Shizuoka Financial Group,Inc. Q2 FY2026 earnings call

• Financial Performance Overview: The interim period achieved record profit across all metrics, driven by top-line growth from rising yen interest rates. Consolidated interim net profit hit 46.5 billion yen, up 11.7 billion yen YoY, reaching 57.4% of the initial full-year forecast, with ROE rising to 7.6% on a net asset basis. Management assessed results as on track to meet the current medium-term plan targets.
• Balance Sheet Management Strategy:
  • Lending: Continue growing core corporate and consumer lending (key customer touchpoints tied to deposit transactions) while shifting low-yield, low-margin structured finance assets to higher-yield alternatives such as real estate non-recourse loans to improve overall balance sheet profitability.
  • JGB Portfolio: Management will capitalize on current high unrealized gains from policy investment equity holdings to execute a large-scale portfolio rebalancing in H2 FY2025: sell ~450 billion yen of low-yield bonds, recognize ~26 billion yen in selling losses, offset this with 25 billion yen in equity sale gains to minimize net impact on profit, and reinvest in higher-yield bonds. This is expected to improve portfolio yield by 0.4pp to 1.2%, cut low-yield bond holdings significantly, and add 7.5-8.0 billion yen in annualized net interest income (a future upside not included in current 2027 profit projections).
  • Funding Strategy: Prioritize acquiring low-cost, sticky core deposits, with a focus on corporate deposits (where early results are seen) and long-term customer accounts (younger worker salary transfers, senior pension receipts). The group will also introduce higher-rate deposit products as needed to supplement deposit growth, and is evaluating alternative funding sources to replace maturing BOJ loans, with mortgage securitization under consideration for the next medium-term plan. For foreign currency portfolios, the group will shift fully to funding foreign currency assets via foreign currency sources (rather than yen conversion) to improve net interest margins amid expected yield curve steepening.
• Cost Control:
  • Credit Costs: Full-year bank single-entity credit costs are projected at 6.0 billion yen, up 1.6 billion yen from 2024 actual results, a conservative estimate that incorporates potential headwinds from tariff impacts, exchange rate and interest rate volatility on regional firms. Even under severe stress scenarios, additional credit costs would have a minimal impact on overall profit, and proactive precautionary provisions for at-risk borrowers maintain strong cost control.
  • Overhead Costs: The group maintains a financial discipline target of keeping consolidated OHR around 50%. By the final year of the current medium-term plan, total consolidated expenses are projected to increase only 1.3 billion yen from 2025 levels: system costs will fall 2.7 billion yen after core accounting system depreciation ends in January 2026, offset by a 5.0 billion yen increase in human capital investment for strategic hiring.
• Medium/Long-Term Growth Strategy:
  • Human Capital: Increase investment in hiring and training by ~2.5 billion yen over the remaining two years to the end of the current medium-term plan, reallocate hired staff to priority growth areas across the group, targeting a 50 billion yen increase in consolidated business gross profit to 240 billion yen by 2027 while improving labor productivity.
  • System & AI Investment: The current medium-term plan allocates 50-60 billion yen to offensive growth investment, with ~20 billion yen spent to date. Deployed projects include the S-CRM sales support system and end-to-end digital loan application processing, with the new Wallet+ mobile app launching soon to drive top-line growth and cost reduction. AI is being rolled out in three phases: internal business processes (AI agents launching in 4 use cases this year), sales support back-office automation, and expanding customer-facing use cases to improve user experience.
  • Alliance, Venture, and Regional Initiatives: The Fuji-Alps Alliance with other regional banks is on track to deliver growth especially in structured finance and real estate lending. The 10+ year venture business initiative has built a unique scalable model, with venture revenue growing steadily and 180+ completed startup partnerships supporting regional innovation. The group is planning to establish a new foundation to support regional new business development full-time, funded by dividend income from 4 million treasury shares allocated to a dedicated trust, accompanied by a 20 billion yen treasury share purchase to offset dilution.
• Capital and Shareholder Return Policy:
  • Capital Structure: Target a CET1 ratio of ~13% by the end of the current medium-term plan, reducing the oversized share of unrealized valuation gains from equity holdings in total capital via systematic policy equity reduction. The group already achieved its current medium-term policy equity reduction target 2.5 years early, and targets cutting the share of policy equity (market value) in net assets to 20% from the current 34.4%.
  • Shareholder Return: Commit to a progressive dividend target of reaching 50%+ payout by 2027, and will conduct opportunistic treasury share purchases to improve capital efficiency. For FY2025, the annual dividend is raised 6 yen to 78 yen per share, for a projected payout ratio of 49.1%, and a 20 billion yen treasury share purchase has been announced.
• Second Medium-Term Plan (Starting April 2026): The 3-year plan will divide business into three strategic domains: 1) Co-creation Domain: deepen regional collaboration in the core Shizuoka market to build a stable business base; 2) Growth Domain: capture growth in Tokyo metropolitan area and overseas markets; 3) Challenge Domain: build new revenue base, open to M&A in priority sectors and exploring opportunities in untapped markets including India and Africa.

1. Banking (Shizuoka Bank Single Entity): Business gross profit increased 7.8 billion yen year-over-year (YoY). Core contribution came from a 13.3 billion yen increase in net interest income driven by rising yen interest rates, offset partially by a 4.8 billion yen decrease in other operating income from low-yield bond replacement. Net recurring profit rose 17.2 billion yen YoY, and interim net profit increased 11.4 billion yen YoY, both hitting record highs. Domestic net interest income grew 9.9 billion yen YoY, while international net interest income increased 3.4 billion yen YoY despite lower lending interest income from falling foreign rates, due to larger reductions in funding costs. Fee-based income rose 600 million yen on a consolidated basis, with a 500 million yen positive contribution from consolidating Seizon Shizuoka Card as a new subsidiary.
2. Non-Bank Group Companies: Aggregate contribution profit was 6.9 billion yen, maintaining a high profit level similar to the prior year. Seishin TM Securities recovered to a growth trajectory from Q2 onward after a weak Q1 due to early-year market weakness. SFG Real Estate Investment Advisors already surpassed its full-year target of 80 billion yen in contracted assets, reaching over 100 billion yen ahead of schedule. All other non-bank group companies maintained solid core profits while expanding their business scope. Non-bank group contributions make up an above-industry-average share of consolidated recurring profit for Shizuoka FG, representing a key competitive advantage.

• Full-year FY2025 consolidated guidance was upgraded: recurring profit raised 6 billion yen to 124 billion yen, net profit raised 5 billion yen to 86 billion yen. The upgrade reflects higher-than-projected core business growth, primarily driven by an 8.5 billion yen upside to net interest income from higher lending and securities yields. This guidance assumes a policy rate of 0.5% and does not include any upside from potential future rate hikes.
• The annual dividend guidance was upgraded in line with earnings, increasing 6 yen per share to 78 yen.
• Management projects a minimum consolidated net profit of 105 billion yen for 2027 (final year of the current medium-term plan), assuming additional policy rate hikes to 0.75%, excluding the upside from the planned JGB portfolio rebalancing.
• FY2025 full-year credit costs are projected at 6.0 billion yen for the bank single entity.

• Rising equity valuations have increased unrealized gains on policy investment equities, which expands total capital and lowers ROE; the current high equity market environment may not persist, requiring continued prioritization of systematic equity reduction to stabilize capital structure.
• If policy rates rise above 1.5% (far exceeding current projections), the impact on credit costs and balance sheet valuations remains uncertain, requiring additional multi-angle stress testing.
• Extremely rapid yen depreciation beyond 165 JPY/USD could negatively impact domestic-focused industries in Shizuoka (such as paper manufacturing) that cannot pass through higher raw material costs to selling prices, increasing credit risk.
• Deposit acquisition competition is intensifying as customer rate sensitivity rises, which will increase funding costs over time; the group is still adapting digital strategies to improve deposit competitiveness in this new environment.
• Policy rate increases could raise credit costs, although projected increases are manageable within current profit levels.

Q: Will the policy of reflecting core business upside to full-year profit guidance remain unchanged going forward? / A: Management confirms that sustainable core business upside (including net interest income gains from policy rate hikes) will continue to be reflected in upward guidance revisions as they occur. One-off gains such as transient equity valuation gains may be handled differently depending on market conditions, but core earnings growth will consistently flow through to reported profit.

Q: What are the highest priority challenges for balance sheet management today? / A: The top priorities are replacing low-yield assets with higher-yield alternatives, and securing stable funding to support this rebalancing. For yen-denominated balance sheets, acquiring sticky core deposits is most critical, and the group is building expertise in digital banking to develop new deposit acquisition strategies, while evaluating alternatives to maturing BOJ loans including securitization skills. For foreign currency balance sheets, the group will fully shift to funding assets via foreign currency sources rather than yen conversion to align with expected yield curve steepening.

Q: What upside factors are not included in the 105 billion yen 2027 net profit projection? / A: Three key upside items are excluded: 1) The 7.5-8.0 billion yen annual net interest income gain from the planned H2 2025 JGB portfolio rebalancing; 2) Faster-than-projected growth from non-bank group subsidiaries, which are already exceeding their original medium-term targets; 3) Potential upside from in-flight strategic M&A discussions. Management acknowledges the current base plan is intentionally conservative, with room for upside across business lines.

Q: How will the group control capital growth and lift ROE amid expanding unrealized equity gains? / A: The group confirms policy equity reduction remains a top priority to limit capital volatility from equity price swings. When unrealized gains increase sharply, as in the current period, the primary near-term response is to expand shareholder return to keep capital at targeted levels. Additional opportunistic rebalancing (such as the JGB portfolio shift) is also pursued when market conditions allow, and management will evaluate further actions based on ongoing profit and capital developments.