Kyushu Financial Group (7180) FY2027 Q1 Earnings Report

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Executive Summary

The quarter recorded higher revenue but lower earnings, with the key takeaway being that the expansion in revenue scale has not translated into improved profit margins. Ordinary revenue increased substantially to ¥851.9B (+32.8% YoY), while Ordinary Income declined to ¥182.2B (△4.7% YoY) and Net Income declined to ¥125.3B (△6.8% YoY). The primary factor was the 35.3% increase in funding costs, centered on deposit interest expenses, which exceeded the growth in funds investment income and fee and commission income. Progress toward the full-year Ordinary Income plan was 28.0%, above the standard 25% benchmark.

Factors Driving Earnings Changes

【Revenue】Ordinary revenue was ¥851.9B, up +32.8% YoY. The Banking segment led overall performance at ¥725.9B (85.2% of total, +37.5% YoY), with Higo Bank at ¥379.1B (+35.0% YoY) and Kagoshima Bank at ¥346.8B (+40.3% YoY), both achieving double-digit revenue growth. The Leasing business at ¥108.9B (+10.9% YoY) and Other businesses at ¥25.6B (+40.1% YoY) also contributed to revenue growth. The balance of loans increased +2.2% YoY, supporting the +25.3% growth in interest on loans.

【Earnings】Ordinary Income declined to ¥182.2B (△4.7% YoY), while Net Income declined to ¥125.3B (△6.8% YoY). Banking segment profit was ¥189.7B (△4.2% YoY). Higo Bank secured earnings growth at ¥102.3B (+8.7% YoY), whereas Kagoshima Bank recorded a significant decline to ¥87.4B (△15.9% YoY), with its profit margin falling by 1,680bp to 25.2%. The primary factor pressuring earnings was the sharp 70.2% YoY increase in deposit interest expenses, which drove total funding costs up +35.3%. Expenses increased only +8.1% YoY, and the expense ratio improved to 26.6% from 32.7% in the same period of the previous year, providing support through cost control. Net extraordinary losses were limited to ¥0.39B, and the gap between Ordinary Income and Profit Before Tax was immaterial. In conclusion, the period saw higher revenue but lower earnings: while core subsidiary Higo Bank achieved both revenue and earnings growth, declining profitability at Kagoshima Bank weighed on consolidated earnings.

Segment Analysis

The Banking segment recorded Ordinary revenue of ¥725.9B (85.2% of total, +37.5% YoY) and segment profit of ¥189.7B (△4.2% YoY). By subsidiary, Higo Bank generated Ordinary revenue of ¥379.1B (+35.0% YoY), profit of ¥102.3B (+8.7% YoY), and a profit margin of 27.0%, down from 33.5% in the previous year, resulting in both revenue and earnings growth. Kagoshima Bank recorded Ordinary revenue of ¥346.8B (+40.3% YoY), profit of ¥87.4B (△15.9% YoY), and a profit margin of 25.2%, significantly down from 42.0% in the previous year, resulting in higher revenue but lower earnings. The Leasing business recorded Ordinary revenue of ¥108.9B (+10.9% YoY), profit of ¥2.8B (+18.9% YoY), and a profit margin of 2.5%. Other businesses achieved substantial earnings growth, with Ordinary revenue of ¥25.6B (+40.1% YoY) and profit of ¥2.8B (+145.6% YoY), suggesting improvements in credit card operations and related businesses. Overall, the profitability gap between Higo Bank and Kagoshima Bank within the Banking segment has widened, making the factors behind Kagoshima Bank’s declining profit margin a key focus going forward.

Key Financial Indicators

【Profitability】The Ordinary Income margin declined to 21.4% from 29.8% in the same period of the previous year, a decrease of 840bp, while the Net Income margin also declined by 630bp to 14.7%. The contraction in profit margins despite revenue growth resulted from funding costs increasing faster than funds investment income. The expense ratio, calculated as expenses of ¥226.4B divided by Ordinary revenue of ¥851.9B, was 26.6%, improving from 32.7% in the same period of the previous year, indicating relatively favorable cost management. 【Cash Quality】Net extraordinary losses were limited to ¥0.39B, and the gap between Profit Before Tax of ¥181.8B and Ordinary Income of ¥182.2B was immaterial, indicating that most earnings consisted of recurring income from the core business. 【Investment Efficiency】Annualized ROE was 6.4%. It is explained by the product of a Net Income margin of 14.7%, total asset turnover of 0.025, and financial leverage of 17.48x. While reflecting the high-leverage structure characteristic of banks, the low asset turnover constrains the level of ROE. 【Financial Soundness】The Equity Ratio was 5.7%, a slight improvement from 5.6% in the same period of the previous year, but remained below the generally cited Basel III benchmark of 8%. The loan-to-deposit ratio was 88.9%, calculated by dividing loans of ¥9,447.5B by deposits of ¥10,621.4B, and remained near the upper end of the typical range for the banking industry.

Cash Flow Analysis

Although a cash flow statement was not disclosed, funding trends can be assessed from changes in key balance sheet items. Loans increased by +¥2,032.3B (+2.2% YoY), while cash and due from banks declined by ▲¥1,045.1B (▲6.7%), indicating a shift in funds from liquid assets toward lending operations. On the funding side, negotiable certificates of deposit increased by +¥1,203.9B (+50.1%), and collateral received for securities lending transactions increased by +¥737.3B (+28.0%), while borrowings declined by ▲¥1,000.2B (▲8.4%), indicating a change in the funding composition accompanied by a shift toward market-based funding. Deposits increased only moderately by +0.5%, and because the pace of loan growth exceeded deposit growth, the loan-to-deposit ratio remained near the upper end of the range at 88.9%. Valuation differences on securities improved substantially to ¥206.1B from ¥23.4B in the same period of the previous year, boosting Comprehensive Income to ¥331.1B (+85.8% YoY). However, this represents Other Comprehensive Income arising from market price fluctuations and must be distinguished from Net Income.

Quality of Earnings

Current-period earnings were primarily based on Ordinary Income of ¥182.2B. Extraordinary income was ¥0.04B, versus extraordinary losses of ¥0.43B, resulting in a limited net one-time loss of ¥0.39B. The difference between Profit Before Tax of ¥181.8B and Ordinary Income of ¥182.2B was immaterial, and the conversion from Ordinary Income to Net Income was primarily attributable to income taxes of ¥56.5B, representing an effective tax rate of 31.1%. Other ordinary revenue, corresponding to non-operating income, increased substantially to ¥256.2B from ¥113.3B in the same period of the previous year. However, Other ordinary expenses also increased similarly to ¥247.8B from ¥103.9B, limiting the contribution of revenue growth to earnings through the offsetting effect of the two items. Comprehensive Income of ¥331.1B significantly exceeded Net Income of ¥125.3B, primarily because of Other Comprehensive Income related to valuation differences on securities of ¥206.1B. This difference contains a significant valuation component associated with market fluctuations; therefore, Net Income and Ordinary Income should be prioritized as indicators of recurring earnings power.

Earnings Forecasts and Guidance

The full-year Ordinary Income forecast is ¥650.0B (+20.8% YoY), and the EPS forecast is ¥104.56. There have been no revisions to either the earnings forecast or the dividend forecast. Q1 progress toward the full-year Ordinary Income forecast was 28.0% (¥182.2B/¥650.0B), while EPS progress was 28.3% (¥29.60/¥104.56), with both exceeding the simple progress benchmark of 25%. However, both Ordinary Income and Net Income declined YoY in Q1. Achieving the full-year earnings growth plan will therefore depend on funds investment income and fee income expanding at a faster pace than funding costs from Q2 onward.

Shareholder Returns

The full-year dividend forecast is ¥38.00 per share, indicating a direction toward an increase compared with the interim dividend of ¥13.00 in the same period of the previous year. The forecast Payout Ratio based on forecast full-year EPS of ¥104.56 is 36.3%, below the generally cited sustainability benchmark of 60%. Based on the average number of shares outstanding during the period of 423.47 million shares, estimated annual total dividends are approximately ¥16.09B, providing approximately 2.8x earnings coverage against forecast full-year Net Income of ¥450.0B. Treasury stock increased +8.7% YoY to ¥24.63B; however, no treasury stock repurchases for the current period were disclosed, and this report evaluates only the Payout Ratio.

Risk Factors

1. Net Interest Margin Compression Risk: Interest on loans increased +25.3% YoY, while deposit interest increased substantially by +70.2%, and total funding costs also increased +35.3%. The burden from rising deposit interest rates is exceeding the growth in net interest income, and the Ordinary Income margin has declined by 840bp.

2. Declining Profitability at Kagoshima Bank: While Kagoshima Bank’s Ordinary revenue increased +40.3%, segment profit declined △15.9%, and its profit margin fell by 1,680bp from 42.0% to 25.2%. This was the primary factor behind the decline in profitability for the Banking segment as a whole, and the trend in the underlying factors requires close monitoring.

3. Equity Ratio Level: The disclosed Equity Ratio was 5.7% (5.6% in the same period of the previous year). Although it improved slightly from the previous year, it remained below the generally cited Basel III benchmark of 8%. The loan-to-deposit ratio was also near the upper end of the range at 88.9%, making this an item requiring monitoring from both capital buffer and funding composition perspectives.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (bank)

Profitability and Returns

Because comparative data for the industry median is not yet available, no determination of the Company’s relative level can be made for its Net Income margin of 14.7%.

Growth and Capital Efficiency

The Company’s Revenue Growth Rate of +32.8% is considered a high level of growth within the industry, although a rigorous relative assessment is limited because industry median data is not yet available.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Higher Revenue but Lower Earnings: Despite a +32.8% increase in Ordinary revenue, Ordinary Income declined △4.7%, indicating a decline in the conversion rate of revenue growth into earnings. The primary factor was the acceleration in funding costs, making this a key issue affecting the achievement of the full-year earnings growth plan.

2. Profitability Gap Between Banking Subsidiaries: Higo Bank achieved both revenue and earnings growth, while Kagoshima Bank recorded higher revenue but lower earnings. Most of the decline in the consolidated profit margin was attributable to Kagoshima Bank, making whether this gap narrows in the coming quarters a key area of focus.

3. Comparison of Progress and Capital Levels: Progress toward the full-year plan was above the planned trajectory, with Ordinary Income at 28.0% and EPS at 28.3%. However, the Equity Ratio of 5.7% improved only slightly from the previous year, resulting in financial results that warrant differentiated assessment of earnings progress and capital adequacy.

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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. The 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 as necessary.

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