Nomura Holdings Inc

TSE:8604

Earnings Call Transcript 2021-Q2

[Operator]

Good day, everyone, and welcome to today's Nomura Holdings Second Quarter Operating Results for Fiscal Year Ending March 2021 Conference Call. Please be reminded that today's conference call is being recorded at the request of the 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 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 those projections. Such factors include economic and market conditions, political events and investors sentiments, liquidity of secondary market, level and the volatility of interest rates, currency exchange rate, 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]

Thank you for joining us. This is Kitamura speaking. I will be presenting the results for the first half and second quarter for the year ending March 2021. In my presentation, I will be following the uploaded document entitled consolidated results and operations. Please turn to Page 2.

Speaking about the first half market, market dislocation caused by the pandemic subsided driven by hopes towards economic recovery and reassurance of expensive liquidity provision by central banks, we saw recovery in equity indices and bond prices. After summer with events like presidential election in the United States and Brexit, there was appropriate level of volatility in the equity market, and there was investor activity. There was strong needs from the investor against the backdrop of low rates in the fixed income market, and there was inflow into the yield products, including agency mortgages and spread products.

In the primary market, along with the improvement of sentiments, we saw the resumption of equity finance, and there was continued appetite for bond insurance. With this as backdrop, net revenue in the first half was JPY 829.7 billion, increase of 16% year-on-year. Pretax income, JPY 265.4 billion, plus 31%. Net income, JPY 210.2 billion, an increase of 8%. This was the highest first half income since introduction of U.S. GAAP in the year ended March 2002.

The pretax income of the 3 segments increased by 176% year-on-year, the highest first half results, EPS, JPY 67.1. ROE, 15.6%. Dividend with the base date of end of September, JPY 20 per share.

Please go to Page 3. These are the highlights for the first half. The bar on the left-hand side is the pretax income by region. As you can see, the total pretax income for the first half was JPY 265.4 billion, an increase of JPY 62 billion from the JPY 203.3 billion of the previous term. The driver was global especially the Americas. And the total of the 3 regions was JPY 107.7 billion. Accounting for approximately 40% of the total of the company. As mentioned in the Investor Day in April last year, in Wholesale, we conducted the business portfolio review, focused our resources on businesses with top 5 market share. Under the corona pandemic, we continued our provision of liquidity, while at the same time, supporting the growth strategy of our clients.

These initiatives delivered results, and we were able to increase revenue in global rates, Asian currency emerging and U.S. equity business.

Also, cost reduction efforts made great contributions to the improvement of profitability in the global business.

On the right-hand side, we give the breakdown by segment. Income increased in all business areas. The pretax income for Wholesale was JPY 153.3 billion, 3.9-fold of the previous term. Income for retail was 2.8-fold the previous year and recovered to JPY 37.9 billion. Of course, the market was a positive factor. But last year's channel realignment, supported by branch integration, gradually has begun to deliver results. And in Asset Management, stable income was generated and the underlying strength to deliver revenues in the 3 segments is improving in its steadfast manner.

Next, let me describe the highlights for Q2, going on to Page 4. As indicated on the top right, the total pretax revenue was JPY 83.6 billion. Net income, JPY 67.6 billion. In Q1, fixed income recorded record high revenue. And -- partly because of the one-off income of JPY 71.1 billion for Nihonbashi redevelopment, there was a slight decline but high level was maintained for Q2. The pretax income for the 3 global markets was JPY 43.4 billion accounting for more than half of the total and contributed to the reduction of effective tax rate. The annualized ROE, 9.8%. EPS, JPY 21.52.

As indicated on the bottom right, the pretax income for the 3 segment was JPY 99.7 billion or negative 18% Q-on-Q. But as Q2 income, it was the highest since the year ending March 2002. Compared to the previous year, the income for all business areas increased, and the total for the 3 segments saw an increase of 191%.

In and after Page 7, we describe each business area. First, Retail. Net revenue for Q2, JPY 92.8 billion, 14% increase. Pretax income, JPY 22.8 billion Q-on-Q, increase of 51%. As I said in the previous session, we are contacting our clients, not only through face-to-face meeting, but we're using online system, telephone and email. Non-facial contact is also being promoted. Hybrid model is evolving, and these efforts are delivering results. And on top of that, with the primary activities also contributing sales increased for all products and services. As indicated on the bottom left, total sales increased in equities, primary deals and foreign equity saw increase. And a high level, as we had recorded in Q1, is being maintained.

There has been great improvement in investment trust and bonds on Q-on-Q basis, and we saw increase in discretionary investments and insurance.

Please take a look at Page 8. Recurring revenue assets and recurring revenue has seen the improvement since end of June. In addition to market elements, we saw increasing investment trust sales for global equities and ESG. And investment trust net inflow was a positive by more than JPY 100 billion. Consulting-related revenue on the bottom left, JPY 3.9 billion. And there has been improvement, especially in insurance and real estate-related business.

Number of active clients on the bottom right. This is the cumulative number of clients who used our services or products at least once since April. The total as the end of September was 717,000, which was beyond the previous term.

Asset Management on Page 9. Revenue, JPY 26.8 billion, declined by 21%. Pretax income, JPY 11.4 billion, minus 40%. In the previous term, there was JPY 10.3 billion of American Century related gains and losses. So the revenue, excluding ACI, was JPY 24.7 billion or 4% increase. As indicated on the bottom left, AUM, JPY 55.7 trillion (sic) [ billion ], partly because of the tailwind in the market, we have delivered a record high.

Please turn to Page 10 for the flow funds shown on the top left, the investment trust business reported net inflows of JPY 563 billion from inflows into ETFs and ESG-related funds launched in August. In the investment advisory business, alternatives such as private equity and infrastructure funds booked inflows as did overseas UCITS funds. But in Japan, there were redemptions in Japan equity value funds, leading to outflows of over JPY 640 billion.

Asset Management has been focused on increasing assets under management in funds for DC plans. As you can see on the bottom right, assets under management of these funds was nearly JPY 1.3 trillion at the end of September. And thanks to a broad product offering, our AUM market share has increased 19.5%.

Please turn to Page 11 for Wholesale. Second quarter net revenue was JPY 220.3 billion, down from the record last quarter. But on a year-on-year basis, all business lines and regions reported stronger revenues. JPY 220.3 billion represents the fifth highest quarterly revenues and the best second quarter revenue performance. As you can see on the bottom left, net revenue by region showed recent stronger contributions from the 3 international regions. Second quarter net revenue from the 3 international regions was JPY 161.7 billion, accounting for 73% of Wholesale revenues. In particular, the Americas net revenue was JPY 95.2 billion, representing over 40% of total revenues and the record quarter since we started rebuilding our business in 2009.

For the KPIs shown just above net revenue by region, our cost income ratio was 70% versus the March 2023 target of below 83% and modified RWA as a percentage of revenue was 8.5% versus a target of around 6%. Both KPIs are ahead of target.

Please turn to Page 12 for an overview by business line. Global Markets second quarter net revenue declined 17% to JPY 192.3 billion. Fixed income net revenue was JPY 104.6 billion, down 32% compared to the record high last quarter, but performance remained strong at over JPY 100 billion. Rates and agency mortgages had a good quarter and Credit, Securitized products and FX and EM were solid.

Equities net revenue grew 13% to JPY 87.6 billion. As you can see on the heat map on the top right, Americas is pointing up on significantly stronger revenues from derivatives, while AEJ revenues also increased on contributions from derivatives.

Please turn to Page 13 for investment banking. Net revenue increased 74% to JPY 28.1 billion. Revenues were a 6-quarter high driven by Japan-related ECM transactions, cross-border M&A and several business reorganizations for Japanese companies. In Japan, of the ECM deals executed this quarter, we acted as lead manager on all of the top 5 transactions by deal size and our ECM revenues grew substantially. Demand for bond issuances remained strong. And our Solutions business had a robust quarter on transactions for equity and real estate sales.

Internationally, we supported multiple ALF, DCM and ECM transactions, leading to higher net revenue, both quarter-on-quarter and year-on-year.

As you can see on the top right, we supported our clients' growth strategies and several business reorganizations through cross-border and Japan domestic M&A transactions. As a result, we ranked in the top 10 of global M&A league table for the 9 months to September.

Please turn to Page 14 for an overview of expenses. Firm-wide noninterest expenses were JPY 285.4 billion, up 2% from last quarter. Compensation and benefits, commissions and floor brokerage and information processing and communications were all roughly unchanged from last quarter, occupancy and related depreciation increased 12% due to one-off costs related to office relocation from Nihonbashi to Toyosu. In other expenses, we reported an increase in expenses related to legacy transactions and consultant fees.

Next, our financial position on Page 15. Our balance sheet at the end of September was JPY 42.7 trillion, up JPY 1.1 trillion from the end of June due mainly to repo transactions.

As shown on the bottom left, our Tier 1 capital ratio at the end of September was 19.3% and our CET1 capital ratio was 17.2%, both up from the end of June. The numerator in the equation, capital, remained roughly unchanged, while the denominator, risk assets declined about JPY 1.3 trillion to JPY 14.8 trillion due mainly to credit spread tightening and lower market risk by position reductions. The red line graph on the bottom right shows net level 3 assets as a percentage of Tier 1 capital at 16%, which has trended down from the peak of 28% at the end of March. This is because Tier 1 capital has increased since March, and we have sold off level 3 assets, mainly securitized products, credit and loan-related positions.

That concludes the overview of our second quarter results. In the second quarter, as market tailwinds eased compared to the first quarter, we started to see results from our efforts to realign our business platform last year, which is leading to improved underlying profitability. For instance, in Wholesale, our business portfolio realignment and focus on areas of competitive strength resulted in continued strong revenues. Although each quarter, we see stronger or weaker performance at each product level, we are benefiting from an overall portfolio effect. Even compared to our U.S. peers who announced results earlier this month, we have demonstrated that our very strong first quarter was not a one-off.

There are a number of macro events ahead, such as the U.S. elections and Brexit. Central banks are continuing with monetary easing, and we expect a certain level of activity to continue into the end of the year. Wholesale revenue performance in October has remained at second quarter levels. We will continue to provide liquidity and support our clients' growth strategies while stringently controlling risk and costs.

In Retail, following the realignment of our channels, we have enhanced our approaches to clients and proposals. For instance, in the corporate and owner space, we are actively using e-mail, videos and webinars, going beyond the division and company to enhance our content for clients while increasing relations and touch points. This has resulted in a more than doubling of average new client onboarding compared to the second half of last year.

We have also seen a large increase in transactions involving head office support functions. In the mass affluent space, the volume of e-mail content and use of online tools has grown significantly leading to an increase in the number of active clients. In October, we have maintained revenues at second quarter levels. We will continue to work on new initiatives.

Globally, the second wave of the pandemic has become serious in some regions, and we must remain vigilant. We will continue to prioritize the safety of our clients, communities and people, while ensuring business continuity as a financial institution participating in the capital markets.

Thank you.

[Operator]

[Operator Instructions]

The first question will be by Watanabe-san of Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe of Daiwa Securities. I have 2 questions. First of all, on Page 15 of the material on capital. Risk assets in comparison to the previous quarter, declined by JPY 1.3 trillion. What was the factor behind? And you did not conduct a buyback. What was the reason? With share prices low, the environment was favorable, but why didn't you conduct the buyback?

Secondly, on Page 12, on global markets, equity in comparison to your U.S. peers, you achieved strong momentum. It seems that you did well, especially in the United States. What were the factors behind? And do you think that this trend is sustainable? Those are my 2 questions.

[Takumi Kitamura, executive]

Thank you very much for the question. First of all, on your initial question, RWA. The reason why RWA declined. The big factor is reduction of market risk. At the end of March, there was a rebound of the market, and RWA increased sharply. But we saw the calming down of the market after the dislocation in March which is well known to you. The average of 60 days is the indicator we use. And March, April market dislocation impact disappeared. So that is the major reason. And around March, risk origination position which was incurring losses, declined, and that has contributed to the reduction of RWA.

The second question is on the reasons why we did not conduct buyback. As we mentioned at the previous Investor Day, our U.S. peers have also decided not to do share buyback. And on a daily basis, in the western countries, there has been increasing new cases of COVID-19, so we cannot loosen our grips at the moment. We're not saying we're bearish, but dividend of JPY 20 has been announced. So we are offering benefits to our shareholders. JPY 20 is the third highest interim dividend. And in the past 10 years, it's been the highest interim dividend. So in that sense, we feel that the momentum -- the high momentum will be sustained in Q3. So we've committed to a total payout ratio of 50% and higher. So if we find the right timing, we would like to conduct share buyback.

Finally, strength in equity, especially in the U.S. market. What's the reason, why and whether we feel that this trend is sustainable. U.S. equity market, with the approaching presidential election, the hedge requirement of investors increased quite significantly, and there was strong appetite. As we've been saying, we have a great team in the United States looking after equity derivatives.

And thinking around this team, there has been many inquiries and orders from our customers. So there was active flow from our customers. And from that flow, we were able to lead to market making and risk revenue. We took a very good position to capture the opportunities.

So will this trend continue in the months ahead? Of course, it would partly depend on the market. But in terms of the strength of franchise, we are quite confident of the robustness of the franchise. We have a diverse customer platform as well as a diverse product lineup. So we don't know whether share prices will go up or down. But in different phases of the equity market, we think that we can capture the opportunities in the derivative markets. I hope I answered your question.

[Kazuki Watanabe, analyst]

I have a follow-up question on the first point, on buyback. Are you saying that total payout ratio of 50% will be delivered by the end of this fiscal year? And at the results announcement for Q1, you said that rather than the quarterly results, you would like to consider Q2 and Q3 and Q4 together to speak about the shareholder benefits, but does that policy still hold true?

[Takumi Kitamura, executive]

When I said by the end of the fiscal year, that means by the time we announced the yearly results. So by the time we announce the fiscal year results, we want to fulfill our commitment of 50% total payout ratio. First half and year-end results will serve as the basis. And that still largely remains unchanged. Thank you very much.

[Operator]

Next, we have Mr. Nakamura from Goldman Sachs Japan.

[Shinichiro Nakamura, analyst]

I'm Nakamura from Goldman Sachs Japan. I have 2 questions. First question, this was also a question in the first quarter results teleconference.

It seems that cost control is effective continuously, Wholesale, Retail, Asset Management, will tight cost control continue? Is it possible to continue cost control in these segments or with the normalization of business operations, will there be worsening in terms of cost control? That is my first question.

And the second question is with respect to investment banking. I believe ECM was very strong, ECM, DCM, M&A. Based on the pipeline that you have right now, could you share with us your outlook towards the second half of the year?

[Takumi Kitamura, executive]

Thank you for your question. First, regarding cost reduction. We committed to reducing costs by JPY 140 billion. And we have achieved about 85% of that recently, which means that we still have to reduce the remaining 50% in cost. We would like to make sure that, that is achieved. That is number one. Because of COVID pandemic, business acceleration cost and other costs declined. Perhaps I don't think we will go back to the situation before in terms of cost. Even after normalization of economic activities, we do not anticipate cost going back to the levels before the pandemic.

Because of COVID-19, various things have undergone a major change. And we have to have a cost structure that is in alignment with the new normal. So we will continue to tightly manage cost. And to adapt to new normal, of course, I think there will be necessary investments. But overall, we will continue to control costs tightly.

Regarding your second question, ECM, DCM and mergers and acquisitions and pipeline. Worldwide interest rates are low, and there is impact on the pandemic. And there is a strong need on the part of the customers to have ample cash on hand. And I think that it will continue to be funding needs for that purpose.

As I mentioned in the first quarter results announcement session. First, fixed income. And then to raise a fund with capital nature. I think those activities will continue. Regarding mergers and acquisitions, as there are dislocations in the economy to adapt to economic changes, business growth through mergers and acquisitions and business reorganization or transformation through M&A, are showing even stronger appetite than before. We see stronger appetite in these respects than before. And I believe actual developments that we see recently reflects this.

As a matter of fact, in Japan, we have received inquiries regarding M&A, which is about 20%, 30% greater than usual years. In view of the new normal, I think that there will continue to be strong needs for ECM, DCM and M&A. I don't think the strong performance in these areas is not transient -- I don't think it is transient.

[Operator]

Next question is by Otsuka-san of JPMorgan Securities.

[Wataru Otsuka, analyst]

This is Otsuka of JPMorgan Securities. I have 2 questions, but let me ask one by one because they are on different topics. Is that agreeable?

[Takumi Kitamura, executive]

Yes, please go ahead.

[Wataru Otsuka, analyst]

First question is on Retail, Page 7. I understand this page, but I wanted to learn about more details. Other security brokerages are announcing cash reports, but Q-on-Q income improvement was quite robust. In corona, there was a slump in Q1 so that is one of the reasons for the recovery. But sales and income balance, the results were strong. So can you elaborate on the backdrop to this strong result?

[Takumi Kitamura, executive]

Thank you. I'm not in the position to speak about our peers, but there are some compounded elements that had led to these results. Of course, the market is fair to all players, so we face the same market as do our peers. In Q1, there was constraint in our sales activities, especially in Retail. And of course, things have not gone back to where it was. But activity has recovered to probably 50% of the original level. So that was a big element. And also nonface-to-face approach to our customers have taken root because our employees' skills have improved in making those virtual contacts.

The number of e-mails, the number of phone calls are being monitored. And we are seeing that the frequency is quite high, and the number of calls and e-mails is quite high, which is also a positive factor.

Even if our employees did not meet face-to-face with their customers, by conversing with them, they would be able to capture their requirements. So that's one differentiation that we have against net security companies. And also last year, we engaged in a channel realignment which has delivered results. So the level of expertise in each area has been elevated.

In corporate owners, the average number of new customers, in comparison to the second half of last year, has reached double. So in comparison to pre-COVID-19, we've been able to cultivate double the number of such customers. So I think the skills have improved and also high net worth customers.

In the midst of low interest rate, how can they ensure the work for the future, and how can they increase their wealth. That kind of demand is stronger on the part of our customers, and the number of people who need our services is increasing. So those different elements have come together to achieve these second quarter results, which may be relatively better than our peers. But we're still midway in terms of the reform. But the effect of the initiatives that we have done so far is probably beginning to deliver results.

[Wataru Otsuka, analyst]

This is Otsuka speaking. For Retail, can you speak about October? You said Wholesale did well in October, but does the same apply to Retail?

[Takumi Kitamura, executive]

This is Kitamura speaking. But October was as good as to the second quarter.

[Wataru Otsuka, analyst]

This is Otsuka speaking. Sorry for asking the same question, but this is on buyback. I do understand what you said. And we have to think about it in the unit of fiscal year. And your commitment is 50% total payout ratio. We understand that. But no one can foresee how the market will fare in the second half. So if there's a deterioration in the market, in the second half, you may confront an environment where you are disabled from conducting buybacks. So rather than waiting, wouldn't it have been better if you had done that buyback while your performance was good in the first half.

So my point is, especially in comparison to your American peers, the continuity of income generation you say it's not onetime off. You say that the current robustness of the franchise will deliver results regardless of how the market will fare. Equity, fixed income, the U.S. brokerages have seen decline in performance, but you're doing well. So is it correct to consider that because you are confident about the months ahead and years ahead that you are going to be considering share buyback in the unit or time span of 1 fiscal year?

[Takumi Kitamura, executive]

This is Kitamura speaking. How do we perceive the second half market? How do we perceive the sustainability of our revenue and income? I think that was the gist of your question. And in that context, the current momentum should continue, that is our assumption. We have a stronger customer franchise and we think that the current environment is -- the market is sustainable. And transformation of the retail business has gradually begun to deliver results. So on a full year basis, we think that we will be able to deliver a certain level of performance.

[Wataru Otsuka, analyst]

This is Otsuka. Then you will be judging from the performance and share prices to consider buyback. Is that correct?

[Takumi Kitamura, executive]

This is Kitamura. Yes, that's correct.

[Operator]

Next question is from Mr. Muraki of SMBC Nikko Securities.

[Masao Muraki, analyst]

I have 2 questions. First question is related to Fixed Income. The U.S. peers were strong in commodities, but you do not have commodities. And I believe that the share has increased in Fixed Income. How do you analyze the situation?

Furthermore, regarding the future outlook, amongst the U.S. peers because of COVID-19, there is an expectation of fundraising as a result of mergers and acquisitions or trading revenue may be supported the year after next because of the change in indices. So next year and onward, what do you expect in terms of customer activities that will support your Fixed Income business?

The second question is about capital adequacy. How do you view capital adequacy? Risk has been reduced significantly and capital ratio has improved. On the other hand, Basel III finalization was deferred, and the Fed has changed the definition of NSFR. These are the recent developments. And in the future because of the review of these criteria or introduction of these criteria, Nomura may be able to benefit from that. And how do you view your current capital adequacy level? Has your view changed?

[Takumi Kitamura, executive]

Thank you for your question. First was about Fixed Income. In that regard, government bond trading in comparison to the first quarter, was slightly down. On the other hand, because of decline in interest rate, agency mortgages were very strong. In the FX, Asian currency and dollar relations, when we look at the relationship, I think the direction was very clear. In these areas, we were able to generate revenues. We are not like U.S. peers where they have various businesses. We are focused on areas where we are strong. And I think that was why we were able to achieve strong results.

How are we looking at the business environment going forward? I believe your question was what our outlook is? As for interest rate volatilities, we believe that volatility has come down. On the other hand, because of a large fiscal expansion, government bond supply will continue to be at a high level in many countries. As a matter of fact, in Europe, many countries are issuing government bonds. And we are involved in underwriting of some of these. And we expect a certain level of activities to continue.

As Muraki-san pointed out, there is a transition from LIBOR to a new index to SOFR. To what extent it is not clear to me yet, but the change in the index may support -- may offer support to full rates.

As for agency, I mentioned that we had strong results. And although yield has come down, but looking at the world, we have very few products that offer yield -- positive yield. Customers in Japan, customers in Asia are looking for yield and are showing strong demand for agency mortgages. We believe that this will continue. In the first quarter next year, we believe that this strong environment will continue.

Now turning to your second question regarding capital adequacy. It seems that market has come down substantially. Our Tier 1 ratio and leverage ratio have recovered significantly as well.

Regarding NSFR, the final proposal in the United States, and you've raised that in your question. In comparison to the rule we had before, regarding the government bond, the haircut ratio was reduced from 5% to 0%. And in some ways, there are revisions that are favorable to financial institutions.

For U.S. Treasury trading, I believe this is going to be a positive factor. Regarding NSFR calculation, for us, this is also going to be positive. And going forward, finalization of NSFR in Japan is expected. That is my understanding. Whether it will be similar to the changes in the United States, we would like to continue to watch carefully, including by maintaining consultations with Japanese FSA.

As for Tier 1 ratio, it is over 19% recently. It seems that it's an ample level. Of course, FRTB is expected in 2023. And this is a major factor for us as we have been saying, but the current level of 19.8% seems to be sufficiently ample. Thank you.

[Masao Muraki, analyst]

Regarding the sufficiently ample level of capital adequacy like Morgan Stanley, some of the excess capital might be used to purchase online broker or asset manager. These are the recent trends.

You expect more merger and acquisitions by customers, but what is your appetite with respect to your own mergers and acquisitions. Have that changed as a result of COVID-19?

[Takumi Kitamura, executive]

The answer will be neither agree or deny regarding M&A prospects. If there are good deals, we are willing to buy. But of course, we have to look at profitability. And in terms of the use of capital, is it a good way to use capital? There is also goodwill implications. So we cannot be reckless in terms of mergers and acquisitions. But if the question is whether we have appetite for M&A, the answer is yes.

[Operator]

The next question will be by Tsujino-san of Mitsubishi UFJ Morgan Stanley Securities.

[Natsumu Tsujino, analyst]

I have 3 simple questions on numbers. First of all, you are doing well in the United States in terms of income, so the effective tax rate has been reduced as a result. But under the U.S. tax regulation, how do you think -- do you think that this income level can be sustained?

Secondly, on shareholders' equity, AOCI minus the negative number has increased by a few tens of billions, JPY 88.7 billion? So that's my second question.

FIC. The third question is on FIC. You shared with us your quite bright prospects. Share is increasing, but do you think that you will be able to further increase your share in this area?

[Takumi Kitamura, executive]

This is Kitamura speaking. First of all, on the carryover in the United States, NOL of the United States. End of March, it was slightly less than JPY 420 billion. So that's plenty still remaining. OCI negative. This is OCA of our own proprietary bonds. Mark-to-market from our own bonds. We used to put that in our P&L. But since a few years ago, we included in the other comprehensive income. Our credit spread tightened in the previous quarter, so we saw some increase in the negative number here.

Further, can we further improve share? As I said already, the area where we compete is very focused. We're quite selective. So for those products, to which we are placing focus, I think there is room for increase in share. But if we think about the general U.S. fixed income market, it would depend. Some products are doing well in some phases. Some are not in certain phases.

If we look at U.S. fixed income in general, to what extent can we do better. Frankly speaking, it's difficult to answer that kind of question. But one of our competitive advantages is a strong franchise, as I said. But we have another competitive edge, and that is access to individual financial assets of Japanese. JPY 1,900 trillion is the estimated number. In terms of individual financial assets, we are introducing not only Japanese products, but products from overseas. And investors are gradually beginning to focus on such products as well.

And of course, COVID-19 still is an issue, but Japanese businesses still have strong capital foundation. And from the investment or asset management perspective, Asian and U.S. products may be a good destination for such investments. So we are a financial institution in Asia, so we can take advantage of our competitive edge in Japan and in Asia. And such risk mainly can be funneled into the Americas. And from such perspective, we might have relative advantage. So for certain products from such perspective, we still believe that our share could be upgraded. Thank you.

[Operator]

[Operator Instructions]

We have Mr. Niwa from Citigroup Japan.

[Koichi Niwa, analyst]

This is Niwa from Citi. Can you hear me?

[Takumi Kitamura, executive]

Yes, we can hear you.

[Koichi Niwa, analyst]

I have 2 questions. First, capital adequacy ratio. And -- so regarding the first question of capital adequacy, Japanese authority and globally as well under stress test that the view on capital adequacy is regarded as important. Under the stressed scenario, if you have any estimates, could you share that with us?

For example, under BOJ Financial System Report, a severe financial market downside risk has been included -- is included in coming up with the estimate. I understand that there is a difference between commercial bank. But in the stressed scenario, do you believe that you still have sufficient capital adequacy level based on your internal model?

And second is related to question by Mr. Muraki in organic growth. Generally speaking, what are the functions that you consider necessary that you would like to acquire through mergers and acquisitions? And through M&A, is Nomura willing to take on a major challenge again? And regarding Asset Management business, there are some consolidations globally. What is your view regarding Asset Management business?

[Takumi Kitamura, executive]

Thank you for your questions. First, about the stress test, of course, we run stress scenarios, but impact is not disclosed publicly. I would like to refrain from disclosing that information.

Tier 1 ratio is over 19% of late, and I am serving as Chief Financial Officer. As CFO, I would say that we will have to apply quite a realistic stress scenario to bridge our appetite. I think if I communicate in this way, I believe you will be able to have a better picture.

Second question was about inorganic growth. Last April, IB boutique Greentech was acquired. But because of COVID pandemic, the launch was somewhat slow. But gradually with Greentech, Nomura are working together on transactions in increasing number recently selecting on certain themes. In that sense, boutiques can be attractive.

As for the size of the acquisition, in the past M&A, we haven't had much lessons learned. As of now, we do not anticipate an extremely large deal. And regarding Asset Management business, within the industry in Japan as well as outside of Japan, there are some consolidations underway, and we are aware of that.

Regarding Asset Management AUM, the target for 2023 is JPY 65 trillion. Through organic growth, we believe that we can achieve this target. But beyond that, what should we aim for? Of course, we are discussing that within ourselves. Nomura Asset Management and ACI in which we have equity investments. And in the next 5 to 10 years, in the asset management industry, we're discussing what our position should be within NAM and ACI. It's not a quit answer to your question. It's not that we are not thinking about M&A, but we are not extremely aggressive about M&A either. We are flexibly thinking about various things.

[Operator]

The next question is by Ban-san of Jefferies Securities.

[バン, analyst]

This is Ban speaking. I have one question. And this is about Wholesale and your prospects of the Wholesale business. Can you give us the differences by region? First of all, Europe. If we look at the quarterly basis, there has been negative in certain countries. Global market fixed income revenue has normalized according to your comment. But with the second wave and more new cases are discovered, what's the downside risk and PBT forecast for the European region? And how do you intend to minimize the downside risk? Do you have such a strategy? That's my first point.

And secondly, this is not limited to Europe, but according to your comments, in terms of region, real estate and global PBT accounting for more than half. In Japan, resumption of the economic growth and financing of Japanese businesses, there seems to be some time lag in Japan. But do you think that the ratio of the global market or overseas regions will continue to grow? Or do you think that you will see a comeback of Japanese businesses or rebound of contribution by Japanese business? Can you speak about the PBT by region?

[Takumi Kitamura, executive]

This is Kitamura speaking. First of all, on Europe. In Q2, losses have been incurred. I touched upon this slightly when I spoke of costs. There had been realization of expenses pertaining to past transactions in Europe. This is a legacy item that happened a long time ago. If we exclude this, we would have recorded profits even for Europe, although this is hypothetical. But business in Q1 -- in Q1, Europe was doing very well. But in the second quarter, in comparison to the first quarter, there was normalization. And another factor was the summer vacation season. ETP, its performance was not so bad, but -- and also the underwriting of sovereigns. There was much activity.

So our London office underwrote sovereigns of various countries and they supported and we're engaged in sovereign issuance of various countries. So in this context, your question was on downside risk, but that exists in the rates business.

So the impact would be rather limited, frankly speaking. As we have said in the past, credit business in Europe is shrinking. So in the universe of credit, you talked about COVID-19 second wave, which may impact the credit business. But in the Rates business, frankly speaking, I don't think there is much downside risk.

On your second point, how should I describe. By chance, non-Japan accounted for about half. But we're not being that particular about breakdown between Japan versus international. If we think about the fee pool, U.S. is a gigantic market, accounting for 50% of the fee pool. So the ratio of the United States, within Nomura, will naturally go up going ahead. But needless to say, it is in Japan, where we have our strongest franchise. BUs, ECM, DCM, M&A, depending on how many are in the pipeline, that ratio could change. We don't have any policy with regards to the ratio of Japan needing to be this percentage of -- or U.S. needing to account for certain percentage of our income. We don't have such indicator.

[バン, analyst]

But what about the level of activities. Do you think that activities in Japan will catch up with other regions? You talked about the pipeline, but how do you foresee the number of deals in the Japanese market, in the pipeline in comparison to other regions and countries? Do you think that the number of deals could increase?

[Takumi Kitamura, executive]

This is Kitamura. In the IB business, we have the strongest franchise in Japan. So we closely monitor the changes. If we look at the M&A, we see an increase of inquiries by 20% to 30%. And it depends on the timing of measurement, but I think there's likelihood that the ratio of Japan could go up.

[Operator]

We will take one last question. We have Sasaki-san from Bank of America.

[Futoshi Sasaki, analyst]

This is Sasaki from Bank of America. Regarding firewall regulation in Japan, it seems that there is a trend that is going negative.

[Takumi Kitamura, executive]

Mr. Sasaki, I'm sorry. Your voice is breaking. I understand that you've mentioned firewall.

[Futoshi Sasaki, analyst]

This is Sasaki speaking. If discussion develops in a way that is advantageous to the banks, what will be the impact? Will there be impact or not on Japan business where you have strong franchise?

[Takumi Kitamura, executive]

Thank you for your question. There is much report on newspaper these days of firewall regulation, convenience for the customer, development of healthy capital markets that are primarily what should be discussed. For the development and growth of healthy capital market, including the way corporate information is handled, there is much that is needed to be discussed. But for convenience of the customers, that will be good for the customers. And in order to grow Japanese capital market further, and there is a talk of making Tokyo a financial center. So what needs to be done is an area that requires much discussion going forward.

[Operator]

This concludes the Q&A session. Questions can be accepted by IR division of Nomura Holdings. There will now be closing remarks.

[Takumi Kitamura, executive]

This is Kitamura speaking. Thank you for staying with us until late in the evening. In Q1, there was the big tailwind in the first quarter, as we explained, so we were blessed by that strong positive tailwind. But the tailwind wasn't as strong in the second quarter but even then, we were able to achieve a certain level, even in Wholesale, which is due to our strong franchise.

And in Retail, realignment of our channel gradually is bringing about results. But we will not stop. This is not the end. And we are continuing our debate of our transformation and our continued reform. We hope that you understood the point that Nomura is changing and will continue to change.

And we truly would appreciate if you could, with affection, continue to cover and monitor Nomura. Thank you, again, for joining us.

[Operator]

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

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