Nomura Holdings Inc (NMR) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome today's Nomura Holdings second-quarter operating results for fiscal year ending March 2012 conference call. (Operator Instructions). 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 condition, political events and investor sentiment, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitor conditions and size, number and timing of transactions.

With that, we would like to begin the conference call. Mr. Junko Nakagawa, please go ahead.

This is Takumi Shibata, Group COO of Nomura. First I will explain the future measures that we will implement, and then I will ask our CFO, Miss Nakagawa, to go over the Q2 highlights. After that we will open the line to questions.

We announced a cost cutting of $400m when we reported the Q1 results. Today we have decided to cut a total of $1.2b, including this US$400m that we have already announced. Simply put, we are trying to adjust our expense or cost base from one suitable for the 2009 revenue environment down to a level suitable for the 2011 revenue environment. And by bringing down the breakeven point we are trying to enhance our business execution capabilities.

And in order to optimize the regional allocation of our management resources, we will reallocate some of the resources that we allocated to EMEA into the Americas and Asia. And for EMEA, under a new expense structure we will build the foundation for growth.

We will become a leaner company. And once we have optimized the regional allocation of our management resources, we will actively meet the needs of our clients. The importance of our global network as well as the clients being the center of our business will remain unchanged and these will be -- continue to be the long-term commitments of Nomura.

Now I will ask Miss Nakagawa, our CFO, to go over the Q2 highlights.

This is Junko Nakagawa, CFO. I will use the presentation to go over the Q2 results of the year ending March 2012. Please turn to page 3.

The current quarter was a challenging one, with the market deterioration -- market conditions deterioration and also turmoil in financial markets based on the Eurozone debt crisis. Q2 net revenues for Nomura Holdings was JPY301.6b, which was down 9% Q on Q, but it was up 9% year on year due to Nomura Land & Building becoming a subsidiary.

For the Retail and Asset Management divisions, these two divisions remained resilient, with continuous inflow of funds despite the tough market conditions. However, the Wholesale division suffered a decline in revenues of 44% Q on Q due to sluggish trading and market volatility impact. As a result, the pre-tax loss for the overall firm was JPY44.6b and net loss was JPY46.1b.

The pre-tax loss and the net loss for the first half were JPY10.3b and JPY28.3b respectively.

Please turn to page 4. As our COO explained earlier, we have decided to cut costs by $1.2b, including the $400m that we announced when we reported our Q1 results. This additional $800m will be a firm-wide cost cutting, but mainly in the Wholesale division.

In order to optimize the regional allocation of our management resources, we will shift some of our resources from EMEA to the Americas and Asia. Europe, or EMEA, will build the foundation for growth under a new expense structure. And by revising or revisiting the cost structure and making the global network more efficient, we will bring down the breakeven point and aim to improve our profitability.

Page 5, please. Here we show the summary of the Q2 and the first-half results for March '12. For the net revenues for each segment and also the pre-tax P&L, please turn to page 6. And for the results of each segment, please turn to page 7 onwards. I will start with the Retail division, pages 7 and 8, please.

For the Retail division, with deterioration of market environments globally, the total sales declined Q on Q and net revenue was JPY84b, which was down 11% Q on Q. Pre-tax income was JPY10.7b, which was down 51% Q on Q.

Within Retail, the sales of shares and bonds trended robustly. And by diversifying the assets class and currency we were able to provide products which meet our clients' needs on a very broad basis. And we achieved a net increase in client assets by -- of JPY1.1 trillion. The tough market conditions which I mentioned earlier are expected to continue for a while, but we will continue to focus on consulting sales and meet our clients' needs.

Next, the Asset Management division, pages 9 and 10, please. The net revenue for Asset Management was JPY16b, which was down 15% Q on Q. Pre-tax income was JPY4.7b, down 37% Q on Q. However, it was up year on year.

With the decline in markets and the yen appreciation, AUM declined. However there was JPY236.1b of inflows into ETFs, and also we continued to enjoy an inflow of funds into public stock investment trusts and the investment advisory businesses. We will continue to provide services to improve our investment management capabilities and also value-adding services to differentiate with our competitors and improve our management performance.

Page 11, please. This is the overview of the Wholesale division. Due to the market volatility, trading was sluggish, and also the fundraisings in primary market were sluggish as well. And net revenue for Wholesale was JPY79.3b, down 44% Q on Q. And pre-tax loss was JPY73.1b. I will give you the breakdown of the Wholesale division from page 12 onwards.

Global Markets net revenue was JPY72.6b, down 44% Q on Q. And the pre-tax loss was JPY48.6b.

For Fixed Income, client activity improved. And Japan, FX and rates continued to show solid performance. However, due to the sharp decline in market liquidity, the trading of securitized products, etc., were sluggish.

For Equities, although the client revenues increased, the slowdown or sluggish trading in derivatives and CBs brought down the overall revenues and we saw decline in revenues for each region overseas.

Page 14, please. Investment Banking was hit by a 40% quarter-on-quarter decline in the global investment banking fee pool, the lowest figure since 2002. As a result, gross revenue fell 26% on the previous quarter to JPY23.8b. Loss before income taxes was JPY24.5b.

While our Global DCM business, including the solutions business and mergers and acquisitions were strong, this could not offset weakness in the ECM business.

As you can see on page 15, however, our global mergers and acquisition business is expanding, driven by Japan outbound M&A. We're number one on the Japan outbound M&A league table with a market share of 45%. In Asia ex-Japan M&A, we improved our ranking from number 19 last year to number nine this year.

Please turn to page 16 for an overview of non-interest expenses. Non-interest expenses increased 17% on the previous quarter to JPY346.2b due to a full three months of expenses booked for newly consolidated entities as result of converting Nomura Land & Building into a subsidiary. Excluding these effects, non-interest expenses declined quarter on quarter. Personnel expenses also decreased sequentially when stripping out the effects from the newly consolidated entities.

Moving forward, we will implement the cost reductions mentioned earlier and ensure a more intense focus on pay for performance. The reductions will be implemented in our three business segments and across corporate functions. The entities consolidated as a result of converting NLB into subsidiary will not be subject to the cost reductions.

On page 17 for an update on balance sheet. Total assets at the end of September were JPY36.9 trillion. Gross leverage was 18.1 times. Net leverage was 11 times. We have shareholder equity of JPY2 trillion and liquidity of JPY5.6 trillion, therefore our financial position remains robust.

In addition to our Basel 2 Tier 1 ratio and Tier 1 common ratio, we have included preliminary figures for Basel 2.5. Under Basel 2.5 our Tier 1 ratio at the end of September was 12.2% and our Tier 1 common ratio was 10.5%.

Please turn to page 18. As shown on the left, approximately 80% of our balance sheet consists of highly liquid trading assets. Assets and liabilities are matched by raising funds in each region, mostly through repo transactions. However, even under stress that could disrupt repo markets, we are able to maintain a liquidity portfolio surplus without the need for additional unsecured funding over one year. Also by increasing the maturity profile of our borrowings and maintaining sufficient capital, we have a solid balance sheet structure.

Before I finish, I wanted to give you a brief outline of our exposure in the GIIPS countries, or peripheral countries in Europe. Please turn to page 19.

Our net country exposure in European peripheral countries is $3.55b. Of this, 83% matures within six months and it's mostly short-term government bonds in countries where we hold primary dealer licenses. 74% is with sovereign counterparties and 20% is with financial institutions and is highly liquid. Assets are inventory assets used for client trading and are marked to market on a daily basis.

We continue to monitor the situation from various angles, including the credit situation in each country, ratings, liquidity, maturity profile and hedging. Our focus remains on ensuring robust risk management.

That concludes the overview of our second-quarter results. And today Nomura also announced JPY4 dividend per share for shareholders of record as of September 30, 2011, as is indicated in the financial report.

Once again, Shibata, COO. As I stated earlier, by becoming leaner and by optimizing the regional distribution of our resources, Nomura will be able to meet the needs of our clients better and more proactively. Many globally active financial institutions will have to cut expenses, raise capital and shrink balance sheets, reflecting the current business environment and new regulatory regimes.

Nomura will cut its expenses like other houses. However, we have already reinforced our capital position and our balance sheet is marked to market and highly liquid. We believe that this is our competitive advantage. We will use this advantage to ensure the quality of our advisory services for our customers, reinforce our commitment to the secondary securities markets and increase our contribution to the primary securities markets. When the market is in a phase of shrinkage, Nomura aims to optimize its size and increase its relative market shares.

At this moment, we would like to have questions and answers.

(Operator Instructions). The first question is from Muraki-san of Deutsche Securities.

In relation to the business restructuring, I would like to ask about the overviews and also the actual impact on the figures. In realigning or restructuring your business you mentioned that you will shift your resources from EMEA to Americas and Asia, which I understand. But what will be the exact capital allocation? What kind -- how will you shift your headcount? Could you provide some additional detail on that?

And shortly before your announcement, Credit Suisse announced their new strategy. And in that they say that they will cut their risk assets in fixed income by 50%. And the capital which is allocated to fixed income, which is 55% of the total, they will reduce that to 39% and reallocate it to the Retail division. This seems to be Credit Suisse's strategy.

In terms of your economic capital, roughly two-thirds is allocated to Global Markets and Merchant Banking. In the business realignment or the reallocation of resources, what will the -- how will you look after you have implemented these changes?

And in your previous guidance you have this announced target of JPY19 trillion under Basel 3. But in total, compared to your previous guidance, will your risk assets increase or will you not use as much risk assets as you have previously envisaged?

My second point is the impact on your earnings or revenues. First of all, the expenses. When -- what will be the timing of booking the expenses? And once the schedule for restructuring is clear, will you be booking or will you be allocating reserves for restructuring? How will you book the expenses? And when will you start seeing the impact? And when will you achieve the run rate of JPY1.2b -- $1.2b? Could you provide more detail on the schedule of the restructuring and the cost cutting, please?

First of all the direction, your question about the overall direction of our strategy. Let's first of all confirm the basics or the basic strategy. The restructuring that we will conduct, this is a strategic restructuring. We will also -- there will be strategic restructuring and also some tactical restructuring. For example, the restructuring of divisions and shutting down certain divisions or regions, this restructuring that we have in mind, we will not conduct that kind of restructuring.

Our strategy will continue to be client-focused and also focus on the importance of global network. This will remain unchanged. And within our existing strategy, we will implement various tactics, strategic tactics to cut our expenses.

In terms of timing, you also asked about the timing, we will start implementing these measures as early as possible. And in Q1 we announced the cost cutting when we announced -- when we reported the results of Q1. So far the progress has been roughly 60%. And this restructuring which we announced today, most of it will be completed within this fiscal year.

And in terms of the actual progress, including the charges that we will have to book, we will be announcing the progress when we announce the results for Q3 and Q4. Over the next two to three years -- the restructuring will be very quick, not over the next two to three years, but much quicker than that. That's the timeframe we have in mind.

In terms of the strategy for each region or for the various regions, as you know, our firm acquired the Lehman Brothers Europe and also the Asian operations and we acquired a lot of the business operations in EMEA or Europe and less in the Americas. So in that sense we will make our European or the EMEA operations slightly leaner and shift or reallocate those resources into Americas and Asia.

As of today, most -- about 60% or the regulatory capital is allocated to EMEA, roughly 30% to Americas and 10% to Asia. We will reduce some of the allocation to EMEA and shift that to the Americas and Asia. This is excluding Japan, this breakdown of 6/3/1. And I'll have our CFO explain further details if there is anything to add.

Sorry, just one follow-up question. The shift from EMEA, you mentioned that this is not a so-called strategic restructuring. So you will not restructure the business divisions and you will continue to maintain the full line business operations but shrink the overall size of your firm or your overall business. That's my first question.

And in relation to the risk assets, Basel 3 basis, JPY19 trillion, the world has changed quite a bit since you announced this target. But are you still sticking to this JPY19 trillion target under Basel 3?

In terms of the size, we are trying to shift our expense structure to one that meets the revenue environment of 2009 instead of the one that meets the current 2011 revenue environment. So we're trying to become a leaner company. And there may be some services which we will cease to be able to provide, but overall we will try to -- we will not --there will not be an impact on some of the major division which have a big impact on our overall business.

And in relation to the JPY19 trillion you mentioned for Basel 3, this is the target figure calculated under Basel 3. And in our case we are trying to -- we are currently already compliant to Basel 3, even without assuming the future earnings that we will generate. So we are not in a situation where we have to reduce our risk-weighted assets.

As for our competitors, there will be Basel 2.5 and then Basel 3. And the businesses, such as Fixed Income, which did not use up too much regulatory capital, we think they will be forced to shrink these types of operations. But in Nomura's case, we -- our current business structure is structured as if Basel 3 were already in place. So we will not -- we are not forced to change our business portfolio from external reasons.

However, we will continue to watch the market environments and allocate our resources on a flexible basis. So as our competitors reduce their commitment for liquidity providing in their fixed income business, we believe there will be opportunities to increase our earnings from that.

And just to reconfirm, as of September end, if you look at the balance sheet as of September end, although the detailed rules for Basel 3 are still not set, based on our understanding of Basel 3 and if we apply our assumptions, Tier 1 ratio is in the upper 8% level, up to 9%, within that range. And for tier 1 common ratio it's more than 8%, higher than 8%.

And as I mentioned earlier, a lot of the financial institutions have to cut costs and have to strengthen their capital. And based on the new regulatory framework, they have to mitigate their risk-weighted assets and reallocate their risk-weighted assets. Compared to that, we have already -- all we have to do one out of the three in order to respond to the new environment. Sorry for the long answer but I hope that answers your question.

So Basel 3 -- thank you very much for your clarification on Basel 3.

Just one correction from the interpreter. Shibata-san mentioned that we will shift our expense base from one suitable for the 2009 environment to meet the 2011 revenue environment.

Our next question is from Tsujino-san from JP Morgan Securities. Miss Tsujino, the floor is yours.

Thank you. There are four questions that I would like to ask. That's quite a bit that I would like to ask. The first one is a simple one. Cost reduction is $800m. Is it mainly reduction in personnel expenses? Is that correct?

And the second question has to do with trading. Page 13, on the left-hand side, I've been looking at that. And I back-calculated using the numbers announced before. And in terms of Global Markets, non-client inflow assets are in a slight negative. That is what I assume. In the past, FY2010 first quarter, saw similar figure. But the number here is negative, I believe. Were there special factors behind this?

So with respect to risk management, you're saying that no major change is necessary and it was mainly due to external environment, is that correct? So if you could please elaborate. That's my second question.

And third question is a follow-up on the second question. October and onward trading and [GM] business, what is the situation October and onwards?

And my last, fourth question, the domestic sales income, pre-tax income in the first quarter was JPY22b. It's now down to a little over JPY10b. That's, I believe, mainly due to reduced fees from investment trusts. Sales of investment trusts have been hovering high and so it will be difficult to grow even further. And you must be affected by market environment and thus is prone to decrease.

So pre-tax income of JPY10b or plus, SMBC Nikko Securities income, Daiwa Retail income, compared to peers in the industry. Well so far you've been posting a relatively high level and you're now down from that level that used to be higher. And so what are the measures that you will be taking for this?

So the simple questions will be answered by Shibata. The more difficult ones will be answered by Nakagawa.

So to address your first question $800m cost reduction, the breakdown thereof. Roughly speaking, personnel expense cut will account for 70% of the total reduction. That is about right, I believe.

And your second question, so revenue from customer flow, compared to that the overall top line is limited, that is what you suggested in your question. And is Nomura gambling the money or did we make mistakes in proprietary trading? I believe that was the gist of your question. Well that is not the case.

We have a product inventory in our customer business. And in this quarter we reduced the inventory quite drastically. In the United States, although with limited inventory, CBS prices went down quite considerably. And CBs, for example, we reduced our CB inventory to a very low level. But in order to serve our customers, there is a minimum level of inventory that we have to hold. And that has come down quite considerably in absolute terms. So that is one of the factors.

And another factor is that the fees that we receive from customers, well, it's best if we can reflect that in profit and loss. But, for example, when we do equity trading and we get a 10-basis-point fee from customers, but in the following facilitation, our trade, our costs still have to be incurred. And so, sorry for being lengthy, but the services that we provide for our customers, facilitation trade and the inventory that we have to keep for the sake of customers, there are costs that have to incurred. And there's leakage, if you will. And that is one of the factors behind.

And the third question is rather difficult to answer and I hope you will allow me not to answer the question. But with respect to Retail business, the environment in the second quarter was such that for the people in the Retail business and for our clients as well, the environment was such that there was a strong need for a consultation. For example, high-yield investment trusts, their performance deteriorated. And existing portfolios, their values have also shrunk. So the sales of investment trusts did not grow as much as we initially expected. On the other hand, foreign bonds grew in sales volumes.

And your question is in the next quarter how are we going to respond to this. We will stick to a consultation-based sales activities. We will provide consultation to customers. And we will of course continue to introduce products that meet the investment needs of our clients. And, on top of that, we will continue to market foreign bonds, of course, and IPOs or POs. Such equity transactions that we have not done recently, at least in the pipeline we are seeing such potential transactions. Therefore, once the market stabilizes if not recovers, the Retail segment's performance will recover and go up once again.

Given the circumstances, we should try to take advantage of the conditions. We should review the cost structure once again and try to achieve efficiency enhancements in the Retail division and cut costs. $800m cost reduction is on a firm-wide basis. And, of course, that does include Retail as well as Asset Management. And needless to say, Wholesale division as well, that will be a large part. And Retail, as I said, is already part of it and it has its own cost reduction program.

Yes. So no answer for my third question about trading position management, about the small loss that was incurred this time. In July, August and September, the losses during this period were large in August. Is that correct? Are they skewed in August?

Well, Tsujino-san seems to very tough; she's not letting this go. So, as you said, July, August, September, during that period it's true that our performance in August was not very good. September saw a slight recovery though.

And regarding trading risk management?

Our fundamental tactics are such that when client activity is low, the temptation is to take a large position. And, just like the famous bank's proprietary trading desk, we may be able to get large earnings. That may be one possibility. But our thinking is that where activity level is low in the market, we will have to endure and try to tide over that. So firm-wide we have tried to reduce risk quite substantially.

So without taking too much balance sheet risk?

Well, of course, we will have to take profit and loss risk. And once client activity goes up, in line with that we will take larger positions. And, well, I'm sorry to not be able to provide the specifics as to what's been happening since October and onward. But at least we can say that we are on a recovery trend.

Thank you very much.

The next question is from Okamoto San of Merrill Lynch Japan Securities.

This is Okamoto. You used the word tactics, so I would like to borrow that word and use it myself. Could you explain the changes in your tactics over the past three months? You announced the cost cutting and then you announced the additional cost cutting today. What caused this change in your tactics?

And also in the reallocation of your management resources, when you say management resources, I believe it includes capital, your personnel, all sorts of items. But when you say reallocation, as was previously asked in the question, how will you reallocate your resources? So you will cut costs, but on the other hand, in terms of the revenues that you generate when you reallocate your resources, could you provide more color on what you actually do?

Your first question for the cost cutting, we announced the $400m at the end of the Q1. And, at the end of Q2, we added $800m of cost cutting; we announced additional $800m. So what changed over the past three months is your first question, so let me address that, or let me try to address that first.

For Q1 or as of Q1, the word we used at the time was improvement of the productivity. I believe that's the phrase that we used. If you look at the market conditions of Q1, which were quite weak, so our target was to improve our productivity of our business. And this additional cost cutting of $800m, well you may have been disappointed when you first heard the $400m figure, but now you'll be asking why we are adding $800m of cost cutting.

One of the main reasons behind this was the future market environment, and it is starting to get more and more clear. This is only our view, so it may differ from other people's views. But if you look at the market conditions in Europe today, the Greek issue, it took two years to address the Greek issue -- Greece issue. And after two years it is still -- a lot of people view it as not totally resolved. So the next 18 months, 24 months will be cloudy. It may be sunny some days but it will be cloudy the other -- the rest of the time. And that's our view of the next 18 to 24 months, which may be wrong, but that is our view.

So based on that view, we responded to that view and try to get through these cloudy times with a lower expense base. After these times of turmoil are over, we think a new world will come. But we think this will continue for two years or so and we have to recalibrate our business to meet the business or the market conditions. And also taking this opportunity, when we look at our clients, including the corporate clients and also the financial institutions, such as banks, they need various solutions which we will continue to actively provide by allocating resources to these businesses. Having a clean balance sheet under such -- these times gives us an advantage compared to our competitors.

And the definition of management resources, your raised some examples, but the basic understanding right now is on the expenses, when we say management resources. So we are not in a situation where we have to raise equity or shrink our balance sheet in certain regions, certain countries. So at the moment when we say reallocation, we're mainly talking about our expenses. And right now we believe is a transition period, with a lot of changes going on. And we believe this will continue for around two years. So we have to apply our management resources very flexibly.

And the areas where we will apply the resources could differ from our competitors. We will flexibly allocate our resources based on the return on assets and return on equity. If a lot of players move out of fixed income business, that means that we will be able to expect a certain size or sizeable returns from fixed income. So we will be flexible. And we have not formed a clear view of what will happen over the next two years; that is quite difficult to do.

Thank you very much.

Next question is from Daiwa Securities Capital Markets, Shiota-san. Shiota-san, the floor is yours.

Thank you. My first question is as follows regarding the credit risk. VaR has been reduced, and during the second quarter I believe VaR had been going down. Is that because of reduced credit risk or trading position was reduced? What was the factor behind the reduced VaR? So that's my first question.

And second, earlier you talked about resource reallocation and that you're mainly talking about expenses. So away from EMEA and more towards Asia and Americas, you're going to reallocate resources. In other words, in Asia and Americas, does the mean that cost will rise in the future? So those are the two questions that I would like to ask.

So VaR reduction, the factors behind are as you rightly pointed out. And, as I said earlier, in these uncertain times and conditions and when most of the clients are on the sidelines, so, for examples, hedge funds, our investment, 75% of their money are in cash. And long-only investors, they try to retain as much cash as possible given the rules that they have to adhere to. So as a firm, the mission that we have we believe is customer facilitation, and so considering that we cannot keep wasteful inventory.

So reduction in value at risk means that we have reduced our inventory quite drastically. Reduction in inventory, behind that is, of course, reduced revenue. We have been expecting that. And the traders, given the current trading environment, they cannot be fully active. And some are dissatisfied, but we have to come back to our mission and exercise control. This is not a very seemly situation; there's no hero in the market.

And as far as the expenses, we would continue to be agile and flexible. If we see business opportunity, we may hire more people. So expenses may go up in the Americas going forward. But what we can say at this moment is if we decide to hire more personnel, we have to make sure that they have to be accretive. And we may reshuffle people within the same segments or divisions, or reduce human resources in some parts and have new hires as part of self funding, and which has led to expense increase. We will do what we have to do. But basically we will retain a cautious stance, otherwise $800m cost reduction becomes inconceivable.

Thank you. About the first question and someone else's question, as order flow increased trading position, pricing was reduced and there was leakage found. And by reducing inventory you are trying to respond to that so that you can prevent losses from recurring. Is that the correct understanding?

So there are two types of losses that could arise from our client business. One is facilitation-related trading for clients. In the case of equities, over a relatively short period of time we will have to look for next customer and, in the meantime, price could change. And that is the nature of facilitation trade. So, frankly speaking, the quality of Nomura's facilitation trade was not up to the standard that we have required. We detected that early and we changed personnel in that area. And, as a result, facilitation-related risk is reduced.

And, now, another reason as to why we could incur losses in client business is inventory. And, as I said, inventory was reduced drastically, distribution inventory. But in the US, CMBS, even if we may want to reduce inventory, there is minimum amount of inventory that we have to hold. For example, in CMBS and CB, convertible bonds, of course the market itself is awry. But in order to respond to customer demands, we need a certain level of inventory, in CBs as well.

CMBS and CBs, in these two areas, market prices are plunged in these areas. We reduced our inventory, but prices kept on going down. But CMBS, RMBS and CBs, in order to do business in these areas these are risks that cannot be avoided. So we did reduce distribution inventories to a great extent, but they are not reduced to zero and thus we have been affected and the value of the inventories is reduced.

Thank you.

The next question is from Goldman Sachs Securities, Tanaka-san.

This is Tanaka from Goldman. Three questions. The first two points are in relation to the $800m cost cutting and the last is about the Skylark.

About the $800m cost cutting, the previous person asked as well, but you explained that this is a firm-wide cost cutting in your materials -- presentation materials. But in your explanation you explained the reallocation from EMEA to the Americas and Asia. And is this reallocation from EMEA to the Americas and Asia, what is the absolute amount of cost cutting as a result of this reallocation?

My second point is in the Americas or in the US, if your costs are going to decline, you explained that you will gain market share while cutting your costs. But considering your current franchise in the US, you are right in the process of building your franchise and you're just starting to see the early results. And if you cut costs in the US or the Americas as well, can you maintain your business franchise while cutting costs?

My third point about Skylark, Q3, what is the impact on Q3, if you could provide any details? And if there are no impact -- if there is no impact, how have you conducted the markdowns or the markups in the past? These are my three questions. Thank you.

Very tough questions, all three of them. The first two I will answer. And the third question about Skylark I will have Miss Nakagawa, our CFO, answer.

This $800m cost cutting, while we say it's a firm-wide cost cutting, we also say, we keep mentioning EMEA and Wholesale division. For Retail division, there is room for cutting some of the -- conducting some general cost cutting. And the breakdown between the front office and back office we will consider as well. There are a lot of very talented personnel in our sales or retail administration divisions, so we will let them do what they really wanted to do. And this is part of the cost cutting.

The second question was also a very deep question, the US franchise. We have just started building it. And if we cut costs dramatically, we will not build the franchise but rather demolish the franchise. I think that's the point of your question. And, generally speaking, we will be cutting costs on a firm-wide basis, including Retail as well as Asset Management. They will participate in the cost cutting. And US will also participate. There will be no sacred cows in this effort.

But considering the franchise business, our commitment remains unchanged. And in any organization there are some who -- some people who contribute, but a certain percentage do not contribute that much. And we have to make our business more efficient. But in terms of our commitment and the franchise which we are currently in the process of building in the US, we have absolutely no intention of stopping the buildup of the franchise in the US.

And for EMEA, which will become leaner, our commitment remains unchanged as well. So it does not mean that Nomura will withdraw from Europe or EMEA and shift to the US. So Americas, Europe -- EMEA, Asia, all three locations are important for our global network, and especially for us conducting the client business.

Now I'll ask Nakagawa-san, our CFO, to address your third question about Skylark.

First of all, whether we have conduction markdowns in the past. Yes, we have conducted several markdowns. And apologies, we cannot disclose the actual amount of each markdown. The impact on Q2, we have not conducted any markups in Q2. So Q3, the current quarter, we will be reporting at the end of Q3, so please wait for our announcement.

Have you ever conducted a markup for Skylark?

Sorry, we cannot comment on specific transactions.

Thank you.

Next, Shinoda-san from Morgan Stanley Securities. Shinoda-san, the floor is yours.

Thank you. I have two questions. My first question is as follows. So a total cost reduction of $1.2b. What are the market assumptions that are behind that? Are you expecting the current situation to continue into the future or are you expecting that the current situation will further deteriorate? What are the assumptions behind the $1.2b? And if your assumptions prove to be right and suppose [JPY1.2b] cut is made, what is going to be the level of our ROE? So that's my first question.

And the second question has to do with Skylark. I believe the investment balance in Skylark is JPY100b. And I'm sure that is already sold off. And if that is correct, from the second to the third quarter risk-weighted assets, how much reduction is going to be made in terms of RWAs? So these are the two questions that I would like to ask.

So what are the assumptions behind our cost-cutting program? That was your first question. For example, a real disaster scenario, black swan may appear from somewhere. And there could be [bank runs] in Europe and that could spread to the world. Or European capital flows out of Asia and China, which we rely on, the growth in China could be subdued. Is that the scenario that we have in mind? No, that is not our assumption.

In 2009 and 2010, looking back on those years, in 2009, throughout the year, trading volume was quite large. And are we expecting the same this year? No. And 2010, as you know, was sluggish. And in our case as well, in the second half of 2010 there was a quick recovery in revenue, however, and are we expecting the same to happen this year? No. So having said what I said, the market environment in 2011 will probably continue into 2012. Market conditions will not change very much into the next year.

And with respect to ROE, as I've been saying in many IR meetings, we are working very hard to be profitable this year. And next year, given the expected environment, we would like to recover so that we will be able to earn a certain level of profit. So those are the assumptions.

So regarding Skylark impact on RWA, risk-weighted assets, the impact is limited to several hundred billion yen.

Well, I have a follow-up question on the first point. So $1.2b cost reduction, when will that start? So expenses in the first quarter were around JPY300b. And there was impact by Nomura Land & Building, and that was part of the expenses. And so there will be two months' worth of expenses to be posted in the second quarter. That's JPY80b and altogether JPY380b and, of course, it depends on ForEx. If you subtract $1.2b the amount will be JPY350b. And market situation is expected to continue and if the cost reduction program is fully implemented. Is that the correct assumption? The numbers I have given, are they correct?

Nakagawa will answer your question.

So Nomura Land & Building, the impact from consolidation is a little below JPY100b. In terms of revenue and expenses, the impact is about the same. And on an annualized basis we're implementing the cost reduction program, so in the first quarter JPY300b, you add JPY100b and you subtract $1.2b.

Well JPY100b, is it an annualized figure?

Well that is the impact in the second quarter.

So from JPY350b and JPY100b is already part of that, so JPY350b minus $1.2b, is that the correct calculation? And once the cost reduction is successfully implemented, the average cost level will be the outcome of that calculation?

I think your calculation is correct. And the way in which the cost reduction program will impact our operations, as Shibata-san earlier said, we will start reducing costs from where we can immediately, but there will be areas which will take a longer time. So it will be some time before we can see the full effect. But the basic thinking itself I believe is correct, as you said.

Well, sorry for asking all the details. Thank you for your answer.

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

Two questions. First of all it's about the Tier 1 common ratio under Basel 3. And under the current calculations you mentioned it was roughly 8%. And including the mitigations, you can easily respond to or comply with Basel 3. And in order to bring the ratio to 10% or the target of 10%, does that remain unchanged?

My second question is about expenses again. And in your previous explanation about the $400m cost cutting, you explained that the progress is roughly 60% and charges will be booked in Q3, Q4. But in relation to the $400m cost cutting which you announced earlier and the 60% progress, were there actually any expenses booked in Q2 and what was the actual amount of expenses that you booked in Q2?

For the first question, I will answer. And I will have Nakagawa-san answer the second question.

For Tier 1 common ratio of roughly 8%, considering the competitive environment, we have to consider the competitive environment. So if our competitors converge to around 9% and we cannot become like Don Quixote and say we will achieve 10%, so we have to consider our competitors as well. And under Basel 3 as well as Basel 2.5, the capital charge for securities companies, securities brokers and also securities divisions of banks will be raised to 2.5 to 3 times. So under the new definition, the 8% that we have calculated, there's a certain size of cushion compared to the current level.

So we will not adjust our target of 10%. But it does not mean that we will definitely stick to this figure; that will be unnatural. So we will continue to watch the situation. And if the trends go towards 11%, there will be some mitigation as well. And, as I mentioned earlier, we will not depend on the future earnings to comply with Basel regulations. We will try to comply based on the current earnings and without any additional mitigation. So we think we have sufficient flexibility to comply with the Basel regulations.

And in relation to the $400m of cost cutting which has already -- which we have already made progress, and your question was about the severance costs related to it. We have already booked the severance costs in Q2, but the amount has been very much controlled. So JPY1b, a little bit over JPY1b. And this is booked in the personnel expenses.

An additional question. You explained that the severance charges are very small, very much controlled. But does this mean you'll be booking large figures in Q3 onwards or will you not be booking that much?

In relation to the $400m of cost cutting, this is the annualized cost cutting, so the impact is not exactly -- there's not a direct or straight impact. And so the impact of the cost cutting will not be that large in terms of the charges. And for personnel expenses, we have already made progress. So, going forward, we will be focusing mainly on the non-personnel expenses. So there's very limited chance that there will be charges required for future cost cutting.

It's time to conclude the question-and-answer session, so a few closing remarks from NHI.

Ladies and gentlemen, thank you very much for being with us for today's meeting. And, of course, we will continue to monitor the situation and continue to make serious efforts at managing our businesses. And I look forward to continued understanding and support. Thank you.

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

That brings the telephone conference call to a close. Thank you very much for being part of this meeting.

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.