Orico Q2 FY2027: Higher funding costs drive 43.7% net profit drop

Orico's first-half operating revenue edged up 0.1% year on year to ¥124.9 billion, while operating profit fell 24.2% to ¥5.4 billion and net income attributable to owners of the parent declined 43.7% to ¥3.5 billion. Ordinary profit was down 24.2% to ¥5.4 billion. Revenue was nearly flat, but profits fell sharply, with the impact of higher interest rates on costs in focus.

Operating expenses increased ¥7.2 billion from a year earlier, mainly because higher market interest rates lifted financial costs. Revenue gains were not enough to absorb the increase, weighing on profit. Other changes are the difference calculated from the year-on-year change in operating profit and the disclosed increase in expenses.

The company said revenue grew in card loans and bank guarantees, while income from property sales also increased. Those gains were offset by lower revenue from overseas operations and other factors, leaving overall operating revenue little changed. The larger decline in first-half net income than in operating profit also highlights the importance of how much of the interest burden Orico can absorb in the second half to meet its full-year targets.

Domestic payment and guarantee services and card loans showed growth, while transaction volumes at overseas operations declined as Orico tightened credit standards. In the second year of its medium-term management plan, the company aims to expand growth areas and advance business restructuring.

• Payment and guarantee business: Demand for rent guarantees remained firm amid growth in single-person households and rising home prices, with stronger sales efforts in the Tokyo metropolitan area also contributing. Volumes rose at existing accounts in accounts receivable payment guarantees, and Orico added new partners by deepening its collaboration with Mizuho Bank.
• Overseas business: Orico prioritized building a portfolio of quality receivables and tightened credit standards, resulting in lower transaction volumes at its three overseas subsidiaries than a year earlier. However, expenses related to loan losses declined, supported by measures including stronger collection systems, and ordinary profit improved.
• Card loan business: Use by major partners was strong and transaction volume increased, but loan balances were below the year-earlier level, in part because of a decline in new business.
• Individual installment credit business: Auto loan volume increased, while shopping credit declined as the company pursued measures that prioritized profitability.
• Bank guarantee business: Orico expanded financial services tailored to local needs. Term-loan volume increased, and guarantee balances rose from the end of the previous fiscal year.

In Japan, expanded partnerships and greater use by existing merchants are supporting growth. Overseas, Orico is prioritizing credit quality over volume, accepting a short-term revenue decline while seeking to contain credit costs.

Total assets fell from the end of the previous fiscal year, and the equity ratio edged down. Orico maintained its annual dividend forecast at ¥40, unchanged from the previous year, and made no revision in its latest earnings report. The report did not include cash flow statement figures, so operating, investing and financing cash flows cannot be compared.

The decline in total assets was mainly due to a decrease in cash and deposits, including as a result of repayments of interest-bearing debt. Net assets fell as retained earnings declined after dividend payments, and the equity ratio was also below its level at the end of the previous fiscal year. The report disclosed no share buyback, making the maintained annual dividend the only shareholder return measure confirmed this time.

Orico left its consolidated forecast for FY2027 unchanged. It expects operating revenue to rise 5.0% from the previous fiscal year, operating profit to increase 3.8% and net income attributable to owners of the parent to grow 0.9%. First-half results represented about 48% of the full-year revenue forecast, about 36% of the operating profit target and about 27% of the net income target, leaving ground to make up on profits in the second half.

Orico made no changes to its forecast and maintained its annual dividend plan of ¥40. Operating revenue through the second quarter was broadly on plan, but profit progress was relatively slow. The key will be whether revenue growth and cost controls in the second half can offset the higher costs associated with rising interest rates.

Orico said it needs to watch rising interest rates and uncertainty surrounding economic conditions and policy in Japan and overseas. In businesses that involve extending credit, changes in customers' ability to repay and in loan-loss expenses can directly affect earnings.

• Rising interest rates: Higher market rates push up financial costs. If increases are not reflected promptly in lending rates or guarantee income, profit margins may come under pressure.
• Economic downturn: If higher prices weigh on consumer spending or corporate activity, card use and demand for loans could weaken, with potential effects on guarantee and installment credit businesses as well.
• Credit risk: Tighter underwriting reduced transaction volumes overseas. If Orico cannot maintain the quality of its receivables, loan-loss expenses could rise and erode profits.
• Geopolitical and policy uncertainty: The company is monitoring the impact on national economies of the Middle East situation, economic policies in Japan and overseas, and changes in financial markets.

Overseas, Orico tightened credit standards and restrained transaction volumes while reducing loan-loss expenses. Balancing growth with credit cost management, and passing higher interest costs through to business revenue, remain key challenges.

Orico's five-year medium-term management plan sets its ultimate goal as establishing a financial model unique to the company. FY2027 is the plan's second year, and Orico aims to accelerate growth by transforming business processes with AI and restructuring its operations.

• Consumer business: Orico plans to expand digital installment payments and personal auto leasing, which it identifies as growth areas, while deepening structural reforms centered on its individual installment credit business.
• Corporate business: The company aims to expand its customer base and deepen relationships by growing bank guarantees and accounts receivable payment guarantees. It also plans to broaden its corporate solutions.
• Operational transformation: Orico will review business processes, including through the use of AI, to strengthen a competitive operating base.

During the first half, Orico expanded partnerships in domestic guarantee-related services, while new business declined in card loans. Progress will depend not only on growing transaction volumes but also on converting growth into earnings while managing interest costs and credit expenses.