Nomura Holdings Inc (NMR) 2008 Q1 法說會逐字稿

Good day, everyone and welcome to today's Nomura Holdings first quarter operating results for fiscal year March ending 2008 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 the telephone lines are placed for listen-only mode. The questions and answer session and a 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 risk, 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 investors and demands, liquidity of secondary markets, level and volatility of interest rates, [variance to] exchange rates, security (inaudible), competitive conditions 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. Good evening, ladies and gentlemen. Thank you for taking time out to join Nomura Holdings conference call to review our financial results for the first quarter ended June 30, 2007. I am Masafumi Nakada, CFO of Nomura Holdings Inc.

Let me first make a few comments before we go into the detailed discussion. Despite the slump in our US residential mortgage backed securities business in the first quarter, the majority of our businesses continued to perform strongly and we reached 13.7% in line with our management goal of 10% to 15% ROE. Domestic retail and asset management remained strong, as commissions for distribution of investment trust reached a record high.

Global investment banking and the global merchant banking showed very good results with increased M&A activity and [evidence] from private equity investments. The US RMBS business is facing difficult market conditions, which we will discuss in a moment, however, our commitment to our US operations remains unchanged. As outlined in May this year, we will harder accelerate our forecast on core competencies; we are taking actions to ensure our US operations become profitable on a sustainable basis.

Going forward, we will continue to invest our core competencies which will include Japanese and Asian equities, (inaudible) products and asset management. We intend to integrate some US equities and marketing efforts into Instinet; this may result in staff transferring from Nomura to Instinet, subject to obtaining regulatory approval.

As we forecast our strategy we are reviewing the overall US operations. Until we have completed reducing our positions in the affected areas, we understandably cannot announce which business will be de-emphasized or exited.

These movements will boost the majority of our US operations to contribute to Nomura Holdings' earnings. Lastly, as announced in today's news release, the dividend for the first quarter will be JPY8.5 per share in line with our dividend policy.

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

Thank you Mr. Nakada. I would now give you an overview of our financial results for the first quarter of the fiscal year ending March 31, 2008 using the document titled, Consolidated Results of Operations.

Please first turn to page 5. This page provides you with consolidated financial highlights for the first quarter ended June 30, 2007. Net revenue for the first quarter was JPY380.7 billion; income before income taxes was JPY142.8 billion and net income was JPY76.7 billion, all of which represent increases both quarter-on-quarter and year-on-year. The strong results come in spite of the turmoil in the US residential mortgage-backed securities business, including the sub-prime mortgage market.

Results were buoyed by commissions for the distribution of investment trusts which reached JPY39.6 billion, a record level since we started reporting results on a quarterly basis under US GAAP, in the year ended March 2002. In addition, domestic retail and asset management remained strong, while our M&A related business was active during the quarter and global merchant banking realized some of its investments. As a result, ROE for the first quarter was 13.7%.

Before outlining the results of each business division, I would like to take a few moments to touch on our RMBS business in the US. Please turn to page 6.

In the US we run a residential mortgage backed securities business in which we hold both residential mortgages for securitization and securitized products that are sold to institutional investors. Due to further deterioration in the US residential mortgage-backed securities market we recognized realized and unrealized losses on our position including sub-prime mortgages and residuals, in turn booking a loss of JPY31.2 billion for the first quarter.

During the first quarter we reduced our position in the residential mortgaged-backed securities business by securitizing over JPY300 billion. As a result our position declined from JPY657.8 billion at the end of March to JPY266 billion as at the end of June, this includes a sub-prime related position of JPY71.1 billion. So far during July we have securitized over JPY40 billion and plan to securitize and sell the remainder of our positions as soon as possible. It is likely that we will continue to run down our residential mortgage-backed securities business. Any reduction or controlled exit, however, will still give weight to maximizing value over time. In addition, our US residential mortgage-backed securities business has no exposure to any leveraged hedge funds.

Next I will provide a brief overview of results for each business division; please turn to page 8.

Net revenue in domestic retail was roughly flat quarter-on-quarter and increased year-on-year. Income before income taxes meanwhile was up from the prior quarter due to a decline in expenses and also increase compared to the first quarter last year. Domestic client assets increased by JPY3.1 trillion from the end of March to JPY88.3 trillion, while the number of client accounts for the balance reached 4 million. We are making steady progress towards our target of JPY100 trillion in domestic client assets and 5 million accounts by the end of March 2010.

A total of 12 investment trusts saw sales of over JPY30 billion during the quarter, as a result commissions for the distribution of investment trust reached a record level since we started reporting results on a quarterly basis. In addition the investment trust administration fees and other increased for the tenth straight quarter. Sales credit grew 26.9% quarter-on-quarter to JPY33.2 billion on the back of strong sales of structured bonds. Stock brokerage commissions meanwhile decreased 23.3% quarter-on-quarter to JPY22.2 billion due to a decline in equity agency transaction value.

Please turn to page 9. In global markets net revenue and income before income taxes both increased quarter-on-quarter and year-on-year. Net revenue and fixed income jumped 94.8% compared to the prior quarter as order flow for interest rate and currency-linked structured bonds reached a record level, more than offsetting the JPY30 billion loss booked due to the deterioration of the US residential mortgage-backed securities market. Net revenue in equity declined 7% from the previous quarter due primarily to a drop in NPO trading revenue.

Please turn over to page 10. In global investment banking our equity underwriting business performed stronger than is normally seen for the first quarter. Our M&A related business enjoyed an increase in activity and our international operations contributed to revenue led by Europe which has been the focus of a strategic buildup. These factors combined to produce a record level of first quarter net revenue since we started reporting results on a quarter basis. In equity financing we acted as lead manager for such deals as a public offering by Daikin Industries, and a secondary offering by Japan Petroleum Exploration.

In M&A we acted as financial advisor on All Nippon Airways' sale of its hotel business and the business restructuring of Jupiter TV by Sumitomo Corporation. In cross border M&A, we advised UK firm, Vedanta Resources, on its acquisition of an Indian iron ore company from Mitsui & Company. Internationally, we acted as global coordinator on Russia's largest ever IPO for PIK Group, a major Russian residential property developer.

Please turn to page 11. Global Merchant Banking reported a net revenue of JPY44.3 billion, and income before income taxes of JPY40.1 billion due to the sale of Deutsche Annington, an investee company of Terra Firma in Europe and Wanbishi Archives, a Nomura principal finance investee company.

Please turn to page 12. Asset management reported increases in both net revenue and income before income taxes on a quarter-on-quarter and year-on-year basis. Net assets in Japan's publicly offered investment trust market grew to a record level during the quarter, thanks to increasing demand for asset management products. In terms of Nomura products, we continue to see strong sales of funds offering frequent distributions, such as the [My Story] distribution type fund. The Nomura Global Contrarian Fund and Nomura RAFI Japan Equity Fund were newly launched for distribution by Nomura Securities.

In the bank channel sales of investment trusts that invest in rates remains robust and net assets increased global high income stock funds and global free asset balance funds. Japan Post saw a steady increase in net assets, for the Nomura Global Six Assets Diversified Fund, and also began selling the Nomura Asset Design Fund.

In our investment advisory business the balance of advisory contracts continued to increase steadily. As a result total assets under management in asset management increased by JPY3.6 trillion from the end of March to a record JPY30.6 trillion.

Please turn to page 13. Other income before income taxes was minus JPY1.8 billion. Please turn to the next page. Non-interest expenses, excluding the effects of consolidation and deconsolidation of certain private equity investee companies increased 1.2% from the prior quarter.

That now concludes the overview of results based on the presentation materials.

Thank you. We will now proceed to the question and answer session. (OPERATOR INSTRUCTIONS).

We have a question coming from [Tai Yimura], please go ahead.

We have a question coming from [Tai Yimura] from Nomura, please go ahead.

Sorry, I made a mistake on our side to listen to the conference there, I'm sorry.

Thank you, sir. (OPERATOR INSTRUCTIONS).

We have a question coming from [Jessica Rutledge], from Lazard. Thank you. Please go ahead.

I have just a very quick question about asset management. Could you tell us where the asset inflow [as an] asset management came from this quarter? It's a very big step up, quarter-over-quarter.

And also, were there any extraordinary gains in your revenues in asset management, or was that all operating revenues?

Okay. Firstly, the revenue of asset management division in this quarter, all of them are the ordinary operating income. We didn't have any special items in the quarter.

And another question is the inflow of the asset management division. Just hold on, please, I'm trying to find out the figures. So, all of the distribution channels, including Nomura Securities, Japan (inaudible), and the other banks who are distributing Nomura asset management products, all of those channels, they still perform very strongly in this quarter. Their basic trend has never changed.

Okay, thank you. I'll let the next question come.

Thank you, ma'am, does that answer your questions?

Yes, it does, thank you, let's move on to the next question.

Thank you. (OPERATOR INSTRUCTIONS).

We have a follow-up question from Jessica Rutledge. Please go ahead.

Apologies, since I seem to have the line to myself this morning, I should ask one more question. On slide 6, your RMBS business, you've told us that you have JPY266 billion in exposure remaining, only JPY71 billion of which is sub-prime? What is the remainder of that exposure? Is that all prime, and if so, is there any particular regional concentration, or any particular type of loan within that that we should be aware of?

So, our RMBS positions, as of end of June, as we already mentioned, we had JPY266 billion in total. Then, [most those parts], apart from the sub-prime positions, we have the [quarter-long] positions, and then regional concentration -- your question is on regional concentration? And our portfolio is to some extent diversified.

Okay, thank you very much.

Thank you, ma'am, does that complete your questions?

Yes, it does.

Thank you. (OPERATOR INSTRUCTIONS)

Okay, we --

There appears to be no further questions at this point in time. Back to you, sir.

Okay, thank you very much, ladies and gentlemen. And before closing this telephone conference, I'd like to take away three points out of today's my presentation.

Firstly, as I already explained, we had very strong results in the first quarter, mainly supported by the strong performance of all business segments, apart from US RMBS business.

Then the management of Nomura Holdings taking the RMBS business slumps quite seriously, and make every effort to reduce positions as much as possible.

And lastly, we continue to invest in a high margin and growing businesses in line with the refocused strategy in the United States, so that the other US operations, and other (inaudible) should start to contribute to the top line and the bottom line of Nomura Holdings.

Okay. Thank you very much.

Thank you, sir.