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Nomura Holdings, Inc. (NYSE:NMR)

F2Q13 Earnings Call

October 29, 2012 5:30 AM ET

Executives

Atsushi Yoshikawa – Group COO; and CEO, Wholesale Division

Junko Nakagawa – CFO

Analysts

Masao Muraki – Deutsche Securities

Tsujino-san – JP Morgan

Tanaka-san – Goldman Sachs

Sasaki-san – Mitsubishi UFJ Morgan Stanley

Jun Shiota – Daiwa Securities

Mitsumasa Okamoto – Merrill Lynch Japan Securities

Operator

Good day, everyone, and welcome to today’s Nomura Holdings Second Quarter Operating Results for Fiscal Year Ending March 2013 Conference Call. 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 for a listen-only mode. The questions-and-answer session would 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 evaluation, competitive conditions and size, number and timing of transactions.

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

Atsushi Yoshikawa

This is Atsushi Yoshikawa, Group COO. Thank you for joining us for Nomura Holdings’ second quarter earnings call. Some of you from the U.S. are joining from early in the morning, and I also understand there is a huge Hurricane Sandy approaching the New York area. So please take care and stay safe.

Today, I will first say a few words before handing over to our CFO, Junko Nakagawa, to give you an overview of our financial results. After that, we will take your questions.

At the Investor Day on September 6, we announced our management targets for March 2016, the year of our 90th anniversary, and a series of measures for our wholesale business. Since then, I have had the opportunity to speak to many stakeholders, and I would like to thank you all for your encouragement and your valuable feedback.

The earnings environment remains challenging for global financial institutions. The most pressing issue for Nomura is to lower our breakeven point in Wholesale to deliver stable earnings without relying on a market recovery. At the same time, we need to understand the diverse needs of our clients, further enhance cross-border and cross-divisional collaboration and provide high value-added solutions.

In our second quarter results, which we are about to run you through, Retail and Asset Management continued to deliver stable earnings. And within Wholesale, Fixed Income made a solid contribution to revenues in each region. In addition, in Investment Banking, closer collaboration across regions and divisions in our focus sectors of FIG, Financial Sponsors, Retail/Consumer and Resources/Energy led to a number of cross-border mandates and we gained further traction during the quarter.

On the other hand, the equities market remained challenging with subdued market activity and lower liquidity on major markets. However, since announcing our Fit for the Future plan, we have communicated closely with our clients regarding our new business model to consolidate our execution services into Instinet. While there are slight differences by region, on the whole, we believe investors are starting to understand our strategy.

With that, I will now hand you over to our CFO, Junko Nakagawa, to run through the highlights of our Q2 results.

Junko Nakagawa

Nakagawa speaking, CFO. I will now give you an overview of our financial results for the second quarter of the fiscal year ending March 2013. Please turn to page three of the document titled Consolidated Results of Operations.

Net revenue for the second quarter was ¥401.7 billion, an increase of 9% compared to the last quarter. Pre-tax income was ¥35.4 billion and net income ¥2.8 billion, representing quarter-on-quarter increase of 80% and 49% respectively. This was our fourth straight quarter of profits.

Pre-tax income for our three business segments totaled ¥15.7 billion and all business divisions were profitable. Despite the challenging environment, Retail and Asset Management remained resilient, contributing to firm-wide earnings.

Wholesale returned to profitability on higher revenues in the Americas, EMEA and Japan, driven by Fixed Income. This more than offset an increasing expenses of approximately ¥6 billion related to a reduction in head count.

For the first half of the fiscal year, net revenue was ¥770.9 billion, up 22% over the same period last year. Pre-tax income was ¥55.1 billion and net income ¥4.7 billion. As such, we returned to profit on half-yearly basis compared to the losses in the previous year first six months.

Page four gives you an overview of the results and page five business segment results. Total income before income taxes from the three businesses segment was as previously mentioned, ¥15.7 billion for Q2 and for the first half ¥24.7 billion. In the second quarter, we also reported ¥12.4 billion unrealized gain on investments in equity securities held for operating purposes, which includes unrealized gains from unlisted equities.

Now, overview of each business segment, please turn to pages six and seven for Retail. The market environment in Retail remained challenging in the second quarter with subdued investor risk appetite. Net revenue declined 2% from the prior quarter to ¥80.8 billion. Pre-tax income declined 10% to ¥11 billion. Sales of bonds slowed due to the low rate environment, but investment trust sales are resilient compared to the overall market. Retail revenues were also supported by stock sales related to large primary offerings.

The graph on the bottom left of page seven shows a slight net outflow of client assets, but we continued to expand our client franchise and the number of client accounts exceeded 5 million as shown on the bottom right.

While we expect the challenging market environment to continue for some time, we remain focused on providing consulting based services to meet the needs of our retail clients.

Please turn to pages eight and nine for Asset Management. Asset Management reported net revenue of ¥15.4 billion and pre-tax income of ¥4.6 billion. Although revenues declined 6% quarter-on-quarter and pre-tax income was down 15% from last quarter when we booked revenues from dividends, Asset Management continued to control costs and deliver stable earnings for the firm.

The investment trust business booked inflows mainly into public stock investment trusts, thanks to a product offering matched to the diverse needs of our clients and continued sales support.

In the investment advisory business, we continued to win international mandates for high yield bonds in Japanese and Asian equities.

As shown on the bottom right of page nine, defined contribution pension system is gaining popularity in Japan and the number of participants has increased by 4.4 million over the past 10 years. Nomura Asset Management has gained an industry-leading market share by assets under management by expanding its lineup of defined contribution investment trusts and collaborating with other divisions in the firm. We are now focused on providing a diverse range of investment opportunities and enhancing investment performance.

Please turn to page 10 for an overview of Wholesale. Wholesale reported net revenue of ¥137.1 billion, an increase of 12% quarter-on-quarter. As already mentioned, we booked a one-off charge during the quarter of approximately ¥6 billion for expenses related to our cost-cutting program, and yet Wholesale returned to profit with income before income taxes of ¥200 million. As shown on the bottom left, revenues were well-balanced across all regions.

Next, breakdown of Wholesale results starting from Fixed Income on page 11. Fixed Income net revenue increased 24% from the last quarter to ¥88.6 billion, the highest level in nine quarters. Revenues were well-balanced across all products and regions. The graph on the top right shows growth in both international revenues and our global client franchise.

Now, page 12 for Equities please. Equities reported net revenue of ¥32.1 billion, a quarter-on-quarter decline of 14%. Client revenues declined on the back of subdued trading activities globally. In trading revenues, lower liquidity and volatility on major markets affected revenues from derivatives business. Given this environment, we started reorganizing our equities business as announced in September.

We are migrating execution services in Europe, the Americas and Asia to Instinet and consolidating our derivates business for greater efficiency and to enhance our product offering and services.

Please turn to page 13 for Investment Banking. Investment banking net revenue increased 24% quarter-on-quarter to ¥16.4 billion. Gross revenue was up 40% at ¥33.3 billion. ECM revenues increased primarily in Japan and EMEA, and we won a number of mandates in our focus sectors and key products in each region.

We continue to see results in our global business during the second quarter. As shown on the right, we executed a number of high profile M&A deals and financing transactions centered in Asia. We were also involved in local deals in EMEA and the Americas in the natural resources sector and businesses for financial sponsors and financial institutions. We will continue to focus on areas where we have a competitive advantage.

Please turn to page 14 for an overview of expenses. Non-interest expenses increased 5% in the second quarter to ¥366.3 billion. The main factors behind the increase include one-off expenses of ¥6.7 billion related to Wholesale cost reductions were booked in compensation and benefits, and a goodwill impairment charge of ¥8.3 billion related to Wholesale was booked on other expenses. Excluding these one-off costs, firm-wide expenses were roughly unchanged from last quarter.

Page 15 gives you an update of our cost reduction program announced on September 6th. The $1 billion cost reduction in wholesale is allocated as 43% in personnel expenses and 57% in non-personnel expenses. Personnel expense reductions will be achieved through headcount reductions, postponing the replacement of leavers, curbing new hires and business efficiencies. The reductions for non-personnel expenses include controlling IT system expenses and cost saves related to head count reduction. As of the end of September, 27% of the planned reductions were underway. This slide outlines the schedule we are working on – working to in order to achieve our target by the end of March 2014.

Please turn page 16 for an update on our balance sheet. Total assets at the end of the quarter were ¥35.4 trillion, gross leverage was 16.9 times and net leverage was 10.6 times. Our capital ratios at the end of September shown on the bottom left are roughly unchanged from the end of June.

Page 17 shows our funding and liquidity. I will leave it for you – leave it to you to look through it later, except to say that there are no significant changes from the end of June.

Page 18 shows our exposure to European peripheral countries. Our net country exposure at the end of September was $3.19 billion, representing an increase of $980 million from our exposure of $2.21 billion at the end of June. The increase is mainly attributable to a rise in sovereign related inventory in Spain and Ireland. However, this exposure consists entirely of trading assets that are marked-to-market on a daily basis and we are managing our positions prudently.

That concludes the overview of our Q2 results. Today, we also announced a dividend of ¥2 per share payable to shareholders of record as of September 30, 2012.

Question-and-Answer Session

Operator

We have a question-and-answer session now. (Operator Instructions) The first question is Mr. Muraki of Deutsche Securities. Muraki-san, please.

Masao Muraki – Deutsche Securities

Thank you very much. I would like to ask two questions. First of all, this is the question I ask on regular basis and that is with regards to revenues by region, Wholesale’s revenues in totality is shown on page 10, Fixed Income and Equity. Could you give us a breakdown by region for Fixed Income and Equity?

Second question is with regards to dividend, last year’s full year dividend was ¥6 per share on full-year basis. First half dividend was decided on ¥2. What’s the backdrop? And unless the performance outperforms the dividend policy, will two – this level of ¥2 dividend be considered as the minimum level, the floor?

Junko Nakagawa

Then, the country breakdown of revenues, first of all on Equity excluding Instinet, if we count the totality as 100%, EMEA accounts for the mid-40% range, 45%; Americas slightly below 30%; Japan approximately 20%. Asia excluding Japan is a little less than 10%. That’s the breakdown. And as far as Fixed Income is concerned, 30%, 35% is accounted for by EMEA and the Americas also have more than 30%. Japan slightly over 20%, and Asia excluding Japan 15% plus or minus. That’s the breakdown. Thank you.

Then on the second question with regards to dividend policy, I’m not so sure whether I’d be able to give you a straightforward response. Our dividend policy is to provide for stable dividend to our shareholders. And taking that into consideration, we’ve decided to pay ¥2, which is the same as the first half in the previous term.

With regards to the full-year total dividends, well, (inaudible) all I can say is we will take into consideration the environment and performance on full-year basis, but cost reduction will lead to improvement of our profitability, especially reduction of the breakeven point and also the negative impact of cost reductions to revenue can be controlled and minimized. So far, we’ve been able to do that. So top management included, we are feeling the outcome of these efforts. And as we proceed into the second half, we will consider the situation and think positively of returning benefits to our shareholders.

So whether ¥2 is the floor, of course, we hope to pay more if performance improves. However, then on the other hand, in the second half, we will look at the performance, this is not a fixed level. We will look at the performance and the environment and decide on the specific dividend amount.

Masao Muraki – Deutsche Securities

Thank you very much. I have a follow-up question on both the first and second point. First of all for Equity and Fixed Income, EMEA and the Americas play major roles. But what about derivatives related revenues, equity derivatives? I assume that the top line is negative. OTC derivatives regulation will become more stringent in the future. What is your outlook? On page 12, you said – you mentioned decline, you will be restructuring this business?

And a follow-up question on the second question. This is not directly linked to dividend, but currently, in 2019 basis common stock tier 1 ratio, I would assume it’s around 8%. Do you consider that the current level of capital adequacy is sufficient or do you think that further surplus – retained earnings is necessary?

Junko Nakagawa

On equity derivatives business, we don’t disclose the substance – the environment was challenging as you had pointed out. Same applies to turnover, and volatility was low, and therefore, it was difficult for us to capture opportunities to be profitable. And previously, equity-linked products were being offered but situation prevailed difficult on mark-to-market basis, and I think our peers who are dealing with similar products faced a similar environment.

How will the future unfold? I do not have any specific views, but in each derivative team, there had been too much distribution. So we try to concentrate and converge into smaller number of teams and have people responsible. And each desk had its own dedicated sales people and traders, but to a certain extent, we’ve tried to integrate these multiple teams in order to improve efficiency in this business, or depending on how the market prevails, we try to be more focused and concentrated on the opportunities we capture.

So are we going to exit from the derivatives business or parts of the derivatives business? No, that is not the case, but we’re trying to reduce cost in order to manage the group to fit the surrounding situation better and we are trying to adapt to the current market environment. However, if we take into consideration the regulatory trend, especially on the derivatives front that are not centrally settled, what kind of initial margin will be charged, various proposals are on the table. And therefore, we have to be watchful of the regulatory trend and respond to any changes on the regulatory front.

On the second point, 2019 exit tier 1 ratio based upon the 2019 exit criteria, according to our simulation, we expect that we would be able to ensure enough capital. Of course, risk-weighted asset that is not the core or that is not directly linked to business will try to be minimized and also we intend to have a buffer zone in terms of retained earnings, but we think that the current level is sufficient. Thank you very much.

Operator

The next question is from Tsujino-san of JP Morgan.

Tsujino-san – JP Morgan

My first point is about the restructuring expenses and how you plan to book it in the future. And today, the progress, you showed the progress on the presentation for personnel expenses, 35%. For this personnel expense, you plan to book a figure by September-end, so there will be more expenses – restructuring expenses in accordance to the progress of the restructuring.

And for the corporate items, the cost of the liquidity pool, the unallocated costs, there are very little unallocated costs left. So right now, things have normalized. Is this the way to understand it?

My third point, some of the equity earnings of affiliates would be unlisted stocks, the unrealized gains on investments held for operating purposes. Why did you conduct this at this timing? Right now, the level of Japanese equities are all lower than people’s theoretical levels, but why did you choose this timing? And there are some equities that are under book value, but what methods did you use to revise the value, and how many shares or stocks are in this revision – included in this revision?

Junko Nakagawa

So let me answer in order of your three questions. First of all, the restructuring expenses, the 35% progress for personal expense meant ¥6.7 billion. Yes, your understanding is roughly correct, but as I explained earlier, the personal expenses reduction in the future also includes the non-replacement of peak leavers, and we plan to reduce the run rate through various methods. So we do not plan to achieve the entire amount only through the head count reduction. So you can’t really multiply the 65% against the ¥6.7 billion.

And also last year’s restructuring, we plan to conduct further restructuring on top of last year’s restructuring, and we would like to execute these reductions quickly and without a big time lag following the press release. And there will be restructuring expenses booked in relation to the progress. And we are expecting further expenses in relation to the restructuring, but the actual amount will not just be a multiple of the two numbers.

As for the liquidity pool, as we promised, we have been persuading the front offices and been allocating the costs, but there is some liquidity pool which we have to maintain which is not exactly related to the business segments, only in relation to the regulations. And there still is some unallocated expenses in corporate items and we do not expect this to go down to zero, unless there’s a big deregulation in the future. Going forward, we will revise the booking entities on a global basis and reduce the unnecessary costs in the future.

Your third point about the investment securities and also why now was your question I guess. And for the unlisted stocks, we believe the situation allows us to conduct more accurate mark-to-market valuations. And we had to review all of the values of the unlisted stocks on our books. And we have been discussing our accountants and based on the information that we have collected and also using a more accurate model, valuation model, we decided to objectively revalue these unlisted stocks. That’s the conclusion that we reached and we decided to revalue the values.

Tsujino-san – JP Morgan

How many stocks are in this pool?

Atsushi Yoshikawa

We cannot give you the exact figure, but the total investment securities, there are about 380 stocks in the entire pool.

Tsujino-san – JP Morgan

But most of those are listed equities, right?

Atsushi Yoshikawa

Well, close to half are unlisted.

Tsujino-san – JP Morgan

Thank you.

Operator

Next question, Goldman Sachs, Tanaka-san. The floor is yours.

Tanaka-san – Goldman Sachs

My name is Tanaka of Goldman Sachs. I have two questions. First of all, the effective tax rate for the second half and your thinking behind. In the second quarter, with the Wholesale cost reduction one-time charge off and the impairment of goodwill has increased the effective tax ratio. If the top line remains unchanged, what would be the effective tax rate for the second half? That’s my first question.

Secondly, by region for the Wholesale segment, what’s your thinking behind revenue allocation? Second quarter EMEA and Americas showed improvement, but in Asia, revenues dropped. You are focusing on Asia, and in the midst of this strategy, is this momentum going to change as we go forth? Could we have your comment on this issue?

Atsushi Yoshikawa

Thank you for the two questions. On the first question of effective tax rate, let me try to respond. As far as the second quarter is concerned, the domestic and external tax rate is used as the assumption for the effective tax rate. Restructuring related costs and goodwill impairment had concentrated mainly in Europe. That being the case, especially revenue international, EMEA and the Americas are resilient, and if this trend continues, and we hope so, then relatively speaking, the domestic effective tax rate is beyond our control. But with contribution from international regions making larger contribution, we will be able to reduce the effective tax rate.

Then on Asia, let me try to make a comment. As you have rightly pointed out, we want to become Asia’s global investment bank. And yet, although we do have that motto, the Asia revenue contribution is not at its best. We’re struggling. As we explained on the investor day in September, Asia’s potential as well as Nomura’s position within the region will become more important. It should. And that is why we need to take measures right now.

The share of Asia in global fee pool is being calculated by a certain consultancy, 25% and going up to 41% in 2015. That’s one benchmark, and as we had shown, we – we’re not looking at Asia alone, but comparison between Asia-U.S. and Asia-Europe and cross-border deals between these different regions are being captured, and our market share still remains low. So these are the areas that we are focusing on in our Asia strategy.

But at the same time, as you know, we can no more in – there are financial institutions that have chosen not to increase their investments and to rather withdraw from the Asian market. And in the midst of not so many business opportunities, we are studying what business opportunities we can grasp.

Even under such circumstances, there are two main points, one is the domestic Asian countries markets that we had not gained foothold into, mainly China, and obtaining licenses in that major market is something that we have been focusing on.

Of course, this is about obtaining licenses, so we cannot specify any timeline but that’s one focal area. And secondly, Japan is the stronghold of Nomura and how we can connect our strength in Japan to expand our Asia business, so Asia including Japan is our mother market.

And Project Mother Market has been launched with the Group, and this is to promote deals between regions and also to increase not only Wholesale but cross businesses between Asset Management and Retail. And we’ve been doing wealth management in Asia, so including the wealth management team in Asia, can cross-border as well as cross-division business be promoted.

Already twice meetings have been held, and we’ve come up with some specific ideas on what areas the team are to be focusing on. So step by step, we wish to capture the business opportunities in Asia to – for those opportunities to make contributions to our results. And by so doing cross border M&A between Asia and Japan and between Asia and other regions, M&A accompanied by solutions leading to profits. This kind of business model is sufficiently viable, and we are taking measures in order to capture those opportunities.

Tanaka-san – Goldman Sachs

Thank you very much.

Operator

The next question is from Mitsubishi UFJ Morgan Stanley Securities, Sasaki-san.

Sasaki-san – Mitsubishi UFJ Morgan Stanley

Can you hear me?

Atsushi Yoshikawa

Yes.

Sasaki-san – Mitsubishi UFJ Morgan Stanley

I have two questions. First of all, the unrealized gain on investments held for reporting purposes, in your annual disclosure – in your disclosure, you explained about ¥20 billion of unlisted stocks which does not have market value. Is this the stocks which – for which you changed the value – revised the value? I think there is also some unrealized losses or losses from the mark-to-market but some – could you explain a bit more detail about the – in relation of the ¥20 billion worth of stocks?

Next, about the impairment of goodwill, the ¥8.3 billion. I think the balance of the goodwill in Wholesale is about ¥70 billion. Why did you decide to book this ¥8.3 billion? And is there a possibility of further impairment for the remaining amount of goodwill?

Junko Nakagawa

Thank you. Let me answer the two questions. For the first question, your understanding is correct. For stocks for which the market valuation is difficult, they have been included in this revision that we conducted in this quarter. For the second point about the impairment of goodwill, as we pointed you out as of March 2012 on our annual disclosure, I think that’s what you looked at, the balance was more than ¥70 billion out of which ¥68 billion was attributable to Wholesale. And in this quarter, we booked impairment for some of that balance.

And there are rules, accounting rules which we have to follow to decide whether we have to book impairment. And yes, we have discussed with our accountants and came up with this impairment amount.

And the reason why we decided to book the impairment of goodwill now is we have considered the earnings in the past and also the current earnings, but we decided to make revisions in our business focus, and we revised the value of the goodwill – some of the goodwill in relation to the acquisition of the Lehman Brothers franchise. And we conducted very detailed calculations. So I will not give you all the details, but for this impairment, that’s how we came up with the value. That’s how we finalized the value. And we have conducted sufficient discussions with our accountants. So in terms of future further impairment, at the moment, there are no signs of future impairment.

Sasaki-san – Mitsubishi UFJ Morgan Stanley

I’d like to ask follow up on the second question. As for the profits or the income, they have been improving as you explained. So I believe the main reason for the impairment was because of the change in the business model. Is this in relation to Instinet and also the way you changed the cash equity business? Could you give me a bit more color on the details of the breakdown of the impairment?

Junko Nakagawa

Well, for Instinet, Instinet is not part of the impairment. Based on the past trends of the market, we have not included the impairments – we have not included Instinet in the impairment. So I think you can guess the details based on that.

Sasaki-san – Mitsubishi UFJ Morgan Stanley

Thank you.

Operator

Next question, Daiwa Securities, Shiota san. The floor is yours.

Jun Shiota – Daiwa Securities

Thank you very much. I have two questions. In your presentation, you mentioned Instinet and transfer of the execution service. You said that you’ve been able to obtain the understanding from investors. Can you specify the pros and cons, the supportive comments and the objections that you are hearing? Retail, clients assets, 2004 Q4, since then there has been a net decline in client assets in Retail. What’s the backdrop, the reason and what’s the most recent situation in the month of October? And had there been any extraordinary factors that had led to this result at the end of September? Those are the two questions.

Atsushi Yoshikawa

Well, then, I will try to respond to the question on Instinet. On September 6, I made the announcement, and that was the first time that Nomura employees and customers heard about that. So in the initial stage, people were questioning what that means, how the services shall change, and what would happen to the salespeople that are covering those accounts or sales traders covering certain accounts. Of course, several questions were asked. And from the investors’ perspective, there had been many questions. But until those points were made clear, there were some investors that had decided to suspend placing orders at Nomura.

And at the moment, after having or continuing explanation to each of those questions, we’ve been able to obtain understanding. Many are positive. And we hear voices saying why didn’t you do it earlier and that they are all for taking that decision at the moment. Equity cash, active management, as a price to that, it’s more difficult to pay commissions. So that could be a means of ensuring good execution and connecting high value-added research to that.

This kind of agency model is something that others want to imitate. Nomura was able to do that, because they had 100% of Instinet. That kind of positive comments were obtained. And as a result, some customers who didn’t have Instinet account have now opened Instinet accounts. And especially this kind of trend is seen in the United States. And there are fast movers amongst investors, because many of them are familiar with unbundled service.

But then on the other hand, in Europe and Asia, there are fewer investors who are familiar with unbundled service and Instinet’s brand awareness is not as high as in the United States. So many are saying, now I understand your point, but who is going to be in charge of me and what am I supposed to do. Those questions are still being asked. And they say they understand why Nomura has become oriented towards that way, but we question whether we need to go through the trouble of opening an account at Instinet. So that kind of wait-and-see attitude is being taken by some.

But we don’t hear any loud voices of negative opinion. But by end of December, especially for the United States, transfer of accounts or with regards to transfer of execution to Instinet, we want this fact to be known. And by end of March for Asia and Europe as well, we want this information to become well-rooted amongst our clients.

And initially, we had some concerns. Of course, we began this effort with some concerns, but fortunately we’ve been able to obtain the understanding of our customers and very fortunately some are very much supporting this decision. The reaction amongst our clients is mixed. It depends on the client, but we think that the trend is more positive than we had originally expected.

Jun Shiota – Daiwa Securities

Then with regards to the transfer of the execution service, so far, you are not losing so many clients as a result of this decision, is that correct?

Atsushi Yoshikawa

It’s still immature to come up to such a conclusion. But if we look at the Instinet and the orders being placed to Instinet, I think we are receiving enough orders. And on the cash side, market’s volume is low and therefore commission income is declining. But the cash drop at Nomura seems to be larger than the drop in the market. So at the moment, we are seeing some negative results. But gradually, we believe that orders placed through Instinet is going to increase. And we’re beginning to see signs of improvement.

But it’s still immature to say that we will not be losing any business. But I am positive about this decision. And when I talk to the people at different offices, they say that the objective is clear and they are highly motivated to do the explanation. So I’m expecting to see more improvements.

Then the second question on Retail, true, this is a minus for some time. It’s a small number, ¥10 billion, and yet, we continue to grow client assets, which trend was tentatively suspended. Risk tolerance of our Retail investors is not going up yet. In other words, with change in the market environment, they want to take profits or they want to monetize their investments. And that trend hasn’t changed.

And your question was whether there have been any extraordinary factors? And when public offering is done or a purchase is done at the – in the open market, some of the customers would turn that into cash. And if we can capture that cash within Nomura account, then that would be fine. But some of them would withdraw a certain amount of cash from their Nomura account. Of course, we’re trying to capture that for reinvestment, but that kind of extraordinary factor was included, which number was not insignificant.

Jun Shiota – Daiwa Securities

Thank you very much. If that extraordinary factor had not prevailed, you would have been able to maintain the net increase in client asses?

Atsushi Yoshikawa

Yes, that’s correct.

Operator

Next question is from Merrill Lynch Japan Securities, Okamoto san.

Mitsumasa Okamoto – Merrill Lynch Japan Securities

My first question is about FIG. There is – was a lot of growth in the results for FIG. And please correct me if I’m wrong, but as for liquidity, was it booked in September, actually after QE3? And was there a lot of increase in the flow, and is that improving or helping the revenues? Could you explain the monthly trends for the revenues?

And moving on to securitization in the U.S., secondary securitization, I think this was one of the major drivers. Is this because of the – you are gaining market share or is there an expansion in the overall secondary market? And is there a pickup in the order flow in the overall market? That’s my first question.

My second question is about the 5% rule, the PGS, and this will be deregulated. And as for Chi-X, what will be the impacts on Chi-X fee? Will there be any positive impact on Chi-X? How do you view the positive impacts on Chi-X?

Atsushi Yoshikawa

As for fixed income, the monthly revenues is – we have not disclosed in the past, I think. And for this quarter, there was QE3 and the unlimited sovereign paper purchases by the ECB, which was a very positive market environment for fixed income and – not only for Nomura, but for the – for our peers as well. They did very well in fixed income and we were one of them.

And our clients or the transactions with clients is increasing. And especially for agency, CMBS transactions, since we started doing that, the client business has been growing very steadily in relation to Ginnie Mae. So I think there is like one issuance per month or so. So the business flow is growing.

On the other hand, in relation to QE3, some of the residential or RMBS positions which we used to have, the market has been improving. And in fact, we used to own it as inventory, but we are reducing the positions and booking profits. Yes, that has been happening.

As for the market share, it depends on the product or the business, but it is slowly increasing. But our market share is still limited within the industry. So I think there is a lot of room for growth in the market share.

In this business, the relations with clients and trust with clients is important. Research, product offering capabilities and secondary trading capabilities, these are all important. And we have been involved for the past two-and-a-half years. We have a good talent that has – that we have built up in the company. So this is one area where Nomura can compete. And the entire team is working very hard and we – I understand they will continue to work hard in this area.

As for the market environment and the outlook for the second half, it might not be as strong as the first half of this year. It might be too naïve to expect a strong second half – as strong as the first half. So we will adequately control risks and we will not – we will control our positions accordingly. I’m not sure if that answered your question, but that’s the answer to – that’s how I feel.

That was the answer from Yoshikawa.

Mitsumasa Okamoto – Merrill Lynch Japan Securities

What about the second point about Chi-X?

Junko Nakagawa

Yes. This is Nakagawa speaking. Generally speaking, yes, I think it will be positive for Chi-X.

Mitsumasa Okamoto – Merrill Lynch Japan Securities

As of today, what kind of impacts or contribution can you expect? Is it difficult to estimate the contribution?

Atsushi Yoshikawa

Yes. I think it’s still too early to say. And right now, we’re still in the phase of trying to gain market share. So I’m sorry, we – it’s very difficult to calculate the positive impact.

Mitsumasa Okamoto – Merrill Lynch Japan Securities

Okay. Thank you.

Operator

(Operator Instructions)

Atsushi Yoshikawa

This is Yoshikawa, and that seems to be all for questions. So we would like to end today’s presentation.

The environment – competitive and regulatory environment for global financial institutions is transforming significantly, and we will – Nomura must also change in line with social changes and the needs of our clients. Our competitive advantage is our geographic position in Asia, an area where strong growth is forecast and with abundant funds. We remain focused on being Asia’s global investment bank.

We will continue to put our clients at the heart of everything we do and ensure we are fit for the future in order to provide high value-added financial services.

Thank you very much for taking the time to join us on today’s call.

Operator

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

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