Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2019-Q1

[Hidenori Yamaguchi, executive]

Thank you very much for waiting, and thank you for joining the financial reporting meeting for the first quarter of FY '18 of Daiwa Securities Group. It's time, so let us begin.

Thank you very much for joining our telephone conference today despite your busy schedules. Today's speaker from Daiwa Securities Group is Mr. Komatsu, Executive Managing Director and CFO. I am Yamaguchi of IR division serving as a facilitator.

Today, we start with the presentation of the first quarter FY '18 results. And then, after that, we will take questions. Please be reminded that this call is also arranged accessible for investors by the Internet. So let's start.

[Mikita Komatsu, executive]

I am Komatsu of Daiwa Securities Group Inc. Thank you very much again for joining our telephone conference today despite your busy schedules. Now I walk through our results of Q1 fiscal '18 announced today by following materials available on our website.

So first, let me start from Page 4. This is our consolidated summary. Percentage of changes in figures is based on the comparison to Q4 fiscal '17. Net operating revenues were JPY 115.6 billion, down by 11.7%. Retail Division revenue fell, partly due to the uncertain market environment since the previous quarter. However, large-sized IPO played a significant role in building net asset inflow and newly opened accounts.

Revenues in Wholesale Division declined as among the business and next-trading income from both equity and FICC in global markets fell, even though revenues from large underwriting deals in global investment banking expanded.

Ordinary income was JPY 25.8 billion, down by 40.5%. Net income attributable to owners of parent was JPY 18.5 billion, down by 49.3%. Annualized ROE was 5.8%, and BPS was JPY 787.29. Also as a part of our capital policy, as you see on Page 3, share repurchase was set with the up-limit to 55 million shares or JPY 40 billion.

Please turn to Page 10 for profits and loss summary. Commission received in total was JPY 73.8 billion, down by 7.3%. Its breakdown on Page 23 shows that brokerage commission was JPY 16.5 billion, down by 13.5% due to the decline in domestic stock trading volume.

Underwriting commission performed well, resulting in JPY 11.4 billion or up by 75.4% as large-sized deals contributed to both equity and debt quarter-on-quarter. In the meantime, distribution commission was JPY 7.6 billion, down by 27.7% as sales of stock investment trust dropped. M&A-related commission was JPY 3.7 billion, down by 62.9% compared to the particularly stronger previous quarter. Net trading income was JPY 26.6 billion, down by 15.3%, as client flow declined. Net gains arising from private equity and other securities was JPY 2 billion, down by 59.8% as those less large funds investment exit.

Next is Page 11 for SG&A. Trading-related expenses were down by 3.8% to JPY 17.9 billion due to the decline of sales promotions. Personnel expenses were down by 5.5% to JPY 46.9 billion as a result of decline in performance linked on payments, and office cost was down by 5.2% to JPY 6.5 billion with a decline in system-related outsourcing fees.

Let us move on to Page 13 for overseas operation. Overseas operation in total delivered JPY 13 million ordinary income, staying in profit. Europe posted JPY 1.2 billion in ordinary loss due to the decline of M&A business from a stronger previous quarter.

In Asia-Oceania, revenues fell Q-on-Q but delivered JPY 1.2 billion of ordinary income, generating profit for 9 quarters in a row. Contributing factors were equity primary deals, wealth management business and gains from equity holdings of SSI Securities, former Saigon Securities, under equity methods.

In Americas, ordinary income finished with a slight loss due to goodwill amortization for this year's advisory, although stronger U.S. equity trading by Japanese retail investors made a contribution to profit.

Now let me explain segment information from Page 14, starting from Retail Division. Net operating revenues were JPY 50.6 billion, down by 7.3%. Ordinary income was JPY 1.8 billion, down by 19.6%.

Foreign equity trading volume remained stable while Japanese equity trading fell. As a result, equity revenues decreased. Fixed income revenue increased with a strong sales of SoftBank Group FB. Distribution commission for investment trust declined due to a decrease in stock investment trust sales. And agency fee for investment trust slightly dropped, shift by the shrinkage of average AUM balance during the quarter.

Now please -- Page 15 please. This page produce sales and distribution amount by product and highlight of this quarter at the Retail Division.

Equity distribution is underlined due to equity offering of Mercari IPO. As shown to the left of the bottom slide, Mercari IPO contribution was so significant that we shift a high -- a record high in 9 years for the number of newly opened accounts. Contract AUM of Wrap Account Service has exceeded JPY 2 trillion, setting a record high.

Domestic bonds grew largely attributable to the corporate bond sales of SoftBank Group whole retail industries.

Now please move on to Page 16. Let me next explain the results of the Wholesale Division. Starting off with global markets. Net operating revenues were JPY 28 billion, down 16.5%, and ordinary income was JPY 5.8 billion or down 47.9%.

With regards to equity business, revenues were down due to stagnant growth in the markets trading volume Q-on-Q, although the clients are good on the recovery trend since mid-May.

With regards to the fixed income, environment was continuously difficult on domestic long term interest rates paid within a very narrow range. Client flow was solid, mainly on the credit side. However, revenues were down with difficult position management.

Revenues of our fees are trading up, both in the U.S. and in Europe.

Please turn to Page 18. This page is on the global investment banking. Net operating revenues were JPY 11.7 billion, down 13.3%, and ordinary income was JPY 0.8 billion, down 53.2%.

In the equity underwriting business, we were able to run the largest mandate, both in IPO and PO this quarter as at Mercari and Renesas Electronics, for which we served as a global coordinator.

In the debt underwriting business, we were elite manager for a multiple number of deals that has the largest trust bond issuance of this quarter by First Bank Group.

Revenues from M&A were down quite a bit vis-à-vis the strong last quarter. However, global cross-border as well as domestic business consolidation rationalization mandate on the DC Advisory and DCS Advisory were involved, contributing to the revenue.

Please turn to Page 19. Let me next explain the Asset Management Division. Net operating revenues were JPY 12.2 billion, down 2.5%, and ordinary income was JPY 7.4 billion, which was up 2.7%.

Daiwa asset management saw an increase in AUM at the end of the quarter, although management fees were slightly down on the back of lower average AUM during the quarter from equity investment trust, excluding ETF, due to market factors.

With regards to reorganization of Asset Management Division, we have announced a memorandum of understanding amongst principal shareholders on the merger between Daiwa SB Investment and [ Mikasa ] Asset Management Company Limited in May.

Also in June, Daiwa Real Estate asset management, which is our core company in the real estate business, signed our MOU on the merger with Mikasa Asset Management who operates Japan Rental Housing Investment, Inc.

With this merger, we are planning to stabilize investment foundation and enhancing competitiveness by integrating know-how and human capital in the real estate asset management business.

Please turn to Page 21. Let me extend the results in business division. We posted net operating revenues of JPY 2.4 billion, down 54.6%, and ordinary income of JPY 1.7 billion, down 59.8%. This completes the explanation of the results in Q1 FY '2018.

[Hidenori Yamaguchi, executive]

Thank you so much. Now I'd like to open the line for questions. Today, we have the simultaneous interpretation. You can ask questions in English, but we are going to repeat the questions in Japanese first, followed by questions in English.

[Hidenori Yamaguchi, executive]

Now please follow the instruction of the operator.

[Operator]

Now we'd like to open the line for questions. Today, for the Q&A session, we are going to repeat questions in Japanese first, followed by questions in English. Now we are receiving questions in Japanese. [Operator Instructions] Now I'm receiving questions from the participants.

[Operator]

The first question is from Muraki from Deutsche Securities.

[Masao Muraki, analyst]

Well, I have 2 questions. First one is regarding your profits and revenues. Well, this time, for the Retail Division and the Wholesale Division was kind of going through a tough time. For the last 16 months for the both 2 divisions, how the performance has been sinking? That's my first question. And then my second question is the outlook for the remaining of the year. And also I have a question regarding the share repurchase.

Well, this time, the site is quite good. So are there any changes for the equity capital as a capital policy?

[Mikita Komatsu, executive]

Muraki, thank very much for your questions. So let me address your first question. For the last 3 months in the Tier 1 for Retail and the Wholesale both Divisions -- for retail business first of all, in April, it was quite slow. But after that in the last 2 months, May and June, the business started to make a rise. For in example, a sales for the stock investment trust in the 3 months, the volume has increased steadily. And therefore, in July, we've seen a steady growth. And also for the Wholesale Division, improved [ support ] for the last 3 months, not as much as the Retail Division, but it is slightly, but distinctly growing, especially the equity side is growing. For FICC business, unfortunately, the business is quite still stagnant. So for FICC, we did not really see an upswing in the trend. But for the global investment banking business, as you already know, in June, there was a large-sized deal. So it made a contribution to growth. Your second question about the share repurchase, the size of it. Well, the site is up to JPY 40 billion, which was probably unseen in the past, I think that's what you mentioned as a large site. But for the last time, the last year, we also had the same amount, but we did not want to lose the amount, but it went up to JPY 37 billion. So this time we have set up the amount for JPY 30 billion again. And well, we wanted to be always flexible in terms of shareholder return and we have said that as our message, especially the end -- towards the end of June the stock price was nearly to JPY 600 per share and a net asset per share as of the end of March, JPY 786. And today, our announcement has said JPY 787. So BPR has been going under the PBR of onetime as a trading results. So that gives us [indiscernible] to start the examination of the possibility. And also when we heard about the equity capital, when we thought about the ratio to keep for ourselves and also at the end of the last fiscal year, the Basel regulation was announced. And when they did some calculations and the impact on us was assumed that the impact would be smaller compared to our anticipation. And given that result that's [ indiscernible ] allows us to see the possibility of share repurchase. And in addition to that, as we've already made the announcements, the return to shareholders of the return ratio of more than 50% was already announced. And among Japanese corporates, recently, the payout ratio or the total return ratio have been on the rise, but still these additional investors, both at home and abroad, have been still saying that it's not enough. So when we worked upon the IR activity and had some communications with investors of [indiscernible] would get the comment regarding that as well, so we fought back. And if you think about the potential shareholders in the next-year longer-term basis and we thought that engagement in that is quite important. So of course, the stock price of today should be there as an assumption, but this time, we decided to set the total amount to be paid for the repurchase of up to JPY 40 billion. But if that JPY 40 billion, according to the current forecast, is only if that JPY 40 billion is going to be repurchased after the dividend payment, it's still going to be within the scope of what we have anticipated to start to fit in. That's my answer. Did I answer your question?

[Masao Muraki, analyst]

Well, I have follow-ups for each question then. Well, fixed income on the JGB trading -- well, you said that there were order flows, but the position management was quite difficult because of the price sense and there were similar comments coming from the Nomura Securities reporting. Given the current volatility or the current level of the interest rate range, then the JGB trading that you were not able to get redeemed, it's probably going to get improvement or...? That's my first question. And the second question is, well, you haven't given the numbers of the June end, but when we look at the set ratio as of the end of March, if you're going to fit that to the Basel regulation, what is going to be the estimate or the ballpark figure?

[Mikita Komatsu, executive]

The first one on the JGB trading, I think that we made announcement as you've just mentioned but maybe, Muraki, maybe you are thinking alike. So JGB Trading, was obviously not easy in some point of time. However, it's not that it has led to generating a loss or anything. But as you just said, that within the less volatility, it did not really generate significant size of the profit. And now that when we start to see the changes in the interest rate, then including the position itself, the trading on the customer side is probably going to expand. And today and tomorrow, DOJ is having the meeting for the policy meeting and probably going to set up some outcome. And if something happens and that could result in the positive results in the account -- against the [ indiscernible ] ratio, we cannot really give a key-point number of the targeted percentage, but in the past probably used to be somewhere between 4.25 points, whereas it's probably in 3.24 points.

[Operator]

We're receiving the next question from SMBC Nikko Securities. Nakamura. Nakamura, please go ahead.

[Shinichiro Nakamura, analyst]

My name is Nakamura from SMBC Nikko Securities. I have 2 questions. First question is on the overhead ratio or cost control, especially in the retail and the Wholesale Division. In the first quarter, [ registration ] was very difficult and [ leads to a ] goodwill amortization was posted. I understand. But on the cost control side, are there anything else that you can do in the very difficult environment, especially in the Retail and Wholesale Division? That's my first question. Second question is related to the new businesses. Today, as we make the public release, you are entering into new businesses and ordinary profit about JPY 10 billion to JPY 15 billion. Ordinary profit is the goal for the new businesses that's [ changed ]. But based upon the current pipeline of the businesses and the pace of investment that you are making, JPY 10 billion to JPY 15 billion range of the ordinary profit seems difficult to me, I do think. And if you don't reach JPY 10 billion to JPY 15 billion, are you willing to expand share buyback to achieve ROE of 10% or more? Are you willing to do more share buyback if you don't generate ordinary income of JPY 10 billion to JPY 15 billion from new businesses?

[Mikita Komatsu, executive]

Mr. Nakamura, thank you very much for your question. Your first question on the cost control. In this particular environment, can we do more? Can we control cost more? To that question, I will say our aim is still the bank, compared to the previous quarter, profits are down, but it definitely means that we have spend investment immediately or that cutting cost geometrically. We don't think it's a necessity at this moment. We are fundamentally very rigid. And from the past, including overseas markets, we have been controlling our costs very stringently, so we don't think we should turn down the cost control even more. But the one thing in this quarter, in this environment, we think sales and marketing are very important in this very difficult environment. So we did campaigns to promote sales. We have taken various initiatives to promote sales. And the flip side is that cost may rise, but in the future, profits should follow. So if we don't do sales and marketing to control the cost and just to enjoy the profit in this quarter only, that's not what we are trying to do. And about Daiwa's human resource costs, we started to consolidate this effort above [ indiscernible ] but in Japan, we have capable young people and the payment level for the young people in Japan, we'd like to increase our pay level for the young employees. It's partially a government initiative. We think that's what we need to spend on. And about IT or IT costs, we need to invest in IT technologies, otherwise, we lose competitiveness against other companies. And by investing in IT technology, we are able to automate the processes that are -- we were doing manually, and ultimately, that's cost reduction. So IT cost is somewhat on the rise, but in total, we look to reduce IT-related costs overall in the future. So about the cost control, we don't think we need to do more now at this point. To your second question about JPY 10 billion to JPY 15 billion are from new businesses. This is the goal in 3 years in the mid-term plan. So we're not trying to generate JPY 10 billion to JPY 15 billion at this moment after the Q1. But for example, today, we have made a press release about the establishment of Daiwa energy and the infrastructure corporation and that we have announced JPY 5 billion for this company, but we are going to invest more, up to maybe JPY 100 billion or so. So we are studying various investment opportunities. So this JPY 10 billion to JPY 15 billion target over 3 years, we don't think it's difficult to achieve at this point. And even if we don't achieve JPY 10 billion to JPY 15 billion, it doesn't trigger our share buyback or more share buyback. If PBR is well above warrant, then it doesn't make sense to do share buybacks just to improve ROE. It's not really an option if PBR is above 1 or well above one.

[Operator]

We'll move on to next Merrill Lynch, Sasaki.

[Futoshi Sasaki, analyst]

This is Sasaki of Merrill Lynch. I have 2 questions. The first one is about CET1 ratio. Contrary to the conventional, I think that the impact seems to be smaller compared to your initial anticipation. I just wanted to know your scope for the [ FR2B ]. I don't know how that is factored in. Can we get some more color in it or the trigger risks? And what's included as content probably changes or the assumptions, but I just want to know how much have you churn for in details. And the second is about the funds deposits, but it's not that from the first 9 months, I know that this business was quite deep because of the IPO of Mercari. I just want to know other details that could go with that.

[Mikita Komatsu, executive]

Well, Sasaki, thank you so much for your questions. Regarding CET1 [ FR2B ] was, or is, opposed -- [ institution ] not to change so much. So actually just to mention, if you're going to allocate all the numbers in details one by one, we are not really assuming to do so. So may be the internal model if we can start off, then internal model, then the impact will be quite small. But to an extent, of course, this really needs to make in a conservative manner in the forecast. For the AUM increase in the fourth quarter and the recent quarter is, of course, the impact coming from the Mercari deal. We've got -- we have had a lot of asset to be formed in the Retail Division. And especially the AUM have increased together with decide that we have under the asset under management.

[Futoshi Sasaki, analyst]

On the Slide 29, looking at the graph, in the first quarter, you have the inflow of JPY 460 billion and the retail is well above JPY 340 billion. So that JPY 460 billion as a total, what's the representation of the Mercari side? 100% of that JPY 460 billion? Or like 60% of that? Can I get some details on that?

[Mikita Komatsu, executive]

Well, it's hard to get depreciation under, but I would say we are speaking 50% or even really 60% is from the Mercari-related. Of course, I have to say it's not only Mercari, but that it had some little effects. So when it comes to Mercari-related, probably a little more than half of that. And of course, as was mentioned, the SoftBank SB made the contribution. So on Page 18, this shows the details of the Wholesale Division. It's not the Mercari of JPY 130 billion and the SoftBank Group of JPY 450 billion or so. So a large portion of the gain is particularly coming from the [ gains ] for the capital increase is it. Well, the pure addition of the 2 probably wouldn't add up, but we had some AUMs to be generated to start the business transaction to do that. That also happens.

[Futoshi Sasaki, analyst]

Well. Okay. So this stage is going to continue against the momentum of [indiscernible]? Or what's your outlook for the inflow, the asset inflow level?

[Mikita Komatsu, executive]

Well, the current speed or the momentum probably is quite high. So for the asset inflow, where in a sense the asset inflow is in the core of the customer base expansion. So we don't think the current momentum is going to continue forever at the current pace. But, of course, we wish that it will continue and, of course, we will make the best effort in doing so. And in this month, what's gone well is asset management work; Goldman Sachs [indiscernible] our strategic funds of the diversification and that is making a lot of contributions because we have to take [ America's ] deal wouldn't recur every quarter, so -- and this -- the Goldman Sachs diversified fund is also giving us asset inflow, so we wish to pay attention to that and paying effort to that as well.

[Operator]

[Operator Instructions] Now, I would like to open the line for questions in English. Please wait for a second. We are going to prepare the line for questions in English. Now I would like to repeat the question in English. So English-speaking operator is going to give you the instructions.

[Operator]

The first question comes from Mr. [indiscernible]

[Unknown Analyst]

Komatsu, I have 2 questions. The first one is on Page 25 of your PowerPoint. On Page 25 for stock brokerage commission, we can see that there was a 15.6% decline from the March quarter to the June quarter, 15.6% decline. And then I looked at Page 29 -- Page 28, excuse me. The trading value of the retail investors, it was 2-6-1-2 for the June quarter versus 3-4-2-0 for the March quarter. This represents a decline of about 22% to 23%. Can you explain to me why there is a difference between the commission decline of 15.6% and the trading value contraction of 23%. This is my first question.

[Mikita Komatsu, executive]

Let me answer one by one. To your first question, thank you so much for your questions. First, about transaction value of domestic equities, I'm on Page 28. I'm thinking about domestic equities. So the reason is because of the market factors. Market in Japan was not strong. Equity market in Japan was not so strong. Volatility was small, and there was a weak deal to the potential life of the market. As a result, our transaction values, our trading value declined. Now on Page 25, brokerage commission. This is not only for domestic equities. This includes foreign equities as well as domestic equities. For foreign equities, as we know, U.S. stocks market was very strong. So in total of domestic and foreign equity, it did not fall as much as the previous page, because our transaction volume [equity] was almost flat. And recently, Facebook and Twitter share price fell recently. But in the first quarter, the U.S. [ stock name ] and the nonstock listed name performance finished strongly in the first quarter. So for the full equity portion, our decline was less. On the other hand, our decline for domestic equities was more severe because of the stagnant market in Japan.

[Unknown Analyst]

Okay. The second question that I have is on Page 29. Earlier, you explained to another analyst that for the JPY 354 billion of inflow from individuals, 50% to 60% could be a result of the IPOs, IPO and also the SoftBank net deal. So if you look and say, that half was the result of these 2 transactions in the June quarter, then for the individuals, it would still be about JPY 170 billion of inflow that was not a result of the 2 deals. Can you explain why the figure remains so high relative to the historical 8 quarters? So excluding those, the money inflow that came in because of Mercari and also the SoftBank net deal, it would still be about JPY 170 billion, which would still be a very big number. I was wondering if you might have insights into why it was so much bigger.

[Mikita Komatsu, executive]

First, about the Mercari, it's about half. For [indiscernible] of JPY 170 billion, quite a large portion of the JPY 170 billion is related to SoftBank bond deal. And another point, in the first quarter, the transaction or trading value declined, as I mentioned earlier and as you pointed out that as well, but the market was not so strong in the first quarter. I'll give you the difference between outflow and inflow or net amount of the 2. So when the market is strong, now people do profit-taking. So the outflow of assets has a tendency. But unfortunately, from April to June quarter, market was not so strong so our people did not sell to lock in the profits as much as the times when the market is strong. But on the net basis of outflow and inflow, it became positive. So this time in this quarter, there was a big contribution from SoftBank deal and the Mercari. On top of that, there was not so much outflow because people did not sell to lock in the profits.

[Unknown Analyst]

Congratulations on the good performance from the Wholesale Division because of these 2 big transactions. As you speak to your investment bankers, Komatsu, what does the pipeline look like for some of these big transactions for the September quarter and the December quarter? Meaning the second half of the calendar year in 2018? Do you think you have already seen the best from the great June quarter in terms of deal flows?

[Mikita Komatsu, executive]

Well, I am not sure 100% about the future, but at the moment, we feel capital funding needs exist and there are other needs also existing in the market. So I feel that financing mandate will increase in the future. When I talk to the staff and employees of global banking division, everybody is pursuing various opportunities and everybody looks quite busy. So I don't think the best has come already. And especially for [indiscernible] deals, in the future, I think we are going to see more deals. And when we see more [indiscernible] deals, then fine I think our projects will arise. So Q1, I don't think Q1 was the best for this fiscal year. We have a strong pipeline, I feel.

[Operator]

[Operator Instructions] As there are no more questions, we now conclude our question-and-answer session.

[Hidenori Yamaguchi, executive]

Well, it seems that there are no more questions, so we'd like to end the telephone conference. In the end, we'll have a message from Mr. Komatsu.

[Mikita Komatsu, executive]

Lastly, we're working on FTG goals by 2030 defined by United Nations. We have decided to work on FTG, and we have started the FTG steering committee with outside experts. Starting from this year. As we made a press release, we have established Daiwa energy infrastructure corporation to promote renewal energy business and better utilize our investment capacity as well as one of our initiatives. The first investment project is to fill up a domestic forward construction fund together with GI Capital Asset Management exclusively for this new company. This is to contribute to FTG such as affordable and clean energy, sustainable cities and community, crime reduction [indiscernible] and so on. We'd like to continue to conduct businesses, pursuing not only economical values such as income and profits, but also social values at the same time. Markets are gradually recovering now. We are determined to drive customers with detailed consultation and to contribute to the asset creation by making efforts to [indiscernible] diverse, including young generation [indiscernible]. I appreciate your continued support to our company. Thank you very much.

[Operator]

This completes the telephone conference. Thank you so much for your participation. Thank you so much for participating in this conference call today. Now please hang up your phones.