SBI Holdings, Inc. (SBHGF) Q3 2024 Earnings Call Transcript

SBI Holdings, Inc. (OTCPK:SBHGF) Q3 2024 Earnings Conference Call February 6, 2024 9:30 PM ET

Company Participants

Conference Call Participants

Unidentified Company Representative

Thank you very much for joining us today for this briefing on SBI Holdings Consolidated Performance for Nine Months FY 2023. For the first – for the interim results and the year-end results, Kitao explains about them and this is the third quarter, so please bear with me.

Starting with the consolidated performance, I’d like to read those numbers in the unit of billions. Revenue JPY164.7 billion. Profit before income tax expense JPY 100.1 billion. In the period for the period JPY70.1 billion. Profit attributable to owners of the company JPY 59.6 billion. So both revenue and profit increased year-on-year for the revenue. It is record high.

So the JPY1 trillion, that is our target for the one year and it is almost certain that we will achieve it. Since the Shinsei has become the member of the group, it is always at least JPY200 billion and that is the quarterly number and also the recently share prices are coming up and JPY 1 trillion yen is also observed for the market cap.

The same time last year, the net profit was rather small and this is because of TPBank listed in Vietnam and their share price went down and there was the fair value losses and in the crypt asset business, the losses were large. So because of these two factors, the profit attributable to owners of the company was low the same period last year. But this year, we do not have such factors. So net profit increased by 600%, almost 7x year-on-year. So this is actually the more natural figure for us.

Now, performance by segment financial services business, the record high asset management business, both revenue and profit before tax are record highs. And for financial services business, revenue was record high. It’s very stable. For investment business, crypt asset business incurred large losses last year, but showing steady recovery.

And the Next-Gen business continues to be in the red, but this is because of advanced investment. So all in all, it is within our tolerance. Performance of the SBI Group’s major listed companies, the SBI Holdings is based on IFRS and the other company entities, the J-GAAP, but both of them good results.

The one exception is SBI ARUHI, impacted by the rates and struggling with the sales of Flat 35, so both revenue and profit decreased. But for SBI ARUHI, the product lineup and operating structure being stronger, they are aiming at recovery in earnings going forward.

Dividend forecast. In the interim dividend, JPY 30 was already paid. And as the financial services, the business based on their numbers, JPY120 is expected for the year-end dividend. And SBI is going to commemorate 25^th anniversary since the foundation, and that will add JPY10 more. So JPY130 for the year-end and for the annual basis, JPY160, that is the forecast. And dividend per share development, as you can see, it is increasing year-on-year. And this is shareholder benefits. XRP and other related products are used as benefits.

Business overview of each core business, starting with financial service business. The revenue increased and a slight decrease in the other profit. But last year, there were some factors. So ALBERT, the shares were sold, and JPY5.1 billion in gain was included last year. And considering the impact of these factors, profit actually increased slightly.

Financial services business, the core business is the securities business, SBI Securities. Operating revenue and net operating revenue, operating profit, ordinary profit. In almost all the items, record high numbers were recorded.

Profit attributable to owners of the company, it is not record high. In December 2020, in the third quarter, JPY37 billion, and we did not reach JPY37 billion, but it’s very close to it. So the net profit was also very good.

Here, the comparison with major brokerage firms, that is this table. Nomura Securities, Daiwa Securities, and SBI Securities is ranked number three. The top three names remain unchanged, and the ranking changes among those three. Online companies or large offline companies, such as the classification, is becoming more and more meaningless.

The banking business, second pillar. SBI Shinsei Bank, the cumulative basis, these are the numbers. The gross operating profit, JPY198.6 billion, ordinary business profit JPY75.8 billion, the record high during the past 10 years. Pre-tax profit, JPY44.9 billion, a slight decrease. Profit attributable to owners of the company, slight decrease, and we’re near JPY38.3 billion. The annual target is JPY45 billion. So as far as progress is concerned, it is 85%. So we are making progress at a very good pace.

On the IFRS basis, it will be JPY31 billion, that is the profit before income tax. Again, a very stable contribution to the profit. Since the bank joined the group, so it was in December 2021, they became a member of the SBI Group, end of ’22, end of ‘23, JPY62.5 billion, JPY75.8 billion respectively. They are cumulative numbers of net business income comparison and a big improvement is observed.

As to the customer basis, the same trend. Before they joined the group, there was a downward trend. But after becoming the member, it is increasing, both for total amount of deposits and number of accounts.

Since DOB, then since the bank and the SBI Group, I said that there was a strong synergy. And this is the creation of synergies, both in amount and the number of accounts, that they are increasing debt finance and loan balance. As we claimed, we have been increasing the numbers based on the synergies.

Moving on to SBI Shinsei Net Bank. On the left-hand side, we have already disclosed ordinary profit on J-GAAP basis, up 15% to JPY25.1 billion, ordinary profit. And as to contribution on IFRS basis, the same period last year, it was before the listing. So it was between the 50-50 ownership. And back then, it was about JPY1.7 billion, that is the contribution. And now our stake is 34.19%. And we are still getting the JPY3.5 billion or JPY3.6 billion of the net earnings from this investment.

And this is the other customer basis of the bank, the number of accounts and the deposits in both terms, that it is increasing the trend. And the main product for Shinsei Net Bank is mortgage loans and SBI Shinsei, SBI ROEs. When you look at the total number or amount of mortgage loans extended, you could see the data on this graph.

SBI Group, new mortgage loan market share is about 10% of total or JPY2.1 trillion. So we exceed the level of mega banks for mortgage loans. We have been showing a considerable amount of presence already to that end. We would like to continue to increase our share, as well as the size we account for in the pie.

The third bank is SBI Savings Bank in South Korea. So K-GAAP and IFRS results are shown here. K-GAAP is closed in December, so it’s up until the fourth quarter and for IFRS base, it’s up until the third quarter, until end of December.

So for K-GAAP Q3, there was a specific factor. The criteria for allowance for doubtful receivables was revised, so it includes gains on allowance reversals. For IFRS, there are no special factors. So the second quarter compared to the first quarter, third and fourth quarters compared to the second and third quarters are seeing greater numbers.

So the absolute amount of profits compared to last year still is down, and it’s quite considerable. However, the trend is on a recovery trend. So for the capital adequacy ratio, it reached a record high of 15.5%. So we are not feeling any soundness issues.

So net assets as well as the performing loan balance as well as delinquency rates are shown here as we always share. So trend wise, we still are seeing a situation where balance is not growing. It’s rather declining. However, for the delinquency rate, we believe the upward trend has subsided. So with this, we believe that we have started to enter a recovery trend.

Next is the third part of the financial services business, which is the insurance business. So this has already been disclosed for the SBI Insurance Group’s performance. So whether it be ordinary income or profit, for the nine months leading up to Q3, we were able to record, record highs. The customer base, in the case of the insurance business, we look at a total number of enforced contracts as a KPI. This has been growing steadily as well. CAGR is at 13.9%.

Next is the second segment, which is the Asset Management Business. So for this segment, two years ago in November, Okasan Asset Management became a member of our Group. Therefore, year-over-year, we saw increases in revenue as well as in profits.

For SBI Global Asset Management, which is a core part of this business, the performance already has been disclosed and on a J-GAAP basis, we were able to recognize record highs. For all of the profit items as well as net sales due to the significant increase of AUM.

For SBI Asset Management, they established new funds and they are extremely popular. AUM has been growing substantially. There are two that are mentioned here. First one is SBI, Japan High Dividend Equity Type. Settlement happens quarterly and the lowest trust fee is proposed and we have been exceeding JPY41 billion as of February 6. And the next one is India Equity Index Fund, where the trust fees are kept extremely low. And as of the February 6, the AUM was at JPY32.8 billion.

So, assets under management for SBI Global Asset Management Group has now reached JPY5.1 trillion. So we are continuing to see a steady growth and on a year-over-year basis, AUM has went up by 15%.

Furthermore, so against the JPY5.1 trillion, Okasan, Rheos, Private Equity, if you add all of these together, we are at JPY8,666.5 billion. So AUM has been growing substantially here. So as already explained or announced, going forward in Japan, the trend from savings to investment is likely to pick up. Therefore, the SBI Group has decided to partner with major Asset Managers, namely the Man group as well as KKR, in order to promote alternative assets and strategies.

We are currently — we have plans to apply for registration as an investment management business. As soon as we’re finished with this, we would like to roll out the business as soon as possible. We are currently at JPY8.7 trillion AUM, but by 2027 or in the year ending March ‘28, we would like to exceed JPY20 trillion. This policy has not changed.

Next is the investment business. For this business there’s two constituents, which is the private equity business and the other is the listed SBI Leasing Services. In the same period last year, as I mentioned at the beginning, we had TPBank in Vietnam. We had to write down valuation losses and that was quite big. So revenue was also in the negative, which was extraordinary, and profits before income tax expense was negative as well. But we don’t have these one-off factors this year, so revenue grew substantially, and so did profit before income tax expense, that turned positive.

So regarding changes in fair value for the investment business, because we had the Vietnam valuation losses last year, which is gone this year, the change has been positive of JPY2.539 billion. But for the listed names, because rates remain high overseas, the venture companies have been challenged with financing. So this environment is continuing. The market itself is not that bad, but some securities are performing well, but the rest are not able to benefit, which is the reason why we’re seeing these results.

So with that in place, when you look at our results around IPOs and M&As, the number is likely to be the same as last year, that’s our prospect for this fiscal year. And when you look at our group’s assets under management, we are at JPY767.5 billion for private equity, etc. Internet, Fintech and Digital Assets are areas of our focus.

And there’s a new fund around the digital space, which would invest into advanced services and products. It is in the size of JPY100 billion. Currently, 70% of the applications have already been received, and we have been receiving commitments from investors. So by leveraging this fund, we would like to invest into promising companies going forward as well.

And also, it’s not just in Japan, but globally. We would like to roll out our investment business overseas as well. I’m not going to go through the entire list, but we are employing a business alliance with a state-owned Saudi Aramco of Saudi Arabia for example, and skipping one and going to the third one for Standard Chartered, it is a global British financial giant, and we have decided to collaborate in the investment field.

And also in Africa, in the Global South, it is said to be the last frontier. But there is a U.K. investment house, which is long established and invested into Africa. We have entered a strategic capital alliance agreement with them. And it’s not just the developed countries, but in these frontier regions too, we would like to be proactive in engaging in investment activities.

So for SBI Leasing Services, here are J-GAAP numbers, which already have been disclosed. So we’ve been seeing a significant rise in both revenue and operating income. And stock prices have reversed as well because of this performance. And on an IFRS basis, it is contributing to earnings as well.

Crypto Asset Business, the fourth segment. Last year, it was a big negative number, minus JPY17.3 billion. The finance, three hours capital, FTX, as you know, as you have already heard, those entities went under. And we had some exposure to those entities, so we incurred big losses. That is the nine-month cumulative numbers last year.

But this year, reflecting on these risks, we have contained risks in operating Crypto Asset Business. In addition, the market has significantly improved as written here, as to spot ETF, the expectation for the approval, and so both amount and size increased greatly, and about JPY2 billion of cumulative profit.

This is customer basis for the group Crypto Asset Business, exchange business. It is also increasing. The VC Trade, BITPoint Japan, providing staking services, which is growing very steadily. And there are needs among the customers, and we’d like to continue to offer such products.

Last segment, Next Gen business segment. Compared to last year, the deficits increased. The major constituents, the biotechnology related and the Web3 related new businesses. As to biotechnology-related business, as you can see on this table, basically, the RET numbers have been reduced. So a subsegment, year-on-year basis, RET number is now smaller.

SBI ALApromo, in 2025, it is scheduled to be IPO-ed and continuing its preparation. Web3 related business, the advanced investment is progressing. SBINFT or SBI Digital Asset Holdings, those entities are involved in the very progressed operations, creating seeds for future businesses.

This is the last slide, the semiconductor business. On October 31, there was a press release and things are moving on as was announced, specifically, JSMC, our partner, and the other construction workers for the foundries. We are now discussing specific construction plan and the cost involved. We are finalizing a plan. And on a potential basis, we are beginning to approach customers. But at this moment, we are in line with the plan for this operation.

So much for the financial results and some thoughts. Maybe I should have said that at the beginning. Today, we have the second part. And this portion is about the effect of zero revolution. We have received many questions from you. So today, I would like to – well, we have developed reference materials for zero revolution as well.

So there are three layers here. First, SBI Securities directly benefit from zero revolution. And the second is for securities-related business. And thirdly, benefits for non-securities business, and I would like to explain about each of these three.

Starting with direct benefit for securities business. So this is a very familiar page. The SBI Group’s customer base is expanding at an accelerated pace driven by zero revolution and expansion of NISA. The day before yesterday, on Monday, the number of accounts exceeded JPY12 million. As you can see, it is growing very steadily, and the line is getting steeper. And this is due to zero revolution and expanded and improved NISA program.

So 1 million accounts, how many months did it take for 1 million? So from 8 million to 9 million, it took about eight months. And to 10 million accounts, about seven months and six months, and from 11 million to 12 million, only four months. So it seems – it is an evidence that there are very high needs, especially from retail customers.

And this is a number of new accounts. On the left-hand side, we have a number of new accounts opened. Second quarter and third quarter, 598,000, 623,000. So on a quarterly basis, they are all record highs.

In January, 280,000, so another record high. In three months, 600,000. So the other 200,000 is for one month’s figure, but actually we achieved 280,000 in January, showing a very high interest. And for number of margin accounts opened, we are seeing same trend, and the number of accounts application is increasing very rapidly.

Next, transfers from our peers. In-transfers and out-transfers are shown here as indication. Until 2022, there’s not much difference between in-transfers and out-transfers. But right before the announcement of zero revolution, based on expectation for the launch, the in-transfers increased and that trend continues. More recently, 25.1 in-transfers and 3.5 out-transfers, so in-transfers are dominant.

So based on that, what is the market share of SBI? This is another familiar page. So after hitting 45%, it was rather difficult to exceed 50% mark. But after the announcement of zero revolution, both for individual stock and margin trading, 50% was exceeded. For individual stock, 51.6% record high, and for margin trading, 53.8% record high.

And SBI Securities for NISA, they are very strong focus. The number of accounts, we are aiming at number one. So in September last year, part two of zero revolution was announced. And this is no commission for individual US Stocks and overseas ETFs in new NISA, that is part two.

This is to satisfy customers’ needs and the number of accounts is actually growing very rapidly. More recently, the steeper the line is, as you can see on this graph. We will continue to offer products and services which satisfy the needs of the customers and we’d like to aim at number one in the number of accounts as well.

And this is number of newly opened NISA accounts. Because of seasonal reasons, there was a drop in the first quarter, the second quarter and third quarter, big increase were shown. And the transfers from the peers was increased 789.4%, the huge increase. And those who already have the securities accounts are now changing, shifting to SBIs.

For October, December period, the 48.9% came from Rakuten Securities, almost half. So among online companies, the trend is toward SBI. This is about iDeCo. We have been engaged in this business for a long time and the number of enrollees is increasing very steadily.

On the right-hand side, balance of investment transfer 401-K distributed by SBI Securities, it is showing steady increase, and this is cumulative number of the customers. The SBI Securities has been Number One for a while and the gap is widening.

So what is the result of SBI Securities? At the end of the third quarter, comparison between the same period last year and this year, 19.9%, the year-on-year increase. The green part at the bottom, and this is the online brokerage of domestic stocks subject to the zero revolution. First quarter and second quarter, that part existed. So for the first — third quarter, we are still looking at the green part.

What about on a quarterly basis? JPY4.8 billion or JPY6.4 billion, those are the numbers in the green. But for October – December period, green part is gone. And the question is whether revenue went down because of that, the answer is no. Actually, on a year basis plus 8.5%. And compared to the immediately previous, the quarter, it is only 2% point decrease.

So the financial revenues, trading revenues, and IPO-related commissions, and the other stock, the commission, which is not online, for example, overseas-related. So including all that, our result was positive. Actually, one portion of revenue source is gone, but striking a good balance we are maintaining good composition.

The breakdown, major breakdown, the open interest credit balance, there’s some seasonal reasons. So the third quarter usually drops, but still remains high as a level. And along with that, trend of financial revenue, up 29.2% or JPY15.162 billion is the result. So this is the result of the diversification and stabilization of earning source.

So for trading revenue, on top of FX, this is also related to foreign currency demonetized bonds. It’s grown by 17.5% to JPY43.696 billion. The breakdown is about 50-50. So domestic stocks online has been covered by the growth in these types of revenue.

So, whether it be yen-denominated or foreign currency bonds, they are trending up. However, due to higher rates overseas, foreign currency, foreign bond sales has been increasing, and for the third quarter, it has recorded record highs. So products with such needs, if we have them in place, customers will buy them. And even if you lose revenue from one product area, you will be able to make up for it in other areas.

And also, online domestic is gone for brokerage commission. But other than that, we continue to diversify and stabilize our source. One area is the area of foreign stocks. So here are some KPIs.

Last year, January is set at one, and now we are at 1.9x more revenue, which is a record high. And in the past, people thought the hurdle was too high to buy or trade U.S. stocks, but there are some first-timers. And compared to last year January, it is twice as high, and this is also a record high.

And also for individual futures and options trading, we started the services, and we’ve been seeing growth in a linear way, and the trading volume in the past three to four months has been growing substantially. There is some volatility, but still we are seeing good growth.

So here on this slide, we talk about the Osaka Digital Exchange, which is a company, a security token platform called START, started on December 25 last year. So there were two property ST names that were launched, and there were about 110 tokenizations that were executed and traded as well within a month.

The value is not as high yet, but these are some new engagements, and by providing them to customers, they will be offered with new opportunities to generate more income. And we will also be increasing our revenue-generating opportunities, and we would like to continue to increase this business. The number of names is still low-level, but we do believe this is a need that customers have as well.

So this is regarding our involvement in IPO underwriting share that we always share. So, when there is an IPO, people call upon an online broker, and there is a high chance that they call upon SBI Securities. And of course, we do make efforts marketing-wise as well. So our involvement rate is 93.7%. So when there’s an IPO, we come as a set that’s turning into our status.

And also, for investment trusts and its balance, here once again, because the market was good, we have been seeing good growth. On top of that, due to New NISA and its start, that has boosted the business. So we were at about JPY9.6 trillion in December, but the investment trust balance exceeded JPY10 trillion in January. And for investment trust fees too, we’ve been seeing linear growth.

So this is a recurring business, and we expect stable revenue. Therefore, we would like to continue to focus and develop this business. And monthly accumulation settings, when you compare December and January, there has been a jump-up in accumulation amount in the number of accounts. This is also associated with New NISA. Some people, customers, felt that they would like to start. So the monthly accumulation amount, we are currently at JPY170 billion.

And for example, we should reach JPY12 trillion for the year if this continues. And the investment trust balance should reach JPY12 trillion. If that’s the case, for SBI Securities, we would be able to generate steady revenue. And we’re not saying that we’re going to end at JPY173 billion. This number still has the opportunity to grow as well on a monthly basis. So that was just quick math that I wanted to share with you. And on the right-hand side, we show the trend for SBI Wrap. We jointly developed this with FOLIO. And balance, as well as the number of accounts, have been steadily growing.

So next, we talk about the ripple effects of the zero revolution on securities-related businesses. The first one is FX, the number of accounts, as well as the amount of margin deposits. For the SBI Group, we have been in the leading position, creating a gap between our peers. And the number of accounts exceeded 2.1 million as of December last year.

SBI Liquidity Markets is one of the core businesses. So the yen-dollar currency rates continue to be volatile. So we were able to reach a record-high operating revenue, and also for spot income, not just the flow of business, but for swap revenue as well as for corporate businesses. We focused on marketing as well as services, and we were able to achieve record-high revenue numbers due to these efforts.

And another related business would be SBI MONEYPLAZA. And for this business, compared to last fiscal year, on a J-GAAP basis, we were able to record higher revenue and profit-before-income tax expenses. And as you can see in the box, co-managed stores with SBI Shinsei Bank, we already expanded to four. And relative to that, we have 26 co-managed stores with 14 regional banks. And the co-managed stores with SBI Shinsei, up until March, we are intending on opening four more. So we’ll continue to expand the co-managed store base.

Thirdly, signs of the zero revolutions effect on expanding the customer base are becoming apparent in businesses other than the securities business. For example, if you see more SBI Securities customers, it starts to have an impact on other group companies in a positive sense, and that is why we prepared this slide.

So SBI Shinsei, SBI Securities, the accounts can be connected. So if you open an account with SBI Securities, they might be interested to open an account at Shinsei as well. So SBI Shinsei can also grow their business steadily because of the solid account base. So we are able to create a virtuous cycle. So we show the example of SBI Shinsei here, but due to the zero revolution, we believe that this is a positive impact that we were able to benefit from.

So the impact of zero revolution on the performance of other securities companies is the final segment in the presentation. So first point I’d like to make is when you look at Q3 alone, which is October through December, we show performance of respective brokers. SBI Securities saw a Q-on-Q decline for the December quarter, and other brokers recorded a similar trend.

So there are some brokers that are seeing Q-on-Q positive trends, and they can be classified. So they didn’t follow the zero commission trend, that’s one group. Another group are people that saw changes in wholesale, and they performed well in their wholesale business during the December quarter, that also recorded positive results Q-on-Q. But other than that, there are many brokers that saw a decline in Q-on-Q.

So first, for the group that didn’t follow the zero commission trends, going forward I believe their performance will become increasingly challenging. The number of accounts, our account base has been growing at SBI Securities. And of course, if customers were going to choose if they want to pay a commission or not, they obviously psychologically will choose the securities company that doesn’t charge.

So for those brokers that will continue to charge, I think their performance will become challenging. And for SBI Securities, with a zero revolution, we made our commission zero, and we would like to leverage this so that we can be in the winning camp when you compare ourselves against peers.

And for those companies that followed the zero revolution, how were they reflected? So comparing Rakuten Securities with SBI Securities, as you can see here, SBI Securities revenue dipped, and operating profit went down by 13.5%, and profit applicable to owners of the company went down by 15.5% compared to the previous quarter.

But for Rakuten Securities, revenue went down by 12.4% Q-on-Q, OP, almost halved, went down by 48.2%, and profit attributable to owners of the company went down by 82.8%. So their performance has been quite tough.

So even if they do the zero revolution and follow suit, still their performance is challenging. So I think it’s a difference in strategy, such as diversification. Unless you diversify, I think their performance will remain to be challenging.

And this is just for your reference. For regional bank-affiliated securities companies, there’s about 27 nationwide, and these companies also have been continuing to face challenging performance. And this is not being shown for the first time, but we believe that the zero revolution will lead to signs of restructuring in the securities industry.

There already has been some consolidation taking place. And needless to say, from my side, DOCOMO and Monex partnered, and Monex became a subsidiary of NTT DOCOMO. And Mizuho and Rakuten Securities also engaged in a capital business alliance with Mizuho Financial Group, owning shares of Rakuten now. So we believe these kinds of trends are likely to develop further going forward.

So I’m sorry that I ran for a long time, but that concludes my presentation. Now let’s move on to Q&A. Please raise your hand if you have any questions.

Question-and-Answer Session

Q –