Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2018-Q4

[Hidenori Yamaguchi, executive]

Thank you all very much for waiting, and thank you for joining the financial reporting meeting for the fourth quarter of FY '17 of Daiwa Securities Group. Thank you very much. It's time, so let us begin. Thank you very much for joining our telephone conference today, despite your busy schedules. Today's speaker from Daiwa Securities Group is Executive Managing Director and CFO, Mr. Komatsu. I am Yamaguchi of IR Division serving as a facilitator. Well, today, we will start with the presentation of the fourth quarter FY '17 results. And then, we'll take questions afterwards. Please be reminded that this call is also arranged accessible for investors by the Internet. So let's start.

[Mikita Komatsu, executive]

I'm Komatsu of Daiwa Securities Group Inc. Thank you very much, again, for joining our telephone conference today despite your busy schedules. Now I'd like to walk through our results of Q4 fiscal '17 announced today by following materials on our website. First, let me start from Page 4. Consolidated summary. Percentage of changes in figures is based on the comparison to Q3 FY '17. Net operating revenues were JPY 130.8 billion, down by 3%. Retail Division revenue fell due to the correction phase of the stock market since February, and the slower stock investment trust sales, while Wholesale Division had revenue growth as equity revenues contributed to global markets and M&A business contributed to global investment banking. Ordinary income was JPY 43.4 billion, up by 2.6% keeping a high level with the profits in association with the property portfolio replacement by Daiwa Office Investment Corporation.

Net income attributable to owners of parent was JPY 36.5 billion, up by 61.2%. Annualized ROE was 11.5%, and BPS JPY 786.56. [ Annualized ] dividend per share is JPY 15. Adding the interim dividend of JPY 13, annual dividend becomes JPY 28 or a payout ratio of 41.9%. From FY '18, dividend policy is amended from approximately 40% of payout ratio to at least 50%. And share unit number will also be changed starting from June 1st from 1,000 shares to 100 shares.

Now please turn to Page 10 for profits and loss summary. Commission received in total was JPY 79.6 billion, down by 6.9%. Its breakdown on Page 23 shows that brokerage commission was JPY 19.1 billion, down by 12%, due to the decline in domestic stock trading volume. Underwriting commission was down in both equity and debt Q-on-Q, posting JPY 6.5 billion, down by 33.9%.

Distribution commission was JPY 10.6 billion, down by 19.9%. Sales of stock investment trust was solid, yet shrunk compared with the previous quarter when the sales was stronger. Net trading, as shown on Page 17, was JPY 31.4 billion, up by 3.2% as equity trading increased on the managerial accounting basis. Net gain on private equity and other securities with an exit of existing investments recorded JPY 5 billion, down by 18.2%. On the line of nonoperating income, property portfolio replacement of Daiwa Office Investment Corp. made a contribution.

Next, Page 11, please, for SG&A. Trading-related expenses totaled JPY 18.6 billion, up by 0.9% due to a slight increase in sales promotions. Personnel expenses were JPY 49.6 billion, up by 2.5% as a result of consolidating 2 M&A advisory entities in the U.S. in Q3. Office cost was JPY 6.8 billion, up by 2.3% with the increase of system-related outsourcing fees. Other expenses rose due to the amortization of intangibles, including goodwill for the acquisition of 2 M&A advisory entities in the United States.

Now let's move on to Page 13 for overseas operation. Ordinary income of overseas in total hit JPY 4.1 billion, up by 142.9% Q-on-Q. Again, like the previous fiscal year, we stayed in profit on a yearly basis and gained ordinary income for 8 quarters in a row. Europe posted a significant growth in both revenues and profits, backed by strong M&A business and overseas CB underwriting. Asia-Oceania income increased as equity brokerage revenues and bond underwriting commission increased. Gains from Saigon Securities, which is accounted for under equity method, also contributed. In Americas, U.S. equity trading remained strong, while FICC slowed down and amortization of intangibles, including goodwill for DCS Advisory also had an impact.

Now please go to Page 14 for segment information. And now I'm going to share the results of the Retail Division. Net operating revenues were down by 8.4% to JPY 54.5 billion, and the ordinary income was down by 31.6% to JPY 12.3 billion. Although the foreign equity trading volume remained brisk, equity revenue decreased due to the decline in both domestic equity trading volume and equity underwriting commission. Fixed income revenue also slightly fell due to the decline in foreign bonds, including structured bonds. Distribution commission for investment trust dropped due to the fall in stock investment trust sales. Agency fee for investment trust, which is linked to the asset under custody, decreased due to the decline in the market towards the end of the fiscal year.

Other revenues increased led by the rise in investment advisory and account management fees related to wrap business.

Please turn to Page 15. This page shows the major topics of this quarter and the situation relative to sales and distribution amount by product in Daiwa's Retail Division. As for investment trust, sales of global EV Revolution Fund was favorable. The March end contract AUM for the Wrap Account Service reached a record high of JPY 1,971.3 billion due to the Q-on-Q increase in the sales contract amount and the decline in the contract cancellation. Daiwa Advanced Wrap was introduced in March 2018, enabling flexible changes in portfolio depending on the shift in investment environment. The offering of Wrap Account Service would be further expanded to accommodate the advance investment needs of our clients.

Now please, look at Page 16. Let me explain the results of the Wholesale Division. As for global markets, net operating revenues were up by 3% to JPY 33.6 billion, and the ordinary income was up by 14.4% to JPY 11.2 billion. As for equity, against the backdrop of major market correction from February, the brokerage commission dropped. However, the increase in both Japanese equity trading to our clients and foreign equity client flow boosted the equity revenue Q-on-Q. As for fixed income, unfavorable market situation continue from the last quarter where the long-term interest rate shifted within a narrow range. Credit remained brisk, yet client flows, including structured bonds dropped, depressing the fixed revenue to a low level.

Please turn to Page 18. This slide explains the global investment banking operations. Net operating revenues were up by 3.3% to JPY 13.5 billion, and the ordinary income was down by 37% to JPY 1.7 billion. The ordinary income dropped due to the Q-on-Q decline in the underwriting deals and the amortization of intangible assets, including goodwill of DCS Advisory. As for equity underwriting, we continue to accumulate lead managed deals such as overseas CBs and IPO, PO deals. As for debt underwriting, we served as the lead manager for multiple deals of straight bonds and Samurai bonds despite the overall market decline in the newly -- amount of newly issued bonds. As for M&A, we integrated Sagent and Signal Hill to launch DCS Advisory. Multiple cross-border deals were managed, leveraging on their global network.

Please look at Page 19. Let me explain the results of Asset Management Division. Net operating revenues were down by 0.5% to JPY 12.5 billion, and the ordinary income was down by 2.6% to JPY 7.2 billion. AUM of Daiwa Asset Management decreased due to the soft market since February, and we experienced a Q-on-Q decline in both revenue and income.

Please look at Page 21. This page shows the results of the Investment Division. Net operating revenues were down by 15.3% to JPY 5.3 billion, and the ordinary income was down by 20.8% to JPY 4.3 billion. This concludes the results of the fourth quarter of FY 2017. So we'd like to move on to the Q&A session.

[Hidenori Yamaguchi, executive]

So simultaneous interpretation will be provided. So you could also participate in English as well. But we will like to first begin the Q&A session in Japanese. After that, we will move to the English Q&A session. So we would follow the instructions from the operator.

[Operator]

We will now like to begin the Q&A session. First of all, we will begin with the Japanese Q&A session. And after that, we will move on to the English Q&A session. [Operator Instructions] Okay, the first question is Muraki-san by Deutsche Securities.

[Masao Muraki, analyst]

I have 2 questions. The first one is about the profitability and the profit conditions in the Retail Division. On Page 14 of the slide, for the current fourth quarter compared to the Q-on-Q basis, so generally speaking, actually this has slowed down in profits. However, for the foreign equity transaction volume has been really record-high, and also the acquisition of the asset itself has been quite active, I think. So those changes. But looking at throughout the financial term that has been seen throughout the quarter? Or is that still continuing into this June period as well? That's my first question. The second is not really relevant to this quarterly result, but some press release said that last year the Coincheck and some western securities firms had been -- made a news. And then there was a news saying that the purchase of the Coincheck have been a big news, and we have heard also about the business alliance relating to the Coincheck business as well. So for example, the virtual currency or the Coincheck, what kind of thought do you have about the possibility of the alliance or working together with them in terms of the businesses going forward?

[Mikita Komatsu, executive]

Muraki-san, thank you very much for your questions. Let me answer your first question about the retail business Q4 results. The 3 respective months had a quite different color. In the first month, including the investment trust sales, it was quite good, but after February, the market had gone into adjustment phase and that had made some impact, the business slowed down. And that slowdown is still remaining in this month, in April. So February, March and April, we are seeing slowdown. But just now, the market itself seems to be showing some signs of recovery, but Japan is going into a, well, we call it a season, so that maybe in May and afterwards, we might be able to pin an expectation for the recovery. But to answer your question, I think that's the current status. And thinking about the transaction of the foreign equities, as the graph shows, for the March quarter, the transaction value itself was -- as a result, was quite big as Slide 28 shows. And in the month of April, the value itself in transaction has slightly declined, but still the money inflow is still continuing. So this trend or the momentum, it's still being remained. That's the question for -- that's the answer for your first question. And moving on to the second question. About the Coincheck, the news release in the Western world, I don't know. Well, I know that there was some news release about the potential deals, but when it comes to something new, like a virtual currency or the coins, this kind of totally new concept of the businesses, of course, we have an high interest and that draws a lot of attention from us. However, for the Coincheck, well, Monex has decided to buy and for us, there were a lot of agendas and points that we needed to consider very carefully. So we had studied, but we did not take any actions. So I think it was not something that we were able to come up as a result. Well, talking about the virtual currency, when it comes to the exchange market or so, we are not really interested in only in market or the exchange market when the currency or the new business arises and launched in the market, it's something when new -- something new gets searched and there will be a variety of possibilities and chances, and we do seek those opportunities in April. The company called INTA Tech, totally new company, which is going to take up challenges in the totally new business domains, that was launched. So by collecting the informations from all possible corners, we'd like to start new business somehow. But at this point of time, there's nothing specific that we can talk about. Did I answer your question?

[Masao Muraki, analyst]

Well, with regards to the question number 1 on Slide 30, you were talking about the growth -- expanding these assets. For the March end, what was the condition? The sales looked quite strong in January, and then after that, that kind of slowed down I think, but for the expansion of the asset itself will the -- investment trust and mutual fund has been quite good and what was the situation for these types of the assets that you have acquired so on?

[Mikita Komatsu, executive]

Well, the asset in the retail side, when they can get a lot of unrealized gains and they wanted to realize it and when that goes down, then there's not much assets that we'll be able to also get from those retail customers. But the target for the AUM have been described in our mid-term plan. And for the AUM expansion or the collection of the customer's assets still remains a focal point. So the short-term gain is not something that we should go after. We need to benefit the customers for asset formation for their own benefits, so the asset inflow we've seen for the most recent times. But in April, EV-related fund was newly released. It's an EV, the electric vehicle, was really matching BOJ and a lot of customers made an entry and participated with new money.

[Operator]

We'd like to move on to the next question from SMBC Nikko, Mr. Nakamura.

[Shinichiro Nakamura, analyst]

So this is Nakamura from SMBC Nikko. I have 2 questions. First question is related to dividend payout ratio. You have raised it to at least 50%. Could you give us the background in making that change? And also what is the basis? What are some of the background to raising the payout ratio? Also another question is related to share buybacks. Now that you're going to raise the dividend payout ratio, is it natural to anticipate that you would have less buybacks? That is the second question. The -- it's part of the first question. Also the second part is more of a technical question. Page 27 about the asset under custody, equity has actually increased by more than JPY 6 trillion. So I think we can assume that there is a large, large size of order, but it seems quite large for the 3-month period. So if you can give us the details as much as you could for that detailed technical question?

[Mikita Komatsu, executive]

Well, Mr. Nakamura, thank you very much for your question. First question, the change in the payout ratio and the shareholder's return policy. So first point, there was definitely heightening demand and requirement for the shareholder's return. So for instance, income funds in the institutional investor segment is increasing in size. And in fact, within our shareholders, we are seeing more of that type of investors. But was that much bigger impact is the fact that we are seeing increase in the retail individual investors. So for us to further increase the individual investors, obviously having a higher payout ratio is a major attraction, it is an important element for these individual investors. So from that light, by enhancing the dividend payout ratio, we should be able to appeal and approach more to the individual investors and increase their shareholdings. Also in terms of the current equity situation, as outlined in this presentation, 21.7%, that is the current total capital ratio. So in comparison to our peers, we do have a fairly high level of capital equity ratio. Therefore, we have the basis to conduct such an aggressive shareholder's return policy. And we do have enough funds for future investment -- business investments, also entering the Tier 1 in terms of the capital. So although we may be short of equity, of course, we can procure the Tier 1 capital as well. So in other words, we do have a high level of flexibility of management. So those have all led to our decision to enhance the payout ratio. So you may ask what would be the total payout ratio, now that we've raised the dividend payout ratio to at least 50%. Actually, we have not made any official commitment for the total payout ratio. So of course, the bottom would be 50%, given the fact that is the dividend payout ratio. But in terms of the ceiling, it could be 100%, it could even be 150%, if possible. So even your question related to share buybacks, just because we enhanced the dividend payout ratio does not stop us from conducting share buybacks. So share buybacks would be conducted accordingly, given into -- different elements into consideration. Now the second question relative to assets under custody. And I think I have slightly mentioned that with Mr. Muraki's question, so -- and the new mid-term plan as KPI, asset under custody or AUM of JPY 80 trillion. JPY 80 trillion is a challenging target that we have posed. So since the beginning of this fiscal term, we have been focusing on increasing the assets under custody or AUM, and that is true for Retail Division as well as for the Wholesale Division. So the fact that we have an increase in equity, it is because we have increased the assets under custody from different corporates and that has led to the overall increase. So of course, I cannot give you the details in terms of company, and so forth. But all in all, we have gathered -- we have successfully gathered our assets from different clients. And so for us to look at the long-term management, it is very important for us to further expand and enhance our business foundation.

[Operator]

Let's move on to the next question. Nomura Securities, Mr. Otsuka.

[Wataru Otsuka, analyst]

This is Otsuka of Nomura Securities. I have a question for Retail Division, and another one for the investments. For the Retail Division, it may be just a qualitative manner, but for the FY '18, you're going to change slightly the strategy so that the branch managers are going to have more liberty to catch the needs of the customers that they are dealing with, so that they will be much more closer to the customer base and then do the proposition sales. Well, just looking back, the fourth quarter and the ordinary income level on Q-on-Q you had a dent, but still it posted JPY 12.3 billion, which is relatively in high level compared to the normal level. So thinking from the strategic point, the JPY 12.3 billion was possible to achieve because of the strategic success or is it because of the good market condition? How should I interpret the achievement of JPY 12.3 billion? That's the first question. The second question is, I just missed your presentation, but for the investment on the quarterly, you had posted the profit of point -- JPY 4.3 billion, which is relatively high. Where did it come from? And on Page 21, on the left-hand side, you show the real estate investment balance. Well, you are not really thinking about expanding the real estate side of the investment anymore?

[Mikita Komatsu, executive]

Thank you very much for the questions, Otsuka-san. Your first question about the Retail Division. Last fiscal year, well, Mr. Nakata became the representative -- President and CEO of this company, and unless you have thought about the closer contract to the customers and the direction has been set accordingly. And with that, something that meets the needs of the customers will be coming more to the market, and we'll be able to sell more of those products. Of course, that was helped by the good market conditions, but that's not all. For example, in the fourth quarter, to meet the customer's needs we were able to provide some mutual fund products and also foreign equities. That made a backbone and then helped the profit to generate in the Retail Division. So JPY 12.3 billion achievement, looking at the current condition, I think, we did quite a good job. So if we had just pursued the conventional way of the business operations, maybe we did not achieve this number. Well, of course, we did not have any -- this calculation of if, we had pursued the conventional method, how much would have been achieved. However -- well, that was one of the reasons. However, as I mentioned earlier, February and March were quite tough. So the change of the policies, or the change of the strategy does not necessarily mean that, that was able to push back and offset all the negative environment. And also I mentioned earlier, that after January of this year, the collection and getting the assets was quite on focus. For example, with selling the mutual funds, we were trying to target at the new money to collect, and that was a strong focus that we stayed. So rather than a better or higher profitability, the increase of the balance of AUC was more of the focus. So JPY 12.3 billion was, of course, a big achievement, but our strategy does not really focus or does not change according the size of the fluctuation of profit itself. Now for the investment side, JPY 4.3 billion was also quite big and one is that the profit has been gained pretty constantly and also the interest rate of the existing investment in the real estate side had materialized. And also there were some stocks as an existing investment, which had gone into exit. So that's why the profit has been gained in the third quarter, fourth quarter, but it's kind of a one-off, it's not really sustainable or continuing and recurring because the big impact was coming from the exits. Well, if your question is whether we are going to just stop making investment in the real estate. Well, we are not going to be aggressively going into the real estate investment, but it does not mean that we are stopping it. It's not that we have purchased real estate, but by making an exit from the existing investment. But it just had happened to be the investment in the real estate, I should say. So for the investment in the real estate, if there are opportunities, of course, we will think about that. But if not, well, basically we have not been very active about the investment in real estate anyway.

[Operator]

I would now like to introduce the next questioner, Mr. Sasaki from Merrill Lynch.

[Futoshi Sasaki, analyst]

This is Sasaki from Merrill Lynch. I have 3 questions. First question is related to the fourth quarter P/L situation. So 2 items I'd like to know: The nonoperating revenue -- within the nonoperating revenue, the gains from REIT, so from selling gains from REIT, I'd like to know how much there is? So I think there is an extraordinary expense in the third quarter, if you can actually refer to that number as well that would be helpful.

[Mikita Komatsu, executive]

So should I answer one by one?

[Futoshi Sasaki, analyst]

Yes, one by one please.

[Mikita Komatsu, executive]

So you've mentioned 3, so I was just waiting for the follow-up question, so I would answer one by one. So the first question related to the nonoperating revenue breakdown. I think JPY 6.2 billion, I think JPY 6.2 billion that was a number we have at hand. And within that, I think more than half -- more than 50% is because of the replacement of the portfolio and the REIT. And -- but it is not actually shown in Asset Management Division, because this is on a consolidated basis. The pricing is reflected on a consolidated basis. And therefore, on an asset management entity basis it hasn't contributed much in terms of the number. Now in terms of the extraordinary profit and because of corporate governance, we were trying to reduce the loans and investment. And because of that, we are seeing more of the extraordinary profit.

[Futoshi Sasaki, analyst]

Also you talked about the assets under custody, and you've mentioned about the equity amount. So actually I have question related to this number. So in the first quarter, the stock price had plummeted quite extensively, and you have JPY 6 trillion increase in the equity for the asset under custody. So probably on a gross basis, it's relative to JPY 10 trillion given the market situation. So what is happening here? Is the clients attributes are changing or maybe the ETFs is changing? So I'm actually JPY 10 trillion of news within the book is actually quite dramatic. So if you can explain more in detail, that would be appreciated.

[Mikita Komatsu, executive]

So JPY 10 trillion, actually that's actually not so much. It hasn't come down that much. So without our sales activities or sales efforts perhaps it might have come down by JPY 1 trillion or JPY 2 trillion. Also in terms of the definition or the attributes of clients haven't changed, so we have made a steady effort to approach the declines under equity. So we were able to address quite a large number of clients putting in their fund through the equity, and that was contributing to this number.

[Futoshi Sasaki, analyst]

So this was just pure individual investors putting their many into equity, is that right?

[Mikita Komatsu, executive]

So it's not the financial institutions. So -- and -- but of course, we have some corporate entities coming in -- bring in their funds. So before, we were strictly focusing on individual investors only, but now we have more funds coming in from the business entities, not the financial institutions.

[Futoshi Sasaki, analyst]

Another question is related to the guidance for this year. So perhaps the Japanese corporates -- the spinout of large-scale spinouts or large-scale M&A could happen this year. So these are large-scale deals domestically. Do you have any chance of winning these large-scale deals? If you can share with us your confidence.

[Mikita Komatsu, executive]

In terms of super-ultra large-scale M&As, quite often it is combined with loan scheme. So in Daiwa's case, we're not banking institutions. And therefore, we cannot provide that sort of service. So of course, we do -- with [ Aozora Bank ], we do have a function through the JV to provide and extend credit, but it's really difficult to provide large amount of credit as such deal which happened, so as you know, when Century acquired Deen back then, quite a large amount of loan was extended to them, if you recall that deal back then. So likewise, whenever these large-scale M&As -- of course, we'd like to be involved as much as possible, and we have been taking various initiatives to do so. But quite often, that is the scheme. Our biggest strength lies with the middle-cap clients. So JPY 500 million level of middle cap, M&A is really our strong point. So for instance, in Europe, we rank #2 or #3 in Europe, and also in the U.S. because we acquired this new M&A house, we are gaining ranking. And that is exactly the reason why we have acquired those entities in the U.S. So to answer your question, yes, we like to be involved if there is such a large-scale M&A. But again, if -- only if we are fortunate to be involved here. But of course, if we want to have more of the loaning scheme in charge to the deal, it would be difficult for Daiwa to be involved in. Thank you very much.

[Hidenori Yamaguchi, executive]

[Operator Instructions] We still have time, but it seems that there are no questions coming in. So we'd just like to finish Q&A. Ladies and gentlemen, with that we would like to conclude the telephone conference. So Mr. Komatsu will make a closing remark.

[Mikita Komatsu, executive]

FY 2017 marked the final year of the previous interim plan and there were disturbances such as the rise in the global geopolitical risk and the uncertainties in the political situation. However, U.K. average recovered to a record-high level in 26 years, enabling us to grow both the consolidated revenue and income for the first time in 4 years. Our new mid-term plan 'Passion for the best 2020' has already begun. We would further evolve our customer-oriented sales system, provide high value-added solutions by our quality sales reps and bankers, and endeavor to enhance further our client satisfaction. It is important to note that FTG's promotion committee chaired by CEO, Mr. Seiji Nakata, was established in February 2018 in line with the sustainable development goals set by United Nations. We are committed to solving social issues through our group business and financial and capital markets. To this end, we would like to request your continued support.

[Operator]

With that, we would like to conclude the teleconference. Thank you all for your participation.

[Hidenori Yamaguchi, executive]

With that, we would like to conclude the teleconference. Thank you for participating until the very end. Please make sure, you turn off your phone.