ZENKOKU HOSHO (7164) FY2027 Q1 Earnings Report

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Executive Summary

Although operating income remained almost unchanged from the previous year, the Company achieved higher ordinary income and net income, driven by increases in non-operating revenue, including interest income and equity in earnings of affiliates. Revenue was ¥11.77B (+2.5% YoY), operating income was ¥7.72B (+0.1%), ordinary income was ¥9.33B (+7.9%), and net income was ¥6.56B (+9.4%). EPS increased 10.9% to ¥49.39 from ¥44.53 in the previous year. The key feature of these results is that financial income drove profit growth while core operating growth remained modest.

Factors Affecting Business Performance

【Revenue】The Company operates the credit guarantee business as a single reportable segment and does not disclose a segment-by-segment breakdown. Revenue (including guarantee fee income and other items) increased 2.5% YoY to ¥11.77B.

【Profit and Loss】Operating income was ¥7.72B, essentially flat at +0.1% YoY. The operating margin declined to 65.6% from 67.2% in the previous year, down 1.6pt, suggesting that selling, general and administrative expenses may have increased at a faster pace than revenue growth (+2.5%). Meanwhile, non-operating income increased substantially to ¥1.85B from ¥1.17B in the previous year, with interest income of ¥1.41B (¥1.07B in the previous year) and equity in earnings of affiliates of ¥0.27B contributing to ordinary income. As a result, ordinary income increased 7.9% to ¥9.33B, and the ordinary income margin improved to 79.3% from 75.4%, up 3.9pt. Extraordinary income of ¥0.16B (gain on sales of investment securities) was a temporary factor with a limited impact. After deducting income taxes and other taxes of ¥2.93B (effective tax rate: 30.8%) from pretax income of ¥9.50B, net income increased 9.4% to ¥6.56B, and the net margin improved to 55.7% from 52.3%, up 3.4pt. In conclusion, operating performance was flat, but the Company recorded higher revenue and profit supported by non-operating income.

Key Financial Indicators

【Profitability】The operating margin was 65.6%, down 1.6pt from 67.2% in the previous year; the ordinary income margin was 79.3%, up 3.9pt from 75.4%; and the net margin was 55.7%, up 3.4pt from 52.3%. While operating-level margins deteriorated modestly, non-operating income lifted overall profitability.【Cash Flow Quality】Non-operating income of ¥1.85B represented 15.7% of revenue. The primary components were interest income of ¥1.41B, dividend income of ¥0.11B, and equity in earnings of affiliates of ¥0.27B, indicating a fairly high degree of dependence on financial income.【Investment Efficiency】ROE was 2.7%. As investment securities account for 64.6% of total assets, the Company has an asset-intensive structure, and total asset turnover has remained low.【Financial Soundness】The equity ratio was 49.2%, up 0.3pt from 48.9% in the previous year. Current assets were ¥123.02B against current liabilities of ¥35.80B, resulting in a current ratio of 343.7%. Interest-bearing debt consisted solely of ¥30.0B in long-term borrowings, indicating a conservative capital structure.

Cash Flow Analysis

As the Company does not disclose a cash flow statement, funding trends are assessed based on changes in the balance sheet. Cash and deposits decreased 4.5% to ¥69.29B from ¥72.55B in the previous year, a decrease of ¥3.25B, while investment securities increased 3.2% to ¥319.02B from ¥309.15B, an increase of ¥9.88B. This suggests that funds shifted from cash and deposits to securities. Current liabilities decreased ¥5.24B to ¥35.80B from ¥41.04B in the previous year, including a ¥5.15B decrease in income taxes payable due to progress in tax payments. Total assets decreased modestly by 1.4% to ¥493.71B from ¥500.83B in the previous year. However, the current ratio remained high at 343.7%, and no concerns were identified regarding short-term liquidity.

Earnings Quality

Recurring earnings are generated through a combination of core credit guarantee-related revenue and non-operating financial income, with the latter driving ordinary income. Total non-operating income of ¥1.85B represented 15.7% of revenue, exceeding a generally accepted threshold. Its components included interest income of ¥1.41B, dividend income of ¥0.11B, and equity in earnings of affiliates of ¥0.27B. Extraordinary income of ¥0.16B (gain on sales of investment securities) was a temporary factor with low repeatability. The effective tax rate on income taxes and other taxes of ¥2.93B against pretax income of ¥9.50B was 30.8%, stable with no significant change from the previous year. Comprehensive income was ¥7.81B, ¥1.25B higher than net income of ¥6.56B. This difference was attributable to a ¥1.25B increase in valuation difference on securities, consisting primarily of unrealized valuation gains. Although operating-level profit growth was modest, the increasing dependence on non-operating income and valuation gains is an important consideration in assessing earnings quality.

Earnings Forecast and Guidance

Progress against the full-year plan was 19.4% for revenue (¥11.77B / ¥60.60B), 18.4% for operating income (¥7.72B / ¥42.00B), 19.8% for ordinary income (¥9.33B / ¥47.20B), and 20.1% for net income (¥6.56B / ¥32.70B). All were below the simple quarterly allocation of 25%, and as of Q1, no revisions had been made to the earnings forecast or dividend forecast.

Shareholder Returns

Under the Company’s plan, the annual dividend forecast is ¥123 and the EPS forecast is ¥246.12, resulting in a payout ratio of approximately 50.0% (¥123 / ¥246.12). The Company holds 4,882 thousand treasury shares, equivalent to 3.5% of the 137,744 thousand issued shares. With an equity ratio of 49.2% and a current ratio of 343.7%, the financial foundation is robust, and constraints on dividend funding are considered limited.

Risk Factors

1. Credit and Economic Cycle Risk: Given the nature of the credit guarantee business, an increase in guarantee payments (subrogation payments) during an economic downturn could pressure earnings. Total provisions have remained at ¥1.07B, and changes in the credit environment could affect core earnings.

2. Dependence on Financial Income Risk: The increase in ordinary income depends substantially on non-operating income, which represents 15.7% of revenue. Interest income of ¥1.41B and equity in earnings of affiliates of ¥0.27B are susceptible to fluctuations in interest rates and market conditions.

3. Securities Price Volatility Risk: Investment securities of ¥319.02B account for 64.6% of total assets, while valuation difference on securities increased to +¥1.25B from +¥0.30B in the previous year. If market conditions fluctuate, a reversal of these valuation gains could affect comprehensive income.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Due to the high-margin structure unique to the credit guarantee business, the Company’s profitability metrics are significantly above the industry median.

Growth and Capital Efficiency

The revenue growth rate was below the industry median, indicating relatively modest top-line growth.

※Source: Compiled by the Company

Key Takeaways from the Results

1. While operating income was almost flat (+0.1%), ordinary income and net income increased in the 7–9% range due to higher non-operating income. A key characteristic is the high dependence of profit growth on financial income.

2. The operating margin declined to 65.6% from 67.2% in the previous year, down 1.6pt, confirming that the pace of core cost increases exceeded revenue growth.

3. The financial foundation is robust, with an equity ratio of 49.2% and a current ratio of 343.7%. Progress against the earnings forecast remained in the 19–20% range, representing a modest pace for Q1.

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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 disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional adviser as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a solid earnings start, with revenue growth and resilient operating profit supplemented by a marked improvement in financial income. Operating revenue increased 2.5% year on year to JPY11.77bn. Operating income was effectively flat, rising 0.1% to JPY7.72bn. The operating margin declined 160bp year on year to 65.6% from 67.2%, indicating that operating-expense growth of 7.4% outpaced revenue growth. Ordinary income nevertheless rose 7.9% to JPY9.34bn, aided by a 58.7% increase in non-operating income to JPY1.85bn. Interest income increased JPY0.34bn year on year to JPY1.41bn and was the principal contributor to this improvement. Net income increased 9.4% to JPY6.56bn, exceeding the growth rate of both revenue and operating income. Net margin expanded 340bp to 55.7% from 52.3%, reflecting improved financial income and a JPY0.16bn gain on sales of investment securities. The securities-sale gain represented 1.4% of revenue and contributed to pre-tax profit, but was not the main driver of the earnings improvement. The effective tax rate was 30.9%, producing a tax burden of 0.691. Annualized ROE was 10.8%, a good level under the stated benchmark, although it remains below the 15% level generally associated with excellent capital efficiency. Liquidity is exceptionally strong, with a current ratio and quick ratio of 343.7%. Financial debt is limited relative to capital, with debt/capital at 11.0%, while interest coverage of 33.44x provides substantial capacity to service interest costs. Investment securities of JPY319.03bn account for 64.6% of total assets, making portfolio yield and market-value movements important determinants of future earnings and comprehensive income. Comprehensive income increased 24.0% to JPY7.81bn, supported by favorable securities valuation movements. Management left both full-year earnings and dividend forecasts unchanged. Q1 progress against full-year guidance is slightly below a straight-line quarterly run rate, but the shortfall is modest and does not by itself challenge the annual plan. The core implication is that earnings momentum currently depends less on expansion in the credit-guarantee operating franchise and more on financial-income conditions and disciplined expense control.

Profitability Analysis

The reported annualized DuPont ROE of 10.8% decomposes into a 55.7% net profit margin, 0.095x asset turnover, and 2.03x financial leverage. The unusually high margin reflects the economics of the credit-guarantee business and meaningful non-operating investment income, while low asset turnover is consistent with the large investment-securities portfolio on the balance sheet. Financial leverage is moderate in the DuPont framework, although financial debt itself is low relative to capital at 11.0%. The principal year-on-year change was margin mix rather than operating throughput: net margin improved 340bp, while operating margin compressed 160bp. Revenue increased 2.5% to JPY11.77bn, whereas operating expenses increased 7.4% to JPY4.05bn, creating negative operating leverage in the quarter. Operating income therefore grew only 0.1% to JPY7.72bn. Below operating income, non-operating income rose to JPY1.85bn from JPY1.17bn, led by interest income of JPY1.41bn versus JPY1.07bn a year earlier. The extended DuPont interest burden of 1.229 is above 1.0 because net financial income exceeds interest expense, rather than indicating financing pressure. EBIT margin was 65.6%, still exceptionally high despite the quarterly compression. A JPY0.16bn gain on sales of investment securities also lifted pre-tax income and should be distinguished from recurring operating profitability. The sustainability of the Q1 net-income growth rate therefore depends on whether portfolio income remains elevated and whether operating-expense growth moderates closer to revenue growth.

Growth Assessment

Revenue growth of 2.5% was positive but moderate for the quarter. Operating profit growth of 0.1% lagged revenue growth, showing that cost absorption did not improve despite the higher revenue base. Ordinary income growth of 7.9% and net-income growth of 9.4% were stronger, but were driven predominantly by financial income rather than by operating-margin expansion. Interest income increased 31.8% year on year to JPY1.41bn, reinforcing the sensitivity of earnings growth to investment yields and portfolio composition. The JPY0.16bn securities-sale gain added a non-recurring component to pre-tax profit. Full-year guidance calls for revenue of JPY60.60bn, operating income of JPY42.00bn, ordinary income of JPY47.20bn, and net income attributable to owners of JPY32.70bn. Q1 progress is 19.4% for revenue, 18.4% for operating income, 19.8% for ordinary income, and 20.1% for net income. These rates are 4.9 to 6.6 percentage points below a 25% straight-line Q1 pace, but none deviates by more than 10 percentage points. The annual guidance therefore appears achievable if earnings exhibit the usual intra-year concentration or if the investment-income environment remains supportive. The company operates principally through a single reportable credit-guarantee segment, making group growth closely tied to mortgage lending activity, housing transactions, lender relationships, guarantee pricing, and credit-cost experience.

Financial Health

The balance sheet is highly liquid. Current assets of JPY123.02bn exceeded current liabilities of JPY35.80bn by JPY87.23bn, producing working capital of JPY87.23bn and a current ratio of 343.7%. Cash and deposits totaled JPY69.29bn, equivalent to 193.6% of current liabilities. The identical quick ratio of 343.7% confirms that liquidity is not dependent on inventory monetization. Total equity was JPY242.97bn, representing 49.2% of total assets. Interest-bearing debt consisted of JPY30.00bn of long-term loans, and debt/capital was a conservative 11.0%. The reported debt-to-equity ratio was 1.03x, below the 2.0x aggressive-financing threshold, while the debt/capital measure and long-term nature of borrowings indicate limited balance-sheet financing risk. Interest coverage was very strong at 33.44x. Long-term loans of JPY30.00bn are well covered by the JPY319.03bn investment-securities portfolio and JPY69.29bn cash balance. Investment securities increased JPY9.88bn year on year to JPY319.03bn and constitute the central balance-sheet exposure. Total assets declined JPY7.12bn year on year, primarily because current assets fell JPY7.90bn, while equity declined JPY2.18bn. The capital structure is therefore robust, but capital preservation and earnings remain materially exposed to investment-market conditions given the portfolio's scale.

Notable B/S Changes

Investment securities: +JPY9.88bn (+3.2%) year on year to JPY319.03bn - reinforces the importance of portfolio yield and market-value movements to earnings and capital. Cash and deposits: -JPY3.25bn (-4.5%) year on year to JPY69.29bn - liquidity remains very strong, but asset allocation has shifted modestly away from cash. Short-term investment securities: -JPY4.99bn (-11.3%) year on year to JPY39.11bn - indicates a reduction in liquid securities holdings within the broader investment portfolio. Total equity: -JPY2.18bn (-0.9%) year on year to JPY242.97bn - capital remains substantial at 49.2% of total assets despite the modest decline. Income taxes payable: -JPY5.15bn (-64.9%) year on year to JPY2.78bn - a significant reduction in current liabilities that contributed to the stronger current ratio.

Cash Flow Quality

The quarter generated net income of JPY6.56bn and comprehensive income of JPY7.81bn. Earnings conversion into operating cash flow and free cash flow cannot be evaluated from the reported figures. Profit quality within the income statement is nevertheless supported by stable operating income of JPY7.72bn and recurring interest income of JPY1.41bn. At the same time, pre-tax income included a JPY0.16bn gain on sales of investment securities, which should not be extrapolated as a recurring source of earnings. The rise in investment securities to JPY319.03bn and the decline in cash and deposits to JPY69.29bn indicate that portfolio allocation remains an important driver of balance-sheet liquidity and future financial income. The JPY2.88bn reduction in unearned revenue may affect the timing of reported revenue and liability balances, but current liquidity remains ample. For this financial business, the quality of earnings should be assessed primarily through the durability of guarantee-related income, realized and recurring portfolio yields, credit-loss provisioning, and preservation of liquidity buffers.

Dividend Sustainability

The full-year dividend forecast is JPY123 per share, unchanged by management. Against forecast EPS of JPY246.12, the implied dividend payout ratio is 50.0%. This is within the stated sub-60% sustainability benchmark and leaves meaningful retained earnings capacity. Retained earnings were JPY242.73bn at Q1-end, providing a substantial capital base relative to the planned dividend. Annualized ROE of 10.8% indicates that the company is generating a reasonable return while retaining approximately half of forecast earnings. The projected dividend appears consistent with the company's earnings guidance, provided the ordinary-income contribution from investment income is maintained. The strong liquidity position, low debt/capital ratio, and 33.44x interest coverage further support financial flexibility. Dividend capacity should be monitored against credit-cost developments in the guarantee portfolio and valuation or income changes in the investment-securities portfolio.

Risk Assessment

Business risks include Mortgage-market and housing-transaction risk: the single credit-guarantee business is exposed to changes in home-loan origination volumes, housing demand, interest rates, and lending-partner activity., Credit risk: deterioration in borrower repayment performance could increase guarantee payments and allowance requirements, reducing underwriting profitability., Investment-income risk: interest income of JPY1.41bn was a major contributor to the improvement in ordinary income, leaving earnings sensitive to portfolio yield, reinvestment conditions, and asset allocation., Market-value risk: investment securities represent 64.6% of total assets, so equity and bond-market movements can affect comprehensive income and capital..

Financial risks include Portfolio concentration risk: JPY319.03bn of investment securities is large relative to JPY242.97bn of equity, making capital sensitive to valuation changes even though liquidity is strong., Interest-rate risk: changing rates can affect both the return on invested assets and the valuation of fixed-income holdings., Earnings-mix risk: operating income was flat year on year, while stronger ordinary and net income relied on non-operating income and a securities-sale gain..

Key concerns include Operating expenses rose 7.4% year on year versus 2.5% revenue growth, compressing operating margin by 160bp., Q1 operating-income progress of 18.4% is below a 25% straight-line pace; subsequent quarterly operating leverage is important for meeting the full-year plan., The JPY0.16bn gain on sales of investment securities supported pre-tax earnings and should not be treated as recurring operating growth..

Investment Implications

Key takeaways include Q1 net income increased 9.4% year on year to JPY6.56bn, outperforming the 0.1% increase in operating income., Operating profitability remains very high at a 65.6% margin, but the 160bp contraction highlights a need for tighter expense growth., Interest income increased 31.8% year on year to JPY1.41bn and was the key contributor to stronger ordinary income., The balance sheet combines very high short-term liquidity with conservative financial debt, as shown by a 343.7% current ratio and 11.0% debt/capital., The forecast JPY123 dividend implies a 50.0% payout ratio versus forecast EPS, supporting a balanced shareholder-return and capital-retention profile..

Metrics to watch include Operating revenue growth and operating-expense growth, particularly whether expense growth falls below revenue growth., Operating-margin trajectory relative to the Q1 level of 65.6%., Interest income, investment yield, and realized gains or losses on investment securities., Guarantee-credit costs, allowance movements, and borrower-default trends., Progress toward full-year operating-income guidance of JPY42.00bn and net-income guidance of JPY32.70bn., Changes in investment securities relative to equity and comprehensive-income volatility..

Regarding relative positioning, 全国保証 exhibits a high-margin, capital-rich credit-guarantee profile with substantial liquidity and low financial debt. Its annualized 10.8% ROE is good but not at the highest benchmark tier, and the quarter shows that incremental earnings are currently more dependent on portfolio income than on expansion in underlying operating margins.