Daiwa Securities Group Inc

TSE:8601

Earnings Call Transcript 2023-Q4

[Motoi Mishiba, executive]

Hello, investor. Thank you very much for waiting. Thank you very much for joining financial reporting conference for the fourth quarter of FY '22 of Daiwa Securities Group. It's time, so let us start. With us today, we have Sato from Daiwa Securities Group, Executive Managing Director and the CFO. I am Mishiba of IR, Serving as a facilitator today.

Today, Mr. Sato will start with the presentation of the results from Q4 of FY '22. And then we will take your questions. Please be reminded that this call is also arranged accessible for investors on the internet. Okay, let's start.

[Eiji Sato, executive]

I am Sato of Daiwa Securities Group. Again, thank you very much for joining our conference call today despite your busy schedules. Today, we released our financial results of Q4 FY '22. So I will now explain the results with referring to the earnings announcement material, which is available on our website. Please turn to Page 4 for consolidated financial summary.

The percentage of change is a comparison to the Q3 FY '22. The net operating revenues were JPY 125.7 billion, up 3.5% and ordinary income was JPY 30.8 billion, up 33%. Retail division is shifting to wealth management business model and made progress in cost reduction, resulting in ordinary income of JPY 6.2 billion. In the Wholesale Division, Global Markets reported a revenue decline due to financial instability originating in the U.S. and Europe, while Global Investment Banking reported an increase in M&A-related commission resulting in an increase in both revenues and income.

The net income attributable to owners of the parent was JPY 17.1 billion, up 12% and annualized ROE was 4.9%. Year-end dividend is JPY 12 per share. Combined with interim dividend of JPY 11, annual dividend is JPY 23. Payout ratio is 52.8%. As a part of capital policy, share repurchase itself is up to 35 million shares or JPY 25 billion.

Now please move on to Page 10 for P&L summary. Commission received was JPY 72.8 billion, up 4.7% and its breakdown is on Page 23. The brokerage commission was JPY 16.3 billion, down 1.8%. Underwriting commission was JPY 8.8 billion, up 15.7%. Distribution commission was JPY 2 billion, down 19.7%. M&A-related commission was JPY 9.9 billion, up 57%. Net trading on -- net days on trading dropped by 37.8% due to FICC revenue decline. Other operating income and other operating expenses increased due to the transfer of real estate by the investment division and the group companies engaged in property business such as Daiwa Securities Realty. Other operating income improved mainly due to Daiwa Next Bank and gains on the property sale.

Now let me move on to Page 11 for SG&A. SG&A was JPY 101.8 billion, up 1.9%. For personnel expenses, performance-linked bonuses rose. For office cost, system-related outsourcing fees increased.

Next is on Page 13 for overseas operations. The ordinary income totaled JPY 5.5 billion, down 11.4% from the previous quarter. Europe gained revenues from ESG-related funds, D.C. Europe and the Green Giraffe, recording JPY 4 billion of ordinary income. Asia and Oceania enjoyed M&A revenue growth as well as SG&A reduction, resulting in revenue increase. Americas had M&A revenue growth, but market turmoil in Europe and U.S. has negative impact. FICC revenue dropped and the region's revenue fell.

Next is segment information. So let me start from a retail division on Page 14. Net operating revenues were JPY 40.5 billion, down 3.9% and ordinary income was JPY 6.2 billion, down 12.4%. Equity revenues increased with the growth of sales commission tied with underwriting deals. FICC revenues dropped as foreign bond sales shrunk. Investment Trust distribution commission revenue fell due to the decline of sales amount of equity investment trust. Asset-based revenues were JPY 20.2 billion, accounting for 51.2% of the net operating revenues in Retail Division.

Please turn to Page 15 for sales and distribution amount by product of Retail division and our topics of the quarter. Equity distribution had a significant increase with the Japan Post Bank Global PO, the largest PO of this fiscal year. As for wrap account service, the contract AUM exceeded JPY 3 trillion hitting a record high of JPY 3.954 trillion. The graph on the left down below shows sales and distribution amount of wrap and equity investment trust. Net increase ratio was 17.2%.

So let's move on to Page 16 for Wholesale division. Starting off with the global markets. Net operating revenues were JPY 25.1 billion, down 9.9%. Ordinary income was JPY 0.1 billion, down 13.6%. Equity revenue slightly declined on the back of lower customer flows. FICC revenue is also decreased. In Japan, revenues increased driven by JGBs and increase in their customer flows. In overseas, revenues declined due to the impact from the financial disturbance coming from the U.S. and Europe.

Please turn to Page 18. This page is on the Global Investment Banking. Net operating revenues were JPY 18.1 billion, up 22.9% and ordinary income was JPY 3.2 billion, up 68.1%. Revenues from equity underwriting business increased as we accumulated the track record of lead manager mandates, such as for Japan Post Bank, the largest PO mandate this year. In the debt underwriting business, we accumulated the track record of serving as a lead manager for many mandates such as for Rakuten Group Bond and so on. Group M&A-related income, including M&A and other income and income of equity-method affiliates, such as Green Giraffe, the M&A house in the areas of European regenerative energy was JPY 15.6 billion.

Please turn to Page 19. Let me next explain the Asset Management division. Net operating revenues were JPY 17.5 billion, up 1.7%. And ordinary income was JPY 11.9 billion, which was up 13.5%. Daiwa Asset Management net revenue and income went down due to a decline in AUM or public equity investment trust, excluding ETFs, associated with the drop in the market values, even though we secured positive net capital inflows. With regards to the real estate asset management, revenues and income were record high. Income increased, thanks to equity investment profit of Daiwa Office Investment Corporation and Samty. AUM of Daiwa Real Estate Asset Management increased.

Please turn to Page 21. Let me explain the results in the Investment Division. Net opening revenues were JPY 7 billion, up 85.9% and ordinary income was JPY 6.5 billion, up 432.2%. Daiwa PI Partners achieved revenue increase from private equity investments and investments in monetary claims. With regards to Daiwa Energy & Infrastructure, income increased due to exit of renewable energy investments.

This completes my explanation of the results in the fourth quarter of FY 2022. FY 2022 was a turbulent year for stock market and the financial markets, when there have been so many [indiscernible] happening in complex rates, such as Russia and Ukraine, global inflation, shift in monetary policy and rapid [indiscernible], collection of BOJ, monetary policy and financial crisis in March from the U.S. and Europe and so forth. And our global markets and Global Investment Banking, Asset Management and Investment divisions offsets a [indiscernible] performance in global markets division and the Retail division showed highly stable performance.

We are [indiscernible] to continue our efforts to promote the shift to wealth management business model, pursuing the best interest for our customers and contribute to realizing the rich society by offsetting more alternative investment opportunities.

Now looking at what happened in April, there are still uncertainties ahead. And [indiscernible] stepping up of the stock market, but we are off to a very good start in the Retail division. Investor sentiment is gradually improving. And the [indiscernible] of sales of stock investment trusts, contracts and foreign equity transaction is outpacing average over Q4. In the market division, equity income is on the recovery. In the Investment Banking division, we served as a lead manager for a large IPO deal and M&A business is off to a good start.

Now COVID is now behind us in Japan and the reopening is accelerating. We are at a turning point now from the deflation, which continued for about 30 years, which is a tail-end for securities business. So we are committed to continue our efforts to promote the shift to wealth management business model, pursuing the best interest for our customers and contribute to realize the rich society by more alternative investment opportunities, making right range of customer needs, [indiscernible] hybrid business.

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

[Motoi Mishiba, executive]

That's the end of the presentation. Now let us open for Q&A session. [Operator Instructions] First question comes from SMBC Nikko, Muraki-san.

[Masao Muraki, analyst]

SMBC Nikko Muraki is asking 2 quick questions. One is about the fixed income. The fixed income performance or the income, you said that domestic business is okay because of the stable -- instability in March, the overseas is struggling a little bit, I think. That's what you said in the presentation. Now within the -- this quarter, what kind of movement you have seen? What kind of dynamics there were? Can you be more -- can you give more color on this?

The second is about you have the result for the transaction of the financial products. And you have added the reserve by about JPY 600 million. You've added that reserve because to prepare for that instability? So the first question is about [indiscernible].

And also the next question is about the ROE improvements. When we are talking about the improvement of the ROE and I think the initiative has been taken, especially for the current year, are there any areas of focus? If you could share your points, I would appreciate it very much.

[Eiji Sato, executive]

Muraki-san, thank you for questions. To answer your first question about FICC, I think the monthly reporting will be probably easier for you to look at and also we separate the answers for domestic and overseas. First of all, that's the performance of FICC. For the 3 months period, I would say 60% in January, 30% in February and 10% in March. So it was very slow in March. And for domestic, the first 2 months, the JGB and the domestic credit, there was a much expectation for the Japanese interest hike so that the trading was critical, but customer flow was big. But in March, because of the market turmoil, we had struggled. So in a quarter base, for domestic markets, it was only a slight debt increase.

Now shifting your eyes to overseas. For the third quarter, it was pretty strong and that momentum was continued into the first 2 months until February, but especially in U.S. because of the struggling situation in the third -- in March, the fourth quarter had a slowdown compared to the previous quarter.

[indiscernible] and also the widening of the credit spread. So treasury and the credit had some impact. But we think that this is more like a transitional or temporary. The treasury MTF and its [indiscernible], it's coming to the level of the third quarter. So we are not very much concerned about that situation or slowdown. For the excess reserves for the financial product transaction, we will have to look at the dealing size or the transaction size of the equity and there is a requirement that we have to have. And we see the transaction volume has increased and that's the reason why the provision has to be bigger. And mainly, the flow coming from the overseas investor had increased and that's the reason why we provided for as an additional. It's not coming because of the market turmoil.

To answer your second question, in order to improve our ROE, what we are doing as an initiative is -- well, as [ Miaki-san ] just assumed, asset-based business or the hybrid business with the wealth management business model is something that we are looking at, which is not much a synergy with the securities business or we are making an investment in the growth areas. And for the current year, the focus areas that we are -- we have selected is the ROE for this year. The reason for its deterioration is the global market. So there are some market factors, which is big. For securities and for equities, interest rates and bonds that are also fragile and then so moving so much so that the operating environment for our business was quite big. However, the ROE was down. That's for sure.

So as we saw -- as we show in November, we have the restructuring plan by spending JPY 40 billion. And with that initiative, there are 2 things to focus upon. One is the profitability improvement. So starting from the current year, Global Market Strategy Plan division is launched. The mission of this division is to have a stronger alignment with the retail business to come up with the product on the quickly -- in the timely manner to meet the demand and needs more.

The second is the overseas market operation business line needs to be reengineered. So far, for Europe, the CVs and the bonds have been transferred to Tokyo and then the business in Europe has been downsized. So that's nonperforming the businesses or low-performing businesses had to be scrutinized for us to make a decision of whether we are going to be pulling off or whether we are going to be downsizing.

So this global market strategy division or the planning division is going to be leading to think about what we are going to do and then think about the future potential of what we should do. Just to add, to [indiscernible] on my idea is the cost reduction, we said that we are going to reduce by JPY 5 billion. But now we have come to a little over JPY 4 billion of cost reduction so far. For the current year, or for the FY '22, we have started to see about JPY 1 billion as an effect. The remainder is going to be leading to the cost reduction in 2023.

[Masao Muraki, analyst]

Well, for the new year, new fiscal year, as you said, the ROE improvement and the profitability improvement that you are going to take is associated with that will be ex loss. For the year that ended, you have the books that have been transferred from Europe and also the business restructuring of about JPY 2 billion. The increment of the success of about JPY 2 billion as well. For the New Year, should we assume that such amount is probably going to be flowing out?

[Eiji Sato, executive]

Well, what kind of visibility do we have at this moment? No, we do not have any clear visibility. Well, as Muraki-san said, in the fourth quarter -- if we just take out the fourth quarter, there's been JPY 3.1 billion of the ex-loss. Now how that is going to reduce the running cost on the annual base? Well, roughly speaking, it's going to be below JPY 2 billion. So it's going to partially going to slow down the running cost, but we need to look at what is going to lead to the reduction of the run cost and also the London or the Europe's screen-down and the system asset removal or the retirement and those things need to be considered. But at this point of time, we do not have any clear visibility of what is going to happen.

[Motoi Mishiba, executive]

Mr. Muraki, thank you so much for your questions. Next questions are from Mitsubishi UFJ Morgan Stanley Securities, Tsujino-san.

[Natsumu Tsujino, analyst]

Financial accounting and managerial accounting, I don't really see the difference of the 2 accounting principles. So please give me some color on the commissions -- other commissions received, which increased on a Q-on-Q basis quite a lot? And is this due to the asset management segment vanilla type of investment trust related to commissions? That's question number one. And is there any one-off improvement there? That's my first question.

Second question. Other operating income and other expenses, both are becoming [indiscernible]. Looking at the slide, probably that due to the investment banking, JPY 6.5 billion profit, where you have sold some assets, which generated not only net profit from the sale, but also expenses [indiscernible]. But if you look at the net between the other operating expenses and operating income, JPY 19.4 billion in Q4 and in Q3, JPY 7.9 billion. So the improvement is more than JPY 10 billion. So increase of the investment business cannot really explain fully. So would you please break that down in more detail?

[Eiji Sato, executive]

Thank you so much for your questions. First, other commissions received. Please go to Page 23. You'll see the breakdown of other commissions received. Related fees and insurance, M&A-related fees are included. And in Q4, JPY 6.3 billion to JPY 9.1 billion M&A fee increased in the fourth quarter.

And your second question was related to...

[Natsumu Tsujino, analyst]

Would you please wait for a moment? Before I forget, M&A-related fees on the quarterly basis, there is some volatility. And in this fiscal year, hopefully, you have tough time in terms of the deal for [indiscernible] and net M&A fee was this amount. But what is the level that you expect for 2023? Do you think you can secure the similar level as this year?

[Eiji Sato, executive]

Well, probably, on the global basis and the income is still down, but why do we see this much fee for the year that has ended. Globally, we focus on the middle cap space. So the pipeline is actually quite good, which is generating income.

And we talked about Green Giraffe, which is related to ESG business in the regenerative energy field and specialized in the ESG or regenerative energy. So Green Giraffe is performing very well on the back of the ESG tranche. And our expectation for this year, as I mentioned earlier, we have [ LT ] investments in ESG-related firms and we sold our good stakes in the Global Investment Banking. It's included in other in M&A -- M&A and other income. However, M&A-related fees, as we disclosed, this other commissions received, this is a pure advisory among the other net fee only. So Green Giraffe-related fees are not included in this line. Therefore, this is doing very well as before. But for 2023, it's really tricky for the M&A business.

The pipeline itself globally is at the high level, very high level. And in particular, for overseas the pipeline level was at the record high in the past in 2021, but we have even higher level of the pipeline now. But are they going to be put into actual new deals? It depends on the market and it depends on the environment. So it's really difficult for us to predict. But I would like to execute to the best extent we could. So this is not a direct answer to your question, but we have the good level of the pipeline. Thank you so much.

Let me address the second part of the question, other -- net basis other income and other expense on a net basis. As I mentioned earlier, mainly Daiwa Next Bank [indiscernible] finance are from the financial profit and loss and other operating income and loss, which declined from that third quarter. This is one of the reasons for the change. And also we have profit from the sale of real estate in the investment division and that's included in the real estate-related business. And we posted profits from the sale. And we posted a profit in the investment division for the investment division-related real estate. And for others, we accounted for the profit in the other segments. But Next Bank is the biggest contributor to this improvement.

[Natsumu Tsujino, analyst]

There's a financial profit and loss, which is not included in the segment information, which was large in Q3, but declined by about JPY 7 billion in Q4, I understood.

[Motoi Mishiba, executive]

Next question comes from Morgan Stanley, MUFG, Nagasaka-san.

[Mia Nagasaka, analyst]

This is Nagasaka of Morgan Stanley, MUFG. I have 2 questions. In the retail business, you have moved to the wealth management business, which is going quite well. Please explain the flow, like a foreign bond and the equity investment trend -- trust trend shows that you are not making a whole recovery, not yet. So what kind of challenges do you think you have? And what's your future outlook as much as you can comment?

My second question is about the return to shareholders. This time, you were talking about up to JPY 25 billion of the share repurchase. I think the amount is probably beyond the expectation of the market. The reason for setting that limitation, if you could provide some colors on that.

[Eiji Sato, executive]

Thank you for your questions. First of all, for the retail business, the Retail division, I may be repeating that we've been focusing upon wealth management business now. However, we are not prioritizing that over the flow business. We need to set a good balance between the wealth management and the flow business. And gradually, the stock income is imagined to increase. And this time, the foreign bond is not making a full recovery or it's actually declining. There are some reasons to it.

First of all the market uncertainties originating in U.S. and the Europe, the market has come to the [indiscernible] phase. So the non-yen bond sales has had a negative impact coming from that. The other reason is really in the month of March, there's been quite a large-sized finance and normally that -- those are the proposal kind of products for the customers. So the proposition activities had slowed down and that did not really help or contributed to push up the sales.

Now compared to the previous quarter, for the third quarter it was that was at a percent of the interest rate hike, especially the foreign currency investment has actually had the good gain. So the sales of the non-yen currency had increased. So the launching pad level of the fourth quarter was really high. However, we are not only sitting back feeling the satisfaction of what we see. So the foreign currency ceiling is still about 30%. And we think we need to increase that more. So for the foreign bonds compared to the other companies, we think we are taking a backburner. And from that perspective, as I briefly mentioned earlier, for the current year, global market strategy division is newly launched.

So this division is going to target at this customer base and then come up with the product lineup to meet their needs to strengthen the marketing so that we'll be able to get more flow income. But one thing that I need to add is that for the fourth quarter, on the balance base, JPY 20.2 billion, that means JPY 80.8 billion on annual base. And we've been growing at a pace of 8% CAGR. Are we able to continue 8% growth? And in the 3 years term, we are going to go beyond JPY 100 billion. So that on the balance base, we think we'll be able to generate quite a lot of significant level of the income. Well, flow income might have a trend of the uptrend, but still is going to have some impact coming from the external. So we need to -- the flow is, of course, the flow business is important that we think we need to, of course, be engaged more with the wealth management business.

And to the second question about the share repurchase. Last time, it was JPY 25 billion. And I think the market expectation is about the same level. Every time I think my answer is the same, but we think about the payout ratio of 50% or more, that's a commitment. And then for the share repurchase, we look at the financial soundness. And just think about the equity regulations, the performance and also the regulation changes and so on, so that they need to be -- we need to have a discussion and then do flexibly as much as we can. So we need to think about those various factors to think comprehensively. And then we thought that we can and we should do JPY 25 billion. So the -- this was for the -- the additional for the year 2022. For the year 2023, we will again observe from the comprehensive perspective and then decide.

[Motoi Mishiba, executive]

Nagasaka-san, thank you so much for your questions. [Operator Instructions] Are there any other questions from the investor? Although we have some remaining, but there are no further questions. So we'd like to end the session today. This completes the telephone conference call.

Thank you so much once again for participating to our earnings announcement meeting. We are going to do our best to exceed your expectation in the future. So we appreciate your continued support to business management policy. And we are going to do our best to create the income structure, which is acceptable to the market environment. So we are going to continue to add efforts in the future. We appreciate your continued support and cooperation.

Once again, thank you so much.