Kyoto Financial Group (5844) FY2026 Q3 Earnings Report

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Executive Summary

The Group maintained revenue and profit growth, driven by the expansion of interest income and fees and commissions, although margins came under pressure from a sharp increase in deposit funding costs. Ordinary revenue was ¥160.585B (+24.2% YoY), Ordinary Income was ¥54.773B (+20.7%), and Net Income attributable to owners of the parent was ¥39.178B (+20.8%). The increase in interest on loans (+25.7%) and expansion in fees and commissions (+11.4%) drove profit growth, while interest on deposits surged by +68.7%, causing the profit margin to decline from the same period of the previous year. Progress against the full-year forecast was 86.3% for Ordinary Income and 87.1% for Net Income, exceeding the standard Q3 progress level of approximately 75%.

Factors Affecting Performance

【Revenue】Ordinary revenue was ¥160.585B, up +24.2% YoY. Interest on loans of ¥58.877B (+25.7%) was the primary growth driver, with loans outstanding increasing 5.0% YoY to ¥7,563.3B and deposits increasing 3.1% YoY to ¥9,547.3B, indicating that loan growth outpaced deposit growth. Fees and commissions increased 11.4% to ¥21.539B, while net fees and commissions expanded 12.8% to ¥15.675B. Interest and dividends on securities remained limited to ¥37.662B (+3.2%), indicating a rising dependence on lending for revenue growth.

【Profit and Loss】Ordinary Income was ¥54.773B (+20.7% YoY), and Net Income attributable to owners of the parent was ¥39.178B (+20.8%). General and administrative expenses increased 6.7% to ¥48.744B, below the revenue growth rate, making expense control a factor contributing to profit growth. Meanwhile, funding costs surged 59.9% to ¥31.475B, with interest on deposits increasing 68.7% to ¥20.468B and putting pressure on margins. Extraordinary items amounted to a net loss of only ¥0.248B, and profit was derived primarily from recurring banking operations. In conclusion, the Group achieved revenue and profit growth.

Key Financial Metrics

【Profitability】The Net Profit Margin was 24.4%, down approximately 69bp from 25.1% in the same period of the previous year, while the Operating Profit Margin was also 34.1%, down approximately 99bp from 35.1%. Annualized ROE was 4.4%, decomposed into a Net Profit Margin of 24.4% × Total Asset Turnover of 0.018x × Financial Leverage of 10.16x. Given the asset-intensive structure of the banking business, Total Asset Turnover is the primary constraint on ROE. Net Interest Margin was 0.94%, with the sharp increase in interest on deposits weighing on profitability. 【Cash Quality】Net extraordinary items amounted to a loss of only ¥0.248B, and current-period profit consisted primarily of recurring fund investment and fee-based businesses. 【Investment Efficiency】ROIC was 4.4%, making the enhancement of returns on invested capital a medium- to long-term challenge. 【Financial Soundness】The Equity Ratio was 9.8%, an improvement of 0.9pt from 8.9% in the same period of the previous year, but remained below the 12% benchmark generally regarded as an indicator of soundness. The loan-to-deposit ratio was 79.2%, within the generally appropriate range.

Cash Flow Analysis

As data from the statement of cash flows was not provided, funding trends are analyzed based on changes in the balance sheet. Cash and due from banks was ¥749.921B, down 44.1% from ¥1,341.005B in the same period of the previous year, suggesting that part of the funds was reallocated to loans and securities. Loans increased 5.0% YoY to ¥7,563.306B, confirming a more proactive deployment of funds that outpaced the 3.1% growth in deposits. Certificates of deposit amounted to ¥58.450B, down 81.2% YoY, indicating a reduction in market-based funding. Meanwhile, deposits increased 3.1% YoY to ¥9,547.283B, with the funding composition shifting toward deposits. Borrowings also decreased 8.6% YoY to ¥399.580B. Overall, these developments can be interpreted as progress in stabilizing funding and allocating funds toward loan assets.

Quality of Earnings

Q3 cumulative profit was affected only minimally by extraordinary items and can be characterized as earnings based on recurring fund investment and fee-based revenue. Extraordinary income was ¥0.115B, compared with extraordinary losses of ¥0.363B, resulting in a net loss of only ¥0.248B. The gap between Ordinary Income of ¥54.773B and Profit Before Tax of ¥54.525B was also limited. Meanwhile, comprehensive income was ¥134.032B, substantially exceeding Net Income of ¥39.178B, primarily due to a ¥92.695B improvement in valuation differences on securities, compared with a negative ¥48.924B in the same period of the previous year. This divergence resulted from valuation gains affected by market conditions, and the reproducibility of the capital enhancement effect in the current period warrants attention. The fact that the 6.7% growth rate in general and administrative expenses was below the 24.2% revenue growth rate can be viewed positively as a structural factor supporting earnings quality.

Earnings Forecast and Guidance

The full-year forecast is Ordinary Income of ¥63.500B (+24.7% YoY), Net Income attributable to owners of the parent of ¥45.000B, forecast EPS of ¥158.41, and forecast dividend of ¥80.00. Q3 cumulative progress was 79.4% for Ordinary Revenue, 86.3% for Ordinary Income, and 87.1% for Net Income, exceeding the standard Q3 progress rate of 75% by 11.3–12.1 percentage points. The profit required in Q4 is only ¥8.727B for Ordinary Income and ¥5.822B for Net Income, representing a level with ample capacity relative to the current company plan. However, as the growth rate in interest on deposits exceeds that of interest on loans, the profit growth rate from Q4 onward will be affected by changes in the interest-rate environment.

Shareholder Returns

The Q2 dividend was ¥40.00 per share, an increase from ¥30.00 in the same period of the previous year. The full-year forecast dividend is ¥80.00, and the forecast full-year Payout Ratio based on forecast EPS of ¥158.41 is 50.5%, within the benchmark level of below 60%. The deduction for treasury shares was ¥39.794B, an increase of ¥14.599B YoY, indicating that share repurchases, in addition to dividends, are affecting capital allocation. Although the Equity Ratio of 9.8% is improving, it remains below the 12% soundness benchmark. The scope for increasing dividends and share repurchases going forward will depend on the balance between earnings sustainability and regulatory capital.

Risk Factors

1. Risk of narrowing loan-deposit interest spreads: Interest on deposits increased +68.7% YoY, outpacing the +25.7% increase in interest on loans, while the Net Interest Margin of 0.94% is below the typical level for domestic banks. The repricing mismatch between assets and liabilities in a rising interest-rate environment represents the most significant profitability risk.

2. Market sensitivity of capital: Accumulated other comprehensive income was ¥666.624B, accounting for 56.4% of net assets, and the ¥92.695B improvement in valuation differences on securities made a significant contribution to the improvement in the Equity Ratio to 9.8%. If interest-rate and equity markets reverse direction, the impact on the Equity Ratio could be substantial.

3. Sensitivity to regional economic conditions and credit costs: Loans increased +5.0% YoY, outpacing deposit growth. While this expands revenue opportunities, changes in regional corporate activity and real estate markets could affect future credit costs.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (bank)

Profitability and Returns

Due to limited comparative data, the relative standing of the 24.4% Net Profit Margin within the industry remains for reference only.

Growth and Capital Efficiency

Due to limited comparative data, the relative standing of the +24.2% Revenue Growth Rate within the industry remains for reference only.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Both Ordinary Income and Net Income increased by more than +20% YoY, and progress against the full-year forecast also exceeded the standard Q3 level. The primary drivers were growth in interest on loans and expansion in net fees and commissions, while the sharp increase in interest on deposits caused profit margins to decline from the same period of the previous year.

2. The Equity Ratio improved to 9.8%, but this improvement was primarily due to the increase in valuation differences on securities, resulting in comprehensive income of ¥134.032B substantially exceeding Net Income of ¥39.178B. Capital sensitivity to market fluctuations remains an area requiring continued monitoring.

3. The 6.7% increase in general and administrative expenses was below the 24.2% increase in revenue, indicating that expense control was a structural factor contributing to profit growth. Meanwhile, the loan-to-deposit ratio of 79.2% remained within the appropriate range, maintaining a balance between loan growth and the deposit base.

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional as necessary.

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