Nomura Holdings' (NMR) Hosts Investor Day (Transcript)

| About: Nomura Holdings, (NMR)

Nomura Holdings, Inc. (ADR) (NYSE:NMR)

Q3 2016 Earnings Conference Call

April 27, 2016 02:00 AM ET

Executives

Takumi Kitamura - CFO

Tetsu Ozaki - COO

Steven Ashley - Head of Wholesale

Analysts

Masao Muraki - Deutsche Securities

Isaac Osaki - Merrill Lynch

Kouichi Niwa - SMBC Nikko Securities

Katsunori Tanaka - Goldman Sachs

Operator

Takumi Kitamura

Thank you for taking your time to join us today. I am Takumi Kitamura CFO. I will now give you an overview of our financial results for the fiscal year ended March 2016. In front of you have our usual presentation titled Consolidated Results of Operations and another document titled overview of results, which is what I will use.

Now you see presentation which is shown on the screen at the moment, the overview of results. Please turn to Page 1. First, let’s look at the full year highlights. As the graph on the right shows, the first half of the year got off to a relatively smooth start. However, client flows declined from August onwards. As China’s economy slowed, oil prices plunged, and uncertainty grew over the impact of monetary policy in major markets. We faced a particularly challenging market environment in the second half of the year. In Retail, sales of stocks and investment trusts dropped year-on-year as sentiment among retail investors cooled on the back of the plunge in stock prices and the consequent volatility in the market.

The Wholesale trading environment deteriorated as liquidity dried up, particularly in spread products such as Credit and Securitized Products. Asset management had a good year, with assets under management growing on the back of significant flows. Overall three segment income before income taxes declined 35% compared to last year. Aside from the three segments, we booked unrealized loss on securities holdings and expenses related to a settlement of a legal dispute. These factors pushed down group income before income taxes, which was ¥165.2 billion, representing a decline of 52% over last year. Net income was ¥131.6 billion, down 41% year-on-year.

In terms of shareholder returns, we will pay a year-end dividend of ¥3 per share to shareholders of record as of the end of March. On an annual basis, the dividend works out to ¥13 per share, giving a payout ratio of 35.6%. Today, we also resolved to launch a share buyback program to allot shares to be transferred upon the exercise of stock options and improve capital efficiently, while ensuring a flexible capital policy. The program will have an upper limit of 35 million shares and ¥20 billion.

Please turn to Page 3. This page shows the trend in income before income taxes from last year. The bar on the far left shows group income before income taxes in FY2014 to FY2015 of ¥346.8 billion, while the bar on the far right shows group income before income taxes in FY2015 and FY2016 of ¥165.2 billion. As I said, retail and wholesale reports at a slowdown in the second half of the year with income before income taxes declining ¥34.2 billion and ¥66.8 billion respectively. Meanwhile asset management reported an increase of ¥4.6 billion, taking income before income taxes to the highest level since the year ended March 2007. The decline in share prices led to a loss of ¥45.4 billion on securities held for operating purposes. Our stake in Ashikaga Holding negatively impacted earnings by ¥28.2 billion. Other shows a loss of ¥11.6 billion. This includes the impact of the settlement with Banca Monte dei Paschi di Siena in the second quarter.

I will now give you an overview of each business, staring with retail. Please turn to Page 4. The graph on the left shows a 9% year-on-year decline in full year net revenue to ¥435.6 billion. Income before income taxes declined 21% to ¥127.6 billion. As the bottom right shows, total sales in the first half of the year got off to a good start, but the market turmoil from August led to a slowdown in sales of stocks and investment trusts due to the cooling down of the sentiment. Amid this environment, we continued to take steps to build up recurring revenue, which increased by 20% year-on-year.

Please turn to Page 5 for Asset Management. Net revenue for the full year reached a record ¥95.4 billion and income before income taxes was ¥36.7 billion, the highest level since 2007. As shown on the right, as of the end of March, assets under management increased by ¥800 billion over the past year. This comprises of negative ¥3.9 trillion due to market factors and inflows as shown on the bottom right of ¥4.7 trillion. The investment trust business reported strong inflows of ¥2.7 trillion into ETFs, products for discretionary investments and privately placed funds for regional and financial institutions. The investment advisory business booked inflows of ¥2 trillion.

Please turn to Page 6 for an overview of Wholesale results. Full year net revenue declined 9% to ¥720.3 billion. Equities and Investment Banking reported higher revenues year-on-year, while Fixed Income had a challenging year in spread products such as Credit and Securitized Products. Income before income taxes declined 81% from the previous year to ¥15.4 billion.

Let's now take a look at the wholesale business signs. Global markets full year net revenue shown in the bar graphs in the middle of the page was ¥600.3 billion, down 12% year-over-year. The Americas performed relatively well, but other regions reported lower revenues. For the fourth quarter revenues particularly slowed as the heat map on the right shows. Fixed income reported a downward trend in all regions. In equities as shown on the right, the arrows point down in EMEA and AEJ due to a decline in client activity, but the Americas is up on solid performance in Cash Equities and contributions from the sale of Chi-X shares. Japan remained resilient amid heightened market volatility.

Please turn to Page 7 for investment banking. On the left you can see investment banking net revenue from our core businesses which increased 4% year-on -year to ¥108.4 billion as shown on the right. The fee pool was down over 10%, but we were able to maintain gross revenue at the same level as last year. In particular, Japan revenues were at their highest in five years. M&A, ECM, and Solutions revenues grew, driven by multiple mandates as you can see here.

Please turn to Page 8. This graph shows wholesale revenues and expenses over the past five years on a U.S. dollar basis. As you know, we have cut $2 billion of costs since 2011, and we have continued to review our businesses in line with changes in the environment. As a result, expenses shown here by the dotted red line have declined 22% from $7.5 billion in fiscal year 2011/12 to $5.9 billion in fiscal year 2015/16. However, in the second half of the fiscal year market conditions deteriorated more than expected, and as the grey line shows, net revenue dropped significantly. This prompted the recent strategic review of our businesses in EMEA and the Americas, which Mr. Ozaki will speak about it in a minute.

Please turn to Page 9 for an overview of non-interest expenses. Full year expenses decline 2% year-on-year to ¥1,230.5 trillion. Compensation and benefits declined 4% as we focused on pay for performance and we reduced costs primarily in our international operations. As shown by the quarterly figures on the right, the gray portion at the bottom shows compensation and benefits gradually decreasing. Fourth quarter compensation and benefits includes just under ¥16 billion in severance related expenses.

Please turn to Page 10 for an update of our capital ratios. This graph shows our capital ratios over the past three years. We have built a Tier 1 capital of ¥480 billion over the past three years, while maintaining a balance between shareholder returns and retained earnings. This ¥165 billion from the perpetual subordinated bond issuance in January is counted as Tier 1 capital. For risk weighted assets, which is the denominator on capital calculations, we have reduced these by 9% to ¥1,550 trillion in three years, despite a preparation on yen depreciation by maintaining efficiencies focus control. Our Tier 1 ratio increased to 16.1% and our set Tier 1 ratio increased to 15.4%. We will continue to pay close attention to the regulatory environment and ensure flexible shareholder returns, while accumulating capital and controlling risk weighted assets.

That concludes the overview of our results. I’ll now hand over to our Group COO, Tetsu Ozaki to discuss our strategy. Thank you.

Tetsu Ozaki

This is Tetsu Ozaki, Group COO. Thank you very much. I will now discuss our group's strategy which we are currently working on.

Please turn to Page 1 of the presentation. In August 2014, we announced our long term vision, Vision C&C, and as we head towards 2020, we have pursued our strategy of building a solid operating platform capable of generating sustainable growth under any environment. Our long term vision and underlying strategy remain unchanged. However, I would like to update you on our strategy based on the changes to the current and near terms outlook for market conditions.

First, our Japan businesses. We are seeing definite results from the transformation we have been implementing and we will continue this. As mentioned earlier, the current international market turmoil and uncertainty in the market over a negative interest rates policy have led to a decline in client activity. That said, in a challenging environment like this it is an opportunity for Nomura to demonstrate our strengths by pinpointing the increasingly diverse needs of our clients and providing them with the best solutions.

In order to continue providing advice on our clients' overall asset portfolios, we will enhance the expertise of our sales staff, increase dialogue with our clients and promote the shift from savings to investment. In our international businesses, our underlying approach remains unchanged. We will continue to strengthen our global client franchise, focus on areas of competitive advantage and work to improve profitability. However, given the challenging earnings environment for the near term, we decided to move faster than initially expected to lower our breakeven point. I'll go into details about this in a minute.

Please turn to Page 3. This is an overview of our global business over the medium to long term. While leveraging our strengths in APAC, we will aim to provide differentiated and high value added services to a diverse range of clients in the east and west, including retail investors, institutional investors and corporates. As such, wholesale will adopt strategies that are matched to the particular characteristics of each region. In APAC, including Japan, we will deepen collaboration with retail, asset management and wealth management, areas we expect to grow over the long term in order to ensure consistent revenue growth across the whole region.

In EMEA, we aim to improve profitability by having global markets and investment banking work together to improve profitability by focusing on areas of competitive advantage with client demand, while maintaining a stringent control on costs. In the Americas, we will enhance our franchise in our areas of strength and pursue growth opportunities in the world's largest market.

Now I will discuss the initiatives we are implementing to achieve our medium to long-term global strategy. Please turn to Page 4. First I will talk about the ongoing regulatory environment and the outlook for the macro environment. Regulations centering on the Basel capital requirements are moving towards being finalized. For example, we expect it to take one to two years to clarify various regulations, such as the minimum leverage ratio in Japan and revisions to risk calculations for risk-weighted assets. So the whole industry continues to pay close attention to developments in the regulatory space. We are in that phase we believe.

Uncertainties are on the rise in the macro environment. Economic growth has slowed in China, and although things have settled down a bit recently, caution is still needed in regards to the credit market turmoil and plunge in share prices, triggered by the drop in oil prices. In addition, negative interest rates policy and other bold monetary easing measures are in place in Europe and Japan. As such, we need to pay close attention to the impact that unintended consequences such as lower liquidity could have on the market. The regulatory and macro environments pose challenges for our businesses over the near term.

Please turn to Page 5. This shows the global fee pool trends. In 2015, turmoil in the credit market had an impact, pushing down the fixed income fee pool. The global earnings environment has faced strong headwinds in the most recent quarter, and we are forecasting that the fee pool will decline by 8% to 17% in 2016. This suggests that the correlation between global GDP growth and the global fee pool which existed until now could break down. For example, we expect to see heightened competition in the equities business, a decline in high yield bond issuances, and the postponement of ECM deals in investment banking and challenging conditions for spread products in the fixed-income business. We have decided to review some of our business lines in our international wholesale business in order to deliver products, profits while maintaining market share, despite this challenging environment, and we are accelerating are focus and selection of businesses.

Please turn to Page 6. As a part of the strategic review of our business lines, we have strengthened our management structure. The new structure ensures swift and efficient decision-making from both business line and regional perspectives, by integrating management of global markets and investment banking, and enhancing collaboration with the regional management. Steven Ashley and Kentaro Okuda are the joint heads of Wholesale. And Steven will continue as Global Markets head based in London and Okuda San will act as Investment Banking head based in Tokyo. But by having joint heads of Wholesale, we will be able to further integrate management of the global markets and investment banking and optimize our wholesale operations. More specifically, key decisions related to the overall wholesale business, such as the allocation of financial resources, client coverage and risk management will be able to be carried out swiftly while ensuring close collaboration with regional management and without worrying about time zone differences.

Please turn to Page 7. This slide shows an overview of strategic actions we are taking. This chart as our CEO, Koji Nagai discussed in December, breaks down our wholesale business into five categories, and outlines our strategic direction for each. While maintaining the underlying strategy discussed in December, we have sped up with the space of implementation, maintaining our current business lines in APAC, but making major revisions to our business lines in EMEA and the Americas. In EMEA, in the execution business, we are closing EMEA stock research coverage and in the ECM business we are closing underwriting of domestic stocks in EMEA while offering equity advisory services. In the non-cash equities business, we are closing business lines other than global convertibles, prime brokerage for APAC clients and quantitative investment solutions. We are also streamlining investment banking coverage and fixed income.

In the Americas, in equity research and the ECM business, we will increasingly focus on sectors where we have strengths in our client franchise, while maintaining our current sector coverage. For spread products, we will focus on more capital efficiencies and revise both costs and financial resources. Meanwhile in the advisory business, we are maintaining and growing cross-border services and promoting multi-product deals with primary end solutions.

In the execution business, we will expand Instinet globally. For the solutions business we have a structure in place to ensure we can move quickly to meet the diverse needs of our clients and further leverage synergies between global markets and investment banking. In fixed income, we aim to build on momentum gained in expanding our market share in macro trading such as rates products.

Please turn to Page 8. This graph shows wholesale costs on a U.S. dollar basis. We have continued to reduce costs in our wholesale business, and costs have come down by 15% over the three years from FY2011/12 to FY2014/15. In the fiscal year just finished at the end of March, our focus on pay for performance drove costs down 9% year on year, primarily in variable costs. In addition, by streamlining across the front, middle and back offices, the business review we are conducting now will bring our future cost run rate down about 20%. This is compared to the year ended March 2015.

Please turn to Page 9. This shows wholesale revenues. As I said, we have worked constantly to lower our breakeven point. But trading revenues shown in gray are susceptible to the market environment and slowed significantly in fiscal year 2015/16. However, current revenue shown in pink has been relatively stable, supported by steady growth in our client franchise. Our client revenue cost coverage ratio increased to 97% last year. Looking ahead, we will significantly lower our cost run rate and reinforce our client franchise to increase our cost coverage ratio and create a lean earnings structure that doesn't rely on trading revenues. We aim to improve our PTI margin back to around 10% to 15% as soon as possible.

Please turn to Page 10. I will now discuss the efficient use of financial resources within wholesale. As you can see here, the result of a continued focus on capital efficiency, when it comes to the allocation of risk weighted assets to wholesale has resulted in 18% decline on a U.S. dollar basis over the two years to March 2015. In fiscal year 2015/16, ahead of cost reductions, we significantly reduced resources in spread products such as securitized products and credit that require relatively large capital commitments, flexibly reallocating resources. While continuing to control the allocation of risk related assets to wholesale, we worked to improve capital efficiency and we are excited to reduce RWA by about 20% compared to fiscal year 2014/15. We remained flexible and managing financial resources, in line with characteristics of each business and we will continue to play our role as a liquidity provider to meet the needs of our global clients.

That concludes the update of our wholesale business. Next I will briefly discuss our retail and asset management strategies, taking this opportunity. Please turn to Page 12. First on retail; as we transform our retail business model and meet our client's diverse needs by accurately advising on their overall asset portfolio, we are ensuring stable and diverse revenue streams. The pie chart in the middle shows the average asset portfolio of households with assets over a ¥100 million. The amount of client assets allocated to securities or a traditional area of strength is only 13%. In order to expand our services to other asset classes that make up the majority of client asset portfolios, we have increased the expertise of our sales staff and put the infrastructure in place. This approach is starting to deliver results and is diversifying our revenues.

For example, our insurance business has grown on the back of demand for cash flow after retirement and inheritance services. Our real estate business is growing as we meet the need for inheritance and business succession. Under the current negative interest rate environment, clients' asset management needs are expected to increase further, and we will enhance products that leverage Nomura's strength.

Please turn to page 13. In retail, we are shifting to Nomura's stable earnings structure by building up recurring revenue and enhancing consulting services. Although the market volatility has had some impact recently, we have seen results over the past few years. As shown on the left. recurring revenue has increased by ¥22.5 billion over the last few years. Last year it totaled ¥76.5 billion, accounting for 18% of all retail revenues. The right hand side shows how investment trusts and discretionary investments, which are the main source of recurring revenue have grown by ¥2.5 trillion over the past two years. This is a testament to the fact that we are meeting the needs of our clients and winning their trust.

Please turn to Page 14. I will now discuss our fund wrap products which are the main products within the discretionary investment category. In order to provide clients with stable performance over the long-term, many of our clients adopt a core satellite strategy whereby fund raps are the core asset and further customization takes place with individual products to meet each clients' exact needs. As shown on the right, this strategy calls for rebalancing based on dialogue with the client every three months, aiming for consistent performance over the long-term.

Please turn to Page 15. The graph on the left shows performance of fund wraps by investment type. Nearly 80% of clients who purchased fund wraps through us choose conservative or mildly conservative portfolios. This asset class performed relatively well during the recent market dislocation.

In addition to strong performance by regularly maintaining the portfolio based on dialogue with the client, we are able to increase the amount of repeat clients as shown on the right. As I said earlier, our business model transformation remains unchanged. Despite the current challenging environment, in times like these we have to accurately meet our clients service needs and provide the best solutions.

Please turn to Page 16 for asset management. In asset management, we are developing and distributing products that meet the needs of our clients. As shown on the left, in recent years we have seen a sharp increase in assets under management in privately placed funds. This is the result of diversifying our product offering to meet the needs of regional financial institutions that face challenges in managing funds.

In the ETF market, we have gained a strong market share by providing products that meet investor needs. We are taking new steps to offer these solutions to our wider client base. We established Wealth Square, which provides a platform for fund wrap services to regional financial institutions. We set up by JP asset management a joint venture with Japan Post Group to provide simple easy to understand products. Nomura funds research and technologies is providing sophisticated fund analysis and research to these new client bases as a more independent institution.

Please turn to Page 17. Last December, we announced a $1 billion investment in American Century, which I will now give you a brief update on initiatives going forward. In terms of client franchise and product strength, Nomura and American Century have a strong complimentary relationship. For clients most of our clients are in Japan, while most of American Century's clients are in North America. By providing products, leveraging the strength of each company to each other's clients, we will be able to grow our businesses.

In asset management, we will continue to grow our business together with retail while also pursuing separate initiatives such as expanding our services for clients outside Nomura Group in Japan and overseas as I just mentioned. We aim for this to result in an expansion of assets under management. That concludes the over view of our strategies for each business division.

In closing I will continue -- we will continue to make steady progress towards achieving our long term management vision and underlying strategy in Japan and overseas. We see the market and regulatory changes as an opportunity. It is in our DNA to constantly transform from within. So the ongoing changes are an opportunity for us to shift to a more stable earnings model in Japan and internationally by providing high value added services that mean the diverse needs of our clients. By significantly lowering the breakeven point of our international wholesale business, we can lay the foundation to shift to a stable and profitable earnings structure in our international business. We will further enhance collaboration of business management and regional management to make sure it becomes fully embedded and our culture.

We look forward to your continued support. Thank you.

Takumi Kitamura

So that concludes our presentation and now we will move on to Q&A. If you have a question, please raise your hand and our staff will bring you the microphone. So any questions? And as I said earlier, we have the Joint Heads of Wholesale, Steve and Okuda San, and they will participate in the Q&A session as well.

Question-and-Answer Session

Q - MasaoMuraki

This is Muraki from Deutsche Securities. Two questions, in Wholesale -- in improving the ROE of Wholesale, I think there are two levers. The first lever is costs, the second lever is the capital, which is my question. On Page 8 of the presentation, you describe the costs of Wholesale, and for March 16, the variable costs have declines to a certain extent. And in terms of pay for performance and the rightsizing of the compensation pool, do you think that is basically completed? Are you happy with the March 16 levels for compensation, as a result of pay per performance? And in April you announced -- or the U.S. investment banks have announced their compensations, which has been reduced significantly by 30% -- 40%. This is for the March quarter. And this was right before the earnings announcement, but there seems to be a significant deflation going on in the industry for compensation, and has this been reflected in your results or your strategy, or are you going to wait another year to further reduce your compensation in March 17? That’s my first question.

My second question is about capital on Page 10. The adequacy of the current capital level and also the share buybacks, if that’s going to be continued in the future, could you comment on that? And as far as I can see from the graph, the RWA will decline, which means the risk will be reduced. So will this allow you to continue share buybacks continuously? Or as you said earlier, you have to respond to changes in the organizations for the next one or two years. So these responses as well as the pressure from regulatory environments, for example, is it difficult for you to do share buybacks unless you issue co-co bonds? So could you share your understanding of the situation please?

Takumi Kitamura

Thank you very much for the questions. So the first question regarding the cost in the Wholesale division, Steve please?

Steven Ashley

Thank you for your question. As regarding -- I think relating to compensation costs, we have been very aggressive at taking down compensation costs this financial year. And that really is related very much due to poor performance and we are a pay for performance organization. And if you don’t achieve satisfactory performance, then the compensation will decline. And I think we have been as aggressive as we possibly can with relation to compensation costs. And what perhaps it doesn’t say in the graph is that the brunt of this has been taken internationally, especially within Europe and the U.S. So as far as concerned, we think we have compensation cost down to what I call a manageable level.

Tetsu Ozaki

So let me make a few additional comments from our side to what Steve has said. So pay for performance that you ask about, for the year that has just ended, whether that initiative over there is complete or not; well as you rightly indicated, the industry is showing similar trend. We're not an exception. So we'll miss the trend that is sweeping the industry. As Steve just said, pay for performance for a Nomura, well of course we take a look at the industry average, but we take closer look at the performance that we are generating. And so we make sure that our pay for performance is based on our own performance. So if our performance is lower than the industry, higher than the industry, that does happen. But for the year that has ended, performance has been poor. We're sorry for that and we have implemented pay for performance based on the performance that we achieved, and we're not foreseeing a rosy future. And so pay for performance is likely to continue I think. So, did that answer the first question?

For the second question, our CFO, Kitamura will answer.

Takumi Kitamura

Yes, so let me address the second question about share buyback. In December last year, Nagai gave a set one target of 11%, and for the year that has just ended, we achieved 15.4% more than 4% above the target. So given that what are our thoughts on share buyback, I think that was the question. As Ozaki just said, the environment continues to be uncertain. But perhaps it will become clear in the next year or so. Between January and March market conditions were very difficult and so being conservative would serve the shareholder interest in the mid to long-term we thought. As a result, we made an announcement about the share buyback. We're not completely sure if we met your expectation or not. But then of course there's some room to do more. Not just issuance of 81 and so forth, we would like to be flexible in considering share buyback going forward.

Unidentified Analyst

[indiscernible] from JPMorgan. Question number one has to do with HR cost in the fourth quarter, ¥126.7 billion. Q-on-Q it's down, as a special factor, special cost of ¥16 billion also for restructuring was included you said, but on the other hand, most probably by the third quarter there must have been a reserve that was set aside for a bonus payment, and there must have been some reversal from the bonus pool that became unnecessary. So HR costs for three months excluding special impact. I don't think ¥126 billion is brought down to ¥16 billion. That's impossible. So could you provide us with the details on that? So, fourth quarter onward, a staff cut of 1,000 according to the media report would start to show and HR costs would further come down. So the details on the fourth quarter with respect to personnel cost please?

And my second question has to do with Pages 8 and 9. I'm taking a look at those two pages. The wholesale cost is down 20%. That means that the cost run rate will go down to $5135 million. So that's down $80.7 billion or even more. I'm having difficulty calculating. It's going to be down even more. So, compared to March 2016, $5871 billion, how much reduction are we expecting here?

And on Page 7, there is a metrics, the businesses that are going to the discontinued and businesses that are going to be streamlined there too, and because of these initiatives revenue must go down and you're trying to grow the remaining businesses. So, as is on Page 9, you're trying to keep up the revenue overall going forward. Well if that's the case, March 2016, the businesses that are closed down, how much revenue was coming out of those businesses discontinued. May I have that number please?

Tetsu Ozaki

The first question about personnel expenses and cost, I'd like to ask Kitamura San to address that question.

Takumi Kitamura

Yes, thank you for your question. As for the personnel expenses, or compensation and benefits, I think you actually explained currently in your question, but up to Q3, the profits have been building up steadily. So EPS was ¥40. But -- so we have not put in that much of a bonus adjustment. And as Ozaki San explained, in the January to March quarter there was a turmoil in the market and our performance was very poor, which led to the bonus adjustment. So the bonus adjustment is in the Q4 and the full-year impact came from Q4. It's correct to understand it that way. And in terms of the revenue at risk and the revenue impact from the business that we closed down, I'd like to ask Steve to answer that one, the impact of the closures.

Steven Ashley

So, the businesses that are being restructured or streamlined actually represents less -- because they have been underperforming actually -- represent less than 5% of our international revenues. And with the redeployment of those resources from those areas to the areas such as origination and solutions which is demand by our clients, we expect to make up that revenue loss.

Unidentified Analyst

The first question, are you not going to disclose the amount related to the bonuses. Is the amount similar, like 70 billion?

Takumi Kitamura

Well, no, we do not plan to disclose the amount of the bonus adjustment.

Tetsu Ozaki

And just to add Steve's comment about the second question, he said 5% or so, but on a pre-tax income basis, the businesses had been struggling for a while, especially with a market environment. So we decided to close them down. And so from a profit basis, we expect quite a big turnaround as a result of these closures and these businesses which have been struggling were not evaluated by our clients. So hopefully we will be able to maintain our flow or recurring revenue from our clients, even as we close down some of our businesses.

Unidentified Analyst

Lastly I'd like to add a direct question. These focus businesses where you plan to expand your client business, I'm sure it's going to take some time. So if there is a delay in that, what will be the conservative outlook for PTI improvement in March '17?

Takumi Kitamura

Well, on Page 5, the fee pool, I don't know if this is going to be the actual result, but on a bare case, $18.2 billion, and at the bottom of that page, we have the fee pool market share, right at the bottom of the page and our plan is to maintain at least 3%. I think a year ago, we were saying the upper 3% range but on a bare scenario, $180 billion or $190 billion. And as a result of the optimization that we have conducted, there is not going to be that much decline in revenue. So I think we can maintain at least around 3% market share. And if you do the math, I think we'll be able to book a certain level of PTI even on bare -- even under a bare scenario

Unidentified Analyst

This is [indiscernible] Securities. Two questions. First is wholesale costs on Page 8. For March -- compared to March '15, there has been a 20% decline, the 6.3 billion. Could you share the breakdown between the fixed cost and the variable costs for this cost reduction? And also, in terms of the severance related expenses, ¥16 billion in Q4, does this fully incorporate the impact of the strategic decisions in the U.S.? Is it over in Q4? Next is the fig trading revenues in Japan? The revenue level seems have dropped quite significantly, but what has been the impact of the negative interest rate policy, and if there was some impact, is it a one-off impact or is it going to continue in the future? Could you share your thinking about this, please?

Tetsu Ozaki

Thank you for your questions. So, the first question on cost, I would like to turn to Kitamura for an answer.

Takumi Kitamura

So that's another question regarding Page 8. Looking at the number for March 2015, you can see a quite a bit of reduction in the variable cost. And of course it's easier to reduce variable cost and so that comes ahead. But then of course, we would like to expand the reduction to fixed cost as well and we would like to make efforts at that.

Unidentified Analyst

And on the severance cost of ¥16 billion, which was reflected already in the fourth quarter results, and most of it is done. So March 2017 there, will be additional cost be incurred?

Takumi Kitamura

Not much. That tail, we do not expect very much of in March 2017.

Steven Ashley

Japan fixed income performance for the last quarter, it's true. We were quite negatively impacted by the change to a negative interest rate policy. And we had some challenges with our position management. And also as a leading provider of liquidity in both cash and derivatives to our clients, and we suffered some losses where we continue to provide liquidity declines and what was a very challenging market environment. But since after the first few weeks of those challenges business has normalized and I expect it to continue to remain in this rate even if we see further reductions in interest rates in Japan.

Takumi Kitamura

Did that consider the question. Thank you. While then let's move on to the next question.

Isaac Osaki

My name is Osaki from Merrill Lynch. I have two questions. Question number one. So strategic review of EMEA and Americas business, how long will it take? What's the period of review that you are expecting? And by the time that review is complete, cost run rate reduction of 20%, will that be done. So give us a rough idea of the timeline. That's question number one.

And question number two, what was commented by Steve. The impact of close business less than 5% of the international business. You have disclosed a breakdown of wholesale business. If we look at the international business, does that include business outside of Japan. So what is the definition there, I wonder. So two questions please.

Steven Ashley

Okay, the first question regarding the costs in our western businesses and the cost reduction, Kitamura San, please.

Takumi Kitamura

Yes, the strategic review of our businesses and also the timeframe that it will take, we are thinking of this year, or as soon as possible within this year or as soon as possible. And this 20% reduction -- when will we reduce our cost by 20%, I think that's your second question. I think it's going to take about two years and for this fiscal period we have already started working on it. But not all of our cost reduction will be enjoyed and deferred in this current fiscal year. But the strategy itself should be completed in a year. And from next year we will be able to fully enjoy the benefits of the cost reduction. So the time frame we have in mind is 2 years. The second question, Steve please.

Steven Ashley

Just to be clear, some of the business lines, or the business lines we are exiting or streamlining, we have already been deemphasizing actually for some time in the hope of controlling cost and being those areas back to profitability. But we've been unable to, as Ozaki San said earlier make those business lines profitable, and we don’t see any likelihood of making them profitable in the foreseeable future, which is why we have decided to exit those lines. But that also explains why actually the revenue lost from the closure of some of those business lines or the streamlining of those business lines is actually quite low, because we -- for example with regards to spread products, we've been deemphasizing corporate credit, investment grade credit actually for the last four or five quarters. So that is why the revenue reduction is quite low in those international business lines.

Unidentified Analyst

My second question is very simple. I'd like to ask the definition of international revenue? Could you define what is included in international revenue Steve?

Steven Ashley

Yes, it's everything excluding Japan.

Takumi Kitamura

The first question, especially in relation to Page 8, let me add a comment on that. I think this overlaps with the previous question, but the March 2016 fiscal year, or actually March -- if you use March 2015 as a base. But the reason why we are using March 2015 as the index is because the previous fiscal year was quite a tough year to begin with. And we showed the fee pool graph in the presentation but in the previous fiscal year we expected the fee pool to normalize. But that did not happen. And in April onwards there was a deterioration in liquidity, and from the summer onwards credit, those breakdowns in credit and since the end of the year, the leverage and the high yield market broke down. So throughout the fiscal year -- it was in crises mode throughout fiscal year March 2016. Especially in fixed income, we have been doing a lot of rightsizing or optimization, and that led to some fixed cost reduction.

So there was very drastic change in the market environment in the second half, and in response to that, we have decided to conduct these major revisions or reviews of our businesses. So we want to optimize our business so that we can continue our business despite the business environment. And the strategies had been -- actually been implemented from last fiscal year. And we have also been working on the front to back -- in the streamlining of front to back initiatives from last fiscal year. So if you add all these up, we expect to achieve the 20% reduction within at least two years. Does that answer your question?

Kouichi Niwa

My name is Niwa from SMBC Nikko Securities. Long term management vision and domestic retail, I have those questions. With the review, EPS ¥100 in 2020 segment profitability or the timeline, are there going to be any changes? So what's going to be the segment breakdown you will be achieving in the future? That’s question number one.

Second, about retail in Japan; looking at recent conditions, the move away from saving to investment has sub-installed. Is that something over concern for you or in order to accelerate of that shift, is that something additional that you need to implement? If you could comment on that please?

Takumi Kitamura

Thank you. Ozaki will answer.

Tetsu Ozaki

I explained on Slide 4. I think this is basically about wholesale. In terms of the macroeconomic environment surrounding us, it's quite tough. That is what is described on this page. But I understand that this is going to be temporary. Are we going to change our management objective for 2020? No, we're not thinking of doing that at this moment. No, the target for each segment -- well given the current environment, and in view of what we assumed in 2020, what is the gap, what is the difference? There may be a lot of debate on that, but at this moment, are we going to change the management target for 2020? We have no intention of doing so at this moment. So we will continue to pursue business model transformation, and once the market normalizes, we shall be poised to achieve the targets for 2020. That is what we will focus on.

For the second question, Kitamura will answer.

Takumi Kitamura

Yes. The growth in discretionary investments business is slowing down of late as you rightly said. As I said for January to March, [indiscernible] average went down by 4,000 compared to the beginning of the year and so the investor mindset has cooled. And Ozaki's presentation material, Page 15, our initiatives regarding fund wraps, fund wrap performance is shown on this slide. As was said, 80% of our clients choose conservative or mildly conservative portfolios. Our fund wrap assets are pretty well protected as they are managed. However, the percentage of fund wrap in the customer portfolio is so limited, there are other securities and investment trusts that can purchase and they're down. And so we have to spend a lot of time trying to get business from existing customers.

Discretionary investments are now up to 2.2 trillion and we have AUM of 100 trillion. So fund wraps account for only 2% of the total AUM we have from our clients. And in terms the number of accounts, that accounts for only 3% of the total accounts we have. So there is ample room to grow. And of course we should not say that the market here is the same as the U.S. The U.S. has a size of 100 times small. But given those numbers, I think there is still ample room to grow. But because of the market conditions of late, investor mindset was chilled. And -- however, in April, I think market conditions have settled but it's not improved to the level that we saw before. Equity prices are up recently, and I think we're seeing a good trend. Hopefully this will continue. Does that answer the question?

Katsunori Tanaka

My name is Tanaka from Goldman Sachs Securities. Page 5, wholesale fee pool, how to read of that, I would like to ask? So you closed equities related business, which has little impact on revenue, but what's been your miscalculation in the past few years. Fixed income pool, it has changed greatly and that must have been your greatest miscalculation. So, fixed income restructuring, that you are presuming, so what is the assumption of your fixed fee pool, as you restructure the fixed income pool? You are taking a tough look at this as we can see from the slide, but is this something that could recover in the future? Is that your take or because of the changes in the investment banking industry, fixed income fee pool may not recover to the previous level? Is that your assumption, as you formulated this restructuring plan?

Takumi Kitamura

Steve please.

Steven Ashley

A couple of things firstly on the fee pool. If we were here in the beginning of the calendar years, most consultants forecast was actually for flat fee pool actually for this calendar year, but it quickly became apparent to us and the rest of the market that actually the fee pool could decline dramatically for many different reasons. And some of them economic, some of them political and we quickly came to the conclusion that the feel pool could dip as we have certainly seen in Q1 by anything between 5% and 15%. And so that is why we took immediate action.

Your questions relating to fixed income, so I would say the challenges we have had in our fixed income business over the last two years has been around spread products, and as I mentioned earlier, we've been deemphasizing very much our spread product business, investment grade credit, unknown agency securitized products business and that has reflected actually in if we go to Page 10, you already see a very sharp decline in the risk-weighted assets allocated to the fixed-income business. And that is because we've been deemphasizing those product lines.

And I think, important point I would make is that many of our peers talk about what they're going to do in the future in terms of reducing risk-weighted asset in fixed income business, but actually we've already mostly completed our fixed-income reduction in the asset classes and in the products that we don't -- where we cannot compete or where we performed poorly. I should also add that within the fixed income business itself, there are many areas where we've been successful and we have a great traction and connectivity with clients. So, around FX or rates or emerging markets, especially in Asia and the solutions business, they've all been strongly performing businesses, even through the decline of the fixed income fee pool.

I think your final question was how much of the reduction is secular and how much is cyclical. And I think some of it is cyclical, but we'll probably have to wait for interest rates to rise, which maybe some years away from us at this stage, but we don't know, just to really understand how much the fixed income fee pool can rebound in the rising interest rate environment.

Unidentified Analyst

[indiscernible] from Credit Suisse. Two questions please. First is somewhat overlapping with the previous question but Ozaki San, you mentioned that right now the things are very tough, and you do not think this will persist in the market forever. And -- but you will not change your targets for 2020. And also with the fee pool that you discussed earlier, you want to maintain at least 3% market share. But let's say we are past this tough environment. So let's say we are in 2020. Do you still think that your market share is going to be like 3% or a little bit above 3%? Are you going to be happy with that? With the changing market environment, the competitors may come back into the market. So what are your thoughts about the future of market share and also competition.

The second question is related to a very recent event. In terms of your cost reduction, Kitamura San explained that you want the full contribution to be seen in March '18, which means for March '17, the tough situation is going to continue. So, we cannot really expect a lot of PTI. Is that the way to think about it?

Takumi Kitamura

Thank you. The first question will be answered by Ozaki.

Tetsu Ozaki

Well, this relates to the previous question as well, but the environment that surrounds us, especially in terms of fixed-income, well, in a nutshell, the business that we're engaged in is liquidity provision business. So with reduced liquidity, our customers will be in a risky position. The same for us is a liquidity provider. And I think that was what happened quite conspicuously in last year.

And of course we have solid investment in banking business as well. And in terms of global markets providing liquidity is at the very base of our business, what we do. So if market conditions are tough, as we're seeing right now, continue, it's going to be even more easier. Our customers know that Nomura will never withdraw from this business. They trust us in that regard but, then of course there are resource constraints. So we have to have very tight control over resources, but I think our reputation has gone up. We are providing the same business, whether the times are good or bad, and 3% market share is the minimum that we would like to achieve and if we can further grow relationships with our customers, we believe that we can bring the number to more than 3%.

So, on the second question, Kitamura will answer.

Takumi Kitamura

Because I'm responsible for the financial aspects, I tend to be conservative and we are taking all the necessary initiatives to be completed as early as possible. There are ones that are already underway, but then there are those others that may take time. So not -- everything may not be reflected this year. But that is not to say that the effects are going to be very minimal. That's not what I mean.

Unidentified Company Representative

The time to close is approaching. So we would like to take the last question. The next question will be the last.

Unidentified Analyst

My name is [indiscernible]. About the dividend payout ratio, I have a question. In the last few years, you are at around 30% in terms of dividend payout ratio, but because of declined -- income, I think that's around 35% or so. So have you thought about dividend payout ratio change, as a result of the number has changed. So on the dividend payout ratio please?

Steven Ashley

Okay, I'll have Kitamura San answer that

Takumi Kitamura

Yes, thank you for your question. As you pointed out, the dividend payout ratio has gone up to close to 36% and if you just look at the half year, it's a very high level. We think 30% is an important benchmark, but meanwhile, as for the full year payout ratio, we also look at the full year payout ratio as well as the stability of dividend payouts, and as a result we have chosen the ¥13 level. Because our bottom line is relatively small, if you look at it from a dividend payout ratio, then ¥1 change in the dividend payout leads to a big difference in the payout ratio. But yes, we do use 30% as one benchmark. Plus, we look at the actual payout amount for the full year and also the stability of dividend payouts -- we'll make decisions from a comprehensive perspective.

With that, I'd like to conclude today's Investor Day. And lastly I'd like to ask Mr. Ozaki for closing remarks.

Tetsu Ozaki

Well, thank you very much for sparing your time today despite your busy schedules. We have combined the results announcement with the Investor Day to take your questions, and we gained a lot of insight from your questions. We will continue this kind of dialogue with our stakeholders and reflect your comments on our management. So we look forward to your continued support. Thank you very much.

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