Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2021-Q1

[Yusuke Fujino, executive]

Ladies and gentlemen, thank you very much for waiting. Thank you for coming and participating to Daiwa Securities Group Telephone Conference for Q1 FY 2020 Earnings Announcement amidst your very busy schedule. It is time. We would like to begin the conference.

From Daiwa Securities Group, we have Sato, Senior Managing Director, CFO. My name is Fujino, Head of IR, and I will be the moderator today.

First, Sato will provide you with the overview of Q1 results for FY 2020. We would like to receive your questions after the presentation. Also, today's conference would also be disclosed to the individual investors through Internet. We would like to begin the explanation.

[Eiji Sato, executive]

I am Eiji Sato, CFO of the Daiwa Securities Group. Thank you for joining us at our telephone conference today amidst your busy schedule. Now I would like to explain the financial results for the first quarter of FY 2020 announced today, according to the financial results briefing material posted on our website.

First, please turn to Page 4. I will explain the summary of consolidated financial results. We compare the rate of increase, decrease with the first quarter of FY 2019. Net operating revenues in the first quarter of 2020 were down by 4.7% to JPY 105.4 billion. Revenues in the Retail Division decreased. Due to the refraining from visiting customers face-to-face affected by the spread of COVID-19, sales of retail products declined especially in April but recovered significantly from May to June.

Wholesale Division revenues increased. Despite declines in M&A and equity underwriting in Global Investment Banking, equity and FICC revenues in Global Markets increased. Ordinary income was up by 5.5% to JPY 21.3 billion. Profit attributable to owners of the parent increased by 55.9% to JPY 17.5 billion. ROE was 5.8% on an annualized basis and BPS was JPY 800.39.

Please turn to Page 10. I'll explain the income statement. Commissions received were down by 15.5% to JPY 57.7 billion. Please see Page 23 for the breakdown of the total commissions received. Brokerage commissions were down by 1.6% to JPY 17.1 billion. Underwriting and secondary offering commissions were down by 12.8% to JPY 4.4 billion due to a decrease in equity underwriting deals. The sales of stock investment trust decreased. Distribution commissions dropped by 30.1% to JPY 4 billion. M&A-related commissions were down by 67.4% to JPY 2.7 billion. Net trading income grew due to an increase in FICC revenue.

Please turn to Page 11. I will explain the situation of SG&A. SG&A fell by 5.7% to JPY 88.8 billion, mainly due to a decrease in trading-related expenses and personnel expenses. Regarding trading-related expenses, in addition to advertising and promotion expenses, commissions paid and transportation expenses decreased. As for personnel expenses, earnings-linked bonuses are decreasing mainly overseas. Regarding depreciation, system-related depreciation increased.

Please turn to Page 13. Next, I would like to explain the ordinary income of overseas operations. Overseas operation ordinary income fell by 12.1% year-on-year to JPY 8.1 billion, and the ordinary income remained in the black for 17 consecutive quarters.

By region, in Europe, FICC revenues recovered and turned into black. In Asia and Oceania, although revenues declined in equity brokerage and IB business, wealth management business as well as recovery in FICC revenues contributed to the income. In Americas, equity revenues increased due to the continued high level of FICC revenues and the expansion of trading volume of U.S. equity.

Next, I would like to explain our business results by division. Please turn to Page 14. I would like to explain the revenues and income of the Retail Division. Net operating revenues were down by 14.8% to JPY 35.1 billion, and ordinary income decreased by JPY 800 million. Equity revenues fell due to a decline in sales commissions from equity underwriting. Fixed income revenues decreased due to lower sales of foreign and domestic bonds. Distribution commission for investment trust dropped due to a decrease in sales of stock investment trust. Agency fees for investment trust also declined due to a decrease in the average balance during the period. In other revenues, investment advisory and account management fees, which are wrap-related income, decreased.

Please look at Page 15. This is the Q1 summary of sales and distribution amount by product and the major topics for Daiwa Securities Retail Division. Due to the spread of COVID-19, the sales and distribution amount of all products decreased. However, when examining the first quarter on a monthly basis, as shown on the left side of the page, sales and distribution bottomed out in April, expanded in May and improved to a level above the previous quarter in June. This improvement is due to the resumption of face-to-face meetings with the customers' consent after the lifting of the state of emergency as well as effective information provision by e-mails using portable terminals and online interviews using Zoom. We believe a new successful sales style has taken off.

Please turn to Page 16. Next, I will explain the Wholesale Division. First, regarding Global Markets, net operating revenues were up by 45.5% to JPY 45.2 billion, and ordinary income increased by 201.8% to JPY 20.5 billion. Equity revenues increased due to steady customer order flows for both Japanese and overseas equities and successful management of position. FICC revenues increased both in Japan and overseas. Domestic FICC revenues rose as customer order flows of JGB and credit expanded. Position management also contributed to the revenues, driven by the tightening of credit spreads. Overseas FICC revenues increased due to Americas' continued strong performance, and Europe and Asia/Oceania showing recovery.

Please take a look at Page 18. This page is on Global Investment Banking. Net opening revenues were JPY 6.2 billion, down 52.8%, and ordinary income was negative or loss of JPY 2 billion. In the equity underwriting business, we executed IPO mandates while the size of the market was shrinking greatly. In the debt underwriting business, we accumulated many mandates for straight bonds, samurai bonds as well as a multiple number of benchmark bonds. With regards to M&As, we executed mandates steadily, utilizing our global network in the sluggish market.

Please turn to Page 19. Let me next explain Asset Management Division. Net operating revenues were JPY 12.7 billion, up 2.7%. And ordinary income was JPY 7.5 billion, which was up 11.8%. Daiwa Asset Management revenue decreased with lower average AUM, or public stock investment trust, excluding ETFs during the quarter, even though net assets remained inflow. Revenues of Real Estate Asset Management increased, with revenues posted as a result of acquisitions and dispositions in the portfolio of Daiwa Real Estate Asset Management. Japan Rental Housing Investments Inc. merged with Nippon Healthcare Investment Corporation through absorption-type merger and changed their names into Daiwa Securities Living Investment Corporation on April 1.

Please turn to Page 21. Let me explain the results in the Investment Division. Net operating revenues were JPY 1 billion, down 75.6%. And ordinary income was JPY 100 million, down 96.3%. This completes my explanation of the results in Q1 FY 2020.

[Yusuke Fujino, executive]

This completes the presentation. Next, we'd like to receive questions from you. For the Q&A today, due to the circumstance, we are going to receive questions in Japanese only. For English-speaking participants, if you have questions, please contact us separately. Now I would like to begin the Q&A session.

[Operator]

[Operator Instructions] We would like to introduce the first question from SMBC Nikko, Mr. Muraki.

[Masao Muraki, analyst]

I have 2 questions. First question is related to Page 15 about the FICC sales situation. So some of your peers also announced their results. So in terms of Retail's sales, how should we evaluate your performance for Retail's revenues? Also, the trends beyond July, given this trend, I believe you are making some recovery. But going forward, what will be your share in terms of the revenues? So what would be your -- what is your impression so far? That is my first question.

Second question related to investment banking related. So this is Page 18. So equity underwriting has been on the decline and M&A has been on the decline, both those in Japan and overseas. So going forward, what is the outlook? What are some of the needs and deals possible? Also for M&A, the number of M&A deals disclosed has been on the decline. So in terms of the control, what is your take, inclusive of the overseas locations?

[Eiji Sato, executive]

Thank you very much, Mr. Muraki. Related to the first question related to Retail Division, so on the quarterly basis, we have booked deficit. But we believe this is a one-off phenomenon. So on a monthly basis, we have disclosed the number. So now we're in the midst of COVID-19, we are coping with the changes, and we are definitely seeing recovery. So we are seeing JPY 800 million of deficit on a full year basis. But April was down by JPY 1.5 billion, and May is JPY 6 billion, and also FICC was JPY 1.2 billion of increase. So in terms of July, we are seeing a similar trend.

So as mentioned, we have been impacted by the refraining from interviews in April, and that has impacted our performance so far. But we are trying to maximize the situation. So we believe we are seeing recovery on a short-term basis. But in terms of our activity, so far, through the digital means, we have been able to expand the contact with the customers. So in the Q1, the number of proposals, we have actually increased it by 1.7x through telephone in comparison to the previous year. And that is why we were able to contain a flat trend.

So -- but in terms of activities, we are continuing with the wealth management-type of fee business and also a relative -- a solution business. And we continue to conduct a steady effort into these areas. So solution business, we have seen some drop here and because of the lack of face-to-face interviews. But now we are using the digital technology, and June onwards, we have also resumed the physical meetings with customers. So we believe the impact would start to show in our numbers.

Related to the second part of your question about the M&A-related business, as you rightly mentioned with COVID-19 has impacted the execution of the M&A deals. But in Q1, we have seen some uncertainty in terms of the guidance for the corporates and also due diligence has taken more time. So basically, the deals are taking more time. It is not as if the deals themselves are being suspended.

Therefore, in terms of the outlook, M&A, going forward, it will still become impacted by COVID-19. But it may actually lead to more consolidation within different industries. So we may see more merger and consolidation and also business succession of the owner family-related businesses. So we are receiving various inquiries so far. So we would like to steadily execute those deals to increase our revenues.

So within COVID-19, whether it is possible to conduct due diligence or not, in fact, we are making use of virtual data room, and we have been able to cope with a certain level of due diligence. So many of the deals are conducted online using Zoom and so forth. So many of the deals have been able to close using technology.

So in terms of Q1, our deals were limited. But Q2 onwards, we should start to see more deals in place, and that should improve the situation. So within COVID-19, so in terms of DC year, so JPY 6.8 billion, where some large-scale M&As have been -- excuse me, $6.8 billion of deal has been acquired. So of course, in terms of investment banking, we are always conscious of cost management. So those efforts will be continued. Thank you.

[Masao Muraki, analyst]

So additional question related, so you've talked about the physical visits. You have resumed some of the physical interviews upon the consent from the customers. But after the last results announcement you've mentioned, how would you conduct the sales? And how would you actually position the offices and so forth? You've mentioned that you would evaluate, revisit those concept on a trial basis. That was the announcement you have made. Could you give us an update on this initiative?

[Eiji Sato, executive]

Actually, we are still trying to identify the actual impact from COVID-19. So we have the real and also the digital. We're trying to find out the best mix of those 2 channels. But even prior to COVID-19, Daiwa, we have been looking into this. So for instance, branches and office, 60% of the entire nationwide offices, we are trying to make it a smaller size or put them into second floor or higher. So these initiatives are underway. And as for 40% of the offices, we are also promote downsizing.

So in terms of downsizing of the branches and offices, in terms of the floor area, about 50% of the sales floor. We are trying to realize the downsizing, and that has been conducted. So we would like to continue with this initiative. Also, in addition to that, as we promote more digitalization, the middle and back offices, we can also downsize in those areas. So for the branches, middle and back offices, we will continue with this effort this year. So on a nationwide basis, we would like to converge the back and middle offices to make their operation more efficient. So by the end of this fiscal year, in terms of headcounts, we should be able to downsize and also allocate more to the customers and solution provision more of a front office-type of businesses. We would like to allocate more headcounts there. Thank you very much.

[Operator]

Now next questions are from Mitsubishi UFJ Morgan Stanley Securities. Tsujino-san, please?

[Natsumu Tsujino, analyst]

FICC and FX revenue, on the managerial accounting basis, would you please take us through what's happening there? For this Q1 to JPY 29 billion showed a significant improvements from the Q4. But as an image, Japan and overseas, what will be the split between the 2? And in comparison with Q4, what is the trend on Q-on-Q basis? And what is the background for that trend?

My second question, so this is related to the first question but probably overseas. Continuously from Q4, I think business was solid. But looking at the monthly basis, April, May and May (sic) [ June ], what's happening on a monthly basis? And what is the current situation? Compared to Q1 results, what's really happening right now? And with regards to Japan, would you please give me the monthly trends, April, May and June on a month-to-month basis in Japan as well?

[Eiji Sato, executive]

Thank you so much for your questions. To your first question, FICC business, Japan and overseas, the mix or the split. Was that your question, Tsujino?

[Natsumu Tsujino, analyst]

Breakdown, the ratio or the absolute figure, whichever works for you.

[Eiji Sato, executive]

Roughly speaking, Q4, Japan accounted for roughly a little bit less than 40%. In Q1, Japan accounted for roughly 50%. And monthly trend, April, May and June and also at the moment, this month, in the area of FICC, May -- April, May and June, April was high, declined in May and then recovered a little bit in June. That's the image of the monthly trend in FICC.

[Natsumu Tsujino, analyst]

Right now, at the moment, in July compared to June, I feel the level is somewhat low, slightly slow compared to June.

[Eiji Sato, executive]

Both in Japan and overseas you mean?

[Natsumu Tsujino, analyst]

Yes.

[Eiji Sato, executive]

This trend, first, in Japan, April, high; May, drop; June, recover. That's the trend in Japan. But overseas, in April, May, June, over month-on-month, it has decreased gradually overseas. Thank you so much.

[Operator]

We would like to move on to the next question from JPMorgan, Otsuka-san.

[Wataru Otsuka, analyst]

This is Otsuka from JPMorgan. I have 2 questions. So I'd like to hear your answer one by one. So first is confirming the numbers. You've mentioned about the retail monthly number. You have just mentioned that, but I couldn't catch the numbers. So you mentioned about minus JPY 1.5 billion and so forth. Could you give us the number again?

[Eiji Sato, executive]

So in terms of Retail Division, so April, minus JPY 1.5 billion; May, minus JPY 600 million; and June was plus JPY 1.2 billion.

[Wataru Otsuka, analyst]

So this is the ordinary income?

[Eiji Sato, executive]

Yes. This is equivalent to ordinary income, yes.

[Wataru Otsuka, analyst]

So for the month of June, JPY 1.2 billion. So it was quite positive. But Q4, for 3 months, it was JPY 1.5 billion. So why, on a single month basis, this performance was so strong? Also, if you were to multiply by 3, could we continue -- expect this trend to continue for the rest of the year?

[Eiji Sato, executive]

So in Page 15, we have the details on the product sales. So if you can look at this number, the month of June, in comparison to the average of the quarter, it is actually quite high, as you can tell. So in terms of Japanese equity, perhaps there's not much change. But in terms of overseas equities and also for investment trust and so forth, we have seen some fairly strong numbers. So the stock market has been quite brisk. That is in the backdrop. And that is the reason why we have seen some positive performance.

Also, from the international diversified investment, we have the wrap funds and also the foreign equities and foreign bonds. Those have been strong as well. So that trend continues into the month of July. But of course, going forward, we need to watch the market. And of course, it will be more impacted by the market trend. But in terms of the recent months, recent weeks, we've seen similar trend continued from June.

Also for your information, so we have been using terminals, digital technology. So through online, we can actually receive and place orders. But in terms of Q1, the fund wraps has been on the decline, and also structured bonds. So the document for confirmation, it has to be on paper based. So we need to have the physical documents to conclude the deals. So that was one of the reasons.

But right now, we have been able to complete the digitalization of all the documents. Therefore, all the products, the placement of order and reception of the orders could be conducted online. So that is an improvement as we speak. And also, for the months of April, May and June, as time progressed, telework and also sales utilizing digital technology and, of course, our employees are getting used to it. And of course, our customers are getting familiar with those, therefore, the level of communication has been enhanced.

[Wataru Otsuka, analyst]

So related to the first question, so JPY 1.2 billion, if that continues for 3 months on a quarterly basis, I think the profit level will be around JPY 3 billion to JPY 4 billion or so. If that is the case then, on a hypothesis basis, what -- how would you evaluate the management? So in comparison to Q3 and Q4, the income-profit level, it is better. But if you would look at the quarterly basis, you cannot actually say that it is at an exceptional level for the Retail Division. How would you say that?

[Eiji Sato, executive]

Thank you very much for that tough question. But I believe we'll see the profit could be improved even further as we promote digitalization. So we will be able to increase the revenues and also reduce the cost as well, therefore, there's much room for the revenue and profit improvement.

As far as our retail strategy is concerned, we are focusing on the business and areas and maximize the use of digitalization. And that is leading to wealth management and also inheritance and also real estate-related business. That is the way we differentiate ourselves from our peers. We'd like to make use of our consulting skills. So just to repeat myself, we need to have the best mix between analog and digital initiatives.

Now in terms of cost or expenses, we have been downsizing the branches and office. And of course, we are trying to converge on the middle and back offices. So by leveraging our digital technology, we have been able to do so. So by using these, we would like to make our operation more efficient.

[Wataru Otsuka, analyst]

What about the second question, my second question related to share buybacks? You have not announced share buybacks this time around. What is the reason behind that? So you're looking at the market in a flexible manner and, of course, in the uncertainty of COVID-19. And also, you perhaps looked into some of the initiatives into the future. Was that the reason why you did not announce share buybacks?

[Eiji Sato, executive]

Actually, yes, your take is right. So our capital policy has not changed from before. So we are trying to have a sound financial standing. And also, we need to have enough funds for future initiatives. And if there's any surplus capital, then we will provide return to the shareholders, inclusive of share buybacks.

But as you know, in April, we have JPY 150 billion of the AT1 bonds, and we have been able to strengthen our equity. But related to COVID-19, the market and also our performance and also the opportunities into the future, it is still posing impact. Therefore, we need to really watch and see and monitor what would be -- would happen. So all those elements will be taken into consideration when we make the decision.

[Wataru Otsuka, analyst]

So just to add on, so in terms of the TSR, total shareholder return, so share buybacks based on TSR, do you have these in mind at this point? Or do you not really explore this? So we're not quite sure how you actually evaluate the share price. But on a relative basis in comparison to your peers, your Q1 number is not as satisfactory. So the share price, if it drops, would you consider ways to enhance the TSR so that you can return to the shareholders? Do you have this concept in mind?

[Eiji Sato, executive]

As we speak, we do not actually have that as our base scenario. So in terms of our dividend and our capital strategy, we disclosed those. We have disclosed those already. But the idea you have mentioned, we would like to explore that going forward. Thank you very much.

[Operator]

Now next questions are from Merrill Lynch. Sasaki-san, please?

[Futoshi Sasaki, analyst]

My name is Sasaki from Merrill Lynch. I have 2 questions. First is related to how to interpret the numbers. When you disclosed the profit by segment -- I'm talking about Page 6, profit by segment. In Q1, looking at the baseline of the ordinary profit, the other adjustments are the second largest swing factor. So these other adjustments, minus JPY 3.9 billion, what's included in minus JPY 3.9 billion in other adjustments line? That's my first question.

My second question is related to your outlook, looking at the appetite of the investment. Under the current circumstance of the market, what is the level of the appetite towards investment? What is the pipeline looking at the moment for investments?

[Eiji Sato, executive]

Other adjustments line, what's included in that line? Group head office and other group companies and the gap between the financial reporting and the managerial accounting and P/L, which does not belong to any segment. And segment profit, this other adjustment, is currently JPY 3.9 billion in Q1. That's actually lower, but there was no particular extraordinary item. This was just accumulation of many minor items. For example, dividend received from stocks we own, which went down. And due to the lower interest rates around the world, overseas locations, so a deterioration of the interest situation. So due to those factors, there were some negative factors that totaled to JPY 3.9 billion negative.

To your second question, appetite of the Investment Division and the pipeline level of the Investment Division. So we are aiming at being a hybrid-type securities group. So traditional securities business, we would like to create a stable revenue environment. So we'd like to make growth investments if conditions are met for those objectives. So we have a certain level of pipeline going forward with investments.

[Futoshi Sasaki, analyst]

So does that mean that in the midterm plan, your target of the investment, do you think you can execute of those investments? What is the density of the pipeline of the investment compared to your assumption in the midterm plan? What is the level of the investments that you can execute under the current circumstance?

[Eiji Sato, executive]

For example, hybrid ratio, we have set the ratio of hybrid ratio. So if you calculate backwards, this hybrid business ratio, so how much do we have to generate revenue in that area? So you can calculate backward. Basically, we'd like to increase the stock-based business so that we can generate stable revenue and stable cash flow. So we have to accumulate stable revenues. Against the target in the midterm plan, I think we are in line in terms of the level of the pipeline that we see at the moment.

[Futoshi Sasaki, analyst]

I have a follow-up question. At the beginning of the Q&A session, with the digitalization, you mentioned that you were trying to downsize or consolidate offices. So when you think about the budget for the next fiscal year, usually, you have to notify the landlord to cancel these 6 months in advance. So you must be, I think, talking to the landlords if you are intending to cancel the lease contracts for some of the floors in your offices. Are you doing that? Or is your time span longer than that? Would you please comment on that?

[Eiji Sato, executive]

Including branches, we are trying to reduce the real estate-related cost or property-related costs. We are considering those in the long span. 60% of the branches, we'd like to downsize. And with that, downsizing cost reduction would be JPY 2 billion to JPY 2.5 billion.

[Futoshi Sasaki, analyst]

And benefits of this reduction, when are we going to see that?

[Eiji Sato, executive]

20% -- a little bit less than 20% will be seen this year. And then in the next fiscal year onwards, 80% of the benefits will be seen. So in the next fiscal year will be the last year. We would like to finish this downsizing by 2023. So over that time frame, as an image, we are expecting the reduction.

[Futoshi Sasaki, analyst]

So to reduce 80% next year, then you have to be, I think, talking with the landlord now to cancel your lease contracts. You have to cancel the contract in September. Otherwise, you cannot reduce by 80% in the next fiscal year.

[Eiji Sato, executive]

We have the schedule. So in the next fiscal year, we are talking with a landlord for offices that we are intending to downsize next year.

[Futoshi Sasaki, analyst]

How about head office in Yaesu, is it included in the scope of your study?

[Eiji Sato, executive]

No. We are not including Yaesu office in the scope of the study.

[Operator]

[Operator Instructions] With this, we would like to conclude the telephone conference. So Sato will provide you with the final remarks.

[Eiji Sato, executive]

This quarter was turbulent, with COVID-19 pandemic shaking the global economy and the capital markets. Under the circumstance, I think we were able to show our capability to respond to change in the environment, securing increase in revenues on a consolidated basis. Strong performance of Global Markets offset the decline in the Retail and the Global Investment Banking Divisions, on the top of the benefits we saw from cost structure reform we have been working on from before, which contributed to higher consolidated income. In the Retail Division, we reported a loss because of significant constraints to face-to-face marketing activities with COVID-19, but I think it's temporary.

Looking at the monthly trend, with the bottom in April, business has been improving gradually in May and also in June. In June, in particular, the profit was a lot higher than the average of Q4 over the last fiscal year. I am feeling that the efforts on digitalization and the revenue structure reform are gradually paying off, which gives me confidence in sustainable business recovery going forward.

At present, Retail Division is addressing business model transformation from broker-centered business model to asset management-type business model centered on stock revenues. Many investors are seeking advice from specialists. With heightening uncertainties around the global economy, now is a time when we can play a role at our social mission to empathize our customers, being by their side to address their challenges on asset management and asset information. Our group interprets this global time of change as an opportunity and step up our efforts on cost and income structure reform by promoting efficiency improvement with the best combination of digital and analog, aiming at being a comprehensive hybrid-type securities group. I would appreciate your continued support and cooperation to us. Thank you so much.

[Operator]

This completes the telephone conference call. Thank you so much for staying to the end.

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