Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2023-Q2

[Eiji Sato, executive]

My name is Sato from Daiwa Securities Group. Thank you. Welcome, and thank you very much for attending our conference today. I will discuss our fiscal year '22 second quarter earnings results announced today using the presentation material posted on our website.

Please turn to Page 4. First, let me provide you with a summary of our consolidated results. The percentage change is based on the comparison with FY '22 first quarter. FY '22 second quarter net operating revenue was JPY 110.9 billion, up 4.5% Q-on-Q. Ordinary income was JPY 14.8 billion, down 17.9% Q-on-Q.

Retail division secured ordinary income of JPY 6.1 billion, thanks to the transition to wealth management type of business model as well as the progress in the cost structure reform.

For Wholesale division, while global markets are weak, global investment banking improved. In addition, we booked extraordinary profit of JPY 11.2 billion. We securitized a portion of ownership of Tokiwabashi Tower as we plan to expand AUM of real estate asset management business. Profit attributable to owners of parent was JPY 19.5 billion, up 64.8%, and annualized ROE was 5.5%. Interim dividend is JPY 11, payout ratio of 51.8%.

Please turn to Page 10. This is P&L. Commission received increased by 5.2% to JPY 70.5 billion. The breakdown of commission is on Page 23. With the rise in Japanese equity trading volume, the brokerage commission increased by 6.4% to JPY 16.1 billion. Underwriting and secondary offering commission increased 17.5% to JPY 6.2 billion. Distribution commission decreased 15.9% to JPY 3 billion.

M&A-related commission was up 31.1% to JPY 9.2 billion. Extraordinary income was up 353.5% to JPY 9.4 billion as we booked JPY 11.2 billion of extraordinary profit due to partial securitization over ownership of Tokiwabashi Tower building.

Please turn to Page 11. Let me explain on the status of SG&A. SG&A expense increased by 1.7% to JPY 98.9 billion. Trading-related expenses, commissions paid increased. Those salaries increased bonus declines, so overall personnel cost was down.

Please turn to Page 13. I will discuss ordinary income of overseas operations. Ordinary income for total overseas operation was JPY 3.4 billion, up 23.9% Q-on-Q. Europe saw progress in revenue restructuring and increase in M&A-related revenues. Asia/Oceania saw decreases in equity and primary revenues as well as in equity method income from SSI. In America, FICC revenue remained solid and recorded an increase in income.

Next, let me discuss by-division performances. Please turn to Page 14. First, on Retail Division. Net operating revenue was up 2% to JPY 41.1 billion and ordinary income recorded JPY 6.1 billion, down 2.3%. Equity revenue increased with rising trading volume in Japanese equities. Distribution commission for investment has fell as stock investment trust sales declined. Other revenues increased due to growth in agency fees. Asset-based revenue expanded to JPY 20.7 billion and accounts for 51.6% of net operating revenue of the Retail division.

Please turn to Page 15. These are the sales and distribution amount trends and topics for the second quarter for Daiwa Securities' Retail Division. For the wrap account service, the recorded contract amount was JPY 152.7 billion and net inflow was JPY 83.2 billion, both expanded Q-on-Q. For stock investment trust, global high dividend stock fund and inbound-related Japanese equity fund saw solid sales trend.

On the lower left-hand side of the slide, there's a graph showing sales and distribution amount and net growth ratio of wrap account service on stock investment trust. The net growth rate was 20.9%.

Please turn to Page 16. Let me discuss on the performance of the Wholesale Division. Starting off with global markets, net operating revenues were JPY 25.2 billion, up 3.2%. Ordinary income was loss of JPY 1.4 billion. Equity revenue increased driven by the recovery of the domestic rate flows of retail investors. However, we had difficult time with derivative position management on the back of volatile market environment. FICC revenues declined. In Japan, we saw a slowdown from the previous quarter when JGB's performed well. In overseas, FICC performed well, although revenues from MDC declined in the United States.

Please turn to Page 18. This page is on the Global Investment Banking. Net operating revenues were JPY 13.5 billion, up 18.3%, and ordinary income was JPY 0.7 billion. Revenues from equity underwriting business increased as we accumulated the track record of mandates as a lead manager. In the debt underwriting business, we accumulated a track record of serving as a lead manager of straight bonds as well as subordinated bonds. M&A's income increased as we executed a mandate steadily in Japan as well as overseas.

Please turn to Page 19. Let me next explain Asset Management division. Net operating revenues were JPY 16.9 billion, down 8.9%. And ordinary income was JPY 10.7 billion, which was down 3.5%. Daiwa Asset Management net revenues went down due to a decline in AUM associated with a drop in the market value, even though we secured a positive net capital inflow. With regards to the real estate asset management, revenues increased driven by AUM increase of Daiwa Real Estate Asset Management and equity method income from Samty.

Please turn to Page 21. Let me explain the results in the Investment division. Net operating revenues were JPY 1.9 billion, down 48% and ordinary income was JPY 0.7 billion, down 82.4%. Both revenues as well as income went down as revenues from investment in private equity decreased. This completes my explanation of the results in the second quarter of FY 2022.

The market in the second quarter was overground by wild volatilities as the world economies faced a big shift, such as Russia's invasion into Ukraine, division of the world, inflation raging, pivot from the long asset monetary easing and so on. All of those factors have impact on prolonging the correction of the stock market since the beginning of the year and the investor sentiment on the back of uncertainties on the interest rates.

In this environment, where there was strong headwinds, our consolidated financial results were tough. Among all, market division saw a severe decline. Customers loss deteriorated due to stronger latency and prudent attitude of investors towards all bond and currency denominated asset classes on the back of weaker equity market as well as drastic yen depreciation.

In addition, we struggled with the position management because market environment became quite volatile and less liquid. In particular, we posted a loss because we could not hedge against our position as well due to declines of both Japanese and U.S. equity prices. Drastic interest rates and exchange rate moves and meet the decline of customer flows we experienced in Q1. We are currently working on improving our accuracy of position management by taking various measures, and we don't think this type of extraordinary environment continues so long. Therefore, we expect our earnings to improve from now on.

In the Retail division, on the other hand, where we are making a good progress of shifting our business model to wealth management business model and cost structure reform, we secured ordinary income of JPY 6.1 billion. And through business portfolio diversification with the Asset Management division and the Investment division maintaining their solid performance, we valuate that we managed to achieve this level of results. As we see the current environment right now in October, we see some signs of light looking at customer activities, even though overall market environment continues to be uncertain.

In the Retail division, funds of sales are maintaining a high level, and we see increase in capital inflows into foreign currency bonds and the foreign currency deposits where there is a pickup in yield. From the middle of October, equity market is restoring its composure, and we expect customer flows of equity and stock investment trust to recover from now on.

On the other hand, in the market division, U.S. FICC business is keeping its solid performance and the domestic FICC business is on the recovery trend.

I'd like to explain something here since it seems there are increasing interest in the level of dependency on the revenues from structured bond sales of Daiwa Securities. The ratio of revenues from structured bond sales in the retail division over the past 3 years was -- from FY 2019 to FY 2021 was 6% to 7% level. However, it has declined to 4% level in the first half of FY 2022. Out of them, if we look at so-called contract structured bonds, its ratio has declined into 3% in this first half.

If you know down further more to look at only sales of them to retail investors, the mix has declined to 1% level in the first half of this year. Even if we decline -- decide to stop marketing structured bonds, we can continue to provide high-quality solutions to our customers by actively proposing other products that match customers' needs.

I appreciate your continued support and cooperation to us. Thank you so much.