On taking office as President
I was appointed as President and Representative Director of Suruga Bank in June 2023. As Suruga Bank transitions from the phase of management reorganization and consolidation to a new phase along a path of full-scale re-growth, I am all to aware of the responsibility of taking on the top role at the Bank and at the same time, I am excited about achieving our new mid-term business plan.
However, nothing will come about simply from being excited. I would like to convey my passion to all our employees to foster a sense of enthusiasm that resonates with them, so they can then make proposals to our customers which gives them the same level of excitement. And as we place importance on such efforts, we will realize our corporate philosophy of “I’m glad you’re here... I’m glad we met.”
Looking back on the first phase of the mid-term business plan
In the first phase of the mid-term business plan, we literally “Re:Started” by revising our business model, strengthening our governance system, and thoroughly enforcing compliance. As a priority issue in particular, we dissolved our relationship with the founding family and implemented a special scheme for share house-related loans.
Under such circumstances, I believe that it was essential for our employees, especially our younger employees, to undergo the process of reaffirming their responsibilities and self-confidence by renewing the corporate philosophy from the bottom up, with the statement, “I’m glad you’re here... I’m glad we met.”
In terms of business, we have steadily solidified our footing by focusing on the retail and solution businesses. In the area of investment real estate loans, we proactively engaged in consulting with wealthy and semi-affluent customers, promoting a shift in quality to middle-risk, middle-return. Furthermore, in terms of initiatives for financial inclusion (FI), we have deepened our business, for example, by starting to provide accounts exclusively for non-Japanese customers.
We also developed new business domains, and achieved results such as growing structured finance into one of our key earnings pillars. As a result, in fiscal 2022, we were able to execute new loans equivalent to ¥236.2 billion, exceeding projected figures.
On the other hand, we regret that we did not achieve some of our KPI targets for phase 1 of the mid-term business plan. The main reason for the shortfall was that gross operating profit (top line) was lower than expected. This is partly due to the impact of the COVID-19 pandemic, which was not anticipated at the time of planning, but also due to insufficient sales activities in the first half of the first phase. However, in the second half, the pace of improvement exceeded projections, and we will continue this upward trend in the second phase.
●Committment to customer-oriented business
Before talking about phase 2 of our new mid-term business plan, I would like to summarize some of the issues we faced, such as share house-related loans.
First, the scandal itself is a problem that should never be repeated. It cannot be denied that, at the root of the matter, was an attitude of going after corporate profits and scale, and neglecting the things that should be truly important, such as trust and putting the customer first.
Companies are long-term. That is why I am committed to upholding our unwavering belief in customer-oriented business, even if it means sacrificing profits and scale in the short-term.
●From a Mt.Fuji model to a Yatsugatake model
At the turning point of the second phase, I would like to touch on the evolution of our business model. Since last year, I have been calling for a shift away from a Mt. Fuji model, a mountain with just one peak, toward a Yatsugatake type model with its many mountaintops. Investment real estate loans are one of Suruga's strengths and will continue to be the mainstay of our business. However, if we rely solely on one growth engine, there is a tendency to place too much emphasize on volume.
But if we can have multiple growth engines, we will be able to balance volume with quality. The emergence of seeds of growth in multiple areas, such as consulting in community banks, FI initiatives in direct banks, and structured finance, is a major achievement in the first phase of the mid-term business plan, and is a key stepping stone into the second phase of the plan.
Steadily changing the profit structure based on a growth model unique to Suruga
●Environmental recognition underlying plan formulation
The second phase of the mid-term business plan (FY2023-FY2025) has started from this fiscal year. In a nutshell, the positioning of this second phase is the full-scale start of Suruga's regrowth trajectory. We will leverage the foundation built in phase 1 to evolve into a growth model unique to Suruga.
I was the leader of the team that formulated the new mid-term business plan, and the most important thing I focused on when drawing up the plan was listening to our employees. It is our employees who carry out the plan. And unless they have a plan which they can apply throughout their daily work, it is meaningless. Over the course of about nine months, I had more than 50 discussions with a total of 260 employees.
Proper awareness of the environment is also vital for formulating a plan. It may sound like a cliché, but the environment surrounding bank management is becoming increasingly uncertain. For example, Japan has had a long period of low interest rates and low inflation, but it is becoming more difficult to say whether this will continue in the future. This is why I thought we needed to formulate a strategy that would allow us to stand firm even in the event of unexpected changes in the interest rate environment or economic structure.
Our corporate philosophy and vision have remained unchanged since the first phase of the mid-term business plan. To achieve our goals, the second phase of the mid-term business plan sets out three management strategies. I will now talk about the background, the issues on hand, and the details of each initiative.
●Management strategy 1: Evolving the retail and solution businesses
As a direction for the evolution of the retail and solution businesses, we have set out to create sources of differentiation founded in resolving AID (Anxiety, Inconvenience, Dissatisfaction) for our customers. Creating sources of differentiation means to look for differences rather than engaging in a war of attrition on interest rate competition.
At Suruga, we have a saying, "differentiation, not differential." The "differential" here is the interest rate differential. It is not enough to simply offer lower interest rates than our competitors. Unless we do things differently, do things that others are not, we will never realize our corporate philosophy of “I’m glad you’re here... I’m glad we met.”
Ever since joining the Bank, Suruga employees have grown up listening to this mantra, "differentiation, not differential", and they have consistently singled out the niche demands of our customers to create new financial products. In recent years we have cited examples of our FI initiatives,but “creating sources of differentiation” has continuously been passed down as part of Suruga's DNA, and I’m proud to say that this is our strength.
On the other hand we have AID, or our efforts to resolve the anxiety, inconvenience, or dissatisfaction our customers may face. For example, it is difficult for non-Japanese customers without permanent residency to get a Japanese credit card or to open a bank account. To eliminate these AID disadvantages faced by foreign customers, we have been offering since last year special accounts exclusively for non-Japanese customers and auto loans to help foreign customers buy a car or motorbike.
“Kyo-so,” meaning collaboration, dialogue, and value creation, is one of the keywords for the second phase of the mid-term business plan. In addition to our tie-up with Credit Saison, we will also take on the challenge to generate new business through collaboration with other external companies and eliminate the AID disadvantages many of our customers face in their everyday lives to epitomize our philosophy of “I’m glad you’re here... I’m glad we met.”
●Management strategy 2: Building a sustainable revenue structure
As the top line is expected to decline owing to collections on existing debts, the pressing task is to counteract this with profit growth and cost reductions in new businesses, shifting to a revenue structure that can achieve sustainable growth. If we break down Suruga's earnings structure into three elements, namely, the old portfolio1, the new portfolio2, and costs3, earnings from the old portfolio will fall in the future, but we will cover this drop by combining new portfolio growth with cost reductions. Furthermore, in the next three years, we would like to be able to offset the slump in the top line solely through growth in the new portfolio.
During the three years of the second phase of the mid-term business plan, we plan to increase core net operating profit in the new portfolio, which consists of the retail and solution businesses and the market finance business, by more than double from fiscal 2022 levels, to cover the fall in profit from the old portfolio. The key to this is the establishment of the four autonomous profit centers, the centerpiece of the second phase of the mid-term business plan.
- O l d portfolio: Earnings from loans accumulated before March 2020.
- New portfolio: Earnings from new loans and services accumulated since April 2020.
- Costs: Expenses, actual credit costs, etc.
●Management strategy 3: Risk-taking and risk diversification
As I have said, the business environment surrounding financial institutions has become increasingly uncertain, so it is vital to lead with resilience in mind. For this reason, we decided to restructure our securities portfolio in the fourth quarter of the previous fiscal year, reducing the valuation loss of 20 billion yen as of the end of December 2022 to 1.2 billion yen as of the end of March 2023.
In addition, in order to control the ratio of real estate to total assets under management at an appropriate level, we have established a new fixed upper limit in our Risk Appetite Statement (RAS). In the old portfolio, which has a relatively high share of older properties and properties located in regional areas, the ratio of single building income loans is expected to decrease from about 60% at the end of fiscal 2018 to about 30% at the end of fiscal 2025.
In addition to real estate, we will take a multifaceted view of various risk factors, including interest rate risk and liquidity risk, in an effort to diversify risks, maintaining control over the balance sheet to ensure resilience.
●Priority measures: Establishing four autonomous profit centers
In April 2023, we reorganized the conventional sales headquarters system into four autonomous profit centers, namely, community banks, direct banks, Greater Tokyo/wide-area banks, and market finance.
There are two main purposes for doing this. The first is, as mentioned above, to strike a balance between quantity and quality by having multiple growth engines. The other aim is to promote an agile response (emphasizing speed, taking on challenges, and autonomous decentralization). By the way, the word "autonomous" includes the idea that it’s OK to fail. It expresses the notion that we can learn from our mistakes and challenge ourselves again to become an organization that evolves independently.
Next, I’d like to give an overview of the business of each type of bank and headquarters.
The first bank is the community bank, a conventional regional bank model based primarily in Shizuoka and Kanagawa. Even in these uncertain and difficult times, it is because customers in the community trust Suruga, entrust us with their precious money, and allow us to give advice, that we can take on many different challenges. We have clearly set out this idea by positioning the community bank at the head of our sales division. What we need to do is simple. We will work closely with local individual and corporate customers to provide customer-oriented solutions and build long-term relationships of trust.
The second business I’d like to touch on is the direct bank, the so-called net banking model. Under the banner of an FI Innovator, we will provide digital services to customers nationwide who are not necessarily well served by financial services. Our aim is to grow our customer base and expand our lineup, including mobile banking smart accounts, and personal loans for different purposes, as well as products and services for non-Japanese customers.
The third bank, which combines loan centers and direct housing loan centers (contact centers) located in the five major metropolitan areas, is a loan center model that offers housing loans and investment real estate loans to customers across the country. We have an overwhelmingly large number of professionals who are well versed in the real estate market, allowing us to provide the very best financial solutions that meet the needs of each and every customer.
The fourth area, market finance, is business that deals with professional investors and markets. In particular, structured finance is a market which many local banks have entered and where competition is fierce, but armed with a number (one of the highest among regional banks) of qualified ARES (The Association for Real Estate Securitization) Certified Masters, we will leverage our highly skilled and knowledgeable human resources to quickly and firmly make headway.
Capital and business alliance with Credit Saison: Beyond the framework of a bank
In May 2023, we announced a capital and business alliance with major credit card company Credit Saison. The partnership has been forged with a mutual vision as both Credit Saison and Suruga Bank share the yearning to create a new business model of a Neo Finance Solution Company that combines the strengths of banks and non-banks.
The aim of this partnership with Credit Saison, a company committed to being a comprehensive living services group, is to provide customers with further solutions to eliminate more "AID" concerns by utilizing Credit Saison’s wide range of functions and seamlessly combining them with our banking functions. By creating this business model, we will be able to offer new added value not only to our customers, but also to Credit Saison's approximately 35 million cardholders.
Our immediate plans for the business alliance include the setting up of a Saison Branch by Suruga Bank and the acquisition of bank agency services by Credit Saison, as well as joint marketing of the Saison Business Platinum Card, cooperation in the housing loan business, and joint development in the real estate finance business.
In the future, we look forward to taking full advantage of both companies’ retail expertise to better understand the many different situations customers face in their lives, evolving into a Neo Finance Solution Company so that customers will say, “I’m glad you’re here... I’m glad we met.”
In full alignment with stakeholders
As a priority measure in the second phase of the mid-term business plan, we have set out to fully align with all our stakeholders, from our shareholders and employees to wider society.
In looking at our employees first of all, in last year's integrated report I talked about the strengths of Suruga Bank's employees, about their ability to identify niche areas for customers’ needs, their speed (being agile) and having a sound sense of crisis management. My thoughts on these three strengths have still not changed, even now. Among these strengths, “agile” is one of the key words of the second phase of the mid-term business plan, and I feel that the behavioral style of speed, taking on challenges, and autonomous decentralization, ideas that are contained in that word, have become more and more widespread among employees.
From the perspective of human capital, we decided to introduce a stock-based compensation system for executives in April 2023, and we will continue to invest in human capital more than ever before by positioning our employees as valuable assets. One issue that needs to be resolved in the future is the increasing average age of our employees. But we will also promote initiatives to turn such challenges into opportunities, for example, by expanding the Meister System so that older employees over the age of 55 can play a more active role over the long term.
It is also important for us to align ourselves squarely with society. In particular, I feel strongly that Suruga cannot survive without the trust and understanding of our local customers in Shizuoka and Kanagawa.
First, we will leverage the comprehensive strengths of the Suruga Bank Group to provide extensive management solutions for our business partners in the community. In addition, we will make every effort to support the local services industry and tourism industry through cycling projects, support education, culture, and sports for children who are the future, and work to address climate change and conserve our wealth of tourist attractions.
We established the Sustainability Promotion Committee in April 2023 to strengthen our efforts for the SDGs.
Finally, in order to align ourselves with our shareholders and investors, we established a basic policy for shareholder returns in our mid-term business plan for the first time. Our first basic policy is to maintain stable dividends, targeting a dividend payout ratio of around 30%. Also, from the perspective of both soundness and capital efficiency, we have set a capital adequacy ratio of at least 10% based on finalized Basel III reforms. Along with this, we have also presented our thoughts on share buybacks, resolving to set a buyback limit in May 2023.
The business of banking is basically a stock business. It will be three years before our current actions are reflected in earnings. I would therefore like to ask our shareholders and investors to see whether our vision, strategies, and actions are positioned in the right direction for growth in three years' time, and ask for your support from a medium- to long-term perspective.
I very much look forward to your continued understanding and further support.