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Nomura Holdings, Inc. (NYSE:NMR)

F1Q13 Earnings Call

July 26, 2012 7:00 AM ET

Executives

Atsushi Yoshikawa – Group COO; and CEO, Wholesale Division

Junko Nakagawa – CFO

Analysts

Masao Muraki – Deutsche Securities

Takehito Yamanaka – Credit Suisse Securities

Mitsumasa Okamoto – Merrill Lynch Securities

Katsunori Tanaka – Goldman Sachs Asset Management

Natsumu Tsujino – JP Morgan

Azuma Ohno – Barclays

Operator

Good day, everyone, and welcome to today’s Nomura Holdings Fist Quarter Operating Results for Fiscal Year Ending March 2013 Conference Call. Please be reminded that today’s conference is being recorded at the request of the hosting company. Should you have any objections, you may disconnect at this point in time. During the presentation, all the telephone lines are placed for listen-only mode. The questions-and-answer session will be held after the presentation.

Please note that this telephone conference contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays, uncertainties and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions.

With that, we’d like to begin the conference. Mr. Atsushi Yoshikawa, please go ahead.

Atsushi Yoshikawa

Good evening. This is Atsushi Yoshikawa, newly appointed Group COO and CEO of the Wholesale division. Let me first briefly introduce myself. I was the CEO of the Asset Management division, as well as the President of Nomura Asset Management from April 2008 to June 2011. After that, I have been working on the buildup of the Americas business as CEO of Americas since last July. Since joining Nomura, I have been working in the Retail business, the equity businesses of Singapore, Hong Kong, New York, as well as investment banking, Asset Management and the regional management of the Americas, and I would like to fully utilize my experience.

The competitive and regulatory environment surrounding global financial institutions is changing dramatically. And the Wholesale division as Asia’s – a global investment bank, we would like to further promote the joint operation between Japan and Asia.

We are based in Asia where a strong economic growth is expected and we would like to fully leverage on the strength and take in the growth of Asia and continuously expand our revenue-generation capabilities. And by providing services and products, which only Nomura can provide to our clients in Japan, Asia and the West, we would like to differentiate ourselves from our peers.

With that, I would like to ask Ms. Nakagawa, our CFO, to go over the highlights of the first quarter’s results. We will take your questions after the presentation. Nakagawa-san, please go ahead.

Junko Nakagawa

This is Junko Nakagawa, CFO. I will now give you an overview of our financial results for the first quarter of the fiscal year ending March 2013 using the presentation titled Consolidated Results of Operations.

Please turn to page three. Net revenue for the first quarter was ¥369.3 billion, a 26% decline from the previous quarter. On a year-on-year basis, revenues increased to 12% due to the conversion of Nomura Land and Building into a subsidiary. Income before income taxes declined 68% sequentially to ¥19.7 billion. Net income was ¥1.9 billion, down 91% quarter-on-quarter.

Retail and Asset Management remained resilient amid the challenging market conditions, driving firm-wide earnings. Wholesale faced a difficult quarter. However, Fixed Income performed well, underpinning the division’s revenues. We also completed the $1 billion cost reduction in Wholesale ahead of schedule. And by lowering our cost base, we were able to limit the impact from the decline in market liquidity and revenue opportunities.

Please turn to pages four and five. Here, we show the overview of our results at the Group level and by business segment. I will give you an update of the performance on each segment from pages six onwards and let me start with the Retail business on pages six and seven.

The market environment turned difficult following the rebound in the prior quarter. Retail investors shied away from taking on risk, leading to a 10% decline in net revenue to ¥82.7 billion. Income before income taxes dropped 40% to ¥12.2 billion. Sales of investment trusts and equities were softer due primarily to market factors. However, we reported stronger sales of fixed income products particularly foreign bonds. Our continued focus on providing consulting-based services to meet the needs of our clients translated into net asset inflows of ¥647.2 billion during the quarter marking our ninth consecutive quarter of net inflows. While we expect the market environment to remain tough for the foreseeable future, we will continue to provide consulting-based services to advise our Retail clients and meet their individual needs.

Please turn to pages eight and nine for Asset Management. Asset Management delivered stable earnings reporting net revenue of ¥16.4 billion, up 5% sequentially, and income before income taxes of ¥5.4 billion, a 30% increase compared to the first quarter last year.

As shown in the graph on the bottom left of page eight, assets under management totaled ¥23.3 trillion at the end of June, down from the end of March due to market factors. From this quarter, we are disclosing gross assets under management, which is the total of our five Asset Management firms. Net asset under management excludes the overlap between the companies and is the figure which we used to disclose until last year.

In the investment trust business, we reported fund inflows mainly into public stock investment trusts. The investment advisory business won new mandates from pension funds and sovereign wealth funds, both domestic and overseas, booking fund inflows of ¥218 billion.

Please turn to page 10 for an update of the Wholesale business. Wholesale reported net revenue of ¥121.9 billion, down 23% from the prior quarter and a loss before income taxes of ¥8.6 billion. -Fixed Income was resilient amidst the challenging market driving the division’s revenues. However, revenues in Equities and Investment Banking were affected by lower market liquidity and fewer revenue opportunities.

A breakdown of the Wholesale division’s performance is given on page 11. Let me start with Fixed Income. Fixed Income reported net revenue of ¥71.5 billion, down 18% quarter on quarter. While client businesses performed well, subdued market volumes impacted trading.

The pie-chart on the top right gives the breakdown of revenues for our four core products. Revenues were well balanced across each product during the first quarter. As shown in the pie chart on the bottom right, we promoted collaboration between our domestic franchise and global platform and the Americas and AEJ booked solid revenues for the quarter.

Please turn to page 12, net revenue in Equities declined 28% from last quarter to ¥37.1 billion. Muted trading volumes in Japan and AEJ coupled with a dearth of primary deals lead to a 15% sequential decline in client revenues. Trading revenues deteriorated as lower levels of market liquidity impacted results in each region and strategy.

Next, Investment Banking, please turn to page 13, Net revenue in Investment Banking was ¥13.3 billion, 33% lower than the prior quarter. Despite the decline in the global fee pool throughout the year, gross revenue was flat at ¥32.3 billion.

While there were fewer revenue opportunities in the ECM business, we have won a number of mandates on high profile mergers and acquisitions transactions, some of which were completed during the quarter. As a result, we ranked number 10 in the Global M&A league table, up from 14 last year.

We have seen success in trading house and sponsor-related businesses, which, combined, account for 18% of the global fee pool. We continue to step up cross-regional collaboration and cooperate across global sectors such as trading and financial sponsors in order to expand revenues.

Next, I will give an outline of expense on page 14. Non-interest expenses decline 20% from last quarter to ¥349.6 billion due primarily to a decline in cost of goods sold at consolidated entities. Non-interest expenses excluding entities consolidated as a result of converting Nomura Land and Building into a subsidiary declined by 5% as shown by the dark blue bars.

Our cost reduction program has led to a steady decline in compensation and benefits each quarter. Of our ¥1.2 billion cost reductions announced last July and November, just under ¥200 million is accounted for by Retail and Asset Management. The savings which center on sales and administration costs and business development expenses are due to be completed as scheduled. Wholesale accounts for the remaining ¥1.0 billion plus. These cost reductions were completed ahead of schedule at the end of June.

Turning now to our balance sheet on page 15, total assets at the end of quarter were ¥35.3 trillion. Gross leverage was 16.8 times and net leverage was 10.6 times. The chart on the bottom left shows our capital ratios. Under Basel 2.5, our Tier 1 ratio was 15% and our Tier 1 common ratio was 13% at the end of June. As such, we maintain solid capital ratios. The graph on the bottom right shows Level 3 assets at a healthy 29% of total assets.

Page 16 outlines our funding and liquidity portfolio. As shown on the top left, 79% of our balance sheet is composed of highly liquid trading and related assets. The bottom right shows that approximately 80% of unsecured funding is long-term debt and demonstrates how we were ensuring stability by diversifying across funding sources and markets.

Our liquidity portfolio at the end of June remains high at ¥5.4 trillion. This represents around 15% of total assets and we maintain abundant liquidity to weather a stressed environment.

Before I finish, I will update you on our exposure in peripheral Europe. Please turn to page 17. Our net country exposure at the end of June was $2.21 billion, representing an increase of $633 million from our exposure of $1.58 billion at the end of March. This increase is mainly attributable to a rise in short-term inventory in Spain. However, this exposure is all trading assets that are marked to market on a daily basis and we manage our positions prudently. We will continue to manage risk stringently by closely monitoring credit conditions in each country, liquidity, the maturity profile of our exposure, and other factors.

That concludes today’s presentation. Now, we are open to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Muraki-san of Deutsche Securities.

Masao Muraki – Deutsche Securities

I have two questions. I was watching the press conference, and from the next CEO – he explained that he will rebuild the global franchise to the adequate size and he focused – he said he will – we will – Nomura will focus on Asia, but I have some questions regarding this. First of all, the Asia business is still loss-making and the fixed income market is small in Asia, but do you think you can become profitable in Asia despite the small fixed income market?

The second question is Europe and Americas. You seem to be operating or some of the business lines seem to be operating on a standalone basis, how do you plan to manage these business lines?

And the second question is regarding the regulatory and revenue environment, and you mentioned in the press conference that the environment is changing, but the global Wholesale division including the domestic business and the Retail business how do you plan to balance the two businesses under the new management? And compared to the past, the Retail business, which is less impacted by the Basel regulations, will you be focusing more of your resources to the Retail business?

Junko Nakagawa

Thank you. This is Junko Nakagawa, CFO. As for the – let me explain about the fixed income market being small in Asia and how we can – whether we can be profitable in Asia. Unfortunately, we do not disclose the details, as usual, but for this quarter, the fixed income business in Asia was very robust and it booked strong figures despite the very tough market – tough environment. And although it was negative compared to the previous quarter, we think the business generated strong revenues and it contributed to the overall revenues of the firm. The fixed income in Asia generated roughly 10% or more than 10% of the revenues. And we believe the fixed income platform is being built up as part of our global platform.

Atsushi Yoshikawa

This is Yoshikawa. I was managing the Americas business and there are several thoughts on my mind, but today I was assigned to this new position and I will be working with the new management team to work on the details, but we have been cutting our costs from last year and we were able to achieve the cost-cutting targets before schedule, but I do not think this is sufficient.

So the question is what we will be working on going forward. And in the past while we have not been changing our tactics, we have been cutting our costs gradually. But I think this alone is not enough. So we will decide on what to focus on and we will become more selective. We will do this very quickly and I have a rough figure, rough image of how we want to be, but it’s still too early for me to explain that.

And I’ve been working mainly in the Americas business so we have to be careful about making decisions about EMEA and AEJ. So over the next month or so, we will work on the details and decide what we will focus on. And maybe sometime towards the end of the year, we will decide what our plans will be, going forward, maybe sometime next year. And when you come up with a plan, it has to be a plan that can be executed. So we will keep that in mind when we set our plans. So I apologize for not being able to give you concrete details, but once things are more concrete and we decide on things, we will explain further.

As for the EMEA and the Americas standalone businesses, yes, I think there are some business like that and our home market, which is Asia and Japan, I think we need the global network to offer services to clients in our home market and also to offer our domestic products in the Western markets.

And the question is whether we can continuously generate returns, which our shareholders expect. And I think the current level is inefficient – insufficient. We have been working in the Americas and EMEA, not purely standalone, but we have been selling U.S. products – Americas products in the Americas and selling the European products in Europe. And there have been some – and we have been booking – generating income based on these businesses. So the question is how much we will expand these businesses and control the risk, control the business. This is one challenge which we have and we have to think about the returns on the risk-weighted assets, volatility and we have to manage the businesses accordingly.

So AEJ and Japan is not going to be the only focus. We have to think about the entire global business and think about business opportunities in each region. And there are some niche areas which the U.S. major players do not enter, but these can be lucrative in terms of profitability for us. So we would like to consider these businesses based on the global and regional management teams.

As for the balance between Wholesale and Retail, we haven’t been focused too much on the balance. So there is no figure as to the ratio between Wholesale and Retail. But, in the past, the domestic Retail and Asset Management businesses have been supporting our global businesses. But since taking on the people from Lehman, it’s been three years, we cannot continue to rely on the domestic businesses forever. And in that sense, we will think about how to convert the businesses so that they can continuously generate profits. And even if they are loss-making, the losses have to be healthy losses, so we would like to review our operations. Sorry that I can only give you the direction but that’s what I’m thinking right now.

Masao Muraki – Deutsche Securities

Just one follow-up question on that. As for the domestic Wholesale business, the personnel and compensation structure mainly based on the domestic Retail business has been applied. But now, you are having global employees and you are changing your personnel and comp structure to adjust for the global market. Going forward, will you have different personnel or compensation structures for the domestic and global businesses? Should you return the global compensation scheme back to the more domestic structure, could you give me your opinion on that?

Atsushi Yoshikawa

Yes, that’s a very good point. That has been on my mind as well and with Nagai-san, our new CEO. We have started discussions about that point. But regarding these personnel and HR issues, these are very important. They are centric to the employees and also the organization of our company so we cannot change them very quickly. And if we reverse the comp structure back to the domestic one and if that leads to costs going up then that’s not the right thing to do.

And me, personally, I joined the Niigata branch, the Retail business and I think this is part of the strength and the dynamism of Nomura. Shibata-san was also – he joined the Kobe branch of the Retail business. Right now, a lot of talented people are joining the Retail division but at some point, they might want to move to the Wholesale division or to headquarters and at the moment it’s getting more difficult to accompany these requests.

Also some people joined the Wholesale division who wants to do the Wholesale business. Well, some people may be avoiding Nomura because they want to work in Wholesale and they do not want to risk being assigned to the Retail division so there are various people and we have to consider each of these people, each of these requests and optimize the structure, we will consider this issue going forward. Sorry, we still have no concrete answers for you yet.

Masao Muraki – Deutsche Securities

Thank you very much.

Operator

The next question is from Credit Suisse Securities, Yamanaka-san.

Takehito Yamanaka – Credit Suisse Securities

Thank you very much for the opportunity. This relates to the earlier question, as new CEO, what specifically are you going to review while you just said that that’s something that you’ll be thinking in more detail going forward? Now the first quarter is over, and the environment is very difficult, but if you start thinking now, do you think you can break even by the end of the year or is your goal something else rather than breaking even? That’s my first question.

And my second question is with regards to the continuation of the strategy that management has changed and I suppose the revisions will be made in a different way from what you have been doing in the past. The basic direction, including overseas and domestic, would the major strategy remain intact or should I be expecting a wholesale change in the strategy so that I should forget about the past perception of Nomura’s strategy, which is the case?

Junko Nakagawa

This is Nakagawa speaking, I would like to answer your first question. By the end of this fiscal year we’ll be able to make it by the end of the fiscal year by reviewing the strategy here at this juncture. Well, we want to maintain profitability, as a company, as we have been saying repeatedly. So what specifically would be the strategy would boil down to how much revenue we can retain. But as you can see as far as the first quarter is concerned, the environment was difficult especially for Wholesale. And so net income level unfortunately is far from what is satisfactory to us. And we feel ashamed that we have to report that level to you at this juncture.

But, in any event, in this environment, we had anticipated tough environment and that is the reason why we had started the cost reduction program that we announced last year. We have been making company-wide efforts to implement this, and Wholesale has been able to complete the program ahead of schedule because we wanted to deliver on our promise. And that has resulted in profits for this quarter.

At the time of the fourth quarter earnings announcement, we said that ROE single digit is – would that be a good milestone, was the question. And the fourth quarter ROE, on the annualized basis, I think I said that that should be a milestone, the first quarter ROE, on the annualized basis. And as the CFO I have not changed my position on that.

Atsushi Yoshikawa

This is Yoshikawa speaking, I’d like to answer your question regarding strategy. Our basic strategy based on Asia, global investment bank based in Asia, that part will remain unchanged. And as we have been saying repeatedly, EMEA, the European continent and UK, relatively speaking, has more resource allocation and Asia, and the Americas, which we consider to strategic, I have been saying that we need to rebalance to those regions.

We have been seeing gradual progress, but I do see the need for increased speeds to speak selfishly as the Americas see – that’s what I’ve been saying. But now that I have assumed this new position, I have to be more fair. Having said that, I think we need to rebalance less EMEAs to be allocated more to other regions.

But Asia is not sacrosanct as someone said. Wouldn’t it be difficult to make a profit in Asia? That is true. So for Nomura, for our global business, this will be the strongest starting point for our competition in Asia, cross-border M&A, I have talked with many of the counterparts in U.S. and they were interested in Japan, in Asia. And that was the opening remarks of our conversation that led to actual business and deals. So we will strengthen Asia. Does it mean more personnel? Not necessarily. What’s important is quality and the relevant services that are considered important for our clients. That’s where we’ll be focusing on.

So, broadly speaking, our strategy will remain unchanged. But, having said that, on a global scale, are we going to provide all products, all services to all kinds in the world? Not necessarily. Narrow and deep is the approach that we have been advocating for some time.

When we look at universal banks and investment banks throughout the world, I think they are pursuing the similar strategy. So, in this competitive market, I think we can be proud of, for instance, financial FIG and financial sponsor segment as well as retail consumer, natural resource, energy and some of the industry segments. I think these are the areas where we are very strong and we would like to further strengthen this very solid business. And there are some half-baked areas where we have room for improvements, and that certainly will be the target of our review and equity research. This is very important for our Asia operation so we can’t delete that of course.

So, in Europe and the Americas, to what extent are we going to do that is the real question. 13, 14 analysts in the Americas and yet we are making progress in our ranking which to me means a lot personally. But for active equity investments, we do see outflows. And the managers, investors, they are under various pressures. Execution needs to be execution-only models and that ratio is increasing.

And in EMEA as well, we do have a large number of personnel today, but, unfortunately, today. Of course, we would like to retain everything, but the current situation does not allow that. We have Instinet and so execution may have to be strengthened. And although we have been continuing with the belief that this is good for everyone for our research to cover everything, as is the case with many of our peers, we may have to take a second look at the continuation of this. So for the next one month or so I’ll be looking at the details as to what is going to change and what is executable. That is the plan.

Takehito Yamanaka – Credit Suisse Securities

Thank you.

Operator

The next question is from Merrill Lynch Securities, Okamoto-san.

Mitsumasa Okamoto – Merrill Lynch Securities

Hello, this is Okamoto. My first question is regarding the $1 billion cost reduction and why you brought it forward. And the impacts on P&L will be seen from the second half of this year, as expected. And in relation to that, on the last page, you show your head count and the head count seems to be going up a little bit in some of the regions, including Asia. So in terms of the cost-cutting that you have been working on, that is pretty much complete, but if you look at the trends in head count, which seems to be going up a little bit, is the cost level – has it hit the bottom and not going to go down further? And as for the future head count, how will it trend?

My second question, I may have – my memory may not be correct, but I think the interest rates are somewhat high for some of the securitized products in the U.S. and recently as the interest seems to be coming down, how will that impact your earnings? Also the Basel 2.5 risk assets, what will be the impacts on that? I’m sorry for the multiple questions.

Junko Nakagawa

Let me address your first question. This is Nakagawa. Regarding the $1 billion cost cutting in Wholesale it has been completed, as we reported. In the past, we explained that it was pretty much completed but – I’m sorry for the subtle expressions, but now we say it’s fully completed and what we mean is the cost-cutting has been scheduled – it’s been put into our schedule and we have cut more than 80% of the cost compared to the previous year, but now we’re saying that the cost-cutting has been completely completed.

And the question is when that will start impacting our P&L. If you look at the non-interest expenses, it has been contributing by several percent and the expenses have been coming down by several percent. This is the result of the cost-cutting efforts.

If you look at the Wholesale division page and the expenses have also been declining – continuously declining overall. There has been a declining trend. This is also the result of our cost-cutting efforts and it has already started to show up in our P&L. And in terms of the announcements that we have been making last year and two years ago for Q3 and Q4 of last year, the figures includes the compensation and personnel expenses related to the restructuring and that was the level including the impact of the restructuring. So, in that sense, there may not be so much change going forward for this expense.

We mentioned $1 billion on a run rate basis, which we have already achieved. And if you look at on a quarterly basis, over the past three quarters, the costs have come down by ¥13 billion.

Regarding the question on head count, if you turn to the last page, which shows the number of employees I think this is the page you’re looking at. And the regions which are going up is, first of all, Japan and, as you can imagine, we have been hiring the new graduates from universities in Q1.

And the other line which is increasing is in Asia, Asia-Pacific. And as we explained in the previous or the announcement before that, we are hiring people in India, in Powai, as part of the cost-cutting program. And we have been shifting our resources from onshore to offshore. As a result of this shift to offshore, the head count is increasing in this area, but that is helping to reduce the overall costs.

And also as we explained in the previous announcement, we are hiring a lot of people who can speak Japanese in Dalian of China who mainly work on the support operations of the Retail business. We have just launched this office and we will review the costs and also the management structure to gradually expand its business.

Yoshikawa-san will explain about the strategy. I think he should explain about the strategy. But in relation to the Basel regulations if you look – if you consider Basel III, the capital charge and the risk charge is said to be very high, which is correct. But for the low ratings or non-investment grade products, the charge is going to be very high and that’s the definition of the regulations. So for RMBS, CMBS products with high ratings, we do not think there will be a big change in the charges. So, going forward, the Tier 1 ratio, which is currently very high, we will continue to consider the returns on risk weighted assets and we are already considering Basel III when we allocate our resources.

Atsushi Yoshikawa

This is Yoshikawa. Let me talk or add some comments about the U.S. For CMBS or securitized products, the best news I heard this year was the CMBS of agency, the series there have been four or five issuances of the CMBSs. So there’s a lot of liquidity considering that this is an agency transaction on this type of new issuance business was good to hear and there are investors who are willing to buy these products. So I think it’s being regarded as a right – proper product, financial product and we are seen as a player in this market. And if the absolute level of interest comes down that will impact the spreads. So compared to the past, I think the spreads are coming down. But I don’t think we have to be worried about it yet.

As for the securitization of leased products, we’re trying to – we’re working on various products. And investors cannot rely just on the ratings to achieve high returns so the question is what kind of products they will buy when it comes down to B rating. And I think more and more investors are willing to purchase these types of products and the investor base is expanding. And I think we have a niche in this area. We have an edge in this area. And, of course, we have to consider the balance between returns and the risks, which we plan to continue managing adequately. But, at the moment, I’m not really concerned about it. I have hopes for this business. Thank you very much.

Operator

The next question is from Mitsubishi UFJ Morgan Stanley Securities. Mr. Saki please.

Unidentified Analyst

Can you hear me?

Atsushi Yoshikawa

Yes.

Unidentified Analyst

Can I start?

Atsushi Yoshikawa

Yes, please go ahead.

Unidentified Analyst

I have two questions. First question is on the balance sheet. The regional core and the core of business have been covered already, but when I look at your balance sheets non-core business assets I think have built up. So these non-core assets, what’s your thoughts on these? How do you intend to deal with those going forward?

And funding, I think you have been continuing a conservative funding. And my question is as the new COO, what’s your view on the funding strategy? How do you plan to use the balance sheet?

My second question, your personal views would suffice, in investment bank what do you think is the ROE level that should be the target? Those are my two questions. Thank you.

Junko Nakagawa

This is Nakagawa speaking, I would also like to talk about the funding structure as well as the balance sheets, large proportion in relation to non-core I think is what you indicated. Yes return on the assets would be looked at and that’s how we – I’m trying to support the company from the financing point of view. As I have reported during the last year, the Nomura Real Estate including the Nomura Land and Building with the consolidation of that, although it’s not on a full scale, we do see the contribution taking place already. So although they are considered as non-core doesn’t mean that this trust should disappear. Of course, private equity Level 3 assets will – which are being disclosed on a continuous basis and if they are non-core and if they are low on return and if they don’t have much synergy with the core business, we have been revisiting those as has been the case and we are seeing progress here already. But when we look at the subsidiaries for the entire direction of the company and looking at the market environment, we are making what’s considered to be the appropriate decision, appropriate actions going forward. So I hope you would separate the two.

The second question, the funding structure, I would like to thank you for describing it as being conservative. Since last year this may sound like an excuse, but given the uncertainties in Europe, once you believe that it has settled down, we see more uncertainties popping up elsewhere. So in this environment when we look at the balance sheet and the structure of the unsecured funding for the time being we believe that we have to continue with this rather conservative funding approach. But, as you have seen, this is going to be a costly approach so Mr. Yoshikawa, the Group’s COO and Wholesale CEO, under his new leadership, under his new policy when we think about reallocation, we will be pursuing appropriate allocation or appropriate size, if there is such a thing. And should we find that there are anything in excess we will try to reduce them somewhat. But this will be done in light of the environment. But, for the time being, given the current environment, I believe that the current conservative approach will have to be continued. In terms of the absolute amount of increase, size or rebalancing, I can’t commit to anything today.

Now, ROE as the investment bank was another question that you asked on a company-wide basis, I think my earlier response should suffice or I hope you would consider it to be sufficed. For Retail (inaudible) they are being done as one-time assets banking retail. And collaboration with the investment banking in fixed income I think we have been able to share with you at the appropriate juncture the results of these collaborations in the fourth quarter and the annualized basis (inaudible) I think. I hope that that would be stably attained as a company. That is my current thinking as CFO in terms of ROE.

ROE, 15% to 20%, that might be familiar to you. If we can achieve that, of course, that will be great. But we can assume that realistically we can’t expect the market to allow that to happen. I don’t think that would ever realize. Two equity financing was done over the last several years and when the environment is bad that underpins our business. But that in turn would mean more difficult ROE.

In the previous fiscal year, I think Wholesale was profitable, but I think that was only about 4% in terms of ROE, and for this year, the ROE is so low that I don’t want to even mention it. I’m embarrassed to mention it. So as far as Wholesale is concerned, continuous profitability from all aspects that correction has to take place. And based on that, 5% ROE on the continuous basis, and when that’s realized maybe we can be more aspiring. So, Wholesale, the global business has to be profitable on a continuous basis and then 5%. So, for the time being, this will be the target for us and we’ll be making efforts to achieve this.

Now we are – considering mainly about Asia, so China, Asia and Japan should environment improve in those markets then we would like to take advantage of that upside, we have a high volatility. And so when that phase arrives, then of course we would like to improve our profitability as a global investment bank that is based in Asia.

Unidentified Analyst

I see, thank you. What is the timeframe that you have in mind with regard to the targets that you’ve mentioned? What is the timeframe that you have in your mind? Could you share that?

Atsushi Yoshikawa

This is Ishikawa speaking. In my mind, the timeframe is two years. Some strategy changes need to be implemented, and based on them, we should attain continuous profitability and continuous 5%. For that to seem feasible, I think we should allow two years. Of course, it will be different should market change dramatically. But, more or less, ballpark two years is the timeframe that I have in mind.

Unidentified Analyst

Thank you very much. Thank you very much for giving very realistic response. Thank you very much.

Operator

The next question is from Goldman Sachs Asset Management, Mr. Tanaka.

Katsunori Tanaka – Goldman Sachs Asset Management

This is Tanaka from Goldman Sachs Asset Management. I have two questions. First of all, your – the selection of your business focus areas, while you reduce – are you also thinking about reducing your risk assets? And if so, how do you think – how do you view the capital ratio and the shareholder returns? Will there be any changes in your strategies?

My second question is from Q2 onwards the business environment, how do you view the business environment from Q2 onwards during the months of April, May and June? Based on the three months, how is July right now and how should we view the second quarter?

Junko Nakagawa

This is Nakagawa. Let me answer your questions. First of all, while we become more selective in our businesses, how we plan to reduce or control our risk assets or how we plan to control our risk assets. As we have been explaining from the past, we have to consider the returns based on the risk and also the capital usage of the assets and we have been assessing the returns very meticulously compared to the past and we have been putting up a lot of focus in this assessment. And we do not plan to uniformly lower all types of risk assets and we will keep some of the assets, which are part of the core business and also have potential for future growth. And so that – in order to invest in these core or future growth areas, we will reduce the other assets.

And as for fixed income, the return on the risk weighted assets has been improving very much. And going forward Tier 1 level, which are very high at the moment, we have been able to report very high Tier 1 levels, this is based on the relatively slow activity in the market, our clients and also ourselves. This is the main reason for the increase in Tier 1. But if you look further ahead in the future up to Basel III, the Tier 1 common ratio of 10%, which we explained earlier, there has been no change to the 10%, which we have in mind. But as Yoshikawa-san mentioned earlier, and also as was explained in today’s press conference, there are changes in the regulatory environment and things are still not concrete yet. So we will take some more time to make a decision on this and also on our shareholder return.

And also the recent trends in our business and also in the environment, as you’re all aware, the fiscal problems of the various countries in Europe are still continuing and they are exacerbating instead of calming down. So the tough environment is still continuing. And in Japan, there is the strong yen and the decline in share prices. But as the overall trend, we think the fixed income will continue to be the driver as it was in Q1. And we expect the equities business to continue to be tough – face a tough environment. And although we cannot give you some details in terms of the figures, but that’s the way we see the market environment. We think things will be – Q2 started in the same way or the same trend as we saw in Q1. Things at the moment are the same as in Q1.

Katsunori Tanaka – Goldman Sachs Asset Management

Thank you.

Operator

The next question is from JP Morgan, Ms. Tsujino.

Natsumu Tsujino – JP Morgan

Thank you. I have some questions on the quarter that ended. On page 13 of your earnings highlights documents you have a some of the corporate items adjustments. For a change, you are posting positive ¥6.6 billion, which means an improvement of about ¥14 billion from the previous quarter. In the fourth quarter, I think from corporate items, many have been allocated to the segments, including the liquidity forecast. Then, in the first quarter, why is it that we are seeing positive figure and cost allocation even if it were to progress further, or if – even if it had progressed? I think it’s kind of irregular that it had ended in a positive figure, so could you explain why this is? That’s my first question.

The second question. In EMEA and Americas and Asia, about the head count allocation, resource allocation, fixed income and equities, revenues on a quarterly basis I’ve been following the development and you always mention them. And when I look at these developments we see elastic line in EMEA. The fixed income revenues although it declined on a quarter-on-quarter basis, I think ¥20 billion plus has been steadily changed about 1.5 times the Americas and for equity, 1.0 or 1.5 times the Americas.

And with regards to the head count allocation, I think it is now comparable. And when I look at page 35 of your presentation through maybe EMEA’s were – or Europe had too many people now reaching – nearing the most appropriate level. So, going forward, if you were to reduce the head count in Europe further I’m afraid that might lead to the revenue decline as well. But shifting from Europe to the Americas, revenue might increase. How do you explain that? And with the reduced head count if that entails reduced revenues, that’s sad. So I wonder how you are planning to counter that.

Junko Nakagawa

This is Nakagawa. I’d like to answer your first question. The corporate items, why do we have the positive figures for this quarter. Subsidiaries that belong to the corporate especially primarily in domestic, including the branches and the real estate management, but that would be others with net – no, there are some that are affiliated with the corporate as well.

The facilities and facilities and supplies management subsidiaries are included as well. The variance comes from the following in the fourth quarter because it was the end of the fiscal year and the first quarter is the beginning of the fiscal year. They are – there tend to be a big gap and there were some of the items that were recorded with a certain lag, recorded in the first quarter. I apologize for this very complicated story, but all these factors added, resulted in positive figure.

On a global scale, we have a business by different divisions and the recognition on the part of the business, these divisions and the recognition on the part of the corporate could be made at different timing sometimes and in reporting the business results, there are some expenses that are allocated to the corporate and usually that happens, that concentrates in the – towards the end of the fiscal year. And the lack thereof resulted in this big positive figure recorded in the first quarter.

Natsumu Tsujino – JP Morgan

So would that mean, Nomura Real Estate Holdings is included in Others, but facilities-related subsidiary, that in corporate items, is that the correct understanding? And if that’s the case, on a quarter-on-quarter basis, maybe that, what you said explains the difference. But in the second quarter, the fact that the first quarter was positive maybe that was distorted and second quarter will be more normalized. Does it mean that we should expect a decline in the second quarter and the liquidity pool cost that were not allocated, I think were concentrated in this area, but have they all been reassigned and there is no part of that included in the first quarter?

Junko Nakagawa

This is Nakagawa speaking, I think you asked two questions about the future prospects, what should we expect I think was your second question. The recording in different quarters tend to happen on a quarterly or at the end of the fiscal year and at the end of the half year, we tend to see that big a difference. We do have the internal dealings and therefore there always is this mismatch in the recording. So I hope you would appreciate the consequence of that.

And the cost related to the liquidity pool, yes, as you have correctly put it out and at that the investors meeting or at CEO Forum, I think, Ms. Tsujino, you answered a question and I answered your question and as per what I explained there, we are making a progress. But for all the costs to be allocated to business, that is not our end purpose. If the resources, liquidity or funding is being used for appropriate (inaudible).

So to be able to appropriately measure the return, we are making this allocation. If the return is low, the allocation would be limited whereas if the return is higher on a request basis, we would allocate more on a float basis and we have been doing that since last fiscal year or last quarter and more so this quarter. But with the request or the rules by the regulators, we have to be rather conservative and we do have some excess for unallocated. And, therefore, for this unallocated liquidity pool that would be included in the corporate items but for other excess depending on how much the fund operation would like to use that, it will vary. But as an overall direction, it is – as a trend, it is declining as you had correctly observed. But, going forward, it may vary depending on the usage.

Natsumu Tsujino – JP Morgan

If I could grill you further, hundreds of millions of yen are still included and the impact of this mismatch in the recording period is still significant. Is that correct?

Junko Nakagawa

Yes, that is correct.

Atsushi Yoshikawa

This is Yoshikawa. When we compare EMEA and the Americas, we still have not conducted detailed calculations, but from last year to this year in Wholesale, we have reduced our cost significantly, and, as a result, the revenues have declined, but I don’t think it has gone down that much, just off the top of my head and we can’t brag about the decline in the profits or the income, but as for our business franchise so far, it has not broken down. And, of course, as for the future, we have to consider whether to tear down some of the businesses, and what to protect, we will review each of these businesses and that’s what we will be working on.

And as you know, in the Americas or in the U.S. economy is slowing down and there’s a lot of headwinds to Wall Street, but it still is a very big market and a lot of players are actively participating in the market. Investors are always looking for something new and when we look at the U.S. market, especially European investment banking divisions of universal banks seem to be shrinking. Their offices including assets and also the head count, so our clients tell us that the service level is declining for these European players. That’s what our investors tell us. Also investment banking clients tell us that as well and we’re not going to cover all of these businesses, but part of that could be covered by Nomura, which represents Japan and Asia, so we are a foreign player in the U.S., but we can cover some of the businesses, which the western players have withdrawn from.

As for Europe, I haven’t worked in Europe, so this is just I’m just getting, but Europe is a home market for the European financial institutions and they want to guard that home market. So the question is how much revenue we can grow? How much market share we can achieve as an Asian player? And, frankly speaking, I’m not sure and I tend to be biased towards the U.S. or the Americas. And I think it’s relatively easy to gain market share in the U.S. compared to Europe. So but as COO, I can’t focus too much on the U.S., so I will study the other regions and decide what the adequate amount of focus to put in each regions and which businesses to expand in Americas, which business we have to lower the risk weighted assets.

Natsumu Tsujino – JP Morgan

Thank you.

Operator

The next question is from Ohno-san of Barclays.

Azuma Ohno – Barclays

I have one question, as for your costs, as you mentioned in the previous reply to a question, so far the impact has been ¥13 billion, so that is relatively small compared to the $1 billion so can we expect continuous cost reduction at the same level for each quarter or will the Wholesale costs settle at the current level?

And the second part of my question is as Yoshikawa-san, the COO explained, you said the cost-cutting was still insufficient, what kind of figure do you have in mind? What is sufficient to you? Could you give us a ballpark figure of as to what you think is sufficient for cost-cutting?

Atsushi Yoshikawa

Okay. I’ll let – Nakagawa will answer the first question.

Junko Nakagawa

The ¥13 billion I mentioned earlier and also the future cost-cutting impact. The cumulative figure for the three quarters is roughly ¥13 billion per quarter, that’s the net decline in costs. And we’re not disclosing too much in terms of details so – and it might be difficult for you to confirm that figure, but on a run-rate basis, we will cut our cost by $1 billion, that’s what we committed.

And, at the moment, it’s difficult to explain how much costs we have cut on a run rate basis, but if you look at the Q1 costs for Wholesale, and you can multiply that by four to get the rough figure for the annualized figure, which is roughly ¥7 billion or ¥6.8 billion – ¥6.9 billion, as we explained with Shibata-san in the past announcements. And I think the figure will be quite close to that ¥6.8 billion or ¥6.9 billion figure.

And as for the future decline in costs, which you asked about in the second half of the question, as for the personnel and compensation expenses, the cuts has been pretty much completed. But as a result of the decline in head count, some travel expenses will be reduced. There’s still – there’s a time lag for these travel expenses, et cetera, to start coming down. So in the second half of this fiscal year, it will show up in our P&L and we have achieved what we promised to show in the second half three or five months earlier to our initial schedule.

Atsushi Yoshikawa

This is Yoshikawa. As for the figures, we do have a rough image in our head, but we still do not have the basis for giving you the figures yet. So I don’t want to give you information that is too soft. So I will not talk about the figures, but over the next month or so we will review these figures more carefully. And, after that, I would like to give you more detail on this issue.

So far, there have been various indirect expenses and we have been cutting these indirect expenses. But going forward, if we are to fully expand our business, there are people working in each of these business lines. So the question is how to treat them fairly and how to control our cost fairly.

So, I don’t want to give out the head count reduction target or the head count target and also the amount of personnel expenses ahead of our schedule and we should avoid unnecessary impact from making these announcements too early. So please forgive me in disclosing the figures a little bit later than your expectations.

Atsushi Yoshikawa

Thank you very much. This is Yoshikawa speaking again. We so far have been engaged in speedy decision-making, proactively addressing changes in the revenue environment faced with difficult economic situations, unclear market environment and new regulatory environment. We as a Wholesale division, feel the need to explore and build a new business model. As the new COO of the Wholesale division, I will like at this juncture to re-examine the situation at Wholesale and identify our direction going forward, which I hope to share with you on at a separate occasion. I ask for your continued support and understanding.

Finally, but not the least, I renew our apologies for causing enormous inconvenience to you in relation to the issue of insider trading related to our public offerings. We at Nomura will work on further enhancement of professional ethics for our executives and associates not to mention compliance so as to regain people’s trust in us.

I thank you for your participation in this earnings conference call despite the last-minute changes in schedule. Thank you very much.

Operator

Thank you for your taking time and that concludes today’s conference call. You may now disconnect your lines.

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