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Nomura Holdings, Inc. (NYSE:NMR)

Q1 FY09 Earnings Call

July 29, 2008, 8:00 AM ET

Executives

Masafumi Nakada - Executive Officer, CFO

Analysts

Operator

Please be reminded that today's conference call is being recorded at the request of the hosting company. Should you have any objections, you may disconnect at this point in time. During the presentation, all the telephone lines are placed in 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 type, number, and timing of transactions.

With that, we would like to begin the conference. Mr. Masafumi Nakada, please go ahead.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Thank you very much. Good evening, ladies and gentlemen. Thank you for taking time out to Nomura Holdings conference call to review our financial results for the first quarter ended June 2008. I am Masafumi Nakada, CFO of Nomura Holdings, Inc.

Let me start with page four of the presentation material. Net revenue for the first quarter of the fiscal year ending March 31, 2009, was 135.1 billion yen. We reported a loss before income taxes of 84.3 billion yen and net loss of 76.6 billion yen for the quarter. The losses are the result of a conservative evaluation of our investment assets, in line with the accounting standards following further review of risks in order to limit future downside risks amid the increasingly crowded economic environment.

We have moved aggressively from last year to deal with our risky portfolio by exiting the U.S. residential mortgage-backed securities business, reducing our commercial mortgage-backed securities portfolio, and addressing our exposure to monoline insurers.

During the first quarter, we stepped up our initiatives to deal with our risky portfolio. The losses for the quarter stem from three main areas: first, we moved to prevent future losses from transactions with monoline insurers that have been downgraded due to deteriorating creditworthiness. As a result, we increased credit provisions to cover 85% of our gross exposure with monolines and booked a loss of 63.1 billion yen. I will go into more detail in a moment; however, we believe that we have now mostly finished dealing with our exposure to monolines.

Second, we wrote down total of 37.3 billion yen on private equity investee companies, which we see as having a high risk of experiencing a deterioration in earnings. We revalued these companies in line with current conditions in order to ensure increased flexibility in future, including ongoing measures aimed at restoring business performance over the medium and long term. Third, because Fortress is an equity-method affiliate, we took in an impairment of 21 billion yen on our stake due to a decline in the share price.

In addition, we have continued raising subordinated funds during the first quarter. We have now raised a total of 600 billion yen from bond insurances and the loans, thereby enhancing our capital structure. By moving to limit downside risks and strengthen our capital structure, we have laid the foundation to capitalize on the business opportunities as they arise.

Although the environment is very tough for generating revenue, we succeeded in expanding businesses with future benefits.

Please turn to the next page. In our retail operations, Domestic Client Assets increased by 3.6 trillion yen from the end of March to 75.8 trillion yen. Net asset inflow was 1.07 trillion yen, an increase of 52% on the prior year quarter. Funds continued to flow into investment product during the quarter with strong sales of both newly launched and the existing investment trusts. Our retail operations from... sorry, our retail operations form a solid foundation for our business and we remain focused on further expanding our client base.

We are also seeing progress in our wholesale business backed by our extensive global network and strong financial position. In the first quarter, we acted as financial advisor on a major cross-border M&A deal and topped the first half league table for M&A involving Japanese companies.

In addition, we invested in Ashikaga Holdings. So we are establishing a steady track record despite the reduction in the market for the supply of funds for businesses as a result of the uncertain economic environment.

Now I will outline our exposure to monoline in more details. Please turn to page seven. The top half of this chart shows the notional amount, gross exposure and the counterparty risk reserve as of June 30 for credit derivative transactions with monoline carried out by our European Global Markets operations.

As shown in the row entitled Others, we have made full provisions for our gross exposure to counterparties that has been downgraded and are believed to be facing a serious decline in creditworthiness and implemented various hedging operations to prevent future losses. For exposure to other monolines, we have made valuations based on a tough market outlook and booked additional provisions. As a result, we have limited losses for 74% of the gross monoline-related exposure shown here and have a net exposure of US$174 million.

Our outstanding notional amount with monoline we haven't finished loss limit operations for was US$3.1 billion as of the end of June. Of this, $430 million references is commercial mortgage-backed securities and we have already made provisions for about two-third of the gross exposure for this notional month.

While there is still a possibility that we may experience limited fluctuations due to hedging, we believe that with the actions taken so far, we have mostly finished dealing with our exposure to monoline.

Please turn to page eight. This page shows our consolidated balance sheet. As I mentioned, we have now raised some 600 billion yen in subordinated debt, including the funds raised through issuing subordinate bond in March. Long-term borrowings increased by is 548 billion yen during the quarter. In addition, our shareholders' equity remained around the same level as the prior quarter at to1.95 trillion yen, and the gross leverage remained low at 13.4 times, allowing us to maintain a solid financial position.

We plan to disclose more detailed figures including the fair value of financial instruments when we submit our quarterly financial report on the August 18. As such, we have revised the way we disclose commercial mortgage-backed securities and other securitization products.

If you turn to page 23, you will see a section entitled Securitization Product Holdings. In response to a request from the regulatory authorities, we will now use this format to disclose our holdings.

Securitization products disclosed to-date has exposure to the U.S. CMBS-related business are not shown here in the chart. They are classified as whole loans under the new disclosure standard. Please refer to the footnote for the figure of the U.S. CMBS-related businesses on this page.

So please turn to page nine. This page shows net revenue and income before income taxes for each business segment. Despite the tough environment, Domestic Retail, shown here in blue, booked income before income taxes of the 16.2 billion yen, an increase of 46.4% from the prior quarter. Asset Management, shown in red, saw income before income taxes roughly triple quarter-on-quarter to 7.6 billion yen.

Commissions for distribution of investment trust increased from the previous quarter, thanks to the development and introduction of new products matched to the needs of investors and the robust sales of existing and newly launched investment trusts.

The Nomura Japan Value Attractive Dividend Stock Investment Fund 0805 launched in May had inflows of over 70 billion yen and the Nomura Multi Currency Attractive Dividend Japan Stock Fund launched in June saw inflows of over 100 billion yen.

Heading into the end of the year, we expect to see an increase in people bringing in share certificates currently held at home, which when combined with the market for retirees represents a significant opportunity to expand our customer base of individual investors.

Our three other business divisions were significantly affected by the market deterioration. Global Markets booked income before income taxes of minus 61.6 billion yen, due mainly to the provisions for monolines. Global Investment Banking recorded income before income taxes of 12.6 billion yen, as income of 19.4 billion yen related to a settlement agreement with the Czech Republic over IPB more than offset a slump in equity financing due to the seasonal factors and depressed stock prices.

Global Merchant Banking booked income before income taxes of minus 39.4 billion yen due to the valuing certain private equity investee companies at fair value.

Internationally, we saw a new development in our asset management business in the United States where we have been undergoing a review of our operations. We were appointed by the Japan Fund, the oldest independent to U.S. mutual fund focused on investing in Japan, to be the investment manager of the Fund's assets, marking our expansion into the U.S. retail mutual fund market.

And in India, where we have established a track record as extensive as our foreign competitors, we gained the membership to the two largest bourses allowing us to commence brokerage operations and we now plan to start full-scale operations in India.

Turning now to the expenses, non-interest expenses totaled 219.4 billion yen.

Sorry, please turn to the page 16. This stage shows the expenses. As I already mentioned, non-interest expenses totaled in the quarter 219.4 billion yen, down 0.2% from the prior quarter and up 7.1% year-on-year. Already mentioned, as we expect the difficult conditions to continue, we are reviewing our costs and expenses very carefully and seriously. In this quarter, commission and floor brokerage, information processing and communications, occupancy and related depreciation, and business development expenses, all saw marked declines from the previous quarter.

Although compensation and benefits increased 12.1% from the previous quarter due to seasonal factors, there was a year-on-year decline of 12.7%, reflecting business results. Other expenses increased by 12.8% due to the impairment of our stake in Fortress. Please see page 16 for further details regarding expenses.

From the first quarter, we have started applying FAS 157 and FAS 159. As a result, we booked 3.0 billion yen in revenue as the net effect of fair value of certain self-funded structured bonds and credit valuation derivatives.

To conclude, we expect market conditions to remain difficult, as I already mentioned, for some time and will continue to respond flexibly by implementing risk management geared to anticipating risks. Despite the current environment, we remain focused on stepping up investment to seek growth over the medium to long term. We will be proactive and won't limit ourselves to organic growth. The fact that we have the financial and management means to do so is one of our strong points. We will also continue to watch closely for any changes to the business environment and work to increase revenues and improve shareholders value.

The first quarter dividend will be 8.5 yen per share, in line with our dividend policy announced at the beginning of the fiscal year.

That concludes today's presentation. We would now like to take your questions. Thank you very much.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question coming from the line of Mr. Brendan Freeman.

Unidentified Analyst

Hell, thank you for taking the time today. My question is on the monoline exposure. I think you said that there could be some additional losses. Would that mostly come from expanded credit spreads or additional downgrades? And what would be the sensitivity around spreads expanding to your income statement? Hello.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Yes, sorry. Firstly, the main reasonable factor of the loss on our monoline exposure in this quarter is the downgrading of the monoline companies creditworthiness. This is the main reason.

Unidentified Analyst

And how much sensitivity would there be to additional downgrades or additional credit widening from here at this point?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Okay. As you can see on the page seven, as of the end of June, we still have the gross exposure of US$314 million in total. Did you see the --

Unidentified Analyst

Yes, Yes.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Yes. Then we have now the counterparty risk results for this exposure 140... around 140. So our net exposure at this moment is around 174.

Unidentified Analyst

I guess, my question is that the difference between the notional exposure today versus three months ago, I think is due to tightening of credit spreads. If the credit spreads are to widen again, would your exposure increase significantly and would you have to take more provisions?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Yes. In... during the three months, of course, the market fluctuated and the liquidity spread also fluctuated. But compared to the end of both the quarters, the total gross exposure has not changed so much.

Unidentified Analyst

I see, I see. Alright, thank you.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions]

Masafumi Nakada - Executive Officer, Chief Financial Officer

So, hello excuse me, this is Nakada. I would like to just add or confirm this one point. At the end of my presentation I mentioned about FAS 157 and 159. As I said from the beginning of this quarter, we have started applying FAS 157 and 157. Then the impact of this new rule's implementation was 13.3 billion yen... 13.0 billion yen. This is a point I would like to reconfirm. Thank you very much.

Operator

Thank you. [Operator Instructions]. And our next question coming from the line of Mr. Achilo Kai [ph].

Unidentified Analyst

Hello.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Hello.

Unidentified Analyst

Hello, Nakada. On page 23, you mentioned you still have about 1.3 billion of U.S. CNBS position as of June. Can you just comment on what actually happened on this CNBS exposure, any losses or any impact from the market aside, separately from monoline exposures?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Alright. Firstly I would like to mention that the exposure of CNBS operations in the United States as of end of March, we have almost the same amount of the exposure. So which means in the last three months or in the first quarter, the positioning has not been changed so much. We adjusted [ph] the same level of the exposure.

Unidentified Analyst

Okay. And --

Masafumi Nakada - Executive Officer, Chief Financial Officer

Sorry, during the quarter, we also have so called hedge operation for this exposure. Then... but there were some of so called hedge [ph], then we had the small amount of negative impact on our P&L. But compared to our total exposure of 1.3 billion, the impact was very limited.

Unidentified Analyst

And this... the limited negative exposure just came from marking to market or actually selling some position, or from basis risk from hedging? Where was this little negative impact coming from?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Sorry, mainly mark-to-market.

Unidentified Analyst

Okay. And then additionally going forward, what is your expected risk of having any losses as you see maturity of some of these CNBS as they close to maturity, when you need to respond it, do you expect any loss from that?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Of course, the --

Unidentified Analyst

Depending on the value of the underlying assets.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Of course. And of course, it depends on the markets, particularly the credit markets. And particularly every quarter we are very carefree to review our portfolio over CMBS. Then we evaluate the portfolios value and then as we already mentioned, it should be fully dependant on the market and the quality of portfolio's assets.

Unidentified Analyst

Okay. And how much are you hedged for this exposure of CNBS? I think the monoline... I thought you only have a few hundred million of monoline contracts for the CNBS. What's your net exposures on the CMBS after hedging?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Okay. Firstly, I would like to tell you the break down of our commercial CNBS portfolio. Roughly speaking, one third [ph] of total portfolio is whole loans, then one-third secondary bonds.

Unidentified Analyst

Okay.

Masafumi Nakada - Executive Officer, Chief Financial Officer

And for the secondary bond operations, we have almost three hedged [ph].

Unidentified Analyst

Okay.

Masafumi Nakada - Executive Officer, Chief Financial Officer

And for the whole loan positions, not to say exactly, but the... generally speaking, it is rather difficult than the secondary bond position due to the hedge the additional loan position. But we are now trying to manage with the addition of whole loan portfolio very carefully having the... very flexible hedge manner [ph].

Unidentified Analyst

So versus the 1.3 billion for this year, you are hedge about a third; a third of your position is hedged?

Masafumi Nakada - Executive Officer, Chief Financial Officer

Sorry. As I said, for the one-third of total portfolio, we have a 100% hedged. Then another two-third over the portfolio, the hedge rate is very flexible, but roughly speaking, we have almost 60% or 70% hedge in total.

Unidentified Analyst

Okay, thank you.

Masafumi Nakada - Executive Officer, Chief Financial Officer

Thank you.

Unidentified Analyst

Thank you very much.

Operator

[Operator Instructions]. We have no questions, Mr. Nakada.

Masafumi Nakada - Executive Officer, Chief Financial Officer

So, thank you very much everybody. I'd like to conclude and close the presentation of our results for 2009 first quarter. Thank you very much for your attention, thank you.

Operator

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

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Source: Nomura Holdings, Inc. F1Q09 (Qtr. End 06/30/08) Earnings Call
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