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Message from the President
The Domestic Economy
 The Japanese economy during the reporting period threw off its weakness and showed convincing signs of staging a full-scale recovery in spite of such adverse factors as the high price of crude oil and certain worrying trends in the global economy. Exports showed a steady upward trend, while corporate earnings improved, leading to higher capital investment. The strong showing of the corporate sector spilled over into household expenditures, with rising consumer spending constituting a driving force for the economy as a whole.
Consumer spending followed a gradual upward path, but housing investment, which had previously been on the increase, flattened out once again. Public works spending was generally lackluster, but private-sector capital investment posted an increase over the previous year. Exports improved and followed a gradual upward trend, in line with the steady recovery of the global economy.
In spite of inventory adjustments in certain sectors, industrial production, which had been flat for some time, began to move upward. Thanks to increased sales, both corporate earnings and the employment picture improved over a wide range of industries, although conditions remained severe.
The Regional Economy
During the period under review, the economy of Wakayama Prefecture showed signs of recovery after its long period of stagnation, but business confidence remained weaker than in the country as a whole.
Consumer spending in the prefecture remained very sluggish during the period, but housing investment and public investment showed improvement after a long period of stagnation. In capital investment, improvement was seen in certain sectors, such as an increase in private-sector construction orders. Despite a continued recovery in certain industrial sectors, industrial production as a whole remained at roughly the same level as in the previous year. The employment situation remained severe, with unemployment at a high level, and the gap between the prefecture and the country as a whole appeared to be widening.
Conditions in the Financial Markets
Short-term interest rates remained at extremely low levels throughout the period under review. In March 2006, the Bank of Japan (BOJ) decided to end the quantitative easing policy that it had maintained for the past five years, and possible interest rate increases thus appeared on the horizon. Nonetheless, as the BOJ continued to supply ample amounts of funds to money markets, interest rates remained at extremely low levels. Long-term interest rates hovered below the 1.5% level during the first half of the period, when the consensus view was that the quantitative easing policy would continue for some time to come. Toward the end of the period, however, long-term rates rose to 1.7% amid rising expectations of the ending of the quantitative easing policy and predictions of subsequent interest rate increases.
Stock prices rose almost consistently throughout the period against the background of favorable corporate earnings and a general expectation that the long-lasting period of deflation was coming to an end. The Nikkei Average, which had started the fiscal year at the ¥11,000 level, topped the ¥17,000 mark by the year-end.
On the foreign exchange markets, the Japanese yen weakened against the dollar in anticipation of a widening gap between Japanese and U.S. interest rates as the latter had risen. By December 2005, the yen had weakened to just over ¥121 to the dollar, but subsequent signs that an interest rate increase in Japan was in the offing helped the Japanese currency recover to the ¥117 level at the end of the fiscal year, as the yen was bought back.
Kiyo Holdings, Inc.
On February 1, 2006, The Kiyo Bank, Ltd. and The Wakayama Bank, Ltd. jointly established Kiyo Holdings, Inc. as their parent company by means of a share transfer transaction.
During the period under review, Kiyo Bank and Wakayama Bank continued to work to increase funding for small and medium-sized enterprises and sought to expand their revenue from fees and commissions. They also directed much of their energy toward improving the soundness of their asset portfolios by advancing the disposal of non-performing loans and providing management consultancy support to improve the management of borrower companies. Thanks to the recovery of the overall Japanese economy and the renewed activity in the country’s stock markets, we are now starting to see signs of a brighter future for the regional economies, which have been stagnating for a long time. This recovery also helps the Group to speed up the process of improving the financial soundness of both banks’ asset portfolios, enabling the two banks to effectively eliminate at an early date the financial risks to which they are currently subject. Although the process of improving the soundness of their asset portfolios resulted in the posting of losses, increases in the balance of housing loans and assets under custody (investment trusts and individual pension insurance products) have contributed to the Group’s profits.
The business performance of Kiyo Holdings for the period under review, on a consolidated basis, was as follows:
Operating revenue amounted to ¥75,529 million, ordinary income to ¥996 million and net income to ¥3,297 million.
On a non-consolidated basis, as Kiyo Holdings was established on the 1st of February 2006, fiscal 2005 consisted of an irregular term of only two months. Bearing that in mind, operating revenue was ¥110 million, ordinary income was ¥11 million and net income was ¥5 million.
For the current term ending March 31, 2007, through the merger* of Kiyo and Wakayama banks, scheduled for October 2006, we hope to quickly realize the full synergistic benefits of our business collaboration and achieve net income for fiscal 2006 of ¥4.5 billion.
Note: The consolidated accounts of Kiyo Holdings for fiscal 2005 include the business performance figures for Kiyo Bank, the surviving company, for the full year from April 1, 2005 to March 31, 2006. The figures for Wakayama Bank, on the other hand, are those solely for the period February 1, 2006 (when Wakayama Bank became an operating company under Kiyo Holdings) to March 31, 2006.
* The merger is subject to approval by the regulatory authorities.
| Business Indicators of Kiyo Holdings, Inc. for Fiscal 2005 |
| (on a consolidated basis) |
(millions of yen) |
| Operating revenue |
75,529 |
| Ordinary profit |
996 |
| Net income |
3,297 |
| Total assets |
3,245,141 |
| Shareholders’ equity |
110,756 |
| Shareholders’ equity per share |
¥139.07 |
| Earnings per share (EPS) |
¥6.78 |
| Diluted EPS |
¥5.70 |
| Capital ratio (domestic standard) |
9.52% |
The Kiyo Bank, Ltd.
Deposits, assets under custody (investment trusts, Japanese government bonds, individual pension insurance products) and loans
The Bank succeeded in increasing the number of deposits by individuals, largely thanks to an advertising campaign featuring the Bank’s 110th anniversary time deposits, although deposits by the public sector declined. As a result, the total balance of deposits came to ¥2,582.8 billion, an increase of ¥1.1 billion over the previous year. The balance of loans also posted year-on-year growth, with consumer loans continuing to grow steadily, centered on housing loans. Loans to corporate customers also showed a recovery tendency, registering a year-on-year gain of ¥13.4 billion to ¥1,783.1 billion.
Within the category of assets under custody, the balance of investment trusts increased by ¥29.5 billion year-on-year to while sales of Japanese government bonds and individual pension insurance products also grew smoothly. As a result, the balance of assets under custody was up ¥50.7 billion year-on-year to ¥247.2 billion.
Earnings
The Bank enjoyed a year-on-year increase of ¥0.1 billion in net interest income, thanks to an expansion in housing loans and good operating results in the field of securities. In addition, brisk sales of investment trusts and individual pension insurance products, among other financial instruments, pushed up revenue from fees and commissions by the same ¥0.1 billion year-on-year.
Expenses also rose, however, by ¥1.2 billion, including expenditures in preparation for the merger of the two banks. As a result, business profit on core banking operations registered a year-on-year decline of ¥1.8 billion to ¥17.0 billion.
As a result of the application of even stricter standards to credit screening ahead of the merger, total credit costs came to ¥25.9 billion, an increase of ¥8.0 billion year-on-year, and as a result, ordinary income decreased by ¥5.1 billion year-on-year to ¥1.8 billion.
Net income declined ¥0.3 billion year-on-year to ¥5.1 billion, mainly due to the fact that the posting of a ¥9.0 billion extraordinary gain on the settlement of the trust fund operation for employees’ retirement benefits was partly offset by the posting of ¥6.4 billion in deferred income taxes in line with a reduction in deferred tax assets.
The Wakayama Bank, Ltd.
Deposits, assets under custody (investment trusts, Japanese government bonds, individual pension insurance products) and loans
The staff of Wakayama Bank continued to work to increase the volume of assets under custody. As a result of these efforts, the year-end balance of investment trusts increased by ¥6.4 billion year-on-year to ¥10.1 billion, which brought the total value of assets under custody to ¥23.5 billion, an increase of ¥12.1 billion over the previous year. Deposits, on the other hand, declined by ¥36.2 billion from the previous year-end to ¥372.1 billion, partly owing to the shifting of funds from deposits to the assets under custody category.
Wakayama Bank succeeded in moving further amounts of non-performing loans off its balance sheets, as a result of which the year-end balance of loans decreased by ¥45.2 billion year-on-year to ¥266.3 billion.
Earnings
Thanks to steps to increase the balance of assets under custody, including the sale of investment trusts, revenue from fees and commissions rose by ¥0.07 billion year-on-year, but as a result of a decline in the interest income on loans, in addition to the expenses involved in the integration of the two banks’ operations, total expenses increased. As a consequence, business profit on core banking operations decreased by ¥0.3 billion year-on-year to ¥2.7 billion.
In the ordinary income/loss account, in spite of the recording of ¥0.9 billion in profits related to equity holdings, the bank posted a loss of ¥10.5 billion, compared with an ordinary income of ¥0.9 billion for the previous year. This is attributable to the posting of ¥12.5 billion in credit costs resulting from the application of stricter standards on the assessment of assets ahead of the merger. Moreover, the bank posted ¥2.2 billion in deferred income taxes with the aim of reducing its deferred tax assets. As a result, a net loss of ¥12.3 billion was recognized for the reporting period, compared with a net income of ¥0.8 billion for the previous year.
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