Nomura Holdings Inc (NMR) 2015 Q1 法說會逐字稿

(interpreted) Good day everyone and welcome to today's Nomura Holdings' first quarter operating results for fiscal year ending March 2015 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. The questions and answer session will be held after the presentation.

Please note that this is -- 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 valuations, competitive conditions and size, number and the timing of transactions.

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

(interpreted) This is Kashiwagi, CFO, speaking. I would like to now present the results of the first quarter for the term to end in end in March 2015. Please take a look at page 2. We face a challenging environment in the first quarter as geopolitical risk increased and investors weighed the outlook for monetary policy. This led to lower volatility globally and a decline in market trading volumes. Amid this environment, retail and asset management both reported higher revenues quarter on quarter while global markets delivered solid revenues in line with the last quarter. As a result, net revenue from the three core business segment increased 1% over the last quarter.

At the group level, net revenue declined 5% to JPY370.8 billion due to a JPY7 billion loss related to tightening of our own credit spread and following the JPY18 billion realized gains booked last quarter on the sales of Fortress shares. We also booked JPY18 billion in Full Career Retirement or FCR related expenses, a factor which increases cost specifically in the first quarter.

The FCR scheme was introduced last year for stock options and other deferred awards. Under the scheme, employees who meet certain criteria in terms of corporate title and length of service don't have to forfeit deferred awards even if they leave the firm voluntarily as long as they don't go to a competitor. Such schemes are widely adopted by US and European financial institutions. As a result of these factors pre-tax income declined 42% quarter on quarter to JPY51.7 billion and net income declined 68% to JPY19.9 billion. ROE for the quarter was 3.2% and EPS was JPY5.26.

Page 4 gives an overview of the business segment results and shows where the items I have just mentioned are included which you can confirm later. I will now give you an overview of performance in each business.

Please turn to page 5 for retail. Although sales of stocks slowed due to a decline in market volumes, sales of investment trust rebounded during the quarter. As a result, net revenue increased 9% quarter on quarter to JPY106.9 billion and pretax income grew 36% to JPY31.6 billion.

From this quarter, we have included a new indicator called net inflows of cash and securities which you can see here in the middle of the right-hand side. This replaces net asset inflows and makes it easier to address actual flows of cash and securities giving a more accurate indication of the growth of client assets. Last quarter, net inflows of cash and securities was negative JPY365.8 billion, but in the first quarter it turned positive to JPY472.9 billion.

As shown on the bottom-left, retail client assets climbed to JPY95.3 trillion, the second highest level ever supported by market gains. As shown on the bottom-left of page 6, net inflow into investment trusts and discretionary investments have been trending up each month and sales of insurance products have increased significantly as you can see on the bottom right. This demonstrates that we are starting to see tangible results from the transformation of our retail business model, reflecting a greater focus on making proposals based on an understanding of each client's individual life plans.

Please turn to page 7 for asset management. Net revenue was JPY23.3 billion, driven by an increase in assets under management and dividend income. This represents the best revenue quarter since September 2007. ING Securities Investment & Trust, the Taiwanese firm we consolidated from this quarter, has started contributing to asset management earnings. Pretax income increased by 56% compared to the last quarter to JPY8.3 billion despite booking FCR related expenses.

Please turn to page 8. The graph on the bottom-left shows the net inflows into the investment trust business excluding ETFs totaled JPY496 billion. As you can see on the right, assets under management in Fund Wrap and SMA discretionary investments, an area retail is focusing on, rose sharply in the first quarter. Our investment management capabilities continue to receive high recognition and we won a total of 13 awards in the R&I Fund Award 2014, the highest number of awards among all recipients.

Please turn to page 9 for an overview of wholesale. Net revenue declined 5% quarter on quarter to JPY188.9 billion. Investment banking revenues slowed from last quarter due to seasonal factors while global markets capitalized on revenue opportunities to deliver solid revenues, in line with the last quarter despite the uncertain market conditions. In addition, the majority of the JPY18 billion in FCR related expenses I mentioned earlier were booked in wholesale which pushed down pretax income by 83% to JPY5.7 billion.

Please turn to page 10 for an overview of each wholesale business line. First, global markets. Fixed income net revenue inched down 3% quarter on quarter to JPY104.5 billion as credit and securitized products offset a slowdown in rates. This represents a solid performance compared to our peers. Equities net revenue increased 5% to JPY62 billion. Cash equities remained firm and a rebound in derivatives contributed to revenues.

As you can see in the heat map on the top right, global markets revenues in the Americas and EMEA were roughly unchanged on an improvement in equity derivatives while credit and FX revenues improved in AEJ. This credible performance compared to the declining revenues across the industry of over 10% is the result of our efforts to grow our client franchise and diversify our business across regions and products.

Please turn to page 11 for investment banking. Net revenue in investment banking declined 30% over the previous quarter to JPY22.3 billion. Gross revenue was JPY43.2 billion. Investment banking first quarter revenues were at the second highest level in five years despite declining from last quarter as largely [CMTOs] in Japan slowed.

Internationally, net revenue declined from the strong prior quarter but increased in each region on an year-on-year basis. As shown on the right, we won a number of high-profile mandates in Japan and overseas and further built up our track record in multi-product deals in key focus sectors.

Please turn to page 12 for an overview of expenses. Group non-interest expenses increased 6% to JPY319.2 billion as compensation and benefits rose due to the JPY18 billion in FCR-related expenses and a rise in bonus provisions in line with performance. All other expenses declined quarter on quarter as you can see.

Please turn to page 13 for a snapshot of our balance sheet. Total assets were JPY43.9 trillion. Gross leverage was 17.8 times and net leverage was 11.3 times. Our Basel 3 Tier 1 and Tier 1 common ratios were both 13%, representing a slight decline from 13.2% at the end of March. This decline is mainly due to the share buyback program we conducted in May.

Applying the fully loaded Basel 3 2019 standard to our balance sheet at the end of June, we maintain a high Tier 1 ratio of 11.9%.

On page 14, last but not least, so we will see that there are no significant changes to our funding and liquidity from the end of March. So I will leave you to look at that later.

To sum up, we gained traction in the first quarter as we started to see the results of the transformation of our retail business, and asset management was able to capitalize on that momentum while also benefiting from new investments.

In wholesale, we strengthened our resilience to environmental changes by widening and deepening our international client franchise and ensuring consistent revenues in line with the last quarter.

The efforts we have made over the past few years are starting to show as tangible results, reconfirming that the strategies implemented by management have been the right ones. We will step up our efforts to create a lean organization resilient to environmental changes and continue to focus on improving profitability.

On August 1st our Group CEO Koji Nagai will speak about our medium- to long-term management vision and we look forward to seeing you there. Thank you.

(interpreted) (Operator Instructions) Masao Muraki, Deutsche Securities.

(interpreted) I have two questions. First of all, fixed income business related question. The second question is with regards to the regulatory environment. First of all, fixed income revenues in the first quarter or in the few past quarters the revenue levels had been more or less flat. When you look at the foreign investment banks, revenues are dropping. So if compared year on year, the revenue share has gone up at the momentum by 0.5 percent point. What is the reason behind what's the biggest contributing factor behind this phenomenon?

And I do have a related question, and this is the question always asked, credit fixed income, sales commission and trading breakup ratio, what is the breakup this time around in Q1? And April-May was probably sluggish and they were, I would assume, was recovery in June, but what's the situation in this current month of July in comparison to the three months from April to June? So those are some of the points I wish to know with regards to the fixed income business.

Secondly, the regulatory environment, most likely the increase of share of fixed income revenue, is backed by the regulatory environment [Depo] outstanding versus derivative notional amount post Lehman has reached record highs. And under this circumstance the leverage is what percent at the moment? And ultimately what is the hurdle that you wish to clear?

Basel 3% is the tentative agreement. Do you think that level is enough or in the United States they're talking about 5% hurdle? Do you think that it would be necessary for Nomura to seek a higher level as well? Thank you very much.

(interpreted) Then customer flow and trading revenue, fixed income customer flow 70%, trading accounts for 30%. And in equity customer flow 80%, trading revenues account for 20%. That's the breakup.

And the reason behind the share going up by 0.5%, since I was appointed to the current position last year I've been repeating my thesis as such that we are being able to do true business with the customers and it's because of the highly capitalized strength of Nomura and also the cost of funding is low in comparison to our peers. And on the regulatory front, we have been relatively advantaged, no Volcker rule or no foreign bank regulation being imposed in the United States, and therefore since we are healthily capitalized although others are trying to reduce their risk weighted assets we are not constrained by such draggers.

And on top of that, if there is another factor behind -- I'd forgotten what I was about to say. So cost regulation and, right, the relative rating, [50] last year single A minus upgrade. And even in other rating agencies for other financial institutions are being downgraded. So in many cases we are being selective, which is quite prevalent in the United States. And more recently in Asia, the relative rating towards Nomura has gone up and that has increased customers, and those are probably the reasons behind the share going up.

And as far as momentum is concerned, April, May, June and July and you have -- as you have rightly pointed out, April was a slow month and since around mid May we were back to normal and we were able to sustain that momentum in June. So in the end the results of Q1 was good.

Other institutions experienced 20%, 25% drop, not our case. And since the beginning of July, it's been dropping in comparison to June at our peers, and same applies to Nomura because of the summer sluggishness.

And your second question was with regard to leverage regulation. The Basel final rules have been announced but the interpretation is still uncertain and therefore it's not a situation where we can precisely do the calculation but as of the balance sheet end of June we think it's in the mid 3% range.

So if you are saying is the rule 3% or do we need to clear 5% like the Americans what would be the level of the requirement. Frankly speaking, we've never been asked for more than 3%. So in terms of minimum criteria, it is our understanding that the hurdle we must overcome was -- is 3%. Should there be a higher level of requirement, as I have been saying, 83% of our balance sheet is trading asset so we can streamline that or derivative compression can also be done. Those are some of the measures that would be made available to us.

(interpreted) Thank you very much. A related question on point one, you mentioned the rating. Moody's is considering upgrading and that has been made public and they're placing you under review at the moment. How many notches will you be upgraded we are not sure, but business-wise Nomura Securities' NSC Baa2 is the current rating. If that is upgraded to single A, then the impact would be quite significant. Is that how we should interpret or is it NHI, or the other day you obtained the ratings for the foreign subsidiary, Nomura America Finance; Baa3 is the current rating.

So in order for them to go up to single A, that would require three notch upgrade, so quite a significant upgrade. But at the holdings company level, unless it's upgraded to single A, there would not be any business impact. How should we interpret the impacts coming from ratings upgrade?

(interpreted) Now, two points have been identified by Moody's, one is performance and second government support. So in terms of probability, I think both is highly probable. Now if we become single A, that would make us very happy as you pointed out, but the bottleneck, now we have to ask the view of the customers by holdings Baa3. In this, it's just one step to non-investment grade, and that's what the customers are saying. So if we're one notch up -- usually people or institutions aren't upgraded two notches at once. So even if we are upgraded to the Baa2 by only one notch, that would have an impact because we would be furthered from non-investment grade.

And single A- at Nomura Securities, A3, if they are upgraded at NSC, then that would make us very happy.

(interpreted) Thank you very much for your response.

(interpreted) Natsumu Tsujino, JPMorgan Securities.

(interpreted) I would like to ask about the HR cost. On page 12, JPY18 billion of JPY168.8 billion is FCR. Q on Q, there is an increase of JPY18.2 billion. In which areas has there been an increase and how much increase has been seen in Japan and how much in overseas, if you could explain that?

And similarly, in terms of expenses, information processing and communication's occupancy, they're all down. Now if we look at others, there was a one-off expense in the fourth quarter, one-off in fourth quarter, but communication and occupancy what is the going to be the outlook of these expenses going forward? If there is a new investment IT-related expenses may rise, is that correct?

And the third question has to do with retail business. There has been a recovery in the sales of investment trusts. Under the new rules, in the fourth quarter the sales force may overreact to the new rules and things have worsened. But now it's going to settle down, so what about on the recovery process?

(interpreted) So there are three questions. Your first question, Q on Q increase of JPY36.2 billion, FCR JPY18 billion and what is the breakdown in Japan and overseas, there are two factors behind this. In Japan in retail in the fourth quarter, well, because it was the fiscal year end, bonus allocation was made relatively large in the first to the third quarter, but in the fourth quarter performance was not as expected. So bonus provision was less than initially expected. Now, as opposed to that in the first quarter in retail, getting back to your third question, this is related to your third question, revenue was very good and because it was the beginning of the fiscal year. With respect to bonus provision, the provision was relatively large and it did have an impact.

Other than that in overseas, with expansion of our business, as you can see from AEJ, on a consolidated basis the number of employees has gone up. There are two subs increase and (inaudible) has gone up.

And compliance risk must be responded to. We have increased human resources there. So there was an increase in cost or expenses in Japan as well as in overseas because of those reasons.

And your second question regarding communication and occupancy. With respect to occupancy of real estate, it's for the future announcement in 2013 we made and at around that time we did restructure. So occupancy expense has gone down. I don't think it will change very drastically going forward. Regarding information or communication cost, the introduction of new systems, could that happen to respond to regulation, yes, that could happen. But once the interaction has started over the mid to long term, there will be positive impact. So is there going to be a dramatic increase or decrease in the communications cost, neither. So I believe that they will remain more or less flat going forward.

And you third question, sorry, regarding business transformation, frankly speaking, between the first and the third quarters rather, excuse me, (inaudible) too much, there was a question from Bloomberg that there might have been some confusions from -- what I am told, there might have been some confusion. But in mid-April, Morita has reported to the board that there is no longer a confusion. I do visit branches myself and as I realized when I'm talking to our people in the branches the message that the management is trying to communicate to the sales force is being communicated well.

And the sales people do have a very strong resolve and determination to meet the targets that we have set for ourselves. So the performance between January and March was something that we were not satisfied with but between April and June we were quite satisfied.

(interpreted) So, FCR, this is non-FCR the breakdown was 50-50, is that correct?

(interpreted) Well, more or less, yes.

(interpreted) Thank you.

(interpreted) Jun Shiota, Daiwa Securities.

(interpreted) And I have two questions. Page 6, retail, by months the discretionary business has been growing. And how do you foresee the future? As indicated here your employees listen to the life plan of the customers, but other then this measure any changes in the evaluation criteria of the sales force? And in order to increase discretionary investment, is it the investment gains that is being sought or are customers placing importance on your people, listening to them in terms of their life plan? And what's the challenge at the branches as you try to grow this business?

The second question is with regards to expenses which was already touched upon, TSE's trading hours will be prolonged. And in response to that will you be reviewing the online transactions or would this require IT investment or reallocation of personnel? And how much cost will you need to incur as a result of those measures? Those are my two questions.

(interpreted) Thank you very much. Then the first question first. With regards to how we view the future, we will continue to ingest efforts into discretionary investment and investment trusts, and we've been doing the same type of evaluations that we've been doing, hearing sheet is made and commission revenue ratio is being reduced and increase of assets, clients assets or customer franchise, new customer and recurring revenue we're placing very high weight in comparison to the conventional criteria and brokers' commissions rate has been reduced so that the employees are seeking long-term net increase in client assets. And this has borne results. Of course, if investment gains are huge then that's all for the better. And most recently, asset management, Nomura Deutsche high yield infrastructure, other products, because of the good performance that invites new fresh money.

So that is one of the phenomenon being seen. And your second point is with regards to TSE night time trading hours and will that mean more cost. In the press conference, a similar question was asked and when I said the answer, our public communication people said Mr. Kashiwagi you should not be responding to hypothetical questions. So I cannot respond to any hypothetical question, sorry about that.

(interpreted) Thank you very much anyway.

(interpreted) Takehito Yamanaka, Credit Suisse.

(interpreted) I have two questions that I would like to ask. My first question is as follows. About wholesale overseas, there was a similar question raised earlier. In the Americas with FCR, profitability is retained and so customer franchise expansion must be having a positive impact. And aside from increase in share, expansion is customer franchised. Are there any other data that we can look at to suggest that customer franchise is in fact expanding, if you could share anything on that front?

And second on retail, page 6. If we look at the slide on page 6, discretionary investments and the sale of insurance is also included in the graph. So you conduct hearing and interviews with customers about their assets and is insurance sales going to be sustainable going forward? What kind of products do you actually sell? If you could explain that please, thank you.

(interpreted) So the first question regarding increase in share, that is happening centering around in the Americas. I can't give you a name but a consorting census survey has been obtained by us recently. And in terms of market share, I think we now have 2.7%. It's slow, but we have made it within the top 10 most probably. Last year it was only 1.9%. So our market share is rapidly growing.

And quite a large number of customers are now looking at us as meaningful counterparty, at least one of the meaningful counterparties. Before there were one-quarter, then more than one-third or our customers are saying so. And we have been able to gain more business with our large customers and that is why our share is up. There may be some other factors, but that is what is happening. What is interesting is that this relates to Muraki's earlier question, what's going to happen going forward.

17% of our customers are expecting to increase business with us, while there are a few others who are saying that they want to decrease business with us because there are more customers who would like to do business with us than those who would like to reduce business with us. People say that we have a momentum, we have in fact the greatest momentum among the peers. So I think there is high probability that our share in the US will further increase in the future.

And to address your second question, the product sold, annuity type of products, they account for the majority of the insurance related products that we sell. Dai-ichi (inaudible) a Japanese insurance, MassMutual in overseas, MetLife, ALICO, these inheritance related annuity related products. Our customers, many of them, are elderly people, we have captured their needs and they purchase some of these products from us for inheritance purposes.

(interpreted) So is this insurance business sustainable?

(interpreted) Yes.

(interpreted) Thank you.

(interpreted) David Lui, Guoco Management.

Could we turn to page 20 of your PowerPoint, please? It shows that the stock brokerage commission from your retail customers declined from JPY22.6 billion in the fourth quarter to JPY15.8 billion in the June quarter, the just-ended quarter. It seems to me that this decline was much bigger than the shrinkage of the retail investor trading value volume on the TSE. Could you shed some light on why there was such a drastic decline? And that's my first question. I have one more. Thanks.

Okay, thank you, David. So let me try to answer your question. Our transaction volume in the retail stock brokerage came down around I think 40% as opposed to 20% industry average. My interpretation is as follows, during the fourth quarter we have seen a very strong equity transaction volume compared to the investment trust distribution during our challenging market environment time. As you know that the -- as you remember that the equity market dropped like a 14% or 15% in some moment.

And in addition, as you may remember that Nomura was suffering from sort of the sluggishness of the retail activity due to the change in culture of the marketing sentiment from the brokerage commission-type oriented company to the more advisory function, advisory fee type company. During that time the management indicated we have to ask our client to hold medium term, in terms of the investments that we have to hold for the medium term, that that medium term has been -- had been interpreted by our sales forces for three years.

So my guess was that during that time our sales forces saw the dip on the market, but if they asked their client to buy investment trust because of the management decision those clients cannot take a profit for three years. So they are so much afraid of that, so instead of recommending the investment trust, they marketed the Japanese equities, particularly ETF. During that period, we saw like $500 billion of ETF. Those number came off as we recovered, as we smooth the transit into the new area or era of the advisory type marketing sales force rather than the brokerage commission type sales forces. And that is the reason I think that we have seen a significant drop in equity as opposed to the good distribution commission generated from the investment trust.

Okay. I have a follow-up, Kashiwagi San. Should we expect this decline in the market share of retail trading to continue as Nomura focuses on providing consulting or advice as opposed to generating retail brokerage commission? Should this be continuing, this shrinkage in market share?

I think it's fairly dependent upon the client's appetite as well the market trend. But in general I don't think we are no longer the firm to chase the sort of the short-term trading activity by the equity transaction by our retail clients, rather we will spend more time and more effort to cultivate the long-term relationship with our clients.

Okay, great. Thank you.

My second question is actually on the compensation. You already explained that JPY18 billion was a result of the Full Career Retirement benefits that you gave to your employees. But that did not still fully explain the huge jump in compensation in the June quarter versus the March quarter. I think there was an increase of around JPY36.2 billion. And you also explained that part of that was because of the extra bonus that you gave to your retail brokers in the June quarter. Should I interpret this as a -- as going forward that there will always be this big jump in the first quarter, June quarter of every year because of the extra bonus that you will be giving up, giving up to your retail brokers?

Okay, so assuming the market environment doesn't change and assuming that the Nomura's profitability will not change in a significant manner, I would say -- and also assuming that there is no change in accounting rules that the -- I think that the -- we tended to have a higher, the accumulation of the bonus pool during the first quarter of the year in addition to the FCR, the Full Career Retirement, as we have seen.

And as you may have noted that during last year, if you look at the page 12 of the presentation material, the first quarter cost base was JPY163.2 billion and it came down to the, on average, around JPY135 billion during the second, third and fourth quarter. So, going forward, I am expecting a similar thing will happen during the second to fourth quarter of this year or even bigger decline should happen. In the meantime, assuming that everything being equal that we should expect some jump in the first quarter. The management of the each of the division tended to try to accumulate the bonus accrual during the first quarter.

All right, okay. Thank you, Kashiwagi San.

(interpreted) (Operator Instructions) Katsunori Tanaka, Goldman Sachs.

(interpreted) I would like to ask about the revenue in overseas. Counterparty credit spread change and if we exclude FCR, the profitability in overseas, how is it going to change? Could you give me a guidance or guideline on that?

And my second question is as follows, the bottom-line volatility is very large. On this point, is this something that you think cannot be helped? Is there any effort made internally to smooth this volatility? So those are two of my questions. Thank you.

(interpreted) So to address your first question, FCR and [UCV], if we exclude them what happens, profit and loss overseas on a net basis is profitable. And for the Americas, as we have shown in the financial performance, we have been able to lay the foundation to consistently produce profitability. And in Europe ever since we took over the Lehman business, we have been able to retain customer franchise and we have been able to reduce the breakeven point and have a stable revenue source.

And so considering the capabilities that we have in Europe, we could have had a profitability this year. In Asia, competition is very intense. A negative JPY300 million in the first quarter, that was the performance in the first quarter, but actually the reality was worse than that, frankly speaking. As far as the trends however, in February, March and April performance is sluggish, but between May and July things started to pick up. ECB interest rate reduction and ForEx business which we struggled before has started to recover. So we're on a recovery track in Asia.

And your second question, on a quarterly basis can we do something about the tax rate and its volatility? If we can do anything about it, it would be best, but we can't do much. Smoothing may not be the term that I should use as the CFO. Of course it's more desirable to smooth the rate. But for that to happen we need to have more profitability overseas.

(interpreted) Thank you.

(interpreted) (Operator Instructions) There seems to be no question, so we will conclude the Q&A session. Now there will be closing remarks from Nomura Holdings.

(interpreted) Thank you very much for being with us until late in the evening. If I may give one supplementary comment with regards to Mr. Yamanaka's, question by Credit Suisse, Mr. Yamanaka, whether the pension and insurance annuity business is sustainable or not, let me share with you some data. The number of insurance sales people in the branches ratio, especially in Q1, was 14% to 15%. Since the beginning of June, it's gone up to 44%. Conversely speaking, it's not yet 100%, so not 100% of the sales force are selling the insurance and annuity related products. But it means that this is sustainable because it still means that there is much more room for increasing sales as we suggest this to the investors.

And we will continue to make best efforts in order to give the best disclosure; that is understandable to all of you. So once again thank you very much for being with us and have a good evening.

(interpreted) Thank you for your taking time. And that concludes today's conference call. You may now disconnect your lines.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.