Nomura Holdings CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.28.11 | About: Nomura Holdings, (NMR)

Nomura Holdings, Inc. (NYSE:NMR)

Q1 2011 Earnings Call

April 28, 2011 4:30 am ET


Kenichi Watanabe – President and Chief Executive Officer

Junko Nakagawa – Chief Financial Officer

Jasjit Bhattal – President and Chief Executive Officer – Wholesale


Masao Muraki – Deutsche Securities Inc.

Takehito Yamanaka – MF Global

Shiyota – Daiwa Securities Capital Markets

Kenichi Watanabe

Before we begin, I’d like to extend our sincere condolences to the victims of the East Japan earthquake. And we are praying for recovery as early as possible.

As for Nomura, we did not suffer major damage, major physical damage, although there was some damage and no casualties fortunately. Immediately after the earthquake, from Monday after the earthquake, we have been working on providing liquidity to the market in Japan and focusing on providing liquidity as well as providing opportunities for trading. That’s where we started from, started off.

And Nomura has been actively sending out information not just within Japan, but globally, and in April, we have setup the East Japan Revival Support Bond Fund 1105. And based on the requests from our customers, we decided to setup and launch this investment trust or this fund. And we will be donating part of the custodial fees to support the recovery.

Separate from this, we have made some donations and we have also collected donations from our staff all over the globe and we have sent the donations directly to the various municipalities and the Governors, so that it reaches the disaster-stricken areas quickly. And together with the donations that we made, we would like to support Japanese securities market, capital market and make sure the markets function. And we would like to continue to work on our main lines of businesses to support the market. And we believe that’s the true support that we can provide to the market.

This was the same after Lehman Shock. We contributed to maintain the functions of the capital markets and we believe we had made sufficient contributions to do that. So after this earthquake, we will continue to send out information on a timely basis and support the markets not just the secondary market, but the primary market as well and make sure the market functions. This is one of the measures that we can work on to help rebuild and revive the Japanese market and this is our responsibility.

Together sending out various information, we have been making proposals and that’s just because the current government is fragile, but there are various stakeholders and we have been making proposals to the ruling party as well as the opposing party and the various municipalities and public organizations. And we have been making various proposals of which some of which we have disclosed, some, which we have not. And we are making these proposals to support the securities market and the capital market. And our proposals are such that we would like to use the markets to help revive the economy. But this is not the main topic today.

And first, we will have our CFO, Junko Nakagawa explain about the March ‘11 results briefly and then I will make my presentation, if I may, later on.

Junko Nakagawa

I’d now like to explain the results for March ‘11. Please turn to page five of the PowerPoint presentation.

I’ll explain the highlights of March ‘11. Pretax income and net income we achieved profits in Q4, which was the eighth consecutive quarter that we were profitable. And we were also profitable in all business lines for the full year.

For retail, which was the driver of profits for the group and also asset management, AUM grew and we achieved growth in both revenues and income. For wholesale, the market environment continued to be tough and we lowered our revenues and income year-on-year, but things bottomed in Q1, which was impacted by the sovereign crisis and we recovered from Q1. We have been making investments mainly overseas and rigorously controlling our costs and we were able to reduce our costs year-on-year. Page six please.

Let me explain the highlights of the Q4 results. Net revenue for Q4 was 299.4 billion yen, up 1% Q-on-Q. Pretax income 37.4 billion yen, up 35% Q-on-Q. Retail revenues was 96.2 billion yen, which was flat Q-on-Q.

Asset management revenue 21.9 billion yen, up 2% Q-on-Q. Wholesale revenue 186.3 billion yen, up 8% Q-on-Q. And the breakdown was global markets revenue 137 billion yen, down 3% Q-on-Q, and investment banking revenue 49.4 billion yen, which was up 59% Q-on-Q.

The full year results for March ‘11. The net revenue was 1.13 trillion yen, and pretax income was 93.3 billion yen. Net income for Q4 was 11.9 billion yen and annualized ROE was 2.3%. Net income for the full year was 28.7%. Annualized ROE was 1.4%.

The effective tax rate for the full year was 69%. The reason why it was high was because our operations in Europe and Asia were loss making. And going forward as overseas operations become profitable, we expect the effective tax rate to decline.

On this slide, we describe the revenue breakdown by division. As you can see on the pie chart on the right, for the full year, our domestic revenues made up 58% and overseas revenues was 42%.

I will now just move on to the highlights of each division on Q4. First the retail. The fourth quarter net revenue was 96.2 billion yen and income before income tax was 17.7 billion yen. For the full year, net revenue was 392.4 billion yen and income before income taxes was 101.2 billion yen.

Retail client assets continued to grow steadily until February, but declined slightly from the prior quarter to 70.6 trillion yen due to the market decline following the earthquake in Japan.

Total sales were up 10% quarter-on-quarter as we continued to provide consulting services to meet the need of our retail clients. Sales of stocks were particularly strong, jumping 25% compared to the third quarter, the highest level in eight quarters. Sales of foreign bonds increased by 18%. This is why we continued our core consulting sales and were able to appropriately address the needs of our clients.

Asset management net revenue was 21.9 billion yen for the fourth quarter and income before income taxes was 7.9 billion yen. For the full year, net revenue was 80.7 billion yen and income before income taxes was 25.1 billion yen. Assets under management grew by 600 billion yen to 24.7 trillion yen as of the end of March, driving both net revenue and income before income tax higher quarter-on-quarter.

As you can see at the diagram at the top left, inflows into public stock investment trusts remained high at 340 billion yen, driven primarily by new inflows into multi-currency funds and funds that invest in Japanese stocks. Our share of Japan’s publicly offered investment trust market trended upwards through the year to 21.8% at the end of March and we maintained the market leading position.

In March, we established LIC Nomura Mutual Fund, a joint venture with Life Insurance Corporation of India, the largest life insurer in India, representing our full-scale entry into the Indian mutual fund businesses.

Next, I’m going to talk about the wholesale. Net revenue was 186.3 billion yen and income before income taxes was 29.4 billion yen from the last quarter. For the full year period, net revenue was 630.5 billion yen and income before income taxes was 6.7 billion yen.

The quarterly gains in net revenue and income before income taxes were driven by higher revenues in Investment Banking and a decline in overall costs of 2.8% compared to the previous quarter. The graph on the bottom left gives a breakdown of net revenue by region.

Now, I’m going to talk about global markets. Net revenue was 137.0 billion yen for the first quarter, down 3% quarter-on-quarter. Fixed income net revenue also declined by 3% to 69.4 billion yen in the fourth quarter. Revenues declined only slightly despite the elevated market volatility and sharp fall in liquidity

Equity fourth quarter revenue was 600 – so net revenue in equity increased 5% over the quarter to 64.3 billion yen. Although volumes were down on major markets, we continue to increase our client business and grow revenues.

We captured a higher market share in Japan by responding to client needs and continuing to provide liquidity in the difficult conditions after the earthquake. Please take a look at the diagram on the left top. Term fixed income grew by diversified source of profitability especially of the FX and Securitized product. The share of these products has increased from 17% to 31% also our revenue in U.S. revenues has quadrupled pushing up the share of our overseas revenue to 70% of our overall business here.

In equity, we had been reinforcing platform in Asia and that has resulted in substantial revenue growth in execution services and primary business is also a contributing factor.

The fourth quarter revenue of the Investment Banking is 54.4 billion yen at gross, 12% quarter-on-quarter decline, but the net revenue 49.4 billion yen, that is a net increase quarter-to-quarter increase of 59%.

In this quarter, we had a public offering of Resona Holdings in Japan and including that we have obtained multiple ECM deals. On the fiscal year, we have 44.3% from domestic ECM, 51.7% in M&A, those are our market share, a very dominant market share.

In Europe, we had a very short-term sales of 3 billion yen for Nordea Bank in Sweden and so called ABB large-scale deal. Also during the fiscal ‘10 we have acquired a major cross-border M&A and we have completed their execution and the revenue from that and private equity business has contributed accordingly.

In this fiscal year, we will be reinforcing our – we have reinforced our product expanded our coverage diversified the source of revenue and include product mix. So we have acquired major cross-broader deals, we have had leveraged finance for acquisitions and taking apparent high-yield. Also we have been able to obtain deals in many regions of the world including Europe, China.

I’d going to talk now about our costs. So non-interest expense for the fourth quarter was 262 billion yen, which 2% declined from the previous quarter. For the fiscal ‘10, it was 1,000,737,400,000 yen, a decrease of 1% year-on-year. We have made an investment in advance in mainly in overseas market, but we have tightened our cost management and overall our expense has come down. And our company’s ratio for the full fiscal year was 46%, which is our labor cost versus to our revenue.

Financial base, we have still – we still have a solid financial base. Tier 1 ratio as of March end is 16.4%, 16.4% for Tier 1 common ratio as well. Total asset, 36.7 trillion yen equity, 2.1 trillion yen.

Gross leverage, 17.6 times, net leverage, 10.3 times. Level 3 asset are around 700 billion yen. So as you can see on the bottom right, it is 37% of – versus Tier 1 equity. In calculating equity as of end of March, we have had a new approval from FSA to apply internal rating methodology on credit risk asset. However, this has not substantially changed our number since before this change.

In last October, we set assumed level as of March 2013 when Basel 3 has been implemented over the mid-term market environment, business strategy, and financial strategies will be taken into consideration and we will for the timing being target to maintain 10%. And the dividend was the standard date of end of March 2011, we will be setting 4 yen per share as a dividend.

So this is it for my presentation. Thank you very much for your attention. Thank you very much. Mr. Watanabe, if you can please.

Kenichi Watanabe

I’d now like to explain our future business strategies. This is the growth scenario, which we were aiming for. In the autumn or fall of 2008, we acquired the personal of Lehman Brothers and we restructured our legacy, negative legacy assets. And we also with the cooperation of yourselves we strengthened our capital base. And following a leverage loss, our strategy was to turn profitable in March 10.

And at the same time, our plan was to rebuild the U.S. business, which we started in March ‘10. And last year in March ‘11, our strategy was to further make our business further profitable and also monetize on the investments that we had made. To become a world-class player in the future is, that was the scenario, which we had in mind so for.

Moving on to the next page. As our CFO explained in her presentation, due to the sovereign crisis in Europe, as well as the changes in the regulatory environment and the tightening of regulations towards financial institutions with these changes in the environment together with East Japan earthquake in March, we were not able to grow in the steady upward trend that we had envisioned. However, we were able to become profitable on a quarterly basis and to raise three points as example of our global measures and the progress that we are making globally.

One is establishing the client platform particularly in wholesale and in the overseas businesses where we did not have that stronger customer or client base so for. And we had to depend more on the prop type of business rather than the intermediary client business. And that was one of the reasons why we have booked a large loss. But in terms of prospering with our clients, we have been expanding our client base, client platform. And for March ‘11, we were able to progress by more than 20% in client on-boarding and as a result, we were able to grow the client flow significantly as well. I think you can see the results more clearly in fixed income where we expanded our product liens and expanded our client base and we gained profitability as a result.

And in terms of clients, in the asset management division as Nakagawa has mentioned briefly in the investment advisory business, we have been doing business not just in Japan, but overseas. And wining contracts from overseas client successfully, especially in the Middle East and in Asia. We have been working with sovereign wealth funds and winning mandates from these sovereign wealth funds for investment advisory business.

The second point in terms of the progress we are making globally is the monetization of the investments that we have been making. Especially in the U.S., which is one of the main hubs that makes up a large share of the global capital markets, we reobtained our license in the U.S. and we have been enforcing our client base in the U.S. and expanding our business. And today, our business in the U.S. is not that large yet, but we are starting to monetize from the U.S. business.

The third global measure we working on is the overseas business. And this may overlap somewhat with previous comments, but excluding the global markets if you look at investment banking, we have been winning major mandates especially in the West not just simply M&A ECM transaction, but we are also providing various solutions as a package. We are being starting to be able to do that. Especially in investment banking, we have been enforcing our overseas platform. And frankly speaking, yes, we have spent some costs and raise the breakeven point, but we believe this was the period to endure and we want to further expand our business in this area.

As I mentioned, one, expansion of client platform; second, the monetization of investments especially in the U.S., and thirdly, the overseas business and expansion of the overseas business. I believe we have made certain progress in these three areas. However, from March ‘12 onwards the challenges that Nomura faces are clear.

As our CFO explained, we need to improve our bottom-line as it was our ROE, which is currently low. In Japan, profitable where the tax rate is high and loss making in overseas where are the tax rate is relatively low, especially in Europe. I’m not going to make any excuses, but we did have the European sovereign crisis. And compared to two years ago, which was profitable March ‘11 was loss making and this lead to the high effective tax rate.

So the challenges that we face are clear and as I mentioned earlier, one is to monetize, further monetize the investments that we made. Second is to expand the overseas business, overseas franchise and make our overseas business profitable.

And in today’s agenda, we have Jasjit Bhattal as one of the presenters and he will explain how we will strengthen our wholesale division, especially the overseas profitability. That is our priority for March ‘12. And we will work on improving our profitability and ROE as early as possible. That will be our target for March ‘12.

Now, page 23. This explains the management environment, which surround us and I’m sure you are all professionals in this area. So I’ll not go into details.

As for Japan, as many people have been saying in various occasions for the first half, unfortunately things will be somewhat slow, but moving into the second half, we are hoping for certain positive trends. And as a result, the volume of business when compared between first half and second half will be quite different.

As for Europe, the sovereign markets and the bond markets, the government bond markets, there is some obscurity or unclarity, which will continue. And we have the gap between North and Southern Europe and the future is not that rosy in Europe. And we are expecting some volatility or instability and we need to conduct our business under these circumstances.

As for the U.S., people have different views, but GDP growth is expected to grow robustly and there will be some financial easing or quantitative easing which will have to be continued. And based on these assumptions, we would like to monetize in the U.S. market.

As for emerging markets, especially Asia, which is the home ground for Nomura, there is a lot of hot money flowing in and out of Asia and inflation for real estate prices et cetera. But despite these items, Asia continues to be a growth area and we would like to expand our business here.

In terms of the management environment, as shown on the top right, Basel 2.5 and Basel 3, there are discussions going on about Basel and towards the end of the year in November there maybe some further detail as a result of the G20 Meeting. But the trend is negative, so there is a headwind blowing in our faces and not just for Nomura but for our competitors as well and we need to comply with this headwind and respond adequately.

And the regulatory capital, and how Nomura allocate its resources, there maybe some more consideration which would have to be made in relation to the regulatory capital. And I’m sure you are aware, but various countries and also the European Union and UK, U.S. and various regions are trying to create a level playing field.

On the other hand, the countries are competing against each other. So we will be heading for not a traditional type of globalization but a more diversified globalization and focus on liquidity regulations, as well as the capital regulations and each country will set their own rules under their government. So the rules will be somewhat diversified, we believe. But in any case, at Nomura Holdings we will allocate our resources effectively.

Next, I will move on to our wholesale division. And these are the KPIs and the revenue targets for each division. For the wholesale division, we will have our division CEO, Jasjit Bhattal, explain later but the challenges we face this year and strengthening the profitability and the revenues of the wholesale division will be one of the major challenges for Nomura this year.

And from the past six months under Jasjit’s leadership we have been prioritizing our businesses and moving more to a performance-based resource allocation structure. So we have started working on this, but we will start seeing some clear results of these efforts hopefully. And I have listed various KPIs on this page from the top right. The revenue growth rate 15% or at least 15% and client revenue ratio 70% is going to be one of the benchmarks. Today, I believe it’s close to 60% and we would like to grow our revenues by at least 35% as a result.

Next page 25, the retail division. I will not go into detail here but in a few years time by 2014 we are targeting 100 trillion yen in client assets. Of course, there will be some fluctuations due to the market valuation, but we will steadily increase the net income, or net increase in client assets.

And has shown on this chart here, if you look at the retail financial assets or individual financial assets, unfortunately still the majority is in the form of cash and deposits. Although some of it is expected to decline as a result of the aging population, so it is important for Nomura and it is a responsibility to allow people to generate adequate returns by making investments instead of just savings. And we believe funds will be flowing not just within Japan but to global investment opportunities and we want to further pursue the consulting sales to achieve this. This will be the targets for the retail business.

On page 27, as mentioned earlier, the asset management division did well last year, but we will further increase the AUM to 30 trillion yen and the balance domestically publicly traded investment trust to 17 trillion yen and investment advisory contract asset balance to 11 trillion yen.

Next on page 28, this describes our relationship with the banks including the Japan Post Bank and we will strengthen our relations with them. That will be one of the key issues for us. As for the overseas business, I explained that there was strong growth in March ‘11, but we will further win more business in investment advisory. And in order to do this we need to come up with attractive products and strengthen our management, our asset management capabilities.

On page 29, there may get some overlap with the CFO’s presentation, but for the past two years the cost over revenue ratio has been very high and as for March ‘11 it was around 92% which was high. And in globalizing our business we have just taken off. And in order to maintain a high run rate level, we will set 80% as one of the benchmarks for cost over revenue ratio.

Next, our financial strategy. The CFO already explained the details, but we will manage our regulatory capital and allocate our resources accordingly. We will maintain sufficient liquidity on hand, which we currently have, but we will continue to do this and various regulatory authorities have their guidelines for reinforcing the assets. In a sense, you could say that we may have too much cash, but this is in response to the guideline of the various countries. And we will pursue more efficient ways of using our balance sheet.

And our balance sheet size is about 36 trillion yen and we will continue to focus our assets on highly liquidity assets and Tier 1 ratio is 10% will be the benchmark, sorry Tier 1 cash level III assets will be 50% of Tier 1. And gross leverage, the benchmark will be around 20 times and for the debt items, we will try to make our debt as long-term as possible and also diversify our debt. And we are also issuing bonds under the Sharia law structure.

And we will continue issuing benchmark bonds in U.S. and Europe and make our debt long term. Tier 1 ratio, we’re looking at two to three years ahead and we are still trying to guess what the regulatory framework will end up being and this is just based on our guess. But we would like to maintain, we believe we can maintain around 10% Tier 1 ratio and we will allocate our resources accordingly.

On page 31, although you all gathered today despite busy schedule and you might be discouraged because there are no major changes in our strategies, but we will continue to be client-focused that we be our basic policy and we will continue working onboarding our client both in Japan and overseas. And we will develop products and services which exceed those of our competitors and allocate our resources flexibly and on a timely basis.

But we may not be able to maintain as much flexibility as we did in the past due to the changes in the regulatory framework. And although it’s not shown on the slide, today as we announced our results, we also announced the changes in our management in the Directors. And we have been separating the execution and the management, we are a committee-based company and under this structure, we are running our firm and the majority of our Directors are external Directors, I think we have eight now.

And the Chairman of the Directors will be switched from (inaudible) and our external director the Chairman of TDK will resign, or did resign and we will have the Ex-Chairman of NYK, Nippon Yusen, I think he’s currently advisor and he is to be the Ex-Chairman of Nippon Keidanren and he is also the Chairman of Regulatory Committee.

(inaudible) the lawyer who had been our External Director for a long time will resign and we will have (inaudible) another lawyer become our new Director after the General Shareholders Meeting.

And he is one of the few Japanese lawyers, who used to be the President of Interpol and he won the vote or the election to become the President of Interpol. And he is an ex-NPA officer but he will be working from the standpoint of preventing money laundering which is one of the issues globally and he will hopefully give us advice.

And on our main Board, we have non-Japanese members, two from the UK and they will continue to be our Board Member and we will have new member Michael Limb from Singapore as a potential Director or Board Member. He used to be Executive Chairman of Pricewaterhouse Coopers in Singapore and he is currently serving as committee members of various government committees and he is one of the external directors, he is external directors of companies as well. And he will join our Board as a non-Japanese member.

We will have David Benson, who is currently Vice-Chairman of Nomura London. He has been working on the risk related items together with the UK FSB, and although this is not still an official rule we’re trying to comply with the UK FSB requirements to halve a risk related member on the Board. And he used to be CRO last year, Chief Risk Officer, but from this calendar year 2011 he has been Vice-Chairman of Nomura London. And his main responsibility have been discussions with the European and the U.S. including Brazil and Washington regulatory authorities and he has been discussing with the regulatory authorities from 2011.

And he has been serving as one of the panelists for the FSB and that’s why we asked him to join the main Board. So he is one of the internal directors that he will join our main Board. I’m sorry it wasn’t shown on the slide, but there was an update of our management and I will ask Jasjit Bhattal the Head of Wholesale to explain the strategies for wholesale and the challenges that we face.

Kenichi Watanabe

Thank you very much, CEO of Wholesale, Mr. Jasjit Bhattal, please come up.

Jasjit Bhattal

Thank you, Watanabe. Thank you, Nakagawa. Clearly, lots of results are being covered, so what I’m going to focus on for the bulk of my presentation is really talk about where we are in terms of the wholesale division landscape and what a strategic task is going to be going forward.

This past year, which also marked the first full-year for the wholesale division, witnessed great change in our industry and at Nomura. While our annual performance has been challenging, we’ve taken several transformational steps to grow the client franchise and are starting to see early success on our positive profitability. In today’s presentation, I will briefly review our results and then more importantly as I said talk about the strategy which will give profitable and consistent returns.

As you heard from our CFO, the wholesale results for this past fiscal year were admittedly challenging. Number of reasons for that; some external, culminating in a 20% decline in global and some internal, mostly local activity and underperformance in certain businesses and a cost overhang from an aggressive investment plan going into last year.

But let me show you, we have not faced these challenges standing still and we made a number of changes which are already starting to yield positive results. What are they specifically?

One, we shifted from a broad growth strategy to very selective and calibrated approach and I will talk more about this in a few minutes. We made several new leadership changes and strengthened the matrix management framework. We vigorously analyzed underperforming businesses and restructured certain product lines, redirecting resources towards accretive businesses which can provide sustainable profitability.

And equally importantly, reinforced a culture of pay per performance to manage compensation costs, but balanced against the need to what businesses with future earnings and franchise potential. And I think it’s worth pointing as our CFO did, at a time when we’ve been growing the business to maintain a compensation ratio at 46% speaks volumes about the firm’s ability to manage its cost.

Our latest results, also speak to the momentum we now command. This past quarter was the best of the year with pretax profits that were greater than the previous two quarters combined, topping four straight quarters of sequential revenue gains. Most importantly, my partners and I stand unified behind a consistent global strategy, which is centered on clients, partnership, accountability, best operating efficiencies and crucially bottom line profitability with aggressive yet achievable targets.

I won’t spend too much time on this slide as the numbers have been already been covered, but I’ll just speak out a few key points. We had a difficult first quarter for all the reasons that were pointed out, but we reacted with speed. Implemented further cost reductions, dramatically slowed the hiring and tightened risk. And it was this discipline that still doing the period that stood us in good stead for the rest of the year and we’re profitable in all three quarters since despite fed ups in the Middle East, recurrence of inflation in European sovereign concerns and most recently the unfortunate events here in Japan.

Both equities and investment banking posted sequential revenue gains each quarter, while fixed income had a resilient performance over the year that far outpaced the 20% to 40% decline across our competitors. And because we aggressively maintained a substantial flat cost base for the year, these revenue gains translated into steadily increasing profits every quarter demonstrating considerable operating leverage.

Our financial performance is predicated more than anything else on our success with clients. Growth in global markets, customer revenues reflected the increasing diversification of our business with double-digit gains in nearly all of our core market products.

In fact, global client revenues were up 25% year-on-year despite overall industry revenue pools declining 20% globally. We also saw rankings improve substantially with Asia ex-Japan research at number two, fixed income research at number five in EMEA, number seven in the United States, one in Japan, we maintained a number one equity research rankings and reclaimed the number one spot in fixed-income for the first time in a decade.

In banking, we continued to build on a notable track record of franchise mandates both in Japan where you continue to dominate and also internationally. Last year, over a third of revenues came from Japan ECM, while this year it was only 17%. M&A doubled its contribution to 26%.

This past quarter, we also ranked number two in Europe and the Middle East accelerate book bills which is increasingly the future of the capital markets and number two, in sponsored lead leverage loans in 2010, while we closed the largest European M&A transaction this year for international par and GDF Swiss and executed the largest ever international convertible offering in Asia ex-Japan from China to China Unicom. This speaks volumes of the breadth and geographic diversification of both our global markets and our investment banking business.

So now to the strategic issues. I wouldn’t today really on the three that are on the slide. Despite the moment and the client success, we continue to address several strategic and structural issues. Most pressing as my CEO pointed out franchise profitability. And we are tackling this by reinforcing a mindset that productivity, cost transparency, and accountability for a pay for performance culture at paramount to our success and you’ve seen it in the compensation ratio that our CFO just pointed out.

We are reallocating resources away from underperforming businesses to self-fund investments and combined with aggressive cost saves this has resulted in notable momentum in our profitability as demonstrated by the last three quarters. Being flexible, being vigilant is a sign of strength.

At the same time, we recognize that the nascent state of our franchise isn’t itself an impediment to growth, but we are already calibrating our investment towards accretive businesses that can in turn fund future growth, while committing to investments with a longer horizon and realistic return targets. Ultimately, in the wholesale business success reads for the success, not only in terms of returns, but crucially in growing our international brand.

We are still overly dependent on Japan, we are fully cognizant of that, we have a plan to address it and that’s why we continue to focus on building cornerstone businesses to sustain our international growth much as how we may have been doing already for instance in securitized products and in our solutions businesses.

So key things. Our highest priority is to put the interest of our clients first for cultural partnership. This is not just a catch phrase, in practice, it means that we allocate resources, commit capital, and generate ideas that our clients need us most. And we are aligning our business to meet those needs much as we’ve done by more closely integrating equities and fixed income under unified leadership under one global market structure.

We target select markets and businesses that we can compete on a level playing field. Deploying resources delivered clear advantage in terms of product knowledge, long held client relationships and a deep understanding of the local market.

And that’s where we’ve seen several successes across all of our geographies particularly in our solutions business by the top leadership and ideas. It is this ideas that approach, which has allowed us to access new people that we gain first-mover advantage and do not have to compete to gain market share in short, success through innovation rather than only depending on financial resources.

And as a smaller and the nimble firm, we can maximize the synergies across our products, our businesses and regions in a way that larger, more banks cannot, which is a clear area of differentiation. Last but not the least, we are aiming to create a best operator platform where we have a strict discipline run balance sheet, risk, costs and productivity, a platform that is singularly focused on profitability.

Division strategies. Let’s start with equities. We have good momentum going into the new year as the fourth quarter was the strongest of the year. The division has been reinvigorated and have strengthened global market platform together with fixed income more closely integrating several engines of growth in distribution, structuring and creating across asset classes.

The biggest beneficiary of this new structure may be derivatives, maybe we also pointed a new global head to grow our distribution risk and structural capabilities with corporate to seize what is anticipated to be the largest fee growth opportunity in the industry next year. We see up to 80% revenue growth in this business.

We continue to believe that our electronic offering is amongst the best on the street and we now have a plan to more closely integrate our Internet platform, which can give substantial synergies with our existing product platform. Our cash business is historical strength at Nomura, we must continue to differentiate ourselves through the intellectual capital and a highly regarded execution capabilities and as well reflected in all our research rankings, in all our trading progress in most of the world’s major stock exchanges and world’s major geographies.

Finally, we also want world-class smart and disciplined risk taking to contribute to the bottom line both in support of and as a profitable expansion to our client businesses. So we made the investment over the last few years, this is going to be a new plan to monetize our equities build out.

Fixed income. Fixed income has been a standout for the firm. Six businesses generating over 30% margins and a well diversified 70% revenue contribution from outside Japan. We strategically invested in the rates businesses, which is evolving into a cornerstone profit center for the firm.

Last year, we witnessed a 19% increase in customer revenues and we have a carefully planned blueprint to expand our client offering, upgrade our infrastructure, allowing flow products and capitalize on the shift towards electronicfication. We are also investing in credit, where we’re already seeing good progress in structuring and Japan flow credit and we are scaling up unusual business while realigning the U.S. towards high yield structuring and investment grade debt.

Foreign exchange has been a longer-term build out for us and we are very conscious of where our competitive edge is. And it is in emerging markets and in Japan, while we upgrade our G10 capabilities to better service our clients. Securitized products has been the standout success story for us in fixed income along with rates rewarding our investment we started in 2009 huge plant force in profitability in its first full year of operation and we aim to maintain this together with higher margin products.

Across asset classes structuring has and will continue to be a core trust of clients. Again going to the earlier emphasis on thought leadership, our ability to be cutting-edge in the terms of solution providers. Last year, we executed over 5,000 data client solutions generating over $1 billion in revenues.

Investment banking. Our mid-term project in IBD will continue to be to aggressively gain traction internationally where we have not yet achieved our full potential and to focus on improved productivity. We’ve had some successes, in fact our international revenues nearly doubled from the first half of last year to the second half reflecting a steadily building pipeline of mandates. To most effectively channel this momentum, we’re narrowing our sector and product coverage with even greater focus in natural resources, financial situations, industrials and sponsors. Not surprisingly it is these four core sectors that provide close to 70% of the people for investment banking.

In terms of products, we already have a visible track record in global finance solutions and M&A, some of which I alluded to, and we’ll continue to grow these in close partnership with global markets. We will aggressively defend our dominance in Japan, but also proactively execute new revenue opportunities such as our Japan solutions businesses and greater cross-border collaboration. Again, across all sectors and geographies maximizing profitability in IBD is our utmost priority, which you can only achieve by increasing banker productivity, appropriately scaling the platform, and aggressively harnessing synergies.

To the regions, clearly underlying all of our regional strategy is increased diversification and profitability, a consistent theme which you’ve heard from my colleagues prior to my presentation. So I’m not going to dwell too much on it. I think it’s important to point out that all regions have seen a pickup in revenues over the course of the year, signifying reasonable moment in unknown Japan franchise and their international revenues having grown to 66% of total wholesale revenues. Our target 70% to 80% of our revenues from outside Japan. But more importantly, our goal is standalone profitability for all of our divisions in each key geography and we have a differentiated strategy to achieve this.

And on this page I’ve listed our key areas of focus for all geographies. So let me address some of the salient features. In Japan, we’ve successfully defended and impressively widened our lead over the competition by tapping new opportunities in rates, foreign exchange, credit and derivatives offsetting the decline in cash and the equity capital markets. We are budgeting continued growth in Japan global markets while expanding on our dominance in IBD through cross-border solutions driven mandates and exploring partnership opportunities with Nomura’s powerful retail and asset management terms.

In Asia Japan, we are also a part of home geography. We are building a higher margin accretive business as we continue to monetize our investments and execution services equity capital markets, foreign exchange, rates and distribution. At the same time, we continue to deepen our penetration of select local markets especially greater China Southeast Asia and India.

In EMEA, our equities business will be focused on derivatives and solutions as well as selectively on cash through a differentiated research offering. Our existing momentum in rates and structuring will be key to driving a 31% overall budgeted increase global markets, which along with our growing IBD pipeline success in our path to profitability in EMEA.

In the Americas, we’ve taken a more focused approach balancing market positioning with real profitability targets. We are projecting a revenue increase with the exception of (inaudible) of more than 60%. With fixed income leading the way and established businesses such as securitized products and rates along with expansion in new credit and foreign exchange.

In equities, we having an added focus on derivatives in the United States while improving our cash performance for insightful research and better alignment with trading. In the meantime, Americas investment banking is more tightly concentrating on a select number of industries with an emphasis on solutions, M&A and importantly being well aligned globally.

Same slide as my CEO put up. With the strategy that I’ve just outlined to you we remain very confident as a wholesale division in our ability to grow both topline revenues and bottomline profitability. Short term target of 35% to 45% revenue growth over two years and we feel confident that we can deliver 15% revenue growth further out capturing at least 4% of the revenue pool among the top ten banks with a consistent client based revenue contribution of 70% to 80%.

I think it is important to bear in mind that this is a business in which investment always has a lag effect. So most of the investment has been made over the last 18 months and it’s over the 18 months or two years that we’re going to start to see the benefits of investment.

We’ll continue to grow our International contribution to 70% to 80% of revenues, which means that while we expect Japan to continue to grow domestic revenues will be outpaced by our global businesses. And most importantly, we believe that a pre-tax target of 10% to 15% is not only achievable but is critical to our long-term competitiveness and we’ll obviously aspire to beat this target.

So in conclusion, with a renewed focused on profitability and productivity it is not only a change in our business strategy it’s more a reflection on a capacity to adopt to all the changes around us. We made a lot of progress over the last year in a volatile market we’ve increased market share, we’ve had better traction with clients, we’ve had greater accountability and transparency in our processes in intensified partnership around new initiatives, budgets, spending and compensation and these are all important milestones.

What will continuously be required is disciplined investment in the right businesses, where we have a competitive edge and we’ll continue to be innovative smart and flexible. We will also need to think across silos, we are doing better at that and building a partnership with our colleagues in retail and asset management, which is huge competitive advantage for us.

And most importantly, ours’ is an industry that relays in the strength of its people. And I believe we’ve got some of the best talent on the street to drive our strategy forward and with the new Nomura of tomorrow, promising significant upside opportunity for clients, employees, and long term value for our investors. Thank you for your time.

(Foreign Language) Thank you very much.

Question-and-Answer session


Thank you very much. We would like to open it up for a Q&A, questions. So if you’re making question, please identify yourself or your name which company you’re working and you wanted for us to be able to answer to your question adequately one question per person. So this session will be posted on our website in a movie, so please take that into account. Thank you.

Masao Muraki – Deutsche Securities Inc.

I’m from Deutsche Bank, I’m Masao Muraki. I have three points. So my first question. So the financial statement, so you have 27.7 billion yen loss before tax and so you have a long-term society cost in that. So how much is that cost for long-term society? And would this be amount funded by external council, would this increase, Mr. Nakagawa, if you could please.

Junko Nakagawa

So like we have mentioned so this includes interest cost due to changes in the regulation and on top of that so we have impairment loss of IT assets, so that’s why we have this number. So that will be about 50% of the amount. So that will be our overall interest cost and we will be making cash, our capital cash management so that we can decrease this cost burden.

Masao Muraki – Deutsche Securities Inc.

Thank you very much. My second question is achieving profitable overseas business now this is very important for improving your RO&E that’s what have mentioned. So Europe, Americas so Asia so in these three market. How close are you to the break even in three regions and which has the – which is the closest to be being profitable and according to your current plan what is the timing to convert these businesses into profitable businesses I mean what is it by different regions. So our overseas status (inaudible) if you can please?

Junko Nakagawa

First I’d like to talk about Europe. And so last year I think it was last year – fiscal year we had a profitably year. Last year we had made a loss so that was a significant impact to our business and so we believe that region is immediate – region which we can bring fit to profitable immediately. So we need to increase to revenue and we have to bring down our breakeven point.

Historically speaking, so former – we have former Nomura entities so we have a large part there still and what I’d mention the first thing in today’s session is we have sales gap issue in Europe and also we have some international financial issues in that region. So a lot of things can happen in the region. So we need to be very careful and prudent in that region and with our wholesale division we will need to seek for way to improve our breakeven point and that is what we are doing right now. So again so we have to create. So we should have the foundation to have a profitable business there and Asia I’d like to talk about Asia. So frankly speaking it’s going to take sometime before we can have a profitable business here.

So Asia in terms of economy in each country and region so for instance in mainland China, India or other Assam or companies there their economy is drastically growing. However, I mean if you look at our business or if you look at the capital market I mean they are not very big in terms of absolute size or if you look at across-the-border transaction I mean they have different – they have a different level of progress in terms of regulations, it’s very difficult yet to make profit in these – in this region. So I mean so the cross-border M&A are the certain business for us and we are doing a quite a number of such cross-border deals. So we’d like to solidly – like just (inaudible) mentioned solidly do that to enhance Nomura brand in the region and then we’d like to take the equity in our All Asia market of course excluding Japan and so we would like to focus on cash portfolio trading.

So that and we are growing it to a profitable business. However but I mean if we take into account investment that we are making right now I mean it’s not immediately a profitable business. So rather than bringing down the break even point for this business we would still need to continue to invest in this region. So that we can grow our market and presence there and wait for the – our markets to grow by itself. And talking about U.S. so in many different field our market share is not yet significant.

However if we look at global markets, we have products and we have a limited range of products and solutions and we are selling them quite well. So we need to get again prudent, careful and we need to seek for a solid growth. So we are not yet ready so we’re right now running the breakeven point in the U.S. And if you look at investment banking like (inaudible) has mentioned. So we will narrow down on the sectors, we will focus on the international enterprises, enterprise with international activities. So we’d like to multiply the number of such clients. So that we can solidly again grow Nomura brand in the market are the people financial and capital market our U.S. is the still a significant portion of this market. So we would like to solidly grow in this market so sorry for haven’t directly answered to your question.

Masao Muraki – Deutsche Securities Inc.

And my last question. (inaudible) So you – there was a discussion whether you will be joining GS efforts and if you look at the global I mean importance of this matter of Nomura, what is your view?

Junko Nakagawa

I mean taking that into consideration we haven’t presented ROE target. If you want to join this organization they tend to bring down the ROE target.

Masao Muraki – Deutsche Securities Inc.

So what is your comfortable ROE target in relevant to this issue?

Junko Nakagawa

ROE, so we do have the internal plan and target for ROE. However we do not want to set a wrong expectation and we didn’t have like to betray such expectation. So we will have to look into the regulatory environment and enhance our ROE. So that’s why we haven’t externally presented our ROE target, so (inaudible). So our official answer would be that in different countries this is a selection to be made by the regulatory body in each individual country. So I’m not in a position to answer that question. So that’s the formal reply from me as of now. But if I am to add to that I mean we have our external Directors, so we have several friends like Mr. David Benson. So each different counties and all the countries in EU.

So we need to communicate to this regulatory body in all of these countries. We’re have been enhancing our such communication and in each country it is in the same year and there are some different view between the continental EU countries and other countries. And in both sense I know in EU, U.K. is inside EU but on the U.K. and other continental nation is having a difference in the view. So in a sense there are substantial differences of view even amongst the EU nations. So having said that basically I mean FSB has to make a certain number of decision and then each nation’s will be following their own path.

So a lot of discussion will happen in this room and in that sense I mean there are a lot of consideration. There are some indices, KPI’s and some of the international organization are making consideration, or they are setting out their views. So which financial institution with the if you look at that the reality I mean nothing is for decided, there is too much little of uncertainty. So certainly not for answering your question directly.

Unidentified Company Representative

The next question please.

Masao Muraki – Deutsche Securities Inc.

Natsumu another from JP Morgan. Thank you. First of all regarding the liquidity pull, an additional question. When you talked about cost control, what period of time are you thinking of and what extent do you think you can lower your cost too? And going forward will you have to allocate these costs to your various business divisions when will you make these allocations, is my first question?

Unidentified Company Representative

During the summer vacation people take the time off especially in overseas. So probably by autumn or fall the outline will become more clear which means that as you point out we will be allocating some of the charges through unsecured funding to the various business lines or the front offices at a adequate cost. So the answer to your question will be the second half of our fiscal year will probably be when we start allocating the costs.

Masao Muraki – Deutsche Securities Inc.

Can you lower your costs about half the current level?

Unidentified Company Representative

Well our initial target is 20% plus in terms of the reduction. We’ll spend a year to lower our costs by 20% to start with.

Masao Muraki – Deutsche Securities Inc.

My second point is March 11, in the first half results you showed your expectations and calculations for Basel III. And the risk mitigation for our securitized product was one of the assumptions of your cultivation. Since then what kind of progress has been made in this area do you have any actual examples? That you can explain how long is it going to take for this to happen?

Unidentified Company Representative

First of all the assumptions at the time in terms of cutting our risk rated assets is progressing steadily and unfortunately I do not have the detailed figures with me. But it is going inline with our plan necessarily unrated securitized products. The speed with which we are getting rid of these positions is faster than we had expected. However the total size is quite large. So it’s going to take some more time to rate ourselves with the position. But the target date deadline is before March 13, and we will achieve it by the deadline. In terms of level III assets and the percentages we are continuing to lower the rate of level III assets such as private equity non-core possessions are declining steadily.

Masao Muraki – Deutsche Securities Inc.

When you sell your possessions are there any buyers? Or can you find enough buyers for your possessions?

Unidentified Company Representative

I think we explained in previous presentations but our principle is not to sell all our possessions in bulk. In terms of unrated securitized products, we will be getting rid of them much as by selling but through other methods as well. And we’re working on it and these various methods are turning out to be very effective.

Masao Muraki – Deutsche Securities Inc.

For private equity possessions?

Unidentified Company Representative

Our strategy is to value up and improve the value and then exit over a period of a few years up to five years or so. This was the original business model and there has been absolutely no change to our business plan. And we are not going to conduct the a higher sale of our private equity possessions.

Unidentified Analyst

Okay, gentlemen and this (inaudible).

Takehito Yamanaka – MF Global

My name is Yamanaka from MF Global. I have two questions as well. The first question, so it’s similar to the earlier question, so similar calculation for Basel III, I got the confirmation. So we have presented a number before and you have associated the deal with the incorporating internal model. And I think the number you presented was 12% and 12 is, you mentioned it’s quite a significant number. But you said your expression assumes to along 10%. Has something changed or has there been any change? So did you specifically baking 2% decline when you say 12% to 10% (inaudible).

Unidentified Company Representative

So because of the enlarged business risk rated asset would of course fluctuate with the change of the business size. So we are confident that we can maintain above 10%. And our assumption could be that it could be very close to 10% or we might have some (inaudible) above 10%. So there is no change in the basic assumption. So the denominator, the size as you have represented, so that has changed. I mean that’s changing the latest situation. So for almost a sudden (inaudible) we’re still confident that we can maintain above 10%, just to confirm, reconfirm excuse me.

Takehito Yamanaka – MF Global

So you are confident that you can maintain 10% but what I wanted to ask is you just mentioned you said I got impression from the last round that your target is 12% so of course you’ll be able to maintain if you obtain that target? But so have you worked on your target in that sense?

Unidentified Company Representative

So the information that we present to you at that time was that after taking some policies by 2013 and we have set multiple assumptions and the percentage was based on those assumptions or a figure rated calculation.

Takehito Yamanaka – MF Global

Thank you. And my second question. I would like to ask (inaudible) presentation has mentioned in the section about the Europe that the derivate is one of your core competencies, and you’ll be very selective about cash. I think that’s what you have mentioned. And in the previous page, so you have had a gross graph, which represents a gross in past several years. The rates and other so some of the fields, which are quietly relevant to the ranking and derivate will the rating, so was the current rating is there any rate to grow derivative given your current rating. And what is your certainty behind your assumption on the gross in derivates given the current rating?

Unidentified Company Representative

Good question and I think that the important thing to focus on is the growth in our derivatives businesses. In fact our derivatives businesses in spite of the ratings challenges are up almost 80% within fixed income in particular. There are ways to mitigate the ratings. We haven’t seen it to be a significant setback because frankly we can either use wall based modern financing or we can even have third-party arrangements in terms of credit announcement. So those are two aspects to do the derivates piece.

When you talk about cash, I think it’s important to bear in mind the statement that I made about being selective is that we have invested very aggressively in the build out of our execution services platform. And going forward that base of investment will be more calibrated and any additional investment will be more focused towards more of the derivatives and the solutions oriented businesses.

Takehito Yamanaka – MF Global

Just after that, so specifically you say you will be more focused. So what is your focus, which part would you stop to invest or stop to work on or in which field you would have decreased priority if you want to focus.

Unidentified Company Representative

Decreased priorities, it’s a question of just shuffling the portfolio. As I said as the very outset, we are continually looking at the returns that we’re getting from each of the businesses given portfolio. And we balance that against where we believe is the biggest opportunity going forward. We’re very comfortable with that cash platform, we’ve had very good returns in our cash platform, and increasingly what you need to do is to grow and bolster our derivatives capacity.

Unidentified Company Representative

Any other question?

Shiyota – Daiwa Securities Capital Markets

Shiyota from Daiwa Securities Capital Markets. Two questions, one is in relation to the results for the Q4 results the effective tax rate has increased and overseas revenue increased in Q4, compared to Q3, but your effective tax rate went up. So why was that and for March 12 onwards what is the effective tax rate going to be? What should we expect?

Unidentified Company Representative

With regard the regional status on the presentation, and the fluctuations or trends in the effective tax rate, the tax impact does not necessarily occur in the same period as changes in the businesses results occur. And even within the overseas entities some are profitable some are not and we’re taxed differently in various reasons. But the overall trend is linked between the business results and the tax rate. But it does not directly link and match in the same quarter.

Shiyota – Daiwa Securities Capital Markets

And the effective tax rate going forward?

Unidentified Company Representative

Today it is well above 50%. So the first priority is to lower it from the current 69%. But tax structures are very local and it differs by each entity and the calculation differs for each entity as well. So the target is of course to lower that effective tax rate but we do not disclose the actual numerical targets.

Shiyota – Daiwa Securities Capital Markets

So yes there maybe some time lag between the quarters as you mentioned. But if you just look at Q4, U.S. and Europe and Asia, was each region profitable or loss making? And what was the extent of the P&L?

Unidentified Company Representative

As you can see on the presentation on a financial basis as it’s shown on the presentation, and on a management basis unfortunately we are still not fully profitable in the regions other than Japan, excluding Japan.

Shiyota – Daiwa Securities Capital Markets

My second point you didn’t touch upon too much today but in for retail for the long-term strategies, are there any risks in the long-term? The challenges that you face potential risks in the future for retail.

Unidentified Company Representative

Well, I can’t really think of any but that’s pretty good enough as top management. As I mentioned earlier if you look at the breakdown our financial assets, investment securities including investment trusts we are maintaining a certain share and we are raising our share but if you include cash and deposits we’re still not sufficiently high in terms of our share if you include the cash and deposits in the denominator.

So there is some room for growth in the future. And we have been traditionally said to be strong in the face-to-face sales but we will also focus on Internet sales as well as call center-based sales and provide services and products on a seamless basis. Especially for Internet sales we will strengthen the Internet sales and that is the main theme of today.

So not necessarily a risk item but one of the challenges that we could face is the impact of the earthquake in March and the changes in risk appetite among retail investors and the sentiment. That could be the largest change that we’re facing. And we hope that the sentiment will not go in a negative direction. And as I mentioned earlier we need to keep sending out information and making proposals to advert that kind of situation and to mitigate the risk.

Shiyota – Daiwa Securities Capital Markets

And in terms of cash and deposits you also mentioned Internet sales, how are you going to set up a new business to strengthen this area?

Kenichi Watanabe

No we do not have any actual plans. With that I would like to end today’s presentation and the results announcement for March 11. Thank you.

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