AEON Financial Service Co. Ltd. is beating the odds. The parent of AEON Bank Ltd. and other financial companies is expanding rapidly in Japan and elsewhere in Asia by focusing on its credit card business, despite the region's sluggish economies.
In practice, that means the volume increase of AEON's new consumer loans in Japan, including cash advances and card loans, is about as big as that of each of the country's three megabanks at around ¥50 billion, said Hideyasu Ban, a financial analyst at Morgan Stanley MUFG Securities Co. Ltd.
But industry watchers in the region say AEON's approach may be reaching its limits inside Japan because of intensifying competition in consumer lending.
Rivals like Seven & I Holdings Co. Ltd, parent of Seven Bank Ltd., may be positioned to challenge AEON's primacy. So far, says Ban, the Seven & I group has not been very aggressive in promoting its credit cards and loans. "If they become more serious about marketing credit cards and loans from Seven Bank through their retail outlets such as convenience and department stores, they could gobble up market share in the consumer loan and credit card business," Ban said.
Tapping into retailing
Shoppers walk past a clothing shop in Tokyo.
Source: Associated Press
Company officials, though, say they still see room to grow. Tetsuro Sugita, head of investor relations at AEON Financial, said the company's retail business is able to promote its consumer finance services, giving it an edge over other Japanese financial institutions. "We are making full use of the AEON group platform to expand," he said.
AEON Group owns and operates 145 shopping malls and 625 general merchandise stores in Japan, and 19 malls overseas. The financial business is a part of the retail group. AEON Financial reported in February that domestic ordinary profit in the nine months ended Dec. 31, 2016, rose 9% from the year before to ¥29.50 billion.
Ordinary profit generated from overseas, however, declined 15% to ¥15.20 billion in the period, mainly due to a stronger yen. AEON Financial's credit card business was the biggest source of ordinary profit, generating ¥29.70 billion in the nine months ended December 2016, up 16% from the year-earlier period.
AEON's credit cards transaction volume totaled ¥3.357 trillion in the April-December 2016 period, up 9.8% from a year earlier. Cash advances outstanding totaled ¥426 billion by the end of 2016, up 5.7% yearly. Bun Kishimoto, manager of corporate communications at AEON Financial, said the company charges an average of about 15% interest a year for cash advances. The fee charged by AEON to credit card member stores for each AEON credit card transaction is 1.5% per month, or 18% a year.
"Consumer loans, mainly cash advances through credit cards, are also a major profit-maker because of the high interest charged, more than an average of 15% per year, while interest on our housing loans is only about 1% a year," Kishimoto said.
AEON Financial does not provide figures for its domestic housing loans outstanding, but Kishimoto put them at about 60% of AEON's total outstanding loans of ¥1.08 trillion at the end of December 2016. AEON's target for increasing its domestic consumer loans was ¥50.60 billion in the fiscal year ending in March, slightly less than its ¥50.90 billion in consumer loans in the previous fiscal year. Its outstanding domestic consumer loans stood at ¥498.2 billion at Dec. 31, 2016, an increase of ¥30.7 billion in the nine-month period that began March 31, 2016.
In focusing on the mass market, where demand for basic purchases is less elastic than a higher-end segment, AEON is somewhat recession proof, Sugita said.
Focus on convenience
"Our credit card is for buying commodities, not expensive stuff," he said, adding that AEON's credit card shopping transactions were growing by 10% per month.
AEON Financial and other retail lenders tend to provide more convenient services for their customers than the banks, Ban said, citing AEON's locations in shops and malls as well as customer-friendly opening hours.
That business approach carries over into foreign markets, where the Japanese megabanks still tend to focus on corporate business, whereas groups like AEON go for the retail market. But while AEON's burgeoning overseas presence helps drive growth, exchange rate risks and exposure to developing Asian economies, such as Cambodia and Myanmar, create some uncertainty.
In fact, AEON Financial operates in 11 Asian countries, but almost all its profit comes from three: AEON Credit Service (Asia) Co. Ltd. in Hong Kong, AEON Thaha Sinspa (Thailand) PCL and Aeon Credit Service (M) Bhd. in Malaysia.
"Japanese banks will not be able to copy our overseas business," Sugita said.
But, Junichi Tanaka, a banking analyst at Japan Credit Rating Agency, said AEON'S overseas business is also prone to weakness. "Its Southeast Asian business depends on local economic conditions and exchange rates," he said, pointing to profits outside Japan, which fell in the nine months ended December 2016 compared with a year earlier, due to a stronger yen and weaker local economies.
As of April 3, US$1 was equivalent to ¥111.00.