Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2020-Q4

[Yusuke Fujino, executive]

For all investors, thank you very much for waiting, and thank you for joining the financial report and the conference for the fourth quarter of FY '19 of Daiwa Securities Group. It's time, so let us begin. Again, thank you very much for joining. Today, Mr. Sato of the Daiwa Securities Group is attending, the Executive Managing Director and CFO, and I am Fujino of IR Division serving as the facilitator.

Today, Mr. Sato will make an explanation of the fourth quarter of FY '19 results. The questions will be taken after the presentation.

For today's conference, please be reminded that this is also arranged accessible for investors via the Internet. So let's start.

[Eiji Sato, executive]

I am Sato of Daiwa Securities Group. Thank you very much for joining our telephone conference today despite your busy schedules. I also appreciate your understanding that we had to change the financial reporting date. Thank you very much for understanding.

Now I'd like to explain our fiscal '19 Q4 results, which we posted today on our website. Please turn to Page 3. Before getting to the reporting, I'd like to say that our hearts go out to those affected by COVID-19. To tackle with COVID-19, Daiwa Securities Group has set up risk management headquarters and embarked on initiatives as follows. For our workers, a remote work system has fully launched. A portable device was procured and provided to all staff so that they can work in a similar environment as in the office, gather information, communicate with colleagues and other divisions, make phone calls with clients, have web meetings and take and place orders.

For our clients, all branches are temporarily closed as a safety measure, but services have been offered through portable devices. Consultation services are available on the phone and/or the web. And our contact center also provide the services via a split team structure.

We at Daiwa Securities Group sincerely hope that the confusion in society caused by the virus comes to an end even just a day sooner, and we'll make an all-out effort for socioeconomic recovery and further development.

Now please turn to Page 5 for consolidated summary. Each percentage of change is based on the comparison to Q3 of fiscal '19. Net operating revenues were JPY 110.6 billion, down by 1.4%. Retail Division revenues was flat. Equity revenues and the investment trust distribution commission increased while debt revenues and agency fee for investment trust dropped. Wholesale Division revenues fell. Global Markets had equity revenue growth, but FICC slowed down. Global Investment Banking revenues dropped due to less equity underwriting.

Ordinary income was JPY 20.2 billion, down by 8.9%. As investment securities write-down was posted, which is nondeductible, corporate tax increased. Therefore, profit attributable to owners of parent was JPY 11.2 billion, down by 28.3%. Annualized ROE was 3.7% and BPS was JPY 796.33.

Let's move to Page 11 for P&L summary. Commission received was JPY 68.3 billion, down by 0.1%. For the breakdown of commissions received, please see Page 24. Both domestic and foreign equity trading increased, resulting in brokerage commission to hit JPY 17.4 billion, up by 24.4%. Underwriting and secondary offering commission was JPY 5 billion, down by 46.3% due to less equity underwritings. Distribution commission in the meanwhile was JPY 5.8 billion, up by 8.3% with the increase of stock investment trust sales. M&A-related commission was JPY 8.3 billion, up by 10.5%. Net trading income fell as FICC tradings decreased, though equity trading increased.

Next is Page 12 for SG&A. With the expense increase in personnel and real estate, SG&A increased to JPY 94.2 billion, up by 1.1%. Personnel expense was up due to performance-linked incentives, and real estate expense increased because of repair and renovation at a training center.

Please see Page 14 for overseas operations. Ordinary income totaled JPY 9.2 billion, up 105.6% since the previous quarter, gaining profit for 16 quarters in a row and marking record high in these 14 years. In Europe, M&A grew while FICC struggled. Asia and Oceania benefited from the contribution of wealth management business and equity revenue growth. Americas enjoyed good performance of FICC main products, mainly treasury, MBS and repo, delivering record-high quarterly profit.

Next is segment information from Page 15. Let's start from Retail Division. Net operating revenues were JPY 41.2 billion, down by 0.2%, whereas ordinary income was JPY 1.5 billion, up by 49.4%. Equity revenues increased since both domestic and foreign equity trading increased. Fixed income was down due to the drop in structured bond sales. Stock investment trust sales grew, and so does distribution commission for investment trust sales, but agency fee for investment trust fell. For the line of other revenues, investment advisory and account management fees as well as insurance sales commission increased.

Please take a look at Page 16. This will show sales and distribution amount as well as CapEx in the fourth quarter. With regards to wrap account services, the contract AUM decreased due to the decline of the market. However, we saw a net asset inflow Q-on-Q. With regards to stock investment trust, sales were solid with Smart Leverage Strategy Fund performed more stably than the market.

Please turn to Page 17. Let me explain the results of the Wholesale Division, starting off with Global Markets. Net operating revenues were JPY 31.1 billion, down 11.2%. And ordinary income was JPY 6.8 billion, down 39.8%. With regards to equity business, net revenues increased as customer order flows increased towards the end of the quarter and thanks to the position management. With regards to the fixed income, domestic fixed revenues decreased. On the other hand, overseas fixed revenues increased. As for domestic fixed, revenues from JGB business increased. However, we struggled with position management. As for overseas fixed business, the Americas performed well continuously.

Please turn to Page 19. This page is on the Global Investment Banking. Net operating revenues were JPY 13.2 billion, down 3.3%. And ordinary income was JPY 2.2 billion, down 31.4%. In the equity underwriting business, we won a lead book managed position for a multiple number of PO deals or real estate investment corporations, including global deals. In the debt underwriting business, we accumulated many mandates where we served as a lead underwriter for straight bonds and benchmark bonds. Revenues from M&A were driven by many mandates, both in Japan and overseas.

Please turn to Page 20. Let me explain Asset Management Division. Net operating revenues were JPY 12.4 billion, down 1.7%. And ordinary income was JPY 6.7 billion, which was down 3.8%. Daiwa Asset Management revenue decreased with lower AUM of stock investment trust during the quarter Q-on-Q attributable to the market decline. Revenues of real estate asset management increased with higher management fees earned by Daiwa Real Estate Asset Management and the launch of operation by Daiwa Securities Logistics Private Investment Corporation. AUM of 2 real estate management companies reached JPY 1.69 trillion.

Please turn to Page 22. Let me explain the results in the Investment Division. Net operating revenues were JPY 4.2 billion, up 96.1%. And ordinary income was JPY 3.2 billion, up 102.5%. What contributed to the higher revenues were investments in monetary claims by Daiwa PI Partners and the gain from sale by Daiwa Energy & Infrastructure. This completes my explanation of the results in Q4 FY 2019.

Next, we'd like to take questions from you. For the call today, we are going to have a simultaneous interpretation and you can participate in English. But because of the circumstance we are in right now, we are going to receive questions in Japanese only today. And if you have questions in English, please contact IR. Please understand.

Now we'd like to move to the Q&A session. [Operator Instructions] Now the line is open for questions.

[Operator]

So the first question is from SMBC Nikko, Muraki-san.

[Masao Muraki, analyst]

I have two questions. First one is about Slide 14, Americas, the profit in Americas because half of the consolidated profit is coming from Americas, as I understand. Well, the interest trading was quite well since last quarter. And this time, it has even grew further. I just wonder the sustainability of the growth. That's my first question.

The second is on Slide 16. On the right-hand side, I read the retail product sales where the wholesales and the consultation over the counter has been temporarily closed and suspended. Now I'm wondering what kind of sales activity you are conducting. And also for selling those products, the current environment is having what kind of influence or what kind of result? I just wanted to know that.

[Eiji Sato, executive]

Muraki-san, thank you for your questions. The first one is regarding the good performance in Americas and its sustainability. Now for the fourth quarter, as you already know, the market volatility has just spiked and our clients' order flow had also spiked. So the primary dealer license has been obtained in Americas since 1986. And in the treasury market, we enjoy quite a big market share. With that record, we have had a lot of orders, and also the spread has been widening. All of them have been a benefit for us. And as of the products around repo, MBS and the treasury, all of them have been performing quite well.

And to foresee the future in the April, not so much as the month of March, the good performance have continued. And the client business and the flow have been showing quite a good performance. Because of the hit by the coronavirus and so on, we would like to see the volatility to start coming down and the situation to start normalizing.

But when it comes to losing interest, we just want to take advantage of the interest rates. And from that perspective, MBS or the customer-centric business will need to be maintained. And we hope that, that will be the case.

Regarding the equity division, the U.S. stock market has been quite active. So from Japan as well there are a lot of buys from the Japanese investors as well. So whether we're going to pursue the post coronavirus, we'll just wait to see how it goes.

And regarding your second question regarding what kind of sales activity we are engaged in for the retail sales. Well, just looking back to the previous quarter, in the fourth quarter, as we said last time, our business is now making a shift from the brokerage to more like a asset management type so that we are in the transition period today.

For the first few months of this year, the market was quite steady in fund wrap, investment trust. So all those products have been selling quite well. But after the coronavirus shock of February '20, the stock market had fell. In that environment, the stock has been quite cheap. So it seems that portion of the market has been expanding.

So from that -- for investment trusts, those are kind of relating to the consultation service. And when the consultation service is available, then the large lot sales seem to be coming in so that -- because of the stay-at-home period that we are going to do here in Japan, we need to temporarily shut down the processes in the branches, which is having some impact on our sales activities. So for the fund wrap, there was a slowdown in March. And for April, we see much more slowdown. But for the month of March, the number of new accounts opened. There was a number that we have seen for the high volatile and the inexpensive products that we have seen compared to some previous quarters have become much more popular.

Then going back to the sales activity. The branch offices are all closed. We can't do the consultation face-to-face, not over-the-counter sales activities either. So as I said, we use terminals or the handheld devices, so our staff will be able to work in a very similar environment as in the office. So information gathering or information sharing, by placing them receiving the orders, the portable devices is fully utilized. And we also use the virtual meetings through the web or through the phones.

So we just continue to strive to provide informations on a timely manner as well. We are not giving up anything. At the same time, we have to, of course, monitor the market. So locally, that as well we have to see from the customer's perspective. It has to be more brought up into our attention.

[Masao Muraki, analyst]

Well, if possible, can I ask you further -- one more question? On the Page 3, left-hand side, you are talking about the portable device that you just mentioned. So even before the corona, it seems that you have already had portable devices even before the coronavirus issue. I'm just wondering, for what kind of purpose you have prepared this portable terminals before the corona?

[Eiji Sato, executive]

Well, for devices, our concept is that we wanted to have the office infrastructure free from locations. So we have launched our product to make it available about 2 years ago. Well, we had PTC or Tokyo Olympics and Paralympics and also the change in the working style, a lot of things were in our mind. And also, when we think about the future, we want to provide better convenience for our clients and customers while cutting down on our costs for the better cost efficiency. So it was a part of that initiative.

And when we talk about the cost structure reform and the improvement, of course, we will work on that continuously. Well, we want to make the IT investments, whereas that's important and necessary, what portable device could be in very much of the advantage because that will make it possible for staff to be able to still work on the sales activities not only for the wholesale, but from, for example, TV or the web meetings are now active. And our staff are using their device and engage in the sales activity continuously.

[Operator]

Next questions are from Mitsubishi UFJ Morgan Stanley Securities, Tsujino-san.

[Natsumu Tsujino, analyst]

You explained about the trading income by the business division, and the fixed income declined quite a lot Q-on-Q. On the other hand, overseas division performed well. Going forward, when I try to project for the future, I'd like to know several things about the situation since the beginning of April, the most recent situation. Earlier, you mentioned that the situation in the United States or the Americas. How is the situation there in terms of the order flow? And the bid-ask spread has increased. That was a tailwind for the business. But at the moment, what is the situation or business environment there?

And in Japan, probably, the credit products did not perform well in March, I assume. But what's happening after April -- since the beginning of April? Is there any potential risk of devaluation losses? If you see the devaluation losses, then we will not see further deterioration in the future. Probably the worst is over. Or if things go well, then we will see the recovery. But what are the factors behind the poor performance of the domestic operations?

[Eiji Sato, executive]

Thank you so much. About the fixed business, the situation is different in each region, as you presumed well, Japan, Europe, the Americas. The fixed rate is different among the 3 regions in the fourth quarter, especially towards March.

Let's look at Japan first. JGB's credit derivatives were a bit [ widened ] for all of those products. As a result, investors' flow decreased. And because of that, Japan and Europe, for credit products, we struggled. So our position did not performed well.

On the other hand, in the Americas, investors' activities for trading increased. And over a bit, spread widened. And because of those 2 double reasons, trading performance improved. From the beginning of April, Japan and Europe, in those 2 countries, clearly, things are recovering compared to March, volatility is lower and the credit spread is gradually coming down. So we see the recovery, gradual recovery. So overall, customer flow is coming back in Japan and Europe. And the market volatility -- liquidity, sorry, liquidity has improved. So our position is improving.

On the other hand, the Americas, March was still good, still strong. The income environment right now is still very strong, not as strong as March, but still, things are performing very well in the Americas.

[Natsumu Tsujino, analyst]

One more question. Switching the topic to domestic retail, foreign equity sales. How is the volume trending for the sales of foreign equity in Japan? How is it increasing Q-on-Q?

[Eiji Sato, executive]

Page 29, please.

[Natsumu Tsujino, analyst]

Sorry, you disclosed on that page. Understood. Understood. I see that page now, Page 29. Sorry. I found the answer on Page 29. So this is the amount trading value. So I think there was some sale of foreign equities from retail investors. So how was the situation in terms of sell and buy for foreign equity?

[Eiji Sato, executive]

Well, we cannot really give you the specific answer in terms of the exact amount of sales and buy. But in the context of market going up, more people sell their positions. When the market is down, then more people buy. So investors behaved by watching the market move up and down.

From January to March, on a cumulative basis, it was net buy. In the third quarter, on the other hand, it was net sell, more net sell. So that's the rough image.

[Natsumu Tsujino, analyst]

Understood.

[Eiji Sato, executive]

In March, in particular, it was net buy of foreign equities in March.

[Operator]

Next question is JPMorgan, Otsuka-san.

[Wataru Otsuka, analyst]

Wataru Otsuka of JPMorgan. Well, my first question is -- I'm sorry to repeat, but Americas FICC business, will FRB be providing supportive measures as a monetary policy? Are you starting to see the impact of it because you are a primary dealer? So the liquidity asset side, you are already probably enjoying the advantage of it. So if FRB is going to expand and reaching out to the low recourse side of the businesses, do you think your income is going to even grow more?

[Eiji Sato, executive]

Well, FRB's policy is, of course, going to make some changes in the industry sentiment. Does it have an impact on the business? Well, the order flow is one thing that will get an impact. So I'm not sure if I did answer your questions. But for March and April, the treasury side have seen some changes, and repos and the MBAs moved that much. So there's been some good performance seen from those 2 products. For May -- for the month of May, once the market starts to settle and the spread starts to look -- to become less volatile, I think we'll be able to get some benefits. I don't know if that directly answered your question to what kind of benefit we do directly get from the FRB policy.

[Wataru Otsuka, analyst]

Well, then I should probably ask in a different way. But loan position that you have to do more income. It's not your direction for the Americas business. Is that correct?

[Eiji Sato, executive]

Well, not that relevant.

[Wataru Otsuka, analyst]

Okay. Understood. Okay. My second question. I like the first part of your presentation. But this time, you did not make a decision for the repurchase of the shares. Why not?

[Eiji Sato, executive]

Regarding the buyback, that relates to the buyback policy. When you look at the financial strategy, we still have the strong financial backbone. That's most important. The followed thing is that should there be any opportunities for the growth investment, then we shall do so. But even if we see the top line for the potential investment for the future growth, if that time comes, then we'd like to think about the active shareholder return. So by following such financial policy, we shall comprehensively make a decision. That's the reason.

[Wataru Otsuka, analyst]

Well, 4Q Tier 1 ratio this time is not disclosed. Is it going to have an -- is it because it's something that has an impact on the consolidation that had happened? Or it's just your comprehensive policy that you looked at to make a decision?

[Eiji Sato, executive]

Well, we had in Q1 of JPY 150 billion in March. So we have been expanding and fulfilling our capital. But we just see the entire landscape comprehensively.

[Operator]

Next questions are from BofA Merrill Lynch, Sasaki-san.

[Futoshi Sasaki, analyst]

Can you hear me?

[Eiji Sato, executive]

Yes. We can.

[Futoshi Sasaki, analyst]

My name is Sasaki from Merrill Lynch. I have two questions. The first question is on the PL of the fourth quarter. The exercise tax rate has increased. I think you touched upon this point a little bit in the presentation. There was the devaluation loss from the marketable securities. So corporate tax has increased. And would you please tell me again the reason why the corporate tax has increased?

Second question, it's not really related to the current situation. But this year, overall, I think the situation is unprecedented environment. And you don't have to tell me the specific figures. But in March 2021, what is the level of budgets that you are discussing internally in your company for March 2021? What is the atmosphere? What is the direction? What is the feel that you have in your company? Are you projecting the increase both in the top line and the bottom line or increasing top line but decreasing bottom line or vice versa? Or are you not trying to accelerate short-term profits, but rather, would you like to invest in this fiscal year in March 2021? To the extent you can, would you please elaborate on the feeling in the company?

[Eiji Sato, executive]

To your first question about the corporate tax. You are right. Your understanding is correct. The devaluation of the investment securities, which cannot be included under the tax reporting results.

And direction for March 2021, when we compile our budgets, the timing is always March, but we could not really incorporate the impact of coronavirus fully to the fullest extent. But in principle, we are trying to perform better and we are trying to transform ourselves from the brokerage-based business model to asset management business model. We'd like to focus on inheritance, business succession, M&A. We'd like to shift our gears to solution businesses. So we'd like to thoroughly work on this transformation in March 2021, and then coronavirus hit. But we are trying to expand the businesses. Through the web meetings and virtual meetings, we are trying to give consultation to our customers to expand the business gradually.

And in the wholesale business division, continuously from the last fiscal year, we were able to capture the market trend timely in the last fiscal year. So this year as well, we'd like to capture the trend of market well on a timely basis.

For IB, the situation is different for FICC and equity. For the equity business, there's an impact from corona shock. So it's going to be difficult for the time being.

And about the IPO, there is strong appetite towards IPOs. We have very strong pipeline for IPOs. So by looking at -- after corona, we'd like to prepare well.

And for the FICC business, business is doing very, very well. There is funding needs, strong funding needs. Towards the end of the year, some investors were in the wait-and-see mode. But from the beginning of April, the bond business, fixed income business has been performing very well. So for the fixed income business and also for the M&A business, we'd like to continuously focus on in this fiscal year. Did I answer your question?

[Futoshi Sasaki, analyst]

Understood. To your first question, let me ask you a follow-up question. IB, the companies around the world are increasing their leverage. And are you receiving many inquiries from companies around the world of a potential fundraising, including equity raising?

[Eiji Sato, executive]

They look at the world after corona. They'd like to recover the capital that they lost. So there are various needs for funds. So in that sense, we are seeing the increase in the number of consultations. So I would like to execute on those consultations, making them into actual deals. In the investment division, too, we are discussing about the future strategies with customers so that we expand the businesses after corona.

[Operator]

Next question is by Nagasaka-san of Morgan Stanley.

[Mia Nagasaka, analyst]

I have one question. Your midterm plan, you have a plan for improving the earnings. I just wanted to know the progress as well as the target, top line of JPY 150 billion for the cost reduction of JPY 15 billion. For cost reduction by about 40% within the current year of 16 -- 60%, that was your plan, I think. So I wanted to know the progress in the quarter. With the expansion of the pandemic, I think you are going through again with the operation. Are there any room still left for accelerating the cost reduction measures? And also for the top line, you're talking about the talent management or the optimization of the talent location. I just wanted to know the current situation of that.

[Eiji Sato, executive]

Thank you for the question. Let's start with the cost side. JPY 50 billion -- JPY 15 billion -- the 50 -- the 40% coming from retail and 10% from the wholesale. But first of all, I was talking about 40% for the year, but we are currently around 50% to the total plan.

[Mia Nagasaka, analyst]

For the future, are there any still headwinds left?

[Eiji Sato, executive]

Well, just given the current environment, it will be hard to say. But as we thought about the overview of how the work and the technological innovation for the further cost reduction into the future as a potential so that we'll be able to become much more efficient in working. So for the cost reduction, not only the retail, but the wholesale and the other divisions, we'll make a review, just like a product, to see whether there will be more headwind for us to increase. It will be just an accumulation of little things. So we will not constrain this effort without leaving any stones unturned.

For the top line growth, about 400 people. The relocation or the location of the talents would be quite important. Especially the 400 people of the shift on the hybrid from the back to the front, for example, that will be the main source. For the year, we are thinking about the trimming down of the structure of the headquarters, so about 60% or a little more of the talent has become much more available in talent pool. But it's not the same as cost-reduction initiatives. It may not be directly related to the results to come at the same timing because depending upon the environment that we play, we might assume for 100 to deliver this year, but we might just end up with having 60% or 70% to deliver at the end of the year. So we are just struggling how to walk through the plans, but for the top line as well, we will continue to make the best effort.

Now for the earnings improvement, please be minded that, first of all, this time, we have been making some investments like portable devices, and that started about 2 years ago. So for the IT investment, we have been active. We have been and we will be. The depreciation will be there and the CapEx will be there. So for the system-related part, this will be for the top line growth and the cost reduction into the future. That's the reason why we think we need to take this initiative quite actively so there will be a gradual increase.

[Mia Nagasaka, analyst]

Last quarter, you were talking about cost-reduction plan at 40%, but you are already at 50%. So what the extra 10% comes from? What kind of an aggressive measure you have taken compared to the original plan?

[Eiji Sato, executive]

Well, by looking at the segment by segment, the retail -- well, I would say compared to the retail, wholesale is cutting cost more than the retail as a progress, I think. We see more progress in Wholesale Division cost-cutting measures.

[Operator]

[Operator Instructions] Now I would like to finish the telephone conference, but Mr. Sato is going to have final remarks.

[Eiji Sato, executive]

FY 2019 was the hardest year since the start of Abenomics with lower revenues and profit. We could not offset the decline of revenues in Retail Division by the Wholesale Division.

In the Retail Division, we felt that some progress was being made as we tried to transform from brokerage-driven business model to a stock revenue-driven asset-management-type business model and pushed cost-reduction initiatives strongly through reforming income expense structure. However, business environment has become very tough as the stock market made a large correction due to corona shock at the end of the fiscal year, and we have much less opportunities to see our customers as we refrain from visiting them since April. We are working with even more constraints such as temporary suspension of counter operations in branches upon the state of emergency announcement by the government.

On the other hand, many customers are seeking for advice as they are anxious about the outlook. Now is the time for us to act on our social mission, which is to be there for each one of our customers, helping to ease their anxiety and resolve their concerns about asset formation and investment.

As I mentioned at the beginning, we have distributed a portable device to every employee so that they can work just as effectively as if they were at the office. Using this advantage, we are working to expand our business by providing highly value-added consultation via forums and web meetings while working from home.

In the Wholesale Division, we were able to generate high level of income, both from equities and fixed, in the year that ended by capturing market trends very well in the global market. Since the beginning of April, we have been able to acquire customer inflows, and both equity and fixed have been performing well compared to average of Q4.

In particular, FICC business is off to a very good start of the year with a large increase. We will not ease our focus on income expense reform and transform to a hybrid comprehensive securities group, respond appropriately and agilely to the change in demand triggered by corona shock, transform ourselves and aim at achieving sustainable growth.

I'd appreciate your continued support to us. Thank you so much.

[Operator]

This completes the telephone conference call. There was some part at the beginning of the call that we could not distribute to everyone online, so please check and access the telephone conference on the home page. Thank you so much for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]