Nomura Holdings Inc (NMR) 2009 Q1 法說會逐字稿

Good day everyone and welcome to today's Nomura Holdings first quarter operating results for fiscal year ending March 2009 conference call. Please be reminded that today's conference call is being recorded at the request of the hosting company. If you have any objections you may disconnect at this point in time.

During the presentation all the telephone lines are placed on listen-only mode. The questions and answer session will be held after the presentation.

Please note that this telephone conference contains certain forward-looking statements and other projected results which involved 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 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 Nomura Holdings conference call to review our financial results for the first quarter ended June 2008. I am Masafumi Nakada, CFO of Nomura Holdings Inc.

Let me start with page four of the presentation material. Net revenue for the first quarter of the fiscal year ending March 31, 2009 was JPY135.1 billion. We reported a loss before income taxes of JPY84.3 billion and a net loss of JPY76.6 billion for the quarter.

The losses are the result of a conservative evaluation of our investment assets in line with accounting standards following a further review of risks in order to limit future downside risks [aimed] at increasingly clouded economic environment.

We have moved (inaudible) from the last year to deal with our risky portfolio by exiting the US residential mortgage-backed securities business, reducing our commercial mortgage-backed securities portfolio and addressing our exposure to monoline insurers.

During the first quarter we stepped up our initiatives to deal with our risky portfolio. The losses for the quarter stemmed from three main areas. First, we moved to prevent future losses from transactions with monoline insurers that have been downgraded due to deteriorated credit worthiness. As a result we increased credit provisions to cover 85% of our gross exposure with monoclines, and booked a loss of JPY63.1 billion. I will go into more detail a moment, however we believe that we have now mostly finished dealing with our exposure to monolines.

Second, we wrote down a total of JPY37.3 billion on private equity investee companies, which we see as having a high risk of experiencing deterioration in earnings. We revalued these companies in line with current conditions in order to ensure increased flexibility in future, including ongoing measures aimed at restoring business performance over the medium and long term.

Third, because Fortress is an equity method affiliate, we took an impairment of JPY21 billion on our stake due to a decline in the share price.

In addition, we have continued raising subordinated funds during the first quarter. We have now reached a total of JPY600 billion from bond insurance and loans, thereby enhancing our capital structure. By moving to limit downside risks and strengthening our capital structure we have laid the foundation to capitalize on the business opportunities as they arise. Although the environment is very tough for generating revenue we succeeded in expanding businesses with future benefits.

Please turn to the next page. In our retail operation, domestic client assets increased by JPY3.6 trillion from the end of March to JPY75.8 trillion.

Net asset inflow was JPY1.07 trillion, an increase of 52% on the prior year quarter. Funds continued to flow into investment products during the quarter with strong sales of both new re-launched and existing investment trusts.

Our retail operations from a -- sorry our retail operations form a solid foundation for business and we remain focused on further expanding our client base.

We are also seeing progress in our wholesale business backed by our extensive global network and strong financial position. In the first quarter we acted as a financial advisor on a major cross-border M&A deal and topped the first half league table for M&A involving Japanese companies. In addition we invested in Ashikaga Holdings, so we are establishing a steady track record despite the reduction in the market for the supply of funds for businesses as a result of the uncertain economic environment.

So now I will outline our exposure to monolines in more detail. Please turn to page seven. The top half of this chart shows the notional amount growth exposure and the counterparty risk reserve as of June 30, for credit derivative transactions with the monoline, carried out by our European global markets operations.

As shown in the row entitled others, we have made few provisions for our growth exposure to counterparty. That has been downgraded and believed to be facing a serious decline in liquidity [to worthiness] and we implemented various hedging operations to prevent future losses.

For exposure to other monolines we have made valuations based on a tough market outlook and the booked additional provisions. As a result, we have limited losses for 74% of gross monoline related exposure, shown here, and have a net exposure of $174 million.

Our outstanding notional amount with monolines we haven't finished loss limit operations for [fall] was $3.1 billion as of the end of June. Of this, $430 million refers to commercial mortgage backed securities and we have already made provision for about two thirds of the growth exposure for this notional amount. While there is still a possibility that we may experience limited fluctuations due to hedging, we believe that with the actions taken so far we have mostly finished dealing with our exposure to monolines.

Please turn to page eight. This page shows our consolidated balance sheet. As I mentioned we have now raised some JPY600 billion in subordinated debt, including the funds raised through issuing subordinated bonds in March.

Long-term borrowings increased by JPY548 billion during the quarter. In addition our shareholders' equity remained around the same level as the previous quarter at JPY1.95 trillion, and the gross leverage remained low at 13.4 times; allowing us to maintain a solid financial position.

We plan to disclose more detailed figures increasing the fair value of financial instruments when we submit our quarterly financial report on August 18. As such we have revised the way we disclose commercial mortgage backed securities and other securitization products.

If you turn to page 23 you will see a section entitled securitization product holdings in response to a request from the regulatory authorities where we will now use this format to disclose our holdings.

Securitization products disclosed to date as exposure to the US CMBS-related businesses are not shown here in this chart as they are classified as whole loans under the new disclosure standards. Please refer to the footnote for the figure of US CMBS-related businesses on this page.

So please turn to page nine. This page shows net revenue and income before income taxes for each business segment. Despite the tough environment, domestic retail shown here in blue booked income before income taxes of JPY16.2 billion, an increase of 46.4% from the prior year quarter.

Asset management, shown in red, saw income before income taxes roughly 3 per quarter on -- sorry 3 per quarter-on-quarter to JPY7.6 billion. Permissions for distribution of investment tracked increased from the previous quarter thanks to the development and introduction of new products, much to the needs of investors and (inaudible) sales of existing and newly launched investment track.

The Nomura Japan Value Attractive dividend stock investment fund 0805 launched in May had inflows of over JPY70 billion and the Nomura Multi Currency Attractive dividend Japan stock fund launched in June saw inflows of over JPY100 billion.

Heading into the end of the year, we expect to see an increase in the people bringing in share certificates currently held at home which, when combined with the market for retirees, represents a significant opportunity to expand our customer base of individual investors.

Our three other business divisions were significantly affected by the market deterioration.

Global Markets booked income before income taxes of minus JPY61.6 billion, due mainly to the provisions for monoline.

Global Investment Banking recorded income before income taxes of JPY12.6 billion and income of JPY19.4 billion related to a settlement agreement with the Czech Republic over IPB more than offset a slump in equity financing due to these seasonal factors and the depressed stock prices.

Global Merchant Banking booked income before income taxes of minus JPY39.4 billion due to devaluing certain private equity investee companies at fair value.

Internationally we saw a new development in our Asset Management business in the United States where we have been undergoing a review of our operations. We were appointed by the Japan Fund, the oldest independent US mutual fund forecast on investing in Japan, to be the investment manager of the Fund's assets, marking our expansion into the US retail mutual fund market.

And in India where we have established a track record as extensive as our foreign competitors, we gained membership to the two largest (inaudible) allowing us to commence brokerage operations and we now plan to start full scale operations in India.

Turning now to the expenses. Non-interest expenses totaled JPY219.4 billion. Sorry please turn to the page 16. This page shows the expenses. As I already mentioned non-interest expenses totaled in the quarter JPY219.4 billion, down 0.2% from the prior quarter and up 7.1% year-on-year.

Already mentioned, as we expect the difficult conditions to continue, we are reviewing our cost and expenses very carefully and seriously. In this quarter, commissions and the floor brokerage, information processing and communication, occupancy and related depreciation and business development expenses all saw a marked decline from the previous quarter.

Although compensation and benefit increased 12.1% from the previous quarter, due to seasonal factors, there was a year-on-year decline of [12.7%] reflecting business result. Other expenses increased by 12.8% due to the impairment of our stake in Fortress. Please see page 16 for further details regarding expenses.

From the first quarter we have started applying FAS 157 and FAS 159. As a result we booked JPY3.0 billion in revenue as a net effect of fair value of a certain self-funded structured bonds and credit valuation of derivatives.

To conclude, we expect the market conditions to remain difficult as I already mentioned for some time, and we will continue to respond flexibly by implementing risk management geared to anticipating risks. Despite the current environment we remain focused on stepping up investment to seek growth over the medium to long term. We will be proactive and want to limit ourselves to organic growth. The fact is that we have the financial and management means to (inaudible) is one of our strong points.

We will also continue to watch closely for any changes to the business environment and we are to increase revenue and improve shareholders' value.

The first quarter dividend will be JPY8.5 per share in line with our dividend policy announced at the beginning of the fiscal year.

That concludes today's presentation. We would now like to take your questions. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). Our first question coming from the line of Mr. [Brendan Freeman].

Hello, thank you for taking the time today. My question is, on the monoline exposure, I think you said that there could be some additional losses. Would that mostly come from expanded credit spreads or additional downgrades? And what would be the sensitivity around spreads extending to your income statement? Hello?

Yes sorry. So firstly the main -- the reason or factor of the loss on our monoline exposure in this quarter is the downgrading of the monoline companies credit worthiness. This is the main reason.

And how much sensitivity would there be to additional downgrades or additional credit widening from here at this point?

Okay. As you can see on page seven, as of the end of June we still have the gross exposure of $314 million in total. Did you see the --?

Yes.

Then now we have now the counterparty risk results for this exposure, $140 million. So our net exposure at this moment is $174 million.

I guess my question is that the difference between the notional exposure today versus three months ago I think is due to tightening of credit spreads. If the credit spreads are to widen again, would your exposure increase significantly and would you have to take more provisions?

Yes. In the -- during the three months of course the market fluctuated, and the credit spread also fluctuated. But the -- compared to the ends of both the quarters the total gross exposure has not changed to much.

I see, alright, thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

So hello, excuse me, this is Nakada. I would like to just add or confirm one point. At the end of my presentation I mentioned about the FAS 157 and the 159. As I said, from the beginning of this quarter we have started applying FAS 157 and 159, then the impact of this new rules implementation was JPY13.3 billion -- JPY13.0 billion. This is a point I would like to reconfirm, thank you very much.

(OPERATOR INSTRUCTIONS). And our next question is coming from the line of Mr. [Yachilo Kai].

Hello?

Hello?

Oh hello Nakada san. On page 23 you mentioned you still have about JPY1.3 billion of US CMBS position as of June. Can you just comment on what actually happened on this CMBS exposure, any losses or any impact from the market? Aside -- separately from monoline exposures?

Alright. Firstly I'd like to mention that the exposure of CMBS operations in the United States, as of end of March we have almost the same amount of the exposure. So which means that in the last three months, or in the first quarter, the apportioning itself has not been changed so much. We just kept the same level of the exposure. So during the --

Okay and --

Sorry, during the quarter we also have the so-called hedged operation for this exposure. Then -- but there were the -- some so-called hedges, then we have the small amount of negative impact on our P&L. But compared to our total exposure, JPY1.3 billion, the impact was very limited.

And does the limited negative exposure just came from marking-to market or actually selling some positions? Or from basis risk from hedging? Where was this little negative impact coming from?

Sorry, mainly mark-to-market.

Okay. And then, additionally going forward, what is your expected risk of having any losses as you see maturity of some of these CMBS as they -- close to maturity? When you need to refund it do you expect any loss from that?

So of course --

Depending on the underlying -- the value of the underlying assets?

And of course it depends on the market, particularly the credit market. And fiscal year every quarter we very carefully review our portfolio of CMBS. Then we evaluate the portfolio's value. And then other, as we already mentioned, it should fully depend on the market and the quality of the portfolio's assets.

Okay. And how much are you hedged for this exposure of CMBS? I think the monoline -- I thought the -- you only have a few hundred million of monoline contract for the CMBS. What's your net exposure from the CMBS after hedging?

Okay. Firstly I'd like to tell you the breakdown of our commercial CMBS portfolio is roughly speaking a third of our total portfolio, of the whole lot. Then one-third is secondary bonds. And for the secondary bond positions we have almost [three fifths]. And for the whole loan position, it's hard to say exactly but the -- we have -- generally speaking it is rather difficult than the secondary bond position to hedge the additional loan position. Actually, we are now trying to manage the additional whole loan portfolio very carefully having the very flexible hedge (inaudible).

So, versus the JPY1.3 billion position you're hedged about a third? A third of your position hedged?

Sorry. As I said, for the one-third of total portfolio we have 100% hedged. Then another two-thirds of the portfolio, hedge rate is very flexible but roughly speaking, we have almost 60% or 70% hedged in total.

Okay, thank you.

Thank you.

Thank you very much.

(OPERATOR INSTRUCTIONS). We have no questions Mr. Nakada.

So thank you very much everybody. I would like to conclude and close the presentation of our results for 2009 first quarter. Thank you very much for your attention, thank you.

Thank you for taking your time, and that concludes today's conference call. You may now disconnect your lines.