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Executives

Takumi Shibata - Group COO; Chairman and CEO, Wholesale

Junko Nakagawa - CFO

Analysts

Masao Muraki - Deutsche Bank

Natsumu Tsujino - JPMorgan Securities

Jun Shiota - Daiwa Capital Markets

Sasaki - Mitsubishi UFJ Morgan Stanley Securities

Mitsumasa Okamoto - Merrill Lynch

Takehito Yamanaka - Credit Suisse

Nomura Holdings, Inc. (NMR) F4Q12 Earnings Call April 27, 2012 12:00 PM ET

Takumi Shibata

This is Takumi Shibata, Group COO. I was able to rearrange my schedule today to join the call and because I'm attending, some of you may think that we are going to make an important announcement. Well, don't worry, we are not going to. As we did on the call last quarter, I will first say a few words and then hand over to our CFO, Mr. Junko Nakagawa to discuss the highlights of our fourth quarter and full-year result and after that we will take your question.

In the fourth quarter, all business divisions were profitable on a pretax basis for the second straight quarter. Revenues and pretax income increased both quarter on quarter and year on year. Retail booked a strong increase in revenues compared to the previous quarter, as we further enhanced our product offerings and responded to the needs of our diversified client base.

Asset Management reports a rise in assets under management and delivered stable revenues. Wholesale reported higher revenues and pretax income on robust client flows and trading, in both fixed income and equities. Investment Banking continued to execute across border global transactions.

Although we faced a challenging second quarter due to the Euro Zone Debt Crisis, business rebounded in the second half of a year and we are profitable on a full-year basis. Our $1.2 billion cost reduction program is progressing on schedule. And in anticipation of tighter regulation, we have reduced risk-weighted assets and strengthened our risk management.

As I said on the call last quarter, the effects of the downgrade by Moody's has been limited in terms of posting additional collateral trading revenues and funding costs. Looking ahead, we will maintain our robust financial position and abundant liquidity while focusing on serving our clients as Asia's global investment bank.

Now I will hand it over to our CFO, Junko Nakagawa to give you an overview of our result.

Junko Nakagawa

This is Nakagawa speaking, the CFO. It is very nice to be given this opportunity. I would like to now present you an overview of our results for the fourth quarter and full-year ended March 2012.

Please turn to page three of the documents entitled consolidated results of operations. All business divisions were profitable on a pretax basis in the fourth quarter, while worldwide revenues and net income increased both, quarter on quarter and year-on-year basis. Net revenue in the fourth quarter increased 23% from the prior quarter to 499 billion yen. Pretax income increased 76% to 60.8 billion yen and net income rose to 24% to 22.1 billion yen.

As shown on the slide, pretax income rebounded in the third and fourth quarters after bottoming out in Q2. Full-year net revenue was 1.5359 trillion yen representing an increase of 36% from the previous year due to the conversion of Nomura Land and Building into the subsidiary of Nomura Holdings. Pretax income declined 9% year on year to 85 billion yen as a result of the difficult second quarter in Wholesale. Net income declined 60% from the previous year to 11.6 billion yen due primarily to a 13.3 billion yen decline in pretax income resulting from a reform of corporate tax system in Japan.

Pages four and five give the overview of results and breakdown by business segment.

Please turn to page six for an outline of results in the retail segments.

Pages six and seven are on retail. Fourth-quarter net revenue in retail was 92.4 billion yen, an increase of 16% over the previous quarter. Income before income tax jumped 101% to 20.3 billion yen. Our product offerings was further enhanced during the quarter and we also continued to offer our consulting-based services as a respond to the diverse needs of our clients. As a result, retail client assets increased by 191 billion yen representing the 8th straight quarter of net inflows.

The full-year net revenue declined 11% to 350.3 billion yen due to a slowdown in the second and third quarter which were affected by market conditions. Although pretax income declined 38% from the prior year to 63.1 billion yen in retail continued to make significant contributions to worldwide earnings.

Asset management results are shown on pages eight and nine. Fourth-quarter net revenue was 15.7 billion yen, up 3% quarter on quarter. Pretax income was down 3% at 4.1 billion yen but the decline was very small. Increases in revenues was driven by a 2 trillion yen rise in assets under management from the end of December to 24.6 trillion yen at the end of March.

We continue to diversify distribution channel. Assets under management distributed through the bank channels are showing steady growth and the number of financial institutions in our distribution networks increased. Despite the challenging market conditions, full-year net revenue was down only 1% to 65.8 billion yen. Pretax income increased 2% year on year to 20.5 billion yen on stronger inflows and drive to contain costs.

Page 10 is of Wholesale results. Net revenue in Wholesale declined 10% sequentially to 159.2 billion yen. Pretax income declined 67% to 12.5 billion yen.

However, excluding the gain related to our private equity business booked in Q3, revenues increased quarter-on-quarter. The Americas and EMEA both reported steady rebound in revenues with EMEA booking its highest revenue in four quarters and Americas booking its strongest quarter for revenues since April ’09 as shown on the bottom left.

On a full-year basis, net revenue declined 12% to 555.9 billion. As a result, we were impacted by first half performance due to the European crisis. Loss before income tax was 36.6 billion.

Please turn to page 11 for a breakdown of the wholesale business, first on Global Markets. Global Markets reported its best quarter for revenues in six quarters. Net revenue of 139.3 billion represents a 17% increase quarter-on-quarter. Pretax income jumped 140% to 20.2 billion.

Fixed income net revenue increased by 22% compared to the third quarter on a strong growth in global Rates and a rebound in revenues from securitized products. Equities revenue grew 30% quarter-on-quarter driven by Japan and Asia as well as by a rebound in both client revenues and trading revenues.

Page 12 gives the outline on half yearly revenues by region for both fixed income and equity. As shown, both fixed income and equities revenues, mainly in our international business, rebounded strongly in the second half of the year.

Next, Investment Banking on page 13. Investment banking gross revenue decline 10% quarter-on-quarter to 40.5 billion. Although pretax losses of 7.6 billion were reported, investment banking has made steady progress in reducing expenses. And non-international expenses have been trending down quarter-after-quarter. Revenue from ECM deals increased both in Japan and internationally and steady increase in cross-border deals were seen.

Page 14. These are some of the notes where the deals on which we acted as a Joint Bookrunner or advisor during the past year. As shown in the center bottom, we acted as the Joint Advisor to Xstrata on its $48.9 billion merger with Glencore, the largest M&A transaction ever in the mining industry.

And as shown on the left, we were involved in another of capital raising transaction for large European international institutions. Also this is to continue growing revenues to closer cross-border collaboration and by working more closely in global sectors such as financial institution group, Asahi versus Apollo and financial sponsors.

Please turn to page 15, for an overview of our non-interest expenses. Fourth quarter non-interest expenses increased 18% quarter-on-quarter to 438.2 billion yen, primarily due to an increase in the cost of goods sold on the back of robust real estate sales at our newly consolidated entities. Non-interest expenses, excluding newly consolidated entities, declined 0.2% quarter-on-quarter as shown by the dark blue bars in the graph on the right.

Full year non-interest expenses were 1.45 trillion yen, up 40% year-on-year due to the impact of expenses related to the newly consolidated entities. Excluding that, non-interest expenses declined 5% from last year.

Page 16 shows you the progress of our cost production program. Our $1.2 billion cost reduction program announced last July and November continues to progress as planned. We will continue to implement this program in order to lower our breakeven point.

Turning now to our balance sheet on page 17, total assets at the end of the quarter was 35.7 trillion yen, gross leverage was 16.9 times and net leverage was 10.4 times.

The bottom left chart shows our capital ratios as of the end of March. Our Tier 1 ratio under Basel 2.5 was 14.1% and our Tier 1 common ratio was 12.2%. We continued to maintain high capital ratios.

Please turn to page 18 for an overview of funding and liquidity. The top left chart shows that 78% of our balance sheet is made up of highly liquid trading assets.

Please see the chart on the bottom right. About 80% of our unsecured funding is in the form of long-term debt and we insure stability by diversifying our funding. Our liquidity portfolio at the end of March remained high at $66 billion, representing around 15% of total assets. We also continue to hold about the same amount of excess liquidity as last year, which is sufficient to respond to our liquidity stress event.

Lastly, please turn to page 19 for an update on our exposure to peripheral Europe. Our net country exposure as of the end of March was $1.53 billion, roughly flat compared to the $1.52 billion exposure at the end of December. Our inventory is all marked-to-market on a daily basis as trading assets and we manage our positions stringently.

We will continue to manage risk stringently by closely monitoring credit conditions in each country, liquidity and maturity profile of our exposure and other factors. That concludes today’s presentation or the highlights.

As noted in today’s financial highlights document and press releases, our annual dividend for the year ended March 2012 will be 6 yen per share. Our year-end dividend of 2 yen per share will be paid to shareholders of record as of the end of March.

Takumi Shibata

Now this is Shibata again. We expect the revenue environment to remain challenging and competitive environment to transform significantly. The competitive environment will transform significantly.

Given this, we will pursue a narrow and deep strategy focused on business areas where we can deliver added value to our clients. More specifically, our narrow entry strategy consists of the following three elements.

First, as the only global investment bank based in Asia, we will leverage our dominant position in Japan to increase our market share across the rest of Asia.

Second, in business segments where we can offer value to our clients, we will concentrate client coverage and provide competitive products and services.

Third, we will step-up global cross-divisional collaboration among wholesale asset management and retail and the entire firm including top management will focus on serving our clients in order to deliver our full capabilities.

As Asia’s global investment bank, global financial services group, we will heighten our focus on our core businesses in our international operations and enhance our products and services that offer added value to our clients. We will anticipate changes to the revenue environment and make decisions quickly to aim for growth with sustainable profits.

In conclusion, Nomura’s unchanging long-term commitment is to remain client centric. Thank you.

And now, we would like to open the line to questions.

Question-and-Answer Session

Operator

We have a question-and-answer session now. (Operator Instructions) The first question will be asked Mr. Muraki of Deutsche Bank.

Masao Muraki - Deutsche Bank

I have two questions. First of all, fixed income trading; in comparison of your shares against your peers and the level of revenue quarter-on-quarter basis, growth in shares seems to be declining at Nomura Holdings. And during Q3 and Q4 your process to disclose the level of revenue which is accompanied by client trading could you give us numbers?

The second is on funding policy; in comparison to the first half, the dividend to be paid out for the second half has been reduced. In the first half losses were reported and restructuring had been announced, but in the second half you have been able to generate approximately 40 billion of profit. Why did you decide on reduction of dividend against the backdrop of generating profits?

Takumi Shibata

There is two points of extreme importance. First of all, on the relative position of Nomura or our share in fixed income; that is already factored into our assumption to begin with. The basic thinking is as follows; we hold relatively small positions to respond to customer requirements for market making. That is the central strategy or policy.

Between January and March, the European Central Bank had offered LTRO operation which in turn had made a significant impact, not only to fixed income, but to the equity side which had two grid; good somewhat of a world market and the equity market.

And under such phases, in principle those who hold large positions can enjoy larger profits under such circumstances. We understand that well and that actually prevailed as a phenomenon.

And based upon the way we manage our balance sheet, this was a natural outcome and we don’t have a culture of drastically taking significantly large position. So this is a natural phenomena that occurs because of our policy as such.

Now as far as revenue from clients are concerned in fixed income, I think your question was whether it’s declining; no, it is not declining for the rest assured.

And on dividend payout, first of all the policy is to focus on how much we pay per year and the target 8 yen has now been reduced to 6 yen per share. In other words, this is not a dividend that is allocated between the two half depending on the level of profit generated.

Now why did we choose to reduce the total amount of dividend? Because, we are in a state of flux in terms of regulatory environment and because we believe that this change in regulation will continue; deregulation can only become more stringent and not the other way around.

And since the beginning of this fiscal year in April, the impact from ECB’s LTRO has diminished somewhat and therefore the European terminal may become reemerging. There are concerns of reemergence of European currencies and there are some institutional investors that are reducing its risk positions.

So on top of the regulatory environment, the increased uncertainty in the European market has prevailed and that is the best decision on dividend. So it was rather regrettable and against our policy, but we had to reduce dividend. You may feel skeptical about the financial position at Nomura. You may question whether we would be able to comfortably achieve Basel III. There could be such voices but I will deny any such factor within Nomura, so this is clearly to respond to the regulatory environment and our perspective on the outlook of the market.

Percentage of client flow, there's hardly been any change Q1. It's slightly over half unchanged. So against total revenue, client flow business accounts for about 63% in Q4. If I may add fixed income client level, the amount itself is more or less flat in comparison to the third quarter. However the ratio of client revenue in comparison to trading revenue has gone done. In other words, there was strong growth in trading and therefore the amount didn't change, but the ratio had declined. On the other hand, trading revenue was robust. Thank you very much.

Masao Muraki - Deutsche Bank

I have a follow-up question on both point one and point two. Q3 and Q4 order flow from client increased according to some of your peers. Does that apply to yours or not? Is it correct to consider that there was not much activity at Nomura? But then in month of April, your peers have found it quite difficult capture such customer flows. What about Nomura in comparison to the January-March quarter, how has April been? And have you seen any change in trend? Te in trend? That's my first point.

Secondly, surcharge under Basel III was set to become 1%, so seven plus one plus one buffer would have meant 9% as the target, that had been the general assumption. But even if we use the 07 or 19 year base line, do you think that you would need to adequately have capital of over and beyond 9%? Has your assumption changed in terms of Basel requirement?

Takumi Shibata

First of all, Q3 and Q4, the client flow in fixed income, if I could give you an overall summary, Q3 that ends in December. We were put in quite a harsh market climate and there were many international institutions that struggled in the midst of such difficultly and even then fortunately, we were able to quite efficiently capture the requirements of the customers.

On top of that in structured business, revenues were quite strong. In addition in Q4 LTRO was a blessing and for example in Continental Europe the banking sector’s financial requirement disappeared and structured business declined quite significantly. But then on the other hand flow of product business became quite robust.

And you asked a comment with regards to how we feel about the performance of April. I think there are mixed situations depending on the institution, but for ourselves we think that the beginning of this fiscal year has been relatively healthy as far as fixed income is concerned and in equity business, there has been the Easter holidays in April and risk aversion generally speaking amongst institutional investors had lead to a reduction of transaction volume in the market in general.

So in that sense for the equity business, April might prove to be quite a challenging month for us as we close our books. Albeit there is seasonality in investment banking and the first quarter tends to be a slow quarter generally speaking. Having said so however, April, May, Japanese ECM deal or international deals in the pipeline are building up to a certain extent. For example since last October to last March, during those months in Europe seven rights offer came to the market and of those we have been involved in five deals as manager and of them in three deals, we served as the global coordinator and therefore to a certain extent we do have some items in the pipelines in investment banking as we had assumed. T. Thank you.

Junko Nakagawa

As for your second question about dividends and targets under Basel III and the impact on our targets, as we mentioned earlier this is not due to changes in the way we view the targets and as we mentioned today on page 17 of the presentation 2:1 common ratio have both been stable compared to December end. So as Mr. Shibata mentioned at the beginning, we have made decisions based on our outlook on the future. Thank you very much.

Operator

Our next question is from Natsumu Tsujino of JPMorgan Securities.

Natsumu Tsujino - JPMorgan Securities

I have two major points. The first question is this may be somewhat overlap with the previous discussion, but the Tier I common ratio under Basel III, the risk-weighted assets has seem to have, you have been able to cut down the risk weighted assets more than 8% as of December end, what is the current stages?

And based on that the risk weighted assets under BASEL III basis; the decline in risk weighted assets. I think you still had some way go in the cutting of risk weighted assets. How much progress have you made and how much improvement can you make, further improvement can you make?

My second question is based on the process or income according to the accounting, under the accounting income. The income seems to be quite large based on -- the accounting income seems to be quite large?

If you look at page 18 of the financial statements at the bottom section, you show the business segment total and the accounting income or income based on the accounting and you also show the breakdown. And in that you have the others portion which is up 19 billion yen in Q4, it was up 4.9 billion yen. And this includes the DVA, so if you deduct DVA its 11.3 billion yen and 28.9 billion yen respectively. So there is an improvement of close to 40 billion yen.

And if you look at the total income of the business segments and the improvement and if you compare that with the improvement in the accounting income, I think you touched upon briefly in your presentation, but the real estate subsidiaries that has been consolidated and the improvement in income as a result of that.

Those are non-business segment improvements in the profits; I think this is the reason for the improvement, but what is the breakdown between the real estate subsidiaries that were consolidated and the non-business segment income recovered improvement?

Takumi Shibata

Well, first of all the way view the BASEL III, as of March end, the Tier 1 common, what we called the so called Tier 1 capital and the Tier 1 common have both been above 10%. So in that sense, the risk weighted assets have been reduced and we are seeing the positively results of this reduction.

If you look at presentation by typical financial institutions, they say that they will comply with BASEL III by such and such date, and in order to do that they will reduce their risk weighted assets by certain date and they will build up their retained earnings. This is a typical presentation by a financial institutional.

But as for Nomura, for both Tier 1 and Tier 1 common we have levels that are above 10%. So we are not in a position that we have to lower our risk weighted assets. What we will do is we will control the further of level of risk weighted assets and focus our assets on more productive, more efficient assets. I think that will be the challenge for us in the future.

Natsumu Tsujino - JPMorgan Securities

If I could just add on my first question. So you say, you do not need to reduce your risk weighted assets further; but if you compare December to March, there has been a significant improvement. This is the positive result of the reduction in risk weighted assets, is that right? And you do not need to reduce risk weighted assets further.

Takumi Shibata

Yes. That’s precisely right. And let me address your second point; page 18 of our financial disclosure, financial results. The other businesses which do not belong to the business segments are, as we pointed out, it includes Nomura Real Estate, [Foreign Language] and as you guess it also includes some of the other group companies, and unfortunately we do not disclose the results of each specific group company.

But to give you or for your information, we can explain what kind of companies are included in this others portion. For example, Nomura Trust & Banking, Nomura Luxembourg, these banking business companies, in order to build a foundation of these banking business these companies serve as the building the foundation of the banking business and these are included. Nomura Babcock & Brown for example are included which are based in these region and as we pointed out Nomura Real Estate.

We have some other companies, for example within our Group, we have a full subsidiary, a 100% subsidiary which manages our real estate properties, especially before the branches and there is a team that supports the property management which is also included in this others portion.

And in Q4, all of these Group companies have made some contribution to the overall revenue. So each of our Group companies has generated good results and as a result, we have seen an improvement in our financial results.

Natsumu Tsujino - JPMorgan Securities

So the Nomura Land & Building or Nomura Real Estate Holdings, you we mentioned earlier, this is included in the others of the business segment revenue or business segment income and there has been an improvement or contribution of close to 10 billion yen I think.

So the remaining portion is as we mentioned is from Nomura Trust, Nomura Luxembourg, the banking related businesses and there are some hedging related devaluation P&L which you do not have to mark-to-market based on the accounting standards; is it the correct way to understand this?

Takumi Shibata

Yes, that’s right.

Operator

The next question is by Shiota San of Daiwa Capital Markets. Mr. Shiota, please?

Jun Shiota - Daiwa Capital Markets

Yes, I have two questions. On page 10 of the presentation material, you have the region-based revenues for wholesale business. In the Americas and EMEA there has been increase between Q3 and Q4 and in Japan and Asia. Especially in Japan, there has been a decline, why? What's the reason behind? That's point 1.

Secondly this has already been touched upon, but a reduction of dividend, according to what was mentioned by Mr. Shibata, you mentioned that you took into consideration the market outlook and the changing regulatory environment and to be well prepared, but for example in the case of US investment banks, there are several institutions that are reinforcing their return to shareholders.

And you are going to have enough capital of more than 10% on capital three basis and whilst your international peers are doing more in terms of shareholder return, thinking about your capital base I don't think that you need to be better prepared than you are today, do you think you need to? Those are the two questions.

Takumi Shibata

Let me take the second question first. This is Shibata speaking and it is true that if zero dividend is to be continued for some time and then in the way of total dividend, slowly and slowly shareholder benefits are being increased. That's what some of our peers are doing and outflow of capital to outside of national institutions is something that the regulatory authorities are wishing to prevent and we are beginning to see those move. So although not in significant amounts, there are several financial institutions that wish to return some benefits to the shareholders because of such regulatory move.

Dividend yield at Nomura has reached a certain level and payout ratio was relatively high. So those factors were taken into consideration as we delivered that decision. In short, in comparison to western peers you are probably hinting that our direction is reverse or to the contrary, but we don’t think so. And your question indirectly implies that you may be guessing that we may increase capital.

Have we factored in such new ones, as we made the decision on dividend I think you are implying that point and clearly put, we are not in any circumstances where we need to increase capital and this decision was clearly done, clearly as we anticipate the changes in the regulatory front and the situation to unfold in Europe.

Now coming to your initial question. Q3 was quite robust in Japan and that was clearly because and only for the Skylark deal which was fixed in Q3 and that had been the swing factor. Generally speaking, investment banking even without that had been doing well and on the fixed income side, the exchange rate had proven to be somewhat difficult, but we weren’t able to make as much money as we had intended to. So the biggest swing factor had been Skylark.

Jun Shiota - Daiwa Capital Markets

Thank you. I have follow ups on questions one and two. On question one, conversely speaking if we want to see increase in dividend what requirements would have to be met for you to decide on increasing dividend? I don’t feel that you need to increase capital because of your current capital adequacy. Dividend ratio being high, what are the hurdles that you need to overcome in order for you to decide on increasing capital?

On the second point, what do you think about Asia?

Takumi Shibata

What's your specific question on Asia for the second question?

Jun Shiota - Daiwa Capital Markets

Well Asia as a region although slightly seems to have experienced a slight decline in Wholesale business between Q3 and Q4, what’s the reason behind?

Takumi Shibata

AEJ, your question is understood. Now, fixed income was quite robust in Q3 in Asia excluding Japan. However that robustness slightly diminished in Q3, more specifically currency rate and customer business and the position in currency market led us to enjoy high revenues in Q3, but that impact was diluted in Q4. So that’s my comment with regards to Asia and on the expectations for increase in dividend, we have announced our dividend policy and it all boils down to our dividend payout policy.

Now quite esoteric brief I use making the policy rather ambiguous, but payout ratio is a yardstick we use and at this current moment, if we look at this in perspective for example on full-year basis, net income $11.6 billion. This term due to the tax reform in Japan, net income declines by 13.3 billion. So without this, it would have been $24.9 billion and full-year dividend 6 yen per share making the payout ratio 88%.

So that's quite close to the ceiling, so in order for us to decide on increase of dividend at 30% of our system in place, where we can comfortably pay dividend and we are on our way to reduce $1.2 billion worth of expenses and the deep and narrow strategy will be further reinforced. Thank you very much.

Operator

Next question is from Mr. Sasaki from Mitsubishi UFJ Morgan Stanley Securities.

Sasaki - Mitsubishi UFJ Morgan Stanley Securities

I have one question. On page 16 of the presentation you described the progress in the cost reduction program. Upto Q4, you have reduced cost by roughly 80%. On your P&L statement, when will the expenses actually decline and what will the size of the reduction be? For example in the next or current fiscal year, will there be a decline of $1.2 billion in your expenses or will it be about half, will it be from the second half of the year, could you explain the size and the timing of the cost reduction on your P&L?

Takumi Shibata

Whereas for the progress of cost reduction, we have made roughly 80% progress and this is on track to being completed. As for the effects of the cost reduction, we explained on page 15 on the non-interest expenses.

Unfortunately there is some impact of the newly consolidated companies, so it's hard to make an apples-to-apples comparison, but the personnel expenses Q1-Q2 there's some ups and downs depending on the quarter, but if you look at the trends in Q3 and Q4, we have described our progress as shown on page 15 and in Q3-Q4 there have been some costs related to restructuring which we have booked and the figures on page 15, includes this restructuring cost.

Going forward, we will continue to work on the remaining 19% cost reduction. As for the personnel expenses, we are expecting to finish the cost reduction a little bit earlier than expected. But the actual effect of the cost reduction will be seen towards late latter half of the first half or maybe from the second half.

So Q2, Q3, Q4 if you compare the GAAP between the quarters, I think there will not be a further reduction as we saw in Q2, Q3, Q4 last year but in the current level, we will continue for a while. As for the other costs, other expenses, for example the interest and the commission fees that we pay. This tends to go up if our trading revenues go up. So these are necessary costs related to our business and we will control the cost but there is a possibility that these costs will increased.

As for real estate related expenses, there has been some media coverage in the U.S. So some of you may be aware but we have made a move or we are planning to move part of our businesses and there will be some cost in relation to moving our business in the U.S., relocating our business. But we will control the costs related to these relocations. So that they do not wipe out the positive results of our main line of business.

So does that mean that for the restructuring costs, how much restructuring cost will be worth, have been booked in Q3 and Q4. And just to confirm in the current fiscal year, from the second half of this year there will be further decline in your cost is just the way to understand this. In Q3, we explained the cost reduction to be around 5 billion to 6 billion yen and for Q4, you can assume a similar level.

The restructuring costs are incurred from various reasons, various items. So it’s hard to clarify, define the restructuring costs but we believe the restructuring costs were roughly 5 billion yen to 6 billion yen in Q4. As for the timing, the effects of the cost reduction will be seen from Q2 in full effect. Sorry, I didn’t address your second half of the question. Yes. We are expecting the full effect to be seen from the second half of this current fiscal year. Thank you.

Operator

Merrill Lynch, Okamoto San will ask the next question. Ms. Okamoto.

Mitsumasa Okamoto - Merrill Lynch

Thank you very much. I want to confirm numbers. That’s my first question. Segmented expenses have been disclosed. My question is wholesale expense increased the factor behind. And I have a related question. According to what you explained, if you exclude the newly consolidated, there has been a decline by 0.5%, and would that reduction and expenses be categorized in the others items and if the restructuring expenses remain unchanged, what would be the changes that are caused in others. So what’s the decline in expense effect that you have been able to achieve in others excluding the newly consolidated subs?

Takumi Shibata

Mr. Shibata says that you don’t foresee robustness in the market but 12.5 pretax income has been insured by wholesale. But if you are not that overly optimistic, how do you intend to up lift the revenues of wholesale from the current level, what’s the strategy as you try to expand upon the revenues generated by wholesale?

Junko Nakagawa

Then Nakagawa will respond to your first question. Q4 expenses increased at wholesale and I think your question was the factor behind, is that correct? Yes. As I explained on page 15, I just want to assess but slightly that global markets revenue was relatively healthy and accompanying that commissions and fees paid and inter company or exchange of money between ourselves and client increased, and real estate related expenditure, New York relocation related rent and some cost incurred for the relocation has been the major factors behind the increase in Q4 and at the same time restructuring expenses as the rate of the factor. It’s more or less the same but non-personnel expenses, there had been a few items where we saw increase and therefore as a result, the whole expense in wholesale and at the end of the fiscal year there are seasonal factors that pushed up expenses. So wholesale in general has increased. Personnel expenses are being well managed at appropriate level. And your latter half of question one where or in what items will this appear, and cost of sales in others to be included, that point was touched upon already but other factors would be related to consolidation.

So personnel, commission and fees paid, real estate related business, development related expenses, all good companies will incur certain expenses. So Nomura land and building related expenses will not, as a lump sum, be booked in others. They will be dispersed so 0.2% increase is shown in personnel expenses, but if we exclude the newly consolidated subs, the actual base line personnel expenses had declined somewhat. Thank you.

Takumi Shibata

Shibata speaking. Let me try to respond to your question. The quarter ends in March. We cannot deny the probability or possibility that there was a bear market rally. LTRO is not so frequently offered at several times a year, and fixed income equity and investment banking in each business area strategies are necessary and especially in fixed income in the quarter ended December, we with agility responded to the trend of the customers and served them well. That trading still can be effective when the market is under certain condition and in terms of equity with volumes coming down as they have been; some kind of new source of revenue has to be discovered without having to make fresh investments.

And already there are few deals under negotiation but basically they are solution based businesses for management of companies in a way of catering to the customer requirements. There are diverse customer needs. And also the size of the deal tends to become small. So even if order is placed by customers when the size of the deal is small, they tend to incur losses.

So trading risk management must be well done. And on the last point related to investment banking, on year-on-year basis in the previous term in international investment banking business, in the previous term there have been significant progress made. Yet, however, ECM dues originating from Japan or insurance related Japanese business had been reduced to almost half in the general market. So normalization of the Japanese market can be to a certain extent expected.

And further in the international arena much progress has already been made and this year’s M&A deals, we will be serving as the driver of the two biggest deals. And the European financial crisis for ourselves had proven to be an opportunity (inaudible) or a few right issue deal where, deals in which we had played leading role. And we think that there would be more such deals to come.

So in investment banking, the international business will continue to be strong and in Japan we believe that the market will recover in comparison to the term ended.

So to a significant effect, we think that the key would be how we can respond to the low volume in the equity business. That would be the key to success in this fiscal year. Thank you very much.

Operator

The next question is from Mr. Yamanaka from Credit Suisse.

Takehito Yamanaka - Credit Suisse

Just one question from me, when you are talking about your capital, the tightening in the regulations, you mentioned the tightening of regulations going forward? And in terms of what will have an impact on Nomura; what kind of risk scenarios you have in mind in relation to the tightening of regulations. If you could explain what risks you have in mind.

Takumi Shibata

First of all, BASEL III and the FSB related discussions. Well, the discussions are pretty much over for capital, for the non-regulated financial institutions. And going forward, the discussions will focus on the so called non-bank banks and the regulations for these non-bank banks are expected to become tighter and the impact that will have on Nomura will be limited, it will only be some indirect impact. There maybe some additional capital burden on our exposure to non-banks.

And in the future FSB discussions, I think the main topic will be the recovery and resolution mechanism. For example, if the capital levels of a financial institution falls, how to recover that level is going to be the question and there are various discussions going on. For example, bond products like [KoKo’s] that can be added to the capital base or senior unsecured bonds the billions of the senior unsecured bonds.

And as for the resolution side, there is a discussion of living will and some banks will be forced to write their living will. For example, banks that have branches globally or subsidiaries globally, if there is a treaty that covers all of this global operations, it would work. But there is no such treaty. Therefore there is the need for ring fencing.

For example, in the UK, capital levels in the UK or capital levels in Singapore, the operations in each region of the globe will need some additional buffer in each location. I think there is a high possibility of this happening.

And as well there is the liquidity regulations in each region which will require banks to hold a certain amount of cash on hand. So there is a discussion about global capital management and global treasury operations. The effectiveness of the management will be diminished.

So in answer to your question, first of all, although it is unclear about what will happen, I think there will be some changes in the non-bank regulation, non-bank bank regulations and for the recovery and resolution regime, the ring fencing of capital and liquidity is possible. Thank you.

Well, this is Shibata again. Thank you very much for attending today’s conference call for such a long time and thank you very much for your very meaningful questions.

Going forward, we will continue our efforts in cost reduction and we will continue to make our business narrow and deep and we will continue to be client centric. And we will continue to develop a very strong financial base and as the global investment bank based in Asia and as the financial services institution we would like to continue our efforts.

Thank you very much for participating in the call today.

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