J Trust 8508
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Toranomon First Garden, 1-7-12 Toranomon, Minato-Ku, Tokyo 105-0001
Summary
Active in financial, real estate, banking, and international segments. Financial is the overwhelming revenue and profits contributor, consisting mostly of credit card and other consumer finance.
Consumer Finance
Key dates
2014-01-16
Coverage initiation
Key financial data
Note: The company is applying the International Financial Reporting Standards (IFRS) from FY03/18.
Note: Year-on-year rises of over 1,000% are shown by “-”.
Note: Since FY12/19 was an irregular nine-month (April–December) fiscal year, YoY growth rates are not shown.
Note: In FY12/20, Keynote Co., Ltd. (currently Gro-Bels Co., Ltd.), J Trust Card Co., Ltd. (currently Nexus Card Co., Ltd.), JT Chinae Savings Bank Co., Ltd., Keyholder Co., Ltd., and all of its subsidiaries and affiliates were reclassified as discontinued operations. JT Savings Bank, a unit in the J Trust’s Financial Business in South Korea and Mongolia, also was designated as a discontinued operation in FY12/20; however in Q1 FY12/21 that designation was cancelled, and JT Savings Bank was reclassified as a continuing operation. Earnings results for Q1 and Q2 FY12/20 have been retroactively adjusted to reflect these changes.
Executive summary
J Trust is a financial services group operating banking and finance businesses in Asia. Since 2009, the company has expanded its business through acquisitions of domestic consumer finance and credit card companies, and in 2012 it launched a South Korean savings bank business, leveraging the expertise it had developed in Japan. In the years leading up to FY03/15 it used approximately JPY97.6bn raised in a rights offering to acquire a finance company and a savings bank in South Korea, and a commercial bank in Indonesia. In August 2019, it bought a commercial bank in Cambodia.
At its Financial Business in Japan (FY12/20: 30.2% of operating revenue), the company concentrated on growth of the consumer finance, credit card, credit guarantee, and servicer (receivables purchase and collection) businesses through FY03/15. From FY03/16 onward, after effectively exiting the unsecured consumer finance loans business, which had limited medium-term growth potential, the company has been expanding the real estate related credit guarantee business and the servicer business, and logging stable profit.
The company’s Financial Business in South Korea and Mongolia (FY12/20: 17.0% of operating revenue) is comprised of a capital business (leasing and installment payments) and a servicer business. J Trust launched its consumer finance business in South Korea in 2009. In 2012 it acquired a savings bank license in South Korea and entered the industry with the launch of JT Chinae Savings Bank (mainly providing loans to individuals and business owners and business loans to companies) and from FY03/13 to FY03/15 it grew loan balances in the savings bank business primarily through M&A. It developed comprehensive financial services in South Korea, but in FY12/20 it sold JT Chinae Savings Bank and entered into an agreement to sell its shares in JT Savings Bank. The agreement to sell JT Savings Bank ended up being canceled in March 2021 due to regulatory issues but the following month J Trust reached a basic agreement to sell not only JT Savings Bank but JT Capital as well.
The company’s Financial Business in Southeast Asia (FY12/20: 48.0% of operating revenue) includes banks in Indonesia and Cambodia. In Indonesia, the company acquired Bank Mutiara in November 2014, renaming it PT Bank JTrust Indonesia Tbk. J Trust moved to bolster the bank’s reserves in FY03/19 in preparation for the write-off of all non-performing loans and also began implementing new lending and credit screening procedures so as to put the bank’s loan portfolio on a firmer financial footing. The company’s efforts to move its Indonesian bank’s operations into the black were dealt a setback by the advent of the COVID-19 pandemic in February 2020, however, and the company now sees more time being needed to make this happen amid the current operating environment. Elsewhere in Southeast Asia, the company acquired a majority stake in ANZ Royal Bank (Cambodia) Ltd. in August 2019, making the Cambodian commercial bank a consolidated subsidiary and changing its name to JTrust Royal Bank. The company is putting in place new measures to attract more small deposits and build up its commercial loan portfolio.
The company has been clearly reordering its business portfolio since Q3 FY12/20. At its Financial Business in South Korea, it sold JT Chinae Savings Bank (currently Nexus Bank Co., Ltd.) to SAMURAI&J PARTNERS and entered into an agreement to sell JT Capital and JT Savings Bank to South Korea’s VI Investment Corporation. In addition to selling consolidated subsidiary Keynote, KeyHolder and its subsidiaries are no longer consolidated. Due to this concerted restructuring, from FY12/21 onward, the company’s core businesses will be credit guarantee and receivables collection operations in Japan and banking in Southeast Asia.
Trends and outlook
FY12/20 results: For FY12/20, the company reported full-year consolidated operating revenue of JPY32.7bn (JPY24.7bn in FY03/19), an operating loss of JPY4.8bn (versus loss of JPY5.1bn in FY03/19), a pre-tax loss of JPY3.0bn (versus loss of JPY5.5bn in FY03/19), and a loss attributable to owners of parent of JPY5.3bn (versus a loss of JPY3.3bn in FY03/19). (Note: All pre-tax figures exclude results from discontinued operations, including Keynote, J Trust Card, and JT Chinae Savings Bank, JT Savings Bank, and KeyHolder [including its subsidiaries].)
FY12/21 forecast (revised as of May 13, 2021): The company forecasts full-year consolidated operating revenue of JPY42.1bn, operating profit of JPY5.5bn, pre-tax profit of JPY8.3bn, and profit attributable to owners of parent of JPY2.0bn. The upward revision to its estimate for operating revenue reflects the boost from the addition of JT Savings Bank, which it will now treat as a continuing operation; offsetting this in part is the dropout of JT Capital, which it will now treat as a discontinued operation and excluded from consolidated accounts. Compared with its initial estimates, the company also hiked its full-year estimates for operating profit and profit attributable to owners of parent; the upward revisions here reflect the addition to earnings (booked under other income) in Q2 expected after prevailing in Singapore courts in lawsuits and being awarded partial settlements of USD17.0mn (roughly JPY1.9bn) and USD7.2mn (about JPY786mn).
Strengths and weaknesses
Shared Research views J Trust’s strengths as its ability to proactively develop finance businesses in Asia based on its expertise accumulated in Japan, its purchasing ability, and the management’s business execution skills. Its weaknesses are that it is easily affected by regulation, its rapid growth entails the risk of personnel shortages, and it has lost sources of stable earnings with the sale of its savings banks in South Korea. (See Strengths and weaknesses section for further details.)
Recent updates
Cancellation of transfer of specified subsidiary JT Savings Bank Co., Ltd.
J Trust Co., Ltd. announced the cancellation of the transfer of specified subsidiary JT Savings Bank Co., Ltd.
In a press release dated April 5, 2021, “Notice regarding the transfer of specified subsidiaries JT Capital and JT Savings Bank and extraordinary gains from the transfer,” the company announced that it would transfer all shares in consolidated subsidiary JT Savings Bank to VI Investment Corporation or a transferee to whom the transfer and assignment of positions, rights, and obligations as set out in the memorandum of understanding with VI Investment are approved by the company.
Under the memorandum of understanding and agreement to extend the transaction period, the deadline for the conclusion of the share purchase agreement was set as November 30, 2021. However, because the deadline was reached without agreement on contract terms between the company and the transferee, the company said it would cancel the share transfer.
Trends and outlook
Quarterly trends and results
Note: In FY12/20, Keynote Co., Ltd. (currently Gro-Bels Co., Ltd.), J Trust Card Co., Ltd. (currently Nexus Card Co., Ltd.), JT Chinae Savings Bank Co., Ltd., Keyholder Co., Ltd., and all of its subsidiaries and affiliates were reclassified as discontinued operations. JT Savings Bank, a unit in the J Trust’s Financial Business in South Korea and Mongolia, also was designated as a discontinued operation in FY12/20; however in Q1 FY12/21 that designation was cancelled, and JT Savings Bank was reclassified as a continuing operation. Earnings results for Q1 and Q2 FY12/20 have been retroactively adjusted to reflect these changes.
Note: In FY12/20, Keynote Co., Ltd. (currently Gro-Bels Co., Ltd.), J Trust Card Co., Ltd. (currently Nexus Card Co., Ltd.), JT Chinae Savings Bank Co., Ltd., Keyholder Co., Ltd., and all of its subsidiaries and affiliates were reclassified as discontinued operations. JT Savings Bank, a unit in the J Trust’s Financial Business in South Korea and Mongolia, also was designated as a discontinued operation in FY12/20; however in Q1 FY12/21 that designation was cancelled, and JT Savings Bank was reclassified as a continuing operation. Earnings results for Q1 and Q2 FY12/20 have been retroactively adjusted to reflect these changes.
Cumulative Q3 FY12/21 results
Overview
Key takeaways from the latest earnings report:
Operating revenue was up JPY1.6bn YoY, breaking down into a JPY1.7bn increase in the Financial Business in South Korea and Mongolia and a JPY53mn increase in the Financial Business in Southeast Asia, offset against a decrease of JPY23mn in the Financial Business in Japan and a decrease of JPY173mn in the Investment Business.
Operating profit grew JPY9.1bn YoY, with profit in the Investment Business up JPY7.3bn, the Financial Business in South Korea and Mongolia up JPY825mn, the Financial Business in Southeast Asia up JPY1.3bn, and the Financial Business in Japan up JPY202mn.
Company left its full-year forecast for FY12/21 unchanged.
Results by segment
Financial Business in Japan
The Financial Business in Japan reported operating revenue of JPY6.9bn and segment profit of JPY3.6bn. While collections on purchased receivables increased, commission income from providing credit guarantees fell due to a decline in outstanding balance of condominium and installment loan guarantees.
Financial Business in South Korea and Mongolia
The Financial Business in South Korea and Mongolia reported operating revenue of JPY11.0bn and segment profit of JPY2.8bn. Interest income and unrealized gains on securities in the savings bank business increased.
Financial Business in Southeast Asia
The Financial Business in Southeast Asia reported operating revenue of JPY12.0bn and a segment loss of JPY3.0bn. Interest expenses on deposits went up as a result of a rise in bank deposit balances, whereas operating expenses turned down in reaction to booking a loss on the sale of securities a year earlier. The segment loss narrowed YoY as a result of drawing down reserves for losses on litigation following progress of a lawsuit in Southeast Asia.
Investment
The Investment Business reported operating revenue of JPY409mn and segment profit ofJPY6.0bn . Its main focus now is the collection of receivables from Group Lease PCL. Although litigation-related expenses grew, segment profit increased YoY as a result of winning a partial settlement of lawsuits filed by the company against Group Lease PCL in Singapore.
Other businesses
The Other businesses reported Q3 operating revenue of JPY299mn and a segment loss of JPY22mn.
Company forecast for FY12/21 and medium-term outlook
Quantitative targets
Along with its Q1 FY12/21 results announcement on May 13, 2021, the company issued a revised forecast for the full year. Under its revised forecast, the company projects full-year consolidated operating revenue of JPY42.1bn, operating profit of JPY5.5bn, pre-tax profit of JPY8.3bn, and profit attributable to owners of parent of JPY2.0bn.
The upward revision in the company’s outlook for operating revenue reflects the boost from the addition of JT Savings Bank, which it will now treat as a continuing operation; offsetting this in part is the dropout of JT Capital, which it will now treat as a discontinued operation and therefore excluding from consolidated accounts. Compared with its initial estimates, the company also hiked its full-year estimates for operating profit and profit attributable to owners of parent; the sharp upward revisions here mainly reflect the addition to earnings (booked under “other income”) in Q2 after prevailing in Singapore courts in its lawsuits and being awarded partial settlements of USD17.0mn (roughly JPY1.9bn) and USD7.2mn (about JPY786mn) (the partial payment actually received during 1H FY12/21 was JPY6.6bn) The company plans to book additional payments of USD1.2mn and USD10.0mn received respectively on July 9 and July 19 on its Q3 accounts.
Addition of JT Savings Bank to consolidated accounts
With regard to its inclusion of JT Savings Bank in its consolidated accounts in FY12/21, the company said that it had originally planned to treat JT Savings Bank as a discontinued operation for purposes of its full-year forecast because it had signed a share transfer agreement to sell its holdings in JT Savings Bank to VI Investment Corporation. However, because the agreement was terminated when VI Investment failed to get the approval of the South Korean Financial Services Commission. VI Investment has since reapplied for approval from the South Korean authorities, but J Trust has decided to treat JT Savings Bank as an continuing operation as it does not think the share transfer is likely to be completed within FY12/21.
J Trust has said that it will reclassify JT Savings Bank as a discontinued operation once it judges the share transfer will become more certain, such as when the deal gains the approval of the South Korean Financial Services Commission.
(For further details, see press releases regarding JT Savings Bank dated October 29, 2020; March 31, 2021; and April 5, 2021).
Treatment of JT Capital as discontinued business
At the time of initial forecast for FY12/21, the company’s board of directors had approved the sale of its stake in JT Capital to VI Investment Corporation. Accordingly, the company planned to treat JT Capital as a discontinued operation and book profit/loss from the sale once it received approval from the South Korean Financial Services Commission.
(For further details, see press release regarding JY Capital and JT Savings Bank dated April 5, 2021.)
Company segment forecasts
Financial Business in Japan
The company forecasts lower operating revenue and profit. It assumes that the credit guarantee balance will be flat YoY. The company expects a decline in revenue due to a change in the asset mix for credit guarantees, as an increasing number of guarantee business projects are low-fee guarantees on condo loans and crowdfunding products.
Financial Business in Southeast Asia
Loans by the banking business consist of the loans recorded for JT Chinae Savings Bank and JT Savings Bank (savings bank operations in South Korea), for PT Bank JTrust Indonesia (banking operations in Indonesia) and JTrust Royal Bank.
Financial Business in South Korea and Mongolia
The company’s initial estimates for the segment performance called for declines in both operating revenue and earnings following the planned sale of its savings banks business, as this would mean taking its savings banks business out of consolidated results and reclassifying it as discontinued operations, leaving only JT Capital and TA Asset Management as its source of revenue during the year. In this relation, the company noted that TA Asset Management saw a decline in operating revenue in FY12/20 following the dropout of large gains on the sale of non-performing receivables booked in FY12/19, and that the leasing business operated by JT Capital could not be expected to generate the same level of earnings as before owing to the rising costs of funding as a non-bank.
In contrast, under the company’s revised forecast, it will be JT Capital that is moved to the discontinued operations column and JT Savings Bank that will remain a continuing business and add to operating revenue.
Investment business
The company’s forecast called for a segment operating profit of JPY2.6bn, this amount including the receipt of USD37.0mn (JPY3.9bn converted at JPY104.5/USD) as partial proceeds following a ruling by the Supreme Court of Singapore concerning litigation filed by consolidated subsidiary J Trust Asia. With the segment having already booked operating profit of JPY3.0bn in Q1, the company raised its outlook for full-year segment operating profit to JPY5.3bn. However, the company received additional partial payments from Group Lease Holdings of USD17.0mn on April 7, USD7.2mn on April 29, and USD1.3mn on May 14, pushing the investment business’ 1H operating profit to JPY5.4bn, above the revised full-year forecast for JPY5.3bn.
Medium-term outlook
A recovery in the company’s earnings hinges on the revitalization of the Southeast Asia business. The company has a target for returning the Indonesian financial business to profitability in FY12/22.
Shared Research thinks that the key issue the company faces is how to grow its financial business in Japan as there are no prospects for booking revenue from its previous core earnings source, the savings bank business in South Korea.
Business description
Company Overview
J Trust got its start in business finance and is now the holding company for a group of companies involved in banking and finance businesses in Asia. It has four segments: Financial Business in Japan (credit guarantees and receivables collection); Financial Business in South Korea and Mongolia (banking, leasing, installment loans, and receivables collection), Financial Business in Southeast Asia (banking, finance, and receivables collection), and Investment (mainly through J Trust Asia). The company is in the midst of realigning its business portfolio. Following business restructuring in FY12/20, the Real Estate and General Entertainment businesses are no longer consolidated, and the company plans to exit the banking business in South Korea.
J Trust grew its business from 2009 onward with acquisitions of consumer finance and credit card companies in Japan. In 2012 it launched a savings bank business in South Korea using expertise acquired in Japan. In the years leading up to 2015 it used approximately JPY97.6bn raised in a rights offering, to buy finance and savings bank companies in South Korea and a commercial bank in Indonesia through 2015. In FY12/20, it sold J Trust Card (parent of JT Chinae Savings Bank) to SAMURAI&J PARTNERS (currently Nexus Bank). Although the exact date has yet to be decided, the company plans to sell all of its shares in JT Capital and JT Savings Bank to VI Investment Corporation,
J Trust has the following segment and business classifications, which serve as the basis for information disclosure: Financial Business in Japan, Financial Business in South Korea and Mongolia, Financial Business in Southeast Asia, Investment, and Other. The company’s primary businesses are the Financial Business in Japan, the Financial Business in South Korea and Mongolia, and the Financial Business in Southeast Asia.
The company restructured its business portfolio in FY12/20. It reclassified the following businesses as discontinued operations: Keynote’s real estate brokerage business (Real Estate segment), commercial construction business and KeyHolder’s real estate asset business (Other), J Trust Card’s credit card and consumer credit services (Financial Business in Japan), JT Chinae Savings Bank and JT Savings Bank (Financial Business in South Korea and Mongolia), and the KeyHolder group’s General Entertainment business. With the discontinuation of these operations, the company brought the number of its reporting segments down from six at end-1H FY12/20 to four by the end of the year.
Note: Since FY12/19 was an irregular nine-month (April–December) fiscal year, YoY growth rates are not shown.
Note: In FY12/20, the Real Estate and General Entertainment segments were classified as discontinued operations, so FY12/19 figures have been adjusted to exclude these. Revenue shares are calculated using total operating revenue before adjustments.
Financial Business in Japan (share of operating revenue: 30.2%)
The Financial Business in Japan is comprised mainly of the credit guarantee and servicer businesses, and its key subsidiaries are Nihon Hoshou and Partir Servicer. The former provides credit guarantee services, while the latter engages in receivables collection.
Credit guarantee
In the credit guarantee business, when a borrower is unable to or has difficulties repaying a loan, the guarantee company pays the bank in lieu of the borrower. When a borrower is unable to pay off a loan, Nihon Hoshou pays off the loan to the loan provider, and that loan amount becomes a cost to Nihon Hoshou.
The company carries on this business through its consolidated subsidiary Nihon Hoshou. As of end-December 2020, Nihon Hoshou had tie-ups with the following financial institutions in the credit guarantee business: Ehime Bank, Kagawa Bank, Tokushima Taisho Bank, Kawasaki Shinkin Bank, Kinki Sangyo Credit Union, Seikyo Shinkumi, Saikyo Bank, Shonan Shinkin Bank, Tokyo Star Bank, and SBJ Bank.
A financial guarantee contract is initially recognized at fair value and booked under trade and other liabilities in the consolidated statement of financial position.
Note: The guarantee fee ratio = guarantee commission received / credit guarantee balance (average of the start and end of the fiscal year).
Through FY03/14 Nihon Hoshou’s guarantees outstanding rose as the number of alliance banks increased and guarantee commissions received also grew. In FY03/15, the credit guarantee balance fell temporarily, because the transfer of the KC Card brand (in January 2015) included the credit guarantee business, which reduced the number of local financial institutions that were partners in the credit guarantee business by six. However, Nihon Hoshou has since gotten the portfolio of loans on which it has provided credit guarantees back on a stable footing with the aid of addition of new types of credit guarantee products.
Background to loan guarantee business
Nihon Hoshou intends to partner with more banks and build up its credit guarantee balance, the bulk of which is for condominium loans. The interest rate on condominium loans tends to be lower than on consumer loans, and Nihon Hoshou’s income is only around 1% of loan amounts. But this business has potential for medium term growth because contracts are large at around JPY95–100mn per contract—compared with JPY500,000 for consumer loans—meaning the loan balance is easy to grow. Furthermore, they are secured and write-off risks are limited. Note that Nihon Hoshou has managed to maintain its occupancy rate above 98% due to careful selection of property areas (98% occupancy in Tokyo, Nagoya, Osaka, and Fukuoka), choosing buildings that are only a 10-minute walk from the nearest station, and strict selection of housing manufacturers that provide adequate property management and repair services. However, as screening criteria of financial institutions are becoming stricter, the company is diversifying its credit guarantee products to include guarantees for overseas real estate-backed loans and reverse mortgages targeting wealthy borrowers.
New initiatives in the credit guarantee business
In March 2019, J Trust, and its consolidated subsidiary, Nihon Hoshou, announced the formation of a business alliance with SAMURAI&J PARTNERS Co., Ltd. (JASDAQ 4764, currently Nexus Bank). The purpose of the alliance is to jointly conduct product structuring, promotions and credit guarantee services in the crowdfunding market. In addition to the development of new credit guarantee products, it seems the companies will look to increase partnerships with peer-to-peer lending companies in the growing crowdfunding market. As of end-December 2020, the cumulative balance of crowdfunding guarantees was JPY3.1bn.
In June 2020, Nihon Hoshou launched an alliance with Campfire offering guarantee services for crowdfunding loans to business operators. The parties have agreed to provide guarantee contracts on loans to business operators who meet screening criteria.
Servicer business
The servicer business came into being in 1999 to deal with bad debts held by financial institutions under the Act on Special Measures Concerning Claim Management and Collection Businesses. Within Financial Business in Japan, Partir Servicer is the main company involved in receivables collection.
The servicer (receivables collection) business involves managing and recovering “specific monetary debts” either on behalf of a financial institution or transferred from one. Specified monetary debts are those based on guarantee contracts or loan receivables, leasing and credit card receivables owed to a financial institution and those belonging to an entity in the midst of legal bankruptcy proceedings. Servicers buy non-performing loans (NPLs) from financial institutions at a discount to fully claimable amounts. The purchased debts are accounted for at book value as purchased receivables under current assets.
Money recovered from debtors is the company’s revenue and accounted for as collection of purchased receivables, loan interest income, and gains on the book value adjustments of purchased receivables in the income statement. Operating expenses in this business are recorded as receivable purchase costs, because they refer to the price required to acquire the receivables (the amortized cost method is used for receivables with which it is possible to estimate future cash flows).
J Trust’s strengths lie in its ability to collect debts owed by individuals. Further, the company says that its ability to analyze collection gives it a competitive advantage when bidding. J Trust said that it has been able to blend the expertise gained by its past acquisitions of a variety of companies which enables it to have a high collection rate.
Gains from recovering written-off NPLs
In Japanese accounting standards, gains from recovering written-off NPLs reflect revenue from collection of NPLs—purchased receivables assumed by Nihon Hoshou from defunct Takefuji—that have already been written off the balance sheet. Written-off NPLs have no book value, so recovery implies zero-cost profits. Through use of its proprietary expertise, the company is making progress in recoveries. Under current IFRS standards, the book value is calculated based on estimated cash flows and recorded as purchased receivables in the statement of financial position, and revenue is recorded as interest income.
As of end-FY12/20, the off-balance sheet loan balance (claimable loans) assumed from the former Takefuji Corp amounted to approximately JPY130.0bn. The average amount recovered on a monthly basis appears to exceed JPY200mn.
Financial Business in South Korea and Mongolia (share of operating revenue: 17.0%)
This segment was previously made up of three businesses: the savings bank business (JT Chinae Savings Bank and JT Savings Bank), the capital business which is part of the specialty finance industry (JT Capital), and the receivables collection business (TA Asset Management). In FY12/20, the company sold J Trust Card (parent of JT Chinae Savings Bank) to SAMURAI&J PARTNERS (currently Nexus Bank). In FY12/21, plans call for selling off both JT Capital and JT Savings Bank. If the planned sales go through, the only business the company will have left in South Korea will be the receivables collection business operated by TA Asset Management.
Providers of consumer loans in South Korea
Three groups provide consumer loans in South Korea. The first tier comprises banks; the second tier is non-bank deposit taking institutions, specialist credit companies and others); the third tier is money lending organizations.
Note: Regulated financial institutions are those under the direct control and supervision of, and licensed by, South Korean regulators.
Note: The above are not legal classifications criteria but are conventions used in the South Korean society.
The banks target creditworthy customers; the non-banks target both creditworthy customers and those needing finance in an emergency; the money lending companies target those with poor credit ratings. As detailed above, customers are given a personal credit rating according to their creditworthiness. Capital companies’ customers mainly range from grade 1 to grade 4, savings banks’ customers from grade 5 to grade 9, and the money lenders’ customers from grade 7 to grade 9.
Interest rates are regulated under the Lending Business Law and apply to all credit providers. The interest rate ceiling was lowered from 49.0% to 44.0% in July 2010, to 39.0% in June 2011, and to 34.9% in April 2014. It was lowered again to 27.9% in March 2016, to 24.0% in February 2018, and to 20.0% on July 7, 2021.
Mutual savings banks
Mutual savings banks are small financial institutions serving SMEs and providing home loans in various regions.
Japanese companies first entered the South Korean mutual savings bank market in 2010. That year Orix group (TSE1: 8591) bought Pureun 2 Mutual Savings Bank, and launched Orix Mutual Savings Bank. In 2012, J Trust took over part of the assets and liabilities from Mirae Bank, which had ceased operations. Also in 2012, through a take-up of new shares, SBI Holdings (TSE1: 8473) bought Hyundai Swiss Savings Bank, South Korea’s largest mutual savings bank, and made it a consolidated subsidiary.
There are major differences in how money lenders and mutual savings banks raise funds. Shared Research thinks that the mutual savings banks have a competitive edge in this respect. Money lenders in South Korea are restricted in raising funds from banks and other regulated financial institutions. They are allowed to make private placements of bonds, but public bond issuances need approval from the Financial Supervisory Service. According to J Trust, mutual savings banks can accumulate low-cost deposits, while making loans at similar interest rates to the money lenders.
Capital companies
Capital companies are one type of specialist finance company established under the specialist finance industry law and are classified as tier 2 specialist finance companies. Capital companies are those in the specialist finance industry excluding credit card companies and are involved in installment finance, leasing, and venture capital financing.
State of South-Korean regulations governing consumer lending
According to the company, South Korea first introduced restrictions on total lending volume for savings banks in 2017. Specifically, increases in consumer loan assets from end-2016 were capped at 5%. Under KGAAP, savings bank reserve ratios for loans with interest rates of 20% and above were raised by 1.5x in 2017. This has depressed profit levels.
In terms of regulatory developments from 2018, the company looks for the introduction of IFRS 9, changes in the debtor rehabilitation receivables framework, a lowering of the maximum interest rate, and an increase in the doubtful account reserve ratio for delinquent loans (impact under KGAAP).
IFRS 9: Consumer loan providers such as savings banks and capital companies have thus far calculated their reserves based on historical credit loss rates. After the introduction of IFRS 9, such companies will need to accumulate reserves that also factor in projections for future credit loss. This is expected to increase reserves.
Changes in debtor rehabilitation receivables framework: The repayment period for receivables that have gone through debtor rehabilitation proceedings may be shortened from the original five years to three years, and the average reduction rate may be raised from the past level of around 30% to a maximum of 60%.
Maximum interest rate: In February 2018, the maximum interest rate was lowered from 27.9% to 24.0%. South Korean President Moon has publicly promised to lower it to 20.0% during his term in office.
Increase in the doubtful account reserve ratio for delinquent loans: The company says the ratio will gradually increase over three years based on the classification of delinquent loan. Under KGAAP, for normal receivables, the ratio will go up from the current 0.5% to a maximum of 1.5%; for questionable loans, the ratio will rise from the current 2% to a maximum of 15%.
J Trust’s consumer finance operations in Japan have faced an environment of tightening regulations such as lower maximum interest rates and the introduction of caps on total lending volume from the late 2000s, and the company has thus accumulated experience in this area. It therefore believes it can implement flexible policies to adapt to the tightening regulatory framework for consumer lending in South Korea. Specific measures accompanying changes to the company’s loan portfolio in FY03/18 included the lowering of the weighting of loans with interest rates of 20% and above, and a reduction in loan interest rates. Consequently, loan balance increased due to a shift in the company’s loan portfolio from consumer to corporate loans amid a tightening of restrictions on consumer loan balances by regulatory authorities.
JT Capital
JT Capital (formerly Standard Chartered Capital), established in 2007, operates a leasing business. As of end-December 2020, it had total assets of JPY52.3bn (-16.7% YoY), operating loans of JPY39.9bn (-26.1% YoY), and finance leases of JPY5.8bn (+29.9% YoY). Because it is a non-bank, funding costs are high, and OPM is just 3.3%.
TA Asset Management
Establishment of loan servicing business
J Trust purchased South Korean consumer finance company Neoline Credit in 2011, and in March 2014 it bought South Korean loan companies KJI Consumer Finance LLC (currently TA Asset Management LLC) and HICAPITAL Co., Ltd. In August 2014, J Trust transferred its loan businesses operated by KJI, HICAPITAL, and Neoline Credit to Chinae Savings Bank. After the business transfer, KJI, HICAPITAL, and Neoline Credit began operating as TA Asset Management, with the organization specializing in purchasing and recovering NPLs.
TA Asset Management earnings
TA Asset Management’s claimable loan balance was JPY29.0bn at end-FY03/19, and declined to JPY3.3bn by end-December 2019, because the company sold JPY26.4bn worth of claimable loans on market. We understand that purchase prices on South Korea’s secondary market for NPLs rose strongly and the company booked gains of JPY1.8bn on the sale. As of end-December 2020, the balance of purchased receivables was JPY2.1bn.
TA Asset Management’s operating revenue comes from interest on loans, gains on the book value adjustments of purchased receivables, gains on recovering written-off NPLs, and other operating revenue. In FY03/18, TA Asset Management’s main revenue source was interest on loans, which is generated when the company recovers purchased NPLs, and gains on the book value adjustments.
Reference: JT Savings Bank
In FY12/20, the company sold JT Chinae Savings Bank and entered into a basic agreement to sell its holdings in JT Savings Bank to South Korea-based VI Investment Corporation. However, after failing to obtain the necessary approval for the sale from South Korean regulators, the date set for closure of the sale of JT Savings Bank in the original agreement has passed and the company was forced to start the process over again. If regulatory approval of the sale is not forthcoming this time around, JT Savings Bank, which generated operating profit of JPY2.7bn in FY12/20 (assuming an exchange rate of KRW/JPY0.0952) might stay on the company’s books as a continuing operation for purposes of calculating consolidated results for FY12/21.
Financial Business in Southeast Asia (share of operating revenue: 48.0%)
In Indonesia, J Trust operates PT Bank JTrust Indonesia Tbk. (the former PT Bank Mutiara Tbk.; BJI), a commercial bank; PT JTrust Investments Indonesia (JTII), which is involved in collections of NPLs; and PT JTrust Olympindo Multi Finance (JTO), which conducts financing services. The company is following its South Korean structure in Indonesia with a three-pronged business structure of banking, receivables collections, and financing. In August 2019, the company purchased 55% of the shares of ANZ Royal Bank (Cambodia) Ltd. and made it a consolidated subsidiary from August 2019. The company changed its name to JTrust Royal Bank Plc. (JTRB).
PT Bank JTrust Indonesia (BJI)
Bank Mutiara (currently PT Bank JTrust Indonesia) became a subsidiary in November 2014
In November 2014, the company acquired 99.0% of shares in Bank Mutiara Tbk. (currently PT Bank JTrust Indonesia Tbk.), an Indonesian commercial bank, and consolidated it as a subsidiary. Indonesian law dictates that foreign entities may only hold up to 40% of ownership in a commercial bank, but as a special case, J Trust has been allowed to hold up to a 100% share in PT Bank JTrust Indonesia, as the bank had been rescued by the Indonesia Deposit Insurance Corporation.
PT Bank JTrust Indonesia is an Indonesian commercial bank with a branch network of 62 branches spread across Indonesia and with total assets of about IDR13tn as of the end of March 2014 (JPY120bn; based on an exchange rate of IDR/JPY0.009 as of November 19, 2014). In November 2008, Bank Mutiara came under the control of the Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan [LPS]). Bank Mutiara restructured its operations under LPS’ supervision, and LPS began the public bidding process for the sale of all shares in Bank Mutiara in March 2014.
PT Bank JTrust Indonesia’s primary revenue source comes from interest on loans (operating revenue in the banking business). According to the company, in FY12/20, loans by the banking business were JPY51.5bn (JPY47.5bn in FY12/19, JPY63.6bn in FY03/19), and the average lending rate was 11.48%. PT Bank JTrust Indonesia worked to reform its management structure from FY03/16. Under a new management team, it aimed to increase the loan balance in a stable way by reducing low-interest and large-lot corporate loans of about JPY1.0bn, focusing on loans for consumers and loans acquired from collaborating with Fintech companies such as P2P lenders, and expanding business alliances with multi-finance companies. However, in FY03/19, the company reshuffled the management and changed its management policy following an increase in NPLs.
The main line items under operating expenses are the deposit interest rate, credit costs, and SG&A expenses. PT Bank JTrust Indonesia’s deposits were held mostly by large time deposit accounts holders, making the cost of funds relatively high. However, the company is working to decrease the average deposit interest rate by increasing the CASA ratio (ratio of current account and savings account deposits as a percentage of overall deposits).
Indonesian business environment
Indonesia is an attractive market with a population of 260mn, GDP growth rate averaging over 6% since 2010, with half of the population under 28 years old and prospects for an expanding middle class. At the same time, the country consists of a group of islands that stretch over a wide area, and 120 million Indonesians (or 46% of the total population) live in non-urban areas. Such individuals only rarely deal with financial institutions.
PT JTrust Investments Indonesia (JTII)
In June 2015, the company established PT JTrust Investments Indonesia (JTII; ownership is J Trust Asia Pte. Ltd. 84.36% and the company 14.79%). In October 2015, it purchased NPLs from PT Bank JTrust Indonesia, and dedicated itself to managing and collecting the receivables. The aim of setting up and launching operations at JTII was to get first-mover advantage with an eye on future market growth in a country where there was a dearth of specialist receivables collection companies. The company said it wanted to capitalize on profit opportunities by combining its expertise on receivables management and collection it had built up in its business in South Korea and Japan. It significantly boosted the number of employees involved in receivables management and collection from 39 at end-March 2019 to 75 at end-December 2019. Note: It is purchasing NPLs from entities other than PT Bank JTrust Indonesia. As of end-December 2020, the balance of purchased receivables outstanding at JTII was JPY25.5bn (JPY29.6bn at end-December 2019).
PT JTrust Olympindo Multi Finance (JTO)
In October 2018 the company purchased 60% of the shares in multi-finance provider Olympindo Multi Finance (currently JTO). In April that year, the company’s consolidated subsidiary J Trust Asia resolved to underwrite a third-party allocation of new shares from Olympindo Multi Finance and its owner Ang Andi Bintoro and family.
Established in 1993, Olympindo Multi Finance is a veteran of the automobile loan industry specializing in multi-finance business for used car loans. It had 40 branches nationwide in Indonesia and a broad network of financial institutions including major banks at that time. In recent years however credit risk in the automobile loan industry in Indonesia has been rising, worsening the fundraising environment for independent multi-finance companies.
However, the fundraising environment for the company’s consolidated subsidiary JTO improved with the backing of PT Bank JTrust Indonesia, and from October 2018 it started joint finance operations with PT Bank JTrust Indonesia and resumed dealings with large used car dealers, which had been on a downtrend. This led to an upturn in monthly new loan numbers and amounts for JTO. In May 2019, the company made 997 new loans and lent IDR115.4bn, 4.3x and 6.0x the respective April 2018 levels. The loan balance has also been in an uptrend since joint finance operations were launched in October 2018. The NPL ratio at JTO had risen to 2.61% before consolidation, but declined to 1.48% in May 2019. It was up to 2.70% as of December 2020, but this was still low compared with the worldwide average of 4.01%.
In addition to its mainstay business of used vehicle financing, since July 2018 the company has entered business partnerships with dealers that sell agricultural equipment brands such as Kubota, Yanmar and Kioti (Korean agricultural machinery). In January 2019, the company entered a new business alliance with PT Rutan and added the Iseki brand to its lineup.
JTO aims to increase the size and territorial coverage of its finance business by handling new products such as agricultural equipment finance and microfinance. However, in 2020, there was a temporary halt to new lending except for agricultural equipment finance and microfinance due to the coronavirus pandemic.
JTrust Royal Bank (JTRB)
In May 2018, the company decided to acquire 55.0% of total common shares issued by ANZ Royal Bank (Cambodia) Ltd. and completed the acquisition in August 2019. The bank became the company’s consolidated and specified subsidiary and changed its name to JTrust Royal Bank Plc. (JTRB) (Results consolidated from August 2019.)
At end-December 2018 the Cambodian banking market comprised 42 commercial banks and 14 specialist banks for a total of 56. It is a growth market with total assets of KHR1,397tn (KHR4,018/USD, or roughly JPY3.8tn), which saw a 20.9% increase YoY. Total assets for ANZ Royal Bank Cambodia at that time were JPY102.5bn (2.7% of total assets), ranking it No. 10 out of 56. Pre-tax profit was JPY2.9bn. It had 10 locations in the capital Phnom Penh, four in the regions, and 409 employees. JTRB has two segments: retail and corporate. Its business strategy targets the top 1% of companies in Cambodia and wealthiest 5% of the population.
Following its consolidation, J Trust plans to expand JTRB’s business strategy to encompass the middle class market, which has a larger market size and higher growth potential. It is also expanding the business further by using the JTRB’s multinational client list, and the group’s receivables collection expertise and network of Japanese companies.
As of end-December 2020, JTRB’s loan balance before consolidation adjustments was JPY69.0bn, up JPY16.4bn from JPY52.6bn in December 2019. The bank is aggressively providing secured loans to the retail sector and trade finance to companies.
The above data are before consolidation adjustments.
Strengths and weaknesses
Strengths
Ability to proactively develop business in Asia by leveraging expertise gained in Japan and South Korea:
J Trust has accumulated expertise in various aspects of the consumer finance business in Japan, including acquisitions, operations, and dealing with regulations. It also has a strong reputation in recovering receivables in South Korea. The ability to leverage such expertise in Asia is one of the company’s strengths. J Trust believes that the changes observed in the business environment for consumer lending in Japan in the 2000s will also play out in South Korea. It believes that South Korea will lower maximum interest rates, that interest rates on consumer loans will fall, and that banks will account for an increasing share of loans to consumers. In response to such changes in business conditions, the company notes that it has been able to employ a proactive business strategy offering low-interest products to quality customers ahead of its competitors based on its experience in consumer lending in Japan. Servicer business TA Asset Management in South Korea has established expertise in managing and recovering receivables, and the company has already launched a similar business in Indonesia. J Trust said it would focus on purchasing receivables from South Korean financial institutions there. Shared Research thinks that it will be able to establish a frontrunner position in the developing servicer market in Indonesia.
Purchasing ability:
The company excels in buying undervalued businesses and receivables. The company uses its proprietary knowledge and business models to collect efficiently. These qualities bear fruit in how the company recovers written-off receivables of Takefuji Corp (defunct) and credit guarantee services where the company strategically partners with banks, introducing customers and dispatching specialists. In addition, the company voluntarily adopted IFRS from Q1 FY03/18. This means it will no longer have to apply straight-line amortization of goodwill required under Japanese accounting standards for future large-scale M&A deals, although under IFRS goodwill will require review by an audit firm based on an impairment test. With the move to IFRS, the company believes there is little chance for existing goodwill particularly in the Indonesian business to negatively impact consolidated earnings for the group, provided the present management stance is maintained.
Management can execute:
Shared Research believes J Trust excels at developing businesses in new areas ahead of its rivals. Senior management led by President Fujisawa has been instrumental in this respect, exerting its market analysis and execution capabilities. Senior management led all the activities to date: launch of South Korean savings bank services (2012), rights offering (2013), and the acquisition of Indonesian commercial bank PT Bank Mutiara Tbk in 2014.
Weaknesses
Susceptible to regulation:
The company’s main businesses, its Financial Business in Japan, its Financial Business in South Korea and Mongolia, and its Financial Business in Southeast Asia, are all regulated businesses. Specifically, its Financial Business in Japan is regulated under the Moneylending Business Act and the Servicer Act, its Financial Business in South Korea and Mongolia is regulated under the Mutual Savings Bank Act, and its Southeast Asia business is regulated by capital adequacy requirements as well as other various regulations. As a result, changes in the regulatory environment can lead to fluctuations in the company’s earnings. Until FY03/14, the domestic unsecured loan business was impacted by an amendment to the Moneylending Business Act, etc., and as of September 2016 the company said it was difficult to expect growth in this business, and had effectively exited it.
Rapid growth entails risk of personnel shortages:
The company may face problems arising from personnel shortages when undertaking due diligence related to acquisitions or conducting post-acquisition operations. The company employed a large number of accounting officers in preparation of the IFRS adoption, and it is also bringing on M&A personnel and reinforcing its human resources through new hires in fields such as internal control and auditing. Despite these efforts, however, personnel shortages remain a weakness for the company.
Lost sources of stable earnings with sale of South Korean savings banks:
In December 2020, the company sold JT Chinae Savings Bank. If it also realizes its plans to sell JT Capital and JT Savings Bank sometime after the end of FY12/21, it will lose another key source of earnings.
Key group companies
J Trust has set up a holdings structure where each group company operates under J Trust. Among the group companies, JT Chinae Savings Bank and Nihon Hoshou in particular provide significant earnings contributions.
Financial Business in Japan
Nihon Hoshou (100%): Focuses on credit guarantee services, as well as receivables collection.
Partir Servicer (100%): Loan servicing (receivables collection etc.) company in the financial industry.
Financial Business in South Korea and Mongolia
JT Savings Bank (100%): Made a subsidiary in March 2015. Operates banking services, including deposits and loans.
JT Capital (100%): Made a subsidiary in March 2015. Provides financial services in South Korea such as home loans, real estate secured loans, car loans, and car leasing.
TA Asset Management (100%). Changed name from KJI Consumer Finance in April 2015. Operates receivables purchase and collection business in South Korea
J Trust Credit NBFI (100%): Made a subsidiary in May 2018. Operates finance business in Ulaanbaatar.
Financial Business in Southeast Asia
PT Bank JTrust Indonesia (92.36%): Made a subsidiary in November 2014. Offers comprehensive financial services in Indonesia including loans to SMEs and foreign-exchange business.
JTrust Royal Bank (55.00%): Made a subsidiary in August 2019. Engaged in retail and corporate business in Cambodia.
PT JTrust Investments Indonesia (99.15%): Established in June 2015. Purchases loan receivables from financial institutions and non-banks and recovers them from debtors.
Turnaround Asset Indonesia (100%): Established in May 2020. Purchases receivables primarily from South Korean financial institutions and recovers them from debtors.
PT JTrust Olympindo Multi Finance (67.90%): Subsidiary since October 2018. Engaged in financing business in Indonesia covering used car loans, agricultural equipment, and new cars.
Investment
J Trust Asia (100%): Established in October 2013. Center for Investment Business operations overseas and in the ASEAN region.
Historical performance
Consolidated results for 1H FY12/21
Overview
*Profit/loss attributable to owners of parent
In 1H FY12/21, J Trust posted operating revenue of JPY22.3bn (+3.3% YoY), operating profit of JPY7.2bn (loss of JPY1.0bn in 1H FY12/20), and a profit attributable to owners of parent of JPY3.9bn (+781.0% YoY) . Operating profit and profit attributable to owners of parent both are on pace to exceed the company’s full-year earnings forecast. However, considering the uncertainties presented by the COVID-19 pandemic and the ongoing restructuring of the company’s business portfolio, the company decided not to change its full-year forecast.
1H operating revenue increased JPY715mn YoY, breaking down into Financial Business in South Korea and Mongolia +JPY857mn, Financial Business in Japan +JPY79mn, and Other businesses +JPY35mn, offset against Financial Business in Southeast Asia -JPY189mn, and Investment Business -JPY76mn. On the profit side, 1H operating profit was up JPY8.2bn YoY, breaking down into Investment Business +6.2bn, Financial Business in South Korea and Mongolia +JPY833mn, Financial Business in Southeast Asia +JPY810mn, and Financial Business in Japan +JPY193mn. The JPY6.2bn YoY improvement in the Investment Business profits reflects the receipt of partial payments related the settlement of a lawsuit in Singapore (totaling JPY6.6bn; J Trust received a payment of USD 37mn from Group Lease Holdings Pte. Ltd. and Mitsuji Konoshita on January 11, 2021, and additional payments of USD25.5mn from Group Lease Holdings in April–May 2021).
1H pre-tax profit totaled JPY7.6bn, a YoY improvement of JPY8.6bn, which is JPY410mn more than the JPY8.2bn improvement in operating profit. This reflects the net impact from a JPY1.0bn increase in financial income, accompanied by a JPY710mn increase in financial expenses, and the posting of JPY113mn in equity-method investment gains from KeyHolder. Corporate income tax paid increased JPY3.7bn YoY, resulting in profit attributable to owners of parent of JPY3.9bn, a YoY increase of JPY3.5bn. Financial income, financial expenses, and corporate tax and other adjustments are summarized in the table below.
During 1H, the company transferred a part of its holdings in stock options for Nexus Bank. J Trust acquired the stock options when underwriting an issue by Nexus Bank via a third-party allotment on March 27, 2019. While intending to exercise these options and sell the stock under favorable conditions that contribute to increasing shareholder value, J Trust agreed to transfer part of its holdings upon receiving an offer from Otas Co., Ltd.
Results by segment
Financial Business in Japan
J Trust’s Financial Business in Japan is engaged primarily in the credit guarantee business and the receivables collection business (including Partir Servicer). The company worked to diversity its credit guarantee products, by providing credit guarantees for condominium loans, real estate secured loans, and crowdfunding loans. In 1H FY12/21, the business posted operating revenue of JPY4.6bn (+1.7% YoY) and segment profit of JPY2.4bn (+8.6% YoY).
Commission income from credit guarantees decreased owing to a decline in the outstanding balance of condominium and individual installment loan guarantees. However, collections on purchased receivables proceeded steadily, and interest income on purchased receivables increased. In addition, provision for doubtful accounts declined as a result of a review of future cash flows, resulting in an YoY rise in segment profit. As of end-1H, the balance of loans for which the company has provided guarantees totaled some JPY206.9bn (-2.0% YoY), with JPY196.5bn being secured loans and JPY10.4bn being unsecured loans. The company aims to raise its outstanding balance of loan guarantees to JPY300bn. Reflecting active buying of receivables, its portfolio of purchased receivables expanded 8.0% YoY to JPY16.5bn.
Partir Servicer has actively participated in bidding for loan receivables while many of its competitors have refrained from bidding amid the COVID-19 crisis. As a result, Partir has evidently increased the number of financial institutions with which it does business.
As for loan guarantees originated from the crowdfunding market, the company worked to bring in new guarantee business via subsidiary Nihon Hoshou, which in February 2021 offered products with credit guarantee services on Cool, a crowdfunding service for peer-to-peer lending (loans) provided by Cool Inc. and Cool Services Inc., and on Ooya.com, a crowdfunding site specialized for real estate investment operated by Gro-Bels Co., Ltd. As of July 2021, Nihon Hoshou has formed loan-type crowdfunding alliances with CAMPFIRE, Inc., and three other companies and real estate investment-type crowdfunding alliances with Gro-Bels and two other companies.
Financial Business in South Korea and Mongolia
In South Korea, the company’s operations include the savings bank business operated by JT Savings Bank, the installment loan and leasing businesses operated by JT Capital, and the non-performing receivables purchasing/collections business operated by TA Asset Management. In Mongolia, the company has a financing business operated by J Trust Credit NBFI. When making its initial forecast for FY12/21, the company originally expected to treat JT Capital as a continuing business but, with a deal to sell JT Capital now expected to close by end-August 2021 (previously June 15, 2021), its revised forecast treats JT Capital as a discontinued business. Meanwhile, the revised forecast (May 13, 2021) treats JT Savings Bank as a continuing business (the initial forecast considered JT Savings Bank as a discontinued business because it was scheduled to be sold during Q1 FY12/21). According to the company, the transfer of JT Savings Bank shares is scheduled to be concluded within three months after the transfer of JT Capital’s shares. Shared Research assumes JT Savings Bank will remain as a continuing business for the entirety of FY12/21.
The Financial Business in South Korea and Mongolia reported 1H operating revenue of JPY9.4bn and a segment profit of JPY2.2bn. The growth in operating revenue was supported by increases in interest income and unrealized gains on securities in the savings bank business, which offset a decline in interest income on operating loans of JT Capital. Loans outstanding at the banking business totaled JPY137.5bn (-50.9% YoY), the sharp decline reflecting the dropout of the loans made by JT Chinae Savings Bank, which is no longer included in consolidated accounts following its sale in Q3 FY12/20. At JT Capital, operating loans outstanding of JPY43.8bn were down 4.1% YoY, reflecting the collection of receivables and loan sales. Reflecting active buying of receivables by TA Asset Management, holdings of purchased receivables jumped 88.3% YoY to JPY1.5bn.
Financial Business in Southeast Asia
The company’s operations in Indonesia consist mainly of the banking business operated by PT Bank JTrust Indonesia (BJI), the receivables collections businesses operated by PT JTrust Investments Indonesia (JTII) and PT Turnaround Asset Indonesia (TAID), and the farm equipment financing and other financing businesses operated by PT JTrust Olympindo Multi Finance (JTO). Its operations in Cambodia consist entirely of the banking business operated by J Trust Royal Bank Plc (JTRB).
The segment reported 1H operating revenue of JPY7.8bn (-2.4% YoY). The banking business saw its interest income rise on the expansion of its loan portfolio. However, overall segment revenue fell owing to a decrease in operating loans at JTO and a decline in securities holdings at the banking business, as well as the absence of revenue booked on sales of securities holdings in 1H FY12/20. As of end-1H, loans outstanding were up 10.6% YoY to JPY58.8bn at BJI in Indonesia and 51.6% to JPY81.8bn at JTRB in Cambodia. BJI aims to improve interest income by expanding its loan portfolio while lowering deposit funding costs by increasing the ratio of small deposit accounts and acquiring new accounts. Since acquiring JTRB, J Trust has sought to shift the Cambodian bank’s core base of depositors from wealthy households to middle-income households. JTRB’s success in winning new deposit accounts has enabled it to expand its outstanding loan balance. However, the lingering impact from the cutback in issuance of new operating loans and the selloff of securities holdings by the segment’s Indonesian units in FY12/20 led to the YoY decline in 1H FY12/21 operating revenue.
JTO saw the outstanding balance of operating loans at its financing businesses contract to JPY1.6bn, a YoY decrease of JPY1.4bn (-46.6%) owing to curbs on new lending during the pandemic. JTO has instead been focusing on strengthening its receivables management and collection business and its tie-up with BJI to increase farm equipment loans, which are not affected by the coronavirus crisis. Meanwhile, JTO has reduced staff numbers by about 1,000 and is downsizing its branch network. Meanwhile, JTII’s receivables collection business continues to be affected by delays in the sale of collateralized real estate owing to the closure of land agency and registry offices in Indonesia. Under such difficult conditions, JTII continued its receivables collection efforts and managed to reduce the balance of purchased receivables outstanding as of end-1H to JPY25.9bn, a YoY decrease of JPY1.8bn (-6.5%). Meanwhile, TAID has launched a new business involving the collection of receivables on behalf of fintech companies.
J Trust’s Financial Business in Southeast Asia managed to reduce its operating loss in 1H, as it posted a loss of JPY2.1bn, down from JPY2.9bn a year earlier. Interest expenses in the segment’s banking business increased during 1H as segment banks implemented various marketing campaigns offering attractive interest rates in an effort to expand their deposit balances and secure liquidity. However, the impact of higher interest expenses was offset by the absence of the previous year’s loss on the sale of securities holdings and a reversal of reserves previously set aside for litigation losses in the wake of favorable developments in a lawsuit in Indonesia.
Investment business
J Trust’s investment business consists mainly of the investment business and investee management support business operated by J Trust Asia. However, J Trust Asia’s recent focus has been on collecting debts owed to it by Group Lease Holdings Pte. Ltd. (GLH) and its former CEO Mitsuji Konoshita. The higher 1H operating profit reflects the partial payments of damages awarded to J Trust Asia in a Singapore lawsuit against GLH and Mr. Konoshita. Based on the Singapore court’s ruling, J Trust Asia received a partial payment of USD37mn from the defendants on January 11, 2021, followed by payments from GLH of USD17mn on April 7, USD7.2mn on April 29, and USD1.3mn on May 14. The lawsuit against GLH has been a long and protracted affair but finally appears to be at the place where the company can start collecting the amounts owed.
Other businesses
Topics
Establishment of factoring company:
On August 2, 2021, J Trust established Frontier Capital Co., Ltd., to conduct a factoring business. The new subsidiary will leverage J Trust’s expertise in credit screening and receivables collection and contribute to the broadening of the group’s business platform.
Received additional partial payment of settlement awarded in Singapore lawsuit
The company has received two more partial payments related to the settlement of its lawsuit in Singapore—USD1.2mn was received on July 9 and USD10.0mn was received on July 19. The company plans to include these amounts in its 3Q FY12/21 accounts.
Consolidated results for Q1 FY12/21
*Profit/loss attributable to owners of parent
For Q1 FY12/21, the company reported consolidated operating revenue of JPY10.9bn, operating profit of JPY4.4bn, and profit attributable to owners of parent of JPY2.8bn. The JPY4.1bn jump in operating profit largely reflected a JPY4.4bn YoY increase in other income, reflecting the amounts awarded in connection with its lawsuit in Singapore courts plus reversals of amounts previously put into reserves for losses on litigation in the wake of favorable developments surrounding a lawsuit being pursed in Indonesia. Pre-tax profit of JPY6.2bn was up JPY6.0bn versus JPY219mn in Q1 FY12/20, the gains here reflecting additions from valuation gains on holdings of Nexus Bank common stock and Series A preferred shares, gains on the sale of Nexus Bank warrants (reported as “financial income”), and equity in earnings of equity-method affiliate KeyHolder.
Along with its release of Q1 results the company raised its initial outlook for FY12/21, and is now projecting full-year consolidated operating revenue of JPY42.1bn, operating profit of JPY5.5bn, pre-tax profit of JPY8.3bn, and profit attributable to owners of parent of JPY2.0bn. The upward revision to its outlook for operating revenue reflects the addition of JT Savings Bank, which is now being treated as a continuing operation; this will be offset in part by the dropout of JT Capital, which will now be treated as a discontinued operation and excluded from consolidated accounts. On the earnings front, the upward revisions to the operating profit and profit attributable to owners of parent forecasts reflect the addition to “other income” (to be booked in Q2) after prevailing in Singapore courts in lawsuits and being awarded partial settlements of USD17.0mn (roughly JPY1.9bn) and USD7.2mn (about JPY786mn).
The company also noted that both its Financial Business in Japan and Financial Business in Southeast Asia came in ahead of its initial expectations in Q1 but that the above-plan results in these areas were not counted when setting its new forecast.
Breakdown of results by segment
Financial Business in Japan
With its main businesses in credit guarantees and receivables collections, the Financial Business in Japan reported Q1 operating revenue of JPY2.2bn (-2.8% YoY) and segment operating profit of JPY1.2bn (+0.9% YoY). The company worked to diversity its credit guarantee products, by providing credit guarantees for condominium loans, real estate secured loans, and crowdfunding loans. Q1 profit growth reflected a combination of a steady stream of income from loan guarantees and additional gains stemming from reductions in provisions for doubtful accounts following a reassessment of projected cash flows from its portfolio of purchased receivables. As of end-Q1, the balance of loans for which the company has provided guarantees totaled some JPY208.2bn (-2.2% YoY), with JPY197.2bn of this being secured loans and JPY11.0bn being unsecured loans. Reflecting active buying of receivables, its portfolio of purchased receivables expanded 3.6% YoY to JPY16.1bn.
As for loan guarantees originated from the crowdfunding market, the company worked to bring in new guarantee business via subsidiary Nihon Hoshou, which in February 2021 offered products with credit guarantee services on Cool, a crowdfunding service for peer-to-peer lending (loans) provided by Cool Inc. and Cool Services Inc., and on Ooya.com, a crowdfunding site specialized for real estate investment operated by Gro-Bels Co., Ltd.
Financial Business in South Korea and Mongolia
In South Korea, the company’s operations include the savings bank business operated by JT Savings Bank, the installment loan and leasing businesses operated by JT Capital, and the non-performing receivables purchasing/collections business operated by TA Asset Management. In Mongolia, the company has a financing business operated by J Trust Credit NBFI. When making its initial forecast for FY12/21, the company originally expected to treat JT Capital as a continuing business but, with a deal to sell JT Capital now expected to close by June 15, 2021, its revised forecast treats JT Capital as a discontinued business. In contrast, the company’s initial forecast for FY12/21 treated JT Savings Bank as a discontinued business (based on expectations that it would be sold sometime during Q1) but under the revised forecast JT Savings Bank is being treated as a continuing business.
For Q1 FY12/21, the Financial Business in South Korea and Mongolia reported operating revenue of JPY4.6bn (+6.2% YoY) and operating profit of JPY1.2bn (+55.3% YoY). As of end-Q1, loans outstanding at its banking business totaled JPY136.3bn (-49.8% YoY), the sharp decline here reflecting the dropout of the loans made by JT Chinae Savings Bank, which is no longer included in consolidated accounts following its sale in Q3 FY12/20. At JT Capital, operating loans outstanding of JPY41.2bn were down 21.2% YoY. Reflecting active buying of receivables by TA Asset Management, holdings of purchased receivables jumped 113.4% YoY to JPY1.5bn.
Explaining growth in operating revenue at the segment, the company said interest income was down as a result of the drop in operating loans outstanding but that was easily offset by rising interest income at its savings bank business and valuation gains on securities holdings. On the earnings front, the strong double-digit rise (+55.4% YoY) in segment operating profit was driven by the margin improvement stemming from cuts in SG&A spending.
Financial Business in Southeast Asia
The company’s operations in Indonesia consist mainly of the banking business operated by PT Bank JTrust Indonesia, the receivables collections businesses operated by PT JTrust Investments Indonesia and PT Turnaround Asset Indonesia, and the farm equipment financing and other financing businesses operated by PT JTrust Olympindo Multi Finance. Its operations in Cambodia consist entirely of the banking business operated by J Trust Royal Bank Plc.
In Q1, the Financial Business in Southeast Asia reported operating revenue of JPY3.8bn, down 6.9% YoY. On the plus side, the segment saw interest income rise along with the expansion of its loan portfolio, but this was not enough to offset the drag from the cutbacks in operating loans in FY12/20 and the dropout of revenue booked on sales of securities holdings at this time last year.
The Q1 segment operating loss of JPY521mn represented an improvement over the loss of JPY1.2bn booked in the same quarter the previous year, with its operations in Indonesia coming in basically in line with plan and operations in Cambodia finishing ahead of plan. On the plus side, the segment benefited from the dropout of forex trading losses incurred in the same quarter last year as the Indonesian rupiah fell on foreign currency markets in the wake of the pandemic and reversals of amounts previously put into reserves for losses on litigation in the wake of favorable developments surrounding its lawsuit in Indonesia. These gains were offset in part by increases in interest paid on deposits, the Indonesian and Cambodian banks’ deposit balances having risen in response to their marketing campaign aimed at attracting new depositors by offering attractive interest rates on deposits and other concessions.
As of end-Q1, PT Bank JTrust Indonesia and J Trust Royal Bank Plc. together reported outstanding loans of some JPY138.2bn, representing a YoY increase of 33.5% (or JPY34.7bn). J Trust Royal Bank Plc. accounted for the bulk of the increase (JPY25.7bn), this reflecting the company’s successful efforts to expand the Cambodian bank’s core base of depositors from mainly wealthy households to include more middle-income households following its acquisition of the bank in 2019, with this in turn facilitating additional lending.
The financing businesses operated by PT JTrust Olympindo Multi Finance reported operating loans outstanding of JPY1.8bn, down 42.9% or JPY1.3bn YoY, the sharp drop in loans here reflecting curbs on new lending in the wake of the pandemic.
The receivables collections businesses operated by PT JTrust Investments Indonesia and PT Turnaround Asset Indonesia reported steady collections during the period and continued to grow its portfolio of purchased receivables, increasing its receivables holdings to JPY26.2bn, representing a YoY increase of 6.2% or JPY1.5bn.
Investment business
Consisting largely of the investment business and investee management support business operated by J Trust Asia, the segment reported operating revenue of JPY188mn and operating profit of JPY3.0bn. The outsized gains at the operating profit level were driven by the partial award of damages given to J Trust Asia in a lawsuit brought in Singapore courts, which easily offset the accompanying increase in litigation-related expenses. As before, J Trust Asia’s main focus remained on the collection of amount due from Group Lease PCL, where it is planning to step up efforts to collect while at the same time working to hold down legal expenses. The lawsuit against Group Lease PCL has been a long and protracted affair but finally appears to be at the place where the company can start collecting the amounts owed.
Other businesses
Consolidated results for Full-year FY12/20
*Profit/loss attributable to owners of parent
**YoY change (%) not shown due to changes in accounting periods between FY12/20 and FY12/19
In FY12/20, J Trust reported operating revenue of JPY32.7bn, operating loss of JPY4.8bn (loss of JPY5.1bn in FY12/19), and recurring loss of JPY3.0bn (loss of JPY5.5bn in FY12/19). While operating revenue at JTrust Royal Bank, acquired in August in FY12/19, made a full-year contribution, operating revenue declined overall in reaction to the recording of gains on sale of receivables following the sale of a large batch of purchased receivables in FY12/19. Operating expenses were JPY17.7bn and SG&A expenses JPY19.6bn. Expenses rose after JTrust Royal Bank was made a subsidiary.
Several one-off factors impacted the loss attributable to owners of the parent. The company recorded JPY1.9bn in valuation gains pertaining to shares of Nexus Bank and income tax expenses of JPY6.5bn due to the booking deferred tax liabilities on Nexus Bank shares. In discontinued operations it booked losses totaling JPY1.4bn due to loss of control of subsidiaries J Trust Card and JT Chinae Savings Bank.
Breakdown of results by segment is as follows. Figures for FY12/19 and FY12/20 have been adjusted to exclude results from discontinued operations, since Keynote, J Trust Card, and JT Chinae Savings Bank, JT Savings Bank, and KeyHolder (including subsidiaries) have been categorized as discontinued operations. As the discontinuation of the General Entertainment Business diminished the significance of the Real Estate Business, the latter has been moved to the Other businesses category.
Financial Business in Japan
The Financial Business in Japan, whose primary businesses are credit guarantee and receivables collection, reported operating revenue of JPY10.0bn and a segment profit of JPY4.9bn. Guarantee commission received increased. There was a steady rise in credit guarantee revenue due to an increase in the secured credit guarantee balance. At Nihon Hoshou, gains on collection of purchased receivables increased as the subsidiary made progress in collection of purchased receivables. Nihon Hoshou also had a decline in provision of allowance for doubtful accounts due to reassessment of future cash flows on purchased receivables.
Financial Business in South Korea and Mongolia
The Financial Business in South Korea and Mongolia reported operating revenue of JPY5.7bn and a segment loss of JPY330mn. The operating revenue reflects lower interest income from loans on a decline in loan amount at JT Capital. Operating revenue was down sharply compared to FY12/19, which saw gains on sale of receivables following the sale of a large batch of purchased receivables by TA Asset Management.
Financial Business in Southeast Asia
The Financial Business in Southeast Asia reported operating revenue of JPY16.0bn and a segment loss of JPY5.5bn. Operating revenue was bolstered by the full-year contribution from JTrust Royal Bank, which was added to the group as a consolidated subsidiary. Interest income grew due to growth in loans at the banking business The segment continued to post losses, attributable to the dropout of the JPY3.3bn gain posted in FY12/19 from the booking of negative goodwill in connection with its acquisition of JTrust Royal Bank. In addition, an increase in interest expenses on deposits due to persistently high deposit interest rates also exacerbated the degree of profit decline.
Investment
The Investment Business reported operating revenue of JPY953mn and a segment loss of JPY1.7bn, the smaller loss primarily reflecting reductions in litigation-related expenses in connection with lawsuits involving J Trust Asia.
Other businesses
The Other businesses reported operating revenue of JPY607mn and a segment loss of JPY161mn. In this segment, J Trust System provides systems development and computer operations for the group.
Consolidated results for cumulative Q3 FY12/20
*Profit attributable to owners of parent
**YoY change (%) not shown due to changes in the quarterly accounting periods between FY12/20 and FY12/19
In cumulative Q3 FY12/20, the company reported consolidated operating revenue of JPY38.8bn and operating loss of JPY1.2bn. It accelerated restructuring from August 2020 in the wake of the coronavirus pandemic and reduced and classified some businesses of the Real Estate Business and Financial Business in South Korea and Mongolia as discontinued operations, leading to an operating loss from continuing operations. However, it posted a profit attributable to owners of parent (which includes discontinued operations).
Business restructuring
The company significantly stepped up the pace of restructuring in Q3. In August 2020, it entered a share exchange agreement with Prospect Co., Ltd. (TSE2: 3528) under which Keynote would become a wholly owned subsidiary of Prospect. Keynote was no longer consolidated and the Real Estate Business was no longer a reporting segment.
On September 23, 2020, the company and consolidated subsidiary J Trust Card entered a share exchange agreement with SAMURAI&J PARTNERS Co., Ltd. (currently Nexus Bank Co., Ltd. (JASDAQ: 4764)) to make J Trust Card a wholly owned subsidiary of SAMURAI&J PARTNERS. The company will transfer its shares in J Trust Card (parent company of JT Chinae Savings Bank) to SAMURAI&J PARTNERS and receive preferred shares in SAMURAI&J PARTNERS. Based on the Nexus Bank share price as of November 9, 2020, the preferred shares are convertible to JPY28.9bn worth of common stock. Due to the share transfer agreement, J Trust Card and its 100% subsidiary JT Chinae Savings Bank were excluded from consolidation and classified as discontinued operations from Q3. Nexus Bank’s share price is significantly above the conversion price, so the company expects to sell the shares or book valuation gains in Q4 or beyond.
The above changes affect the following segments: Financial Business in Japan, Financial Business in South Korea and Mongolia, and Other. Adjusting FY12/19 results (irregular nine-month reporting period) to exclude discontinued operations, operating revenue was JPY37.7bn (JPY20.4bn lower than unadjusted figure) operating loss was JPY3.9bn (operating profit of JPY287mn before adjustments), and loss attributable to owners of parent was JPY3.3bn (down by JPY11mn from unadjusted figure). This was due to a decline of roughly JPY20.0bn in operating revenue for the company.
On October 29, 2020, the company announced that it had decided to transfer all shares of its consolidated subsidiary JT Savings Bank Co., Ltd. to VI Investment Corporation (headquarters: Seoul, Republic of Korea). The price is approximately JPY13.3bn (KRW146.4bn). This means that in the Financial Business in South Korea and Mongolia, the company has withdrawn from the savings bank business, so segment earnings will come from JT Capital and TA Asset Management. In cumulative Q3, JT Savings Bank booked operating revenue of JPY8.9bn, more than 20% of consolidated operating revenue of JPY38.8bn. The company planned to classify the business as discontinued operations from Q4.
The value of cash and shares from the sale of the two savings banks is roughly JPY42.1bn (JT Chinae Savings Bank: JPY28.9bn, JT Savings Bank: JPY13.2bn), significantly above the company’s market capitalization of JPY26.2bn (as of November 9, 2020). The company plans to use the funds to reduce interest-bearing debt and deploy them in group restructuring.
Meanwhile, the Financial Business in Southeast Asia continues to incur losses. In Indonesia, the banking and finance subsidiaries are not meeting operating costs. In cumulative Q3, the Financial Business in Southeast Asia posted operating revenue of JPY12.0bn, 30.9% of the consolidated total of JPY38.8bn. In Q3 FY12/19, before the restructuring, it accounted for 16.6% (JPY9.7bn of a consolidated total of JPY58.1bn in operating revenue) so the company’s dependence on the business has doubled.
Earnings overview
Operating revenue and operating expenses
In cumulative Q3 FY12/20, the company reported consolidated operating revenue of JPY38.8bn, an operating loss of JPY1.2bn, and profit attributable to owners of parent of JPY1.2bn. The company booked JPY915mn in equity-method investment profit from its holdings in Nogizaka 46 LLC and JPY237mn in gains from the loss of control in Keynote, which is now classified as discontinued operations, following a share exchange as profit. Making JTrust Royal Bank a consolidated subsidiary (nine-month contribution) was a major factor boosting operating revenue YoY. The consolidation of North River also contributed to operating revenue growth. In FY12/19, TA Asset Management in the Financial Business in South Korea and Mongolia sold a large volume of purchased receivables. This had a negative impact on operating revenue growth. The consolidation of JTrust Royal Bank and North River boosted operating expenses considerably. Reducing operating expenses was a reactionary drop-off in provisions for doubtful accounts for purchased receivables incurred in the financial business in Indonesia in FY12/19. Nihon Hoshou also booked a smaller provision for doubtful accounts.
SG&A expenses
The consolidation of JTrust Royal Bank and North River boosted expenses. M&A costs and litigation expenses were down.
Other revenue and expenses
The company booked a gain on negative goodwill due to making JTrust Royal Bank a consolidated subsidiary in FY12/19, but this factor dropped out.
Equity-method profit and losses
The company booked JPY915mn in equity-method investment profit from its holdings in equity-method affiliate Nogizaka 46 LLC upon the consolidation of North River.
Segment results
Financial Business in Japan
In cumulative Q3 FY12/20, the Financial Business in Japan, whose primary businesses are credit guarantee and receivables collection, reported operating revenue of JPY6.9bn and a segment profit of JPY3.4bn. Guarantee commission received increased steadily. At Nihon Hoshou, gains from adjustments to book value of purchased receivables decreased as the subsidiary made progress in collection of purchased receivables. (J Trust Card results excluded from Q3.)
Credit guarantee services
Nihon Hoshou provides credit guarantee services. According to monthly company data, the credit guarantee balance finished end-September 2020 at JPY210.7bn, including condominium loan guarantees of JPY155.9bn. The balance of secured loans (loans for condominiums and real estate-backed loans) was JPY197.4bn. As of end-September 2020, Nihon Hoshou partnered with the following financial institutions in the credit guarantee business: Ehime Bank, Kagawa Bank, Kawasaki Shinkin Bank, Kinki Sangyo Credit Union, Saikyo Bank, Shonan Shinkin Bank, Seikyo Shinkumi, Tokyo Star Bank, Tokushima Taisho Bank, and SBJ Bank.
Guarantees obtained through the crowdfunding market with Nexus Bank (formerly SAMURAI&J PARTNERS (JASDAQ: 4764)), business partner since March 2019, increased. The company plans to grow new guarantee businesses, modeled on the one it runs with Nexus Bank. It has already established a guarantee fund in collaboration with existing guarantee partner Camp Fire, and is in talks with multiple peer-to-peer lending companies regarding guarantee collaborations, which points to further growth in transactions. It also plans to roll out a real estate investment version of crowdfunding in accordance with the Real Estate Specified Joint Enterprise Act. This will be a real estate purchase guarantee business. The key element will be a purchase guarantee provided by the company that will leverage the ability of Nihon Hoshou to evaluate real estate, enabling investors to invest with peace of mind.
Collection of receivables
Receivables collection in Japan is mainly handled by Nihon Hoshou and Partir Servicer. In receivables collection, Partir Servicer’s NPL acquisitions trended steadily, driving an increase in the balance of receivables handled (as of end-September 2020, the claimable loan balance was JPY822.8bn). The company purchases receivables from major debt collection companies, major online credit card companies, and credit card companies affiliated with major banks. The balance also benefited from the purchase of receivables from major credit card companies in Q3 (adding roughly JPY20.0bn). In addition, the off-balance sheet claimable loans Nihon Hoshou assumed from the former Takefuji Corp was approximately JPY130bn. Including the balance of claimable loans at Partir Servicer, the total was over JPY900bn. Note that under IFRS, the claimable loans Nihon Hoshou assumed from the former Takefuji Corp are recorded as purchased receivables in the statement of financial position, and funds recovered booked as interest income on the income statement.
Financial Business in South Korea and Mongolia
In cumulative Q3 FY12/20, the Financial Business in South Korea and Mongolia reported operating revenue of JPY12.9bn (down by JPY1.8bn YoY) and a segment profit of JPY2.3bn (down by JPY1.6bn YoY; results from JT Chinae Savings Bank excluded from Q3). The operating revenue reflects a combination of higher interest income on an increase in loan amount at JT Savings Bank and lower interest income from loans on a decline in loan amount at JT Capital. Operating revenue was down sharply compared to FY12/19, which saw gains on sale of receivables following the sale of a large batch of purchased receivables by TA Asset Management. Operating profit declined on lower gains on sales of receivables.
Savings bank, installment loan business, and leasing business
As of end-September 2020, the balance of loans at JT Savings Bank was KRW1.3tn, up by KRW122.4bn from end-December 2019. However, the balance of operating loans at JT Capital at end-September 2020 was KRW438.9bn, down by KRW132.6bn from end-December 2019. The delinquency rate (loans in arrears by 90 days or more) was 2.51% at JT Savings Bank and 1.79% at JT Capital, historical lows.
Receivables collection business
Following the sale of roughly JPY26.4bn in receivables on the market in FY12/19, as of the end of December 2019, the balance of claimable loans at TA Asset Management was JPY3.3bn, versus JPY21.8bn in December 2018. It had declined to JPY780mn by end-June 2020, before rising to JPY1.9bn at end-September 2020. Due to the significant reduction in the balance of claimable loans, the company had considered purchasing receivables, and given the ongoing rise in NPL purchase prices in FY12/19, Shared Research understands that the company had been maintaining a wait-and-see approach, but it appears to have purchased some in Q3 in view of price trends.
Financial Business in Southeast Asia
In cumulative Q3 FY12/20, the Financial Business in Southeast Asia reported operating revenue of JPY12.0bn and a segment loss of JPY4.3bn. The company expected a segment loss of JPY3.4bn in its initial forecast, but losses exceeded this due to major delays in asset growth amid the pandemic. Operating revenue was bolstered by the nine-month contribution from JTrust Royal Bank, which was added to the group as a consolidated subsidiary. The losses at the segment were attributed to a combination of 1) the dropout of the gains booked in FY12/19 from the booking of negative goodwill in connection with its acquisition of JTrust Royal Bank; and 2) an increase in interest on deposits as deposit interest rates remained high.
In Indonesia, PT Bank JTrust Indonesia carries out banking business, PT JTrust Investments Indonesia collects receivables, and PT JTrust Olympindo Multi Finance finances purchases of automobiles and farming equipment. In Cambodia, JTrust Royal Bank Plc. (JTRB) started operating a banking business in August 2019.
Banking business
PT Bank JTrust Indonesia
Loans outstanding at PT Bank JTrust Indonesia had declined to JPY43.8bn at end-November 2019, but turned around from December 2019 to reach JPY47.8bn in March 2020. However, as the number of COVID-19 cases started growing in Indonesia, the country announced an effective lockdown on April 24, and the bank was forced to curtail its lending operations. Loans outstanding declined from JPY53.2bn at end-June to JPY47.9bn at end-September.
Credit quality has deteriorated. At end-December 2019 the gross NPL ratio was 1.5% (7.4% at end-September 2019, but had risen to 2.7% at end-March 2020, 4.2% at end-June 2020, and 4.4% at end-September 2020 (before consolidation adjustments, based on company materials). As of end-September 2020, loans outstanding at its banking business (aggregate of PT Bank JTrust Indonesia and JTrust Royal Bank) totaled JPY105.9bn (of which PT Bank JTrust Indonesia accounted for JPY47.9bn). Note that the company’s provision for doubtful accounts is enough to cover the outstanding NPLs on a net basis.
Once the large-scale pandemic-induced social restrictions were enforced and the Indonesian economy stalled, PT Bank JTrust Indonesia’s customers and business partners withdrew deposits in order to make payments. The balance of deposits declined from JPY112.0bn at end-March to JPY94.0bn at end-June. However, they increased to JPY98.6bn at end-September as economic activity resumed. The company has sold securities since March 2020 to ensure liquidity. The balance of securities declined from JPY33.9bn at end-March to JPY23.8bn at end-June and JPY15.7bn at end-September, or about half.
As of end-September, operating revenue was JPY6.5bn (including interest income of JPY5.6bn) and operating expenses of JPY8.3bn (including interest expenses of JPY5.9bn). The core business is still operating under negative interest spreads, and the operating loss was JPY4.3bn.
JTrust Royal Bank
JTRB has been consolidated since August 2019. The bank’s loan balance was JPY54.1bn at end-December 2019, and grew to JPY61.8bn at end-September 2020. The bank had JPY41.7bn in corporate loans and JPY20.1bn in personal loans. The NPL ratio remained low at 0.59%.
To date, the COVID-19 pandemic has had a limited impact in Cambodia. Cumulative totals as of end-March were 109 persons infected and no deaths; as of end-September, 277 infections and no deaths (source: COVID-19 Dashboard by the Center for Systems Science and Engineering at Johns Hopkins University)). However, JTrust Royal Bank had been taking a cautious stance on new lending as it carefully assessed the impact, but started building its loan book from August to boost earnings.
Finance and receivables collection businesses
PT JTrust Investments Indonesia (JTII)
The processing of PT Bank JTrust Indonesia’s NPLs mainly comprises sale of receivables to PT JTrust Investments Indonesia (JTII). The balance of purchased receivables at JTII declined from JPY29.7bn at end-December 2019 to JPY25.4bn at end-September 2020. The share of purchased receivables secured by collateral at JTII following the sale of NPLs is not disclosed. The company is starting to pass on to JTII the expertise in receivables management and collection which it has built up in Japan and South Korea. It boosted the headcount from 39 collection officers at end-March 2019 to 75 at end-December 2019. The company wants to make best use of its receivables collection expertise in the Indonesian NPL market in light of surging prices for NPLs in South Korea. In the long term, depending on economic developments, there may be a need for additional processing of purchased receivables to reflect their market value. We believe it necessary to look at both PT Bank JTrust Indonesia and JTII in order to assess the company’s progress in processing of NPLs.
PT JTrust Olympindo Multi Finance (JTO)
JTO provides loans to finance automobile and agricultural equipment purchases. Under Indonesian government-directed debt restructuring arrangements, the company collected receivables. The ratio of assets 90 days or more in arrears overall rose from 1.25% at end-December 2019 to 2.99% at end-September 2020, below the average 4.93% arrears ratio for the Indonesian multi-finance industry overall. JTO stopped making new loans other than for agricultural equipment in May 2020 as it was keeping an eye on changes to the market in the wake of the COVID-19 pandemic. The value of new monthly loans was JPY1.6bn in February 2020. JTO has kept new lending below JPY100mn since May 2020, with JPY62mn in September.
General Entertainment
In cumulative Q3 FY12/20, the General Entertainment Business reported operating revenue of JPY6.2bn and a segment loss of JPY451mn. Segment operating revenue got a boost from the addition of North River to the group, but finished even deeper in the red as this was not enough to offset the continued impact from the novel coronavirus pandemic and increases in fixed costs.
The General Entertainment segment includes allfuz Inc., which provides ad planning and development services and operates a live concerts and entertainment business; UNITED PRODUCTIONS, Inc., which operates a video production business; FA Project Inc., which provides planning, development, and production services for entertainment content; and Zest Inc., which operates a performing arts production business. North River provides a range of production services including video content and live concerts. While there are signs that some economic activities stalled during the pandemic may resume, self-restraint is still widespread. The consolidation of North River as a subsidiary boosted operating revenue, but losses widened as COVID-19 dampened revenue and increased fixed costs.
Investment
In this business, the company mainly operates the J Trust Asia investment business and provides management support to investees. In cumulative Q3 FY12/20, the Investment Business reported operating revenue of JPY731mn and a segment loss of JPY1.2bn due to litigation expenses involving J Trust Asia.
Other businesses
Other businesses primarily comprise J Trust System performing systems development and computer operations for the group. In cumulative Q3 FY12/20, the Other businesses reported operating revenue of JPY539mn and a segment loss of JPY95mn. Because Keynote is no longer a consolidated subsidiary, the real estate asset services provided by Keyholder are included in Other businesses.
Income statement
Note: Figures that exceed 1,000% YoY, are denoted by “-.”
Note: In FY03/17 IFRS results, figures down to pre-tax profit exclude results for discontinued operations (Adores, Inc).
Operating revenue and profit had maintained an uptrend until FY03/14, but over FY03/16–FY12/20, the company suffered losses.
FY03/11–FY03/14
Operating revenue increased from JPY4.9bn in FY03/09 to JPY61.9bn in FY03/14 and operating profit grew from JPY240mn to JPY13.7bn over the same period.
Up until FY03/13, business expansion was achieved through M&A centering on the Financial Business in Japan, with growth in operating revenue and profit driving consolidated earnings. While many peer companies were struggling financially due to the January 2006 ruling by the Supreme Court allowing borrowers to request the refund of interest payments, the December 2006 enactment of the amended Money Lending Business Act, the June 2010 lowering of the maximum interest rate under the Capital Subscription Law, and the introduction of limits on total volume, J Trust was aggressively pursuing M&A. Specifically, it acquired Station Finance (March 2009), Lopro Corporation (September 2010), KC Card (August 2011), and the consumer financial business of Takefuji Corp. (March 2012), which was undergoing corporate reorganization proceedings, and made these subsidiaries.
In October 2012, J Trust launched a savings bank business in South Korea and established JT Chinae Savings Bank. Owing to initial investment costs, the Financial Business in South Korea registered an operating loss in FY03/13. However, when the Financial Business in Japan saw operating revenue and profit fall in FY03/14, the Financial Business in Korea logged growth in both operating revenue and profit. As a result, consolidated operating profit reached JPY13.7bn in the same year.
FY03/11–FY12/20
In July 2013, J Trust procured funds of JPY97.6bn through a rights offering, which it used to expand its business overseas. While continuing to expand its business in South Korea through the acquisition of savings banks, it entered the Indonesian banking business in November 2014 with the acquisition of PT Bank JTrust Indonesia.
After this time, J Trust suffered repeated losses due to provisioning for doubtful accounts in South Korea and Indonesia. An operating loss was recorded in FY03/15 due to the provisioning for doubtful accounts and the processing of NPLs in South Korea. In FY03/16, despite a swing to profit in South Korea, the operating loss continued owing to the amortization of goodwill from the acquisition of PT Bank JTrust Indonesia and increasing provisions against NPLs. An operating loss was again recorded in FY03/17 (Japanese accounting standards basis) mainly due to provisions against NPLs at PT Bank JTrust Indonesia.
In FY03/18, the Investment Business posted an operating loss as a result of valuation losses, but on a consolidated basis (IFRS), the company turned an operating profit thanks to increased operating revenue at PT Bank JTrust Indonesia and a reduction in the provision for doubtful accounts. Then, in FY03/19, another operating loss of JPY32.6bn was recorded as a result of the processing of NPLs at PT Bank JTrust Indonesia and the provisions booked in the Investment Business. In the irregular nine-month fiscal year ended-December 2019, the company posted operating profit of JPY287mn.
In FY12/20, the financial business in Southeast Asia continued to post losses. Several one-off factors impacted the loss attributable to owners of the parent. Although the company booked JPY1.9bn in valuation gains on shares of Nexus Bank, it had income tax expenses of JPY6.5bn due to the booking of deferred tax liabilities on Nexus Bank shares. In discontinued operations it booked losses totaling JPY1.4bn due to loss of control of subsidiaries J Trust Card and JT Chinae Savings Bank.
Balance sheet