Tohoku Area Banking Industry Report

Tohoku Area at grace

• Tohoku represents 8.2% of Japan GDP. Population has been declining since 1980’s and per capita GDP ranks lower 25% tile except for Miyagi and Fukushima

• Center of Economy is Sendai. Many banks are opening their branch in Sendai.

• Compared to other area, drop of DI was relatively moderate.

• There is 15 banks in Tohoku area. Except for 77 bank, their size are small and OHR are high. 7 out of 15 banks have 70+ OHR and 5 (Michinoku, Iwate, Tohoku, Shonai, Toho) of which are highest 20% among Japanese banks.

• Shonai, Hokuto, Tohoku, and Michinoku aligns together in several business areas.

• Though Shonai had high MOF capital ratio of 11% in 03/08, it has dropped to 8.7% in 9/08 because Shonai injected capital to Hokuto. Hokuto’s MOF capital raito became 8.0% in 9/08 because of this injection.

Aomori

Iwate

Hokuto

77

SendaiShonai

Kirayaka

Toho

Fukushima

Daito1.5 tn+ deposit

4 tn+ deposit

<1.5tn deposit

Yamagata

Akita Kita-Nippon

Tohoku

Michinoku

: AAI NET (ATM Alliance)

: Alliance (Study group, Syndicate loan, Securitization product)

: Mizuho is one of the major shareholders

: Tokyo Mitsubishi UFJ is one of the major shareholder

Tohoku Economy – as bad as Kanto and Chubu

• DI of small/mid manufacturing companies in Tohoku area has dropped by 12.7 point from (-38) 1H 2008 to (-50.7) 2H 2008. The drop is almost as high as Kanto and Chubu where many manufacturing companies for export exist.

Manufacturing Companies

Non-manufacturing Companies

DI of small/mid companies by region

Tohoku Area

0.0 1.0 2.0 3.0

Kanto

Hokkaido

Kinki

Chubu

Kyusyu

Chugoku/Shikoku

Tohoku

Hokuriku

Average population per regional bank mn

Hokkaido

Tohoku

Kanto

Hokuriku

ChubuKinkiChugoku/Shikoku

Kyusyu

Source: Compiled using “Statistics of Prefecture 2008”

• Tohoku ranks second lowest nationwide among peers when measured by average population per regional bank.

• 15 regional banks among population of only 9.5 million people.

Shonai Bank: 11th largest out of 15 banks in Tohoku

0,000

0,500

1,000

1,500

2,000

2,500

3,000

3,500

77 B

ank

Toho

Ban

k

The

Aom

ori

Bank

Bank

of Iw

ate

Aki

ta B

ank

Mic

hino

kuBa

nk

Yam

agat

aBa

nk

Kira

yaka

HD

*

Kita

-Nip

pon

Bank

Hok

uto

Shon

ai B

ank

Send

ai B

ank

Toho

ku B

ank

Fuku

shim

aBa

nk

Dai

to B

ank

Deposits of all regional banks in Tohoku (as of FY03/08)

Source: Compiled from company annual reports

* Kirayaka HD is aggregation of Shokusan Bank and Shiawase Bank

JPY bn

Size Matters

Source: Company Annual Report (as of 3/2008)

• Tohoku ranks second lowest nationwide among peers when measured by average population per regional bank.

•OHR, thus profitability of the bank, is correlated to the size of bank. Because of its size, “Jinano” banks have disadvantage to their competitors.

Holding-co w/ Hokuto Bank

Post-merger: Shonai & Hokuto become 4th largest Tohoku bank

0

500

1,000

1,500

2,000

2,500

3,000

3,500

77 B

ank

Toho

Ban

k Th

e Ao

mor

i Ban

k Sh

onai

& H

okut

oBa

nk o

f Iw

ate

Akita

Ban

k M

ichi

noku

Ban

k Ya

mag

ata

Bank

Ki

raya

ka H

D *

Kita

-Nip

pon

Bank

H

okut

o Ba

nkSh

onai

Ban

kSe

ndai

Ban

kTo

hoku

Ban

k Fu

kush

ima

Bank

D

aito

Ban

k

Deposits as of FY03/08JPY bn

However, MOF Cap ratio of Shonai Bank has dropped from 11% (03/08) toto 8.7% (9/08)because of the capital injection to Hokuto Bank

Akita

●

●Yamagata

●●

●

●

●

●●

●

●

●

●

●

●●

●

Akita City

TsuruokaCity

Sakata City

Yamagata City

●

●●●

●

●

●

●

●●

●●

● Sendai City

Iwate

Miyagi

Appendix 1: Shonai Bank

Fastest Growing Bank In Tohoku

Source: Compiled from company annual reports

* Kirayaka HD is aggregation of Shokusan Bank and Shiawase Bank

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Shon

ai B

ank

Bank

of Iw

ate

Yam

agat

a Ba

nk

Kita

-Nip

pon

Bank

The

Aom

ori B

ank

Aki

ta B

ank

Hok

uto

Toho

ku B

ank

Send

ai B

ank

Mic

hino

ku B

ank

77 B

ank

Fuku

shim

a Ba

nk

Kira

yaka

HD

*

Growth in deposits of all regional banks in Tohoku (3yr CAGR; as of FY03/08)

ISB and Branch Strategy

SendaiCityYamagata

City

In-store branch map (6 in Yamagata; 8 in Miyagi, 1 in Fukushima)

While most other banks are prioritizing impersonal channels like net banking, Shonai is expanding efforts into face-to-face banking.

Two key distribution channels: Branches: Elegant interior design; focus on “life-consulting” ISBs: Shopping mall based; Low up-front investment burden

Concentrating on investment trust and insurance products, Shonai has been successful in acquiring affluent customers.

Using the innovative In-Store Branch (ISB) format, Shonai has also achieved high new customer acquisition at low cost.

While most other banks are prioritizing impersonal channels like net banking, Shonai is expanding efforts into face-to-face banking.

Two key distribution channels: Branches: Elegant interior design; focus on “life-consulting” ISBs: Shopping mall based; Low up-front investment burden

Concentrating on investment trust and insurance products, Shonai has been successful in acquiring affluent customers.

Using the innovative In-Store Branch (ISB) format, Shonai has also achieved high new customer acquisition at low cost.

【 ISB （ in-store branches ）】【 ISB （ in-store branches ）】

【 Branches with elegant interior design offer individual consulting areas 】

【 Branches with elegant interior design offer individual consulting areas 】

Leverage ISB expertise

3

0

30

1211

3

Shonai will become an agency in Tohoku area and also provide Aeonbankconsulting service of In Store Bank management for other Aeon ISBs.

Aeonbank has found in 2007 backed by one of the top GMS in Japan, Aeon.

Shonai made an alliance with Aeonbank in Nov 2008.

# of ISBs of Aeonbank by Area

Countrywide network of GMSs Successful pioneer of SBI in Tohoku Area

Source: Company Semi Annual Report

Branch Mgt Consulting

4

1

1

1

15Shonai

Michinoku

Yamagata

Iwate

77

ISBs

# of ISBs of Regional Banks in Tohoku

Focus on Fee Business

Source: Compilied from company annuar reports

Fee Income Ratio （ Fee Income / Gross Profit ）

Ratio of mutual fund AUM to total AUM and ratio of fee income to gross profit

0%

5%

10%

15%

20%

0% 5% 10% 15% 20% 25%

Mutu

al Fu

nd A

ssets

under

managem

ent

/ M

utu

al Fund A

ssets

and D

eposi

ts u

nder

managem

ent

Asset MgmtFee Business

Traditional Banking

OtherFee

Business

Shonai Bank

Survey of 64 regional banks (as of FY3/08)

Top Saler of MF/Insurance in Tohoku Area

0

20

40

60

80

100

120

140

160

180

200

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

(bn) Mutual Fund sales since Dec 1998

7 year CAGR 25.2%

7 year CAGR 25.2%