Daiwa Securities Group Inc

TSE:8601

Earnings Call Analysis

Daiwa Q3 FY2023: Mixed Financial Results

Daiwa Securities Group reported a 2.5% increase in Q3 FY2023 net operating revenues, totalling JPY 147.8 billion, while ordinary income rose marginally by 0.1%. Retail division income grew due to heightened equity investment trust sales and wrap account contracts, yet Wholesale's Global Markets saw reduced revenues from lower equities and FICC customer flows. Net trading income lifted by 9.9%, backed by FICC. However, profit attributable to the parent company dropped by 4.5%, with a resultant annualized ROE of 7.7%. SG&A expenses climbed by 3.1%. A robust market uplifted the Retail Division in January, pushing income from equity transactions and investment trust sales up nearly 40% from Q3's average.

Strengthening Revenue Streams despite Mixed Performance

Daiwa Securities Group Inc. displayed resilience by obtaining record asset-based revenue due to increased sales of equity investment trusts and wrap account contracts. Even as overall profit to owners descended by 4.5%, the company experienced a slight rise in commission income and a 9.9% increase in net trading income, reflecting a stronger FICC revenue stream.

Investment in Talent and Infrastructure amid Rising Expenses

Expenses swelled by 3.1%, driven by higher trading-related payouts, personnel costs due to raised bonus compensations linked to overseas performance, and investments in digital transformation and IT.

Diverse Global Operations Fortifying Earnings

Ordinary income from global operations surged by 67.1%, with Green Giraffe's growth in Europe, wealth management success in Asia and Oceania, and expanded FICC and M&A income in the Americas bolstering the company's international financial dynamics.

Retail Segment Shows Profitability and Growth

In Daiwa's Retail Division, revenues edged up slightly by 1%, yet ordinary income improved by a healthier 4.6%. Assets under management in wrap accounts enhanced wrap-related revenues, making asset-based revenues account for 48% of the division's net operating revenues. The net increase ratio of the wrap account service and stock investment trust combined stood at an impressive 25.7%.

Wholesale Adjustments in A Volatile Market

The Wholesale Division faced an 8.6% drop in net operating revenues and a significant 44.4% decrease in ordinary income. Equity revenues suffered from a decline in customer engagement, although the Americas showed revenue increases due to heightened interest rate volatility and treasury and repo expansions.

Investment Banking Weathering Interest Rate Challenges

Within Global Investment Banking, a modest 0.1% revenue uptick contrasted with a 67% drop in ordinary income, as debt underwriting dwindled amidst rising interest rates and a dampened long-term bond market.

Asset Management: A Mixed Bag with Promising Prospects

The Asset Management Division noted a 3.3% rise in net revenues and a slight 0.8% increase in ordinary income. However, forecasts suggest a promising equity method investment gain in the next quarter, evidencing potential revenue growth.

Investment Division Shines with Substantial Growth

Daiwa's Investment Division's remarkable performance stood out, with an 83.1% jump in net operating revenues and a solid 12.8% increase in ordinary income.

Striving for Sustainable and Diverse Income Streams

Daiwa's strategic focus on sustainable and diversified income has led to the highest consolidated ordinary income in eight years. Their initiative to become less market-dependent and more oriented towards wealth management and a broadened business portfolio is bearing fruit.

Retail Division's Ambitious Growth and Forward Outlook

With a 12% boost in asset-based revenue over the last year, the Retail Division has maintained a steady performance level, aligning with Daiwa's goals for a JPY 100 billion ordinary income target by 2030. The start of the new year bodes well, as the division's performance exceeds quarterly averages, signaling sustained growth.

Positive Market Dynamics Uplifting Recent Performance

Daiwa's client engagement is increasing, benefiting from a conducive market environment that brings equity income levels above third-quarter averages. This positive trend extends into the beginning of the new year, reflecting an overall optimistic trajectory for the company.

Earnings Call Transcript 2024-Q3

[Motoi Mishiba, executive]

Dear investors, thank you for your patience. Thank you for taking time out of your busy schedule today to participate in the telephone conference for the third quarter of fiscal year 2023 earnings results of Daiwa Securities Group Inc. The time has arrived, and we will now begin the conference call.

Mr. Eiji Sato, Senior Executive Managing Director and CFO of Daiwa Securities Group is in attendance here. I am Mishiba, General Manager of the Investor Relations Office, and I will be facilitating the entire meeting. Thank you very much for your cooperation in advance.

Mr. Sato will give you the explanation for the earnings for Q3. Your questions will be accepted after the briefing. The meeting will be open to the general investors via the Internet. We will now begin the explanation.

[Eiji Sato, executive]

This is Eiji Sato, Senior Executive Managing Director of Daiwa Securities Group. Thank you very much for taking time out of your busy schedule today to attend our telephone conference. I will now explain our financial results for the third quarter of FY 2023, which we announced today in accordance with the explanatory materials posted on our website.

Please turn to Page 4. First, I will explain the summary of consolidated financial results. Percentage figures represent changes from the second quarter of FY 2023. Net operating revenues for the third quarter of FY 2023 were JPY 147.8 billion, up 2.5%. Ordinary income was JPY 40.8 billion, up 0.1%. In the Retail division, both revenue and income increased. We posted record high asset-based revenue, thanks to increased sales of equity investment trust and a high level of wrap account contracts.

In the Wholesale Division, Global Markets reported lower revenues in both equities and FICC due to lower customer flows. Global Investment Banking saw revenue from debt underwriting declined from the strong previous quarter. Profit attributable to owners of the parent company was JPY 28.4 billion, down 4.5%. ROE was 7.7% on an annualized basis.

Please turn to Page 10. I will now explain the income statement. Commissions received totaled JPY 86.2 billion, up 0.2%. The breakdown of commissions received is on Page 23.

Brokerage commissions were JPY 20.2 billion, down 7.9% due to the decrease in trading of Japanese stocks. Underwriting and secondary offering commissions were JPY 9.2 billion, up 0.4%. Distribution commissions were JPY 4.1 billion, up 11.9%. M&A-related commissions were JPY 11.6 billion, up 6.2%.

Net trading income increased 9.9% due to an increase in FICC revenues.

Other operating revenues and other operating expenses increased due to real estate sales in the Investment division and Daiwa Securities Realty Co.

Please turn to Page 11. I will now explain the status of SG&A. SG&A expenses were JPY 109.8 billion, up 3.1%. Trading-related expenses increased due to a rise in free commissions paid in line with an increase in transactions. Personnel expenses increased due to a hike in bonuses linked to business performance, mainly in overseas markets. And office costs, outsourcing costs related to DX and IT increased.

Please turn to Page 13. Next, I will explain the ordinary income of the overseas operations. Ordinary income for the overseas operations totaled JPY 6.4 billion, up 67.1% from the previous quarter.

In Europe, ordinary income was JPY 1.2 billion, thanks to the contribution of Green Giraffe's revenue growth.

Asia and Oceania posted an increase due to the contribution of earnings from the wealth management business and equity-method investment gains of SSI Securities.

In the Americas, FICC income and M&A income expanded, resulting in an increase in ordinary income.

Next, I will explain the results by segment. Please turn to Page 14. First, I will explain the income and expenses in the Retail Division. Net operating revenues were JPY 49.8 billion, up 1%, and ordinary income was JPY 12.5 billion, up 4.6%.

Equity revenues decreased due to a decline in trading of Japanese equities.

Distribution commissions for investment trust increased due to higher sales of stock investment trust.

Wrap-related revenues increased as contract AUM of wrap accounts increased.

Asset-based revenues totaled JPY 23.2 billion accounting for 48% of net operating revenues in Retail Division in Daiwa Securities. This was 94.3% of fixed cost and 63.8% of total cost in the Retail Division of Daiwa Securities.

Please turn to Page 15. This page shows the status of sales and distribution in the topics for the third quarter in Daiwa Securities Retail Division.

The wrap account services contract amount was JPY 199.3 billion and the net inflow was a high level of JPY 104.8 billion. Net inflow remained at a high level, but decreased from the previous quarter. One factor is the increase in the number of applicants for gift tax support services against the backdrop of the recent review of the gift tax system. This service allows customers to give a portion of their assets to family members during their lifetime while managing their assets. And since the provision of the gift is in December, we believe that seasonal factors had a large impact.

The stock investment trust, sales of a wide range of issues, including Daiwa Dynamic India Stock Fund, Invesco World Best Equity Open, Daiwa Blackstone Private Credit Fund and Others were strong.

The lower left-hand side of the slide shows a graph for the amount of sales and distribution and net increase ratio of wrap account service and stock investment trust. The net increase ratio was 25.7%.

Next turn to Page 16. I will explain about the Wholesale Division. Starting off with Global Markets. Net operating revenues were JPY 33.7 billion, down 8.6%. Ordinary income was JPY 5 billion, down 44.4%.

With regards to equity, revenue declined on the back of the decline in customer flows under the uncertain market environment, FICC revenues declined Q-on-Q due to the rise in interest rates compared to the previous quarter when JGB and credit businesses were strong.

In the Americas, revenues increased driven by the rise in interest rate volatility and expansion of customer flows of the treasuries and repo.

Please turn to Page 18. I, this page is on the Global Investment Banking. Net operating revenues were JPY 18 billion, up 0.1% and ordinary income was JPY 1 billion, down 67%. Revenues from debt underwriting business declined with the increase in interest rates, in particular, with less number of long-term bonds issuance. M&A revenues increased driven by Europe and the Americas.

Please turn to Page 19. Let me next explain Asset Management Division. Net operating revenues were JPY 18.6 billion, up 3.3%. And ordinary income was JPY 11.6 billion, which was up 0.8%. Daiwa Asset Management net revenue and income went up due to increase in AUM during the quarter and secured positive net capital inflows into public equity investment trust, excluding ETF. With regards to the real estate asset management, both revenue and income went down due to the decline in some of the equity-method investment gains Q-on-Q. However, some equity method investment gain, which is included in the consolidated PL with a 4-month lag is expected to be JPY 2.1 billion in the fourth quarter, which is up by around JPY 1.5 billion compared to this quarter, Q3.

Please turn to Page 21. Let me explain the results in the Investment Division. Net operating revenues were JPY 8.3 billion, up 83.1% and ordinary income was JPY 5.3 billion, up 12.8%.

Daiwa PI Partners achieved a revenue increase from investments in monetary claims in the real estate. This completes my explanation of the results in the third quarter FY 2023.

We secured a consolidated ordinary income of JPY 117.8 billion in this quarter, which is the highest in 8 years. I feel a good progress has been made on the quality of income. We have been totally working towards establishment of income structure, which are not so susceptible to the market environment, shifted to wealth management business and expanding business portfolio through hybrid strategy over close to 7 years now.

I see results from them in steady progress towards sustainability and diversity of income, stability of consolidated financial performance and the visibility into the future for sure.

In the Retail Division, ordinary income recovered to JPY 38.1 billion and the stable asset-based revenue in the third quarter was JPY 23.2 billion, which indicates 12% increase over the past 1 year.

Looking at the past 3 years, we have been able to maintain the same level, which gives me confidence towards the establishment of Retail Division ordinary income of JPY 100 billion target by 2030.

Now in terms of what's happening now in January, Retail Division's performance is expanding well in tandem with the start of the new ecosystem in the strong Japanese equity market. Specifically, income from equity transactions and investment trust sales have increased by around 40% compared to the average of Q3, and the fund wrap contract amount has been outperforming over the average of Q3.

In the market division, client flows are increasing, with a good market environment. Income from equities has been at the level well above the average of the third quarter.

On the other hand, we are off to a slightly slow start in FICC in Japan. However, in overseas, in particular, in the U.S., we are off to a very good start, which is higher than the average of Q3, with strong client flows with interest rate volatility staying high.

Currently, our share price has recovered to [ PBR1 ] However, it's not a goal, it is only a milestone. Looking into the future, there is exciting expectation getting out of the deflation, normalization of monetary policy, progress towards Asset Management Division such as new ESOP. There are heightening roles and responsibility needs that our group should take on as a leading player in the capital market.

We'd like to further improve PBR by showing the results in acceleration of shift to wealth management business model and a stable improvement of consolidated ROE, hence improving the valuation from the market.

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

[Motoi Mishiba, executive]

This concludes our explanation. We will now continue to take your questions. Today's telephone call will be available in English with simultaneous interpretation. [Operator Instructions] Please note that today's Q&A session will begin with questions in Japanese, followed up by questions in English. [Operator Instructions]

We will now introduce the first question, SMBC Nikko Muraki-san.

[Masao Muraki, analyst]

This is Muraki from SMBC Nikko. I have two questions. So this is apart from the earnings, the announcement, starting in April, we would have the new CEO, and he will be entering into the new mid-term management plan. So we haven't been introduced to the new CEO. So from a CFO's perspective, would you see the difference in the character between the existing -- incumbent CEO and the new CEO, Mr. Ogino? Also, I do believe the discussions are underway for the next round of the mid-term management plan. What are some of the major points of discussion? So that is my first question.

And my second question relates to your capital policy. On Page 9, you mentioned about the capital ratio. So the ratio has been on the rise. So in the past earnings announcement with the full loading of the new Basel, so you have JPY 300 billion of unused -- unallocated capital. That was a number that was disclosed. But of course, we have the results from the competitors. So this might be too early in phase, but do if you have any ideas related to the next round of the share buybacks about touching upon those unused capital. If you can share with us your thoughts, that would be helpful. Those are the two questions.

[Eiji Sato, executive]

Thank you very much for your question. So the first question, it is somewhat of a challenging question to answer. But it is difficult to compare by the individuals. But I would like to share with you my personal impression of Mr. Ogino, the new CEO. But at the announcement, of the transfer of the CEO, Mr. Nakata mentioned. So he is very high in character and also quite a bright, cheerful personality, and he's quite capable of actually caring and giving considerations to others. Also, he does not really wave under -- even under tough conditions.

In terms of the management style, just to share with you, he very much focuses on the speed. And that is definitely one of the strengths, but I do believe the initial question was whether the strategy director would change or not. But as mentioned, the next round of the midterm management plan, it is under consideration -- under the new, the CEO, Mr. Ogino.

But to give you the conclusion, no changes in terms of the general direction of the management as one of the capital policy. So he has been Head of the Business Planning division, and he has been responsible of the wealth management business and suit for the hybrid type of business, that is expansion of the business portfolio. So he has been working in tandem with Mr. Nakata in the past. Therefore, going forward, so we have announcements at the -- announcement meeting. So Mr. Ogino mentioned this. So the business reform that has been initiated by Mr. Nakata will be further accelerated under the new management. So the retail and the wealth management business will be strengthened. And also, we will continue to expand the business portfolio, so we'll be resilient against the fluctuation within the market environment.

Now the major points of the next medium-term management plan will be the same. So of course, the concrete plans and the tactical issues, hopefully, you can wait until May of this year.

Also related to the second part of your question about the capital, the September end. So Basel related, 22% or so is the capital ratio, so KPI is 18%. So we are above by 4% or so.

So from external eyes, perhaps the capital ratio is high, but we are conducting various simulation of how to make use of this capital surplus. So we may actually apply those 2 growth strategies and growth investments. Those are one of the considerations. So considering all those, we do not believe that current capital ratio is in excess either.

So just to repeat, we will look at the softness of the financial and also the shareholders' return, we would have to strike the right balance. That is the basic policy in terms of the capital policy. Having said that, of course, we are continuously engaged in enhancing of the ROE. And so we would use the capital surplus to the growth initiatives. But of course, if there is an access, we would like to return those to the shareholders.

When it relates to growth investment, so we have JPY 1.45 trillion. So it could be next -- we do not like to miss the opportunities for growth investment because we have restrictions with the capital ratio, we will not -- we'd like to avoid that because that would not lead to a maximization of the corporate value. So we are definitely in the process to refine and look at what are some of the possibilities for the growth investments.

Also another point, the capital ratio, so we have been impacted by the foreign currency-related adjustments, the account that is impacting this number. So of course, it may fluctuate depending on the FX situation going forward. So that is why we do need to look at this in a rather conservative manner. So with the credit rating agencies, they are expecting even a higher level than the Basel's capital ratio. So without increase in the risk-weighted asset, without increasing the equity, the credit rating agency tends to look at this in a negative manner. So we need to give due consideration to this as well.

Now we would like to take all these factors into consideration. Did we answer your question, sir?

[Masao Muraki, analyst]

Just related to the first and the second question, just an additional question. you mentioned about acceleration of the mid-term plan. So I think in the previous mid-term plan, you've actually invested quite heavily in the hybrid-type business. So in terms of investment, should we expect a similar level as the previous mid-term plan, not the current one? Or since you're in for acceleration, I expect me to see even higher levels of investment.

[Eiji Sato, executive]

Just to reiterate, we are definitely finalizing the numbers. So we cannot actually give a guidance right now. So in the previous years, JPY 300 billion was amount that we invested. And in the current mid-term plan up until now, we have just over JPY 150 billion or so in terms of investment. So, it will be higher than the current mid-term plan. Whether it is similar to the previous mid-term plan, we are trying to finalize that right now.

[Motoi Mishiba, executive]

Next questions are from Morgan Stanley MUFG Securities, Nagasaka-san.

[Mia Nagasaka, analyst]

This is Nagasaka from Mitsubishi Securities. I have two questions. First, probably it's too early for me to ask you, but towards the next fiscal year, would you please give me the outlook by business to the extent you can? Would you please give me some color? In the Retail Division, the investor activities, investor behaviors are changing. In the Wholesale division, although it's a cyclical business, but for example, there is recovery of M&A business overseas, and you're getting into the new cycle. So what is your expectation towards the next fiscal year? What is the view? Could you please comment on what you're thinking towards the next fiscal year?

Second question from CFO, you talked about diversity, sustainability of the income structure and you are succeeding in changing the structure of the income, which was very good. But what are the challenges that you feel still existing in your company?

[Eiji Sato, executive]

Thank you so much. First, in the Retail Division, in particular, global markets, global investment banking, respectively, I can give you the outlook.

In terms of the business environment, there is the tailwind for all of those business lines. In particular, in the Retail Division, the stock prices are quite high. But from the medium to long-term perspective, inflation hedging needs and our FX activities are increasing so much. So in the third quarter, equity income has increased, and also, there are varieties of news of equities were sold very well, and we've been maintaining very strong performance with fund wrap sales.

So mainly customers, retail investors, there is a structural change, meaning. Now is the time, in that environment where rates are increasing, so retail investment. [indiscernible], where they have to really shift the portfolio from savings in the banking accounts or the investment. So there is this heightened needs from retail investors, investing actively in equity. So looking at our product sales, I think the income structure has been well diversified, which is very positive. And a flow income maybe cyclical but asset-based revenue is quite sticky revenue stream. So with the expansion of AUM, we can expand asset-based revenue.

Now in the Global Markets division, the stock market is doing well. Equity income is performing well. And the interest rate is expected to gradually increase in Japan. So in this environment where there are interest rates -- spot interest rates, retail investors, individuals as well as the institutional investors want to invest in yen bonds especially credit investments are to increase.

In addition, foreign currency denominated investments are going to increase. Currently, there is uncertainty over FX markets but once it stabilizes, then I think we are going to see the pickup of the foreign-currency-denominated assets, such as foreign bonds, or other foreign currency investment products, which is a tailwind.

Global Investment Banking business. For Japanese companies, the capital business improvement is a long-lasted theme that they must work on. So they need to do the equity finance, ECM, DCM, M&A. There's all the tailwind for us, and they are reviewing the shareholders' mix, and they are working towards improvement of ROE. To do that, they have to consider M&A possibilities or opportunities, which are giving us the tailwind. And in terms of the pipeline for the future, for the corporate side, we have more deals in the pipeline. And for PO, I think the pipeline is about the same as last year.

For M&A pipeline, much higher, much higher deals are in the M&A pipeline compared to last year. In particular, in Europe, I think it's exceeding the peak back in 2022, both in terms of the number of deals and amount of deals.

In the Americas, compared to 2021, the number of deals in the pipeline is higher. So very strong pipeline. So M&A, I think the market is going to bottom out or near the bottom. So in terms of the large recession or big volatility of the interest rate unless those things happen, I think we have good tailwind for our businesses overall for all of those business lines.

And the second question about the sustainability of the income? Did you ask me about that?

[Mia Nagasaka, analyst]

Yes, yes. So if you see some challenges faced by your company, what are those challenges? So the income model has become much more sustainable, more diverse. I think the structure of your income is getting better. On the other hand, are there any challenges issues at all in your mind.

[Eiji Sato, executive]

Challenges, the capital efficiency or return on capital. So ROE, 7.7% on a consolidated basis has been just reported. And our cost of capital is 8% to 9% from new perspectives, I think, for companies. So for this fiscal year, we have to achieve ROE exceeding cost of capital, we'd like to achieve that by the end of this year. And the driver of achieving that will be AUM-based income.

Asset-based income, which is expected to increase over time, which is not so susceptible to the market environment. So by increasing that, we'd like to enhance our ROE level. In the global markets, there is a following wind for all of our business lines.

From the past, the income mix from Global Markets has been quite high. So we'd like to really enjoy the upside in this business to really increase our return on equity.

At the same time, you didn't ask me about the following, but let me add. Since our Q1 of 2019, we've been continuing JPY 27.5 billion, cost reduction. That's our target for cost reduction and since 2024 onwards, we are going to add additional JPY 3 billion. In total, JPY 10 billion or so cost reduction has been our target. So we'd like to reduce cost while increasing the profitability of stabilizing the income structure and then also increasing ROE.

[Motoi Mishiba, executive]

The next question is from SBI Securities Otsuka-san.

[Yujin Otsuka, analyst]

This is Otsuka from SBI Securities. So, I have 2 questions. First, I would like to pose each one of those questions. First relates to Retail Division. So the situation starting in January, I missed that point. So if you can also reiterate the situation January onwards, so you mentioned about 40%, increase, that's a number I have heard but if you would mind repeating your statement, that is the first question. So shall we go one by one?

[Eiji Sato, executive]

Yes. So the first question, in the Retail Division, the situation in January. So in terms with the transaction of equity related revenues, and also the -- from the investment trust distribution, it's a increase by 40% in comparison to Q3 and fund wrap contract amount in comparison to Q3, it is actually above the Q3 level.

[Yujin Otsuka, analyst]

Understood. So those numbers, the statement you have just made, could you please give us more granularity? What sort of activities with it? So are they actually using cash to purchase this? Or are you seeing more of the new customers? Also the background to this favorable trend, is it because the U.K. average has actually gone up by JPY 3,000 from the beginning of the year? Is that the reason behind that?

[Eiji Sato, executive]

So in terms of January, so JPY 2,500 or so there has been a rise in Nikkei average, so with the share price rise, we may have a profit taking sales. But of course, we see introduction of new sales, we also have new customers as well, so therefore there's more active transactions.

Also, in terms of our investment trust and also for fund wraps, as mentioned already, the share price rise, that is definitely a tailwind, but in addition to that inflation and also the FX risk hedge are some of the reasons why customers are purchasing. So the high net worth individuals, for the elderly population who were not making investment before, now they are making a new entry into the market and also within the existing customers because of the introduction of new ESOP. They are actually increasing the purchasing amount. So it's a fairly complex factor in seeing these positive activities.

So are they selling something and purchasing new because that's what happened in the past as we see increase in the Nikkei average, they were just like finalized on the profit. And that would be it. Actually, I think it is both ways. So they may do profit-taking sales, and they may actually purchase other assets. we may have some customers. Also, we have absolutely a new -- brand-new sales and entry into the market.

[Yujin Otsuka, analyst]

The second question relates to the Wholesale Division. So in Q3, I have a question related to the profitability. So this is Page 16. We have Global Markets; on Page 18, we have investment banking. This is the area I'm looking at. So in comparison to Q2, on both lines, the profit has come down, especially for IB. So JPY 18 billion in terms of the operating revenue. However, the profit seems to come down. And as Mr. Sato mentioned about the outlook. You've mentioned about different factors for the positive outlook. But how should we look at the profit, if you can give us more color, so that would be my second question.

[Eiji Sato, executive]

So in terms of global markets about the profitability, domestic and overseas. We need to look at those separately. In comparison to Q2, Q3, overseas was more positive, especially the U.K. -- excuse me, U.S. FICC was positive. In comparison to the domestic market because a lot of these are linked to the business performance and also FX, the average of the term, that would impact the amount on the cost side. So you would have to watch those different elements.

In terms of the outlook, both domestic and overseas is important, especially for global investment banking. In comparison to Q2, Q2 is better in terms of M&A. This is for Europe and U.S. alike. Therefore, the revenues will rise. But of course, in line with that, the cost will rise as well. So that is why the profit did not actually grow as initially expected.

In terms of the outlook, both domestic and overseas are very both strong. In terms of profitability, there are some factors that were driven by domestic and also overseas.

So there's different color in terms of how it impacts the income or profit. But generally speaking, with the rise in the revenues, the income should rise as well. But of course, it may actually change according to FX move because that may change the cost. But the general trend, it would not change. Did that answer your question?

[Yujin Otsuka, analyst]

Yes, well understood.

[Motoi Mishiba, executive]

Next questions are from Citigroup Securities, Niwa-san.

[Koichi Niwa, analyst]

This is Niwa from Citigroup. Can you hear me?

[Motoi Mishiba, executive]

Yes, we can hear you.

[Koichi Niwa, analyst]

I have two questions. First, this may sound repetitive, but I'd like to ask you about retail investors' investment appetite at the moment? And the second, my question is on the cost. Sorry for the duplication with other questions. But for the retail division, what is the status of sales? I have 3 specific questions. First, what is the appetite level of retail investors by product type?

For the equities, foreign investment trust, are they selling well in the third quarter. It seems like they sold very well, but how about domestic investment products? And domestic equity products, bond products, what does it take for retail investors to add the positions in those? Are you expecting that in Q4?

And also for the minor point, looking at Page 29, retail investors. I think probably due to a large investment but there is a significant decline that negative number, what is the background?

Second question, cost, you mentioned that you would continue cost control. On the other hand, I would expect cost increases, such as human resource cost. And also, the long-term employment situation needs to be considered. So what is your expectation of the cost in the fourth quarter, and also in the next fiscal year onward.

[Eiji Sato, executive]

First, retail investors' investment appetite. It's really difficult to generalize. But in this quarter, the assets which are positive to medium to long-term asset building sold well. So in accordance with the financial goal, we propose the optimum portfolio investment. That's our sales and marketing style. So with that as an assumption, specifically, if we have to mention some products where we see the momentum. Actually, all products are selling well. Japanese equities, foreign equities, foreign fixed income, everything is improving. And again, let me repeat, inflation hedging, FX hedging and yen is weak. So those products are sitting well. And also, there are investors who have strong appetite in general.

And about investment trust, in the third quarter, if you look at the banking of products, which sold very well, the products are quite diverse. There is no concentration on any specific theme fund, in particular, but across the board, we see strong needs equities, Japanese equities, foreign liquidities, fixed income alternatives. So we see diverse needs in one. So appetite is quite diverse across the board.

So retail investors' appetite towards investment is increasing. And which individual is buying more, depending upon their view to the market. And also asset inflows are adding position, did you ask me about -- what was the second question?

[Koichi Niwa, analyst]

Yes. Second question was about adding positions of retail investor.

[Eiji Sato, executive]

Well, position adding, if you look at this page, if you look at net capital inflow at JPY 42 billion positive. And this difference between the 2 is negative. As a result, you see the negative number on that page. This is due to the multiple number of large capital outflows from large accounts. That is the major reason. So fundamentally, this is just a one-off.

Yes. Next question was on the cost. Yes. In terms of the cost control, continuously, we are addressing that as a structural reform project. So we are working in the whole company. So you're asking me about human resource cost, personnel costs? But in terms of the wage cost increase, we don't regard them as cost but rather investment in people. So we have to really raise wages to avoid net negative, net of inflation.

But for all of our employees, we'd like to work them well to improve the productivity, hence, profitability of the company. So how can we improve the productivity of our people. We need to take various actions. One of them is by raising the wage level to motivate them well or to increase the engagement from our employees to improve the productivity of our people. So this is a big message, from the management to our employees. So that's something that we have to really invest.

Now how much wage are we going to increase?

According to mass media, some reports 7%, but we are still considering the specific level of wage increase, so we cannot really comment on the specific percentage. But in 2023, impact on the wage cost was 4%, which is about a little bit less than 2.5%, if the wage increase is 4%. So we'd like to invest so that we can increase the productivity of our people.

[Motoi Mishiba, executive]

The next question is from Nomura Securities, Sasaki-san.

[Daisuke Sasaki, analyst]

This is Sasaki from Nomura Securities. I have two questions. First question relates to Page 29 about the net asset inflow. So within your explanation, you mentioned how the customers' activities are becoming more active. So the portfolio has been much more strengthened. So judging from the graph from Page 29, it doesn't seem as if we are seeing much of a net inflow. So going forward, towards the FX hedge and also inflation hedging, how are the customers actually making -- structuring your portfolio? That is the first question.

And the second question the outlook for your guidance for your performance. You mentioned across the board, all the products are doing well. So if that is the case, could it be, would you have ROE 10% under your horizon? So is there a possibility to reach that number? Those are the two questions.

[Eiji Sato, executive]

The customers' activities are becoming more active. So in terms of the Retail Division, so the main customers, so Daiwa Securities has a strength in terms of consulting. So the customers who appreciate the value add that we provide through the consultation. So more of a elderly, high net worth individuals and also the business operators, business owners. These are the main customers and their activities are definitely becoming more robust. And that's why we've been able to have the asset inflows. Also the stock market is doing well, so the profit taking sales are also happening on the other side.

So on a net basis, as this is what we are seeing on Page 29 on a net basis, so this is individuals, but also the corporates are just as important. So we will continuously focus in these areas. So you can tell that Retail Division and net asset inflow has been quite solid.

Also in terms of ROE, first, we need to go, take a step-by-step approach. So we cannot reach 10% from 7% all at once. It might not be possible because we need to be building those through flow of revenues. So asset-based revenues will be the basis to accumulate and build the capital. So we can actually stably enhance the ROE. In course of that, because we have tailwind, and we also intend to capture the changes within the market. And by doing so, we would like to enhance the profit and thereby also increasing our ROE.

So you mentioned whether 10% within our horizon. Our answer to that is we are aiming towards that 10%.

[Daisuke Sasaki, analyst]

Understood. So within the -- just to confirm within your initial explanation, so the business owners are included within the corporates. But the elderly high net worth individuals, did you say they were part of the corporate, the customer profile? Can I just confirm that?

[Eiji Sato, executive]

So individuals, and of course, we have the corporate. So for instance, asset management company of the high net worth individuals, that's one example. Also, the business owners, [indiscernible] who also trust us. So for both individuals and corporates, they are both important. So we think of business, not just the individuals.

So even with the corporates, so they may have the asset management, wealth management is even conducted by the corporates. We do see that quite often in Japan. So are you looking at the Q3 numbers? So for the individuals. So on the right-hand side, the net inflow of cash, it shows the -- how we have seen quite an increase there.

[Daisuke Sasaki, analyst]

So generally speaking, when you talk about corporates then so probably the regional financial institutions fall within this. So I just wanted to confirm whether it is inside this corporate as opposed to individuals.

[Eiji Sato, executive]

So at each branch, they serve different operating companies. So that's what we mean by corporates.

[Daisuke Sasaki, analyst]

So even with this adjustment with U.S. equity and Japan equity, do you think your explanation still stands? So even you have a stable source of revenues, of course, it would still be impacted by the market fluctuation. So what are your thoughts related to this?

[Eiji Sato, executive]

So of course, if there's an adjustment in the market, we will be impacted by that. However, we do believe this is a cyclical move. So in the mid- to long-term basis, hopefully, you can watch the trend as opposed to those short-term adjustment. So if there's a short-term adjustment, but if there will be a recovery, it may not deteriorate the investor sentiment because we need to look at investment from a mid- to long-term basis. So within their portfolio, they are conducting the investment. Also in addition to that, our downward strength is the fund wrap.

So if you look at the how the fund wrap has been incorporated, so when there are lot of funded products that increases in value with inflation. So they are impacted not just by the equity markets, so this is called a typical example of the international diversification. No, we do not believe this will be impacted much. So the fee commissions after, excluding the fees and commissions of fund wraps, we do monitor the performance.

So if you look at this, the performance in the stable -- in the past 3 years, the return was more than 3%. In 5 years, 3.7% or so. And even in 10 years, just short of 10%. In terms of active management, it's 8% in terms of the growth. So this is even after excluding the fees and commissions. So we've been able to retain quite a strong return. So the average holding period is over 11 years. And we have new contracts over 40%. We've been able to retain that. So this number show the strong performance. And I will not be impacted much by the equity market.

[Motoi Mishiba, executive]

Next questions are from Bank of America, [indiscernible].

[Unknown Analyst]

[indiscernible] from BoA Securities. Can you hear me?

[Motoi Mishiba, executive]

Yes, we can hear you.

[Unknown Analyst]

Two questions. First, TSE is working on the reform and probably large cap deal is a project for TSE and you are engaged in the deals for large caps. But what is the pipeline? What is the structure trying to get those opportunities of large cap deals?

Second question, the quarterly ROE 7.7% slowed down a little bit to 7.7%, it appears, but sustainability -- sustainably, you have been improving ROE. So 8%, PBR above 1%. Those are the levels that probably you can achieve.

And now [ PBR1 ] is just a milestone you said to get more valuation from the market. What are the specific capital actions in the next medium-term plan? Specifically, are you going to increase dividends compared to buyback? Or are you going to narrow the gap between the results and guidance and so forth?

[Eiji Sato, executive]

First to your first question, TSE, market reform, and PBR improvement actions. Each company is trying to think autonomously about those topics and to improve capital efficiency and improve ROE. One must work on itself. And there are more companies working on those. So for large caps in particular, we have a business relationship with a diverse range of large-cap companies. And I would like to have the sustainable strong relationship because we are an independent security company.

So from the mutual perspective, we are well positioned to give them advice. So, we'd like to continue to have a close relationship with large-cap companies. So the pipeline is strong, as I mentioned earlier, but we'd like to really work towards leading the deals.

In particular, recently, there are vocal shareholders who are quite vocal giving opinions to industry. So including the companies of against that, we'd like to give a comprehensive advice to large-cap companies. As a result, we get business from them, MA or any other types of businesses? We'd like to generate deals from the comprehensive advice.

And to your second question, in the future, to improve PBR, even furthermore, what are the specific actions in the next medium term management plan. So probably just preaching to the client about PBR multiplied by ROE, that all boils down to that. So enhancing ROE is quite important. And the PER is evaluation from the market. So equity -- based upon the equity story or long-term vision, we have to really show the market, the growth story or growth vision, which is very important. In the retail business and are we going to strength asset management business which is core.

In addition, we'd like to enhance the business portfolio, turning to capital growth and also to improve the capital efficiency or return on capital. As before, we are trying to distribute excessive capital for growth and looking at growth pipeline, if we have excess, then we would like to return that excess capital back to shareholders, which indicates no change from the past.

And with regards to the dividend, in the next mid-term plan, we are currently in the process of compiling the next mid-term plan. So at the appropriate time in the future, we would like to disclose our policy.

[Motoi Mishiba, executive]

At this time, with that, we would like to conclude the Q&A session. Thank you very much for staying with us until the end. We would definitely like to meet your expectations. Daiwa Securities Group as a whole, will work hard to engage in various initiatives to enhance the ROE and also to enhance the PBR. We would like to ask for your continued support. Thank you very much today.