Aozora Bank,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥117.14B
• Net Income: ¥12.92B
• EPS: ¥98.37

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Aozora Bank delivered a solid FY2026 Q2 with strong ordinary income growth and expanding margins, but profitability levels remain modest for a bank and the ultra-thin NIM underscores structural headwinds. Revenue rose 1.8% YoY to 1,171.44, while ordinary income jumped 53.9% to 153.80 and net income increased 14.2% to 136.13. Using the provided growth rates, the net profit margin improved to 11.6% from roughly 10.4% a year ago, an expansion of about 126 bps. Ordinary income margin expanded more sharply to 13.1% from about 8.7%, a roughly 445 bps improvement, indicating better operating efficiency and/or lower credit/cost burdens. Cost efficiency appears strong with a Cost-to-Income Ratio (CIR) of 27%, far better than sub-50% industry benchmarks. However, the Net Interest Margin (NIM) is only 0.6%, far below the >2% healthy benchmark, implying earnings are vulnerable to deposit betas and rate competition. ROE is 2.9% by DuPont, reflecting low asset turnover typical of banks and thin margins, partially offset by leverage. The effective tax rate is 10.6%, which supported net earnings; any normalization upward would be a headwind. Balance sheet leverage is high (D/E 16.25x), a sector norm but still a risk factor if credit costs rise. Liquidity positioning is healthy with an LDR of 71.2%, suggesting ample funding headroom. Book value per share is approximately JPY 3,420 (calc), providing a sizeable capital buffer versus EPS of JPY 98.37 for the half. Dividend visibility appears reasonable with an implied payout ratio of 42.1% and interim dividends of JPY 19 in Q1 and JPY 19 in Q3 declared. Earnings quality can’t be validated due to missing cash flow data; OCF/NI is not calculable. Forward-looking, earnings momentum hinges on NIM stabilization, deposit cost control, and credit cost containment, with CIR discipline as a key offset. Overall, Q2 shows improved profitability through margins and efficiency, but sustainability depends on navigating a low-NIM environment and interest-rate/credit cycle dynamics.

Profitability Analysis

ROE decomposition (DuPont): ROE (2.9%) = Net Profit Margin (11.6%) × Asset Turnover (0.014) × Financial Leverage (17.25x). The component exhibiting the largest implied improvement is the margin element: ordinary income grew 53.9% vs revenue +1.8%, resulting in an estimated ordinary margin expansion of ~445 bps and net margin expansion of ~126 bps YoY. Business drivers likely include: (1) improved spread/volume economics in core lending and securities (ordinary income outpacing revenue), (2) tight cost control reflected in a very low CIR of 27%, and (3) a low effective tax rate (10.6%) supporting bottom-line conversion. Asset turnover remains structurally low for banks (0.014), and leverage remains high (17.25x), consistent with the sector. The margin gains appear partly sustainable if CIR discipline persists; however, durability is uncertain given a very low NIM (0.6%) that could compress further if deposit costs rise faster than asset yields. Watch for any acceleration in SG&A/overhead or credit costs that would erode the current margin advantage; at present, there is no evidence SG&A is growing faster than revenue, but lack of disclosure limits verification.

Growth Assessment

Top-line growth was modest at +1.8% YoY, while ordinary income growth was strong at +53.9% YoY and net income rose +14.2% YoY, indicating positive operating leverage. The quality of profit growth appears driven by efficiency and mix rather than core spread expansion given the reported NIM of 0.6%. With LDR at 71.2%, there is capacity to grow loans should risk-adjusted returns justify it, but low NIM underscores a challenging revenue environment. Fee and other non-interest income trends are not disclosed; if growing, they could be a stabilizing factor. Outlook hinges on BOJ policy normalization effects on asset yields versus deposit betas, securities portfolio valuation, and credit cost trajectory. Absent cash flow details and breakdowns of non-interest items, we view the growth as favorable but sensitive to macro/interest rate moves.

Financial Health

Leverage: D/E is 16.25x, which triggers a formal warning (>2.0) but is structurally typical for banks; nonetheless, it amplifies earnings and capital sensitivity to credit losses and market shocks. Liquidity: LDR is 71.2% (within the 70–90% optimal band), implying a conservative funding posture and solid liquidity buffer. Current and quick ratios are not meaningful for banks and are unreported. Maturity mismatch: Not directly assessable from disclosures; funding is deposit-centric (58,495.83) versus loans (41,631.23), which helps mitigate near-term refinancing risk, though asset duration vs deposit repricing remains a key sensitivity. Off-balance sheet obligations: Not disclosed; contingent liabilities (guarantees, derivatives) may exist as is typical for banks but are unreported in this dataset. Capital adequacy ratios (e.g., CET1) are not provided; absent these, solvency appraisal relies on equity (4,733.22) versus total assets (81,655.91), and on earnings retention.

Cash Flow Quality

OCF and FCF are unreported, so OCF/Net Income, working-capital dynamics, and FCF coverage cannot be assessed. In banking, accrual earnings quality is often cross-checked via cash earnings, credit cost recognition, and securities gains/losses; these details are unavailable. Given the low NIM (0.6%), earnings are susceptible to accrual assumptions around credit costs and securities valuations, but there is no direct evidence of manipulation. Dividend and capex claims on cash are light for banks; sustainability should be judged against earnings and capital metrics rather than FCF, which are not fully disclosed here.

Dividend Sustainability

The calculated payout ratio is 42.1%, below the 60% benchmark and thus ostensibly sustainable against current earnings. Interim dividends of JPY 19 in Q1 and JPY 19 in Q3 (JPY 38 YTD) align with a moderate payout policy relative to EPS of JPY 98.37 for the period. FCF coverage cannot be computed due to missing cash flow data; for banks, capital adequacy (e.g., CET1) is the binding constraint, which is not disclosed. With ROE at 2.9%, internal capital generation is modest; however, given strong CIR and positive earnings, the current payout appears maintainable absent a jump in credit costs or NIM shock.

Risk Assessment

Business Risks:

• Sustained low NIM (0.6%) compressing core profitability
• Deposit beta and funding cost increases outpacing asset yield repricing
• Credit cycle deterioration leading to higher credit costs
• Securities portfolio valuation volatility impacting OCI and earnings
• Regulatory and capital requirements affecting dividend capacity

Financial Risks:

• High leverage (D/E 16.25x) magnifying losses in stress scenarios
• Low ROE (2.9%) and ROIC (2.9%) relative to cost of equity
• Interest rate risk (asset duration mismatch vs deposit repricing)
• Concentration in deposit funding despite healthy LDR
• Tax rate normalization risk from currently low effective tax rate (10.6%)

Key Concerns:

• Very thin NIM leaves little buffer against adverse shocks
• Earnings quality can’t be validated due to missing cash flow and credit cost disclosure
• Dependence on cost discipline (CIR 27%) to offset revenue headwinds
• Unreported capital ratios (e.g., CET1) limit solvency assessment

Investment Implications

Key Takeaways:

• Strong YoY profit improvement with significant margin expansion despite modest revenue growth
• CIR at 27% highlights excellent cost control and supports earnings resilience
• ROE remains low at 2.9%, indicating limited capital efficiency
• NIM at 0.6% is a material structural headwind and key sensitivity
• Liquidity stance is conservative with LDR at 71.2%, supporting stability

Metrics to Watch:

• Net Interest Margin (trajectory post-BOJ policy changes)
• Credit costs and NPL/Stage 3 ratios (not disclosed here)
• Securities AFS/OCI sensitivity to rate moves
• Deposit growth and deposit beta
• Capital adequacy (CET1 ratio) and RWA trends
• Cost-to-Income Ratio sustainability
• Ordinary income composition (net interest vs fees vs trading/others)

Relative Positioning: Operational efficiency (CIR) appears stronger than typical domestic peers, but profitability (ROE, NIM) is weaker; balance sheet liquidity (LDR) is conservative, positioning the bank defensively in a low-yield environment.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis