Nomura Holdings Inc (NMR) 2007 Q3 法說會逐字稿

Thank you for waiting. Good day everyone and welcome to today's Nomura Holdings' third quarter operating results for fiscal year ending March 2007 conference call. Please be reminded that today's conference 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 or investor sentiments, liquidity in secondary markets, level [involuntary] of interest rates, currency exchange rates, security valuation, competitive conditions and size, number, and timing of transactions.

For the duration of the presentation all lines will be placed in a listen-only mode. [OPERATOR INSTUCTIONS]. Following the questions and answer session, we would like to ask for you to please stay on the line to participate in a very brief questionnaire concerning the presentation.

Now I would like to turn the conference over to Mr. Masafumi Nakada and I'll be standing by for the Q&A 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 Nomura Holdings' conference call to review our financial results for the third quarter ended December 31, 2006. I am Masafumi Nakada, CFO of Nomura Holdings Inc.

Let me first make a brief comment about the financial results before we go into the detailed discussion.

In the quarter we were successful in grasping business opportunities stemming from the shift of individuals' financial assets from savings to investment products. This translated into positive results, both commissions for the distribution of investment trusts and the Asset Management division profit were record highs, since the fiscal year ended March 2002, when we began reporting quarterly earnings under U.S. GAAP.

In addition ROE recovered significantly to 14.6% for the quarter. While short term turbulence in the markets is unavoidable, we are well on the way to having in place a business platform that will allow us to consistently achieve our target ROE of 10 to 15% over the mid term.

As previously announced, during the quarter we made the decisions to acquire Instinet, a global agency broker with advanced electronic trading solutions for institutional investors, and to make an investment in Fortress Investment Group, a major global alternative asset management company. Going forward, we will continue to pursue further growth, work to enhance the profitability of each business division and aggressively develop new business areas.

Lastly, our third quarter dividend will be JPY8 per share in line with the target dividend set out in our dividend policy.

So now I will hand it over to Mr. [Hymal] for detailed discussions of our financial results. Afterwards I will answer any questions you may have.

Thank you Mr. Nakada. I will now give you an overview of our financial results for the three months ended December 31, 2006 using the document titled Consolidated Results of Operations.

Please turn to page four.

Beginning this time we have added a key points section to the top. First of all, ROE for the third quarter recovered to 14.6%. With this, cumulative ROE for the first three quarters of the fiscal year ending March 2007 now stands at 8.9%. Underpinned by our success in grasping business opportunities, in conjunction with the shift of individuals' financial assets from savings to investment products, commissions for distribution of investment trusts increased to JPY33.7b. This exceeded the level set in the fourth quarter of last year and marked a record, since the year ended March 2002, when we began reporting quarterly earnings under U.S. GAAP.

In the Asset Management division, assets under management increased to a record high JPY25.6 trillion, while revenue and income before income taxes both marked new record high levels since we began reporting earnings on a quarterly basis.

In addition, our equity and equity-related bookrunner deal value totaled $7.3b in the quarter; another record high. We also retained the number one spot in the equity and equity-related league table for calendar year 2006; the fourth consecutive year in the top spot.

Now please turn to page five.

This page provides you with consolidated financial highlights for the three months ended December 31, 2006. Net revenue for the third quarter was JPY322.9b, an increase of 28.7% compared to the previous quarter, and a decrease of 10.2% compared to the same quarter in the previous year. Income before income taxes increased 80.8% quarter-on-quarter, and decreased 29.4% year-on-year, to JPY132.1b. Net income during the period rose 81.7% quarter-on-quarter, and declined 25.7% year-on-year, to JPY79.1b. As a result, ROE for the third quarter was 14.6%.

Please turn to page six.

Total net revenue from business segments rose 20.7% quarter-on-quarter, and declined 20.1% year-on-year, to JPY308.7b, as a result of a significant quarter-on-quarter recovery in net revenue in the Domestic Retail and Global Markets divisions. Income before income taxes increased 47.3% quarter-on-quarter and decreased 37.9% year-on-year, to JPY143.9b.

In Other, we reported approximately JPY34b in revenue related to the IPO of Nomura Real Estate Holdings.

Next, I will give you a more detailed overview of the performance of each business segment. Please turn to page 7 where I will start by discussing Domestic Retail.

In Domestic Retail, net revenue increased 22.6% quarter-on-quarter and decreased 15.2% year-on-year, to JPY115.9b, while income before income taxes rose 66.4% quarter-on-quarter, and fell 36.7% year-on-year, to JPY46.9b. During the third quarter Domestic Client Assets net inflow remained a high JPY1.3 trillion and, as of December 31, 2006 Domestic Client Assets stood at JPY81.5 trillion; an increase of JPY3.8 trillion from the end of September 2006.

Commissions for distribution of investment trusts grew 40.9% quarter-on-quarter to JPY33.7b which was a record high since we began reporting earnings on a quarterly basis. This was the result of strong sales of existing investment trusts offering frequent distribution, as well as newly launched funds such as the Asia Attractive Dividend Stock Fund. With the steady growth of assets in stock investment trusts, investment trust administration fees grew to JPY12.1b; the eighth consecutive quarterly increase. Revenue from stock brokerage commissions grew 19.8% quarter-on-quarter to JPY22.6b.

Now please turn to page eight for a review of Global Markets.

Global Markets net revenue increased 61% quarter-on-quarter and fell 32.2% year-on-year to JPY78.1b. Income before income taxes grew by JPY27.7b quarter-on-quarter and declined 60.4% year-on-year to JPY24.1b.

In Fixed Income net revenue jumped 176.8% quarter-on-quarter to JPY51.8b, as order flow for interest rate and currency-linked structured bonds recovered. In Equity, net revenue fell 3.1% quarter-on-quarter to JPY23.3b, as a result of weak trading revenue from MPO transactions and block trades.

Now please turn to page nine for a review of Global Investment Banking.

In Global Investment Banking, net revenue decreased 18.9% quarter-on-quarter and fell 31.7% year-on-year to JPY24.1b. Income before income taxes declined 32.9% quarter-on-quarter, and 53.1% year-on-year, to JPY10.9b. While we acted as bookrunner for $7.3b in equity and equity-linked deals in the quarter, which was a record since we began reporting quarterly, there were no complex deals worked on with the Global Merchant Banking division, nor any large IPOs, as there were in the previous quarter.

In equity underwriting we acted as lead manager for several large deals including issues from Aeon, Toyota Motor and Sharp. We retained the number one spot in the equity and equity-related league table for the 2006 calendar year; the fourth consecutive year we ranked number one.

In M&A, we were financial adviser on such deals as the consolidation of Sumitomo Corporation's lease businesses and the Toshiba Ceramics MBO.

In overseas business we acted as joint bookrunner for Infosys Technologies' $1.6b global offering and a $430m IPO from Sistema-Hals, a major Russian real estate company.

Please turn to page 10 for a discussion of Global Merchant Banking.

Global Merchant Banking net revenue declined 79.2% quarter-on-quarter and 88.5% year-on-year to JPY9.2b. Income before income taxes fell 83.9% quarter-on-quarter and 91.4% year-on-year to JPY6.7b.

Gains and losses, including the impact from Terra Firma's sale of a partial stake in an investee company, were recorded in the quarter.

Now please turn to page 11 for a discussion of Asset Management.

Asset Management net revenue increased 2.9% quarter-on-quarter and 35.8% year-on-year to JPY24.5b. Income before income taxes grew 9.9% quarter-on-quarter and 94.7% year-on-year to JPY12.2b. Assets under management grew by JPY2.6 trillion during the quarter to JPY25.6 trillion, contributing to the growth.

In addition, the posting of both calendar year-end performance fees and unrealized gains from seed money for new product development helped boost net revenue and income before income taxes to record highs since we began quarterly reporting.

Investment trust sales remained strong this past quarter. Sales of the My Story Profit Distribution-type Fund, B Course, funds distributed through banks, particularly those offering frequent distributions, and the Nomura Global 6 Assets Diversified Fund, being distributed through Japan Post, all remained strong. The Asia Attractive Dividend Stock Fund and other newly-launched funds also enjoyed firm sales.

Now please turn to page 12 for a discussion of non-interest expenses.

Non-interest expenses, excluding the effect of the consolidation and the deconsolidation of certain private equity investee companies, increased 4.3% from the previous quarter and rose 6.6% year-on-year to JPY164.8b.

With the growth in earnings, compensation and benefits rose 10% to JPY82.8b. The graph on the right shows fixed and variable expenses related to compensation and benefits. Fixed-type compensation and benefits for the third quarter totaled JPY41.9b, while variable-type compensation and benefits totaled JPY40.9b.

That concludes the overview of results based on the presentation materials. Now we would like to take any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS]. We'll go to David [Lou] with [Juco].

Okay. On page seven of your presentation, there you say that the commissions for distribution of investment trusts grew 40.9% quarter-on-quarter to JPY33.7b. And then, on page 18 in your appendix, you also have a breakdown of the commissions and there it says commissions for distribution of investment trusts was JPY33b. Which figure is correct please?

[OPERATOR INSTRUCTIONS].

Okay, hold on one second please. We're looking for the data to answer that question, one second please.

Sorry to keep him waiting. Firstly, could you open the page 24. So, on the second line from the top, you can find the commissions for distribution of investment trusts which is JPY33.7b for the third quarter, which is equivalent to the figure on page seven, which is the correct figure.

Okay. It's just that if you look at that page 18, can you see page 18 there? Your main revenue items, they are on page 18, in the first -- in the fourth line from the top, it says commissions for the distribution of investment trusts.

Yes, so on page 18 we show the figure of financial accounting. And on page 24, which is the figure of the business segment.

Okay, so that's correct. Okay, thank you.

And the second question is that, on page four of the presentation, there you said equity and equity-related bookrunner Japan deal value totaled $7.3b in 3Q, and that was a record since you began quarterly reporting. Could you tell me how this pipeline is looking for the 4Q right now?

Okay. Firstly -- at this moment I cannot tell you to the exact figure how much, or how many we're having right now on the pipeline. But generally speaking, the sentiment investment banking who are underwriting our Capital Market business is still -- looks very good. And for the fourth quarter I am rather optimistic.

Okay, I see. Okay. And one last question is on the level of your customers' deposits. I guess you have a lot of these assets of the customers in your Retail Brokerage division. Do you have any idea of what percentage of the money is invested and what percentage is left in cash at this moment compared with a quarter ago?

Maybe, I ask you to page 25 where you can find the Domestic Retail Clients' Assets composite or portfolio. Then the figure for the [bond] investment trust, which does include the so-called short term or money market products which would be almost equal to the cash position.

Okay. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS]. We'll go now to Jessica Rutledge with Lazard Asset Management.

Yes, hello, can you here me?

Yes.

I just had a couple of quick questions for you. First off, what precisely did the Terra Firma sell last quarter?

Okay. I cannot tell you the details what happened in Terra Firma's portfolio, but a small portion of the portfolio Terra Firma has been sold and we, how shall I say, the Terra Firma realized some profit on that. And, on top of that, the remaining position we marked up based on the price at which we sold.

And are there further exits expected near-term from Terra Firma or from Private Equity generally?

Okay, it will fully depend on the market conditions which are, at this moment, very difficult to say what is going to happen.

Okay. And in the Asset Management segment, you comment that there was another one-time gain from the initial funding of something. What was the non-recurring factor in this quarter's Asset Management's earnings?

On [Elogram] in United States, which is the subsidiary of Asset Management division, we had this annual or incentive fee income which was the -- just one-time annual revenue.

And how much was that?

About JPY1b.

Okay. And is that what happened last quarter as well? It looks like your net revenues have basically jumped to the mid-20s from the high teens. Is that due to non-recurring factors in both quarters?

Which was the realized profit of the strategic acquisition of the Asset Management division.

Okay and that was in the last quarter?

Yes, that was the last quarter.

So this quarter, accepting that JPY1b incentive fee, those were all normal recurring net revenues for Asset Management?

Yes, but as we already mentioned, we had also had some unrealized gains from the so-called seed money for the new product development.

And how much was that?

Around JPY2 to JPY3b.

Okay. Thank you very much.

And then last question, a nice easy one, your net inflows have done just extraordinary the last few quarters. Can you give us some sense of how sustainable that is and what inflows might be looking like for the rest of the year?

Okay, looking at the January, our retail clients they are still strongly interested in the investment trust products, so money inflow is still strong and very steady.

And do you have any guess at this point of much of those retiree inflows you'll be likely to see in the next two quarters?

Sorry, at this moment it's very difficult to say how much.

Understood, and thank you very much.

[OPERATOR INSTRUCTIONS]. And at this time we will conduct a brief electronic survey. To participate --