ANNUAL REPORT 2011 for the year ended March 31, 2011

Financial Section Management's Discussion and Analysis

I. The Credit Saison Group

TOTAL OPERATING REVENUES

ToTal operaTing revenues - artwork
(Years ended March 31)

The Credit Saison Group has five business segments: Credit Service, Lease, Finance, Real Estate related and Entertainment. The Credit Service Segment is the Credit Saison Group's most important segment, and generated approximately 80% of total operating revenues in fiscal 2010.

The Credit Saison Group's operating revenues consist primarily of fees from affiliated stores generated via credit card and interest and fees from customers generated via revolving credit, cash advances, specialty loans and other transactions. Both of these are earned in our mainstay Credit Service Segment.

Operating expenses mainly comprise advertising expenses, point redemption costs, costs of uncollectible receivables, personnel expenses, fees and financial costs.

II. Analysis of Income Statements

1. Market Environment

In fiscal 2010, the Japanese economy showed signs of an upturn in business conditions, buoyed by economic stimulus measures taken by the government of Japan. However, the outlook is highly uncertain due to the yen's appreciation and weak stock markets, as well as a downturn in economic activity caused by the impact of the Great East Japan Earthquake that struck on March 11, 2011.

In the non-banking sector, many consumer finance and credit card business companies have lost commercial viability due to the tightening of regulations. Many of these companies have had no choice but to either join Japan's megabanks or delist their shares. Publicly listed companies in the non-banking sector are also finding it difficult to survive.

2. Operating Revenues

In fiscal 2010, operating revenues declined by 6.9% year on year to ¥285,713 million. During the fiscal year, the Credit Service Segment, our core segment, worked to increase shopping transaction volume by strengthening its alliance strategy. Measures included upgrading and expanding premium cards, which offer prospects for high utilization and high spending per transaction, and issuing a new affiliated card with the Wal-mart Group. The Company also worked to expand and strengthen its earnings structure. These efforts included opening the Company's Web-based shopping point site Eikyufumetsu.com to all Internet users 16 years or older. This site features "Eikyufumetsu Points," a point program allowing customers to economically save shopping points which have no expiry date. At the same time, the Company worked to boost affiliate revenue by increasing Net members through mutual exchange of customers with prominent online companies. However, cash advance revenues decreased, primarily due to the impact of total lending restrictions (caps on total borrowings from moneylenders at 1/3 of annual income). Consequently, overall operating revenues in the Credit Service Segment decreased year on year. In the Lease Segment, overall operating revenues increased, mainly due to the positive impact of the adoption of new lease accounting standards, but were partly offset by a drop in business volume as companies curtailed capital investment. Meanwhile, in the Finance Segment, overall operating revenues decreased due to a decline in the balance of real estate loans, despite higher revenues mainly from Flat 35 long-term, fixed-rate mortgage loans (the receivables of which are acquired and securitized by Japan Housing Finance Agency). In the Real Estate Related Segment and Entertainment Segment, operating revenues declined because of a drop in net sales.

3. Operating Expenses and Operating Income

The Credit Saison Group controlled advertising and personnel expenses in fiscal 2010 by implementing cost cutting measures with a priority on improving efficiency. As a result, selling, general and administrative (SG&A) expenses contracted by ¥10,547 million, or 4.3%, to ¥235,759 million. This reflected declines in major SG&A expenses: the provision for point programs was ¥13,729 million, down ¥148 million, or 1.1%, year on year; advertising expenses decreased ¥1,694 million, or 10.4% year on year, to ¥14,557 million; fees paid were down ¥1,852 million, or 3.7% year on year, to ¥47,564 million; and personnel expenses declined ¥2,342 million, or 5.2% year on year, to ¥42,767 million. The Company reduced credit costs by striving for better management of receivables. The decrease in these costs also reflected a decline in the number of claims handled by lawyers and other proxies, compared with an increase in such claims in the previous year. Financial cost decreased ¥1,800 million, or 7.4% year on year, to ¥22,577 million, on account of a reduction in interest-bearing debt. Overall, operating income for fiscal 2010 decreased by ¥8,796 million, or 24.3%, from the previous fiscal year to ¥27,377 million. Additionally, the Company sharply reduced communication costs by increasing the number of Net members who are able to check their usage statements at any time over the Internet. The Company is encouraging members to switch to these statements as a means of conserving the environment and offering better customer convenience.

4. Non-Operating Revenues and Expenses and Net Income

Non-operating revenues increased 50.2% year on year to ¥6,948 million, while non-operating expenses increased 163.4% from the previous fiscal year to ¥12,868 million. The main factor behind the changes was the Company's recording of equity in earnings of equity-method affiliated companies of ¥2,010 million and this mainly reflected an extraordinary loss of ¥9,986 million incurred due to the impact of the Great East Japan Earthquake, which struck on March 11, 2011. As a result of the above, the Credit Saison Group posted net income of ¥12,830 million.


BREAKDOWN OF SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES

  (Millions of yen)
2011 2010 % change
Cost of uncollectible receivables 66,217 67,379 (1.7)
Included in the above:      
Allowance for losses on accounts receivable 44,115 53,784 (18.0)
Losses on accounts receivable 5 0 5,980.9
Provision for losses on interest repayment 18,445 9,109 102.5
Allowance for losses on guarantees 3,651 4,486 (18.6)
SG&A expenses excluding cost of uncollectible receivables 169,540 178,925 (5.2)
Included in the above:      
Advertising expenses 14,557 16,251 (10.4)
Provision for point program 13,729 13,877 (1.1)
Personnel expenses 42,767 45,109 (5.2)
Fees paid 47,564 49,416 (3.7)
Total SG&A expenses 235,759 246,306 (4.3)
(Years ended March 31)
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