Japan Securities Finance Co.,Ltd. Q4 FY2025 earnings call

Overall Financial Performance

• All consolidated profitability metrics hit all-time records:
  • Operating profit: 11.329 billion yen, up 11.3% YoY
  • Ordinary profit: 12.507 billion yen, up 13.4% YoY
  • Net income: 10.375 billion yen, up 29.2% YoY (large increase driven by special gains from real estate and unlisted share sales)
  • Consolidated ROE: 7.4% (6.5% on an underlying basis excluding special gains)
• Key growth drivers: Higher margin trading loan balances, continued solid performance from security finance business, and non-recurring special gains from asset sales.

Strategic Business Development

• Security finance business has been the core driver of earnings base strengthening, leading to a more diversified business portfolio and more resilient multi-streamed earnings structure, reducing reliance on traditional margin trading.
• Key strategic initiatives for security finance: Expanding client base to include more overseas financial institutions, diversifying traded securities to include foreign stocks and foreign government bonds, leveraging the firm's strong financial foundation, high external credit ratings, neutral positioning, and agility in niche markets to capture growing demand.
• Benefited from strong demand for Japanese government bonds as high-quality liquid assets from overseas financial institutions and the return of positive market interest rates, leading to solid growth in lending of Japanese government bonds against Japanese equity collateral for stock repo transactions.
• The firm now has 6.8% market share in SC security finance transactions and 3% in GC transactions, with overseas transaction balances and client counts in a sustained growth trend.

Transparency and Investor Engagement Improvements

• Updated reference materials in response to frequent investor requests for clearer explanations of the firm's niche business model, market position, and interest rate impact:
  • Added plain-language explanations of the firm's mission, business model, and history of supporting capital markets
  • Added clear presentation of market position and share
  • Added explanation of how interest rate changes impact earnings
• Management regularly incorporates investor feedback into corporate planning, with top recurring investor questions focused on next steps for corporate value improvement, clearer business model explanation, and interest rate impact on earnings.

Human Capital Development

• Identified strengthened talent development and employee engagement as a core long-term enabler for further growth. Formally established a human capital policy in 2023 to set clear commitments for providing growth opportunities, supporting employee development, and building a positive working environment, with the goal of fostering an organizational culture focused on achieving higher targets. The firm refreshed its brand logo and advertising in 2024 to signal its new strategic focus, which received positive market feedback.

Nisshokin (Parent Company) Standalone (gross operating profit by business segment, excluding stock lending fee netting adjustments):

1. Margin Trading Business: 15.1% YoY increase in profit. Driven by rising loan balances from buoyant equity markets and higher lending rates from market rate increases; even with lower stock lending balances, the overall segment grew. No explicit percentage of total gross profit contribution is provided in the transcript.
2. Security Finance Business (Aggregate): Gross operating profit of 7.351 billion yen, broadly flat YoY against the prior year's very strong large growth. Segment breakdown:
   • Stock repo transactions: YoY profit increase, driven by rising funding demand from securities firms following interest rate changes.
   • Bond repo/spot-next transactions: High stable outstanding balances from steady demand for collateral usage and international regulatory compliance, but slight margin compression vs the prior year's large increase led to a YoY profit decrease.
   • General credit finance: YoY profit increase, driven by buoyant equity market conditions.
   • General stock lending: Steady fail-avoidance borrowing demand, but slight YoY profit decrease vs the prior year's large growth.
   • Retail securities-collateralized loans: YoY profit increase, driven by buoyant equity markets and product improvements including expanded eligible collateral.
3. Securities Investment: YoY profit increase, driven by accumulated carry returns and portfolio rebalancing effects.

Nisshokin Trust and Banking (100% subsidiary):

• Trust fees: 1.69 billion yen, up 6.8% YoY, driven by focus on managed trust services including customer segregated funds trust.
• Ordinary profit of 1.755 billion yen and net income of 1.226 billion yen, broadly flat YoY against the prior year's strong growth.

Consolidated (adjusted for netting of stock lending/borrowing fees):

• Operating revenue: 55.334 billion yen, up 29.4% YoY
• Operating expenses: 36.606 billion yen, up 45.5% YoY (the large increase reflects the shift from negative to positive funding costs after negative interest rate policy ended; revenue growth outpaced expense growth)

• For FY2026 March full year: Management expects operating profit and ordinary profit to increase, supported by a positive interest rate environment, resilient margin trading business, and further expansion of security finance business.
• Consolidated net income attributable to parent shareholders is forecast to decline YoY, as the large special gains recorded in FY2025 will not repeat; on an underlying basis excluding the special gain impact, net income is forecast to increase by approximately 0.3 billion yen.
• ROE is expected to rise further to the upper 6% range.
• The firm is changing its guidance disclosure policy: Previously it only published scenario-based trial calculations due to high sensitivity to equity market trends, but due to business portfolio diversification that reduced earnings volatility, it will now publish standard point forecasts, with no change to the set of disclosure items.
• Shareholder Return Guidance:
  • The firm maintains its target of 100% total payout ratio (dividends + share buybacks) through FY2025, with a target 70% consolidated payout ratio for ordinary dividends. The planned total payout ratio for the current year is on track to hit 100%.
  • Ordinary dividend is planned to increase from 68 yen per share to 80 yen per share. A 2.8 billion yen, 1.7 million share buyback program has been authorized.
  • Future shareholder return policy will be set as part of the next medium-term management plan, with a default bias toward further enhancement of shareholder returns.
• The next 3-year medium-term management plan will target higher profitability and capital efficiency, with clear milestones and roadmaps to be disclosed after board discussion, building on the current plan's early achievement of targets. Management has already stated it will target an 8% ROE after exceeding the prior 5% target.

• Need to monitor potential negative impacts of US trade tariff policy on Japanese economic and financial capital markets, even though the current interest rate environment is overall positive for the firm.
• Key strategic challenge: Capturing growing diversified finance demand for cross-border securities transactions to drive further business growth amid the post-negative interest rate external environment change, while continuing to expand overseas client base and diversify eligible securities.
• Talent development and engagement is a critical long-term challenge, as results take time to materialize, but it is core to sustained long-term corporate value growth.
• The firm's niche, unique business model continues to face requests for clearer explanation from investors, requiring ongoing improvement in communication transparency.

The provided transcript does not include a formal Question and Answer section with exchanges between analysts and management, so no content can be summarized for this section.