Hokkoku Bank / 8363
COVERAGE INITIATED ON: 2020.09.29 LAST UPDATE: 2020.09.29
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Research Coverage Report by Shared Research Inc. Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.
Executive summary ------3 Key financial data ------5 Banking business earnings structure and glossary ------6 Recent updates ------8 Highlights ------8 Trends and outlook ------9 Quarterly trends and results ------9 Business ------16 Bank overview ------16 Business description ------18 Business model reform process ------24 Net interest income (83.9% of non-consolidated core gross profit) ------29 Net noninterest income (16.1% of non-consolidated core gross profit) ------34 Market and value chain------43 Market size and trends in regional banking industry ------43 Main competitors ------48 Strengths and weaknesses ------51 Historical performance and financial statements ------53 Income statement ------53 Balance sheet ------54 Cash flow statement ------55 Historical performance ------56 Other information ------60 History ------60 Consolidated subsidiaries ------60 Corporate governance and top management (end-March 2020) ------61 Dividend policy ------61 Major shareholders ------62 Employees ------62 Profile ------62
02/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Executive summary
Business overview
◤ Hokkoku Bank is a mid-tier regional bank with a lending share of 43.1% in Ishikawa Prefecture (loans outstanding in the prefecture totaled JPY4.2tn as of FY03/19). Hokkoku Bank is one of the 64 regional banks classified by the Financial Services Agency (FSA), among 191 Japanese banks licensed to operate in Japan under the Banking Act. The bank raises short-term funds through individual deposits and invests in long-term assets such as corporate loans and securities, earning the yield spread between long- and short-term interest rates in the form of interest income, its main source of profit. Against the backdrop of a sustained decline in its deposit-lending margins, Hokkoku Bank considers reducing general and administrative expenses and expanding noninterest income as top priorities for its Banking business. It has scaled down its branch network by 30%, and also become the first Japanese bank to move its backbone system (core banking system that manages customer accounts) to the cloud (migration scheduled to be completed in 2021). The bank is digitalizing its banking operations ahead of rivals, and strengthening its cost competitiveness in an effort to support sustainable operations.
◤ Hokkoku Bank has been focusing on expanding noninterest income businesses (Consultation services, Bank cards, and Leasing) to offset a decline in its interest income attributable to a contraction in deposit-lending margins. At present, its net noninterest income accounts for 16.1% of core gross profit (equivalent to gross profit for companies; total of net interest income and net noninterest income), exceeding the average of 13.7% for the 64 regional banks. Core gross profit has been at a CAGR of -1.7% over the last 10 years and core operating profit (equivalent to operating profit for companies) at a CAGR of - 3.7%, still a milder decline compared with rivals (Hokuriku Bank: -5.4%, Fukui Bank: -13.2%).
◤ Hokkoku Bank commenced a drastic overhaul of its business model in 2000. The objective was to create a virtuous cycle by enhancing productivity through the adoption of information and communications technology (ICT). This was expected to fuel changes in work styles, drive reforms of the personnel evaluation system, and ultimately give rise to a mindset change of employees that would further accelerate productivity improvements. The bank adopted groupware to visualize its operations and enhance productivity. It also revamped its personnel evaluation system, discarding the traditional sales quotas imposed by supervisors and introducing a system that assesses employees based on whether they achieved objectives in collaboration with their colleagues and organizations. These reforms have virtually eliminated overtime work and contributed to a change in employee mindset from the previous emphasis on meeting quotas individually to a commitment to resolving customer problems collaboratively as a team.
◤ The reforms that started with a review of the bank’s IT systems (extending to banking office work) have been underway for two decades. They have resulted in a 30% reduction in branches, simplified screening processes, a transition from outsourced to in-house systems development, a move of its backbone system to an open system, and the migration of online banking (customer services) to the cloud (a banking industry first in Japan). The bank also plans to migrate its backbone system to a public cloud service by 2021 (another industry first). Its labor productivity (core gross profit/number of employees) has been at a CAGR of -0.2% over the last 10 years in part due to contraction in core gross profit, but the decline has still been modest compared with rivals (Hokuriku Bank: -1.8%, Fukui Bank: -4.3%).
◤ Hokkoku Bank aims to provide additional customer value through Consultation services, leveraging its experience from its own operational reforms and implementation of ICT solutions. It has shifted its focus from ad-hoc lending to a lending stance rooted in an understanding of the potential and future prospects of customer businesses and has started leveraging its screening expertise in Consultation services. Drawing on its experience in digitalizing business processes, it has begun offering ICT and productivity improvement consultation services through a team of 100 members (mainly excess personnel due to branch network reduction). In addition, the bank is a licensed Visa debit card issuer. It not only issues debit cards but also acts as an acquirer, providing a cashless payment method to consumers in the Hokuriku area—where adoption of cashless payments has been slow—and creating earnings opportunities for affiliated merchants. In 2016, Hokkoku Bank became the first Japanese regional bank to launch an overseas branch in Southeast Asia (Singapore) to provide support for business transactions in the region. Through its Singapore branch, the bank provides overseas support to Hokuriku-based companies seeking to expand their sales channels overseas.
03/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
◤ Hokkoku Bank’s earnings (core gross profit) comprise net interest income (over 80% of core gross profit) and net noninterest income (fee income). Its income, mainly generated from lending and deposit transactions, is calculated by multiplying loans outstanding by deposit-lending margins, and interest margins are yield on loans minus yield on deposits and general and administrative expenses. While the Bank of Japan (BOJ) has maintained its negative interest rate policy, the bank’s yield on deposits has hovered around zero. As yield on deposits has no room to decline further, the ongoing contraction in deposit- lending margins can be partly attributed to an inexorable decline in the yield on loans. The bank’s fee income (i.e., noninterest income) is a product of the customer count and fees per customer. Income in the Consultation services business is calculated as the hourly rate multiplied by the number of staff deployed, income in the Bank cards business corresponds to affiliated merchant fees (including card issuance fees), and income in the Leasing business is the product of the lease balance and lease rate.
◤ Hokkoku Bank’s strategic decisions are dictated by the Basel III capital adequacy ratio requirements (minimum of 10.5%) specified by the Basel Committee on Banking Supervision (BCBS). To keep its capital adequacy ratio above a certain level, the bank must expand its capital at a faster pace than its assets. At the same time, increases in its capital adequacy ratio lead to a decline in ROE (because ROE = ROA x financial leverage). This means the bank needs to improve ROA to a greater extent than just what is necessary to offset the decline in ROE. To expand ROA (≂ profit/assets ≂ (gross profit/assets) x 1 - overhead ratio [OHR = general and administrative expenses/gross profit]), the bank can pursue two strategies: increase ROA itself or reduce OHR. To strengthen ROA, Hokkoku Bank is focusing on expanding income from its Consultation services, Bank cards, and Leasing businesses. To reduce OHR, it has scaled back its branches and undertaken measures to reduce costs such as migrating its backbone system to the cloud.
Earnings trends
◤ On a consolidated basis, Hokkoku Bank reported FY03/20 ordinary income of JPY74.7bn (+11.4% YoY), ordinary profit of JPY13.2bn (-6.9% YoY), and profit of JPY7.3bn (-14.8% YoY). The consolidated capital adequacy ratio (international standard) was 10.30% (-1.48pp YoY). On a non-consolidated basis, core gross profit came to JPY41.6bn (+0.2% YoY), core operating profit to JPY12.2bn (-8.2% YoY), and ordinary profit to JPY12.0bn (-6.3% YoY). The main factor pushing down profit was a 205.4% YoY increase in cost of credit to JPY9.8bn.
◤ For FY03/21, the bank forecasts ordinary profit of JPY8.5bn (-35.5% YoY), profit of JPY4.5bn (-38.4% YoY), and non- consolidated core operating profit of JPY11.0bn (-9.6% YoY). It expects some impact from the novel coronavirus (COVID-19) pandemic on the economy as a whole to linger. It also thinks earnings will likely be weighed down by a rising cost of credit and investment to implement its new medium-term business plan ahead of schedule.
◤ Hokkoku Bank has extended its medium-term business plan (originally covering FY03/19 to FY03/21) by three years to FY03/24. The new plan calls for FY03/24 consolidated ordinary profit of JPY16.0bn (CAGR of 5.0% from FY03/20), consolidated profit of JPY10.0bn (CAGR of 8.1% from FY03/20), operating income from new businesses (Consultation services, Bank cards, and Leasing) of JPY4.0bn (CAGR of 22.9% from JPY1.8bn in FY03/20), non-consolidated OHR of 60–65%, and non-consolidated ROE of 4.0%.
Strengths and weaknesses
Hokkoku Bank’s strengths are 1) distinct measures to stay ahead of rivals through the early adoption of digital and cloud solutions to streamline operations, 2) growth in noninterest income businesses driven by Consultation services, and 3) successfully avoiding labor productivity decline by consistently enhancing productivity and strengthening noninterest income. Its weaknesses are 1) its vulnerability to structural declines in demand as the population contracts in its core market, the three Hokuriku prefectures, 2) its slow progress in enhancing credit risk management among internationally active banks, and 3) a lack of diversity in personnel recruiting.
04/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Key financial data
Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Consolidated ordinary income 70,130 70,160 69,314 66,573 74,109 74,686 67,413 68,633 67,114 74,740 YoY -7.2% 0.0% -1.2% -4.0% 11.3% 0.8% -9.7% 1.8% -2.2% 11.4% Non-consolidated ordinary income 57,846 58,524 58,248 55,409 63,162 64,125 56,729 57,693 56,610 64,050 YoY -7.8% 1.2% -0.5% -4.9% 14.0% 1.5% -11.5% 1.7% -1.9% 13.1% Cons.- non-cons. difference 12,284 11,636 11,066 11,164 10,947 10,561 10,684 10,940 10,504 10,690 Non-cons. core gross profit 48,561 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 YoY 0.2% 0.2% -3.5% -1.2% 1.7% -1.6% -5.3% 2.5% -7.8% 0.2% Non-cons. core operating profit 17,062 18,270 17,098 16,606 16,856 17,974 15,142 16,694 13,253 12,162 11,000 YoY 5.6% 7.1% -6.4% -2.9% 1.5% 6.6% -15.8% 10.2% -20.6% -8.2% -9.6% Cons. ordinary profit 13,000 14,865 14,123 16,798 18,941 17,601 15,867 16,367 14,165 13,181 8,500 YoY 96.6% 14.3% -5.0% 18.9% 12.8% -7.1% -9.9% 3.2% -13.5% -6.9% -35.5% Profit attributable to owners of parent 7,435 6,314 6,994 7,855 7,989 9,569 10,851 10,163 8,583 7,310 4,500 YoY - -15.1% 10.8% 12.3% 1.7% 19.8% 13.4% -6.3% -15.5% -14.8% -38.4% Per-share data (split-adjusted; JPY) Shares issued ('000) 337,401 327,401 317,401 314,601 314,601 299,901 299,901 29,990 29,110 29,110 EPS 21.9 19.0 21.7 25.0 25.5 31.5 362.5 346.4 296.8 255.6 161.1 EPS (fully diluted) 21.9 19.0 21.7 24.9 25.5 31.4 361.3 Dividend per share 0.0 0.0 6.0 7.0 7.0 8.0 9.0 90.0 80.0 70.0 60.0 Book value per share 585.5 622.4 665.8 683.5 782.9 752.4 8,138.9 9,029.6 9,106.3 8,361.4 Cons. Balance sheet (JPYmn) Cash and due from banks 61,464 55,927 77,445 160,303 544,907 467,351 748,544 1,094,772 1,221,400 1,389,813 Securities 892,892 902,333 886,272 893,006 1,190,527 1,018,148 1,104,367 1,060,597 1,088,790 990,091 Loans and bills discounted 2,202,152 2,265,382 2,322,999 2,350,504 2,355,374 2,328,285 2,315,444 2,402,114 2,567,333 2,599,328 Lease receivables and investment assets 21,505 21,588 21,495 22,812 21,672 21,741 25,160 29,602 33,335 36,532 Property, plant and equipment 36,337 35,511 33,551 37,368 38,301 36,923 35,223 34,155 32,804 31,414 Intangible assets 2,756 3,036 3,834 7,589 8,970 8,866 8,315 9,385 10,097 11,122 Total assets 3,294,745 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 Deposits 2,874,581 2,958,403 3,011,013 3,049,886 3,079,447 3,086,299 3,185,984 3,362,662 3,538,022 3,634,904 Call money and bills sold 195 12,659 324,605 67,916 293,334 696,969 847,399 981,819 Total liabilities 3,091,867 3,195,850 3,268,911 3,290,339 3,932,060 3,669,000 4,068,006 4,504,115 4,758,010 4,856,502 Adjusted shareholders' equity 170,380 171,875 175,276 180,620 182,882 188,353 198,706 201,734 207,876 210,266 Shareholders' equity 197,141 203,390 211,089 214,904 238,433 225,508 243,969 261,121 263,329 233,592 Total net assets 202,878 209,777 218,492 223,438 247,730 235,020 252,358 268,777 271,215 240,765 Total liabilities and net assets 3,294,745 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 Cons. equity ratio 6.0% 6.0% 6.1% 6.1% 5.7% 5.8% 5.6% 5.5% 5.2% 4.6% Cash flow statement (JPYmn) Cash flows from operating activities 59,596 14,973 -8,211 73,257 637,701 -218,579 324,491 290,627 140,604 110,694 Cash flows from investing activities -51,776 -820 34,841 12,420 -247,118 143,804 -41,647 63,755 -12,320 61,370 Cash flows from financing activities -2,809 -19,869 -5,133 -3,249 -5,791 -3,945 -3,243 -8,884 -2,627 -5,852 Financial ratios (non-consolidated) Deposits and negotiable certificates of deposit 2,963,289 3,107,913 3,164,634 3,174,562 3,155,196 3,188,655 3,306,839 3,452,266 3,614,553 3,712,689 Loans and bills discounted 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 Loan-to-deposit gap 751,462 833,183 832,729 815,947 792,064 853,062 982,344 1,039,347 1,031,588 1,094,745 Loan-to-deposit ratio 74.6% 73.2% 73.7% 74.3% 74.9% 73.2% 70.3% 69.9% 71.5% 70.5% Securities-to-deposit ratio 30.09% 29.01% 27.98% 28.06% 37.66% 31.88% 33.33% 30.63% 30.05% 26.62% Dependency on securities investment 21.12% 22.15% 21.05% 21.01% 25.03% 26.90% 26.94% 33.23% 31.95% 24.83% Cash reserve ratio 3.03% 4.15% 5.63% 5.53% 17.27% 14.65% 23.54% 33.29% 33.79% 37.43% Overhead ratio (core gross profit-based) 64.86% 62.46% 63.58% 64.20% 64.26% 61.27% 65.54% 62.94% 68.07% 70.75% ROA (ordinary profit-based) 0.34% 0.40% 0.35% 0.42% 0.45% 0.41% 0.34% 0.33% 0.26% 0.24% ROE 5.70% 6.80% 5.86% 7.03% 7.63% 7.20% 6.01% 5.93% 4.98% 4.94% Profit ratio of customer services 0.33% 0.35% 0.29% 0.25% 0.18% 0.19% 0.15% 0.12% 0.13% 0.09% Credit cost ratio 0.21% 0.18% 0.25% 0.07% 0.32% 0.25% 0.05% 0.06% 0.12% 0.37% Lending margin (after credit costs) 1.44% 1.36% 1.17% 1.27% 0.96% 1.03% 1.16% 1.04% 0.89% 0.63% Yield on loans (year-end balance-base) 1.66% 1.55% 1.42% 1.34% 1.28% 1.27% 1.21% 1.10% 1.02% 1.00% Total capital adequacy ratio (consolidated) 14.68% 13.62% 13.69% 13.06% 11.72% 12.98% 12.60% 12.32% 11.78% 10.30% Tier 1 ratio (consolidated) 11.62% 11.79% 11.76% 11.24% 9.65% CET1 ratio (consolidated) 11.61% 11.78% 11.76% 11.23% 9.65% Risk-weighted assets 1,382,370 1,394,738 1,413,743 1,524,966 1,711,241 1,788,624 1,912,390 2,126,757 2,243,467 2,294,518 No. of branch offices and employees (non-consolidated) No. of branches (global) 122 117 112 104 103 104 104 105 105 105 No. of employees 2,009 1,951 1,894 1,842 1,787 1,781 1,787 1,802 1,787 1,759 Source: Shared Research based on bank data Notes: Loan-to-deposit ratio = loans outstanding/(deposits + negotiable certificates of deposit + bonds) Securities-to-deposit ratio = securities/(deposits + negotiable certificates of deposit + bonds) Core gross profit = net interest income + net fees and commissions + net trading income + net other operating income - net gains/losses on bonds Core operating profit = core gross profit - general and administrative expenses, etc. Yield on loans = interest on loans and discounts/average loans outstanding Yield on securities = interest and dividends on securities/average balance of securities Yield on interest-earning assets = interest income/average balance of interest-earning assets Yield on deposits = (deposits + negotiable certificates of deposit + bond interest)/(deposits + negotiable certificates of deposit + average balance of bonds) Total cost of funding = (interest expenses + general and administrative expenses)/average balance of interest-bearing liabilities OHR = general and administrative expenses/core gross profit The bank conducted a 1-for-10 reverse stock split with an effective date of October 1, 2017.
05/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Banking business earnings structure and glossary
Earnings structure of banking business (per financial summary) Earnings structure of banking business (per disclosure materials)
Ordinary income Interest income Interest on loans Gross profit (＝[1]+[2]+[3]+[4]) Int e re st and dividends on securit ies Interest on call loans Core gross profit (＝Gross profit - [5]) Interest on receivables under resale agreements Interest on receivables under securities borrowing transactions Net interest income Net interest income [1] Interest on bills bought Interest on deposits with banks （=interest income - interest expenses） other
Fees and commissions Fees and commissions on domestic and foreign exchanges Net fees and commission Net fees and commissions (=Fees and commissions - Fees Other fees and commissions and commissions payments) [2]
Trading income Gain on trading account securities transactions Income from securities and derivatives related to trading transactions Net trading profit Net trading profit [3] Income from trading-related financial derivatives transactions Other trading income
Other Net other operating profits (＝Ot her operat ing income - Net other operating profit operating Gain on foreign exchange transactions Other operating expenses) [4] income Gain on trading account securities transactions Gain on sale of bonds Net bond-related gains (losses) [5] Net bond-related gains (losses) Gain on redemption of bonds (= Gain on sale + Gain on redemption - Loss on sale - Loss on Income from derivatives other than for trading or hedging redemption - Loss on written-off claims) Other Gain on sale
Other Gain on redemption ordinary Reversal of allowance for loan losses Net stock-related gains (losses) income Recoveries of written off claims Loss on sale Gain on sale of st ocks and ot her se curit ie s Gain on money held in trust Loss on redemption Non-performing loans disposal Other Written-off claims Ordinary expenses Expenses Personnel expenses Interest Interest on deposits expenses Interest on negotiable certificates of deposit Non-personnel expenses Interest on debentures Interest on call money Taxes Interest on payables under repurchase agreements Interest on payables under securities lending transactions Net operating income (before provision for ordinary loan loss) Interest on bills sold (= Gross profit - Expenses) Interest on commercial papers Core operating profit Interest on borrowings and rediscounts (= Net operating profit - [5]) Interest on short-term bonds Interest on bonds Provision for ordinary loan loss Interest on bonds with subscription rights to shares Interest on interest swaps Operating profit Other interest expenses (= Gross profit - Expenses - Provision for ordinary loan loss) Nonrecurring gains (losses)
Net stock-related gains (= [6]-[7]-[8]) Fees and Fees and commissions on domestic and foreign exchanges commission Other fees and commissions Gain on sale [6] payments Loss on sale [7] Trading Expenses on trading securities and derivatives expenses Expenses on securities and derivatives related to trading Write-off [8] transactions Expenses on trading-related financial derivatives transactions Other trading expenses Non-performing loans disposal Provision for individual loan loss Other Loss on foreign exchange transactions operating Loss on trading account securities transactions Provision for contingent losses expenses Loss on sale of bonds Loss on redemption of bonds Written-off loans Loss on devaluation of bonds Amortization of debenture issuance cost Loss on disposal of loan claims Amortization of bond issuance cost Expenses on derivatives other than for trading or hedging (Total loan-loss provision and expenses) Other Reversal of provision for loan loss [3] General and administrative expenses Recovery of written-off claims [4] Other Provision of allowance for loan losses ordinary Written-off loans Reversal of provision for contingent losses expenses Loss on sale of stocks and other securities Loss on devaluation of stocks and other securities Other nonrecurring income (losses) Loss on money held in trust Other Ordinary profit Ordinary profit Source: Shared Research based on bank data
Glossary
▷ Gross profit = Net interest income + Net fees and commissions + Net trading income + Net other operating income
▷ Core gross profit = Net interest income + Net fees and commissions + Net trading income + Net other operating income - Net gains/losses on bonds
▷ Net interest income: The difference between interest income generated by investing funds (interest on loans and discounts and interest and dividends on securities generated by investing deposits and other funds in loans and securities), and interest expenses paid to raise funds (e.g. interest on deposits).
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▷ Net fees and commissions: Fees and commissions minus fees and commissions payments. Net fees and commissions, earned when the bank provides services, are the difference between fees and commissions collected for services offered by the bank (such as fund transfer, investment trust sales, insurance sales, and arrangement of syndicated loans), and the expenses needed to provide such services. It includes fees and commissions on domestic and foreign exchanges (the largest component), fees and commissions on fund transfers for individuals or companies (including syndicated loan arrangement fees and ATM usage fees), fees and commissions earned in the investment banking business (including for M&A), and fees and commissions on sale of investment trusts and insurance products at bank branches.
▷ Net trading income: Net income from trading accounts (designated for trading purposes) that aim to generate capital gains from short-term fluctuations in securities or currency exchange market prices (including derivatives transactions and foreign exchange transactions such as forward foreign exchange contracts) or from variation among markets. Net trading income is the difference between income and expenses directly related to transactions in trading accounts. This is a separate account to record results from transactions that are distinct from non-trading operations such as lending and deposits. Trading income mainly comes from gains realized through operations with trading accounts such as market transactions (such as securities) and derivatives transactions. Trading expenses, which are expenses incurred in trading account operations, roughly correspond to losses incurred on market transactions of securities and derivatives transactions. Hokkoku Bank does not operate trading accounts, so it does not record trading income or trading expenses.
▷ Net other operating income: Profits other than net interest income or net fees and commissions. This includes gains/losses on sale of bonds such as government bonds held for investment purposes (net gains/losses on bonds) and gains/losses from foreign exchange and bonds trading (sales/purchase of foreign currencies). Net gains/losses on bonds are generated from sale of government bonds and other bonds held. In other word, net gains/losses on bonds can be considered unusual gains/losses.
▷ Net noninterest income = Net fees and commissions + Net trading income + Net other operating income
▷ Core operating profit Core gross profit - General and administrative expenses
▷ Cost of credit = Provision of allowance for general loan losses + Non-performing loans (NPL) disposal amount - Reversal of allowance for loan losses - Recoveries of written-off claims
07/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Recent updates
Highlights
On September 29, 2020, Shared Research initiated coverage of Hokkoku Bank, Ltd.
For previous releases and developments, please refer to the “News and topics” section.
08/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Trends and outlook Quarterly trends and results
Cumulative (consolidated) FY03/19 FY03/20 FY03/21 FY03/21 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of Est. 1H Est. % of Est. FY Es t . Ordinary income 18,387 34,544 51,522 67,114 22,060 39,483 58,944 74,740 22,071 YoY -7.8% -2.7% -4.2% -2.2% 20.0% 14.3% 14.4% 11.4% 0.05% Ordinary expenses 13,139 25,455 38,638 52,948 16,229 30,737 45,741 61,558 14,800 YoY 11.7% 2.7% 1.7% 1.3% 23.5% 20.8% 18.4% 16.3% -8.8% Ordinary profit 5,248 9,088 12,584 14,165 5,831 8,746 13,203 13,181 7,271 121.2% 6,000 85.5% 8,500 YoY -35.8% -15.2% -20.2% -13.5% 11.1% -3.8% 4.9% -6.9% 24.7% -31.4% -35.5% Profit 3,438 5,814 7,954 8,583 3,573 5,229 7,659 7,310 4,818 137.7% 3,500 107.1% 4,500 YoY -38.1% -18.2% -23.5% -15.5% 3.9% -10.1% -3.7% -14.8% 34.8% -33.1% -38.4% Quarterly FY03/19 FY03/20 FY03/21 (JPYmn) 1Q2Q3Q4Q1Q2Q3Q4Q1Q Ordinary income 18,387 16,157 16,978 15,592 22,060 17,423 19,461 15,796 22,071 YoY -7.8% 3.8% -7.1% 4.9% 20.0% 7.8% 14.6% 1.3% 0.05% Ordinary expenses 13,139 12,316 13,183 14,310 16,229 14,508 15,004 15,817 14,800 YoY 11.7% -5.4% -0.2% 0.3% 23.5% 17.8% 13.8% 10.5% -8.8% Ordinary profit 5,248 3,840 3,496 1,581 5,831 2,915 4,457 -22 7,271 YoY -35.8% 51.2% -30.9% 168.0% 11.1% -24.1% 27.5% - 24.7% Profit 3,438 2,376 2,140 629 3,573 1,656 2,430 -349 4,818 YoY -38.1% 52.8% -35.1% - 3.9% -30.3% 13.6% - 34.8%
Cumulative (non-consolidated) FY03/19 FY03/20 FY03/21 FY03/21 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of Est. 1H Est. % of Est. FY Es t . Gross profit (A) 12,402 22,387 33,539 42,882 12,645 23,963 37,546 47,53811,718 Core gross profit (A)-(B) 11,812 21,447 32,261 41,509 11,073 20,704 31,873 41,584 10,915 YoY -6.2% -6.0% -8.3% -7.8% -6.3% -3.5% -1.2% 0.2% -1.4% Net interest income 10,298 18,572 27,826 35,556 9,524 17,550 27,027 34,876 9,337 Net fees and commissions 1,446 2,845 4,246 5,604 1,347 2,771 4,263 5,9381,432 Net other operating income 657 968 1,465 1,722 1,773 3,642 6,255 6,723 948 Net bond-related gains (losses) (B) 590 940 1,278 1,372 1,572 3,259 5,673 5,952 803 General and administrative expenses (C) 7,120 14,090 21,117 28,256 7,183 14,386 21,955 29,422 7,287 Net OP (before provision for general loan loss) (A)-(C) 5,281 8,296 12,421 14,626 5,461 9,577 15,591 18,116 4,431 Core operating profit (A)-(B-(C) 4,691 7,356 11,143 13,253 3,889 6,317 9,917 12,162 3,627 60.5% 6,000 33.0% 11,000 YoY -17.6% -16.6% -20.7% -20.6% -17.1% -14.1% -11.0% -8.2% -6.7% -5.0% -9.6% Core OP (ex. gains [losses] on trust cancellation) 6,465 10,202 12,268 3,724 6,075 9,568 11,813 3,627 Provision for ordinary loan loss [1] (D) 153 -415 -421 203 -139 579 1,5642,674312 Operating profit (A)-(C)-(D) 5,128 8,712 12,843 14,422 5,601 8,998 14,02615,4414,118 Net bond-related gains (losses) (B) 590 940 1,278 1,372 1,572 3,259 5,6735,952803 Nonrecurrent gains (losses) -224 -331 -1,184 -1,642 92 -658 -1,641 -3,4642,825 Net stock-related gains 556 1,054 1,299 1,309 3,125 3,541 4,192 3,975 3,400 Nonperforming loan disposal [2] 967 1,464 2,316 3,062 3,338 4,298 5,7467,1031,409 Reversal of provision for loan-loss [3] Gain on recovery of written-off claims [4] 5 14 17 69 2 10 12 17 2 Ordinary profit 4,903 8,380 11,658 12,780 5,693 8,339 12,385 11,977 6,943 126.2% 5,500 92.6% 7,500 YoY -36.5% -14.0% -19.3% -13.3% 16.1% -0.5% 6.2% -6.3% 22.0% -34.0% -37.4% Extraordinary income (losses) -10 -85 -98 -710 -89 -195 -559 -1,154 -58 Profit before income taxes 4,892 8,295 11,559 12,070 5,603 8,143 11,82510,8236,885 Income taxes 1,577 2,726 3,933 4,046 2,067 3,126 4,583 4,147 2,202 Profit 3,314 5,569 7,625 8,023 3,537 5,018 7,242 6,676 4,682 156.1% 3,000 117.1% 4,000 YoY -38.1% -16.7% -22.3% -15.4% 6.7% -9.9% -5.0% -16.8% 32.4% -40.2% -40.1%
Credit cost ([1]+[2]-[3]-[4]) 1,114 1,033 1,877 3,195 3,196 4,867 7,2989,7591,720 YoY - 134.2% 69.9% 104.5% 186.9% 371.2% 288.8% 205.4% -46.2%
Quarterly (non-consolidated) FY03/19 FY03/20 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Gross profit (A) 12,402 9,985 11,152 9,343 12,645 11,318 13,583 9,992 11,718 Core gross profit (A)-(B) 11,812 9,635 10,814 9,248 11,073 9,631 11,169 9,711 10,915 Net interest income 10,298 8,274 9,254 7,730 9,524 8,026 9,477 7,849 9,337 Net fees and commissions 1,446 1,399 1,401 1,358 1,347 1,424 1,492 1,6751,432 Net other operating income 657 311 497 257 1,773 1,869 2,613 468 948 Net bond-related gains (losses) (B) 590 350 338 94 1,572 1,687 2,414 279803 General and administrative expenses (C) 7,120 6,970 7,027 7,139 7,183 7,203 7,569 7,467 7,287 Net OP (before provision for general loan loss) (A)-(C) 5,281 3,015 4,125 2,205 5,461 4,116 6,014 2,525 4,431 Core operating profit (A)-(B-(C) 4,691 2,665 3,787 2,110 3,889 2,428 3,600 2,245 3,627 Core OP (ex. gains [losses] on trust cancellation) - 6,465 3,737 2,066 3,724 2,351 3,493 2,245 3,627 Provision for ordinary loan loss [1] (D) 153 -568 -6 624 -139 718 985 1,110 312 Operating profit (A)-(C)-(D) 5,128 3,584 4,131 1,579 5,601 3,397 5,028 1,415 4,118 Net bond-related gains (losses) (B) 590 350 338 94 1,572 1,687 2,414 279803 Nonrecurrent gains (losses) -224 -107 -853 -458 92 -750 -983 -1,823 2,825 Net stock-related gains 556 498 245 10 3,125 416 651 -217 3,400 Nonperforming loan disposal [2] 967 497 852 746 3,338 960 1,448 1,357 1,409 Reversal of provision for loan-loss [3]------Gain on recovery of written-off claims [4]5935228252 Ordinary profit 4,903 3,477 3,278 1,122 5,693 2,646 4,046 -408 6,943 YoY -36.5% 72.1% -30.4% 288.2% 16.1% -23.9% 23.4% - 22.0% Extraordinary income (losses) -10 -75 -13 -612 -89 -106 -364 -595 -58 Profit before income taxes 4,892 3,403 3,264 511 5,603 2,540 3,682 -1,002 6,885 Income taxes 1,577 1,149 1,207 113 2,067 1,059 1,457 -436 2,202 Profit 3,314 2,255 2,056 398 3,537 1,481 2,224 -566 4,682 YoY -38.1% 68.8% -34.4% - 6.7% -34.3% 8.2% - 32.4%
Credit cost ([1]+[2]-[3]-[4]) 1,114 -81 844 1,318 3,196 1,671 2,431 2,461 1,720 YoY - - 27.1% 188.4% 186.9% - 188.0% 86.7% -46.2% Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.
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Quarterly trends in consolidated ordinary income (left) and consolidated ordinary profit (right)
(JPYmn) Q1 Q2 Q3 Q4 (JPYmn) Q1 Q2 Q3 Q4
78,000 74,740 17,000 67,114 68,000 15,000 14,165 15,796 13,181 13,000 1,581 58,000 15,592 11,000 3,496 4,457 48,000 19,461 16,978 9,000 38,000 7,000 3,840 2,915 17,423 28,000 16,157 5,000 18,000 7,271 3,000 5,831 22,060 22,071 5,248 8,000 18,387 1,000 -22 -2,000 -1,000 FY03/19 FY03/20 FY03/21 FY03/19 FY03/20 FY03/21 Source: Shared Research based on bank data
Q1 FY03/21 results Summary
▷ Ordinary income (consolidated): JPY22.1bn (+0.05% YoY)
▷ Core gross profit (non-consolidated): JPY10.9bn (-1.4% YoY)
▷ Core operating profit (non-consolidated): JPY3.6bn (-6.7% YoY) (60.5% of 1H target, 33.0% of full-year target)
▷ Ordinary profit (consolidated): JPY7.3bn (+24.7% YoY) (121.1%, 85.5%)
▷ Profit (consolidated): JPY4.8bn (+34.8% YoY) (137.7%, 107.1%)
At the consolidated level, ordinary income increased 0.05% YoY to JPY22.1bn. Interest on loans and discounts and interest and dividends on securities both declined, but the bank recorded an increase in gains/losses on securities (net bond-related gains/losses + net stock-related gains). Ordinary expenses fell 8.8% YoY to JPY14.8bn due mainly to a decline in credit-related costs. As a result, ordinary profit rose 24.7% YoY to JPY7.3bn, and profit attributable to owners of parent rose 34.8% YoY to JPY4.8bn, surpassing the full-year target of JPY4.5bn. At the non-consolidated level, core operating profit fell 6.7% YoY to JPY3.6bn. Net interest income was down YoY due mainly to declines in interest on loans and discounts and in interest and dividends on securities. In general and administrative expenses, non-personnel expenses expanded YoY. Non-consolidated ordinary profit climbed 22.0% YoY to JPY6.9bn.
Non-consolidated profit/losses Core gross profit Core gross profit fell JPY158mn YoY to JPY10.9bn. Net interest income was down JPY187mn YoY. Net fees and commissions rose JPY85mn YoY, but the growth was not sufficient to offset the decline in net interest income. Net other operating income (excluding net gains/losses on bonds) was down JPY56mn YoY. The yield on corporate loans based on business potential remained in a downtrend, and the bank looks for a decline of about 5bp over the full year. At the same time, it indicated the yield on consumer loans is showing signs of bottoming out, reflecting effects of a 0.1% hike in its effective prime interest rate for new loans in autumn 2019.
The bank forecasts an 8% YoY increase in net fees and commissions for full-year FY03/21. Although its sales activities in April and May fell short of plan due to the impact of the COVID-19 pandemic, the bank recorded a 6.3% YoY increase in net fees and commissions in Q1 FY03/21 because it booked roughly JPY100mn in M&A fees (one deal).
Net other operating income fell 46.5% YoY to JPY948mn (of which net bond-related gains contributed JPY803mn). The bank manages roughly JPY80.0bn in investment trusts, but it was unable to record gains on sales by flexibly selling assets.
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General and administrative expenses General and administrative expenses increased JPY104mn YoY to JPY7.3bn. Personnel expenses were down JPY109mn YoY, but non-personnel expenses increased JPY239mn YoY. OHR was 66.8%, up 1.9pp from 64.9% in Q1 FY03/20. The bank projects full- year FY03/21 OHR of 71.0–72.0% (70.8% in FY03/20).
Core operating profit Core operating profit declined JPY262mn YoY to JPY3.6bn, due mainly to a decline in net interest income and an increase in non- personnel expenses. The bank recorded zero gains/losses on cancellation of investment trusts.
Ordinary profit Gains on securities fell JPY494mn YoY to JPY4.2bn, reflecting a YoY decline of JPY769mn in net bond-related gains and a YoY increase of JPY275mn in net stock-related gains. Gains on securities finished below the JPY9.9bn recorded in Q1 FY03/20 (net bond-related gains: JPY6.0bn, net stock-related gains: JPY4.0bn), but exceeded the bank’s FY03/21 full-year target of JPY2.5bn. Cost of credit fell JPY1.9bn YoY to JPY1.4bn. Ordinary profit rose 22.0% YoY to JPY6.9bn, driven by nonrecurring gains of JPY2.7bn attributable to growth in net stock-related gains and a reactionary decline in cost of credit.
Main accounts (non-consolidated) Interest-bearing liabilities (period-end balance) The balances of deposits (deposits + negotiable certificates of deposit [NCD]) were firm both for individual and corporate customers, rising JPY244.4bn YoY to JPY3.9tn. Individual deposit assets increased mainly on growth in individual deposits. Government bonds were up JPY2.4bn, investment trusts down JPY6.2bn, and over-the-counter (OTC) insurance sales at bank branches down JPY6.1bn.
Interest-earning assets (period-end balance) Loans outstanding were up JPY79.6bn YoY to JPY2.6tn. Housing loans were up JPY37.7bn YoY.
Valuation difference on available-for-sale securities Balance of securities with fair value was JPY1.0tn, and the valuation difference narrowed JPY12.5bn YoY to JPY57.9bn.
NPL trends NPLs based on the Financial Reconstruction Act were down JPY1.0bn YoY to JPY59.0bn. The NPL ratio was 2.16%, down 0.1pp from 2.26% in Q1 FY03/20, but up 0.05pp from 2.11% at end-FY03/20. Allowance for loan losses rose due to deterioration of classification of claims (worth over JPY1.0bn) in Q1 FY03/20. In Q1 FY03/21, classification of claims worth JPY700mn was deteriorated. For FY03/21, Hokkoku Bank forecasts JPY6.0bn in cost of credit, JPY2.0bn above the typical annual amount. However, amid concerns over further economic impact from the COVID-19 pandemic, the bank does not rule out the possibility of an increase in cost of credit beyond JPY6.0bn.
Capital adequacy ratio In Q1 FY03/21, the consolidated total capital adequacy ratio stood at 11.20%, up 0.9pp from 10.30% at end-FY03/20. At the non-consolidated level, the capital adequacy ratio was 10.96%, up 0.86pp YoY from 10.10% at end-FY03/20.
For details on previous quarterly and annual results, please refer to the Historical performance and financial statements section.
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Full-year bank forecast Numerical targets For FY03/21, Hokkoku Bank forecasts consolidated ordinary profit of JPY8.5bn (-35.5% YoY) and profit of JPY4.5bn (-38.4% YoY), alongside non-consolidated ordinary profit of JPY7.5bn (-37.4% YoY) and profit of JPY JPY4.0bn (-40.1% YoY).
In Q1 FY03/21, the bank reported consolidated ordinary profit of JPY7.3bn (+24.7% YoY; 85.5% of its full year target) and profit of JPY4.8bn, which exceeded its full-year target. The outcome reflected a JPY4.2bn gain on securities (total for net bond-related gains and net stock-related gains), surpassing the full-year target of JPY2.5bn.
Earnings forecasts FY03/20 FY03/21 YoY (JPYmn) 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. 1H Est. 2H Est. FY Es t . Consolidated ordinary income 39,483 35,257 74,740 Consolidated ordinary profit 8,746 4,435 13,181 6,000 2,500 8,500 -31.4% -43.6% -35.5% Consolidated profit 5,229 2,081 7,310 3,500 1,000 4,500 -33.1% -51.9% -38.4% Core gross profit (non-consolidated) 20,704 20,880 41,584 Core operating profit (non-consolidated) 6,317 5,845 12,162 6,000 5,000 11,000 -5.0% -14.5% -9.6% Ordinary profit (non-consolidated) 8,339 3,638 11,977 5,500 2,000 7,500 -34.0% -45.0% -37.4% Profit (non-consolidated) 5,018 1,658 6,676 3,000 1,000 4,000 -40.2% -39.7% -40.1% Source: Shared Research based on bank data
Non-consolidated earnings forecast President and CEO Shuji Tsuemura has indicated the bank aims to accelerate its medium-term business plan through FY03/24 by one or two years. Therefore, its earnings are unlikely to expand in the near term as the bank expects performance in FY03/21–22 to be weighed down by growth in expenses associated with upfront investment and by an increase in cost of credit due to the impact of the COVID-19 pandemic.
Assumptions of the forecast
▷ Net interest income: The bank basically looks for a 5bp decline in the yield on loans over the full year, but its yield on consumer loans is showing signs of bottoming out due in part to the effects of a 0.1pp hike in the bank’s prime interest rate in autumn 2019.
▷ Net fees and commissions: The bank anticipates an increase of 8% YoY, but it was unable to conduct sufficient sales activities in April–May in Q1 FY03/21, so we will carefully watch whether it can compensate for the lag in Q2 and beyond.
▷ General and administrative expenses: The bank expects an increase driven by non-personnel expenses. It plans to focus on developing a corporate transaction system for Hokkoku Cloud Banking. In addition to accelerating investment, the bank expects depreciation of systems and upgrade costs to increase by several hundred million yen (its new medium-term plan calls for JPY3.1bn in systems depreciation and upgrade investment in FY03/21). We understand the bank also assumes full-year OHR of 71.0–72.0%, exceeding 70.8% in FY03/20.
▷ Gains on securities: The bank forecasts total gains of JPY2.5bn, comprising net bond-related gains and net stock-related gains.
▷ Cost of credit: The bank initially forecasted JPY6.0bn in cost of credit, which is JPY2.0bn above the typical level. In Q1 FY03/21, cost of credit finished at JPY1.7bn, broadly in line with the quarterly target. The bank now does not rule out the possibility cost of credit will come in above its initial forecast of JPY6.0bn and reach JPY10.0bn, on par with the FY03/20 level.
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Medium-term business plan Numerical targets In November 2019, Hokkoku Bank extended its original three-year medium-term business plan covering through FY03/21, until FY03/24 (now effectively a six-year plan), rebranding it as “Communication x Collaboration x Innovation 2024”.
The new medium-term business plan calls for FY03/24 consolidated ordinary profit of JPY16.0bn (versus JPY13.2bn in FY03/20) and profit of JPY10.0bn (JPY7.3bn). It targets JPY4.0bn in non-consolidated income from new businesses, which include Bank cards, Leasing, and Consultation services (JPY1.8bn in FY03/20). As for management indicators, it looks to maintain a capital adequacy ratio in the 11% range, and targets OHR of 60-65% and ROE in the 4.0% range. Over the long term, it aims to bring down non-consolidated OHR to the 50% range and raise non-consolidated ROE to over 5.0%. In July 2020, President Tsuemura indicated the bank aims to accelerate its medium-term plan through FY03/24 by two years.
Numerical targets in medium-term business plan
FY03/19 FY03/20 FY03/21 FY03/22 FY03/23 FY03/24 FY03/25 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Previous medium-t erm plan (JPYmn) Communication x Collaboration x Innovation 2024: Current medium-term plan (three year extension of the previous plan) Act. Act. Plan Plan Plan Plan Plan Ordinary profit (consolidated) 14,165 13,181 12,500 16,000 Profit (consolidated) 8,583 7,310 8,000 10,000 Income from new businesses (non-consolidated) 1,224 1,756 2,500 4,000 Consultation 410 661 1,200 1,500 Individuals 200 Corporates 1,000 Leasing 274 332 600 500 Bank cards 537 762 700 2,000 28,256 29,422 A little less than General and administrative expenses (non-consolidated) 25,500 Non-personnel expenses 12,004 13,062 Personnel expenses 14,372 14,261 Core system costs (depreciation, upgrades, operation, and maintenance) 2,600 2,700 3,100 3,100 3,000 2,300 1,600 Capital adequacy ratio (consolidated) 11.78% 10.30% Over 12.5%, Maintain under 13.0% 11–12% range Overhead ratio (non-consolidated; core gross profit-based) 68.1% 70.75% 60–65% ROE (non-consolidated) 3.12% 2.75% 4.0% Number of employees 1,787 1,759 Approx. 1,800 Number of branches applying the branch-in-branch approach 5 8 10–15 Source: Shared Research based on bank data Note: FY03/21 targets are the initial targets included in the previous medium-term plan. Assumptions behind the medium-term business plan The medium-term business plan does not include a numerical target for core gross profit. Assuming the BOJ will maintain its negative interest rate policy for the foreseeable future, net interest income is likely to remain in a downtrend. The medium-term plan envisages noninterest income businesses will offset the decline in net interest income, while reducing expenses such as depreciation of systems by migrating the core banking system to the cloud.
If we assume non-consolidated OHR of 64% (medium-term plan targets 60–65%) and general and administrative expenses of JPY27.5bn (FY03/21 target in previous medium-term plan [JPY25.0–25.5bn in personnel and non-personnel expenses] + taxes), core gross profit works out to JPY43.0bn (= 27,500/64%). Core gross profit was JPY41.6bn in FY03/20, so this implies a JPY1.5bn YoY increase. The assumption of JPY27.5bn for general and administrative expenses implies a roughly JPY1.9bn decline from the JPY29.4bn in FY03/20. Because Hokkoku Bank aims to accelerate its new medium-term plan, Shared Research thinks the bank expects expenses including depreciation of systems to increase by several hundred million yen above its released forecasts for FY03/21–22, before halving in FY03/24–25. Looking at the breakdown of system depreciation and upgrade costs, the bank needs to depreciate its Hokkoku Cloud Banking system for individual customers (launched in September 2019) and assets with a 10- year depreciation schedule for its core banking system (Bank Vision) that was upgraded in 2015.
Net interest income, which makes up the bulk of core gross profit, has been at a CAGR of -3.14% in the last five years. Net interest income is driven by trends in loans outstanding and yield on loans. Even if we assume a CAGR of 2.07% for loans outstanding (the actual growth rate for the last five years), net interest income looks poised to decline further given that the yield on loans is also declining.
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Key points of medium-term business plan Strengthen net noninterest income The medium-term plan calls for income of JPY4.0bn from new businesses, breaking down into JPY2.0bn for the Bank cards business, JPY1.5bn for the Consultation services business, and JPY500mn for the Leasing business. The bank is particularly focusing on income growth in the Bank cards business, which it aims to expand from JPY762mn in FY03/20 to JPY2.0bn. The Bank cards business has already been profitable on a single-year basis, and the bank expects the promotion of cashless payment solutions to contribute to increases in affiliated merchants and in the number of debit cards issued.
Hokkoku Bank aims to expand its Leasing business share by achieving an optimal mix of lending and leasing services. However, it has lowered its numerical target from JPY600mn in the previous medium-term plan to JPY500mn in recognition of fierce price competition from major leasing companies. To shore up its group-wide sales capabilities, in April 2020 Hokkoku Bank established a new leasing division to oversee leasing business across the group. The bank has consolidated its credit decisions and response policies, and set up an operating structure that covers all aspects from lease consultations to execution.
Key points of medium-term management strategy Sales t o individual client s Sales t o corporate client s 1. Strengthen sales Sales strategy Key point s Object ives Key point s Object ives ●Secure earnings from new businesses ■ Increase noninterest income ・Adopt sales approach (Consultation services, Leasing, Bank cards) (1) Increase assets (1) Maximize revenue that facilitates under management per customer ・ Diversify interaction comprehensive ●Promote cashless operations (2) Adopt multi- (2) Expand range of with customers in line transactions with all faceted sales approach transactions in Toyama with their needs customers for loans and Fukui Prefectures ・ Support sales ・Develop deeper ●Evolve and optimize customer data analysis (3) Strengthen non- (3) Further develop through data-driven understanding of through IT solutions face-to-face Bank cards, Leasing, marketing customers to find int eract ion w it h Consultation services more consultation customers businesses service opport unit ies
Sales t o individual client s Sales t o corporate client s 2. Optimize management further Systems strategy Key point s Object ives Key point s Object ives 2019: Release of 2021: Release for Hokkoku Cloud Ensure all transactions corporate customers, Banking for individual can be completed Complet e all ■ Branch-in-branch approach, dynamically ● Digit alize t ransact ions t hrough cloud overdraft (online customers, round-the- without visiting a consultations online, deploy and streamline staff banking (next-generation online banking) borrowing, online clock real-time funds branch, improve improve productivity repayments, improved transfer, smartphone productivity security, etc.) app
■Reduce system operation and ● Integrate subsystems into extended Key point s Object ives maintenance costs relationship management (xRM) system → Reduce systems depreciation, upgrade investment, operation and maintenance costs by consolidating subsystems Depreciation costs Reduce by half → Establish structure that supports in- house development of subsystems Challenge: Secure professional IT talent
3. Enhance personnel training Personnel strategy Key point s Object ives
● Secure talents to accelerate evolution in ■ Cultivate professional human resources IT solutions ・Strengthen personnel → consultants and ・Limit the role of branches in relative terms → systems engineers ● Change work styles move to branch-in-branch approach (10–15 ・Reduce personnel → clerical workers and branches) ● Opt imize personnel st ruct ure branch staff
4. Capital adequacy ratio and ROE Recognition of current situation Key point s Object ives
●Reduce risk assets, unwind cross- (1) Curb excessive increases in risk assets, (2) shareholdings with financial institutions, To secure earnings through the smooth reduce cross-shareholdings w it h financial Maintain capital ratio at the 11% level subordinated debt provision of funds in regional areas and institutions, (3) introduce subordinated debt appropriate risk-taking, a certain degree of growth in risk assets and a decline in the Improve ROE (aim for target of 4.0% in ●Aim to streamline capital through share Conduct share buybacks and reduce shares capit al rat io are inevit able FY03/24, and 5% or higher over the medium buybacks, improve ROE outstanding to long term)
Source: Shared Research based on bank data
In the Consultation services business, the bank aims to cultivate professional personnel who can handle a large number of complex challenges and provide new value from a top management perspective. By expanding target customers beyond individual companies and providing comprehensive consultation services for corporate groups and industries as a whole, the bank will develop programs that contribute to the development of regional ecosystems.
Enhance efficiency through IT-driven sales and cost reductions Hokkoku Bank’s IT system strategy is a critical part of its overall management strategy. Its Hokkoku Cloud Banking system, released in 2019, has mainly supported individual customer transactions but will have support for corporate customer transactions in 2021. This will provide cloud banking support for nearly all of the transactions handled by Hokkoku Bank’s
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physical branches today. Because the system runs on a public cloud service, the bank will be able to rapidly respond to customer needs while keeping costs down. In 2021, the bank plans to move its core banking system to the cloud, effectively consolidating all customer data in the cloud. It expects to leverage the resulting data to qualitatively enhance its sales activities from 2022. The bank is also striving to bring the development of subsystems in-house. It has already started internal development of several systems, including its customer relationship management (CRM) system, which is slated for launch in 2021. The in-house development of subsystems is expected to reduce maintenance costs and system upgrade investment.
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Business Bank overview Prominent regional bank in Hokuriku area Hokkoku Bank is a mid-tier regional bank operating out of Ishikawa Prefecture. It was formed out of a merger of Kano Godo Bank, Kashu Bank, and Nowa Bank in December 1943. It became the only regional bank headquartered in Ishikawa Prefecture when former rival Ishikawa Bank filed for bankruptcy in 2001. The bank has no ties with megabanks or conglomerate-controlled banks, and therefore has a strong independent character. It had total assets of JPY5.1tn in FY03/20 (putting it in 30th position among the 64 regional banks nationwide; non-consolidated basis) and had the highest lending share (at 43.1%) in Ishikawa Prefecture in FY03/19 (according to the “Financial Map for 2020” special issue of the monthly magazine “Financial Journal”). Hokkoku Bank has a traditional banking business model centered on deposit and lending transactions. It raises short-term funds through deposits and invests in long-term assets such as loans and securities, earning the yield spread between short and long-term interest rates. In addition, the bank collects fees from noninterest income transactions (currency transactions such as the transfer of funds between distant areas, and noninterest income businesses including consulting, cards, and leasing operations). In recent years, the bank has focused on Consultation services, Bank cards, and Leasing as new businesses, and its fee-based businesses are expanding steadily.
Mainly operates in “three Hokuriku prefectures” Hokkoku Bank is headquartered in Ishikawa Prefecture, but it has expanded its presence into neighboring Toyama and Fukui Prefectures. Collectively referred to as the “three Hokuriku prefectures,” these three prefectures form an industrialized zone along the Sea of Japan nearly equidistant from Japan’s three largest metropolitan areas—the Tokyo, Tokai, and Kinki metropolitan areas. By shipment value, the top industries in the region are chemicals (Toyama ranked top among 47 prefectures, Ishikawa 6th, and Fukui 2nd), industrial machinery and equipment (Toyama 4th, Ishikawa 1st, and Fukui 8th), and electronic components, devices, and electric circuits (Toyama 5th, Ishikawa 2nd, and Fukui 1st) (based on the 2014 Census of Manufacture by Ministry of Economy, Trade and Industry [METI]). Other characteristics common in the three prefectures are high education standards, a high ratio of women in the workforce, and a low employee turnover rate. Access to female labor has contributed to the development of the textile, electronic component, and other industries that require meticulous workmanship. Between 2015 and 2040, the population in these three prefectures is expected to fall 7.1% in Toyama Prefecture, 5.4% in Ishikawa Prefecture, and 5.6% in Fukui Prefecture, exceeding the average national decline of 4.8%. However, the area is expected to attract a growing number of domestic and international tourists once the Hokuriku Shinkansen route—which opened in 2015 and currently runs from Tokyo to Kanazawa (Ishikawa Prefecture)—is extended to Tsuruga (Fukui Prefecture) in 2023.
Enhanced cost structure and fee business through overhaul of business model In FY03/20, core operating profit declined YoY due to a rise in cost of credit. However, the bank continues to make steady progress with the transformation of its business model through operational reforms that started in 2000. Its reforms aimed at achieving a low-cost structure began with a shift to paperless operations, and the resulting productivity gains have allowed employees to reduce overtime work and increase time spent interacting with customers. Putting work rationalization via IT systems at the heart of its reforms, the bank has realized a backbone system (core banking system mainly centered on account management) based on open standards and brought systems development and maintenance in-house under a self-reliance policy. It is also working to move its core banking system to the cloud (an industry first), and plans to start operating the cloud- based system in 2021. It has also leveraged its expertise (accumulated in its own operational restructuring) in paid consultation services aimed at resolving customer problems, and this has contributed to its earnings.
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Earnings trend
Core gross profit Yield of loans (JPYmn) Core operating profit Deposit yield Overhead ratio (core GP-based; RHS) 60,000 72% 2.0% Gross deposit-lending margin (RHS) 1.0% 48,669 48,669 48,561 48,561 70.8% 47,162 47,162 46,951 46,951 46,414 46,414 46,384 46,384 45,041 45,041 41,509 41,509 1.8% 43,949 43,949 70% 50,000 41,584 1.6% 1.72% 0.8% 68% 1.61% 68.1% 1.4% 40,000 1.47% 66% 1.2% 1.36% 0.6% 1.28% 1.27% 65.5% 1.23% 30,000 64.9% 64% 1.0% 1.13% 64.2% 64.3% 1.06% 1.02% 63.6% 0.8% 0.34% 0.4% 62.9% 62% 0.31% 0.31% 0.31% 0.30% 20,000 62.5% 0.28% 0.27% 0.6% 0.24% 61.3% 60% 0.4% 0.16% 0.2% 10,000 0.12% 58% 0.13% 0.2% 0.09% 0.06% 0.03% 0.02% 0.02% 0.01% 0.01% 0.01% 0.00% 0 56% 0.0% 0.0% FY03/11 FY03/13 FY03/15 FY03/17 FY03/19 FY03/11 FY03/13 FY03/15 FY03/17 FY03/19
Source: Shared Research based on bank data
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Business description
Business model Customers Hokkoku Bank’s customers are mainly individuals and companies in Ishikawa, Toyama, and Fukui Prefectures. The three Hokuriku prefectures have a total population of approximately 3.0mn (Ishikawa 1.1mn, Toyama 1.1mn, and Fukui 787,000). Based on monthly average disposable income, Ishikawa Prefecture currently ranks top among the 47 prefectures of Japan, Toyama Prefecture 3rd, and Fukui Prefecture 5th, suggesting these are relatively affluent areas. The three prefectures also have high homeownership rates.
Overview of three Hokuriku prefectures
Nationwide Hokuriku % of Japan Toyama Ishikawa Fukui Total area sq. km 377,974 12,624 3.34% 4,248 4,186 4,191 Total population 000 127,444 2,996 2.35% 1,063 1,146 787 Gross product (nominal, FY2016) JPYbn 549,866 12,400 2.26% 4,566 4,6233,211 Primary 6,107 127 2.08% 50 45 32 Secondary industry 149,290 4,255 2.85% 1,748 1,456 1,052 Tertiary industry 392,227 7,993 2.04% 2,754 3,120 2,119 Number of listed companies 3,832 69 1.80% 26 27 16 Number of offices 5,340,783 153,199 2.87% 51,785 59,770 41,644 Number of employees 000 56,873 1,423 2.50% 505 541 377 Source: Shared Research based on “Population, Demographics, and Number of Households Based on Basic Resident Register” by the Ministry of Internal Affairs and Communications (MIC), “Prefectural Accounts” by the Cabinet Office, the “2016 Economic Census – Activities Survey” by MIC, and other materials
Income levels by region
Nationwide Hokuriku Toyama Ishikawa Fukui Real income per working household (monthly) JPY'000 534 610 591 (9) 651 (1) 587 (10) Disposable income (monthly) JPY'000 434 510 510 (3) 517 (1) 504 (5) Income per head JPY'000 3,217 3,110 3,295 2,908 3,157 Passenger cars per head units 1.052 1.681 (2) 1.488 1.736 (1) Homeownership ratio ％ 79.4 (1) 70.8 76.5 (4) Total floor space per home sqm 150.08 (1) 127.58 (7) 143.83 (2) Source: Family Income and Expenditure Survey by MIC Note: Prefecture rankings in parentheses
The three Hokuriku prefectures form an industrial zone along the Sea of Japan nearly equidistant from Japan’s three largest metropolitan areas—the Tokyo, Tokai, and Kinki metropolitan areas. By shipment value, the top industries in the area are chemicals (Toyama ranked top among 47 prefectures, Ishikawa 6th, and Fukui 2nd), industrial machinery and equipment (Toyama 4th, Ishikawa 1st, and Fukui 8th), and electronic components, devices, and electric circuits (Toyama 5th, Ishikawa 2nd, and Fukui 1st) (based on the 2014 Census of Manufacture by METI).
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Major industries in the three Hokuriku prefectures and domestic market shares
Shipments from % of Japan three Hokuriku Indust ry Products Hokuriku Toyama Ishikawa Fukui prefectures (JPYmn) Silk, rayon textile refining, bleaching and dyeing 76.4% 0.0% 0.0% 76.4% 782 Polyester long fiber textiles 72.4% 0.0% 36.8% 35.6% 24,121 Manufacture of textile products Warp knit fabrics 75.5% 32.0% 2.8% 40.6% 19,622 Fabric tapes 52.2% 1.0% 20.3% 30.9% 18,360 Knit and lace dyeing and finishing 66.9% 0.0% 0.0% 66.9% 5,581 Manufacture of furniture and fixtures Fixtures for offices and stores 35.8% 3.3% 32.5% 0.0% 69,171 Manufacture of pulp, paper, and paper products Japanese traditional paper 25.2% 6.5% 0.0% 18.6% 546 Copper recycled metals, copper alloy 52.7% 52.7% 0.0% 0.0% 27,943 Manufacture of non-ferrous metals and products Aluminum extrusion 26.6% 26.6% 0.0% 0.0% 87,097 Copper alloy castings 28.9% 23.2% 5.7% 0.0% 28,909 Aluminum sash for residential use 41.5% 39.6% 1.0% 0.8% 117,235 Manufacture of fabricated metal products Rivets 30.9% 0.0% 15.4% 15.5% 10,791 Metallic foil 84.3% 0.0% 84.3% 0.0% 4,130 Manufacture of production machinery Parts for manufacturing and knitting machineries 42.3% 1.8% 37.1% 3.4% 13,149 Dedicated machines 27.0% 26.5% 0.5% 0.0% 52,654 Silicon transistors 29.6% 0.0% 29.6% 0.0% 52,654 Electronic parts, devices, and electronic circuits Resistors 25.3% 6.2% 0.0% 19.1% 40,177 Glass frames 96.7% 0.0% 0.0% 96.7% 32,971 Other Parts for glasses 94.9% 0.0% 0.0% 94.9% 5,916 Lacquerware kitchen and dining products 73.8% 1.3% 33.8% 38.8% 7,732 Source: Shared Research based on METI’s 2014 Economic Census
There are more than100,000 companies in the three Hokuriku prefectures, 99.8% of which are small and medium-sized enterprises (SMEs) and 86.2% of which are small companies. Toyama and Ishikawa Prefectures also have many large companies. A total of 69 listed companies operate in the region (27 in Ishikawa Prefecture, 26 in Toyama Prefecture, and 16 in Fukui Prefecture). The top five companies by market capitalization (as of end-July 2020) in each prefecture were: (1) Toyama Prefecture: Hokuhoku Financial Group, Inc. (TSE1: 8377), Hokuriku Electric Power Company, Nichi-Iko Pharmaceutical Co., Ltd., Cosel Co., Ltd., and Tonami Holdings Co., Ltd.; (2) Ishikawa Prefecture: Kusuri No Aoki Holdings Co., Ltd., Hokkoku Bank, Shibuya Corporation, EIZO Corporation, and Space Value Holdings Co., Ltd.; and (3) Fukui Prefecture: Mitani Corporation, Seiren Co., Ltd., Fukui Computer Holdings Co., Ltd., Mitani Sekisan Co., Ltd., and Maeda Kosen Co., Ltd.
Number of companies by business scale in three Hokuriku Prefectures Small and medium (number of Large corporations Total enterprises Medium Small companies) % of total % of total % of total % of total % of total Nationwide 11,157 0.3% 3,578,176 99.7% 529,786 14.8% 3,048,390 84.9% 3,589,333 100.0% Hokuriku 227 0.2% 104,253 99.8% 14,237 13.6% 90,016 86.2% 104,480 100.0% Toyama 93 0.3% 34,613 99.7% 5,042 14.5% 29,571 85.2% 34,706 100.0% Ishikawa 89 0.2% 40,430 99.8% 5,398 13.3% 35,032 86.5% 40,519 100.0% Fukui 45 0.2% 29,210 99.8% 3,797 13.0% 25,413 86.9% 29,255 100.0% Source: Shared Research based on bank data Note: Data as of end-June 2016. Main banks in three Hokuriku prefectures Of the 47,111 companies headquartered in the three Hokuriku prefectures, 12,905 companies have selected Hokuriku Bank (Toyama Prefecture) as their main bank, 9,121 companies Hokkoku Bank (Ishikawa Prefecture), and 7,504 companies Fukui Bank (Fukui Prefecture) (Tokyo Shoko Research, as of end-March 2019).
Value chain Hokkoku Bank has a traditional banking model under which net interest income from deposit and loan transactions accounts for 83.9% of non-consolidated core gross profit, so its value chain consists of (1) accepting deposits from depositors, (2) centrally managing accumulated deposits and pooling funds that can be readily redirected toward loans, (3) making loans with funds raised through deposits, (4) creating liquidity through fund transfers (such as account transfers), (5) screening repayment ability of borrowers, (6) shouldering and managing credit risk, and (7) recovering loans. In this way, the bank functions as a platform that joins together different customers segments such as depositors and borrowers in its deposit and lending operations, remitters and recipients in its fund transfer operations, and payers and providers of public services in its automatic withdrawal operations.
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Value provision Through its value chain, the bank provides fundamental value to customers across a range of services that include (1) deposits as a principal-protected method to manage funds, (2) corporate loans based on an understanding of customer businesses, (3) bank transfers, bills and checks, automatic withdrawals, and other settlement services, and 4) cash-related services offered free of charge (such as deposit and cash withdrawal).
However, the financial intermediary function of the banking business has weakened since households and companies have entered a state of a cash surplus. This is apparent in Hokkoku Bank’s loan-to-deposit ratio, which has declined from 74.6% in FY03/11 to 70.5% in FY03/20. Also, trends such as the progressive unbundling of financial functions and fierce competition from a growing number of newcomers from other industries are eroding the value of the traditional banking business value chain, centering on deposits and lending.
Loan-to-deposit ratio: The loan-to-deposit ratio represents loans outstanding as a proportion of bank deposits. It is calculated as “loans outstanding /(deposits + negotiable certificates of deposit) x 100.” It is an indicator of the degree to which a bank allots deposits to loans. When companies obtain loans for capital expenditures and thus strengthen their competitiveness, they energize the economy and contribute to the exit from deflation. Under such circumstances, the loan-to-deposit ratio increases. Conversely, a low loan-to-deposit ratio indicates low demand for funds among private-sector companies. Another factor that puts downward pressure on the loan-to-deposit ratio is banks’ reluctance to lend to SMEs due to NPL concerns. When the loan-to-deposit ratio is low, banks invest surplus funds in securities and other financial instruments.
To counter these trends, Hokkoku Bank has been expanding its fee income (noninterest income) businesses, and has shifted its business model to provide new value to customers, including through consultation services. It has gained extensive experience through its business reforms since 2000, which have included improvements in productivity through concentration of office work, a transition to paperless operations and effective ICT strategies, and a reform of its personnel evaluation system and organization. It strives to pass on such experience and expertise to customers through consultation services, and customers have appreciated the proposal capabilities of the bank’s relationship managers (RMs) handling corporate transactions, relative to those at its competitors.
Sales channels Branches Hokkoku Bank’s largest sales channel through which it offers value to customers is its network of the head office and 104 branches (86 head office and branches in Ishikawa Prefecture, 11 branches in Toyama Prefecture, three branches in Fukui Prefecture, and one branch each in Tokyo, Osaka, Nagoya, and Singapore). This network of branches was reduced significantly throughout the business model reforms started in 2000, when the bank transitioned from a comprehensive banking system that enabled transactions for individual and corporate customers across all branches, to an area-specific sales structure. Under the new structure, the bank set up a few main branches (that handle transactions for both individual and corporate customers), and multiple satellite branches (that mainly cater to individual customers) around each main branch. In 2016, Hokkoku Bank became the first Japanese regional bank to establish a branch in Southeast Asia.
In the past, when the bank mainly competed for lending volume with rivals, it made sense to operate a large network of branches to increase contact with customers. However, as the population in the region continues to decline and demand for funds shrinks, aggressive sales tactics have largely become obsolete. In a bold move, Hokkoku Bank scaled back its branch network from 155 branches in 1997 to 97 (excluding 8 branch-in-branches) as of end-FY03/20. If we index its number of branches in FY03/01 at 100, its number of branches contracted to 73.4 in FY03/20. This compares with average 96.2 for the 64 regional banks.
Sales structure and Hokkoku Cloud Banking While downsizing its branch network, Hokkoku Bank has worked to diversify contact points with customers in line with their needs. For individual customers, the bank deploys consulting advisors (CAs) to its branches to conduct over-the-counter consultation. The Money Plaza of its head office customer support division is staffed by CAs who engage in door-to-door sales. As for corporate transactions, the bank has a team of relationship managers (RMs) who make sales visits to companies and individual customers.
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In terms of non-face-to-face sales channels, the bank revamped its online banking for individual customers and launched Hokkoku Cloud Banking in September 2019, making it the first Japanese regional bank to migrate its online banking services to the cloud. With the release of Hokkoku Cloud Banking, the bank fully revamped the user interface (UI) of its online banking services and introduced a smartphone app, biometric authentication, transaction approval system with smartphone app, a one-time password, and round-the-clock real-time funds transfer system. It also waived fees for money transfers to Hokkoku Bank accounts. The bank has roughly 1.2mn deposit accounts, about 130,000 of which have been registered for Hokkoku Cloud Banking.
Earnings structures Income structure Core gross profit = net interest income + net noninterest income The income of the Banking business breaks down into interest income from loan and deposit transactions, and noninterest income derived from fee businesses. Main earnings in the business are expressed as core gross profit, which corresponds to gross profit at regular companies. Net interest income is the difference between interest income (mainly interest on loans and discounts and interest and dividends on securities) and interest expenses (mainly interest on deposits). On the other hand, net noninterest income corresponds to net fees and commissions (fee income earned from the provision of financial services minus direct expenses incurred to provide such services) and the difference between total gains/losses in trading accounts and net gains/losses on bonds such as government bonds, municipal bonds, and corporate bonds (gains/losses on sales, gains/losses on redemption, and losses on devaluation of bonds). In other words, net noninterest income is equivalent to “net fees and commissions + net trading income + net other operating income - net gains/losses on bonds.” Since the bank does not possess trading accounts, it does not record net trading income.
Net interest income Over 70% of the bank’s net interest income is generated from interest on loans and discounts (= loans outstanding x deposit- lending margins). Deposit-lending margin is the sum of deposit margin (deposit spread; market interest rates minus yield on deposit) and lending margin (lending spread; yield on loans minus market interest rates). The market interest rates used in the calculations of the deposit and lending spreads are the three-month TIBOR and 10-year swap rates, respectively.
Deposit-lending margin is based on deposit and lending spreads. However, deposit spread has effectively evaporated amid the continued negative interest rate policy by the BOJ. This means lending spread has essentially accounted for all of deposit-lending margins since FY03/19. Hokkoku Bank’s yield on loans has declined from 1.72% in FY03/11 to 0.99% in FY03/20. It remains above the bank’s expense ratio, but the gap between the two is shrinking. Gross deposit-lending margin (including yield on securities) fell by almost two-thirds from 0.30% in FY03/11 to 0.11% in FY03/20.
Yields and margins
Yield and margins FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. (All branches) Yield on investment (A) 1.53% 1.46% 1.36% 1.27% 1.22% 1.10% 1.05% 1.03% 0.88% 0.80% Yield of loans 1.72% 1.61% 1.47% 1.36% 1.28% 1.27% 1.23% 1.13% 1.06% 1.02% Yield on securities 1.24% 1.22% 1.17% 1.13% 1.15% 1.21% 1.19% 1.52% 1.31% 1.09% Cost of funding (B) 1.21% 1.11% 1.04% 0.99% 0.91% 0.80% 0.81% 0.76% 0.72% 0.68% Deposit yield 0.13% 0.09% 0.06% 0.03% 0.02% 0.02% 0.01% 0.01% 0.01% 0.00% Expense ratio 1.07% 1.00% 0.97% 0.95% 0.95% 0.90% 0.89% 0.84% 0.81% 0.81% Gross deposit-lending margin (A)-(B) 0.31% 0.34% 0.31% 0.28% 0.31% 0.30% 0.24% 0.27% 0.16% 0.12% (Japan) Yield on investment (A) 1.51% 1.45% 1.35% 1.27% 1.21% 1.05% 0.99% 0.96% 0.80% 0.74% Yield of loans 1.72% 1.61% 1.47% 1.36% 1.28% 1.28% 1.22% 1.12% 1.03% 0.99% Yield on securities 1.21% 1.19% 1.12% 1.10% 1.08% 1.08% 1.06% 1.40% 1.11% 0.99% Cost of funding (B) 1.21% 1.11% 1.04% 0.99% 0.93% 0.80% 0.81% 0.71% 0.63% 0.63% Deposit yield 0.13% 0.09% 0.06% 0.03% 0.02% 0.02% 0.01% 0.01% 0.00% 0.00% Expense ratio 1.06% 1.00% 0.97% 0.95% 0.95% 0.89% 0.88% 0.82% 0.79% 0.79% Deposit-lending margin 1.59% 1.52% 1.41% 1.33% 1.26% 1.26% 1.21% 1.11% 1.03% 0.99% Net deposit-lending margin 0.53% 0.52% 0.44% 0.38% 0.31% 0.37% 0.33% 0.29% 0.24% 0.20% Gross deposit-lending margin (A)-(B) 0.30% 0.34% 0.31% 0.28% 0.28% 0.25% 0.18% 0.25% 0.17% 0.11% Source: Shared Research based on materials published by Hokkoku Bank, the Regional Banks Association of Japan, Hokuriku Bank, and Fukui Bank
Interest and dividends on securities are the second major source of income, after interest on loans and discounts. They comprise interest and dividends on trading account securities and securities, and cash dividends on investment trusts (including gains on cancellations and redemptions). The high ratio of interest and dividends on securities to the bank’s core gross profit indicates the bank’s dependence on investment in securities. The average ratio in 10 years through FY03/20 was 25.4%, surpassing the average of 23.6% for the 64 regional banks. Hokkoku Bank’s dependence on interest and dividends on securities has increased
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consistently from FY03/14, rising to 33.2% in FY03/18. In FY03/20, the bank used such interest and dividends to aggressively implement charge-off and provisioning in preparation for an increase in NPLs. Its securities-to-deposit ratio has averaged 30.5% over the last 10 years and stood at 26.6% in FY03/20.
Securities-to-deposit ratio: The securities-to-deposit ratio represents the balance of securities under management as a proportion of balance of deposits (including NCDs). A high securities-to-deposit ratio means a bank is actively investing in securities. However, securities holdings may be subject to impairment losses during market shocks. Investments in safer financial instruments such as government bonds entail low costs to gather credit risk information therefore yield lower returns than loans, which require a greater degree of credit risk information. Consequently, banks with a high securities-to-deposit ratio seek to increase lending in pursuit of higher margins, and therefore tend to competitively slash their interest rates (according to “Financial System Report” by BOJ, April 2017).
Net noninterest income (= net fees and commissions + net trading income + net other operating income) Noninterest income mainly comprises fee income. As a dwindling yield on loans pushed its net interest income down from JPY42.4bn in FY03/12 to JPY34.9bn in FY03/20, Hokkoku Bank has adopted a strategy of driving income growth by expanding fees and commissions, including from fee businesses. Its high ratio of net noninterest income (= net noninterest income/core gross profit) is the result of its move from an income structure centered on lending to one with a greater diversity of businesses. In other words, the bank has successfully shifted away from a traditional banking business model. Its ratio of net noninterest income has steadily increased over the last five years from 13.3% in FY03/15 to 16.1% in FY03/20, topping the average 13.8% for the 64 regional banks.
Ratio of net noninterest income
Net noninterest income, % of core GP FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Net noninterest income, % of core GP 12.7% 12.9% 13.0% 13.7% 13.3% 11.9% 12.5% 13.0% 14.3% 16.1% Core gross profit 48,561 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 Net interest income 42,377 42,405 40,845 40,011 40,887 40,881 38,457 39,197 35,556 34,876 Non-interest income 6,184 6,264 6,106 6,373 6,275 5,533 5,492 5,844 5,9536,708 Source: Shared Research based on bank data Cost structure General and administrative expenses can be broadly divided into non-personnel and personnel expenses and taxes. Non- personnel expenses include rent and repair costs for branches, system-related expenses, and deposit insurance premiums. The following table shows the breakdown of non-consolidated general and administrative expenses. “Other” includes deposit insurance premiums paid under the deposit insurance system. The effective deposit premium rate currently stands at 0.033%, translating into an expense of JPY330mn per JPY1tn in deposits.
Deposit insurance premiums: Under the deposit insurance system, financial institutions pay deposit insurance premiums to the Deposit Insurance Corporation of Japan to protect their deposits—up to a certain amount—in the event of bankruptcy. Up to JPY10mn in ordinary deposits and time deposits are protected per depositor per financial institution. The effective deposit insurance premium rate was set at a high 0.084% in the wake of the collapse of Japan’s bubble economy in the 1990s, but has been lowered significantly since FY2015, reaching 0.033% in FY2019.
OHR and expense ratio OHR represents general and administrative expenses as a proportion of core gross profit. A low OHR implies a bank generates large profit with low expenses, pointing to high efficiency. The expense ratio is calculated by dividing general and administrative expenses by total assets. Although Hokkoku Bank’s OHR of 70.8% in FY03/20 exceeded the average 69.7% for the 64 regional banks, its OHR has averaged 64.8% over the last 10 years, compared with 66.9% for the average of 64 regional banks. The bank’s expense ratio has averaged 0.74% for the last 10 years, compared with a 0.81% for the average of 64 regional banks.
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General and administrative expenses (non-consolidated)
SG&A expenses FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. SG&A expenses 30,783 31,185 29,189 30,306 29,809 29,486 30,320 Salaries and allowances 12,018 11,636 11,376 11,352 11,468 11,390 11,230 Retirement benefit expenses 1,928 1,517 1,376 2,014 1,985 1,765 1,412 Statutory welfare expenses 126 119 121 142 121 134 118 Depreciation 2,056 2,435 3,587 3,632 3,754 3,801 4,012 Amortization of goodwill 3333333 Rents and rental fees 644 647 598 602 590 573 587 Building and repair expenses 129 102 134 119 148 92 95 Consumables expense 651 805 418 654 484 360 517 Utilities expenses 324 330 291 277 285 291 276 Travel expenses 62 53 50 59 77 108 106 Commutation expenses 796 726 692 720 680 692 871 Advertising expenses 598 467 459 424 240 352 564 Dues and taxes 1,625 2,181 1,862 1,819 1,946 1,879 2,098 Other 9,818 10,158 8,216 8,484 8,022 8,041 8,426 Source: Shared Research based on bank data
OHR and expense ratio Overhead ratio FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (core gross profit-based) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 64.9% 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% 64 regional banks 65.3% 66.0% 66.1% 66.2% 65.9% 65.4% 68.4% 67.7% 68.7% 69.7% General and admin. expense FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 ratio (as % of total assets) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.96% 0.90% 0.86% 0.85% 0.73% 0.73% 0.67% 0.60% 0.56% 0.58% 64 regional banks 1.02% 0.94% 0.88% 0.85% 0.80% 0.78% 0.74% 0.71% 0.69% 0.68% Source: Shared Research based on materials published by Hokkoku Bank and the Regional Banks Association of Japan Capital adequacy ratio (international standard) Regulations governing capital adequacy ratio Because it operates an overseas branch in Singapore, Hokkoku Bank is subject to international capital adequacy ratio requirements specified by the Basel Committee on Banking Supervision (BCBS). This means the bank needs to pursue profit (≂ interest on loans and discounts - interest on deposits - (general and administrative expenses [ personnel expenses + non- personnel expenses]) while maintaining a capital adequacy ratio (capital/risk-weighted assets) of at least 10.5%.
To prevent its capital adequacy ratio from declining, the bank must expand its capital at a faster pace than its assets. Because capital expansion (excluding capital increases through stock offerings and dividends) equals to increases in retained earnings, capital growth (capital increase/capital) fluctuates in parallel with ROE (profit/shareholder’s equity). Accordingly, the bank needs to improve ROE to increase its capital adequacy ratio. However, because ROE is a function of ROA and financial leverage, rises in the capital adequacy ratio lower ROE, which means the bank needs to improve ROA to a greater extent than necessary to offset the decline in ROE. To expand ROA (≂ profit/assets) ≂ (gross profit/assets) x (1 - overhead ratio [OHR= expenses/gross profit]), the bank can pursue two strategies: increase ROA itself or reduce OHR.
To maintain its capital adequacy ratio at the required level, Hokkoku Bank continues to cut expenses in an effort to lower OHR, while at the same time focusing on noninterest income transactions in new businesses such as Consultation services, Bank cards, and Leasing.
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Capital adequacy ratio
Capital ratio (international standard) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Consolidated [1] Total capital ratio [4]/[7] 14.68% 13.62% 13.69% 13.06% 11.72% 12.98% 12.60% 12.32% 11.78% 10.30% [2]Tier 1 capital ratio [5]/[7] 11.62%11.79%11.76%11.24%9.65% [3]Common Equity Tier 1 ratio [6]/[7] 11.61%11.78%11.76%11.23% 9.65% [4]Total capital [4]/[7] 232,180241,107262,127 264,462 236,482 Total capital requirement 203,057 190,081 193,626 199,176 200,679 143,089 152,991 170,140 179,477 183,561 [5]Tier 1 capital 208,002225,602250,307 252,195 221,604 [6]Common Equity Tier 1 207,737225,420250,151 252,068 221,504 [7] Risk-weighted assets 1,382,370 1,394,738 1,413,743 1,524,966 1,711,241 1,788,624 1,912,390 2,126,757 2,243,467 2,294,518 [8]Consolidated leverage ratio (x) 4.974.31 Non-consolidated [1] Total capital ratio [4]/[7] 14.32% 13.20% 13.11% 12.46% 11.18% 12.81% 12.46% 12.19% 11.59% 10.10% [2]Tier 1 capital ratio [5]/[7] 11.50%11.66%11.64%11.06%9.46% [3]Common Equity Tier 1 ratio [6]/[7] 11.50%11.66%11.64%11.06% 9.46% [4]Total capital [4]/[7] 225,938235,556256,801 257,982 229,851 Total capital requirement 194,906 181,290 182,488 186,298 188,179 141,077 151,160 168,446 178,023 182,030 [5]Tier 1 capital 202,815220,449245,269 246,246 215,441 [6]Common Equity Tier 1 202,815220,449245,269 246,246 215,441 [7] Risk-weighted assets 1,360,883 1,373,202 1,391,773 1,494,303 1,682,763 1,763,466 1,889,509 2,105,583 2,225,287 2,275,381 [8]Consolidated leverage ratio (x) 4.874.20 Source: Shared Research based on bank data
Business model reform process Start of reforms that would span 20 years Core operating profit was roughly JPY22.9bn in FY03/97, but fell sharply to roughly JPY17.5bn in FY03/01 due to ballooning costs for NPL disposals. This came at a time when the traditional banking business model was being shaken up by the surge in NPL disposal costs in the wake of the collapse of the bubble economy and by the Financial System Reform, “Japanese Big Bang.” In autumn 2000, Hokkoku Bank conducted customer interviews on a large scale, receiving feedback such as “we do not expect services beyond lending and money collection from Hokkoku Bank” and “although companies face many problems, how can Hokkoku Bank help them resolve these?” The surprisingly low expectations from customers alarmed the bank, which feared it would become unable to discern the needs of its customers if it did not change its course. Hokkoku Bank subsequently decided to thoroughly reform its organization and employee mindset, and started laying the groundwork for a transformation into a more customer-oriented bank.
Overhaul of business model based on IT strategy that included office work reform The customer focus envisioned by Hokkoku Bank is being realized by providing support for customer operations and elevating customer satisfaction. The bank believed that customer-centric management was a prerequisite for sustainable operations, and this became the core policy driving the reforms. To achieve customer-centric management, the bank needed to break away from a rigid organization. It also realized it had to encourage its results-oriented and reserved employees to be more outgoing to customers, and that having employees experience how changes in work practices can enhance productivity would be a more effective approach to achieve this goal than simply trying to boost morale. To produce visible productivity gains, the bank put a revamped IT system strategy that included a review of office work at the center of its reforms.
The reforms of bank office work also led to an examination of existing branches. From 2000, Hokkoku Bank transitioned from a comprehensive banking system that facilitated transactions for individual and corporate customers across all branches to an area- specific sales structure. The latter entailed the establishment of a few main branches that handle both individual and corporate transactions, and multiple satellite branches that mainly cater to individual customers. The bank continued to eliminate or consolidate branches following its organizational review, scaling down its domestic branches (including sub-branches) by nearly 40% from 155 at end-FY03/98 to 97 (excluding eight branch-in-branches) at end-FY03/20.
At the same time as the review of its branch network, the bank consolidated its office work. To transform its branches from places for office work to places for consultation and sales activities, the bank consolidated office work processes into a designated center, and sped up workflows by shifting to paperless operations and increasing operational visibility.
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Overview of bank office work reforms (including consolidation of work) Category Description Objectives & Effects ・2007: Start of project to consolidate and simplify office work at branches in the center ・Convert branches from places for office work to consultation and sales venues ・Consolidate and take over sales-related office work into Consolidat ion of the designated center, consolidate document (notification office work of loss, notification of change of registered information) related work → register images and make available online to all branches ・Consolidate bank passbook, certificate, and card ・Reduce office work burden at reissuance related work into the designated center branches ・Consolidate and store branch-related supporting ・Shift to paperless operations Consolidation of documents in file center at branches document storage ・As a basic rule, consolidate documents in file center, and ・Mitigate office work-related do not store them at branches risk by moving such tasks to ・Abolish or reduce office work that is overly ineffective the specialized units (tolerate some office work-related risks) ・Mitigate risk of data loss due Simplification and rationalization ・A bolish slip verificat ion (rece ipt se al, approval seal, to erroneous disposal of data of office work verification seal (x)) → abolish double checks or other factors ・Ensure all branches can accept various notifications online ・Introduce office equipment and systems that facilitate consolidation ・Introduce management system to consolidate various Mechanization and notices systems adoption ・Launch systems to support sales of financial products, and achieve paperless operations for documents received from customers ・Use tablet PCs Source: Shared Research based on bank data Review of systems development In 2000, Hokkoku Bank outsourced the development and operation of its core banking system to a major software vendor. The rationale behind this approach was to free employees from cumbersome IT development and operation tasks, allowing them to focus on their own responsibilities. However, over the course of the following two years, the bank realized that fully outsourcing IT systems development to—or collaborating on such development with—an external vendor with little knowledge of banking operations resulted in development delays, reduced originality, and gave rise to an undesirable mindset among employees who regarded systems as an “external component.” The absence of a sense of ownership in particular diluted internal checks on system development outsourcing costs. In 2007, the bank changed its outsourcing contract and brought systems development in-house.
As part of a reform of its systems development, the bank temporarily shut down its IT systems division (the division was restored later) by 2008 and integrated it into its general planning division. It took this drastic measure to close a perceived gap between management and IT operations, which were a central part of the bank’s operations. By involving employees focused on systems development in a review of systems development from a management and business strategy perspective, the bank managed to build relationships that facilitated mutual proposals.
Double Productivity Initiative In 2009, Hokkoku Bank launched the “Double Productivity Initiative,” which aimed to increase work visibility, create new rules, and have all divisions identify, discuss, and find creative solutions to the productivity bottlenecks they faced. However, as the initiative kicked off, many divisions cited worker shortages and only optimized their own workflows, resulting in only partial optimization. Transforming its employee mindset therefore became a priority for the bank.
The “Double Productivity Initiative” was driven in large part by two key measures: 1) the adoption of tablet computers and the overhaul of groupware, and 2) reforms of the screening division, which worked the longest hours in the bank. To establish management practices that could elevate productivity across its entire organization, the bank had to build an environment that could support transparent workflows, paperless operations, and access to information by all employees at the same time. In 2012, Hokkoku Bank adopted a non-customized version of the POWER EGG 2.0 groupware, which allowed employees not only to manage emails, workflows, files, and database usage, but also to visualize schedules and business progress. Also with organization-wide search functionality, employees can pull up various data on all employees such as which meetings they had
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attended, which comments they had offered, and to what extent they had become involved in certain initiatives, by simply typing in employee names. The adoption of the groupware accelerated efficiency improvements, and allowed the bank to cut its paper-based document volume from 3.3mn sheets in FY03/15 to 1.0mn sheets in FY03/20 (according to the bank’s disclosure brochure).
Under a traditional banking model, a screening division is expected to act as a brake for branches, which are eager to make loans. However, in the belief that banks should take risks and in an effort to prevent loans from being held up by a screening division, Hokkoku Bank transferred decision-making authority for loans to branches, and built reporting and monitoring systems to deal with higher risks. The bank thought its branches were best positioned to understand customer businesses by virtue of working on the frontlines. It adopted a new stance on the screening division, directing it to share its experience and expertise with the consultation services team to provide advice on management problems and business plans to customers. The screening division underwent drastic reforms, reducing its loan approval documents by over 80%, and shortening the time required to finalize loan approval within the organization by more than 50%. As a result, monthly overtime per employee declined from 15 hours and 28 minutes in FY03/08 to 8 hours and 53 minutes in FY03/15, and further to 3 hours and 24 minutes in FY03/20 (according to its disclosure documents).
Focus shift of personnel evaluation from each employee to team collaboration Sales quotas are commonly used for sales representatives as performance metrics in a range of industries. Hokkoku Bank abolished sales quotas as part of its reforms. More specifically, the bank eliminated sales targets that are unilaterally imposed on sales personnel by headquarters or immediate supervisors. Instead, it introduced a system under which sales staff set their own targets that exceed present performance and cannot be achieved without effort. In making this change, the bank aimed to promote self-reflection (why was a target not achieved, was the strategy flawed, were market trends misread, etc.) and promote a plan-do-check-act (PDCA) cycle to determine the next steps to take. By emphasizing growth through the application of lessons learned toward the resolution of future problems, and by encouraging the process of discussing and resolving targets—hitherto managed by each employee—with team members, the bank aimed to foster a culture that facilitates spontaneous communication and collaboration among employees. This intention is also reflected in the name of the current medium-term business plan “Communication x Collaboration x Innovation 2024.”
Move to core banking system based on open standards and migration to cloud To transition to a customer-centric business model, Hokkoku Bank realized it needed to overhaul its core banking system. In 2012, it decided to transition from a robust hosted computer system to a windows-based system that utilized open standards, and it completed the migration in 2015. The bank had considered post-reform system operation, and concluded that migration from a third-generation online system to a system based on open standards was necessary to link up with external services.
In 2019, Hokkoku Bank became the first Japanese bank to migrate its online banking services to the cloud (with the release of Hokkoku Cloud Banking). It also adopted Bank Vision, an open-standard core banking system package supplied by Nihon Unisys, as its core banking system, and decided to move the system to a public cloud service (Microsoft Azure). This will make it the first Japanese bank to run all its systems in the cloud once the move is completed in 2021. Materials published by the BOJ show that only 2.1% of Japanese banks had moved their core banking system to a public cloud service as of 2018 (see table below), which is further evidence of Hokkoku Bank’s progressive mindset.
Cloud adoption by financial institutions Migration of core banking system to the cloud by financial institutions Category FY2016 FY2017 YoY change FY2017 Public cloud Communit y cloud Privat e cloud Not migrat ed T otal (incl. securities, Banks 2.1% 1.4% 4.3% 92.1% 37.7% 44.3% +6.6pp Life and nonlife insurance, insurance, other) 11.6% 10.1% 18.8% 62.3% City and trust banks 100.0% 100.0% - securities, credit card Regional banks 76.2% 81.8% +5.6pp Second-tier regional banks 56.8% 71.1% +14.3pp Online banks 70.0% 82.0% +12.0pp Shinkin banks 15.3% 20.6% +5.3pp Credit unions 14.6% 13.1% -1.5pp Source: Shared Research based on BOJ’s “Workshop on IT-powered Enhancement of Finance (Phase 3)” (Third meeting: “Strategic Cloud Utilization”)
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First-mover advantages through adoption of next-generation technology In addition to its core banking system, Hokkoku Bank plans to move its information systems such as customer relationship management and loan support to a public cloud service to improve management efficiency, reduce costs, enhance its AI- powered consulting functions, and support the adoption of digital solutions by customers in the future, thus contributing to regional revitalization. The bank expects to eventually reduce its on-premises information systems to 20–30% of their current size. The FSA has researched the effects of the adoption of next-generation technology by regional banks on their core operating profit, and the results are outlined in the following diagram. The upshot is that such technologies should increase core operating profit by lifting income while reducing general and administrative expenses and other costs. The deployment of IT systems has been a central component of Hokkoku Bank’s business model reforms, and Shared Research thinks it is leading the industry in this respect.
Benefits and effects of next-generation technologies
Revenue- Costs and expenses ＝ Interest income+ Fees Cost ratio × Loans outstanding Profit Fees per No. of (cost per × Work volume + Fixed costs Loan yield × No. of Loan per customer customers work) × customers customer
AI (pre-) screening
Digital marketing ⤴ Roboadvisor ⤴ App, UI/UX
QR payments ⤴ Regional digital currency, distributed ledger ⤴ Cloud, API ⤴ RPA, human resources
Source: Shared Research based on “Examination of Regional Banks’ New Business Models that Employ Next-Generation Technologies” by Financial Research Center (FSA institute) Reforms and achievements to date Hokkoku Bank has pushed through business reforms centered on moving its core banking system to the cloud, digitalizing its Banking business, and strengthening noninterest income transactions (such as in the Consultation services business), and it has been at the forefront of such innovation in the banking industry. The reforms have contributed to growth in profit, which rose to JPY10.9bn in FY03/17 and to JPY10.2bn in FY03/18, topping the JPY10.0bn mark. In FY03/19–20, profit fell on heavy investment in IT and growth in the amount of NPL disposals. Shared Research understands cost reduction effects will emerge in the future as the bank continues to digitalize its operations.
The following table compares Hokkoku Bank to other regional banks in terms of profit ratio of customer services and profit ratio of loans. Profit ratio of customer services has continued to decline both for Hokkoku Bank and its peers. As of FY03/11, it was already negative for Fukui Bank and the Bank of Toyama. The downtrend has been mainly driven by shrinking deposit-lending margins, slow progress in expanding noninterest income transactions, and a failure to decisively reduce general and administrative expenses. The profit ratio of customer services is expected to turn negative for over 60% of Japanese regional banks in FY03/25 (according to the “FY2015 Finance Report” by the FSA).
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Profit ratios of customer services and loans Profit ratio of FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 customer services Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.33% 0.35% 0.29% 0.25% 0.18% 0.19% 0.15% 0.12% 0.13% 0.09% Hokuriku Bank 0.46% 0.37% 0.36% 0.24% 0.24% 0.22% 0.15% 0.13% 0.12% 0.12% Toyama Bank -0.52% -0.48% -0.61% -0.51% -0.44% -0.39% -0.37% -0.20% -0.14% -0.25% Fukui Bank -0.13% -0.16% -0.16% -0.14% -0.10% -0.12% -0.09% -0.10% -0.04% 0.00%
Profit ratio of FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 lending services Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.04% 0.06% 0.02% -0.01% -0.08% -0.04% -0.10% -0.12% -0.10% -0.13% Hokuriku Bank 0.17% 0.12% 0.11% 0.02% -0.03% -0.01% -0.03% -0.02% -0.05% -0.05% Toyama Bank -0.14% -0.17% -0.41% -0.39% -0.46% -0.45% -0.51% -0.43% -0.39% -0.51% Fukui Bank 0.25% 0.17% 0.08% 0.00% -0.09% -0.12% -0.19% -0.26% -0.21% -0.19% Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association Note: Profit ratio of customer services = net operating profit from customer services (= outstanding loans x deposit-lending margins + net fees and commissions - general and administrative expenses)/deposits Note: Profit ratio of loans = net operating profit of loans (= loans outstanding x deposit-lending margin - general and administrative expenses)/deposits
However, Hokkoku Bank and Hokuriku Bank have held on to a positive ratio, and the gap between their ratios has narrowed compared to 10 years ago (Hokuriku Bank’s ratio was 0.13pp higher than Hokkoku Bank in FY03/11, but only 0.03pp higher in FY03/20). Cost efficiency of banks increases with the scale of the banks. Hokuriku Bank’s total assets of roughly JPY8tn are 1.6x those of Hokkoku Bank, indicating the latter is achieving nearly the same level of efficiency. Fukui Bank has 0.6x (roughly JPY3tn) the total assets of Hokkoku Bank and the Bank of Toyama 0.1x (roughly JPY0.5tn). As is evident from the following table, cost reductions are harder to achieve for smaller banks.
Meanwhile, the profit ratio of loans has been negative at Bank of Toyama since FY03/11, and turned negative at Hokkoku Bank from FY03/14, and for Hokuriku Bank and Fukui Bank from FY03/15. Due to shrinking deposit-lending margins, growth in lending alone has proved to be insufficient to cover general and administrative expenses.
The gaps in expense ratio and OHR between Hokkoku Bank and Hokuriku Bank are also contracting. Over the last 10 years, Hokkoku Bank’s expense ratio has averaged 0.74%, compared with 0.73% for Hokuriku Bank. Over the same period, Hokkoku Bank’s average OHR was 64.8%, just below the 64.9% at Hokuriku Bank. In light of the differences in assets size between the banks, we can safely conclude that Hokkoku Bank operates with higher efficiency than Hokuriku Bank.
Expense ratio and OHR General and admin. expense FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 ratio (as % of total assets) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.96% 0.90% 0.86% 0.85% 0.73% 0.73% 0.67% 0.60% 0.56% 0.58% Hokuriku Bank 0.89% 0.89% 0.81% 0.78% 0.75% 0.71% 0.66% 0.61% 0.59% 0.56% Toyama Bank 1.30% 1.28% 1.33% 1.20% 1.13% 1.10% 1.09% 0.99% 0.96% 1.09% Fukui Bank 0.92% 0.91% 0.93% 0.90% 0.87% 0.85% 0.81% 0.83% 0.75% 0.71% Overhead ratio FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (core gross profit-based) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 64.9% 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% Hokuriku Bank 60.9% 61.3% 61.8% 65.7% 65.9% 64.6% 66.1% 66.7% 67.2% 68.4% Toyama Bank 77.4% 77.4% 87.9% 80.3% 80.1% 78.4% 85.2% 82.2% 77.9% 83.4% Fukui Bank 60.0% 62.2% 65.2% 70.4% 73.2% 77.5% 81.8% 87.5% 87.0% 85.0% Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association
Hokkoku Bank’s labor productivity (= core gross profit/number of employees) has been at CAGR of -0.2% for the last 10 years in part due to a downtrend in core gross profit, but the pace of decline has been slower than at rivals Hokuriku Bank (-1.8%) and Fukui Bank (-4.3%). Hokkoku Bank sees little prospect of an upturn in core gross profit while its deposit-lending margins continue to shrink, but it is keeping labor productivity steady through reforms of its business model.
Labor productivity Labor productivity FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 24.2 24.9 24.8 25.2 26.4 26.1 24.6 25.0 23.2 23.6 Hokuriku Bank 31.1 30.4 28.5 26.8 27.3 26.9 26.3 26.1 26.4 26.5 Toyama Bank 17.7 18.7 18.5 19.7 21.0 20.2 18.5 18.5 19.9 21.5 Fukui Bank 26.9 26.7 25.2 23.0 21.9 20.4 19.1 18.5 17.5 18.1 Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association
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Net interest income (83.9% of non-consolidated core gross profit)
Net interest income: deposit and loan transactions, and investment in securities
Non-consolidated interest income breaks down into interest on loans and discounts and interest and dividends on securities, generated from deposit and loan transactions and from investment in securities, respectively. Net interest income accounted for 83.9% of non-consolidated core gross profit in FY03/20.
Loans Loans outstanding by recipient size and loan type As of end-March 2020, loans outstanding stood at JPY2.6tn, with 75.3% made to SMEs, and 11.6% to mid-tier and major companies. Hokkoku Bank had borrower companies of 108,983 SMEs with average loan outstanding per company of JPY18.1mn as of FY03/20. By loan type, corporate loans based on business potential accounted for 49.2%, loans made to individual customers for 37.8% (of which 95.9% were housing loans), and loans to local public agencies and corporations for 13.1%.
Corporate loans based on business potential One of the measures called for by the Japan Revitalization Strategy adopted by the Cabinet in June 2013 was the “promotion of financing by regional financial institutions based on evaluation of business potential.” The 2014 Financial Monitoring Policy released by the FSA in September 2014 similarly made reference to financing based on an evaluation of business potential, stating that “financial institutions should facilitate the growth of companies and industries based on an assessment of borrower companies’ business profiles and growth potential (evaluation of customers’ business potentials), providing financing and advice without overly relying on financial data, collateral and guarantees.” The FSA regards the provision of loans and advice— underpinned by proper judgment—to support the growth of companies and industries as the fundamental role of banks. Banks must evaluate business potential based on information about (1) the management philosophy and vision of the company as well as the capabilities of top management, (2) company strengths that are not necessarily evident in their financial statements, and (3) plans for future business development. To this end, prospective borrower companies need to prepare a business plan that contains the necessary information, and explain it to the bank.
Loans outstanding by borrower size and loan type
Loans outstanding breakdown FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. By size 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 YoY 4.1% 2.8% 2.5% 1.1% 0.2% -1.2% -0.5% 3.8% 7.0% 1.4% Composition 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Small- and medium-enterprises 1,313,685 1,353,652 1,373,889 1,410,924 1,483,199 1,552,045 1,594,966 1,738,723 1,892,171 1,972,824 YoY 0.9%3.0%1.5%2.7%5.1%4.6%2.8%9.0%8.8%4.3% Composition 59.4% 59.5% 58.9% 59.8% 62.7% 66.4% 68.6% 72.0% 73.2% 75.3% Medium-sized and large corporations 353,700319,700310,800291,100 320,900 302,600 YoY -9.6%-2.8%-6.3%10.2%-5.7% Composition 15.0%13.7%13.4%12.1%12.4%11.6% Local public agencies and corporations 526,200463,700418,700383,100 369,900 342,500 YoY -11.9%-9.7%-8.5%-3.4%-7.4% Composition 22.3%19.9%18.0%15.9%14.4%13.1% By attribute 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 YoY 4.1% 2.8% 2.5% 1.1% 0.2% -1.2% -0.5% 3.8% 7.0% 1.4% Composition 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Business loans 1,175,007 1,203,760 1,228,747 1,220,149 1,169,421 1,158,392 1,137,570 1,179,608 1,268,668 1,286,748 YoY - 2.4% 2.1% -0.7% -4.2% -0.9% -1.8% 3.7% 7.5% 1.4% Composition 53.1% 52.9% 52.7% 51.7% 49.5% 49.6% 48.9% 48.9% 49.1% 49.2% Consumer loans 525,971 546,432 570,468 610,426 667,502 713,421 768,156 850,174 944,358 988,604 YoY 3.8%3.9%4.4%7.0%9.4%6.9%7.7%10.7%11.1%4.7% Composition 23.8% 24.0% 24.5% 25.9% 28.2% 30.5% 33.0% 35.2% 36.6% 37.8% Housing loans 510,946 529,845 548,920 581,645 634,214 677,626 727,116 807,170 901,824 948,045 YoY 3.7%3.7%3.6%6.0%9.0%6.8%7.3%11.0%11.7%5.1% Composition 23.1% 23.3% 23.5% 24.7% 26.8% 29.0% 31.3% 33.5% 34.9% 36.2% Other loans 15,024 16,587 21,548 28,781 33,288 35,795 41,039 43,004 42,533 40,558 YoY 10.4% 29.9% 33.6% 15.7% 7.5% 14.7% 4.8% -1.1% -4.6% Composition 0.7%0.7%0.9%1.2%1.4%1.5%1.8%1.8%1.6%1.5% Local public agencies 510,849 524,538 532,690 528,040 526,209 463,780 418,769 383,137 369,939 342,592 YoY 2.7% 1.6% -0.9% -0.3% -11.9% -9.7% -8.5% -3.4% -7.4% Composition 23.1% 23.1% 22.8% 22.4% 22.3% 19.9% 18.0% 15.9% 14.3% 13.1% Source: Shared Research based on bank data
Lending trends by industry By industry (excluding “other”), manufacturing is the top industry as borrower of domestic loans, followed by local government, services, wholesale and retail, and real estate and goods rental and leasing.
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Lending trends by industry
Loans by industry FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Japan (ex. special international financial transactions account) 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,321,972 2,406,090 2,565,840 2,597,412 Manufacturing 317,015 332,283 342,004 329,534 322,789 314,943 306,328 316,357 331,115 323,722 Composition 14.3% 14.6% 14.7% 14.0% 13.7% 13.5% 13.2% 13.1% 12.9% 12.5% Agriculture and forestry 6,834 7,362 7,140 6,437 7,302 7,106 7,406 8,506 8,127 9,556 Composition 0.3%0.3%0.3%0.3%0.3%0.3%0.3%0.4%0.3%0.4% Fisheries 406 434 455 1,202 1,355 1,382 1,668 1,713 1,034 946 Composition 0.0%0.0%0.0%0.1%0.1%0.1%0.1%0.1%0.0%0.0% Mining and quarrying of stone and gravel 689 660 692 556 587 10,584 10,605 10,508 9,928 8,539 Composition 0.0%0.0%0.0%0.0%0.0%0.5%0.5%0.4%0.4%0.3% Construction 105,992 105,824 103,252 100,842 99,514 102,511 107,549 117,444 126,067 129,760 Composition 4.8%4.7%4.4%4.3%4.2%4.4%4.6%4.9%4.9%5.0% Electricity, gas, heat supply, and water 31,734 38,771 37,715 35,738 33,389 33,559 33,509 31,598 31,693 31,844 Composition 1.4%1.7%1.6%1.5%1.4%1.4%1.4%1.3%1.2%1.2% Information and communications 22,940 22,023 21,811 21,309 19,733 17,093 14,690 12,910 13,275 12,223 Composition 1.0%1.0%0.9%0.9%0.8%0.7%0.6%0.5%0.5%0.5% Transport and postal services 47,835 47,297 46,690 47,534 44,695 41,925 41,010 40,745 43,871 42,635 Composition 2.2%2.1%2.0%2.0%1.9%1.8%1.8%1.7%1.7%1.6% Wholesale and retail trade 255,781 252,118 253,520 244,587 229,591 228,662 223,252 225,274 244,759 254,734 Composition 11.6% 11.1% 10.9% 10.4% 9.7% 9.8% 9.6% 9.4% 9.5% 9.8% Finance and insurance 100,644 109,544 115,400 116,752 95,668 71,965 62,351 55,727 50,973 42,428 Composition 4.6%4.8%4.9%5.0%4.0%3.1%2.7%2.3%2.0%1.6% Real estate and goods rental and leasing 146,511 153,061 156,659 167,472 170,497 170,489 163,804 173,231 201,138 214,351 Composition 6.6%6.7%6.7%7.1%7.2%7.3%7.1%7.2%7.8%8.3% Services 212,047 213,516 217,384 226,101 238,133 237,313 249,258 270,990 293,214 303,296 Composition 9.6% 9.4% 9.3% 9.6% 10.1% 10.2% 10.7% 11.3% 11.4% 11.7% Local public agencies 464,837 477,885 495,265 491,284 480,416 438,626 390,920 355,567 337,854 308,534 Composition 21.0% 21.0% 21.2% 20.8% 20.3% 18.8% 16.8% 14.8% 13.2% 11.9% Other 498,555 513,948 533,913 569,260 619,455 659,427 709,615 785,513 872,786 914,838 Composition 22.5% 22.6% 22.9% 24.1% 26.2% 28.2% 30.6% 32.6% 34.0% 35.2% Source: Shared Research based on bank data Long versus short-term, floating versus fixed-rate, term, and purposes of loans A closer look at Hokkoku Bank’s outstanding loans in Japan in FY03/20 reveals that long-term loans (loans on deeds) accounted for 81.5%, fixed-rate loans for 75.8%, and loans with a remaining loan maturity of seven years or more for 58.0%, according to the bank’s disclosure materials. The bank’s loan portfolio has become increasingly skewed toward long-term and fixed-rate loans due to the continued low-interest rate climate and efforts to lock in customers. By purpose of loans, 48.6% of the loans are used to fund capital expenditures and 51.4% are used as part of working capital.
Stepping up lending in neighboring prefectures In addition to Ishikawa Prefecture, its home territory, Hokkoku Bank also makes loans in the neighboring Toyama and Fukui Prefectures. At end-March 2020, its loans outstanding in the three Hokuriku prefectures were JPY2.4tn. Ishikawa Prefecture accounted for 69.5% (JPY1.8tn) of total outstanding loans, Toyama Prefecture for 17.7% (JPY462.2bn), and Fukui Prefecture for 4.5% (JPY116.5bn). The bank’s loans outstanding were up 0.4% in Ishikawa Prefecture, up 6.4% in Toyama Prefecture, and up 12.6% in Fukui Prefecture.
Lending trends in three Hokuriku prefectures
Cross border loans FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Loans outstanding (non-consolidated) 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 Three Hokuriku prefectures 1,938,600 1,972,800 2,006,500 2,053,000 2,068,600 2,090,100 2,194,200 2,350,800 2,399,000 YoY 1.8% 1.7% 2.3% 0.8% 1.0% 5.0% 7.1% 2.1% Composition 85.2% 84.6% 85.1% 86.9% 88.6% 89.9% 90.9% 91.0% 91.6% Ishikawa 1,746,800 1,707,100 1,687,200 1,732,700 1,812,800 1,820,200 YoY -2.3%-1.2%2.7%4.6%0.4% Composition 73.9% 73.1% 72.6% 71.8% 70.2% 69.5% Loans to SMEs 1,163,100 1,171,700 1,178,300 Toyama 245,200 299,100 335,100 381,600 434,300 462,200 YoY 22.0%12.0%13.9%13.8%6.4% Composition 10.4% 12.8% 14.4% 15.8% 16.8% 17.7% Loans to SMEs 197,800 257,200 294,200 Fukui 60,900 62,300 67,800 79,800 103,500 116,500 YoY 2.3%8.8%17.7%29.7%12.6% Composition 2.6% 2.7% 2.9% 3.3% 4.0% 4.5% Loans to SMEs 36,500 41,600 47,200 Other 336,000 359,000 352,100 310,000 266,800 234,300 218,700 232,100 218,900 Source: Shared Research based on bank data Interest-earning assets, interest-bearing liabilities, and yields Net interest income is the difference between interest income and interest expenses. Interest income mainly comprises interest on loans and discounts and interest and dividends on securities, which are generated by investing funds raised through deposits into loans and securities. Interest expenses mainly include interest on deposits paid to raise funds. The bank reported net interest
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income of JPY34.9bn in FY03/20, mainly from JPY26.0bn in interest on loans and discounts (excluding interest on deposits) and JPY10.3bn in interest and dividends on securities.
Interest on loans and discounts and interest on securities are obtained by subtracting interest expenses (average balance of assets under management [average for start and end of fiscal year] multiplied by interest on funds raised) from interest income (average balance of assets under management multiplied by interest on each asset). The following table shows trends in interest- earning assets, interest-bearing liabilities, and yields.
Interest-earning assets, interest-bearing liabilities, interest and yields
Investment and funding (Japan) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 CA GR and (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. change Average balance 10-year CAGR Total investment management account 3,028,976 3,103,702 3,109,227 3,166,945 3,448,234 3,841,800 3,802,995 4,058,614 4,480,353 4,555,324 4.2% Loans outstanding 2,107,572 2,164,491 2,226,425 2,288,930 2,352,372 2,314,281 2,277,643 2,332,051 2,440,942 2,522,500 1.8% Commodity-linked securities 1,016 393 495 447 924 934 538 155 106 103 -20.5% Securities 761,011 825,746 803,226 804,735 1,024,859 1,030,842 955,970 930,232 941,578 894,313 1.6% Call loans 107,465 88,661 64,630 48,753 59,838 10,544 103,754 328,623 582,634 638,859 19.5% Deposits 17,564 1,114 1,103 946 696 473,951 413,418 411,191 411,241 410,034 37.0% Capital finance accounts 2,928,956 3,003,275 3,004,836 3,065,796 3,460,502 3,728,671 3,712,445 4,059,878 4,486,424 4,568,651 4.5% Deposits 2,798,686 2,830,211 2,879,981 2,956,966 3,027,581 3,027,869 3,108,556 3,245,417 3,377,792 3,501,397 2.3% Negotiable deposits 111,719 153,853 138,925 122,119 121,941 111,524 95,981 96,705 85,198 110,172 -0.1% Call money 54 246 2,246 150,512 251,644 163,284 451,242 807,804 836,262 Payables under repurchase agreements 45,682 77,241 Payables under securities lending transactions 167,559 345,293 349,849 229,175 148,902 132,656 Borrowings 8,510 10,636 11,082 9,285 7,792 7,212 5,851 4,434 2,733 1,246 -17.5% Interest 10-year change Total investment management account 46,373 45,407 42,333 40,514 42,555 42,850 40,119 41,590 39,206 36,189 -10,184 Loans outstanding 36,855 35,312 33,131 31,527 30,476 29,799 28,238 26,610 26,013 25,786 -11,069 Commodity-linked securities 5321220000 -5 Securities 9,264 9,927 9,085 8,908 11,849 12,529 11,159 14,008 11,701 8,836 -428 Call loans 1179468528725-13181124-37 -154 Deposits 35 1 1 7 121 474 411 409 407 406 371 Capital finance accounts 4,629 3,609 2,169 1,223 1,531 1,836 1,969 2,609 3,716 1,716 -2,913 Deposits 3,624 2,595 1,730 869 753 704 559 393 340 297 -3,327 Negotiable deposits 160 192 149 91 71 55 22 18 9 10 -150 Call money 0 0 2 204 202 120 616 658 211 211 Payables under repurchase agreements 671 1,750 0 Payables under securities lending transactions 154 358 804 668 137 365 365 Borrowings 58 59 59 54 50 46 34 20 15 8 -50 Yield 10-year change Total investment management account 1.53% 1.46% 1.36% 1.27% 1.23% 1.11% 1.05% 1.02% 0.87% 0.79% -0.74pp Loans outstanding 1.74% 1.63% 1.48% 1.37% 1.29% 1.28% 1.24% 1.14% 1.06% 1.02% -0.72pp Commodity-linked securities 0.49% 0.87% 0.47% 0.43% 0.22% 0.27% 0.12% 0.33% 0.33% 0.18% -0.31pp Securities 1.21% 1.20% 1.13% 1.10% 1.15% 1.21% 1.16% 1.50% 1.24% 0.98% -0.23pp Call loans 0.10% 0.10% 0.10% 0.10% 0.14% 0.24% -0.01% 0.05% 0.02% 0.00% -0.10pp Deposits 0.19% 0.09% 0.11% 0.76% 17.42% 0.10% 0.10% 0.10% 0.09% 0.09% -0.10pp Capital finance accounts 0.15% 0.12% 0.07% 0.03% 0.04% 0.04% 0.05% 0.06% 0.08% 0.03% -0.12pp Deposits 0.12% 0.09% 0.06% 0.02% 0.02% 0.02% 0.01% 0.01% 0.01% 0.00% -0.12pp Negotiable deposits 0.14% 0.12% 0.10% 0.07% 0.05% 0.04% 0.02% 0.01% 0.01% 0.01% -0.13pp Call money 0.10% 0.10% 0.10% 0.13% 0.08% 0.07% 0.13% 0.08% 0.02% 0.02pp Payables under repurchase agreements 1.47% 2.26% 0.00pp Payables under securities lending transactions 0.09% 0.10% 0.23% 0.29% 0.09% 0.27% 0.27pp Borrowings 0.68% 0.55% 0.54% 0.58% 0.64% 0.63% 0.58% 0.45% 0.56% 0.68% 0.00pp Source: Shared Research based on Hokkoku Bank’s securities reports
The bank’s interest-earning assets have expanded at a CAGR of 4.2% over the last 10 years, while its loans have increased at a CAGR of 1.8%. Much of the growth in interest-earning assets has been driven by the bank’s current account deposits at the BOJ (held under a current account contract) and call loans. In interest-bearing liabilities, deposits have increased at a CAGR of 2.3%, but borrowed money (such as borrowed money from the BOJ or other financial institutions, and overdrafts) has fallen sharply.
Analysis of interest received and interest paid From FY03/11 to FY03/20, interest on loans and discounts fell JPY11.1bn, and interest paid on deposits and negotiable certificates of deposit (NCDs) was down JPY3.5bn, driven by a downtrend in interest rates during the period. The yield on loans declined 0.72pp from 1.74% in FY03/11 to 1.02% in FY03/20. Upon closer analysis, we find the declines in interest received and interest paid can be attributed to account balance effects and interest rate effects, with the latter outweighing the former. As noted below, the bank’s interest received from loans has declined significantly due to a drop in its yield on loans.
Factors driving change in interest income and expenses: account balance versus interest rate effects
Interest income and expenses (Japan) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Interest income -1,793 -516 -673 -2,536 937 -2,700 -1,330 Increase (decrease) by balance 759 1,393 5,439 -654 2,233 4,456 1,093 Increase (decrease) by rate -2,553 -1,909 -6,112 -1,882 -1,296 -7,157 -2,423 Interest expenses -943 -99 83 -485 -420 -378 -38 Increase (decrease) by balance 43 85 103 -15 63 28 -4 Increase (decrease) by rate -986 -185 -19 -470 -484 -407 -34 Source: Shared Research based on bank data
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NPLs Japanese banks are legally required to disclose NPLs they hold under the Banking Act and the Financial Reconstruction Act. Claims disclosed under the Financial Reconstruction Act are referred to as NPLs based on the Financial Reconstruction Act (in addition to loans, includes customers’ liabilities for acceptances and guarantees). Not all disclosed NPLs are irrecoverable. Some portions of NPLs are secured by collateral or guarantees, and other portions are offset by the allowance for loan losses. At end- FY03/20, NPLs based on the Financial Reconstruction Act (non-consolidated) totaled JPY57.4bn, accounting for 2.11% of the bank’s total claims. Its NPL ratio reached a low for the last 10 years.
Status of NPLs based on the Financial Reconstruction Act
NPLs based on the Financial Reconstruction Act FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Bankrupt or de facto bankrupt 17,914 16,897 14,322 12,830 27,030 15,526 10,434 5,965 8,000 11,854 Doubtful 53,650 49,320 66,281 62,865 63,412 58,996 54,399 50,359 47,330 43,872 Special attention 1,113 6,147 764 1,402 1,137 1,210 1,283 1,446 1,305 1,660 Total (A) 72,677 72,365 81,368 77,098 91,580 75,733 66,117 57,771 56,636 57,387
Total credit (B) 2,247,093 2,304,327 2,358,972 2,383,515 2,486,057 2,441,435 2,392,606 2,488,281 2,654,205 2,707,200
Bankrupt or de facto bankrupt 0.79% 0.73% 0.60% 0.53% 1.08% 0.63% 0.43% 0.23% 0.30% 0.43% Doubtful 2.38% 2.14% 2.80% 2.63% 2.55% 2.41% 2.27% 2.02% 1.78% 1.62% Special attention 0.04% 0.26% 0.03% 0.05% 0.04% 0.04% 0.05% 0.05% 0.04% 0.06% Total (A) / (B) 3.23% 3.14% 3.44% 3.23% 3.68% 3.10% 2.76% 2.32% 2.13% 2.11% Source: Shared Research based on bank data
43.0% of Hokkoku Bank’s NPLs were protected by collateral or guarantees as of FY03/20. The bank had set aside an allowance for loan losses to cover the JPY32.0bn in unprotected NPLs, and its reserve ratio was 91.45%, up from 89.16% in FY03/19. Its coverage ratio was 95.12%. Its coverage ratio was 100% for bankrupt or de facto bankrupt loans, 96.3% for doubtful loans, and 32.7% for special attention loans.
Coverage of disclosed claims
Status of coverage of NPLs on FRA FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. NPLs based on the Financial Reconstruction Act 72,677 72,365 81,368 77,098 77,990 69,129 63,845 56,449 55,397 56,164 Secured by collateral and guarantees 50,191 50,999 52,334 49,964 45,478 38,725 34,302 30,574 28,386 24,156 69.1% 70.5% 64.3% 64.8% 58.3% 56.0% 53.7% 54.2% 51.2% 43.0% Not secured (C) = (A) - (B) 22,485 21,365 29,034 27,133 32,512 30,404 29,542 25,874 27,010 32,008 30.9% 29.5% 35.7% 35.2% 41.7% 44.0% 46.3% 45.8% 48.8% 57.0% Provision for loan loss (D) 14,563 13,510 18,787 18,371 21,787 26,684 25,477 22,909 24,085 29,272 20.0% 18.7% 23.1% 23.8% 27.9% 38.6% 39.9% 40.6% 43.5% 52.1% Rate of provision (D) / (C) 64.76% 63.23% 64.70% 67.70% 67.01% 87.76% 86.23% 88.54% 89.16% 91.45% Coverage ratio ((B)+(D))/(A) 89.09% 89.14% 87.40% 88.63% 86.24% 94.62% 93.63% 94.75% 94.71% 95.12% Source: Shared Research based on bank data Investment in securities Interest and dividends on securities account for a high ratio of core gross profit, highlighting the bank’s dependency on securities investment. For the 10 years through FY03/20, the ratio averaged 25.4%, above the average of 23.6% for the 64 regional banks. The bank’s dependence on securities investment has increased consistently since FY03/14, advancing to 33.2% in FY03/18.
The balance of securities increased JPY267.9bn YoY in FY03/15, breaking down into increases of JPY142.6bn for foreign bonds, JPY66.3bn for yen denominated bonds, and JPY58.5bn for equities and investment trusts. The ratio of equities and investment trusts remained below 10% through FY03/14, but has since increased to the 17% level.
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Balance of securities investments
Securities investment outstanding (acquisition FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 cost-based; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Securities investment outstanding (acquisition cost-based) 856,000 862,600 838,100 841,100 1,109,000 961,900 1,037,700 973,400 1,007,500 954,900 YoY 6.9% 0.8% -2.8% 0.4% 31.9% -13.3% 7.9% -6.2% 3.5% -5.2% Japanese Yen-denominated bonds 734,600 752,800 718,500 695,700 762,000 689,200 644,000 618,700 648,100 662,600 YoY 7.1% 2.5% -4.6% -3.2% 9.5% -9.6% -6.6% -3.9% 4.8% 2.2% Composition 85.8% 87.3% 85.7% 82.7% 68.7% 71.6% 62.1% 63.6% 64.3% 69.4% (breakdown) Japanese government bonds 3,491 3,559 3,487 3,127 3,878 3,784 2,570 - - - Local government bonds 2,046 2,278 2,052 1,966 1,921 1,296 1,629 - - - Corporate bonds 1,809 1,691 1,646 1,864 1,821 1,812 2,241 - - - Total 734,600 752,800 718,500 695,700 762,000 689,200 644,000 - - - Foreign currency-denominated bonds 64,700 46,400 45,500 70,400 213,300 131,000 235,200 168,300 184,800 122,100 YoY 2.4% -28.3% -1.9% 54.7% 203.0% -38.6% 79.5% -28.4% 9.8% -33.9% Composition 7.6% 5.4% 5.4% 8.4% 19.2% 13.6% 22.7% 17.3% 18.3% 12.8% (breakdown) Foreign securities 64,700 46,400 45,500 70,400 213,300 131,000 235,200 --- Stocks and mutual funds 56,300 63,200 73,800 74,900 133,400 141,600 158,400 186,300 174,600 170,200 YoY 10.6% 12.3% 16.8% 1.5% 78.1% 6.1% 11.9% 17.6% -6.3% -2.5% Composition 6.6% 7.3% 8.8% 8.9% 12.0% 14.7% 15.3% 19.1% 17.3% 17.8% (breakdown) Stocks 45,100 46,900 44,400 45,000 78,100 81,100 93,100 - - - Other 11,200 16,300 29,400 29,900 55,300 60,500 65,300 - - - Total 56,300 63,200 73,800 74,900 133,400 141,600 158,400 - - - Source: Shared Research based on bank data
Hokkoku Banks posted a JPY84.0bn gain on the valuation of securities in FY03/18. However, unrealized gains on equities and investment trusts declined JPY44.9bn YoY to JPY33.5bn in FY03/20 due in part to a market downturn caused by the COVID-19 pandemic.
Valuation gains/losses
Gains (losses) on valuation of securities FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Held-to-maturity securities 512761 ------Other securities 35,666 38,852 47,200 49,751 79,223 54,640 64,586 84,001 78,406 33,511 Stocks 26,065 22,483 27,877 34,907 57,709 42,171 62,000 87,305 76,699 51,704 Bonds 9,757 15,740 18,442 14,437 13,338 12,487 6,568 4,657 4,057 -593 Other -157 628 881 406 8,175 -19 -3,982 -7,961 -2,350 -17,598 Total 35,717 38,879 47,207 49,753 79,223 54,640 64,586 84,001 78,406 33,511 Stocks 26,065 22,483 27,877 34,907 57,709 42,171 62,000 87,305 76,699 51,704 Bonds 9,809 15,767 18,448 14,439 13,338 12,487 6,568 4,657 4,057 -593 Other -157 628 881 406 8,175 -19 -3,982 -7,961 -2,350 -17,598 Source: Shared Research based on bank data Deposits At end-March 2020, the bank’s outstanding of deposits stood at JPY3.7tn, with individual deposits accounting for 66.7%, corporate deposits for 25.5%, and public and financial institution deposits for 7.8%. The outstanding of deposits has grown at a CAGR of 3.9% for the last three years.
Deposits trend
Breakdown of deposits (inc. NCD) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Deposits (incl. NCD) 2,963,290 3,107,914 3,164,635 3,174,562 3,155,197 3,188,655 3,306,839 3,452,266 3,614,553 3,712,689 YoY 4.9% 1.8% 0.3% -0.6% 1.1% 3.7% 4.4% 4.7% 2.7% 3-year CAGR 2.3% 0.5% 0.3% 1.4% 3.0% 4.3% 3.9% Personal deposits 2,028,309 2,061,376 2,093,361 2,124,961 2,162,086 2,199,999 2,247,498 2,324,776 2,401,959 2,478,127 YoY 1.6% 1.6% 1.5% 1.7% 1.8% 2.2% 3.4% 3.3% 3.2% Composition 66.3% 66.1% 66.9% 68.5% 69.0% 68.0% 67.3% 66.5% 66.7% Corporate deposits 731,026 797,468 806,675 766,286 741,848 749,559 802,612 875,028 918,352 946,143 YoY 9.1% 1.2% -5.0% -3.2% 1.0% 7.1% 9.0% 5.0% 3.0% Composition 25.7% 25.5% 24.1% 23.5% 23.5% 24.3% 25.3% 25.4% 25.5% Public deposits 178,797 230,291 245,438 252,257 226,832 214,355 232,175 228,648 265,168 260,694 YoY 28.8% 6.6% 2.8% -10.1% -5.5% 8.3% -1.5% 16.0% -1.7% Composition 7.4% 7.8% 7.9% 7.2% 6.7% 7.0% 6.6% 7.3% 7.0% Financial institution's deposits 25,156 18,778 19,158 31,056 24,429 24,741 24,552 23,813 29,073 27,724 YoY -25.4% 2.0% 62.1% -21.3% 1.3% -0.8% -3.0% 22.1% -4.6% Composition 0.6% 0.6% 1.0% 0.8% 0.8% 0.7% 0.7% 0.8% 0.7% Source: Shared Research based on bank data
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Net noninterest income (16.1% of non-consolidated core gross profit)
Hokkoku Bank generates noninterest income from deposits and lending, currency exchange, securities, agency operations, safe custody and safe deposit box, guarantee, and other services. Its ratio of noninterest income rises in tandem with increases in the relative weightings of such services. The bank records fees for various services mentioned above under fees and commissions, and its high ratio of noninterest income is a result of a successful transition from a business structure centered on deposit and lending operations to one with greater diversity.
As noted earlier, the ratio of net noninterest income (percentage of core gross profit) has risen 3.4pp from 12.7% in FY03/11 to 16.1% in FY03/20, compared with an increase of 2.0pp from 11.8% to 13.8% in the average ratio for the 64 regional banks over the same period. This shows that Hokkoku Bank’s fee businesses have expanded steadily. The bank continues aiming to move away from a traditional banking business model geared toward deposit and lending operations and toward a comprehensive financial services model under which it can expand fee businesses.
Move to comprehensive financial services model: Since “Japanese big-bang” deregulation of its financial markets in 1996, the country has reformed many of its financial systems, and pushed ahead with diversification of financial products, services, and sales channels in an effort to respond to household asset building needs and to increasingly heightened funding needs of companies. The banking industry saw the ban on over-the-counter sales of investment trusts lifted in 1998, the ban on securities brokerage services lifted in 2004, and the partial ban on over-the-counter sales of insurance products (which up to that point had only been introduced gradually) fully lifted in 2007. In addition, new systems of trust agent services and bank agent services were implemented, facilitating one- stop shopping for consumers who could now receive a comprehensive range of financial products and services from a single financial institution. The degree to which financial institutions engage in comprehensive financial services can be determined by comparing their noninterest income ratios.
Hokkoku Bank is focusing on its Consultation services, Bank cards, and Leasing businesses to expand noninterest income transactions. In FY03/20, it reported income of JPY661mn (+JPY251mn YoY) in the Consultation services business, JPY762mn (+JPY225mn YoY) in the Bank cards business, and JPY332mn (+JPY57mn) in the Leasing business. Its medium-term business plan calls for Consultation services income of JPY1.5bn, Bank cards income of JPY2.0bn, and Leasing income of JPY500mn.
Income from new businesses (non-consolidated)
Income from new businesses FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Income from new businesses 3366088841,2241,756 YoY 81.0%45.4%38.5%43.5% Composition 100.0% 100.0% 100.0% 100.0% 100.0% Bank cards 200275371537762 YoY 37.5%34.9%44.7%41.9% Composition 59.5%45.2%42.0%43.9%43.4% Leasing 2688203274332 YoY 238.5% 130.7% 35.0% 21.2% Composition 7.7%14.5%23.0%22.4%18.9% Consultation 110245309410661 YoY 122.7% 26.1% 32.7% 61.2% Composition 32.7%40.3%35.0%33.5%37.6% Source: Shared Research based on bank data
Consultation services
Consultation services to support community-based financing Japanese regional banks across the board are currently stepping up their consultation services. Since the FSA urged all regional financial institutions to enhance Relationship Banking functions in 2003, regional banks—which operate under a business model rooted in community-based financing—have worked to evaluate business potential, improve the profitability, and support the growth of regional customers. However, the FSA commented in 2016 that “initiatives to provide high-quality, suitable consulting have been insufficient,” pointing to slow progress in related business expansion. Hokkoku Bank launched its Consultation services business in August 2015, and has registered steady growth in the business since.
Banks’ consultation services: Japanese regional banks’ consultation services were developed in response to the government’s declaration that the state of “relationship banking” is an important aspect of the disposal of NPLs for regional banks (Program for Financial Revival, October 2002). The concept of relationship banking has not been clearly defined, but the term is used to refer to financing services tailored to local communities. In March 2003, the FSA released a document titled “Toward enhancing functions of Relationship Banking” in an attempt to encourage regional banks to enhance relationship banking functions, promote various initiatives to invigorate SMEs and revitalize regional economies, and concurrently solve the NPL problem. In June of the same year, the
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FSA revised its Guidelines for Administrative Processes, clarifying that consultation and other customer support services performed in the context of relationship banking functions correspond to “ancillary operations” specified in the Banking Act. This paved the way for the development of consultation services by banks. In May 2011, the FSA revised its supervision guidelines, calling on regional financial institutions to adopt a business model centered on community-based financing and positioning the “evaluation of business potential” as an integral part of such a business model. After the release of the Japan Revitalization Strategy in 2015, the FSA in April 2016 stated that regional financial institutions had not yet sufficiently provided high-quality and suitable advisory services despite demand from companies, and it urged such institutions to beef up their community- centric financing operations through consultation services. (“Working Group on Banks’ Financial Intermediation for the Regional Economy,” FSA, April 2016)
Difference between banks’ consultation services and services offered by major consulting firms Leading consulting firms mainly aim to resolve challenges faced by customers, and are therefore project-driven. Conversely, banks such as Hokkoku Bank offer consultation services that do not necessarily seek to address a single problem, but rather aim to support customers in achieving long-term growth.
Description of consultation services Hokkoku Bank’s consultation services aim to jointly address and resolve challenges facing customers based on an understanding of their businesses. Its key underlying assumption is that improved corporate management contributes to regional revitalization. The bank has set up a team of roughly 100 consultants at its head office, who cooperate with branches to provide services to customers. Its consultant team is larger than the teams at Hokuriku Bank (84) and Fukui Bank (48).
Consultation services provided Business consultation Descript ion of consult ing services 1 Management strategy ▶Formulat ion of management philosophy, basic policy, and act ion guidelines ▶Formulation of management plan ▶Proposal of policies for each client 2Business optimization ▶Business Process Re-engineering (BPR) standards, proposals (optimizat ion of business processes) ▶Optimization of office work by using cloud-based accounting software ▶Creation of manuals for various work processes 3 Business succession and ▶Formulation of business succession plans ▶Design of holding and spin-off companies ▶Development of internal capital strategy systems to prepare for management succession 4 Management ▶Formulation of management plans ▶Support for reform of organizational culture ▶Cost management enhancement 5M&A ▶Coordination of sale of company and M&A ▶Support related to negotiations and contract creation, etc. ▶ Advice regarding calculation of enterprise value 6ICT ▶Introduction of effective groupware ▶Support for paperless operations ▶Introduction of various systems 7 Business matching ▶Referrals to new customers and suppliers ▶Referrals to development partners for new products and technologies ▶Referrals to subcontractors 8 Real estate ▶Provision of real estate information (sales and rental operations) ▶A dvice regarding effect ive ut ilizat ion of real estate ▶Referrals to real estate brokers 9 HR development ▶Implementation of various forms of training ▶Training of managers ▶Improvement of organizat ional capabilit ies 10 HR systems ▶Analysis of existing personnel, and development of ideal employee profile ▶Formulation of personnel evaluation system ▶Design of wage schemes 11 Staff recruitment ▶Opt imal HR mat ching ▶Proprietary HR information network ▶Support for employee retention 12 Retirement benefit ▶Design of overall system ▶Introduction of defined contribution pension plans ▶Support for retirement benefit systems accounting 13 Overseas operations ▶Cult ivat ion of overseas sales channels ▶Support for establishment of overseas bases ▶Advice regarding trading procedures 14 Startup businesses ▶Formulation of business plan ▶Fund raising ▶Resolut ion of various problems (select ion of suppliers, et c.) 15 Medical and long-term ▶Formulat ion of profit abilit y improvement plans for medical and long-term care businesses ▶Support related to care est ablishment of clinics and long-t erm care facilit ies ▶Incorporation and business succession for medical centers 16 Subsidies ▶Provision of various subsidies and grants ▶Support for preparation of business plan ▶Cooperation with various support inst it ut ions Source: Shared Research based on bank data Consultation services for ICT adoption Hokkoku Bank aims to support the use of ICT by regional customers, thereby enhancing the labor productivity of such customers and, by extension, the region as whole. Drawing on its experience with systems-driven business model reforms, it seeks to share its expertise and introduce third-party vendors. The bank also provides support for groupware adoption and helps organize workshops that provide information about ICT investment to customers.
Consultation services for business efficiency The bank provides consultation services to resolve a variety of challenges faced by companies such as streamlining of office work, the transition to paperless operations, and visualizing operations. It helps resolve problems by leveraging its expertise in banking and its experience in streamlining office work. It provides support for streamlining office work by leveraging IT tools such as groupware and cloud-based accounting software.
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For example, in 2015, Hokkoku Bank entered into a business alliance with fintech company freee KK (TSE Mothers: 4478), under which it introduces the cloud-based accounting software “freee” (sold online by freee) to its customers to help streamline accounting work. Using the freee software, customer companies can move away from paper-based processing to fully digital processing. The accounting software also integrates with customers’ bank accounts, allowing companies to share their financial information with Hokkoku Bank over the cloud, thus shortening screening processes at the bank. It therefore expects to achieve a deeper trust relationship with its customers.
Consultation services for management improvement Hokkoku Bank offers support to companies in need of management improvements to promote not only short-term but also medium- to long-term growth. Rather than focusing exclusively on historical financial results, the bank looks at future prospects of companies, including their business model and scope for improvement.
Consultation services for overseas operations The bank supports overseas expansion of its customers by leveraging its networks in Southeast Asia through its Singapore branch. It launched the Singapore branch (starting from an existing representative office, converted into a full-fledged branch later; the first Singapore branch of Japanese regional banks) ahead of its competitors. The branch has 15 staff members (seven Japanese employees and eight local staff) with 15 staff members supporting from the head office in Japan. A key focus area for the Singapore branch is helping customers cultivate sales channels. It also contributes to customer product development by facilitating overseas business negotiations, conducting market research based on each consulting agreement, and researching the needs of local buyers. The bank’s efforts to beef up consultation services have also contributed to growth in foreign exchange transactions.
Profitability of consultation services Hokkoku Bank receives consultation fees from customers for its consultation services. Fees are calculated based on the hourly rate of the responsible consultant(s). Shared Research understands the bank aims to expand ancillary businesses and improve earnings as part of its comprehensive financial services through securing loans or other financing, rather than simply aiming to generate fee income.
Consultation contracts and income The number of consultation contracts has increased about 5x from 110 in FY03/16 to 510 in FY03/20. Over the same period, consultation income has increased 6x from JPY110mn to JPY661mn.
Example of consultation project: Improving productivity in Yamanaka lacquerware production region The following is an example of a consultation project Hokkoku Bank has worked on. The bank aimed to enhance productivity in the production region of Yamanaka lacquerware. The project was recognized as an excellent initiative, winning the Minister’s Award in the “Distinguished Initiatives by Financial Institutions that Contribute to Regional Revitalization” category—certified by the Secretariat of the Council on Overcoming Population Decline and Vitalizing Local Economy of the Cabinet—in May 2019.
Issues Yamanaka lacquerware is traditional Japanese lacquerware produced by craftsmen in the city of Kaga, Ishikawa Prefecture. The city of Kaga has been a manufacturing region of Yamanaka lacquerware for about 450 years, and constitutes the largest lacquerware market in Japan with a production value of JPY10.0bn. In recent years, the number of Yamanaka lacquerware workshops has fallen by 60% from its peak mainly due to aging of the craftsmen, and the decline in the number of craftsmen had bottlenecked the production process. The production process for Yamanaka lacquerware has several stages, starting with the placement of orders by lacquerware shops (wholesaler) based on product planning and sales. Materials shops subsequently supply processed (molded) wood and plastic materials to craftsmen who consecutively apply the lacquering, and different craftsmen apply the sprinkling of gold or silver powder (referred to as maki-e in Japanese). Yamanaka lacquerware products need to pass through the hands of several craftsmen before they are delivered to lacquerware shops, therefore lacquerware shops
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could not grasp progress for each stage after placing orders. Also, the ordering process has traditionally relied on telephone and fax communication, which has resulted in some order errors.
Establishment of Yamanaka Lacquerware Consortium The Hokuriku area is home to many traditional industries, and the lacquerware industry is a key customer industry for Hokkoku Bank. It has set up a Yamanaka Lacquerware Consortium comprising 36 Yamanaka lacquerware-related companies that were customers of the bank. The aggregate output of the consortium members accounts for roughly 60% of all shipments from the production region. Hokkoku Bank offers new services to enhance productivity in the production region as a whole, which could result in maintaining and expanding businesses with such customer companies.
To resolve issues in the area and industry, Hokkoku Bank considers the problems of individual companies as regional or industry- wide issues. It works to resolve problems for the region as a whole to ensure future succession of traditional industries. If collaboration between public and private sectors is needed to expand regional resolutions to the Hokuriku area or entire nation, the bank emphasizes playing a coordinating role between the parties.
Solutions The bank aimed to unify management of the production process of Yamanaka lacquerware using a cloud-based process management system, under which purchase orders from lacquerware shops are shared with the entire supply chain (including materials suppliers and craftsmen), allowing each party to check manufacturing progress online. The sharing of information over the cloud has led to benefits to both lacquerware shops (such as visualization of the process, sharing of inventory information, and centralized order data) and the craftsmen (such as centralized order receiving and placing, and simplified invoice payments).
Hokkoku Bank enlisted cooperation from the national and local governments and arranged for half of over JPY17mn in project costs to be covered by subsidies. The system development was outsourced to a local IT company in the city of Kanazawa (Ishikawa Prefecture). The consortium members pay monthly system usage fees to the local IT company.
Effects Initial data for the project pointed to a 10–30% increase in efficiency for business processing.
Project effects and outcome Results Craftsman in the Type of work Degree of reduction Monthly working hours Hours reduced lacquerware process (approximate) Before After Lacquerware Payment 30% 30 20 -10 manufacturer Ordering 30% 100 70 -30 Billing 10% 80 70 -10 Wooden base maker Order-taking 10% 150 135 -15 Coating craftsman Billing 10% 3.0 2.5 -0.5 Gold lacquer paint er Billing 10% 3.0 2.5 -0.5 Source: Shared Research based on bank data Implications To improve the productivity of regional SMEs, Hokkoku Bank thinks it needs to (1) establish relationships with customers that allow face-to-face discussions, (2) visualize processes done by manpower and automate them through adoption of IT systems, and (3) provide support to customers for overall progress management of the project through close involvement.
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Bank cards business Background and purpose of Bank cards business Hokkoku Bank started offering Visa debit card services in 2016 with the aim of enhancing productivity of local companies and improving convenience for consumers through cashless payment solutions. It decided to promote such solutions, leveraging its experience of the “Double Productivity Initiative” launched in 2009, based on the rationale that improved productivity and profitability of local companies would confer merits to banks as well. The bank also thought worker shortages in the region will intensify once the extension of the Hokuriku Shinkansen route drives up the volume of domestic and inbound tourists. Against this backdrop, it thought that further adoption of cashless payment solutions in the region and the resulting reductions in time and personnel required to handle cash transactions will not only expand benefits from inbound tourism but also help offset worker shortages.
When it launched its debit cards, the bank paid careful attention to aspects such as versatility (broad acceptance), immediacy (immediate settlement), and security. Given the increase in payment terminals compliant with international payment standards in anticipation of demand growth from inbound tourists, the bank opted for debit cards of the international Visa brand.
Debit cards The main difference between credit and debit cards lies in the timing of settlements. When using credit cards, cardholders borrow funds against a credit line and repay these at a later point in time. When using debit cards, the funds are immediately withdrawn from their account. Other distinct features of debit cards are that they can only be issued by a bank that offers deposit accounts, that they can only be used to pay up to the amounts cardholders have in their bank accounts, that applications are in principle not subject to screening, and that they tend to earn fewer reward points than credit cards.
Differences between credit and debit cards Compar is on it ems Credit cards Debit cards Payment method Deferred payments (can borrow from credit line) Immediate payments (no credit line) Screening Screening applies (in principle) No screening (in principle) Age restrictions 18 or above Generally 15-16 or above Withdrawal account Can be selected by cardholder (with some exceptions) Automatic withdrawal from account held at issuing bank Annual fees Range from free to over JPY100,000 Generally range from free to several thousand yen Issuance fee None (in principle) None (in principle) Sign-up fees None (in principle) None (in principle) Depends on cards, ranging from roughly JPY100,000 to over Spending limit Up to bank account balance JPY10mn One-time payment, two installments, multiple installments, Payment method One-time payment only revolving payments, bonus payments, etc. Reward points Reward point return rate: average of 0.5％ Reward point return rate: average of 0.3％ Wide range of benefits such as access to airport lounges, Benefits As a general rule, reward points only discounts, etc. Relatively easy to obtain high insurance coverage amounts Ancillary insurance Differs widely by card with many cards (particularly gold cards) Can be used at affiliated merchants (convenience stores, Can be used at affiliated merchants (convenience stores, Usage in Japan chain restaurants, hotels, etc.) chain restaurants, hotels, etc.) Usage overseas Can be used at affiliated merchants Can be used at affiliated merchants Impact on credit history Usage builds credit history Usage does not build credit history Advantages/ Healthy card usage can have a favorable effect on loan Loss of card can lead to third parties getting a hold of PIN disadvantages screenings. code, resulting in unauthorized withdrawals Source: Shared Research based on bank data Licensed Visa acquirer In February 2016, Hokkoku Bank obtained a license as a Visa acquirer (first among Japanese banks), and it subsequently started rolling out payment terminals to affiliated merchants. This marked the first time a regional financial institution acted in the capacity of acquirer. While debit card issuer functions were confined to banks that operated debit accounts for customers, acquirer functions had up to that point been the territory of credit card and other companies.
As an acquirer, Hokkoku Bank can receive fees from affiliated merchants. By performing double duty as a card issuer and acquirer, it is able to utilize its own settlement system to reduce fees for affiliated merchants, thus undercutting other credit and debit card companies and offering new low-cost earnings opportunities to affiliated merchants. Hokkoku Bank started offering Visa debit cards in the Hokuriku area from April 2016.
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According to METI’s guidelines for Cashless Vision, affiliated merchants are typically charged a fee of 3.24% (combination of card issuer and acquirer fees), of which 2.3% goes to the issuer. Hokkoku Bank, on the other hand, charges its affiliated merchants a more affordable 2.98% (at most), giving it a competitive edge over credit card companies.
Traditional credit card income structure
Royalty Royalty International brands 0.05% 0.05%
JPY5 per unit/transaction Acquirer Issuer Member store royalty B (paid to issuer): 2.3%
Affiliated store royalty A Card holder annual fee (paid to issuer and (free to some tens of acquirer): 3.24％ thousands of yen)
Affiliated store Cardholder
Source: Shared Research based on Cashless Vision by METI, April 2018 Notes: The conceptual diagram above illustrates the income flow for credit card operations. However, the same model applies to debit card operations. International credit card brands: Visa, Master, JCB. AMEX, Diners Club Acquirer: Typically a credit card company that enters into agreements with merchants (acquires merchants, screens merchants, and serves as payment intermediary). Card issuer: A company that issues credit cards (issues the cards, manages cardholders, bills cardholders for usage, and monitors card usage). In the case of debit cards, the card issuer must be a depository institution.
Track record in Bank cards business As of end-March 2020, Hokkoku Bank had issued 206,000 debit cards and signed up 7,768 affiliated merchants (and supplied the same number of payment terminals).
Bank cards business data FY03/17 FY03/18 FY03/19 FY03/20 Total number of debit cards issued ('000) 58 109 154 206 T ot al number of affiliat ed st ores w it h debit card t erminal 1,753 3,410 5,537 7,768 Source: Shared Research based on bank data Card eligibility To cater to a wider customer demographic than credit cards, Hokkoku Bank accepts applications for debit cards from customers aged 15 and above. There is no spending limit per se but charges must remain within the scope of the balance of deposit of the cardholder. No screening is required as part of the application, and charges are automatically withdrawn from cardholder deposit accounts when they present their card for payment.
Reward points and value-added services Hokkoku Bank has launched an email service that notifies cardholders of card usage. It also has developed and provided the Hokkoku Wallet (Hokkoku Saifu) smartphone app, which allows cardholders to check their reward point balances and card usage details, and search for affiliated merchants. To contribute to regional revitalization, Hokkoku Bank has developed a system under which cardholders can spend accumulated reward points at local affiliated merchants. The bank says its debit cards have gained traction even in remote areas and among seniors, which are the areas and demographic it had been expected would be resistant to cashless payments. The cards are contactless and simply need to be tapped against a terminal to make a payment. Concerns over the COVID-19 pandemic coupled with the ease of use for seniors make the cards appealing.
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Collaboration with e-commerce mall COREZO In May 2019, Hokkoku Bank launched the e-commerce mall COREZO, which is operated by its subsidiary Hokkoku Management (acquired license pursuant to provisions in Article 16-2-9 of the Banking Act). With large e-commerce site operators entering into the banking industry, Hokkoku Bank launched the e-commerce mall as a platform for regional revitalization, leveraging its unique characteristics and perspectives as a bank that is rooted in local communities.
COREZO is an e-commerce mall through which various business operators can directly sell locally manufactured products such as sake, confectionary, and craft products to consumers. It opens up new sales channels for the bank’s customers, particularly SMEs. Hokkoku Bank continues to sign up new stores for the platform. Companies who open a store on the mall can choose from two payment plans: fixed and variable rate. Under the fixed-rate plan, stores pay a monthly fee of JPY12,000 per store. Under the variable-rate plan, they pay a monthly fee equivalent to 3.0–5.0% of their monthly sales. By undercutting major e-commerce site operators, which charge fees commensurate with sales, the bank aims to reduce the financial burden for companies that set up a store. The reward points accumulated on debit cards issued by the bank can be used for purchases on COREZO with an exchange rate of JPY1 per reward point.
Leasing business Leasing business by bank following revision of Bank Act Japanese banks were barred from engaging in leasing transactions until 2011, when the ban on such operations was lifted with a revision of the Bank Act. Prior to the changes, Hokkoku Bank’s consolidated subsidiary Hokkoku General Leasing undertook leasing operations. Hokkoku Bank had focused on lending operations and referred leasing inquiries from customers to its subsidiary. Because its lending and leasing operations were conducted by separate sales teams, it was unable to fully leverage the bank’s customer base and information networks to secure competitive advantages. As major leasing companies with extensive capital resources entered into the Hokuriku area, Hokkoku General Leasing started lagging such rivals in cost competitiveness due to differences in total cost of funding.
Finance leases: A lease transaction under which a leasing company (lessor) purchases an asset selected by a user (lessee). This type of lease transaction cannot be cancelled and requires the lessee to pay nearly the entire purchase price of the asset and related expenses through a series of lease payments. Unlike ordinary rental agreements where the lessee selects an asset that is already owned by the lessor, the lessor purchases a new asset selected by the lessee, grants the lessee operating control of the asset during the term of the lease, and recovers the total cost of the asset, including the purchase cost, capital cost, fixed asset taxes, and insurance premiums through lease payments over the lease period. A wide range of assets can be purchased under finance leases, such as computers and telecommunications equipment, office equipment, machine tools, and industrial machinery. Finance lease transactions can also be categorized into two groups based on whether or not they transfer ownership to the user after the lease period expires.
Differences with operating leases: In operating lease transactions, users pay lease fees throughout the lease period, and return the leased asset to the leasing company once the lease period expires. A key difference between operating and finance leases is that the total value of lease payments is lower than the total value of the asset in operating leases, but higher in finance leases. In addition, lease periods can be flexibly set in operating leases, but are required to be at least 60–70% of the statutory useful life of the asset in finance leases.
Overhaul of lease sales structure Following the lifting of the ban on engagement in leasing operations by banks, Hokkoku Bank rebuilt its group-wide sales structure for leasing operations. It established a team of 300 sales staff across the group, the largest such team in the Hokuriku area, and clarified the responsibilities of Hokkoku Bank and Hokkoku General Leasing. The bank has consolidated relevant sales counters at Hokkoku Bank, and collaborates with Hokkoku General Leasing for finance leases with a transfer of ownership and operating leases, which it cannot handle directly. Under the new structure, Hokkoku Bank became capable of leveraging its sales force to meet the capital investment needs of its customers, which include purchases of commercial vehicles, heavy machinery, kitchen equipment, copiers, hair salon equipment, and computers.
Optimal mix of lending and leasing services By expanding its range of lease products, the bank has broadened its tool set to resolve customer problems, and this has led to new orders and inquiries. For example, the bank could previously only offer loan proposals to medical companies in need of
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funds for capex. By adding leasing solutions to its portfolio, the bank now can propose lease solutions to them for medical equipment and therefore has been able to capture projects without getting embroiled in interest rate competition. Customer companies can easily compare the terms of loans and leases, and have access to sales staff with extensive knowledge of leasing through the close collaboration between Hokkoku Bank and Hokkoku General Leasing. By proposing an optimal mix of lending and leasing services, the bank can obtain detailed information on customer companies’ capital investments and spending plans. This in turn allows Hokkoku Bank to lock in customers by providing additional consulting services targeted at core businesses of customer companies.
Track record and medium-term plan Hokkoku Bank’s income from the Leasing business has steadily increased from JPY203mn in FY03/18 to JPY275mn in FY03/19 and JPY332mn in FY03/20, but we understand lease rate competition with major leasing companies is intensifying. The bank’s medium-term plan calls for income of JPY500mn from the Leasing business.
Lease assets
Lease investment assets (group total) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 1,1004,3008,4009,50010,000 Hokkoku General Leasing 19,20018,40019,00020,80023,900 Source: Shared Research based on bank data
Retail banking services for individual customers
Hokkoku Bank recommends medium- to long-term investment products to individual customers. Focusing on core investment, it selects investment trusts based on these criteria: (1) clear investment policy of fund managers and regular reports, (2) flexible cash allocations to dynamically adapt to sudden changes in market prices, (3) flexible control of hedging to mitigate impacts of price fluctuations within funds rather than upfront decision on dynamic management of currency exposure.
In the past, financial institutions would prioritize securing fee income by urging purchasers of investment trusts to repeatedly sell the products they purchased and buy different products, and this ultimately became a matter of public concern. In response, financial institutions started selling theme-based investment trusts and held off on recommending other products until the themes of the original products became less popular. Hokkoku Bank selects investment trusts based on the aforementioned criteria and recommends medium- to long-term investment in products that keep risk down to a certain level. The investment trust holding period for the banks’ customers averaged 6.98 years (as of FY03/20), which is longer than the average four years for major banks and leading regional banks.
To its younger customer demographic, the bank recommends investment trusts with periodic investment, under which customers steadily allocate funds into an investment trust each month. These investment products typically start out with small investment amounts, making them more accessible to customers. They also employ dollar-cost averaging strategy to keep the number of investment units high when the price is low, and low when the price is high. In FY03/20, the bank had 20,646 customers investing in accumulation-type investment trusts, or 47.2% of its total number of investment trust customers (43,714).
Of the total assets deposited at Hokkoku Bank, over 90% are individual deposits. Rather than aggressively pushing sales of investment trusts or insurance products, the bank strives to provide financial consulting based on an understanding of customers’ asset formation needs.
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Balance of deposit assets under Hokkoku account
Assets under Hokkoku account FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Personal deposits 2,028,309 2,061,376 2,093,361 2,124,961 2,162,086 2,199,999 2,247,498 2,324,776 2,401,959 2,478,127 YoY 1.6% 1.6% 1.5% 1.7% 1.8% 2.2% 3.4% 3.3% 3.2% Composition 86.2% 86.0% 85.5% 85.8% 86.3% 87.6% 88.4% 89.1% 89.9% 90.6% Japan government bonds 99,572 95,214 87,494 67,223 47,525 36,121 32,528 28,347 22,270 26,471 YoY -4.4% -8.1% -23.2% -29.3% -24.0% -9.9% -12.9% -21.4% 18.9% Composition 4.2% 4.0% 3.6% 2.7% 1.9% 1.4% 1.3% 1.1% 0.8% 1.0% Mutual funds 115,430 101,670 106,919 105,466 113,009 96,338 87,031 86,996 85,305 73,780 YoY -11.9% 5.2% -1.4% 7.2% -14.8% -9.7% 0.0% -1.9% -13.5% Composition 4.9% 4.2% 4.4% 4.3% 4.5% 3.8% 3.4% 3.3% 3.2% 2.7% Insurance (over-the-counter; annuity insurance, other) 109,634 137,988 161,470 178,445 183,997 180,025 174,915 168,561 163,228 156,330 YoY 25.9% 17.0% 10.5% 3.1% -2.2% -2.8% -3.6% -3.2% -4.2% Composition 4.7% 5.8% 6.6% 7.2% 7.3% 7.2% 6.9% 6.5% 6.1% 5.7% Total 2,352,945 2,396,248 2,449,244 2,476,095 2,506,617 2,512,483 2,541,972 2,608,680 2,672,762 2,734,708 Mutual funds (no. of contracts) 21,12524,58025,343 YoY 16.4%3.1% Source: Shared Research based on bank data
Corporate revitalization fund
Formation and management of public-private Ishikawa SME Revitalization Fund The Hokkoku Bank group manages revitalization funds through its consolidated subsidiary Hokkoku Management. In 2010, it formed Ishikawa SME Revitalization Fund, Hokuriku’s first public-private revitalization fund with a total investment amount of JPY3.0bn and an investment period of 10 years. The fund has invested in 13 companies (nine hot spring inns, two manufacturing companies, one Japanese restaurant, and one service provider), all of which have completed rehabilitation proceedings. In 2016, the bank formed Ishikawa SME No. 2 Revitalization Fund with an investment value of JPY2.0bn. The fund has invested in four companies, one of which has completed rehabilitation proceedings. It remains invested in the other three companies.
In April 2020, the bank group reached its upper investment limit for Ishikawa SME No. 2 Revitalization Fund, and formed Ishikawa SME No. 3 Revitalization Fund with a total investment amount of JPY2.0bn, with 50% to be contributed by the Organization for Small & Medium Enterprises and Regional Innovation, and the remaining 50% by Hokkoku Bank, Notokyoei Shinkin Bank, Kanazawa Shinkin Bank, Tsurugi Shinkin Bank, Ishikawa Guarantee, and Hokkoku Management. All investees are SMEs with profitable core businesses whose earnings have deteriorated as a result of excess debt. This means they can be revitalized through financial restructuring or business reforms. Although the Fund pursues medium- to long-term investments by, for example, buying monetary claims and investing in equities, it does not aim at liquidating investees to generate near-term profit or reselling purchased claims. Using a hands-on approach, the Fund is involved in the management of the investees and aims to revitalize them over an investment period of five years. After the revitalization has been completed, the investees raise funds such as loans from their lender banks and make repayments to the Fund.
The bank transfers corporate customers and their claims that are classified as companies in danger of bankruptcy and assets in danger of bankruptcy, respectively, to the Fund. Hokkoku Servicer, Ltd., a subsidiary of the bank, undertakes a role of servicing for de facto and legally bankrupt companies. However, not all companies in danger of bankruptcy are included in the Ishikawa SME No. 3 Revitalization Fund. As the Organization for Small & Medium Enterprises and Regional Innovation holds a 50% stake in the fund, companies must have a certain business scale to be considered. Looking at Hokkoku Bank’s corporate customers, the business scale of hot spring inns or similar business size is needed for the companies to be included in the Fund. The Fund also invests to revitalize customer companies of other Shinkin banks who invested in the Fund. In addition to companies in Ishikawa Prefecture, the Fund invests in companies in Toyama Prefecture and Fukui Prefecture. Hokkoku Bank has not factored income from its revitalization funds into its new medium-term plan and earnings forecasts.
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Market and value chain Market size and trends in regional banking industry
Market size and market share Hokkoku Bank had 1.49% share of regional bank assets (total assets: JPY342tn) as of end-March 2020 As of end-March 2019, 105 regional banks operated in Japan (64 regional banks and 41 second-tier regional banks), making up 36.7% (roughly JPY418tn) of the JPY1,138tn in total assets of Japanese major banks and regional banks. As of end-March 2020, Hokkoku Bank’s non-consolidated total assets stood at JPY5.1tn, putting it in 30th position among the 64 regional banks. It had a 1.49% share of the JPY342.0tn in total assets of the 64 regional banks (according to the Regional Banks Association of Japan).
Classification of depository institutions and total assets size Total Category Description assets (JPYtn) Globally act ive banks City banks (4) MUFG, Sumitomo Mitsui, Mizuho, Resona Major banks (9) 720 Trust banks, other (5) Sumitomo Mitsui Trust, Mitsubishi UFJ Trust, Mizuho Trust, Shinsei, Aozora Headquartered in each prefecture, covering the prefecture as the main operational base Regional banks (105) Regional banks (64) 418 Tier 2 regional banks (41) Total banks 1,138 Shinkin banks (259) Cooperat ive t ype of financial inst it ut ions t o provide mut ual aid for regional prosperity 158 Credit unions (146) Cooperat ive t ype of financial inst it ut ions t o provide mut ual aid for regional prosperity 146 Japan Post bank 209 Norinchukin Bank 104 Source: Shared Research based on “Conditions and Challenges of Regional Financial Institutions” by FSA (September 13, 2019) Notes: Major banks include the city banks below, the trust banks below, as well as the former long-term credit banks Shinsei Bank and Aozora Bank. City banks: Mizuho Bank, MUFG Bank, Sumitomo Mitsui Banking, and Resona Bank Trust banks: Mitsubishi UFJ Trust and Banking, Mizuho Trust & Banking, and Sumitomo Mitsui Trust Bank Former long-term credit banks: Shinsei Bank and Aozora Bank Regional banks: Financial institutions that are licensed under the Banking Act (similar to city banks in this respect). Second-tier regional banks are mostly former mutual banks that used to be licensed under the Mutual Loan and Savings Bank Act (abolished in 1992). These banks are now governed by the Banking Act.
43.1% share of loans outstanding in Ishikawa Prefecture, 21.1% in three Hokuriku prefectures (as of end- March 2019) Hokkoku Bank had a 21.1% share of the JPY11.1tn in total loans outstanding at depository institutions in the three Hokuriku prefectures, compared with 27.7% for Hokuriku Bank (as per Hokuriku Bank materials).
Loans outstanding in the three Hokuriku prefectures Loans Hokkoku Bank Hokuriku Bank Fukui Bank (JPYbn) outstanding Balance Share Balance Share Balance Share Ishikawa 4,202 1,813 43.1% 715 17.0% 161 3.8% Toyama 4,292 434 10.1% 1,677 39.1% 79 1.8% Fukui 2,651 104 3.9% NA NA 1,025 38.7% Total 11,146 2,351 21.1% NA NA 1,265 11.4% Source: Shared Research based on 2020 special issue of the monthly financial journal “Kinyu Map,” and disclosure documents released by Fukui Bank
Ishikawa Prefecture: As of end-March 2019, Hokkoku Bank had a 33.9% share of the total outstanding of deposits and savings of JPY9.8tn in the prefecture, and a leading share of 43.1% of the JPY4.2tn in total loans outstanding in the prefecture. The second was Hokuriku Bank with a 17.0% share of loans outstanding. By bank category, regional banks had a 46.9% share of outstanding of deposits and savings in the prefecture, Japan Post Bank 16.5%, shinkin banks 13.6%, agricultural cooperatives 13.0%, major banks 6.4%, labor banks 2.6%, credit unions 0.7%, and second-tier regional banks 0.3% (based on 2020 special issue of the monthly financial journal “Kinyu Map;” outstanding of deposits and loans data based on domestically licensed banks’ banking accounts; deposits include negotiable certificates of deposits [NCDs]).
Toyama Prefecture and Fukui Prefecture: Hokuriku Bank has the top 39.1% share of loans outstanding in Toyama Prefecture. Hokkoku Bank has JPY434.3bn in outstanding loans in the prefecture (10.1% share), exceeding the JPY263.3bn in outstanding loans of the Bank of Toyama, which operates out of the prefecture. Fukui Bank has the leading 38.7% share of loans outstanding in Fukui Prefecture, where Hokkoku Bank has outstanding loans of JPY103.5bn (3.9%).
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Share expansion: As of March 2020, Hokuriku Bank had the top share of loans outstanding in the three Hokuriku prefectures (27.33%, -0.06pp YoY), with Hokkoku Bank in second position (19.78%, +0.42pp YoY) and Fukui Bank in third position (15.77%, -0.16pp YoY), according to a survey by Tokyo Shoko Research. Among the top 10 financial institutions in the three Hokuriku prefectures, Hokkoku Bank is the only one that is expanding its share of loans outstanding (according to the Nikkei, August 17, 2020).
Competitive landscape Cross-prefecture lending and branch network Hokkoku Bank, Hokuriku Bank, and Fukui Bank provide loans across the three Hokuriku prefectures, and also operate branches in major metropolitan areas such as Tokyo, Osaka, and Aichi Prefecture. Hokkoku Bank intends to expand its presence in Toyama and Fukui Prefectures with its consultation services as a tool to gain access to potential customers), ultimately helping it to expand its share of loans outstanding. The bank has built a team of 100 consultants, compared with 84 at Hokuriku Bank (at end- March 2020). Rival Fukui Bank plans to put together a team of 60 consultants in FY03/21.
Competition from the standpoint of branch network Hokkoku Bank Hokuriku Bank Fukui Bank Toyama Bank FY03/20 FY03/19 FY03/20 FY03/20 Head office and branches in Japan Ishikaw a 86 30 9 Kanazawa area (incl. head office) 45 17 4 Kaga area 22 Noto area 19 Toyama 11 60 3 39 Fukui 3 17 62 Tokyo 161 Osaka 131 Aichi 131 SUM [1] 103 145 80 39 Branch in branch [2] 8 Total locations [1]-[2] 95 Overseas branches 1 Singapore 1 Total branches 104 Sub-branches in Japan 1 42 7 Kanazawa area, Ishikawa 1 Money Plaza (locations) 9 Overseas offices (locations) 2 6 Shanghai 1 1 Singapore 1 Bangkok 1 1 Source: Shared research based on disclosure documents released by the banks. Note: In addition to the data above, Hokuriku Bank also has branches in Hokkaido, Kanagawa, Niigata, Nagano, Gifu, and Kyoto Prefectures, and representative offices in New York, London, and Dalian. Fukui Bank also operates a branch in Kyoto Prefecture. The numbers of Hokuriku Bank and Fukui Bank branches listed for the Kanazawa area are limited to those with a registered address in Kanazawa City.
Structural problems in the banking industry Pullback in financing needs According to Flow of Fund Statistics released by the BOJ, the private nonfinancial corporations sector moved to financial surplus in 1999. The household and private nonfinancial corporations sectors are presently both maintaining financial surpluses. The move to financial surplus in the private nonfinancial corporations sector drove a sharp decline in interest rates on loans and there is little prospect of an upturn given the current environment.
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Financial surplus/deficit in the private sector (households and nonfinancial corporations) and contract interest rates on new loans
(JPYtn) Liabilities, financial surplus and deficit; households; flow (％) Liabilities, financial surplus and deficit; non-financial corporations; flow 80.0 4.5 New; total; domestically licensed banks 4.0 60.0 3.5 40.0 3.0 20.0 2.5
0.0 2.0 1.5 -20.0 1.0 -40.0 0.5 -60.0 0.0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Shared Research based on BOJ materials Note: Financial surplus and deficit data based on Flow of Fund Statistics Shrinking deposit-lending margins The continued negative interest rate policy of the BOJ has led to a flattening of the yield curve, giving rise to an environment in which the traditional banking business model that generates income from the yield spread between long- and short-term interest rates no longer functions. Loan-to-deposit ratios continue to decline, and the widening gap between deposits and loans is tracking the decline in interest rates. Meanwhile, population declines in regional areas are eroding loans outstanding while a financial surplus at households is contributing to increases in outstanding of deposits. As long as these conditions persist, logic suggests interest rates on loans will remain in a downtrend.
Flattening JGB yield curve Relationship between loan-deposit gap and interest rates
JGB interest rate 10-year JGB (%) average interest rate (%) 3.0 2.5 March 2008 March 2011 2.5 March 2014 2.0 March 2017 2.0 March 2020 1.5 1.5 1.0 1.0 y = -1E-06x + 2.9279 0.5 R² = 0.9113 0.5
0.0 0.0
-0.5 -0.5 123456789101520253040 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 Term to maturity (years) Deposit-loan gap (nationwide; deposits outstanding - loans outstanding Source: Shared Research based on Ministry of Finance (MOF) materials Source: Shared Research based on Ministry BOJ materials Population decline limiting funding needs Funding needs in regional economies is being affected by population declines and falling birthrates and aging population. The table below illustrates the relationship between the working-age population and loans outstanding by prefecture, showing a strong correlation between the two (except in Tokyo, Osaka, and Fukuoka). The number of households in the three Hokuriku prefectures is poised to decline further through 2040, based on regional population projections by the National Institute of Population and Social Security Research. Compared with 2015, the number of households in 2040 is expected to be down 7.1% to 363,000 in Toyama Prefecture, down 5.4% to 428,000 in Ishikawa Prefecture, down 5.6% to 263,000 in Fukui Prefecture, and down 4.8% to 50.8mn nationwide. In other words, the population in the three Hokuriku prefectures is projected to contract at a faster pace than the national average.
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Correlation between loans outstanding and working-age population
(JPYtn) 25 y = 0.0036x + 0.5781 R² = 0.9524 20
15
10
5
0 0 1,000 2,000 3,000 4,000 5,000 6,000 Working-age population ('000)
Source: Shared Research based Statistics Bureau (MIC) and BOJ materials
Household number projections for three Hokuriku Prefectures Number of households ('000) Rate of change 2015 2015 2020 2025 2030 2035 Prefecture 2015 2020 2025 2030 2035 2040 ↓↓↓↓↓↓ 2040 2020 2025 2030 2035 2040 Nationwide 53,332 54,107 54,116 53,484 52,315 50,757 -4.8% 1.5% 0.0% -1.2% -2.2% -3.0% Tokyo 6,691 6,922 7,054 7,107 7,097 7,019 4.9% 3.5% 1.9% 0.8% -0.1% -1.1% Toyama 390 392 389 383 373 363 -7.1% 0.3% -0.7% -1.7% -2.5% -2.8% Ishikawa 452 457 456 450 440 428 -5.4% 1.0% -0.2% -1.2% -2.3% -2.7% Fukui 279 280 279 275 270 263 -5.6% 0.3% -0.5% -1.2% -1.9% -2.5% Source: Shared Research based on 2019 Household Projections for Japan (by Prefecture) by National Institute of Population and Social Security Economies of scale The general and administrative expenses of regional financial institutions are strongly correlated with their loans outstanding, and banking business in general is conducive to economies of scale. For this reason, banks have a strong incentive to merge. (“Regional Finance-Related Issues and Future Directions to Create the Optimal Competition of Regional Corporations,” FSA, April 11, 2018)
Capital Adequacy Ratio requirements (finalization of Basel III reforms) Implementation schedule for Basel III reforms In July 1988, the Basel Committee on Banking Supervision (BCBS) published capital measurement and minimum capital requirement standards for internationally active banks (Basel I Accord). In June 2004, it refined risk weight functions against the backdrop of diversification and growing complexity in financial transactions and advances in risk management (Basel II Accord). From 2010, it focused on strengthening bank capital (qualitatively and quantitatively), introducing liquidity regulations, and reviewing disclosure standards. From December 2017, it started finalizing the Basel III reforms that are scheduled to be phased in from January 2022 and completed in 2027. However, in the wake of the COVID-19 outbreak, the BCBS on March 27, 2020, announced it would delay the application of the finalized Basel III by one year until January 2023.
Implementation schedule for Basel III reforms
2010 2011 2012 20132014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Capital adequacy ratio regulation Capital Tier 1 + Tier 2 8.0％ (same as before) Tier1 Transition 6.0% Common Equity Tier 1 Transition 4.50% Interest rate risk on the banking book For Tier 1: 15％ Capital floors Transition (from 50％ to 70.0％) 72.50% Capital buffer Capital conservation buffer Transition 2.50% G-SIBs surcharge (in the case of 1%) Transition 1.00% Leverage regulation Leverage ratio 3% G-SIBs buffer Up to 0.5-1.75％ Liquidit y re gulat ion Liquidit y cove rage rat io Transition (from 60％ to 90％) 100% Net st able funding rat io 100% T ot al loss-absorbing capacit y (T LA C) regulat ion T LA C divide d by risk-w e ight ed asset s Transition 18.00% Leverage ratio Transition 6.75% Source: Shared Research based on BCBS, FSA, and Upper House materials
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Basel III application in Japan The key points of the finalized Basel III reforms are (1) revisions to standardized approach to credit risk, (2) revisions to the internal ratings-based framework to credit risk, (3) revisions to operational risk measurement framework, (4) the introduction of capital floor, and (5) revisions to leverage ratio requirements.
International versus domestic standard Internationally active banks Domestically active banks Mega banks (holding companies, banks, trust banks), major Other banks, other regional banks, other tier 2 regional banks, Banks included regional banks other Capital Capital (Tier 1 + Tier 2), Tier 1, Common Equity Tier 1 Core capital (common stock Tier 1 + more) Capital (Tier 1 + Tier 2): 8%, Tier 1: 6%, Common stock Tier 1: Core capital: 4% (Common stock Tier 1: 4.5%, if internal models Minimum capital adequacy ratio 4.5% method is applied) Capital buffer Capital conservation buffer: 2.5%, other None T he first pillar Minimum capital adequacy ratio Total capital: 10.5%, Tier 1: 8.5%, Common stock Tier 1 capital: Core capital: 4% (Common stock Tier 1: 4.5%, if internal models + Capit al buffer 7.0% method is applied) Leverage regulation Leverage ratio: 3% or higher None Liquidit y regulat ion Liquidit y coverage rat io and st able funding ratio: 100% or higher None Interest rate risk on the The second pillar 15% or less of T ier 1 capit al W ill be 20% or less of core capit al banking book
Range of disclosure Capit al rat io, capit al composit ion, capit al inst rument Capit al rat io and capit al composit ion (limit ed t o core capital) The third pillar Semiannually (with obligation to make efforts for quarterly Frequency of disclosure Quarterly disclosure); quarterly, if internal models method is applied) Source: Shared Research based on FSA materials
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Main competitors
Hokkoku Bank competes with major banks including megabanks, regional banks, second-tier regional banks, shinkin banks and credit unions, and Japan Post Bank in the three Hokuriku prefectures—Ishikawa, Toyama, and Fukui Prefectures. Among regional banks, its main rivals are Hokuriku Bank (Hokuhoku Financial Group [TSE1: 8377] affiliate) and the Bank of Toyama (TSE1: 8365), which operate out of Toyama Prefecture, and Fukui Bank (TSE1: 8362), which operates out of Fukui Prefecture. For reference, we include the earnings trends at these rival banks below.
Hokuriku Bank (Hokuhoku Financial Group [TSE1: 8377] affiliate)
Hokuriku Bank earnings (non-consolidated) Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Ordinary income 108,887 105,460 103,086 97,797 94,047 93,387 92,995 91,139 90,239 88,528 Gross profit (A) 87,942 88,718 87,814 78,480 80,079 75,768 69,707 68,937 70,940 71,755 Core gross profit (A)-(B) 88,560 88,531 82,342 77,048 76,520 75,342 72,943 71,246 69,169 66,882 YoY - 0.0% -7.0% -6.4% -0.7% -1.5% -3.2% -2.3% -2.9% -3.3% Net interest income 73,066 73,590 69,993 66,314 64,068 63,474 62,803 61,156 58,207 55,298 Interest on loans and bills discounted 69,131 65,573 61,597 57,703 54,490 52,175 48,851 46,558 44,423 42,835 Interest and dividends on securities 12,505 14,349 13,318 12,304 12,327 13,827 17,033 18,106 16,391 14,257 Interest on deposits 8,310 5,922 4,314 3,222 2,508 2,093 1,308 1,047 923 739 Trust fees Net fees and commissions 12,898 11,689 10,623 9,123 10,571 10,625 9,029 9,108 9,954 10,564 Net trading income 1,142 516 152 309 230 166 71 45 52 136 Net other operating income 834 2,920 7,043 2,731 5,209 1,500 -2,197 -1,371 2,725 5,749 Net bond-related gains (losses) (B) -618 186 5,472 1,432 3,558 426 -3,236 -2,309 1,771 4,872 General and administrative expenses (C) 53,891 54,231 50,925 50,584 50,459 48,650 48,234 47,503 46,477 45,768 YoY - 0.6% -6.1% -0.7% -0.2% -3.6% -0.9% -1.5% -2.2% -1.5% Personnel expenses 26,736 26,560 25,939 25,638 25,244 24,926 24,551 24,082 23,578 22,673 Non-personnel expenses 24,374 24,943 22,638 22,624 22,493 20,790 20,174 19,904 19,628 19,762 Taxes 2,780 2,726 2,347 2,321 2,721 2,933 3,508 3,516 3,269 3,332 Net operating profit (before provision for general loan loss) (A)-(C) 34,051 34,486 36,888 27,895 29,620 27,118 21,472 21,434 24,462 25,987 Core operating profit (A)-(B-(C) 34,668 34,300 31,416 26,463 26,061 26,692 24,708 23,743 22,692 21,114 YoY - -1.1% -8.4% -15.8% -1.5% 2.4% -7.4% -3.9% -4.4% -7.0% Core operating profit (ex. gains [losses] on trust cancellation) 21,15319,943 Gains (losses) on trust cancellation Provision for ordinary loan loss [1] (D) 214 -1,950 -2,681 0 -499 0 1 1,040 -558 2,189 Operating profit (A)-(C)-(D) 33,836 36,437 39,569 27,895 30,119 27,118 21,472 20,394 25,021 23,797 Nonrecurrent gains (losses) -10,920 -8,958 -21,196 2,575 -5,592 -356 3,379 3,767 -2,847 -6,078 Net stock-related gains -2,216 -1,310 -6,758 183 139 -22 3,542 4,476 400 168 Gains on sale 501 83 137 200 166 2,349 4,340 4,606 2,361 3,189 Losses on sale 385 296 10 0 0 1,036 629 76 1,941 1,923 Write-off 2,332 1,097 6,885 16 25 1,335 168 53 19 1,098 Nonperforming loan disposal [2] (E) 6,918 6,409 12,065 -4,239 2,264 -1,109 -650 849 3,402 7,103 Provision for individual loan loss 5,105 5,224 11,168 0 1,850 0 -10 631 3,250 6,815 Provision for contingent losses 537 271 63 -473 -274 49 -319 -48 -149 -23 Written-off loans 15 137 45 90 106 171 123 53 24 8 Loss on disposal of loan claims 524 764 49 212 32 7 4 61 52 61 Other loss on disposal of loan claims 735 0 574 0 -1,594 -9 241 (Loan-loss provision and expenses [1]+[2]) 7,132 4,459 9,384 -4,239 1,765 -1,109 -649 1,889 2,844 9,292 Reversal of provision for loan-loss [3] -4,644 Gain on recovery of written-off claims [4] Reversal of provision for ordinary loan loss [5] Other Ordinary profit 22,915 27,478 18,373 30,471 24,526 26,761 24,852 24,161 22,173 17,718 YoY - 19.9% -33.1% 65.8% -19.5% 9.1% -7.1% -2.8% -8.2% -20.1% Extraordinary income (losses) -1,716 -2,461 -442 -2,096 -1,100 -857 -717 -1,898 -1,088 -897 Gain (loss) on disposal of non-current assets -71-182-81-24 Impairment loss 3612,071 Gain on recovery of written-off claims [4] Other 71182 Profit before income taxes 21,198 25,017 17,930 28,374 23,425 25,903 24,135 22,262 21,085 16,821 Income taxes 9,280 13,609 5,615 10,540 8,745 9,400 5,403 6,490 5,494 5,582 Income taxes–current Income taxes–deferred Profit 11,918 11,407 12,315 17,833 14,680 16,503 18,732 15,772 15,590 11,238 YoY -000000000
Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 7,133 4,458 9,384 -4,329 1,764 -1,109 -650 1,889 2,844 9,292 YoY - -37.5% 110.5% -----50.6%226.7% Loans and bills discounted (BS year-end balance) 4,252,329 4,233,960 4,332,774 4,227,696 4,365,302 4,383,442 4,467,623 4,670,149 4,740,350 4,910,354 Credit cost ratio (bps: 0.1％＝10bps) 16.8 10.5 21.7 -10.2 4.0 -2.5 -1.5 4.0 6.0 18.9
Overhead ratio 60.9% 61.3% 61.8% 65.7% 65.9% 64.6% 66.1% 66.7% 67.2% 68.4% Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Hokuriku Bank financial statements
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Fukui Bank (TSE1: 8362)
Fukui Bank earnings Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Ordinary income 33,058 32,796 31,819 30,447 31,971 27,061 25,024 25,018 24,434 25,317 Core gross profit (A)-(B) 32,800 32,731 31,397 29,563 28,807 26,928 25,801 25,388 24,088 24,674 YoY - -0.2% -4.1% -5.8% -2.6% -6.5% -4.2% -1.6% -5.1% 2.4% Net interest income 29,231 9,172 27,886 25,568 24,834 23,689 22,976 22,524 21,523 21,834 Interest on loans and bills discounted 25,786 24,379 22,691 20,887 19,617 18,583 17,395 16,791 16,439 16,299 Interest and dividends on securities 5,775 6,370 6,448 5,790 6,352 6,395 6,907 6,995 6,295 6,824 Interest on deposits 1,818 1,180 848 801 797 789 454 510 531 476 Short-term investments and interest expenses -3,658-1,399 Trust fees Net fees and commissions 3,314 3,266 3,209 3,217 3,153 2,928 2,471 2,355 2,501 2,770 Net trading income 0000000000 Net other operating income 511 356 720 1,660 3,982 441 -424 136 408 710 Net bond-related gains (losses) (B) 258 65 421 884 3,164 134 -777 -369 344 642 General and administrative expenses (C) 19,672 20,350 20,482 20,804 21,098 20,881 21,112 22,215 20,965 20,985 YoY - 3.4% 0.6% 1.6% 1.4% -1.0% 1.1% 5.2% -5.6% 0.1% Personnel expenses 9,491 10,165 10,198 10,675 10,913 10,932 10,912 10,965 10,972 10,870 Non-personnel expenses 9,307 9,346 9,379 9,298 9,182 8,925 9,045 9,864 8,854 8,984 Taxes 873 838 904 830 1,002 1,023 1,153 1,384 1,139 1,130 Net operating profit (before provision for general loan loss) (A)-(C) 13,386 12,445 11,336 9,643 10,873 6,180 3,911 2,802 3,468 4,331 Core operating profit (A)-(B-(C) 13,128 12,381 10,914 8,758 7,708 6,046 4,688 3,173 3,122 3,689 YoY - -5.7% -11.8% -19.8% -12.0% -21.6% -22.5% -32.3% -1.6% 18.2% Core operating profit (ex. gains [losses] on trust cancellation) 3,0093,378 Gains (losses) on trust cancellation 113311 Provision for ordinary loan loss [1] (D) -1,502 0 9,302 223 0 0 -656 0 -145 -667 Operating profit (A)-(C)-(D) 14,888 12,445 2,034 9,420 10,873 6,180 4,567 2,802 3,613 4,998 Nonrecurrent gains (losses) -5,677 -987 -15,197 3,373 -5,762 5,443 1,599 2,990 17 -2,452 Net stock-related gains -206 -2 -502 786 1,877 602 338 -672 56 -512 Gains on sale 8 83 180 892 1,994 2,075 1,107 993 637 255 Losses on sale 13 80 368 105 117 1,470 764 989 580 675 Write-off 201 6 314 0 0 1 4 675 0 0 Nonperforming loan disposal [2] (E) 6,195 4,006 16,370 1,211 10,230 523 1,833 439 1,588 3,315 Provision for individual loan loss 3,995 0 -2,329 491 0 0 1,293 0 555 2,706 Provision for contingent losses 184 252 215 147 101 112 118 44 96 106 Written-off loans 1,861 3,737 18,388 563 10,101 406 416 394 888 501 Loss on disposal of loan claims 1541595928451460 (Loan-loss provision and expenses [1]+[2]) 4,693 4,006 25,672 1,434 10,230 523 1,177 439 1,443 2,648 Reversal of provision for loan-loss [3] 0 1,133 0 158 712 0 2,695 20 0 Gain on recovery of written-off claims [4] 0 1,181 1,011 2,968 1,226 2,881 2,112 681 826 608 Reversal of provision for ordinary loan loss [5] 96 3 45 15 31 13 20 Other 724 706 567 826 1,161 1,754 950 702 767 Ordinary profit 9,210 11,458 -13,162 12,793 5,110 11,623 6,167 5,792 3,630 2,546 YoY - 24.4% - - -60.1% 127.5% -46.9% -6.1% -37.3% -29.9% Extraordinary income (losses) 486 -1,515 -1,633 -965 -107 -1,469 -5 -35 -54 -225 Gain (loss) on disposal of non-current assets -109 -34 -62 -44 -24 -89 9 74 -25 -143 Impairment loss 497 1,480 1,723 420 82 1,059 15 112 37 97 Gain on recovery of written-off claims [4] 1,093 Profit before income taxes 9,697 9,943 -14,795 11,827 5,002 10,154 6,161 5,757 3,576 2,320 Income taxes 3,523 2,891 -4,239 4,983 2,880 3,002 1,029 1,769 751 467 Income taxes–current Income taxes–deferred Profit 6,173 7,051 -10,556 6,843 2,121 7,151 5,132 3,988 2,824 1,853 YoY - 14.2% - - -69.0% 237.2% -28.2% -22.3% -29.2% -34.4% Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 3,599 1,690 24,563 -1,537 8,801 -3,086 -966 -2,951 596 2,040 YoY --53.0%------242.3% Loans and bills discounted (BS year-end balance) 1,405,346 1,437,127 1,434,451 1,500,113 1,552,575 1,586,129 1,603,187 1,628,851 1,672,399 1,731,033 Credit cost ratio (bps: 0.1％＝10bps) 25.6 11.8 171.2 -10.2 56.7 -19.5 -6.0 -18.1 3.6 11.8
Overhead ratio 60.0% 62.2% 65.2% 70.4% 73.2% 77.5% 81.8% 87.5% 87.0% 85.0% Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Fukui Bank financial statements
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Bank of Toyama (TSE1: 8365)
Bank of Toyama earnings Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Ordinary income 7,012 6,523 7,187 6,728 6,743 6,710 6,163 5,853 6,200 6,587 Core gross profit (A)-(B) 6,656 6,623 6,683 6,747 6,743 6,710 6,163 6,063 6,233 6,587 YoY 1.5% -0.5% 0.9% 1.0% -0.1% -0.5% -8.2% -1.6% 2.8% 5.7% Net interest income 6,095 5,975 5,965 6,103 6,000 5,911 5,480 5,230 5,343 5,694 Interest on loans and bills discounted 5,030 4,843 4,662 4,411 4,088 3,826 3,437 3,268 3,235 3,191 Interest and dividends on securities 1,562 1,448 1,540 1,907 2,104 2,254 2,163 2,028 2,139 2,524 Interest on deposits 536 354 274 248 220 208 144 101 71 60 Short-term investments and interest expenses Trust fees Net fees and commissions 531 616 691 619 718 785 671 820 878 880 Net trading income 0000000000 Net other operating income 384 -70 529 4 21 12 10 -198 -22 9 Net bond-related gains (losses) (B) 356 -100 504 -19 0 0 0 -210 -33 0 General and administrative expenses (C) 5,154 5,129 5,875 5,421 5,398 5,263 5,248 4,984 4,854 5,494 YoY Personnel expenses 2,841 2,778 2,783 2,704 2,632 2,616 2,570 2,536 2,476 2,425 Non-personnel expenses 2,102 2,114 2,786 2,504 2,529 2,359 2,389 2,146 2,086 2,439 Taxes 210 237 305 212 236 287 288 301 291 630 Net operating profit (before provision for general loan loss) (A)-(C) 1,858 1,393 1,311 1,306 1,344 1,446 915 869 1,346 1,092 Core operating profit (A)-(B-(C) 1,501 1,493 807 1,326 1,344 1,446 915 1,079 1,379 1,092 YoY 7.8% -0.5% -45.9% 64.3% 1.4% 7.6% -36.7% 17.9% 27.8% -20.8% Core operating profit (ex. gains [losses] on trust cancellation) 1,150584 Gains (losses) on trust cancellation 229508 Provision for ordinary loan loss [1] (D) -178018534213430000 Operating profit (A)-(C)-(D) 2,036 1,393 1,126 964 1,331 1,402 915 869 1,346 1,092 Nonrecurrent gains (losses) -1,391 -414 -854 -248 -22 284 679 829 585 -56 Net stock-related gains -552 -449 -43 1,202 287 785 353 669 486 -153 Gains on sale 22 0 129 1,203 287 786 386 817 545 2,970 Losses on sale 233 383 43 0 0 0 33 146 58 3,074 Write-off 3416512910001049 Nonperforming loan disposal [2] (E) 796 100 813 1,563 503 690 37 2 1 16 Provision for individual loan loss 79607936622296520000 Provision for contingent losses Written-off loans 0100 24 115 Loss on disposal of loan claims 0 12 0 92 0 13 2 (Loan-loss provision and expenses [1]+[2]) 618 100 998 1,905 516 733 372116 Reversal of provision for loan-loss [3] 0 197 0 0 0 0 221 21 17 28 Gain on recovery of written-off claims [4] 273773445993584551 Reversal of provision for ordinary loan loss [5] Other -41 -88 -35 39 148 129 48 82 37 34 Ordinary profit 645 979 271 716 1,308 1,687 1,595 1,698 1,932 1,036 YoY -10.8% 51.8% -72.3% 164.2% 82.7% 29.0% -5.5% 6.5% 13.8% -46.4% Extraordinary income (losses) 0 -7 -20 -6 -3 -11 -89 -2 -38 -110 Gain (loss) on disposal of non-current assets -5 -6 -19 -6 -3 -11 0 -1 -10 -7 Impairment loss 0-890-28-103 Gain on recovery of written-off claims [4] Profit before income taxes 646 972 251 710 1,305 1,675 1,505 1,696 1,893 925 Income taxes 232 223 -73 10 166 714 376 428 511 215 Income taxes–current 16 23 36 194 134 706 198 469 459 230 Income taxes–deferred 216 200 -109 -184 31 7 178 -41 52 -15 Profit 413 748 325 699 1,139 960 1,129 1,268 1,381 710 YoY -33.2% 81.1% -56.6% 115.1% 62.9% -15.7% 17.6% 12.3% 8.9% -48.6% Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 116 YoY ------Loans and bills discounted (BS year-end balance) 270,882 276,819 282,053 274,062 275,185 281,817 284,337 301,585 318,692 332,616 Credit cost ratio (bps: 0.1％＝10bps) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.03 0.48
Overhead ratio 77.4% 77.4% 87.9% 80.3% 80.1% 78.4% 85.2% 82.2% 77.9% 83.4% Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Bank of Toyama financial statements
50/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Strengths and weaknesses
Strengths
◤ Distinct measures to stay ahead of rivals through the early adoption of digital and cloud solutions to streamline operations: Japanese banks have seen an inevitable drop in core gross profit driven by shrinking deposit-lending margins amid the BOJ’s continued negative interest rate policy, declining funding needs due to a contraction in the working-age population, and a drop in the number of companies. Regional banks, which have a smaller business scale, have struggled to make headway on cost reduction because they cannot take advantage of economies of scale, unlike major banks and top-tier regional banks. However, Hokkoku Bank (ranked in 30th position among the 64 regional banks by total assets) has become the first Japanese bank to move its online banking systems to the cloud and adopt an open system for its backbone system. It plans to transition its core banking system to the cloud in 2021. By shifting to a cloud-based backbone system and integrating subsystems into an extended relationship management (xRM) system, the bank aims to significantly reduce system maintenance and upgrade costs, and gain tools to strengthen its sales capacity. Only 2.1% of Japanese banks have transitioned their core banking system to a public cloud service (as of 2018, BOJ materials), underscoring Hokkoku Bank’s first-mover advantage in the industry.
◤ Growth in noninterest income driven by Consultation services: As interest income is unlikely to turn upward in the current environment, growth in core gross profit largely hinges on growth in noninterest income businesses. The bank generates noninterest income from three businesses: Consultation services, Bank cards, and Leasing (provided in collaboration with a consolidated subsidiary). Noninterest income made up 16.1% of core gross profit in FY03/20, exceeding the average of 13.8% for the 64 regional banks, as well as the 11.5% for rival Fukui Bank. While its competitors are also stepping up consultation services, Hokkoku Bank has gained an edge. Its consultation services on ICT and productivity enhancements, based on experiences of its own successful reforms, carry greater weight with customers. In its Bank cards business, Hokkoku Bank can leverage its position as a card issuer and acquirer to attract affiliated merchants with more affordable fees than competing banks that are merely licensed card issuers, and thus expand its earnings opportunities.
◤ Successfully avoiding labor productivity decline by consistently enhancing productivity and strengthening noninterest income: Hokkoku Bank has leveraged IT systems to change the work styles and improve the productivity of its employees, resulting in a fundamental transformation of its organization and change in mindset among its employees. By moving IT systems development from outsourcing to in-house, the bank has managed to reduce costs and build a systems strategy that reinforces its sales capacity. The effects of the reforms have been apparent in the bank’s labor productivity. Its OHR has averaged 64.8% over the last 10 years, roughly on par with rival Hokuriku Bank. Although banking is an industry where economies of scale tend to be achieved more easily than other industries, Hokkoku Bank has maintained its OHR at the same level as rival Hokuriku Bank with its larger (1.6x) business scale. OHR is best reduced by improving labor productivity (OHR ≂ general and administrative expenses/core gross profit ≂ [general and administrative expenses/number of employees]/[core gross profit/number of employees] ≂ expenses per employee/labor productivity). In FY03/20, labor productivity came to JPY23.6mn at Hokkoku Bank (CAGR of only -0.25% in last 10 years), compared to JPY26.5mn at Hokuriku Bank (CAGR of -2.0% in last nine years) and JPY18.1mn at Fukui Bank (CAGR of -4.0% in last 10 years). In fact, Hokkoku Bank has managed to avert a decline in labor productivity by consistently implementing productivity improvement initiatives and by strengthening noninterest income businesses.
Weaknesses
◤ Vulnerability to structural decline in demand as the population contracts in its core market, the three Hokuriku prefectures: In 2016, the FSA published the report “Challenges and Competitive Conditions Facing Regional Banks,” in which it promoted bank mergers as a means of cost reduction necessary to compete with rivals as population declines drive a structural decline in regional funding demand. The report pointed out that banks operating out of Ishikawa Prefecture and neighboring Toyama and Fukui Prefectures could not escape a decline in profitability even if they effectively controlled those markets, due to the expected large declines in population in those prefectures. In fact, from 2015 to 2024, the number of households is projected to decline 7.1% in Toyama Prefecture, 5.4% in Ishikawa Prefecture, and 5.6% in Fukui Prefecture, versus 4.8% decline nationwide. Even though Hokkoku Bank establishes a competitive edge over its rivals through its
51/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
business model reforms, it remains unclear whether it can counter the impact of population decline successfully. Put differently, the bank will likely struggle to survive independently in the future, without considering mergers and integration over the medium to long term.
◤ Slow progress in enhancing credit risk management among internationally active banks: Because it operates an overseas branch in Singapore, Hokkoku Bank is regarded as an internationally active bank (17 of the 115 banks in Japan fall into this category, of which 10 are regional banks). In FY03/20, the bank’s capital adequacy ratio stood at 10.3%, putting it in last position among the 10 regional banks operating under the international standard. While the other nine banks employ the internal ratings-based approach to calculate credit risk, Hokkoku Bank uses the standardized approach, under which required capital is calculated based on risk weights designated by financial regulators. Banks that opt for the standardized approach are required to have higher capital than those that adopt the internal ratings-based approach. In the finalization of the Basel III reforms, the effectiveness of the internal ratings-based approach was called into question, and subsequent discussions have leaned toward imposing some restrictions on this model. There is therefore little incentive for Hokkoku Bank to switch approaches at this juncture. However, banks that have advanced risk management are not barred from using the internal ratings-based approach. From the standpoint of capital allocation efficiency, internationally active banks are expected to continue enhancing and refining risk management, and optimizing capital levels. Hokkoku Bank’s cost of credit rose from 12bp in FY03/19 to 37bp in FY03/20. Consequently, its yield on loans adjusted for cost of credit declined from 94bp to 65bp over the same period, falling below the 89bp average for the 64 regional banks. While the yield on loans remains in decline, sharp increases in cost of credit will continue to have a major impact on earnings. Therefore, Hokkoku Bank needs to enhance its credit risk management not only to clear regulatory requirements, but also to prepare for risk, maintain optimal capital levels, and ensure effective capital allocation.
◤ Lack of diversity in personnel recruiting: Hokkoku Bank looks to develop a new business model by pursuing a digital transformation (DX) strategy and a systems strategy for its Banking business. The bank believes the adoption of digital technologies is inevitable to meet the needs of its customers at an advanced level, and it sees human resources and digital solutions as the engines that will power its reforms. It has independently developed systems and reinforced its consultation services by relying on its own staff (mainly employees hired shortly after graduation from college), thus cultivating a spirit of self-reliance. We understand the bank hires few mid-career candidates, and that many of such hires leave the bank eventually. However, as customer needs continue to change rapidly in the cloud era, hiring human resources with highly specialized skills is becoming increasingly important. Although its organizational culture promotes diversity in human resources, Hokkoku Bank does not have a great track record of bringing in mid-career hires and its organization appears to lack openness. However, the bank will need to compete with major banks and fintech companies to secure professional human resources, not only in the Hokuriku area but also in major cities such as Tokyo, as well as abroad. If Hokkoku Bank fails to secure external talent or if it struggles to develop talent internally, it may be forced to switch back to the outsourcing of systems development, thus jeopardizing the sustainability of its operations.
52/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Historical performance and financial statements Income statement
Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Gross profit (A) 49,202 49,177 50,433 45,925 52,403 48,043 44,004 43,911 42,882 47,538 Core gross profit (A)-(B) 48,561 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 YoY 0.2% 0.2% -3.5% -1.2% 1.7% -1.6% -5.3% 2.5% -7.8% 0.2% Net interest income 42,377 42,405 40,845 40,011 40,887 40,881 38,457 39,197 35,556 34,876 Interest on loans and bills discounted 36,650 35,175 33,042 31,489 30,335 29,671 28,153 26,620 26,302 26,260 Interest and dividends on securities 10,255 10,779 9,882 9,746 11,807 12,486 11,838 14,969 13,263 10,326 Interest on deposits 3,839 2,861 1,934 988 826 762 583 413 350 310 Trust fees Net fees and commissions 5,890 5,902 5,772 6,114 5,957 5,186 5,071 5,332 5,603 5,937 Net other operating income 933 869 3,813 -201 5,557 1,975 475 -618 1,722 6,722 Net bond-related gains (losses) (B) 641 508 3,482 -459 5,240 1,628 55 -1,129 1,372 5,952 General and administrative expenses (C) 31,499 30,398 29,852 29,778 30,306 28,439 28,806 28,346 28,256 29,422 YoY -2.5% -3.5% -1.8% -0.2% 1.8% -6.2% 1.3% -1.6% -0.3% 4.1% Personnel expenses 16,562 16,321 15,762 15,524 14,748 14,445 14,284 14,441 14,372 14,261 Non-personnel expenses 13,424 12,620 12,568 12,629 13,376 12,131 12,702 11,958 12,004 13,062 Taxes 1,512 1,456 1,522 1,625 2,181 1,862 1,819 1,946 1,879 2,098 Net OP (before provision for general loan loss) (A)-(C) 17,702 18,779 20,581 16,146 22,096 19,603 15,197 15,565 14,626 18,116 Core operating profit (A)-(B-(C) 17,062 18,270 17,098 16,606 16,856 17,974 15,142 16,694 13,253 12,162 YoY 5.6% 7.1% -6.4% -2.9% 1.5% 6.6% -15.8% 10.2% -20.6% -8.2% Core OP (ex. gains [losses] on trust cancellation) 12,268 11,813 Provision for ordinary loan loss [1] (D) 2,117 -273 -1,735 -252 2,871 335 1,037 -469 203 2,674 Operating profit (A)-(C)-(D) 15,585 19,052 22,316 16,399 19,225 19,267 14,160 16,034 14,422 15,441 Nonrecurrent gains (losses) -4,627 -5,602 -10,364 -1,611 -2,070 -2,628 -140 -1,293 -1,642 -3,464 Net stock-related gains -1,272 -359 -1,988 806 2,841 2,841 378 1,636 1,309 3,975 Gains on sale 454 265 468 1,246 2,956 3,516 955 2,595 2,267 5,958 Losses on sale 180 307 2,055 395 51 80 543 943 949 1,302 Write-off 1,546 317 401 44 64 594 33 15 8 680 Nonperforming loan disposal [2] (E) 2,638 6,008 8,369 4,019 5,995 5,949 754 2,095 3,062 7,103 Provision for individual loan loss -1,159 2,551 7,326 1,953 3,867 5,566 153 1,638 2,540 6,756 Provision for contingent losses Written-off loans 3,798 3,457 964 1,716 944 3 11 4 13 11 Loss on disposal of loan claims 0 0 78 350 1,183 379 589 453 507 335 (Loan-loss provision and expenses [1]+[2]) 4,755 5,735 6,634 3,767 8,866 6,284 1,791 1,626 3,265 9,777 Reversal of provision for loan-loss [3] 0 Gain on recovery of written-off claims [4] 1,536 836 2,147 1,216 555 692 63 69 17 Reversal of provision for ordinary loan loss [5] Other Ordinary profit 10,958 13,450 11,951 14,787 17,155 16,638 14,020 14,741 12,780 11,977 YoY 103.3% 22.7% -11.1% 23.7% 16.0% -3.0% -15.7% 5.1% -13.3% -6.3% YoY 103.3% 22.7% -11.1% 23.7% 16.0% -3.0% -15.7% 5.1% -13.3% -6.3% Extraordinary income (losses) 895 -346 -2,664 -1,312 -2,764 -770 -333 -629 -710 -1,154 Gain (loss) on disposal of non-current assets -125 -149 -168 -50 -883 -369 -100 -183 -143 -204 Impairment loss 150 196 2,496 1,261 1,881 401 232 316 566 949 Gain on recovery of written-off claims [4] 1,371 Profit before income taxes 11,853 13,104 9,286 13,475 14,390 15,868 13,687 14,112 12,070 10,823 Income taxes 4,910 7,020 2,925 6,220 6,930 6,238 3,579 4,632 4,047 4,147 Income taxes–current 5,361 3,669 4,226 3,428 2,362 5,226 2,327 3,876 3,930 5,327 Income taxes–deferred -451 3,350 -1,300 2,791 4,567 1,011 1,251 756 116 -1,180 Profit 6,943 6,083 6,361 7,254 7,459 9,629 10,107 9,479 8,023 6,676 YoY 17.8% -12.4% 4.6% 14.0% 2.8% 29.1% 5.0% -6.2% -15.4% -16.8%
Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 3,384 4,197 5,798 1,620 7,651 5,730 1,099 1,562 3,195 9,759 YoY -69.2% 24.0% 38.1% -72.1% 372.3% -25.1% -80.8% 42.1% 104.5% 205.4% Loans and bills discounted (BS year-end balance) 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 Credit cost ratio (bps: 0.1％＝10bps) 15.3 18.5 24.9 6.9 32.4 24.5 4.7 6.5 12.4 37.3
Overhead ratio 64.9% 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods. Note: Gains/losses on cancellation of investment trusts are recorded under net interest income. Note: Fee income in the Consultation services and Bank cards businesses is recorded under fees and commissions.
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Balance sheet
Balance sheet FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. ASSETS Cash and due from banks 61,454 55,907 77,372 160,264 544,854 467,253 748,466 1,094,614 1,221,230 1,389,693 Call loans 28,316 73,148 100,846 15,308 30,000 54,561 Bills bought 5,396 5,608 3,252 2,165 1,329 1,468 1,451 1,449 1,436 1,424 Trading account securities 179 322 182 437 833 157 156 167 90 111 Money held in trust 19,987 22,018 25,070 15,077 15,025 15,024 13,531 13,531 13,523 13,519 Securities 891,712 901,535 885,336 890,924 1,188,257 1,016,633 1,102,331 1,057,489 1,086,000 988,490 Government bonds 351,475 360,605 356,569 319,080 393,299 384,670 260,527 224,069 176,024 114,664 Local government bonds 209,241 234,564 210,131 200,222 195,989 132,901 164,130 178,922 260,275 313,547 Corporate bonds 183,816 173,480 170,389 190,870 186,202 184,269 225,959 220,408 215,890 233,808 Stocks 71,249 69,424 72,302 79,970 135,889 123,277 155,125 180,666 169,439 143,491 Loans and bills discounted 2,211,827 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 Foreign exchanges 2,261 2,562 2,469 2,743 3,553 11,044 11,323 11,963 9,508 13,106 Other assets 12,573 11,757 11,081 10,023 12,846 15,116 49,779 83,928 76,680 41,276 Property, plant and equipment 35,089 34,348 32,466 36,268 37,251 35,851 34,205 33,121 31,747 30,354 Intangible assets 2,626 2,926 3,765 7,628 9,018 8,920 8,364 9,427 10,021 11,014 Differed tax assets 10,1437,5585,2481,415 911 Customers' liabilities for acceptances and guarantees 21,937 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 Allowance for loan losses -24,531 -22,380 -26,849 -26,462 -32,614 -37,980 -37,580 -34,968 -36,085 -44,172 Total assets 3,278,975 3,389,749 3,470,599 3,491,955 4,160,559 3,885,746 4,302,922 4,755,750 5,014,316 5,082,150 LIA BILITIES Deposits 2,879,268 2,964,029 3,016,535 3,054,179 3,084,829 3,091,438 3,191,693 3,368,595 3,543,889 3,641,527 Negotiable certificates of deposits 84,021 143,884 148,099 120,383 70,367 97,217 115,146 83,671 70,664 71,162 Call money 195 12,659 324,605 67,916 293,334 696,969 847,399 981,819 Payables under repurchase agreements 93,82831,206 Payables under securities lending transactions 36,027 36,009 35,416 49,517 374,027 337,572 359,851 197,918 204,703 93,634 Borrowed money 20,000 6253 Foreign exchanges 4957538211822 5 71412 Bonds payable 30,000 Borrowed money from trust account 90129 Other liabilities 21,140 13,687 12,480 12,131 29,797 32,850 64,955 12,995 14,874 35,077 Provision for bonuses 760 810 785 766 782 785 797 792 782 772 Provision for retirement benefits 6,197 6,607 7,376 7,757 9,070 8,875 9,382 9,786 9,791 9,560 Other allowance 266 330 426 454 487 509 415 804 882 1,002 Deferred tax liabilities 10,9863,6698,13714,96213,697 Deferred tax liabilities for land revaluation 4,837 4,192 3,354 2,952 2,237 2,113 1,819 1,724 1,630 1,499 Acceptances and guarantees 21,937 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 Total liabilities 3,084,506 3,189,314 3,263,173 3,278,427 3,924,381 3,659,632 4,061,937 4,499,600 4,756,886 4,854,728 NET A SSETS Capital stock 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 Capital surplus 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 Retained earnings 130,199 131,367 134,079 138,839 144,288 146,001 154,235 161,415 162,778 167,480 Treasury shares -350 -253 -197 -215 -3,931 -188 -193 -5,138 -920 -4,064 Shareholders' equity 167,812 169,077 171,845 176,587 178,320 183,775 192,005 194,240 199,821 201,379 Valuation difference on available-for-sale securities 22,037 25,924 31,551 33,489 55,135 38,996 46,090 59,540 55,420 24,078 Deferred gains or losses on hedges -717 -487 -399 -277 -388 -181 -25 -2 -1 -16 Revaluation reserve for land 5,238 5,775 4,243 3,514 2,879 3,260 2,589 2,371 2,189 1,980 Valuation and translation adjustments 26,558 31,213 35,395 36,725 57,625 42,075 48,653 61,909 57,608 26,042 Share acquisition rights 97 144 185 215 232 262 326 Total net assets 194,469 200,434 207,426 213,527 236,178 226,113 240,984 256,150 257,429 227,422 Total liabilities and net assets 3,278,975 3,389,749 3,470,599 3,491,955 4,160,559 3,885,746 4,302,922 4,755,750 5,014,316 5,082,150 Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.
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Cash flow statement
Cash flow statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 59,596 14,973 -8,211 73,257 637,701 -218,579 324,491 290,627 140,604 110,694 Profit before income taxes 13,897 14,524 11,458 15,486 16,177 16,830 15,534 15,738 13,449 12,027 Depreciation 2,508 2,536 2,457 2,321 2,666 3,812 3,837 3,935 3,992 4,297 Impairment loss 150 196 2,496 1,261 1,881 401 232 316 566 949 Increase (decrease) in provision for loan loss -2,815 -2,145 3,973 -630 5,759 5,670 -808 -2,682 1,119 8,238 Decrease (increase) in provision for loans outstanding -89,786 -63,242 -57,623 -27,514 -4,879 27,071 12,833 -86,671 -165,219 -31,995 Decrease (increase) in deposits 63,295 142,964 54,954 10,256 -19,654 33,801 117,914 145,452 162,453 98,030 Decrease (increase) in call loans 41,810 -45,127 -25,345 86,456 16,283 -75 -29,930 -24,485 54,585 202 Increase (decrease) in call money 1,780 711 20,469 -7,426 311,865 -257,408 224,071 402,093 148,850 133,055 Decrease (increase) in foreign exchanges [assets] -1,037 -300 92 -274 -810 -7,490 -279 -639 2,454 -3,597 Increase (decrease) in foreign exchanges [liabilities) -33 7 -3 29 35 -96 -16 2 6 -2 Interest income -47,431 -46,467 -43,317 -41,522 -42,555 -42,855 -40,565 -42,327 -40,229 -37,082 Interest expenses 4,862 3,895 2,314 1,368 1,535 1,841 1,982 3,004 4,554 2,098 Gains (losses) on securities 631 -154 -1,523 -339 -8,093 -4,496 -477 -506 -2,752 -9,928 Increase (decrease) in borrowed money from trust account 9039 Interest and dividends received 37,012 34,642 33,697 32,612 31,070 30,469 28,900 26,705 26,929 27,700 Interest paid -5,007 -4,535 -5,087 -2,441 -1,655 -1,925 -1,960 -2,933 -4,681 -2,217 Cash flows from investing activities -51,776 -820 34,841 12,420 -247,118 143,804 -41,647 63,755 -12,320 61,370 Purchase of securities -264,065 -221,017 -304,834 -305,399 -1,229,524 -1,116,029 -1,015,753 -627,735 -491,010 -853,296 Proceeds from sale of securities 41,445 38,130 154,558 95,016 825,796 1,104,447 836,754 558,025 395,753 852,237 Proceeds from redemption of securities 161,391 173,955 179,657 210,779 150,373 142,450 125,707 119,787 71,483 54,339 Interest and dividends received on investment 10,859 11,779 11,835 12,240 13,785 15,304 12,834 16,695 14,849 12,240 Purchase of tangible fixed assets -919 -861 -2,037 -6,496 -4,929 -1,040 -1,398 -1,436 -955 -1,089 Purchase of intangible fixed assets -817 -1,174 -1,857 -4,067 -3,053 -1,602 -1,282 -2,905 -3,015 -3,378 Proceeds from sale of tangible assets 339 374 519 449 419 280 1,508 1,324 574 317 FCF (1+2) 7,820 14,153 26,630 85,677 390,583 -74,775 282,844 354,382 128,284 172,064 Cash flows from financing activities -2,809 -19,869 -5,133 -3,249 -5,791 -3,945 -3,243 -8,884 -2,627 -5,852 Cash dividends paid -2,027 -2,000 -1,942 -2,046 -2,040 -2,428 -2,544 -2,508 -2,616 -2,180 Cash dividends paid to non-controlling interests -8 -10 -10 -10 -13 -10 -10 -7 -5 -5 Purchase of treasury stock -1,553 -2,891 -3,194 -1,224 -3,786 -1,516 -4 -5,017 -4 -3,203 Depreciation (A) 2,508 2,536 2,457 2,321 2,666 3,812 3,837 3,935 3,992 4,297 Increase (decrease) in cash and cash equivalents 4,986 -5,713 21,541 82,449 384,820 -78,734 279,600 345,492 125,661 166,203 Cash and cash equivalents (year-end) 61,131 55,418 76,959 159,409 544,230 465,496 745,097 1,090,589 1,216,250 1,382,462 Source: Shared Research based on bank data Note: Figures may differ from company materials due to differences in rounding methods. Cash flows from operating activities In FY03/20, cash inflows were JPY110.7bn, mainly on increases in call money and deposits. Cash flows in the Banking business do not show the changes in cash obtained from interest margins, but rather include the changes in deposits and loans that form the basis for interest margins. In other words, cash flows from operating activities do not reflect cash earned from core operations.
Cash flows from investing activities Cash inflows were JPY61.4bn due to proceeds from sale of securities.
Cash flows from financing activities Cash outflows were JPY5.9bn due mainly to JPY3.2bn in purchases of treasury shares.
As a result of the above, cash and due from banks at end-FY03/20 were up JPY166.2bn from the start of the fiscal year to JPY1.4tn.
55/63 Hokkoku Bank / 8363 RCoverage LAST UPDATE: 2020.09.29 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Historical performance
FY03/20 results Summary
▷ Ordinary income (consolidated): JPY74.7bn (+11.4% YoY)
▷ Core gross profit (non-consolidated): JPY41.6bn (+0.2% YoY)
▷ Core operating profit (non-consolidated): JPY12.2bn (-8.2% YoY) (105.8% of full-year target)
▷ Ordinary profit (consolidated): JPY13.2bn (-6.9% YoY) (101.4%)
▷ Profit (consolidated): JPY7.3bn (-14.8% YoY) (97.5%)
The COVID-19 pandemic drove declines in inbound and other demand, and caused stagnation in production and exports in the manufacturing industry. Against this backdrop, the Japanese government launched a financing support program for SMEs, and the bank received roughly 2,000 borrowing applications under this program. At the consolidated level, ordinary income rose JPY7.6bn YoY to JPY74.7bn on an increase in gains on sale of bonds. Ordinary expenses expanded JPY8.6bn YoY to JPY61.6bn due to an increase in credit-related costs. As a result, ordinary profit fell JPY984mn YoY to JPY13.2bn, and profit attributable to owners of parent declined JPY1.3bn YoY to JPY7.3bn. At the non-consolidated level, the bank posted higher income bur lower profit for the first time in two years. Core operating profit was down YoY for the second year in a row. Ordinary income expanded thanks to gains on sale of securities, but was depressed by a decline in net interest income and an increase in the NPL disposal amount.
Non-consolidated profit/losses Core gross profit Core gross profit increased JPY75mn YoY to JPY41.6bn as a JPY680mn YoY drop in net interest income was offset by growth in net fees and commissions and net other operating income.
Net interest income Interest on loans and discounts fell JPY42mn YoY, and interest on deposits also declined JPY40mn YoY. The yield on loans was down 0.04pp YoY to 1.02%. The yield on deposits was down 0.01pp YoY to 0.00%. The deposit-lending margin was 0.99%. Although a JPY2.9bn YoY decline in interest and dividends on securities was offset by short-term investments, net interest income was down JPY678mn YoY.
Net fees and commissions Net fees and commissions rose JPY334mn YoY to JPY5.9bn. In new businesses, income expanded JPY225mn YoY to JPY762mn in the Bank cards business, and JPY251mn YoY to JPY661mn in the Consultation services business.
Net other operating income Income was up JPY57mn YoY to JPY332mn in the Leasing business.
General and administrative expenses General and administrative expenses rose 1.2bn YoY to JPY29.4bn, mainly reflecting a YoY increase of JPY1.1bn in non-personnel expenses. OHR was 70.8%, up 2.7pp from 68.1% in FY03/19.
Core operating profit Core operating profit was down JPY1.1bn YoY. Net interest income—the main driver of core operating profit—declined JPY680mn YoY to JPY34.9bn due mainly to a drop in interest and dividends on securities. Net fees and commissions, which include fee income, was firm thanks to contributions from the Bank cards and Consultation services businesses.
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Ordinary profit Gains on securities rose JPY7.2bn YoY to JPY9.9bn, breaking down into YoY increases of JPY4.6bn in net bond-related gains and JPY2.7bn in net stock-related gains (gain on sale of equities). However, ordinary profit and profit were weighed down by a JPY3.2bn YoY rise in the effective NPL disposal amount (credit costs) to JPY9.8bn attributable to a downgrade in the borrower classification of customer companies. Credit cost rate (credit costs as a proportion of loans outstanding) tripled from 12.4bp in FY03/19 to 37.3bp.
Main accounts (non-consolidated) Interest-bearing liabilities (period-end balance) Balance of deposit (deposits + NCD) was firm both for individual and corporate customers, rising JPY98.1bn YoY to JPY3.7tn. Individual deposit assets increased JPY61.9bn YoY to JPY2.7tn mainly thanks to growth in individual deposits. Contracts for investment trusts with periodic investment rose by 763 YoY to 25,343.
Interest-earning assets (period-end balance) Loans outstanding were up JPY35.0bn YoY to JPY2.6tn, reflecting across-the-board growth in the three Hokuriku prefectures, up 12.6% YoY in Fukui Prefecture, up 6.4% YoY in Toyama Prefecture, and up 0.4% in Ishikawa Prefecture. Lending to SMEs, which is a focus area of the bank, was up 4.3% YoY to JPY2.0tn.
NPL trends NPLs based on the Financial Reconstruction Act rose JPY751mn YoY to JPY57.4bn. Bankrupt/de facto bankrupt loans were up JPY3.9bn YoY due to a drop in the borrower classification of claims for its customers, but doubtful loans were down JPY3.5bn YoY. The NPL ratio stood at 2.11%, down 0.02pp from 2.13% in FY03/19.
Capital adequacy ratio (international standard) Unrealized gains/losses on available-for-sale securities were down JPY44.9bn YoY to JPY33.5bn as the COVID-19 pandemic caused stock market turmoil. The consolidated capital adequacy ratio declined from 11.78% at end-FY03/19 to 10.30%.
Q3 FY03/20 results
▷ Ordinary income (consolidated): JPY58.9bn (+15.0% YoY)
▷ Core gross profit (non-consolidated): JPY31.9bn (-1.2% YoY)
▷ Core operating profit (non-consolidated): JPY9.9bn (-11.0% YoY) (86.2% of full-year target)
▷ Ordinary profit (consolidated): JPY13.2bn (+4.9% YoY) (101.6%)
▷ Profit (consolidated): JPY7.7bn (-3.7% YoY) (102.1%)
At the consolidated level, ordinary income rose 15.0% YoY to JPY58.9bn. Ordinary expenses rose 18.4% YoY to JPY45.7bn due mainly to an increase in credit-related costs. As a result, ordinary profit rose 4.9% YoY to JPY13.2bn, and profit attributable to owners of parent declined 3.7% YoY to JPY7.7bn. At the non-consolidated level, core operating profit declined 11.0% YoY to JPY9.9bn. Net interest income fell YoY mainly on a decline in interest and dividends on securities and non-personnel expenses in general and administrative expenses rose YoY. Ordinary profit was up 6.2% YoY to JPY12.4bn.
Non-consolidated profit/losses Core gross profit Net interest income fell JPY799mn YoY. Net fees and commissions grew JPY17mn YoY and net other operating income expanded JPY395mn YoY, but the increases were not sufficient to cover the decline in net interest income. Core gross profit was down JPY388mn YoY to JPY31.9mn.
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General and administrative expenses General and administrative expenses rose JPY838mn YoY to JPY22.0bn, reflecting a YoY increase of JPY714mn in non-personnel expenses. OHR was 68.9%, up 3.4pp from 65.5% in Q3 FY03/19.
Core operating profit Core operating profit declined JPY1.2bn YoY. Net interest income—the main driver of core operating profit—fell JPY799mn YoY to JPY27.0bn due mainly to a drop in interest and dividends on securities.
Ordinary profit Gains/losses on securities increased JPY7.3bn YoY to JPY9.9bn, breaking down into YoY increases of JPY4.4bn in net bond-related gains and JPY2.9bn in net stock-related gains (gains on sale of equities). At the same time, ordinary profit and profit were weighed down by a JPY1.9bn YoY rise in the effective NPL disposal amount (credit costs) to JPY7.3bn attributable to a drop in the borrower classification of claims of its customers.
Main accounts (non-consolidated) Interest-bearing liabilities (period-end balance) The balance of deposits (deposits + NCD) was firm both for individual and corporate customers, increasing JPY152.9bn YoY to JPY3.7tn. Individual deposit assets increased mainly thanks to growth in individual deposits. Government bonds increased JPY2.0bn YoY and investment trusts rose JPY6.5bn YoY, but over-the-counter (OTC) insurance sales were down JPY7.8bn YoY.
Interest-earning assets (period-end balance) Loans outstanding increased JPY42.0bn YoY to JPY2.6tn. Housing loans were up JPY58.0bn YoY.
Valuation difference on available-for-sale securities The balance of available-for-sale securities with fair value was JPY1.0tn, and the valuation difference widened JPY29.6bn from Q3 FY03/19 to JPY84.8bn.
NPL trends NPLs based on the Financial Reconstruction Act were down JPY600mn YoY to JPY56.8bn. The NPL ratio was 2.08%, down 0.10pp from 2.18% in Q3 FY03/19.
1H FY03/20 results
▷ Ordinary income (consolidated): JPY39.5bn (+14.3% YoY)
▷ Core gross profit (non-consolidated): JPY20.7bn (-3.5% YoY)
▷ Core operating profit (non-consolidated): JPY6.3bn (-14.1% YoY) (54.9% of full-year target)
▷ Ordinary profit (consolidated): JPY8.7bn (-3.8% YoY) (67.3%)
▷ Profit (consolidated): JPY5.2bn (-10.1% YoY) (69.7%)
At the consolidated level, ordinary income rose JPY4.9bn YoY to JPY39.5bn due to an increase in gains on sale of securities. Ordinary expenses rose JPY5.3bn YoY to JPY30.7bn on an increase in credit-related costs. As a result, ordinary profit fell JPY342mn YoY to JPY8.7bn, and profit attributable to owners of parent declined JPY585mn YoY to JPY5.2bn. In light of the 1H FY03/20 results, the bank revised its initial full-year forecast announced in May 2019. The revised forecast calls for consolidated ordinary profit of JPY13.0bn (revised up from initial forecast of JPY11.5bn) and profit of JPY7.5bn (unchanged), alongside non- consolidated core operating profit of JPY11.5bn (revised up from the initial forecast of JPY10.5bn) and ordinary profit of JPY12.0bn (revised up from JPY10.5bn).
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Non-consolidated profit/losses Core gross profit Net interest income declined JPY1.0bn YoY, net fees and commissions were down JPY74mn YoY, and net other operating income was up JPY355mn YoY. Core gross profit declined JPY743mn YoY to JPY20.7bn.
Net interest income Net interest income fell JPY1.0bn YoY as a JPY118mn YoY increase in interest on loans and discounts was offset by a JPY1.6bn YoY decline in interest and dividends on securities. The yield on deposits was down 0.01pp YoY to 0.00%. The deposit-lending margin was 1.03%, down 0.04pp from 1.07% in 1H FY03/19.
Net fees and commissions Net fees and commissions declined JPY74mn YoY.
Net other operating income (includes net gains/losses on bonds) Net other operating income increased JPY354mn YoY to JPY382mn.
General and administrative expenses General and administrative expenses were up JPY296mn YoY to JPY14.4bn, reflecting a JPY300mn YoY rise in non-personnel expenses. OHR was 69.5%, up 3.8pp from 65.7% in 1H FY03/19.
Core operating profit Core operating profit declined JPY1.0bn YoY. Net interest income—the main driver of core operating profit—fell JPY1.0bn due mainly to a drop in interest and dividends on securities. Higher general and administrative expenses also had an impact.
Ordinary profit Gains/losses on securities increased JPY4.8bn YoY to JPY6.8bn, with YoY increases of JPY2.3bn in net bond-related gains and JPY2.5bn in net stock-related gains (gains on sale of equities). At the same time, an increase in the effective NPL disposal amount (credit costs) from JPY3.8bn in 1H FY03/19 to JPY4.9bn weighed on ordinary profit and profit.
Main accounts (non-consolidated) Interest-bearing liabilities (period-end balance) The balance of deposits (deposits + NCD) was firm both for individual and corporate customers, rising JPY98.6bn YoY to JPY3.6tn. In individual deposit assets, government bonds were up JPY6.6bn from end-FY03/19 to JPY28.8bn, investment trusts were up JPY119mn to JPY85.4bn, and OTC insurance sales were down JPY4.2bn to JPY159.0bn.
Interest-earning assets (period-end balance) Loans outstanding increased JPY85.3bn YoY to JPY2.6tn. Lending to SMEs, which is a focus area of the bank, were up JPY129.3bn YoY to JPY1.9tn.
NPL trends NPLs based on the Financial Reconstruction Act declined JPY735mn YoY to JPY56.5bn. Bankrupt/de facto bankrupt loans were up JPY3.0bn YoY, and doubtful loans were down JPY3.3bn YoY. The NPL ratio was 2.14%, down 0.11pp from 2.25% in 1H FY03/19.
Capital adequacy ratio (international standard) The consolidated capital adequacy ratio increased from 11.78% at end-FY03/19 to 11.92%.
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Other information
History
Date Description Dec 1943 Hokkoku Bank was established by a merger of three banks in Ishikawa, namely Kano Godo Bank, Kashu Bank, and Nowa Bank, with its head office in Kanazawa Apr 1961 Started operating foreign exchange services Apr 1973 Listed on the Second Section of the Tokyo Stock Exchange and Second Section of the Osaka Securities Exchange (listing changed to First Section at both exchanges in 1974, delist ed at t he Osaka Securit ies Exchange in May 2010) Apr 1974 Established The Hokkoku General Leasing Co., Ltd. Jun 1981 Established The Hokkoku Credit Service Co., Ltd. Apr 1983 Started securities services (over-the-counter sales of JGBs and other) Jul Established The Hokkoku Credit Guarantee Co., Ltd. Nov 1993 Started trust agency services Dec 1998 Started handling mutual funds Feb 2000 Hokkoku Ishikawa JCB Card (established in April 1991) renamed to Hokkoku JCB Card Apr 2001 Started over-the-counter sales of insurance Apr 2005 Started securities brokerage services Apr 2009 Hokkoku Credit Service merged with Hokkoku JCB Card in an absorption-type merger Mar 2010 Established The Hokkoku Management, Ltd. Sep 2011 Established The Hokkoku Servicer, Ltd. Nov 2014 Completed construction of Hokkoku Head Office building in Kanazawa Mar 2016 Opened a branch in Singapore Oct 2018 Started trust banking services Jan 2019 Opened an office in Bangkok Sep Launched Hokkoku Cloud Banking Nov Est ablished Digit al Value Co., Lt d. Source: Shared Research based on bank data
Consolidated subsidiaries
Capital Consolidated subsidiary Main business Established Voting rights ratio (JPYmn)
Hokkoku General Leasing Co., Ltd. Leasing Apr 1974 90 68.19%
Hokkoku Credit Services Co., Ltd. Credit card services Jun 1981 90 75.49%
Hokkoku Credit Guarantee Co., Ltd. Credit guarantee services for consumer financing Jul 1983 90 70.00%
Corporate revitalization fund, accounting work for Hokkoku Management, Ltd. Mar 2010 100 100.00% subsidiaries, online market place operat ion) Hokkoku Servicer, Ltd. Debt collection Sep 2011 500 95.00%
Digital Value Co., Ltd. System development, operation, and management Nov 2019 90 90.00%
Source: Shared Research based on bank data
In November 2019, Hokkoku Bank moved its core banking system to the cloud to reduce system costs and reinforce its sales capabilities based on data utilization. The bank established Digital Value Co, Ltd., to recruit professional IT staff with expert knowledge of cutting-edge technologies and strengthen system development capabilities for the group. Digital Value received investment from Nihon Unisys, Ltd., and Fixer Inc.
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Corporate governance and top management (end-March 2020)
Form of organization and capital structure Form of organization Company with Audit & Supervisory Board Controlling shareholder and parent company None Directors and Audit & Supervisory Board members Number of directors under Articles of Incorporation 21 Number of directors 15 Directors' terms under Articles of Incorporation 1 year Chairman of the Board of Directors President Number of outside directors 5 Number of independent outside directors 5 Number of members of Audit & Supervisory Board 6 Number of outside members of Audit & Supervisory Board 5 Other Participation in electronic voting platform Yes Providing convocation notice in English Yes Eligible for stock option None Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology In place Corporate takeover defenses None Source: Shared Research based on bank data
Top management Shuji Tsuemura 1985 Joined Hokkoku Bank. Assigned to Musashigatsuji Branch. In charge of forex and fundraising at international banking unit. Engaged in the planning and development of product services at the Business Planning Division and Business Development Division. 1995 Involved in the establishment of the Hong Kong Branch and worked there. 1998 Assigned to the HR Department. 2000 As the customer relationship management (CRM) project team leader in the General Planning Department, led the CRM Organization Capability Rebuilding Project, the Strategic Cost Reduction Project, the Financing Innovation Project, and the System Strategy Rebuilding Project. 2008 Appointed Executive Officer, General Manager of General Planning Department and Information Systems Department. 2009 Appointed Director and Executive Officer, General Manager of General Planning Department and Operations Department. 2010 Appointed Managing Director and Executive Officer, General Manager of General Planning Department. 2011 Appointed Managing Director and Executive Officer, General Manager of General Planning Department and Human Resources Development Office. 2013 Appointed Senior Managing Director. Oversaw the Productivity Improvement Project (internally referred to as “Double Productivity Initiative”), Core Banking System Migration Project, New Headquarters Construction Project, and Internationally Active Bank Project (establishment of Singapore branch). 2014 Appointed Senior Managing Director, Representative Director. 2017 Promoted digital transformation across the bank. June 2020 Appointed President (Representative Director).
Dividend policy
Hokkoku Bank’s dividend policy calls for stable and continuous dividend payments. In addition to steady dividends, the bank pays performance-linked dividends commensurate with profit levels. It aims to maintain a payout ratio (steady dividends + performance-linked dividends) of 25–30% for the foreseeable future. It pays dividends from surplus twice each year, as interim and year-end dividends. Interim dividends are determined by the board of directors, and year-end dividends by the general meeting of shareholders. In FY03/20, the bank paid an annual dividend of JPY70 per share, breaking down into an interim dividend of JPY35 and a year-end dividend of JPY35 (comprising a steady dividend of JPY30 and performance-linked dividend of JPY5). In FY03/21, it projects an interim dividend of JPY30 and a year-end dividend of JPY30, for a total annual dividend of JPY60 per share.
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Major shareholders
Top shareholders Shares held ('000) Shareholding ratio Meiji Yasuda Life Insurance Company 1,564 5.56% Japan Trustee Services Bank, Ltd. (Trust account) 1,459 5.19% Nippon Life Insurance Company 1,311 4.66% The Master Trust Bank of Japan, Ltd. (Trust account) 969 3.44% Sumitomo Life Insurance Company 770 2.74% Hokuriku Electric Power Company 669 2.38% DFA Intl Small Cap Value Portfolio (Standing proxy: Citibank Japan Ltd.) 641 2.28% Hokkoku Bank Employees Shareholding Association 555 1.97% Japan Trustee Services Bank, Ltd. (Trust account 5) 414 1.47% JP Morgan Chase Bank 385151 (Standing proxy: Mizuho Bank, Ltd. Settlement Department) 372 1.32% SUM 8,727 31.04% Source: Shared Research based on bank data Note: As of end-March 2020.
Employees
▷ Number of employees (consolidated): 1,816 (average number of temporary employees: 462) (end-March 2020) Banking business: 1,788 (459); Leasing business: 28 (3)
▷ Number of employees (non-consolidated): 1,759 (447) Average age: 41.1 Average years of service: 17.3 Average annual salary: JPY6.4mn
Profile
Company Name Head Office The Hokkoku Bank, Ltd. 2-12-6 Hirooka, Kanazawa, Ishikawa, Japan Phone Listed On +81-76-263-1111 The First Section of the Tokyo Stock Exchange Established Exchange Listing December 18, 1943 April 1973 Website Fiscal Year-End https://www.hokkokubank.co.jp/english/ March IR Contact IR Web [email protected] https://www.hokkokubank.co.jp/english/ir/annualreport.html
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