Equipment Financing. Business Overview. Installment Sales. Finance Leasing, Operating Leasing, Auto Leasing, Other

Transcription

1 Annual Report 2011

2 Step Up as a Multimodal Corporate Financial IBJ Leasing Company Limited (the Company ) was established in 1969 as a general leasing company under an initiative by The Industrial Bank of Japan, Ltd. (now Mizuho Corporate Bank, Ltd. and Mizuho Bank, Ltd.), with the participation of 16 major companies representing Japanese industries, including life insurance companies. The IBJ Leasing Group operates as a multimodal financial services group that provides services for corporate customers with a focus on leasing. The financing of industrial machinery and machine tools accounts for a high ratio of our business operations, and we are also heavily involved in the financing of construction machinery, vessels and other items. In addition, we are expanding the scope of our business activities by proposing a wide range of solutions that meet customers increasingly diversified needs and enhancing our presence in the specialized financing area. In the coming years, we will continue to meet increasingly sophisticated and diversified financial needs, and earn the satisfaction and trust of our customers.

3 Services Group Contents 02 Business Overview 04 Characteristics of the IBJ Leasing Group 06 Consolidated Financial Highlights 08 A Message from the President 12 Third Medium-Term Management Plan 14 Review of Operations 15 Equipment Financing 16 Financing 17 Fee Businesses/Overseas Operations 18 Topic 19 Funding 20 Corporate Governance 24 Directors, Auditors and Executive Officers 25 Financial Section 63 Corporate Information 64 Stock Information 65 Headquarters and Branches 66 Major Group Companies IBJ Leasing Annual Report

4 Business Overview The IBJ Leasing Group provides wide-ranging financial services including leasing, installment sales and loans by utilizing its financial expertise and ability to understand the value of equipment. The Group possesses expertise cultivated through the provision of optimal financial services that meet the diverse needs of our customers as heretofore. Through this expertise, we enable our customers to access the know-how of a wide range of in-house professional teams so that we can closely monitor customer needs and provide the best solutions. Photo: Siemens Japan K.K. Equipment Financing Finance Leasing, Operating Leasing, Auto Leasing, Other The leasing business is a financial service by which the Company purchases machineries and equipment that customers have selected, and leases them to customers. We provide structured leases and other high-valueadded leases to satisfy the sophisticated and diverse leasing requirements of customers. Installment Sales Installment sales are a financial service provided for articles unsuited to leasing and items used for considerably longer than their statutory service life. As with leasing, the Company purchases machineries and equipment that customers have selected and sells them on an installment basis. 02 IBJ Leasing Annual Report 2011

5 Financing Specialized Financing, Corporate Finance, Other We provide a range of services, including vessel financing, real estate financing and other types of specialized financing, and corporate financing such as factoring, to meet the diverse financing requirements of customers. Solar power generation system Fee Businesses Used Equipment Sales, Life Insurance Sales, Other As one means of accommodating diverse customer equipment requirements, the Company serves as an intermediary in the purchase and sale of used machinery and other equipment. The Company sells life insurance, non-life insurance and investment products to satisfy customer needs for the mitigation of business risk. IBJ Leasing Annual Report

6 Characteristics of the IBJ Leasing Group A multimodal financial services group offering services for corporate customers As a multimodal financial services group serving corporate customers, the IBJ Leasing Group has five key strengths: 1) a strong customer base centered on large corporations and mediumsized enterprises, 2) proposal capabilities that utilize expertise and specialized knowledge of equipment, 3) the flexibility and agility of a non-bank financial institution, 4) a strong funding infrastructure, and 5) strong risk management. We take advantage of these strengths to provide multimodal financial services. The Customer Base A strong customer base ranging from large corporations to medium-sized companies IBJ Leasing was established under an initiative by The Industrial Bank of Japan, Ltd., a leading industrial financial company at the time. Due to this background, the Company has a strong customer base ranging from large companies 中 堅 企 業 to mediumsized 14.7% companies. Offers wide-ranging business possibilities, including opportunities for structured finance and M&A. Composition of Contract Execution by Size of Company Small and medium-sized enterprises 21.2% Medium-sized companies 14.7% Large companies 64.1% Note: Large companies are capitalized at 1 billion and above. Medium-sized companies are capitalized at over 100 million to under 1 billion. Small and medium-sized enterprises are capitalized at below 100 million. Amount of contracts executed in fiscal 2010, excluding specialized financing The Equipment Financing Sector Proposal capabilities that utilize expertise including equipment valuation and disposal capabilities and specialized knowledge in accounting and taxation Tailor-made services that utilize the benefits of leasing in meeting financial strategy requirements A high proportion of industrial machinery and factory machinery for manufacturers Composition of Amount of Executed Leasing Contracts by Equipment Type IBJ Leasing Industry average (%) Other Commercial and service equipment Information and communication equipment Construction equipment Transportation equipment Industrial and factory equipment Figures are five-year averages from fiscal 2006 to fiscal IBJ Leasing Annual Report 2011

7 Emphasis on specialized financing that utilizes leasing expertise Composition of Operating Assets in the Financing Sector The Financing Sector Assessment of cash flows generated by equipment The collateral value of the financed assets is certain Specialized knowledge of accounting and taxation Financing that takes advantage of the agility and flexibility of a non-bank financial institution Corporate financing 33.6% Factoring Structured financing Specialty financing 66.4% Vessel financing Corporate financing needs, such as accounts receivable financing As of March 31, 2011 Real estate financing A stable, strong funding infrastructure Composition of interest-bearing debt Funding Extensive business relationships of funding with approximately 90 financial institutions, including city banks, regional banks, life insurance companies and financial institutions related to JA Banks Agile operation based on asset and liability management (ALM) Direct procurement 41.1% Commercial paper, etc. Indirect procurement 58.9% City banks and trust banks Regional banks Optimal fund procurement by means of an ALM policy based on analysis of the interest rate outlook and interest rate fluctuation risk As of March 31, 2011 Life insurance companies and the Norinchukin Bank, etc. Risk Management Assurance of management stability improvement and allocation of capital to new businesses through appropriate management and control of financial risk Credit risk Market risk Fluctuation of the value risk Reserve for new business activities Allocation of risk capital Capital Capital surplus Retained earnings A reserve needed to maintain the Company as an on-going concern Allocated capital (corresponding each risks) Shareholders equity Allocation of capital IBJ Leasing Annual Report

8 Consolidated Financial Highlights IBJ Leasing Company, Limited and consolidated subsidiaries, years ended March 31 () Summary of income: Revenues 350, , , , ,059 Gross profit 26,527 26,501 28,076 29,506 31,090 Operating income 13,666 11,544 6,755 11,257 15,444 Net income 8,984 7,799 3,348 7,019 9,025 Financial position: Operating assets 1,031,249 1,092, , , ,633 Total assets 1,132,989 1,195,336 1,076,150 1,017,099 1,028,020 Interest-bearing debt 987,677 1,057, , , ,629 Equity 54,943 57,428 55,994 63,342 69,392 Per share data: (Yen) Net income Equity 1, , , , , Dividend Key indicators: (%) ROE Equity ratio Gross Profit Operating Income Net Income/Net Income per Share Net income Net income per share () 35,000 31,090 30,000 29,506 28,076 26,527 26,501 25,000 () 16,000 13,666 12,000 11,544 11,257 15,444 () 10,000 8,984 8,000 7,799 7,019 (Yen) 500 9, ,000 15,000 8,000 6,755 6, ,000 3, ,000 5,000 4,000 2, IBJ Leasing Annual Report 2011

9 Fiscal 2010 Highlights In the consolidated financial results for fiscal 2010, the Group achieved continued increases in each profit measure through improvement in funding costs and credit costs and returned to pre-financial crisis profit levels. A slight year-on-year decrease in operating assets due to strong redemption pressure compared to the amount of contracts executed A steady increase in net assets coupled with an increase in the equity ratio An increase in the annual dividend per share for the ninth consecutive year Equity/Equity Ratio ROE Dividend per Share Equity Equity ratio () (%) 69,392 70, ,342 60,000 54,943 57,428 55, , , ,000 (%) (Yen) ,000 10, IBJ Leasing Annual Report

10 A Message from the President President and CEO Tsutomu Abe The Business Environment in Fiscal 2010 and the Group s Response to the Great East Japan Earthquake In fiscal 2010, the year ended March 31, 2011, business recovery continued in the U.S. against a backdrop of monetary easing, and growth fueled by internal demand continued in China. Consequently, the global economy was firm on the whole, notwithstanding financial problems in southern Europe and political instability in northern Africa and the Middle East. Meanwhile, the Japanese economy continued to struggle. Exports were sluggish, corporate production activity plateaued due to factors including rapid yen appreciation and high resource prices, and capital expenditure, including investment for maintenance and updates, remained at a low level. The leasing industry experienced an unavoidable decrease in overall lease transaction volume year on year due to continued capital investment restraint in 08 IBJ Leasing Annual Report 2011

11 Japan throughout the year. In these circumstances, the Great East Japan Earthquake of March 11 caused widespread damage, and business confidence in Japan rapidly worsened as the resulting supply chain and electric power supply problems led to a sharp drop in economic activity. Fortunately, the Great East Japan Earthquake had only a slight impact on the IBJ Leasing Group, and we were spared injury to employees or damage to offices. The impact on the financial results was also minor. Although we provided an allowance for doubtful receivables in the fiscal 2010 settlement of accounts with respect to customers for whom impact from the disaster had been confirmed by March 31, the amount was extremely small. In addition, we made cautious assumptions about the possible future impact of the disaster and recorded an allowance for doubtful receivables as a preventive measure. Solid Results in All Facets of Business Operations in Fiscal 2010 To summarize business operations in fiscal 2010, in equipment financing we continued to focus on reinforcing our customer base, and accumulated excellent assets by engaging in wide-ranging proposal-based selling to identify and meet customers financial management needs. To further promote business with medical institutions, at the end of March 2011 we acquired a Japanese financing subsidiary of the Siemens Group of Germany. In addition, in the environment and energy markets, where growth is expected, we have worked to strengthen business promotion capabilities through reorganization and other means. In the financing sector, vessel financing was affected by a slump in purchase orders for newbuildings due to yen appreciation. In real estate financing, we engaged in non-recourse financing of rigorously selected projects involving high-quality office buildings in urban centers that generate stable rent income. Overseas, the IBJ Leasing Group is steadily increasing transaction volume by stepping up sales activities targeting Japanese companies expanding into Asian markets. Furthermore, in a joint venture with an Indonesian listed finance company, we established a leasing subsidiary and commenced business operations in Indonesia, a country attracting attention as an important location for Japanese companies setting up overseas operations. On the earnings front, the Group secured gross profit before funding costs and write-offs at roughly the level of the previous fiscal year, and reduced funding costs by means including increased issuance of commercial paper in a favorable funding environment, thanks to continued monetary easing. In addition, credit costs fell sharply as a result of rigorous credit risk management and a decrease in the number of corporate bankruptcies. Consequently, earnings improved dramatically, with operating income rising 37.2% year on year to 15.4 billion and net income rising 28.6% to 9.0 billion. In addition, due to redevelopment of the site of the previous head office building, in February 2011 we relocated the head office and simultaneously consolidated the offices of subsidiaries to boost collaboration within the Group and increase operating efficiency. IBJ Leasing Annual Report

12 A Message from the President Results of the Medium- Term Management Plan and Establishment of the Third Management Plan In the first medium-term management plan, covering the three-year period beginning fiscal 2004, the IBJ Leasing Group sought to strengthen its financial base, increase earnings potential, and improve asset quality. At the same time, we put in place a management control structure involving integrated risk management and ALM operation, and listed the Company s shares on the Second Section of the Tokyo Stock Exchange in October 2004 (on the First Section in September 2005). Although the Group launched the second medium-term management plan in fiscal 2007, the financing environment changed dramatically following the sub-prime problem in 2007 and the onset of the global financial crisis in Since the Group was significantly affected by this worsening of the funding environment and the surge in customer bankruptcies that ensued from the crisis, we switched to a rolling plan under which we reviewed the targets in the plan each year without changing its basic framework. As a result, in fiscal 2010 we were able to shake off the effects of the financial crisis and return to business results at the pre-crisis level. During this recovery process, we have made great progress in the area of marketing. We have stepped up proposal-based selling, such as for proposals for operating leases, and succeeded in expanding our activities in specialized financing by engaging in real estate financing and boosting vessel financing activities. In addition, we have energized our overseas business activities by means including the establishment of subsidiaries in China and Indonesia. This experience has caused us to recognize anew that the Group s strengths are its distinctive corporate customer base, and our expertise in proposing solutions that precisely meet customer needs. Building on these results, in fiscal 2011 the Group has launched the third medium-term management plan with the aim of Step up as a multimodal corporate financial services group. Fulfilling Our Corporate Social Responsibility through Contributions to Society and Dynamic Operations At the IBJ Leasing Group, we believe that the key to fulfilling our role in the creation of a sustainable society is to provide appropriate and effective solutions to increasingly diverse socioeconomic issues through our business activities, and to grow by responding to changes in the socioeconomic structure. To assist customers in the wide-ranging business fields that they grapple with and help resolve the issues they face, we strive to develop and provide financial services that draw on the financing know-how and specialized ability to understand the value of equipment that we have cultivated over many years in the leasing business. In addition, we are working to build a dynamic organization by ensuring sound organizational operation as a good corporate citizen, developing our compliance activities and risk management system, strengthening personnel development, and creating a safe, rewarding workplace environment. The IBJ Leasing Group aims to grow and develop together with society by making corporate social responsibility the basis of all business activities. Dividends In fiscal 2010, we continued to increase shareholder returns by raising the dividend by 2 to 46 per share, the ninth consecutive year of dividend increases. Since the listing of the Company s shares in fiscal 2004, our basic policy has 10 IBJ Leasing Annual Report 2011

13 been to pay dividends in accordance with business performance while striving to increase ROE. Taking into account the Company s basic earnings potential and medium- to long-term growth strategy, and the fact that the distinctive characteristics of the financial services industry make a strong shareholders equity position key to increasing corporate value, we intend to pay dividends while maintaining a balance between shareholder returns and enhancement of shareholders equity. We will continue to strive to increase corporate value by using retained earnings to reinforce our business infrastructure. Launch of the Third Medium-Term Management Plan in Fiscal 2011 with the Aim of Contributing to Japan s Recovery In fiscal 2011, the first year of the third medium-term management plan, public investment for recovery from the Great East Japan Earthquake will gradually gain impetus. On the other hand, downward pressure on economic conditions from the prolonged nuclear power plants problem and electric power supply shortages is expected to continue, and recovery in domestic demand will likely take time. In addition, in the financial markets, monetary easing is expected to be maintained. Although the IBJ Leasing Group has been cautious in its forecast of leasing demand in fiscal 2011, we will vigorously proceed with key policies and measures to get off to a solid start in the first year of the plan. The term of the third medium-term management plan coincides with the initial phase of a long recovery process for Japan. The efforts of the Group, and indeed the entire leasing industry, to contribute to the recovery effort will likely come under scrutiny. The Group intends to mount an all-out effort to contribute to Japan s early recovery from the earthquake by leveraging all of our equipment financing and financial service capabilities. We ask the continued understanding and support of our stakeholders in the coming years. President and CEO Tsutomu Abe IBJ Leasing Annual Report

14 Third Medium-Term Management Plan (Fiscal 2011 to Fiscal 2013) On May 6, 2011 the IBJ Leasing Group announced the establishment of the medium-term management plan covering a three-year period beginning in fiscal Business Environment during the Term of the Plan Although the recovery from the Great East Japan Earthquake is expected to gradually gain impetus, Japan s economy will likely take considerable time to normalize. On the other hand, overseas economies are recovering on the whole, and Japanese companies focused on mainland Asia are expected to continue their business expansion. In the leasing industry, although competition among leasing companies and with companies in other industries is likely to further intensify, the Group expects expansion of business opportunities as fullscale changes in the IFRS, Basel III, and other regulatory systems result in the emergence of various financing needs as companies seek to cope with changes in the external business environment. Plan Objectives In light of this environment, in the third medium-term management plan the Group has set forth the objective of Step up as a multimodal financial services group offering services for corporate customers. The Group will seek to further expand the business base by taking advantage of distinctive strengths recognized anew through the recent efforts to cope with the global financial crisis and other drastic changes in the business environment. In accordance with this basic policy, the Group will step up activities to promptly and accurately identify and meet customer needs by enhancing proposal capabilities and specialized expertise, and contribute to the rebuilding and recovery of Japan s economy through equipment financing and financial services capabilities. The new plan s numerical targets for fiscal 2013 include net income of 10 billion and an operating assets balance of 1.2 trillion, as well as efficiency targets of maintaining ROE of 10% or higher and OHR of 45% or less. Specific Measures The Group has set forth specific measures in the third medium-term management plan: 1) The Group will reinforce analysis capabilities to anticipate customer needs and focus on identification of diversifying financing needs and proposal-based selling, including proposals for corresponding to IFRS and other regulations. 2) The Group will enhance product and service capabilities in the financing sector that take advantage of the distinctive characteristics of a non-bank financial institution. 3) Overseas, the Group intends to identify and meet the overseas capital expenditure needs of Japanese companies expanding their business in Asia and other regions through collaboration among domestic and overseas organizations. 4) The Group will expand business in the specialty financing sector, an area of strength, by actively identifying and meeting needs for vessel financing, real estate financing and new forms of financing. 5) In new business fields, the Group will step up activities in growth areas, including the environment and energy sectors. The Group will also build on existing businesses in a changing social environment to open up new business sectors by taking advantage of its expertise in leasing, accounting and taxation. 6) In addition, the Group will expand the scope of its business activities through more active involvement in M&A and asset acquisition. In particular, we will do our utmost to contribute to Japan s rapid recovery from the earthquake disaster through our equipment financing and financial services capabilities. 12 IBJ Leasing Annual Report 2011

15 Plan Framework Basic Objective Step up as a multimodal corporate financial services group Capture customers needs quickly and accurately by improving proposal capabilities and expertise Contribute to revival and development of Japanese economy by providing financing functions Strategic Concept Target Customers Domestic companies, Japanese companies overseas Large companies, quality small and medium-sized companies Industries with strong financing needs, etc. Customer Needs Equipment funding, business funding needs Advantages in finance, accounting and tax Administrative streamlining, laborsaving needs, etc. Our Group s Strengths Proposal capabilities based on leasing know-how Agility and flexibility as a non-bank Strong relationships with customers Solid fundraising base, etc. Numerical Targets (FY2013) Net income The balance of operating assets ROE OHR 10 billion 1.2 trillion 10% or higher 45% or less IBJ Leasing Annual Report

16 Review of Operations Deputy President Shinichiro Nagashima Multimodal Financial Services that Satisfy Customer Needs In business development in recent years, the IBJ Leasing Group has focused on expansion of leasing, specialized financing such as vessel, and real estate financing, and corporate financing, as well as development of the equipment financing and financing sectors. Since fiscal 2007, we have more clearly defined this approach amid a downtrend in leasing demand and set forth a basic policy of steadily growing as a multimodal financial services group that serves corporate customers by expanding the customer base. Owing to IBJ Leasing s background of establishment under the initiative of the Industrial Bank of Japan, a leader in industrial finance at the time, a distinctive characteristic of the Group s business is strong business relationships with many of Japan s leading corporations and a focus on enhancing relationships with large corporations and mediumsize companies. One of the Group s strengths is financial services that provide tailor-made solutions adapted to the financial strategy needs of these customers. Over the years, the Group has arranged numerous structured leases and other financing deals that satisfy the wide-ranging needs of customers including electric machinery and automobile manufacturers, railroad companies, and beverage companies. The Group intends to continue to engage in business operations highly valued by our customers by accumulating specialized knowledge and unique expertise and promptly implementing beneficial proposals. In addition, we will take advantage of our ability to propose solutions together with manufacturer-affiliated sales companies and financial companies to further expand the customer base and establish unique strengths through wide-ranging alliances with leading manufacturers and sales companies in the fields of construction machinery, industrial machinery and machine tools, and large transportation equipment including trucks and buses. At the same time, we are stepping up our activities in specialized financing areas such as vessel financing and real estate financing and also strengthening activities in which we can take advantage of our characteristics as a non-bank finance institution. Vessel financing in particular is an area in which we are recognized as a major financer in the marine transport industry and have established a position as a top-drawer player through strong relationships with companies in related industries and expertise developed over many years. In real estate financing, we have accumulated expertise in information gathering and project analysis and are rigorously selecting projects centered on non-recourse financing of urban office buildings for which stable demand can be expected. Furthermore, amid changes in the roles and structure of financial institutions, we are expanding our business domains by taking advantage of the agility and flexibility of a non-bank financial institution through a variety of activities, including participation in project financing and corporate financing by means of receivables factoring. In addition, in overseas business operations, the Group focuses management resources on Asia, where economic activity is brisk. We are steadily accumulating operating assets by actively identifying financing needs associated with capital expenditure by Japanese companies. The IBJ Leasing Group will continue to accelerate activities to further expand the customer base and develop a new business base to lay a foundation for further growth. 14 IBJ Leasing Annual Report 2011

17 Equipment Financing In fiscal 2010, factors including rapid yen appreciation and high resource prices led to sluggish exports and plateauing of production output. In addition, capital expenditure, including investment for maintenance and updates, remained low, as companies maintained a cautious posture amid stagnant business conditions in Japan. As a result, the lease transaction volume for the leasing industry as a whole unavoidably decreased by 7.4% year on year, increases in December and January notwithstanding. In this operating environment, in fiscal 2010, the IBJ Leasing Group focused on accumulating high-quality assets by taking advantage of our customer base, principally major corporations, and actively engaging in proposal-based selling grounded in careful identification of customers finance and taxation needs. By equipment type, we were able to identify and meet financing needs for capital expenditure in industrial machinery and machine tools, mainly in the automotive, semiconductor and electric machinery sectors. In the civil engineering and construction machinery sector, we secured transaction volume at the prioryear level in Japan, and lease transactions at the subsidiary in China continued to increase. In the medical sector, customer development efforts steadily progressed nationwide against a backdrop of upward revision of medical treatment fees and recovery in capital expenditure propensity among medical institutions, and the Group continued to increase transaction volume in medical equipment financing. Furthermore, in the environment and energy sectors, where growth is expected, we reinforced the business promotion function through reorganization and engaged in selling activities through tie-ups with companies in environment-related businesses. As a result, the IBJ Leasing Group saw a 2.5% increase year on year in the amount of contracts executed in the equipment financing sector to billion. The balance of operating assets fell by 3.1% to billion as a result of collection of scheduled payments. To further promote business with medical institutions, the Company acquired at the end of March a Japanese financing subsidiary of Siemens of Germany involved in medical equipment vendor finance. We will expand the customer base in the medical sector by continuing to actively engage in vendor sales through collaboration with the newly acquired company. Amount of Contracts Executed by Equipment Type (Billions of yen) 17.5 Other Medical equipment Office equipment 24.5 Commercial and 43.4 service equipment 46.8 Information and 27.5 communication equipment Construction equipment Transportation equipment Industrial and factory equipment Trends in the Balance of Operating Assets in Equipment Financing (Billions of yen) 1, IBJ Leasing Annual Report

18 Financing In the results for specialized financing in fiscal 2010, the Group maintained a cautious posture in vessel financing while closely observing market trends. In real estate financing, a sector in which we limited involvement in fiscal 2009, against a backdrop of recovery in market conditions, we built up assets by engaging in rigorous selection of excellent assets. We engaged in corporate financing adapted to our customers needs by taking advantage of the agility and flexibility of a non-bank financial institution, including receivables factoring for large corporations. As a result, the balance of operating assets showed a net increase of 13.7 billion from the previous fiscal year-end to billion, as real estate financing and corporate financing compensated for a decrease in vessel financing. Vessel financing Market conditions for marine transport were mixed. Demand for dry bulk carriers was low, heavily influenced by iron ore prices and trends in China. On the other hand, demand for containerships saw some recovery due to an upturn in the U.S. economy and other factors. In these circumstances, although large shipping companies experienced improvement in business results as a result of demand recovery and cost cutting, ship owners curbed purchase orders for newbuildings due to concerns about deterioration in business results from rapid yen appreciation. In light of these market trends, the Group continued to apply rigorous selection criteria to new contracts. Real estate financing In the real estate market, amid a slowing rate of decline in land prices in urban areas and continued gradual recovery in real estate transactions, the number of inquiries for non-recourse financing projects increased. We financed mainly highly liquid, high-quality office buildings in urban centers that generate stable cash flows, carefully selecting business partners and closely scrutinizing risk and return. At the same time, we limited involvement in corporate risk-based financing deals to industrial conglomerates, major corporations and other business partners in stable financial positions and met financing needs for large real estate projects. Number of Financing Contracts Executed (Billions of yen) Vessel financing Real estate financing Corporate financing Trend in the Balance of Operating Assets in Financing (Billions of yen) Vessel financing Real estate financing Corporate financing IBJ Leasing Annual Report 2011

19 Fee Businesses Overseas Operations To meet the diverse needs of customers, the IBJ Leasing Group engages in the purchase and sale of used equipment and the sale of insurance products and investment products. In the used equipment business, the IBJ Leasing Group takes advantage of property valuation capabilities, a form of specialized expertise developed through activities in the equipment financing sector, to engage in the disposal and sale of used equipment and facilities. Subsidiary KL & Co., Ltd. differentiates itself from banks and other financial institutions by actively meeting customer needs for the purchase and sale of used equipment during facility updates, utilizing property appraisal expertise and a network of trading companies specialized in used equipment and facilities. The used equipment market in fiscal 2010 showed signs of an upturn in the adverse trading environment that began with the onset of the global financial crisis. The market situation completely changed due to the earthquake disaster, and demand increased for civil engineering machinery, power generation equipment, and other equipment for the disaster recovery effort and for coping with power supply shortages. Nevertheless, companies adopted an even more cautious posture toward capital expenditure, and overall buying and selling stagnated. In these circumstances, the IBJ Leasing Group focused on developing new relationships with used equipment buyers and sellers and reinforced collaborative selling within the Group. Profit from Used Equipment Sales (Billions of yen) In overseas business activities, the IBJ Leasing Group is steadily increasing transaction volume by identifying and meeting the financing needs of Japanese companies expanding into Asian markets. Our subsidiary in China, located in Shanghai, continues to achieve solid results in construction machinery leasing amid the robust civil engineering and construction demand in China. In addition, financing transactions related to capital expenditure increased due to revision of the valueadded tax. The subsidiary has steadily accumulated assets since it began business operation in 2008, and in August 2010 the Company implemented a capital increase of U.S.$10 million, increasing total capital to $20 million. The subsidiary in Thailand, located in Bangkok, continues to steadily increase transaction volume by actively identifying and meeting the strong capital expenditure needs of companies in automotive-related businesses. Furthermore, in a joint venture with an Indonesian listed finance company, we established a leasing company in Jakarta, Indonesia, a country that has recently been increasingly attracting the attention of Japanese companies as a China plus one site. The new subsidiary commenced operations in November 2010 as our fourth business base in Asia. Subsidiaries in Asia (as of July 31, 2011) China (Shanghai) Wholly owned subsidiary Thailand (Bangkok) Jointly operated with a local bank Indonesia (Jakarta) Provides 80% of investment in local joint venture affiliate IBJ Leasing Annual Report

20 Topic Overseas Business Development In general, overseas production activities by Japanese companies have been expanding since the 1980s. Until the mid-1990s, these activities consisted principally of the automotive industry setting up production in North America due to aggravation of trade friction between Japan and the U.S. and rapid yen appreciation following the Plaza Accord. The second half of the1990s brought a sudden surge of expansion into Asia in search of inexpensive labor in response to intensification of global competition. Furthermore, accompanying economic development in Asia, income levels are rising and personal consumption is increasing year by year, and Japanese companies are increasingly setting up operations because Asia is not only a producing region, but also a new consuming region. In this environment, the IBJ Leasing Group is shifting management resources from Europe and North America to Asia and developing our business bases there to accelerate sales activities in a region where high growth is expected. To actively identify and meet a variety of customer needs, we currently operate four Asian subsidiaries in China, Thailand, Indonesia, and the Philippines. First of all, in July 2008 the Company established a wholly owned subsidiary in Shanghai, China. Our aim was to identify and meet financing needs, primarily for construction machinery, a forte of the IBJ Leasing Group, in view of the rapid expansion of demand for civil engineering and construction machinery accompanying infrastructure development in the country. Since its founding, the subsidiary has achieved solid results in construction machinery leasing through collaboration with Japaneseaffiliated construction machinery manufacturers. Recently, it has also steadily expanded the scope of its business activities. For instance, facilities financing transaction volume has increased due to revision of China s value-added tax. Next, since Thailand was one of the first Asian countries where many Japanese companies set up assembly and export bases for automobiles, electrical goods and other products, in 1992 the Company established a joint venture leasing company in partnership with Krung Thai Bank, one of Thailand s leading banks. The subsidiary delivers solid results by utilizing its own domestic customer base to actively expand transactions with Japanese-affiliated companies and by meeting the financing needs of excellent local companies through Krung Thai Bank s business network. Most recently, we established a joint venture in Indonesia with Verena Multi Finance, a publicly listed company. Recent political and economic stability in Indonesia has encouraged a number of Japanese companies to set up business operations there, primarily for two-wheel and four-wheel vehicles, and increased demand for facilities financing is anticipated. The new subsidiary commenced operations in November Furthermore, in addition to business activities conducted through these local business bases, in areas where we do not have local operations we are actively stepping up involvement in overseas projects by providing optimal solutions to customers through transactions that utilize cross-border financing and SPCs. Amid forecasts for continuation of high economic growth in China and the ASEAN countries and the current high yen exchange rates, propensity for capital investment in Asia by Japanese companies is expected to increase. The IBJ Leasing Group will continue to engage in coordinated sales activities through collaboration among the overseas operations and domestic sales divisions with the aim of further expanding the overseas business base by promptly and accurately identifying and meeting the diverse financing needs of our customers associated with overseas business expansion and capital investments. Executive Officer, General Manager, International Department Yasuo Sato 18

21 Funding 1. Funding Policies The IBJ Leasing Group is diversifying its funding methods to ensure its funding stability and control funding costs, which are important factors for the provision of a wide range of financial services. In accordance with asset and liability management (ALM) policies, the Company also engages in flexible funding adapted to the current financial environment. With regard to ALM operation, the Company s ALM Committee holds monthly meetings to analyze current interest rate trends and the outlook for interest rates. We also perform detailed analyses of the impact of interest rate volatilities on the present value of assets and liabilities, using indicators such as Delta and Value at Risk (VaR). We have formulated ALM policies based on these analyses, and work to ensure smooth funding and cost control by flexibly implementing those policies in day-to-day operations. The Company strives to diversify funding in the interest of funding stability and cost control, and procures long-term and short-term funding from financial institutions and financial markets. The Company collects funds from approximately 90 financial institutions, including city banks, regional banks, insurance companies and financial institutions related to JA Bank, and maintains stable transactions with these institutions through relationship management. The Company obtains funding from financial markets through the issuance of commercial paper and the securitization of lease receivables and has obtained ratings of a-1 from Rating & Investment Information, Inc. (R&I) and J-1 from Japan Credit Rating Agency, Ltd. (JCR) for its commercial paper. The Company plans further diversification of funding methods, and has received from JCR a preliminary shelf registration rating of A and a senior long-term credit rating of A. 2. Funding in Fiscal 2010 With regard to yen interest rates in fiscal 2010, in the first half both long-term and short-term market interest rates declined due to concerns about economic deceleration and prospects for continued deflation amid a worldwide monetary easing trend. In the second half, long-term market interest rates rose against a backdrop of higher interest rates in the U.S. and improvement in economic indicators. However, short-term market interest rates remained low and stable in response to a decline to an effective interest rate of zero in the comprehensive monetary easing policy the Bank of Japan introduced in October. The BOJ further increased monetary easing in response to the Great East Japan Earthquake in March, and long-term market interest rates once again declined. In these circumstances, the IBJ Leasing Group shifted the balance of indirect funding to short-term borrowings as borrowings came due and increased the amount of commercial paper issued in a continued favorable environment for commercial paper issuance. The balance of interest-bearing debt rose by 9.0 billion from the previous fiscal year-end to billion due to funding to increase short-term liquidity to prepare for possible emergencies in the aftermath of the Great East Japan Earthquake. Funding costs improved dramatically, decreasing by 1.7 billion from the previous year to 5.5 billion as the Group benefited from continued low interest rates in a funding environment that remained favorable due to factors including monetary easing. Funding Situation Funding Costs Long-term borrowings Short-term debt Securitized liabilities Commercial paper (Billions of yen) 1,200 1, (Billions of yen) IBJ Leasing Annual Report

22 Corporate Governance Corporate Governance Structure Basic Approach The IBJ Leasing Group recognizes that it is essential to ensure effective corporate governance, meaning a framework governing business activities centered on a closely regulated relationship between shareholders and management, and that the basic objective for corporate governance is to put in place an environment to ensure this. The Board of Directors and Executive Officers To facilitate vibrant deliberations of agendas and speedy decision making, the Company s Board of Directors currently (as of July 2011) has seven members. To ensure transparency by incorporating objective perspectives, the Company appoints two outside directors to the Board. The Board of Directors decides basic management policies and other important matters and supervises the execution of business. The Chairman of the Board of Directors, who does not have a concurrent business execution role, serves as the chairperson of Board of Directors meetings. The Chairman ensures the appropriateness of the supervisory function and decision making of the Board joined by outside directors. The Company has adopted an executive officer system to ensure rapid and efficient execution of business in accordance with Board of Directors decisions, and delegates authority for business execution to the Chief Executive Officer and executive officers. The Company determines the executive officer with approval authority for each business operation, clearly defines the authority of the executive officers, and has established an advisory body to support the decisions of executive officers with approval authority and ensure mutual supervision among them. Auditors and Audit Committee The Company has adopted a company with auditors system consisting of one internal auditor and three outside statutory auditors. The Audit Committee audits Directors decision-making activities at Board of Directors meetings and other occasions, as well as the Company s entire business operations, to ensure that Directors fulfill their legal duties, such as duty of prudence, fiduciary duties and ensuring that business operations are conducted properly. To ensure the effectiveness of audits, corporate auditors attend important meetings, including Board of Directors meetings and Executive Committee meetings, and also have regular meetings with Representative Directors to exchange views on important audit-related issues. Corporate auditors Corporate Governance Structure General Meeting of Shareholders Accounting Audit Directors / Outside Directors Board of Directors (Chairperson: The Chairman) Audit Auditors / Outside Auditors Audit Committee Independent Auditors (Audit Firm) Audit Cooperation Advisory Committees Executive Committee Chief Executive Officer (President) Credit Committee Audit Department Business Committee ALM Committee Corporate Officers Compliance Division (Under the direct control of CCO) New Product Committee Control Legal Division IT System Investment Committee Legal Advisors Operating Units Administrative Units 20 IBJ Leasing Annual Report 2011

23 also cooperate closely with the Audit Department, an internal audit department, to ensure efficiency, and regularly receive reports from this department regarding the plans and results of audits. Furthermore, the Audit Committee holds regular meetings with independent auditors to listen to their reports, and to exchange information about each other s auditing policies to raise the efficiency and quality of auditing. Internal Audit Department The Company s Audit Department is responsible for conducting internal audits. To ensure the independence of this function, the department reports directly to the President. The Audit Department conducts internal audits on the entire Company organization as well as consolidated subsidiaries to ensure efficiency and appropriate conduct in business operations and compliance measures, and to give specific advice, recommendations and suggestions regarding the improvement of business operations. The Audit Department coordinates corporate auditors and independent auditors as necessary. Audit results are periodically reported to the Board of Directors, which determines, based on these results, whether improvements to systems, organizations and regulations are necessary for the avoidance of various risks. Compliance The IBJ Leasing Group regards strict compliance as essential to the creation of a stable management base. On this understanding, the Group complies with laws and regulations and practices honest and fair business activities in accordance with the norms of society. To ensure the trust and confidence of society, the Group is firmly committed to maintaining strict compliance. Compliance Structure The Company has formulated Compliance Regulations to ensure compliance, and has also appointed a Chief Compliance Officer and established the Compliance Division. Furthermore, each department general manager functions as the department-level head of compliance, and is tasked with supervising and enforcing its practice. In addition, the Audit Department examines and assesses the current state of compliance in each department. The Company has created a system in which necessary measures are taken based on reports from the Audit Department. As an internal reporting system, the Company has set up a compliance hotline structure to enable all of its employees to report potential violations directly to the Compliance Division and/or the corporate auditors. The Company has also formulated Rules on the Protection of Whistleblowers to protect reporters. Compliance Activities To ensure compliance throughout the organization, the Company has formulated The Corporate Code of Conduct of IBJ Leasing Group as well as published a Compliance Manual, a guidebook describing key rules and regulations that must be followed to ensure full compliance within all business operations. The Compliance Manual is also available on the corporate intranet so that directors and employees can refer to it easily in the course of their daily work. Furthermore, every year the Company arranges a Compliance Program, a set of concrete hands-on activities that raises awareness of compliance issues through education and training for general managers, as well as stratified training and/or e-learning. Internal Control The Group regards it as a key management responsibility to maintain a system that ensures proper conduct of business operations, and to work toward strengthening internal control. Under the Corporate Law, the Group is required to strengthen its internal control system, and to this end, IBJ Leasing and 10 domestic affiliates have formulated basic policies to ensure proper and effective operation. In addition, the Company is also working to enhance the reliability of financial reporting as required by the Financial Instruments and Exchange Law. CSR The Company recognizes that any company will need to fulfill its corporate social responsibilities (CSR) if it is to grow sustainably and strengthen its ties with society. Therefore, we work to ensure that our organization operates with CSR as an integral part of all business activities, with the aim of becoming a corporate group capable of earning the trust and understanding of society at large. In accordance with its environmental plan, the Company has created an Environmental Policy. Under this policy, we work to ensure strict compliance with environmental laws and regulations; to provide services that contribute to environmental conservation, such as leases with emission credits; to properly manage equipment for which lease terms have expired, and to reduce the environmental impact IBJ Leasing Annual Report