SBI Sumishin Net Bank reports first results as public company
SBI Sumishin Net Bank (SSNB) started trading on the Tokyo Stock Exchange Standard Market on March 29, 2023, after raising about USD 366m with pricing set the bottom of a range (JPY 1,200). With the IPO practically taking place at fiscal year end, SSNB set itself up for positive results, however, the stock gave up approximately 10% during a week where the Nikkei 225 reached a 30+ year high.
SSNB is of particular interest to us, as it has built a strong position in the Banking-as-a-Service (BaaS) market and sees this business line contributing one eighth of ordinary profit during FY25/3.
SSNB’s BaaS business serves 819,000 (out of a total of 6.15m) accounts across partners as varied as Japan Airlines, SBI Securities, Takashimaya, and Nippon-Ham Fighters.
In the final fiscal quarter, account fees contributed 29%, transaction fees 64%, and earnings on deposits 7% to the revenue in the BaaS business.
Customer acquisition cost (CAC) still appears relatively volatile from quarter to quarter, depending on the partner onboarded, however, if it should stabilize around — or under — JPY 600 (~USD 4.5), the attractiveness of the business becomes obvious in light of the average monthly account fee of JPY 122.
These unit economics translated into a Gross Operating Profit of JPY 1,738mn, and an Ordinary Profit of JPY 576bn during the last quarter. For the whole fiscal year, that represented about 4.2% of ordinary profits for SSNB. Given the target outlined above, SSNB plans to triple the ordinary profit contribution of the BaaS business over this and the following fiscal year.
In light of the SVB and First Republic bank failures, one might inquire about SSNB’s health. At the core of its business, SSNB runs a large volume, high quality, low risk mortgage book, and does not provide high risk loans such as corporate loans or bank card loans. It has increased its mortgage market share from 4.4% to 6.5% during the past fiscal year, while maintaining an expected loss ratio of 0.02%, and aims to scale this to a 10% market share by FY25/3.
To support this growth, SSNB also recently announced that it will deploy Dayta Consulting’s credit screening application from August 2023 onwards. Dayta Consulting is joint venture between SSNB (60%) and Hitachi (40%) that utilizes a consortium-type AI screening model based on data from multiple banks to provide an estimated probability of default, implemented as a “pay-as-you-go” model. Since this data pooling approach provides abundant and diverse data, it is possible to accurately and timely identify the characteristics of data that indicate default. SSNB expects this service to help it to better understand the risks associated with loans, speed up loan decisions, control credit costs and therefore be a significant factor in the planned scaling of mortgage underwriting.
The low loss ratio mentioned above leads to some distortions on the capital adequacy side as these assets are adjusted to a higher risk weight than the actual risk due to the capital floor introduced with Basel III. Hence the unadjusted capital adequacy ratio of 19% turns into 8.95% once adjusted under Basel III. As the capital floor will be raised further annually over the next five years, this gap is expected to widen. Note that as a domestically regulated bank, the minimum capital adequacy ratio is only 4%.
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