Nomura Holdings Inc

TSE:8604

Earnings Call Transcript 2021-Q3

[Operator]

Good day, everyone, and welcome to today's Nomura Holdings Third 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 teleconference 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 investor 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]

Good evening. This is Takumi Kitamura, CFO of Nomura Holdings. I will now give you an overview of our financial results for the third quarter of the fiscal year ending March 2021, using the document titled Consolidated Results of Operations. Please turn to Page 2. Net revenue for the 9 months to December was JPY 1,231.8 billion, representing a year-on-year increase of 17%. Income before income taxes increased 45% to JPY 396.8 billion. Net income grew 23% to JPY 308.5 billion. This is a record set of results from the year ended March 2002 when comparisons are possible.

Earnings per share for the 9-month period were JPY 98.3 and annualized ROE was 15.1%. Our core business, 3 segment income before income taxes increased 132% year-on-year to JPY 349.3 billion. Notably, Wholesale income before income taxes grew 180% to JPY 230.2 billion.

Please turn to Page 3 for an overview of the 3 key points for the year-to-date period. First, the performance of our international business has improved significantly, delivering a record level of income before income taxes since the year ended March 2003 when comparisons are possible. The bar graph on the left shows income before income taxes by region. Firm-wide income before income taxes for the 9 months was JPY 396.8 billion, an increase of over JPY 120 billion compared to JPY 273 billion for the same period a year before. The driver of this growth was international business, and in particular, the Americas, as shown here in dark red.

Total income before income taxes from the 3 international regions grew 2.8x to JPY 167.2 billion, representing an increase of over JPY 100 billion. As a result, our international business accounted for 42% of firm-wide income before income taxes. The second point is that all divisions delivered revenue growth during the 9-month period, and we were able to stringently control costs.

As shown on the top right, the 3 segment net revenue climbed 27% year-on-year to JPY 1,062.3 billion, while expenses increased only by 4%. The JPY 140 billion cost reduction program we embarked on 2 years ago was over 90% complete at the end of December. We expect to complete this by the end of March, 1 year ahead of schedule. These efforts have helped us lower our cost base.

As a result, 3 segment income before income taxes increased 132% year-on-year. Wholesale maintained momentum throughout the 3 quarters delivering income before income taxes of JPY 230 billion. To be sure, our performance was supported by favorable market conditions, including higher volatility and an increase in client flows on the back of macro events as well as a global rally in equity markets. However, the third point, I would emphasize is that our business franchise has developed in each region, focused on our core products, and we were able to monetize these favorable conditions.

Page 4 is a slide we used at our investor presentation in December, which shows the market share for our core products. We have grown our market share and retain top 5 positions in key products, such as U.S. and European government bonds, AEJ credit, U.S. securitization business and U.S. equity listed options.

In Investment Banking, we ranked #11 in global M&A league table and #4 in the global Sovereign, Supranational and Agency bond league table. The global franchise helped lift our calendar year 2020 Global Markets net revenue by 38% compared to the previous year. Our growth has been on par with our U.S. peers who offer a full lineup of services across regions. We feel that we have gained traction having taken the right strategic path to realign our business portfolio in April 2019, focus resources on client businesses with top 5 market share and enhance our franchise.

Next, let's take a look at third quarter performance. Please turn to Page 5. As shown on the top right, firm-wide income before income taxes increased 57% to JPY 131.3 billion, while net income grew 45% to JPY 98.4 billion. All of our 3 core business segments posted strong performance this quarter; 3 segment income before income taxes was JPY 127.5 billion, the highest in 13.5 years since the first quarter of the year ended March 2008.

International income before income taxes was JPY 59.5 billion, representing a solid performance for the third straight quarter and contributing to a lower firm-wide effective tax rate. Third quarter annualized ROE was 14.2% and EPS was JPY 31.16.

Please turn to Page 8 for an overview of results for each business. First, Retail. Third quarter net revenue increased 6% quarter-on-quarter to JPY 98.2 billion, while expenses remained roughly unchanged from the previous quarter. As a result, income before income taxes grew 24% to JPY 28.3 billion, the highest level in 3 years. In summer 2019, we realigned our coverage areas into corporates and owners, high net worth and mass affluent to provide more effective proposals in the best way possible.

Despite restrictions on sales activities amid the pandemic, we have been able to meet the diverse needs of our clients by making the best use of face-to-face meetings and non-face to face interactions.

Our total sales shown on the lower half of the slide were JPY 3 trillion, or over JPY 1 trillion a month on average. Sales of stocks shown in red were particularly strong and sales of Japanese secondary stocks increased. Although Investment trust sales slowed 7% quarter-on-quarter, we booked inflows in U.S. stock funds and ESG-related funds. Sales of bonds, insurance and discretionary investments all grew compared to the previous quarter.

Please turn to Page 9 for an update on KPIs. Recurring revenue assets shown on top left increased to nearly JPY 18 trillion lifted by market gains. The consulting-related business shown here on the lower left consists of many transactions that require extensive face-to-face interactions so is the most susceptible to restrictions on sales activities. However, we were able to increase revenues from insurance and M&A by taking the paperwork for insurance sales. That was done in person completely online and enhancing our support for M&A by SMEs. The number of active clients shown on the right is trending above last year as we have seen results from further developing our approaches by coverage area.

Please turn to Page 10 for Asset Management. Third quarter net revenue increased 39% quarter-on-quarter to JPY 37.3 billion and income before income taxes gained 96% to JPY 22.3 billion. American Century Investments related gain/loss was significant this quarter at JPY 13.2 billion. These results represent the strongest net revenue and income before income taxes since the year ended March 2002 when comparisons are possible.

We reported net inflows into investment trusts, the investment advisory business and the international business, which helped by a favorable market tailwind boosted assets under management to a record JPY 61.2 trillion. Our efforts to expand assets under management paid off as revenue excluding ACI remained roughly flat quarter-on-quarter despite changes to our product mix and the impact from a revision to ETF fees.

Please turn to Page 11. First, the flow of funds shown on the left saw about JPY 590 billion of inflows into the Investment Trust business. ETFs reported inflows of approximately JPY 200 billion, and MRF inflows were approximately JPY 500 billion from funds likely derived from profit taking on the back of the stock market rally.

In the investment advisory and international businesses, we reported net inflows of JPY 680 billion on inflows in Japan into yen bonds, Japan stocks and alternatives and internationally into UCITS funds.

Of the JPY 61.2 trillion in assets under management in Asset Management, JPY 17.3 trillion sits outside the Investment Trust business. Of this, 46% or JPY 8 trillion is in the international business, as shown on the bottom right.

Outside Japan, we are focused on leveraging the group's network to expand our distribution channels. As you can see here, in the 9 months to December, we booked inflows of around JPY 600 billion. The international business is a growth area for Asset Management.

Please turn to Page 12 for an overview of the Wholesale results. Net revenue remained high, in line with last quarter at JPY 223.1 billion, while expenses declined by 6%. As a result, income before income taxes increased 17% to JPY 76.9 billion. Compared to when the pandemic first started to take hold, we have been able to respond much better to investors and issuers, and we have seen a rebound in high-touch businesses, such as financing and M&A.

As fixed income revenues normalized in the third quarter, equities and investment banking drove revenue expansion, highlighting a more balanced revenue mix within Wholesale. While Fixed Income accounted for 62% of Wholesale revenues in the first quarter, third quarter revenues were 44% Fixed Income, 40% Equities and 16% Investment Banking.

Looking at net revenue by region shown on the lower left, the Americas slowed from what was a record quarter last quarter, but remained strong. AEJ reported its best revenue quarter in 6 years on strong performance in ForEx and Emerging and Japan revenues grew driven by Equities and Investment Banking. This has resulted in a more regionally diverse revenue mix.

Please turn to Page 13 for an overview of our business line. Global Markets maintained momentum from the strong previous quarter with net revenue of JPY 187.5 billion, a record since the year ended March '02 when comparisons are possible.

Fixed Income net revenue declined 6% quarter-on-quarter to JPY 98.1 billion, while softer revenues in Rates is the main reason for the decline, Americas agency mortgages revenues remained robust. AEJ ForEx Emerging had a strong quarter and Americas and EMEA Securitized products booked higher revenues. Net revenue in Equities grew 2% to JPY 89.4 billion. As you can see in the heat map on the top right, the Americas arrow is pointing diagonally down for Equities, but Derivatives had a strong quarter. Japan and AEJ reported stronger revenues in both cash and derivatives on the back of solid client flows.

Please turn to Page 14 for Investment Banking. Third quarter revenues saw strong contributions from industrial realignment and business reorganizations in Japan and cross-border M&A transactions. Japan-related ECM also had a strong quarter. Investment Banking net revenue was the strongest in 9 years since the October to December quarter in 2011, and net revenue increased 27% quarter-on-quarter to JPY 35.6 billion.

The right-hand side shows major deals announced or executed during the third quarter. The red boxes represent cross-border transactions and the green shaded boxes are sustainability-related transactions.

Last year, we successfully supported the needs of a diverse range of issuers, such as fundraising needs amid the pandemic, strategic realignments and business reorganizations driven by corporate governance considerations. The number of transactions the Nomura Greentech is involved in also trended up on the back of growing interest in social issues such as climate change.

Please turn to Page 15 for noninterest expenses. Firm-wide expenses decreased 5% to JPY 270.8 billion, although firm-wide revenues increased by 9%, compensation and benefits were kept at roughly the same level as last quarter. Commissions and floor brokerages declined by 5% on lower trading volumes in the Americas. Occupancy and related depreciation declined by 5% as last quarter included costs related to the move to Toyosu office. Other expenses declined by 23% due to a drop in expenses related to legacy transactions and other transaction-related expenses.

Page 16 gives you an overview of our financial position. Our balance sheet at the end of December was JPY 44.6 trillion, up JPY 1.9 trillion from the end of September due to repos and trading assets. As shown on the bottom left, our Tier 1 capital ratio at the end of December was 19.9%, and our CET1 capital ratio was 17.7%, both up compared to the end of September. Tier 1 capital, which is the numerator in the calculation, increased by approximately JPY 98 billion due to a buildup of income, while risk assets, the denominator, inched up only slightly from the end of September as a decline in market risk offset an increase in credit risk. That concludes today's overview of our third quarter results.

To sum up, this quarter, we saw the results of our business platform realignment, which started 2 years ago, and we were able to monetize favorable market conditions and business opportunities. We delivered results in terms of earnings with a 3 segment income before income taxes, reaching a record high since the global financial crisis and annualized ROE of over 14%.

Wholesale maintained the strong momentum of the first half, and we further diversified our revenue drivers. The realignment of our coverage areas in retail has led to a virtuous cycle, and performance has trended up since bottoming in the July to September quarter in 2019. Inflows contributed to record high assets under management in Asset Management. We continued to stringently control costs. We were able to reduce costs while each business division reported revenue growth. We are well positioned to deliver sustainable earnings globally.

In January, Wholesale maintained third quarter momentum with a good start to Rates, Credit and ForEx/Emerging in Fixed Income, cash and derivatives in Equities and advisory and solutions in Investment Banking.

Following the realignment in Retail, our efforts to enhance the expertise of sales partners in each coverage area is succeeding, and we are meeting the needs of various clients despite the pandemic. Daily revenues are relatively stable, and we are maintaining third quarter revenue levels. As the number of coronavirus cases rises again globally, we must remain vigilant. We will leverage the whole firm to ensure business continuity as a financial institution in the capital markets while putting the health and safety of our clients, communities and people as our highest priority.

Thank you. I will now take questions.

[Operator]

[Operator Instructions] The first question comes from Mr. Muraki from SMBC Nikko Securities.

[Masao Muraki, analyst]

This is Muraki from SMBC. I have 2 questions. First, in the U.S.A., the composition of profit in the U.S.A. and also the sustainability of this profit level. Page 3 shows that this year growth in profit was mainly driven by the U.S.A. On the 9-month period, excluding ACI valuation gain, U.S. Wholesale gain is about JPY 100 billion, but Fixed Income, Equity and IB, what is the composition among with the 3? Also -- so some businesses that are in top 3, so you focused on those businesses, and you explained that, that was the success factor. On the other hand, Page 33 shows that over a 2 year period, the headcount has been reduced by about 10% or more. So the performance has significantly improved, I suppose. So how do you view the sustainability of this current situation?

The second question is a simple question. Page 28. Regarding Retail, the flow of funds in Retail business, in the third quarter, it was negative. So on the 9-month period, it's not a significant inflow. However, by age bracket, so those above -- below 60 years old, it's inflow, but those above 60 in age it's outflow according to the disclosure before. But what is the situation for the most recent quarter?

[Takumi Kitamura, executive]

Thank you very much. This is Kitamura. Firstly, regarding the wholesale profit in the U.S.A. and what is the composition of the profit in the U.S.A.? I'm afraid to tell you that PTI contribution by business is not being disclosed. However, basically, GM represents a significant proportion of that. Also within GM, Fixed Income, Equity, what is the contribution from those businesses within GM. Now depending on market conditions, the situation changes. For example, in the first quarter, Fixed Income naturally was big in size, and in the third quarter, Equity actually outsized Fixed Income. In that sense, we are well balanced in the mix.

For IB, the impact of COVID-19 was felt in the early part of the period. However, gradually towards the third quarter, the situation gradually improved. Especially in April last year, we purchased Nomura Greentech that focuses on sustainable energy. It's a famous boutique. So Nomura Greentech conducted sustainability-related deals, and we have accumulated such deals. And in August, we made an announcement on the tie-up with Wolfe Research in the U.S.A. So that is in from the viewpoint of enhancement of IB business. That tie-up is starting to generate positive benefit. So Wolfe Research sales members are providing quality feedback, which are highly appreciated by issuers.

So regarding the sustainability that you inquired about. In IB, we have a pipeline of deals being accumulated and also Fixed Income and Equity businesses are well balanced. So in that sense, the profit in the U.S.A., I believe, has sustainability. The high market share means that even if the market collapses, we will be left with a certain level of P&L. So that is the answer to your first question.

And my answer to your second question is all along, as I've told you, the trend hasn't changed much. So those below the age of 60, basically, we see inflow, net inflow. And those above the age of 70, we see the trend of outflow. So that structure has remained unchanged. Unfortunately, in this quarter, JPY 195 billion of negative inflow -- net inflow of cash and securities was suffered. In the most recent quarter the situation was, I wouldn't say, severe, but market was good. That's a good thing for us, but many clients had unrealized gain, especially in Investment Trust products. People have -- they have unrealized gain.

So for now, at the timing when they can expect unrealized gain, they, I believe, sold their positions to secure their profit. So whether it is Equities and Investment Trust, that selling pressure was strong. Some funds stayed in MRF, but other funds flowed out. However, looking at the inflow number and purchasing number, those numbers are trending at quite high level. So continuously, of course, we have to stay focused on providing good services, but by receiving inflow from clients, our intention is to keep growing the AUM.

[Operator]

The next question is by Ms. Tsujino, Mitsubishi UFJ Morgan Stanley Securities.

[Natsumu Tsujino, analyst]

My first question relates to the future of the Global Markets, FICC. If the situation should worsen, what would be the cost? This time around in the United States, Rates shrank and that was a general trend in the sector. On the other hand, mortgage issuance continues to be robust and on Q-on-Q, there has been growth. So my understanding is that there was stability in that business area and credit spread has become quite tight. So in the weeks and months ahead, what would happen to the FIC desk where profitability had turned to negative. If the situation is going to further worsen, what would be the trigger?

And what about the mortgage, which did well? If we see negative in mortgage, it would be long-term rates going up or issuance going up. But although rates have gone up, it's lower than a year ago, it's lower than 2 years ago. So can you elaborate on your concept in these areas?

My second question is with regards to your policy of dividend, 30% each half year and total return ratio, 50% is your benchmark, and you do share buyback. So that capital policy remains unchanged, I wanted to confirm that point. Those are my 2 questions.

[Takumi Kitamura, executive]

This is Kitamura speaking. Thank you very much for your questions. Your first question is what would happen to Fixed Income profitability going ahead. And if the profitability would worsen, what would be the trigger. FRB, premature tapering. The likelihood is not so high at this juncture. But if that should happen, there could be a sudden rise in long-term rates. So that could be 1 risk factor. And should that happen credit and securitized products and spread products would be heavily impacted. As I have been saying from some time ago, we have shrank down our position. And to a certain extent, we think that the situation in those businesses would be manageable. There could be some volatility in the Rates business due to those triggers, but to our business such impact from such trigger would be rather limited.

I talked about this before. But for us, the biggest challenge is low volatility and low activity. That would be the biggest challenge for Nomura. In Q3, talking about the Rates business, the volatility remained at relatively low level, and activity was not so high either. And therefore, U.S. rates business saw some slowness. But since the beginning of this year, clients also began to become more active. And when we observed the January market, such challenges have not realized in the most recent days. We're not overly optimistic about the times ahead. But on the other hand, there are a few expectations. First, vaccination, leading to corona under control and road map towards economic growth and fiscal expenditure and monetary policy of various governments making headlines leading to various speculations, but rebalancing activities of investors due to such trend may occur.

And then on the investment side, structure capital inflow should be caused, but the rates are extremely low. So we continue to expect strong demand for yield. Another point, SSA sector. There could be issuance demand in the response to the pandemic, and we have seen recently issuance related to sustainability in Japan and in other countries. In this area, we have quite competitive positioning. So in that context, those 3 factors are -- which we are expecting for in terms of the upside.

Going on to your second question, we are making profits, but are we going to change the benchmark for total return ratio. That's how I interpreted your question. Our commitment is 30% dividend payout ratio and 50% total return ratio. And we have no intention to change that commitment. Thank you.

[Natsumu Tsujino, analyst]

So that means that you will do share buyback, right?

[Takumi Kitamura, executive]

This is Kitamura speaking again. We have committed to total return ratio of 50% or higher. So by combining dividend and share buyback, we will live up to our commitment.

[Operator]

Next question comes from Mr. Watanabe from Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe from Daiwa Securities. I have 2 questions. First question is about Investment Banking. Revenue of Investment Banking in third quarter was quite high. ECM, DCM, M&A, what is the composition of Investment Banking revenue in the third quarter? And for IB deals, backlog, do we see an increase or a decrease in terms of the trend? And tax effect in the U.S.A., performance is improving. Next year, are you -- is there a possibility that you will be booking DTA next year in the U.S.A.?

[Takumi Kitamura, executive]

Thank you very much. This is Kitamura. Regarding the composition of IB, that performed well in the third quarter. I'm sorry to tell you that the breakdown itself is not being disclosed. But in the IR pack, Page 23, so in the form of commission, you can refer to a number. So Equity, Fixed Income and M&A, we have the disclosure based on that categorization. And as you see, M&A grew rapidly. I believe you will be able to guess that. And regarding the pipeline. So for M&A, we have an increasing trend for the domestic M&A pipeline. So Nomura has very strong relations with corporate managers. So with the economic environment changing drastically, I believe we are being able to make timely and quality proposals.

And for ECM, that situation is not bad. Now the enhancement of our financial position, to -- through the fundraising and also the sale of stocks to generate cash and also the acquisition for future growth. So those corporate demand for funds and also improvement of capital efficiency through unwinding of cross held shares. So there are very wide range of demands. And so this current trend, I believe, will continue. And as for DCM. Earlier, Tsujino-san asked about this and I answered, that social bonds and sustainability-linked bonds and green bonds issuance has very strong demand.

So in each of the business lines, so certain size of pipeline is what we have. And regarding your second question, in the U.S.A., the tax level in the U.S.A., whether we are going to post DTA, deferred tax asset, if there is any possibility for us to post DTA next year. The last 2 years, the profits in the U.S.A. has been solid. Unfortunately, our deferred tax asset comes with a valuation allowance. So DTA has been 0 due to valuation allowance as we've explained to you from time to time. And from here, with ShinNihon EY auditor, and we are going to have a discussion. So we will decide on the possibility of recovery and based on the accounting rule, we will be conducting the accounting treatment and as needed, we will post DTA. But I cannot say whether we're going to post DTA or not. It really depends on how we are going to evaluate the possibility of likelihood of recovery.

[Operator]

The next question will be by Mr. Otsuka, JPMorgan Securities.

[Wataru Otsuka, analyst]

This is Otsuka of JPMorgan Securities. I have 2 questions. One is numerics and second is the stock price of Nomura. First of all, sorry, I've asked this question before, but the profit level that you have just reported, you described it as record high, historical high, and that describes it all. But other than Fixed Income, the market gave you a tailwind. But how would you evaluate your people? Do you think that they did well or do you think that they could have done better in a positive market trend? And also, you touched upon this in your presentation, but the cost level. Of course, cost reduction plan is well underway and is being achieved, but in Q3, the trend of cost versus revenue was rather divergent. So the ratio may change due to bonus allowance? That's my first question.

And secondly, I'm going to deviate from the results announcement. But Mr. Kitamura, as you said, if we look at the historical trend of profit, Q3 was quite wonderful. But capital -- market capitalization or P/B, your stock price isn't catching up with high-performance in terms of profits. So how is that being taken by the top management? That's my second question.

[Takumi Kitamura, executive]

This is Kitamura speaking. Thank you very much. First of all, how -- our self-assessment of Q3. I think it was a good quarter. Q1 was a good quarter as well, but we might have attached too much weight on Fixed Income. But in Q3, for each business line, Wholesale, Equity, IB and Asset Management, Retail, the revenue and profits were well balanced, and we were able to record a quite robust bottom line. Is this the limit? Was this as far as we could have gone? Not really. We will continue the initiatives that we have embarked upon and by realizing and continuing these initiatives, we think that there is further room for expansion.

On cost control, you said divergence between revenue accounted for versus expenses. And that's quite a good point, but cost reduction, after implementation, there are some cases where time lag is caused until it is accounted for say initiatives began in the first half. And then that appears in statutory accounting later. So in the end, due to such process, you may find that in appearance at a glance, there's divergence between revenue and expenses. And also provisioning. So will we provide for more allowance because of the profit level? Quarter-by-quarter, we provide for appropriate level of bonus allowance each quarter taking into consideration the profit level. That's my answer.

And as I said, we are proceeding well in terms of cost reduction. And there are achievements that's derived from what we had originally planned and there are cost reductions that we had achieved, which had not been factored into the plan as a result of the pandemic. So we will be able to achieve the goal 1 year ahead. On the other hand, there are items that had been in the plan originally that are still under implementation. And the results of cost reduction will only come out in the coming fiscal year. But at any rate, IT and digital transformation investment towards the future will continue to be necessary. So cost control and appropriate investment for growth will have to be well balanced in order to continue to monitor company wide cost. That is my response.

Sorry, and stock price. That was another question. Well, ROE 15%; PBR 0.6. Frankly speaking, cheap. But at the press conference this afternoon, everybody was talking about sustainability. There were many questions on sustainability. The current stock price reflects such concern. I'm guessing that, that's partly because we haven't been able to truly resolve such concerns. And as I have talked about, we are conducting the review of business portfolio to concentrate on selected areas where we have competitive strength, and we are working on cost reduction and achieving results from those initiatives. But that has led to a much stronger business platform in comparison to the past.

So by taking this opportunity, we are communicating those facts to the investors and to the market, which I think is very important in the context of our stock price. And we are also very strong in the public sphere. And by leveraging our strength in the public sphere, we will also aggressively embark upon initiatives in the private sphere. And by taking such measures, we are hoping that the image of Nomura in the market will change. So what was your take? I would like to ask you what your impression was after the results announcement this time around. But we would be most appreciative if you could write in your reports, your commentary, on our stock price. That concludes my response.

[Wataru Otsuka, analyst]

Sorry, I have a follow-up question on the first point, quarter-on-quarter or year-on-year. In Retail, 9 months, 9% increase, but expense, minus 4%, as indicated on Page 8. So this is difference between revenue growth versus expenditure. So your employees contributed to the 9% profit growth. So you have to incentivize the hard work. So including the provisioning for bonus, expenses dropped by 4%, same applies for Wholesale, 20% increase in revenue total in 9 months, but expense only grew by 2%. Does that mean that you are provisioning for bonus and incentivizing, but you are still able to reduce other cost items?

[Takumi Kitamura, executive]

This is Kitamura speaking. That's exactly the case. In terms of personnel expenditure, we do the provisioning based upon our performance. NP is the area, nonpersonnel expenses is the area where cost has been cut. So your interpretation is correct. We are provisioning for personnel costs, while the total cost has dropped.

[Operator]

The next question is from Mr. Sasaki of Bank of America.

[Futoshi Sasaki, analyst]

This is Sasaki from Bank of America. I have 2 questions. Firstly, so these days in the U.S.A., some names have quite high volatilities when we look at transactions. So you have high market share in auction transactions. Is there a positive impact or a negative impact for you? And the second question is under the Biden administration, which came to the office, and you, I believe, have a clear outlook, but what is your view towards Biden administration in the sense of its impact on your business? Or do you see nothing to do with your business between Biden administration and your business?

[Takumi Kitamura, executive]

Thank you for your question. This is Kitamura. Regarding your first question, regarding the specific names, we refrain from commenting on specific names. However, we are a liquidity provider and we are playing the role as a liquidity provider in the market infrastructure. So the market moves have been quite robust and violent, and we weren't completely immune to the market movement. However, the impact was not very drastic to the extent that it affects us greatly. So that wasn't a magnitude.

So secondly, the impact of Biden administration on our business. So U.S. economy and the U.S.-China relation, I'm not sure what is going to go -- what is going to happen from here, and regulations on financial institutions, that's something that we are paying close attention to. On the other hand, the new administration is upholding a couple of agendas, including infrastructure and investment in the area of environment. So those themes are what we are paying attention to. So under the new administration, significant upgrading to the U.S. infrastructure can be expected. So recently, we have grown in such areas as infrastructure finance. Also, as mentioned earlier, Nomura Greentech, this is a boutique house that focuses on sustainability related to business, and we have that entity within the group. So for such entity, the current situation presents great big business opportunities.

So in addition to local businesses in the U.S.A., Japan and Asian investors in the area of ESG and sustainability investment, we receive a quite strong interest and inquiries from those investors in Japan and Asia. So to these investors, our -- we can -- we could leverage our business in the U.S.A., and we could connect our -- the assets in the U.S.A. with investors in Japan and Asia. In that sense, I believe there are a lot of opportunities that we can pursue. But -- so what is going to come out from the current situation is what we will keep paying close attention to. Thank you.

[Futoshi Sasaki, analyst]

One more thing. So regarding your comment, I have a follow-up question. Now, the performance is quite solid, and your balance sheet is very strong, and you have lots of business opportunities. And the stock price is considered undervalued. But why are you refraining from -- or why are you hesitant to conduct share buyback? What is the reason why you are being hesitant to buy back shares?

[Takumi Kitamura, executive]

This is Kitamura. We are not intending to be hesitant about share buyback, but -- so we have 2 more months to the end of this fiscal year. Our sense is to maximize the performance and as explained many times, total return ratio of 50% of -- or more is what we are going to keep focusing on this year.

[Operator]

[Operator Instructions] We have with us Niwa-san of Citigroup Japan.

[Koichi Niwa, analyst]

This is Niwa speaking. Are you getting my voice?

[Takumi Kitamura, executive]

This is Kitamura. Yes, I hear you well.

[Koichi Niwa, analyst]

This is Niwa. There's just 1 question. March 2025 from the management vision perspective, how would you assess Q1 to Q3 or Q3, in particular? I'd appreciate if you could assess from 3 perspectives. First of all, as base profit, on Page 5, if I look at Page 5, JPY 120 billion would be the base line profit. But in the 2025 vision, I think JPY 70 billion was the normalized level. So do you think that the baseline has gone up? And ROE, 15%, if we think from such perspective, when will you review the KPI towards 2025? And what would be your focus in the review of such KPI? That's my second point.

Third point. In the management vision, the expansion of profit source or contribution from new business areas increasing, those were some of your aspirations. But in Q2 or Q3, are you getting more confidence that you will be successful towards those goals? So my interest is whether we can expect higher level of profits from those new areas. So that is my question.

[Takumi Kitamura, executive]

Thank you. This is Kitamura speaking, and thank you for your question. Last year, in April, we announced the 2025 vision. That was when we were right at the midst of the pandemic. So we at least announced our tentative program or the vision that we have compiled then, and we also commented that we will revise the vision as it becomes necessary. And if we look at Q3, there has been tailwind from the market, but at the same time, the level of profits has been elevated. So we will discuss amongst our top management. And as far as the review of the midterm management plan is concerned, yes, there is a possibility that would be within the scope of management discussion.

And also, new business areas that was part of your question. And frankly speaking, we are still focused on the traditional business area. I'm not sure whether traditionally is the right word, but much of the profit is sourced from the conventional business areas. On the other hand, as an extension of the conventional business, sustainable related business, which is very close to the conventional business is gaining momentum. And in this area, we think that we can expect further expansion. So I would not categorize this as a completely fresh green area, but we think that this is an area where we can expect further profit contribution. And also private and digital, these are some of the domains where we have not yet been able to monetize the opportunities yet. So the other day, we made an announcement on private shares, unlisted private shares and investment entities. So through these initiatives, we will be seeking further upside.

And in the digital domain, I'm not sure whether you recall our comment, digital asset custodian business, Komainu, is our group company. And there's strong interest in the market. So we will strengthen our initiatives in such areas. I'm not sure whether I have been able to respond to your question, Mr. Niwa, but this could be a new business area where we have quite high hopes. Thank you very much.

[Koichi Niwa, analyst]

This is Niwa speaking. I have a follow-up question. In the discussion of review of midterm business plan, if you want to elevate the level of ROE, would you change the benchmark of total return ratio? Or I think your target of capital ratio is 11%. Is there room for review? In other words, you can afford to increase your payout ratio, can't you? So is that going to be subject to review?

[Takumi Kitamura, executive]

This is Kitamura speaking. Total return ratio of 50%, that benchmark included, we will be looking at our business portfolio and the right level of capital. In the discussion, not necessarily directly linked to the midterm plan, we will be discussing those matters. So CET1 11%, that is our target. And yes, there is the possibility that we may review that. There's also a possibility that we won't touch on that. So we will think about various vantage points.

[Operator]

The next question comes from Ms. Tsujino of Mitsubishi UFJ Morgan Stanley.

[Natsumu Tsujino, analyst]

I just have one question. This is Tsujino. So you just now talked about expense. But on a quarterly basis, for the personnel expense and real estate occupancy-related cost and others, and what is the change on a Q-on-Q basis? And also by segment and in Retail -- Domestic Retail and Asset Management and Wholesale and what is the level of expense? And looking at the change in expense, what caught my attention is other expense. So Wholesale expense is down, but that may have something to do with other expenses. So then to organize information, then decline in expense, other expense, what is the biggest component there in other expense? And what kind of impact is it having on each segment of business?

[Takumi Kitamura, executive]

Thank you. This is Kitamura speaking. That's a quite technical question. So I'm not sure if I was able to follow. But regarding other expense, related to the transactions conducted in the past that's a fuzzy way of describing it. But that expense is -- has come down in this quarter related to the past transactions. So this expense in terms of segment, it's not allocated to any particular business line or segment.

[Natsumu Tsujino, analyst]

Tsujino speaking. So if I try to take a deep dive, then I cannot finish. But -- so the cost is down by more than JPY 10 billion, but for the headquarters or corporate, it's more than JPY 10 billion. And in the third quarter, related to the past transactions, I think there was an expense that was booked related to expense that was conducted in the past. But I wonder if there is a significant decline on a Q-on-Q basis. So is there any additional information that you can give me? So on a Q-on-Q basis, the expense or provision of expense, is it possible for such expense to come down significantly on a Q-on-Q basis?

[Takumi Kitamura, executive]

This is Kitamura. Thank you very much for paying very close attention to our numbers. In the third quarter, so unfortunately, we have JPY 10 billion or so of expense related to the transaction conducted in the past, but it's down compared with the level in the second quarter. So in the second quarter, the relevant expense was higher than the third quarter. And also, professional fee to some experts and also other SG&A, and there are miscellaneous expenses included here in the other expense line. That is why it's called other lines. And we see slight decreases in different miscellaneous cost lines. I don't know if that satisfies you, but.

[Natsumu Tsujino, analyst]

Tsujino, speaking. Understood. I think I have better sense.

[Operator]

Thank you very much. Now it's almost time to finish the call. So we are going to take the last question. The next question comes from Mr. Ban from Jefferies.

[バン, analyst]

Hello?

[Takumi Kitamura, executive]

Yes, I hear you, Mr. Ban.

[バン, analyst]

This is Ban of Jefferies. We've gone over border time. So very quickly, just 2 questions. Including the presentation, it may be premature, but next fiscal year, you will continue to increase top line. But at the end of this fiscal year, headcount also is expected to decline. But when -- as you try to maximize top line, will headcount begin to go up again after bottoming out? Or in view of the pandemic, are you going to continue to control headcount whilst you try to continue to increase top line revenues? That's my first point.

Secondly, in the previous quarter results announcement, flow increasing by 20% or 30% was mentioned. And you did well this quarter, and you were able to harvest, enjoy a great harvest. So from the sustainability perspective, can we expect an increase of sustainability-related business by 20% to 30% in the next fiscal year as well? Do you think that this space will be maintained? I'd appreciate if you could comment on that point.

[Takumi Kitamura, executive]

This is Kitamura speaking. To deal with your first question. First, top line is increasing while total headcount is declining. For us, human resources is a very important asset. It's an important capital, but the role of human capital is changing. Things that can only be done by human beings are declining. So with controlled headcount to a certain extent, it would be possible to grow the top line. Of course, there are business areas that are human capital intensive and in such areas, we will be recruiting people. But on a firm-wide basis, we do not believe that -- I think more than quantity, the issue or key is quality.

And another point, business flow. How would the business flow trend as we think about the next accounting year? Since the beginning of this year, we have seen activation of client flow at high level. And as I said, there are a few key factors as we try to think about next year's market. So we are not necessarily optimistic, but there are expectations. We think that decent level of client flow will continue. We have diverse clientele and each client faces particular challenges. So to a certain extent, I think we will continue to be in demand by the clients. That concludes my answer. I hope I answered your question.

[バン, analyst]

Yes. That was quite an abstract question, but thank you for your response, Mr. Kitamura.

[Takumi Kitamura, executive]

This is Kitamura. Thank you, everyone, for attending the call. So for the performance in the third quarter, I believe, based upon the business platform reconstruction and of course saving initiatives that we have worked on, we believe those initiatives materialized in terms of the benefit and the result in the third quarter. In that sense, we look at it positively. For 3 quarters in a row, we were able to deliver the performance we did.

And regarding our business, in the sense of sustainability of our business, we have the hope that we will start to see some positive change. And as a result, hopefully, the market's view towards us will change for the better. So all along, we have been strong in the area of public. So moving forward -- so under the theme of public to private, which is the new growth strategy struck out by Mr. Okuda, we will steadfastly work on this initiative so that we can secure bottom line profit. So I ask for your continued support. Thank you very much for your time today.

[Operator]

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

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