The advantages of a comprehensive financial services strategy

Broadly stated, there are three advantages to the AIFUL Group's transformation into a comprehensive financial services strategy. The first is the maintenance of stable growth in profits as a result of the diversification of revenue sources. The second is the diffusion of business risk through the diversification of its business portfolio. The last advantage is the enhancement of capital efficiency through financial leverage.

1. Maintaining stable profit growth

While the consumer credit market has remained virtually unchanged over the past ten years, dedicated consumer finance operations and unsecured consumer loan companies are growing faster than ever. Even during the depression that followed the collapse of the bubble economy, consumers continued to accept these companies' innovations, allowing them to achieve growth rates more than twice of those tens years ago. Today, though, the environment is changing. Firstly, the demand for unsecured loans are predominantly individuals in their twenties or thirties. With the aging of the Japanese population, this demographic has already begun to shrink. In addition, the high profit margin in consumer finance has prompted IT firms to enter this market. Furthermore, banks have joined in, entering into capital and business tie-ups with major consumer finance companies, while credit card companies, looking to increase their share of the market, have strengthened their cash-advance operations. All these developments have produced striking changes in the industry. The increase in sources of consumer financing has resulted in thinning demand throughout the industry.

In view of this, the AIFUL Group has expanded its capabilities beyond its core competency, focusing on growth potential in the consumer credit market as a whole, and concentrating management resources in credit card and business loan operations. This initiative has strengthened the entire Group's management structure and profitability. Moving forward strongly with its multiple brand and product diversification strategies, the Company has succeeded in diversifying its business portfolio, thus securing a broad spectrum of revenue sources.

2. Diversification of the Company's business portfolio and risk

Expanding the Company's business domain to encompass the entire consumer credit market has brought steady progress in the diversification of its business portfolio.  From the fiscal year ended March 31, 1999 through to the fiscal year ended May 31, 2009, the Group restructured its receivables portfolio at a steady pace while maintaining growth in loans outstanding. In the fiscal year ended March 31, 1999, the Group's portfolio breakdown was simple - it was predominantly made up of unsecured loans at 82.4% and home equity loans at 17.6%. By the fiscal year ended May 2009, this picture had changed. With the acquisition of LIFE in the credit card field, and Businext Corporation and City's in the business loans area, strong growth over the next several years saw unsecured loans fall to 62.1% of the Group's portfolio, while credit card business, business loans, business finance, and credit guarantees rose strongly. Over the medium to long term, it is the Company's aim to reduce unsecured loans to 50%.

Branching out into related businesses is an extremely effective way of achieving risk diversification. For instance, AIFUL's unconsolidated bad debt write-off ratio for unsecured loans was 15.97% in the fiscal year ended May 2009. That same ratio for home equity loans was only 6.64%, and for LIFE's credit card operations, 6.29%. In addition, the majority of interest repayment claims are generated by unsecured loans. The reduction of unsecured loans in the Company's portfolio is an effective hedge against the risks associated with interest repayment, as well as regulatory changes.

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