ANNUAL REPORT 2012 for the year ended March 31, 2012

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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 declared annual dividends of ¥30 per share for fiscal 2011.


OPERATING REVENUES AND OPERATING INCOME BY SEGMENT

  (Millions of yen)
Operating Revenues   Operating Income (Loss)
2012 2011 % growth   2012 2011 % growth
Credit Service 198,875 230,873 (13.9)   27,161 15,973 70.0
Lease 14,670 14,451 1.5   5,099 5,038 1.2
Finance 15,715 15,580 0.9   7,781 6,796 14.5
Real Estate-related 3,059 12,322 (75.2)   (10,174) (2,182)
Entertainment 12,999 13,940 (6.8)   2,066 1,737 18.9
Total 245,318 287,166 (14.6)   31,933 27,362 16.7
Eliminations or corporate (1,309) (1,453)   (67) 15
Consolidated 244,009 285,713 (14.6)   31,866 27,377 16.4
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 Business Segment

This segment consists of the credit card shopping business, servicing (loan collection agency) business and other businesses. Segment operating revenues for fiscal 2011 declined by 13.9% year on year to ¥198,875 million, while segment profit increased by 70.0% to ¥27,161 million.

1) Credit Card Shopping Business

In the Credit Service Business Segment, the areas in which people are using credit cards continue to expand each year. There is an ongoing shift in the mainstream from cash to cashless settlement as people increasingly use credit cards for spending related to everyday life, such as settlements of small amounts, public utility bills, hospital and medical clinic bills, as well as for the growing area of online shopping. On the other hand, the credit card sector continues to face a difficult business environment despite two years having passed since the introduction of total lending restrictions following the revision of the Money-Lending Business Control and Regulation Law which caused a contraction in the cash advance market.

In this business climate, Credit Saison worked to reinforce its operating revenue base by expanding cashless settlement services through initiatives to break the dominance of the cash market, mainly through credit cards and efforts to expand the Internet business and fee-based businesses. At the same time, the Group focused on improving operational efficiency, mainly by strengthening measures to deal with credit risks and revising the cost structure based on a cost-benefit analysis.

However, full enforcement of the Money-Lending Business Control and Regulation Law brought restrictions on total lending into effect that greatly reduced cash advance revenues. Moreover, the Company transferred the affinity card issuance business operated with Sogo & Seibu to Seven CS Card Service. As a result of these factors, the number of new cards issued for fiscal 2011 was 1.96 million, and the total number of cardmembers as of March 31, 2012 was down 12.7% from the previous fiscal year-end at 24.75 million.

The card shopping transaction volume was ¥3,402,400 million, down 13.9% year on year, and the shopping-related revolving credit balance was ¥262,100 million, down 12.6%. The number of active card members for the year was 12.99 million, down 11.6% from the previous year, and cash advances on cards was ¥321,900 million, down 28.1%.

■ Key Initiatives in the Credit Card Shopping Business During Fiscal 2011

Enhancing Cashless Settlement Services Through Credit Cards

One of Credit Saison's 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 the Saison American Express® Card series, which features a lineup of four high-status premium cards.

One of these enrollment activities involves forming alliances with various kinds of companies involved in business, travel or services. By offering cardmembers service-based perks, Credit Saison and its alliance partners can effectively encourage our respective customers to use each company's services. This business model has helped us to develop more American Express cardmembers from among the customer bases of our alliance partners and promote increased use of the cards.

To enlarge the shopping-related revolving credit balance, we have focused on increasing user convenience for Internet members with a service that makes requests for timely revolving credit payments using the Internet and a service for subsequent online conversion of one-time payments to revolving payments.

In other initiatives, we have been working to expand the areas in which credit cards are used. For example, in August 2011, we started issuing NEO Money, a prepaid card for use outside of Japan by tourists, business travelers, exchange students and others. In the same month, we formed an alliance with China UnionPay, which is an international brand in China that operates an interbank settlement network. Based on this alliance, we teamed up with U.C. Card Co., Ltd. to begin recruiting affiliated stores for the issuance CUP Card, which is expected to see growth in total settlement volume.

By adding new settlement services such as prepaid services to our existing credit card offerings, we will establish a source of revenue from the cashless settlement market going forward.

Strengthening Internet and Fee-based Businesses

The total number of Internet members reached 6.96 million as of March 31, 2012, a 25.0% 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 3.49 million, an increase of 49.8% year on year.

Credit Saison operates Eikyufumetsu.com, a shopping points website, making use of its approximate 25 million-member base and its Eikyufumetsu Points ("Saison Permanent Points" in English) program of points that never expire. Approximately five and a half years after launching, the website has over 500 tenants and 50,000 participating shops. Monthly trading on the website has reached approximately ¥4 billion, with the highest single day of trading recorded at about ¥240 million.

Looking ahead, we plan to improve the convenience of our Internet services even more, and expand revenues from this sector by launching a service allowing the use of Eikyufumetsu Points to pay for online shopping purchases. Eikyufumetsu Points were launched by Eikyufumetsu.com together with Seven Net Shopping Co., Ltd. and Groupon Japan, Inc. in November 2011.

We will also upgrade and enhance customer information in an effort to capture revenues from a new advertising and marketing business that utilizes our customer base.

Going forward, we remain determined to reinforce our initiatives in new Internet businesses. We will build systems for generating revenue from a variety of Internet-based services while continuing to use the Internet to reduce costs.

Credit Risk Management

Credit Saison continues to accumulate healthy receivables by taking steps to recover overdue receivables swiftly and continuing to ensure payment of receivables through counseling. Another approach we have used is to make extra requests for contract payments. We carry out inspections that help to control risks during initial and intermediate credit checks. Through these initiatives we are expanding our stock of good quality receivables.

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

■New Developments and Future Initiatives

On September 10, 2010, Credit Saison made a comprehensive agreement with SEVEN & I FINANCIAL GROUP CO., LTD. (currently Seven Financial Service Co., Ltd.) and Sogo & Seibu. In accordance with this agreement, Credit Saison spun off its affinity card issuance business operated with Sogo & Seibu as of April 1, 2011 through an absorption-type company split, and transferred the business to Seven CS Card Service.

This move will enable the Group to offer a range of attractive Seven & i Group services to customers in addition to the current affinity card services. Since July 2011, customers who use their preregistered Saison Card or UC Card at Seven Eleven convenience stores or Ito Yokado department stores and supermarkets throughout Japan have been eligible to automatically receive Nanaco Points as well as ordinary Eikyufumetsu Points.

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.

In another initiative, in November 2011, Credit Saison concluded a business alliance with Yahoo Japan Corporation with the goal of increasing convenience for customers of both companies. Both companies have strong foundations in online and physical shops. By developing new services that make full use of each company's strengths, Credit Saison and Yahoo Japan plan to propose significant added value to their customers.

The two companies plan to enable automatic conversion of Eikyufumetsu Points into Yahoo! Points by linking their respective IDs. This will attract membership to Yahoo! Japan Shopping from Eikyufumetsu.com and should lead to larger transaction volumes at Eikyufumetsu.com. It should also enable Credit Saison affiliated merchants to transmit discount and special offer information through Yahoo! Loco, Japan's largest location-based service Website, among other benefits. This development of customer referral services between online shops and their physical counterparts is intended to encourage greater activity among consumers.

2) Servicing (Loan Collection Agency) Business

JPN Holdings Co., Ltd. is mainly involved in contract-based servicing of small unsecured loans. While the processing agency business, which is the core of the servicing business, JPN Holdings has been impacted by revised business conditions among business partners, but has seen revenues increase year on year. The main factors behind the increase are enhanced sales activities in the personnel outsourcing and telemarketing businesses, and the additional contribution from the net sales of private-sector childcare center operator KINDER NURSERY Corporation (currently KINDER NURSERY Co., Ltd.), which was consolidated in November 2010.

2. Lease Business Segment

According to statistics issued by the Japan Leasing Association, overall lease contract volume for the entire leasing industry in fiscal 2011 was ¥4,599.7 billion, up 1% year on year.

Credit Saison recorded a lease contract volume of ¥96,852 million, up 4.5% year on year. Operating revenues rose 1.5% year on year to ¥14,670 million and segment profit climbed 1.2% to ¥5,099 million. These increases were mainly due to efforts to strengthen ties with existing customers and to increase the number of partner sales agencies.

In the rental business, the wave of replacements of televisions for models compatible with terrestrial digital broadcasts ran its course. We therefore expanded sales channels for energy-saving electrical products as well as for B2B2C and B2B2B rental services in order to meet customers' needs going forward.

3. Finance Business Segment

This segment consists of the credit guarantee business and other finance-related business. In the credit guarantee business, the amount of guarantees executed increased due to efforts to strengthen ties with affiliated financial institutions. We also worked to improve the quality of receivables. In other finance-related business, the longterm, fixed-interest-rate mortgage loan, Flat 35, (the receivable of which is acquired and securitized by the Japan Housing Finance Agency) contributed to segment operating revenues.

As a result, segment operating revenues for fiscal 2011 increased 0.9% year on year to ¥15,715 million, and segment profit increased 14.5% to ¥7,781 million.

1) Credit Guarantee Business

Credit Saison focused on obtaining high-quality transactions 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 fiscal 2011, we endeavored to increase our transaction volume by entering into a total of 43 new alliances with regional financial institutions, expanding the network to a total of 308 financial institutions, a net increase of 43 institutions from fiscal 2011. The gross guarantee balance before recording an allowance for losses on guarantees increased by 7.2% from the previous fiscal year to ¥168,600 million.

2) Other Finance-Related Business

Credit Saison engages in financing collateralized by real estate properties with individuals and corporations. Since March 2009, we have handled Flat 35 mortgage loans. The number of loans executed in fiscal 2011 fell 9.5% year on year to 1,771 loans, with a total balance of ¥49,600 million, down 10.3%. The main factor in this decrease was the impact of a reduction in the size of preferential interest rates offered under a scheme to support purchases of high-quality houses (Flat 35S scheme). However, the special treatment given to cardmembers and the trust and reliability built up through the credit card business have been highly evaluated by the market. We have accumulated 4,278 loans with a total balance of ¥118,800 million in this business since it began.

The total balance of receivables in the other finance-related business as of March 31, 2012, including for the Flat 35 Tsunagi (Bridge) Loans that the Company started handling in July 2010, declined 13.9% year on year to ¥68,700 million.

4. Real Estate-related Business Segment

The Real Estate Related Business segment consists of the real estate business, the real estate leasing business and other businesses. In fiscal 2011, consolidated subsidiary Atrium recorded a loss on reappraisal of its assets. As a result, segment operating revenues decreased 75.2% year on year to ¥3,059 million, leading Credit Saison to record a segment loss of ¥10,174 million.

5. Entertainment Business Segment

This segment consists of the amusement business and other operations. Amid the lingering impact of tightened regulations on game machines, Credit Saison worked to create sound, safe and enjoyable facilities that have the support of their communities. Operating revenues for the segment declined 6.7% year on year to ¥12,999 million, primarily because of the impact of reduced operating hours and suspension of operations at some stores due to the Great East Japan Earthquake. Nevertheless, as a result of efforts to streamline operations, segment profit increased by 18.9% to ¥2,066 million.

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