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Nomura Holdings, Inc. (NYSE:NMR)

F3Q2012 (Qtr End 12/31/2011) Earnings Call

February 1, 2012 12:00 pm ET

Executives

Takumi Shibata - Group COO, Chairman & CEO, Wholesale

Junko Nakagawa - CFO

Analysts

Masao Muraki - Deutsche Bank

Natsumu Tsujino - JPMorgan

Takehito Yamanaka - Credit Suisse

Katsunori Tanaka - Goldman Sachs

Jun Shiota - Daiwa Securities Capital Markets

Takumi Shibata

Hello everyone this is Takumi Shibata, group COO. I will speak first followed by Miss. Nakagawa, our CFO who will go over the Q3 highlights. After the presentation we will be happy to take your questions.

In Q3, all of our business segments were profitable on a pre-tax basis and we reported higher revenues and income compared to last quarter. Despite the tough market conditions, the retail segment continued to respond to client needs through its consulting-based strategy while our Asset Management business continues to capture diverse investor flows and both divisions delivered stable earnings and saw results from their efforts to reduce costs as well.

The Wholesale Division reported stronger revenues in all regions and business lines driven by improved trading revenues and further growth across our global investment banking platform. On this call last quarter we announced that we plan to reduce our expenses by $1.2 billion. And we explained that we will adjust our cost structure to make it suitable for the revenue environment in 2011 instead of 2009. And thereby lower our breakeven point and improve our business execution capabilities.

Since then, we are swiftly implementing the announced cost reductions and we expect to have over 80% completed by the end of March this year. During the third quarter, we started to see some of the effects of the cost reduction program, but we expect the full effect to start contributing to our performance from the next fiscal year. In anticipation of changing market conditions and tighter regulations, we reduced risk assets and enhanced our risk management. We will continue to expand our offering of products and services that add value to our clients while maintaining our robust financial positions and ample liquidity as Asia’s global investment bank.

The recent management changes reflect our determination and although they were amicable departures, our intention is to create a flat management organization that allows for simpler communication lines and faster decision making processes while we also streamline our cost structure. While we expect the environment to continue to remain challenging for the time being, our focus is to continue expanding revenues by leveraging our geographic advantage as Asia’s global investment bank and proactively responding to the needs of our global clients.

With that, I would like to hand you over to our CFO, Mr. Junko Nakagawa, to give you an overview of our Q3 results.

Junko Nakagawa

This is Junko Nakagawa, CFO. Based on the presentation, I would like to go over the highlights of the Q3 results for fiscal year March 2012.

Please turn to page 3. Both revenues and income increased during the third quarter and all divisions were profitable on a pre-tax basis. As we contend with the debt crisis in Europe and challenging market conditions, Nomura’s long-term commitment to being a client-driven organization remains unchanged and we are adapting swiftly to the new revenue environment, expanding revenues and reducing cost by $1.2 billion as previously announced in order to lower our breakeven point.

Please turn to page 4. Our net revenue increased 34% quarter-on-quarter to become 404.9 billion yen and income before income taxes was 34.5 billion yen and net income was 17.8 billion yen. For the fiscal year to date, for the first three quarter our net revenue was 1.04 trillion yen which was an increase of 25% compared to the same period in the prior year due primarily to Nomura Land and Building becoming a subsidiary of Nomura Holdings.

Pre-tax income was 24.2 billion yen which was down 57% from the previous year due to the difficult second quarter in Wholesale. We reported a net loss for the year-to-date of 10.5 billion yen due to a 13.3 billion yen impact from the changes in the Japanese tax system. Excluding that the net income for the period was 2.8 billion yen.

On pages 5 and 6, we describe the highlights of this fiscal period as well as the segment information and as for the results of each segment, we will explain from page 7 onwards. Let me start with the retail segment on pages 7 and 8. Retail revenues was 79.7 billion yen, which was down 5% Q-on-Q. Pre-tax income was 10.1 billion yen, down 6% Q-on-Q.

Despite the tough market conditions, we continued our efforts in consulting sales and we’re able to achieve a net asset inflow for seven consecutive quarters and we limited the decline of revenues to a minimal level.

In bonds, we were able to achieve a broad range of investment needs and our sales grew for four consecutive quarters. The sales of foreign currency bonds trended strongly, while JGBs and domestic corporate bonds also were steady.

Please turn to pages 9 and 10 for Asset Management. Net revenues in Asset Management were 15.3 billion yen, down 4% from the last quarter. Income before income taxes declined 10% to 4.2 billion yen.

While assets under management have remained flat since the second quarter, Asset Management contained costs and continued to deliver stable profits. Although investors shied away from the public stock investment trust market due to current conditions, investment advisory assets under management were roughly unchanged from the prior quarter.

Now please turn to page 11 for an overview of Wholesale results. Net revenue more than doubled to 176.2 billion yen. Income before income taxes rebounded, both quarter-on-quarter and year-on-year, jumping 3.5 times compared to the last quarter to 37.8 billion yen. Revenues increased significantly in each region and business line as our client-driven strategy continued to gain traction through close alignment of services to client needs.

Please look at the bottom left on page 11 for a regional breakdown. Next page 12 for a breakdown of Wholesale results. First, Global Markets. Net revenue in global markets jumped 63% quarter-on-quarter to 118.7 billion yen. Pre-tax income was 8.4 billion. In fixed income, most products posted quarterly gains.

International business contributed to a larger share of revenues driven by strong performance in EMEA and Asia excluding Japan. Net revenue in equities increased to 19% sequentially. Although client revenues were down due to weaker volumes, trading revenues improved during the quarter.

Page 13 gives a breakdown of fixed income and equities performed by each region for your information. Now on investment banking on page 14, gross revenue increased 90% quarter-on-quarter to 45.1 billion yen. Net revenue including the Private Equity business was 57.4 billion yen. Pre-tax income was 29.4 billion. Revenues were driven by Japan and EMEA. Closer cross-regional collaboration out of our home market resulted in DCM transactions for Japanese and international issuers and cross-border M&A deals. In EMEA, we executed various ECM/DCM deals for European financial institutions and provided them with solutions.

Page 15. As indicated on the left the graph indicates average gross revenue for the first two quarters as well as the third quarter. As shown, international revenues improved substantially and our domestic revenue base remained solid.

Page 16. Although net interest expenses increased by 7% to 370.5 billion yen, they actually declined 4% when you exclude the effects from making Nomura Land and Building a subsidiary. Please look at the bar chart for your reference. Other expenses increased 37% from the prior quarter, primarily due to higher costs of goods sold at consolidated entities. Personal expenses increased by 10% through cost reduction as well as stringent cost management.

Progress of cost reduction program, please turn to page 17. Total 1.2 billion yen cost reductions have been announced in July and November last year and as shown here the program is on track.

Wholesale, which accounts for 87% of the $1.2 billion, had achieved 66% progress by the end of December last year. We are working to reduce both personnel and non-personnel expenses to achieve 81% of the planned reductions by the end of March and lower the break-even point in Wholesale.

Please turn to page 18 on balance sheet related items. Total assets were 33.5 trillion yen, gross leverage was 16.2 times and net leverage was 10.1 times, all of which are lower than at the end of the second quarter. The table on the bottom left shows that as a result of an increase in risk-weighted assets as of the end of December under Basel 2.5, our Tier 1 ratio was 12.9% and our Tier 1 common ratio was 11.1 %, both of which are lower than at the end of September which was calculated under Basel 2. The variance will be explained on the next page.

Page 19, this is a comparison of our risk-weighted assets and Tier 1 ratio as of the end of September and December. On the left, if Basel 2.5 is applied to our September-end balance sheet, market risk would have been 3.8 trillion yen higher, giving risk-weighted assets of 16.7 trillion yen as shown in the central bar chart.

During the third quarter we reduced our private equity exposure and trading positions in line with the current revenue environment and at the end of December, risk-related assets were $15.9 trillion. As a result, at the end of December under Basel 2.5, our Tier-1 ratio was 12.9% with Tier-1 common ratio at 11.1%, both high capital adequacy ratios.

Please turn to page 20 on funding and liquidity. The top left shows our balance sheet, 75% of which is composed of highly liquid trading related assets. On the bottom right you will find that 80% of our unsecured funding is in the form of long-term debt and is diversified in terms of both composition and market source. Our liquidity portfolio consisting of mainly sovereign bonds such as JGBs and US treasuries had accounted for as high as 17% of total assets as at end of December.

Finally, exposure to European peripheral countries on page 21. Our net country exposure at the end of December was $1.52 billion, representing a 57% decline from $3.55 billion at the end of September. Exposure to Italy declined from $2.81 billion, or 71% of the total, at the end of December to $800 million within and/or 53% of the total, at the end of December. Our inventory’s all trading assets held for client trades and is marked-to-market on a daily basis.

We will continue to closely monitor credit conditions in each country, liquidity, maturity profile, and hedging to ensure stringent risk management.

That concludes my presentation of our third quarter results.

Takumi Shibata

This is Shibata again and as for the future revenue environment, earnings environment, we expect it to continue to remain challenging, given the fiscal difficulties in Europe as well as the current state of the financial services industry. In light of this, next fiscal year we will focus on leveraging the effects from reducing our cost base to gain further momentum.

We also believe the competitive environment will transform significantly, gradually presenting us with more business opportunities. And let me explain using some examples: First of all, in the developed countries, particularly as European financial institutions retreat to their home markets and commercial banks increasingly focused on traditional businesses, there will be room for a global pure investment bank like ourselves to increase business opportunities.

Secondly, financial institutions in the developed world such as banks and life insurers will require solutions to help them overcome the Eurozone crisis and comply with financial regulations. And we are uniquely positioned to provide these solutions.

And third, Japanese companies are increasingly going overseas and we are in an advantageous position to support them overseas.

And going back to the basics I believe Nomura offers five competitive advantages. First of all we have a unique hybrid business model with the Retail and Asset Management businesses generating stable revenues on the one hand and the Wholesale business generating market-based revenue on the other hand.

Secondly, our quick decision making where we anticipated global, financial, regulatory reforms and moved ahead of our competition to enhance our capital position and realign our cost structure to meet the current earnings environment.

Thirdly, we have a robust financial position with a highly transparent balance sheet, sufficient levels of capital and abundant liquidity. Fourthly we have a stringent risk management structure in place. And lastly, we are positioned as a systemically important financial institution in Japan.

Looking ahead, the importance of maintaining a global network will only increase. As we strive to become Asia’s global investment bank, we will choose areas of focus internationally and allocate resources accordingly. We will leverage our competitive advantages and our global platform to meet the needs of our global clients. Our unchanging long-term commitment is to remain a client-driven organization. And this commitment will remain unchanged.

With that, we would now like to open the line to take your questions. Thank you.

Question-and-Answer Session

Operator

We’ll have a question-and-answer session now. (Operator Instructions) The first question is Mr. Muraki from Deutsche Bank. Pleas go ahead.

Masao Muraki - Deutsche Bank

I have two major questions. First of all, this question is addressed to Mr. Shibata. In Wholesale Division, Interim CEO has been appointed according to your press release. So there is an option of hiring from outside, but you also talked about expeditious decision making in the mid-run, you may continue to serve or double back. So based upon the current management structure how will the management structure unfold in the future?

Second question is with regards to credit rating. In the fifth point with regards to your competitiveness, you said that Nomura is identified as a domestic SIFI in Japan. Now in terms of credit worthiness currently review is underway for your rating, would your entity begin identified has domestic SIFI impact in the rating?

Takumi Shibata

Now in terms of interim appointment at this juncture most likely, approximately one year or two years or three years, it would not be a natural even if this current structure continues for that kind of timeframe. Within or organizationally especially in terms of decision making at the very top level there used to be two layers which have now been removed.

Layer-by-layer cost is incurred and stuff is required for each layer and communications become cumbersome and therefore removal of tiers within the decision making organization was achieved in order to simplify the structure and at the same time efficiency of cost has been pursued. So this expression or interim structure will continue for some time to come.

And thus in terms of the future successor, it is true that we’ve been approached by many; but we are not planning to take any specific action and in the long run we will seek to find a successor from within the organization.

On the fifth point, on the concept of SIFI, as you may know we were not qualified as a Global-SIFI; we were on the verge, but didn’t qualified as G-SIFI.

If we look at the numbers for 2014 and that is the year when they will be side on the final list and even at 29 that have been designated are not officially appointed. As we look at the financial market, especially in the European continent and think about the European financial institutions of streamlining the balance sheet, we question whether we can be kept as outside of the top 29. So there still remains the possibility of ourselves being designated as a G-SIFI and also the equity ratio, shareholders equity of Nomura.

Even with 1% surcharge, we have abundant shareholder equity that enable us to tolerate that and also with regards to the shift to the home market, no country has made any particular announcement, but, if we think about the current situation, Nomura being dropped from the group of Japanese SIFI in unthinkable.

In this nation, and when we think about the financial infrastructure of this nation, we are proud to be making or playing a very important role of contributing to the society at general. The meaning of serving support, what we – the organization that made an announcement is S&P, on November, 9th last year, Moody’s placed Nomura on credit watch. But S&P’s announcement came later and S&P affirmed our credit rating after Moody’s announcement and there is a factor of two notches. So our mindset is to have the other credit agencies appreciate those two notches, but the decision is nothing for Nomura to make. It is theirs to make.

Masao Muraki - Deutsche Bank

Thank you very much. On the second point, with regards to the credit rating, if there is a change, could you give us -- how you would be responding depending on what scenario and what simulations you’ve done in order to come up with the planned responses for each of those scenarios?

Takumi Shibata

First of all, our basic policy is to conduct simulations assuming several different scenarios. However, for example, AAA credit rating was held by a company and if that is suddenly downgraded when they did not offer collateral in any transaction, certainly because of the downgrade, they are put into a position where they would have to offer collateral, putting them tight in terms of funding. More specifically, in 2008, AIG was put into that kind of corner; fortunately or unfortunately in the case of Nomura in terms of ISDA Agreements or CSA in all derivatives, over the counter transactions.

At this moment, we’re not required to offer huge amount of collateral. We do nothing that there would be any significant impact based upon the current agreement if there is a change by one notch between 10 billion and 20 billion of additional collateral will be supplied. Two notch change would be quite a stressful scenario beyond imagination. But, in terms of contract, there would be an impact of between 60 billion to 70 billion yen additional collateral.

Now in terms of cash liquidity at hand, cash at hand on dollar basis 70 billion to 72 billion in between 70 billion to 72 billion. So the order of additional collateral that would be required would not have any significant impact to our liquidity position.

Operator

The next question is Ms. Tsujino from JPMorgan. Please go ahead.

Natsumu Tsujino - JPMorgan

If you look at the improvement of global markets revenues on page 12, the shadowed portion on page 12. The client flow revenues grew slightly in fixed income and it was flat or slight decline in equities. So overall, it was basically flat or I say is decline for equities which means that most of the improvement came from position management and over the past few quarters, the global market revenues improved quite significantly compared to the stable or flat client flow revenues?

And if the stagnant client flow revenues continue, can you maintain this level of the global markets revenues. Could you comment on that please? That's my first point and my second point is this is a more detailed question. If you look at the corporate expenses or corporate accounts, corporate items, in the segment others for example on page 13 of your financial announcements, the negative figure from the corporate items increased by 20 billion yen quarter on quarter. And for example the funding cost of the liquidity pool and other expenses are probably in this, but even so this is quite a significant increase.

And in the past some of the unallocated expenses have been included in here and the figure has been going up and down, so could you describe the breakdown and also why these items are included here. And my other question is, Mrs. Shibata mentioned that retail and asset management are the stable businesses.

But if you look at slide 30, the reason why you were able to generate pre-tax income of 10 billion domestically was not so much from the traditional retail and asset management businesses and the results were somewhat volatile. And if you look further up for several lines, the sales of investment trust commissions have declined significantly. And in terms of the regulations, the future regulations are unclear, but when the regulatory framework changes for securities firms, how do you plan to conduct your business and what preparations are you making for the future?

Junko Nakagawa

Their were three questions. So Ms. Nakagawa will answer the second question and your first point about client flow versus position revenues. When the client flow comes back we expect our position with also improved that tends to be the trend. And so one of the management challenges that we face is there are some facilitation trades that are required in our business which incurs some losses or loss ratios in our trading.

And therefore we have replaced some of our staff in the trading team to better talented people. And looking at the current state from a distance, from bird’s eye view, if you look at the client flow revenue of the global markets on absolute terms, it has increased quarter-on-quarter. And on the other hand, there were gains, trading gains that exceeded the increase in client flow of revenues. That was due to the low loss ratio as well as adequate risk management.

I think these brought about the strong trading results. I think that’s what happened in Q3. As for retail, which is your third question, you pointed out that the investment banking revenues or the sales commissions are volatile. For example, on a ECM deal or even in DCM transactions, like some of the more recent transactions, the question is how many more deals are we expecting in the future and this time last year, if you look at the deal flow in capital markets, related deals in investment banking, the pipeline was relatively weak last year but since then the pipeline has expanded.

So, as the market stabilizes and you could say this year was relatively stable compared to last year. Once the market stabilizes, I think the volatility in this business will decline. As for the regulations on Investment Trusts, there are various media reports at the moment and my view is that the media, the newspapers do not understand the regulatory discussions and as for the future framework for the sales of investment trusts and this momentum to provide adequate disclosure about the sales of investment trust, there is discussion going on about that.

On the other hand, there are some more detailed specific case by case discussions going on at the same time. And the first discussion is about the structure whereas the second discussion is about more regulatory supervision and there are some media reports which confuse the two issues, which is leading to some confusion among the readers. As of today, our view is that as a securities firm, it’s not that there are some new issues arising for securities firms, but it is the new market entrants into the market who sometimes do not conduct adequate disclosure which is leading to complaints and as the industry overall, we would like to have the same types of standards that applies in terms of disclosure and also explaining the various products which would lead to improving the overall Japanese market.

And we are fully cooperative for this trend and we will cooperate in any way that we can but as for Nomura, all we have to do is further strengthen the ways we have been disclosing information in the past.

So, the decline in investment trusts is temporary and you expect early recovery. Well, the market environment was extremely weak, we have to accept that. So, if the weak market conditions continue, then these weak figures could continue as well. However, despite these weak market conditions, by responding to the various needs of our clients and conducting consulting sales, I think we have proven that, that is possible from the Q3 results and if you compare the market environment of 2012 against 2011, we cannot expect a big improvement, but even if we do not expect a big improvement, once the investors and clients get more used to this kind of volatility, I think we can expect for a certain improvement, thank you.

Next I would like to explain about this large negative figure in the corporate items. Last year, there was a contribution from the subsidiaries but in this fiscal year, the subsidiaries are not contributing. That is one of the big drivers of this negative figure. As for the funding cost of the liquidity pool, your understanding is correct.

There has been some impact from the market changes especially towards the end of the fiscal year, but we will allocate these charges adequately to the business segments and we will continue our efforts in that area in the next fiscal year. Another point is in Q3, Nomura Holdings issued subordinate bonds and the bond issuance cost is also included in these corporate items. We are also conducting restructuring and these also impact this figure and some of the fund allocated costs are included in the corporate items. These are the main reasons for the increase in the figure.

Natsumu Tsujino - JPMorgan

As for the unallocated figures there are several billion yen of increase quarter on quarter, is that correct, is my question. And as for the subsidiaries or affiliates that were contributing in Q1 and Q2, which changed in Q3 or is the decline in Q3 temporary one off trend or was Q1 or Q2 exceptionally strong.

Junko Nakagawa

The first point of the contribution from the subsidiaries, there are some subsidiaries, which we have set up for funding purposes and there are some full subsidiaries which we consolidate on our books, which are not part of our business lines, business segments. For example subsidiaries which are providing real estate and other facilities. And usually these subsidiaries contribute by several billions of yen but in this fiscal period the figure was relatively weak compared to the other quarters. And for the funding costs for treasury there has been an increase Q on Q in Q3 of less than 5 billion yen but there has been an increase in Q.

Operator

The next question is Mr. Yamanaka from Credit Suisse. Please go ahead.

Takehito Yamanaka - Credit Suisse

I have two points. First of all cost reduction related question. In Q2 a similar question was raised to in terms of cost reduction you said is on track. In Q3 for example cost through headcount reduction. Was there extra cost because of the restructuring? Second question, pertains to the change in competitive environment which was touched upon by Shibata as you concluded the presentation. There would be new business opportunities for Nomura because European financial institution will be concentrating on their whole markets and the commercial banks would be pursuing on their tradition business. What is begin done or what are you trying to do? What opportunities are you capturing as a result? Could you elaborate on those points? Those are the two questions. Then the first question will be responded by Mr. Nakagawa?

Junko Nakagawa

I think there are many ways to the market but its between six to seven billion yen when you say six to seven billion, in terms of profit and loss statement item which a line is it included in, mainly in personal expenses. Thank you very much.

Takumi Shibata

On your second question on the competitive climate what’s happening at the moment? Currently European banks are faced with shortage in capital adequacy in some cases and secondly dollar denominated funding in the market is becoming tighter. Dollar assets that have been accumulated in the past are now on sales. They have no choice and many are coming out for sales.

And third factor, within the Eurozone long-term unsecured funding is becoming ever more difficult because of several reasons. As a result, what could happen? In order to respond to the new regulatory environment with regards to the first point, banks will try to shrink down the size of the risk-related assets. On the second issue, this in Japan, Asia and in the United States, financial institutions in these regains including large companies and private equity firms are being offered. They are receiving many offers. If there are assets that could be sold, there are assets that cannot be sold especially when there is a wide spread between the book value versus the market value, there could be some difficulties.

Now what kind of significance do these trends have on ourselves, weekend service intermediary and the second factor of dollar denominated funding and on the third element, fundamentally there could be various structured products to be sold, to capture and cultivate new investor-ship and currently these trends are leading to businesses for Nomura but what’s interesting is that ECB for a three-year funding on collateral basis, they would be providing liquidity. They may be providing liquidity and then at that instance, that third business opportunity sourcing will decline for Nomura. So there could be negative impact depending on how ECB, what steps ECD would take.

Now this is rather immediate or rather materialistic in terms of the immediate profits, but if we step one step back, I cannot give you the name but one gigantic company of Europe, I talked with the CEO of a large European company and this CEO says he doesn’t know who to talk to now and this maybe an example of commercial banks returning to their traditional business. In other words, so far they took advantage of advantageous funding cost on the part of banks. So banks were able to offer discounted interest rates as they lend to various European companies and that could serve as a seat to gain M&A mandate or ECM mandate. So that had been somewhat of a business model, a few European banks had been pursuing.

But suddenly they had to change direction. On standalone basis, they have to charge interest rate that is normal or that could be profitable on a standalone basis and ourselves included, independent investment banks like ourselves. If they can offer high quality advice, some companies are seeking such high quality advice, and Nomura is beginning to enjoy such benefit and I am sure they would be reflected in future potential transactions. It’s not just Nomura that is enjoying these opportunities. Others are also enjoying such opportunities.

There could be many other leeway where we could find other business opportunities to which we are looking forward. For example, it depends on how you look at the picture, but in our fixed income business it requires capital but we want to pursue business opportunities solidly. On the other hand, in the future there could be various opportunities or various people who would want to back out from the fixed income business because they don’t want to use capital. What does that mean for institutional investors? That would mean a different people offering liquidity and the liquidity suppliers becoming different. We want to continue to provide liquidity to our clients and that is one means of increasing client revenue and a means of increasing trading revenues.

Further all three and solvency too. These new regulatory environments are awaiting us and under the changed transition of the regulatory environment during that transition period costs will naturally and by necessity be incurred there could be various services to minimize those transition costs and I am sure that many entities will emerge, one of which is Nomura because we have in-depth expertise and because we have a very clean balance sheet and by tapping on those strengths we are finding increased business opportunities which will continue to increase.

Takehito Yamanaka - Credit Suisse

Very briefly I have a supplementary question according to what I heard from you, you said that there could be various business opportunities. Are you saying that you expect those to emerge? We can't really confirm being an outsider. Those opportunities are intangible yet, when do you think that those opportunities will become tangible?

Takumi Shibata

Rabobank Tier 1 capital funding or Milano Banca Popolare rights issue. These opportunities have been captured by ourselves and structured products. There could be opportunities there and really by gaining permission from the authorities there are insurance related projects that are under execution. This is a relatively small project. Acquisition of an insurance company, so if you read or see those opportunities you will find that opportunities are actually being realized, because of the nature of these deals, we need to keep the confidentiality in terms of the name of our clients. So we cannot disclose everything, but already these are opportunities that are very obvious in the pipeline. Thank you very much.

Operator

The next question is Mr. Tanaka from Goldman Sachs. Please go ahead.

Katsunori Tanaka - Goldman Sachs

Hi, I have two questions. The first is about the regulations on investment trust, the regulations on the product, investment trust products. And as far as I know there have been some issues in the way the investment trusts have been sold, but also in terms of the distribution from the investment trust, there were some issues with the products themselves, investment trust themselves. And in these cases, if the nature of the investment trust changes, the distribution type investment trust changes, how much impact will there be?

And my second question is, just going back to the figures that were discussed earlier, the cost reduction schedule on page 17 and the progress you are making, this includes the one-off 6 billion to 7 billion cost increase that you mentioned and should we assume that that 6 billion to 7 billion is included in these figures?

Takumi Shibata

I will adjust the first question and I’ll have Nakagawa San for the second point. Well, the regulations on the investment trust sales, this is important and as you pointed out, there have been some issues in design or the structure of the investment trust and there have to be some improvements made in the industry. And if you look at Nomura Asset Management, I used to be Head of Nomura Assets so I am familiar, but when the investment trust which was problematic in terms of distribution were launch, Nomura Asset Management was not involved in such products. We were somewhat late or we were determined not to be involved in such products.

So, as far as Nomura goes, we are not exposed to investment trust that are structured so that the payout of the principal is used has the payout of the distribution. However, there are some cases where the investment trusts or the managers cannot payout the distribution as the initial plan, according to the initial plan. And if you look at the period from October to December last year, there have been six such products.

But this was not because of the structure of the investment trust, this was due to the decline in returns from the underlying assets and the whole industry, overall industry there are more than 100 investment trusts product that have reduced their distribution or their dividend.

In November, we launched an investment trust global high yield which has equities as underlying assets and also uses call transactions and there have been quite strong needs for this product. And in Q3, we sold around 80 billion yen and as of today, it is still popular. So from Nomura standpoint, these tightening in the regulations helped improve the quality of investment trust product and it also improves the sales attitude of our people when they face their clients and it is also beneficial to the overall industry, not just for Nomura.

Junko Nakagawa

As for your second point about cost cutting and the restructuring cost or pursuing the cost reduction, the restructuring costs are not included in the $1.2 billion of cost cutting. But as you can see from the Q3 results, the restructuring cost that I explained earlier has been absorbed by the cost reduction benefits; the benefits have far outweighed the restructuring costs. And it will be probably next fiscal year onwards that you will actually see the concrete results of the cost cutting, but we will continue to make our efforts. Thank you.

Operator

We’re approaching the closing time and therefore the next person’s question will be the final question. Daiwa Securities Capital Markets, Mr. Shiota.

Jun Shiota - Daiwa Securities Capital Markets

Thank you very much, on global markets trading; October, December was good, but from the flow, revenue didn’t grow so robustly. But since the beginning of January, how has the market been, liquidity is back, but could you describe as the most recent performance, that’s the first point? Secondly, sorry for repeating the same question, but this is once again with regards to regulation of investment trust. If you have numeric’s we would very much appreciate? Distribution type of investment trust product, what’s the ratio of your investment trust products that would be deemed to be problematic?

Takumi Shibata

Now the first question, it’s difficult to respond, but on the current market environment, during the course of the year last year, traditional (inaudible) investors and hedge fund investors were on a strike in effect. But then, since the beginning of January they become much healthier and active. And what about the most recent trend and I think the supply to our peers as well the fifth income transactions were quite significant in January and I think this view is shared with this industry, I would assume.

And for equity as well, we are seeing comeback, but not to the extent that we can celebrate with a glass of champagne. For example, TSE turnover, take a look at those numbers and much of that is accounted for by proxy.

Jun Shiota - Daiwa Securities Capital Markets

So, and also on investments trust products, what’s the percentage of investment trust which may be just as being bogusly or crossly dividend?

Takumi Shibata

Nomura Assets as I said at the beginning, offers monthly distribution investment trusts, but they were a late comer, so half of the total assets yet are accounted for by monthly dividend type; 70% is the industry-wide average for that and Nomura Asset is about 50% so plenty choice type. Within Nomura Asset Management’s asset accounts for 40% of the equity investment trust products and from those numbers you may be able to do your own calculation for your own assumption. Thank you very much.

Operator

Now we are closing the Q&A session. Thank you.

Takumi Shibata

This is Shibata again. Its late in the evening and thank you very much for participating for long-time in today’s conference call. Moving into Q4, we will continue to make efforts to improve our results. And from next April onwards, we will start our new fiscal year under a new cost structure and we will strive to achieve revenues similar to what we achieved in Q3 of this fiscal year. Thank you very much.

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