Nomura Holdings Inc (NMR) 2010 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 2010 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 on 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 investor sentiment, 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. Thank you very much for taking the time to join us today. I will first outline our financial results for the second quarter of the fiscal year ending March 2010 and then open the line to questions.

Please turn to page four of the document entitled Consolidated Results of Operations. Page four gives you an overview of our second quarter results. Net revenue for the quarter was JPY300b. Income before income taxes was JPY27.3b and net income attributable to Nomura Holdings was JPY27.7b.

We achieved a second consecutive profitable quarter despite seasonal factors such as the slow summer period. Retail operation in Japan continued to focus on providing consulting based services to customers and once again, recorded monthly customer purchases of over JPY1 trillion.

Our wholesale business remains profitable and we have started to build out our US operations to complement our Europe, Middle East, and Asia businesses.

For the first half of the fiscal year, we reported net revenue of JPY598.4b, income before income taxes of JPY58.7b, and a net income of JPY39.1b. Excluding a credit value adjustment on our liabilities, we generated income before income taxes of over JPY100b for the six month period giving us a clean start as the firm focused on the flow businesses.

Although we are not yet fully satisfied with our absolute level of profit, we believe we have made significant progress in positioning Nomura to achieve constant profitability.

The next page shows how one year after we acquired part of Lehman Brothers, we have diversified our operations and our new platform is contributing to revenues. In fact, revenues from our international operations were greater than those from Japan for the first time ever. In addition, all regions were profitable in the second quarter.

Turning back to the previous page, you can see that our total capital ratio under Basel II was 28.8% (sic - see presentation) and our Tier 1 capital ratio was 13.3% at the end of September. Both of these figures are preliminary.

When the recent capital we raised is taken into account, our preliminary total capital ratio is 24.7% and our preliminary Tier 1 capital ratio is 17.3%. Our second quarter results also reflect a JPY7b net credit value adjustment on the liabilities and derivatives.

Next, I will give you a brief overview of how we are expanding our business platform. Please turn to page 6. This shows a breakdown of our second quarter results by business division. As you can see, over the past year, Global Markets have grown to become a significant driver of revenues. Now, I will run through the highlights from each business division for the quarter.

Please turn to the next page, where I will start with our retail operation in Japan. As I mentioned, our focus on providing consulting based services to retail customers meant we recorded monthly customer purchases of over JPY1 trillion. The product mix was well balanced among stocks, bonds, and investment trust.

We maintained our leading market share in the distribution of investment trusts with a monthly primary and secondary sales totaling between JPY400b and JPY500b.

The graph on the right hand side of page 8 shows how we have improved productivity percent compared to last year. This improvement in productivity has been driven by a reorganization of our sales channel that better equipped our retail operations to provide client focused services, thereby enhancing the consulting skills of our people and increasing customer trust in Nomura. So, in addition to our unparalleled retail distribution capabilities, we continue to improve our consulting expertise to provide a higher level of service to retail investors in Japan.

As a result of these efforts, retail net revenue for the second quarter was JPY93.2b, an increase of 25% compared to the same period of last year.

Turning to asset management, we continued to increase our market share spurred on by robust sales of investment trust. We are well-positioned to solve this market as some of our foreign competitors scale back their operations in Japan.

The strong sales of investment trust also led to further inflows of funds. Nomura Asset Management led the industry with JPY320b in net asset inflows in the second quarter.

Net revenue in asset management was JPY16.5b thanks to the [buoyant] investment trust business and the recovery in the market environment.

So next, I will turn to our wholesale business where our new world-class service platform is now up and running and our operations are growing sustainably both in Japan and internationally.

First, in the investment banking, we worked on a number of large financing deals and maintained our leading market share in underwriting for Japanese insurers. Page 10 shows equity finance and M&A mandates we have won so far this fiscal year. Internationally, we advised on such high profile deals as Anglo American's defense against the takeover attempt by Xstrata in Switzerland.

In Europe, a closer collaboration between the investment banking and global markets is aimed at providing a balance sheet management solution for corporate clients. This is our business we expect to grow in the future.

Net revenue in the investment banking was JPY20.9b. Global Markets saw rapid increases in its client base and the flow of business volumes in both Europe and Asia.

Page 11 shows the increase in average daily trades for our main product lines in Europe and Asia, as well as net revenue growth for both regions. Trading volume increases have been particularly strong and are shown here in multiples rather than as percentage increases.

The next page shows the result of this momentum. We were number one on the London Stock Exchange for the three months to September and the number one on the Eurex for equity index options for the same three-month period.

Page 13 gives an overview of progress in the market share in Asia Pacific including Japan. Naturally, we are number one in Japan. In addition, the pace of our growth in trading volumes is outstripping that of the major securities exchanges across Asia. Global fixed income is also increasing its market share and was number one in JGB closing bid rankings. We also regained our primary dealership in the US during the second quarter.

The next page shows the exchanges on which we hold licenses and the countries where we are a primary dealer. I am sure this gives you a feel for how we are building out our global equities and the global fixed income businesses to deliver world class product and services to our clients worldwide.

The integration of our international platform following the Lehman acquisition is now complete and we have moved to the next phase of developing a broader, deeper client base.

Page 15 shows the year-on-year growth in active client numbers for both Global Equities and Global Fixed Income. We are increasing the client numbers and generating deeper revenues from major clients. For instance, in the past, the majority of Nomura's client services in the Global Equities centered on the Japanese equity. Now, we have the capacity to provide services in European and Asian equities as well. The second quarter net revenue in the Global Markets was JPY174.5b.

Pages 16 and 17 show our wholesale revenues by business. Revenues in each business are growing rapidly and our wholesale business revenue share compared to our peer group had increased significantly from last year to 4.2%.

Please turn to page 18 where I will touch briefly on our Merchant Banking business. In Japan, we sold our stake in the Kawamura Electric and in Europe, we booked a valuation gain on an investment in a bio-pharma venture.

As a result, Merchant Banking returned to profit for the first time in four quarters. We continue to mark conservatively in the sale of merchant banking assets and our business exposure has declined compared to last year. At the same time, we remain focused on increasing the value of existing investments.

That concludes the overview of our business highlights. Before I finish, allow me to take a few minutes to comment on our recent capital raising.

Please turn to page 19. There are two reasons why we are raising capital now. First, to procure resources for our wholesale business expansion in Europe, Asia, and the United States as well as to continue our retail expansion in Japan. Second, to stay on the right side of the expected regulatory capital divide and go for growth.

To be sure, two major capital increases in one year, albeit for the first time in 20 years, has caused some concerns over dilution from existing shareholders. However, the regulatory environment has changed since our last capital raising in March, we are now starting to gain clearer insight into the direction of regulatory capital requirement that will be used to help prevent future financial crisis.

Having acquired the EMEA or European and Asia Pacific franchises of Lehman Brothers last year to build out our international platform, if we were to steer our resources to regulatory capital rather than the growth opportunities, we would not be moving forward.

We believe that the trend towards regulatory tightening will give rise to winners and losers. And we intend to be on the winning side of this regulatory capital divide as shown here on page 19. This will give us a strong capital base to better serve our clients. Those firms that end up on the other side of the divide will face increasingly marginal opportunities.

The next page illustrates how we plan to allocate the capital. We will continue our retail expansion in Japan and seek further growth in our international wholesale business. In addition to our Europe and Asia businesses which are now up and running, we will build out in the US to establish this market as another driver of revenue.

The former Lehman platforms in Europe and Asia are performing strongly. The next step for Nomura is to rebuild our presence in the US and seek opportunities for growth in the emerging markets such as China, India, ASEAN countries and Islamic markets.

We did not take on the Lehman platform in the US and this market is now the missing piece in our global franchise. It is also a market with the enormous business potential when you consider the scale of the people, the product opportunities and the cross border mandates. We will also need to offer a US product in order to deliver a world-class lineup of product and services to our clients in Europe, Asia, and Japan.

We plan to organically build out our US business. The global financial workforce is now highly mobile and we are seeing extremely talented people from our competitors knocking on our door every day.

Page 21 shows our US wholesale organization. Equities is made up of a team from Bank of America. Fixed Income consists of former Lehman people who are looking to join up again with their former colleagues from New York.

The next page shows the progress in our US build out. As with the Europe and Asia, momentum is so strong that it is best to describe the multiples rather than percentage increases.

So we feel that now is the perfect time to raise capital and invest in our wholesale business build out in the US and other markets. We are now focused on investing the funds raised into growth areas in order to achieve our medium term targets as soon as possible.

Finally, I will update you on our financial position and risk assets. Please turn to page 23. I mentioned our total capital ratio earlier, then the total assets at the end of September were JPY27.7 trillion, shareholders equity was JPY1.62 trillion, gross leverage was 17.1 times and the net leverage was 11.1 times.

Page 25 outlines our Level 3 assets which we continue to manage carefully while expanding high liquid businesses.

The next two pages outline the key performance indicators that we have adopted to evaluate the performance of each business and Nomura as a whole. In terms of cost efficiencies, we have cut unnecessary expenses JPY55b during the first half of the fiscal year and continue to work towards achieving our target of reducing expenses by JPY100b for the full year.

Today, we declared a JPY4 dividend per common share payable to the common shareholders of record on September 30, 2009. This is in accordance with our dividend policy which calls for a stable dividend using a consolidated dividend payout ratio of 30% as a key indicator.

In conclusion, it is now exactly one year since I first spoke to you about our strategy regarding the Lehman acquisition. The chart on page 28 is the same as the one I showed last October to set out our plans to get Nomura's new wholesale platform up and running.

You may notice that we have overlaid on top of last year's chart the course that we have progressed through in the past year. As promised, we created change with the Lehman acquisition, moved with speed to get our new platform up and running and as a result, our wholesale business is now performing powerfully.

Revenues have rebounded and our ROE is on the rise up from 3% in the first quarter to 7% in the second. And as I said earlier, for the first time ever, we generated more revenue outside Japan than in our domestic market.

Nomura is well on the way to becoming a truly global investment bank. We are moving to the next stage of our build out and putting our enhanced capital position to use to accelerate momentum in our client-focused businesses and drive revenue growth.

Our intention is clear. To be an independent investment bank with a global reach that delivers world class products and services to a worldwide client base.

Thank you for your time. Now, I'd like to take your questions.

Thank you. (Operator Instructions).

The first question comes from Mr. [Patrick Buchanan] from Fidelity Investments. Please go ahead, sir.

Hi, I just had a quick question on the expenses. You talked about JPY100b reduction year over year, could you just give us a little more color as we look out here, the comp ratio was a bit high and I'm just trying to understand what your outlook is for expenses for the full year I guess in absolute terms. Thank you.

So, the breakdown of the cost reduction, roughly speaking, 50$% of total cost reduction came from the personnel expense and another 50% from the non-personnel expense.

And out of non-personnel expense, 50% of non-personnel expense reduction was for the IT-related expenses. Then another half of the non-PE came from the other various items. Then regarding personnel expenses we are now controlling, paying attention to the ratio of the personnel expense against the revenue. It is one of the most important key indicators in our firm to control the expenses. Thank you.

Our next question comes from Mr. Fraser Laird from Scottish Widows. Please go ahead sir.

Thank you. Could you say anything about the prospects for the Investment Banking operations returning to profits in the next quarter?

Yes. For the third and fourth quarter we are now accumulating the mandate in the pipeline. And I expect that the top-line of the Investment Banking division will improve in the third and fourth quarter executing each of the mandates in the pipeline. Of course, this should depend on the market conditions in the second half. But I expect the revenue of the investment banking division will improve in the second half.

Thank you.

Thank you. (Operator Instructions). Next question comes from Mr. [Josh Grosky], from MFS. Please go ahead, sir.

Thank you for taking my question. I had a question on the business segment breakdown and there's a line item called Other Expenses and it was JPY22.3b this last quarter. Two parts to the question. First, this tends to be a negative number. So what type of expense does this tend to be? And is this mostly a Japan related expense, or overseas, or non-Japan related expense. Thank you.

Okay. I give you the breakdown of the other -- item called the Others which recorded the JPY22.4b. So the first item should be the own credit value adjustment. For the second quarter it was approximately JPY7b which was the (inaudible) in the first quarter.

And then next large item is the cost for the own converted bond, the conversion. Actually according to the US GAAP, if our own converted bond would be converted, then we need to book the cost at the time of the conversion. And that's why in the first -- in the second quarter, excuse me, our own converted bond issued in last December some of them have been converted. This is the reason. These two are the large items in the segment Others.

Thank you.

Yes.

(Operator Instructions). Next question comes from Mr. Patrick Buchanan from Fidelity Investments. Please go ahead, sir.

Hi. I just had one more question for you on Merchant Banking and Private Equity Investments. Do you -- if you look out to the year, is there potential for further realizations from those portfolios? Thanks.

So actually at this moment, as I already mentioned, the Merchant Banking division is now focusing on the so-called [valuing-up] the existing assets on the portfolio, also in Japan as well as in Europe. And, of course, the first stage should depend on the market as well as the macro environment. But, on top of that, in each company we are investing, we have the separate clause for value-up.

But generally speaking, the large investment in Japanese portfolio, at this moment, the business of the companies we are investing are going well, despite of the rather stagnant economy in Japan. So, in this sense, for the moment the portfolio looks okay. But we would like to continue to manage the portfolio carefully. Do I answer to your question?

Yes. And I was wondering if you had anything in the pipeline that you are expecting to sell out of that portfolio in the --?

Regarding the exit, at this moment we don't have any particular plan to exit in the third and fourth quarter. But, of course, this depends on the further market and the macro economy development in the second half. But for the time being we don't have any plan.

Okay, great. Thank you.

Thank you. (Operator Instructions). Next question comes from [Mr. Hiro Kato] from SAC Capital. Please go ahead, sir.

Hi. Thank you for taking the question. I have a question on personnel costs. Going forward in the next one to two years, what do you expect the cost per headcount is going to be? Is it going to increase, decrease or going to be about the same, and given that the performance is probably going to be the same.

So, it's rather difficult question to answer, but the fiscal year we managed the personnel expense based on the principle of pay for performance. So then what we would like to do in the next few years is to grow our top line as well as bottom line. So if we would be able to realize -- we would be able to achieve our goal, then in this case the personnel expense per capita could be higher. Then, on the other hand, it should also depend on the market environment. And, as you know, the regulatory environment is now changing or moving. And that's why, as I said at the beginning, it is hard to forecast at this moment. But anyway our policy of the personnel expense management is quite clear. Do I answer your question?

Just a follow up. So do you think payout per revenue per person is going to stay the same, or is it going to change going forward?

As I already mentioned at this moment we are managing the personnel expense using the key indicators of the ratio, personnel expense ratio against the revenues. But we always try to improve our control methodology. And taking -- paying attention to the, as I mentioned, regulatory environment changes, we may have the additional indicated for the appropriate personnel expense management in the future.

Then our current level of the ratio that we indicated is in the comfortable range, I think.

Okay, thank you.

Thank you. (Operator Instructions). Next question comes from Mr. Josh Grosky from MFS. Please go ahead, sir.

Thanks for the second question. A two part question. Looking at Nomura Securities, your parent company, looks like you're actually shrinking the balance sheet quarter on quarter. So the first question is why is this happening? And do you expect the parent balance sheet to continue to shrink in Japan.

And the second question is, if you look at your second quarter of fixed income trading profits, they were very strong. And I was wondering, if you look at the increase in trading profits, the fixed income trading profits quarter-on-quarter, did most of that increase come from Europe, or other regions like either Japan or non-Japan Asia, or the US? Thank you.

Okay. Your first question regarding the balance sheet of Nomura Securities which is our broker-dealer arm in Japan. And this broker-dealer subsidiary is doing the fixed income business with the fixed income clients in Japan, mainly the institutional clients. And usually this business includes the large amount of repo business. And this should fully depend upon the total size of the balance sheet, how much repo business we have done with the institutional clients. That's why in each quarter this total size of balance sheet could move from quarter-to-quarter depending on the size or turnover of the repo businesses. The reason why the most recent reduction of the total balance sheet size, caused by the reduce of the repo businesses or repo positions.

So, then the second question, fixed income revenue is sourced geographically. As we mentioned the more than half -- actually about 60% of our fixed income division revenue came from Europe, and 30% from Japan, and rest 10% from non-Japan Asia.

Okay. And just a quick follow up. What did those percents look like in the first quarter?

Just hold on please. Sorry to keep you waiting. For the first quarter it was -- for Europe it was 45%. Japan 48%. And then 6% non-Japan Asia. And 2% United States.

Okay. Thank you very much.

You're welcome.

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

So thank you very much for your attention.

Thank you for your taking time. And that concludes this conference call. You may now disconnect your lines. Thank you.