SBI Sumishin Net Bank — Mortgage & BaaS Powerhouse

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). It ended the last trading week with a quote of JPY 1,720. 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. Having just reported its first half results, SSNB also set a high bar for corporate disclosure, so we are going to pick up some of the most interesting themes in this post.

Ordinary profits were 48% of full-year guidance, while net profits came in at 52% of full-year guidance. Mortgage loan originations, which actually decreased slightly during the first fiscal quarter, rebounded, and the number of Banking-as-a-Service (BaaS) accounts exceeded one million for the first time, contributing to strong fee income overall.

The first new disclosure in this earnings release illustrates the potential impact of rising interest rates to the earnings power of the franchise. SSNB has become Japan’s largest mortgage originator, and over 90% of its mortgages are floating rate. While clearly a positive for the bank in a rising rates environment, also consider the potential impact on individual consumption when/if the Bank of Japan adjusts its monetary policy. Depending on the analyst you follow, the abolishment of Yield Curve Control (YCC) might come as soon as year-end 2023, or as late as September 2024 — we are more aligned with the arguments that support the latter.

Digital Banking

On the infrastructure side — important given recent system outages of the Zengin payments network and at JCB — SSNB disclosed that it has moved to a multi-region implementation on Amazon Web Services (AWS), allowing it to fail over from one region to another, presumably leveraging the AWS Tokyo and Osaka regions.

SSNB also zoomed in on the number of corporate accounts, which exceeded 100,000 for the first time in April, and have shown continuous growth. SSNB services 6.5m retail accounts.

Mortgages

In the mortgage segment, SSNB newly highlighted its sales channel strategy through banking agents. With 148 agent locations as of March 2023, and the recent addition of Aruhi, SSNB is well on its way to its 500 locations target.

SSNB has been the first online bank to offer mortgage loan terms of up to 50 years, a measure made necessary by the real estate market reaching (and often exceeding) bubble time valuations. To keep the dream of owning a home within reach, the longer-term loans available to borrowers under 30 years old, spread the repayments over a longer period.

Banking-as-a-Service (BaaS)

As mentioned previously, the number of BaaS accounts has exceeded one million for the first time. The customer acquisition cost per account has been reduced to just over JPY 300, while the fee income per account has held steady.

With the launch of Keio NEOBANK on September 27, Sumitomo Mitsui Trust NEOBANK on September 29, and MATSUI Bank on October 1, SSNB now serves 15 BaaS partners, with another five apparently signed. Based on disclosures in its first results as a public company in May, these five might include SBI FX Trade, Nomura Real Estate Solutions, and MILIZE.

The integration with Matsui Securities, a brokerage with 1.5m accounts, allows the bank balance being counted as part of the securities purchasing power, while also earning a 0.2% annual interest rate. For the month of operation, SSNB states that 60% of those opening a Matsui Securities account have also opened a Matsui Bank account.

On November 7, SSNB and Japan Airlines (JAL) launched the new JAL Mileage Bank application, expanding the SSNB reach from payment users only to all 30 million JAL frequent flier program members. SSNB targets to increase its JAL customer ten times based on this recent deployment.

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