Nomura Holdings Management Discusses F3Q14 Results - Earnings Call Transcript

| About: Nomura Holdings, (NMR)

Nomura Holdings, Inc. (NYSE:NMR)

F3Q14 Earnings Call

January 30, 2014 4:30 AM ET


Shigesuke Kashiwagi – CFO


Jun Shiota – Daiwa Securities Capital Markets

Takehito Yamanaka – Credit Suisse Securities

Futoshi Sasaki – Mitsubishi UFJ Morgan Stanley Securities

Katsunori Tanaka – Goldman Sachs Japan

Natsumu Tsujino – JPMorgan Securities

Koichi Niwa – SMBC Nikko Securities


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. 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 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 involves 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 industrial sentiments, 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.

Shigesuke Kashiwagi

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 entitled, Consolidated Results of Operations.

Please turn to page 3. For the nine months to December 2013, we reported a four-fold increase in pre-tax income to JPY273 billion. Net income for the period is 6.1 times, year-on-year to JPY152.3 billion.

Accumulated earnings per share for the nine months, was 39.8 trillion. Although net revenue stopped [ph] 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 cost, 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 Holding s relisted and we booked an unrealized gain of JPY11.3 billion in wholesale at the time of soliciting.

The other segment includes an unrealized gain of JPY1.2 billion, representing the gain from the listing dates 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 are retail investors looked to take on more risk.

Market factors also helped here, 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 means 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 contribution 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 reports at 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 wholesales results.

Unidentified Company Representative

Net revenue 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 slant 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, there are types of products in the Americas recovered, and raising credit in EMEA remained resilient.

AEJ saw a slight decline in revenues primarily in the FX business due to talk of tapering in the U.S.

Equities – net revenue of JPY58.8 billion down 11% from the previous quarter, although the cash equities business, with their best performance, the derivative is business slow down during the quarter.

In the heat map on the top right, Japan’s fixed income includes both Japan, and headquarters, which means, it includes the JPY10 billion loss related to the change devaluation 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 [ph] in Japan.

Internationally, we won a number of financing mandates in key sectors such as the IPOs of Italian luxury brand, Montclair and UK financial service company, Just Retirement.

We also saw a rise in M&A and multi-product transactions such as the acquisition by Grifold [ph] of the transfusion diagnostics unit of Novartis which we expected to go through the fourth quarter and ahead [ph].

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 in expenses, higher compensation and benefits due to increased bonus revisions 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 renegotiation in rents since the year before last resulting in low occupancy and related depreciation cost.

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, Basel III tier 1 and tier 1 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.

Level 3 Assets shown on the bottom right declined to 17% of tier 1 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.

Question-and-Answer Session


(Operator Instructions).

Shigesuke Kashiwagi

The first question is from Mr. Moeraki [ph] of Deutsche Securities. My first question, is in relation to wholesale. Is this a 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 those. So what are the revenues from the positions and the trading of both businesses. Could you give the breakdown between equities and fixed income?

This is Kashiwagi. As for you 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 break down was 8 to 2. And for equities, Q3 in Japan was mid 30% level. EMEA was about 20%, Americas was mid 30% level, and AEJ was about 10%. And that’s for the client driven, and risk driven break down 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 derivative, 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 revenues. 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 U.S. and was better compared to Q1 and Q2. Thank you.

For fixed income, if you look at the share of the revenues, it’s on an upward trend. And I think the background for this is that you are not shirking 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 the perspective, we have already completed our funding, our 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 on relation to our fixed income business.

As for the future, in relation to the leverage regulation, 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, assume that you can net the reverse ripple [ph], 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 showed the graph showing the inflow and outflow of funds, based on the recent change in the taxation or tax scheme, there’s been an increase of about JPY500 billion of the stand by fund. How do you expect this trend in the stand by 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 funds flowing into MRS in Q3, about JPY1 trillion is the increase in the balance that we [ph] saw. And as for where these funds move on to, well, moving into January, there has been an outflow of funds from MRS, and the TSE 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 perspectives, initially, I think the NISA funds will flow into – well, we thought it would flow into shares, but it’s also flowing into the investment trust as well. So we expect this money to continue to flow into individual stocks, as well as investment trust. Thank you.

Unidentified Company Representative

The next question is by Ms. Fijna [ph] of JPMorgan. Ms. Fijna, the floor is yours.

Thank you very much. Retail business, January – since the beginning of January, how is the sales of investment 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 trust are concerned, because of the slight volatility in the process, 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 both 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 kinds of investments that they’ll be going to do? And what about the spot stocks [ph] 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 – most of the money going into actual stuff. And that was our assumption. But in terms of comparison, the investment trust has remained relatively low. And so from the NISA accounts, much of the money had flown into stocks. But now we are seeing investment trust after Japanese equity or after global equity, foreign fixed income or balanced fund, and much funds are now beginning to flow into various sets of funds.

Online to 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 – on account openings? 1.616 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 transactions that have come through NISA. Thank you very much.

Shigesuke Kashiwagi

The next question is from Mr. Shiota of Daiwa Securities.

Jun Shiota – Daiwa Securities Capital Markets

Yes, thank you. My first question is about global markets on page 11 on the upper right. It shows that AEJ will somewhat flow from both equities and fixed income. But at the moment, what is the rate and interest business in the emerging countries? I think there’s some pickup in the action. But how do you feel?

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 positions, 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?

Shigesuke Kashiwagi

Yes, the VAR at the end of December has been – is a result of the tapering or even incorporated in some 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, this figure has come down quite significant from what is showed here. Yes, moving into January, the risk has been declining whereas in December, we were on a risk-on situation. Thank you.


The next question is by Mr. Yamanaka of Credit Suisse. Mr. Yamanaka, the floor is yours.

Takehito Yamanaka – Credit Suisse Securities

Thank you very much. Just one question if I may, after Q2 Fitch ratings, conversation emerged and there were talks that maybe transaction will increase but we heard that it won’t change for some time but if it does, 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 ratings change?

Shigesuke Kashiwagi

With regards to Fitch upgrade of rating, it was 29th of September, if the transactions would close since then but it did 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 explain to them the best ramp up of Fitch upgrade and overall, investors were positive. So when there was upgrade of Fitch rating, there was in impression that we would begin to see American investors increasing the transactions, that we can expect further to come from our Asian and European investors in the months and years ahead. Thank you very much.


(Operator Instructions). The next question is from Mitsubishi UFJ Morgan Stanley Securities, Mr. Sasaki.

Futoshi Sasaki – Mitsubishi UFJ Morgan Stanley Securities

Hi this is Sasaki from Mitsubishi UFJ Morgan Stanley. 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 but if – with the ratio of compensation against the net – with income. Is this going to continue to decline?

And secondly about the wholesale business in the Americas, and you talked about the recovery and securitized products but in terms of the product set you are involving right now, the securitized products which one are – where – what is the most common product that is backing the securitized products? Which – where do you see the strongest recovery and which products have it?

Shigesuke Kashiwagi

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 have to wait until the end of the 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 security and a lot of the products are backed by residential mortgages but we are also involved in the commercial mortgage backed products as well. Thank you.


The next question is by Mr. Tanaka of Goldman Sachs. Mr. Tanaka, the floor is yours.

Katsunori Tanaka – Goldman Sachs Japan

Thank you very much, my name is Tanaka of Goldman Sachs. [inaudible] can be made due to change of valuation methodology. In the management accounting, it’s domestic beat [ph] but in the financial accounting which are done 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 this matter. Thank you very much.

Shigesuke Kashiwagi

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 are certain disclosed figures and that put into perspective all credit derivative [ph] 4.4 billion as a total and SBA [ph] finance is slightly below 10 billion and for both, most of it is international.

So internationally, we believe that in the financial accounting, the business situation was positive while profit making. Thank you very much.


The next question is from Mr. Tsujino of JP Morgan.

Natsumu Tsujino – JPMorgan Securities

My usual technical question but on the page 13 of the Tan Chen [ph] disclosure material, the segment other items and the other items within the segment other. It’s minus 20 compared to Q2 and Q3 minus 43, so not much difference here but in relation to CVA and DVA, was minus 116 for Q2 and minus 64 for Q3. And I believe this 2 billion also 1.2 billion for as – was included in here.

So if you do the math, does it mean that Q3 was basically zero? And it’s been at around JPY10 billion but if – could you give me some color on – could you give – disclose as much as you can on this other items 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?

Shigesuke Kashiwagi

Yes, for the corporate items, I think you are more knowledgeable about this than I am. It includes various items and for this it’s clear, it has been somewhat higher than usual but we are trying to control the volatility. So we –

Natsumu Tsujino – JPMorgan Securities

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

Shigesuke Kashiwagi

Well, if there are some various extraordinary items that are included in here. And for the others of 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. For the SA-MA gap the difference is from the gap from financial and management accounting and also there are some items due to the adjustments based on US gap. So that will be my answer, as usual.

Natsumu Tsujino – JPMorgan Securities

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

Shigesuke Kashiwagi

Yes, that’s correct.

Natsumu Tsujino – JPMorgan Securities

Thank you.


The next question is by SMBC Nikko Securities, Mr. Niwa.

Koichi Niwa – SMBC Nikko Securities

I have two questions. First of all, fairly at risk – the change is not so significant but as the event of December this went to higher 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.

Shigesuke Kashiwagi

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 on mode. And since the beginning of January, VAR has been reduced quite significantly. Thank you very much.

Koichi Niwa – SMBC Nikko Securities

The second question is somewhat political, for fourth quarter of the Citibank’s, how should we view the general banking sector of the Citibank’s in Japan this year and the next?

Shigesuke Kashiwagi

Fundamentally, the equity market, there has been somewhat of a correction phase most recently but generally speaking we think that the presence will go upward and the market will be on an upward treat. ECM, many finance magnates are expected to come in and large transaction not as high this year’s first half but we can expect a huge big ticket items. And at the ordeals behind equity price going up, refund connection can move – become quite active and as an active IBO [ph] market, I think there is expectation that the market size will beyond JPY1 trillion.

Last year there was 58 IBOs [ph] and this year, this fiscal year we’re expecting about 80 IBOs [ph] [inaudible] NTT Docomo’s major issue then, was there an – we think that the market will continue to be quite robust and healthy and interest rates remain health 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, post order transactions, accompanying and financing multi-product deals, we do have a healthy pipeline.

Koichi Niwa – SMBC Nikko Securities

Rather detailed question but from this year’s level, are you expecting you’re – on your increase next year, is that the right way to look at it?

Shigesuke Kashiwagi

In terms of IBO [ph], yes but other than IBO [ph], I’m not sure. Thank you very much.


(Operator Instructions)

Shigesuke Kashiwagi

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.

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