Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2020-Q1

[Eiji Sato, executive]

[Interpreted] This is Sato of Daiwa Securities Group. Thank you very much for joining our telephone conference today despite your busy schedules. I'd like to explain our fiscal '19 Q1 results, which we released today with using the material uploaded on our website.

First, please turn to Page 4 for consolidated summary. Each percentage of change is based on the comparison to Q4 of fiscal '18. Net operating revenues were JPY 107.1 billion, down 0.3%. Retail division revenues increased due to investment trust sales growth and the foreign stock transaction expansion, while wholesale division revenues dropped. Global Markets had FICC revenues growth, whereas equity to revenue sale. Global Investment Banking had increase of debt underwriting spread decrease of equity underwritings and M&A revenues.

Ordinary income was JPY 17.9 billion, up 1.5%. Revenue improvement of Retail division as well as profit generation of investment division positively contributed to income. Profit attributions to owners of parent was JPY 16 billion, up 19.8%. Annualized ROE was 5.2%, and the BPS was JPY 787.65. As a part of capital policy, share repurchase program is set up for up to 50 million shares or up to JPY 30 billion.

Let's move to Page 10 for P&L summary. Commission received was JPY 64.9 billion, up 2.5%. For the breakdown of commission received, please see Page 23. As foreign stock trading volume expanded, although domestic stock trading volume shrunk, brokerage commission remained flat at JPY 12.4 billion. Underwriting and secondary offering commission enjoyed increase of debt underwritings resulting in JPY 6.9 billion, up 11.2%. Distribution commission also enjoyed sales growth of stock Investment Trust, recording JPY 6.3 billion or up 16.5%. Net trading income grew due to an increase in client flow of both foreign equity and FICC.

For the line of nonoperating income, profit from equity method grew and extraordinary income was JPY 1.9 billion. As a result of merging Daiwa SB Investments into Sumitomo Mitsui Asset Management, JPY 11.4 billion was posted as gain on change in equity and JPY 7.9 billion as expenses associated with its structural reform.

The structural reform-related expenses includes the cost for integrating 3 offices to other offices as was announced on June 27 and also factored in the estimated cost of relocating sales offices from street level floor to upper floor and the returning unused floor in pursuit of property cost reduction down the road. From FY 2019 first quarter, the new standard is applied to overseas operations using IFRS. The lease expense, which have been counted in office cost, was switched into depreciation and financial expenses. The real estate expenses was JPY 9.1 billion, down by 5.2%. Depreciation increased to JPY 7.7 billion, up 22.4% due to the system renewal at Biosecurity and the new lease accounting standard of IFRS.

Please look at Page 13. This is for overseas operations. Ordinary income totaled JPY 600 million, staying in profit for 13 quarters in a row, so down 71.3% from the previous quarter. Europe had a recovery of FICC but slowdown of M&A businesses and equity trading. Asia and Oceania enjoyed revenue contribution from Wealth Management, which led to profit increase. Americas continued driving overseas operations as U.S. stock trading growth contributed to equity revenues, while M&A and FICC had revenue decline.

Now let me move to segment information from Page 14. Retail division finished with net operating revenues of JPY 43 billion, up 3.7% and ordinary income of JPY 2.6 billion, up 38.4%. Equity revenues rose, benefiting from the hike in foreign stock trade volume. Fixed income revenues fell despite the contribution from sales of SoftBank Group straight bonds. These foreign bond sales dropped. Book investment trust sales increased, which drove distribution commission for investment trust.

Now please see Page 15. This page is on the sales and distribution amount and topics in the first quarter in the Retail division of Daiwa Securities. With regards to the wrap account service, contract AUM at the end of June was at the record high of JPY 2171.6 trillion driven by the increase in contract amount. With regards to the stock investment trust, sales of global organisms, genome equity funds were strong. Furthermore, sales of Japanese bonds increased driven by sales of straight bonds issued by SoftBank Group.

Please turn to Page 16. Let me next explain the results of the Wholesale division, starting off with the global markets. Net operating revenues were JPY 27.3 billion, down 3.9%, and the ordinary income was JPY 4.5 billion, down 20.3%. With regards to equity business, although the client flow of foreign equities increased, thanks to our timely information provision capturing the U.S. market trend, Japanese equity trading based on the customer flow struggled with the low transaction value in the Japanese market. As a result, net revenues were down. With regards to the fixed income, fixed revenue increased on the back of higher client flow for credit products in the environment where interest rates were in the downward trend.

Please turn to Page 18. This page is on the Global investment banking. Net operating revenues were JPY 12.1 billion, down 14.8%, and ordinary income was JPY 0.9 billion, down 44.1%. In the equity underwriting business, we served as a global coordinator in the largest mandate in the first quarter, which was the second public offering by Japan Post Insurance. In the debt underwriting business, we accumulated many mandates where we served as a lead underwriter, such as for SoftBank Group straight bonds. Revenues from M&As were strong driven by domestic and cross-border transactions. In April, we unified brands associated with M&A Advisory Services globally to DC Advisory to propel further integrated operation of the M&A business.

Please turn to Page 19. Let me next explain asset management division. Net operating revenues were JPY 11.3 billion, down 3.4%, and ordinary income was JPY 6.2 billion, which was down 4.6%. Daiwa asset management average AUM or public equity investment trust excluding ETFs during the quarter was down. Management fees was slightly down. However, commissions paid to distribution agents were down more, thereby revenues increased. With regards to Daiwa Real Estate Asset Management, management fee decreased because property acquisitions were limited to a small amount versus the previous quarter.

Please turn to Page 21. Let me explain the results in the investment division. Net operating revenues were JPY 1.6 billion, and ordinary profit was JPY 0.9 billion. This completes my explanation of the results in the first quarter of fiscal year 2019.

Down on the U.S.-China trade issues. Aftermarket environment continued, such as the lowest individual transaction values in the Japanese market since the beginning of Abenomics on a quarterly basis. Therefore, unfortunately, we could not recover our results so much. On the other hand, we made a good progress on the fundamental reform of our sales structure and also the income structure reform we started to establish in our management. In addition, we were able to implement a stepping stone to expand income base by preparing to start new brand, Connect, which mainly targets at people who are trying to build assets via mainly smartphone channel starting to really collaborate with Japan Post Group in Asset Building businesses and so forth.

On the back of 100-year life now used towards building, managing, preserving and succeeding of assets are increasing in the Daiwa Securities business. We'd like to make sure to have the right structure in place to provide the best solutions to our customers by appropriately capturing their needs that are diversifying and becoming more complex.

I would appreciate your continued support to us. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]