Nomura Holdings, Inc.
Q1 2022 Earnings Call Transcript

Published: 1 Aug 2021

[Takumi Kitamura:]

Good evening. This is Takumi Kitamura, CFO of Nomura Holdings. Now on our First Quarter Results of the Fiscal Year Ending March 2022, I'm using the document titled consolidated results of operations. Please turn to Page 2. Net revenue increased 108% quarter-on-quarter to ¥353.3 billion, while income for income taxes improved to ¥78.5 billion, as shown on the top right. Three segment income before income taxes was ¥35.6 billion, recovering from a loss last quarter due to two main reasons. First, Investment Management established in April this year made a significant contribution; and the second, Wholesale performance improved.

[Operator:]

Now the first question comes from Mr. Muraki of SMBC Nikko. Mr. Muraki, please go ahead.

[Masao Muraki:]

Thank you. This is Muraki from SMBC. I have two questions. First, the revenue from the market department, page 10. Top left, fixed income on a year-on-year basis is in line with US peers. For equities are slightly weaker compared with US peers. But how do you evaluate the performance of the first quarter? Also after August, what kind of situation will create another downside? Could you elaborate on your outlook? That is my first question. My second question goes a bit away from the financial reports, but I would like to ask a question about the enhancement of risk management. Yesterday, Credit Suisse publicized a report, more than 100 pages, and looking at the content of their report, it appears that if the exposure exceeds limit by more than 20 times -- well, the exposure exceeding the limit by 20 times, and that was left for a long time, and that was identified as the cause.

[Takumi Kitamura:]

Thank you very much. This is Kitamura. Regarding your first question, regarding the global markets revenue, how do we evaluate the global markets revenue in the first quarter? So as Mr. Muraki said, for fixed income, our performance is in line with our US peers, especially when it comes to our core business, which is rates business. The rates business declined in – as the market normalized. So as the market normalized, our rates revenue was also normalized. That's our evaluation. Equity business is underperforming somewhat. However, excluding the impact from the incident in the USA, wholesale's overall performance is that bottom line is ¥37 billion. This includes investment banking. Annualized number is ¥150 billion, so this is not that bad. If anything, FY 2019-2020 as compared with FY 2020 – 2019/2020 before pandemic, we are above that level now. So that means, we have accumulated the power. So looking at the numbers, on a daily basis, we acknowledge – we have acknowledged the difficult environment. But excluding that incident in the USA, we have ¥37 billion of bottom line profit. So our evaluation is that the performance was decent. And our outlook into the future, as of now, there is a mixed views towards the market conditions. The market moves seem quite unstable. So when it comes to risk taking, we are being quite prudent. But moving forward, of course, there will be some ups and downs. We believe the environment will not be that bad. As mentioned earlier, reopening of economy and infrastructure package announced by Biden administration and inflation expectation triggered by them and the tapering moves by central banks, so there will be progress in discussions on those matters. So there will be some twists and turns moving ahead. But there would be various factors that will urge investors to rebalance their positions. So current situation will not continue forever, especially the monetary easing created lots of money that have been left to be invested somewhere. So sometime in the future, we will start to see the move with such funds waiting to be invested.

[Masao Muraki:]

Thank you very much, Mr. Kitamura. Regarding my first question, my follow-up question is regarding risk. You mentioned the geopolitical risks. But in these days, China's regulatory risk has been drawing attention. But in your case, at wholesale business or local retail business in China is there a possibility that geopolitical risks will materialize as a true risk?

[Takumi Kitamura:]

Thank you. This is Kitamura. The last couple of days, Chinese equities and Hong Kong equities have trended in a quite volatile manner, I acknowledge that. But it does not immediately affect our business at this point in time. But regarding this matter, we are carefully monitoring the situation. That is my answer.

[Masao Muraki:]

Thank you very much, Mr. Kitamura for clear answer. Thank you.

[Kazuki Watanabe:]

This is Watanabe from Daiwa Securities. I'd like to ask two questions on capital policy. First, CET1 percentage is up to 17.7%. And there is a cash in about ¥50 billion by selling a number of research institute shares. And can you tell me about your thinking around share buybacks? And next is the – on dividends, the profit revenue. I think that has taken into consideration the losses from the US incident. And so that ¥65 billion loss in the first quarter, would that be brought back in? So could you tell me of your thinking of what would be the profit level of the distributable dividends?

[Takumi Kitamura:]

This is Kitamura. Thank you. I think your first question is why we did not conduct a share buybacks this time. Now, we had made – we have had discussions and different considerations, and quite honestly, if I may, we just thought, this is not the right timing for share buybacks. At some point in time, as we have promised we will be conducting it, in sometime in the future. Second is on the thinking around dividend and distributable dividends and the profit. When we distributed dividends the end of last fiscal year, we had excluded the impact from the loss of the US incident. So, this time it will not be consistent, if we apply it differently this time, compared to what we did end of last fiscal year. So that would actually be difficult to treat it differently this time around.

[Kazuki Watanabe:]

This is Wantanabe. Just a confirmation. So, even if you had cash from NRI sale of JPY50 billion, you would be making considerations around, I think, in that loss from the U.S. incident?

[Takumi Kitamura:]

So yes, we will be making that consideration.

[Kazuki Watanabe:]

Thank you very much.

[Wataru Otsuka:]

Thank you. This is Otsuka from JP Morgan Securities. So I have two questions. My first question is about the page 7. So, this is a new disclosure. The way to look at the numbers is what I want to ask about. So this time, the Nomura Capital Partners investees IPO is mentioned, I believe it's about Plus Alpha Consulting that JPY24 billion of gain. I'm not sure this is everything, but this IPO portion, without this IPO portion, then from this gain/loss number JPY24 billion, this would have been or might have been lower than the revenue compared with the previous quarter's number of JPY54 billion. The number could have been lower than the previous quarter. Is it the right way of thinking -- looking at this number? This is my first question.

[Takumi Kitamura:]

This is Kitamura. Thank you. JPY35.5 billion is the investment gain. So, if we exclude JPY24 billion, then the remaining a number, of course, will be short or smaller as you pointed out. In the previous quarter, JPY24.2 billion, the investment gain, in the previous quarter. Actually, this number partially includes the former Merchant Banking department's markup numbers. So this JPY24.2 and – number that we have, JPY24 billion deducted from JPY35 billion, that is not apple to apple comparison. So if you go back to the previous financial report, then previously what was disclosed as Asset Management division, ACI gains was JPY10 billion or so of number was booked to ACI lines. The other remaining number was included in the investment gain, previously. I hope I answered your question.

[Wataru Otsuka:]

Yes, thank you very much. That was clear. Let me move on to the next question. My second question is about page 12 about personnel expense. So, in this most recent quarter as you show depending on the performance, on a Q-on-Q basis there has been an improvement. And this US incident related loss compared with the previous quarter and this quarter excluding that loss, if we take that second numbers from three segments then, unfortunately, the revenue is -- sorry, a profit is down, I believe. But personnel expense is it linked to the pre-tax income?

[Takumi Kitamura:]

Thank you, this is Kitamura speaking. Regarding the personnel expense, on a quarterly basis, well, it's difficult to look at personnel expense on a quarterly basis because of some technical factors involved, especially in the fourth quarter. For example, the bonus model. Change to bonus model could have a big concentrated effect. Compared with previous quarter, quarter-on-quarter analysis or comparison is something that doesn't match your – our situation. Of course, as much as possible during the fiscal year or period, we are trying to equalize the volatility of P&L, however we cannot rule out such special factors. And also, our thinking about the bonus is that, of course, revenue is an important factor. But there are other factors considered as well. So Q-on-Q comparison is not that easy. And especially in the first quarter, technical accounting factors are also involved. As you know, deferred compensation is granted to our employees. And accounting impact from that tends to concentrate in the first quarter. So the first quarter personnel expense tends to look big, and also there is a factor of weak Japanese Yen and other factors. So my answer is not that straightforward, but there are various factors involved here.

[Wataru Otsuka:]

Okay. Thank you, Mr. Kitamura. Then page 9, the expense ratio 121%. So the US incident excluded, then this ratio is around 80% and it's a bit high but that's linked to the factors you mentioned. So, it's volatile and the tricky?

[Takumi Kitamura:]

Kitamura speaking. Yes. So, in the middle of the quarter, or quarter-on-quarter, the expense ratio is volatile, so we should take a look at the full year number. But 80% that percentage itself, excluding various factors as Mr. Otsuka calculated and that ratio Wholesales KPI, income – a cost income ratio is 80%. This number is in line with the KPI of Wholesale.

[Wataru Otsuka:]

Thank you very much, Mr. Kitamura for the clear answer.

[Operator:]

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

[Natsumu Tsujino:]

First, I have a question on the market division. And this time, compared to the average situation last year, equity has come down. And when we look at the contents of what's going on, equity, you look at the market and comparing it with US peers, you're not doing much in US equity, so I can see that. But for fixed income, what are the areas that we did worse than last year? And so basically, when we look into the second quarter, what were the areas that you can expect improvement, or do you expect the situation to continue? If you could talk about that situation, say, on different products, so that would be my first question. Should we do one-on-one? Can you reply to that question, please?

[Takumi Kitamura:]

This is Kitamura. So the global market -- so we have clients, revenues from clients, and there's rest of revenue coming from flows. There's two streams of revenues. So there are two components that we look at. When we look at the trading volume compared to last year, the trading in government bonds were down about 11%. And as a result, the client revenue has declined somewhat because of that. And when we look at volatility is low compared to last year. So the ask bid, yes, is lower. So the risk revenue, it has been an environment where we have not been able to get revenue from that given that environment. And this time around, that is -- this first quarter, the direction of the yield curve is -- hasn't been set. And in the middle of this quarter, we've been a return of the replacement trade. And because of macro factors, we have seen a lower activities, lower trading activities of our clients. Moving forward, as I've mentioned the direction of the rates and the interest rates are mixed, will probably be mixed. But the overall trend would be that there will be inflation and the expansion of the yield spread. So that is how we see it. And in that environment, especially in our business, especially around fixed income, it will be an environment where we should be able to have a better business for fixed income. So, I think the biggest catalyst would be tapering.

[Natsumu Tsujino:]

This is Tsujino. So, for fixed income, so when we look at your US peers' earnings, I thought that you could have done better or higher. So compared to the peers, is there anything that is of concern to you?

[Takumi Kitamura:]

This is Kitamura. It just so happens that we're sort of sharing similarly with what the US peers did last year. Now as we look at the first quarter, when we look at the securitized products and credit, they did well. On the other hand, for us, our strength or core business, the slowdown in rates has been more pronounced this year. And even in that environment, our performance faring as well as our US peers, I think we could say that we've done a relatively good job.

[Natsumu Tsujino:]

This is Tsujino. Thank you very much. The valuation gain from ACI, unrealized gain from ACI, how should we evaluate that? There are realized and unrealized portion and the unrealized gain -- realized gain of plus alpha, and you said that the unrealized gains are going to be part of the distributable -- I mean, the profit for distributable dividend. And I think since this is more of a temporary than realized gain, so I don't think you will be canceling it against the US incident loss. But when we see this kind of volatility in earnings, so there is a fluctuation in unrealized gains, and there is a fluctuation in your actual earnings, what are -- what is your thinking around the dividend and the thinking of profits?

[Takumi Kitamura:]

This is Kitamura. So, I think your first question was around how we think about the unrealized gains around ACI and the impact to our P&L. Now ACI's earnings, so regarding the valuation, we take into consideration what we expect for their earnings moving forward. And since they are a non-listed company, I don't know to what extent I could comment on this. But when we look at the AUM of ACI, they have been expanding. There are market factors. There is also increase in AUM by inflows. And that is the reason why we have increased our sort of valuation there. So there is an unrealized gain there. And evaluating ACI, the valuation of ACI, it may not be straightforward. But as I mentioned, it is a non-listed company therefore, when we make the valuation, we are quite conservative. Of course, it's a bit difficult to -- if you ask a proof what it is that they do. Now we are -- even when we look at our third party valuation sort of entities, we do think that the way we evaluate ACI is quite conservative. Now the thinking around dividends, I think that was your second question. Now as a matter, of course, since we are part of the market, of course, there will be fluctuations in our P&L, but we are striving to stabilize our earnings, stabilize our revenues. That is what I've been explaining. And the thinking around shareholder return, of course, our basic performance of our core business to be linked with that, that is -- of course, that's important. In addition to that, to make as stable dividend returns as possible is also important. So that has been taken in on a comprehensive manner, and that is how we decide our dividend amount. Now since there is a large fluctuation in our earnings on our P&L, there would be fluctuations there inevitably. But we – the thinking is that we want to be able to make stable dividend payments stable as much as possible. Thank you very much.

[Futoshi Sasaki:]

Thank you. This is Sasaki from Bank of America. So please answer to each of my questions. First question is about retail. After July, so you mentioned the current situation of wholesale, but you didn't comment on the current situation of retail after July. What is the current situation? And also in the first quarter performance, looking at the total sales due to COVID, in the first quarter last year, the sales activities stopped and the level in the first quarter was the same as last year. So how do you evaluate the current situation?

[Takumi Kitamura:]

Thank you for the question. This is Kitamura. I thought I touched upon that, but let me repeat that. The situation of retail in July is as follows

[Futoshi Sasaki:]

Thank you, Mr. Kitamura. Then regarding the level of total sales in the first quarter, was there any special factor that impacted the total sales level in Q1?

[Takumi Kitamura:]

This is Kitamura. In the first quarter, our customers' activities were slow. And the total sales, especially the equities, declined by 28% because of the customers staying on the sidelines. However, our business model is being transformed in a significant manner. So we are single-mindedly focused on expanding the assets of clients. As a result, the decline came in that juncture. And we are not, of course, satisfied with the situation. But to a certain extent, some of what happened was not avoidable. But as we continue with our initiatives, once we have support from the market, then necessarily, we will see recovery.

[Futoshi Sasaki:]

Thank you, Mr. Kitamura. Regarding the wholesale business, there was a loss in the US incident, and that, I believe, has been a challenge. But in your transactions with family offices, has there been any changes that you've implemented, especially with single-family offices? Now regulatory are tightening has been discussed. But as Nomura, have you changed the way to conduct business with them?

[Takumi Kitamura:]

Thank you. This is Kitamura speaking. Regarding the family offices, we cannot say that all family offices are to blame. We cannot generalize family offices and make a singular comment. Family – many of our family office clients have huge assets. And in terms of the asset management and financing, there are various needs on their end and the Nomura's global platform and Nomura's capabilities of making proposals on products. So those services of ours, we believe, are appropriate in satisfying the needs of those clients. On the other hand, compared with the regular investors, institutional investors, there is only so much information that we can obtain from family office clients. So we will do what we can to obtain information from them, family office clients, and we will do the best we can in managing risks. So this time, there were weaknesses exposed in our risk management. So regarding that, by strengthening risk management frameworks, we would like to continue providing certain services. So regarding the regulatory tightening being discussed, I'm aware of that. But what is going to be the end result? Honestly speaking, it's something we cannot control directly. But due to the – if the regulatory tightening urges family offices to open up and disclose more, then market will become more favorable. Then regarding the regulatory trend, we will keep monitoring the regulatory trend.

[Futoshi Sasaki:]

Thank you, Mr. Kitamura. Regarding the prime brokerage in some regions, I believe you've downsized your prime brokerages in some regions. How would that hit your revenue in the future, or will there be no impact?

[Takumi Kitamura:]

This is Kitamura. The PB, prime brokerage business itself, it is positioned as playing the supporting role to the overall equity business. So some prime brokerage business might have been downsized, but the impact on our performance is limited. Nomura has strength in Japan equities and Asian equities and US equity derivatives. For those areas, by having the refined risk management, we will be continuing with those businesses. So in that sense, the impact on our business or performance will be limited. Thank you.

[Futoshi Sasaki:]

Thank you, Mr. Kitamura for your answer.

[Koichi Niwa:]

This is Niwa. I have two questions on investment management and the thinking around personnel expenses. My question is that in the area of alternative investments, the unrealized gain and what is related to the IRR, the right bottom in Page 8, you haven't disclosed the AUM there. So how much unrealized gain is there, and the investment period from the vintage. So, the capital gain that you've seen in this first quarter, is this a level -- the capital gain level is something that you expect to see regularly moving forward as well? Next question is around personnel expense and to acquire talent and talking about international personnel expense. So, for the new joiners or the new recruits, it seems that the pressure to higher compensation is increasing, and it seems that all the other companies are having a niche -- having troubles with that, which would be posing pressure on increased costs, and how are you going to tolerate that and when we think -- when you think about the outflow of people how -- what are you doing to retain them?

[Takumi Kitamura:]

This is Kitamura. On your first question. So the large profit came from, not from the alternative investment area. On that area, on the alternative investments, the AUM, I mean, we will -- we are investing our clients' assets to alternative products. So that is a different profit. If the profits are coming from the X Merchant Banking business, and it's a bit difficult to know how much we could expect. Now, if we could markup and of course when there is an exiting from the position, we would see profits of this way. So it is difficult to say what we could expect moving forward. How much or what was the level. So, that is something difficult to comment on. On your second point, on the personnel expense costs and gaining talent. And newspaper -- when we look at newspaper reports, we see that companies are increasing compensation to capture young talent. So what we need to retain our talent, I think what's most important is to give a fair evaluation of what they are doing and their contribution. I think that is most important. And to return to their expectation to their growth, career growth, provide training opportunities, education opportunities, and to support their career growth, and to provide a working place that has diversity, and to provide a platform or place, where you can expect people with high capability to flourish. And we have been conducting things to increase the engagement of the employees. So, we've been conducting engagement surveys as well. And of course, compensation or salary, wage, is an important factor in retaining talent and attracting talent. But in addition to that, by different -- by implementing different initiatives, we intend to attract and retain talent. On the other hand, just a more bigger picture, so the role of employees or people is changing quite substantially, compared to the past. Now, human capital is, needless to say, very important for a company, but things that could be replaced by -- I mean, what people need to do, what they don't need to, what could be replaced. That is changing and we expect that, that will change in the future as well. We need to understand that and to attract necessary people. So, when we think about that, I think it is possible to control a personnel cost rise to some extent. Did I answer your question?

[Koichi Niwa:]

I'd like to ask further a question on your latter part, this new up. Even looking at your peers, when you look at your medium-term profitability of 25%, that doesn't need to be changed?

[Takumi Kitamura:]

This is Kitamura. No, no intention to change that target.

[Koichi Niwa:]

This is Niwa. Thank you very much.

[Takumi Kitamura:]

This is Kitamura. Thank you very much for your time today. There are some ups and downs, some items are going up, there are others going down. But as we came out of the first quarter, we believe the result was decent. And though it's not reflected in P&L, there are some positive moves such as expansion of client assets. Also, our activities for stabilizing revenue, I believe, are starting to show effectiveness. And today, I haven't had time to talk about this, but for example, we are working on establishing entity to invest in private equities and also, we are working on enhancement or enrichment of contact centers. And in a way, we are sowing the seeds for future growth. So, these new activities, so that they will start to grow and bear fruit, and contribute to the bottom line profit that you see. We would like to make our utmost effort and I ask for your continued support. Thank you, very much, and thank you for your time today.