ANNUAL REPORT 2013 for the year ended March 31, 2013

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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.

 The Company plans to invest internal reserves efficiently in order to achieve low-cost operations and continuously expand its businesses.

1. Dividend per Share

Based on its dividend policy, Credit Saison declared annual dividends of ¥30 per share for fiscal 2012.


OPERATING REVENUES AND OPERATING INCOME BY SEGMENT

  (Millions of yen)
Operating Revenues   Operating Income (Loss)
2013 2012 % growth   2013 2012 % growth
Credit Service 190,484 198,875 (4.2)   24,192 27,161 (10.9)
Lease 14,434 14,670 (1.6)   6,147 5,099 20.5
Finance 17,327 15,715 10.3   8,985 7,781 15.5
Real Estate-related 9,807 3,059 220.6   955 (10,174)
Entertainment 13,597 12,999 4.6   2,104 2,066 1.9
Total 245,649 245,318 0.1   42,383 31,933 32.7
Eliminations or corporate (1,244) (1,309)   (71) (67)
Consolidated 244,405 244,009 0.2   42,312 31,866 32.8
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. 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 settlements as people increasingly use credit cards for settlements of small amounts, as well as for online shopping. On the other hand, the credit card sector is expected to continue to face a difficult business environment given that the contraction in the cash advance market following the revision of the Money Lending Business Act has compelled companies to transform their business models and take other actions to reform their businesses.

In this business climate, Credit Saison worked to reinforce its operating revenue base by expanding cashless settlement services, mainly through credit cards, and by tackling the challenge of making the Internet business a core operation, along with fullscale business participation in the Asian region. At the same time, the Group has been working to improve operational efficiency, mainly by strengthening measures to deal with credit risks and revising the cost structure based on a cost-benefit analysis.

However, the effects of revisions to the Money Lending Business Act brought restrictions on total lending into effect that have reduced cash advance revenues.

As a result, segment operating revenues for fiscal 2012 declined by 4.2% year on year to ¥190,484 million, while segment profit decreased by 10.9% to ¥24,192 million.

1) Credit Card Shopping Business

The number of new cards issued for fiscal 2012 was 2.51 million, an increase of 28.2% year on year, and the total number of cardmembers as of March 31, 2013 was up 0.3% from the previous fiscal year-end at 24.82 million. The number of active card members for the year was 13.62 million, up 4.8% from the previous year.

The card shopping transaction volume was ¥3,547.0 billion, up 4.2% year on year, and the shopping-related revolving credit balance as of March 31, 2013 was ¥260,300 million, down 0.7%.

The balance of cash advances on cards was ¥267.5 billion, down 16.9%.

■ Key Initiatives in the Credit Card Shopping Business During Fiscal 2012

Enhancing Cashless Settlement Services Through Credit Cards

Credit Saison seeks to realize a cashless society through initiatives to break the dominance of the cash market, which represents the dominant transaction settlement method for consumer spending in Japan. To this end, the Company is working to develop and provide a variety of cashless settlement methods centered on credit cards.

One of Credit Saison’s priority strategies is to enhance 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 that can be chosen according to customer lifestyles.

One of these enrollment activities involves forming alliances with various kinds of companies that meet the needs of American Express cardmembers. By offering cardmembers service-based perks, Credit Saison and its alliance partners can effectively encourage our respective customers to use each company’s services. Through this approach, Credit Saison strove to expand the number of new cardmembers.

Credit Saison used Internet-based channels to step up the enrollment of cardmembers who are highly active in using their cards. In addition, the Company implemented measures to jointly enroll new cardmembers with partner companies and to expand sales at partner companies. These measures included discount services offered when using cards at affiliated retailers, double-your-points program, and a program that allows Eikyufumetsu Points to be exchanged for gift certificates at affiliated merchants.

In another initiative to encourage greater card use, Credit Saison partnered with local department stores, specialty stores and other retailers in Ikebukuro, Sapporo and Fukuoka, as well as with other card companies, to run Regional Revitalization Campaigns, which aim to contribute to increased card use, higher merchant sales and the revitalization of towns. In this manner, the Company implemented initiatives to stimulate consumer spending and enhance the satisfaction of customers and merchants.

In other initiatives, we have been working to expand the areas in which credit cards are used. For example, in August 2011, we issue NEO Money, a prepaid card for use outside of Japan by tourists, business travelers, exchange students and others. We are working to increase use of NEO Money in partnership with travel agencies and universities, and to expand the network of affiliated stores in Japan accepting China UnionPay, which is an international brand in China that operates an interbank settlement network.

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


Strengthening Fee-based Businesses Utilizing the Internet

The total number of Internet members reached 8.56 million as of March 31, 2013, a 23.0% 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 4.75 million, an increase of 36.1% year on year.

Credit Saison sees the challenge of transforming the Internet business into a core business as a key strategy. Particular effort is being focused on expanding the Eikyufumetsu.com shopping point site, where customers can earn up to 20 times more Eikyufumetsu Points compared with points earned by directly using conventional Internet shopping sites. We have sought to increase the appeal of Eikyufumetsu.com by expanding the range of services through which points can be accrued.

We are also updating and enhancing the accuracy of our Internet members’ customer information to capture revenues from a new advertising and marketing business that utilizes our customer base. In fiscal 2012, we focused on energizing research businesses such as Internet-based questionnaires. We have made steady progress, with operating revenues from the advertising and marketing business increasing more than two-fold from the previous fiscal year.

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 encourage customers to make advance deposits into their remitting accounts by no later than the payment deadline in order to prevent receivables from becoming overdue. 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.

As a result, the Company has seen improvement in the condition of its 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.


Full-scale Business Participation in the Asian Region

In June 2012, Credit Saison opened a representative office in Hanoi, Vietnam, with the aim of making a full-scale entry into the retail finance business in the fast-growing Asian region.

Furthermore, in March 2013, Credit Saison formed a capital and business alliance with econtext ASIA Ltd., an online settlement firm in the Digital Garage Group, and agreed to jointly promote development and provision of settlement services and e-commerce infrastructure in the Asian market, including Japan. Drawing on the business resources and know-how of both companies, we will actively work to develop and promote new schemes that provide new value for customers and affiliated merchants.

Going forward, Credit Saison will continue to prepare the way for our medium/long-term overseas strategy aimed at entering the non-bank sector of markets in the Asian region, such as Indonesia and Singapore.

■New Developments and Future Initiatives

In April 2013, Credit Saison partnered with the major drug store chain cocokara fine, Inc. to issue the COCOKARA CLUB CARD, Japan’s first Visa prepaid card that can be used at Visa affiliated merchants in Japan and overseas. The card also functions as a point card, so customers can accumulate points and use them to make purchases at Visa affiliated merchants around the world. The card serves as a new, more convenient way to shop at drug stores, where cash has been the dominant payment method.

Credit Saison also introduced Coiney, a smartphone settlement service, through a business alliance with its developer Coiney, Inc. and began soliciting affiliated merchants in April 2013. We intend to strengthen our partnership with Coiney, further diversify the arenas where cards with smartphone-enhanced functionality are used, and continue working to expand the credit card settlement market.

In regard to overseas strategy, Credit Saison established a consulting company in Hanoi, Vietnam, in April 2013, to prepare for the launch of a business aimed at providing expertise in installment purchases and the loan business, including know-how that the Company has developed in Japan in regard to the card businesses. The goal is to support the development of retail finance businesses by local companies. While working to commercialize support services for the development of retail finance operations, Credit Saison will cultivate its expertise in order to meet market needs in the Asian region.

2) Servicing (Loan Collection Agency) Business

JPN Holdings Co., Ltd. is mainly involved in contract-based servicing of small unsecured loans. In the servicing business, JPN Holdings saw a decrease in the number of servicing contracts from existing customers in step with improvement in the quality of receivables at non-banks, its main customers in the servicing business. However, thanks to a boost from higher sales in the personnel outsourcing business, where efforts were focused on expanding business with government ministries and agencies, overall revenues in this business increased year on year.

2. Lease Business Segment

According to statistics issued by the Japan Leasing Association, overall lease contract volume for the entire leasing industry in fiscal 2012 was ¥4,875.4 billion, up 6.0% year on year.

Credit Saison recorded a lease contract volume of ¥105.3 billion, up 8.8% year on year. This increase was mainly due to measures to expand sales channels for energy-saving electrical products such as LED lighting in the rental business, along with efforts to strengthen ties with existing customers and to increase the number of partner sales agencies. Operating revenues decreased 1.6% year on year to ¥14,434 million. Segment profit climbed 20.5% to ¥6,147 million, mainly due to a decrease in credit cost.

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 and the guarantee balance increased due to efforts to strengthen ties with affiliated financial institutions. In other finance-related business, the long-term, 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 2012 increased 10.3% year on year to ¥17,327 million, and segment profit increased 15.5% to ¥8,985 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 2012, we endeavored to increase our transaction volume by entering into a total of 45 new alliances with regional financial institutions, expanding the network to a total of 348 financial institutions, a net increase of 40 institutions from fiscal 2011. The gross guarantee balance before recording an allowance for losses on guarantees increased by 17.0% from the previous fiscal year to ¥197,300 million. This was the result of efforts to build a framework for meticulous collaboration with regional financial institutions through free-loan guaranteed products for which the loan purposes were expanded to include business finance.

2) Other Finance-related Business

Since March 2009, we have handled Flat 35 mortgage loans. The number of loans executed in fiscal 2012 fell 0.4% year on year to 1,764 loans, with a total balance of ¥48,200 million, down 2.8%. 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 6,042 loans with a total balance of ¥167,000 million, surpassing the ¥150,000 million mark for the first time in this business since it began.

From April 2012, the system was revised so that Flat 35 loans may be used to finance only 90% of the purchase price of a property, down from 100% previously. We responded quickly by launching “Flat 35 PLUS,” a Credit Saison home loan package that provides financing for the remaining 10% of the property value not covered by Flat 35.

In January 2013, we began offering the “Saison Asset Formation Loans” (loans for purchasing condominiums as an investment), in an effort to further upgrade and expand our product lineup.

The total balance of receivables in the other finance-related business as of March 31, 2013, increased 3.0% year on year to ¥70,800 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 2012, segment operating revenues increased 220.6% year on year to ¥9,807 million, leading Credit Saison to record a segment profit of ¥955 million. This result partly reflected a loss on reappraisal of assets recorded by consolidated subsidiary Atrium in fiscal 2011. In line with the restructuring of the Real Estate-related Business, we have separated this business into retained business and withdrawn business. Revenues and expenses related to withdrawn business have been recorded under non-operating revenues and expenses from the fiscal year under review.

5. Entertainment Business Segment

This segment consists of the amusement business and other operations. Credit Saison worked to create sound, safe and enjoyable facilities that have the support of their communities. Operating revenues for the segment increased 4.6% year on year to ¥13,597 million, primarily reflecting higher sales following the impact of reduced operating hours and suspension of operations at some stores due to the Great East Japan Earthquake in the previous fiscal year. As a result, segment profit increased by 1.9% to ¥2,104 million.

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