Operator: [Operator Instructions] Now we would like to open the floor for questions. [Operator Instructions] SMBC Nikko Securities, Muraki, please ask your question.
Masao Muraki: Yes. This is Muraki, SMBC Nikko Securities. I want to know more details about what happens when the interest rate goes up. If the short term interest is about 5 basis point, like it was in 2007, and the long-term interest rate is about 1.5%, let’s say under that scenario, what kind of business opportunities will ORIX see? In the integrated report, I saw that there was a story about when you joined Mr. Inoue and lease profit and funding. There used to be margin arbitrage, but right now it is not possible. But if the short-term interest rate is about 50 basis point, maybe arbitrage would be possible again in the corporate financial services business. So I want to know if that’s possible. So that’s the business aspect.
And also with regard to ORIX Bank and ORIX Life, considering the potential IPO as a CEO, what level of profit or gain on sales would you be satisfied with or can you expect that? If you look at [indiscernible] and PBR, for example, it is going high, and its PBR is about 2 times right now. So for ORIX Life and ORIX Bank, I understand that you will not be holding these entities forever, and once the financial policy normalizes, maybe it becomes unrealistic to sell off these assets. That’s my question.
Makoto Inoue: Thank you. First of all, impact of a higher interest rate? Well, of course, the bank, life and the lease, we can expect arbitrage as the spread widens. So this is a favorable situation for us. So centering around corporate financial services, lease operations, which used to slow down in the past can now accelerate. But with dozens of basis points, the spread would not widen that much. So interest rate will have to reach maybe 3% – 2%, 3%, 4%, before we can do an interesting spread business, arbitrage business. Life and Bank, well, the assets that we hold are different from lease. They are more liquid, which means that including potential sales of assets, maybe we can expect improvement in the earnings. Now Bank and Life, well, zero interest rate continued for a long time and the PBR in the financial service sector was 0.05 or something like that.
So we can expect improvement in the share prices due to higher interest rate. And once that happens, of course, we will start a dialogue with the market, [indiscernible] bank, yes, we do look at those things as well. And [indiscernible] PBR goes up that much? Why not ORIX Bank? That’s the question that we received. Now, a real estate condo investment and also trust business and merchant banking restart and various activities are starting, but we don’t want to suggest one single thing. The business model has to be multiple, not just one. Otherwise, overall PBR will not go up. So either way, to prove the earnings from the banking business, we need to increase the number of businesses that are multifaceted. And this is something that I’m talking with the bank team.
As for life insurance, of course, the higher interest rate will directly impact that business. So embedded value and other improvements could be expected. So depending on the situation, in the future, life insurance liquidation – excuse me, life insurance sell off may be possible, but we don’t have enough materials to decide that right now. Now, in terms of negative impact, private equity, of course, and also real estate development projects would experience higher interest rate and also higher construction cost. High interest rate will push up general costs. So for development and exit NOI, we have to carefully look at the arbitrage and build the new projects very carefully. We are not doing any low spread businesses. More than 3% arbitrage is possible for the projects that we find.
So several tens of basis points of interest rate high could not impact us that much. I hope that answers your question.
Masao Muraki: Yes, thank you. I read your story very interestingly on the integrate report about how to leverage or take advantage of failures. Thank you.
Operator: Next is Sato from JPMorgan Securities.
Koki Sato: Thank you. This is Sato speaking. First question about the U.S. business. On Page 31 of your presentation material, you are disclosing the numbers and compared with the past, new investments are being controlled, you mentioned. And this time the real estate system business segment is down. But if you look at the total picture, it’s flat, I think. So what you say, the controlling risk is what you are doing. And when you continue with that, the base profit of each business and the segment assets, what will be the trend of those? What should we expect? So, if you can give us some more details on that and also the higher interest rate in the United States. Could you comment on that as well? In the past, Avalon charge the interest payment would increase and also the USA segment, that would be positive, so it would be offset.
And also on another page, the higher interest rate in the United States does not have much impact. So as of now, when you look at the current portfolio, the higher interest rate in the United States, how would that impact on your profit and loss? If there are any update. Thank you.
Makoto Inoue: So USA operation, first of all, most of the main business in the United States are private credit, so financial business. So PE, the amount is limited or small. So for real estate, it’s multifamily finance and agency or sell to agency and credit, double B or single B equivalent companies, we were providing loans to those companies. So single B, double B minus loans, there are some remaining and right now they’re using the tangible asset or rather they are using the intangible assets. So the cash flow based is the collateral used for most of the loans in the United States. When the interest rate rises, the cash flow on the customer side turns negative. So there are several higher credit cost and bad debt increasing and we have already worked them out and we increased the provision.
So we have done the mark-to-market and then selling them off. So that’s what we have in the United States. So after that, naturally, even when the interest rate goes up basically or say that up to 5% or so and if stabilizes, then around 5% funding cost will be the assumption, so that increasing the balance of the loan. And then in the future when the interest rate comes down, then we can do the arbitrage and also 25 basis points is possible here and probably we are reaching the peak. So we are trying to wait and see and start to make new investments and then we should be able to make that quick recovery. As for the interest rate in the United States, as I said, a 25 basis point or 50 basis point. If it’s within 25 basis points it would be better, especially ORIX USA, most of the assets are floaters, so fixed interest rate, we don’t have an asset at the fixed interest rate, so the impact will not be a big one on us.
Also Avalon and others, Avalon expectation and investment, they are all in U.S. dollars. So Avalon’s earnings is improving, including our hedge cost, we think that it would take some time before the recovery. So we have to really reconsider the hedge cost. But as of now, the Avalon and others for the U.S. denominated investments, the interest cost, how to change that and we are thinking that we should reconsider. But that’s being reconsidered. So we have not yet made a final decision. In the future this is something that we need to work on. Did I answer your question?
