Nomura Holdings Inc (NMR) 2009 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 2009 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. During the presentation all the telephone lines are placed for listen-only mode. A question 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 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 investors 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 would like to begin the conference. Mr. Masafumi Nakada, please go ahead.

Thank you very much, ladies and gentleman. Thank you very much again for joining us today in Nomura Holdings second quarter result announcement. My name is Masafumi Nakada, CFO of Nomura Holdings Inc.

So I will now give you a brief overview of our results for the second quarter of the year ending March 31, 2009, using the document entitled Consolidated Results of Operations. Please turn to page four.

Net revenue for the second quarter was JPY128.1b. Income before income taxes was minus JPY69.3b and the net income was minus JPY72.9b.

During the quarter, the financial uncertainty spread from the United States to the other markets around the world, and the global plunge in share prices caused further turmoil in the financial markets.

In anticipation of a worsening market environment, we moved quickly last year to drastically reduce our exposure to risk assets, including securitized products and monoline insurers. However, the unprecedented velocity with which the markets have continued to deteriorate this year has lead to a significant loss in the second quarter.

Governments and financial authorities around the world have made progress in responding to the global financial crisis. However, the movement of stocks and currencies has been particularly volatile in October and we expect the environment for trading, brokerage and other businesses to remain tough for the time being.

That said, we see the current turmoil as the perfect opportunity to enhance our operations. With that in mind, we recently completed the acquisition of Lehman Brothers Asia-Pacific franchise, equities and investment banking businesses in Europe and the Middle East and the service platform in India. This will allow us to move aggressively to rebuild our wholesale operations.

I will go into more detail of our recent acquisitions in a moment, but first allow me to give you a brief overview of the results in the second quarter for each business segment.

In the Domestic Retail, income before income taxes was JPY5.3b, down 77 -- sorry 67.1% from the prior quarter. Despite the tough operating environment, we were able to maintain a profit in Domestic Retail. Our customer base continues to grow with an ongoing inflow of net assets and an increase in the number of customer accounts.

Net asset inflow was up 32% quarter on quarter, at JPY1.4 trillion, mainly due to an increase in physical stock certificates being brought into branch offices ahead of dematerialization of stocks in Japan. A total of six new publicly offered investment trusts were launched during the quarter, attracting some JPY590b. This clearly demonstrates that the trend among Japanese retail investors of shifting funds into investment products remains firm.

Indeed, during October we have seen a surge in buy orders from retail customers who view the current plunge in stock prices as a buying opportunity.

Turning to Global Markets, revenue was minus JPY6.5b and the income before income taxes was minus JPY86.7b as losses were booked on credit, derivatives and equities trading due to the financial market turmoil. Included in the loss are the direct impact to trading from Lehman's collapse of around JPY17b and JPY12b lost in asset finance, primarily due to provisions and revaluations at fair value for real estate related exposure and loans.

To give you an idea of our real estate related exposure for investment purposes, we have about JPY190b, excluding securitized products, private equity investments and US commercial real estate loans. These assets have been valued conservatively to appropriately reflect current market conditions.

In addition, at the end of September, we had an exposure of $400m related to Icelandic banks. Into the third quarter we have started to see risks arise in relation to this exposure.

As this position was hedged through a CDS, or credit default swap transaction with Lehman, we had to find an alternative hedge following Lehman's bankruptcy. However, the turmoil due to the nationalization of banks in Iceland has led to a significant drop in value. We expect conditions to remain uncertain for the time being, and we will continue to monitor this position taking the closely appropriate measures as needed.

Global Investment Banking posted a pre-tax loss of JPY8.7b, mostly as the pace of equity underwriting deals was weak and losses were booked related to Asset Finance. However, Japanese corporates continue to actively pursue large M&A deals and cross-border transactions are on the rise.

We acted as a financial advisor on TDK's tender offer for German firm EPCOS.

Global Merchant Banking, income before tax -- sorry, income before income taxes was JPY14.6b, generated mainly from the sale of our stake in Tungaloy.

Asset Management, income before income taxes declined 90.2% from the previous quarter to JPY800m. The decline is mainly attributable to unrealized losses on pilot funds and the decline in asset management fees resulting from reduction in assets under management due to the plunge in the stock markets.

We continued increasing the lineup of our Next Funds series, adding seven new funds during the quarter for a total of 33.

Internationally we received a new mandate to manage Asian equities for leading funds.

Non-interest expenses decreased 10% quarter-on-quarter, to JPY197.4b. Compensation and benefits were reduced by 8.9% from the prior quarter, reflecting business performance, while other expenses declined by 34.2% from the first quarter, when we took an impairment charge on our investment in Fortress.

In regards to Fortress, we currently hold 55m shares. The recent share price of $3.6, as of October 27, is down significantly from the book price of $11.99. We continue to monitor developments closely and we will take the appropriate steps as needed.

Our quarterly dividend per share for the second quarter 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 of our financial results.

Now I would like to explain in a little more detail, our acquisitions related to Lehman Brothers. Please turn to page three of the -- another document, entitled Acquisition of Former Lehman Brothers Operations.

So we moved quickly to open discussions with administrators following the bankruptcy of Lehman Brothers on September 14. Then on September 22, we announced the acquisition of Lehman's Asia Pacific franchise, including Japan and Australia, and then the following day we announced the acquisition of Lehman's European and Middle Eastern equities and investment banking operations.

On October 7, we hired former Lehman Brothers fixed income staff, and on October 14 we completed the acquisition of three companies in Lehman Brothers' services platform in India.

The next page shows an outline of the acquisitions. The acquisitions provide us with three key components in our business infrastructure to help us achieve our management vision of being a world-class organization. Now please turn to page five.

By acquiring some 8,000 former Lehman employees, we have been able to instantly bring on board world-class human resources and the infrastructure that supports them.

Along with these new employees comes the most important assets for our business, clients. The acquisitions will allow us to expand our access to the broad range of clients. The client bases of Nomura and Lehman are surprisingly complementary, as I will explain in a moment.

The acquisitions in India, meanwhile, give us the IT platform used by the former Lehman Brothers. A competitive platform is a crucial element for global business operations. The fact that we were able to acquire this platform at a reasonable price and in a short timeframe is a significant plus for us.

For instance, one of Lehman's strengths was its high-velocity trading engine, which allows significantly faster trading of stocks and bonds. This service is highly valued by hedge funds and the system helped Lehman achieve the top share.

Such a new infrastructure will substantially enhance our business, not only the wholesale business, but also the lineup of competitive products in our retail business.

Next, I will outline the key strategies for the acquisitions. Please turn to page six.

We will now move with speed to overhaul our wholesale operations by enhancing our product and service delivery, while significantly expanding our international franchise and client base. By leveraging the highly complementary operating infrastructure of Nomura and Lehman, we aim to create a unique client-focused investment banking model.

We will also be able to reduce costs with Lehman's multi-regional integrated infrastructure platform. And we will create world-class management structure in terms of organization, management bodies, and the corporate systems.

Now please turn to page seven where I will outline some key figures related to the acquisitions.

First, headcount. Some 8,000 people have joined Nomura from Lehman, 3,000 of whom work in our international wholesale operations. As we had about 1,700 people in our international wholesale business before the acquisitions, you can see that we have been able to achieve a significant jump in headcount. What's more, over 95% of ex-Lehman employees accepted our offer of employment.

We expect costs for the acquisitions in Asia-Pacific, Europe and the Middle East and India to total about JPY2b -- sorry $2b. We believe this is a very reasonable price to pay because in a normal acquisition you have to pay a premium on top of the market capitalization of the target firm.

In terms of revenue, the combined pre-tax income of Nomura and the acquired businesses for fiscal 2007 comes to $5b, net of one-time effects such as sub-prime and monoline-related losses.

But the benefits are not just increased revenues. Before it filed for bankruptcy, Lehman Brothers claimed the top share in trading on the Tokyo Stock Exchange. This presence will only get stronger when combined with Nomura. In addition, while Nomura is the number one in M&A in Japan, Lehman was a top player in Asia and Europe.

So why did we choose Lehman and what synergies can we expect? The next page shows a comparison of client bases.

Nomura's global strength lies in Japanese equity products and services for traditional investors such as the pension funds and the mutual funds based on our competitive research. Lehman's strength is with hedge funds and other similar clients due to its competitive execution services.

By acquiring Lehman's European equity operations, we have been able to add European equities to our product lineup. In the domestic fixed income business, our strength lies with domestic investors, while Lehman is focused on international investors. For instance, in JGB underwriting, we hold the top share for domestic investors, and Lehman holds the top position for the international investors.

In investment banking, we maintain the top market share in Japan, with a niche coverage in emerging markets such as India and Eastern Europe. Lehman meanwhile, is a top player in Asia and Europe with their broad client base. We can expect to see this complementary relationship deliver results in the growing area of cross-border M&A.

In addition, we have a substantial base of customers including high net worth investors in the retail business in Japan and the rest of Asia. Lehman's client base is in the wholesale business.

So as you can see, there is a perfectly complementary relationship between Nomura and Lehman Brothers in terms of clients and products and services. We will maximize these synergies to rapidly expand our client-facing businesses. Please turn to the next page.

This shows an outline of the road to revenue. Phase one is already completed. We are now in phase two, working on getting the acquired businesses up and running again. In some businesses, transactions with the clients have already started, both in Japan and overseas. We have a global coordinated effort to get the businesses fully operational as soon as possible.

In the third phase, we will promote efficiencies in the combined organization and infrastructure. And in the fourth phase, you can expect revenues to be generated from synergies during the next fiscal year.

In addition, we recently announced a new management structure which allows our increasingly diverse pool of managers to be appointed as Senior Managing Directors. This move positions us to enhance our business execution structure in response to the increasingly sophisticated nature of the financial services industry. The introduction of this new management structure led to three non-Japanese managers being appointed Senior Managing Directors.

In another management move, we recently announced that the positions of Head of Equity Europe, the Middle East and Africa, and Head of Equity, Asia Pacific, including Japan will be filled by former Lehman managers. As we work to build an operating structure for the combined organizations, we will appoint whoever is the right person for the job.

This is the first time we have reported three straight quarterly losses since we first started disclosing our financial results under US GAAP on a quarterly basis.

The top management is acutely aware of the situation and we are moving with a heightened sense of urgency to overcome this situation.

That said, we have a strong positioning financially and we have time and opportunity in our side. Our main focus now is to get our newly-acquired business infrastructure up and running as quickly as possible and move with speed to transform ourselves into a world-class organization. This is key to increasing shareholder value going forward.

That concludes today's presentation. So now I would like to open the lines to questions. Thank you very much.

(Operator Instructions) We have no questions, Mr. Nakada.

Thank you very much, ladies and gentleman, for your attention. Thank you very much.

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