Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2020-Q2

[Eiji Sato, executive]

I'm Sato of Daiwa Securities Group. Thank you very much for joining our telephone conference despite your busy schedules. I'd like to explain our fiscal '19 Q2 results, which were just released today, 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 Q1 of fiscal '19. Net operating revenues were 10.1%, down to JPY 96.3 billion. Retail Division revenues were down due to foreign stock trading value decrease since the market correction phase in August and the fall of stock investment trust sales in value.

Wholesale Division revenues increased. Global market had equity revenues declined but overseas FICC revenue grows. So in total, the revenues grew. Global Investment Banking had revenue growth in equity and debt underwriting, while M&A revenues dropped.

The loss from provision due to revaluation of the existing investment was recognized in Investment Division. Ordinary income was down 45% to JPY 9.8 billion. Profit attributable to owners of parent was up 7.8% to JPY 17.3 billion. Annualized ROE was 5.6%, and BPS was JPY 798.65. Interim dividend was JPY 11. Payout ratio, 51.5%.

Let's turn to Page 10 for P&L summary. Commission received was 0.2% down to JPY 64.8 billion. For the breakdown of commissions received, please see Page 23.

Brokerage commission was up 2.2% to JPY 12.6 billion. Underwriting and secondary offering commission had an increase of both equity and debt underwritings, recording JPY 8.3 billion, up 20.3%. Distribution commission had a decline of stock investment trust sales, resulting in JPY 5.7 billion or down 10%. Due to the truncate of foreign equity trading, net trading income fell.

Extraordinary income was JPY 11.6 billion, JPY 8.5 billion gain from the sales of fixed assets associated with transferring noncurrent asset was posted, and JPY 4.6 billion gain on step acquisition was recognized as purchasing additional units of Samty Residential Investment and turning that into consolidated subsidiary. As a part of income structure reform, several systems and software which we are to stop using have been impaired, posting JPY 3.6 billion in the line of structural reform-related expenses.

Now let's turn to Page 11 for SG&A. SG&A with the main reduction in trading related and personnel expenses resulted in JPY 89.8 billion or down 5.1%. Trading-related expenses had a decline in commission related to trading and the personnel expenses had decreased in earning-linked bonuses.

Please turn to Page 13 for overseas operations. Ordinary income totaled JPY 1.6 billion, up 163%, staying in profit for 14 quarters in a row. Europe had FICC revenue growth and SG&A shrinkage so that the size of deficit became smaller. Asia and Oceania remained in profits due to good performance in wealth management, despite the revenue declines in equity and M&A businesses. Americas enjoyed revenue growth as FICC revenue grew.

Next is segment information from Page 14. Retail Division recorded net operating revenues of JPY 40.7 billion, down 5.4% and ordinary income of JPY 1.1 billion, down 57.7%. Equity revenue decreased as both domestic and foreign equity trading dropped.

Fixed income revenues fell since foreign bond sales fell despite JGB sales for retail industries increased. Book investment trust sales fell since the equity market correction of August, so was the distribution commission for investment trust sales.

Please turn to Page 15. This page is on the sales and distribution amount and topics in the second quarter in the Retail Division of Daiwa Securities. With regards to the wrap account service, contract AUM at the end of September was at the record high of JPY 2.233 trillion, driven by the increase in contract amount. With regards to the stock investment trust, sales of Daiwa U.S. REIT Plus was solid. Furthermore, sales of Japanese bonds were at the high level, driven by sales of straight bonds issued by SoftBank Group and the JGBs for individual investors.

Please turn to Page 16. Let me explain the results of the Wholesale Division, starting off with Global Markets. Net operating revenues were JPY 27.8 billion, up 2% and ordinary income was JPY 5.5 billion, up 21.4%. With regards to equity business, net revenues decreased due to a drop in customer order flows of foreign equities upon the stock market decline on the back of the U.S.-China trade issues and others. With regards to the fixed income, domestic FICC revenues declined due to a decrease in customer order flows for structured bonds and credit products. On the other hand, overseas FICC revenues increased with a strong U.S. performance.

Please turn to Page 18. This page is on the Global Investment Banking. Net operating revenues were JPY 11.9 billion, down 1%, and ordinary income was JPY 2.8 billion, up 203.1%. In the equity underwriting business, IPO deals contributed. In the debt underwriting business, we accumulated many mandates where we served as a lead underwriter, such as SoftBank Group's straight bonds and others. We also focused on SDGs-related bonds such as sustainability bonds and social bonds. Revenues from M&As were down Q-on-Q yet high level with accumulation of domestic and overseas deals.

Please turn to Page 19. Let me explain Asset Management Division. Net operating revenues were JPY 11.6 billion, up 2.4%, and ordinary income was JPY 6.5 billion, which was up 5.6%. Daiwa Asset Management average AUM of public stock investment trust, excluding ETFs, at the end of the quarter was slightly up Q-on-Q. Management fees were slightly down. However, commissions paid to distribution agents were down more. Therefore, revenues increased. AUM of 2 real estate management companies reached JPY 1.33 trillion, with the addition of Samty Residential, who serves as a sub sponsor.

Please turn to Page 21. Let me explain the results in the Investment Division. Net operating revenues were minus JPY 5.5 billion, and ordinary income was a loss of JPY 6.5 billion because we posted losses associated with revaluation of existing investments. This completes my explanation of the results in the second quarter FY 2019.

In the second quarter of FY 2019, tough market environment continued. But retail transaction amount in the Japanese market overall renewed record low since the start of Abenomics in the environment where there are more uncertainties around the global economy. Under this circumstance, ordinary profit in the Retail Division was limited to JPY 3.8 billion. Upon this tough situation, we have developed cost reduction and income expansion measures aiming at JPY 30 billion income improvement in the whole group. We are going to work on them speedily.

In the Retail Division, we are working on thorough cost reductions, such as moving branches from the ground floor to the second or higher floor, returning floors, downsizing by consolidation and elimination of nearby branches, abolishing in-branch ATMs, switching some documents from post mail distribution to email distribution and so forth, while watching carefully customer needs and return on cost benefits.

On the other hand, to expand income, we have been working on transforming the business model from traditional brokerage business model to the asset management-driven business model through expanding solution businesses, such as inheritance, business succession and real estate, and so forth. We are going to accelerate this initiative. In addition, we are aiming at securing more stability in consolidated results by expanding new businesses, such as real estate, renewable energy, agriculture, health care and others.

I'd appreciate your continued support to us. Thank you very much for your participation.