Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2022-Q3

[Yusuke Fujino, executive]

Thank you all very much for waiting and thank you very much for joining the financial reporting conference for the third quarter of FY '21 of Daiwa Securities Group. It is time. So let us start.

Again, thank you very much for joining our telephone conference today despite your busy schedules. Today's speaker from Daiwa Securities Group is Sato, Executive Managing Director and CFO. I am Fujino of IR Division serving as a facilitator today.

We will start with the presentation of the third quarter of FY '21 results, and then we'll take your questions. Please be reminded that this call is also accessible on the Internet. So let's start.

[Eiji Sato, executive]

[Interpreted] Well, I am Sato of Daiwa Securities Group. Thank you very much for joining our telephone conference today. Today, we released our financial results of the Q3 of FY '21. I now explain the results by following the earnings announcement material, which is available on our website.

First, please turn to Page 4 for consolidated financial summary. And here, the percentage of change is of comparison to the Q2 FY '21. The third quarter of FY '21 on a consolidation basis recorded growth in both revenue and income. Retail Division ordinary income was JPY 12.7 billion, up 2.7%, exceeding JPY 10 billion for 4 consecutive quarters.

In Wholesale Division, Global Markets had FICC revenue recovery, and the Global Investment Banking had equity underwriting revenue growth. Net income attributable to owners of the parent was JPY 26.6 billion, up 0.2%. Annualized ROE was 8%, and the BPS hit the record high, JPY 897.76.

Now please turn to Page 10 for P&L summary. Commission received was JPY 84.4 billion, up 1.8%. The breakdown of the commission received is on Page 23. Transaction volume of Japanese equities increased, and the brokerage commission recorded JPY 20.1 billion, up 3%. Underwriting commission had a contribution of large-sized equity underwriting, recording JPY 13.7 billion, up 39.4%.

As for distribution commission, equity fund sales volume declined, finishing at JPY 5.5 billion or down 10.1%. M&A-related commission was JPY 7.9 billion, down 33.3%. Due to the real estate transfer, which was acquired as warehousing for Group's Real Estate Asset Management business, other operating revenues and expenses increased for almost the same amount.

So let us move to Page 11 for SG&A. SG&A was JPY 98.3 billion, down 0.2%. Trading-related expenses increased in line items such as commission paid. As for personnel expenses, earnings-related bonuses overseas decreased.

Now please turn to Page 13 for overseas operations. The ordinary income totaled JPY 2.7 billion, up 79.9% compared to the previous quarter. In Europe, while M&A revenue fell, primary revenue increased so that the result in total improved. Asia and Oceania had a growth of primary revenues and gains from equity method investments in SSI securities. Thus, the region delivered a high level of profit. Americas had revenue increase in FICC and the primary as a result of which the region recorded revenue growth.

Next is segment information. So let me start from Retail Division on Page 14. Net operating revenues were JPY 49.7 billion, up 0.3% with the ordinary income of JPY 12.7 billion, up 2.7%. Equity revenue gained with the growth of sales commission tied with underwriting deals. Investment trust distribution commission revenue fell due to the decline of sales amount of equity investment trust. Agency fee for investment trust increased as the asset under custody increased. In the line of others, wrap-related revenues increased. Asset-based revenue expanded to JPY 19.6 billion, accounting for 40.4% of the net operating revenues in the Retail Division.

Please turn to Page 15 for sales and distribution amount by products of Retail Division and our topics of the quarter. Equity distribution increased significantly with the Japan Post Global PO, the largest PO deal of this year, which has a positive impact on new account opened and asset inflow.

As for wrap account service, with the rise of contract amounts and the net inflow, the contract AUM hit the record high of JPY 2,925,900,000,000. The graph on the left down below shows sales and the distribution amount of wrap and equity investment trust. Net increase ratio was 22.4%.

Please turn to Page 16. Let me next explain about the Wholesale Division. Starting off with Global Markets. Net operating revenues were JPY 35.8 billion, up 10.2%. Ordinary income was JPY 11.2 billion, up 27.9%. Equity revenues declined. Although customer order flows for Japanese and foreign equities remain firm, derivative revenues were down. FICC revenues increased both for domestic and overseas. In Japan, customer order flows for JGBs and the derivatives recovered. In Americas, revenues improved due to higher interest rates and volatility.

Please turn to Page 18. This is on the Global Investment Banking. Net operating revenues were JPY 17.5 billion, down 2.7%; and ordinary income was JPY 4.8 billion, up 40.5%. In the equity underwriting business, we served as a lead underwriter for the largest PO mandate this year, Japan Post Holdings; and accumulated a multiple number of lead underwriter deal mandates. In the debt underwriting business, we accumulated the track record of serving as a lead underwriter for straight bonds and subordinated bonds. With regards to M&As, we made steady execution of mandates both in Japan and overseas.

Please turn to Page 19. Let me next explain Asset Management Division. Net operating revenues were JPY 18.2 billion, up 3.3%; and ordinary income was JPY 11.2 billion, which was down 11.5%. Daiwa Asset Management revenue increased on the back of net capital inflows or publicly offered investment trust as well as higher AUM during the quarter. With regards to the Real Estate Asset Management, AUM has increased both for Daiwa Real Estate Asset Management and Samty Asset Management.

Please turn to Page 21. Let me explain the results in the Investment Division. Net operating revenues were JPY 3.1 billion, up 209%; and ordinary income was JPY 1.7 billion. We secured profits driven by exits from a multiple number of existing investments.

This completes my explanation of the results in the third quarter of FY 2021. Stock market in the third quarter went up and down on the back of cross currency such as global economy normalization, expectation towards solid corporate results, resurgence of COVID cases and cost fields towards inflation and so on.

In this environment, we demonstrated our comprehensive capabilities as a group with the increase in profit to consolidated ordinary income of JPY 40.5 billion and profit attributable to the owners of the parent of JPY 26.6 billion. In particular, Retail Division has been generating more than JPY 10 billion for 4 quarters in a row, which is a result of our efforts of transforming to wealth management style business model and our cost structure reform, which we have been taking our time, which contributed to stable growth in our performance.

So far in January, it is true that Retail Division is seeing somewhat slowness in trading of Japanese and foreign stocks compared to before, driven by more latency attitude of retail investors upon the big correction of the market. On the other hand, we have not seen the big shift of investor segment so far with increased unrealized gains from the upward run in the market up to this point. Actually, we see movements of buying the deep behaviors as well.

Furthermore, there is strong demand for long-term diversified investments. Our fund wrap sales are still doing very well. Total product sales amount is almost the same level as the average of the third quarter. Having said that, there are more uncertainties in the market. Many of our customers are in need of professional advice. Now is the high time when we actively put out a proposal of products and services, which fit each one of the customers need to long-term asset building needs to accelerate the transformation into wealth management business model and contribute to the achievement of our customers' goals.

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

[Yusuke Fujino, executive]

Now, we'd like to open the line for the questions from you. Today, due to the system, we received questions in Japanese only. If you have questions in English, please contact the IR department. Thank you so much for your understanding.

[Operator]

[Interpreted] [Operator Instructions] So the first question is from SMBC, Muraki-san.

[Masao Muraki, analyst]

[Interpreted] This is Muraki of SMBC. I have 2. Well, both of my questions are regarding the outlook for Retail and for Wholesale. In the last comment, you said that -- you talked about the current situation of the Retail Division. Well, when we think about the future of what is going to happen, so far, your emphasis has been placed upon the foreign equities. When we think about the stocks, mainly, the focus was on technology stocks, I think.

Now when it comes to the business of the foreign stocks, how is the current correction working and going to have an impact? And increasing of those foreign equities, as you also mentioned, we will imagine what is going to happen in the month of February and beyond, what kind of a downside and the upside do you think you'll be able to see?

And also, the other part of my question is regarding the pandemic related, especially in the U.S., it seems that the financial reporting has had still so, but it seems that there will be a monetary tightening policy to come, and the market has been moving in the month of January. So the tightening is -- what kind of an impact does it have on your FICC business? So those are my 2 questions.

[Eiji Sato, executive]

[Interpreted] Thank you very much for your question, Muraki-san. First of all, for the Retail business -- regarding the sentiment in the Retail business. Well, the foreign equities was the main focus. However, the price has been down mainly. And so far, there was a trend of the upside. So it seems that there's been a lot that been inside so far and the demand has been some [indiscernible] not being good so much.

And for the data we have put, our overall -- your point was that we have gained a lot from the foreign equities. But although there was a big exposure to that. For now, when we talk about Japanese equity accounts for about 70%. So even there was an impact on the foreign equities because of the current changes, that does not really have much impact on us because their representation is not that big now. And rather than that, there's been much more to buy are quite strong. And we see quite a greater demand still continuing for the buy.

But in the stock market, of course, we will see some volatility ups and downs that will be happening. But our estimate is that for the whole institute business, the market might -- the market did not only had marks that did not have the -- was beyond the expectation or below the expectation. But as soon as we see a trajectory much more clearly and have much more visibility, then I think that there will be uncertain expansion of what we have had for the future. And that's what we are estimating to happen. And also in January, the capital inflow has increased. Even compared to the normal days, it is steadily increasing. So I think that there is an attention being paid to that business.

Now moving on to the Wholesale business because of the monetary policy change, what kind of impact it is going to have on our business? Now the FICC has been quite smooth and quite steady. But there are some market factors and also that are -- of course, the market factor does exists. But for us, I think our competitiveness was quite resilient to those changes in the policy. And our trading capability is quite high. Of course, in the domestic market, but also for the U.S., the treasury primary leader is the position that we have enjoyed for a long time. And with the expertise and know-how that we have established not only in the U.S. but also globally, I think even in Japan, we were able to enjoy the situation and from the institutional industries. And also, with the rise of the volatility, the flow is also increasing.

In the U.S., treasury -- the treasury-related flow of the customers is also on the rise. And so far, like last year, the big contributing factor was MBS, mortgage-backed securities. Look, this has been stagnant because of the market condition. But going forward, the steepening -- of course, ahead, the spread is going to probably become wider. So the secondary flow might be happening. So MBS is something that we also need to pay attention to. And also, the hike of the interest and the stock price down is going to invite the credit widening -- the credit split widening. So that's where we need to monitor closely continuously.

Did I answer your question?

[Masao Muraki, analyst]

[Interpreted] Thank you very much. So regarding the point number one, in January, the capital inflow was quite steady and increased compared to the previous quarter. Now the asset class that enjoyed those inflows, what kind of product is that from the Retail investors?

[Eiji Sato, executive]

[Interpreted] Well, thank you very much. First of all, there was a large-sized debt issuance. So that interacted inflow and also wrap is certainly increasing and AUM is increasing. And the same specific fund is also increasing, and the net inflow is also increasing. But there are some movements that we see from the U.S. market so that the U.S. equity or the related investment trust, we will need to see it consciously.

[Operator]

[Interpreted] The next questions are from [indiscernible] Morgan Stanley.

[Unknown Analyst]

[Interpreted] I have a similar question. First, in the Retail Division, the assets -- in the third quarter, asset-based fee plan increased from Q3 -- Q2 to Q3 and other areas declined. So what's getting better? What's getting less? Asset-based fee plan. I don't know about this particular situation for the asset-based fee plan sales trend. So would you please give me more color what's selling well, that's not selling well? And then from the beginning of January due to the high volatility of the markets, what changes have you seen in investors or Retail investors behavior? Would you please give me more color on those? And furthermore, the stock of flow in the Retail Division is somewhat slow, you said. But what about transaction value of the foreign equities?

And this year, in Q2, Q3, the transaction value of foreign equities has been increasing, probably on the back of rise of the market. But in this high large downward trend of the stock market, I wonder what is happening to the transaction value of foreign equities? In January, you didn't see any impact at all from the transaction value of foreign equities in January, in particular, like higher selling, is that happening? Would you please give me more color on those?

And with regards to overseas, looking at a PL in our business unit in FICC business units. Domestic represents more than 80%, and then equities, domestic represents 85%. So stock overseas is probably around JPY 3 billion or so per quarter. That's my impression, which was different totally in the last fiscal year. But this level of around JPY 3 billion per quarter, is there any scenario where you expect this JPY 3 billion to go down furthermore? You talked about correction of the credit market. But what -- under what scenario do you think this JPY 3 billion will be much lower going forward?

[Eiji Sato, executive]

[Interpreted] Thank you so much, [indiscernible] So what's selling well? What's not selling well? In principle, growth-related equity investment trust are slowing down due to this environment. On the other hand, value on investment trust are performing well, roughly speaking. And then for holding equity, we see somewhat slowdown of the transaction. And asset-based fee plan is selling very well, that's because relatively speaking, NASDAQ-linked products or growth U.S. equities are bidding on U.S. growth. Those are driving the strong performance of asset-based fee plan.

And what's happening to the transaction value of the foreign equity due to the big stock market correction for foreign equities. I think we are off to a slow start of the year. For Japanese equities, I think our transaction value is increasing, so there our products selling better. There are products that are selling good, offsetting to each other. So there are stronger investor behaviors of buying the debt, if you will.

And FICC, Japanese portion is quite large for FICC business. For overseas scenario, in the future, the interest rates are expected to go up, but we have MBS, and we have other U.S.-related products, and we have European products as well. So in the Global Markets, in FICC, what is the risk scenario, the market confusion, volatility and with this increasing volatility, there are actually profit-making opportunities. But there are some losses expected by the investors as well. But as I mentioned, for us, it's more stable compared to players who are making big transactions using the balance sheet. So U.S. treasuries and MBS, you said European credit. I couldn't hear what you said, okay, credit understood. European credit understood.

[Operator]

[Interpreted] So next question is from Morgan Stanley MUFG, Nagasaka-san.

[Mia Nagasaka, analyst]

[Interpreted] This is Nagasaka of Morgan Stanley MUFG. I have 2 questions. One is about Global Investment Banking outlook for the future. Now there is a correction phase of the equity price, especially equity in the M&A business seems to have had an impact from that correction opportunity and also pricing impact, I think, are going to be seen so that maybe there might be some influence, if you could explain.

The second point is about the return to shareholders. Last April, you had the buyback -- you had announced the buyback of up to JPY 30 billion, and that was subject to the return for the year fiscal 2020. In the current year, your performance has been quite strong. So for the FY 2021, do you have any policy for the return to shareholders or any conditions or the trigger for us to make a decision for buyback? If you could give any comments on that.

[Eiji Sato, executive]

[Interpreted] Thank you very much. The first question about the outlook. Well, currently, there has been some correction of the equity price. But in the longer-term period, the company's M&A -- I think there's been quite a big demand. And thinking about the trends for the expansion of that business itself, I think we could probably talk about that. But for the fourth quarter only for the APL business, the impact coming from the equity price correction might have some hit. At this point of time, the impact has been quite limited. But it seems that the flow has been a little bit slow.

As you mentioned, the growth stock has been mainly coming down as a price. So for the start-up companies, there seems to be the price has been valued or discounted. So at this time, there might be some company which is going to have some hard time going forward. However, the market has been seeing the current situation, which is quite good. So there might be some bias on equity itself, but from the investor side, it seems that the -- that's been making complete -- so under that situation, is the IT business related cases are probably going to see some pick up faster than the other industry. And also, for the DCM, the issuance is relatively sting at a high level. And it seems that companies might come up with the issuance timing ahead of their original schedule if they face some financial constraints.

And for the M&A, when we look at the material, it seems that the pace is slowing down slightly. But the market itself is slowing down. There has been a growing uncertainty and concerns about what is going to happen. So some deals or mandate I might have -- might need to have some time until it's closed or make a decision. But it does not necessarily mean that there are no pipelines or no deals or no mandate. So well, as I mentioned earlier, for domestic Japan, the pipeline has expanded by about 20% to 30%. And the level has been really hitting a record high level. So market -- we will just see very closely on what is going to happen and then make sure to steadily pursue what will be available.

And for the shareholder return for the year 2020, we had the 45 million shares available. And just thinking about the timing that we have done that, we will look at the performance and the result of the fourth quarter of this year. And then we will think about the pipeline for the growth opportunity or the investment in the future growth in the business. And then we have to assure that our policy for the shareholder return does not change. So whenever there will be a surplus, then we will think about the balance of how to return to shareholders, inclusive of the options of the buyback.

[Operator]

[Interpreted] Next questions are from Bank of America, Mr. Sasaki.

[Futoshi Sasaki, analyst]

[Interpreted] Sasaki from Bank of America speaking. I have 2 questions. Number one, on Page 27 of the presentation, AUM. Let me ask you about how I should interpret this. So JPY 75.5 trillion. And declined in Q2 or versus Q2, and that decline is driven by equities. But the globally, stock index is up. According to explanation, the capital inflow is firm. So you would assume this should increase, but why equity balance is down at the end of the third quarter?

My second question, again, Page 30 of the presentation, asset-based revenue. Going forward, if the correction of the stock market continues, this asset-based revenues, which has been increasing, I do think it's going to be starting to decline? Or it's not as simple as that. How should I interpret this asset-based revenues as market corrections continue?

[Eiji Sato, executive]

[Interpreted] Thank you so much. First, with regards to assets under custody, equity assets under custody is down. In the Retail Division, it's up. It's positive. Capital inflow is positive. But in the Wholesale Division, partially, there was some outflow. That's why assets under custody are down and among equities, under our custody, there are some names where the market value declined. That's why in total, the assets under custody were down for equities. And asset-based -- asset balance-based revenue, we've been outpacing against our target in the medium-term management plan. But downward -- mainly downward, and then trust -- investment trust, I would like to drive this asset-based revenues by selling more of those. And this is linked to the balance. So if there's a big correction of the stock market, inevitably, asset-based revenues could go down, but I would like to keep increasing the balance on the net basis.

[Futoshi Sasaki, analyst]

[Interpreted] To my first question, you mentioned that in the Wholesale, there was capital outflow. Is that financial commercial corporate clients or Retail? And for the asset-based revenues in the third quarter, JPY 48.6 billion and then JPY 19.6 billion. So what is the breakdown within that? So like 30% for wrap and then 60% or equities. Would you please give us more breakdown within JPY 48.6 billion and then JPY 19.6 billion?

[Eiji Sato, executive]

[Interpreted] Okay. To your first question. We do not disclose specific categories of customers, so we cannot really answer that question. And then asset-based revenue breakdown, again, we have to retain from disclosing the breakdown.

[Futoshi Sasaki, analyst]

[Interpreted] Okay. But first for Page 30 in the footnote, clearly, is the agency fee for investment trust, investment advisory and account management fees, clearly, but -- so I can just add up all the disclosed figures to arrive at JPY 19.6 billion. Would you please give me some comment -- rough comment as to what -- which fee is more and which fee is less?

[Eiji Sato, executive]

[Interpreted] Although I cannot give you that absolute amount for each type of fee, but the big ones are standard fees. That's the largest component. And then our agency fee follows. So those are the 2 big components within JPY 19.6 billion. And then the third largest one is the account management fee.

[Futoshi Sasaki, analyst]

[Interpreted] Understood. Okay. I'll think through later on.

[Operator]

[Interpreted] [Operator Instructions] So next question is from Otsuka-san of JPMorgan.

[Wataru Otsuka, analyst]

[Interpreted] This is Otsuka of JPMorgan. Can I ask question 1 -- I wanted to ask question one by one. The first one is about Retail. On Page 15, Well, Sato-san, you made a remark on this presentation. For the fourth quarter, since January, you said in the presentation that just looking at this product, it is just a confirmation, but the equity investment trust is not decreasing that much, but equity distribution primary is included in the 15 -- on this Page 15.

Well, secondary, it means that the domestic side is increasing, but foreign side is decreasing. So when we compare to the previous month or the previous quarter, that's basically flattish. Is that correct? That's my question -- my first question.

[Eiji Sato, executive]

[Interpreted] Well, regarding the equity, Japanese equity is increasing, and the foreign equity is decreasing. So it has remained flat. Slightly negative, I should say. For the equity investment trust, compared to the third quarter, the investment trust of the foreign equities is slow. But for wrap account, compared to the third quarter average, it became -- it is becoming stronger.

[Wataru Otsuka, analyst]

[Interpreted] Okay, that's the image. It's clear. My second question is about Wholesale. On Slide 16, if you could refer to that page to use the figures. For FICC, you see that the revenues are on the rise. Well, for domestic and foreign, can you break that into 2 -- those figures into 2 because the U.S. banking, the financial period for that second quarter, third quarter, they seem to had FICC decline and that happened for a lot of U.S. banks, I think.

So in this region, the FICC -- I'm just wondering where you were able to seize and capture the opportunity for growth? For FICC revenues, well, this is in comparison to the second quarter rate JPY 13.3 billion to JPY 15.1 billion, there's an increase from the second quarter to the third quarter. So I want to see where it increased and how it has increased?

[Eiji Sato, executive]

[Interpreted] Okay. This growth. Well, both for the domestic and the foreign had increased, but I'd say the magnitude is much bigger for the domestic. Roughly speaking, domestic is about 40%. So the -- about 40% of the increase came from the domestic and the 10% came from the overseas. So that's JGB and derivatives.

[Wataru Otsuka, analyst]

[Interpreted] Okay. Understood, clear.

[Eiji Sato, executive]

[Interpreted] And also, JGB's point is quite different. We were able to capture the flow on JGB, which was a contributing factor.

[Operator]

[Interpreted] Next questions are from Mr. Niwa, Citi.

[Koichi Niwa, analyst]

[Interpreted] This is Niwa from Citi. I have 2 questions. First question is on the expense overseas, outlook of that and domestic IPO market. With regards to the first question, there was a big change in expenses relating to labor costs in the M&A business, as I understand mainly U.S. companies are seeing cost increases -- cost inflation. And is it impacted on your business? Are you anticipating the cost inflation going forward? And what is your view for the profitability of your overseas business?

And the second question, there has been so much discussion going on. But relating to how the valuation price is determined or calculated for IPO prices. Like there are so many discussions about potentially shortening the period for the valuation of calculation. But what is the anticipated impact? Is it a positive opportunity for you? Or are there more negative pressure on your business?

[Eiji Sato, executive]

[Interpreted] Thank you so much. With regards to M&A, in the investment banking business, that's the hottest business area at the moment. As you know, major investment banks are struggling to retain strong talent. Therefore, there's cost inflation, the strong cost inflation trend. On the other hand, in the whole industry, recently, there is this movement to increase the base salary rather than bonus. And considering that, there are some cost pressures, upward pressures.

On the other hand, our target, which is the middle-cap market. Compared to other players targeting a large cap, the level is lower. The outlook for the cost inflation is not that high in the middle-cap. But the people who are joining our company, well, otherwise well known as a company who is strong in Asia. So for example, in Europe and the Americas, there are those companies who operate only in those markets, but there's a perception that when they joined our group, then they can work globally, not only in Asia. So we are recruiting -- we have 500 people, excluding Japan, employees in Japan. So I think we have the competitive advantage in terms of human resources. So in the whole industry, we see the cost inflation trends. But we think we can control the labor cost.

For example, in the M&A business. M&A business is big in Europe, the Americas, followed by Asia. We are currently making upfront investments for the future, industrial, healthcare are the areas, for example, where we'd like to strengthen our capabilities. So cost can only increase other business performance increases.

And our IPO pricing issue. According to our understanding, from September last year in the IPO market, there's a task force group discussing valuation methods of calculation of IPO price, including issuer side and academia and professionals are involved in the discussion. And the reason why IPO in Japan price is high, is specific to Japan but the scheme to determine the IPO price. If there is any area from the issuer side, that needs to be improved, then definitely we would like to cooperate.

We understand that we are not operating this business in such a way that has a risk from that perspective. So we'd like to do our best to cooperate to the appropriate pricing. But looking at the IPO market, IPO price in some deals is less or declined. So we do value IPO from investors too. So we'd like to continue to study, but at this stage, it's really difficult for us to measure the potential impact on our profitability. But at this point, we don't think the impact is large.

[Koichi Niwa, analyst]

[Interpreted] Understood.

[Operator]

[Interpreted] It seems like there's no more questions. So we'd like to end the Q&A session now. So thank you very much for joining our telephone conference. And thank you very much for your continued support in advance. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]