Aozora Bank. FY st Quarter Financial Results. (April 1 June 30, 2018) July 30, Copyright 2018 Aozora Bank, Ltd.All Rights Reserved.

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1 Aozora Bank FY 1 st Quarter Financial Results (April 1 June 30, ) July 30,

2 I. Financial highlights Earnings results Profit attributable to owners of parent was 11.3 billion yen, representing progress of 26% towards the full-year forecast Consolidated net revenue was 22.0 billion yen and business profit was 10.4 billion yen, both representing an increase year on year Net interest income was 14.0 billion yen, an increase of 1.0 billion yen year on year. The net interest margin also expanded by 2 bps compared to the previous year Financial condition Financial Reconstruction Law (FRL) ratio (non-consolidated basis) declined 0.01 points to 0.25% from March 31, The ratio of loan loss reserves to total loans was 1.62% The capital adequacy ratio (domestic standard) is expected to remain at an adequate level (the ratio as of March 31, was 10.39%) Quarterly dividends FY first quarter dividend payment: 40 yen per common share (Note) Unless otherwise stated, all amounts stated in 1 billion yen have been rounded down to the nearest 0.1 billion yen. 1

3 II. PL: Summary Profit attributable to owners of parent was 11.3 billion yen, representing progress of 26% of the 43.0 billion yen full-year forecast Consolidated net revenue was 22.0 billion yen, an increase of 0.3 billion yen, or 1.7% year on year, and business profit was 10.4 billion yen, an increase of 0.3 billion yen, or 3.2%, representing progress of 24% and 26%, respectively, towards the full-year forecasts Profit attributable to owners of parent decreased 3.1 billion yen, or 21.7% compared to the previous year. This was mainly due to an increased tax burden and the previous year s reversal of specific loan loss reserves resulting from the collection of large-lot non-performing claims A FY B B-A Amount % FY full-year forecast Progress Net revenue % % General & administrative expenses % % Business profit % % Credit-related expenses Gains/losses on stock transactions Other gains/losses Ordinary profit % % Extraordinary profit Profit before income taxes % - - Taxes Effective tax rate 18.2% 32.9% +14.8% Profit attributable to owners of parent % % 2

4 II. PL: Net revenue Net revenue was 22.0 billion yen, an increase of 0.3 billion yen, or 1.7% year on year Net interest income was 14.0 billion yen, an increase of 1.0 billion yen, or 8.3% Non-interest income was 8.0 billion yen, a decrease of 0.7 billion yen, or 8.2% A FY B B-A Amount % Net revenue % Net interest income % Non-interest income % Net fees & commissions % Net trading revenues % Gains/losses on bond transactions % Net other ordinary income excl. gains/losses on bond transactions % 3

5 II. PL: Net revenue Net interest income Net interest income was 14.0 billion yen, an increase of 1.0 billion yen, or 8.3% year on year Net interest margin increased by 2 bps from the prior year to 1.44% The Bank continued its disciplined balance sheet management. The yield on loans increased 30 bps compared to the previous year, reflecting an increase in U.S. dollar interest rates. The yield on securities also increased, mainly due to an increase in dividends on investment trusts and ETFs Funding costs increased by 30 bps year on year. Foreign currency funding costs increased due to an increase in U.S. dollar interest rates, the impact of which exceeded the slight decline in yen funding costs A FY B B-A Net interest income Interest income Interest on loans and discounts Interest and dividends on securities Other interest income Interest on swaps Interest expenses Interest on deposits and NCDs Interest on debentures and bonds Interest on borrowings and rediscount Other interest expenses Interest on swaps Decreases in expenses are shown as positive Net interest margin Yield on total investments (A) 2.09% 2.41% +0.32% Yield on loans 1.77% 2.07% +0.30% Yield on securities 3.13% 3.54% +0.41% Yield on funding (B) 0.67% 0.97% +0.30% Net interest margin (A)-(B) 1.42% 1.44% +0.02% <Net interest margin> 4

6 II. PL: Net revenue Net fees and commissions Net trading revenues Net fees and commissions were 1.6 billion yen, almost the same as the previous year Net trading revenues were 2.2 billion yen, a decrease of 1.4 billion yen, or 38.4% This result was mainly due to the decline in earnings from the sale of derivative-related products to our financial institution customers. Aozora strives to achieve stable earnings by providing derivativerelated products to meet the investment needs of our financial institution customers and the hedging needs of our corporate customers A FY B B-A Net fees and commissions <Earnings from Financial Product Sales to Retail Customers> Fees and commissions received Loan business-related and deposits Securities-related and agency Other Fees and commissions payments Net trading revenues Earnings from Financial Product Sales to Retail Customers (included in the two items above) Earnings related to the sale of investment trusts, insurance, and structured bonds

7 II. PL: Net revenue Net other ordinary income Gains/losses on bond transactions were a gain of 1.5 billion yen, compared with a gain of 1.0 billion yen in the first three months of Net other ordinary income, excluding gains/losses on bond transactions, was 2.6 billion yen, an increase of 0.4 billion yen, or 22.3% year on year Gains from limited partnerships were 2.8 billion yen, an increase of 0.1 billion yen, or 6.7%, mainly supported by gains associated with buyout related investments A FY B B-A Gains/losses on bond transactions Japanese government bonds (JGBs) Foreign government bonds & mortgage-backed securities Others Net other ordinary income excl. gains/losses on bond transactions Incl. Gains from limited partnerships Real estate-related Distressed loan-related Others (Buyout, etc.)

8 II. PL: G&A expenses G&A expenses were 11.6 billion yen, almost the same as the previous year This result was mainly due to incremental expenses associated with the Bank s business areas of focus, offset in part by continued cost control measures taken by the Bank during the period This represented progress of 22.4% of the full-year budget of 52.0 billion yen. Expenses associated with the opening of the Bank s internet banking venture are expected to increase in the second quarter The OHR was 52.7% G&A expenses breakdown <G&A expenses transition> Apr. - Jun. A FY Apr. - Jun. B B-A G&A expenses (A) Personnel Non-Personnel Tax Net revenue (B) OHR (A)/(B) 53.4% 52.7% 7

9 II. PL: Credit-related expenses Credit-related expenses were a net reversal of 0.7 billion yen This result was principally due to the reversal of general loan loss reserves reflecting an overall improvement in credit conditions and the risk profile of our borrowers The previous year saw a reversal of specific loan loss reserves resulting from the collection of large-lot nonperforming claims The Financial Reconstruction Law (FRL) ratio declined 0.01 points to 0.25% from March 31, The ratio of loan loss reserves to total loans remained high at 1.62% Credit-related expenses End - Mar. End - Jun. Reserves for loan losses (A) Total loans (B) (A) / (B) A FY B B-A Credit-related expenses Write-off of loans Reserves for loan losses Specific reserve for loan losses General reserve for loan losses Gains/losses on disposition of loans Recoveries of written-off claims Reserve for credit losses on off-balance-sheet instruments Ratio of loan loss reserves to total loans 2, , % 1.62% < FRL claims (Non-consolidated)> 10 5 Bankrupt Special attention 0.50% Doubtful FRL ratio* 0.26% 0.25% End-Mar. 17 End-Mar. 18 End-Jun. 18 Coverage Reserves Collateral & guarantees Coverage ratio 100.0% 83.6% 86.2% *Ratio of FRL claims to total claims 8

10 III. Balance Sheet: Summary Total assets were 4,927.8 billion yen, an increase of 15.0 billion yen from March 31, Total net assets were billion yen, a decrease of 6.9 billion yen, or 1.6%, from March 31, B - A Loans and bills discounted 2, , Domestic loans 1, , Overseas loans * Securities 1, , Incl. JGBs Incl. Foreign government bonds Cash and due from banks Trading assets End - Mar. A End - Jun. B Others Total assets 4, , Deposits / Negotiable certificates of deposit B - A 2, , Debentures,Bonds Borrowed money Payables under securities lending transactions Trading liabilities Others Total liabilities 4, , Capital stock Capital surplus Retained earnings Treasury Stock Valuation difference on available-for-sale securities End - Mar. A End - Jun. B Others Total net assets Total liabilities and net assets 4, , * Overseas loans refer to those with no final risk residing in Japan 9

11 III. Balance Sheet: Funding The Bank flexibly managed its funding position in light of its asset requirements. Total core funding was 3,353.0 billion yen, an increase of billion yen, or 3.9%, from March 31, The percentage of retail funding to total core funding was 54% Funding sources Total core funding <Funding sources by product> Deposits/ NCDs End-Mar. A B-A 3, , End-Mar. A End-Jun. B End-Jun. B B-A 2, , <Funding by customer segment> Financial Institutions Corporate and Public Institutions Retail 3, , , , Debentures/ Bonds Liquidity reserves , Liquidity reserves End-Mar. End-Jun ,000 1, , ,810.0 Retail funding ratio * Stable funding ratio * 56% 54% 71% 69% End-Mar. 17 End-Mar. 18 End-Jun. 18 Loan-to-deposit ratio incl. NCDs 88% 88% 85% * Aozora Bank index; defined as follows Retail funding ratio = Retail deposits/ Total core funding Stable funding ratio = (Retail deposits + Corporate long-term derivative-embedded deposits and borrowings) / (Total core funding + Corporate long-term derivative-embedded borrowings) 10

12 III. Balance Sheet: Loans Balance by industry Loans were 2,634.8 billion yen, an increase of 23.6 billion yen from March 31, Domestic loans increased by 9.6 billion yen. Overseas loans increased by 13.9 billion yen End - Mar. A End - Jun. B Total loans (A) 2, , B-A <Loan portfolio by industry> Domestic loans 1, , Overseas loans * (B) * With no final risk residing in Japan (B) / (A) 37.3% 37.5% - Loans by domestic offices (excluding Japan offshore market accounts) 2, , Manufacturing Information and communications Transport, postal services Wholesale and retail sale Financial and insurance Real estate Incl. Non-recourse loans Leasing Other services Others Incl. Overseas (Headquarters booked) Loans by overseas offices incl. Japan offshore market accounts Total 2, ,

13 III. Balance Sheet: Loans Overseas Overseas loans* were billion yen, an increase of 13.9 billion yen from March 31,. The percentage of overseas loans to total loans was 37.5% The Bank continued its selective origination of corporate loans and real estate non-recourse loans, mainly in North America where risk-return profiles remain relatively attractive Overseas loans on a U.S. dollar basis declined compared to March 31, due to the prepayment of several larger loans <By industry> * With no final risk residing in Japan End - Mar. A End - Jun. B <By region> B - A Total loans (A) 2, , Overseas loans * (B) (B) / (A) 37.3% 37.5% - U.S. dollar basis ($ million) 9,157 8, U.S. real estate non-recourse loans <U.S. real estate NRL by area> City % New York 40% Washington, D.C. Chicago San Francisco Los Angeles Miami San Jose Boston Atlanta Seattle 39% Others 21% 12

14 III. Balance Sheet: Loans Domestic real estate 98% of the non-recourse real estate loans remained at an LTV of 70% or below Tokyo-metro focused. Most non-recourse loans were office or residential B-A Total loans 2, , Real estate sector Non-recourse loans End - Mar. A End - Jun. B Cumulative % of portfolio 70% or below 80% or below LTV Status 98.0% 99.4% Non-recourse loan breakdown <By area> <By sector> 13

15 III. Balance Sheet: Securities Securities were 1,194.3 billion yen, an increase of 54.5 billion yen, or 4.8%, compared to March 31, The higher level was mainly the result of increases in the Bank s ETF and investment trust positions Total unrealized gains were 42.4 billion yen, compared with 58.4 billion yen as of March 31, Total unrealized gains, including unrealized gains/losses on hedging instruments, were 6.8 billion yen Book value Unrealized gains / losses End - Mar. End - Jun. End - Mar. End - Jun. A B B - A C D D - C JGBs Municipal bonds / Corporate bonds Equities Foreign bonds Foreign government bonds MBS Others Others ETFs Domestic equities Foreign currency ETFs Investments in limited partnerships REIT Investment trusts Others Total 1, , Unrealized gains, incl. gains/losses on hedging instruments

16 IV. Dividends FY first quarter dividend: 40 yen per common share Dividend forecast per common share for FY is 184 yen The Bank intends to continue quarterly dividend payments Dividend per common share 1st quarter 2nd quarter 3rd quarter Year-end Full-year Current forecast (FY) Dividend payment (FY) Payments in previous term *1 () 40 yen yen *2 40 yen 40 yen 50 yen 54yen 184 yen * 1 The Bank consolidated every ten common shares into one common share on October 1, Figures in Dividend per common share are presented as if the share consolidation was effective at the beginning of FY2016 * 2 The full-year dividend forecast for FY is based on the total dividend amount, which is 50% of the profit attributable to owners of parent estimated at 43.0 billion yen for the full year, divided by the total number of outstanding common shares (excluding treasury stock) as of March 31, <Dividend transition *1 *2 > 15

17 V. Reference: Consolidated, Non-consolidated Difference Difference between consolidated and non-consolidated earnings Non-consolidated profit attributable to owners of parent 11.6 Subsidiaries Company name Shareholding, etc. Net Earnings * GMO Aozora Net Bank, Ltd. 50.0% -0.4 Aozora Securities Co., Ltd % 0.3 Aozora Loan Services Co., Ltd. 67.6% -0.0 Aozora Regional Consulting Co., Ltd % -0.0 Aozora Investment Management Co., Ltd % 0.0 Aozora Real Estate Investment Advisors Co., Ltd % -0.0 ABN Advisors Co., Ltd % -0.0 Aozora Corporate Investment Co., Ltd % -0.0 Aozora Asia Pacific Finance Limited (AAPF) 100.0% 0.1 Aozora Europe Limited 100.0% 0.0 AZB Funding 100.0% -0.1 Aozora Investment, Inc. etc % -0.0 Total -0.1 Consolidation adjustments -0.0 Profit attributable to owners of parent 11.3 Difference -0.2 Reference: Loss attributable to non-controlling interests -0.2 * Voting rights ratio is 85.1% 16

18 V. Reference: Capital adequacy ratio (as of March 31, ) The capital adequacy ratio (domestic standard) is expected to remain at an adequate level (to be announced in mid-august) Capital adequacy ratio was 10.39% as of March 31, Domestic standard End-Mar. End-Dec. End-Mar A 2017 B B - A Capital adequacy ratio 10.75% 10.74% 10.39% -0.36% Regulatory capital (A-B) Instruments and reserve (A) Shareholders' equity Others Regulatory adjustment (B) Risk-weighted assets 4, , , Credit risk assets 3, , , Market risk assets Operational risk assets

19 V. Reference: Mid-term KPIs Net interest margin Non-interest income ratio Overhead ratio (OHR) FY2016 Results Results FY Results Mid-term targets (FY-2020) 1.28% 1.30% 1.44% * 1.20% 46% 44% 36.4% 45-55% 52.8% 53.6% 52.7% 50% ROE 10.6% 10.0% 10.5% * 9.0% ROA 1.0% 0.9% 0.9% * 0.8% * Annualized basis 18

20 V. Reference: Performance Indicator Comparison Return on assets (ROA) Overhead ratio (OHR) * FY Full-Year FY Full-Year Full-Year Apr.-Jun Full-Year Aozora NPL ratio Major domestic bank average *Annualized basis 0% Aozora Loan loss reserve ratio Major domestic bank average (FRL ratio, non-consolidated) (Loan loss reserves/total loans) Mar. 31, Jun. 30, Mar. 31, Mar. 31, Jun. 30, Mar. 31, Aozora Major domestic bank average Source: Domestic bank websites Major domestic banks are MUFG, Mizuho, SMBC, Resona, SMTB and Shinsei Aozora Major domestic bank average 19

21 <Contact> AOZORA BANK, LTD. Corporate Communication Division TEL: FAX: URL: Mr. Hiroyuki Kajitani Mr. Takashi Sakama Ms. Junko Matsumoto Mr. Kenji Nakanishi Mr. Sohei Ito This presentation contains forward-looking statements regarding the Bank s financial condition and results of operations. These forward-looking statements, which include the Bank s views and assumptions with respect to future events, involve certain risks and uncertainties. Actual results may differ from forecasts due to changes in economic conditions and other factors including the effects of changes in general economic conditions, changes in interest rates, stock markets and foreign currency, and any ensuing decline in the value of our securities portfolio, incurrence of significant credit-related cost and the effectiveness of our operational, legal and other risk management policies