Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2022-Q4

[Unknown Executive]

[Interpreted] Thank you very much for waiting, and thank you for attending Daiwa Securities Group investor Conference Call for the Fourth Quarter of FY 2021 financial results. At this time, we would now like to begin the call. From Daiwa Securities Group, we have Eiji Sato, Executive Managing Director, CFO. My name is, [indiscernible] and I have been assigned as the Head of IR Office starting in April. So from Sato, he will share with us the earnings results for Q4 for FY 2021. And we will receive questions after the explanation. Also, today's call will be streamed to the retail investor through Internet. We will now like to begin the explanation.

[Eiji Sato, executive]

[Interpreted] My name is Sato from Daiwa Securities Group. Thank you for taking time from your busy schedules to attend our conference call today. I will now explain the financial results the fourth quarter of fiscal year 2021, which we announced today in accordance with the financial results presentation material posted on our website.

Now first, please turn to Page 4. First, I would like to provide a summary of the consolidated earnings results, percentage figures are comparisons [ to the ] third quarter of FY 2021. In Q4, net operating revenues and ordinary income declined due to adjustments in the stock markets. In the Retail division, sales of stock investment trust and trading of foreign stocks declined. In the Wholesale division, global markets posted higher FICC revenues, but lower income due to lower equity revenues. In Global Investment Banking, equity and debt underwriting declined.

Net income attributable to owners of the parent was JPY 17.9 billion, a decrease of 32.6%. ROE was 5.3% on an annualized basis. BPS was JPY 925.81, the highest ever. Year-end dividend is JPY 16 per share. Interim dividend was JPY 17. On a full year basis, the dividend will be JPY 33 per share. Dividend payout ratio is 52.3%. Also as part of our capital policy, we have set up a share repurchase program of up to 33 million shares and the total amount of JPY 25 billion. Also, we have resolved for the cancellation of treasury shares up to 130 million shares.

Please turn to Page 10. The following is an explanation of income statement. Commissions received totaled JPY 69.2 billion or minus 18%. The breakdown of commissions received is shown on Page 23. Brokerage commissions amounted to JPY 17.6 billion, down 12.1% due to a decrease in trading of both Japanese and foreign stocks. Underwriting and secondary offering commissions were JPY 5 billion or minus 63% due to a decrease in both equity and bond underwriting deals. Distribution commissions were JPY 3.4 billion, down 38.8% due to a decrease in sales of equity investment trusts. M&A-related commissions were JPY 7.5 billion or minus 4.7%.

Please turn to Page 11. We will now explain about the SG&A. SG&A was down by 3.6% to JPY 94.8 billion. Personnel expenses, including earnings-linked bonuses decreased.

Please turn to Page 13. Next, I will explain the ordinary income and the overseas operations. Ordinary income for the overseas operations totaled JPY 3.7 billion, up 34.7% from the previous quarter. In Europe, primary revenues, which were strong in the previous quarter, declined. In Asia and Oceania, primary earnings declined. Equity in earnings of SSI securities contributed to the high level of income. In Americas, M&A revenues declined, while FICC revenues increased on the back of higher interest rate volatility, resulting in higher revenues and income. I will now explain our performance by segment.

Please turn to Page 14. First, let me explain the income and expenses of the Retail Division. Net operating revenues were JPY 42 billion, down 15.5%, and ordinary income was JPY 6.7 billion, down 47.2%. Equity income decreased due to lower trading of both Japanese and foreign equities. Distribution commission for investment trust decreased due to a decline in sales of stock investment trust. Agency fees for investment trust decreased due to a decline in the balance of the investment trust sold. Asset-based revenues increased to JPY 18.9 billion. As a percentage of operating revenues in Retail division, it accounted for 46.1%.

Please turn to Page 15. There is a status of offerings in sales in Daiwa Securities retail division and the topics for this quarter are under review. Wrap account services, the balance of assets under contract as of March 31, 2021, which is at JPY 2.9573 trillion, a record high. In stock investment trust, sales of investment trusts related to U.S. growth type stocks declined, although purchase of value type stock investment trust grew. In domestic bonds, sales volume increased due to Softbank Group corporate bonds and JGB for retail investors. The lower left-hand side of the slide shows a graph of the amount and net increase in the amount of wrap and equity investment trust offered and sold. The net increase rate was 14.5%.

Please turn to Page 16. I would like to explain about the Wholesale Division. Starting with the Global Markets. Net operating revenues were JPY 34.2 billion, down 4.7%. Ordinary income was JPY 10.3 billion, down 8.1%. Equity revenues declined, foreign equity and derivative revenues were down. FICC revenues increased. In Japan, customer order flows for JGB and derivatives increased, although revenues from the credit were stagnant. In the Americas, revenues improved from treasuries, MBS and repo on the back of higher interest rates and higher volatility.

Please turn to Page 18. This page is on the Global Investment Banking. Net operating revenues were JPY 10.7 billion, down 38.7%. And ordinary income was loss of JPY 700 million. In the equity underwriting business, we accumulated a track record of mandates, meeting various financing needs. In the debt underwriting business, we accumulated deals serving as a lead manager of straight bonds and subordinated bonds. With regards to M&A, we made steady execution of mandates, both in Japan and overseas.

Please turn to Page 19. Let me next explain Asset Management Division. Net operating revenues were JPY 17.7 billion, down 2.7%. And ordinary income was JPY 11.2 billion, which was down 0.8%. Both the revenues and ordinary income were record highs on an annual basis.

Daiwa Asset Management net revenues declined on the back of lower AUM due to the market value factor, even though capital inflows of publicly offered investment trusts were net positive. With regards to the Real Estate Asset Management, increase in equity method investment gains from Samty Asset Management contributed to increase in profits.

Please turn to Page 21. Let me explain the results in the Investment Division. Net operating revenues were JPY 4.1 billion, up 30.2%, and ordinary income was JPY 4.1 billion, up 137.4%. Both net operating revenues and ordinary income of Daiwa Energy & Infrastructure increased on the back of income and capital gains, Daiwa PI Partners, secured a high level of monetary claims investment income. This completes my explanation of the results in Q4 FY 2021.

Stock market in 2021 was a wild ride. After recording the highest level in 31 years at Nikkei average of JPY 30,670 on the back of expectations towards global economy normalization and the new government and then going into a big [ collection ] upon repeated bad news one after another such as resurgence of COVID cases, global rate hikes, iteration of Russia-Ukraine circumstance and so forth.

In this environment, we secured JPY 135.8 billion, the high level for the first time after 4 years, making a good start as the first year of the medium-term management plan. Retail, Asset Management and the Investment Division grew their performance, offsetting a slowdown of the Wholesale Division, which demonstrated our comprehensive capabilities as a group.

In particular, the performance of the Retail Division showed a remarkable recovery, which is a steady result of the transition to wealth management business model and cost structure reform, which we have taken time to address carefully. With regards to right now in April, the market continues to be unstable. However, the customer activities are recovering after hitting the bottom in February. When I look at product sales, I see somewhat slower start with regards to Japanese equities, yet sales of foreign equities and equity investment trust are improving.

Furthermore, I see continuously robust needs towards medium- to long-term asset formation needs, therefore, bond wrap sales are maintained at the high level. We are committed to work continuously to establish wealth management business model and a hybrid business model towards building a stronger income model, which is not susceptible to market changes. I appreciate your continued support and cooperation to us. Thank you very much.

[Operator]

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

[Masao Muraki, analyst]

[Interpreted] This is Muraki. I have 2 questions. So on the last point, you have mentioned so the current situation in April. So in comparison to the average for the -- the January, March quarter, retail markets and also from investment ramping. What is the current situation for the customers' activity and also the revenue situation? If you can give us more color for the month of April, that will be helpful. That's the first question.

The second question relates to the retail investors, the funds flow. So for Page 15, on the left-hand side, if you look at this chart, given this current market situation, so net increase in funds perhaps is slowing down in terms of the net inflows or net increase. But if you go to 33 for the Next Bank, the yen-denominated deposit has been on the decline for this quarter. So where exactly are the retail funds going? What is your analysis? if you can share those with us, again, that will be highly appreciated.

Is it going to the individual equity? Or is it had actually been remitted to other banks? So what is the current flow that you are seeing resulting in the situation? So those are the 2 questions.

[Eiji Sato, executive]

[Interpreted] Thank you very much. So related to the first part of your question. So let's talk about Retail Division, the current situation in Retail Division. So of course, the month of April is not fully over. But what we are forecasting right now -- so in comparison to the March quarter, it is stronger in the foreign equity and also the equity investment trust. So the wrap business, the wrap service actually was strong for March, but it was even stronger in April. So about 20% to 30% better in comparison to the average of the previous quarter.

Now for the domestic equity, it is somewhat slowing down in comparison to the March quarter. So bonds, again, it's slowing down somewhat. So that is our current observation for the month of April. And so in terms of the global market, so we have equity and FICC, people do look at those.

Equity, the market continues to be unstable. So we are impacted by that trend. But on the other end, in the Retail Division, we are seeing more of an aggressive buying for the foreign equity. So that is positive. So, we are watching the trends in April as we see the fiscal year. And in terms of FICC, it is seem -- so for the derivative and also -- for the derivatives it's been quite positive.

Now in terms of the domestic front, so we are seeing increasing interest rate volatility. So we are seeing flow for FX. Also credit, we are seeing improvement from Q4. Also in terms of the Americas, so with the increase in the volatility for the interest rate, the customer flows have been on the increase and offered good spread is also improving. So to treasury, we are seeing some activities going on.

Now the Americas, for January, February and March, so we have seen some improvement as we progress. So we continue to see this positive trend continuing into the month of April. Also in terms of Europe, it has been -- the credit has been sluggish. But in comparison to Q4, we are seeing some improvement in the month of April.

Related to the second part of your question, about Next Bank, the decline in the deposit. As far as Daiwa is concerned, we are not necessarily seeing this as a negative trend. In fact, it is really about the aggressive buying within the markets. So it is actually buying those products. That's where the funds have been used. So we haven't fully captured how much they have turned to other banks. But we do believe, basically, it is used for buying -- further aggressive buying the products.

So Next Bank, actually, the deposit is not just from the retail investors only. So all in all, we do not perceive the deposit amount to be significantly declined. So we do not believe that these account holders are churning.

[Operator]

Next question from [indiscernible], Morgan Stanley.

[Unknown Analyst]

[Interpreted] I have 3 detailed questions. First, the accounting trading PL and financial PL. If you add them together, then you get trading income. But under the managerial accounting, the FX and on -- trading income is also reported under the managerial accounting, which is the sum of trading income and financial income. And there are other items included. So there is sometimes a difference. And this time, JPY 32 billion for the quarter -- fourth quarter. But under the managerial accounting, it's less by JPY 4 billion. So what's included in each? In the past, there were some special items included. So would you please explain what's included?

Second question is related to extraordinary loss. Again, there are various items included like a market-related expense, fixed asset disposal loans. So what are they included in the extraordinary loss? That's my second question.

My third question Investment Division, Daiwa Energy & Infrastructure, income gain was positive and you received the capital gain as well. So in the Investment Division, the performance in the fourth quarter was very strong. But on the accounting reporting, if I look at PL, where is that strong performance included? So marketable securities related PL was slightly good in the fourth quarter. So would you please give me more breakdown.

[Eiji Sato, executive]

[Interpreted] Thank you so much. You have given me very difficult question. So I don't know if I can answer all of your questions specifically, but let me try. First, financial accounting reported financial income. Income is not only for Daiwa Securities, but also the income is also from the Investment Division. For example, Next Bank, fund-related financial income and other operating profit is accounted for in various lines. Therefore, there are variances in each quarter. So it's really difficult to identify the specific factor for the fourth quarter only. There are various items.

And second question related to the extraordinary loss relating to the market-related loss. We have losses coming from Japan and overseas, arising from a multiple number of businesses getting done or a withdrawal. As a result, we have accounted for the extraordinary results. And for the specific item, we have just made a decision on the policy and execution of the disposal was scaling down or withdrawal is going to be happening from now on.

So I would like to refrain from giving you more details than that. And related to Daiwa Energy income gain, capital gain which are the lines are in the PL capturing those operating expense. And also it's also accounted for as the decline in revenue not only expense, but decline in revenue, too.

[Unknown Analyst]

[Interpreted] Understood. For my first question, and second question -- I'm sorry. I have a follow-up question to my first question. You said it was difficult for you to answer, but it's minus JPY 4 billion for the fourth quarter, which is relatively large on a consolidated basis, trading and financial income, the financial reported number and the managerial reported number. So Next bank, if there is a negative number for that bank. Is it substantially economic significance? Or can I just ignore this variance?

And about the extraordinary loss, understood, but in the future, is there any possibility that you are going to report the similar nature of the extraordinary loss in the future?

[Eiji Sato, executive]

[Interpreted] To your first question, the follow-up question. Next Bank, this is related to the hedge changes. Hedge position changes. So again, I'm very sorry -- but if you look at this number on a quarterly basis, numbers naturally move. So it's really difficult to give you the technical answer.

And to your second follow-up question, extraordinary loss, is there any possibility that we are going to see this again for unprofitable businesses from the perspective of improving ROE. We'd like to scale down or withdraw from unprofitable businesses. That's something that we need to do in the future. So we have to continuously do the selection and focus. So there may be some extraordinary loss, but if any, the scale of that extraordinary results in the future is not going to be large.

[Operator]

We would now like to move on to the next question from Nomura Securities, Sakamaki-san.

[Naruhiko Sakamaki, analyst]

[Interpreted] This is Sakamaki from Nomura. I have 2 questions. First question relates to the share repurchases, the background to which deciding on the amount, what were some of the elements you have considered? That is the first question.

Second question relates to Retail Division. This is Page 14. So in terms of the asset-based revenue, Q2 and Q3, if you look at the past quarter, it's about JPY 19 billion or so. So for the past 9 months or so, it has been flat. So of course, we do understand the market situation impacted for the March quarter. But in terms of the asset-based revenue, if you can actually summarize on the performance for the past 12 months, that would be helpful?

[Eiji Sato, executive]

[Interpreted] Thank you very much for that question. First of all, in terms of the share repurchases, how we set about deciding on the amount. So this is just repeating of what we have shared with you in the past. So our shareholders' return, we have 50% or higher in terms of the dividend payout ratio. That is what we're committed to. And on top of that, we will consider share repurchases depending on the financial soundness and also the pipeline for the growth investment and also the management situation, regulations, also share price. So we would actually take all of these into consideration and conduct these on a flexible manner.

So we have conducted on a fairly integrated comprehensive consideration, and that is why we have decided on this amount. So as for this fiscal year, if you were to look back, it has been very challenging in terms of the operating environment. So we have been able to cope with such tough environment. And so, following our past policy, we looked at the investment pipeline and as well as the financial soundness and the share price has been taken into consideration to decide on the current amount. Now in terms of share buyback, so for 2021, the additional shareholder return. So we would continue to also explore shareholders return for FY 2022 as well.

Also related to the second part of the question, so flat -- perhaps it is flat as you mentioned. But there has been a drop in the share price, which has posed a large impact because the asset-based revenue, it is truly based on the market price. So we are seeing some inflows from the inflows. But because of the drop in the market price, the actual amount balance has stayed flat. And as I have mentioned previously, on a global basis, the share market has been -- the stock market has been going through a major correction. So the investment [ or ] sales have significantly declined.

However, on the other hand, we have the international diversified investment and also fund wrap, it has had a relatively positive performance. So in terms of the contract AUMs and so forth, actually has been trending stronger than what we have forecasted in the midterm plan. So in terms of fund wraps, as at March end, about 97% or higher other customers, okay? And JPY 400 billion, more than JPY 400 billion is the total unrealized gains. So there is a certain lot of resilience vis-a-vis the share price drop in the market. So we do perceive that we have had a fairly good performance. So from that, the customer satisfaction continues to be high. So the average duration of holdings is longer than 8 years.

Also in terms of the contract, it is getting larger in terms of the size. And also, we have 40% in terms of the -- so anyways, we would believe the fund wraps would actually will be established as the core product for enhancing the asset-based revenue. And we might have shared this with you, but we have around JPY 900 trillion, which is 7.2% within the individual account. This is for the U.S. fund wraps. So it's sevenfold or even higher in the U.S. in terms of the fund wrap. So we think that there's much, much room to further improve this in Japan.

We are seeing the prolonging of the Russian invasion into Ukraine, and there are some negative elements. However, the market have already factored this into consideration. So we do not expect to see similar disruption as we have seen in Q4. So even if the current unstable market continues, we can leverage on our strength, which is our wealth management planning tools.

We would like to leverage on this so we can actually make proposal to the customers. So the stock related products, we would also aim to increase the revenue for these. Also, when the market subsides, the -- now we would have more profit coming in from the higher balance of the asset-based revenue. So we could have maybe JPY 10 billion or so on a quarterly basis, that could be the potential. So that is how we intend to execute our sales strategy.

[Operator]

Next questions are from Bank of America, Sasaki-san.

[Futoshi Sasaki, analyst]

[Interpreted] My name is Sasaki from Bank of America. I have 2 questions. First, I'd like to know more color on the results for the fourth quarter. When I look at the performance by segment, other/adjustments, which is at the bottom on the page, in the fourth quarter, minus JPY 9.078 billion. So since 2010, since you started disclosing this format, it's the largest amount. What is included in negative JPY 9 billion? And then exercisable tax was lower up to 20% in the fourth quarter. What was the reason for the lower tax?

[Eiji Sato, executive]

[Interpreted] First, other/adjustments, it's really technical. Everything related to the performance of group companies, consolidation adjustments and the profit and losses, which do not belong to the segmentation and financial accounting -- financial managerial accounting related items. So everything else is all included in there. And it's minus JPY 9 billion, but that's not due to any special extraordinary factors, but it's just the accumulation of many different things. And as an example, funds that we own and the securities income from that has decreased. And business deteriorated in some group companies and [indiscernible], Fintertech, which are affiliated companies.

So deterioration of the performance. But throughout the whole year, minus JPY 9.3 billion. And last year, it was minus JPY 13.5 billion, which is lower compared to the last fiscal year. But there are so many items included that it's really difficult to forecast for the future. But we are trying to focus on the hybrid business model, which should expand in the future. As it expands, I think it should be positive on this other category.

To your second question, the lower tax, nonconsolidated subsidiaries, There are minority shareholders in some of our subsidiaries. And as before tax, we can account for 100%. But because of the profit of those affiliated companies and also equity method companies profit increased. So on the after-tax basis, then we can account for the improved profit from equity method applied companies. And that's also the reason.

[Futoshi Sasaki, analyst]

[Interpreted] Understood. If that's the case to my first question, there was nothing extraordinary. If it's just permanent or chronical then minus JPY 9 billion multiplied by 4, is that rough amount as an image for the annual number?

[Eiji Sato, executive]

[Interpreted] No, no. That's not what I mean. There is a seasonality. So throughout the whole year, then the amount is not going to be so large. But if you look at on the quarterly basis, then sometimes in some quarters this number can be large at times. This amount is not going to continue in the future.

[Futoshi Sasaki, analyst]

[Interpreted] Understood. Understood. And also -- in your medium-term management plan, do you need to review or revise your midterm plan? What is your stance on the news of revision? This year average is assumed to be JPY 35,000 or so as an assumption for the business environment. But right now, JPY 26,000 or so. So business environment surrounding business has changed. So at this point, do you think you need to revise your current midterm plan? What is your stance there?

[Eiji Sato, executive]

[Interpreted] Well, as you mentioned, market assumption, as I explained in the management strategy meeting, looking at stock market and other market conditions, currently, they are lower compared to the time when we announced midterm plan, but our business portfolio is well diversified. So equity business is not the only business. We have a primary and a secondary equity markets impacting our business, of course, but we have other businesses that are growing, too.

So right now, do we need to revise or review our midterm plan? No, we have just finished the first year. So in the future, we are going to keep our eyes on the market environment. And JPY 50 billion ordinary profit is a target for hybrid business. So we're going to see how we progress and then make a judgment if we need to revise or not.

[Operator]

Next question from [indiscernible], Morgan Stanley.

[Unknown Analyst]

[Interpreted] About the dividend payout ratio. So you've mentioned 50% is the target you have. But recently, you have been trending higher than that 50%. So is there a certain reason why you have set up 50%? So perhaps the dividend payout ratio, do you intend to enhance it? Is that why you're trending around 52% to 53% in the recent quarter? So even if you were to round off, perhaps you can actually -- do you still intend to actually keep it higher than 50%. So is there a certain intent behind this? So you do have the baseline of 50%, but do you also intend to gradually raise that line or not? So that is the first question.

Also, the second point is just confirmation. So about JPY 20 billion -- the buyback of JPY 25 billion, you've mentioned this is the add-on for the shareholder return for FY '21. And for 2022, you will consider the share -- the share return -- shareholder returns. So why are you doing this for -- by the end of March? So I just want to clarify about the intent of the share repurchases.

[Eiji Sato, executive]

[Interpreted] First of all, in terms of the dividend, so every 6 months, we aim to go higher than 50% for the dividend payout ratio. So EPS that would also be higher than 50%. So we actually go by yen. So I say that will make a difference by JPY 1.5 billion. So this is indeed a technical issue. So 49.9% will not be sufficed. We need to have 50%. We need to be higher than 50%.

Also the second part of your question, perhaps I was misleading in my statement. For FY 2021, this is the additional shareholder return on top of the dividend. But the margin is the time we have set. And in the past year, when we set up the share repurchases, if you were to see the timeline, it's always been end of March. So this is all about setting up the share repurchase plan. So we have actually set up on purpose a long duration. But of course, if we can point the share repurchases before that, then we will do so. So this is just a program that we have set up.

[Unknown Analyst]

[Interpreted] Understood. So JPY 25 billion is additional shareholders return for FY '21, then?

[Eiji Sato, executive]

[Interpreted] Yes, that is right.

[Operator]

[Operator Instructions] We are receiving questions from the audience. Next questions are from Citigroup Securities, Niwa-san.

[Koichi Niwa, analyst]

[Interpreted] I have 2 questions. First, about the buyback? And the second comparison versus your peer in the Retail Division. My first question is on the buyback you have canceled some, but do you think you're going to keep 5% without cancellation? What is the criteria of deciding how much you keep and how much you cancel?

Second question is on the stock basis. Wealth Management business in comparison to your peers. Looking at the past 12 months, your peers are trying to chase you, catching up with you, and your peer is trying to address this business trying to catch up with you. So in the actual sales build, do you feel a threat from the competitor? Or do you think you have been maintaining competitive edge against your competitor in the wealth management business? Could you please give us your view on the competitive advantage?

[Eiji Sato, executive]

[Interpreted] About the cancellation of treasury stock. Well, there's no intention on our side to keep more than we need. We have stock options, limited restricted treasury stocks. There are some treasury stocks that we have to keep to some extent. On top of that, there is a possibility to use treasury shares for the future M&As. So considering all of that, we decided that amount of cancellation of treasury shares. Again, it's very difficult to precisely answer. But I would like to keep the amount of shares that we need -- we think we need, and then everything else is to be canceled.

To your second question, competitive advantage against our competitors. It's really difficult for me to give you a quantifiable answer, but we've been doing this business since 5 years ago. So we have taken a long time addressing this business, trying to change the corporate culture, changing HR system, investing in IT systems, in people. So we have been training salespeople, too, which is not easy. And we have been carefully addressing this business by taking time, especially wealth management planning is -- we have a tool to analyze customers' assets.

And I think amount of assets of our customers having account with other competitors is more than JPY 8 trillion. So we analyze not only the assets that they entrust with us, but we analyze assets of our customers in our competitors or other companies accounts, too. So I think this is very advanced way of analyzing customer's assets. So that is leading to the inflow of customers assets from our competitor.

And our biggest strength is fund wrap. So we have a very good services in the customer care for our fund wrap service. And the format of the fund wrap is also good. It's really difficult to compare our performance versus the performance of other companies. But in the fourth quarter, in the stage where the market our segment -- our performance of fund wrap service was very good. And customers really do evaluate on our fund wrap service highly, comprehensively looking at all of those factors. And the competitors is focusing on this business.

There is no ultimate -- there's no end to the war. We keep brushing up our capabilities, and our wealth management business model is the business that we have to provide solutions to meet customers' needs. So it was a lengthy answer, but I hope I answered your question.

[Operator]

[Operator Instructions] If there are no more questions, with that, we would like to conclude the Q&A session. Thank you very much for staying with us until the very end. So we ask for your continued support to Daiwa Securities Group. Thank you very much.

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