Nomura Holdings, Inc. (NMR) Q3 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Nomura Holdings Third Quarter operating results for fiscal year ending March 2010 conference call. Please be reminded that today's conference call is being recorded at the request of hosting company. Should you have any objections, you may disconnect at this point in time. During the presentation, all the telephone lines are placed for listen-only mode. The questions-and-answer session will be held after the presentation. Please note that this conference call contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays and certainties and other factors not under the company's control which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and other investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size , number, and timing of transactions. With that, we would like to begin the conference. Mr. Masafumi Nakada, please go ahead.

Thank you very much. So thank you very much for joining us today. I will now give you a brief overview of Nomura Holdings third quarter results and then open the line to questions. So please turn to page four of the document entitled consolidated results of operations. This page gives you an overview of our third quarter results. Nomura was profitable for the third straight quarter docking net revenue of ¥274.5 billion, income before income taxes of ¥18 billion and net income attributable to Nomura Holdings of ¥10.2 billion during the third quarter. Please turn to the next page. Our two main revenue drivers, retail and wholesale, both posted increased revenues and income compared to the prior quarter as we continue to expand our business. The graph on the left shows our Retail operation in Japan which forecast on providing customers with the consulting services. Total processes for the third quarter were approximately ¥3.5 trillion and the net revenue was over well ¥100 billion. The highest level so far this fiscal year. Wholesale made up of Global Markets and Investment Banking also booked increased revenue and income as the Investment Banking returned to profit for the first time in six quarters. This resulted in business segment pretax income of ¥77 billion an increase of 56% compared to the second quarter. However, as the next page shows we deducted ¥18 billion in credit value adjustments, ¥8 billion in expenses related to conversion of our convertible bonds, ¥4 billion in unrealized losses on the investment securities and ¥16 billion in fees related to Nomura Holdings global offering giving us pretax income of ¥18 billion. The chart on the right that gives the same breakdown for the fiscal year-to-date. Pretax income from the businesses totaled ¥189 billion from which we deducted ¥64…

(Operator Instructions). The first question comes from the line of Mr. Fujikawa from The Boston Company. Please go ahead sir.

Hi, one quick question. Are you doing anything to have our rating agency upgrade you from BBB to something a little better?

So, actually, regarding the timing of the actions taken by the rating agencies. Should be decided by the agencies themselves. That’s right, it is almost impossible for me to tell you what is the timing, but anyway that we are going to continue to sell the profitability quarter-by-quarter and which is the most important, I think we need to do, because that came to see the stable performance which is their most critical part. Takamune Fujikawa - Boston Company): Okay, now let’s just assume your credit rating improved by one notch and how much will you save on financial expense if rating goes up?

At this moment it is rather hard to say how much impact on funding side as well as side but I am quite sure that if we would get upgrading, even one notch, it should have a rather big impact on our business, watch over the business expansions right as well as the funding side. Takamune Fujikawa - Boston Company): Okay, thank you.

(Operator Instructions) The next question comes from the line of Mr. (inaudible) from SAC Capital. Please go ahead sir.

Hi, thank you sir for hosting this call. My question is what is your outlook for the equity finance pipeline in Japan going forward? Do you still see a lot of financing coming ahead in this quarter or in the next two quarters?

Firstly for the fourth quarter or current quarter, I don’t expect the full or much or many ECM transactions as we had in the third quarter. And in the next year estimate, actually I don’t have the whole year's forecast yet but we are now trying to accumulate the possible transaction in our pipeline, and but anyway I just wondered, it is still had to say but the next year's volume of primary transaction in Japan, it would be more than this year or almost the same rate as this year (inaudible).

I have a follow-up different question. What is your take on the new, the Arrowhead system. Is there a difference in the volume transaction or is that mainly linked to CapEx or the any of the Index performance? The volume from the beginning of this year, was there any impact from the Arrowhead system upgrade?

It has just started yet to being over January as you know, and it is still (inaudible) to see the impact on business but we belied that it should help us to increase our trading volume and theoretically this high velocity engine that we are trading should bring with it big benefit.

What do you think that benefit should be theoretically?

Then basically in order to utilize this Arrowhead system, each broker needs to have the own system which should be able to collect with this Arrowhead and in this sense, a large broker dealers like ourselves should be able to take it as advantage because here we have already invested in new system and then we are ready for utilizing the Arrowheads through our own system.

Next question comes from the line Mr. [Carl Storm] from (inaudible) Investment. Please go ahead.

Hi good evening this is Camille. I have two question and third question which I am not sure you'll answer but I'm going to ask it anyway. So the first question is that you are hedge related charges in the quarter, could you give a little bit more detail on what these charges for, what caused it and expectations of anything in the fourth quarter? Number two would be trends that you are seeing in the fourth quarter and although it's been only a month just how things are moving in terms of trying to get a sense for how the year will shape up and then third, consensus I just looked on Bloomberg, consensus for March is ¥94 billion for net income adjusted. How is management feeling about that? Thanks.

First your question about the economic hedge, as you already said, it's rather hard to answer that question but anyway the third quarter, we have included our own credit value adjustment in this number and then anyway the fourth quarter at this moment, it is very hard to estimate how much it would be or it could be. And then so the first quarter, I forgot to estimate and as far as the January is being concerned, we have rather a good start of the first quarter, actually the last quarter, particularly the second half of the November and December. The trading volume with [client] declined so much and then from the beginning of January, the flow of business, the volume returned back and then our trading as well as the retail in Japan, they have been doing reasonably well. And then whole year's estimate, that you mentioned about the Bloomberg Conference that right?

Yes

It was the ¥94 billion you said.

Net income adjusted, yes.

As you know, we don’t disclose any forecast or estimate, as I already said in January we had a good start. This is what I can tell you at this moment.

(Operators Instructions). The next question comes from the line of Mr. [Swarsky] from MFF.

I had a question about the fixed income trading profits on your income statement. Sequentially, they went down substantially, is that due to narrower spreads, lower client volume, and where there any one-off losses that you've already pointed out included in that decline?

If you look at adjusted, fixed income trading P&L, as you mentioned, it looked like it declined so sharply compared to the second quarter, but if you take the old credit value adjustment, and other accounting adjustments like convertible bond, conversional convertible bond fees and the economic hedge and so on, then actually the trading P&L for fixed income declined, but they are not so sharply as you have seen the numbers. So the main reason why the fixed income trading profit declined compared to second quarter was, you are absolutely right, the main reason should be the decline of [client] activities and then we had also the declining of the spread of the trading and those two are the main reasons.

Okay and just to clarify on the previous questioner’s question, the hedge loss in your segment reporting was ¥25 billion, you said that included ¥18 billion of credit value adjustment, were there any other one-offs in the 25?

So not all of 18, but around the 14 was included.

And the rest of the 11 is real [brokerage] loss.

Yes, that’s right.

Okay and you are saying the full credit value adjustment as well as the full convertible bond one-off costs negatively impacted the fixed income profits on the income statement, which should be in total ¥26 billion?

So if you talk about the numbers of segment information, then it was not included, but if you look at the financial accounting numbers, then it is included in a trading at the negative number.

Okay and further clarification on page six, you mentioned that your business segment pretax income was ¥77 billion, it actually looks like its 87 on some of the five segments from your financial press release, and I am just trying to reconcile the ¥87 billion to ¥77 billion?

So the numbers on the earnings release was ¥87 billion, this doesn’t include the headquarters number then a ¥77 includes the headquarters number this is the gap between the two numbers.

And that gap is your unallocated cost?

That's right?

The next question comes from the line of (inaudible), please go ahead.

I have two questions on cost, I was curious that the compensation to revenue was higher than many of your global peers at 46%, and I was curious if this might change in the fourth quarter as its commonly practiced in the industry to bring that down and what we should look for in the year ahead with the comp ratio. And my second question is just on cost cutting in general, if you could quantify or talk about any further cost cutting initiatives and opportunities that you have.

So first question about key ratio that has the net revenue. I think you mentioned about 46% is not the lower range of our competitors. And about the further time being we would like to manage the compensation level around the 45%, and but at the same time we would like to also look at they are risk adjusted profit, that’s to decide the affair. And up to a great level over compensation but anyways we are going to decide this years account level in the next few months having there full years result in the next March. Then anyway this comp ratio should be fluctuating in the next few quarters not only the fundamental but also the other competitors in due course. We still have some unclear or uncertain factors mainly in near area of regulation of regulatory changes. So, then next question is the further cost cutting initiative, yes we do. And since the beginning of the year we have been attacking all their possible items of their cost-cutting including the cutting of the IT cost, cutting of the real estate expenses and the cutting of the other, even if more liken. But one of the main areas we would like to focus on this, utilizing the resources in Powai in India, which is the operating service company in the group, then we are utilizing the resources but over their front side as well as the middle and back office side, I’m quite sure that we will be able to have the more efficient operations and so that’s why we are now starting so called the off shoring of project in each business line to maximize the utilization of their resources.

(Operator Instructions). The next question comes from the line of (inaudible) from MFF. Please go ahead.

My second question. Investment banking, you said your overseas revenue was 16.6 billion. Can you give me a sense for whether this is breakeven yet on the overseas portion of the investment banking segment?

So actually the overseas operation, if we look at their net numbers it is still below breakeven. Then, that's why I quote that the overseas industry and banking business will be able to increase revenues accelerating the businesses with the clients not only in Europe but also the US.

So, after you acquired the Lehman folks, you had to come up with a pipeline from scratch, when did that pipeline start to translate into overseas investment banking revenue?

As you have seen the overseas investment banking revenue, they [haven't] started to grow particularly in the third quarter. And we are seeing some contributions of the solution so called the solution businesses, and this is not the ECM or DCM type of business but the (inaudible) type of the services to the corporate clients mainly. Then expanding the US business platform, we expect that the top line will increase by the way we are accumulating the transaction in a pipeline from the beginning of the year. I should say the third quarter's revenue growth was one of the, I should outcome of the accumulation of transaction in a pipeline in the last two quarters. Then, I hope as I already mentioned in the fourth quarter and more transaction will be executed then we should be able to incur the investment banking performance.

Okay and a follow-up on that or actually a separate question. You highlighted on page six of your presentation 16 billion of one off cost with your own the port PLC, but when I look at the cost in your SG&A there is no lumpy 16 billion anywhere, some [appears] to know where that 16 billion was booked?

So question is the Nomura PLC?

Yeah. It seems like a big see and you think you'd be able to see it one of the cost items?

Actually this the fee related to the our own capital raising in the last October right and at that time the issuer number of holding retained, the Nomura securities which is the Japanese broker deal and other oversees subsidiary as the underwriter where they are paid or Nomura holdings paid the fee to these subsidiaries including Nomura securities but anyway all the subsidiaries they belong to the group which is that’s why this is just the inter-company transaction, that’s why they really have the offset this fee payment amounted to the 160.

Okay so it's not a one off cost, it’s an elimination item?

Yes, right.

(Operator Instructions). We have no questions, Mr. Nakada.

Okay, thank you very much everybody for your attention. So, I would like to conclude today’s presentation and conference call. Thank you.