Nomura Holdings Inc (NMR) 2011 Q3 法說會逐字稿

Thank you for attending Nomura Holdings' Q3 financial results teleconference. This telephone conference will be conducted based on the financial results posted on Nomura Holdings' web page. For those of you participating through the web, please take a look at the slides on the web page. For those of you without the presentation material with you, please also look at our web page.

Please note that this telephone conference contains some future projections based on Nomura's forecasts as of today. The actual results could differ significantly due to various reasons.

During the presentation all of the phone lines will be muted and we will have a Q&A session following the presentation. With that, we would like to start the presentation. Mr. Nakada, please go ahead.

Thank you. And thank you for participating in the telephone conference for our Q3 results for the year ending March '11. My name is Masafumi Nakada. I'm the CFO.

First I would like to go over the highlights. Please turn to page four. In this quarter we were able to grow both in revenues and in pre-tax income. And, as shown on the table on the right, we have grown [planned] for each quarter for the past [following] quarters. Net revenue was JPY295.9b, up 7% Q on Q and up 8% year on year. Pre-tax income was JPY27.8b, up 29% quarter on quarter and up 55% year on year. Net income was JPY13.4b, which was 13 times the previous quarter and up 31% year on year.

The pre-tax income of the business segments was JPY40.8b, and we were able to grow our revenues and profits in all three business divisions.

The Retail division booked revenues of JPY97.5b, up 11% Q on Q. And pre-tax income was JPY23b, up 1%. We saw well balanced growth in our major products, including equities and investment trusts, and our client assets balance grew as well.

For the Asset Management division we saw an increase in AUMs, mainly in investment trusts, and we booked revenues of JPY21.4b, up 11% quarter on quarter. Pre-tax income was JPY7b, up 34%.

Wholesale division revenues was JPY172.2b, up 5% quarter on quarter. Pre-tax income, JPY10.8b, up 41%. Within Wholesale division, for global markets we continued to expand our business based on client flow, despite the tough situation. And we saw a revenue contribution from Asia and the US, and we only saw revenue decline of only 2%. For investment banking we saw large ECM businesses in Japan, as well as growth in the overseas business. And our revenue grew Q on Q by 64%.

As of December end 2010 our Tier 1 ratio was 17.3% and Tier 1 common ratio was 17.1%.

Please turn to the table on page five, our cumulative figures up to Q3. Under the tough situation following the European sovereign crisis in May, revenues were JPY831.3b, down slightly by 5% year on year. And pre-tax income was JPY55.8b, down 27%. And net income was JPY16.8b, down 66%. Based on the cumulative figures, our ROE or annualized ROE is 1.1%, but as of Q3 our ROE was 2.6%.

Please turn to page six. Here we show the breakdown of revenue by division. And, as you can see on the pie chart on the right, our domestic revenues were 57% and non-Japan revenues 43%.

Let me go over the highlights for each of our divisions in Q3. Please turn to page seven. First, the Retail division. On top of the equity-related businesses, we were able to sell a broad range of investment trusts and grow our revenues. Net increase in client assets was JPY2.1 trillion. And on top of this we saw an improvement in market conditions and our client asset balance grew from JPY68.1 trillion from the previous quarter to JPY72.3 trillion.

Please turn to page eight. Based on our focus on consulting sales and meeting our clients' needs, we were able to achieve well-balanced growth in our major products. We saw strong trends in our sales of both domestic and overseas equities. We saw strong interest among clients in our high-yield products as well as our equity-related investment trust. And we saw sales growth.

Please turn to page nine. In our Asset Management division, on top of the increase in AUM, we saw an increase in the -- or improvement in the performance-linked fees, and that helped drive our revenues. We saw an increase in funds in the publicly offered investment trusts and our AUM grew to JPY24.1 trillion. In the publicly offered investment trust market share, we continued our high or number-one market share at 21.7%. And you can see this on the next page. In the investment trust business, we continued or we expanded the number of funds investing in Asia. And in the investment advisory business we continued to receive our mandates for products from overseas investors for the Japan- and Asia-related products.

Please turn to page 11. Let me explain about the Wholesale division. In this quarter we saw an improvement in the business conditions, mainly in the ECM business for investment banking. But, on the other hand, for the bond markets the market deteriorated in October. And in November we saw a reoccurrence of the sovereign crisis, starting off in Ireland, and in December we saw a sharp increase in interest rates in the US. So for trading, the market conditions continue to be tough.

And in the equity markets, although the trading volume improved in emerging markets, we continue to see sluggish trading in the developed countries. However, despite these conditions, our Wholesale division booked increased revenues and also increased income. And we saw a full-scale contribution from our US division or US business and achieved business expansion on a global scale.

Page 12. This page describes global markets. And despite the slow client activity, we were able to increase our revenues from client flows from Q1. In fixed income, while our peers see a sharp slowdown in their revenues, we were able to adequately manage risk and maintain our revenues at only 8% down. On the other hand, in the US, even though the market -- interest rates spiked, we were able to grow our revenues. In equities we saw growth in both cash equity and derivatives. And we saw growth in the client flow, which resulted in an 11% Q-on-Q growth. We especially grew the client flow in Asia and we were able to monetize on the strong research rankings. And following the succession of the Lehman Brothers business in 2008, we achieved record quarter results.

Page 13. In global markets we saw a big change in the revenue breakdown by region. If you look at the pie chart on the right, the top upper pie chart shows the breakdown for FY'09 and the bottom pie chart shows it for this quarter. And, as you can see, we saw an increase or, as explained, we saw an increase in fixed income in the US and equities in Asia and the contribution from the two regions is improving. We will continue to maintain a high level of revenues in Japan and expand our overseas business.

On page 14, in investment banking we worked on large ECM deals in Japan, such as TEPCO and Otsuka Holdings, maintaining a commanding lead in the Japan-related ECM league table. In Asia, we acted as joint global coordinator on the listing of Chongqing Rural Commercial Bank, the third largest Hong Kong IPO by a Chinese company last year. And also in EMEA we worked -- we acted as a joint bookrunner on the rights issue by Spanish Bank BBVA. Although 10% decline in fund raising in Japan market took place, we were able to retain the number nine spot in the 2010 global ECM league table. And in the 2010 global M&A rankings, we moved up four places to number 12. And we are continuing to execute global [book] trades, such as the deal we did for Barclays.

Page 15. Given the huge revenue opportunities and growth potential of those markets, we are focusing on expanding our business in the US and Asia, particularly China, India and Australia. Particularly China, from the global point of view, it is the biggest -- it is the next biggest market in terms of fee pools after the US and it is a fast-growing market. For this quarter, in addition to working on the Chongqing Rural Commercial Bank listing, we played a key role in deals across a diverse range of products during the third quarter, including acting as joint bookrunner on a high-yield bond issuance by Central China Real Estate. And also in Japan we are maintaining high level of revenues in Japan and continue making efforts to increase the business in overseas markets.

Page 16. This page shows the overview of fourth quarter momentum so far. In Retail segment we are further enhancing our consulting services to respond to diverse demand for reinvestment in invested funds coming up for redemption or reaching maturity, such as Japanese government bonds for individual investors. In Wholesale segment we are focused globally on winning mandate for primary deals and increasing client growth. And, as you can see on the bottom right chart, in this January we have already won a number of mandates for primary deals.

Page 17. Let me talk about segment 'other'. Segment 'other' includes our fair-value gain on our own debt of JPY1.5b and this is included in 'other' under 'other'. Although not shown in this segment, we booked a JPY1.7b gain on investment securities during the quarter.

Page 18. Let me talk about non-interest expenses. Overall it was JPY268.1b, up 5.5% (sic - see presentation) quarter on quarter. As for compensation and benefits, it was increased by 13% compared to the previous quarter and our compensation ratio for the nine months cumulative to December was 47.1%. So the compensation increase quarter on quarter mainly is due to an increase in bonus payment in response to the increase in revenue and higher headcount in the United States. In non-personnel expenses, quarter-on-quarter basis, it was declined by [21.8%] and this is reflecting our continuous effort to reduce costs.

Page 19. As for the financial position, we maintain a robust financial position. And as of December end, Tier 1 ratio was 17.3%. Tier 1 common ratio was 17.1%. And the total asset of the JPY33.3 trillion was recognized in shareholders' equity with JPY2.1 trillion. Gross leverage was 16.2x and net leverage was 10x. And the level 3 assets stood at approximately JPY800b or 43% against Tier 1 capital.

This concludes my presentation. So we will maintain this robust financial publishing and leverage the success of our business platform expansion and then expand revenues in business that meets the needs of our clients. This concludes my presentation. Thank you very much. Now I would like to entertain questions.

Sorry, before that, non-labor cost compared to the previous quarter I mentioned the 21.8% reduction. That was [not] wrong -- it was 28% reduction. Sorry for this correction.

(Operator Instructions). The first question is from JP Morgan Securities, Mr. Tsujino. Tsujino-san, please go ahead, or Ms. Tsujino, please go ahead.

I have three questions. First of all in relation to your personnel expenses, yes, I understand revenue increased. If you calculate the pre-tax income for Nomura it is -- we see worsening or the adjusted pre-tax income is worse compared to the previous quarter. And this reflects the hedged P&L and various other items. So I'm sure you'll agree that there needs to be some adjustment made to the pre-tax income. So while the actual adjusted pre-tax income has declined, the personnel expenses have grown by JPY10b or so. So is there something -- was there something extraordinary that went on in Q3? This is my first question.

And my second question is on page 14, where you describe the Wholesale division, the revenues and the pre-tax income. Is it correct to understand that you have included the P&L from the Otsuka Holdings stake that you had? And also we have made our internal calculations on how much thr P&L was, but can you disclose the figure?

And Q3 -- the third question on global markets, on page 13. As usual, I would like a breakdown by region for both fixed income and equities. And if I see the pie chart on this page, which doesn't break it down between fixed income and equities, and from here you can see that the US grew and Asia grew while Japan shrunk quite significantly. And the reason why the Japan contribution or the composition shrunk, could you please give me the reason for that?

In terms of the personnel expenses, as Tsujino-san mentioned, if you look at the adjusted income which Tsujino-san mentioned, if you turn to page 26 of our presentation you will see our consolidated figures as well as the figures for each segment. And, as you can see here, we show the pre-tax income for the three segments on the fourth line from the top. And this does not include or reflect the impact of investment securities and does not include the impact of the market valuation of our own debt. And even with this adjustment, you can see that our pre-tax income has grown.

So our understanding is that at the business segment level we saw a recovery from Q2. And we are seeing a clear recovery trend. Therefore, even from your point of view or your viewpoint, the increase in our personnel expenses and the provisions are logical and explainable, we believe.

And the final amount for the full year of personnel expenses will reflect the actual results of the full year and will be determined accordingly. And we have only had one month of Q4 and we still have two months to go, so the final figure for personnel expenses will be determined in March.

And in relation to your second point about investment banking revenues and whether it includes the Otsuka Holdings valuation P&L, it does not -- it does include it. And the amount is not as large as JPY10b, which you mentioned, but we do not disclose the actual amount of each deal, each transaction.

And your third question about the regional breakdown of revenue. For fixed income, Japan was around 30% and EMEA around 35% or so, and the US was 27% or so, and AEJ was around 10%, a little bit less than 10%. That's for fixed income. So we saw steady growth compared to Q1 and Q2 for the US revenue. On the other hand, for equities, Japan was around 30% and EMEA was 33% or so. US roughly 10% and AEJ was almost 30%, so 28% or so. So for equities you could say that AEJ grew in terms of contribution.

And I'd like to confirm how you mentioned that the Japan portion -- you mentioned how the Japan contribution is shrinking. Are you referring to the shrinking of the ratio or the composition of Japan?

Yes. However based on the breakdown that you gave me, and if I do the rough calculation, I see that it hasn't shrunk that much. So maybe we don't have to focus on this too much. Thank you.

And just one additional question, in relation to personnel expenses and, yes, pre-tax income increased by 5.2%, so that justifies the increase in personnel expenses. But if you look at page 17 in the other segment, the negative or the losses are increasing and the headquarter figure was declining. But in this Q3 the figure was minus JPY15.7b. So could you touch upon this?

Yes. For the headquarter expenses and the overhead expenses, the Q3 tended to be large. And various items are included in this. And in Q3 the main reason why the corporate for the headquarter accounts increased was in this quarter we had the London Office, which is the regional headquarters for Europe, we moved -- we relocated the office. And the various expenses in relation to the relocation were booked under the corporate items account. So that's one of the big reasons.

Another reason is in EMEA, especially in the UK, due to the tightening of liquidity regulations, which is progressing at the moment, and in response to the tightening of the liquidity regulations, we need to build up a liquidity pool in the EMEA region. And this is in response to the regulations. So, in that sense, in some key areas we are seeing a negative spread type of situation. But this is necessary for continuing our business in EMEA region. And that is also booked under the corporate items, or the headquarter account. So please understand that these are included in this line.

So some of these items are one-off items in Q3. So we will not see these items in Q4 onwards. But, in relation to the response to the regulations, this could be a recurring item for a while. There is a possibility.

In relocating your London Office, we saw a worsening of about JPY20b Q on Q. So was this a huge cost for the relocation? What explains the JPY20b of Q-on-Q deterioration, other than the London office relocation? Was this mainly in relation to the liquidity pool which you mentioned?

Well, for Q2 there were some positive one-offs. So we cannot make an apples-to-apples comparison between the two quarters.

Thank you.

The next question is from Mr. Muraki from Deutsche. So, Mr. Muraki, please go ahead.

I have two questions. The first one is about trading. As for the position management, I would like to ask a question. So the overseas financial institutions after November, they are struggling in terms of the trading. And then we don't see a big drop in the revenue. So how did you manage your [position] during the term? And I would like to know the dynamics you went through.

And also in the competitors, due to the severe competition, spread has become more [shrinked], and that kind of comment was made. So as for the spread of the transaction, how it is moved or transitioned? Please update that.

And the second one is related to Basel III and Basel III based risk-weighted asset calculation method. And I think that we see some content of the calculation method. If there is any change from the conventional formula, please let me know. And also, since last year, or probably this year or until the next March, I think that you will be continuing this. So I would like to know the plan if you have any change.

And, first of all, trading position management. For this term, for example, October, we had a certain environment but this environment suddenly changed in November, particularly in EMEA market, or it had a big storm or hard times. And also liquidity [shrinked] at some point in time. And when it comes to December we saw rate movement drastically, means the market volatility was quite high, and showed we had a disciplined position in control and also, for that purpose, risk management department did a very attentive monitoring. And this was one of the reasons.

And, on the other hand, against customer flow business share, it captured, with this effort, the overall market growth could be captured in an appropriate manner. That is another reason. Therefore, from this context, our strategy was not [carte blanche] under this market environment. So we performed correct strategy, given the environment today.

And also the value-added risk, if you look at the figure of that, the risk funded itself. We are very cautious in terms of controlling them.

And as for the competitors, [starters] and the spread, let's say in the area of credit, when we had -- excluding the specific event takes place. And we didn't see a big change in this quarter and also the rate. For example, the government bond type product, we had a wider spread in some cases. But the trend is on a shrink, means we have more competition. And I think the competitors are saying the same thing.

As for the Basel III question, as you mentioned, several items have been cleared -- clarified, but it's not fully clarified. As of today there is no big change; we don't see a big change. And also our idea or concepts have not changed. And the risk-weighted asset mitigation and, in this context, as for the direction or strategy, there is no change.

And a related question to Basel III, as for the risk mitigation, the target for the one year, or for the Basel 2.5 will be introduced. So will you be targeting that for the reduction? Am I understanding correctly? And also, in the short term, you are going to dispose and the -- like securitize for that, which has a lower liquidity. How are you going to reduce this type of product?

So for the timeframe of the Basel III adoption period should be taken into account for our mitigation efforts. This is a basic stance and strategy, and also rated product. And within the derivative contract and the products which will get the maturity and then the other reduced, then that will be reduced.

And other than those products, as for the underlying, [the rating] acquisition will be one of the things and also cancellation of the contract. There might be some cases that we to -- that consequently incurred. This will happen in some cases and also -- so not cancellation. That kind of method will happen, as Muraki-san indicated.

Now, not only us, but also other companies are in the same situation. And then, if everyone looks at the same direction and takes same action, then that will cause distortion in the market. So, as mentioned before, within the timeframe I mentioned previously and we need to make adequate decision.

Thank you very much.

The next question is from Merrill Lynch Japan Securities; Okamoto-san.

This is Okamoto. In terms of Nomura Securities, I believe the reporting segments are Retail and Wholesale. This applies from this current fiscal year. Could you please just disclose the figures for Q3 for Nomura Securities by segment?

And for the investments which you make next year, how will you book these investments and when will the depreciation start -- amortization start for the investments?

First of all for Nomura Securities and the breakdown by segment, we typically disclose this when we make the quarterly announcements and it was the same for Q2. Actually, I'm sorry, we announced the figures for the interim results. So we announced it at the end of the first half. So the next announcement will be when we announce the full-year results. So we hope for your understanding; we do not provide quarterly disclosure.

And your second question was [in list of STAR-IV]?

Yes, STAR-IV.

In relation to STAR-IV, the timing of when we will start booking investments and when we will start booking them or booking the costs, well some of these figures will start being booked from Q4 of this fiscal year, there is a possibility. But I think most of the figures will be booked from the next fiscal year onwards.

So you'll book the costs from next year?

I was explaining about the investment timing, and the actual starting of the usage is expected to be 2013, or early 2013. So the depreciation or amortization will start at around that time.

Thank you.

And the next question is from Mr. Shinoda from Morgan Stanley. Mr. Shinoda, please start.

I have one question about the Q3 pre-tax income and, according to the disclosure, it's JPY27.8b. Compared to Q2 it is plus by JPY6b or so. So this JPY27.8b and the hedged part with the own -- the debt [evaluation] in Otsuka Holdings, JPY10b is subtracted. So what would be the -- based on this pre-tax income, what would be the reality of the pre-tax income? I think it would be JPY12b or JPY13b. On the other hand, when we apply the same standard, JPY33b. So from Q2 to Q3, pre-tax income seems to go down. On the other hand, looking at the global market, so the income is increasing. Maybe it seems that you had some loss in Q3. So how should I evaluate the result?

At the same time, when we calculate the trading profit and loss, so Q2 -- Q2 would be JPY210b? And Q3 was JPY400b. So on the accounting basis it seems to go down. Is my understanding correct, or is there any information that is not disclosed on the material, so you have some transient other cost or something that I overlooked? So my point here is, in the reality basis, the income went down or not from Q2 to Q3?

So in your question for Q3, did we have any tentative -- temporary loss or transition loss? We don't have any of that kind of one-time loss. But what we didn't have in Q2 and what we have in Q3, one of the phenomena is in the investing banking other part. Previously this can be called merchant banking, and this merchant banking part in the past in the area of EMEA portfolio. After revisiting the evaluation, we had -- we made a value decrease.

And this was not something happened in Q3 -- Q2 in terms of the factor. And by quarter basis, we revisit the value. And during that process we had a value loss. And also there is an impact of strong yen, and the overseas portfolio went down due to the yen appreciation. That is part of it.

So this is one difference from Q2 and Q3, so that the Q3 seemed to have lower income. And, as you pointed out, in the global market, for example, fixed income at the revenue or profit compared to Q2, it went down. Rather than doing something in the trading, as I explained before, overall the market customer activities decreased. That's why revenue standard went down slightly below -- from Q2. That is the reason.

Thank you very much.

The next question is from Credit Suisse Securities, Ohno-san.

Just one question from me. In personnel expenses and the level of personnel expenses, the cumulative compensation ratio was 47.1% or so. For the full year, what kind of level should we assume, should we expect? I'm sure it depends on the revenue trends. But, for example, last year, up to Q3, it was 47.1% and for the full year it was 46%, or even below 46%. So for this fiscal year, what are your targets for the compensation ratio? And, for next year onwards, what kind of level should we expect?

Yes, the ratio of compensation against overall revenues tends to trend at about 45% to 46% and we have been repeating that we want to manage it at that level. There has been no change to this policy, so that is the benchmark that we use for managing the comp ratio. And for the next fiscal year, we are currently calculating the budget, working out the budget for the next year. And we have to consider the overall market conditions as well as our business plan for the future. And we will work out the adequate comp ratio target.

Just to add to my question, up to Q3, 47.1% is the cumulative ratio. So, for the full year, let's say it comes down to 45% to 46%, does that mean if revenues do not change that much in Q4, the comp ratio for Q4 on a standalone basis will decline? Is this what we should expect?

Well, I cannot commit to anything. But, as I mentioned earlier, yes, the benchmark -- that is the benchmark that we have in mind. So in that -- if we are to achieve that benchmark, yes, as you just mentioned, the comp ratio should come down, yes.

Thank you.

And the next question is from Daiwa Securities Capital Markets, Mr. Shiota. And Mr. Shiota, please go ahead.

I have two questions. The first question is about tax rate. And, compared to the previous quarter, I think you had [lessened] the tax burden. So I would like you to elaborate this point. And by [the others], I think this might be related to overseas profit. So I would like you to explain about this tax rate.

And, just like the previous question, what standard should we follow for the Q4? What can we expect for Q4? If you have any advice, please let us know.

And the next one is multi-region status. And in January I think the revenue, the profit/loss status is improving. So, compared to the previous quarter, is there any advice or guidance? That's my question. Thank you.

As for the tax rate, as Shiota-san mentioned, yes, correct. In the Q2 and in the Q1, compared to those quarters, the overseas financial profit and loss has been improving. And, because of this, Q3's tax rate became lower or improved. And what about for the full-year forecast? The tax rate showed domestic and overseas revenues and profits, rate and [starter] situation. If this trend continues to Q4, then for the full year it will become somewhere in the 60%, somewhere mid 60% in some cases, or the early 60%, first half of the 60%. That will be the expected range for full year.

Tax rate, 60%, correct?

Yes.

Thank you very much.

And as for the most recent momentum, overall, January, yes we had a good start. But our projection, in global markets, in overseas, yes, it's progressing smoothly or steadily. And fixed income and equity, if we look by these aspects, fixed income had a strong start. And for equity, compared to fixed income, it showed a slow pace but it followed the improvement trend that we went through in the past.

Thank you very much.

(Operator Instructions). We would now like to conclude the Q&A session. Lastly we will have a word from Nomura Holdings.

Thank you very much for participating in today's telephone conference. We hope for your continued support. Thank you.

We will now conclude the telephone conference. Thank you for your participation.

Speaker statements on this transcript were interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.