Nomura Holdings Inc

TSE:8604

Earnings Call Transcript 2019-Q2

[Operator]

Good day, everyone, and welcome to today's Nomura Holdings Second Quarter Operating Results for Fiscal Year Ending March 2019 Conference Call. Please be reminded that today's conference call is being recorded at the request of hosting company. Should you have any objections, you may disconnect at this point in time. [Operator Instructions]

Please note that this telephone conference contains certain forward-looking statements and other projected results, which may involve known and unknown risks, delays, uncertainties and other factors, not under the company's control, which may cause actual results, performance or achievement of the company to be materially different from the results, performance or other expectations implied by these objections -- projections. Such factors include economic and market conditions political events and investor sentiment, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions.

With that, we would like to begin the conference. Mr. Takumi Kitamura, Chief Financial Officer, please go ahead.

[Takumi Kitamura, executive]

Good evening. This is Takumi Kitamura, CFO of Nomura Holdings. I will now give you an overview of our results for the first half and second quarter of the year ending March 2019.

Please turn to page 2. During the first 6 months of our fiscal year, investors became markedly risk averse due to concerns of U.S.-China trade friction and a fall in emerging markets currencies on the back of pricing U.S. interest rates. The Nikkei remained range bound between 22,000 and 23,000. Market Volumes were at their lowest since July, September quarter in 2016. Amid this challenging environment, net revenue declined 22% year-on-year to JPY 554.9 billion, while income before income taxes was down 91% at JPY 14.1 billion. Three, segment income before income taxes declined 61% to JPY 48.8 billion on the back of sluggish performance in both Wholesale and Retail.

Retail investor sentiment worsened during the first half and our Retail business reported lower transaction levels mainly in stocks, investment trusts and foreign bonds. Our Asset Management business continue to grow steadily but reported a sequential decline in revenues as last year's revenues were lifted by an approximately JPY 12 billion gain related to American Century Investments.

In Wholesale, Fixed Income revenues were down due to sluggish performance in Rates, Credit and EM FX.

Other segment was dragged down by expenses of about JPY 20 billion related to our recent settlement with the U.S. Department of Justice and about JPY 30 billion loss related to economic hedging, transactions. As a result, we reported a net loss of JPY 6 billion for the 6-month period and EPS was negative JPY 1.78. In addition, we have set a dividend per share of JPY 3 to shareholders of record as of the end of September.

Moving now to our second quarter results, please turn to Page 3. The graph on the bottom right shows 3 segment income before income taxes of JPY 26 billion. This was up 14% quarter-on-quarter as Wholesale returned to profit after booking a loss in the first quarter. The top right shows firm-wide income before income taxes of JPY 500 million, representing a sequential decline of 97%. Outside of the 3 business segments, we booked a loss before income taxes of just over JPY 25 billion, which includes a number of one-off expenses. First, in the United States, we booked JPY 19.8 billion in expenses related to legal settlement. The Department of Justice had been investigating certain residential mortgage-backed securities securitized by our U.S. subsidiary in 2006 and 2007. To avoid protracted and expensive litigations for transactions that occurred over 10 years ago, we decided to settle the matter. Second, we recognized an FX translation adjustment loss. We have been winding up a subsidiary in the Middle East and North Africa region as part of plans to set up a representative office. Since this subsidiary was established, the yen has depreciated, and we recognized an FX translation adjustment loss of JPY 7 billion. This was sitting on our balance sheet and because the subsidiary was deemed to be effectively wound up in the second quarter, we recognized the JPY 7 billion as an expense. The third factor is related to economic hedging, which is a regular item in our quarterly reporting. For the second quarter, we booked a loss of JPY 16 billion. During the quarter, the interest rate for certain emerging markets currencies and the yen interest rate moved up significantly, leading to a wider-than-normal negative impact. Net loss for the quarter was JPY 11.2 billion. EPS was negative JPY 3.32.

Next, let's take a closer look at each business. Please turn to Page 6 for an overview of Retail. Net revenue was JPY 85.7 billion, down 8% quarter-on-quarter. Income before income taxes declined 39% to JPY 12.2 billion. A fall in emerging markets currencies and uncertain market conditions impacted retail investors sentiment. As you can see in the bottom half of this slide, total sales were down 13% from last quarter. By product, sales of secondary stocks, investment trusts and bond slowed, while discretionary investments increased.

Turning now to Page 7. The bottom left shows net inflows into discretionary investments of JPY 83.8 billion, lifting client assets to over JPY 2.8 trillion. Annualized recurring revenue was JPY 90.9 billion and the recurring revenue cost coverage ratio was 31%. The bottom right shows net inflows of cash and securities of about JPY 680 billion. This was mainly due to a higher ratio of purchases of JGBs for individual investors and primary bonds using new funds as well as contributions from IPO transactions and large stock deposits. Looking just at the Retail channels mainly for individual investors, inflows were around JPY 120 billion.

Please turn to Page 8 for Asset Management. Net revenue declined 5% to JPY 24.7 billion. Income before income taxes declined 13% to JPY 8.9 billion. The decline was mainly because gain and loss related to American Century Investments negatively affected quarter-on-quarter results. Excluding that, the underlying business performed well. Combined inflows into the Investment Trust and Investment Advisory businesses have remained positive for 9 straight quarters. Assets under management grew to a record high of JPY 52.8 trillion.

As you can see on Page 9, net inflows were JPY 436 billion for the quarter. The Investment Trust business reported inflows into ETFs and privately placed funds for financial institutions. The Investment Advisory business won a mandate to manage Japanese equities for a domestic public pension fund, and internationally, we booked inflows into U.S. high-yield products and UCITS funds. As shown on the bottom right, assets in defined contribution funds reached nearly JPY 1 trillion, driven by an increase in participants in corporate DC plans and a broader scope of the population qualifying for iDeCo. We also enhanced our product lineup aimed at encouraging people to build up their assets of postretirement, such as our offering of target year funds set at 5-year intervals that automatically rebalance assets according to the target timing of each individual client.

Please turn to Page 10 for an overview of Wholesale results. From April this year, we changed our accounting policy, so the revenues and expenses for certain Instinet transactions are now shown as net value rather than gross value. As a result, revenues and expenses both declined by JPY 4.6 billion in the first quarter and JPY 4.1 billion in the second quarter. There was a neutral impact on pretax earnings. With the return of yen interest rate volatility in the second quarter and on an uptick in the market participant activity, Japan and AEJ reported stronger Fixed Income revenues. Equities revenues remained roughly unchanged, while Investment Banking revenues were down slightly due to fewer revenue opportunities. As a result, Wholesale reported an 8% increase in net revenue to JPY 147.7 billion. Income before income taxes was JPY 4.9 billion, which although still muted, represented a rebound from last quarter's loss. As you can see in the graph on the bottom left, revenues in Japan and AEJ improved but declined in the Americas and EMEA.

Please turn to Page 11. Global Markets net revenue increased 10% to JPY 123.8 billion. Fixed Income net revenue grew 21% to JPY 69.6 billion as challenged trading revenues rebounded driven by Japan, offsetting a slowdown in client revenues in the Americas and EMEA. As the heat map on the top right shows, in Japan, speculation of Bank of Japan policy tweaks drove a return of volatility and client activity, resulting in an improvement in the Rates products. In AEJ, the arrow is pointing up due mainly to an improvement in Credit. In the Americas and EMEA, Rates and Credit were softer and the arrow is pointing diagonally down. Equities net revenue was JPY 54.2 billion. As you can see on the right, Japan offset a slowdown in the Americas and EMEA, resulting in roughly flat revenues quarter-on-quarter. By product, Cash Equities revenues declined on lower market, while derivatives revenues increased on the back of an improvement in Japan.

Please turn to Page 12 for Investment Banking. Net revenue declined 5% to JPY 23.9 billion. Amid a contraction in the global fee pool, Japan and AEJ delivered resilient performance, while EMEA and Americas reported lower revenues. Transactions were delayed due to U.S.-China trade friction and other factors contributing to a decline in M&A and solutions-related revenues. However, as shown on the right, we won multiple Asia-related cross-border mandates and continued to support our clients' global financing needs.

Please turn to Page 13 for an overview of noninterest expenses. Firm-wide noninterest expenses totaled JPY 282.5 billion, up 9% quarter-on-quarter. The sequential increase is due mainly to higher expenses in Other, which includes the JPY 19.8 billion related to a settlement with the U.S. Department of Justice and JPY 7 billion FX translation adjustment loss related to the winding up of subsidiary in Middle East and North Africa region. Excluding those 2 factors, firm-wide expenses declined quarter-on-quarter.

Please turn to Page 14 for an overview of our financial position. Our balance sheet at the end of September totaled JPY 45.4 trillion, up JPY 2.6 trillion from JPY 42.8 trillion at the end of June. This increase is mainly attributable to yen depreciation and an increase in repurchase agreements. As shown on the bottom left, Tier 1 capital was JPY 2.7 trillion, roughly unchanged from the end of June, while risk assets stood at JPY 15 trillion, a decline of JPY 770 billion, mainly in market risk. As a result, our Tier 1 capital ratio was 18% at the end of September, and our common equity Tier 1 ratio -- capital ratio was 16.9%. Our leverage ratio was 4.44%, and our liquidity coverage ratio was 191.1%.

That concludes the overview of our second quarter results.

To sum up, second quarter income before income taxes was impacted by over JPY 40 billion due to one-off expenses and a loss related economic hedging transactions. This resulted in a loss for the quarter and a very tough set of results. Although these one-off expenses will disappear from the third quarter onwards, we once again recognize the challenges surrounding profit levels in our core businesses, especially Retail and Wholesale.

Our Retail business is the industry leader with over 5.3 million client accounts, but we believe we need to grow our client base even further. To maximize client satisfaction in the most efficient way, it will be a key to clearly identify client segments, so that the right person makes the right proposals to the right clients.

In terms of further developing our client franchise, we saw an increase in client meetings in the first half of the year that led to business with current high net worth clients who hold great potential, but we had not been able to build up sufficient relations yet. Another sign of changes starting to gradually take effect is that net flows of cash and securities turned positive during the first half. In the second half of the year, while we are yet to see a full-scale rebound in revenues, we will continue with these initiatives to ensure that we improve client satisfaction while pursuing business growth.

In relation to our Wholesale business, as I said here 3 months ago, we have been reallocating management resources to play to our strengths. In October, Wholesale revenues have been improved from the previous quarter and looking at the drivers of this improvement in terms of regions, we are confident that we are heading in the right direction. We have started to review our cost base centering on corporate functions and will work ahead of schedule to realize the JPY 60 billion fixed cost reduction program we have committed to.

Thank you very much.

[Operator]

[Operator Instructions] The first question is from Mr. Muraki, Deutsche Securities.

[Masao Muraki, analyst]

This is Muraki speaking. I have 2 questions. The first question is about international Wholesale business. Towards the end, you've discussed resource allocation -- reallocation of resources done in this quarter. Could you discuss that in more detail? And how it will have a positive impact? Furthermore, excluding extraordinary factors for 2 consecutive quarters, international recorded losses. Are there going to be additional review of portfolio and further reallocation of resources? If so, please share that information with us. The second question is about Retail business. On Page 24, Retail profit and loss breakdown is given. Investment Trust free is down 27% year-on-year and for foreign bond fee is down 40%. Retail investors are waiting on the sidelines as you have described. But emergency currency depreciation, how has that affected Retail business results and client revenue? Three months ago, you've also mentioned that Retail investors are staying on the sidelines and you have also made similar comment this time. And this investor sentiment, how long do you think will continue? So these are 2 questions.

[Takumi Kitamura, executive]

This is Kitamura speaking. Thank you very much for the questions about resource reallocation outside of Japan to discuss in more detail. Regarding Europe, there are uncertainties, and we believe that there are greater uncertainties and given the size of the fee pool, the expected revenue is higher in the Americas. And from the second quarter, financial resources, such as risk-weighted assets, part of such assets have been shifted. To be more specific, flow rates in Europe -- from flow rates in Europe to the U.S. client financing solutions, there was a shift, and to equity as well where we can expect growth in people, we are reallocating managerial resources to businesses where we can expect increase in fee and in addition to resource reallocation -- financial resource allocation, regarding flow, the sales realignment was also implemented. In the past, each sales would be handling individual product, a single product in some cases. However, now each salesperson is covering not just single product, but multiple products. We will be able to improve efficiency, and at the same time, we will be able to offer services that will offer greater satisfaction amongst the customers. Because of greater uncertainties, although I mentioned, there are greater uncertainties, but in Europe, flow credit euro rates, in these businesses, we have new heads in place, and we have renewed leadership team partially. In that sense, financial resources, human resources were reviewed and reallocated. On the other hand, financial resources are partially shifted from Europe to the United States, and we have to maintain the balance of financial, physical and human resources, so we are also taking measures to maintain the balance in Europe. Additionally, maybe this is too premature to discuss this, but flow business -- in flow business, we would like to enhance efficiency further. We would like to make greater use of AI in trading activities, APO -- POC, proof of concept is progressing very well, and therefore, we would like to positively consider introduction of such measures. Regarding your second question about depreciation of emergency -- emerging country currencies, how this affected the results and how long will depressed mindset of investors continue? To be honest, looking at this past quarter, as other companies, other peers have discussed, there was a outflow -- significant outflow of funds from emerging countries and emerging currencies declined sharply and interest rose sharply. And foreign bonds that customers held declined in price rapidly. And we are spending much time -- we have to spend much time to follow-up on these customers. And therefore, foreign bond sales and Investment Trust sales declined, and I believe, there was a significant impact from the depreciation of emerging country currencies. As for how long depressed investor mindset will continue, our willingness to buy and willingness to invest, we can see many such episodes. But in November, Nikkei declined sharply from 24,000 to 21,000. However, despite that sharp decline, we are seeing sales or investments, and if Nikkei stays at this low level, then there is a risk that investors may become inactive again. However, we would like to look at the market, and it seems that there is a strong willingness to buy up the bottom on the part of the investors, that is the result. I think it was -- it is November 8, there will be midterm elections in United States, and although, outcome has become even more clear, but there is also Brexit, which is a major event. So these upcoming events, as they are digested by the market, I think, that there will be less uncertainty. After the second half of this year and beyond, we hope that these uncertain factors will be eliminated, and at the same time, we hope to see higher level of market activities, and we hope that investors will have a more optimistic mindset.

[Masao Muraki, analyst]

I have another question for clarification about emerging currency. I think it's Turkish lira, but you've mentioned that you have to spend much time to follow-up on the customers, that was discussed in the past tense. And you -- so you haven't spend much time, that was the thing of the past, and now you are able to -- the sales force is able to spend time on other activities now, is that the correct understanding?

[Takumi Kitamura, executive]

We were not spending time solely on following up of -- on the customers, but it's true that significant time had to be spent to follow-up on the customers. And recently, things have become more stable including in Turkey, so we believe that the situation is better than the second quarter. As for financial instrument sales, rather than selling financial instruments, we are now more focused on consulting in that sense, and as I mentioned during my press conference at TSE, we believe that we're seeing outcomes from consulting businesses, M&A for mid-tier companies. The number is now up to about 100 per year and operating lease contract conclusion exceeds full year result of last year in just 6 months this year. And investment discretionary is increasing, in particular, SMA is increasing, so we have to spend time to follow-up on the customers. And because of that, the sales was at a low level, but at the same time, as we followed up on the customers, we also strengthened consulting sales, and we believe that we are seeing the results of that.

[Operator]

Next question is from Mr. Watanabe from Daiwa Securities.

[Kazuki Watanabe, analyst]

Watanabe from Daiwa Securities. I have 2 questions. First about Asset Management business, ACI-related business deteriorated, but what's the actual amount of the second quarter? And second, it's about your capital policy, September and the risk assets declined significantly, market risk declined according to your explanation. Could you be more specific, please? Next about dividend. In the first half, you made losses per year, the JPY 3 interim dividend were repaid. What's the justification on the grounds for JPY 3? So 2 questions, please.

[Takumi Kitamura, executive]

Kitamura speaking. First regarding your ACI-related P&L, in the quarter, minus -- in the middle of JPY 1 billion, between JPY 1 billion, JPY 2 billion, that the first quarter, almost no significant impact, I think I said. But in this quarter, around somewhere between minus JPY 1 billion to minus JPY 2 billion, somewhere in the middle of that range. And then, RWA, what is the reason of the decline of the RWA? In the first quarter, I think, I'm not quite sure whether the question was raised in this, but in relation to FHFA litigation, initially, regarding the bonds that were sold here, we received them -- we repurchased them, you might remember that explanation. Because of that, at the end of June -- RWA at the end of June, to be honest, it increased. I remember that I said was to that effect. Concerning this, the disposal of positions, it has been conducted gradually and partly because of that, market risk decreased. And to control hedge risk -- the hedge positions in equity and in the Rates did we do that, GM as a whole, we see more diversification. That's in the background. Thirdly, about the dividend, how do we calculate that actual amount JPY 3? It was a difficult issue, but with the -- there was a settlement with the DOJ about JPY 20 billion. And in relation to liquidation of the subsidiaries and the FX losses, these were kind of temporary idea -- matter that hits our past performance. And from shareholders, we do have some expectations from shareholders. We took that into consideration, and as a result, JPY 3 per share is the -- what we have come up with.

[Kazuki Watanabe, analyst]

Additional question, please. The ACI-related expenses, at the end -- until the end of September, I think, the U.S. economy -- market was pretty brisk. But this time, it has a negative effect. What's the reason behind that? And secondly, regarding the dividend, this -- excluding the temporary negative impact times payout ratio and then you got that JPY 3, that's my question?

[Takumi Kitamura, executive]

Kitamura speaking. To be certain, if you look at the New York Dow, at that time, it was pretty robust. But in Asset Management business as a whole, I think the situation was rather difficult. Other than that ACI, there the revenue capabilities and the market trend and the capital cost, they themselves were working hard -- have been working hard to lower cost. Taking that into consideration, the fair value, it was derived. As for dividend, excluding all those negative factors, we -- how did we come up with a JPY 3, I think that was the question. We do take those factors into consideration. Having said that, our payout ratio, we say that it's 30%, but our calculation may not have been that precise. I don't really think it's 30% on the dot.

[Operator]

Next question is from JP Morgan Securities, [ Mr. Otsuka ].

[Unknown Analyst]

I am [ Otsuka ] from JP Morgan Securities. I have 2 questions. First question is about Page 13, in the appendix section, and this is to clarify what was discussed by Mr. Kitamura, CFO. As far as cost is concerned -- the view on cost is concerned, excluding extraordinary factors, cost has declined Q-on-Q as you've mentioned and also cost reduction program that is now being implemented. So although revenue declined this quarter, do you plan to implement additional cost reduction program or rather by managerial resource reallocation, such as in Wholesale and by increasing sales capabilities, are you putting more focus on increasing your top line -- strengthening your top line capabilities? That is the first question. And the second question is about the recent trends. You've discussed that in the month of October, activities recovered relatively speaking, but when we look at Nikkei alone, the beginning of October was the peak. And in October, Nikkei declined substantially, and in September, there was a rise, and so it was up and down. But even despite this up and down in the market, Retail investors are still willing to invest and buy stocks. These are my 2 questions.

[Operator]

Microphone apparently is not on.

[Takumi Kitamura, executive]

So first about the cost reduction question. In 2017 -- in fiscal 2017, we promised that we will reduce the cost of about JPY 60 billion over 5 years. As for various measures, we are implementing these measures, for example, purchasing real estate and digitalization using technology to improve operational efficiency. But naturally, we are implementing these measures. However, looking at the performance of this first half of the year and as for cost reduction over 5 years, we believe that 5 years may be too long given the performance from the first half of the year, so we have to accelerate cost reduction where that is possible. And right now, we are working hard to accelerate the pace of cost reduction. We will continue to implement measures to reduce cost. That is what we have to continue to do. And at the same time, as [ Mr. Otsuka ] rightly pointed out, we also have to strengthen and expand our top line, which is also very important for us. So which is more important? Are we focused more on increasing top line or are we more focused on reducing cost? It's not that we are focused on just one or the other, we have to pursue both. Furthermore, as for Retail investors -- Retail customers, their investment mindset or sentiment, it's true that the sentiment is not so solid, as I mentioned earlier, but as markets declined significantly, the investors who were not investing as our stock prices went up to JPY 24,000 without turnover increasing, the stock prices were increasing. And I think there are investors who missed opportunities to invest while the market was rising and as a Nikkei declined by JPY 3,000, I think, those investors who missed opportunities before, are now investing, that is what I feel. And depending on the market going forward, if Nikkei recovers once again, then such investors may take profit or if the market declines again, such investors may also be discouraged.

[Unknown Analyst]

I have additional question, a brief question. In the first half, as for corporate tax, it seems the -- percentage seems to be high at JPY 16.6 billion. Is this due to technical factors or temporary factor?

[Takumi Kitamura, executive]

The answer, pretax income is total of income of Japan and international businesses. And as for international businesses, performance has been poor for a long time, but this quarter, it turned to a small loss. And on a consolidated -- we cannot consolidate the tax unfortunately. And Japan was profitable, so we have to pay tax. And because international business was loss making, effective tax rate was higher unfortunately.

[Operator]

Next question is from Mitsubishi UFJ Morgan Stanley Securities, Tsujino.

[Natsumu Tsujino, analyst]

Well, customers assets, there have been inflow of clients assets, JPY 681.7 billion. And according to your initial explanation, the Retail alone JPY 120 billion, I think -- about JPY 120 billion, was that actually high? I would appreciate some examples. But despite that, if I look at the sales of various products, there were not so brisk, actually went down. So regarding the new inflow, new money, where were they invested in terms of products? Who are they simply just sitting as cash? Is there just going to drop in the insurance? That's my question. So regarding the developing new customers or rather among with the existing clients, if you could develop them further, how will that result in the products of -- sales of products? Please give me some examples. I have another question. At the moment, the JPY 60 billion cost -- fixed cost reduction, as you mentioned this before, but in the shorter period, are you trying to actually do them, for instance, to date, until what -- which date, how much money you may not be able to disclose that. But in the next 3 months or in the next 6 months, devising a certain plan and coming up with some specific things. Could I expect such movements internally? That's all for me.

[Takumi Kitamura, executive]

Regarding the net inflow of the Retail, this is JPY 120 billion net flows of the cash and securities, yes, in a way. First quarter, it was a little lower than this. For quite a long time, regarding the net flow, it was in the negative territory, net flow of cash and securities. We were criticized severely, but if you look at the Retail Channel itself, yes, we received in flow.

Regarding the net flow of cash and securities, some of them were from corporate. Sometimes there was the outflow of the Equities, that's also counted here. So in this quarter, the new -- the IPOs, like the world, partly because of that we received inflow and there were -- we also had a large lot here securities Equities. So where did we see the orders for the Equities, their JGBs for individuals and also TMTC if you -- foreign bonds primary ones. It was not the switching as the new cash we received by orders from clients. So for the first time in a large time -- long term, we were able to enjoy the positive figures in the net flow.

Second question about your cost. In the short period of time, what about our cost reduction efforts? Yes, we are trying to accelerate this endeavor. Reduction of fixed cost in -- is not something that we could do in 1 quarter in the 5 years period. We do this -- feel that -- we do have a sense of crisis and we have been discussing this and we want to accelerate the effort. But at the moment, March 2019, at this moment, we cannot actually disclose the actual number. But internally, we've been having discussion.

[Natsumu Tsujino, analyst]

Lastly, I have a follow question about Retail. You mentioned what kind of sales activities and now you're saying that you're focusing on the consulting and there have been some M&As of SMEs. So for business owners, you have certain measures -- well, you have certain measures, I could see that. But regarding the ordinary individuals with cash, what kind of changes have you made and what are the results? Could you share that with us? For instance, you haven't really seen results, but such and such are the objectives if we have them. Please, let us know.

[Takumi Kitamura, executive]

As I said before, to who of us are using what measures. Those segmentation efforts should be clarified. That's the extent to the discussions we have. And as for the full part, so Nomura as a company, and we believe a lot of things have to be done by people. So to which customers and [ who ] parting we believe that signal we can handle this including machinery. But with regard to segmentation, we are still working on the segmentation efforts and by clarifying them, we would like to actually get the results. Unless we come up with clear segmentation for certain high net worth people, the services could be less than optimal, not sufficient. So after doing the good segmentation work for customers that we require our manpower, we would like to address them seriously. That's how we would like to go.

[Natsumu Tsujino, analyst]

I have a question. Any time table? Any schedule?

[Takumi Kitamura, executive]

When we have good opportunity disclose something, we would like to utilize that.

[Operator]

The next question is from Mr. Sasaki Merrill Lynch Japan Securities.

[Futoshi Sasaki, analyst]

I am Sasaki from Merrill Lynch. I have 2 questions. First question is about revenue and profit. One-time settlement excluding that when we look at the securities segment, Equities segment, I think return on equity on an annualized terms is on the lower end of a single-digit number, but do you have any prospect of recovering this? And if return on equity stays at low rate, I'm afraid that rating agencies might start to take a negative look. Your company's rating is now single A minus. But, for example, if a downgrade to EEE occurs, your relations with customers may be affected. Do you have any prospect of normalizing profits? And if low profitability continues for a long time, what do you think the impact will be on your rating? That is the first question. The second question, this is not related to the performance but you have discussed the use of AI in trading. With Pimco, you're developing model together and are you going to verify that model? And in case of Nikkei average, in comparison to human beings, prediction may be more precise, I think that was the extent of the improvement of preciseness. But to what extent has the model been adjusted or changed up?

[Takumi Kitamura, executive]

First question, when do we expect to see normalized level of profit. Because of our business -- nature of the business, we are affected by the market conditions. But when volatility rises, we had been able to achieve results. We take pride in that fact. And in the second quarter, DOJ policy was adjusted slightly because of that minor adjustment of DOJ policy. Fixed Income business in Japan showed significant improvement. I'm not saying that we are affected by the market condition as an excuse, but we cannot deny that we are affected by the market condition. And as for the responses reaction of the rating agencies, the rating is defined by the rating agencies and this is outside of our control. However, the circumstances that we are in and the measures that we are implementing, the measures that we are discussing, are being implemented and by explaining these, we would like to seek better understanding from the rating agencies. Regarding the use of artificial intelligence, correction Hero's, we are not developing this with Hero's. I would like to refrain from naming the name of the company, but we will be using AI engine of a certain company and in the customer transaction in the market where -- whether we are able to use that AI engine, we have been doing a verification study for the past 3 months or so. And we expect much improvement in the performance. And now we would like to actually implement that engine and increase products where this AI engine is applied.

[Operator]

The next question is from Mr. David Lou from Gokul Management Company.

[David Lui, analyst]

On Page 6 of the PowerPoint, it shows the difficulties with the Retail Division. On the lower right-hand side, you show that stock sales were down 7% quarter-on-quarter, Investment Trusts were down 13% quarter-on-quarter, bonds were down 33%. And earlier, you commented that the situation improved in the month of October. Given the fact that the trading value on the TSE in Nagoya, in the month of October, increased by about 20% versus the September quarter. Can you provide some more comment on here stock sales, Investment Trust and bonds? Have they fully recovered or only partially recovered despite the increase in trading level on the TSE? That's my first question.

[Takumi Kitamura, executive]

Well, regarding my explanation, perhaps it was not really well expressed, but Retail is significantly recovering. I don't think I mentioned that. I don't mean Wholesale, yes, there are some signs of recovery, but for the Retail sector, perhaps you have some expectations, that's the case in Retail. Now I am in a difficult position. Speaking of Retail, to be honest with you, I mean, looking at the second quarter, well, we're still on the line of the second quarter. But when there was volatility, there was some appetite for buying on dip, that's what we saw, seeing that sense engines of the total sales compared with the second quarter. Perhaps it is slightly better than the previous quarter. Having said that, it is not a significant improvement. If my explanation was not correct, I would like to take this opportunity to apologize.

[David Lui, analyst]

Okay. Thank you for the clarification, Kitamura. My second question is on the dividend. Earlier, you explained to another analyst how you arrived at JPY 3 for the first half. It was cut from JPY 9. Basically, you said that it was some of these one-time factors, one-time expenses that lead management at Nomura to reduce it from JPY 9 to JPY 3. Let's say next year, if there were no such one-time expenses, can I assume that you will raise it back to JPY 9?

[Takumi Kitamura, executive]

Regarding dividend. The 6 months performance is determinant. Regarding our dividend policies, payout ratio 30% is what we have been expressing to the external community. In principle that's the one benchmark we use. If the performance is brisk, naturally, it increases the dividend. That's a possibility. Regarding this JPY 3, we took into consideration various factors; performance is one, the onetime expenses is another thing. We took all those factors into consideration in a comprehensive manner. In our case, there are so many stakeholders. You mentioned Rating agencies, that's one; and investors like you, there are shareholders and the financial authorities. There are so many stakeholders. So we took those into consideration in a compressive manner and then came up with JPY 3, that's all I could say.

[David Lui, analyst]

Okay, great. And towards the end of for your remarks earlier, you said that you plan on growing the total number of client accounts as shown on Page 6 of the PowerPoint. Right now, if standing at JPY 5.32 million client accounts. But you said that Nomura really wants to grow that. Can you shed some light on how you can achieve that? And if you have any numerical targets on the growth?

[Takumi Kitamura, executive]

5.3 million accounts. As you know in Japan, we are number 1 securities company with this number. If you look at the population in the securities, here in Japan, total there are accounts -- securities accounts of about 20 million in Japan and of which we have 5.3 million. To be honest with you, it's not high at all in my personal opinion, not high at all. We are top securities company in Japan. I won't have the bigger, higher dream. With regards to specific numbers, I don't have the specific numbers with me. But we would like to expand the customer base, client base more. On the other hand, regarding 5.3 million accounts when we talk about the growth, does that mean we need Human Resources to do so? Not necessarily. We think otherwise. We are now shifting to consulting-based businesses.

Per sales representative coverage in terms of the number of clients, it's limited. That's the result of segmentation and that should also result in the more satisfactory services to our customers.

So there are certain things that have to be handled by people, and there are certain things that can be handled by technology. Response to various needs of customers, we need to clarify those things that I have been talking about this repeatedly. We would first like to do this without fail intent of increasing the number of accounts. We need to rely on technology as well.

[David Lui, analyst]

Okay. My last question, Kitamura, is on earlier you talked about...

[Unknown Executive]

There are so many question, we -- a lot of other analysts is waiting. So could you stop on this question?

[David Lui, analyst]

Okay, I stop here.

[Unknown Executive]

Thank you so much.

[Operator]

Next question is from the Nakamura from SMBC Nikko Securities.

[Shinichiro Nakamura, analyst]

I'm Nakamura from Nikko Securities. I will be quick. I have 2 questions. First about Japan's fixed. It is -- the profit increased more than 15%. But looking at the client trend, could you discuss in more detail the second quarter and the recent trend? That is the first question. And the second question is about client finance solution in the United States for you reallocating resources. What is the recent trend and what is the future outlook?

[Takumi Kitamura, executive]

Thank you for your question. This is Kitamura speaking. About Fixed Income in Japan, as for [ client.pro ], interest rates have remained stable for a very long time and about the future trend of the interest rate in the market, I think there were conflicting views. And I think that led to increase in volume.

[Shinichiro Nakamura, analyst]

Against that backdrop, how clients has changed?

[Takumi Kitamura, executive]

Flow itself has not changed. But in terms of giving more color, so far there were many customers who were engaged in short-term trading. But long-term investment flow based on actual demand I think is increasing. In October, in comparison to September, we believe that we continue to see the same trend from September, that is our impression. And next about CFS, to be honest, we do not think that we will have immediate results after starting this. But organizational realignment is complete and we have listed target customers and in this new organization, the traditional IB business and nontraditional financing solution business will be offered. We have begun to offer these businesses. In the first half of this year and when we look at the first half performance from last year, in comparison to the previous year, we do see an increase. So we are seeing results. And the pipeline -- in terms of pipeline, the tendencies that we see a bigger pipeline in the second half of the year at Nomura, but I hear that there is a gradual buildup of a pipeline.

[Operator]

Next question is from Citigroup Japan, Mr. Niwa.

[Koichi Niwa, analyst]

Thank you, I have 2 questions. First on share buyback. Suppose that we put this share buyback program, what are the terms and conditions for resetting in terms of agility, quantitatively? What are the things that we should keep in our mind in relation to share prices to the extent possible, could you share that with us? That's question one. Question number 2, structural issue or structural reform. On this theme, in the Q&A about fixed cost reduction programs, you mentioned that you intend to accelerate them, but you are now conscious of going beyond that. You -- I think are you just trying to increase the top line? But differently, on the quarter, you had about JPY 40 billion before tax results. So could we just wait for the improvement of top line or structural reform for -- to further the increase the profitability? Are there certain things that we should sort of keep in our minds? If so, let us know.

[Takumi Kitamura, executive]

Kitamura speaking. Regarding the share buyback, as you might know, regarding the program that has been established, gradually, we've been doing the repurchasing of our shares. Once this program is completed, whether we are going to set a new framework, we need to sort of pause when the time arrives and based on our capital policies. And again, also looking to the regulatory move, so although it has been clarified to a certain extent, and we also have to look at the share price as well as the performance. Once again, we have to revisit them when the time arrives. In terms of the shareholder returns, we believe that we have been pretty positive, but for additional programs for share buyback, we would like again to do that when the time arrives. As for the -- you mentioned structural reform, JPY 40 billion, that bottom figure, are we satisfied? Naturally, we are not satisfied at all. In terms of our profitability, if it improves then when the market recovers, when the top line grows, yes, we are happy. But we can't be fully dependent -- depend on that alone.

[Koichi Niwa, analyst]

Does this external environment include in technology? There have been significant changes and they keep changing. So what do we actually mean, or what do you mean by structural reform? It can be difficult? The cost reduction including the fixed cost reduction?

[Takumi Kitamura, executive]

It's not that if we do JPY 60 billion, that's the end of the story. We would like to continue to address that. As for the improvement of profitability, I think there is a required investment. As I said here, AI implementation, naturally it involves certain cost. While ensuring the investment amount for those purposes, we also would like to make sure that we would reduce cost more. Thank you.

[Operator]

Next person will be your last question to ask a question. Next Mr. Tanaka from Goldman Sachs Japan, please.

[Katsunori Tanaka, analyst]

I'm Tanaka from Goldman Sachs. Quickly, I have 2 questions. About the U.S. rates. As interest rates rise in the United States, rates in the U.S. are improving. Could you comment on the prospect in the third quarter outlook? And for contingent liability, JPY 80 billion was the disclosed figure in the first reported. But after the settlement with DOJ, how has this figure changed?

[Takumi Kitamura, executive]

This is Kitamura speaking. As for the United States, rates are moving onetime it topped 3.2%, and it's now down to around 3%, in terms of the U.S. interest rates. So in that there is a growing volatility -- there's a growing volatility and client activities are also recovering. For our business, we believe that this is a positive direction; however, it is difficult to predict the future, but rapid rise of interest rate might invite decrease in stock prices and outflow of funds from emerging countries and reduction of the spreads. So not everything is positive, so we would like to pay close attention to that and manage risks. As for contingency liability, in the first quarter, as of the first quarter, as when the quarterly first report was published, the figure was JPY 80 billion. What is included in JPY 80 billion? The breakdown has not been discussed so far. What is included is not what I will be discussing now. I believe it is on the 15th of November, or the 14th of November, when we publish a quarterly report from this quarter. We ask you to look at the information contained in that report. And I apologize that I don't have the answer as of now.

This is Kitamura speaking once again. Thank you very much for your kind patience over this lengthy session. There were difficult questions or harsh questions. And I believe that is a reflection of your expectations for our company.

Having said so, globally, I think there's a growing anxiety about slowing down of the economy globally when the credit cycle in the United States will come to an end. That is the cause of anxiety. And so far, geopolitical risks are affecting the market sentiment and what will happen with the Brexit deal. There are many uncertainties that may affect the markets. We know that the environment is difficult, but our mission is that through financial and capital markets, to contribute to the creation of affluent life. With our capabilities, our mission is to contribute to the creation of affluent life. We believe that as our social mission. And we would like to be the most trusted partner that is selected by our customers and we would like to continue to make efforts every day to achieve this. Thank you very much.

[Operator]

Thank you for taking your time. And that concludes today's conference call. You may now disconnect your lines.