Kyushu Financial Group (7180) FY2026 Q3 Earnings Report

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Executive Summary

For the nine months ended Q3 of FY2026, Ordinary Income and Net Income both grew substantially faster than Revenue, driven by the expansion of net interest income and fee income. Revenue (ordinary revenues) was ¥1858.5B (+11.3% YoY), Ordinary Income was ¥446.4B (+48.3%), and Net Income was ¥310.0B (+48.2%). The primary drivers of earnings growth were increased interest income on loans and expanded fee income, with investment income from funds growing at a faster pace than interest expense on deposits. The Ordinary Income margin expanded from 18.0% in the prior year to 24.0%, clearly demonstrating an improvement in the earnings structure.

Factors Affecting Performance

【Revenue】Ordinary revenues increased 11.3% YoY to ¥1858.5B. The Banking segment led the overall results at ¥1506.7B (+14.1%), with Kagoshima Bank showing particularly strong growth of ¥704.7B (+24.1%). Higo Bank recorded ¥802.0B (+6.5%), the Leasing Business ¥300.9B (+3.5%), and Other Businesses ¥61.8B (+4.6%), with all businesses securing revenue growth.

【Profit and Loss】Ordinary Income was ¥446.4B (+48.3%) and Net Income was ¥310.0B (+48.2%), achieving profit growth substantially above the rate of revenue growth. Banking segment profit was ¥443.2B (+54.5%), with both subsidiaries recording high profit growth rates: Kagoshima Bank at ¥238.6B (+62.1%) and Higo Bank at ¥204.7B (+46.5%). The allowance for loan losses decreased by ¥40.4B from the same period of the prior year, while the containment of credit costs also supported profit. Non-operating extraordinary gains and losses were very small (extraordinary gains of ¥0.03B and extraordinary losses of ¥0.6B), indicating that earnings growth was based on recurring profitability. In conclusion, the Group achieved both revenue and profit growth.

Segment Analysis

Banking accounts for the majority of ordinary revenues (81.1% composition ratio) and is also the core business in terms of profit. Kagoshima Bank recorded segment profit of ¥238.6B (profit margin of 33.9%), demonstrating higher profitability than Higo Bank’s ¥204.7B (profit margin of 25.5%), with both banks improving their profit margins from the prior year. The Leasing Business recorded profit of ¥10.2B on revenue of ¥300.9B (profit margin of 3.4%), representing a 6.8% decline in profit YoY and contrasting with the Banking Business through its low profit margin and declining earnings trend. Other Businesses, including credit card operations, recorded a relatively high profit margin of 17.9% and profit growth of +19.6%, contributing to earnings diversification.

Key Financial Metrics

【Profitability】The Ordinary Income margin improved to 24.0% (18.0% in the prior year), while the Net Income margin improved to 16.7% (12.5% in the prior year); both expanded by more than 400bp. Annualized ROE was 5.4%, representing an increase led by improved margins, assuming the high financial leverage structure typical of regional banks.【Cash Quality】Against Net Income of ¥310.0B, income taxes and other taxes were ¥135.9B, resulting in an effective tax rate of approximately 30.5%, which is within the normal range. Dependence on extraordinary gains and losses was also extremely limited, indicating good earnings quality.【Investment Efficiency】The balance of loans was ¥9兆2987.5B (+2.8% YoY), while deposits were ¥10兆4558.5B (+1.2%), maintaining a loan-to-deposit ratio of 89.0%, near the upper guideline for the banking industry. The balance of securities expanded to ¥2兆2771.2B (+22.1%), increasing market sensitivity.【Financial Soundness】The Equity Ratio improved slightly to 5.5% (5.3% in the prior year). Net assets were ¥7597.2B (+7.9% YoY), supported by the improvement in valuation differences on securities from -¥327.0B to +¥187.9B.

Cash Flow Analysis

Cash and deposits were ¥1兆6822.8B, while deposits of ¥10兆4558.5B exceeded loans of ¥9兆2987.5B by ¥1兆1570.9B, maintaining a funding surplus. Borrowings decreased 8.8% YoY to ¥1兆1444.6B, while collateral received for bond lending transactions increased 123.2% YoY to ¥6611.8B, indicating a slight increase in reliance on market-based funding. Comprehensive income of ¥708.3B substantially exceeded Net Income of ¥310.0B; this difference was primarily attributable to the improvement in valuation differences on securities (from -¥327.0B in the prior year to +¥187.9B in the current period) and an increase in deferred hedge gains and losses. Accordingly, it should be noted that the current-period strengthening of capital reflects not only profits generated by the business but also gains from valuation increases resulting from improved market conditions.

Earnings Quality

Net Income of ¥310.0B was barely affected by extraordinary gains and losses (extraordinary gains of ¥0.03B and extraordinary losses of ¥0.6B), and the increase in profit was based on the expansion of recurring net interest income and fee income. While ordinary revenues increased by +11.3%, the increase in ordinary expenses was contained at +3.2%, resulting in strong operating leverage. However, interest expense on deposits surged from ¥34.9B to ¥147.3B, indicating a rapid increase in funding costs. The allowance for loan losses decreased by ¥40.4B from the same period of the prior year, supporting profit, but it will be necessary to monitor future trends to determine whether this reflects structural improvement in credit quality or the deferral of future credit costs. Comprehensive income exceeded Net Income by ¥398.3B, primarily due to the improvement in valuation differences on securities. As this includes factors subject to market conditions, earnings quality should be assessed separately from Net Income.

Earnings Forecast and Guidance

The full-year earnings forecast remains unchanged at Ordinary Income of ¥505.0B (+17.4% YoY) and forecast EPS of ¥80.88. Q3 cumulative Ordinary Income of ¥446.4B reached 88.4% of the full-year plan, exceeding the standard progress rate of 75% by more than 13 percentage points. Ordinary Income of ¥58.6B is required in the remaining Q4. Because the high cumulative progress rate incorporates seasonality, gains and losses related to securities, and trends in credit costs, it would not be appropriate to judge the likelihood of full-year upside based solely on this progress rate.

Shareholder Returns

The Q2 dividend was ¥13.00 per share (ordinary dividend of ¥12.00 and commemorative dividend for the 10th anniversary of establishment of ¥1.00), while the full-year dividend forecast remains unchanged at ¥27.00 (ordinary dividend of ¥26.00 and commemorative dividend of ¥2.00). The forecast Payout Ratio against forecast EPS of ¥80.88 is 33.4%, which is conservative and below the general guideline of 60%. Q3 cumulative Net Income has already reached 88.5% of the full-year plan, indicating substantial earnings capacity supporting the dividend forecast. Because the forecast includes a commemorative dividend, sustainability assessment based on the ordinary dividend should distinguish the anniversary-related factor.

Risk Factors

1. Risk of NIM compression: Interest expense on deposits surged from ¥34.9B in the same period of the prior year to ¥147.3B, indicating a rapid increase in funding costs. Whether the improvement in loan yields can consistently outpace this increase will determine the sustainability of future net interest income.

2. Dependence on the regional economy: As a regional financial institution whose operating base is primarily Kumamoto and Kagoshima, fluctuations in local demand for funds and credit conditions directly affect performance. The balance of loans increased only +2.8% YoY, indicating limited quantitative expansion.

3. Risk of market price fluctuations: The securities balance expanded to ¥2兆2771.2B (+22.1% YoY), and valuation differences on securities improved from an unrealized loss in the prior year to an unrealized gain. Changes in interest rates and stock prices will have a greater impact on other comprehensive income and net assets.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (bank)

Profitability and Returns

The Company’s Net Income margin of 16.7% improved substantially from 12.5% in the same period of the prior year; however, relative positioning cannot be compared because industry median data has not been prepared.

Growth and Capital Efficiency

The Company’s Revenue growth rate of 11.3% represents strong growth for a regional bank; however, relative comparison is not possible because industry median data has not been prepared.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Ordinary Income and Net Income both achieved approximately 48% profit growth YoY, and the Ordinary Income margin improved by 599bp to 24.0%. Both banking subsidiaries achieved revenue and profit growth, with Kagoshima Bank’s 33.9% profit margin showing particularly notable improvement.

2. Progress against the full-year plan was 88.4% for Ordinary Income and 88.5% for Net Income, substantially exceeding the standard progress rate of 75%. However, the decrease in the allowance for loan losses and improvement in valuation gains on securities may include temporary factors supporting performance, making it important to monitor Q4 trends in credit costs and market-related gains and losses.

3. The forecast Payout Ratio of 33.4% provides ample earnings coverage, and the sustainability of the ordinary dividend excluding the commemorative dividend can also be assessed as broadly favorable.

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 after consulting with professionals as necessary.

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