Nomura Holdings Inc (NMR) 2007 Q2 法說會逐字稿

Good day everyone and welcome to today’s Nomura Holdings second quarter operating results for fiscal year ending March 2007 conference call. Please be reminded that today’s conference call is being recorded at the request of the hosting company. Should you have any objections, you may disconnect at this point in time.

Please note that this telephone conference contains certain forward looking statements and other projected results which involve known and unknown risks, delays, uncertainties and other factors not under the Company’s control which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transaction.

[OPERATOR INSTRUCTIONS]. Following the Q&A session, we would like to ask for you to please stay on the line to participate in a very brief questionnaire on the presentation.

Now I will turn the call over to Mr Masafumi Nakada and I’ll be standing by for the question and answer session. Thank you sir, you may now begin.

Thank you very much. Good evening ladies and gentlemen. Thank you for taking time out to join the Nomura Holdings conference call to review our financial results for the second quarter ended September 2006. I am Masafumi Nakada, CFO of Nomura Holdings Inc.

Let me comment on the financial results before we go into the detailed discussion. Our performance picked up compared to the first quarter with the contributions to the revenue from private equity investment and the expanded equity underwriting. However, the drop in trading and stock brokerage commission pushed ROE for the second quarter down to 8.3% or 6.1% for the first half of the fiscal year, down from 7.4% last year. We are clearly disappointed with these results.

The business segment totals, which represents results from our main stay operations, were up in terms of above our net revenue and income compared to the previous quarter and the first six months of the last year. To be sure, trading and stock brokerage commissions were hit by the short-term market environment. However, we are making steady progress with the three strategies for growth we outlined at the beginning of the fiscal year.

Looking at the current environment, the My Story profit distribution type funds topped JPY13m in just one year and five months, and our investment banking operations are continuing to see results, such as working as lead manager on major financing deals including those for E.ON and Sharp. As such, we believe we can achieve our corporate goals on a full year basis.

Last week the dividend for the second quarter will be the target dividend of JPY80 per share in line with our dividend policy. So now, I will hand you over to Mr. Hayes for detailed discussion of our financial results and afterwards I will answer any questions you may have.

Thank you and good evening. I will now give you an overview of our financial results for the three months ending September 2006 using the documentation consolidated results of operations.

Please turn to page four. This page shows our consolidated financial results for the second quarter of the year ending March 31, 2007. Net revenue for the second quarter was JPY251b, a 22% increase from the first quarter and 8% year-on-year increase. Income before income taxes was JPY73.1b, 2.2 times the previous quarter or a decline of 38% compared with the same period last year. Net income increased 2.2 times quarter-on-quarter to JPY43.5b representing a decline of 29% compared to last year. ROE for the second quarter was 8.3%. The graph on the left and in the middle give a breakdown of net revenue and income before income taxes.

Please turn to page five. During the second quarter, although Global Markets net revenue declined by 30% from the first quarter and income before income taxes for the segment was negative, net revenue in Global Investment Banking, Global Merchant Banking and Asset Management expanded. As a result, total net revenue from the business segments was JPY255.7b, an increase of 22% compared with the first quarter, or 16% gained year-on-year. Income before income taxes from business segments was JPY97.7b, up 79% quarter-on-quarter and 20% year-on-year.

Next, let’s look at the performance of each business division. Please turn to page six. Domestic Retail net revenue declined 11% quarter-on-quarter to JPY94.5b, a 7% decrease from the second quarter last year. Income before income taxes dropped 34% from the first quarter to JPY28.2b, a decline of 32% year-on-year. Net asset income remained strong throughout the quarter at JPY1 trillion. Domestic client assets grew from JPY77.7 trillion at the end of September, up JPY1 trillion from the end of June. So, as you can see, we continue to make steady progress towards our target of JPY100 trillion in domestic clients’ assets.

An overall decline in equity transactions for individual investors during the quarter led to a 33% sequential decline in stock brokerage commissions to JPY18.8b. Commissions for distributions on investment trusts declined 15% compared to the first quarter. Despite the decline, demand for investment trusts remained strong as customer needs continue to diversify and commissions totaled JPY23.9b in line with levels seen last fiscal year.

Please turn to page seven. Global Markets net revenues declined 30% quarter-on-quarter to JPY48.5b, a 38% drop from the prior year. Income before income taxes was minus JPY3.6b. Fixed income net revenue declined 39% quarter-on-quarter to JPY18.7b due to a drop off in JGB and derivative training as a result of turmoil in the bond market stemming from a revision to Japan’s consumer price index and changes in the interest rate and foreign exchange markets. Equity net revenue decreased 29% compared to the first quarter to JPY24b reflecting a continued slump in block trades and a decline in trading revenue due to reduced stock market volatility.

Please turn to page eight. Global Investment Banking net revenue increased 58% from the prior quarter to JPY29.7b up 45% year-on-year. Income before income taxes increased 2.9 times quarter-on-quarter to JPY16.3b, an increase of 78% compared to the same period last year. In equity underwriting, we acted as lead manager for such deals the public offerings by Elpida Memory and Matsushita Electric, and IPOs of Nomura Real Estate Holdings and MID REIT. We ranked number one in the equity and equity related Japan league tables for the nine months to December 30, 2006. In M&A, we acted as financial advisor on a number of [inaudible] deals, such as the tender offer by Oji Paper for Hokuetsu's paper mills and Marubeni's purchase of Daiei shares from the Industrial Revitalization Corporation of Japan.

Please turn to page nine. Global Merchant Banking second quarter net revenue totaled JPY44.5b, up 3.7 times compared to the first quarter and 6.5 times compared to the same period last year. Income before income taxes increased 4.2 times sequentially to JPY 41.5b or 8.9 times year-on-year. During the second quarter we booked realized and unrealized gains as a result of the partial sale of our stake in Tungaloy an investee company of Nomura Principal Finance, as well as unrealized gains and losses on Terra Firma investee companies. In terms of new investments, we invested JPY53b as a general partner, as an investment partnership for a management buy-out of Skylark, and underwrote JPY25b of a capital increase by Mitsui Life Insurance.

Please turn to page ten. Net revenue in Asset Management rose 35% quarter-on-quarter to JPY23.9b, an increase of 55% compared to the second quarter last year. Income before income taxes increased 2.1 times quarter-on-quarter or 2.4 times year-on-year to JPY11.1b. To be sure, we sold our stake in a Group company on the quarter. However, even after disregarding the profit form this sale, Asset Management saw a quarter-on-quarter increase in net revenue and income before income taxes on the back of an expansion of highly profitable core assets. Following the sale of this Group company, total assets under management in Asset Management remain unchanged from the previous quarter at JPY23 trillion.

Looking just at Nomura Asset Management, assets under management totaled JPY22 trillion at the end of September, up JPY1.2 trillion compared to the end of June. This increase is mainly due to expansion of assets under management in investment trusts, distributed via range of different channels, and the signing of investment advisory contracts with institutional investors outside Japan.

In terms of individual products, steady growth in terms of funds offering frequent distributions remain strong. Assets under management in the My Story profit distribution type of funds [inaudible] increased by JPY271.3b, during the quarter to JPY922.1b. Assets in newly launched funds, such as the Nomura All-In-One fund, also saw solid growth. Assets under management in funds for bank customers, meanwhile, grew by JPY426.5b compared to the end of the first quarter, totaling JPY1.3 trillion. The growth in assets is mainly attributable to solid demand for the Global REIT Open Nomura Japan-US REIT Fund. Assets under management in the Nomura Global 6 Assets Diversified Fund, distributed through Japan Post, grew by JPY79.7b compared to the end of June to JPY247b. This represents a 68% share of the market for funds distributed through Japan Post. Total assets under management in the Asset Management division stood atJPY23t as of September 30.

Please turn to page 11. Non interest expenses including the effects of consolidation, de-consolidation of certain private equity investee companies increased 2% during the second quarter to JPY158b. Compensation and benefits decreased 5% quarter-on-quarter to JPY75.2b. And information processing and communications rose 19% to JPY27.3b. The graph on the right shows fixed and variable expenses related to compensation and benefits. Fixed price compensation and benefits for the second quarter fell to JPY41.9b, although variable type compensation and benefits was JPY33.4b.

Before finishing, I would like to make a few additional comments on the difference between second quarter segment total and consolidated results. Please turn to page 20. Second quarter income before income taxes for the segment results include a realized gain from the partial sale of our stake in Tungaloy, and investee company of Global Merchant Banking, as well as an unrealized gain on the main portion of our stake based on fair value. However, because Tungaloy is still a consolidated subsidiary, the unrealized gain is not booked in the second quarter consolidated results. The adjustments to this unrealized gain is included in taxes, consolidation, de-consolidation of certain private equity investee companies. Unrealized gains or losses from our stake in Tungaloy will be reflected in our consolidated results when Tungaloy is no longer a consolidated subsidiary or accounted for under the equity method.

That now concludes the overview of our results. We would now like to take any questions that you may have.

Thank you sir. Our question and answer session today will be conducted electronically. [OPERATOR INSTRUCTIONS]. Our first question will come from Lazard Asset Management’s [Jessica Relish]. Your line is open ma'am, please go ahead.

Hi, I have just two quick questions for you on the private equity consolidation. Was there a balance sheet impact of that consolidation as well, a contribution to assets for example?

Again, we will pause for just one moment.

Hello, I will give you an answer to your question. As you pointed out, this consolidation has exaggerated impact on our balance sheet. [Technical difficulty] investment with the Skylark, and it will be transaction.

I’m sorry, so of your reported asset number, how much of that comes from the private equity consolidation?

Excuse me, your question is regarding the Tungaloy?

I’m sorry, could you repeat the question?

Yes, your question is regarding the Tungaloy?

Yes, my question is regarding the impact of the consolidation of all of your private equity affiliates on your balance sheet.

Okay, if you look at -- can I ask you to turn to page 30? This page shows the current assets of the private equity investment, which includes Terra Firma and [NFP], which is an investment in Japan.

Okay. We can follow up with this offline because that doesn’t quite answer my question. But just one other quick question on the private equity gains. The mark to market gains that you took on Terra Firma this quarter, where did those come from exactly, what was mark to market?

Firstly, basically we do not disclose the detail of the evaluations of the portfolio of Terra Firma. But, but basically we evaluate our position of Terra Firma's investment based on the fair value method. Then this time, based on that method, we marked up some part of our position in Terra Firma.

Okay. Thank you very much.

Our next question will come from Mr Miles Wixon from Oppenheimer. Please go ahead

Hi, thank you for the call today. I know you can’t give any specific details to specific transactions but, in general, how profitable in terms of margins or some quantitative measure are hostile takeover bids in which you participate?

Okay. I suppose your question is regarding the recent deal over Oji Paper's takeover. Is that right?

No, I’m asking in general because I don’t want to ask about a specific transaction. In general, how profitable are or would a hostile takeover bid in which you participate be?

As you know, the hostile -- the type of hostile takeover business has just begun in Japan and that's why we don’t have a full, many concrete deals so far. But, in general, profitability of such a type of transaction should be higher than the friendly takeover case.

Okay. Is there any kind of number that you can provide from any type of contextt?

At this moment, we, sorry about that, we don’t disclose any concrete numbers. But, generally speaking, the level of profitability should be getting closer to the cases in the United States.

Okay. Thank you. And my second question is just, can you briefly walk us through how the pipeline is looking for Investment Banking activity?

As I’ve already mentioned, in the final quarter or at the beginning of the final quarter, we have already the mandate as lead manager. The lead management, therefore, for a few big transactions in the capital markets. And towards the end of the quarter and the fourth quarter, I expect the reasonable and good volume of transactions or potential for deals in the pipeline.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. We will now move on to Mr David Lee with Gouco for our next question. Please go ahead.

Hi. A question about internet trading for your clients. You started this operation may be four or five months ago. Could you tell us where you stand on profitability or losses and how does your internet trading commission rate differ from your competitors like E-Trade, Matsui or Monex and how big margin downs do you have right now?

Okay. As I’ve already mentioned, [inaudible] [JOINVEST], which has a subsidiary of online brokerage. We have begun in the last May and, timing-wise, it was not necessarily the best timing to start the equity brokerage business, as you know. And, so far, the acquisition of new clients, we haven’t really hit our target and we are still under the breakeven. Anyway, just three months has passed and personally I think it is a little bit too early to say if it is a success or not.

But, anyway, in the last six months we have a very difficult and a tough market environment and the idea -- generally speaking, most of the internet brokers, they are struggling or they have been struggling, including our [JOINVEST]. But in the second half we believe the improvement of the market environment, and the same thing do investors, and I expect the business on [JOINVEST] will also improve in the second half.

For your full service, retail brokerage business, have you made any changes to your commission rate. How much are you getting per trade versus, for example, the last quarter or the same quarter last year?

So, we are now introducing a more flexible, commission and fees profile to our client. But basically our profitability margins in the retail business has not been changed performance in the last few quarters. It has been very stable.

Okay. Let me move onto your trading profits. You said here on your slides that trading revenue declined due to market factors. Could you give us an idea of what kinds of trading profits these were? Were these proprietary trading profits or these were bond trading profits? Can you just give us a bit down of what kinds of trading profits you are talking about?

So, partly the main part of our trading business is the positioning for our client trade. In other words, we have a position coming from the order flow of all our clients. So, it is not a pure proprietary trading position. So, anyway, on this position, in this quarter, we couldn’t generate the original amount of revenue mainly due to the market, a very tough market environment, including the interest rate and the ForEx exchange volatility lowering and -- or declining. And, on top of that, we also have much less order flow from the other clients, including the sale of foreign bonds to the retail investors.

The last question I have is on Asset Management on the sales of investment trusts. It is no secret that the sales of investment trusts sort of flattened out in the last couple of months. Could you tell us the flow of assets into Nomura in each of the three months of the second quarter?

Sorry, at this moment, I don’t have the exact number on a monthly basis. But, basically, every month we have the almost the same amount of inflow.

Okay. And so far in October is the inflow any different from the last quarter?

Sorry, your question is regarding the investment trust for --

Yes, investment trust, yes.

I would say a similar level of inflow we have.

Okay. Thank you very much. Thank you.

[OPERATOR INSTRUCTIONS]. We will now move onto Camille Carlstrom from Putnam Investment. Please go ahead.

Forgive me for not knowing because I haven’t had time to run through all the numbers, but can you just quickly tell me the impact on your balance sheet of listing Nomura Real Estate Holding? Does the Real Estate come up on your balance sheet?

Nomura Real Estate, it shouldn’t have any impact on the balance sheet.

Thanks.

Anything else Miss Carlstrom?

No, that’s it, thanks.

Thank you. [OPERATOR INSTRUCTIONS]. And it appears there are no final questions.