Nomura Holdings Inc (NMR) 2014 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 2014 conference call. Please be reminded that today's conference call is being recorded at the request of the hosting Company. So if 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. 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 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'd like to begin the conference. Mr. Shigesuke Kashiwagi, please go ahead.

This is Shigesuke Kashiwagi. Good evening. I will now give you an overview of our financial results for the third quarter of the year ending March 2014 using the document titled consolidated results of operations.

Please turn to page 3. For the 9 months till December 2013, we reported a four-fold increase in pre-tax income to JPY273 billion. Net income for the period jumped 6.1 times year on year to JPY152.3 billion. Accumulated earnings per share for the 9 months was JPY39.83.

Although net revenue inched up by only 1%, you will remember that last year's results included Nomura Real Estate Holdings as a consolidated subsidiary. While this is no longer reflected in our earnings, all three business segments reported robust revenues and we maintained a tight control on costs, resulting in significantly higher pre-tax and net income for the period.

For the third-quarter period, net revenue was JPY379.4 billion, pre-tax income was JPY86.9 billion and net income was JPY48.3 billion. Annualized ROE was 7.9%.

Net revenue from the three business segments increased 5% to JPY337.9 billion and pre-tax income grew 18% to JPY84.4 billion. All business divisions reported higher revenues and income for the quarter.

I will discuss each segment in detail in a moment, but first I would like to briefly explain a number of significant items. Please refer to the bottom of page 5. First Ashikaga. On December 19th, Ashikaga Holdings relisted and we booked an unrealized gain of JPY11.3 billion in wholesale at the time of the listing. The other segment includes an unrealized gain of JPY1.2 billion representing the gain from the listing date until the end of December.

Next, in the third quarter we refined the valuation methodology for uncollateralized derivative. This funding valuation adjustment shows up in wholesale as an unrealized loss of JPY10 billion. And other also includes a JPY5.4 billion loss from changes to own and counter-party credit spreads.

Now, let's look at retail. Please turn to page 6. Net revenue increased 7% quarter on quarter to JPY128 billion. Pre-tax income climbed 19% to JPY47.7 billion. Sales of stocks and investment trusts rose as retail investors looked to take on more risk. Market factors also helped steer retail client assets to a record JPY96 trillion as shown in the graph on the bottom left.

Please turn to page 7. Recurring revenue was JPY13.5 billion or JPY54 billion on an annualized basis, as shown on the bottom left. This is ahead of budget. We recorded 1.16 million NISA account applications as of the end of December.

Please turn to page 8 for asset management. Net revenue increased 14% to JPY21.2 billion. Strong pre-tax income of JPY8.9 billion, up 45% quarter on quarter, included contributions from dividend income and performance fees. Net assets under management reached a record JPY32.9 trillion, driven by new fund inflows and the favorable market environment.

The investment advisory business reported an increase in assets under management of JPY400 billion on inflows into a diverse range of products such as stocks and bonds. As shown on the bottom right of page 9, we recently announced the acquisition of ING Group's asset management subsidiary in Taiwan to further expand our footprint in Asia.

Please turn to page 10 for an overview of wholesale results. Net revenue grew 3% over last quarter to JPY188.7 billion. Pre-tax income increased 10% to JPY27.8 billion. As shown in the graph on the bottom left, Japan and the Americas improved giving a well balanced revenue mix across regions.

In global markets, fixed income had a solid performance while investment banking booked higher revenues due to the unrealized gain from the listing of Ashikaga Holdings I mentioned earlier.

Please turn to page 11, global markets net revenue is roughly flat quarter on quarter at JPY158 billion. Fixed income reported a 6% rise in net revenue to JPY99.2 billion. As shown by the heat map on the top right, securitized products in the Americas recovered, and rates and credit in EMEA remained resilient. AEJ saw a slight decline in revenues primarily in the FX business due to talk of tapering in the US.

Equities booked net revenue of JPY58.8 billion, down 11% from the previous quarter. Although the cash equities business posted robust performance, the derivatives business slowed down during the quarter.

In the heat map on the top right, Japan fixed income includes both Japan and headquarters, which means it includes the JPY10 billion loss related to the changed valuation methodology for derivatives. This makes underlying performance look worse than it actually is. Excluding this loss, we would have reported a gain of over 10% indicated by a red upward facing arrow.

Please turn to page 12. Investment banking revenue increased 29% to JPY30.7 billion on the JPY11.3 billion unrealized gain from the listing of Ashikaga Holdings. Gross revenue in investment banking of JPY35.9 billion was softer compared to the previous quarter as a result of decline in overall fee pool in Japan.

Internationally we won a number of financing mandates in key sectors such as the IPOs of Italian luxury brand MONCLER and UK financial service company Just Retirement. We also saw a rise in M&A and multiproduct transactions such as the acquisition by Grifols of the transfusion diagnostics unit of Novartis, which we expect to close through the fourth quarter and further ahead.

Please turn to page 13 for analysis of expenses. Firm-wide expenses increased 3% quarter on quarter to JPY292.5 billion. The main factors behind the increase includes higher compensation and benefits due to increased bonus provisions and rise in business development expenses as a result of expenses related to marketing campaign for NISA accounts.

As part of our cost reduction initiatives, we have begun -- we have been reducing office space and renegotiating rent since the year before last, resulting in low occupancy and related depreciation costs.

Please turn to page 14 for an update of our balance sheet. Total assets increased by JPY1.8 trillion from the end of September to JPY43.6 trillion, partly due to the depreciation of the yen. Our Basel III Tier I and Tier I common ratios were both 12%. The 10.4% figure you see at the top right is calculated by applying 2019 fully-loaded Basel III standards to our balance sheet at the end of December and although down slightly from 10.7% in September, remains at a high level. Basel III assets shown on the bottom right declined to 17% of Tier I capital as the decline from the listing of the Ashikaga Holdings more than offset an increase due to yen depreciation.

That concludes the presentation on our third quarter results.

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

Masao Muraki, Deutsche Securities.

My first question is in relation to wholesale, especially fixed income. And secondly, I'd like to ask about the fund flow in retail. First of all for the wholesale division -- apologies for the housekeeping type question, but between the equities and fixed income what is the regional breakdown? And also what are the revenues from the positions in the trading of both businesses? Could you give the breakdown between equities and fixed income?

Yes, this is Kashiwagi. As for your first question about fixed income in Q3, Japan was close to 20%, a little bit less than 20%; EMEA was a little bit less than 40%; Americas was about 30%; and AEJ was mid 10% level. And the client revenue and risk driven revenue was 8 to 2, the breakdown was 8 to 2. And for equities, Q3 Japan was mid 30% level; EMEA was about 20%; Americas was mid 30% level; and AEJ was about 10%. And as for the client-driven and risk-driven breakdown between -- for equities was 9 to 1.

And going back to fixed income, I mentioned the close to 20% in Japan. And the FVA of derivatives about JPY10 billion is booked here as part of our management accounting.

Thank you. For fixed income the interest rates are going up in Americas, but you are still growing your securities products related revenue. But I believe that the ratio of the positions from securities products, has that increased or not?

Well, basically the -- now that the tapering and the direction of the economy is a bit more clear, that it's going towards tapering, the market compared to Q1 and Q2 has picked up and transaction volume has picked up now that the outlook has become more clear. And for the housing market, the consensus is that the market is still strong. So these were the positive items for the securitization business in the US, our Company was better compared to Q1 and Q2.

Thank you. For fixed income if you look at the share of the revenue, it's on an upward trend and I think the background for this is that you are not shrinking your balance sheet. In terms of the competitive environment, what is the situation right now? How do you see the competitive environment? And also the leverage regulations will be implemented from 2015. What will you do to prepare for this during 2014 and how will that impact the share?

Yes, for the fixed income business, as you pointed out, there is the leverage regulations and it will impact the various players in the market and also the capital requirements in various countries as well as Basel III. There are various items which will directly impact the fixed income business because this is a risk taking business. And in that perspective we have already completed our funding or capital raising in 2009 and also our balance sheet is relatively clean compared to our peers I believe. So our -- compared to our peers, I think we are not putting a -- we are not having to control our business and control our balance sheet usage in relation to our fixed-income business.

As for the future in relation to the leverage regulations, there has been a recent draft that was announced, but the details of the rules and the interpretation of these rules are still somewhat vague. But for example, assuming that you can net the reverse repos, the mid 3% level or the upper 3% level is I think where we are at and this is what we have been saying from the past. So we will continue to monitor the regulatory environment and we will not necessarily increase our balance sheet, but not shrink it that much either.

Thank you. As for my second question about asset management and retail business, in your presentation on page 9, I think this is mainly in relation to Nomura Asset Management, you show the graph showing the inflow and outflow of funds. Based on the recent changes in the taxation or tax scheme, there has been an increase of about JPY500 billion of the standby funds. How do you expect this trend in the standby funds to continue from January onwards? What is your outlook? Could you explain your outlook about this please?

Yes. As you pointed out, there has been a lot of fund flowing into MRF in Q3. About JPY1 trillion is the increase in the balance that we saw. And as for where these funds moved on to, well, moving into January there has been an outflow of funds from MRF. And the TEC hasn't made an announcement today, but the individual investors are buying equities.

So does this mean that the standby funds will continue to flow into individual shares, individual stocks instead of investment trusts?

Well, there was a question about NISA in the press conference that was held earlier, but from our perspective initially I think the NISA funds will flow into -- or we thought it would flow into shares. But it's also flowing into the investment trust as well. So we expect money to continue to flow into individual stocks as well as investment trusts.

Thank you.

Natsumu Tsujino, JPMorgan.

Retail business, January, since the beginning of January how is the sales of investment trusts trending in comparison to Q3, since the beginning of this month?

Thank you very much. Since the beginning of January, how has the business momentum been? As I said, stock sales is robust. And as far as investment trusts are concerned, because of the slight volatility in the prices there has been some slowness experienced.

Thank you very much. NISA accounts, active accounts, how many of the NISA accounts have become active? And also I believe that most of the account openers were existing openers. What about new -- completely new customers opening up NISA accounts? And where are those money going into, what are they buying? And what about the existing customers who had opened NISA accounts, what are they buying? And what are the kind of investments that they begun to do? And what about the spot stocks in terms of size? Are they being purchased in ordinary accounts and not necessarily through NISA accounts? What is the overall picture at the moment?

In terms of amount, transaction amount or funds out of NISA accounts, it's not even one month since this system began. So I cannot give you any absolute number. And we believe that the purchase will be done on gradual basis. And so far we've seen much of the money going into actual stocks. And that was our assumption. But in terms of comparison the investment trust has remained relatively low.

So from the NISA accounts, much of the money had flown into stocks, but now we are seeing investment trust, active Japanese equity or active global equity, foreign fixed income or balanced funds. And much funds are now beginning to flow into various types of funds. In online too, the NISA account opening has remained slow. So the agility seems to be rather slow. 20% to 30% NISA accounts are already active according to certain information we've obtained.

What about at Nomura, do you have any ratio or numbers in terms of the active accounts against all account openings?

1.16 million accounts were opened, and I cannot give you the absolute number of active accounts. But NISA funds against total transaction volume of stock was 20%. This is not yen amount, but number of transactions. So that is the overall number of transaction that have come through NISA.

Thank you very much.

Jun Shiota, Daiwa Securities.

My first question is about global markets. On page 11 on the upper right, you show that AEJ was somewhat slow for both equities and fixed income. But at the moment what is the rate and interest business in the emerging countries? I think there is some pickup in the action, but how do you see this?

Yes, for AEJ there has been some impact from the tapering. In last year's Q3 and Q4, we were impacted from the tapering. But in terms of -- I think this is not so much in terms of our position, but the client flow has slowed down and we have been impacted in Q3. And also we expect Q4 to continue to be impacted relatively to the other regions.

Thank you. My second question is about page 18, about the value at risk. December there has been an increase for the various products. Is this from your position or is it because of the impact from the market volatility? Why did the figures go up in December?

Yes, [there are] at the end of December has been -- is a result of the tapering already been incorporated into the market, factored into the market. And so we had been controlling our risk. And secondly, because of the weaker yen, the figure seems to be larger than what is actually -- what is the fundamental situation.

So as of today the figure has come down quite significantly from what you showed here?

Yes, moving into January the risk has been declining, whereas in December we were in a risk-on situation.

Thank you.

Takehito Yamanaka, Credit Suisse.

Just one question, if I may. After Q2, Fitch rating conversation emerged and they were talks that maybe transaction will increase. But we heard that it won't change for some time. But ever since, have you been able to achieve any increase in the number of customers or transaction volume? Could you update us on the recent trends caused by the rating change?

With regards to Fitch upgrade of rating, it was 29th of September -- is the transactions were closed since then. But it takes some time and therefore in reality, I cannot give you any quantified numbers for Q3. And as far as Q4 is concerned, we are not expecting sudden emergence of transactions caused by the upgrade of rating. But we will begin to see the effects gradually.

Since last fall and towards the beginning of this year, Asian and European investors were visited and we explained to them the backdrop of Fitch upgrade. And overall investors were positive. So when there was upgrade of Fitch rating, there was an impression that we would begin to see American investors increasing transaction, but we can expect further to come from Asian and European investors in the months and years ahead.

Thank you very much.

(Operator Instructions).

Futoshi Sasaki, Mitsubishi UFJ Morgan Stanley Securities.

Two questions, first is in relation to the comp ratio. If you look at the figure or the compensation divided by the operation revenue, it seems to be declining, the ratio of compensation against the net income. Is this going to continue to decline?

And secondly about the wholesale business in the Americas, and you talked about the recovery in securitized products. But in terms of the products that you are involved in right now, the securitized products, which ones are -- what is the most common product that is backing these securitized products? Where do you see the strongest recovery, in which product type?

Yes, as for the comp ratio, this year is -- I think it was about 37% for the overall Group. And I think this downward trend is seen not just for Nomura, but also for the entire industry. And I think we will have to wait until the end of this fiscal year to make our final decision. And we do not have a clear quantitative target about where we want to take the comp ratio.

And as for your second question about the securitized products, basically these are residential mortgage backed securities and a lot of the products are back by residential mortgages. But we are also involved in the commercial mortgage backed products as well.

Thank you.

Katsunori Tanaka, Goldman Sachs.

Derivatives, JPY10 billion, due to change of valuation methodology. In the management accounting, it's domestic [fig]. But in the financial accounting, which item? And if this loss is excluded, what about the international bottom line, will it appear differently if this loss is excluded, if I could have your comment on these matters?

Thank you very much. In terms of financial accounting, most of it is booked for international, some domestic, but overwhelmingly Americas and EMEA international. And for the overseas financial accounting, there is certain disclosed figures and that put into perspective on credit negative JPY5.4 billion as the total. And FVA minus is slightly below JPY10 billion for both, most of it is international. So internationally, we believe that in the financial accounting the business situation was positive or profit making.

Thank you very much.

Natsumu Tsujino, JPMorgan.

My usual technical question, but on page 13 of the [Tanshin] disclosure material, the segment other item and the other items within segment other. It's minus 20 compared to Q2 and Q3 was minus 43. So not much difference here. But in relation to CVA and DVA was minus 116 for Q2 and minus 54 for Q3.

And I believe the JPY2 billion -- oh, sorry, JPY1.2 billion for Ashikaga is included in here. So if you do that math, does this mean that Q3 was basically zero? And it has been at around JPY10 billion, but could you give me some color on -- could you give -- disclose as much as you can on this other item in others? And also for the corporate items, although there has not been a sudden change, I think this is a normal level of change, but could you explain -- could you give me some color on the corporate items as well?

Yes, for the corporate items, I think you are more knowledgeable about this than I am. It includes various items. And for this fiscal year, it has been somewhat higher than usual, but we are trying to control the volatility. So we --

Has there been an increase in your cost in relation to liquidity related issues or has there been a reversal of some of the allocations that you've made?

Well, there are some various extraordinary items that are included in here. And for the others, the other segment, just a minute please. It's close to JPY9 billion I think is the change, the difference. And unfortunately my answer will be the same as usual. So the SAMA gap -- there are differences from the gap from financial and management accounting and also there are some items due to the adjustments based on US GAAP. So that will be my answer as usual.

Thank you. For this item, this is the valuation adjustment for your own credit and the CVA and DVA. So this is purely a technical item. Whereas for the corporate item, this is somewhat impacted by your strategic decision. Is this the way to look at this?

Yes, that's correct.

Thank you.

Koichi Niwa, SMBC Nikko Securities.

I have two questions. First of all, value at risk, the change is not so significant, but as of end of December it went to a high level for the first time in some time. Can you describe some of the factors behind how should we interpret the VAR, if you could make any supplementary comments on VAR?

The response will be the same as the previous question. Towards the year-end, risk mode was increasing on a global basis and in that context, the Japanese environment was very favorable. So generally speaking, there was a risk mode. And since the beginning of January, VAR has been reduced quite significantly.

Thank you very much. The second question is somewhat political. On fourth quarter of the city banks, how should we view the general banking sector of the city banks in Japan this year and the next?

Fundamentally the equity market, there has been somewhat of a correction phase most recently, but generally speaking we think that the prices will go upward and the market will be on an upward trend. ECM, many finance mandates are expected to come in and large transactions, not as high as this year's first half, but we can expect a huge big ticket item. And IPO deals -- behind equity price going up, refund collection can become quite active. And as an active IPO market, I think there is expectation that the market size will be beyond JPY1 trillion.

Last year there was 58 IPOs and this year -- this fiscal year we're expecting about 80 IPOs. DCMs -- NTT DoCoMo's major issuance was there and we think that the market will continue to be quite robust and healthy. And interest rates remain healthy, and therefore, we think that the demand from investors for new issues will continue to be robust.

Overseas markets, as we mentioned in the presentation, cross-border transactions and accompanying financing multiproduct deals, we do have a healthy pipeline

A rather detailed question, but from this year's level are you expecting year-on-year increase next year? Is that the right way to look at it?

In terms of IPO, yes. But other than IPO, I am not sure.

Thank you very much.

(Operator Instructions).

Thank you very much for participating in today's teleconference until late in the evening, and we ask for your continued support. Thank you.

Thank you for your taking 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.