Nomura Holdings Inc

TSE:8604

Earnings Call Transcript 2021-Q4

[Operator]

Good day, everyone, and welcome to today's Nomura Holdings Fourth Quarter and Full Year Operating Results for Fiscal Year Ended 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 investor sentiments, liquidity of secondary market, level and the volatility of interest rates, currency exchanging 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 fiscal year ended March 2021.

Please turn to Page 2. First, our full year results. As you can see on the bottom left, net revenue was [ JPY 1,401.9 billion ], up 9% year-on-year, and income before income taxes was JPY 230.7 billion, a decline of 7% compared to last year.

The decline in income before income taxes is due to segment Other. Three segment income before income taxes, which represents our core business, increased by 35% to JPY 230.9 billion. Although Wholesale declined year-on-year due to the U.S. loss, Retail and Asset Management both delivered strong performance.

Net income was JPY 153.1 billion, down 29%, while EPS was JPY 48.63 and ROE was 5.7%. Our dividend for shareholders of record as of the end of March was JPY 15 per share, resulting in an annual dividend of JPY 35.

Before I go into more details, I would like to first say a few words about the possible loss arising from business activities announced on March 29. Please turn to Page 3. On March 26, an event occurred at U.S. subsidiaries, including Nomura Global Financial Products Inc., whereby we were subject to a potential significant loss due to prime brokerage transactions with a U.S. client. The loss based on market prices at that time was estimated at $2 billion.

We take this matter very seriously and have taken a number of steps to address it. First, we took a disciplined approach to exit our positions, taking into account both market impacts and minimizing losses. As a result, as of April 23, we have now exited over 97% of our positions.

We have also confirmed the facts of the event and checked for similar risk in existing transactions in our prime brokerage and other financing-related businesses. We have confirmed that there are currently no other similar transactions. This event was a very specific individual case.

In order to ensure proper risk management of such cases in the future, we will engage third-party experts to conduct a thorough review of our risk management framework in Wholesale and Risk Management, while also enhancing our global risk controls.

Our results for the full year and fourth quarter ended March 2021 announced today include an impact of $2.3 billion or JPY 245.7 billion, reflecting the winding down of our positions in March and an additional amount due to changes in market prices.

As of April 2013 (sic) [ April 23 ], impact to our consolidated financial results from April 1 is estimated as a loss of JPY 62 billion, which will be booked in the fiscal year ending March 2022. This event had a major impact on our financial results for the full year and particularly fourth quarter ended March 2021. However, excluding this event, our core business of Retail, Asset Management and Wholesale global business all delivered strong results. I would also emphasize that our financial health remains robust, including our capital metrics and liquidity.

Please turn to Page 4. This slide outlines the changes in income loss before income taxes from FY '19/'20 to fiscal year '20/'21. The left-hand side shows FY '19/'20 income before income taxes of JPY 248.3 billion with a segment breakdown shown on the far left.

Despite headwinds from the pandemic, Retail reported robust sales of stocks and investment trusts as favorable market conditions led to improved investor sentiment and the diversification of client approaches we have taken since the year before last worked well. Cost reductions also helped improve the bottom line. Net revenue increased by 10%, while costs declined by 4%, resulting in a JPY 42.9 billion gain in income before income taxes.

In Asset Management, American Century Investments-related gain or loss improved markedly, and income before income taxes increased by JPY 45.5 billion. Net inflows of JPY 1.9 trillion over the year lifted the assets under management to a record high of JPY 64.7 trillion, resulting in the highest income before income taxes since the year ended March 2001 -- 2002 when comparisons were possible.

Wholesale shown at the light blue bar graph in the middle, reported a decline in income before income taxes of JPY [ 2 27.9 billion ]. Let me explain this in more detail. First, as I said earlier, the impact arising from transactions with a U.S. client was JPY 245.7 billion. Of this, JPY 204.2 billion is booked as a trading loss deducted from Equities net revenue. The remaining JPY 41.6 billion is booked as a loan loss provision in expenses. Excluding the U.S. loss, wholesale reported an increase of JPY 217.8 billion in income before income taxes.

As shown on the next page, in fixed income net revenue increased by 31%, driven by strong performance in rates, credit and securitized products. While Investment Banking net revenue shown on the right grew 35% as we supported multiple M&A and ECM transportations. Equities, shown in the middle, declined 41% due to the loss arising from transactions with the U.S. client. Excluding that, we continue to see strong momentum in the fourth quarter.

We have also been able to keep our cost base down by completing our $1 billion cost-reduction program 1 year ahead of schedule.

Please turn back to Page 4. Segment Other, shown to the right of Wholesale, reported a decline in income before income taxes of JPY 110.9 billion. The main reason for this are shown in the list below. Second from the top, we booked an impairment charge of JPY 47.7 billion on our stake in affiliate, Nomura Real Estate Holdings. This is because the market value of the company is lower than that for our consolidated book value, and we determined that the decline in value is not one-off occurrence.

Naturally, this is just an accounting treatment, and there is no impact on our business relationship with our company. The other factors are shown on the slide.

Please turn to Page 6 for an overview of the fourth quarter results. This quarter saw the impact from the loss arising from the transactions with the U.S. client. And as shown on the top right, firm-wide loss before income -- loss before income taxes was JPY 166.1 billion and the net loss was JPY 155.4 billion, and EPS was negative JPY 50.78. The graph on the bottom right shows a significant loss in Wholesale due to the loss in the U.S. Excluding this event, our business remained solid in Retail and Asset Management posting strong net revenue in line with the previous quarter, while Wholesale saw robust performance in Investment Banking.

Please turn to Page 9 for an overview of performance in each division, starting with Retail. Fourth quarter net revenue was JPY 96.8 billion. Stronger sales of Japanese secondary stocks and higher recurring revenue offset a slowdown in primary transactions, and the net revenue remained roughly unchanged from the previous quarter. Income before income taxes remained solid, although declined 8% to JPY 26.1 billion.

As shown on the bottom of the page, total sales grew 7% quarter-on-quarter. Sales of stocks increased 9%, while bond sales were up 14%, driven by sales of U.S. dollar and the Australian dollar-denominated bonds.

Please turn to Page 10. The graph on the top left shows that recurring revenue assets, such as investment trust and discretionary investment trusts, grew to JPY 18.2 trillion, driven by the market rally and net inflows into investment trusts contributing to higher recurring revenue. Consulting-related revenue was JPY 4.4 billion, improving from last quarter on contributions from annuities and other products.

Growth in the number of active clients were sluggish compared to the previous fiscal year when the number of clients reentering the market increased as the market plunged. As you can see on the top right, net inflows of cash and securities was over JPY 300 billion, which combined with market factors, lifted retail client assets to a record high of JPY 126.6 trillion.

Please turn to Page 11 for Asset Management. Net revenue was JPY 36.6 billion and income before income taxes was JPY 21.4 billion. This represents the second highest level after last quarter since the year ended March 2002 when comparisons were possible. The top left shows that American Century Investments-related gain or loss remained high at JPY 10.4 billion, and net revenue, excluding ACI increased 9% on the back of growth in assets under management.

Please turn to Page 12. The graph on the top left shows outflows of JPY 765 billion in the investment advisory and international businesses shown in gray due to the impact from outflows by public pension funds in Japan. The investment trust business shown in red continued to book inflows into ETFs and funds in MRFs increased as investors parked funds after locking gains from sales. Defined contribution funds, et cetera, also reported continued inflows. Total inflows in the investment trust business were JPY 393 billion.

The bottom right shows assets under management and publicly offered ESG funds in Japan. Recently, there has been growing interest in Japan in social and environmental issues by enhancing our product offering to meet demand to invest in companies that contribute to resolving these problems. Assets under management in ESG funds increased to JPY 643 billion as of the end of March, representing growth of more than double over the past year.

Please turn to Page 13 for Wholesale. As shown on the top left, net revenue was negative JPY 800 million, and net loss was JPY 165.9 billion. As I said at the start of my presentation, the loss related to transactions with the U.S. client impacted Americas equities, net revenue and wholesale expenses.

Net revenue by region shown on the bottom left shows that the Americas were down significantly due to this impact, while Japan and AEJ both slowed mainly due to fixed income. EMEA reported stronger net revenue in both Fixed Income and Equities.

Please turn to Page 14 for an overview of each business line. Global Markets net revenue was negative JPY 36.8 billion. Fixed income declined 14% to JPY 84.3 billion. As the heat map on the right shows, in the Americas, securitized products had a good quarter on an uptick in client flows, and EMEA revenues were driven by European government bonds. Asia reported solid revenues in credit and FX, EM compared to the strong previous quarter and Japan booked softer revenues in rates and credit.

Equities net revenue was negative JPY 121.1 billion. Looking at the heat map, the Americas reported stronger revenues in cash equities, but the loss mentioned earlier significantly impacted revenues. EMEA revenues increased on contributions from cash equities. And in AEJ, the arrow is pointing up for cash and derivatives, both of which had a good quarter. Japan posted stronger revenues and derivatives, but revenues declined due to weaker block trades and primary flows.

Please turn to Page 15 for Investment Banking. Net revenue was JPY 36.1 billion, representing another strong quarter. Our global M&A business had a particularly good quarter driven by Japan and Americas as well as contributions from announced deals that closed.

Internationally, we supported multiple sustainability-related transactions, and the Americas ECM franchise was involved in multiple deals underpinned by our alliance with Wolfe Research in the active market environment.

Please turn to Page 16 for noninterest expenses. Firm-wide expenses for the quarter were JPY 336.1 billion, an increase of 24% compared to the third quarter. Notably, other expenses increased by JPY 97 billion to JPY 140 billion due to the loan loss provision I mentioned and the impairment charge on our stake in Nomura Real Estate Holdings.

Compensation and benefits declined by 30% as we contained bonus provisions in line with pay for performance.

Our financial position is shown on Page 17. At the end of March, our balance sheet was JPY 42.5 trillion, declining by JPY 2.1 trillion from the end of December due to a decline in repo transactions and trading assets. As the table on the bottom left shows, we have Tier 1 capital of approximately JPY 2.8 trillion, a decline of over JPY 110 billion from the end of December. This is mainly because of the deterioration in performance during the period and dividend payments, while the amount of FX translation adjustments increased due to the lower yen. Risk-weighted assets were JPY 16 trillion, an increase of JPY 1.1 trillion from the end of December due to an increase in market risk following a rise in U.S. interest rates and higher volatility in the equities and FX markets as well as higher credit risk. As a result, our Tier 1 ratio at the end of March was 17.7%, and our common equity Tier 1 ratio was 15.7%.

The red line graph on the bottom right shows level 3 assets as a percentage of Tier 1 capital increasing to 20% at the end of March from 17% at the end of December, due mainly to a decline in Tier 1 capital. That concludes today's overview of our fourth quarter results.

To conclude, the management takes very seriously the concerns caused over the significant loss arising from transactions with the U.S. client. We will implement the measures I discussed to benefit the firm in the future.

Looking back on the full year, all our core businesses reported stronger net revenue. We also made solid progress towards achieving our fiscal 2022, '23 KGI/KPI targets with retail client assets and assets under management in asset management, both hitting record highs.

The pandemic prompted shift to remote working, and we saw a heightened focus on diversifying our work and boosting efficiencies, allowing us to reach our JPY 140 billion cost reduction target announced in 2019 1 year ahead of schedule. Retail and Wholesale performance slowed slightly in early April, but momentum has returned in the second half of the month. The business environment in 2021 is looking good. Amid the low-interest rate environment, we believe there will be continued demand to manage funds. And as the economy normalizes and fiscal and monetary policy accelerate global growth, the funds should continue flowing into the equity market.

[Operator]

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

[Masao Muraki, analyst]

This is Muraki from SMBC. I have 2 questions. First question is about Page 3. Regarding the loss that comes from the transaction with a specific client. So [ 2.9 billion ] is the loss amount. Then in terms of the growth exposure, it's about $10 billion or so. Then in full line, in U.S. and EMEA, full line equity business is not being conducted, but why is 1 client using this size of -- this extra size of balance sheet. So my question is, on the right-hand side, the similar transactions with similar issues do not exist, and you confirmed it. But when you say the similar issue, what kind of issue do you mean? And also, already multiple preventive measures have already been implemented. But what do you mean by preventive measures?

My second question is regarding Americas. Excluding this incident, as you see in Page 25, on a quarterly basis, JPY 40 billion or so of profit is generated. So including the fourth quarter, compared with past, the level of profit is fairly high. But given the normalization of market conditions in the new fiscal year, in a full year basis, the profit contribution from the USA, how do you view the profit contribution from Americas? Those are my 2 questions.

[Takumi Kitamura, executive]

This is Kitamura. Thank you for your question, Mr. Muraki. So after the incident that happened in the U.S.A., for prime brokerage transactions, we have conducted a full overview -- overhaul of prime brokerage transactions in the sense from the viewpoint of exposure and margin and notional. And from multifaceted perspectives, we have given a review. And so -- and we confirmed that there was no other transactions. That was the same in nature with the transaction that happened with this particular client. So as I said in the earnings release, this transaction was a unique and individual transaction.

As preventive measures, partially margin request has been made and also risk framework enhancement is one of the actions that we are working on now.

[Masao Muraki, analyst]

Also, secondly, the profit contribution from Americas, how do we view the profit contribution from the U.S.A. going forward?

[Takumi Kitamura, executive]

Including the U.S.A., the importance of our international business, including U.S.A., for Nomura is significant. As of now, in our strategy, we do not have any major change in terms of direction. As you know, all along, we have told this that we have focused on products where we have strength as we execute the business. So for those carefully selected businesses in terms of the feeble, we are ranking -- making it into top 5, and we were able to establish those businesses the last few years. So in that sense, the market franchise that we have established will be fully leveraged so that we can generate further revenue and profit.

And as you pointed out, Mr. Muraki, for March 2021 throughout the year, of course, I shouldn't be talking about what if. But excluding what happened, the performance would have been very robust. But as you mentioned, JPY 40 billion or so of quarterly profit and more than JPY 100 billion of profit for full year is achieved -- would have been achieved. Of course, there is market tailwind, but with products where we have strength. I'm talking about not just one product, but multiple such product, in that sense, our revenue is being stabilized. And at the same time, we have reduced cost and reduced the breakeven point. So now we have more sustainability in terms of our ability to secure profit.

And how do we view the recent market environment? At one point, sometime in the fourth quarter, interest rates went up somewhat. So clients' activities slowed down. On the other hand, agency mortgage was very active. But recently, the U.S. treasuries yield has steepened and that's supportive for us. For a firm like us, who is the market mediator, flat yield curve makes it difficult for us to generate revenue. But in a situation where yield curve is steeper, then I do believe that we have opportunities to generate revenue.

[Masao Muraki, analyst]

Mr. Kitamura, regarding my second question. So this is an individual point, but the notional limit you mentioned, within that limit the U.S. businesses have been conducted, is that the right understanding? What's the notional limit extra sized in the first place? And also, dynamic margin control system is in place at some firms, while not at other firms?

In your case, in real time, as you control margin, including IT system, would you say that your mechanism is on par with the level or quality of the industry's top players? Or do you need additional investment on that front?

[Takumi Kitamura, executive]

Thank you, Mr. Muraki. Whether there is limit or not, of course, naturally, we do have limit, but for individual transaction, I'm not disclosing the details.

Then what about dynamic margin, which Mr. Muraki said, I believe you referred to variation margin, but naturally, for us, the amount of collateral that we have, whether that amount is -- balance is sufficient or not is being watched on a daily basis. And naturally, we request additional collateral as needed. So we have industry standard mechanism.

On the other hand, based upon the changes in environment, could we have been more quick? We could have been quicker in our action taking, but we are still in the process of validation. So I cannot conclude here. But we do -- I believe we do have the conventional system, standardized system.

[Operator]

Next, we have Otsuka from JPMorgan.

[Wataru Otsuka, analyst]

This is Otsuka from JPMorgan. Please answer after each question. The first question is about provision. JPY 40 billion or more of provision, I would like to understand the thinking behind us. On Page 3, this fiscal year, I think $590 million loss was estimated in the first quarter, to offset for that, was there a provision? That is the first question.

[Takumi Kitamura, executive]

Thank you for your question. This is the first question. As all of you are aware of, prime brokerage service can be categorized roughly into 2 types. First is cash prime brokerage and the second type is derivatives based synthetic prime brokerage. And this time, allowance was booked for cash prime brokerage-related activities. As for cash prime brokerage, as many of you may know, is lending with a collateral of securities. And regarding this lending, based on the recoverability judgment, loan loss provision was booked. And in relation to that, in this fiscal year, after the start of this fiscal year, [ JPY 570 million -- $570 million ] of loss was booked. And the question was whether it is going to be offset? The answer is it will not be offset.

[Wataru Otsuka, analyst]

Related question, so it was originally an allowance due to the transactions with certain U.S. clients, or have you reviewed whether there are similar transactions? And as a result of the risk review, have you booked additional allowance?

[Takumi Kitamura, executive]

No, the former is the case.

[Wataru Otsuka, analyst]

I see, the former is the case. Now turning to the second question. This is also related to Page 3. This might sound somewhat strange, but we have numbers from the earnings release. And on the Investor Day on May 12, based on these actions, strategy regarding, for example, prime brokerage business, how that will be developed and implemented? And as [indiscernible] mentioned earlier, those -- there are those that are being validated and reviewed, you may not be able to discuss these fully, but I would like to understand that there will be more information disclosure on May 12, will there be more detailed information on May 12?

[Takumi Kitamura, executive]

Thank you for your question. There are some reviews that have been completed, and there are ongoing reviews and there are reviews to be started. What lessons we can learn from these reviews, such as from the event this time around, will, of course, be reflected in the business strategy, management strategy going forward. And regarding the management strategy, as Otsuka-san mentioned, on Investor Day on May 12, we would like to provide presentations on the strategy.

[Operator]

Next question is from Mr. Watanabe of Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe from Daiwa. I have 2 questions. First question is about the profit contribution from prime brokerage business. At the cruising pace, out of the U.S. equity revenue, what's the percentage or proportion of private brokerage business?

And in your answer to Muraki's question, you said that there wasn't similar transactions. But in terms of the way clients apply leverage and as you revisit risk management framework, are you sure that the revenue from prior brokerage business will not come down? And second question is regarding the shareholder return. Now you are just conducting dividend payout. So could you explain -- elaborate more on the thinking behind the decision on the shareholder return?

[Takumi Kitamura, executive]

Thank you. So regarding the prime brokerage revenue contribution, as a percentage to the total U.S. equity revenue, sorry, I cannot -- I'm not -- I cannot disclose the details. Regarding the enhancement of the risk management framework, to what extent would the revenue from prime brokerage come down? Since I cannot comment on the denominator itself, it's difficult to comment on that. But in our U.S. equity business, the last couple of years, we have seen robust situation. So that's in the equity derivative area. So that's different from the prime brokerage area that had issue this time.

And regarding your second question about the dividend, I believe. Firstly, this time, unfortunately, due to the incident that happened, full year net profit came down to JPY 153.1 billion, but Retail division and Asset Management division, as mentioned, did very well. Also, Wholesale division aside from certain business lines did well, very -- did very well, so as I've said all along, the fundamental revenue making power of businesses has gone up steadily. And at the same time, we have sufficient capital. So in the form of -- in the format of dividend, we would like to conduct shareholder return. That is the background in which we decided on the amount of dividend payout. So in that sense, this shows our confidence towards the continued sustainability of our performance.

Regarding buyback, we contemplated hard on that possibility, but we had a loss of JPY 260 billion and that undermined capital. So dividend alone has about 70% of payout ratio. So this time, we would like to adjust and pay out dividend as shareholder return policy. And looking at the situation, and we will consider the opportunities of conducting buyback sometime in the future.

[Kazuki Watanabe, analyst]

A follow-up question regarding the first question. So this loss was unique and individual in nature. But in terms of risk management framework, so how -- so what is the background behind which you are overhauling the risk management framework?

[Takumi Kitamura, executive]

This is Kitamura. So for us -- so several people have said it, but this transaction, I believe, was idiosyncratic but just because it's idiosyncratic, it doesn't mean that we can just be lenient about that. But we are intending to strengthen our risk management framework.

[Kazuki Watanabe, analyst]

Mr. Kitamura, then in that sense, there won't be much impact coming from that?

[Takumi Kitamura, executive]

Kitamura speaking. That's dependent on the outcome of the review. So as a result of the review, we will be determining what kind of enhancement we will be implementing. But what happened, I believe, was quite unique. So our -- it's not that our risk management framework was defective. So the impact on revenue will depend on what kind of risk management framework we will put in place, but the impact will be -- it will not be that big.

[Operator]

Next from Mitsubishi UFJ Morgan Stanley, we have Ms. Tsujino.

[Natsumu Tsujino, analyst]

The first question, this may be somewhat related to earlier question, but the answer was not very clear. So once again, I would like to ask this question regarding equity revenue in the U.S. portion of that. This is more than 20 billion to 30 billion up to the third quarter last year on a quarterly basis, it started to rise in the first quarter, and it was around 50 billion in the second and the third quarter. And in the fourth quarter, it is now in the losses. But without [indiscernible] if not for [indiscernible], I believe it would have been over 40 billion. And therefore, in the second quarter, third quarter level from that level, it seems that there is a decline of about 10 billion. Given that situation, this number for the quarter, coming from a certain specific client, were there increase in transactions significantly because of booming market conditions? If that was the case, then going forward, at best, it may be about 40 billion. Should that be the appropriate estimate for the future revenue? And what is your view on this? That is my first question.

And the second question is FIC this time in Japan, the arrow is pointing down, vertically downward in Japan, and it seems that it's now less than half the previous level. Was there special circumstances resulting in this and to estimate first quarter and beyond, how should we understand this? Those are my questions.

[Takumi Kitamura, executive]

Thank you for your questions. I've received a couple of questions. Regarding this specific customer involved in this incident, after January this year, the transaction size with us increased partly because of surge in share prices, transactions with us increased. What Tsujino-san said is about the second and the third quarters. Whether there were huge transactions with that customer in the second, in the third quarter, the answer would be no. The answer is no.

Then why in the fourth quarter, it appears that there is some deceleration? Overall, centering around the United States and in various other countries, interest rate is rising, and there is also tightening in China. And between Asia and the United States, there is a flow of fund and equity-linked bonds, I believe transactions of these have somewhat have slowed down in flow derivatives, it was somewhat difficult to make profit in that area. But Q-on-Q, in the fourth quarter, there was a decline, as you correctly pointed out. But on a full year basis, U.S. equity was performing strongly and derivatives are driving the equity revenue and that structure remains unchanged.

Now as for the recent trend, in the fourth quarter, equity derivatives in the Americas was slow, but in April, it seems that there is a recovery in pace. That is what I would like to additionally mention. Now I believe the second question was about fixed income and the weakness in Japan and why the weakness in Japan. Overall, I believe this is due to year-end factors. Repack bond in structured products were somewhat slow. Furthermore, emerging bond because of reversal in dollar trend, credits did not perform as strongly. Overall, there was not much movement in flow -- interest flow rates, and this was also slow. And I believe those are the factors why Japan in the fourth quarter was somewhat slow. And going forward, we have started a new fiscal year.

And regarding the fundamental outlook, relatively speaking, I believe we can say that fundamentals outlook are favorable, and there are monies that need to be invested. We believe that there is ample money that is trying to find return or investment opportunities. So in the new fiscal year, in the first quarter, we expect that there will be some movements of such money. And therefore, we expect some recovery in comparison to the fourth quarter.

[Operator]

The next question comes from Sasaki from BoA Securities.

[Futoshi Sasaki, analyst]

This is Sasaki from Bank of America. I have 2 questions. So first, regarding the U.S.A. So this was an individual unique idiosyncratic transaction, as you said, but the management of holding company was aware of this transaction, I believe, but is my understanding correct? So that's my first question.

Then Nomura Real Estate Holdings impairment that you have taken in the fourth quarter. So this is a basic question, but Nomura Real Estate Holdings shares are listed. So is it the impairment of listed Nomura Holdings shares? And looking at the stock price end of March, why have you decided to impair? So I do not understand the reason. So could you explain to the extent possible?

[Takumi Kitamura, executive]

This is Kitamura. Mr. Sasaki, I didn't really understand your first question.

So NHI's management, including myself, did you say, the management of NHI was aware of the transaction in the U.S.A.? And can you be more specific? So are you being specific in terms of the timing?

[Futoshi Sasaki, analyst]

Well, it goes back some time. But CMBS in the U.S.A. had huge loss and the management at that time put in place a system that allowed them to understand and monitor the book. So the management, my understanding is that you explained earlier that the management has a system to monitor the situational book, then I thought that management to us familiar, aware of what's going on with that transaction. That's the background.

[Takumi Kitamura, executive]

This is Kitamura. We have a massive size of trading assets, and we have a huge number of clients. So at NHI management level, whether we have the names of individual customers and the positions, not limited to this client, but we do not follow the details of individual clients' transactions. But when the issue is surfaced, of course, at the Nomura Holdings level as the holding company, we have been involved in the decision-making.

And the second question regarding Nomura Real Estate Holdings, so this is about the listed shares. So why have we decided on impairment? So that's your question. So in -- from the end of January through February, the Nomura Real Estate Holdings stock price was up, but our consolidated book value of investment has been above the market price for protracted period of time. So that's the major reason. Last year, since the COVID-19 shock, this company's PBR has been below 1 time continuously. But the performance is good. So our book value on our book has been on the rise, basically. So compared with our book value on our balance sheet, this company's market value, unfortunately, has been at a lower level for a certain period of time. That's why in March, we had to book the impairment.

[Futoshi Sasaki, analyst]

Mr. Kitamura, so regarding the first part of your answer, so Muraki-san asked about this and huge amount of position, I believe, was held, and that can be estimated based upon the size. And trading accounts were JPY 15 trillion. And if there is JPY 1 trillion worth of order, then I don't think that -- of course, you say that you cannot understand everything but if it -- if the size is JPY 1 trillion, you couldn't say that you were not aware.

[Takumi Kitamura, executive]

Kitamura speaking. For example, in a swap transaction, not this transaction, but the notional amount is very massive. But on our balance sheet, what place on our balance sheet is the win or loss of divertive transactions and that positions. So JPY 1 trillion out of JPY 15 trillion, that's not really a valid point.

[Futoshi Sasaki, analyst]

I see. Okay, understand. Regarding Nomura Real Estate Holdings, for a certain period of time that you mentioned, looking at the stock price, end of March last year, stock price declined and after that, it stagnated for a while. But the last 12 months or so, the stock price or the market value has been below the book value. Is that what you're saying? Or you saw the shrinking possibility of recovery, and you made some decision judgment and took the impairment, what was the case?

[Takumi Kitamura, executive]

Kitamura speaking. For a certain period of time, the market value has been below our book value. So that's the major reason. So the former scenario that you mentioned is what happened.

[Operator]

We have Mr. Niwa from Citigroup next.

[Koichi Niwa, analyst]

This is Niwa from Citi. Can you hear me?

[Takumi Kitamura, executive]

Yes, I can hear you.

[Koichi Niwa, analyst]

I have 2 questions. First is about investment banking, and the second is about dividend. First, regarding the investment bank, what is the level of future pipeline, in comparison to the past, what is the level of growth? And regions, deals, value per deal, is there any characteristic of potential deals in the pipeline? With your efforts in comparison to the past, if there are improvements or results? That is what I would like to know. And if possible, if you could separate between M&A and ECM?

And the second question is regarding dividend. And this is also related to question by Watanabe-san, but simply put annually, JPY 35, in the second half JPY 15, how was this calculated?

[Takumi Kitamura, executive]

Thank you for your questions. First, M&A pipeline or IB pipeline. That was the first question. As for our outlook going forward, we believe, generally speaking, outlook is favorable. In the second half of the year, of the fiscal year that just ended towards the second half of the year, there was also a growing momentum for increase in revenue from M&A, and we believe that this momentum is continuing. And there are, I understand, a large number of inquiries about possible deals. Business portfolio review is underway by many companies, nonfinancial companies. Given the current environment, I think companies are pressed to do that. And there are many companies that are contemplating possible divestiture, as I understand. And although the future is uncertain during the pandemic, companies are affected. And there are also some M&A to save companies that are struggling. And on the other hand, Japanese companies are searching for growth opportunities in market and going outside of Japan, and there are also such deals, as I am informed.

Regarding ECM, during the pandemic, companies are consolidating their financial standing, and there is growing need to do so. And this is related to earlier question, but M&A finance -- as a part of M&A finance, financing needs exist. And regarding governance, in Japan as well, we are coming closer to global standard. And strategic across shareholding is unwound, and there is a need to sell such shares. So I believe that we also have reasonably strong pipeline for ECM.

Now turning to your question regarding dividend, JPY 15 for the second half of the year, how this was calculated. Had it not been for this incident, and I shouldn't discuss what if -- I'm fully aware of that, but had it not been for the incident, and excluding that, our fundamental earnings capability remains strong and stable dividend level continuing from the first half of the year was also taken into account. And therefore, from these general point of view, we have decided on JPY 15 dividends for the second half of the year.

[Koichi Niwa, analyst]

I have a follow-up question. Your company does not issue guidance. But regarding the dividend for the second half of the year. And you've also used the word confidence, is this going to be a message for this new fiscal year, for example, annual dividend of JPY 30, if we divide it -- calculated that using the payout ratio of 30%, then KGI of JPY 100 will be overperformed. And is that the right way of understanding this new fiscal year?

[Takumi Kitamura, executive]

Well, at least for the term ending in March 2021, had it not been for the incident, I believe that, that level of number would have been achieved. Overall, we believe that our earnings capabilities are strengthened. And in that respect, we have confidence. We are confident. But unfortunately, we are starting from the negative JPY 62 billion in the beginning of this fiscal year. And we have to start from this negative level to generate profit. Structural reforms were underway to alleviate market impact, but we cannot be completely free from market impact. And so I believe we were enjoying some tailwind from market environment in 2020. I hope this addresses your question.

[Operator]

The next question is asked by Mr. Ban from Jefferies.

[バン, analyst]

I have -- my questions have some overlaps with the questions asked. But the first question is regarding U.S. operations. So U.S. subsidiary stock has been impaired somewhat. So the reason is changes in your forecast for the revenues down the road. But for this specific counter-party and incident is viewed as an individual idiosyncratic case. And have you changed your revenue forecast for the U.S.A. moving forward? That's my first question.

And the second question is regarding Nomura Real Estate Holdings. Now you've booked impairment and -- but there is no change to the business relations. But moving forward, so as business partners within Nomura Group, is there any change? There may not be change as of now, but moving forward, would it be possible for you to revisit and revise the working relation with Nomura Real Estate Holdings in the future?

[Takumi Kitamura, executive]

Thank you for your question. This is Kitamura. Regarding the first question, Nomura Holdings America as entity, the impairment of that firm, the -- it's not that revenue forecast has been changed. So I'm checking the press release, but there is no mention of that. And the incident that happened in the U.S.A., because of that, there was a lot that happened at the subsidiary of NHA. So NHA's net value, asset value of the holdings came down. So we booked impairment. So it is not -- it does not mean that we changed the revenue forecast. So as I explained, our U.S. operations revenue-making capability has been improved. So this write-down is attributable to one-off loss.

And regarding Nomura Real Estate impairment, this is accounting treatment. So between ourselves and Nomura Real Estate Holdings, there is no impact on the relation between the 2 firms. For example, public to private is our strategy in Retail division. Collaboration with Nomura Real Estate is being implemented, and Retail division has expanded its real estate-related businesses. And also in various areas, we are looking to expand private area businesses. And in that context, we would like to explore further opportunities of collaboration with Nomura Real Estate, and we are in the process of discussion. So the impairment that was booked, it's just for the accounting purposes.

[Operator]

It is now time to end today's session. We would like to end the Q&A session. If you have further questions, please send your question to IR Department of Nomura Group. Mr. Kitamura, CFO, please.

[Takumi Kitamura, executive]

Regarding the loss from the U.S. business, we had to incur a very large cost, and the management takes this very seriously. In the third quarter and up to the middle of the fourth quarter, we were showing a very strong performance. And therefore, I also found this quite regrettable, but we would like to learn lessons from this and would like to use that in our future business for benefit.

Our management vision announced last year of achieving sustainable growth by helping resolve social issues remains unchanged. In addition to public markets, as I mentioned earlier, in addition to public markets where we are strong, we will expand our service in private markets and aim to take the firm to the next level. We will give an update on each of our business at our Investor Day next month. Thank you very much.

[Operator]

Thank you for taking the 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.]