Nomura Holdings Inc (NMR) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Nomura Holdings' third-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 hosting company. If 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. The question and answer session will be held after the presentation.

Please note that this conference call 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 expectation implied by these projections. Such factors include economic and market conditions, political events and other 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 would like to begin the conference. Mr. Masafumi Nakada, please go ahead.

Thank you very much. So thank you very much for joining us today. I will now give you a brief overview of Nomura Holdings' third-quarter results and then open the lines to questions.

So please turn to page four of the document, entitled "Consolidated Results of Operations". This page gives you an overview of our third-quarter results. Nomura was profitable for the third straight quarter, booking net revenue of JPY274.5b, income before income taxes of JPY18b, and net income attributable to Nomura Holdings of JPY10.2b during the third quarter.

Please turn to the next page. Our two main revenue drivers, retail and wholesale, both posted increased revenues and income compared to the prior quarter, as we continued to expand our business.

The graph on the left shows our retail operations in Japan, which focused on providing customers with the consulting services. Total purchases for the third quarter were approximately JPY3.5 trillion and net revenue was over JPY100b, the highest level so far this fiscal year.

Wholesale, made up of Global Markets and Investment Banking, also booked increased revenue and income as Investment Banking returned to profit for the first time in six quarters.

This resulted in business segment pretax income of JPY77b, an increase of 56% compared to the second quarter. However, as the next page shows, we deducted JPY18b in credit value adjustments, JPY8b in expenses related to conversion of our convertible bonds, JPY4b in unrealized losses on investment securities, and JPY16b in fees related to Nomura Holdings' global offering, giving us pretax income of JPY18b.

The chart on the right gives the same breakdown for the fiscal year to date. Pretax income from the businesses totaled JPY189b, from which we deducted JPY64b in credit value adjustments, JPY17b in expenses related to the convertible bonds and JPY16b in fees for our global offering, and added JPY4b in unrealized gains on investment securities, giving us year-to-date pretax income of JPY77b.

So, excluding these adjustments, pretax income from our core businesses for the first three quarters was JPY189b, which is a better representation of our profitability for the year to date.

I will now outline how we expanded our business platform during the third quarter. Please turn to page seven for an overview of our results by business division.

In addition to our longstanding revenue engine of retail in Japan, our wholesale operations are now another driver of growth, with revenues increasing in both Global Markets and Investment Banking.

The next page shows a breakdown of third-quarter results by region. As you can see on page eight, in addition to Japan, revenues in our international operations are becoming increasingly well advanced.

Turning now to business division highlights for the quarter, starting on the next page. Retail continued to focus on consulting services and, aside from November when market conditions deteriorated, total purchases of well over JPY1 trillion were booked in both October and December. Total purchases for the quarter were approximately JPY3.5 trillion.

As page nine shows, Retail also made the most of opportunities arising from the string of public offerings by Japanese corporates during the quarter, booking JPY560b in stock sales in the retail channel alone.

Net revenue in Retail was JPY104.3b, the highest level so far this fiscal year and for the past two years. Income before income taxes jumped 33% from the last quarter, to JPY35.2b.

Please turn to the next page. In Asset Management, the Nomura Global Six Assets Diversified Fund was awarded the Morningstar Fund of the Year for the third straight year. And in the Next Funds product lineup, we added an Indian equity linked ETF, improving the quality and depth of our product offering. Internationally, we won a number of investment advisory mandates in Asia, Islamic markets and Europe, and increased our overseas investment advisory assets under management.

As a result, net revenue in Asset Management was JPY17.2b, up 4.7% from the second quarter.

Turning to our wholesale business, the next page shows Investment Banking, which returned to profit for the first time in six quarters. In Global Markets, we continued to build up our US business (inaudible). Investment Banking revenues in our international operations are growing significantly, along with revenues in Japan, as you can see on page 11. In fact, third-quarter net revenue doubled quarter on -- sorry, quarter-on-quarter, both in Japan and overseas.

The next page outlines recent investment banking deals we have worked on. In addition to our dominant position in Japan, we acted as joint bookrunner on the IPO of Malaysia's leading mobile communications service provider, Maxis, the largest ever IPO in Southeast Asia. We were also sole bookrunner for a convertible bond issue by Tata Power, the largest domestic private utility player in India. And as you can see on the next page, we have won a number of awards in Asia, which is a testament to our rapidly increasing market presence.

In Europe, our solutions business, which is a collaborative effort between Investment Banking and Global Markets to provide balance sheet and portfolio management solutions to corporate clients, is making a substantial contribution to revenue growth.

We worked on many of the high-profile equity finance deals in Japan during the quarter. And as page 14 shows, we topped the Japan-related ECM league table and further increased our market share. Although we are currently ranked 15th in the global M&A league table, we are aiming to increase our ranking as we build up our platform in the US.

Investment Banking net revenue doubled quarter-on-quarter, to JPY44.5b, and revenues from international operations also doubled compared to the prior quarter.

Please turn to page 15. In Global Markets, in addition to the momentum gained in our European and Asian businesses, we saw a rapid increase in our client base and flow business volume in the US during the quarter. Although revenues were sluggish compared to the first two quarters, our business platform continues to grow and we are performing relatively well compared to the slump experienced by our global competitors.

Nomura already boasts the number one market share on both the Tokyo and London stock exchanges, and the next page, 16, shows how we are expanding our liquidity businesses in Asia. We have recently gained membership to stock exchanges in India and Malaysia, and trading volumes are increasing in these markets. In January, the Australian Securities Exchange admitted Nomura as a market participant.

In fixed income, we became a Primary Dealer in India and an AOFM Dealer Panel Member in Australia, and both businesses are seeing increased volumes.

As the next page shows, our European and Asian businesses continued to grow in the third quarter.

Then, page 18 shows growth in average daily trade volumes and revenues in our main product lines in the US. Growth is so strong that it is shown as multiples, rather than on a percentage basis. As recent media reports noted, we are already ranked highly compared to our peers in US securitized products such as government-sponsored entity collateralized mortgage obligations.

Net revenue in Global Markets declined 6.1% from the second quarter, to JPY163.8b. However, as I mentioned earlier, net revenue in our wholesale operations overall, which is the total of Global Markets and Investment Banking, was JPY208.3b and income before income taxes was JPY49.4b, a quarter-on-quarter increase of 34%. This represents increases in both revenues and income compared to the previous quarter.

The next page outlines our global wholesale business market share. Our share is increasing each quarter and currently stands at 5.2%. Merchant Banking continued to raise the value of investee companies during the quarter, with performance progressing as planned or ahead of plan in some cases. Net revenue was JPY1.8b.

So, before I finish, I will give you a quick recap of our financial position and risk assets as of the end of December 2009. Please turn to page 21.

During the third quarter, we raised JPY435b in common equity and EUR1b in debt. We will continue to diversify debt by currency and region, raising long-term debt in currencies other than yen to support our international business growth.

The next page shows that on a preliminary basis, as of the end of December 2009, our capital ratio under Basel II was 25% and our Tier 1 capital ratio was 17.8%. In addition, our Tier 1 common ratio was 17.7%. As we have not issued any preferred shares or other hybrid instruments, our Tier 1 common ratio is roughly the same as our Tier 1 capital ratio.

Total assets as of the end of December were JPY29.8 trillion and shareholders' equity was JPY2.11 trillion. Gross leverage was 14.1 times and adjusted leverage was 8.7 times.

Page 23 shows Level 3 assets. We continued to carefully manage our exposure to Level 3 assets during the third quarter, and remain focused on expanding businesses that are highly liquid.

So page 24 shows the composition of our balance sheet. As you can see here, our balance sheet total assets increased by around JPY2 trillion quarter-to-quarter, but most of them came from the increase of the highly liquid assets exposure. So we continue to manage balance sheet, focusing on the highly liquid assets business in order to expand the client -- the flow business with the clients.

So then, next page, 25 and 26, these pages show the outline key performance indicators for each business division and on a firm-wide basis. And please take a look at the graph on the bottom right of page 26, entitled "Cost Efficiencies". This shows that we cut both personnel and non-personnel expenses for a total cost reduction of JPY24.5b during the third quarter. We remain focused on cutting costs in line with our target set out at the beginning of the current fiscal year.

So, to wrap up, we continue to build momentum in our core businesses and strengthen our financial base. This positions us well to deliver world-class products and services to our clients as a global, independent investment bank.

That concludes my presentation. Then, I would like to open the lines to questions.

Thank you. (Operator Instructions). The first question comes from the line of Mr. Fujikawa from the Boston Company. Please go ahead, sir.

Hi. One quick question. When do you expect -- or are you doing anything to have a rating agency upgrade you to -- from BBB to something a little better?

So, actually, regarding the timing of the actions taken by the rating agencies, it should be decided by the agencies themselves. That's why it is almost impossible for me to tell you what is the timing. But anyway, we are going to continue to show the profitability quarter-by-quarter, which is the most important thing we need to do because they are still keen to see the stable performance, which is their most critical point.

Okay. Now, let's just assume your credit rating improves by one notch. And how much would that -- how much will you save on financial expense, if rating goes up?

At this moment, it is rather hard to say how much impact on funding side, as well as business side. But I'm quite sure that if we would get the upgrading, even one notch, it should have the rather big impact on our business, both of the business expansion side as well as the funding side.

Okay. Thank you.

(Operator Instructions). The next question comes from the line of Mr. [Kato] from SAC Capital. Please go ahead, sir.

Hi. Thank you for hosting this call. My question is what is your outlook for the equity finance pipeline in Japan, going forward? Do you still see a lot of financing coming ahead in this quarter or in the next two quarters?

Hello, Kato-san. Firstly, the -- as for the fourth quarter or current quarter, I don't expect so much or many ECM transactions as we had in the third quarter. And in the next year's estimate, actually, I don't have the whole year's forecast yet. But we are now trying to accumulate the possible transactions in our pipeline. And -- but the -- anyway, at this moment it is still hard to say the next year's - how should I say? - volume of primary transactions in Japan will be more than this year or almost the same level as this year or not. It's still too early, I think.

I have a follow-up, a different question, if --

Yes, please.

Is there a -- what is your take on the new -- the TSE arrowhead system? Is there a difference in the volume transaction or is this mainly linked to the TOPIX or Nikkei index performance? The volume from the beginning of this year, has there been any -- was there any impact from the arrowhead system upgrade?

Okay. It has just started at the beginning of January, as you know, and it is still too early to see the impact on our business. But we believe that it should help us to increase our trading volume. And theoretically, this high-velocity engine of trading should bring us the big benefit.

What do you think that benefit should be, theoretically?

Basically, in order to utilize this arrowhead system, each broker needs to have the own system, which should be able to connect with this arrowhead. And in this sense, the large broker dealers like ourselves should be able to take advantage because we have already invested in a new system and then we are ready for utilizing the arrowhead through our own system.

Thank you.

Thank you. The next question comes from the line of [Mr.] Carlstrom from Putnam Investments. Please go ahead.

Hi, good evening. This is Camille. I have two questions and a third question which I'm not sure you'll answer, but I'm going to ask it anyway. So the first question is your hedge-related charges in the quarter, could you give a little bit more detail on what these charges are for, what caused it and expectations of anything in the fourth quarter?

Number two would be trends that you're seeing in the fourth quarter. I know it's only been a month, just how things are moving in terms of trying to get a sense for how the year will shape up.

And then, third, consensus -- I just looked on Bloomberg. Consensus for March is JPY94b for net income adjusted. How is management feeling about that? Thanks.

Just hold on, please.

Thank you.

First, your question about the economic hedge. As you already said, it's rather hard to answer to your question. But anyway, the third quarter, we have included our own credit value adjustment in this number. And then, anyway, the fourth quarter, at this moment - how should I say? - it is very hard to estimate how much it would be or it could be.

And then, so the fourth quarter forecast or estimate, and as far as January is concerned we have rather the good start of the fourth quarter. Actually, the last quarter, particularly the second half of the November and December, the trading volume with clients declined so much. And then, from the beginning of the January, the flow business volume turned back and then our trading, as well as the retail in Japan, they have been doing reasonably good or reasonably well.

And then, whole year's estimate, you mentioned about the Bloomberg consensus, right?

Yes.

It was JPY94b, you said?

Net income adjusted, yes.

So, as you know, we don't disclose any forecast or estimate, so that's why the -- anyway, as I already said, in January we have a good start. This is what I can tell you at this moment.

Thank you.

You're welcome.

(Operator Instructions). The next question comes from the line of Mr. Skorski from MFS. Please go ahead.

Thanks. I had a question about the fixed income trading profits on your income statement. Sequentially, they went down substantially. Was that due to narrower spreads, lower client volume? And were there any one-off losses that you've already pointed out included in that decline? Thank you.

So, firstly, the first thing I would like to tell you is, if you look at just the fixed income trading P&L, as you mentioned, it looks like it declined so sharply, compared to the second quarter. But if you take the own credit value adjustment and other -- the accounting adjustments like convertible bond -- conversion of convertible bond fees and economic hedge as one, then actually the trading P&L for fixed income declined, but not so sharply as you have seen, the numbers.

So -- but the main reason why the fixed income trading profit declined compared to second quarter was yes, you are absolutely right. The main reason should be the decline of client activity level and then we had also the declining of the spread of the trading, and those two are the main reasons.

Okay. And just to clarify on the previous questioner's question, the hedge loss in your segment reporting was JPY25b. You said that that included JPY18b of credit value adjustment. Were there any other one-offs in that JPY25b?

So, not all of JPY18b but around JPY14b was in credit.

And the rest of the JPY11b is a real (multiple speakers) loss?

Yes, that's right. That's right.

Okay. And you're saying the full credit value adjustment as well as the full convertible bond one-off costs were negative -- negatively impacted the fixed income profits on the income statement, which would be in total JPY26b?

So, if you talk about the numbers of segment information, then it was not included. But if you look at the financial accounting numbers, then it is included in trading as a negative number.

Okay. And one further clarification. On page six, you mentioned that your business segment pretax income was JPY77b. It actually looks like it's JPY87b on the sum of the five segments, from your financial press release. I'm just trying to reconcile the JPY87b to the JPY77b.

Just a moment, please. So the number on the earnings release of JPY87b, this doesn't include the headquarters number. Then, JPY77b includes the headquarters number. This is the gap between the two numbers.

And that gap is your unallocated cost and (multiple speakers)?

Yes, that's right.

Okay.

You're welcome.

Okay. Thank you very much.

The next question comes from the line of Mr. [Padimov] from GVI. Please go ahead.

Hi. I have two questions on costs. I was curious that the compensation to revenue was higher than many of your global peers, at 46%. And I was curious if this might change in the fourth quarter, as is commonly the practice in the industry to bring that down, and what we should look for in the year ahead for the comp ratio.

And my second question is just on cost-cutting in general, if you could quantify or talk about any further cost-cutting initiatives and opportunities that you have.

So, first question about PE ratio versus the net revenue. I don't think the -- as you mentioned, our 46% is not the lower range of our competitors. And -- but for the time being, we would like to manage the compensation level around the 45% and -- but at the same time, we would like to also look at the risk-adjusted profit in order to decide the fair and appropriate level of compensation.

But anyway, we are going to decide this year's comp level in the next few months, having the full year's result in March, in the next March. Then, anyway, this comp ratio should be -- will be fluctuating in the next few quarters, not only from Nomura but also the other competitors, because we still have some unclear or uncertain factors, mainly in the area of regulations or regulatory changes.

So then next question is the further cost-cutting initiatives. Yes, we do. And we -- since the beginning of the year, we have been attacking all the possible items of the cost-cutting, including the cutting of the IT cost, cutting of the real estate expenses and cutting of the other, even small items. But one of the main areas we'd like to focus on is the utilizing the resources in Powai, in India, which is the operating service company in the Group. Then, we're utilizing the resources, both of the front side as well as the middle and back office side. I'm quite sure that we will be able to have more efficient operations, and so that's why we are now starting so-called the offshoring project in each business line, to maximize the utilization of Powai resources.

Great. Thank you.

Thank you.

(Operator Instructions). The next question comes from the line of Mr. Skorski from MFS. Please go ahead.

Thanks for my second question. Investment banking, you said your overseas revenue was JPY16.6b. Could you give me a sense for whether this is breakeven yet, on the overseas portion of the investment banking segment?

So, actually, the overseas operation, if we look at the net number, it is still below breakeven. Then, that's why I hope that the overseas investment banking business will be able to increase the revenues, accumulating their businesses with the clients, not only Europe but also the US.

So, after you acquired the Lehman folks, you had to come up with a pipeline from scratch. When did that pipeline start to translate into overseas investment banking revenue (multiple speakers)?

Yes, actually, as you have seen, the overseas investment banking revenue has started to grow, particularly in the third quarter. And where we have seen some contributions of the solution -- so-called solution businesses, which is not the ECM or DCM type of business but the tailor-made type of the services to the corporate clients, mainly. Then, expanding the US business platform, we expect that the top line will increase.

But anyway, accumulating the transactions in the pipeline from the beginning of the year, this is the -- how should I say? The third-quarter revenue growth was one of the - how should I say? - outcome of the accumulation of transactions in the pipeline in the last two quarters. Then, we -- I hope, as I already mentioned, in the fourth quarter and other on the -- the more transactions will be executed, then we should be able to improve the investment banking performance.

Okay. And a follow-up on that, or actually a separate question.

Yes.

You highlighted on page six of your presentation JPY16b of one-off costs was your own PO, your own PO fee. But when I look at the costs in your SG&A, there's no lumpy JPY16b anywhere, so I'm curious to know where that JPY16b was booked.

So, your question is the Nomura PO fee? Am I right?

Yes. It seems like a big fee and you'd think you'd be able to see it in one of the cost items and hard to see.

So this is the fee -- actually, this is the fee related to our own capital raising in last October, right? And at that time the issuer, Nomura Holdings, retained the Nomura Securities, which is the Japanese broker dealer, and other -- the overseas subsidiary as the underwriter, where we are paid or Nomura Holdings paid the fee to these subsidiaries, including Nomura Securities. But anyway, all the subsidiaries belong to the Group, which is -- that's why this is the adjusted inter-company transaction. That's why we have offset this fee payment, amounting to the [160].

Okay. So it's not a one-off cost, it's just a --?

Yes, that's right

It's an elimination item.

Yes, yes, that's right.

Okay. Thank you.

You're welcome.

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

Okay. Thank you very much, everybody, for your attention. So I would like to conclude today's presentation and conference call. Thank you.

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