Earnings Call: Q4 2026

May 21, 2026

Summary

Core profit rose to JPY 71.1 billion as net interest income and fees grew, with loan balances up 5.5%. FY2027 guidance targets JPY 65 billion in net profit, while integration planning and shareholder returns advance.

Thank you for joining us today for the financial results briefing for the fiscal year ended March 2026. First of all, let me apologize for the late timing of this session. I would also like to thank you for joining us despite the poor weather. I understand that some of you are joining online as well, and I appreciate your participation. I will mainly walk you through the items shown on the left side of the slides. I will keep my remarks brief so that we can spend more time addressing your questions. Let me start with the earnings for the fiscal year ended March 2026. In short, we delivered a very strong set of results. First, consolidated core business net profit, excluding gains and losses on cancellation of investment trusts, came in at JPY 71.1 billion, up JPY 15.6 billion year-on-year. As you can see, interest on loans increased, while interest expenses on deposits also rose. However, the biggest driver was the significant increase in net interest income. At the same time, non-interest business profit continued to grow steadily, increasing by JPY 3.7 billion to JPY 29.3 billion. We are now very close to our near-term target of JPY 30 billion. Overall, our core business performed extremely well. Next, consolidated profit attributable to owners of parent came to JPY 58.8 billion, up JPY 14.9 billion year-on-year. As you can see, net credit costs remained relatively stable. Last fiscal year, we revised our business forecast upward twice. We initially forecast JPY 49 billion, then raised it to JPY 55 billion at the interim stage. The final result was JPY 58.8 billion. Under our current medium-term management plan, which runs through the fiscal year ending March 2028, our initial target for consolidated net profit is JPY 60 billion. We are now approaching that level. We also achieved our ROE target. Our plan calls for ROE of 10% by the fiscal year ending March 2028, and we have already reached that level. Our OHR was 45.7%, placing us in the mid-40% range. This demonstrates that we are maintaining strong cost discipline. Although our capital ratios are not shown on this page, our core CET1 ratio was 13.5% and our total capital ratio was 15.13%. These levels were slightly above the range assumed in our capital allocation plan. Over the next three years, we intend to utilize our capital more effectively and move in the right direction. Let me move on to deposits and loans. As I mentioned earlier, net interest income was very strong. One of the major drivers was loan growth. As you can see, most categories posted increases, and total loans grew by 5.5%. The areas highlighted in red are segments where we see relatively high RORA. These segments recorded particularly strong growth. At the same time, our core volume segments also performed well. Loans to SMEs increased by 2.3%, while loans to individuals increased by 3.7%. Overall, loan growth was solid. The high RORA segments grew at a faster pace because the base is still relatively small. Even so, total loan growth reached 5.5%. RORA also improved compared with the fiscal year ended March 2025, as shown in the figures in parentheses. Turning to interest rates, these are execution rates, meaning flow rates rather than stock rates. The blue line represents SME loans, and you can see that rates have been rising steadily. Rate sensitivity has become quite high. As I have explained previously, we have shifted the majority of SME loans from a prime rate basis to a market rate basis. When policy rates rise, market rates tend to increase even more. As a result, the passthrough rate for SMEs loans linked to market rates is approximately 140%. This is why rates have been increasing smoothly. For apartment loans and housing loans, competition limits the extent to which new execution rates can rise. However, when rates reset or when the prime rate rises for housing loans, stock rates also increase. As you can see, stock rates for apartment and housing loans are rising gradually, while stock rates for SMEs loans are increasing more clearly. The slower increase in stock rates reflects the presence of fixed-rate loans. Those loans are repriced only when they reach their reset timing, so the impact takes time to appear. However, once they are reset, the higher rates remain in place for a long period. Long-term interest rates have also risen significantly. The benchmark rates used when repricing long-term fixed-rate loans have increased as well. As those loans reach maturity and are reset, their rates are expected to rise accordingly. Let me turn to deposits. This remains somewhat of a challenge for us. Corporate deposits, however, performed well. Total deposits increased by 1.3%, while corporate deposits grew by 4.2%. To some extent, this reflects the strength of our relationships with customers. Put simply, when we ask customers to place deposits with us in line with our share of their borrowings, many of them say, "That makes sense," and do so. We also include this as part of our internal performance incentives, and in some cases, customers realize, oh, I had actually placed those funds elsewhere, and then move their deposits to us. Going forward, we also need to strengthen settlement transactions and increase our share in that area so that deposits naturally accumulate with us. In any case, corporate deposits increased by 4.2% last fiscal year. The challenge is that individual deposits remained flat. As shown in the orange section, we are implementing various initiatives to attract more individual deposits. For customers able to place relatively large amounts, we offer premium time deposits. We also hold live events, as shown in the middle of the page. The text may be difficult to read on the screen, but details are included in your handouts. For example, when customers receive retirement benefits or other lump sum funds, we first offer attractive deposit rates. Loan rates have been rising steadily, so even if deposit rates rise with a relatively high follow-through rate, our margins still expand. That allows us to offer competitive deposit rates. At the same time, we do not want those funds to leave once the promotional rates expire. After customers place their deposits with us, we provide consulting services covering their entire asset portfolio, including inheritance-related matters to help build long-term relationships. Not all of the funds will remain as deposits, of course. Some will move into investment products, while some will remain on deposit. We would like to establish that kind of stable relationship. Our deposit share with Gunma Prefecture is currently in the 30% range, slightly below 40%. This means there are still substantial deposits in the prefecture that we do not yet hold. In addition, other financial institutions in the prefecture generally have relatively low loan-to-deposit ratios. From that perspective, we believe there is still meaningful potential for individual deposits to shift to us. If deposits, both corporate and individual, and lending to SMEs and individuals continue to grow in a balanced manner, we believe this will lead to a healthy overall structure. Let me now cover our bond portfolio. Our bond balances have come down significantly. This portion represents government bonds, while this section shows municipal bonds. As I have mentioned before, more than half of these municipal bonds are privately placed bonds issued by the prefecture that Gunma Bank underwrites. Most of the bonds we have underwritten recently are being held to maturity, and those now account for more than half of the total. The JPY 160.3 billion shown here represents corporate bonds. Up to this point, these are domestic bonds. The pink section represents stocks. The next section is investment trusts, and the blue portion represents foreign bonds. Our yen-denominated bond position has become fairly small overall. That said, we have not yet actively rebalanced the portfolio. Yields on domestic bonds are still relatively low, so we continue to carry a certain amount of unrealized losses. As you can see, the valuation gains and losses on stocks and bonds are roughly offsetting each other. Whether these are gains or losses, they are already reflected in our capital ratios because we are regulated under international standards. So we do not see any issue from a soundness perspective. Now that interest rates have started to recover, we would like to move ahead with portfolio rebalancing. At some point, particularly for these categories, we may consider taking certain actions. However, we would first do so within the scope of our guidance, and then consider additional measures as part of the post-integration plan going forward. Last year as well, we realized a modest loss and offset it with gains on stocks. That is something we have been doing on an ongoing basis. For a significant portion of our government and corporate bonds, we also hold bear positions through investment trusts to broadly offset the risk. So we are not particularly concerned about this. Fees increased by JPY 3.7 billion, reaching a record high for the seventh consecutive year. As I mentioned earlier, non-interest business profit came to JPY 29.3 billion, bringing us close to the JPY 30 billion level. For this fiscal year, we have set an ambitious target of JPY 35 billion. We have initiatives for both corporate and individual customers. For corporate customers, in particular, the green section at the top refers to what we call the connecting process or our full-spectrum approach. This involves listening carefully to customer needs beyond financing and proposing a wide range of solutions. The blue section represents areas where we will work together with Daishi Hokuetsu Financial Group. They are particularly strong in these areas. Although the integration has not yet taken place, we have already started reviewing each other's sales and promotion frameworks, and we can see there are quite a few differences between us. This year, we want to focus on learning from them and strengthening our own capabilities so that we can begin realizing part of the synergies. More specifically, our current approach relies heavily on specialized teams at headquarters. As a result, our coverage of customer needs is still somewhat limited. In simple terms, we still do not have enough hands to fully cover the market. Going forward, we plan to gradually expand our sales structure, strengthen staffing both at headquarters and at branches, and learn from Daishi Hokuetsu Financial Group's approach, including how they manage maturities, hedge ratios, and customer negotiations. They are ahead of us in terms of execution in this area, so we see them as an important benchmark. Last year, we generated JPY 1.97 billion in this business, and our goal is to increase that to JPY 3.8 billion. As shown here, we have built a fairly strong track record in subsidy-related services. For example, there is a major program called the Large-Scale Growth Investment Subsidy, which has a subsidy cap of up to JPY 5 billion. We were able to secure projects close to that upper limit. In this program, we ranked second among regional banks, and our approval rate was a very high 75%. For the Labor-Saving Investment Subsidy program, our approval rate was 100%. These initiatives have been very well-received by our customers. Our approach to individual consulting is essentially the same as I mentioned earlier, namely a full asset approach. The bank's role is to understand the customer's overall asset situation, support inheritance-related needs, and help customers in the asset-building stage gain initial investment experience through products such as NISA and recurring investment plans. We make proposals tailored to different life events. The bank takes an overall view of the customer's assets, while the securities business focuses on proposals that appeal to affluent customers. So we differentiate the roles of the bank and the securities business. As part of this effort, we are increasingly referring affluent customers to our securities subsidiary, Gungin Securities. We are also increasing staffing there and opening offices outside Gunma Prefecture. Through these efforts, we would like to continue expanding this business. This segment generated JPY 9.5 billion previously, and we are aiming to increase that to JPY 11.4 billion. Taking all of these initiatives together, our plan for this fiscal year is to achieve the JPY 35 billion target originally set in our medium-term management plan for the fiscal year ending March 2028. In other words, we would like to achieve that target one year ahead of schedule. We have been steadily putting these measures in place, and we believe they provide a solid foundation for achieving the target. Net credit costs remain stable. On the expense side, personnel expenses increased as we implemented fairly significant wage hikes. We also increased investments in areas such as digital and AI, and we made some renewal investments in branches as well. Even so, growth in gross profit far outweighed the increase in expenses. As a result, our OHR has continued to decline. For the current fiscal year, we expect it to fall below 45% and move into the lower 40% range. Our disclosed claims ratio remains in the low 1% range. Let me now turn to our business forecast for this fiscal year. We announced a forecast for consolidated profit attributable to owners of parent of JPY 65 billion. As I mentioned earlier, our medium-term management plan had set a target of JPY 60 billion for the fiscal year ending March 2028. We now expect to reach JPY 65 billion in the fiscal year ending March 2027, which means achieving that target one year ahead of schedule. In this forecast, we expect OHR to fall below 45% to around 44%, while ROE is expected to reach approximately 10.5%. With this, I think the natural question becomes: what happens to the current medium-term management plan? In any case, from April 2027, the management integration will begin, so we will naturally formulate a new management plan for the new financial group. I will explain more about the integration later, but as part of that process, the numerical targets will probably be revised as well. A new medium-term management plan will start in April 2027, and new targets for Gunma Bank will be established as part of the new group framework. That said, the current medium-term plan is not only about financial targets. It also includes various KPI-based initiatives and action plans, and there is still a lot left to do in those areas. We expect to carry those initiatives forward and incorporate them into the new medium-term plan while continuing discussions with Daishi Hokuetsu Financial Group. Let me now discuss our capital policy. This is a chart we show every year, but I think our overall approach in this area has worked relatively well, which is reflected in these results. Our PBR has moved well above 1X and currently stands at 1.3X. ROE also reached 10%. It's hard to say whether the market is really assuming a 10% cost of capital. With a 10% ROE and a PBR of 1.3X, the market's perceived cost of capital may actually be somewhat lower than that, but this is something that changes over time, so it's difficult to say with certainty. At this point, I think we're gradually moving beyond the stage where the discussion is simply about raising PBR. Instead, we are entering a phase where we enhance corporate value through EPS growth, and I believe the overall environment is moving in that direction as well. To achieve that, of course, we need to continue increasing core business net profit. We also need to manage capital efficiency properly. Another important part of the story, in my view, is the integration. Until now, we have explained the integration mainly in terms of top-line growth and synergies, but once that element is added, the discussion changes somewhat. We are already above PBR of 1X, so the conversation is gradually shifting towards what level we can achieve from here. That is the direction we would like to move towards going forward. Let me now talk about RORA. With interest rates rising, RORA naturally moves higher as well. On this page, we break the factors down into profit margin factors and risk-weight factors. The details are fairly technical, so I would ask you to refer to the materials for more detail, but naturally, rising interest rates contribute to the profit margin side. The risk-weight side is influenced by the composition of borrower ratings. For example, if the proportion of higher-rated borrowers increases, risk-weights decline, risk-weighted assets decrease, and RORA improves. For large corporates, those ratings generally do not move that much. But in areas such as rental real estate, RORA improved from the risk-weight side because we revised the rating methodology. For unsecured loans as well, we changed the methodology used to estimate loss given default under the internal ratings-based approach. We now use internally estimated parameters, and improvements in those estimates have contributed significantly on the risk-weight side. In fact, for unsecured loans, the profit margin side has not changed very much, but the risk-weight side improved because revised calculation parameters were approved and implemented. That effectively reduces risk-weighted assets and improves RORA. We will continue these efforts and steadily move the RORA bubble chart further upward and to the right. As shown here, we have also made a number of changes with a stronger focus on profitability, particularly for large corporates and borrower ratings. From the standpoint of balancing loans and deposits, loan growth has been very strong. At the same time, the possibility of resuming full-scale bond investment is beginning to emerge. Given that, we will probably become more selective in how we allocate assets to large corporates going forward. The impact of improving parameter estimates and estimation methodologies, which I mentioned earlier, is reflected here. The same applies to deposits. Overall, we are working to embed RORA-focused management throughout the organization. This framework is led by head office, but much of the actual execution takes place at the branch level. I think the concept has become fairly well embedded across the branches. Let me now discuss shareholder returns. For the fiscal year ended March 2026, we paid an annual dividend of JPY 62 per share and also conducted a JPY 6 billion share buyback during the summer. Combined, the dividend payout ratio came to 40%, exactly in line with our commitment. Total shareholder return came to 50.1%, meaning shareholder returns were fully aligned with the framework we had previously outlined. For the current fiscal year, we have announced a dividend forecast of JPY 70 per share. This will mark the sixth consecutive year of dividend increases. We increased the dividend by JPY 17 per share for the fiscal year ended March 2026, and we are planning a further increase of JPY 8 per share for this fiscal year. Shareholder returns continue to expand steadily. Next, let me touch on shares for policy purposes. As we have explained before, our initial target was to reduce the book value of policy shareholdings by JPY 20 billion. Progress currently stands at 84%, although including agreed transactions, we have already exceeded 100%. Our next target is to reduce the ratio to below 10% by the fiscal year ending March 2028. However, because share prices of policy shareholdings themselves have risen, book value has also increased, which means we need to make additional efforts. We are preparing a new plan. Ultimately, this target will need to be achieved on an integrated group basis. Accordingly, we will continue discussions with Daishi Hokuetsu Financial Group on how to incorporate this into the new group medium-term management plan. We will also need to clearly communicate our policy to proxy advisory firms. That said, discussions with our counterparties have been progressing quite smoothly. Compared with when we first began these efforts, I feel acceptance has improved significantly. Let me now explain the management integration. I believe many of you have already reviewed the details. The new holding company will be called Gunma Niigata Financial Group Incorporated or GNFG. I personally think it's a pretty good name. The headquarters will be located in Tokyo. Mr. Ueguri, President of Daishi Hokuetsu Financial Group, will serve as Chairman, while I will serve as President and Group CEO. Please also refer to the mission, values, and vision shown here. As we have explained many times before, both banks have strong capabilities and are leading banks in their respective regions. Gunma Bank has strengths in lending, RORA, management efficiency, and capital management. Meanwhile, Daishi Hokuetsu Financial Group is one of the leading regional banking groups in non-interest income, with strong consulting capabilities, product capabilities, and advisory capabilities. In that sense, the relationship is highly complementary, and by combining these strengths, we believe both sides can further enhance earnings growth. Both banks are highly capable institutions with long histories, so how we integrate them will be extremely important. That is why the holding company will be located in Tokyo rather than in either Niigata or Gunma. The key point is here. We intend to establish a substantial headquarters function with an appropriate organization and staffing level, which we currently expect to be around 100 people. The office will be located in the Tekko Building, close to Tokyo Station. From there, we will establish the group's overall strategy and communicate those policies to the group companies, particularly the two banks. Based on those plans, both banks will conduct their operations and business activities. The board will consist of three directors from each bank, reflecting the spirit of equal partnership. In addition, outside directors will form the majority, with seven outside directors in total. Four will be nominated by Gunma Bank and three by Daishi Hokuetsu Financial Group. Because these are outside directors, we wanted to avoid having an even number, which is why the total is seven. The 13-member board will make decisions for the group going forward. This page shows the quantitative targets for the new financial group. The figures shown here are the numbers we announced in March as part of the final integration agreement for 2026. At that time, the figure here was JPY 91 billion in net profit. After closing the books, however, the actual result came in at JPY 100.9 billion. I imagine the natural question going forward will be how we intend to handle these targets. These figures are based on certain assumptions regarding balances and interest rate scenarios. It is not simply the case that the targets automatically increase because the latest results came in higher. That said, the interest rate environment has changed somewhat, and balance growth has also remained quite strong recently. Taking those factors properly into account, we would like to formulate a medium-term management plan that meets your expectations while also exploring the synergy potential in greater depth and reflecting that in the plan. At this stage, we have indicated targets of JPY 140 billion and ROE of above 10.5%. We would like to take a careful look at these targets and present a plan that we believe will meet your expectations. This is another part of the synergy story. As I mentioned earlier, Gunma Bank has its own strengths, while Daishi Hokuetsu has strengths in other areas. Once we integrate, our branch coverage broadens, our customer base expands, and our capital base also becomes larger. With that scale, we believe there will be many things we can do that would have been difficult for either side to achieve independently. For example, we should be better able to make use of our overseas business platform. Daishi Hokuetsu is also particularly strong in M&A advisory services and has built substantial experience within its region. Once integrated, we believe those capabilities can be expanded into the Kanto area, including Gunma Prefecture, and the number of transactions should increase significantly. The same applies to business matching and client referrals. We believe new opportunities can emerge in these areas as well. Both regions face a number of common structural challenges. By combining a larger capital base with expanded human resources, we believe we will be able to take on initiatives that would have been difficult to fully pursue on a standalone basis. We would also like to pursue new initiatives centered on regional development. These initiatives would help solve local issues, improve regional sustainability, and strengthen the long-term sustainability of local economies. The three themes shown here are already included in Gunma Bank's current medium-term management plan. These include business succession, fostering new industries, open innovation, and improving efficiency. Efficiency improvements are particularly important because labor shortages are becoming increasingly serious. On the lifestyle side, we also want to promote cashless services and data utilization while leveraging our trading company functions to provide customers with useful information and services. Another important area is maintaining regional infrastructure. In addition, we believe there is considerable potential in tourism and related businesses through the use of overseas expertise. Both regions have abundant natural resources, so we would like to develop those areas further by leveraging international knowledge and partnerships. This represents the second major synergy that has emerged through the integration. Through these initiatives, we aim not only to increase earnings, as shown earlier, but also to help ensure that the regions become more sustainable and continue to develop over the long term. This represents the new mission of our group going forward. We are constantly working on a variety of initiatives. As you can see here, under our pre-action initiatives, we have already been doing many things together, including joint training programs, inviting around 1,200 people to Gunma to support our volleyball team, and co-hosting Gunma Niigata Marché. Over the next year, the focus will shift more towards integration preparation work. This includes aligning internal rules and policies, as well as establishing more detailed operational procedures for how we will work together going forward. We are currently moving ahead with these kinds of practical preparations. By putting the two groups together and using the figures as of the end of March 2026, I think this gives you a rough idea of the overall scale. The market capitalization shown here is around JPY 1.2 trillion, although I believe it is already in the JPY 1.4 trillion range as of today. This will be the scale at which the new group starts. At the same time, we see this as a starting point, and we would like to continue building on this momentum going forward. That concludes my presentation.