Nomura Holdings Inc (NMR) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Nomura Holdings fourth 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 of time. During the presentation, all telephone lines are placed in a listen-only mode. The question and answer session and brief electronic survey will be held after the presentation.

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 and 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 condition and size, number and timing of transactions.

With that, we'd like to begin the conference. Mr. Masafumi Nakada, please go ahead.

Thank you very much and good evening, ladies and gentlemen. And thank you for taking time out to join Nomura Holdings' conference call to review our financial results for the fiscal year ended March 2007. I am Masafumi Nakada, CFO of Nomura Holdings, Inc.

Let me first make a few comments before we go into the detailed discussion. In the reported fiscal year, [is spurred on] by the shift of individual financial assets from savings to investment products. Commissions for distribution of investment trusts were at a record level for the second consecutive quarter and asset management revenue expanded significantly. Global investment banking and global merchant banking also performed strongly and we were able to maintain revenue of over JPY1 trillion.

On the other hand, last year highlighted that we still have some issues to address in our market-related business in Japan and internationally. Also, effects from the increase in expenses related to the investment for future growth led to a tough result overall.

Looking ahead into the current fiscal year, we believe that, in order to further diversify our revenue sources and boost profitability, we must enhance our client businesses in the area of wholesale, such as global markets, and move forward with further reforms of our international operations.

In the global market, our equity derivatives business is expanding across Europe and -- with equity-linked structured bonds and fund derivatives for Japan. In fixed income, order flow for interest rate and currency-linked structured bonds is strong and our product lineup is expanding.

We completed the acquisition of Instinet in February and the firm has recently launched its Chi-X alternative trading system in Europe. Our business base is steadily expanding amid the global trend towards [best] execution and we can expect Instinet to contribute to earnings going forward.

In our international operations, we are implementing strategies tailored to each region. And, in particular, we are increasing our focus on core competencies in the Americas and expanding our operations across Asia.

Lastly, as announced in today's news release, the dividend for the fourth quarter will be JPY20 per share. As such, the total dividend for the full year will be JPY44, which translates to a consolidated payout ratio of 47.7%. In line with our dividend policy, our target dividend, based on a dividend on equity of 3%, will be JPY34.0 per share for the year ending March 31, 2008, an increase of JPY2 per share compared to the target dividend for the year ended March 2007. In addition, once we have achieved a certain level of performance, we will add to the target year end dividend in line with performance, to ensure the payout ratio is 30% or more.

So now I will hand it over to Mr. [Hyess] for a detailed discussion 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 full year and three months ended March 31, 2007, using the document titled 'Consolidated Results of Operations.

Please turn to page five. This page provides you with consolidated financial highlights for the year ended March 31, 2007. Net revenue for the full year was JPY1.09 trillion, a decrease of 4.8% compared to the prior fiscal year. Income before income taxes decreased 41% to JPY321.8b. Net income decreased 42.2% to JPY175.8b. As a result, ROE for the full year was 8.3%.

Please turn to page six. Total net revenue from business segments for the year decreased 0.2% to JPY1.06 trillion. Income before income taxes from business segments decreased 16.5% to JPY377.3b.

In domestic retail, a decline in equity agency transaction value led to a drop in stock brokerage commissions compared to last year, while commissions for distribution of investment trusts and investment trust administration fees and other increased. As a result, revenue remained strong in domestic retail at roughly the same level as last year. However, expenses increased, due to investment and income before income taxes declined 18.4% year on year to JPY160.9b. Net asset inflow for the full year was JPY6 trillion and domestic client assets increased by JPY4.7 trillion from the prior year to JPY85.2 trillion.

In global markets, income before income taxes declined 62.7% to JPY58.8b, due to weaker trading revenue in fixed income and equity.

Global investment banking income before income taxes decreased 13.8% to JPY44.4b. Although equity underwriting and M&A business performed strong and we expanded our business in Europe following a strategic build up there, the decline in income was a result of increased expenses due to a strengthening of human resources in our international operations.

Global merchant banking remained strong, with income before income taxes of JPY52.8b. During the year, we invested in Skylark and Mitsui Life Insurance and booked realized and unrealized gains from the sale of a part of our stake in Tungaloy and the sale of a stake in a Terra Firma investee company.

Asset management saw a significant expansion of assets under management in investment trusts and investment advisory. A gain realized from the sale of our stake in a joint venture combined with a strong asset increase to boost income before income taxes 76.8%, compared to the prior year, to JPY36.5b.

Please turn to page seven. Next, I will outline the key points of our results for the three months ended March 31, 2007. Commissions for distribution of investment trusts were JPY39.1b, significantly higher than the previous quarter, which was a record level since we began reporting earnings on a quarterly basis. Assets under management in asset management reached a record JPY27 trillion. While our investment trust business performed strongly during the quarter, our international operations were hit by the impact of the trouble in the U.S. sub-prime loan market, raising our effective tax rate. As a result, ROE for the fourth quarter was 6%.

Please turn to page eight. This page provides you with consolidated financial highlights for the three months ended March 31, 2007. Net revenue decreased 3.6% from the prior quarter to JPY311.3b, down 4.4% compared to the same period last year. Income before income taxes decreased 37.1% quarter on quarter to JPY83.2b, a decrease of 60.3% year on year. Net income was JPY33.1b, a 58.2% decrease on the prior quarter and a 74.3% decrease compared to the same period last year. ROE for the fourth quarter was 6%.

Please turn to page nine. Total net revenue from business segments declined 8.1% quarter on quarter and increased 0.5% year on year to JPY283.6b, as revenue for the IPO of Nomura Real Estate Holdings was booked in the previous quarter. Income before income taxes from business segments was JPY81.2b, down 43.5% from the prior quarter and 19.8% compared to the same period last year.

Next, I will give you a more detailed overview of the performance of each business segment. Please turn to page 10, where I will start by discussing Domestic Retail. Net revenue in Domestic Retail increased 7.1% quarter on quarter to JPY124.1b, which is roughly flat year on year. An increase in expenses due to investment in human resources and technology systems led to a 7.6% quarter on quarter decline in income before income taxes to JPY43.3b representing a 15.8% decline from the fourth quarter last year. Domestic client assets were JPY85.2 trillion as of March 31, 2007, up JPY3.7 trillion from the end of December.

The number of client accounts with an outstanding balance was 3,953,000, an increase of 53,000 accounts from the end of December. Commissions for distribution of investment trusts grew 16% quarter on quarter to JPY39.1b, the second consecutive quarter in which a record high was posted since we began reporting earnings on a quarterly basis. This was the result of robust sales of existing investment trusts offering frequent distributions, as well as newly-launched funds. Investment trust administration fees and other grew 10.2% to JPY13.4b. Revenue from retail stock brokerage commissions grew 28.1% quarter on quarter to JPY28.9b, due to an increase in equity agency transaction value.

Please turn to page 11. In Global Markets, net revenue increased 21.2% quarter on quarter and decreased 26.4% year on year to JPY94.6b. Income before income taxes decreased 0.8% quarter on quarter and 63.7% year on year to JPY23.9b.

Fixed income net revenue declined 58% from the prior quarter to JPY21.8b, as the impact from the deterioration in the U.S. sub-prime loan market more than offset strong order flow for interest rate and currency-linked structured bonds. Equity net revenue jumped 186% quarter on quarter to JPY66.6b on a rebound in trading revenue from MPO transactions and equity derivatives. Further, Instinet was consolidated in February and its results are reflected here in equity.

Please turn to page 12. In Global Investment Banking, net revenue increased 10.4% quarter on quarter to JPY26.6b, a decline of 14.6% year on year. Income before income taxes grew 6.5% quarter on quarter to JPY11.6b, a 31.5% decline from the fourth quarter last year.

In equity finance, we acted as lead manager in a number of large deals, including the offerings of shares in Honda Motor and Nintendo by the Banks' Shareholdings Purchase Corporation, and a Euroyen convertible bond issue by Toray Industries. We ranked number one in the Japan equity and equity-related league tables for fiscal 2006, the sixth straight year we have retained the top position. In M&A, we acted as financial advisor in such deals as the management integration of Daimaru and Matsuzakaya Holdings, the capital and business alliance between Marubeni, Aeon and Daiei and the merger of Mitsubishi Pharma and Tanabe Seiyaku.

Please turn to page 13. Net revenue in Global Merchant Banking was minus JPY0.9b and income before income taxes was minus JPY5.2b, as there were no major exits during the quarter. In terms of new investments, we invested approximately JPY30b via a special purpose vehicle in the tender offer for Tsubaki Nakashima and acquired a stake in Kawamura Electric.

Please turn to page 14. In Asset Management, net revenue declined 1.9% quarter on quarter and increased 30.5% year on year to JPY24.1b. Expenses increased due to the consolidation of offices at the headquarters, leading to a 34.2% quarter on quarter decline in income before income taxes to JPY8b, an increase of 39.6% from the fourth quarter last year.

Sales by Nomura Securities, banks and Japan Post of investment trusts offering frequent distributions remained strong and assets under management in Asset Management grew JPY1.4 trillion from the end of December to a record JPY27 trillion. In addition, Japan Post selected a Nomura Asset Management product for distribution as its new target fund.

Please turn to page 15. Net revenue in other was minus JPY0.5b. The U.S. alternative asset manager Fortress Investment Group, in which we announced an investment in December 2006 and was listed on the New York Stock Exchange in February 2007, is accounted for under the equity method, according to U.S. GAAP.

Please turn to page 16. Non-interest expenses, excluding the effects of consolidation and de-consolidation of certain private equity investing companies, increased 22.8% from the previous quarter to JPY202.3b. Compensation and benefits increased 13% quarter on quarter to JPY93.5b. Commissions and floor brokerage increased 53.8% from the prior quarter to JPY18.1b, primarily due to consolidation of Instinet. The increased investment in information technology in Japan led to a 17.7% quarter on quarter increase in information processing and communications to JPY32b.

The graph on the right shows fixed and variable expenses related to compensation and benefits. Fixed-type compensation and benefits for the fourth quarter totaled JPY47.9b, while variable-type compensation and benefits totaled JPY45.6b. And that concludes the overview of our results based on the presentation materials.

[OPERATOR INSTRUCTIONS]. There are no questions in the queue. [OPERATOR INSTRUCTIONS]. We'll hear from Jessica Rutledge with Lazard Asset Management.

Hello, thank you for holding this call. Could you tell us just a little bit more about the U.S. mortgage-backed security losses this quarter?

Okay. As you know, we have been engaged in the business of securitization of residential mortgage loans and commercial mortgage loans in the last few years. And then, since last autumn, the U.S. residential mortgage market has started to get weak. And having [that situation], of course we have some positions of loan in order to make the transaction of securitization. Then, we have some loss on our position, having the bad performance of the residential mortgage market in the last few months in the fourth quarter. This is the rough situation which we had in the fourth quarter.

Have you written off all of your exposure at this point, or is there anything left?

Excuse me, I couldn't catch your point [inaudible].

I apologize. Is there any remaining exposure left to U.S. mortgages that we should be aware of?

Oh, okay. At this moment, we still have some positions, because we are now trying to make [new] transaction of securitization.

Okay. I will follow up on that later, then, offline. Thank you very much.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. We do have a follow-up question from Jessica Rutledge, Lazard Asset Management.

Since I seem to have the option to monopolize you this morning, I'll take advantage of it. Could you tell us a little bit about the Asian private wealth management expansion that you were talking about a few days ago? I think that is a very interesting thing.

Yes, as you mentioned, just recently, we have announced that we are now building up the team for the wealth management business in the Asian region. But actually, Nomura has a long term relationship with a local [inaudible] client in the Asian region since -- or for the last few decades.

And now, we would like to expand the customer base and enhance the client -- or deepen the client relationship with our clients in the region. That's why we decided to set up the new special team for that business. And, well, utilizing our historical relationship with the local clients, we would like to find out the business opportunities of our product distribution or marketing, as well as creating the new business opportunities.

And what is the rationale for doing that now?

Well, actually, since last year, we set the strategy of international business in each of our three regions. In Asia, we would like to expand our business to contribute our top line interest and -- Then, we believe that it is the best timing for us to expand our business of the wealth management in Asia. And actually, we have a plan to increase the client assets in our custody in the Asian region by 25% or higher in the next few years.

And what are the assets under custody now in Asia?

Sorry, we don't disclose the actual number.

Okay. Well, thank you. Thank you again for holding this call.

No problem.

[OPERATOR INSTRUCTIONS]. We have no questions. We would like to conclude the Q&A session. Mr. Nakada, do you have any closing remarks?

Thank you very much, everybody, for your attention. Thank you.