Nomura Holdings Inc (NMR) 2012 Q4 法說會逐字稿

Good day everyone and welcome to today's Nomura Holdings fourth-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 telephone lines are placed for a listen-only mode. The question and answer session will be held after the presentation.

Please note that this telephone conference contains certain forward-looking statements and other projected results which involve known and unknown risks, delays, uncertainties and other factors not under the Company's control, which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or other expectations implied by these projections.

Such factors include economic and market conditions; political events and investor sentiments; liquidity of secondary markets; level and volatility of interest rates; currency exchange rates; security evaluations; competitive conditions in size; number and timing of transactions.

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

This is Takumi Shibata, Group COO. I was able to rearrange my schedule today to join the call and because I am attending some of you may think that we are going to make an important announcement. Well, don't worry, we are not going to. As we did on the call last quarter, I will first say a few words and then hand over to our CFO, Mr. Junko Nakagawa, to discuss the highlights of our fourth-quarter and full-year results. And after that we will take your questions.

In the fourth quarter all business divisions were profitable on a pre-tax basis for the second straight quarter. Revenues and pre-tax income increased both quarter on quarter and year on year. Retail booked a strong increase in revenues compared to the previous quarter as we further enhanced our product offering and responded to the needs of our diverse client base.

Asset management reported a rise in assets under management and delivered stable revenues. Wholesale reported higher revenues and pre-tax income on robust client flows and trading in both fixed income and equities. Investment banking continued to execute cross-border global transactions. Although we faced a challenging second quarter due to the eurozone debt crisis, business rebounded in the second half of the year and we were profitable on a full-year basis.

Our $1.2b cost-reduction program is progressing on schedule, and in anticipation of tighter regulations we have reduced risk weighted assets and strengthened our risk management.

As I said on the call last quarter, the effects of the downgrade by Moody's has been limited in terms of posting additional collateral, trading revenues and funding costs. Looking ahead, we will maintain our robust financial position and abundant liquidity while focusing on serving our clients as Asia's global investment bank.

Now I will hand over our CFO, Junko Nakagawa to give you an overview of our results.

(Interpreted). This is Nakagawa speaking, CFO. Very nice to be given this opportunity. I would like to now present you an overview of our results for the fourth quarter and full year ended March 2012. Please turn to page three of the document entitled Consolidated Results of Operations.

All business divisions were profitable on a pre-tax basis in the fourth quarter, while firm-wide revenues of net income increased both quarter-on-quarter and year-on-year basis. Net revenue in the fourth quarter increased 23% from the prior quarter to JPY499b. Pre-tax income increased 76% to JPY60.8b and net income rose 24% to JPY22.1b. As shown on the right, pre-tax income rebounded in the third and fourth quarters after bottoming out in Q2.

Full-year net revenue was JPY1,535.9b, representing an increase of 36% from the previous year, due to the conversion of Nomura Land and Building into a subsidiary of Nomura Holdings. Pre-tax income declined 9% year on year to JPY85b, as a result of the difficult second quarter in Wholesale. Net income declined 60% from the previous year to JPY11.6b, due primarily to a JPY13.3b decline in pre-tax income resulting from a reform of corporate tax system in Japan.

Pages four and five give the overview of results in breakdown by business segment. Please turn to page six for outline of results in the Retail segment. Pages six and seven are on Retail.

Fourth quarter net revenue in Retail was JPY92.4b, an increase of 16% over the previous quarter. Income before income taxes jumped 101% to JPY20.3b. Product offering was further enhanced during the quarter. We also continued to offer consulting-based services to respond to the diverse needs of our clients. As a result, Retail client assets increased by JPY191b, representing the eighth straight quarter of net inflows.

For the full year net revenue declined 11% to JPY350.3b, due to a slowdown in the second and third quarters, which were affected by market conditions. Although pre-tax income declined 38% from the prior year to JPY63.1b, Retail continued to make significant contributions to firm-wide earnings.

Asset management results are shown on pages eight and nine. Fourth quarter net revenue was JPY15.7b, up 3% quarter on quarter. Pre-tax income was down 3% at JPY4.1b. The decline was very small. Increase in revenues was driven by JPY2 trillion rise in assets under management from the end of December to JPY24.6 trillion at the end of March.

We continue to diversify distribution channels. Assets under management distributed through the bank channel are showing steady growth and the number of national institutions in our distribution network increased. Despite the challenging market conditions full-year net revenue was down only 1% at JPY65.8b. Pre-tax income increased 2% year on year to JPY20.5bn on stronger inflows and drive to contain costs.

Page 10 is on Wholesale results. Net revenue in Wholesale declined 10% sequentially to JPY159.2b. Pre-tax income declined 67% to JPY12.5b. However, excluding the gain related to our private equity business booked in Q3 revenues and profits increased quarter on quarter.

The Americas and EMEA both reported steady rebound in revenues, with EMEA booking its highest revenue in four quarters and Americas booking its strongest quarter four revenues since April '09, as shown on the bottom left. On a full year basis net revenue declined 12% to JPY555.9b as results were impacted by first-half performance due to the European crisis. Loss before income tax was JPY36.6b (sic - see presentation).

Please turn to page 11 for breakdown of the Wholesale business, first, on Global Markets. Global Markets reported its best quarter for revenues in six quarters. Net revenue of JPY139.3b represents a 17% increase quarter on quarter. Pre-tax income jumped 140% to JPY20.2b.

Fixed income net revenue increased by 22% compared to the third quarter on strong growth in global rates and a rebound in revenues from securitized products. Equities revenue grew 30% quarter on quarter, driven by Japan and Asia, as well as by a rebound in both client revenues and trading revenues.

Page 12 gives the outline on half-yearly revenues by region for both fixed income and equities. As shown, both fixed income and equities revenues, mainly in our international business, rebounded strongly in the second half of the year.

Next, Investment Banking on page 13. Investment Banking gross revenue declined 10% quarter-on-quarter to JPY40.5b. Although pre-tax losses of JPY7.6b were reported, Investment Banking has made steady progress in reducing expenses and non-financial expenses have been trending down quarter after quarter. Revenues from ECM deals increased both in Japan and internationally and steady increase in cross-border deals was seen.

Page 14. These are some of the noteworthy deals on which we acted as joint book runner or advisor during the past year. As shown in the center bottom, we acted as the joint advisor to Xstrata on its $48.9b merger with Glencore, the largest M&A transaction ever in the mining industry. And, as shown on the left, we were involved in a number of capital-raising transactions for large European financial institutions.

Also this is to continue growing revenues through closer cross-border collaboration and by working more closely in global sectors, such as financial institution groups, natural resources and power and financial sponsors.

Please turn to page 15 for an overview of our non-interest expenses. Fourth quarter non-interest expenses increased 18% quarter on quarter to JPY438.2b, primarily due to an increase in the cost of goods sold on the back of robust real estate sales at our newly-consolidated entities. Non-interest expenses excluding newly-consolidated entities declined 0.2% quarter on quarter, as shown by the dark blue bars in the graph on the right.

Full-year, non-interest expenses were JPY1.45 trillion, up 40% year on year, due to the impact of expenses related to the newly-consolidated entities. Excluding that non-interest expenses declined 5% from last year.

Page 16 shows you the progress of our cost-reduction program. Our $1.2b cost-reduction program announced last July and November continues to progress as planned. We will continue to implement this program in order to lower our breakeven point.

Turning now to our balance sheet on page 17, total assets at the end of the quarter was JPY35.7 trillion, gross leverage was 16.9 times and net leverage was 10.4 times. The bottom-left chart shows capital ratios as at the end of March. Our tier-one ratio under Basel 2.5 was 14.1% and our tier-one common ratio was 12.2%. We continued to maintain high capital ratios.

Please turn to page 18 for an overview of funding and liquidity. The top-left chart shows that 78% of our balance sheet is made up of highly liquid trading assets. Please see the chart on the bottom right. About 80% of our unsecured funding is in the form of long-term debt and we ensure stability by diversifying our funding.

Our liquidity portfolio at the end of March remained high at $66b, representing around 15% of total assets. We also continue to hold about the same amount of excess liquidity as last year, which is sufficient to respond to a liquidity stress event.

Lastly, please turn to page 19 for an update on our exposure to peripheral Europe. Our net country exposure as at the end of March was $1.53b, roughly flat compared to the $1.52b exposure at the end of December. Our inventory is all marked to market on a daily basis as trading assets and we manage our positions stringently. We will continue to manage risk stringently by closely monitoring credit conditions in each country, liquidity, the maturity profile of our exposure and other factors.

That concludes today's presentation of the highlights.

As noted in today's financial highlights document and press releases, our annual dividend for the year ended March 2012 will be JPY6 per share. Our year-end dividend of JPY2 per share will be paid to shareholders on record as of the end of March.

This is Shibata again. We expect the revenue environment to remain challenging and competitive environment to transform significantly. The competitive environment will transform significantly. Given this, we will pursue a narrow and deep strategy focused on business areas where we can deliver added value to our clients.

More specifically, our narrow and deep strategy consists of the following three elements. First, as the only global investment bank based in Asia we will leverage our dominant position in Japan to increase our market share across the rest of Asia.

Second, in business segments where we can offer value to our clients we will concentrate client coverage and provide competitive products and services. Third, we will step up global cross-divisional collaboration among Wholesale, Asset Management and Retail. And the entire firm, including top management, will focus on serving our clients in order to deliver our full capabilities.

As Asia's global investment bank -- global financial services group we will heighten our focus on our core businesses in our international operations and enhance our products and services that offer added value to our clients. We will anticipate changes to the revenue environment and make decisions quickly to aim for growth with sustainable profits.

In conclusion, Nomura's unchanging long-term commitment is to remain client centric. Thank you. And now we would like to open the line to questions.

(Operator Instructions).

I have two questions, first of all, fixed income trading. In comparison of your share against your peers and the level of revenue quarter-on-quarter basis, relative share seems to be declining at Nomura Holdings. Comparing Q3 and Q4 it used to be your practice to disclose the level of revenue which is accompanied by client trading. Could you give us those numbers?

The second is on funding policy. In comparison to the first half the dividend to be paid out for the second half has been reduced. In the first half losses were recorded and restructuring had been announced, but in the second half you've been able to generate approximately JPY40b of profit. Why did you decide on reduction of dividend against the backdrop of generating profits?

Those two points are of extreme importance. First of all, on the relative position of Nomura or our share in fixed income, that was already factored into our assumption to begin with. The basic thinking is as follows.

We hold relatively small positions to respond to customer requirements for market making. That is the central strategy or policy. Between January and March the European Central Bank had offered LPRO operations, which, in turn, had made a significant impact not only to fixed income, but to the equities side, which had triggered somewhat of a bull market in the equity market. And under such phases, in principle, those who hold large positions can enjoy larger profits under such circumstances. We understand that well and that actually prevailed as a phenomenon.

And based upon the way we manage our balance sheet this was a natural outcome. And we don't have a culture of drastically taking in significantly large positions, so this is a natural phenomena that occurs because of our policy as such.

Now, as far as revenues from clients are concerned in fixed income, I think your question was whether it's declining. No, it is not declining, so rest assured.

And on dividend payout, first of all, the policy is to focus on how much we pay per year and the target JPY8 has now been reduced to JPY6 per share. In the -- in other words, this is not a dividend that is allocated between the two halves depending on the level of profit generated.

Now, why did we choose to reduce the total amount of dividend? Because we are in a state of flux in terms of regulatory environment and because we believe that this change in regulation will continue. The regulation can only become more stringent and not the other way around. And since the beginning of this fiscal year in April the impact from ECBs LTRO has diminished somewhat and, therefore, the European turmoil may become re-emerging.

There are concerns of re-emergence of European crisis and there are some institutional investors that are reducing its risk position. So on top of the regulatory environment the increased uncertainty in the European market has prevailed and that is the backdrop to our decision on dividend.

So it was rather regrettable and against our policy, but we had to reduce dividend. You may feel skeptical about the financial position of Nomura. You may question whether we'd be able to comfortably achieve Basel 3. There could be such voices, but I will deny any such factor within Nomura. So this is purely to respond to the regulatory environment and our perspective on the outlook of the market.

Percentage of client flow; there's hardly been any change. Q1 is slightly over half, unchanged, so against total revenue client flow business accounts for about 63% in Q4.

If I may add, fixed income client level, the amount itself is more or less flat in comparison to the third quarter. However, the ratio of client revenue in comparison to trading revenue has gone down. In other words, there was strong growth in trading and, therefore, the amount didn't change but the ratio had declined. On the other hand, trading revenue was robust. Thank you very much.

I have a follow-up question on both point one and point two. Q3 and Q4 order flow from clients increased according to some of your peers. Does that apply to yours, or not? Is it correct to consider that there was not much activity at Nomura? But then in the month of April your peers have found it quite difficult to capture such customer flows. What about Nomura? In comparison to the January/March quarter how has April been? And have you seen any change in trend? That's my first point.

Secondly, surcharge under Basel 3 was said to become 1%, so 7% plus 1%, plus 1% buffer, would have meant 9% as the target. That had been the general assumption. But even if we use the '07 or 19-year baseline do you think that you would need to adequately have capital of over and beyond 9%? Has your assumption changed in terms of Basel requirement?

First of all, Q3 and Q4 the client flow in fixed income, if I could give you an overall summary. Q3 that ends in December. We were put in quite a harsh market climate and there were many financial institutions that struggled in the midst of such difficulty. And even then, fortunately, we were able to quite efficiently capture the requirements of the customers. On top of that, in structured business revenues were quite strong.

In addition, in Q4 LTRO was a blessing and, for example, in continental Europe the banking sector's financial requirement disappeared and structured business declined quite significantly. But then, on the other hand, flow product business became quite robust.

You asked a comment as regards to how we feel about the performance of April. I think there are mixed situations depending on the institution. But for ourselves we think that the beginning of this fiscal year has been relatively healthy as far as fixed income is concerned. And in equity business there has been the Easter holidays in April and risk aversion generally speaking amongst institutional investors has led to reduction of transaction volume in the market in general. So in that sense for the equity business April might prove to be quite a challenging month for us as we close our books.

IB; there is seasonality in Investment Banking and the first quarter tends to be a slow quarter generally speaking. Having said so, however, April, May Japanese ECM deals or international deals in the pipeline are building up to a certain extent.

For example, since last October to last March, during those months in Europe seven rights offers came to the market, and, of those, we have been involved in five deals as manager. And, of them, in three deals we served as the global coordinator. And therefore to a certain extent we do have some items in the pipeline in Investment Banking as we had assumed. Thank you.

As for your second question about dividends and targets under Basel 3 and the impact on our targets, as we mentioned earlier, this is not due to changes in the way we view the targets. And as we mentioned today, on page 17 of the presentation, tier-one ratio, tier-one common ratio have both been stable compared to December end. So, as Mr. Shibata mentioned at the beginning, we will -- we have made decisions based on our outlook on the future. Thank you very much.

Thank you, Mr. Muraki, from Deutsche Securities.

The next question is from Ms. Tsujino from JP Morgan Securities.

I have two major points. The first question is -- this may be somewhat overlap with the previous discussion. But the tier-one common ratio under Basel 3, the risk-weighted assets have -- seem to have -- you have been able to cut down the risk-weighted assets more than 8% as at December end. What is the current status?

And based on that, the risk-weighted assets under Basel 3 basis, the decline in risk-weighted assets, I think you still had some way to go in the cutting of risk-weighted assets. How much progress have you made? And how much improvement can you make -- further improvement can you make?

My second question is based on the profit or income according to the accounting income. The income seems to be quite large based on -- the accounting income seems to be quite large. If you look at page 18 of the financial statements, at the bottom section you show the business segment total and the accounting income or income based on the accounting, and you also show the breakdown. And in that you have the Others portion, which is up JPY19b.

In Q4 it was up JPY44.9b and this includes DVA, so if you deduct DVA it's JPY11.3b and JPY28.9b respectively. So there's an improvement of close to JPY40b. And if you look at the total income of the business segments and improvement, and if you compare that with the improvement in the accounting income, I think you touched upon it briefly in your presentation.

But the real estate subsidiaries that have been consolidated and the improvement in income as a result of that, but also the non-business segment improvement in the profits. I think this is the reason for the improvement, but what is the breakdown between the real estate subsidiary that were consolidated and the non-business segment income improvement?

Well, first of all, the way we view the Basel 3, as of March end the tier-one common -- tier-one and tier-one common, what we call -- the so-called tier-one capital and the tier-one common have both been above 10%. So in that sense the risk-weighted assets has been reduced and we are seeing the positive results of this reduction.

If you look at a presentations by typical financial institutions they say that they will comply with Basel 3 by such and such a date. And in order to do that they will reduce their risk-weighted assets by a certain date and they will build up their retained earnings. This is a typical presentation by a financial institution. But as for Nomura for both tier-one and tier-one common we have levels that are above 10%. So we are not in the position that we have to lower our risk-weighted assets.

What we will do is we will control our total level of risk-weighted assets and focus our assets on more productive, more efficient assets. I think that will be the challenge for us in the future.

If I could just add on my first question. So you say you do not need to reduce your risk-weighted assets further. But if you compare December to March there has been a significant improvement. This is the positive result of the reduction in risk-weighted assets. Is that right and you do not need to reduce risk-weighted assets further?

Yes, that's precisely right. Let me address your second point, page 18 of our financial disclosure -- financial results. The other businesses, which do not belong to the business segments, are -- as you pointed out, it includes Nomura Real Estate (inaudible). And as you guessed it also includes some of the other Group companies. And unfortunately we do not disclose the results of each specific Group company.

But to give you -- or for your information we can explain what kind of companies are included in this Others portion, for example, Nomura Trust and Banking, Nomura Luxembourg, these banking business companies. In order to build the foundation of these banking business these companies serve as building the foundation of the banking business and these are included. Nomura Babcock & Brown, for example, are included, which are based in each region and, as we pointed out, Nomura Fudosan, Nomura Real Estate.

We have some other companies. For example, within our Group we have a full subsidiary -- 100% subsidiary which manages our real estate properties, especially for the branches. And there's a team that supports the property management which is also included in this Others portion. And in Q4 all of these Group companies have made some contribution to the overall revenue. So each of our Group companies has generated good results and, as a result, we have seen improvement in our financial results.

So Nomura Land and Building or Nomura Real Estate Holdings, as we mentioned earlier, this is included in the Others of the business segment revenue or business segment income. And there has been an improvement -- or contribution of close to JPY10b, I think. So the remaining portion is -- as you mentioned, it's from Nomura Trust, Nomura Luxembourg, the banking-related businesses.

And there is some hedging related evaluation P&L, which you do not have to mark to market based on the accounting standards. Is this the correct way to understand this?

Yes, that's right.

Thank you.

Next question is by Shiota San of Daiwa Capital Markets. Mr. Shiota, please.

Yes, I have two questions. On page 10 of the presentation material you have the region-based revenues for Wholesale business. In the Americas and EMEA there has been increase between Q3 and Q4. And in Japan and Asia, especially in Japan, there has been a decline. Why? What's the reason behind? That's point one.

Secondly, this has already been touched upon, but reduction of dividend. According to what was mentioned by Mr. Shibata you mention that you took into consideration the market outlook and the changing regulatory environment to be well prepared. But, for example, in the case of US investment banks there are several institutions that are reinforcing their return to shareholders.

And you're going to have enough capital of more than 10% on capital 3 basis. And whilst your international peers are doing more in terms of shareholder return, thinking about your capital base I don't think that you need to be better prepared than you are today. Do you think you need to? Those are the two questions.

Let me take the second question first. This is Shibata speaking. And it is true that if a zero dividend is to be continued for some time and then in the way of a token dividend, slowly and slowly shareholder benefits are being increased, that's what some of our peers are doing.

And outflow of capital to outside of financial institutions is something that the regulatory authorities are wishing to prevent. And we're beginning to see those moves. So, although not insignificant amounts, there are several financial institutions that wish to return some benefits to the shareholders because of such regulatory move.

Dividend yield at Nomura has reached a certain level and payout ratio was relatively high, so those factors were taken into consideration as we delivered that decision. In short, in comparison to western peers you're probably hinting that our direction is reverse, or to the contrary, but we don't think so.

And your question indirectly implies that you may be guessing that we may increase capital. Have we factored in such nuance as we made the decision on dividend? I think you're implying that point. And, clearly put, we are not in any circumstances where we need to increase capital and this decision was purely done purely as we anticipate the changes in the regulatory front and the situation to unfold in Europe.

Now, coming to your initial question, Q3 was quite robust in Japan and that was purely because and only for the Skylark deal which was booked in Q3. And that had been the swing factor. Generally speaking, Investment Banking even without that had been doing well and on the fixed income side the exchange rate had proven to be somewhat difficult. But we weren't able to make as much money as we had intended to. So the biggest swing factor had been Skylark.

Thank you. I have follow ups on questions one and two. On question one, conversely speaking, if we want to see increase in dividend what requirements would have to be met for you to decide on increase in dividend? I don't feel that you need to increase capital because of your current capital adequacy, dividend ratio being high. What are the hurdles that you need to overcome in order for you to decide on increasing capital?

On the second point, what do you think about Asia?

What's your specific question on Asia for the second question?

Well, Asia as a region, although slightly, seems to have experienced a slight decline in Wholesale business between Q3 and Q4. What's the reason behind?

[AEJ] your question is understood. Now fixed income was quite robust in Q3 in Asia excluding Japan. However, that robustness slightly diminished in Q3. More specifically, currency rate and customer business, and the position in currency market, led us to enjoy high revenues in Q3, but that impact was diluted in Q4. So that's my comment with regards to Asia.

And on the expectations for increase in dividend, we have announced our dividend policy and it all boils down to our dividend payout policy.

Now quite esoteric words I use, making the policy rather ambiguous. But payout ratio is a yardstick we use. And at this current moment, if we look at this in perspective, for example, on full-year basis, net income JPY11.6b. This term due to tax reform in Japan net income declines by JPY13.3b.

So without this it would have been JPY24.9b and full-year dividend JPY6 per share, making the payout ratio 88%. So that's quite close to the ceiling. So in order for us to decide on increase of dividend at 30% have a system in place where we can comfortably pay dividend. And we are on our way to reduce $1.2b worth of expenses and the deep and narrow strategy will be further reinforced. Thank you very much.

The next question is from Mr. Sasaki from Mitsubishi USA, Morgan Stanley Securities.

Can you hear me?

Yes, we hear you well.

I have one question. On page 16 of the presentation you describe the progress in the cost-reduction program. Up to Q4 you have reduced costs by roughly 80%, eight zero. On your P&L statement when will the expenses actually decline and what will the size of the reduction be?

For example, in the next -- or current fiscal year will there be a decline of $1.2b in your expenses, or will it be about a half? Will it be from the second half of the year? Could you explain the size and the timing of the cost reduction on your P&L?

Well, as for the progress of cost reductions, we have made roughly 80% progress and this is on track to being completed.

As for the effects of the cost reduction, we explain on page 15 on the non-interest expenses. Unfortunately, there is some impact of the newly-consolidated companies, so it's hard to make an apples-to-apples comparison. But the personnel expenses Q1, Q2 there's some ups and downs depending on the quarter, but if you look at the trends in Q3 and Q4 we have described their progress as shown on page 15. And in Q3/Q4 there have been some costs related to restructuring which we have booked and the figures on page 15 includes these restructuring costs. Going forward we will continue to work on the remaining 19% cost reduction.

As for the personnel expenses, we are expecting to finish the cost reduction a little bit earlier than expected. But the actual effects of the cost reduction will be seen towards the latter half of the first half, or maybe from the second half. So Q2, Q3, Q4 if you compare the gap between the quarters I think there will not be a further reduction as we saw in Q2, Q3, Q4 last year. But the current level will continue for a while.

As for the other costs -- other expenses, for example, the interest and the commissions/fees that we pay, this tends to go up if our trading revenues go up. So these are necessary costs related to our business and we will control the costs, but there is a possibility that these costs will increase.

As for real estate related expenses, there has been some media coverage in the US, so some of you may be aware. But we have made a move -- or we are planning to move part of our businesses and there will be some costs in relation to moving our business in the US, relocating our business, but we will control the costs related to this relocation so that they do not wipe out the positive results of our main line of business.

So does that mean for the restructuring costs -- how much restructuring costs will be -- or have been booked in Q3 and Q4? And just to confirm in the current fiscal year from the second half of this year there will be further decline in your costs. Is this the way to understand this?

In Q3 we explained the cost reduction to about JPY5b to JPY6b and for Q4 we have -- you can assume a similar level. The restructuring costs are incurred from various reasons, various items, so it's hard to clarify/define the restructuring costs. But we believe the restructuring costs were roughly JPY5b to JPY6b in Q4.

As for timing, the effects of the cost reduction will be seen from Q2 in full effect. Yes, sorry, I didn't address your second half of the question. Yes, we are expecting the full effect to be seen from the second half of this current fiscal year. Thank you.

Merrill Lynch, Okamoto San will ask the next question. Mr. Okamoto.

Thank you very much. I want to confirm numbers. That's my first question. Segmented expenses have been disclosed. My question is Wholesale expense increase, the factor behind. And I have a related question.

According to what you explained if you exclude the newly-consolidated there has been a decline by 0.5%. And would that reduction of expenses be categorized in the Others item? And if the restructuring expenses remain unchanged what would be the changes that are caused in Others? So what's the decline in expense effect that you've been able to achieve in Others, excluding the newly-consolidated subs?

Mr. Shibata says that you don't foresee robustness in the market, but JPY12.5b pre-tax income has been enjoyed by Wholesale. But if you're not that overly optimistic how do you intend to uplift the revenues of Wholesale from the current level? What's the strategy as you try to expand upon the revenues generated by wholesale?

Then Nakagawa will respond to your first question.

Q4 expenses increased at Wholesale and I think your question was the factor behind. Is that correct?

Yes.

As I explained on page 15, I touched upon this aspect slightly, that global markets revenue was relatively healthy and, accompanying that, commissions and fees paid and inter-company or exchange of money between ourselves and clients increased. And real estate related expenditure New York relocation related rent and some cost incurred for the relocation had been the major factors behind the increase in Q4.

And at the same time restructuring expenses as the weight of the factor it's more or less the same. But non-personnel expenses there had been a few items where we saw increase and, therefore, as a result the whole expense in Wholesale. And at the end of the fiscal year there are seasonal factors that push up expenses, so Wholesale in general has increased.

Personnel expenses are being well managed at appropriate level. And in your latter half of question one, where or in what items will these appear? And cost of sales Others to be included; that point was touched upon already. But other factors would be related to consolidation, so personnel commissions and fees paid, real estate related, business development related expenses, all Group companies will incur certain expenses.

So Nomura Land and Building related expenses will not, as a lump sum, be booked in Others. They will be dispersed. So a 0.2% increase is shown in personnel expenses. But if we exclude the newly-consolidated subs the actual baseline personnel expenses had declined somewhat. Thank you.

Shibata speaking, let me try to respond to your question. The quarter that ends in March we cannot deny the probability or possibility that there was a bear market rally. LTRO is not so frequently offered several times a year. And fixed income equity and investment banking in each business area strategies are necessary.

And especially in fixed income in the quarter ended December we with agility responded to the trend of the customers and served them well. That trading style can be effective when the market is under certain a condition.

And in terms of equity, with volume coming down as they have been, some kind of new source of revenue has to be discovered without having to make fresh investments. And already there are few deals under negotiation but, basically, they are solution-based businesses for management of companies, a way of catering to the customer requirements. So there are diverse customer needs.

And also the size of the deal tends to become small. So even if order is placed by customers, when the size of the deal is small they tend to incur losses. So trading risk management must be well done.

And on the last point related to Investment Banking, on year-on-year basis in the previous term in international Investment Banking business in the previous year there had been significant progress made. Yet, however, ECM deals originating from Japan or issuance-related Japanese business had been reduced to almost half in the general market.

So normalization of the Japanese market can be, to a certain extent, expected. And, further, in the international arena much progress has already been made and this year's M&A deals we served as -- we will be serving as the advisor of the two biggest deals. And the European financial crisis for ourselves had proven to be an opportunity.

Banco de Sabadell or a few rights issue deals were deals in which we had played leading roles and we think that there would be more such deals to come. So in Investment Banking the international business will continue to be strong and in Japan we believe that the market will recover in comparison to the term ended.

So to a significant effect we think that the key would be how we can respond to the low volume in the equity business. That would be the key to success in this fiscal year. Thank you very much.

The next question is from Mr. Yamanaka from Credit Suisse.

Just one question from me. When you were talking about your capital, the tightening in the regulations, you mentioned the tightening of regulations going forward and in terms of what will have an impact on Nomura. What kind of risk scenarios you have in mind in relation to the tightening of regulations? Could you explain what risks you have in mind?

Well, first of all, Basel 3 and the FSB-related discussions. Well, the discussions are pretty much over for capital for the non-regulated financial institutions. And going forward the discussions will focus on the so-called non-bank banks and the regulations for this non-bank banks are expected to become tighter. And the impact that will have on Nomura will be limited. It will only be some indirect impact.

There may be some additional capital burden on our exposure to non-banks. And in the future FSB discussions I think the main topic will be recovery and resolution mechanism. For example, if the capital levels of a financial institution falls how to recover that level is going to be the question and there are various discussions going on. For example, bond products like CoCos that can be added to the capital base, or senior unsecured bonds -- the bail ins of the senior unsecured bonds.

And as for the resolution side there is a discussion about living will and some banks will be forced to write their living will, for example, banks that have branches globally [or] subsidiaries globally. If there's a treaty that covers all of this -- the global operations it would work. But there is no such treaty, therefore, there is the need for ring fencing.

For example, in the UK capital levels in the UK or capital levels in Singapore the operations in each region of the globe will need some additional buffer in each location. I think there's a high possibility of this happening. And as well there's the liquidity regulations in each region which will require banks to hold a certain amount of cash on hand. So there's the discussion about global capital management and global treasury operations. The effectiveness of the management will be diminished.

So in answer to your question, first of all, although it is unclear about what will happen, I think there will be some changes in the non-bank regulation -- non-bank bank regulations. And for the recovery and resolution regime the ring fencing of capital and liquidity is possible. Thank you.

Well, this is Shibata again. Thank you very much for attending today's conference call for such a long time and thank you very much for your very meaningful questions.

Going forward we will continue our efforts in cost reduction and we will continue to focus -- make our business narrow and deep and we will continue to be client centric. And we will continue to develop a very strong financial base. And as the global investment bank based in Asia and as a financial services institution we would like to continue our efforts. Thank you very much for participating in the call today.

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

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.