of the Chiba Lotte Marines, equipped with “MasterCard® PayPass™,” a globally available credit settlement service function using MasterCard’s non-contact IC technology. We also endeavored to enhance and upgrade services and functions for the “QUICPay” and “MobilePass” cards. Starting with a credit card settlement service at Kansai Electric Power Co., Inc., we extended a credit card settlement service to Tohoku Electric Power Co., Inc., Shikoku Electric Power Co., Inc., and Kyushu Electric Power Co., Inc., during the year under review to enhance the convenience of credit cards. In addition, we agreed on a business alliance regarding the joint promotion of “iD™,” NTT DoCoMo’s mobile phone credit settlement service, and the joint study of a provision for new services using mobile phones, and worked for the operational start of such new services. Furthermore, we decided to supply Orico cardholders with “eLIO,” a credit card settlement service exclusively for Internet shopping, which was developed by Sony Finance International, Inc.