Nomura Holdings Inc (NMR) 2017 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 2017 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 pressed 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 achievement 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 variations, competitive conditions and size, number and timing of transactions.

With that, we'd like to begin the conference. Mr. Takumi Kitamura, Chief Financial Officer, please go ahead.

Good evening. This is Takumi Kitamura, CFO. I'll now give you an overview of our third quarter financial results. Please turn to page 2 of the document titled consolidated results of operations. This is the executive summary page.

As you are well aware, last year monetary policy took center stage around the world and we saw a number of events that could be considered historical turning points such as Brexit and the US Presidential election in November. In the latter half of the year, as uncertainties started to fade away, we saw renewed risk taking in the equities markets, and in the fixed income markets, heightened volatility in rates and FX lead to a rush of investors rebalancing their portfolios.

Amid this environment, we reported a 35% increase in income before income taxes for the nine months to December to JPY240.5 billion and an 18% increase in net income to JPY178.4 billion. ROE for the period was 8.6% and earnings per share was JPY48.76. Although declining year on year, retail performance has continued to improve after bottoming out in the first quarter.

Asset management reported stronger income before income taxes compared to the previous year due partly to an increase in assets under management. Wholesale reports a significant gain in income before income taxes as fixed income booked stronger revenues and we saw the benefits of cost reductions. In our international business which has been one of our key challenges, all regions were profitable with income before income taxes of JPY71.4 billion, which accounted for 30% of Group income before income taxes.

Turing now to third quarter results, as you can see on the top right, Group income before income taxes was JPY95.9 billion, up 17% quarter on quarter. And net income increased 15% to JPY70.3 billion. This represents a significant improvement in earnings since the trusts in the fourth quarter of last year. Earnings per share was JPY19.44 and third quarter annualized ROE was 10.3%.

As shown on the bottom right, total income before income taxes from the three business segments was JPY87.4 billion. All businesses reported stronger net revenue and income before income taxes compared to last quarter. Let's now take a look at each businesses in more detail.

Please turn to page 5 for retail. Net revenue increased 18% quarter on quarter to JPY101.3 billion. Income before income taxes grew 80% to JPY25.9 billion. As the stock market rallied and the yen depreciated after the US Presidential election, investor sentiment improved and we saw a strong trading in stocks, investment trusts and bonds.

Total sales shown on the bottom left recovered to over JPY3 trillion for the quarter. In particular, secondary sales of Japanese and international stocks, JGBs for individual investors and foreign bonds increased considerably. Investment trusts reported inflows into funds for US high yield bonds and US equities.

As you can see on the bottom left of page 6, discretionary investments saw net inflows of JPY42.6 billion. Spread on by market factors, client assets and discretionary investments grew to JPY2.4 trillion as of the end of December. The market rebound also drove an increase in client assets in investment trusts and recurring revenue recovered from the previous quarter.

Please turn to page 7 for asset management. We continue to book inflows into investment trusts and the investment advisory business in the third quarter lifting assets under management to a record JPY43.2 trillion. This led to an increase in management fees which also combined with gains related to American Century Investments and dividend income to give a quarter on quarter increase in net revenue of 36% to JPY28.9 billion.

Income before income taxes was JPY14 billion, the highest quarterly result since the year ended March 2002. The investment trust business reported inflows into ETFs and privately placed funds for regional financial institutions. In the investment advisory business, we won mandates from Australian and Chinese institutional investors mainly for high-yield products.

Please turn to page 8. As you can see on the bottom right, we are moving forward with various collaborative efforts with American Century Investments or ACI, the US Company we invested in last May. In November, we set up the US Value Strategy Fund managed by ACI and targeted at retail investors in Japan. A Japanese pension fund also started using a global equity product managed by ACI.

Please turn to page 9 for an overview of wholesale results. Net revenue increased 10% quarter on quarter to JPY197.3 billion. The Americas and AEJ had a good quarter. Fixed income was the main driver of revenues as FX and the rates businesses delivered resilient performance. Despite making bonus provision in line with the pay for performance, we continue to stringently control costs and income before income taxes increased 21% to JPY47.4 billion.

Please turn to page 10 for an overview of each business line's results. Global markets reported net revenue of JPY173 billion. Fixed income net revenue increased 18% to JPY117.3 billion on strong performance in rates and emerging market's FX. As you can see in the heat map on the top right, the Americas reported solid performance in the rates and FX and AEJ had a good quarter in emerging markets. And both regions show a positive upward trend.

Equity's net revenue was roughly in that quarter on quarter at JPY55.8 billion. Although the quarter got off to a slow start in October, the market rebound following the US Presidential election led to increased client activity in November and December. The heat map shows AEJs result from a strong previous quarter, but the other three regions all reported higher revenues.

Please turn to page 11 for investment banking. As you can see on the top left, third quarter net revenue increased 2% quarter on quarter to a JPY24.2 billion. Gross revenue, which represents revenues before allocation to other divisions, was roughly unchanged at JPY41.7 billion. Japanese revenues declined as equity financing by Japanese corporates dropped off. However, we continue to diversify our revenue streams across business and regions. And the Americas and AEJ performed well.

The right hand side showed some key deals for the quarter. In M&A, we leveraged a global franchise to win a number of cross-border and multi-product mandates. As you can see, we are moving beyond Japan and increasingly winning the mandates to advise overseas companies.

Please turn to page 12 for an overview of expenses. Third quarter non-interest expenses were JPY272.7 billion which, as you can see, represents a steady decline in expenses compared to a year ago. However, third quarter expenses were up 3% quarter on quarter due mainly to yen depreciation and an increase in non-personnel expenses such as business development expenses.

Please turn to page 13. Total assets were JPY43.1 trillion and the shareholders' equity was JPY2.8 trillion. Our Tier 1 capital ratio was 18.5% and our Common Equity Tier 1 ratio was 17.6%, both down slightly from September due to yen depreciation which caused risk-weighted assets to increase by JPY900 billion from JPY13.7 trillion at the end of September to JPY14.6 trillion at the end of December.

Applying the fully loaded 2019 Basel III standard to our balance sheet at the end of December gives a CET 1 ratio of 17%. Our leverage ratio was 4.47% and our liquidity coverage ratio was 178.6%. That concludes the overview of our third quarter results.

To sum up, 2016 was marked by several major events that shook the markets. However, especially in the third quarter, we delivered an overall solid set of results well balanced across all regions and businesses. In the past, Nomura relied heavily on its Japan business, in particular retail, but by focusing on our core businesses and enhancing cross-regional and cross-divisional collaboration, we have been able to diversify our revenue sources and spread earnings out across regions and divisions.

Our most recent performance remained solid overall. Retail performed well in January although down slightly from third quarter numbers as there were fewer business days in the month. Yen depreciation and the stock market rarely have had a positive effect on assets under management in asset management. Wholesale continues to build on the momentum gained through the third quarter with fixed income as the key driver of revenues. We'll continue to work to generate consistent revenues and to control cost stringently to ensure sustainable growth.

Thank you very much.

(Operator Instructions). Masao Muraki, Deutsche Securities.

I have two questions. First is about your expenses. On a consolidated basis, if you look at your results for compensation and benefits, on a year on year basis the top line has grown but your compensation and benefits has fallen significantly. And on a Q-on-Q basis, again top line has grown, but compensation and benefits has been remained flat. And with the weakening of the yen, both the top line and compensation and benefits could have gone up on a Q-on-Q basis, but this time your growth in compensation and benefits has been smaller than your top line growth. And is it because you changed the way you make provisions for bonuses? That's my first question.

And my second question is, when you mentioned the recent situation in January at the end of your presentation, could you give me more color on the retail and wholesale businesses? For retail, I believe the sales is slowing down and for the outflow from investment trusts which was quite strong in October to December. Has there been any change in January onwards or is the outflow continuing?

Moving to wholesale, could you tell me the difference between geographies or businesses? For example, fixed income, the Americas and Asia was strong whereas equities Japan was strong. Is the same trend continuing in January? So, is the same trend as Q3 continuing in Q4?

Regarding the first question, compensation and benefit whether -- even though it's likely to be inflated because of weaker yen the compensation and benefits didn't change from the second quarter and why was that, that's your question I understand. For one thing, in the second quarter, the first half bonus provision was made and included in the second quarter, that's the first reason. And secondly, up until the second quarter, we had the fixed labor cost which corresponds with salary. The level of salary came down in the third quarter. As a result, in the third quarter the performance-linked bonus provision was accrued to some degree, but consequently on a Q-on-Q basis we do not see much difference.

For compensation and benefits, which you asked about, involves relevant point. The run rate cost for wholesale overall has trended as follows. The excluding bonus provision, run rate cost as of now is about JPY5.3 billion or so. Initially JPY5.9 billion was the starting point and we aim to lower it to JPY5.1 billion or so and that has been our intention. And now it's down to about JPY5.3 billion, so it's about 70% to 80% of the goal achieved. From here by spending the next two years or so, we would like to lower the run rate further.

The second question, the recent trend, you would like more details about the recent trend. As I commented, I cannot provide any more comment than I had already provided.

This is Muraki again. For fixed income, compared to your US peers, you were relatively strong in your results. And if we look at the breakdown of revenues, position management revenues which is not directly linked to client flow, so the trading portion was quite high for three consecutive quarters. On a mid-term basis, is this sustainable?

The five American players compared with last year had the 16% difference in our performance. We outperformed the five US players. There is some seasonality factor, as you know American players have accounting year end at the end of December. So because of that, they might have refrained from using their balance sheet. In our case at Nomura, we are not proactively utilizing balance sheet. That wasn't the case, but we've stayed close to clients' needs and the flow and we made sure that we provided liquidity. As a result, we see the numbers that we are seeing now.

Also the level of revenue fixed income, whether it is sustainable or not, in the third quarter we had pretty clear direction. Therefore, we do receive influence from market environment, so I cannot give an answer with certainty but continuously we will keep focusing on cost control so that we can keep expanding and maintaining the platform of client. And also we would like to control risk as we aim to increase the market share.

And you also asked about the client flow in fixed income, also versus trading revenue, the breakdown between the two. The client revenue is about 60% plus and trading revenue is a bit above 30%. Between second quarter and third quarter, the breakdown remains about the same.

Thank you, understood.

Kazuki Watanabe, Daiwa Securities.

I have two questions. First, page 7 regarding asset management division. So, American Century related gain was recognized. So what's the contribution to the profit and what kinds of factors are involved in related to the changes of the fair value?

And secondly, my question is about the impact of the financial regulation in the USA. You are not a bank holding Company, so if the financial regulation is released in the USA, the direct impact is limited. In that case, GS, Morgan Stanley will increase their competitiveness. So, on relative terms, you might have a negative impact. So what would be the negative impact? But the market liquidity will increase, that could be a positive factor for you. You may have to use your intuition, but on a net basis, which would you expect more, positive factor or negative factor?

Thank you for your question. This is Kitamura. First regarding asset management and the ACI related P&L in asset management, this is roughly JPY4 billion of revenues which we have recognized. And in terms of how we calculate the fair value, we look at the business performance of ACI as well as the market environment. And when we say market environment, we mean the comparison with other listed peers and based on these factors we conduct the market valuation of ACI.

Moving on to the financial regulations in the US and the impact to Nomura, with the election of Mr. Trump and immediately after the election there was talk about the abolition of the Dodd-Frank rule. There were hopes about that. And I think that this is what you are referring to in your question. And whether this could be a tailwind to the overall financial industry, there were talks about that. But when looked at closely, these financial deregulation -- we don't expect the very stringent regulations targeting large financial institutions to change that much. Maybe for second tier banks and smaller financial institutions, maybe these people will be impacted by the financial regulation in response to the current excessive regulations, but not so much for large institutions.

And there are discussions ongoing about that at the moment but -- by the way, it's going to take time in relation to financial regulations being abolished or weakened or deregulated. And it's quite hard to say what's going to happen to the Dodd-Frank rule and the reversal of that. But in relation to the excessive regulation of financial institutions or financial industry and whether this kind of regulation act is actually hampering the financial industry, if the excessive regulations are going to be normalized then that will improve the liquidity which had been compressed significantly because of the regulations and that will have a positive impact to Nomura.

So on a net basis, there are both positives and negatives so, which is larger is a question. But frankly speaking, it's quite hard to say what the net impact will be. But just to give you my personal view, maybe the net impact is going to be positive.

Thank you very much for your detailed explanation.

Natsumu Tsujino, JPMorgan Securities.

First of all, for equities investment trusts and the sales of investment trusts in October, November, December, what was the percentage of equities investment trust sales among total sales from October to December? And based on that, from December onwards, have things stabilized or calmed down a little bit?

I believe there was some volatility during the period, but what are your views at the moment? Could you give me a bit more color on what you mentioned earlier? And as for global markets on the [foot of] fixed business, what was the monthly trend for the fixed business? The fixed in the US was very good, very strong. But could you give a bit more detail about which area was strong?

Thank you very much for your questions. First regarding sale of equities investment trusts, how it trended from October to December. As you can imagine, October, November and December, every month we saw improvement. Recently compared with the third quarter, the situation is mostly the same, so I believe you could imagine the recent situation.

Then moving onto the next question about the fixed income monthly trend in the global market business, the month of October was the timing immediately before the presidential election in the USA, so our stance was pretty cautious. That cautious stance continued till the middle of November. After that, based upon the victory of Donald Trump, the rates and dollar went up, and rates and FX activities were very robust. So the activities went up rapidly and December we witnessed similar trend. As for the size of revenue for each month, probably a three to four -- if I am going to give you some kind of breakdown or split or a ratio, so -- or 30% and a 40%.

So it didn't increase that much?

That's correct.

And in terms of the monthly increase in equities investment trusts, was it like 1 to 1.2 or 1.5? What was the extent of the improvement, monthly improvement?

I'm afraid this is very rough number, about 3 to 4 to 5, that's the proportion.

Okay, understood. And my final question is, yesterday Daiwa announced its results. There was a 42% Q-on-Q increase in equity investment trust sales and SMBC Nikko saw a slight decline, Mizuho 50% to 60% increase, so the results were quite different among the different brokers on a Q-on-Q basis. And based on these results of your peers, how do you evaluate your own performance?

Nomura achieved 11% or so of increase. In that sense each company, I believe, conducted different types of approaches. Daiwa, Mizuho grew in a significant way and how I view that I cannot comment on other company's situation. But probably they might have focused on equities, that's what I imagine. But as Nomura, in our sales activities, we are not focusing on any particular product. We are starting from client's needs. And as a result, we saw 11% increase in equities area as a result of meeting client's needs.

Okay, thank you.

Takehito Yamanaka, Credit Suisse.

I have one question. Regarding the retail division, in the second quarter the equities brokerage commission recovered significantly. What's the background to that?

Thank you for question. Equities, yes, the Nikkei average for sharp recovery or sharp growth and under these circumstances, there was a lot of trading for some of the names which saw a lot of rises in the share price. And also ETF trading and US equities or foreign equities in mainly US was quite active. And primary deals also contributed.

As I mentioned in the press conference, the momentum among investors towards equities or the interest in equities was a bit weak, but our sales people have been working to improve that. And they captured the changes in the equity markets quickly and followed up with proposals to our clients and I think that led to the success. Even the young Nomura sales people are able to talk about the markets and explain it to the clients. We're working on that, so I think we started to see the results of these efforts.

The US equities and foreign equities, is the percentage of overseas equities growing?

Well, in this case, in the primary deals there was JR Kyushu and also Keyence, so Japanese equities saw a very sharp rise. So in terms of the percentage, it was not that large. Foreign equities was not that large.

Thank you very much.

David Lui, Guoco Management.

Kitamura, congratulations on a great set of results. I have two questions; my first question is on page 12 of your power point presentation. I am looking at compensation and benefits. After your restructuring last year, we could see the compensation and benefits drop substantially from JPY141.8 billion to the mid-120s. Can you tell me if this is going to stay constant or the famous projects Waterline is going to put more pressure on compensation and benefits? That's my first question.

The second question is really on also the project Waterline. Is it going to focus more on non-personnel costs going forward or is it going to still focusing on compensation and benefits?

David, thank you very much for your question. The first question, for the first question regarding compensation and benefits, that's coming down. It's going to go down further. I believe there is consistency. As a company, we are going to be ensuring pay for performance model. So, if performance is good then compensation and benefits of course will go up. So we'll be ensuring the full implementation of pay for performance. So, if performance is less than favorable, then compensation and benefits will be held down.

From here, whether we are thinking about a project, certain projects, we are not thinking about any specific project. And regarding the Waterline project you asked about, inside the firm there are various inefficient wasteful practices. What we are trying to do is to take stock of those things so that we can improve the productivity of the firm because since we've been in business for such a long time, so in various areas of the Company, we see accumulation of unnecessary things. So, the initiative is intended to clear those unnecessary things.

If anything, we are targeting NPE, non-PE rather than PE as our focus. For example, cost reduction may not be conducted overnight, but we review the meetings that are unnecessary and we check whether unnecessary e-mails are being sent or any unnecessary work is being conducted. We review work process and as a result, we believe we can identify opportunities for a cost reduction.

I have a second question is on page 13 of your PowerPoint. It's about your capital position. Looks like you are doing quite well. In the upper right hand corner of page 13, we can see the Common Equity Tier 1 ratio increase in the last few quarters and now is almost 18%, a little bit below 18%. Could you review your excess capital position right now? And how you may be thinking about share buy backs as well as potential increase in dividends if you are thinking about these two particular avenues?

So on Tier 1 ratio and the CET 1 ratio level, as you know the credit risk related to rules were supposed to be finalized last year. But the finalized rules were not publicized, so uncertainty still remains in the regulatory environment. Because of this, at this point in time, we will be conservative as we manage our financial standing because that I believe will be in the interest of shareholders. Then what is the size of excess capital? Regarding that question, regulatory environment needs to be clarified first. Without clarification of that, it's not appropriate for me to comment on that. But two years ago at Nomura, we set CET 1 target that we've announced. 11% is the publicly announced CET 1 target that we've announced two years ago. And we are going to conduct control so that we can retain say above 11% no matter what happens. And as a result, when various regulations are clarified, as David San mentioned, we will have more visibility about the size of excess capital.

So shareholder return and the necessary investment and the various perspectives will be considered. And dividend is going to be one of the options and of course share buyback is another option.

I would just have one quick one. Is it fair to say Kitamura San that based on the 11% minimum target that you set two years ago, Nomura's capital ratio is looking very good right now? Would you say that?

For now [rating], our kept Tier 1 CET 1 ratio is 17.6%, much higher than 11%. And we will realize in a possible impact for the upcoming regulatory, but we believe that we can absorb in a coming regulatory impact using this buffer.

Okay, thank you very much. Congratulations again.

Thank you.

(Operator Instructions).

Well, thank you very much for participating late in the evening. The results from Q1 to Q3 and Nomura's performance during that period I think shows that Nomura's efforts has been in the right direction. Meanwhile the market environment, the political movement, there still are a lot of uncertainties going forward. We will continue to control our expenses as well as our risks, so that we can sustainably grow Nomura regardless of the environment. We look forward to your continued support. Thank you.

Thank you for 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.