Nomura Holdings Inc (NMR) 2015 Q2 法說會逐字稿

Thank you. This is Shigesuke Kashiwagi. I will now give you an overview of our financial results for the second quarter of the year-ending March 2015, using the document titled Consolidated Results of Operations.

Please turn to page 2. For the first half of the fiscal year, we reported net revenue of JPY744.7 billion and the income before income taxes of JPY125.7 billion. First half net income was JPY72.7 billion, the second highest level in 10 years, following on from the high recorded in the first half last year.

In the second quarter, the environment remained challenged, as geopolitical risks, such as the situation in Ukraine heightened and investors weighed the outlet for a monetary policy. In this environment, second quarter net revenue increased by 1% to JPY373.8 billion and income before income taxes grew 43% to JPY74 billion. Net income increased 166% to JPY52.9 billion. Second quarter ROE was 8.4% and EPS was JPY14.15.

In terms of shareholder returns, today we announced an interim dividend of JPY6 per share, making a dividend payout ratio of 30.2%. In addition, our Board of Directors today approved a resolution to set up a share buyback program in order to raise capital efficiency and ensure a flexible capital policy. The upper limit will be 40 million shares, which equates to 1% of outstanding shares and a maximum aggregate repurchase price of JPY28 billion. Of these 40 million shares, approximately 20 million are expected to be used for stock option exercise in the future. The approximately 20 million shares remaining will be used flexibly for various purposes related to our capital management policy.

The performance for each business is shown from page 5 onwards, which I will discuss in a minute. Regarding our business segment results shown on page 4, segment Other includes a JPY6.4 billion gain from changes to our own and our counter-parties credit spreads, as shown in the box at the bottom of the page. This is compared to a JPY7.1 billion loss last quarter.

Last quarter, we also brought forward the booking of Full Career Retirement related expenses of approximately JPY18 billion, which means expenses were down for the second quarter. As a result, income before income taxes grew 43%, even though net revenue inched up by only 1%.

I will now give you an overview of performance in each business. Please turn to page 5 for Retail. As shown on the bottom left, total sales were up 20% quarter-on-quarter on robust sales of equities, investment trusts and discretionary investments. Net inflows of cash and securities were approximately JPY480 billion, which together with market factors drove retail client assets to a record JPY99.3 trillion at the end of September.

Retail net revenue increased 10% quarter-on-quarter to JPY117.9 billion and income before income taxes rose 23% to JPY38.9 billion.

We continued transforming our retail business model and as you can see on page 6, the changes are becoming evident in discretionary investments and investment trust net inflows. Discretionary investment net inflows in the second quarter last year averaged JPY1.1 billion a month. That increased to an average of JPY80.9 million a month in the second quarter. Inflows in September reached nearly JPY100 billion and we continued to build on that momentum with October inflows trending even higher.

Second quarter recurring revenue was JPY15.2 billion, which is over JPY60 billion on an annualized basis. This is ahead of plan to meet our March 2016 target of JPY69.6 billion. As shown in the bottom-right, sales of insurance products slowed slightly from last quarter, but we continued to make progress in the insurance business while growing discretionary investments and investment trust net inflows.

To further accelerate the transformation of our business model and support the needs of our clients to build their assets over the mid-to-long term, we have decided to revise certain aspects of our HR system. Specifically, we will extend the time employees in the General Career Type A category spend at each branch before being transferred. We will also create a new employment category aimed at expanding recurring revenue. The retirement age for this category will be set at 65, but employees will be able to extend their contracts until they turn 70. They will be paid for performance and more weight will be placed on recurring revenue than transaction revenues.

Please turn to page 7 for asset management. Net revenue was JPY21.7 billion, down 7% from the previous quarter, which included dividend income. Income before income taxes slipped 6% to JPY7.8 billion, but remains at a solid level. Assets under management reached a record JPY34.8 trillion as of the end of September on inflows into the investment trust business, primarily the Nomura, Deutsche Bank high dividend infrastructure stock fund, as well as market factors.

In the Investment Trust business, sales of privately placed funds for regional financial institutions were robust and we saw a marked increase in assets under management in Fund Wrap and SMA funds. In the Investment Advisory business, we're working to expand our distribution channels for UCITS-compliant funds into regions outside the EU, such as Asia and South America.

Please turn to page 8. In April, we converted ING's Taiwan operations into a consolidated subsidiary and this month changed the company name to Nomura Asset Management Taiwan. During the second quarter, as shown on the bottom right, we saw progress in new businesses and worked to develop products tailored to client needs and improve investment performance.

Please turn to page 9 for an overview of wholesale results. Net revenue increased 1% quarter-on-quarter to JPY190.6 billion. Revenues remained resilient amid challenging market conditions, as stronger revenues in Japan and AEJ offset a slowdown in EMEA and the Americas. As FCR related expenses were booked last quarter, income before income taxes increased 3.9 times quarter-on-quarter to JPY22.2 billion.

Please turn to page 10 for performance by business line. Global markets posted a net revenue of JPY168.1 billion, up 1% quarter-on-quarter. Fixed income net revenue was JPY104.1 billion. Client revenues grew and robust performance in the FX business offset a slowdown in other products.

Equities net revenue increased 3% to JPY64 billion, although equity derivatives saw a slowdown from the strong prior quarter. Cash equities made a solid contribution to revenues. Most products in Asia, ex Japan, reported strong revenues in the quarter. As shown in the heat map on the top right, the Americas and EMEA saw a decline in fixed income revenues, while Asia ex Japan FX and equities revenues improved, and Japan had a solid quarter in cash equities, rates and foreign exchange.

Please turn to page 11 for Investment Banking. Net revenue increased 1% quarter-on-quarter to JPY22.5 billion. Gross revenue was JPY40.7 billion. Despite a smaller fee pool in Japan, we won a number of high profile ECM and DCM mandates and revenues remained roughly unchanged quarter-on-quarter. We're building out our solutions business, which is growing in Japan. Internationally, although revenues declined from last quarter, they increased year-on-year on good performance in the Americas and Asia ex Japan.

As shown on the right, we were involved in many M&A transactions, including Japan related deals. We also saw an expansion of businesses associated with M&A, such as acquisition finance and risk hedging services. In the Americas, we are gaining a track record in equity finance. In AEJ, we are diversifying our revenue mix.

Please turn to page 12 for an overview of expenses. Second quarter firm-wide expenses declined 6% quarter on quarter to JPY299.8 billion. Compensation and benefits declined significantly, as the first quarter included FCR-related expenses of JPY18 billion. Commissions and floor brokerage increased in line with trading volumes. Business development expenses increased due to higher NISA and other advertising costs.

Please turn to page 13 for an update of our balance sheet.

Total assets were JPY43.8 trillion. Gross leverage was 17.1 times and net leverage was 10.7 times. Our Basel III Tier 1 and Tier 1 common ratios were both 12.7%, down from 13.1% at the end of June. Previously, the risk weighting for equity exposures was 100%. This is now 300% for listed equities and 400% for equity exposures that are not publicly traded. This is because transitional arrangements or grandfathering ended in July. As a result, our risk-weighted assets increased by JPY600 billion. Applying the fully loaded Basel III 2019 standard to our balance sheet, at the end of September, we maintain a high Tier 1 ratio of 11.8%.

To sum up, during the second quarter, we continued to make progress in the direction set out by top management as we gained traction in transforming our retail business model and grew assets under management in Asset Management.

In October, Moody's upgraded us by two notches. We have seen a bigger reaction to this by counterparties compared to the upgrade by Fitch last year. We expect our Wholesale client business to grow further on the back of this.

Given the current state of the regulatory environment and our business in each region, we are shifting market risk, which has been concentrated in London to Japan. We have also focused on reducing liquidity risk and we expect interest expense related to regulatory compliance in London to decline by over $50 million annually.

Looking at the current quarter, October got off to a challenging start due to the spike in volatility and decline in liquidity, which also combined with seasonal factors. However, we remain focused on delivering a good set of results for the second half, underpinned by the progress I have just mentioned. Thank you.

(Operator Instructions) Muraki, Deutsche Securities.

I would like to ask about the wholesale division. You mentioned the upgrade by Moody's. Previously when you had your upgrade, you visited overseas investors in a caravan or by a road show process and you worked on benefiting from the upgrade, but what are you planning to do this time to gain market share from the upgrade?

And my other question is with this upgrade of two notches, which part of your business will benefit? Where will you see the positive impact from the upgrade and from which quarter will you start seeing the positive impact of your upgrade? Could you talk about the upgrade -- the impact it has on your business and your revenues? And in relation to wholesale, you talked about your partial shift of positions from London to Japan, but on page 32 of the presentation, you show Europe, Americas and Asia-Pacific. Compared to three months ago, the headcount has increased and I am sure there are new employees or new graduates joining overseas, but even year-on-year there has been a headcount in Europe and the Americas. So your headcount overseas has been increasing. Which divisions or which businesses are you expanding through this headcount increase?

And my second point is the change in the HR structure that you mentioned and you will have a new job type, a General Career Type A. What is the percentage of these Type A people and how many of these people will be positioned in the branches longer compared to the past? Could you give me the percentage of the people who will be staying in the branches longer?

This is Kashiwagi. Let me address your questions one by one. First question was about the impact from the upgrade and what we will do in terms of communicating this to our clients. Actually tomorrow I will be -- we will have people leaving Japan to visit Europe and we also -- and visiting clients overseas. This is part of the regular update. And for U.S. we will conduct a stakeholder communications with the clients, regulators, rating agencies and we've a communication officer in-charge of this type of stakeholder communication. So he will be visiting our stakeholders. For Asia, we still do not have any plans to send people over from Tokyo, but the CFO in Asia will communicate with our clients. And right now our sales branches, sales offices in Asia have been asking us about the impact of Moody's and also details on the deposit insurance law; we're receiving inquiries from Asia.

And that will lead to the impact on our business, which was the second part of your first question. As for the sectors which will be impacted, it will mainly be asset management or asset managers which handle other people's money and also businesses which cover the public clients, public institutions and also international organizations. These clients will start doing more business with us, mainly in derivatives, because we would probably meet or we now meet the minimum level of ratings which they require. And actually two weeks ago, when we attended the World Bank Meeting in Washington for the IMF, with our COO, Mr. Yoshikawa, and Mr. Ozaki from Wholesale, and we had meetings with clients and we talked about the upgrade and then they offered to do derivative transactions with us. We got this immediate response and feedback from them.

Last year when we were upgraded by Fitch, I think, compared to that time, I think this time the impact is larger. And in terms of the timeframe, we still have to sign the [ISTA] agreements with our clients, so we're not going to see an immediate effect, it will probably be mainly starting from next year onwards.

As for your second question about the headcount, yes, as we have pointed out, in Japan, we had the new graduates join this April, so June end was large in terms of headcount, whereas for the overseas, we had the new graduates and also the summer interns included in the headcount, there were some summer interns. And in terms of AEJ, this also includes India where there was headcount increase. And the sections which are seeing the increase in headcount is not so much the front office, but more the middle and back office and the like operations, IT, risk management, these divisions are seeing the headcount increase. This is probably due to our response to the regulatory environment.

Your third point about the General Career Type A, we have included some information in the disclosure. The total number is 14,391 people and we do not disclose the breakdown. So we hope you understand. But in the past it was typical for them to be relocated after three years, but going forward we want to extend the coverage with our clients in various regions, so we're thinking of extending that three years to five years.

Just a follow-up question for the -- in relation to the first question, the ratings upgrade. Your balance sheet will be evaluated better or stronger, thanks to this upgrade. But in the conference calls of foreign banks, overseas banks, one of the reasons they cited for market volatility is because of the trading volume and the repo positions and the various institutions lowering the positions. So each financial institution are strategically using the very valuable repo positions, but in your case, with your stronger balance sheet, how do you plan to utilize it? How are you utilizing it at the moment? If you just look at your balance sheet, on a relative basis it seem that you seem to be -- the balance sheet seems to be expanding or not shrinking compared to your peers, but how do you plan to use your balance sheet and actually collect revenues using your balance sheet?

This is Kashiwagi. As for the balance sheet, we believe our balance sheet is relatively, I wouldn't say, loose, but we are not limiting the usage of balance sheet as much as our peers. But having said that when you think about the regulatory environment in the future, we cannot leave the current situation as it is and I've been talking about this with the front office teams. And when we talk with retail and also equities fixed income, in order to allocate resources, they are tending to focus more on the larger clients in their resource allocation. And when we offer the balance sheet usage or leverage, we make sure that the business is going to generate a certain level of profits. And if you look at our balance sheet, it has shrunk by JPY100 billion. This is probably due to the -- because the yen weakened, the balance sheet could have increased or expanded, but we have -- our front office has been controlling the balance sheet through efficient operations.

Tsujino, JPMorgan Securities.

First of all, regarding page 10, the heat map on page 10, fixed income this time in the Americas, Europe, they are all coming down, they are down by 30% or so in these regions. Not many firms disclose these details. If we look at your peers, they do not disclose to such an extent. They usually focus on Europe and Americas. Quarter-to-quarter, the declines of your peers are several percentage points, but you are down by 30%. So why has this come down and what are the characteristics which have contributed to this and what is the outlook for the third quarter?

You know that I have taken a close look at all our foreign peers, but quarter-to-quarter there has not been much of a decline, but some firms, when it comes to emerging currencies or emerging markets or currencies, some have had strong performance. That's exactly the same for us. Our ForEx business has been very good and that's why overall it's fine. In other words, other segments were not very good. Japan was good region wise and Asia ex Japan, in terms of rates, ForEx, structured product related business, the Asian financial institutions who manage their surplus funds and they have had strong demand for our products. As far as ForEx business is concerned dollar is strong. We were able to capture that trend. And in Asia, there are strong countries such as Indonesia and India, as opposed to weaker countries. So in terms of the trading environment, I think it was easier for our clients to trade.

So in Europe and Americas, [my comments] and there were some developments in those other regions. It was difficult for people to capture or identify trends. So in Europe and Americas, rates and credits in those segments we saw a slowdown. What offset it, that was global ForEx and Asia emerging markets business.

Now going forward, our outlook is as follows. (inaudible), the market has seen increased volatility. In August when volatility was low it was tough, into October with increased volatility, it's not easier either.

In terms of the season between October and December trading by clients tends to slow down. So we're not after profitability over the short-term and we have been reducing risk since the end of September. If there is an opportunity we will look to increase risk, but for the time being we're going to see a slow trend and with the upgrade by Moody's we like to take advantage of that and make solid efforts in sales into the next year.

I've two technical questions remaining. One, for the firm overall, the liquidity [pool] cost Q-on-Q has it increased or is it flat?

Our firm-wide liquidity pool cost is more or less flat. It is [fair] that the cost allocation to corporate items are rising, I mean that the allocation to the business segments is decreasing. That may be the tendency that we might have seen this quarter.

May I? This is my last question, thanks for being technical. I'm looking at the number for unrealized gains and losses in investments in equity securities for operating purposes and I wonder if the changes in the unlisted securities gains and losses are included in this or not?

No they are not.

Understood. But Ashikaga's shareholding that's being reduced and it's listed elsewhere as a negative, is that correct?

I am sorry, Ashikaga is under the others.

Shiota, Daiwa Securities.

This is Shiota from Daiwa. I've two questions, one is in relation to the retail business. On page 6, you show that the discretionary investments, discretionary comps saw a large growth and in your comments you talked about the target of JPY69.6 billion for March 2016 and how you're outpacing that, and the client assets exceeded JPY99 trillion, so you're getting closer to the JPY100 trillion mark. So you saw a lot of growth in the quarter, but was this due to some kind of extraordinary reason or was it thanks to the strong market? Could you explain the reason for this strong growth and your future outlook? Is this kind of very fast growth going to continue? Could you share your views on that please?

My second question is in relation to your share buyback, and you will use half of the shares that you buy back for stock options. Going forward, how many more shares do you have to buy back for using for the stock option purposes?

As for your first question, are you talking about the discretionary investments or are you talking about client assets or just are we talking in general?

Yes, I was talking about discretionary investments and also the increase in the net inflow.

There were no extraordinary items -- extraordinary reasons. So I think it was a result of us capturing our clients' needs, based on the shift in our business model. So it's a result of our efforts I think and we expect this to continue in the future. And as I mentioned in my presentation, the discretionary investments have seen further acceleration in the month of October.

This is Shiota again. So it's not really due to the strong market, it's based on your own efforts?

Kashiwagi again. Yes, I think what we saw this month is that we saw growth, even though the overall market declined the sales to our clients, especially in the equities area, we saw a lot of growth in our sales, even though the overall market was down. And for discretionary investments, there are people who buy regardless of whether the market is going up or down and actually not only did we win new accounts, but also some of our existing clients increased their holdings, or increased their balance and we expect that to continue in the future as well.

This is Kashiwagi. Your second question about the stock options and also the share buyback and how many more shares we need to buy back for stock option purposes, well this will be calculated at the end of the fiscal year, after we have closed the books and we calculate the results and we will allocate the shares for stock option. So we do not have a clear figure for you, but the reason why we conducted this share buyback is not to allocate shares for previous stock options, but it is for allocation for next May and we're buying part of the shares that we will be using in next May. So it's not for previous stock options.

This is Shiota again. So when you say part -- this action was for part of the stock options in May, does this mean that you will continue having to buy shares in next year? Is there a fair chance that you will need to buy more shares for stock option?

Yes, at the end of April next year, we will go and buy the remaining shares we need for next year's stock option and we're diversifying the timing of acquisitions of the shares for stock option.

(inaudible), Merrill Lynch Japan.

My name is (inaudible) from Merrill Lynch. I have just one point to ask about the domestic HR system and its change. Why are you changing the system at this timing? What is the motivation or the rationale behind the change, if you could please explain? You talked about the term and the paying out, does that mean that short term costs are going to rise or are you expecting operating income to go up in the future? So if you could further elaborate on that. Those are the two points I wanted to ask.

There are two separate discussions, General Career Type A, their posting will be extended from three years to five years. So that's one thing. And another aspect is for General Career Type A or B, those who want to apply to them, they can remain in sales positions and they can serve up to age 65 and they don't have to be transferred, they don't have to move. We have an FA system, so it's going to be a new system, similar to the FA system that's currently in place. The basic philosophy behind is the same. For one thing, we want our people to serve the local customer in the local community over an extended period of time. We want them to have solid dialog and gain their trust. So that AUM can be increased and more than the brokerage revenues, [stock] revenue should be focused upon as they conduct their sales activity. So those are the two main reasons.

And to give you further detail in terms of the age balance, I think it's the same with any financial institution in Japan. In 1989 -- 1991 we were having a large number of employees who belong to that Asia bracket, but when it comes to those who have slightly younger than those people, the number of employees is smaller. So those two will be reaching middle managerial positions, we want them to work longer and demonstrate their experience and expertise that they have accumulated over the years to sell to their customers in their sales activities. So that's the purpose of the system. It may appear as a sudden decision, but actually this is something that we have been internally discussing for the past year or [two].

With respect to incentives, what kind of incentives are you going to give them? Are you going to review the incentives this time as well?

The payout for brokerage revenue will be reduced and stock revenue related payout will be increased and we want to make sure that short term costs are not going to rise, but as the balance goes up in the future, the revenue that we gain will be greater, that is what we expect to see.

This will start at the beginning of the next fiscal year, when will this be initiated? That will be my last question.

This is going to be implemented April next year.

Niwa, SMBC Nikko.

I've two questions. One is in relation to the domestic investment trust sales and the tone or the pace of sales, and second is in relation to the tax. First, I don't know if you -- based on the time series data on page 23 of the presentation, you show the investment trust sales in Q2, JPY2.4 trillion. Is this level an organic level? And historically, I think this is in-line with the average -- the historic average. But based on the current situation of your sales activities or your retail business, how much organic growth can you expect going forward for investment trust sales? That's my first point. Second, this is a technical issue, but the tax expense was relatively low in Q2, and could you explain why and also could you explain the thinking behind the tax?

Yes, for investment trust sales, compared to last year, when there was a lot of trading volume and the market suddenly picked up due to the tax -- changes in the tax scheme or changes in the tax break, I think we cannot compare with last year. But the investment trust constantly grew during the September quarter when the market was relatively quiet and in October we're continuing to see steady investment trust growth. So I think we will continue to see growth, regardless of market conditions.

And secondly, as for the corporate tax, it was 28% and this is mainly due to the overseas profits, especially in Asia we booked a lot of profits in Asia, or AEJ. And on a net basis -- the tax is not calculated on a net basis. So if one office, one region generates large profits in overseas, we can use the deferred loss or cumulative loss to offset the profit. And this quarter, the main reason for the low tax was because of the large profit in Asia. And there are some other tax adjustments that have been made. So from the next period onwards when things normalize, the tax should go back up to the lower 30% range, which is the normal level.

(Operator Instructions) A few closing comments from Nomura Holdings.

Thank you very much for being with us until late in the evening. For the second quarter, between July and September, we the top management are satisfied in terms of retail reform and asset management segment is increasing its balance. We're very pleased about that. As far as the Wholesales division is concerned, we're having better relationships with overseas regulators and they are leading to reduction in funding costs into October.

Thanks to our efforts, Moody's has upgraded us and the momentum is increasing, thanks to that. And in terms of the business portfolio, Asia is doing very well. We have a pretty well diversified revenue source and we shall continue to make efforts in the second half. Thank you once again.

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.