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Nomura Holdings, Inc. (NYSE:NMR)

F1Q 2011 Earnings Call

July 29, 2011 5:30 AM ET

Executives

Junko Nakagawa – CFO

Analysts

Masao Muraki – Deutsche Securities

Tsujino – JPMorgan

Shiel Dasan – Daiwa Securities Capital Markets

Mr. Kasai – Citigroup Securities

Yamana Pasan – MS Global Securities

Operator

Good day, everyone and welcome to today’s Nomura Holdings’ First Quarter Operating Results for Fiscal Year Ended March 2012 Conference Call. Please be reminded that this 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 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 valuations, competitive conditions and size, number and timing of transactions.

Now we’d like to begin the conference.

Mr. Junko Nakagawa, please go ahead.

Junko Nakagawa

Thank you for taking the time to join us today. I’m Junko Nakagawa, Nomura Holding’s CFO. I will now give you an overview of our results for the first quarter.

Please turn to page four for the document entitled consolidated results and operations. This page sums up our first quarter highlights. In short, we faced a very challenging environment during the quarter.

Page five gives you a more detailed outline. Please turn to page five. Our net revenue was JPY330.4 billion, up 27% year-on-year, and 10% quarter-on-quarter. The higher figures include the effect from an increase in consolidated entities after Nomura Land and Buildings became a subsidiary.

Income before income taxes rose 5.3 times from the first quarter last year to JPY34.4 billion, a decline of 8% quarter-on-quarter. Net income was JPY17.8 billion, an increase of 7.7 times year-on-year, and 49% compared to the previous quarter. So despite the challenging market environment globally, we reported our ninth consecutive quarter of profitability.

In Japan, retail and asset management in comp income increased quarter-on-quarter and its difficult market conditions following the earthquake. Business segment income before income taxes was JPY14.6 billion.

Turning down to the highlights by business segment. Retail reported net revenue of JPY94.2 billion, down only 2% from the prior quarter. Income before income taxes increased to 25% to JPY22 billion. We saw robust sales of the investment trusts, foreign bonds and other products much to the reach of retail investors. Retail made a sold contribution to firmwide earnings.

Asset management reported a 9% sequential wise in net revenue to JPY18.8 billion and a 19% increase in income before income tax to JPY7.4 billion. The investment trusts and investment advisory businesses, both continues to expand and asset under management increased by JPY600 billion to JPY25.3 trillion.

Wholesale revenues were impacted by the challenging market environment, which net revenue declining 24% quarter-on-quarter to JPY141.2 billion. Loss before income taxes was JPY14.9 billion.

I’d like to talk further about wholesale by different segments. Global markets posted net revenue of ¥130.1 billion up 35% year-on-year and down only 5% quarter-on-quarter. Fixed income market conditions were top and revenues were driven by credit and structured products. Equity revenues increased significantly from the prior quarter in the Americas and Asia excluding Japan. Investment banking booked net revenue of ¥11.2 billion down 8% year-on-year and 77% sequentially due a decline in ECM activity in Japan following the earthquake.

Please turn to page six. As we can see net revenue was ¥330.4 billion, income before income taxes was ¥34.4 billion and net income was ¥17.8 billion. First quarter annualized ROE was 3.4%. Pretax income includes one-off gain of ¥24.3 billion from the consolidation of Nomura Land and Building.

Please turn to page seven. Page seven shows business segment net revenue and income before income taxes. Next, I will outline the first quarter highlights for each businesses, please turn to page eight.

First, I’d like to talk about retail. In addition to earthquake, retail had to deal with historical high-end levels and the decline in trading value on the Tokyo Stock Exchange. In spite of the difficult environment, we saw new fund inflow in investment trusts and foreign bonds as well as robust sales of insurance products as we supported to our client individual needs with consulting services.

Retail client assets were essentially unchanged from the prior quarter at ¥70.4 trillion. Net revenue was ¥94.2 billion, down quarter-on-quarter and income before income tax increase to ¥22 billion. Please see page nine for more details on sales side product.

Please turn to page 10. Page 10 shows asset management. Inflows of ¥310 billion into public stock investment trusts, such as East Japan Revival Support Bond Fund, currency selection-type funds, and Japanese equity funds, help increase asset under management to ¥25.3 trillion, that is up ¥600 billion from end of March. Net revenue increased by 9% from the prior quarter to ¥18.8 billion, and income before income taxes increased 19% to ¥7.4 billion. Please turn to the next page.

In the investment advisory business, we own more mandates from pension funds worldwide and government entities and sovereign funds in Asia and Middle East to managed Asian equity products which are performing well.

As shown on the top right, investment advisory assets under management are still expanding. In the investment trust business, we delivered product mass to in Western East maintaining our leading position in Japan; however we offered Investment Trust market was share of 21.9%. Please turn to page 12.

Page 12 gives an overview of wholesale, net revenue increased 30% year-on-year to ¥141.2 billion, which was down 25% from last quarter. Pre-tax loss was ¥49.9 billion. It has been a very challenging market environment for wholesale with the sovereign crisis in Europe, political instability in the Middle East concern of a slowdown in the U.S. economy and the market slump in Japan for 1b earthquake.

However, as the pie charts on the bottom right show in spite of the difficult markets revenues grew steadily in the Americas and Asia, key regions where we have been strategically investing.

To address our current market challenges, we plan to implement a cost reduction program in wholesale as over $400 million or over ¥32 billion in one rate expenses. This annualized savings are equivalent to about 5% of last year’s wholesale cost base. This strategic cost savings will help pays away for investment in high gross regions and promising businesses.

Please turn to page 13. In our global markets businesses, client activity was subdued market-wide. But revenue contributions in Central U.S. and the west of international business coupled with disciplined risk management.

Our revenue declines were relatively small compared to our competitors. And fixed income, as revenues dropped across the industry, our revenues were down only 3% quarter-on-quarter at JPY67.6 billion, which increased sales of credit and foreign exchange products.

Equities revenues, increasing the Americas and Asia ex-Japan offsetting weaker results in Japan and Europe. Volumes on major markets trenched due to economic circumstances are following the earthquake in Japan, but we reported only a 12% decline in revenues at JPY56.7 billion.

Please turn to page 14. In global markets, the share of revenues from the Americas is steadily increasing. Both fix income and equities are gaining market share rising up industry rankings and expanding client base. Moving things forward, we will work to further expand our international revenues, while maintaining our solid revenue base in Japan.

Please turn to page 15. Page 15 outlines investment banking. We saw revenue growth in our international businesses and diversified revenues from pull-through M&A deals with products such as leveraged finance solutions businesses. However, while gross revenue increased 11% year-on-year, it declined 41% quarter-on-quarter to JPY32.3 billion due to a drop of – in domestic ECM activity up to the earthquake. And the recent market additions pre-tax loss was ¥20.6 billion.

Please move on page 16, in Japan which was hit by sharp Yen appreciation after the earthquake, we increased dominant market shares compared to the same time last year.

Outbound acquisitions and investments by Japanese companies have been on the rise due to the strong Yen. As you can see from this slide, we advise blue chips Japanese companies, such as Dai-Ichi Life and Itochu on high profile fast ported yields. In Asia, we acted as joint book runner on several large convertible bond yields for three straight months since April. In June we book run CB issuance by Lotte Shopping, the larger service CB deal in Asia and Japan consumer retail sector. In that month $900 million, we ranked number two in the CB table of four Asian corporate. In U.S. and America we maximize M&A report revenue and booked revenues from financial sponsor and insurance related solutions businesses.

Please turn to page 17, I would like to explain about expenses for cost. First quarter non-interest expenses were ¥296 billion up 13% quarter-on-quarter. Excluding the impact of the consolidation of Nomura Land and Building expenses declined by about 3% from the previous quarter. Although compensation and benefits increased 7% to ¥136.3 billion we continue to implement a pay for performance third quarter entirely.

Before I finish I will give you an update on our financial position at the end performance the quarter. Please go to page 18. As shown here our financial position remains robust at the end of June our Tier 1 ratio 16.2% and we had total assets of ¥39.7 trillion and shareholders’ equity of ¥2.1 trillion, gross leverage was 18.8 times and net leverage was 11.6 times.

Level 3 assets totaled ¥800 billion or 35% of the Tier 1 capital. We will continue to closely watch market conditions and taking into account our business strategy and financial position to aim for a Tier 1 ratio of around 10% when Basel 3 is introduced 2013. That concluded my overview of our first quarter results.

We will continue to build a truly high end driven organization an increase our international revenues while maintaining a robust financial position. Thank you.

Question-and-Answer Session

Operator

We are going to have a question-and-answer session at this moment. (Operator Instructions) Through the announcement start your question with your name and company. We will take your questions until the end of the meeting. (Operator Instructions) The first question is from Masao Muraki from Deutsche Securities. Muraki have three questions.

Masao Muraki – Deutsche Securities

My first question is as followed, so in wholesale cost reduction program of more than $400 million is to be implemented as was said in the presentation, so you know, which regions, in which areas and what are the time schedules for the cost reduction program, if you could share the information with us?

And the second question has to deal with regulation Basel 2.5 to be introduced next year when that is introduced, what would be the size of the risk assets and Tier I ratio is going to change to which number, if you can give us guidance as to what Tier I ratio is going to be? And question number three, what is discussed on the Basel III discussions. For CPs, the capital surcharge for green cities, so, up until the time when it is introduced, how much additional charge are you assuming? And what kind of coordination, adjustments are you making?

Junko Nakagawa

Mr. Marcie, thank you, so, on your first question regarding the cost reduction program. As I have explained earlier in the wholesale division our cost reduction initiatives are to be implemented to improve profitability. Personal cost and non-personal cost regardless of which it is, so an annual basis, we will like to achieve over $400 million cost reduction. Now as to the breakdown, across regions and areas we are to reallocate and reconsider resource allocation. But then we are financing increased investment based on savings and of course in view of the cost reduction program and the investment we’re going to have a net reduction in our cost and we were suffering we can and I am not able to share any further details with you at this moment. I hope you will understand.

The second point Basel 2.5, what will be the impact of Basel 2.5 that was your question. In terms of the major impact, while we are not disclosing specific numbers as to what the major impact is going to be and the Basel III, how much surcharge we are assuming, what percentage. What the other question?

Masao Muraki – Deutsche Securities

So additional capital charge, how much are you assuming at this moment? Well, Tier 1 ratio of 10% will be your target for the time being, I think you said. And given the earlier proposal, do you think you will be requiring common share Tier I ratio of 10%?

Junko Nakagawa

Even if we are recognized as given the confrontation given so far, think a phased approach is going to be applied and therefore the percentage required will be low at around 1%. I hope that answers your question.

Masao Muraki – Deutsche Securities

So additional surcharge of 1% and Tier 1 ratio of 10% to be targeted, and is it – when its – such that you do not need to change those numbers drastically going forward?

Junko Nakagawa

In terms of risk appetite, Tier 1 ratio is 10%. We have been saying and as we have explained many SEPSA measures will be taken and as a target we believe that should be sufficient. Thank you.

Operator

Next question is from Mr. Tsujino from JPMorgan.

Tsujino – JPMorgan

So the consideration outside segment, I think you have the chart for that in your press report, second phase of the presentation. So the account where you have 4.7 billion measure so I think was consolidation of 24.3 billion. So did you think you would have 11.5 and this number 11.5 – so we see a reduction of the fourth quarter?

Junko Nakagawa

And our equity cost – declined slightly and in the fourth quarter there was some special nature of cost spending – outgoing cost. So this 12 point some billion I think I believe it’s a normal level.

Mr. Tsujino – JPMorgan Can we believe this is normal closing double number? And here I got to ask question on this table. So we have other miscellaneous. So you have 4.7 billion other. So we have ¥5.5 billion positive. So yes, in tent loss are ¥7.1 billion or the debt so this would make it ¥12.7 billion. So if you look at the previous quarter, if you try the same type of adjustment you would have sequential minus figures. So – and but right now in this quarter we have positive number after the adjustment. So why is the case, why do we have positive on this quarter?

And global markets revenue, the third question. So fixed income and equity has been treated separately in Europe, Americas, Japan and Asia excluding Japan. And we have been presenting what are the respected shares so we would like to ask for the same number.

Junko Nakagawa

Thank you very much, Mr. Juno, first the corporate account, head office account, 11.5 billion, which you have mentioned. First point is we had a one-off factor, so estimated factor that’s we have described in the – our last meeting and so we have the decline in that type of one-off factor and also we have strengthening regulation on liquidity and financial cost, interest cost has slightly improved. So basically my answer you have pointed out.

The second point – so subsidiary not included in segments or some of the banks subsidiaries, who has made the profit. So, and, sorry for the normal. So the difference in the handling of our financial accounts, so that’s why we are seeing this number. Can you be a little bit more specific about that point? And, so, what’s not including in segment, so subsidiaries not included in segment, was there any special factors to subsidiaries?

Junko Nakagawa

No. There were haven’t been any special factor.

Tsujino – JPMorgan

So, excluding on credit you had been sequentially continue to be minus negative figure, but at this quarter I think I see in the substantial improvement about ¥10 billion. We have earlier asset management department, we had made a note there. Can we look at page 26? So what is to be in asset management about this subsidiary, some of the about this subsidiary is now included in others. So that’s I think one of the key factor. But it will not tens of billion yen, but several billions that you say?

Junko Nakagawa

Yes, that if the case.

Unidentified Company Representative

The third point in your question. so I’d like to start with fixed income Japan, EMEA, Americas and Asia excluding Japan, so that’s Americas slightly less than 40%, excuse me Japan about slightly less than 30%, EMEA, Europe about 30%, Americas slightly more than 20%, Asia Pacific and Japan are about 10%, and Japan, EMEA, Americas, Asia, that’s the order. Japan slightly more than 20%, EMEA about striking more than 30%, Americas about 20%, Asia, slightly less than 30%, that’s the break.

Thank you very much. So I’d like to add to my question, so when we see increase in labor cost, we would assume that Nomura, because we have a quite Nomura land and building, you are going to – their labor, the company’s labor cost is included and is that impact that has caused a labor cost to increase quarter-to-quarter, well I would assume that’s one of the factor, but that would not explain all for the labor cost increase because it’s too small to explain the overall labor increase, so can you provide us the further break in what the labor cost increase is while or how much from Nomura land and building and how much from other factors?

Junko Nakagawa

So I think I have communicated to you about in the last meeting. So we are ensuring pay-for-performance that has been our message, so if we make a compression quarter to quarter, it’s a little bit difficult to explain because the number structure changed because the performance system. So factors for the labor cost in piece basically it’s not – we have more impact from increasing our labor cost rather than impact from consolidation, so because we have a very short term for term profit and loss. Thank you very much.

Operator

The next question is from Daiwa Securities Capital Markets, Shiel Dasan. Shiel Dasan, please.

Shiel Dasan – Daiwa Securities Capital Markets

Yes, thank you. I have two questions that I would like to ask. This is a follow-up question from the earlier question by region, by segment. I understand that you cannot disclose this numbers, but what about the timing. So if you look at the next couple of quarters what timing will you start to see this effect of cost reduction initiatives? And regarding cost again why are you announcing this at this timing, not at the end of the last quarter? And my next question has to do with big exposure if you can share with us any numbers I’d appreciate it. So those are my questions, two of them.

Junko Nakagawa

Sure Dasan, thank you very much for your questions. So your first question when will we start to see the effective cost reduction initiatives. As I said at the asset, we are now scrutinizing and we viewing the content of the cost reduction program when will we start to see the effect what timing, we are not able to communicate that to you at this moment, I hope you will understand.

However, as we implement the program, well before we implement the program we are reviewing it closely and they can be actual. So we have come out with this number that I have disclosed and of course we will start reducing cost from where we can. We hope to getting touch with you and get back to you with the specifics in the following quarters going forward.

And as to when we will release and disclose the timing, why are we announcing this at this moment not at the end of – I will ask Ken.

Unidentified Company Representative

Well usually we would announce such programs when we finally tell you knew plan, but as you understand we have seen impact from the earthquake as well as impact from U.S. and impact from the changing environment in the U.S. By large I think is and priority at regulatory environment was becoming very, very fast.

On top of that market conditions have become harsh due not only to those quite in Japan but developments around the world as well. So rather than being too optimistic but I think slowly (inaudible) going forward, we thought that we should be conservative in coming up with estimate. And to address your second question, what’s your question about the exposure country-by-country in Europe, Portugal, Greek, Spain, and Italy, Thailand, these are big countries. What your exposure in these countries?

Junko Nakagawa

So Greek, where people are paying most attention our exposure is very little in Greek. And with respect to country exposure in Europe, there are countries where we serve as primary dealer, so we do have inventories of Sovereign bonds, but these are highly liquid instruments and they are mainly short term instruments. As far as the numbers as of June excluding short terms debt, net exposure is little less than $2 billion, that’s ¥160 billion.

Well, it depends on the Forex rate but it’s a little less than $2 billion and those instruments with the tenure of one year or longer $0.5 billion and that’s ¥40 billion. And with respect to the breakdown, most is in Italy and there are liquid – there are liquid exposures and they on the trading book. And, we do mark-to-market them on a daily basis. I think you can see feel reassured about that. Thank you.

Operator

Next question is from Mr. Kasai from Citigroup Securities. Kasai, please

Mr. Kasai – Citigroup Securities

Okay. I’d like to ask my questions, so page 18 of the presentation, so capital ratio, so Tier 1 comment as of March and 16.4 and its been in order of 13.8% as of June, so Nomura land and building, is it inside, I’ve heard that capital, one of the major impact which has put down the Tier 1 common to come down?

And as you said, can we understand that the numbers are improving afterwards and the point is – other question is on cost reduction, so you are expecting $400 million cost reduction? So will it be a cost reduction in revenue related in departments or would these cost reduction has a nature of not impacting the revenue, just have a positive impact on the bottom line. So what type or what is the objective of the cost structure, would it impact the revenue?

Junko Nakagawa

Thank you very much for your question. The first part of your question, so stock swaps and other transaction did not have any impact. So the factors impacted – so because we had consolidated LB and we had our increase in the risk weighted assets. So the impact is relatively light given that we have a very large capital. And the cost reduction program, the second part of your question, so would this impact the revenue.

No, I’m not going to say it will have zero impact, that would not be the case, but it’s not just a simple cost reduction so we will be looking into market environment, we would look into the outlook of what we are doing and we will be in a sense reallocating resources both in terms of human and our finance. So we would like to take this management resource and reallocate them in a way it most makes sense. So in some areas, we might review a strategic business. So we might take away the resources from a certain department and reallocate it to more focus areas. Thank you very much.

Operator

The next question is from MS Global Securities, Yamana Pasan. Yamana Pasan, please your questions.

Yamana Pasan – MS Global Securities

I have two questions. My first question is as follows. This is a follow-up to the previous question about $400 million cost reduction program. I have question again I understand that you are still reviling it and $400 million I understand that that is the net reduction amount. How did you arrive at that number? What’s behind that $400 million with that, that cost reduction, what is that you are aiming at? So ¥32 billion and how did you arrive at that number?

And my second question, in one of the common questions, pre-tax income of overseas subsidiaries disclosed according to prior discloser, just as is in the fourth quarter U.S. business is profitable but in management accounting terms it has yet to breakeven. So Americas, Asia, Europe, Oceania how should I be looking at these numbers and how can I interpret the management accounting number as well, if you could please elaborate on that?

Junko Nakagawa

Yamana Pasan Thank you for your question. So question about the cost reduction program. The number that we have disclosed you may think it’s either small or large, and how did we arrive at that number. The number itself of course is not that – we pulled it out of thin air.

We looked at the pre-market conditions, we also look at the future and after many discussions internally we came out with this number we are trying to relocate resources and we came out with this number believing that this is realistic number that we can achieve. And of course we must start executing from areas where we can as I said earlier and the number itself what the wholesale cost, if you look at the wholesale base last year, this amount $400 million is about 5% of last year’s cost base, it’s not small. And as I’ve said, we saw reducing cost from where we can.

And you second question. So the difference between accounting and management accounting, I think you’re looking at the numbers that we disclosed in response to the coming questions. The biggest factor is that perhaps we explain before once in response to liquidity regulation. We have had to deal with the regulation and translated into difference between the two and transfer pricing also is a factor. There are some accounting gaps between regions owing to transfer pricing.

Yamana Pasan – MS Global Securities

Well, excuse me, in Americas I see that you have income, but in effect it is not possible yet. So are you still running up losses?

Junko Nakagawa

I don’t think we have communicated anything on that yet. Well, if you could just look at the numbers, as I have explained in my presentation earlier, I think we haven’t able to gain good performance given the current market environment. I hope you will understand that. Thank you.

Operator

Next question is from Morgan Security (inaudible).

Unidentified Analyst

Thank you very much. Just one question from my side, so page 18, so you have regulated capital ratio, I mean we don’t have to look into this, so this ratio is a critical index and why at this timing, given such criticality, why did you decide to bring Nomura land and building into your consolidation because risk weighted asset increased and they are putting aside and negative good grow amortization, I mean there is not effect, but still you have made them a consolidated subsidiary? So why did you have to make Nomura land and building subsidiary? And in the future, so do we have these continuations of having listed subsidiaries or how are you going to sell off all the entities or maybe not selling them, but do you have any assumption on how you can compress on the risk weighted asset of these new subsidiaries?

Junko Nakagawa

Thank you very much. So consolidation of Nomura land and building, so what is the rationale or objective. So it was not done for profitability, at least not short-term profitability. So we have looked into the group organization. We want to improve our group’s structure. And also we wanted to improve our capital structure. And we wanted to have an optimal allocation of our resources and we wanted to enhance the speed of decision making and that is why we wanted to improve our group’s structure and our group’s capital structure that is our rationale.

So as a result, yes, actually appointed our tier 1 ratio, our tier 1 common ratio has slightly come down as you have pointed out and we do know that these are critical indexes. But we have – and yeah, second part of their question was how do we plan to improve this index. So we will enhance the corporate tally of each and every subsidiary as group and also enhance the value of the group itself. So we have – we’ll look into every option to enhance the corporate value and group value. Please, I beg your pardon. We have nothing specific that we can communicate to you at the moment, but as soon as we are ready to disclose we’ll be communicating these points to you. So risk weighted asset is increasing. So you are taking more risk. But the profit is you are not expecting increase in the profit that is a very – not an efficient way of capital reutilization. So maybe – as you’ll plan to discard or dispose of some of in next few quarters, you said with speed.

Unidentified Analyst

So can we understand that – that your sense of speed in taking care of your risk assets? So I maybe speedy to misunderstand you, so we are looking to every other options once we make decision yes, we will be very strict to make action, but deliberation needs to be done very carefully, so not only the consolidation of the Nomura land and building but we are at that post for all other issues.

So we have been making deliberations on the consolidation of NLB and that’s because we are prepared to this so we are taking the action at this timing. And you mentioned increasing risk asset and so by 2013 we are expecting our 3.5% return on equity and eventually we are targeting 4.5% and we are still confident that this is very achievable target. Thank very much.

Operator

(Operator Instructions) The next question is from Credit Suisse, (inaudible) please start your question.

Unidentified Analyst

I have two questions, page 36 that (inaudible) with the head count. Headcount is increase in Japan, Asia or China as well the head count seems to be increasing. Why? If you could give us details as to why head count increasing in these regions. And the second point about the $400 million cost reduction program. If you are to reduce the head count as well, how much reduction in head count, how many people will you be (inaudible) you may not have that decision yet, but if there is anything that you can share with us, I’d appreciate it. Thank you.

Junko Nakagawa

Thank you. So your first question about the head count, why head count are increasing in some regions on page 36. Well, your understanding as to why is that correct. The number of consolidated subsidiaries and affiliates (inaudible) that impact. 7500 that is the impact of consolidation in particular in Asia. Well, as far as Japan’s concern, what you have said is correct, consolidation.

And second as to why the numbers are increasing in Asia with NLB consolidation there were several others that were also consolidated and there’s a company with 800 staff and I think we earlier reported about offshore business in Thailand and so that has an impact and we have offshore entity in India that we’ve had there for some time and that business is growing with increased head count. So these are the factors behind the headcounts in these regions.

And your second question about cost reductions, how much head count reduction are we going to consider, was your question. So reallocation of managerial resources that is the focus of the program and as it turns out of course the head count may change, I will not deny that possibility, but we are now going to start from reducing the head count for this program. So there will be some increases and decreased depending on the region and between division or strategies there will be reductions in some areas.

But then as I said, there are some other areas, there will be increased investments, meaning the headcounts may rise. So on a net basis, I may not translate into net head count reduction, but of course we would like to improve profitability by reallocating the managerial resources. That’s going to be the objective.

Unidentified Analyst

Well then how are you actually going to reduce the cost?

Junko Nakagawa

As I said at the beginning of course personal cost and non-personal cost, recall this of which it is, costs will be subjected to reduction and there are ample areas where we can be creative in reducing cost. And there are different countries, different regions, where we have to consider appropriate allocations of people MDs, EDs, junior staff allocation, depending on jobs, so considering that I think there is ample room for being creative in reducing costs. All right, thank you.

Operator

Next question from Mr. Tsujino from JPMorgan. Please.

Tsujino – JPMorgan

Just two more points, one point just a confirmation. So MLB itself has realistic and those are the ones we used for the group business, Nomura Group business. So the risk assets increased because of Nomura real assets holding is a hanging (inaudible) MLB. So that’s the holding – that holding has a lot of risk asset. Is that the case? Just to confirm. And I’d like to talk about the labor cost as well.

Junko Nakagawa

When we look into comp ratio, so you mentioned group changes in the globe structure and it’s not contributing to increase in the labor cost. And you said, net revenue is increasing because of different – like we have 24.3 billion reduction of negative amortization. And you have (inaudible) revenue included. So excluding those and calculated that on denominated, so comp ratio is above 50%. So first quarter, we usually have a higher comp ratio and last quarter, previous year it’s still a substantial increase in comp ratio year-on-year.

Tsujino – JPMorgan

So can you enlighten me on the region for the factors which drove up the effective comp ratio?

Junko Nakagawa

The first point, your understanding is quite correct, precise. The second point labor cost. Now you are talking about comp ratio I would believe. Right now we time to factor which works on profit before tax about slightly more than ¥20 billion. So but if you look into group total we need to include these numbers. So believe those assumptions that we should exclude this from other group profitability I do not think is a precise or appropriate where (inaudible). Thank you very much.

Tsujino – JPMorgan

Hello, can you hear me?

Junko Nakagawa

Yes. Please go ahead.

Tsujino – JPMorgan

Regarding wholesale I have two questions. First, with respect to investment banking I have question. So considering the deal pipeline that you have right now investment banking segment turning profitable once again when will that happen, will that happen in the next quarter or two quarters from now what timing will that happen, that’s my first question?

And second at the beginning of this fiscal year. I think your firm has issued a very powerful message about the wholesale business in terms of KPI so 10% increase in annual revenue and (inaudible) that you announced those the numbers that the outside of this year, and this KPI, do you believe that they need to review. So those are the questions that I wanted to ask. Thank you.

Junko Nakagawa

So, thank you. Thank you for questions. Your first question regarding investment banking, well its recover what’s the pipeline. Well, this is more or less a forecast, I may not be able to provide you with the correct answer, but as far regarding debt, debts have started to recover from the middle of the first quarter, that’s our impression.

And as I said earlier, DCM however, will continue to be difficult. That’s our expectation, not just in Japan, but around the world equity markets are being rather sluggish turnover, trading values has declines and as I explained when I discuss global market the way in which risks are taken among investors have changed and investors are taking less risk today. So in the in first half of this fiscal year, we’re taking a conservative approach. In the second half in view of the macroeconomic recovering, we hope that the manufacturing factor will start to recover at a pace earlier than initially expected. Also we have to hope so for that happen. Anyway in the second half, we believe that recovery will become more firm and steady. That is our expectation.

Your second question, while we announced the other day our plan that was announced and it was a midterm outlook and as we have announced today, we’re going to reduce cost given that the current circumstances are very severe. We will have to continue to make extra efforts and in order to reallocate manager resources, so that we are to reduce cost and are we going to review the KPIs. We will not do so at this moment, but as we make studies in the future if revision to the KPI is wanted, we will be back to you to report that to you. Through cost reduction we will like to focus on increasing revenue and profitability. If that is the case then, new cost reduction program, even if that is implemented, the topline target or forecast is not going to be revised, is that correct?

Unidentified Company Representative

Well the environment will change going forward, so we will not deny the possibility of having had to revise the topline target, but we are not doing that at this moment.

Tsujino – JPMorgan

Thank you, understood.

Junko Nakagawa

We got to close the Q&A session as we are having no more questions. So a closing remark from Nomura Holdings. Thank you very much for attending the teleconference today bringing your busy schedule. Now we will close the conference call. Thank you very much for your participation. Please feel free to hang up your telephone. Thank you.

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