Growing to be the “Comprehensive Financial Service Group” together with entire local communities — “True First Call Bank Group” is our mission —
Overview of Interim Financial Results for FY2018 — IR Presentation —
The Hiroshima Bank, Ltd.
December 4, 2018 President Toshio Heya Table of Contents
1. Highlights of FY2018 1H 2 3. Progress of Mid-term Plan 2017
(1) Summary of Progress of Mid-term Plan 2017 15 (2) State of achievement of Management objectives 16 2. Overview of Interim Financial Results for (3) Enhancement of asset management business 1 17 — Collaboration between banking and securities businesses — FY2018 (4) Enhancement of asset management business 2 18 (1) Summary of business performance in FY2018 4 — Business for HNWIs and corporations — 1H (5) Enhancement of high value-added banking business 1 19 (2) Net interest income 5 — Business loans — (6) Enhancement of high value-added banking business 2 (3) Net fees and commissions income 6 20 — Personal loans — (4) Expenses 7 (7) Initiatives for efforts for regional development 21 (Reference) Comparison with other banks 8 (Reference) Major development projects in Hiroshima City 22 (FY2018 1H) (8) Initiatives for structural reform 23 (5) Balance of loans, deposits, etc. 9 (9) Initiatives for the work-style reform 24 (deposits+NCD) and foreign currency funding (10) Response to financial digitalization — Branch office strategies — 25 (6) Loans to SMEs and personal loans 10 (11) Response to financial digitalization 26 — Responding to diversification in payment methods — (7) Securities 11 (8) Credit costs and non-performing loans 12 4. Initiatives for ESG (9) Capital adequacy ratio and ROE 13 (1) Initiatives for ESG 28
5. Business Forecast for FY2018
(1) Forecast of business performance and dividend in FY2018 30 1 1. Highlights of FY2018 1H
Core banking profit increased year on year, due mainly to an increase in net interest 1 P.4 income and lower expenses.
2 The interest on loans increased on an interim basis for the first time in 10 years. P.5
Due to stronger ties between banking and securities business, the non-interest income 3 P.6 ratio, including income from Hirogin Securities, increased at a steady pace to 34.0%.
4 Due to focusing on consulting sales, lending to SMEs increased at a steady pace. P.10
Support to improve management helped maintain the non-performing loan ratio was at 5 P.12 a favorable historical low of 1.20%.
We made the decision to pay a commemorative dividend (2.0 yen per share); 6 accordingly, the dividend payout ratio projection was revised upwards. P.30 Initial projection for FY2018 consolidated dividend payout ratio: 21.1% → 23.5% 2 Growing to be the “Comprehensive Financial Service Group” together with entire local communities — “True First Call Bank Group” is our mission —
2. Overview of Interim Financial Results for FY2018
3 (1) Summary of business performance in FY2018 1H
As for profit and loss in FY2018 1H, net income decreased by 5.0 billion yen on a year-on-year basis to 12.6 billion yen, while net interest income increased and expenses fell and credit costs rose due to bankruptcies at major borrowers. Losses resulting from the impact of gains on the reversal of the allowance for investment losses booked the previous year also hurt net income. Due to the loss of the impact of gains from negative goodwill booked in the previous year, interim net income attributable to owners of the parent decreased by 3.0 billion yen on a year-on-year basis to 12.0 billion yen. (Billion yen)
FY2018 1H YoY change ( Change rate ) Net interest income 35.2 0.3 Net fees and commissions income 8.8 0.0 Core gross banking profit 44.10.3 ( 0.8% ) - Expenses 26.5 -0.1 Core banking profit 17.60.5 ( 2.4% ) Gains/Losses on securities 2.2 -1.7 - Credit costs 2.5 1.7 (Reversal of allow ance for investment losses) (–)(- 4.9 ) Ordinary profit 17.5-6.2 ( -25.8% ) Inte rim ne t income 12.6-5.0 ( -28.5% )
Consolidated ordinary profit 17.4-1.3 ( -6.8% ) Interim net income attributable to owners of the parent 12.0-3.0 ( -20.1% ) (including gains from negative goodwill etc.) (–)(-2.0 ) 4 (2) Net interest income
Net interest income was up by 3.0 billion yen from the previous year, due mainly to an increase in interest on loans for the first time in an interim period for 10 years (on a full-year basis, it increased in FY2017 for the first time in 10 years) and despite a decrease in interest and dividends on securities.
Details of each item in net interest income Breakdown of net interest income (Average balance and interest rate) (Billion yen) Interest on loans ＋0.3 FY2018 1H YoY change
Interest on loans 30.7 0.3 Average Interest balance rate +1.2 -0.9 Interest and dividends on securities 7.8 -1.1 FY18 1H Deposits + 35.2 billion yen Deposits + NCD interest (-) 1.1 -0.5 NCD interest Foreign -0.5 currency +0.3 billion yen Foreign-currency procurement costs FY17 1H procurement 2.2 -0.6 34.9 billion yen costs etc. etc. (-) -0.6
Average Interest Net interest income 35.2 0.3 balance rate ±0 -0.5
Changes in loan interest (1H)
500
450
400 Average Interest balance rate 350 -2.5 +1.4
300
250 44.4 44.6 200 40.7 37.7 35.3 34.2 33.1 150 32.4 31.9 30.5 30.4 30.7 100 Interest and
50 dividends on securities 0 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 (Billion yen) -1.1 5 (3) Net fees and commissions income
Net fees and commissions income remained unchanged on a year-to-year basis. This was because while profit from the investment banking business and asset management business decreased, costs associated with domestic exchange etc. also declined. The ratio of non-interest income (including income from Hirogin Securities) grew steadily to 34.0% due to an increase in net sales income from Hirogin Securities.
Breakdown of net fees and commissions income Trend of non-interest income and its ratio (including income from Hirogin Securities) 250 (Billion35.0% yen) (Billion yen) Non-interest income ratio 34.0% FY2018 1H 33.6% 34.0% YoY change 32.9% 200 32.8% 33.0% Investment banking business 1.4 -0.2
16.3 32.0% Syndicated loans, etc. 0.7 -0.3 15.2 15.4 15.7 150 2.5 2.4 Hirogin Securities Sales of derivatives to customers 0.2 0.1 1.7 2.2 31.0% 1.4 1.5 1.6 1.4 Asset management business 3.5 -0.1 Investment banking 30.0%
100 3.9 3.4 3.6 3.5 Asset management Insurance products 1.9 0.4 business 29.0% Investment trusts 0.8 -0.2
Financial instrument intermediary 28.0% 0.2 0.0 50 services 8.5 8.6 8.0 8.4 Foreign currency deposits Domestic27.0% 0.4 -0.3 exchange, etc. Pesonal loan-related -1.8 0.0 0 26.0% 15 1H 16 1H 17 1H 18 1H Domestic exchange, etc. 5.7 0.3 A 49.8 46.3 45.8 46.1 Net fees and commissions Net fees and commissions income+ segregated trading income + other banking income (excluding bonds-related gains/losses) + Non-interest (net operation income of Hirogin Securities - financial income/expenses- Brokerage charge to the Bank/Trust fee) 8.8 0.0 = income ratio income Core gross banking profit + (net operation income of Hirogin Securities - Brokerage charge to the Bank/Trust fee) A 6 (4) Expenses
Due mainly to lower tax burdens, expenses were down by 0.1 billion yen from the previous year. The adjusted overhead ratio improved by 0.7 points to 60.1% on a year-on-year basis.
Trend of expenses and Adjusted overhead ratio Breakdown of expenses
400 Adjusted (Billion yen) (Billion yen) overhead ratio 70% Non-personnel expenses 61.0% 60.8% 350 60.1% 55.8% 60% Major factors YoY change Response to disaster caused by 300 50% +0.8 -0.7 heavy rain in Western Japan 27.3 26.6 -0.1 26.5 26.5 (donations etc.) +0.1 40% -0.2 250 Deposit insurance premium -0.1 Taxes -0.2 , etc. 12.8 30% 200 12.3 12.8 12.6
Non-personnel -0.2 20% 150 Personnel expenses 10% Major factors YoY change 100 0% Bonus +0.2 14.2 14.5 13.8 13.9 +0.1 50 Retirement benefit expenses -10% Personnel -0.1 , etc. +0.1 0 -20% 15 1H 16 1H 17 1H 18 1H * Adjusted overhead ratio = Expenses／Core gross banking profit 7 (Reference) Comparison with other banks*1 (FY2018 1H)
(*1) Target… Top 15 first-tier regional banks, including FG and FH, in terms of the amount of funds (deposits + NCD) and first-tier regional banks in Hiroshima, Yamaguchi, Ehime, Okayama, and Shimane prefectures Mebuki FG, Kyushu FG, Concordia FG, Nishi-Nippon FH, Kansai Mirai FG, Chiba Bank, Gunma Bank, 77 Bank, Fukuoka FG, Shizuoka Bank, Hachijuni Bank, Bank of Kyoto, Hokuhoku FG, San-in Godo Bank, Chugoku Bank, Iyo Bank, and Yamaguchi FG Note: Data is based on calculations performed by Hiroshima Bank based on earnings briefings from each bank. FG/FH figures are simple aggregates of figures for banks under FG/FH control.
Banking profit margins and changes therein Non-interest income ratio and its increase/decrease rate
Profit ratio Non-interest income ratio 33.0% 0.50% Hiroshima Bank (non-consolidated) (Profit ratio: 30.6%, Decrease 31.0% rate: -0.1%) Includes income of Hirogin 0.40% Securities Hiroshima Bank Ratio: 34.0%, (Profit ratio: 0.30%, Increase rate: +0.4% Increase rate: +0.04%) 29.0% 0.30% 27.0% Average of the top Average of the top 15 banks 15 banks 0.20% 25.0%
0.10% 23.0% Average of the neighboring 5 Average of the banks YoY change 21.0% neighboring 5 YoY increase/ banks 0.00% decrease rate (%) 19.0%
- 0.10% 17.0% YoY change YoY - 0.20% 15.0% increase/ - 3.0% - 2.0% - 1.0% 0.0% 1.0% 2.0% 3.0% 4.0% decrease - 0.10% - 0.05% 0.00% 0.05% 0.10% 0.15% rate (%)
Loan balance (loan interest rate ‒ deposit rate) / 2+ Fees and commissions income + segregated trading income + other banking fees and commissions income ‒ operating expenses Banking Non-interest income (excluding bonds-related gains/losses) = ×2 = profit margin Average balance of deposits, etc. *2 income ratio Core gross banking profit (*2) Our bank uses the formula given below to calculate average deposit balances for banks that do not publish figures for average deposit balances. Average deposit balance + (beginning balance of NCDD + ending balance of NCD)/2 8 (5) Balance of loans, deposits, etc. (deposits+NCD) and foreign currency funding
The average balance of loans increased in business, personal, and municipal sectors by 230.0 billion yen (+4.0% YoY). The average balance of deposit assets increased in the personal sector but declined in municipal and financial sectors. Overall, the average balance of deposit assets decreased 34.7 billion yen (-0.5% YoY). Sufficient and stable fund-raising capacity was secured for foreign currency loans.
Trend of the average balance of loans Trend of the average balance of deposits, etc. (deposits+NCD)
+230.0 (Billion yen) -34.7 (Billion yen) (yoy +4.0%) (yoy -0.5%)
Municipal and 5,918.4 7,495.6 7,460.9 financial 7,262.6 sectors‘deposits 5,688.4 6,835.8 535.5 454.7 -80.8 Loans to local 524.8 (yoy -15.1%) 5,341.4 governments* 370.3 836.5 +42.4 5,148.5 (yoy +5.3%) Corporate deposits -13.3 794.1 2,260.0 2,246.7 2,187.2 (yoy -0.6%) 575.0 2,032.0 514.3 Personal loans +65.0 (yoy +4.5%) Personal deposits +59.4 1,495.9 4,700.0 4,759.4 1,430.9 4,433.5 4,550.6 (yoy +1.3%) 1,354.8 1,290.9
15 1H 16 1H 17 1H 18 1H
Business loans Foreign currency fund-raising for foreign currency loans +122.6 (Total of all currencies as of the end of September 2018) (yoy +3.5%)
3,586.0 Items Balance (Billion yen) 3,411.6 3,463.4 3,343.3 Loans 241.6 Total 241.6 Stable fund-raising capacity Deposits 136.5 (credit line) Long-term fund-raising 91.6 Commitment line raising +62.8 15 1H 16 1H 17 1H 18 1H Stable fund- 76.3 *Loans to local governments refers to loans to local public bodies and publicly-owned corporations. Total 304.4 9 (6) Loans to SMEs and personal loans
The average balance of loans to SMEs continued to increase at a steady pace, supported by financial intermediary functions, including enhancements in consulting sales. The ratio of loans to SMEs in business loans continued to increase at a steady pace, based on steady portfolio adjustments. Due to efforts to increase personal loans led by the headquarters, including telemarketing, personal loans increased by 61.2 billion yen (YoY +4.1%). In the apartment loan sector, we assumed loans judged to have sufficient stress tolerance based on a recognition of these loans as effective inheritance tax shelters or reliable property investments.
Trends in the average balance of and number of business loans Trend of the average balance of personal loans (including Flat 35)
Trend of the number of business loan borrowers +61.2 Number of business Average rate for new loans loan borrowers (yoy +4.1%) 30,726 2nd half of FY18 1H 29,656 29,914 +812 FY2017 29,001 Major 1,563.8 Other companies 0.33% 0.34% -0.3 27,254 6.9 Mid-sized 1,502.6 (yoy -4.2%) 26,326 26,524 0.41% 0.40% 25,771 +730 companies 7.2 98.6 SMEs 0.73% 0.76% 1,427.8 84.1 Consumer Number of retail clients (Number（先） of loans business loan 7.4 (Less than 1 billion sales) Total borrowers) 0.75% 0.75% 1,364.0 68.4 +14.5 End of September End of September End of September End of September 5.7 (yoy +17.2%) 2015 2016 2017 2018 40,000 61.9 3,586.0 3,411.6 3,463.4 Apartment 35,000 3,343.3 420.9 loans 395.6 Loans to major and +25.3 mid-sized companies 363.2 (yoy +6.4%) 30,000 1,123.3 1,140.8 -17.5 billion yen 335.4 1,194.5 1,202.3 (YoY -1.5%)
25,000 Flat 35 67.9 -3.8 20,000 71.7 73.0 (yoy -5.3%) 73.1 15,000 Loans to major and mid-sized companies 2,472.7 2,209.3 2,322.6 +150.1 billion yen 10,000 2,148.8 (YoY +6.5%) Housing loans 969.6 +25.6 915.8 944.0 5,000 887.9 (yoy +2.7%)
(Billion yen)
0 15 1H 16 1H 17 1H 18 1H (Billion yen)
Ratio of loans to SMEs in business 64.3% 64.8% 67.1% 69.0% 15 1H 16 1H 17 1H 18 1H loans 10 (7) Securities
The average balance of securities decreased by 402.6 billion yen due to the redemption of government bonds. Interest-rate risk declined on a year-on-year basis. The balance of cross-shareholdings was reduced by 0.3 billion yen on a year-on-year basis through dialogue with issuing entities.
Trend of the average balance of securities Trend of the interest rate delta *The amount of change in the fair value when the interest rate declines by 10bp
Reference: Breakdown of multi-asset investment (Billion yen) trusts (end of September 2018) (Billion yen) Deposits, etc. Japan Exchange 5% 10% 10% North America 3.9 15% 25%10% Government bonds, etc. Europe Other shares Europe 5% 1,957.0 20% 1,888.8 Foreign securities in Bonds 2.1 foreign currencies 60% 377.1 10% 30% Japan 269.8 North America 1.1 1,658.9 2.0 0.9 80.0 82.9 -402.6 1.0 1.1 383.9 (yoy -24.3%) 0.8 352.0 End of September 2015 End of September 2016 End of September 2017 End of September 2018 356.0 1,256.3 Corporate bonds, 82.9 investment trusts, Trend of the term-end balance of cross-shareholding etc. (including private REITs) 144.0 +51.7 133.8 (yoy +13.5%) 298.9 435.6 -0.3 (Billion yen) Stocks -2.5 78.4 (yoy -0.4%) 133.8 (yoy -3.0%) 0.7 74.5 80.4 73.2 1.7 72.9 Private REITs Foreign bonds 1.7 2.2 +0.5 161.5 -137.4 13.3 (yoy +29.4%) (yoy -46.0%) 13.3 Shares of 1,043.0 1,007.2 116.0 13.4 13.4 affiliates Municipal bonds 4.1 ±0 -17.8 (yoy ±0.0 %) 759.4 (yoy -13.3%) Non-listed 4.3 shares 4.2 4.1 -0.1 462.8 Government (yoy -2.4%) bonds 60.3 55.2 Listed shares -296.6 53.9 53.2 -0.7 (yoy -39.1%) (yoy -1.3%) End of September 2015 End of September 2016 End of September 2017 End of September 2018 15 1H 16 1H 17 1H 18 1H 11 (8) Credit costs and non-performing loans
Credit costs increased by 1.7 billion yen on a year-on-year basis due to an increase in the disposal of non-performing loans following bankruptcies at major borrowers. The NPL ratio remained favorable, staying at the historically low level of 1.20%, thanks to a year-on-year decrease of 0.9 billion yen in the claims disclosed under the Financial Revitalization Act.
Trend of credit costs Trend of NPLs (term-end balance) and NPL ratio 1400 30 (Billion yen)0% (Billion yen)3% 0.08% 25 1200 NPL ratio (after partial direct 0.07% 0% 1.79% amortization) 2% 20 0% 2% 1000 93.7 1.28% 1.25% 1.20% 15 0.03% 0% 1% 2.5 19.4 -0.9 10 Credit cost ratio 800 1.9 73.4 72.5 Credit0% costs 69.4 1% +1.7 5 16.3 0.8 15.2 18.1 Sub-standard 0% 600 0% 0 0% -1% -5 400 65.5 -1.5 50.4 0% 48.5 47.5 -1% -10 Doubtful 200 -15 0% -2% -0.06% 8.8 5.7 6.7 6.9 Bankrupt, etc. -20 0% 0 -2% 15 1H 16 1H 17 1H 18 1H End of September 2015 End of September 2016 End of September 2017 End of September 2018 12 (9) Capital adequacy ratio and ROE
The consolidated capital adequacy ratio remained acceptable at 11.03%. Against the backdrop of a steady increase in net assets, consolidated ROE fell 1.7% year-on-year.
Trend of consolidated capital adequacy ratio and the balance of subordinated financing Trends in consolidated ROE
400 Consolidated Consolidated capital ROE adequacy ratio 14% 9.4% 10.0% 8.5% 350 9.0% 12.16% 8.0% 6.6% 11.90% 7.0% 6.0% 4.9% 11.39% 12% 5,000 11.03% 5.0% 300 4.0% 3.0% 4,800 Reference: 2.0% 1.0% BIS Standard 10% 12.09% 0.0% 250 4,600
4,400 8% 200 4,200
6% 4,000 150 480.8 26.0 25.0 3,800 455.7 4% 443.9 Net assets 100 436.6 3,600 (consolidated) 15.0 15.0 Balance of subordinated 3,400 financing 50 2%
3,200 (Billion yen) (Billion yen)
0 0% 3,000 End of September End of September End of September End of September End of September End of September End of September End of September 2015 2016 2017 2018 2015 2016 2017 2018 * Redemption date: December 2021 Net assets = [Total term-beginning balance of net assets (excluding share acquisition rights) + Total first-half-ending balance of net assets (excluding share acquisition rights)] /2 13 Growing to be the “Comprehensive Financial Service Group” together with entire local communities — “True First Call Bank Group” is our mission —
3. Progress of Mid-term Plan 2017
14 (1) Summary of Progress of Mid-term Plan 2017
Management strategies in Mid-term Plan 2017 Results of FY2018 1H (summary)
Off-balance Core banking profit increased year on year, but the impact of Assets Liabilities (Customers’ accounts) bankruptcies at major borrowers resulted in a 45% progress 1 rate for consolidated net income (full-year). Banking business 3 P.16 Non-deposits UP Loans ＵＰ Deposits UP Practice “Fiduciary duty” Promote loans to local SMEs Promote efforts to contribute We stepped up efforts to strengthen ties between banking Increase steady personal by providing consulting services to stable asset building and securities business, to make investment proposals to deposits Promote efficient sales of Shift to corporations with excess funds, etc. with the aim of personal loans led by the 2 non-deposits headquarters increasing the balance of total deposit assets and non-interest income. P.17-18 Expansion of volume Increase the balance of total deposit assets and asset with “high quality” management income. Increase loan interest We focused on high value-added businesses by identifying needs related to operational risk, including the response to Change of the portfolio through Capital adequacy ratio 3 controllable risk-taking Asset management the disaster caused by heavy rain business 2 P.19 (including business with Hirogin Securities) in Western Japan. Securities DOWN Retained We expanded regional development efforts to respond Appropriate risk-taking according to the market earnings UP effectively to growth in inbound tourism. environment 4 P.21-22
We implemented workstyle reform and personnel Achieve management objectives through key earning generators: 5 reassignments to promising markets to maximize the income from high value-added banking business and non-interest 1 effectiveness of our personnel. income from asset management business P.23-24
We established channels (face-to-face and non-face-to-face) Response to financial capable of offering customers optimal financial services and Regional development Structural reform projects 6 4 5 digitalization 6 stepped up the provision of new services. P.25-26 15 (2) State of achievement of Management objectives
(Billion yen, %)
Profit attributable to owners of the parent Consolidated ROE Average total balance of deposit assets
Final year Final year Final year 30 billion yen around 6% YoY 10 trillion yen 26.5 or more 5.5% +117.5 or more YoY 4.9% 9,360.0 -3 9,167.8
12 YoY -1.7%
FY18 FY18 FY21 FY18 FY18 FY21 FY18 FY18 FY21 1H Results Target Mid-term plan 1H Results Target Mid-term plan 1H Results Target Mid-term plan
Non-interest income ratio Consolidated capital adequacy ratio Adjusted overhead ratio (including income from Hirogin Securities)
Final year 11.0% 40% or more YoY 62.6% +0.4% 10.5% 60.1% YoY Final year 35.8% -0.3% Final year 50% level 10% or more 34.0% YoY -0.7%
FY18 FY18 FY21 FY18 FY18 FY21 FY18 FY18 FY21 1H Results Target Mid-term plan 1H Results Target Mid-term plan 1H Results Target Mid-term plan
16 (3) Enhancement of asset management business 1 — Collaboration between banking and securities businesses —
Increase the number of joint offices, strengthen sale forces, and step up mutual introductions of customers; enhance the efficiency of front office services, integrate banking and securities, and provide products and services that meet diverse customer needs.
Enhancement of BK/SE unified management Promotion of financial instrument intermediary services
Measures Results (including estimates) Wholly-owned subsidiary (June 1, 2017) Number of joint offices 10,000 14,000 (total number including booths) Number of active 12,715 3 8 16 accounts of financial (FY2016) (FY2017) (FY2018) instrument
9,000 intermediary services 12,000 10,698 Increase the number of joint offices to Average for provide one-stop function YoY change Joint offices (FY2018 1H) all offices 8,000 9,049 10,000 Number of accounts of Approx. Approx. 8,690 756.8 financial instruments intermediary services acquired +50% +40% 719.1 Income from financial Approx. Approx. 7,000 8,000 instruments intermediary Hirogin services 2.7-fold 2.2-fold 643.7 191.2 Securities 613.7 141.9 Balance of Strengthen sales power to acquire new The number of employees of the intermediary 6,000 87.6 6,000 accounts of financial instrument bank seconded to Hirogin Securities transactions + 20 persons 73.7 intermediary services (April 1, 2017 to April 1, 2018.)
5,000 4,000 Hirogin Securities was qualified to conduct trust agreement agency business and bank Hirogin Enhance measures to meet needs for Securities agency business (January 4, 2018) 556.1 577.2 565.6 inheritance tax saving 540.0 Balance of 4,000 2,000 First in nation (regional bank securities subsidiary) direct transactions
Term-end balance Introduce customers with (fair value, billion yen) Enhance ability to meet insurance 3,000 0 insurance needs to the bank needs End of March 2016 End of March 2017 End of March 2018 End of September (from October 1, 2018). 2018
Allow digital signing of certain application Proportion of Hirogin Securities’ net FY2016 FY2017 FY2018 1H Strengthen ability to adapt to forms used to open intermediary accounts operating income customer needs + enhance business (from November 3, 2018) corresponding to 18.4% 30.8% 44.4% Enable accounts to be opened and Intermediary income efficiency + go paperless structured notes to be purchased simultaneously 17 (4) Enhancement of asset management business 2 — Business for HNWIs and corporations —
Have personnel with strong proposal-presenting skills respond proactively to inheritance/gift-related needs. Also endeavor to offer solutions to corporations that meet their needs not only for financial products, but also for risk management.
Proactive responses to inheritance needs (including proposals to corporate owners) Strengthen proposals targeting corporations.
Trends in holdings of shares and investment trusts by private sector non-financial corporations Can be handled (Trillion yen) Goal: Ensure inheritance Past gift trust by our bank Strengthen proposals goes smoothly. (Goal: Testamentary (existing service) 500 involving financial products. Minimize conflict.) (from April 2018) substitute trust Investment trusts Goal: Minimize inheritance Testamentary trust tax. Corporate investment balances Foreign-currency time (Ancestor) (preparation of will) 400 deposits Before inheritance Insurance, etc. are growing year after year. Structured notes, etc. Can be handled Inheritance by our bank 300 (existing service) starts Organization of (from April 2018) inherited assets Testamentary trust (execution 200 Respond to risk management Goal: Complete inheritance of will) procedures smoothly. needs. Concerned about second <
(Person) 320 FP Grade 1 247 277 300 Provide comprehensive solutions that go beyond lending money. End of March 2016 End of March 2017 End of March 2018 End of September 2018 Note: FP Grade 1: Grade 1/CFP of Financial Planning Certification, FP Grade 2: Grade 2/AFP of Financial Planning Certification 18 (5) Enhancement of high value-added banking business 1 — Business loans —
Leverage operational risk as an opportunity to strengthen the consulting business to increase loan balances to SMEs and boost income from investment banking business.
Leveraging operational risk to strengthen consulting business Mazda-related suppliers' needs
Earthquake in northern Osaka prefecture Increasing Heavy rains in Western Japan in Suspension of operations, concerns about Mazda Relevant suppliers July 2018 declining sales, etc. operational 2018 Hokkaido Eastern Iburi risks Earthquake, etc. Began launching next Procure funds and operating capital generation of products (7th for the next generation of products Actions our bank can take to respond to increased concerns generation) in FY2018 Formulate business plan to [Example risk map] accompany overseas expansion Impact on business (large) and respond to exchange risks. Building a new plant in the US Natural disaster risk Risk of changes as part of a joint venture with in the external environment Toyota Amendment of Subcontracting Act Exchange rate Derivatives (requires improvements in payment terms) Loans with provision for principal repayment Source: Mazda Earthquakes waiver in the event of a disaster fluctuations Fires Bankruptcies Business matching (introducing insurance companies) For subcontractors: Loans with insurance to cover business Floods continuation expenses Soaring raw Increasing cash payments Procurement Winds Loans to assist with disaster prevention materials prices Reducing settlement periods of funds and BCP Declining demand for trade notes, etc. Cyber risks
Personal information Loans for cybersecurity leaks Frequency Information system failures Frequency Promoting loans for SMEs and business insurance (low) (high) Organizational Risk of 27,000 administration risk Average balance of loans 2,472.7 accidents 10.0 (1H actual) Business Business insurance to SMEs continuity Work-related 2,368.7 25,000 Business succession support loans Business insurance death or injuries 8.0 Securing human Introduce familiar insurance 2,238.4 Traffic accidents 23,000 resources Health management and agents 2,148.8 Mental health assessment loan schemes 6.0 2H 0.45 0.47 21,000
4.0 Business insurance Impact on business (small) 19,000 premiums 0.24 0.24
2.0 0.11 0.41 1H17,000 Offer appropriate solutions to meet the various needs 0.23 0.07 0.21 (Billion yen) identified using the risk map. 0.0 0.04 15,000 Expand the lineup of consulting-based loan products. FY2015 FY2016 FY2017 FY2018 19 (6) Enhancement of high value-added banking business 2 — Personal loans —
Increase the balance of personal loans by strengthening related headquarters functions; endeavor to enhance business efficiency and reinforce governance.
Strengthening efforts to promote housing loans and apartment loans Promoting personal loans
Trends in average balance of personal loans 1,563.8 1,590.0 1,518.9 96.0 Others Past activities focused on 88.2 105.5 promoting loans for new and used Apartment loans, homes; now... 439.0 409.8 420.9 etc.
Personal Loan Center
Housing loans Newly assign 1,020.9 1,037.5 1,049.0 Support with housing loans + Flat 35 dedicated staff to Apartment loans (Billion yen) promote: FY2017 FY2018 1H FY2018 Prospect
Reference: Status of apartment loans (Proportion of balance by region (Proportion of balance by credit rating Expand opportunities for contact with [as of end of September 2018]) [as of end of June 2018]) Support for customers (on holidays and at night). Increase introductions from home Four local 2% 6% housing loans Normal prefectures builders. borrowers 98% Step up cooperation with builders. 94% Integrate/network contact points to achieve rapid response. Apartment loans Reinforce governance through more rigorous loan screening (Proportion of balance by age (Proportion of loans executed by purpose [as of end of September 2018]) [loans executed in April–June 2018]) Includes funds for land Under 50 70 or older purchases. 11% Between 50 12% Funds for building 12% construction Free up personnel through enhanced business 49% and 60 Between 60 88% efficiencies (reassign to activities that promote markets). 28% and 70 20 (7) Initiatives for efforts for regional development
Actively promote regional development. For example, SETOUCHI BRAND CORPORATION, in which our bank has an equity stake, is attracting world-famous hotel chains to land earmarked for redevelopment in Hiroshima City.
Trends in tourist numbers Setouchi Brand promotion structure (Setouchi DMO*)
300 (10,000 people) 243 *A form of organization mainly seen in the US and Europe that centrally handles strategy formulation, surveying, marketing, promotion, 8,100 Increased etc. 201 for 250seven Numbers of foreign consecutive 7,600 tourists 166 years200 Setouchi Tourism Tourism-related
7,100 Total numbers Authority business operators 150 104 of tourists
6,600 100 Making 6,989 6,100 the Setouchi region 6,618 6,777 50 6,181 even more attractive
5,600 0 FY2014 FY2015 FY2016 FY2017 Numbers of 862 942 959 950 SETOUCHI BRAND Equity hotel guests CORPORATION stake Other regional Sources: Japan Tourism Agency, Hiroshima Prefecture banks, etc. The number of tourists has been rising steadily, but the number Equity stake of hotel guests has bottomed out. Setouchi Kanko Kasseika Fund (fund for revitalizing tourism in Setouchi) Attracting hotel chains (managed by Setouchi Tourism Partners) Comparison of numbers of hotel rooms (2016) Financial assistance Numbers of hotel rooms per 1,000 people Establish a full-service hotel on approximately 6,400 m2 Cities with more than 1,000,000 of land earmarked for redevelopment in downtown 19.7 residents 15.5 15.2 Hiroshima City. 13.4 12.9 9.6 9.5 9.4 9.0 8.7 Operated by the Hilton Group * First Hilton in Chugoku and Shikoku regions. The Hilton Group currently operates 16 hotels/resorts (Rooms) nationwide. Osaka Kyoto Fukuoka Sapporo Sendai Niigata Okayama Hiroshima Kitakyushu Kobe Plan is for 415 guestrooms, eight conference Source: Ministry of Health, Labour and Welfare, Ministry of Internal Affairs and Communications facilities, a spa, a gym, etc. Fewer hotel rooms compared to other major cities Scheduled to open in 2022 21 (Reference) Major development projects in Hiroshima City
Redevelopment of Hiroshima Station South (Completion image of Futabanosato land readjustment project Exit Square EKICITY HIROSHIMA New H.O. building) ・ Izumi Head Office building … Completed in Oct. 2013 ・ ・Development of the Free Housing building and Project to rebuild ・ High-precision radiotherapy … Completed in Oct. 2015 …Completed in Oct. Passage commercial building … completed in Jan. 2017 center 2017 ・Development of the South ・ Condominium … Completed in Jun. 2016 …Expected to Commercial bldg.: Hiroshima Bank, Exit Square ・ Hiroshima TV Head Office … Completed in Mar. 2018 complete in 2020s 11 floors and one basement ・Change of the traffic Edion, medical facilities, etc. building …Expected to Head Office building system Housing bldg.: ・ Hiroshima-higashi Police … Expected to open in fall complete in 2020s ・Reconstruction of the 46 floors and one basement Station, etc. of 2018 …Expected to station building complete in 2020s Total number of condominium units: 480 Expected to start construction in January 2019 Utilization of the former site of Hiroshima Municipal Stadium Expected to complete in January Utilization of Chuo park Move and reconstruction of Chamber of Kamiya-cho and Hiroshima 2021 Commerce and Industry building Hacchobori area Station Redevelopment of Kamiya-cho (reconstruction of Sun-mall) BIG FRONT Hiroshima ・ East building … Completed in Mar. 2015 (pachinko parlor) ・ East building (others) …Completed in May 2016 ・ West building …Completed in Aug. 2016 Project for the use of the former site of First regional Hiroshima University headquarters West building: Structuring of Private bank 52 floors and two under the ground ・Sports club …Completed in Aug. 2016 Bic Camera, Hotel Kawashima etc. ・Hospital …Completed in Oct. 2016 REITs Total number of condominium units: 514 ・Apartment house …Completed in Apr. 2017 East building: for students 10 floors and one basement ・Condominium …Expected to complete in fall Investment targets are real estate related to local 2020 Pachinko Parlor, car parks redevelopment and reconstruction projects Our wholly-owned subsidiary Hirogin REIT ＜Other projects (in Hiroshima Prefecture)＞ Management gives investment instructions Project to utilize the former site of Project to redevelop site of As the leader of community development, the Bank Hiroshima-nishi Airport former Hiroshima East Redevelopment of Hijiyama Park takes initiatives for the regional redevelopment, Construction of a football stadium ・Renovate existing facilities … Until Mar. 2019 Police Station (Manga library, Army contributing to local redevelopment and Redevelopment of the front area of (previous page) Cemetery, etc.) Fukuyama Station ・Establish new facilities … From Apr. 2019 revitalization of regional economy (observation facility・ Utilization of the former site of Fukuyama Modern Art Museum, etc.) municipal race track Privatization of Hiroshima Airport, etc.
The Kamiyacho and Hatchobori districts of Hiroshima have been officially designated as areas urgently Increase in population and requiring urban renewal (October 2018). numbers of households Revision of special measures Higher land prices and rents Restriction and limitations (use restriction and Expected impact: floor area limitation) will be eased. Increase in private sector Special taxation (tax reduction on registration and Contribute development projects, etc. license and acquisition of real estate, etc.) to the improvement of regional productivity 22 (8) Initiatives for structural reform
Free up more time for sales promotion and personnel through various structural reform projects; relocate human resources to promising markets and headquarters departments.
Structural reform project name Outline Outcomes (including expected outcomes) Effects
Use sales-supporting devices (tablet) Integrate customer information and Increased customer interaction Sales Promotion Reform management tools dispersed by business type Managed to secure 180 Receive application for financial instruments by times by 0.5–1.0 hours per day per Project tablet members of personnel person (compared to FY2016 1H) Secure customer service time through intensive (FY2017) management of actions and results
Receive application for a personal loan by Personal Loan Enhanced business efficiency Low Cost Operation tablet Reallocated personnel Centralize back office work to the headquarters Clearer promotion structure (April 2018) Centralize housing loan refinance and Stronger governance P.20 apartment loan sales to the headquarters
Thorough reduction Project to Reduce the Labor Experimental deployment of tablets at Reduce documents branches (from December) To secure about 130 Burden at Branch Offices Reduce the use of seals or signatures Promoting self-transactions by customers members of personnel Reduce the vault Reducing manager tasks/eliminating second (in total between FY2018 and P.24 Reduce manager’s tasks line of procedures (back office) FY2021) Reduce the use of passbooks Ease burden on managers by reducing administrative tasks. Implement measures to reform working Head Office Reconstruction styles at the headquarters, taking Electronic approval/deployment of mobile Free up personnel by PCs (headquarters) Project advantage of the temporary Head Office improving productivity Non-territorial office Shorten time required for approval by 40%. P.24 Electronic approval Reduce number of printed sheets by (planned). Internal mobile phones approx. 50%. (FY2018 to FY2021) Mobile PC Enhance functions of new channels (mobile Explore possibility of creating a smartphone app, Response to Financial application) “Wallet+”. Digitalization Diversification and enhancement of settlement Build technology infrastructure in partnership Create new earning functions with electronic payment service provider. Step up provision of services based on new opportunities P.25-26 Participate in project to build a data sharing technologies (e.g., AI). infrastructure through Hiroshima Sandbox. Respond to open API Enhance marketing (*) Dedicated smartphone app administered by iBank Marketing Co., Ltd., part of the Fukuoka Financial Group. For more information, see http://ibank.co.jp. 23 (9) Initiatives for the work-style reform
Proactively and continuously implement various work-style reform measures to improve productivity.
Use of tablets for transactions in the lobby (Project to reduce the labor burden at branch offices) Work-style reform measures at headquarters
1. Visits branch. Shorter wait Introduced the electronic Bank times Introduced mobile PCs counters Meet customers in the lobby approval workflow and guide them to the ATM appropriate channel. Fewer errors (incomplete entries, etc.) No need for revisions or seals to indicate corrections 2. Enters information into tablet. (when corrections need to be made)
Customer Make use of wait times to have customers complete transactions by themselves (self-transactions). (no need to fill out and affix seals to forms) No need for operations No need for superficial checks Paper-free approval/reporting flow (performed automatically by system) 3. Confirms information entered. Reduced back-office processing (completed at the counter) Electronic approval away from office Reduced manager tasks (no need to affix seal of confirmation) Customers check the information they entered. Approval Report Numbers of No need for detailed 4. Administrative processing document checks documents documents, etc. printed sheets No need to attach documents FY2015 2H
Hiroshima Bank FY2017 Approx. four Detailed check of transaction – 3.8 days 5.2 days 1H details FY2016 1H million sheets (number of days from issuance to approval)
FY2018 FY2018 Approx. 2.7 1H 2.6 days 2.8 days 1H million sheets To reduce about 520,000 work hours in total a year (-1.2 days) (-2.4 days) (approx. 33% reduction) by developing the above measures and other measures Huge improvement (between FY2018 and FY2021, compared with the 2nd half of FY2017) Lower printing costs Secure about 130 employees and relocate them (FY2018 to FY2021) in decision-making speed 24 (10) Response to financial digitalization — Branch office strategies —
In the face of changing consumer needs and behavior patterns and declining customer branch visits, urgent challenges include building channels (face-to-face and indirect), providing services that expand points of contact with customers, and delivering more sophisticated services. Study on revamping branch operations in light of deregulation and integrating external offices with branches
Changing customer needs, fewer customers visiting branches Overhaul of branch functions
Administrative Branch counters ATM/IB Enhance customer services by building a network of procedures (face-to-face channel) (non-face-to-face channel) Changes in customer core branches and small, compact branches. behaviors and needs Transform the form and functions of branches by Visit to home, Consultations Visit to branch workplace, etc. reducing administrative burdens. Specify the roles of branch offices and optimize personnel assignments based on market characteristics. Increase the number of joint offices with Hirogin Trends in number of customers visiting branch counters at our bank Securities, focusing on core branches. (average per month) 65 Achieve flexible branch office management in response to deregulation. 52 The number of customers 40 visiting branch counters is Flexibly determining operating days and hours. declining year after year “Strengthen interactions with and improve service for 28 (and is expected to continue falling customers”; “enhance efficiency” in accordance with in the future). local conditions and customer needs. (10,000 people)
2007 2012 2017 2022 (Forecast) Integrate three external offices with branches Urgent (closure of external offices). We must enhance customers interactions and With the number of visiting customers declining due to the popularity of other channels, we plan to close them (in January and continue to provide sophisticated services. March 2019) based on their proximity to their mother branches. 25 (11) Response to financial digitalization — Responding to diversification in payment methods —
Seek to expand points of contact with new customers and increase earning opportunities by introducing a brand debit card and providing a smartphone app through a partnership with iBank Marketing Co., Ltd. Develop an AI credit-screening model for small businesses that doesn’t require human involvement; begin making preparations to deploy the system.
Provide new means of payment. Create “Wallet+” smartphone app.
Spring 2019 Provide functions not available JCB/Visa-brand debit card with the Hirogin app (planned).
Note: Actual designs may differ from these illustrations. with whom we currently have little interaction. To date, we have lacked transaction points with the following Field testing of sophisticated loan screening involving AI customers (we lacked initiatives to attract them): (2nd round) Young people We will make an effort to Credit-averse people attract such customers. Financial data Account balance trend data Profitability indicators This is our future goal: Liquidity indicators Increases in sales Shareholders’ equity ratio, Achieve a smooth transition to etc. Hirogin Value One.* Obtain data that can’t be captured from users of Hirogin Value One. AI Analyze correlations with data for Calculate risk of Reference: Value credit-card borrowers who have defaulted in the bankruptcy. transactions handled (billion yen) 50.0 46.4 past. 43.4 Develop strategies 40.1 involving use of the Build an AI credit-screening model for small businesses.
FY2014 FY2015 FY2016 FY2017 new data. Begin marketing ahead of the launch of loan products for small businesses (release planned for spring 2019). (*) All-in-one card with ATM card, credit card, and card loan functions 26 Growing to be the “Comprehensive Financial Service Group” together with entire local communities — “True First Call Bank Group” is our mission —
4. Initiatives for ESG
27 (1) Initiatives for ESG
Seek to enhance corporate value on a long-term and continual basis through initiatives targeting the environment, society, and governance. Efforts to enhance governance Environment/social initiatives
(Completion image of March 2017 Construction of eco-friendly new Head Office New H.O. Bldg.) building (publicly announced) June 2017 Made Hirogin Securities Co., Ltd. a wholly-owned subsidiary Formulated Action Policy for Customer-Centric July 2017 Selected for MSCI Japan Empowering Women Business Administration Index
* Expected to complete in January 2021
December 2017 Began offering privately-placed bonds that provide donations to educational institutions April 2018 Merged Hirogin Lease Co., Ltd. and Hirogin Auto April 2018 Women in managerial/supervisory roles surpasses 10%. Lease Co., Ltd. 10.9% Proportion of women in 10.8% managerial/ Hirogin Lease Co., Ltd.(surviving company) 180 11.0% 9.3% supervisory roles 10.0% 160 151 148 9.0% 140 126 19 17 Managers8.0% 7.0% 120 June 2018 Published “Current Initiatives for Customer-Centric 19 6.0% 100 5.0% 129 134 Supervisors Business Administration” 4.0% 80 107 3.0%
60 2.0%(Total number of persons) 2017/4/1 2018/4/1 2018/10/1 July 2018 Merged Hirogin Mortgage Services Co., Ltd. and July 2018 Donated money to those affected by heavy rain in Western Hirogin Business Support Co., Ltd. Japan in July 2018; dispatched bank employees as Hirogin Business Services Co., Ltd. volunteers August 2018 Formulated the Hiroshima Bank Health Management
Declaration Participated in every year for September 2018 Participated in activities in the Hirogin nine years no Satoyama (weeding, etc.) November 2018 Restored and donated “Inori no Izumi” fountain to Hiroshima City April 2019 Absorb and merge with Hirogin Wealth (project celebrating our bank’s 140th (announced in Management Co., Ltd. anniversary) November 2018) 28 Growing to be the “Comprehensive Financial Service Group” together with entire local communities — “True First Call Bank Group” is our mission —
5. Business Forecast for FY2018
29 (1) Forecast of business performance and dividend in FY2018
With respect to performance in FY2018, there are no changes to the earnings forecast announced in May. This forecast specified net income of 25.6 billion yen and net income attributable to owners of the parent of 26.5 billion yen. The forecast for the annual dividend is expected to be 20 yen, which is 18 yen per share based on the payout table plus a commemorative dividend to mark our 140th anniversary.
Business forecast for FY2018 Payout table and estimated dividend in FY2018
(Billion yen) Dividend per share Profit attributable to Consolidated owners of the parent (2) payout ratio Forecast for (1) Fixed Performanc (1)+(2) e-based 1H performance FY2018 YoY change Over 33 billion yen 12 yen 12 yen 24 yen Less than 22.7% Net interest income 35.2 69.0 0.8 20.8% to less than Over 30 to 33 billion yen 12 yen 10 yen 22 yen Interest on loans 30.7 61.2 0.2 22.9% 20.8% to less than "Net f ees and commissions income" 8.8 17.2 -0.6 Over 27 to 30 billion yen 12 yen 8 yen 20 yen 23.2% Core gross banking profit 44.1 86.2 0.1 20.8% to less than Over 24 to 27 billion yen 12 yen 6 yen 18 yen - Expenses 26.5 54.0 0.3 23.4% 20.8% to less than Core banking profit 17.6 32.2 -0.1 Over 21 to 24 billion yen 12 yen 4 yen 16 yen 23.8% Gains/Losses on securities 2.2 3.7 -0.3 20.8% to less than Over 18 to 21 billion yen 12 yen 2 yen 14 yen Ordinary profit 17.5 36.3 -1.6 24.3%
Current (interim) net income 12.6 25.6 -1.4 18 billion yen or less 12 yen 0 yen 12 yen 20.8% or over
Current (interim) net income attributable to owners of the parent 12.0 26.5 0.7 Consolidated dividend payout ratio Dividend to mark our 140th 23.5% (+2.4% compared anniversary +2 yen with forecast) (amount of addition to dividend per share) 30 Reference for this material
This material contains statements about future business performance. These statements do not guarantee future business performance and are subject to uncertainties. Please note that actual future business performance may differ from our goals, depending on changes in the business environment and other factors.
Management Planning Division, The Hiroshima Bank, Ltd. (Persons in charge of IR: Yashiki and Asano)
Phone: 082-504-3823 FAX: 082-504-0171 URL: http://www.hirogin.co.jp/
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