Executive Summary
Envalith attended the IR Day hosted by Yokohama Financial Group, Inc., featuring Representative Director Nobuo Onodera and Saoko Suzuki, General Manager of the Corporate Planning Department.
Management's core view is that positive rates have changed the central question in banking. The issue is no longer how to secure volume. It is where, and under what discipline, to allocate a limited balance sheet and capital base.
- The gap between loan-rate and deposit-rate pass-through
- Rotation out of low-yielding assets
- Embedding RORA metrics in branch performance evaluations
Management called the ROE target of above 11.5% in the final year of the medium-term plan a stretch goal. It nonetheless sees the target as achievable with determined execution.
Message from the Company
In a world without interest rates, the key question in banking was how to secure volume. Now that rates have returned, the question is where, how much and under what discipline we allocate a limited balance sheet and capital base. We will manage scale, rates, liquidity and capital as one, and deliver sustainable ROE growth anchored on improving RORA." (Nobuo Onodera, Representative Director)
Key Discussion Points
Integrated Balance Sheet Management With RORA as the Decision Metric
The company argues that the four levers cannot be managed in isolation. Growing loans consumes liquidity and capital, while moving deposit rates shifts the spread. Risk assets grew just 3%, yet domestic net interest income rose 12%. This marks a clear shift toward growth driven by earnings quality rather than balance sheet expansion. Branches are now measured on a proprietary new-origination RORA metric, so RORA is taking root on the front line as well as at headquarters.
Strengthening the Deposit Base While Widening Spreads
Against policy rate hikes, loan-rate pass-through stands at 78%, versus only 44% for deposits. This gap is the main source of spread improvement. Retail deposits make up roughly 70% of the total, and a deep base of liquid deposits used for payroll and settlement keeps pass-through low. The company has raised the weighting of core deposits in branch evaluations from about 10% to 30%. It has also mobilized the entire organization, from branch managers to teller and back-office staff, around deposit gathering.
Redeploying Low-Return Assets and Disciplined Capital Use
The company has halted new investment in held-to-maturity JGBs. These yield about 0.3% and are negatively carried. Roughly JPY 564B of redemption proceeds through 2031 will be redirected to lending and more flexible JGB management. On cross-shareholdings, the target is to bring them below 10% of consolidated net assets by end-March 2030, and senior management is joining negotiations to accelerate the pace. Capital priorities are, in order, organic growth, strategic investment and shareholder returns. Management is consistent in deploying capital with discipline rather than hoarding it.
Envalith's Perspectives
Floating-rate loans have risen to 72% of the book, while the core of liquid deposits keeps pass-through low. Under IRRBB, a 1% rate rise is estimated to add JPY 46.3B a year to net interest income. The balance sheet thus combines resilience to rising rates with earnings sensitivity. The company plans to use receive-fixed swaps and gradually build medium- to long-term bond holdings to hedge against future rate cuts. We read this as a deliberate effort to extend the earnings benefit of the hiking cycle.
Rate hikes make it increasingly likely that the FY2026 ROE plan of 9% will be exceeded. For FY2027, the company targets Net Income above JPY 165B and ROE above 11.5%, with 12% in view during the next medium-term plan. Management concedes this is a stretch, but stressed that its projections exclude carry gains from bond portfolio rotation. Factor in a growing deal pipeline in the business divisions and faster cross-shareholding reductions, and the plan looks conservative, with upside levers left in reserve.
Growth is centered on SME and high-net-worth lending, both relatively high-RORA segments. Structured finance is driving net interest income growth. The delinquency rate on high-net-worth loans is just 0.05%. Real estate exposure is dominated by rental operators, with limited lending to property traders. The company is taking more risk while maintaining asset quality.
The LCR of 121.6% is on the low side among major banks, which the company has long acknowledged. An external review found its calculation method overly conservative relative to regulatory requirements. From October, the company will revise the methodology within the regulatory framework, which would put the ratio above 130% on a like-for-like basis. It will also strengthen liquidity management by pairing the LCR with proprietary liquidity stress tests. Rising market values have widened the gap between cross-shareholdings and the target. However, the number of counterparties agreeing to sales is steadily increasing, and the focus now shifts to whether reductions can accelerate.
Q&A Highlights
- Q
As domestic lending becomes more profitable, will you shift capital toward lending rather than buybacks? How will you close the P/B discount?
AOur priorities are unchanged: organic growth, strategic investment, then shareholder returns. As long as we have assets that generate sufficient RORA after funding costs, lending gets first call on capital. Strategic investment is limited to financial and adjacent areas that we can manage ourselves and integrate through PMI. We will only pursue deals that enhance ROE even after goodwill amortization. We have no intention of signaling that returns will take precedence. Building a visible track record of this capital cycle is, in our view, the only way to dispel uncertainty over our capital policy.
- Q
Given the lag in passing rate hikes through to mortgage rates, isn't ROE above 11.5% in FY2027 an ambitious target?
AWe acknowledge it is a stretch figure. However, the business divisions' deal pipeline has continued to build this fiscal year. Our projections also exclude improved carry from bond reinvestment and rotation. Together with faster cross-shareholding reductions, we believe the target is attainable with determined execution.
- Q
How do you decide on duration and volume when redeploying HTM redemption proceeds and BOJ current account balances into JGBs?
ABecause rates are rising, management has instructed the markets division to proceed cautiously. Current purchases center on the intermediate segment, such as 2-year JGBs. We have also begun gradually adding 10-year JGBs as yields have risen. The basic aim is a laddered portfolio of 2- to 5-year maturities. We treat securities as a vehicle for surplus funds after loans and deposits. In theory, the entire balance beyond required BOJ current account reserves could go into JGBs.
- Q
Which asset class would credit costs emerge from first?
AIf they arise, they would first come from small corporate borrowers with a few dozen employees. These firms are polarizing based on their ability to pass on costs and secure staff. Because the exposure is granular and diversified, we do not expect a major credit event. Proactively supporting M&A and business succession matching for these firms helps keep credit costs in check. LBO loans can generate large per-deal losses. We address this through multi-faceted screening at the underwriting stage and stronger middle- and back-office monitoring.
- Q
Aren't cross-shareholding reductions lagging the target?
AWe take this criticism seriously. We are negotiating at every level of the client relationship, from branch managers up to top management. With the Corporate Governance Code now more widely embedded, even holders we once considered immovable are agreeing to sell. We need to spread sales over time to reflect each company's circumstances, such as trading volume, finding block buyers and capital and business alliances. Even so, the number of agreeing counterparties is steadily rising, and we will accelerate reductions from here.
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