Taiyo Fund Financial Sector Candidates

Sector outlook SectorCharacteristicsRecommendation Regional banksHighly correlated to the bank sector index. A bank have to be extremely unique. Otherwise, it will perceived as one of them and priced as such. 16 th bank Nagoya bank Nishi Nippon? LeaseShrinking market: Lease market has been shrinking for last XX years. Credit crunch: Most of them are “keiretsu” NA Consumer finance 過払請求 is dragging business and credit crunch will take place in Some consumer finance companies bankruptcy risk. (i.e. Aiful) Struggling to transform its business Aiful’s restructuring could be a turning point for the industry. NA Credit card Consumer finance business is suffering 過払請求 and Credit Crunch. But not as serious as consumer finance Some companies are doing well on transaction business Aeon Credit Real EstateVacancy rate is as high as that of 2003 (Tokyo Office 7.52%). A good news is that vacancy rate has stopped declining in August after 19- month consecutive drop. Lending market is tight. REITs have refinancing issue in next few years. Leopalace 21 Brokerage firmHighly correlated to the transaction volume of the market Internet brokers are taking customers from traditional brokers Strategy matters Kabu.com

Bank in Chukyo area hypothesis Chukyo area rebound Chukyo area, the industrial area in Japan, has hit seriously by the current recession. Once economy is back, it is likely that the economy of these areas will recover more steeply than other areas and thus banks in there area will benefit more from that. –Does economy recovery soon? –Tokai has high exposure to auto sector. Having a bank in this area will increase auto exposure of Taiyo portfolio too much? Bank consolidation 16 th bank is interested in taking a initiative in bank consolidation of Chukyo area. –16 th bank is the largest bank in Gifu. Since the market size of Gifu is small, 16 th bank has entered in Aichi market very early and the bank has the largest market share in Chukyo area (Aichi, Mie, Gifu). –Regional banks in Aichi prefecture is small and fragmented. However, as Aichi market is big, a small bank can survive without drastic action. As the consequence, banks in Aichi generally agree that consolidation in that area makes sense but do not take any action. –Banks in Aichi are making loose alliance for product development and services. –Of those three banks in Aichi, 16 th bank has closest relationship with Nagoya bank and thinking the bank as potential merger target. However, some says that Nagoya is reluctant to that because they may lose control. –Do investors make money from bank consolidation? –What could be a catalyst for bank consolidation? –How Taiyo can make money out of this?

Investment thesis – Aichi exposure Nagoya rebound Tokai/Chubu area, industrial area in Japan, has hit seriously by the current recession. DI has dropped by 40 points from -15 (09/2008) to – 55 (06/2009) (Total is down by 31 point) and stock performance has been worse than other peers in 2008 and 2009 YTD (see below) Once economy is back, (actually, DI for 09/2009(expectation) shows some recovery and is better than 03/2006) it is likely that the economy of these areas will recover more steeply and thus banks in there area will benefit more. Stock performance 2009 YTD Tokai/Chubu(median)-7%-27%-6%-13%44%4% Regional Bank (median)-3%-22%-11%-14%47%4% Topix11%-42%-12%2%44%10% DI 6/20099/2009 Tokai/Chubu Total-45-14

Tokai/Chubu Area Since Tokai bank has merged with Sanwa bank and eventually became part of BMTU, there is no dominant player in Tokai area as 77 th in Tohoku. 1.5 tn+ deposit 4 tn+ deposit <1.5tn deposit Shizuoka 16 Ogaki-Kyoritsu Gifu 105 3rd Mie Nagoya Aichi Chukyo Suruga Shimizu Shizuoka-Chuo : Capital Injection : ATM Alliance : Mizuho is one of the major shareholders : BMTU is one of the major shareholder : SMBC is one of the major shareholders Three regional banks in Aichi prefecture. Each has loan assets of 1-2 tn, which is relatively small among regional banks. Both 16 th and Ogaki-Kyoritsu entered Aichi market very early since Gifu market is very small. Ogaki is providing unique service to is customers. Relationship w/ other banks are relatively weak. 16 th has invected capital for Gifu last year for “Kyusai” As the consequence, 16 th ’s capital is not so strong. 105 th is another big regional bank in this area. It has entered Aichi market relatively recently. Banks in Shizuoka is more interested in penetrating Kanto (Kanagawa) area. Large market share in northern Mie prefecture. Its main market is southern Mie where economy is weak.

Banks in Chukyo area

Additional Questionnaire for 16 th bank – and expected answers How What is your strategy and competitive advantage? –They said to penetrate Nagoya market in the past meeting. But strategy was not clear. –For competitive advantage, they said that 16 th brand is strong. Is that so? How is the Aichi economy doing? –It will be a good opportunity for Jack to hear about auto industry market situation 16 th bank has injected capital to Gifu bank last year for “Kyusai”. Several years ago, government has injected capital to Gifu as preferred stock and it could be converted to common stock next year. If that happens, it will be difficult for 16 th to exit from Gifu bank. Therefore 16 th bank has to decide what to do with Gifu bank this year. –Option 1: Negotiate Mitsubishi Tokyo UFJ (the largest shareholder of gifu bank) and exit from Gifu –Option 2: Acquire 100% of Gifu bank. In this case, 16 th bank need to raise capital. –Option 3: Do nothing Have you decided what to do? –They will not answer this question easily. Does bank consolidation make sense in Aichi? What is the benefit for the banks? And what is benefit for shareholders? Do you have particular partner in your mind? –Nagoya bank? 105 bank? One of the major concern for the counter party would be that 16 th bank is big and they may lose control if merged with 16 th bank. How do you respond to that fear?

Questionnaire for Nagoya bank – and expected answers Questions used for other banks Though bank of Nagoya has the largest deposit and loan assets among three regional banks in Aichi, the size is does not reach a critical mass (it is generally said that a regional bank need to have deposit of 4-5 tn to be efficient). How can Nagoya bank fill in the gap? –Aichi market is big and we can live with current size. Aichi is attractive market and many big regional banks outside Aichi is entering this market. Which bank (incl. other two regional banks and mega banks) do you think the main competitor? What is a competitive edge of Aichi bank? –Aichi bank, Chukyo bank, Ogaki kyoritsu, 16 th, 105 th –Mega bank is not a direct competitor. They are targeting large company and we are targeting mid/small companies. –We have close relationship with Aichi-based companies, that is our competitive edge On the contrary what kind of alliance do you have with other banks? With which bank do you have closest relationship? –ATM alliance with Nagoya, Aichi, Chukyo, 16th, 105 th, –16th bank is the closest Bank consolidation is taking place in many area (Kyusyu, Tohoku, Kyusyu). What is your policy? Who could be a potential partner? –Aichi market is big and we do not have urgent needs for consolidation –Culture is different What is the major concern –16th is big and they may control everything –16 th ’s capital is Are you interested in Holding co structure such as Fukuoka financial (kyushu) and Shonai/Hokuto group (Tohoku) –Do not see the benefit of Holding co structure