Nomura Holdings Inc (NMR) 2012 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 2012 conference call.

Please be reminded that today's conference call is being recorded at the request of the hosting Company. Should you have any objections, you may disconnect at this point in time. During the presentation, all the telephones lines are placed for listen-only mode. The question and answer session will be held after the presentation.

Please not 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 materially different from their results, performance, or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiment, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions.

With that, we would like to begin the conference. Mr. Takumi Shibata, please go ahead.

Hello, everyone. This is Takumi Shibata, Group COO. I will speak first, followed by Ms. Nakagawa, our CFO, who will go over the Q3 highlights. After the presentation, we will be happy to take your questions.

In Q3, all of our business segments were profitable, on a pretax basis, and we reported higher revenues and income, compared to last quarter. Despite the tough market conditions, the Retail segment continued to respond to client needs through its consulting-based strategy, while our Asset Management business continues to capture diverse investor flows. And both divisions delivered stable earnings, and saw results from their efforts to reduce costs as well.

The Wholesale division reported stronger revenues in all regions and business lines, driven by improved trading revenues, and further growth across our global investment banking platform.

On this call last quarter, we announced that we plan to reduce our expenses by $1.2 billion, and we explained that we will adjust our cost structure to make it suitable for the revenue environment in 2011, instead of 2009, and, thereby, lower our break-even point and improve our business execution capabilities. Since then, we are swiftly implementing the announced cost reductions, and we expect to have over 80% completed by the end of March this year.

During the third quarter, we started to see some of the effects of the cost reduction program, but we expect the full effects to start contributing to our performance from the next fiscal year.

In anticipation of changing market conditions and the tighter regulations, we reduced risk assets and enhanced our risk management. We will continue to expand our offering of products and services that add value to our clients, while maintaining our robust financial position and ample liquidity as Asia's global investment bank.

The recent management changes reflects our determination and, although they were amicable departures, our intention is to create a flat management organization that allows for simpler communication lines, and faster decision-making processes, while we also streamline our cost structure.

While we expect the environment to continue to remain challenging for the time being, our focus is to continue expanding revenues by leveraging our geographic advantage as Asia's global investment bank, and proactively responding to the needs of our global clients.

With that, I would like to hand you over to our CFO, Ms. Junko Nakagawa, to give you an overview of our Q3 results.

This is Junko Nakagawa, CFO. Based on the presentation, I would like to go over the highlights of the Q3 results for fiscal year March 12. Please turn to page 3.

Both revenues and income increased during the third quarter, and all divisions were profitable on a pretax basis. As we contend with the debt crisis in Europe and challenging market conditions, Nomura's long-term commitment to being a client-driven organization remains unchanged. And we are adapting swiftly to the new revenue environment, expanding revenues and reducing costs by $1.2 billion, as previously announced, in order to lower our break-even point. Please turn to page 4.

Our net revenue increased 34%, quarter on quarter, to become JPY404.9 billion, and income before income taxes was JPY34.5 billion, and net income was JPY17.8 billion.

For the fiscal year to date, for the first three quarters, our net revenue was JPY1.04 trillion, which was an increase of 25% compared to the same period in the prior year, due primarily to Nomura Land and Building becoming a subsidiary of Nomura Holdings.

Pretax income was JPY24.2 billion, which was down 57% from the previous year, due to the difficult second quarter in Wholesale. We reported a net loss for the year to date of JPY10.5 billion, due to a JPY13.3 billion impact from the changes in the Japanese tax system. Excluding that, the net income for the period was JPY2.8 billion.

On pages 5 and 6 we describe the highlights of this fiscal period, as well as the segment information. And as for the results of each segment, we will explain from page 7 onwards. Let me start with the retail segment on pages 7 and 8.

Retail revenues were JPY79.7 billion, which was down 5% Q-on-Q. Pretax income was JPY10.1 billion, down 6% Q-on-Q. Despite the tough market conditions, we continued our efforts in consulting sales, and were able to achieve a net asset inflow for seven consecutive quarters, and we limited the decline in revenues to a minimal level.

In bonds, we were able to achieve a broad range of investment needs, and our sales grew for four consecutive quarters. The sales of foreign currency bonds trended strongly, while JGBs and domestic corporate bonds also were steady.

Please turn to pages 9 and 10 for Asset Management. Net revenues in asset management were JPY15.3 billion, down 4% from the last quarter. Income before income taxes declined 10% to JPY4.2 billion. While assets under management have remained flat since the second quarter, asset management contained costs and continued to deliver stable profits. Although investors shied away from the public stock investment trust market, due to current conditions, investment advisory assets under management were roughly unchanged from the prior quarter.

Now please turn to page 11 for an overview of Wholesale results. Net revenue more than doubled to JPY176.2 billion. Income before income taxes rebounded both quarter on quarter and year on year, jumping 3.5 times, compared to the last quarter, to JPY37.8 billion. Revenues increased significantly in each region and business line, as our client-driven strategy continued to gain traction through close alignment of services to client needs. Please look at the bottom left on page 11 for regional breakdown.

Next, page 12 for breakdown of Wholesale results. First, Global Markets. Net revenue in Global Markets jumped 63%, quarter on quarter, to JPY118.7 billion. Pretax income was JPY8.4 billion. In fixed income, most products posted quarterly gains. International business contributed a larger share of revenues, driven by strong performance in EMEA and Asia, excluding Japan. Net revenue in equities increased 19% sequentially. Although client revenues were down, due to weaker volumes, trading revenues improved during the quarter.

Page 13 gives a breakdown of fixed income and equities performed by each region for your information.

Now on Investment Banking on page 14. Gross revenue increased 90%, quarter on quarter, to JPY45.1. Net revenue, including the Private Equity business, was JPY57.4 billion. Pretax income was JPY29.4 billion. Revenues were driven by Japan and EMEA. Closer cross-regional collaboration out of our home market, resulting in DCM transactions for Japanese and international issuers and cross-border M&A deals. In EMEA, we executed various ECM/DCM deals for European financial institutions, and provided them with solutions.

Page 15. As indicated on the left, the graph indicates average gross revenue for the first two quarters, as well as the third quarter. As shown, international revenues improved substantially, and our domestic revenue base remained solid.

Now, on page 16. Although non-interest expenses increased by 7% to JPY370.5 billion, they actually declined 4% when we exclude the effects from making Nomura Land and Building a subsidiary. Please look at the bar chart for your reference. Other expenses increased 37% from the prior quarter, primarily due to higher cost of goods sold at consolidated entities. Personnel expenses increased by 10% through cost reduction as well as stringent cost management.

On progress of cost reduction program, please turn to page 17. Total JPY1.2 billion cost reduction has been announced in July and November last year, and as shown here, the program is on track. Wholesale, which accounts for 87% of the JPY1.2 billion, had achieved 66% progress by the end of December last year. We are working to reduce both personnel and non-personnel expenses to achieve 81% of the planned reductions by the end of March and lower the break-even point in Wholesale.

Please turn to page 18, on balance sheet related items. Total assets were JPY33.5 trillion. Gross leverage was 16.2 times, and net leverage was 10.1 times, all of which are lower than at the end of the second quarter. The table on the bottom left shows that, as a result of an increase of risk-weighted asset as of the end of December under Basel 2.5, our Tier 1 ratio was 12.9%, and our Tier 1 common ratio was 11.1%, both of which are lower than in the end of September, which was calculated under Basel 2. The variance will be explained on the next page.

Page 19. This is a comparison of our risk-weighted assets and Tier 1 ratio as of end of September and December. On the left, if Basel 2.5 is applied to our September end balance sheet, market risk would have been JPY3.8 trillion higher, giving a risk-weighted asset of JPY16.7 trillion, as shown on the central bar chart.

During the third quarter, we reduced our private equity exposure and trading positions in line with the current revenue environment, and at the end of December, risk-weighted assets were JPY15.9 trillion. As a result, at the end of December under Basel 2.5, our Tier 1 ratio was 12.9%, with Tier 1 common ratio at 10.5%, both high capital adequacy ratios.

Please turn to page 20 on funding and liquidity. The top left shows our balance sheet, 75% of which is composed of highly liquid trading-related assets. On the bottom right, you will find that 80% of our unsecured funding is in the form of long-term debt, and is diversified in terms of both composition and market source. Our liquidity portfolio, consisting of mainly sovereign bonds, such as JGBs and US treasuries, had accounted for as high as 17% of total assets as of end of December.

Finally, exposure to European peripheral countries on page 21. Our net country exposure was $1.52 billion, representing a 57% decline from $3.55 billion at the end of September. Exposure to Italy declined from $2.81 billion, or 71% of the total at the end of September, to $800 million, or 53% of the total at the end of December. Our inventory is all trading assets held for client trades, and is marked to market on daily basis.

We will continue to closely monitor credit conditions in each country, liquidity, actuary profile, and hedging to ensure stringent risk management.

That concludes my presentation of our third quarter results.

This is Shibata again, and, as for the future revenue earnings environment, we expect it to continue to remain challenging, given the fiscal difficulties in Europe, as well as the current state of the financial services industry. In light of this, next fiscal year we will focus on leveraging the effects from reducing our cost base to gain further momentum. We also believe the competitive environment will transform significantly, gradually presenting us with more business opportunities.

Let me explain using some examples. First of all, in the developed countries, particularly as European financial institutions retreat to their home markets, and commercial banks increasingly focus on traditional businesses, there will be room for a global pure investment bank, like ourselves, to increase business opportunities.

Secondly, financial institutions in the developed world, such as banks and life insurers, will require solutions to help them overcome the eurozone crisis and comply with financial regulations. And we are uniquely positioned to provide these solutions.

Thirdly, Japanese companies are increasingly going overseas, and we are in advantageous position to support their move overseas.

Going back to the basics, I believe Nomura offers five competitive advantages. First of all, we have a unique hybrid business model with the Retail and Asset Management businesses generating stable revenues on the one hand, and the Wholesale business generating market-based revenues on the other hand.

Secondly, our quick decision making, where we anticipated global financial regulatory reforms, and moved ahead of our competition to enhance our capital position and realign our cost structure to meet the current earnings environment.

Thirdly, we have a robust financial position with a highly transparent balance sheet, sufficient levels of capital, and abundant liquidity.

Fourthly, we have a stringent risk management structure in place

Lastly, we are positioned as a systemically important financial institution in Japan.

Looking ahead, the importance of maintaining a global network will only increase. As we strive to become Asia's global investment bank we will chose areas of focus internationally, and allocate resources accordingly. We will leverage our competitive advantages, and our global platform, to meet the needs of our global clients.

Our unchanging long-term commitment is to remain a client driven organization, and this commitment will remain unchanged.

With that, we would now like to open the line to take your questions. Thank you.

We have a question and answer session now. (Operator Instructions).

I have two major questions. First of all, this question is addressed to Mr. Shibata. In Wholesale division, interim CEO has been appointed, according to your press release, so there's an option of hiring from outside, but you also talked about expeditious decision-making in the mid-run. You may continue to serve or double-hat, so based upon the current management structure how will the management structure, how will the management structure unfold in the future?

Second question is with regards to credit rating. In the fifth point with regards to your competitiveness, you said that Nomura is identified as a domestic SIFI in Japan. Now in terms of credit worthiness, currently review is underway for your rating. Would your entity being identified as domestic SIFI impact the rating?

Now in terms of interim appointment, at this juncture most likely approximately one year or two years or three years. It would not be unnatural, even if this current structure continues, for that kind of timeframe. Within our organization, especially in terms of decision-making at the very top level, there used to be two layers which have now been removed.

By layer by layer cost is incurred and staff is required for each layer, and communications become cumbersome. And, therefore, removal of tiers within the decision-making organization was achieved in order to simplify the structure and, at the same time, efficiency of cost has been pursued. So this expression, or interim structure, will continue for some time to come.

And thus, in terms of the future successor, it is true that we've been approached by many, but we are not planning to take any specific action. In the long run, we will seek to find a successor from within the organization.

On the fifth point, on the concept of SIFI, as you may know we were not qualified as a global SIFI; we were on the verge, but didn't qualify as GSIFI. If we look at the numbers for 2014, and that is the year when they will decide on the final list, even the 29 that have been designated are not officially appointed.

As we look at the financial market, especially in the European continent, and think about the European financial institutions of streamlining the balance sheet, we question whether we can be kept as outside of the top 29. So there still remains the possibility of ourselves being designated as a GSIFI and also the shareholders equity of Nomura. Even with 1% surcharge, we have abundant shareholder equity that enables us to tolerate that.

And also, with regards to the shift to the home market, no country has made any particular announcement. But if we think about the current situation, Nomura being dropped from the group of Japanese SIFI is unthinkable.

In this nation, and when we think about the financial infrastructure of this nation, we are proud to be playing a very important role, contributing to the society at general. The meaning of sovereign support -- what we've -- the organization that's made an announcement is S&P. On November 9 last year, Moody's placed Nomura on credit watch, but S&P's announcement came later. S&P affirmed our credit rating Moody's announcement, and there is a factor of two notches. So our mindset is to have the other credit agencies appreciate those two notches, but the decision is nothing for Nomura to make. It is theirs to make.

Thank you very much. On the second point with regards to the credit rating, if there is a change, could you give us how you would be responding, depending on what scenario and what simulations you've done in order to come up with the planned responses for each of those scenarios?

First of all, our basic policy is to conduct simulations assuming several different scenarios. However, for example, AAA credit rating was held by a company and, if that is suddenly downgraded when they did not offer collateral in any transactions, suddenly, because of the downgrade, they are put into a position where they would have to offer collateral, putting them tight in terms of funding.

More specifically, in 2008, AIG was put into that kind of corner. Fortunately, or unfortunately, in the case of Nomura, in terms of ISDA agreements or CSA, in all derivatives over the counter transactions, at this moment, we're not required to offer huge amounts of collateral.

We do not think that there would be any significant impact. Based upon the current agreement, if there is a change by one notch, between JPY10 billion and JPY20 billion of additional collateral will be supplied.

A two notch change would be quite a stressful scenario, beyond imagination, but in terms of contract, there would be an impact of between JPY60 billion to JPY70 billion additional collateral.

Now, in terms of cash liquidity at hand, cash at hand, on a dollar basis, in between $70 billion to $72 billion. So the order of additional collateral that would be required would not have any significant impact to our liquidity position.

Thank you very much for those answers.

If you look at the improvement of Global Markets revenues on page 12, the shadowed portion on page 12, the client flow revenues grew slightly in fixed income, and it was flat or a slight decline in equities.

So overall, it was basically flat, or it says decline for equities, which means that most of the improvement came from position management. And, over the past few quarters, the Global Markets revenues improved quite significantly, compared to the stable or the flat client flow revenues.

And, if the stagnant client flow revenues continue, can you maintain this level of Global Markets revenues? Could you comment on that, please? That's my first point.

My second point is, and this is a more detailed question, if you look at the corporate expenses or corporate items, in the segment others, for example, on page 13 of your financial announcement, the negative figure from the corporate items increased by JPY20 billion, quarter on quarter.

For example, the funding cost of the liquidity pool and other expenses are probably in this, but even so, this is quite a significant increase. In the past, some of the unallocated expenses have been included in here, and the figure has been going up and down. So could you describe the breakdown, and also why these items are included here?

And my other question is, Mr. Shibata mentioned that Retail and Asset Management are the stable businesses. But if you look at slide 30, the reason why you were able to generate pretax income of JPY10 billion domestically was not so much from the traditional Retail and Asset Management businesses, and the results were somewhat volatile.

And, if you look further up several lines, the sales of investment trust commissions have declined significantly.

And, in terms of the regulations, the future regulations are unclear. But when the regulatory framework changes for securities firms, how do you plan to conduct your business and what preparations are you making for the future?

Well, there were three questions, so Miss Nakagawa will answer the second question. Your first point about client flow versus position revenues; when the client flow comes back, we expect our position revenues to also improve. That tends to be the trend. Also, one of the management challenges that we face is there are some facilitation trades that are required in our business which incurs some losses or loss ratios in our trading. Therefore, we have replaced some of our staff in the trading team to better talented people.

And, looking at the [client flow] from a distance, from a bird's eye view, if you look at the client flow revenue of Global Markets, on absolute terms, it has increased quarter on quarter.

On the other hand, there were trading gains that exceeded the increase in client flow revenues, and that was due to the low loss ratio as well as adequate risk management. I think these brought about the strong trading results. I think that's what happened in Q3.

As for Retail, which is your third question, you pointed out that the Investment Banking revenues, or the sales commissions, are volatile. For example, on an ECM deal, or even in DCM transactions, like some of the more recent transactions, the question is how many more deals are we expecting in the future.

And this time last year, if you look at the deal flow in capital markets-related deals in investment banking, the pipeline was relatively weak last year. But since then, the pipeline has expanded.

So as the market stabilizes, and you could say this year was relatively stable compared to last year, once the market stabilizes, I think the volatility in this business will decline.

As for the regulations on investment trusts, there are various media reports at the moment, and my view is that the media and the newspapers do not understand the regulatory discussions.

As for the future framework for the sales of investment trusts, and this momentum to provide adequate disclosure about the sales of investment trusts, there is discussion going on about that.

On the other hand, there are some more detailed specific case by case discussions going on at the same time. The first discussion is about the structure, whereas the second discussion is about more regulatory supervision. And there are some media reports which confuse the two issues, which is leading to some confusion among the readers.

As of today, our view is that, as a securities firm, it's not that there are some new issues arising for securities firms, but it is the new market entrants into the market who sometimes do not conduct adequate disclosure which is leading to complaints.

And as the industry overall, we would like to have the same types of standards be applied in terms of disclosure and also, explaining the various products, which would lead to improving the overall Japanese market.

We are fully cooperative for this trend, and we will cooperate in any way that we can. But as for Nomura, all we have to do is further strengthen the ways we have been disclosing information in the past. So the decline in investment trusts is temporary.

And you expect earlier recovery?

Well, the market environment was extremely weak; that is, we have to accept that. So if the weak market conditions continue, then these weak figures could continue as well. However, despite these weak market conditions by responding to the various needs of our clients, and conducting consulting sales, I think we have proven that that is possible from the Q3 results.

If you compare the market environment of 2012 against 2011 we cannot expect a big improvement. But even if we do not expect the big improvement, once the investors and clients get more used to this kind of volatility, I think we can expect for a certain improvement.

Thank you.

Next, I would like to explain about this large negative figure in the corporate items. Last year, there was a contribution from the subsidiaries, but in this fiscal year the subsidiaries are not contributing. That is one of the big drivers of the negative figure.

As for the funding cost of the liquidity pool, your understanding is correct. There have been some impact from the market changes, especially towards the end of the fiscal year, but we will allocate these charges adequately to the business segments, and we will continue our efforts in that area in the next fiscal year.

Another point is, in Q3, Nomura Holdings issued subordinate bonds, and the bond issuance cost is also included in these corporate items. We are also conducting restructuring, and these also impact this figure, and some of the unallocated costs are included in the corporate items. These are the main reasons for the increase in the figure.

As for the unallocated figures, there are several billion yen of increase quarter on quarter. Is that correct, is my question? And as for the subsidiaries that were affiliates that were contributing in Q1 and Q2, what changed in Q3? Or is the decline in Q3 a temporary one-off trend? Or was Q1 and Q2 exceptionally strong?

Your first point about the contribution from the subsidiaries. There are some subsidiaries which we have set up for funding purposes, and there are some four subsidiaries which we consolidate on our books which are not part of our business segments. For example, subsidiaries which are providing real estate and other facilities.

Usually, these subsidiaries contribute by several billions of yen but, in this fiscal period, the figure was relatively weak, compared to the other quarters.

And for the funding costs for treasury, there has been an increase Q-on-Q in Q3, less than JPY5 billion, but there has been an increase.

Thank you.

I have two points. First of all, cost reduction related question. In Q2, similar question was raised [from us] in terms of cost reduction you said is on track. In Q3 for example, cost through headcount reduction. Was there extra cost because of the restructuring?

Second question pertains to the change in competitive environment which was touched upon, Mr. Shibata, as you concluded the presentation. There would be room for business opportunities for Nomura, because European financial institutions will be concentrating on their [home] markets, and the commercial banks would be focusing on their traditional business. What is being done, or what are you trying to do? What opportunities are you capturing as a result? Could you elaborate on those points? Those are the two questions.

Then the first question will be responded by Miss Nakagawa.

I think there are many ways demarcate, but it's between JPY6 billion to JPY7 billion

When you say JPY6 billion to JPY7 billion, in terms of profit and loss statement item, which line is it included in?

Mainly in personnel expenses.

Thank you very much.

On your second question on the competitive climate, what's happening at the moment? Currently, European banks are faced with shortage in capital adequacy in some cases. And secondly, dollar denominated funding in the market is becoming tighter. Dollar assets that have been accumulated in the past are now on sale. They have no choice, and many are coming out for sale. And third factor, within the eurozone, long-term unsecured funding is becoming ever more difficult because of several reasons.

As a result, what could happen? In order to respond to the new regulatory environment with regards to the first point, banks will try to shrink down the size of the risk-weighted assets.

On the second issue, in Japan and Asia and in the United States, financial institutions in these regions, including large companies and private equity firms, are being offered; they're receiving many offers. There are assets that could be sold. There are assets that cannot be sold, especially when there is a wide spread between the book value versus the market value. There could be some difficulties. Now what significance do these trends have on ourselves? We can service an intermediary on the second factor on dollar denominated funding.

On the third element, fundamentally, there could be various structured products to be sold to capture and cultivate new investorship. And currently, these trends are leading to businesses for Nomura. But what's interesting is that ECB, for three year funding on collateral basis, they would be providing liquidity, they may be providing liquidity. And then at that instance, that a third business opportunity sourcing will decline for Nomura. So there could be negative impact, depending on what steps ECB would take.

Now this is rather immediate, or rather materialistic in terms of immediate profits, but if we step one step back, I cannot give you the name, but one gigantic company of Europe; I talked with the CEO of a large European company, and this CEO says he doesn't know who to talk to now.

This may be an example of commercial banks returning to their traditional business. In other words, so far they took advantage of advantageous funding cost on the part of banks, so banks were able to offer this kind of interest rate as they lent to various European companies.

And that could serve as a seed to gain M&A mandate, or ECM mandate. So that had been somewhat of a business model a few European banks had been pursuing. But suddenly, they had to change direction. On standalone basis, they have to charge interest rate that is normal, or that could be profitable on standalone basis, and ourselves included, independent investment banks like ourselves.

If they can offer high-quality advice, some companies are seeking such high-quality advice. Nomura is beginning to enjoy such benefit, and I'm sure they would be reflected in future potential transactions.

It's not just in Nomura that is enjoying these opportunities; others are also enjoying such opportunities.

There could be many other leeways where we could find other business opportunities to which we are looking forward. For example, it depends on how you look at the picture, but in our Fixed Income business it requires capital, but we want to pursue business opportunities solidly.

On the other hand, in the future there could be various opportunities or various people who would want to back out from the Fixed Income business, because they don't want to use capital. What does that mean for institutional investors? That would mean different people offering liquidity, and the liquidity suppliers becoming different.

We want to continue to provide liquidity to our clients, and that's one means of increasing client revenue, and a means of increasing trading revenue.

Further, Basle 3 and Solvency 2. These new regulatory environments are awaiting us and under the transition of the regulatory environment, during that transition period, costs will naturally, by necessity, be incurred.

There could be various services to minimize those transition costs, and I'm sure that many entities will emerge, one of which is Nomura, because we have in-depth expertise, and because we have a very clean balance sheet. And by tapping on those strengths, we are finding increased business opportunities, which will continue to increase.

Very briefly, I have a supplementary question. According to what I've heard from you, you said that there could be various business opportunities. Are you saying that you expect those to emerge?

We can't really confirm, being an outsider, those opportunities are intangible yet.

When do you think that those opportunities will become tangible?

Rabobank, Tier 1 capital funding, or Milan Bank Popular, rights issue; these opportunities have been captured by ourselves.

Structured products, there could be opportunities there. And already, by gaining permission from the authorities, there are insurance-related projects that are under execution. This is a relatively small project, acquisition of an insurance company, so if you read, or see those opportunities you will find that opportunities are actually being realized.

Because of the nature of these deals, we need to keep the confidentiality, in terms of the name of our clients, so we cannot disclose everything, but already these are opportunities that are very obvious in the pipeline.

Thank you very much.

I have two questions. The first is about the regulations on investment trusts; your regulations on the investment trust products. Now as far as I know, there have been some issues in the way the investment trusts have been sold, but also in terms of the distribution from the investment trusts; there were some issues with the investment trusts themselves. And in these cases, if the nature of the investment trust changes, the distribution-type investment trust change, how much impact will there be?

And my second question is, just going back to the figures that were discussed earlier, the cost reduction schedule on page 17, and the progress you are making, this includes the one-off JPY6 billion to JPY7 billion cost increase that you mentioned. Should we assume that JPY6 billion or JPY7 billion is included in these figures?

I will address the first question, and I will have Nakagawa-san address the second point.

The regulations on the investment trust sales, this is important. As you pointed out, there have been some issues in design, or the structure of the investment trusts, and there have to be some improvements made in the industry.

If you look at Nomura Asset Management, I used to be Head of Nomura Assets, so I am familiar, but when the investment trusts, which were problematic in terms of distribution, were launched, Nomura Asset Management was not involved in such products.

We were somewhat late, and we were determined not to be involved in such products. So as far as Nomura goes, we are not exposed to investment trusts that are structured so that the payout of the principal is used as the payout of the distribution.

However, there are cases where the investment trusts, or the managers, cannot pay out the distribution according to the initial plan. And if you look at the period from October to December last year, there have been six such products.

But this was not because of the structure of the investment trust; this was due to the decline in returns from the underlying assets. In the overall industry, there are more than 100 investment trust products that have reduced their distribution, or their dividends.

In November, we launched an investment trust, Global High Yield, which has equities as underlying assets, and also uses call transactions. There have been quite strong needs for this product, and in Q3 we sold around JPY80 billion, and as of today, it is still popular.

So from Nomura's standpoint, these tightenings in the regulations help improve the quality of the investment trust products, and it also improves the sales attitude of our people when they face their clients. It is also beneficial to the overall industry, not just for Nomura.

As for your second point about cost cutting and the restructuring costs for pursuing the cost reduction, the restructuring costs are not included in the $1.2 billion of cost cutting. But as you can see from the Q3 results, the restructuring costs that I explained earlier have been absorbed by the cost reduction benefits. The benefits have far outweighed the restructuring costs.

And it will probably be next fiscal year onwards that you'll actually see the concrete results of the cost cutting, but we will continue to make our efforts.

Thank you.

We are approaching the closing time and, therefore, the next person's question will be the final question. Daiwa Securities Capital Markets, Mr. Shiota.

On Global Markets, trading October/December was good, but from the flow revenue didn't grow so robustly. But since the beginning of January, how has the market been? Liquidity is back, but could you describe the most recent performance? That's the first point.

Secondly, sorry for repeating the same question, but this is once again with regards to regulation of the investment trust. If you have numerics we would very much appreciate. Distribution type of investment trust product, what's the ratio of your investment trust products that would be deemed to be problematic?

Now the first question, it's difficult to respond, but on the current market environment, during the course of the year last year, traditional [long only] investors and hedge fund investors were on a strike, in effect. But then, since the beginning of January, they've become much healthier and active.

And what about the most recent trend, and I think this applies to our peers as well? Fixed income transactions were quite significant in January, and I think this view is shared within this industry, I would assume.

For equity as well, we are seeing comeback, but not to the extent that we can celebrate with a glass of champagne. For example, TSE turnover, take a look at those numbers, and much of that is accounted for by proxy.

And also on investment trust products, what's the percentage of investment trust which may be judged as being bogusly or falsely dividended?

Nomura Asset, as I said at the beginning, offers monthly distribution investment trust, but they were a latecomer. So half of the total assets yet are accounted for by monthly dividend type. 70% is the industry-wide average, while that at Nomura Asset is about 50%. So currency choice type, we think Nomura Asset Management's assets account for 40% of the equity investment trust products, and from those numbers you may be able to do your own calculation for your own assumption.

Thank you very much.

This is Shibata again. It's late in the evening, and thank you very much for participating for a long time in today's conference call.

Moving into Q4, we will continue to make efforts to improve our results. And from next April onwards, we will start our new fiscal year under a new cost structure, and we will strive to achieve revenues similar to what we achieved in Q3 of this fiscal year. Thank you very much.

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

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.