Nomura Holdings Inc (NMR) 2014 Q1 法說會逐字稿

Good day, everyone and welcome to today's Nomura Holdings' first quarter operating results for fiscal year ending March 2014 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 telephone lines are placed for listen-only mode. A 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 the interest rates, currency exchange rates, security evaluations, competitive conditions, and size, number and timing of transactions.

With that, we like to begin the conference. Mr. Shigesuke Kashiwagi, please go ahead.

This is Shigesuke Kashiwagi, CFO. Thank you very much for participating on Friday evening. I will now give you an overview of our financial results for the first quarter of the year ending March 2014 using the document titled consolidated results of operations.

Please turn to page 3. For the first quarter, we reported a significant increase in both revenue and income compared to the same period last year driven by a strong contribution from our Japan businesses, particularly retail. First quarter net revenue was JPY431.3 billion, income before income taxes was JPY113.2 billion, and net income was JPY65.9 billion. Annualized ROE for the quarter was 11.3%. Following a secondary offering of shares in March, Nomura Real Estate Holdings was converted from a consolidated subsidiary into an equity method affiliate.

Accordingly, from the first quarter of this year, Nomura Real Estate Holdings' operating revenues, expenses, and net income will no longer be fully reflected in our consolidated results. Instead, only approximately 34% of the Company's net income will be included in our net revenue as equity in earnings of affiliates. As a result of this deconsolidation and a one-off gain of JPY51.1 billion from the secondary offering in the previous quarter, both net revenue and income before income taxes declined quarter-on-quarter.

Net revenue from the three business segments was JPY381.1 billion and income before income taxes was JPY113 billion, exceeding the already strong previous quarter. As shown on the right, three segment income before income taxes has increased for four straight quarters and was at the highest level since the quarter ended June 2007. The performance of each business is shown from page 6 onwards, which I will discuss in a moment. For now, please turn to page 4 for an overview of our results.

As I said, because we booked a one-off gain last quarter on the secondary offering of Nomura Real Estate Holdings' shares, and as the Company has been deconsolidated from this quarter, net revenue and the income before income taxes declined on a quarter-on-quarter basis. However, as shown on the far right, we reported a substantial profit improvement on a year-on-year basis.

Please turn to page 5 for our business segment results. As shown at the bottom of the page, we booked full career retirement related expenses of JPY9 billion during the first quarter. To-date, our internal rules stipulated that when a person left the firm voluntarily, they would forfeit stock options and other deferred compensation at the time of their resignation. However, this year, we have introduced full career retirement provisions, which permit the recipients of the awards to continue to vest in the awards upon voluntary termination if certain criteria based on corporate title and length of service within Nomura are met. This is standard practice among our international peers.

By introducing this provision, even though compensation payments will be deferred, we have to recognize the full expense at the time the criteria are met. We expect these expenses to arrive each year in the April-June quarter when deferred compensation is granted. However, the total amount will differ depending on the firm's full year performance and total compensation levels. The Other segment includes a gain of JPY5.9 billion as a result of changes to our own and our counterparty credit spreads, the main factor being a slight widening of our own credit spread.

Please turn to page 6 for our business segment results. Retail net revenue was JPY166.3 billion, up 20% from last quarter. Income before income taxes grew 42% to JPY81.1 billion, representing the best quarter since we started disclosing quarterly results in the year ended March 2002. The market rally in Japan in April and May drove robust sales of stocks and equity-related investment trusts. Total sales for the quarter reached approximately JPY7 trillion as we continue to deliver products tailored to client needs.

The graph on the bottom left of page 7 shows net asset inflows of JPY188.1 billion and investment trust inflows of JPY262.1 billion, demonstrating solid net inflows amid the market rally when some investors sold to lock in profit. The graph on the bottom right shows recurring revenue, a key performance indicator, which was JPY13.8 billion. This puts us ahead of plan as we work towards our revenue target for the year ending March 2016.

Please turn to pages 8 and 9 for asset management. Net revenue in asset management increased 10% quarter-on-quarter to JPY20.2 billion. This represents our best quarter since March 2008 driven by dividend income and an expansion in assets under management. Income before income taxes grew 71% to JPY6.7 billion, and profits remained strong despite the full career retirement related expenses I mentioned earlier. Inflows into the investment trust business totaled JPY406 billion and the investment advisory business booked inflows of JPY349 billion. Net assets under management increased by JPY1.2 trillion from the end of March to JPY29.1 trillion as of the end of June on the back of better investment performance due to the improved environment.

Page 10, please, an overview of wholesale. Net revenue in wholesale was JPY194.6 billion in line with the previous quarter as equities in investment banking offset a slowdown in fixed income. Expenses increased due to a rise in commissions and floor brokerage from higher trading volumes, and as a result of full career retirement related expenses. This led to a 29% decline in income before income taxes to JPY25.2 billion. By region, revenues increased by 6% in Japan and 9% in EMEA, while the Americas declined by 19% due to a slowdown in rates and securitized products.

Please turn to page 11 for an overview of global markets results. Net revenue in global markets was JPY165.3 billion. Revenues were resilient as client revenues expanded in all regions despite heightened volatility in the market. Fixed income booked net revenue of JPY97.6 billion. As you can see on the top right, EMEA and Asia ex-Japan remained resilient, while the US reported a slowdown mainly in rates and securitized products resulting in an overall decline in revenues of 14%. Equities reported a 13% rise in net revenues quarter-on-quarter to JPY67.8 billion on the back of robust performance in the cash business in Japan and the Americas, including Instinet, and an improvement in the derivatives business in EMEA and the Americas.

Now, page 12 for investment banking. Net revenue in investment banking rose 23% quarter-on-quarter to JPY29.3 billion in line with the third quarter of the last fiscal year driven by robust performance in Japan related businesses. In Japan, revenues were at the highest level in nine quarters as we won ECM and DCM mandates across a wide range of sectors, such as this year's largest IPO for Suntory Beverages & Food.

As shown on the top right, we maintained the number one spot in the January to June Japan-related league tables for each product. We also executed a number of high profile international transactions. We will continue to build up a track record in both the sectors to raise our international presence and expand revenues.

Please turn to page 13 for an overview of expenses. Non-interest expenses declined by 34% to JPY318.1 billion due to the deconsolidation of Nomura Real Estate Holdings. Other expenses which previously included cost of goods sold at Nomura Real Estate Holdings declined by 77% this quarter. Excluding Nomura Real Estate Holdings, expenses increased by 8%. Compensation and benefits rose due to higher bonus accruals given the robust Japan business, yen depreciation and full career retirement related expenses of JPY9 billion.

Commissions and floor brokerage also increased due to higher trading volumes primarily in equities. Restructuring expenses were JPY2.4 billion, down by JPY5.1 billion from last quarter's total of JPY7.5 billion. As shown on the bottom right, the $1 billion cost reductions we announced in September last year were 87% complete at the end of June and we plan to have them fully completed by March next year. Although we are starting to see the benefits of cost reductions in some areas due to the increase in some expense items that I just mentioned we won't see tangible results at the firm-wide level until the second half of the current fiscal year. We are maintaining our cost discipline and will continue to focus on lowering our breakeven point.

Please turn to page 14 for an update on our balance sheet. Total assets at the end of the June are JPY4.2 trillion, gross leverage was 17.7 times and net leverage 10.6 times. On Basel 3 basis, Tier 1 ratio and Tier 1 common ratio were both 11.9%. The 10% figure shown on the top right is calculated by applying the 2019 Basel 3 standards to our balance at the end of June. This figure is roughly the same as at the end of March.

On page 15, there are no significant changes to our funding and liquidity from March, so I will leave it for you to look through later. That concludes today's presentation on the first quarter of the fiscal year to end in March 2014. Thank you.

(Operator Instructions) Mr. Muraki, Deutsche Securities.

I have two questions. One is in relation to page 11, global markets. The graph you showed with the arrows is quite easy to understand. Thank you. During the quarter, I guess the revenue environment changed quite significantly at the beginning and the latter half of the quarter especially for fixed income. But if you would separate the first half of the quarter and the second half, where is the decline occurring in the second half which geography and which business is slowing down in the second half. In terms of the volatility in the fixed income market things are starting to stabilize overseas. Are you seeing an improvement in April for the fixed income volatility?

My second point is on page 14, you explained the growth leverage and I guess this is the accounting base leverage of 17.7 times for gross leverage and using this to calculate the Basel 3 leverage ratio required by Basel 3, what level are you at in terms of the leverage ratio calculated from this 17.7 times gross leverage?

This is Kashiwagi. Thank you for your question. As for your first question if you look at the April to June quarter, yes things changed during the quarter between the first half and second half of the quarter. And as we show on page 11 since the end of May to June things slowed down in the rates business in New York and also the securitized products business. This was the most impacted. And from the middle of the quarter onwards the market environment started to stabilize and towards the end of June things moved into a recovery trend. And from April -- July onwards the recovery is continuing. Other than that for example for JGBs, which was also impacted, this was mainly in the first half of the quarter, so April to early May. And since mid-May to June things started to stabilize for JGBs. So overall, for the global markets business April, May, June -- April, May was high and June was low, but things are recovering moving into July. This is the overall situation for global markets.

And as for your second question in June the Basel 3 leverage ratio has been announced and the standards for the -- details about the standards have not been announced yet, so it's still too early to calculate the exact figures. However, on a best effort basis, if you base the calculation on the proposal by Basel 3, very roughly speaking our Basel 3 percentage would be about 3% the leverage ratio. And through the consultation period, the details of the standards will be disclosed and we will conduct more accurate calculations and announce the leverage ratio based on the new standards when the time comes.

Under the current Basel 3 standards the 3% from 2018 onwards is the standard which we have to fulfill and we will continue to allocate our assets and resources adequately so that we will achieve the 3% and sufficient buffer from the 3% level required.

Thank you very much. This is Muraki again. You say roughly 3% in your guidance. Is this -- I guess this does not reflect the new proposal by Basel in June, and the US banks are also calculating the ratios without reflecting the Basel 3 proposal, is this the case? And if this is true, then I think the ratio is somewhat lower compared to your US peers or US banks. How do you think you can respond by lowering your exposure?

This is Kashiwagi again. The 3% or roughly 3% I mentioned is based on the -- reflecting the proposal in June. So, it's based on our understanding of what was proposed. And the US banks are saying 4% to 5%, but this is a different -- we use different calculation method compared to the US banks.

So, you are not going to have to improve -- increase the percentage by reducing your risk-weighted assets?

Yes, 83% of our trading positions or 83% of our assets are trading positions. So, we are not -- there are items which we can remove when cut down from a balance sheet and we can compress the balance sheet especially in the derivatives area. So, I don't see -- I don't feel the need to shrink our balance sheet if it has a big impact on our business. And in terms of our capital ratios, as long as we can continue generating profits, we can maintain our capital ratio, so we do not see that having a big impact.

Thank you very much.

Ms. Tsujino, JPMorgan.

I have three questions. First of all, fixed income, you mentioned Q1 trend and you said that situation improved going into July in the United States. If you can sustain the current state, US fixed income in Q2 in comparison to the first quarter, is it correct to consider that there would be improvements? Looking towards Japan, there has been a decline in Q1 in comparison to Q4 because Q4 was a very good quarter, but despite the volatility in the JGB market, the decline was controlled, and therefore, that means that you did quite well. In the current market environment and the flow level in comparison to the first quarter, how do you foresee the second quarter faring in comparison to Q1? That's my first question.

Second question, on page 13 of your [attaching], the breakdown of the non-three segments, which is the familiar template, are they -- right below the corporate items -- negative in Q4 CVA, DVA, negative numbers, JPY45 billion plus gains recorded, so affiliates did well, it's JPY8.7 billion negative in Q1, so minus JPY14 billion. There has been a significant drop there for affiliates, and subsidiaries were doing too well in the previous quarter. So are they back to normal? Is that how we should interpret these numbers or should we consider that they are deteriorating -- the performance is deteriorating?

Lastly, to the extent you can comment on pipelines in the investment banking underwriting of equity, recently many announcements have been made, but if the market environment is friendly in 3Q or Q4, can we expect many deals in the pipeline, or is it because there is concentration before the summer holidays so much so that there would not be so many items coming out of the pipeline in Q3? I know that it's difficult to respond to such question, but to the extent you can comment, I would very much appreciate.

Thank you very much. On your first question on fixed income, 1Q and the month of July, situation in US and Japan, we began the month of July quite well not only in fixed income, but in equity as well. So, that's my first message. And as I responded to Mr. Muraki's question in the United States in mid-June, the market deteriorated, but thereinafter, the market seems to have bottomed out. And currently, the recovery trend seems to have begun and we believe that this momentum is currently being sustained.

In Japan, JGB, as I said in the previous results announcement, is important business for ourselves, but in Q1, there was a time in May that we struggled, but thereinafter, the market has stabilized and the liquidity. Although there has been some shrinkage in the liquidity, there has been stabilization of volatility and recovery continues into the month of July. That's the momentum.

On your second question, as you have rightly pointed out, JPY8 billion plus JPY5.9 billion is slightly less than JPY14 billion. And this is an area where frequent questions have been asked. Non-three segment gains and losses, banking affiliates performance had been included, and their performance was quite good in Q4 and the contribution has dropped in Q1, because of the decline in their performance. US GAAP related adjustments and time difference, these are some of the factors that are quite difficult to explain in words, verbally.

And your other question was with regards to the investment banking business. ECM deals, Q2 pipeline is so and so robust and REIT related deals, there will be some coming in the Q2 pipeline following 1Q, not in the order of Suntory Beverage & Food, but they are quite sizable deals, and therefore, ECM momentum will be maintained. I will not say there will be expansion. I will neither say there will be decline. I can just say that the momentum will be sustained on the M&A side on year-on-year basis, cross-border deals, Japanese corporates cross-border deals is declining, but I think there are many potential deals. And our bankers are receiving many inquiries from our clients. So, there is a major current of Japanese companies faced with structural transformation, so we believe that there would be M&A deals coming out. Thank you.

Thank you very much. Then on your second point, you said that there are factors or elements related to affiliates and subsidiaries or other factors like US GAAP adjustments that are difficult to explain, but those are negative factors? Is that correct?

Yes, they are more or less negative factors.

Thank you very much.

Mr. Shiota, Daiwa Securities.

I have two questions. One is in relation to the overseas businesses and the income for the various regions. On page 22, you show how EMEA is recovering quite significantly, but in terms of the earnings, it did not recover that much in this quarter. And based on the management accounting, what's the situation for each region globally? This is my first question.

My second question is in relation to the retail business. On page 26 you show the trends in the balance of client assets, and for the equity investment trust, from JPY8.9 trillion to JPY8.6 trillion, there has been a decline. And if you look at the market value -- based on market value, it should have increased. And as for the net increase this year, it's about JPY260 billion. So, my question is why the balance of the equity investment trust has declined this quarter, whether there are any special reasons, the stock investment trust?

Yes, this is Kashiwagi. For the first question, in Americas, there has been a big recovery based on financial accounting. And this is due to the owned credit and also the restructuring expenses, we booked a large amount last quarter, last period. So, because of the non-recurrence, it's of -- increase of JPY32 billion. And this fiscal year, actually for JPY4.4 billion on a financial accounting basis, but owned credits -- most of the owned credit is -- JPY5.9 billion is booked here. So, EMEA continues to be loss-making.

However, the business performance itself is -- thanks to the Fit for the Future strategy, I think they are recovering gradually. And this year, on page 11, as we show on the -- with the chart with the arrows, Americas, unlike Japan or EMEA, things are relatively flat or improving unlike the Americas and Japan. So, we will continue working on the restructuring and we will continue capturing the cross-border businesses.

As for your second question, the client assets in retail and the reason why the stock investment trust has declined -- declined from JPY8.9 trillion to JPY8.6 trillion as of June end. This is due to market reasons, and especially the high yields and emerging currency investment trust, which we have high exposure to. These high yield products, the prices declined by about 7%, and for the emerging country like Brazil real products, again, a 7% decline. And although this is non-emerging, we have quite a large exposure to Australian products, Australian dollar, and this is also -- there was a decline of about 7%. So, these have been impacting the balance.

Just a follow-up to the second question, so if you exclude the market valuation, if you look at the net increase, there was a net increase in the stock investment trust in Q1, is that how to look at it?

Yes. April and May for the Japan investment trusts, there was a lot of sales for Japan equity investment trusts. And in June, we saw the sales in the non-Japan investment trusts. And for high yields and the emerging products, there was a decline, but due to the prices coming down and becoming more reasonable, affordable, there has been a recovery in the latter half of the quarter. So, the trends of sales have been quite different for the different investment trusts, but overall, things have been quite strong.

Thank you very much.

Mr. Sasaki, Mitsubishi UFJ Morgan Stanley.

I have two questions. First of all, global markets, Japan equity related business, what's the trend in the months of May, June, and July even talking about the relevant items, could you describe the situation? Cost is the second question. The target of cost reduction of JPY1 billion, you said that it's going to become tangible in the second half, how is it going to become visible? Could you comment on the cost reduction in the second half? Those are the two questions.

Thank you very much. On the Japanese equity performance in May, June, and July, the general trend is as I have explained. In mid-May or June, the market environment deteriorated and it was difficult to generate gains, but thereinafter, we saw the market settle down and trading business also expanded. And currently, we are doing fairly well.

Your second question was on wholesale Fit for the Future second half cost reduction and what numbers you are to be expecting. It's not possible to make any comments in a precise manner. We are in the process of relocating our office from downtown to the midtown in the United States, and this process will be completed by the end of September. The relocation itself is more or less complete, but in end of September, the lease contracts for the downtown office will be terminated which will be realized in the second half. I cannot give you any qualified numbers -- quantified numbers, but as indicated in today's presentation material Fit for the Future will come into effect. 87% has been completed, but as for compensation and benefits, 92%. And please wait for few moments. I apologize. 92% compensation and benefits, non-personnel expenses together, personnel and non-personnel expenses together 87% progress rate. We will continue to make efforts in this area.

Thank you very much.

Mr. Tanaka, Goldman Sachs Securities.

This is Tanaka from Goldman. I have two questions. One is in relation to the comp ratio, and if you exclude, Nomura Real Estate and also excluding the FCR cost and the cost-cutting, the comp ratio is more visible, but from Q2 onwards, will the comp ratio remain stable? Is that the way to look at it? How do you expect the comp ratio to trend from Q2 onwards? My second question is about the overseas rating agencies, your dialogue with the rating agencies overseas, is there any progress? What impression do you get from the dialogue with the overseas rating agencies?

This is Kashiwagi speaking. Your first question about the comp ratio for the firm wide basis, Q1 38% was the -- roughly the comp ratio level, and this excludes the FCR that I mentioned. And the western investment banks are roughly in the mid-30% to mid-40% range. So, we will control our comp ratio within that range. And the 38% -- sorry, that includes the FCR, the full career retirement.

And your second question about the dialog with the rating agencies, the last time there was the rating agency by last -- my Moody's last March. That was the latest action by the rating agencies. Compared to last March, the business environment has changed quite significantly, and our management strategies have changed a lot too. So, we will continue to talk with Moody's and explain our story, growth story.

And as for the business environment in Japan, it's improving. And Japan had been weak for the past 15 to 20 years, but right now, things are completely changing in Japan, and we are seeing an improvement, see the improvement in retail and asset management. For wholesale, we have been working on the -- or we have been stepping up our restructuring efforts. And under the Fit for the Future strategy, we are focusing our businesses. And from Q4 last year to Q1 this year, we are seeing the results of these initiatives. This is what we are explaining to the rating agencies.

And in terms of R&I who shifted their outlook to negative temporarily last year, but this May, they moved it back from negative to single A plus. So, they have improved their outlook. And JCR remains unchanged AA minus. And S&P, as I explained about Moody's earlier, we are explaining the same things, and we are also explaining the strong capital base and our financial structure. So, we will continue explaining that to the rating agencies.

Just a confirmation on the comp ratio, if you exclude FCR, it's about 36% -- a little bit less than 36%. So, is there a chance that this will go up a little bit? Should we expect an increase in the comp ratio?

This is Kashiwagi. Generally speaking for -- one of the characteristics of this current fiscal year is that the retail division is doing well and so we are seeing strong trends in the retail even though wholesale wasn't that bad either, so the comp ratio will have a downward bias. And going forward, as the wholesale performance improves or if it improves then the comp ratio should -- can go up from the current level

Thank you.

[David Luis, Global Management Company].

I have a question about the full career retirement expense. For the JPY9 billion of cost for this quarter, can you tell me Kashiwagi-san how many people this covered for this quarter. And do you expect this number to change wildly going forward? And also could you give me a breakdown, geographical breakdown of these people. Was it mostly in Japan or was it mostly in the US or elsewhere? Thanks.

Hi, Mr. Luis, thank you very much for asking the question. Regarding the number of the people who has received this compensation we cannot disclose the number. And as for the region, I think more has been allocated to the overseas rather than Japan actually. And wholesale division accounts around 70% to 80% of the total $9 billion of cost. And asset management division accounts around 10% and others account 10% to 20%.

Okay, thanks. If I could have a follow-up, is that -- do you expect this to happen every quarter or I think you said earlier that this would happen only in the March quarter and June quarter is that true. And also if you could explain one more time as to why we have this kind of accrual, is it because these people leave the firm voluntarily and they are allowed to keep their options or restrict or stop, and if you could just explain the nature of these expense --- this expense, that will be great? Thanks.

Okay, let me answer the second quarter first. First of all, this kind of mechanism is very much popular and common among the other major financial institutions and globally. And the Nomura is kind of latecomer into the new mechanism because the essence of this mechanism is that the -- I have seen that the people who are like 55 years old and are working for the --- from long period of time and he or she just gets paid by the firm with the stock option. And if he wants to -- he or she wants to leave he has to -- he or she has to give up that default compensation.

In order to accommodate that kind of people's needs, unless the people do not join the competitors most of the firm has been giving the stock option (inaudible) and those people who are leaving carry those options and as time goes on they can exercise the option; that has been the case. And in order to be competitive to hire the people from outside, the talented people Nomura has to also be equipped with this kind of the mechanism. That's the reason we introduced this mechanism, this April.

As for the timing of the accounting, and yes, we pay out the compensation in May reflecting the performance from the previous April through March. And going forward what's going to happen is the most likely -- most of the FCR will hit our first quarter. And I would like to remind -- I would like to inform you that assuming that some of the people who has been working with Nomura for a certain period of time and within the six months period of time he or she will reach to that minimum level, let's say in December, then his compensation or her compensation, deferred compensation for two and a half years period time will be recognized at that time in December. So, most likely majority of the FCR related expense will happen in the first quarter going forward. But it does not necessarily mean that we will have a zero recognition in the second quarter and third quarter and fourth quarter. Very small amount should be recognized during the second and third and fourth quarter. I hope I answered your questions.

Thanks. Based on what you said it sounds like that this number should be fairly stable going forward because we are talking about the long time employees of Nomura who for some reason, one reason or another would simply like to leave the business rather than join a competitor. So, I would say using the concept of insurance and actuarial calculations is it fair to say that this should be a fairly stable number?

I think that this compensation is really first of all the reflection of the performance of the firm. So, I don't -- I cannot say this will be stable. But as long as the number of the people who will be qualified will remain stable, yes, and also as long as their performance is stable it might be rather less volatile number.

Okay. Thanks very much Kashiwagi-san.

Yamanaka-san, Credit Suisse.

I have just one question. In your press conference towards the media and in the Q&A of the press conference you talked about the Americas business and the competitive environment. And your answer to the question was you are competing with the financial institutions in EMEA who are -- some of them are withdrawing from Americas, so Nomura has some opportunities there. I believe this was your answer. Could you give me some example, and where do you think you can expand your business in the Americas? If you have any ideas there that will be great.

Thank you. This is Kashiwagi. At the press conference, I was talking about or we were talking about capital ratio and we were competitive from a capital ratio perspective. And also I explained how we have a clean balance sheet. And I am not sure about how the European peers have -- what kind of balance sheets they have. But if you look at the level three against the Tier 1 common, we have a very clean balance sheet. So and also the capital base 11.9%, under the Basel 3 2019 standards, we have quite a strong capital position even compared to the global peers.

And on top of that currently the home country, Japan, is strong whereas the European players are struggling due to their home countries being weak, I think that is another strength of Nomura. And lastly as Muraki-san -- we've talked about with Muraki-san, we are comfortable with the leverage ratio as of today. So, from that perspective I think we have a relative advantage compared to our peers.

And while our European peers shrink in their home country which could happen, and some of them will shrink their businesses in the US if they are not competitive enough. So, from that perspective, I think we are at an advantage.

So, this is Yamanaka again. So, does that mean that it's getting quite easy for you to use your balance sheet in your business, is that what you mean?

Yes, well, I am not saying that we will generate money using our balance sheet but as they say in the media, the pressure on the Western or the European banks is quite strong in terms of compressing their balance sheet. Meanwhile Nomura can conduct business even by maintaining the current balance sheet, and we don't have to expand our balance sheet and we can continue offering liquidity in the principal business.

Thank you.

(Operator Instructions) Mr. David Luis, Global Management Company.

On page 22 of the PowerPoint presentation, you have provided your geographical breakdown of your profitability by quarter. It's so great to see Japan providing most of the profit in the last two quarters because of the stock market rally in Japan. But I was looking at the other regions, it seems to me that they did not do as well in the first quarter and most of them were running at losses. Is it fair to say that this will persist, that the losses from these different regions, mostly the US, Europe, as well as Asia, excluding Japan, or Mr. Kashiwagi, are you sensing some kind of a turnaround, a more sustainable turnaround from these regions in their contribution to Nomura's bottom line going forward? Thank you.

Yes. Thank you very much for asking the question. Yes, Nomura Management is really committed to turnaround our overseas operation to bring it back to the normal sustainable profitability and achieving the JPY50 billion PTI from the overseas operations by March 2016. And in order to do so, we do have our internal target to make it at least profitable by March 2015. And as you can see from the table that the US operation has been performing pretty nicely during the last year. And due to the sudden increase in the US interest rates on the 1.5% to 2.5% within a short period of time, that caused some of the challenging time for Nomura's fixed income, not only the fixed income for Nomura, but also the entire industry. But as I understand, the quarter-to-quarter profit -- revenue for the fixed income for the majority of the shop has declined by more than 20%. So, I don't think Nomura is alone. But due to the lack of the -- enough business line to support the region, our number became negative.

US operation, we do have Instinet, which has been growing and we are very much comfortable with that. And also, we do have a company called NCRAM, Nomura Corporate Research and Asset Management, which is specialized in the high-yield bond asset management. I think I understand they have something like the $20 billion for the asset under management. And these are the three engines for Nomura that the -- with the turbulence in the market that these three engines did not give us a kind of comfort, unfortunately.

And as for the European operation, yes, we have to fix our European operation. And as we announced our Fit for the Future cost reduction last year, $1 billion -- additional $1 billion cost reduction for the wholesale side and more than 40% of the cost cut has been done in the EMEA. We understand, first of all, the European countries are facing some of the challenging time and their financial system and the society and economy is suffering from the crisis.

And also in terms of the cost structure within Nomura, when we bought the Lehman operation in Europe and Asia, we decided to have some sort of a global function in Europe, considering the time zone advantage, and also we had a bigger operation than the US. So Europe has been performing this some sort of the sub-headquarter for entire Nomura. So, that's the reason their financial burden has been very heavy. Their performance in terms of the fund management accounting is better than this financial reporting, but we will continue to implement at least for the future cost-cutting initiative. And going forward, I think we can show you the better picture.

Thanks. I have a follow-up on the US operation. You said that besides the fixed income operation, which had a tough time in the March quarter -- in the June quarter, you did have other pockets of stability like Instinet and your high yield bond operation. But how about going forward knowing that interest rates in the US are most likely to continue to go up -- is unlikely that interest rates will fall back down. The 10-year treasury will go back down to the 1.5% level from the current level of 2.5% is quite unlikely. So, knowing that the interest rates in the US will most likely continue to perk up, what does that mean for -- what would that mean for Nomura's fixed income trading operation?

And I understand Kashiwagi-san that Nomura did no worse than the others in the June quarter, but how about going forward knowing that interest rates would go up? Should we expect further losses from your fixed income operation going into the future as rates increase in the US? Thanks.

Okay. Regarding the US operation, as I answered to the question from Mr. Yamanaka from the Credit Suisse, that I think Nomura management team is comfortable with our -- we have the advantageous position in the US operation given the fact that some of our competitors from the Europe are facing some of the capital constraints and also the required leverage ratio is tough one and also home country is suffering. As opposed to those factors Nomura is enjoying the strong home country. And we do have a strong capital base of 10% at the exit level of the Basel 3 requirement.

And the leverage ratio is, as I touched on, as I provide you some sort of the guidance, we are -- roughly speaking, we do have a 3% of the leverage ratio. So going forward, we expect that the -- our competitive position in the US market near to some other friendly competitors from Europe is very -- is better. And I am also comfortable with our management team in New York, most of them joined Nomura after our acquisition of Lehman in 2008, but we have been able to have a diversified portfolio of the management team, as well as the diversified portfolio of the business, not only the securities products, but also the credit and FX, and the rates, particularly credit products and FX rates products were profitable during the last years.

And we have seen a gain in the market share. And as I said, relative to the European shop, I think we do have a strong base with a good management team. And we continue to add some of the sales staff, and we have to strengthen the capital base, and we expect that we will have a higher share.

Thanks a lot.

This is Kashiwagi speaking. Thank you very much for participating today. And if you have any follow-up questions, please contact the IR division. And we will continue working on our disclosure and we look forward to having your advice. Thank you very much for participating late in the evening.

Thank you for your time and 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.