Yamaguchi Financial Group, Inc. 2Q Earnings Flash
A wider loan-deposit spread lifted core net business profit (excl. investment trust and swap cancellation gains/losses) by 37.6%. Results beat plan, and the annual dividend is set at JPY 100. The next focus is defending the deposit base.
Key Positives From The 2Q Results
Further policy rate hikes lifted interest on loans by JPY 11,907M, outpacing the JPY 7,552M increase in interest on deposits and expanding core banking earnings. Core net business profit, which strips out one-off market-related items (investment trust cancellation and interest rate swap termination gains/losses), came in at JPY 36,719M, +37.6% YoY (company disclosure). This points to a clear improvement in underlying earnings power. Both recurring profit and net income beat interim guidance.
- Net interest income (excl. investment trust and swap cancellation gains/losses) was JPY 61,100M, +17.7% YoY (our estimate). Both volume (average loan balance +4.3%) and higher yields contributed
- Domestic loan yield rose 0.27pt to 1.33%. This outpaced the 0.15pt rise in the deposit yield, widening the loan-deposit spread
- OHR improved to 48.73% (-6.79pt). Gross profit growth more than absorbed the 4.7% rise in expenses
- Recurring profit of JPY 35,283M beat interim guidance of JPY 30,500M by 15.7% (our estimate)
- Shareholder returns were stepped up. The annual dividend forecast is JPY 100 (JPY 64 in the prior year), and share buybacks totaled JPY 12,919M in 1H
Key Concerns From The 2Q Results
Core banking is performing well, but the deposit base is shrinking. Combined period-end deposits at the three banks fell by JPY 352.1B from the prior fiscal year-end, with the shortfall funded by NCDs and borrowed money. Losses on bonds of -JPY 31,989M from portfolio rebalancing were offset by gains on equities and swap termination gains. Continued disposal of unrealized losses will remain a source of earnings volatility.
- Combined individual deposits at the three banks fell 1.8% YoY, and public-sector and financial institution deposits fell 22.7% YoY. With the deposit yield up 0.14pt, intensifying competition for deposits warrants attention
- Market-related gains/losses across bonds, equities, swaps and investment trust cancellations totaled -JPY 3,095M (our estimate). Losses on bonds of -JPY 31,989M from rebalancing were largely offset by JPY 14,844M in swap termination gains from unwinding hedges and JPY 13,149M in gains on equities
- Unrealized losses stood at -JPY 45,361M on held-to-maturity securities and -JPY 99,945M on available-for-sale bonds. Further rate hikes worsened the held-to-maturity position by JPY 9,410M from the prior fiscal year-end
- Net fees and commissions fell 7.4% to JPY 7,780M. Investment trust balances rose 34.5%, but growth in customer assets is not translating into fee income
- Substandard loans rose to JPY 24.3B (+JPY 6.1B from the prior fiscal year-end), while the coverage ratio fell to 61.82% (-5.05pt). The net reversal in credit costs of -JPY 976M is one-off, and a rise in credit costs over the medium term warrants attention
Focus Areas / Items To Monitor Going Forward
- Stemming Deposit Outflows And Funding Costs: Can the group halt the decline in average deposits while the deposit yield rises, and sustain the wider loan-deposit spread? Whether outflows of public-sector and financial institution deposits have run their course is another key point
- Progress In Rebuilding The Bond Portfolio: After 1H losses on bond sales of -JPY 31,893M, will loss-cutting continue in 2H? We need to confirm the level of market-related gains/losses assumed in the full-year recurring profit target of JPY 67,500M
- Non-Interest Income And Medium-Term Plan Targets: What assumptions underpin the upward revision to the medium-term management plan profit targets announced the same day? We need clarity on when and how net fees and commissions will turn around
- Expected scale of 2H losses on bond sales, and the policy for offsetting them with gains on equity sales and swap terminations
- Drivers of deposit outflows (public-sector/financial institution and individual), and the deposit pricing strategy going forward
- Assumptions behind the upward revision to medium-term plan profit targets (policy rate, loan yields, deposit beta)
- Reasons for the decline in net fees and commissions despite growth in customer assets, and remedial measures
- Breakdown by industry of the increase in substandard loans, and views on the lower coverage ratio
- Background to the termination of the business alliance with Ehime Bank, and the impact on operations and earnings
Key Financial Highlights
| Item | Value | YoY |
|---|---|---|
| Ordinary Income | JPY 146,224M | +28.7% |
| Consolidated Gross Business Profit | JPY 55,377M | +3.4% |
| └ Net Interest Income | JPY 76,845M | +44.1% |
| └ Interest on Loans | JPY 71,524M | +20.0% |
| └ Interest on Deposits (incl. Interest on NCDs) | JPY 22,323M | +51.1% |
| └ Interest and Dividends on Securities | JPY 18,621M | +13.7% |
| └ Gains/Losses on Interest Rate Swap Terminations | JPY 14,844M | +JPY 13,528M |
| └ Net Fees and Commissions | JPY 7,780M | -7.4% |
| └ Other Business Income | -JPY 29,671M | -JPY 21,276M |
| └ Gains/Losses on Bonds (JGBs, etc.) | -JPY 31,989M | -JPY 24,093M |
| Expenses (excl. Non-Recurring Items) | JPY 34,901M | +4.7% |
| Consolidated Core Net Business Profit | JPY 52,465M | +86.7% |
| Consolidated Core Net Business Profit (excl. Investment Trust Cancellation and Interest Rate Swap Termination Gains/Losses) | JPY 36,719M | +37.6% |
| Consolidated Net Business Profit | JPY 20,475M | +1.3% |
| Gains/Losses on Equities | JPY 13,149M | +166.4% |
| Credit Costs | -JPY 976M | Prior Year: -JPY 326M |
| Recurring Profit | JPY 35,283M | +32.0% |
| Extraordinary Gains/Losses | -JPY 187M | Prior Year: JPY 2,564M |
| Interim Net Income Attributable to Owners of Parent Company | JPY 24,837M | +15.4% |
| EPS | JPY 122.60 | +20.2% |
| OHR | 48.73% | -6.79pt |
| ROE (Net Assets Basis) | 7.36% | +0.67pt |
| Domestic Loan Yield (Three Banks Combined) | 1.33% | +0.27pt |
| Domestic Deposit Yield (Three Banks Combined) | 0.38% | +0.15pt |
| Average Total Loans (Three Banks Combined) | JPY 9,041.2B | +4.3% |
| Average Deposits and NCDs (Three Banks Combined) | JPY 10,892.6B | -1.4% |
- Net income growth (+15.4%) lagged recurring profit growth (+32.0%), mainly because the prior-year extraordinary gain (JPY 2,690M gain on sale of subsidiary shares) did not recur
- Of the JPY 8,551M increase in recurring profit, the main driver was the +JPY 10,027M rise in core net business profit (excl. investment trust and swap cancellation gains/losses). Market-related gains/losses were a -JPY 1,550M YoY drag (our estimate)
Performance By Business Segment
The three banks account for the bulk of consolidated earnings, and each posted growth of over 30% in core net business profit (excl. investment trust and swap cancellation gains/losses). International operations drove Yamaguchi Bank, and loan growth drove Kitakyushu Bank. Momiji Bank's gross business profit declined due to losses on bond rebalancing.
Segment Performance Table
| Segment | Gross Business Profit | YoY | Core Net Business Profit (excl. Investment Trust and Swap Cancellation Gains/Losses) | YoY | OHR |
|---|---|---|---|---|---|
| Yamaguchi Bank | JPY 28,386M | +3.9% | JPY 28,299M | +34.8% | 30.93% |
| Momiji Bank | JPY 14,677M | -4.3% | JPY 9,126M | +31.3% | 50.21% |
| Kitakyushu Bank | JPY 8,474M | +31.7% | JPY 3,777M | +55.9% | 55.43% |
| Three Banks Combined | JPY 51,539M | +4.9% | JPY 41,203M | +35.7% | - |
| Consolidated | JPY 55,377M | +3.4% | JPY 36,719M | +37.6% | 48.73% |
(Kitakyushu Bank has no investment trust cancellation or interest rate swap termination gains/losses; core net business profit is shown.)
- Kitakyushu Bank: Interest on loans rose 29.3% YoY on volume growth, with period-end loans +5.8% and housing loans +14.1%. Together with reversals of credit costs, interim net income reached JPY 4,262M (+133.2% YoY)
- Yamaguchi Bank: Net interest income in international operations was JPY 11,048M (+85.3% YoY), and FX trading gains rose JPY 1,379M YoY. With JPY 9,521M in gains on equities, interim net income rose 29.5% YoY
- Corporate Lending (By Industry): Across the three banks, loans to transportation and postal services rose JPY 60.8B, wholesale and retail trade JPY 32.6B, and construction JPY 20.0B. The banks are capturing rising local capex
- Individual Customer Assets: Across the three banks, investment trusts rose 34.5% YoY and public bonds 166.9% YoY. Customer assets at YM Securities also grew 19.6% YoY, capturing demand for asset building
- Momiji Bank: Losses on bonds of -JPY 13,818M exceeded JPY 9,450M in swap termination gains, reducing gross business profit. Credit costs swung from a net reversal of -JPY 1,158M in the prior year to an expense of JPY 21M
- Deposits (Kitakyushu Bank): Period-end deposits fell 11.0% YoY, mainly due to a JPY 131.1B decline in public-sector and financial institution deposits. Funding was supplemented with NCDs and borrowed money
- Fees and Commissions (Group): The consolidated decline of -JPY 623M exceeded the three-bank decline of -JPY 142M, indicating a larger drop at non-bank group companies (our estimate)
- Credit (Manufacturing): Risk-monitored loans to manufacturers across the three banks stood at JPY 35.6B (+JPY 5.9B from the prior fiscal year-end). Alongside the rise in substandard loans, deterioration at individual borrowers warrants close monitoring
Progress Versus Full-Year Guidance
Progress against full-year guidance stands at 52.3% for recurring profit and 55.2% for net income (our estimate). In the prior year, interim results accounted for 59.4% of full-year recurring profit and 65.2% of net income, so progress this year is lower. That said, interim results beat guidance by JPY 4,783M at the recurring profit level and JPY 4,837M at the net income level. Implied 2H recurring profit of JPY 32,217M is below the 1H result of JPY 35,283M. Achieving the plan will depend on the scale of 2H losses on bond sales.
| Item | Value (2Q Cumulative) | Full-Year Forecast | Progress Rate |
|---|---|---|---|
| Recurring Profit | JPY 35,283M | JPY 67,500M | 52.3% |
| Net Income Attributable to Owners of Parent Company | JPY 24,837M | JPY 45,000M | 55.2% |
| EPS | JPY 122.60 | JPY 222.70 | 55.1% |
Changes To Guidance
Full-year consolidated guidance announced on May 8, 2026 (recurring profit JPY 67,500M, net income JPY 45,000M) was left unchanged. Interim results beat guidance, and the company also raised the profit targets in its medium-term management plan on the same day. This indicates that management recognizes the improvement in core earnings power.
Commentary On Shareholder Returns
- The interim dividend was JPY 48 (JPY 32 in the prior-year period). The dividend forecast was revised to a year-end dividend of JPY 52 and an annual dividend of JPY 100 (JPY 64 in the prior year, +JPY 36)
- The JPY 100 annual dividend forecast implies a payout ratio of 44.9% on full-year forecast EPS of JPY 222.70 (our estimate)
- The company bought back JPY 12,919M of its own shares in 1H. Treasury shares at period-end stood at 33,223,827 (28,731,030 at the prior fiscal year-end), and the average number of shares outstanding fell 4.0% YoY
Financial Position
Total assets shrank to JPY 12,740,898M (-3.3% from the prior fiscal year-end) as deposits and NCDs declined. Liquidity was managed by drawing down cash and due from banks and increasing borrowed money. The CET1 ratio held in the 12% range at 12.27%, but edged down due to share buybacks and higher risk-weighted assets.
- Key Figures
- Leverage Metrics
| Item | Value | Additional Information |
|---|---|---|
| Cash and Due from Banks | JPY 1,227,179M | -26.2% vs. prior FY-end |
| Loans | JPY 8,944,119M | +0.0% vs. prior FY-end |
| Securities | JPY 2,067,992M | +1.1% vs. prior FY-end |
| Deposits + NCDs | JPY 10,749,232M | -4.2% vs. prior FY-end |
| Shareholders' Equity | JPY 677,639M | +1.4% vs. prior FY-end |
| Interest-Bearing Debt (Borrowed Money + Bonds) | JPY 796,199M | +7.9% vs. prior FY-end (our estimate) |
| └ Borrowed Money | JPY 748,799M | +8.4% vs. prior FY-end |
| └ Bonds | JPY 47,400M | Flat vs. prior FY-end |
| Valuation Difference on Available-for-Sale Securities | JPY 5,150M | Prior FY-end: -JPY 1,549M |
| Unrealized Gains/Losses on Securities (Total) | -JPY 34,015M | +JPY 2,028M vs. prior FY-end |
| Metric | Value | Notes |
|---|---|---|
| Total Capital Ratio (International Standard) | 13.26% | -0.13pt vs. prior FY-end; company disclosure |
| CET1 Ratio | 12.27% | -0.07pt vs. prior FY-end; company disclosure |
| Leverage Ratio (Holding Company) | 5.31% | Company disclosure |
| Debt/Equity | 1.17x | (Borrowed money + bonds) ÷ shareholders' equity; 1.10x at prior FY-end; our estimate |
| Loan-to-Deposit Ratio | 83.2% | Loans ÷ (deposits + NCDs); 79.7% at prior FY-end; our estimate |
| NPL Ratio (Financial Reconstruction Act Basis) | 1.62% | +0.04pt vs. prior FY-end; company disclosure |
Disclosures Released Alongside The Earnings Announcement
- 2026/11/13Termination of the business alliance with Ehime Bank, signaling a review of the group's wide-area partnership strategy
- 2026/11/13Upward revision to medium-term management plan profit targets, reflecting improved core earnings power
- 2026/11/13Revision to the FY3/27 dividend forecast, raised to JPY 48 interim, JPY 52 year-end and JPY 100 annual
Major Announcements During The Quarter
- 2026/10/30Advance disclosure of unrealized losses on securities as of 2Q-end, released as the group continues to rebuild its bond portfolio
- 2026/11/13Profit targets raised in the second year of the medium-term management plan, underscoring the commitment to achieving ROE above the cost of capital
- 2026/11/13Termination of the business alliance with Ehime Bank, reflecting a review of the framework for partnerships with regional financial institutions
Large-Shareholding Filings / Material Proposals Over The Past Year
Not applicable
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