ANNUAL REPORT 2011 for the year ended March 31, 2011

Financial Section Management's Discussion and Analysis

III. Policy For Return To Shareholders

To raise shareholder value, Credit Saison places high importance on initiatives to reinforce our corporate structure and to continuously expand our businesses. Our fundamental policy for shareholder returns calls for steady enlargement of internal reserves to realize the initiatives described above, while delivering appropriate, stable and continuous dividend payments to our shareholders.

1. Dividend per Share

Based on its dividend policy, Credit Saison allocated annual dividends of ¥30 per share in fiscal 2010.

Operating Revenues And Operating Income By Segment

  (Millions of yen)
Operating Revenues   Operating Income (Loss)
2011 2010 % growth   2011 2010 % growth
Credit Service 230,873 250,175 (7.7)   15,973 25,627 (37.7)
Lease 14,451 12,574 14.9   5,038 2,128 136.7
Finance 15,580 16,829 (7.4)   6,796 5,011 35.6
Real Estate Related 12,322 15,021 (18.0)   (2,182) 1,825 -
Entertainment 13,940 14,648 (4.8)   1,737 1,730 0.4
Total 287,166 309,247 (7.1)   27,362 36,321 (24.7)
Eliminations or corporate (1,453) (2,391) -   15 (148) -
Consolidated 285,713 306,856 (6.9)   27,377 36,173 (24.3)
Note: Operating revenues and operating income of each segment include intersegment operating revenues.
(Years ended March 31)

IV. Review of Operations By Segment

1. Credit Service Segment

This segment consists of the credit card shopping business, servicing (loan collection agency) business and other businesses. Segment operating revenues for fiscal 2010 declined by 7.7% year on year to ¥230,873 million, while segment operating income decreased by 37.7% to ¥15,973 million.

1) Credit Card Shopping Business

In the credit card sector, credit card usage has continued to grow because of the increased use of credit cards in people's daily lives for small-amount settlements and settlement of public utility bills and hospital and medical clinic bills and because of the expansion in the online shopping and digital content markets. However, the full enforcement in Japan of the Money-Lending Business Control and Regulation Law and revisions to the Installment Sales Law have shrunk the cash advance services market and have driven up various costs to comply with the revised law. Therefore, it is expected that the business environment will continue to be challenging for all companies in this business sector.

In this business climate, Credit Saison endeavored to strengthen its earnings structure by expanding its issuance of high-status premium cards and bolstering its alliance strategy, as well as expanding its presence in the payment settlement domain and strengthening efforts to build up Internet businesses. Efforts were also focused on improving business efficiency, such as by reducing credit risks, and revising our cost structure based on a cost-benefit analysis.

The total number of cardmembers as of March 31, 2011 increased by 0.2% from the previous fiscal year-end to 28.34 million, adding a total of 2.12 million new cardmembers.

The card shopping transaction volume amounted to ¥3,953.4 billion, a year-on-year increase of 2.8%, while the shopping-related revolving credit balance advanced by 0.6% to ¥299.9 billion. The number of active cardmembers also increased, up by 2.6% to 14.70 million. On the other hand, cash advances on cards decreased by 25.0% to ¥447.6 billion.

■ Key Initiatives in the Credit Card Shopping Business During Fiscal 2010

Alliance Network Expansion

One of our priority strategies is to focus on premium cards offering prospects for high utilization and high spending per transaction. Accordingly, we continued to strengthen cardmember enrollment activities for Saison American Express® Card, which features a lineup of four highstatus premium cards.

Furthermore, Credit Saison formed a new alliance with Walmart Japan Holdings LLC. and Seiyu LLC. to issue the Walmart Card SAISON American Express® Card, which provides "1% discounts everyday, anytime" at Seiyu and certain other stores nationwide. We strove to increase transaction amounts and revenues by making this the first credit card of new cardmembers. Elsewhere, in an initiative to expand the payment settlement domain, Credit Saison developed a new cardless B2B bill payment agency service offering a complete online application process. Through a business alliance with Yahoo Japan Corporation, we began providing this new payment settlement services to businesses participating in Yahoo! Japan Shopping and Yahoo! Japan Auction.

Furthermore, Credit Saison entered the prepaid card business with the issuance of the UNIQLO Online Gift Card, a house gift card that can be used at Internet shopping sites UNIQLO /g.u. Online Stores.

Enhancement of Internet Strategies

The total number of Net members reached 5.57 million as of March 31, 2011, a 30.7% year-on-year increase. The number of members registered to view Web-based usage statements, which enable users to easily check their usage statements at any time over the Internet, was 2.33 million, an increase of 164.8% year on year.

Credit Saison operates, an online shopping mall, using two powerful tools at our disposal: our more than 28.0 million membership base and the non-expiring Eikyufumetsu Points. In the approximately four and a half years since its opening, this online mall has grown to have 580 tenants and around ¥3.5 billion in monthly sales, and set a daily sales record of about ¥160 million. Furthermore, from fiscal 2010, services were made available to all Internet users aged 16 or over, including those who do not have a SAISON Card or UC Card, who may now register as Net members.

In addition, Credit Saison worked to increase Net members through the mutual exchange of customers with prominent online companies such as DeNA Co., Ltd. and GREE, Inc., which have large customer bases and strong brands. Credit Saison also worked to create new revenue streams by adding various services to Examples include enabling customers to accumulate shopping points when using group coupon purchasing services, as well as when using brand merchandise trade-in services and making successful bids or purchases through overseas auctions.

Going forward, we remain determined to reinforce our initiatives in new Internet businesses. We intend to grow fee businesses based on commissions from a variety of Internet-based services into major revenue sources, while reducing costs through the use of the Internet.

Ensuring Credit Risk Management

Although the growth trend previously observed in the number of receivables intervened for by third parties, including attorneys and certified judicial scriveners, had diminished in fiscal 2010, interest repayment claims have remained at high levels.

In addition, Credit Saison will flexibly address payment consultations and other needs of cardmembers personally affected by the Great East Japan Earthquake. We also believe it is essential to closely monitor the impact of disruptions in economic activity in our exposure to credit risk.

We will continue to focus on improving the quality of receivables by establishing measures to limit our risk exposure. Specifically, we will employ excessive borrowing management and strengthen our servicing system. In addition, we will maintain thorough credit control that balances returns and risks through appropriate offers of credit.

■New Developments and Future Initiatives

Credit Saison has made a comprehensive agreement with SEVEN & i FINANCIAL GROUP CO., LTD. (currently Seven Financial Service Co., Ltd.) and Sogo & Seibu Co., Ltd. Under the agreement, Credit Saison has spun off its affinity card business with Sogo & Seibu to Seven CS Card Service Co., Ltd., which was established on September 17, 2010.

After the split from Credit Saison, the affinity card business will provide customers with the Seven & i Group's attractive services, in addition to existing card operations. Furthermore, as a result of a merger with Seven Card Service Co., Ltd., the card business will be expanded to cover the entire Seven & i Group. The expansion in business size should enable Credit Saison to formulate medium- to long-term growth strategies not only for expanding the earnings of the joint venture, but also for increasing Credit Saison's processing fees, referring customers to the Seven & i Group, and developing new services.

Furthermore, Credit Saison has commenced field trials of settlement services using Near Field Communication (NFC), a next-generation non-contact IC technology, together with KDDI CORPORATION, SOFTBANK MOBILE Corp. and other partners. In these field trials, NFC-equipped mobile phones will be used to download MasterCard® PayPass™ and make payments through mobile phones over readers set up at MasterCard-affiliated merchants in Japan, South Korea and Europe. This is the world's first example of a field trial of mobile settlement services spanning multiple countries.

Going forward, Credit Saison will continue to innovate in response to changes in the operating environment through these sorts of large-scale alliances and new business initiatives utilizing mobile phones, with the aim of becoming the industry No. 1.

2) Servicing (Loan Collection Agency) Business

JPN Holdings Co., Ltd., which is mainly involved in contract-based servicing of small unsecured loans, entered the nursing school business by acquiring in November 2010 the shares of KINDER NURSERY Co.,Ltd. which operates 27 private-sector nursing schools.

In fiscal 2010, JPN Holdings' operating revenues decreased year on year, despite the addition of net sales of humanplus Corporation and KINDER NURSERY which were integrated into JPN Holdings. This decrease was mainly due to the negative impact of revised business conditionswith customers in the servicing business.

2. Lease Segment

According to statistics issued by the Japan Leasing Association, overall lease contract volume for the entire leasing industry in fiscal 2010 (preliminary figure) was ¥4,546.2 billion (down 7.5% year on year). Credit Saison recorded lease contract volume of ¥90.1 billion for fiscal 2010, down 10.2% year on year, mainly due to the curtailment of capital investment by companies. However, for fiscal 2010, operating revenues rose 14.9% year on year to ¥14,451 million, and operating income increased 136.7% year on year to ¥5,038 million. This was mainly the result of the Company's continuing efforts to strengthen ties and revise business conditions with existing customers and increase the number of partner merchants. Other factors included a reduction in the cost of uncollectible receivables through efforts to enhance the soundness of receivables as well as the positive impact of the adoption of new accounting standards for leases.

In the rental business, transaction volume was ¥2.5 billion, up 496.5% year on year. This increase primarily reflected efforts to strengthen agency channels and increase B2B2C rental transactions, in addition to higher sales of digital terrestrial TV sets in response to surging demand ahead of changes in the Japanese government's eco-point program effective November 2010.

3. Finance Segment

The Finance Segment consists of the credit guarantee business and other finance-related businesses. In fiscal 2010, the Company posted higher revenues from the "Flat 35" long-term, fixed interest rate mortgage loan service (the receivables of which are acquired and securitized by the Japan Housing Finance Agency), which is one of the Company's finance-related businesses. However, the balance of loans, including real estate loans, decreased. In the credit guarantee business, the cost of uncollectible receivables decreased as the Company focused on improving the quality of receivables. As a result of the foregoing, operating revenues were ¥15,580 million, down 7.4% year on year, while operating income was ¥6,796 million, up 35.6% from the previous year.

1) Credit Guarantee Business

Credit Saison focused on obtaining high-quality items by utilizing its close business relationships with affiliated financial institutions in both sales and management, particularly in the guarantee business for unsecured free loans to individual customers.

In addition, in fiscal 2010 we endeavored to increase our transaction volume by entering into a total of 49 new alliances with regional financial institutions, expanding the network to a total of 265 financial institutions, an increase of 47 institutions from fiscal 2009. However, the gross guarantee balance before recording an allowance for losses on guarantees decreased by 8.1% from the previous fiscal year to ¥157.3 billion.

2) Other Finance-Related Business

Credit Saison engages in financing collateralized by real estate properties with individuals and corporations.

In March 2009, we started to offer a long-term fixed-rate mortgage loan called Flat 35 (the receivable of which is acquired and securitized by Japan Housing Finance Agency). This mortgage loan service was popular because of the special benefits offered to card members and the accumulated sense of trust and security among customers built over the years by our credit card business. As a result, in fiscal 2010 our Flat 35 service made 1,957 loans with a total balance of ¥55.3 billion. Since the launch of the Flat 35 service, Credit Saison has extended a total of 2,507 loans with a total balance of ¥69.2 billion.

Furthermore, in July 2010, Credit Saison began offering the Flat 35 Tsunagi (Bridge) Loan, which provides funds for borrowers to use before they receive Flat 35 funds, for purposes such as down payments for land acquisitions, as well as payments for the start of construction or construction in progress.

In fiscal 2010, the total balance of receivables in the other-finance related business was ¥79.8 billion, an increase of 9.6% from the previous year.

4. Real Estate Related Segment

The Real Estate Related Segment consists of the real estate business, real estate leasing business and other businesses. Credit Saison generated steady revenues from the real estate leasing business; however, real estate sales declined in the real estate business. As a result, in fiscal 2010 operating revenues of the segment decreased 18.0% year on year to ¥12,322 million. Credit Saison recorded an operating loss of ¥2,182 million in this segment.

5. Entertainment Segment

This segment consists of the amusement business and other operations. In this segment, Credit Saison worked to create sound, safe and enjoyable facilities that have the support of their communities, while striving to increase administrative efficiency. As a result, although operating revenues of the segment decreased by 4.8% year on year to ¥13,940 million, operating income increased by 0.4% year on year to ¥1,737 million.

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