Rakuten Bank reports earnings, beats expectations
Rakuten Bank reported its first full quarter as a public company — the previous results announcement for the fiscal year ending March 31, 2023, came on May 10, after listing only on April 21 — and slightly beat consensus estimates. Ordinary profit was 25.5%, and net income 25.6% of full-year guidance. After the earnings announcement, Rakuten Bank traded up around 3%, and reclaimed the JPY 2,000 level, compared to a JPY 1,400 IPO price. Total market capitalization is JPY 350bn (USD 2.4bn).
For this article, we will take a detailed look at the disclosed account data, which is quite intriguing, and provides a clear path for growth on its own. Rakuten Bank has a distinct competitive advantage in customer acquisition, as around two thirds of its account openings originate from within the Rakuten ecosystem. The number of accounts exceeded 14m for the first time this quarter, although the growth rate is significantly below the 15%+ outlined in the medium-term plan, which sets a target of 25m accounts by the fiscal year ending March 2027.
The deposit balance increased from JPY 8.13trn a year ago to JPY 9.48trn, a growth rate of 16.6% year-on-year, also below the 20% growth rate targeted in the medium term plan, which looks to achieve a JPY 20trn deposit balance by the fiscal year ending March 2027.
Rakuten Bank’s strategy for fee-based income follows a clear path: (I) acquire more accounts, (II) induce a greater use of those accounts, and (III) then incentivize even more customer transactions within the group. As we have learned from other “neobanks”, the number of accounts is rather meaningless if those accounts are merely secondary. European neobanks, for example, tend to show an impressive number of accounts opened, but with unprofitable deposit balances in the mere hundreds of Euros. With a growth rate of deposit balances greater than the projected growth rate of accounts, Rakuten Bank is acutely aware of the challenge and is actively pursuing the use of accounts into primary status, i.e. used for deposit of payroll and direct debit of regular household expenses. And they explain the economics behind that strategy….
The average revenue per account for primary use (or main accounts, as Rakuten Bank calls them), is three times higher than for secondary accounts, and the deposit balance is six times higher. Hence, there is tremendous upside to incentivizing existing secondary accounts to redirect their salary payments to Rakuten Bank, for example through point campaigns. Rakuten Bank has seen the ratio of primary accounts increasing from 14.5% in March 2018 to 31.1% in March 2023, and 31.4% at the end of the June quarter.
Lastly, it is worth evaluating Rakuten Bank’s customer demographics. While neobanks often target young people, which bodes well for future growth, the larger share of private household wealth is held by the older professionals and elderly, especially so in Japan. Hence it is re-assuring to see a healthy mix in terms of age groups. with one third of the customers 50 years and older, and half in their 30s and 40s combined. One explanation for this higher share of the wealthy age brackets is that Rakuten Bank is not a “neobank” at all. It was launched in July 2001 as eBank, and become a fully owned subsidiary of Rakuten in 2010. So its first customers were the early adopters of the first internet wave, and find themselves today in the older one third of the customer demographics.
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