On track to achieve medium-term management plan targets one year ahead of schedule. Targeting ROE of 12%+ through organic growth (ROE 11.5%+α) supplemented by strategic investments

Summary

In FY2025, core banking profit reached a record-high JPY 169.6B (+JPY 35.8B YoY), while net income attributable to owners of parent company came in at JPY 106.5B with ROE of 7.9%, meeting the upwardly revised plan. For FY2026, the company guides for net income of JPY 129.0B and ROE of 9.0%, driven primarily by expansion in domestic loan-deposit interest income, effectively clearing the medium-term plan targets (FY2027: ROE >9%, net income >JPY 120.0B) in just the second year. To reach a medium-to-long-term ROE of 12%+, management laid out a roadmap to first lift ROE to 11.5%+α through organic growth—including RORA-focused asset allocation and expansion of solution-based fee income—then bridge the remaining gap through capability-enhancing strategic investments (inorganic growth). At the briefing, President Kataoka highlighted the realization of intra-group synergies and creation of more client-facing time for frontline staff as key priorities, outlining a path toward improved capital efficiency through productivity gains and AI/digital adoption.

Key Points (Earnings Highlights and Growth Actions)

• Management Strategy And Market Assessment
  • Against a backdrop of entrenched inflation and heightened corporate action activity, forward-looking corporate loan demand is expanding; the lending growth outlook has been revised upward by over JPY 100B versus the medium-term plan
  • Management acknowledges intensifying deposit competition and an accelerating shift from savings to investment; end-of-period individual deposit growth of just +0.3% is positioned as a management challenge
  • Under a Middle East escalation stress scenario, the estimated credit cost impact is capped at JPY 18.0B; the general loan loss reserve methodology has already been tightened
• Current Business Progress And Drivers
  • The LBO loan arrangement ratio rose to 83%, confirming the establishment of solution-driven deal origination
  • Consulting contracts for high-net-worth lending have grown 1.6x over five years, with related fee income expanding 2.3x, validating the consulting-led business model
  • Underperforming funds were cut at a loss, low-yield JGBs (below 0.50%) were reduced and replaced, and the securities portfolio was restructured
• Strategic Initiatives And Inflection Points
  • In March 2026, a basic agreement was reached on a 15% equity stake acquisition in Sumitomo Mitsui Trust Panasonic Finance, a strategic investment to complement leasing capabilities
  • "Goal Design Lab," a goal-based advisory tool co-developed with MILIZE, launched in December 2025, driving the transition to a stock-based business model
  • Development of a digital comprehensive financial service for SMEs has commenced (free invoice management functionality, fully non-face-to-face account opening with next-business-day turnaround, etc.), aimed at enhancing stickiness of corporate deposits

Outlook And Strategy

• FY2026 guidance assumes a policy rate of 0.75%, projecting net income of JPY 129.0B and ROE of 9.0%; at a policy rate of 1.0%, approximately JPY 3.0B of upside exists
• At a 1.0% policy rate, FY2027 ROE is envisioned at over 10% (net income of ~JPY 150.0B); even at 0.75%, ROE of ~9.5% (net income of ~JPY 140.0B) is expected
• To reach medium-to-long-term ROE of 12%+, organic growth lifts ROE to 11.5%+α, with the remainder bridged by capability-enhancing inorganic investments (leasing, non-bank, AI/fintech, payments, etc.)
• At the briefing, President Kataoka explained that priority will be given to filling capability gaps the group currently lacks, presenting strategic alignment and PMI certainty as the two key investment decision criteria
• Both EPS and DPS are planned to grow at a ~25% CAGR from FY2022 to FY2026; the progressive dividend policy (~40% payout ratio) and opportunistic share buybacks will continue
• CET1 ratio stands at 11.4%, trending down toward the medium-term plan target of ~11%, with a planned operating range of 10.5%–11.5% in anticipation of quality risk-weighted asset accumulation

Positive Factors

• Robust capital demand in the Greater Tokyo Area drove average loan balances up +3.5% YoY, with SME lending accelerating to +4.4%
• Structured finance balances expanded from JPY 72.4B in FY2018 to JPY 871.6B in FY2025 (CAGR +42%). LBO-related revenue totaled JPY 21.1B, comprising JPY 12.9B in interest income and JPY 8.2B in fee income (yield approaching 3%)
• The loan-deposit spread continued to widen on a quarterly basis (Q4: 1.181%, +0.115pt YoY), with the prime-linked proportion rising to 42%, enhancing interest rate sensitivity
• OHR improvement trend sustained: 52.0% → 49.0% → 44.6% (FY2026 plan), with 31,000 hours of head office workload already eliminated versus FY2024
• The retention rate on individual campaign time deposits (1.0% p.a.) reached 65% post-maturity, establishing them as cost-efficient sticky deposits
• Group assets under management grew steadily to JPY 3,169.1B (+JPY 284.1B YoY)

Concerns / Risks

• End-of-period individual deposit growth remains subdued at +0.3%, with outflows from the savings-to-investment shift becoming apparent; the FY2026 average individual deposit balance plan is a modest +0.5%
• While the Tokyo lending market share has steadily improved, it remains at just 2.0% as of March 2025, highlighting the challenge of further penetration in a fiercely competitive market
• FY2026 net fees and commissions are guided at JPY -6.1B YoY, reflecting conservative estimates given the timing-dependent nature of SF-related fees
• A stress scenario involving Middle East escalation implies credit costs of up to JPY 18.0B, representing meaningful risk versus the FY2026 credit cost plan of JPY 10.0B
• Cross-shareholdings have risen to 18.3% of consolidated net assets (market value basis) due to equity price appreciation, requiring accelerated reduction to meet the sub-10% target by March 2030
• AI adoption remains at an early stage of proprietary data and model integration; management itself acknowledges the risk of competitive disadvantage from delayed implementation

Performance Highlights

FY2025 consolidated results for the FG, driven by the domestic banking division, delivered net income attributable to owners of parent company of JPY 106.5B (+JPY 23.7B YoY, +28.6%) and ROE of 7.9% (+1.5pt), meeting the upwardly revised plan. Three-bank combined core banking profit (excluding investment trust cancellation gains/losses) hit a record JPY 169.6B (+JPY 35.8B), while OHR improved by 3.0pt to 49.0%. Credit-related costs remained low at JPY 7.4B (credit cost ratio: 0.04%).

Segment Performance

• Net Income Attributable to Owners of Parent Company: JPY 106.5B (+28.6% YoY)
• ROE (TSE Basis): 7.9% (+1.5pt YoY)
• Core Banking Profit (Excluding Investment Trust Cancellation Gains/Losses): JPY 169.6B (+26.7% YoY)
• Domestic Loan-Deposit Interest Income: JPY 177.7B (+JPY 20.9B YoY)
• Domestic Net Fees and Commissions: JPY 47.0B (+JPY 2.4B YoY)
• Loans Outstanding (Three-Bank Combined, End of Period): JPY 17.3T (+4.2% YoY)
• Deposits (Three-Bank Combined, End of Period): JPY 20.7T (end-of-period balance JPY 20,771.3B, +1.7% YoY)
• NPL Ratio (Three-Bank Combined): 1.2% (−0.1pt YoY)
• OHR (Three-Bank Combined): 49.0% (−3.0pt YoY)
• CET1 Ratio: ~11.4% (prior year: ~11.9%)
• EPS: JPY 94.0 (+JPY 22.4 YoY)
• DPS: JPY 38 (+JPY 9 YoY)
• Total Payout Ratio: 77% (prior year: 64%)