Nomura Holdings, Inc. (NMR) Q3 2011 Earnings Report, Transcript and Summary

Thank you for attending Nomura Holdings Q3 Financial Results Telephone Conference. This telephone conference will be conducted based on the financial results posted on Nomura Holdings webpage. For those of you participating through the web, please take a look at the slides on the webpage. For those of you without the presentation material with you, please also look at our webpage. Please note that this telephone conference contains some future projections based on Nomura’s forecast as of today. The actual results may differ significantly due to various reasons. During the presentation, all of the phone lines will be muted. We will have a Q&A session following the presentation. With that, we would like to start the presentation. Mr. Nakada, please go ahead.

Thank you, and thank you for participating in the telephone conference for our Q3 results for the year ending March 11. My name is Masafumi Nakada, the CFO. First, I would like to go over the highlights. Please turn to page four. In this quarter, we were able to grow both in revenues and in pre-tax income. And as shown on the table on the right, we have grown for each quarter for the past following quarters. Net revenue was Y295.9 billion, up 7% QoQ and up 8% year-on-year. Pre-tax income was Y27.8 billion, 29% quarter-on-quarter and up 55% year-on-year. Net income was Y13.4 billion, which was 13 times the previous quarter and up 31% year-on-year. The pre-tax income of the business segments was Y40.8 billion, and we were able to grow our revenues and profits in all three business divisions. The Retail Division booked revenues of Y97.5 billion, up 11 QoQ and pre-tax income was Y23 billion, up 1%. We saw well-balanced growth in our major products including equities and investment trusts and our client assets balance grew as well. For the Asset Management Division, we saw an increase in AUM mainly in investment trust, and we booked revenues of Y21.4 billion, up 11% quarter-on-quarter; pre-tax income was Y7 billion, up 34%. Wholesale Division revenues was Y172.2 billion, up 5% quarter-on-quarter; pre-tax income Y10.8 billion, up 41%. Within Wholesale Division for global markets, we continued to expand our business based on client flow despite the tough situation, and we saw revenue contribution from Asia and the U.S., and we saw revenue decline of only 2%. For Investment Banking, we saw large ECM businesses in Japan as well as growth in the overseas businesses, and our revenue grew QoQ by 64%. As of December end 2010, our Tier 1 ratio…

We will now start the Q&A session. (Operator Instructions). The first question is from JPMorgan Securities, Mr. Tsujino. Mr. Tsujino, please go ahead.

I have three questions. First of all, in relation to your personnel expenses. Yes, I understand revenue increase. If you calculate the pre-tax income for Nomura, it is worsening – compared for the adjusted pre-tax income is worse compared to the previous quarter, and this reflects the hedge P&L and various other items. But I’m sure you’ll agree that there needs to be some adjusted made to the pre-tax income. So, while the actual adjusted pre-tax income has declined, the personal expenses have grown by Y10 billion or so. Is there something – was there something extraordinary that went on Q3? This is my first question. And my second question is on page 14, will you describe the wholesale division, the revenues and the pre-tax income. Is it correct to understand that you have included the P&L from the Otsuka Holdings stakes that you had? And also we had made our internal calculations on how much that P&L was, but can you disclose the figure? In Q3, or the third question on global markets on page 13, as usual I would like a breakdown by region for both fixed income and equity. And I see the pie charts on this page, which doesn’t break it down between fixed income and equities. And from here, you can see that the U.S. grew and Asia grew, while Japan shrunk significantly. And the reason why the Japan contribution or the composition shrunk, could you please give me the reason for that.

In terms of the personnel expenses, as Chichino san [ph] mentioned, if you look at adjusted income, which Chichino san [ph] mentioned. If you turn to page 26 of our presentation, you will see our consolidated figures as well as the figures for each segment. And as you can see here, we show the pre-tax income for the three segments on the fourth line from the top. And this does not include or reflect the impact of investment securities and does not include the impact of the market valuation of our own debt. And even with this adjustment, you can see that our pre-tax income has grown. So, our understanding is that at the business segment level, we saw a recovery from Q2, and we are seeing a clear recovery trend. Therefore, even from your point of view or your view point, the increase in our personnel expenses and the provisions are logical and explainable, we believe. And the final amount for the full year of personal expenses will reflect the actual results of the full year, and will be determined accordingly. And we have only – we’ve only had one month of Q4, and we still have two months to go. So, the final figure for personnel expenses will be determined in March. And in relation to your second point about investment banking revenues and whether it includes the Otsuka Holdings valuation P&L, it does include it. And the amount is not as large as Y10 billion, which you mentioned. But we do not disclose the actual amount of each deal or each transaction. And your third question about the regional breakdown, revenue for fixed income, Japan was around 30%; and EMEA around 35% or so; and the U.S. was 27% or so; and AEJ was around 10%, a little bit less than 10%. That’s for fixed income. So, we saw steady growth compared to Q1 and Q2 for the U.S. revenue. On the other hand for equities, Japan was around 30%; and EMEA was 33% or so; U.S., roughly 10%; and AEJ was almost 30% to 28% or so. So, for equities, you could say that AEJ grew in terms of contribution. And I’d like to confirm how you mentioned that the Japan portion, you mentioned how the Japan contribution is shrinking. Are you referring to the shrinking of the ratio or the composition of Japan?

Yes. However, based on the breakdown that you gave me, and if I do the rough calculation, I see that it hasn’t shrunk that much. So, maybe we don’t have to focus on this too much. Thank you. And just one additional question, in relation to personnel expenses. And yes, pre-tax income increased by 5.2%, so that justifies the increase in personnel expenses. But if you look at page 17 in the other segment, the negative or the last figures are increasing and the headquarter figure was declining, but in this Q3 figure was minus Y15.7 billion. So, could you touch up on this?

Yes. For the headquarter expenses and the overhead expenses, the Q3 tended to be large. And various items are included in this. And in Q3, the main reason why the corporate or the headquarter accounts increase was in this quarter, we had the London office, which is the regional headquarters for Europe. We relocated the office, and the various expenses in relation to the relocation were booked under the corporate items account, so that’s one of the big reasons. Another reason is in EMEA, actually in U.K. due to the tightening in liquidity regulations, which is progressing at the moment. And in response to the tightening of the liquidity regulations, we need to build up a liquidity pool in the EMEA region, and this is in response to the regulations. So, in that sense, in some areas, we are seeing a negative spread type of situation, but this is necessary for continuing our business in EMEA region and that is also booked under the corporate items or the headquarter account. So, please understand that these are included in this line. So, all of these items are one of items in Q3. So, we will not see these items in Q4 onwards. But in relation to the response to the regulations, this could be a recurring item for a while. There is a possibility.

In relocating your London office, we saw worsening of about Y20 billion QoQ. So, was this a huge cost for the relocation? What explains the Y20 billion of QoQ deterioration, other than the London office relocation? Was this mainly in relation to the liquidity pool, which you mentioned?

Well, for Q2, there was some positive one off. So, we cannot make an apples, apples comparison between the two quarters.

Thank you.

Next question is from Mr. Muraki from Deutsche. So, Mr. Muraki, please go ahead.

I have two questions. First one is about trading. And for the position management, I would like to ask a question. So, the overseas financial institutions after November, they are struggling in terms of the trading, and then we don’t see a big drop in revenues. So, how did you manage your position during the term, and I would like to know the dynamics you went through and also in the competitiveness, due to the severe competition spread has become lower, shrink and that kind of comment was made. So, as for the spread of the transaction, how it is at the move or transition, please update that. And the second one is related to Basel III, and Basel III based risk-weighted asset calculation methods, and I think that we see some contents of the calculation method. If there is any change from the conventional formula, please let me know. And also since the last year or probably this year or until the next March, I think that you will be continuing this. So, I will have to know the plan if you have any change.

And first of all, trading position management, for this term, for example, October, we had a certain environment. But this environment suddenly changed in November, particularly in EMEA market or it had a big storm or hard time and also liquidity shrink at some point. And when it comes to December, we saw a rate movement drastically means the market volatility was quite high. In short, we had a disciplined positioning control and also for that purpose, risk management department did a very attentive monitoring, and this was one of the reasons. And on the other hand, against customer flow business share, it captured with this effort the overall market flows could be captured in an appropriate [inaudible], that is another reason. Therefore, from this context, our strategy was not wrong under this market environment, so we performed correct strategy given the environment today. And also the value-added risk, if you look at the figure of that, the risk standard itself, we are very cautious in terms of the controlling them. And as for the competitive status in the spread, let’s say in the area of credit, when we have – excluding the specific event takes place and we didn’t see a big change in this quarter and also the rates. For example, the government bond type product, we had a widest spread in some cases, but the trend is on a shrink means we have more competition. And I think the competitors are the same thing. As for the Basel III question, as you mentioned, several items have been cleared, clarified, but it’s not fully clarified. As of today, there was no big change. We don’t see a big change. And also our idea or concepts have not changed. And the risk-rated asset mitigation and in this context, as for the direction or strategy, there is no change.

The related question to Basel III as for the risk mitigation, the target for the one year or so the Basel 2.5 will be introduced. So, will you be targeting that for the reduction? Am I understanding it correctly? And also, in a short-term, you are going to dispose like the securitize product, which has a lower liquidity. How are you going to reduce this type of product?

So, for the timeframe, on the Basel III adaptation period should be taken into account for our mitigation efforts. This is a basic step [ph] in strategy and also a rated product. And within the derivative contract, the products which will get the maturity and then reduced then that will be reduced. And other than these products, as for the underlying, so rating acquisition will be one of the things. And also cancellation of the contract, there might be some case that we have to – the cost might be incurred. This will happen in some cases. And also, so not cancellation, that kind of methods will happen as Muraki-san indicated. Now, not only as, but also the companies are in the same situation and then if everyone looks at the same direction and takes same action, then that will cause distortion in the market. So, as mentioned before within the timeframe I mentioned previously, and we need to make adequate decision. Thank you very much.

The next question is from Merrill Lynch Japan Securities, Okamoto san.

This is Okamoto. In terms of Nomura Securities, I believe the reporting segments are retail and wholesale. This applies from this current fiscal year. Could you please disclose the figures for Q3 for Nomura Securities segment? And for the investment, which you make next year, how will you book these investments and when will the depreciation start, amortization start for the investments?

First of all for Nomura Securities and the breakdown by segments. We typically disclose this when we make the quarterly announcements and it was the same for Q2. Actually, I’m sorry. We announced the figures for the interim results. So, we announced it at the end of the first half. So, the next announcement will be when we announce the full year results. So, we hope we are understanding. We do not provide cordially disclosure. And your second question was in relation to Star Four [ph]?

Yes, Star Four [ph].

In relation to Star Four [ph], the timing of when we will start booking investments and when we will start booking them or booking the costs. Well, some of these figures will start being booked from Q4 of this fiscal year. There is a possibility. By a think most of the figures will be booked from the next fiscal year onwards.

So, you’ll book the [inaudible] for next year?

Well, I was explaining about the investment timing and the actual starting of the usage is expected to be 2013 or the early 2013. So, the depreciation or amortization will start at around that time. Thank you.

And the next question is from Mr. Shinoda from Morgan Stanley. Mr. Shinoda, please start. Shinoda [ph]: I have one question about the Q3 pre-tax income, and according to the disclosure, it’s a Y27.8 billion compared to Q2, it is plus by Y6 billion or so. So, this Y27.8 billion and the hedge part was the own kind of debt [ph], the variation and Otsuka Holdings, Y10 billion is subtracted? So, what will be the – based on this pre-tax income, what would be reality of the pre-tax income? I think it will be Y12 or Y13 billion. On the other hand, when we apply the same standard, Y33 billion. So, from Q2 to Q3, pre-tax income since to go down. On the other hand looking at the global market, so the income is increasing maybe it seems that you had some lost in Q3. So, how should I evaluate the result? At the same time, when we calculate the trading, profit and loss for Q2 would be Y210 billion and the Q3 was Y400 billion. So, on the accounting basis, it seems [inaudible]. Is my understanding correct or is there any information that is not disclosed on the material? So, you have some transient, the cost or something that I overlooked? So, my point here is in the reality basis, the income went down or not from Q2 to Q3?

So, in your question for Q3, did we have any tentative temporary loss or transition loss, we don’t have any that kind of one-time loss. But what we didn’t have in Q2 and what we have in Q3, one of the phenomena is in the investment banking other part, previously this can be called Merchant Banking. And this Merchant Banking fought in the past in the area of EMEA portfolio after the revisiting the evaluation, we made a – value or the decrease. And this was not something happened in Q2 in terms of defector and by quarter basis, we revisited the value, and during that process, we had a value loss and also there is an impact of strong yen, and the overseas portfolio went down due to the yen appreciation that is part of it. So, this is one difference from Q2 and Q3; so that the Q3 seem to have lower income. And as you pointed out, in the global markets, for example, fixed income, the revenue or profit compared to Q2, it went down. Rather than doing something in the trading, as I explained before, overall – the market customers’ activities decreased that’s why revenue standard went down slightly below from Q2. That is the reason. Thank you very much.

The next question is from Credit Suisse Securities, Ohno san.

Just one question from me, in personnel expense and the level of personnel expenses. The cumulative composition ratio was 47.1% or so. For the full year, what kind of level should we assume, should we expect? I’m sure it depends on the revenue trends, but for example last year up to Q3, it was 47.1% and for the full year, it was 46% or even below 46%. So, for this fiscal year, what are your targets for the compensation ratio? And for next year onwards, what kind of level should we expect?

Yes, the ratio of compensation, against overall revenues tends to trend at about 45 to 46%, and we have been repeating that. We want to manage it at that level. There has been no change to this policy. So, that is the benchmark that we use for managing the comp ratio. And for the next fiscal year, we are currently calculating the budget, working out the budget for the next year. And we have to consider the overall market conditions as well as our business plans for the future, and we will work out the adequate comp ratio target.

Just to add to my question, after Q3, 47.1% is a cumulative ratio. So, for the full year, let’s say it comes down to 45 to 46%, does that mean if revenues do not change that much in Q4, the comp ratio for Q4 on a standalone basis will decline? Is this what we should expect?

Well, I cannot commit to anything. But as I mentioned earlier, yes, that is the benchmark that we have in mind. So, if we are to achieve that benchmark; yes, as you just mentioned, the comp ratio should come down, yes. Thank you.

And the next question is Daiwa Securities Capital Markets, Mr. Shiyota. And Mr. Shiyota, please go ahead. Shiyota [ph]: I have two questions. The first question is about tax rate. And compared to the previous quarter, I think you had a less in the tax that are burden [ph]. So, I would like you to elaborate this point, and about the – I think this might be related to overseas profits. So, I will like you to explain about this tax rate. And just like the previous question, what standard should we – for the Q4, what can we expect for Q4, if you have any advice, please let us know. And the next one is most recent status. In the January, I think the revenue or the profit loss started to see improving compared to the previous quarter, is there any advice or guidance? That’s my question. Thank you.

As for the tax rate, as Shiyota san [ph] mentioned; yes, correct. In the Q2 and the Q1, compared to those quarters, the overseas or the financial profit and loss has been improving and because of this Q3 tax rate became lower or improved. Shiyota [ph]: And what about for the full year forecast of the tax rate?

So, domestic and overseas revenues and profits rate and start fluctuation, if this trend continues to Q4, then for the full year it will become somewhere in the 60%, somewhere mid-60% to in some cases or the early 60%, first half of the 60%. That will be the expected range for full year. Tax rate, 60%. Correct, yes. Thank you very much. And as for the most recent momentum, overall – January, yes, we had a good start. But our projection in global markets, in overseas; yes, it’s progressing smoothly or steadily. And fixed income and equity, if we look by these aspects, fixed income had a strong start; and for equity compared to fixed income, it showed a slow pace, but it follows the improvement trend that we went to in the past. Thank you very much.

(Operator Instructions). We would now like to conclude the Q&A session. But we will have a word from Nomura Holdings.

Thank you very much for participating in today’s telephone conference. We hope for your continued support. Thank you.

We will now conclude the telephone conference. Thank you for your participation.