8600.T

Capital Structure and Capital Cost Focused Management

• The December 2023 capital increase successfully strengthened the group's balance sheet: the capital adequacy ratio rose to near the 9.5% interim target, and rating agency JCR upgraded the group's rating to the middle of the A range.
• The capital increase freed up capital to allow the group to formalize a balanced strategy across growth investment, shareholder returns, and internal reserves, and shifted focus explicitly to improving ROE and stock market valuation.
• The group changed shareholder return policy: shifting from a 1% DOE starting target to a target of 30%+ payout ratio starting from FY2025, with a 16.5 yen annual dividend (20% payout) as a transitional measure for FY2024, and a planned 26 yen annual dividend exceeding 30% payout for FY2025.

Lending Business Performance

• The Bank of Japan's negative interest rate exit and policy rate hikes were passed through to lending rates: the group raised prime rates by a total of 0.40%, with over 90% penetration for the first hike, and stock-based lending yield rose 0.06%. The share of market-linked loans increased from 70.9% to 72.4%.
• Lending growth was led by real estate, transportation (primarily ship financing in the Setouchi Inland Sea region), and sustainable finance, with 13.9% of total lending in Tokyo, where the group holds only 0.2% market share, leaving significant room for future growth.
• Credit costs hit 3.7 billion yen in FY2024 (the highest level in seven years) due to proactive reserve building and risk positioning, but the financial rehabilitation law disclosed non-performing loan ratio fell and collateral coverage increased, so credit risk remains under control.

Deposit Business Performance

• The group focused on building core sticky deposits rather than competing with high rate offers, growing deposits steadily, with growth in payroll transfer and corporate internet banking contracts in its home regions of Tokushima and Kagawa.
• New initiatives include an internet branch at Tokushima Taisho Bank, and a fan-linked term deposit for Kagawa Bank's championship handball team to support regional deposit gathering.

Fee and New Business Development

• Fee business growth is driven by the group's "connecting" strategy, which focuses on linking customers to regional, sustainability and succession opportunities, with corporate consulting revenue growing steadily.
• 57% of Shikoku region small and medium enterprises lack a successor, a higher rate than the national average, creating large in-house M&A and business succession fee opportunities for the group, which are already contributing to profit.
• New specialized subsidiaries were launched: Tokugin Tomoni Linkup focuses on decarbonization and primary industry revitalization in Tokushima (a national leader in decarbonization policy), and Kagawa Bank launched a foreign worker recruitment business to address local care sector labor shortages, with plans to expand to other industries.

Securities Investment

• The group actively rebalanced its securities portfolio in Q4 FY2024 to strengthen balance sheet health, recording large temporary losses but improving portfolio yield. Policy holding stock ratio has already fallen to 7% of net assets.

Strategic Initiatives Under 5th Management Plan

• Human capital strategy: Tokushima Taisho Bank sends staff to Tokushima Prefectural Police to gain anti-money laundering and counter-terrorism financing expertise; Kagawa Bank sends 300 corporate bankers on overseas training over 5 years to build global perspective.
• Operational strategy: Kagawa Bank is centralizing back office operations at headquarters to refocus branches on sales; Tokushima Taisho Bank is consolidating multiple fragmented business systems onto one platform, which is projected to cut 20 full time positions and add several hundred million yen in annual profit.
• Governance: The board is being expanded to add more diversity, increasing the number of female outside directors from 2 to 3, with new members including a certified public accountant who runs a small and medium enterprise, and a Kagawa University professor specializing in career development and regional revitalization.

• The group expects net profit to increase year-over-year and hit another all-time record high in FY2026 March ending, marking a new record high profit.
• Credit costs are projected to fall to 2.8 billion yen, returning to the pre-COVID average level, and securities related profit/loss is projected to be near net zero.
• Management notes the two subsidiary banks have differing views on lending rate hike penetration (one expects 90% penetration, the other is more cautious due to potential trade risks), so the group guidance uses a slightly lower overall penetration assumption, leaving material upside potential to earnings if penetration exceeds expectations.
• Even if the Bank of Japan does not deliver expected additional rate hikes in 2025, the 0.25% March 2025 rate hike has not yet been fully reflected in earnings, so a baseline earnings increase is still locked in, with no material downside to guidance.

The transcript does not provide separate absolute financial figures or revenue contribution percentages for individual product/operating segments. It confirms that both subsidiary banks (Tokushima Taisho Bank and Kagawa Bank) achieved all-time record high ordinary profit and net profit, and core operating profit excluding foreign currency funding costs hit an all-time record high for the full group, with all 5th Management Plan targets achieved one year ahead of schedule.

• The group's capital adequacy ratio has not yet reached the average level for domestic regional banks under Basel rules, requiring further capital building.
• Gradual credit quality deterioration is occurring as the economy normalizes after COVID, with more internal rating downgrades than upgrades observed in FY2024.
• Securities portfolio valuation losses expanded faster than expected in late FY2024 due to unfavorable market moves, though losses remain manageable given the group's low securities-to-deposit ratio.
• The group's PER remains relatively low compared to peer regional banks, partially due to limited investor understanding of the 2023 capital increase, leading to an unpriced risk premium on the stock.
• Potential trade disruptions from Trump tariffs create uncertainty for lending demand and interest rate penetration, leading the group to take a cautious base assumption for FY2026.
• Deposit gathering remains the key bottleneck to growth as the group's capital constraints have eased.

Q: Why did the company shift from a DOE-based dividend policy to a 30%+ payout ratio target, with a larger-than-expected dividend increase? What drove this change? / A: Management regularly shares investor feedback with the board of directors. Two key discussions drove the change: first, outside directors noted that DOE is less intuitive for general investors, and most market participants focus on payout ratio, so shifting to payout ratio improves transparency. Second, profits have grown faster than the board expected after the 2023 capital increase, and the capital adequacy ratio is already near the interim 9.5% target, so the group can afford to increase shareholder returns while still balancing growth investment and internal reserves. The larger dividend increase reflects this improved profit and capital position. (418 characters)

Q: Why does the FY2026 guidance appear conservative, especially with core operating profit projected to fall year-over-year? Would no additional BOJ rate hikes cause a material earnings downside? / A: The projected core profit decline is a technical effect from reallocating capital away from equity securities to lending, which mechanically reduces dividend income from securities. On the core operating profit metric the group prioritizes (excluding foreign currency funding costs), the guidance projects an increase. The guidance does incorporate a more cautious assumption for lending rate hike penetration, so there is material upside if penetration hits the higher end of expectations. If the BOJ does not hike rates further, the March 2025 rate hike has still not fully flowed into earnings, so that baseline gain remains, and any additional hike would only impact the second half of the fiscal year, so the downside impact would be limited. (598 characters)

Q: What is the company's strategy for the Financial Services Agency's sustainability-focused dialog with regional banks, covering both your home region and your expansion into Tokyo/Osaka? / A: Management views growth in Tokyo/Osaka and local regional development as two complementary engines of growth. Tokyo and Osaka have huge economic scale and the group has a very small market share, with many customers seeking the close, relationship-driven service the group provides, so there is substantial growth room in these markets. In the home region, there is strong unmet demand for small-ticket business succession, M&A, and sustainability initiatives that large national players are not interested in, and as a local regional bank the group has existing customer relationships and the agility to serve these needs, which can be monetized. The group's local initiatives (such as the new decarbonization subsidiary and labor recruitment business) both contribute to sustainable regional development and create new profit opportunities for the group. (632 characters)