The following factors constitute the principal business risks that have potential to affect the business results, stock price and fi nancial position of the IBJ Leasing Group. Forward-looking statements contained herein represent the judgment of the IBJ Leasing Group as of June 26, 2018. Business risks and other risks are not limited to those listed.
1. Trends in Corporate Capital Investment and Investments in Leased Plant and Equipment
In Japan, lease transactions are widely used as a fund procurement technique when companies undertake capital investments. Trends in the amount of corporate capital investment and in the amount of investment in leased plant and equipment tend to follow the same underlying pattern, and the amount of investment in leased plant and equipment may be affected by trends in corporate capital investment.
Trends in the amount of contracts executed by the IBJ Leasing Group, the amount of corporate capital investment and the amount of investment in leased plant and equipment do not always coincide. However, any signifi cant decrease in the amount of corporate capitalinvestment and the amount of investment in leased plant and equipment may affect the future business performance of the IBJ Leasing Group.
2. Interest Rate Fluctuation Risk and Effect of Changes in the Funding Environment
Although many leasing fees and installment payments are based on the interest rate levels prevalent at the time of agreements, and themajority are fi xed revenues, interest-bearing debt includes debt with fl oating interest rates. Therefore, funding costs, which are part of thecost and expenses, fl uctuate. As a result, interest rate fl uctuations may affect the business performance of the IBJ Leasing Group.
Also, while it is possible to reduce the effects of interest rate fl uctuations by raising the weight of interest-bearing debt with fixed interest rates, gross margins may contract since fi xed-rate interest is generally higher than fl oating-rate interest. Accordingly, the weighting and component ratios of interest-bearing debt with fi xed-rate interest and interest-bearing debt with floating-rate interest may affect the business performance of the IBJ Leasing Group.
The Company uses derivative transactions to hedge the risk of such interest rate fl uctuations. Specifi cally, we manage the matching ratio (setting the ratio of the portion of assets not subjected to interest rate fl uctuation risk by allocating liabilities and derivatives with fi xed-rate interest and fl oating-rate interest to assets with fi xed-rate and fl oating-rate yields) through the use of asset liability management (ALM) techniques. Accordingly, with respect to transactions subject to interest rate fl uctuations, fl uctuations in market interest rates may affect the business performance of the IBJ Leasing Group.
The IBJ Leasing Group’s fund procurement methods include commercial paper and other direct funding in addition to indirect funding. Therefore, changes in the funding environment may affect the procurement of funds.
3. Credit Risk
Lease transactions involve the provision of credit to customers in the form of leases over relatively long terms (averaging fi ve years). The initial expected profi t is secured by collecting the full amount of leasing fees from the customer. Therefore, the IBJ Leasing Group assesses the appropriateness of entering into contracts by conducting strict credit checks of each customer, and by assessing the future second-hand value of leased equipment. We also strive to control and minimize credit risk within the operating assets portfolio through quantitative monitoring of credit risks. Moreover, in instances when a customer’s credit status has deteriorated and non-payment of leasing fees, etc., occurs, we work to recover as much as possible of the outstanding amount through the sale or transfer of leased equipment to other customers.
Furthermore, from the perspective of credit risk management, we conduct self-assessments of assets in compliance with the Financial Inspection Manual of the Financial Services Agency, which is recommended by “Temporary treatment of accounting and auditing on the application of accounting standard for fi nancial instruments in the leasing industry.” (Report No. 19 of the Industry Auditing Committee of the Japanese Institute of Certifi ed Public Accountants).
As a result, the portion of credit in “long-term receivables” in the year ended March 31, 2018 was ¥8,400 million. The Company provides allowance against 100% of this amount and directly reduces the entire amount as the amount deemed uncollectible. Nonetheless, depending upon future economic trends, new bad debts caused by the deterioration of the credit status of companies may affect the business performance of the IBJ Leasing Group.
4. Risk of Changes to Regulatory Systems
The IBJ Leasing Group provides comprehensive fi nancial services, mainly leases, rentals, installment sales and loans, in accordance with current laws and regulations, tax systems and accounting standards. Signifi cant changes to such regulatory systems and standards may affect the business performance of the IBJ Leasing Group.
5. Other Risks
Other risks that may affect the business performance of the IBJ Leasing Group include price fluctuation risk (the risk of the estimated residual value of operating leases falling below the originally anticipated level), operational risk (the risk of inappropriate processing of clerical work), systems risk (the risk of IT systems failure or incorrect operation), and compliance risk (the risk of illegal or antisocial activities).