Nomura Holdings, Inc. (NMR) Q2 2018 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Nomura Holdings Second Quarter Operating Results for Fiscal Year Ending March 2018 Conference Call. [Operator Instructions] During the presentation, all the telephone lines are placed for listen-only mode. The question-and-answer session will be held after the presentation. 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 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 investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive condition and size, number and timing of the transactions. With that, we'd like to begin the conference. Mr. Takumi Kitamura, Chief Financial Officer, please go ahead.

This is Kitamura, CFO. I will now give you an overview of our results for the second quarter ended September 2017. Please turn to Page 2. Compared to the same period last year, the first half had relatively major market events and the client activity in the fixed income markets slowed due mainly to historically low interest rate volatility. On the other hand, the Japanese stock market rally is supported by robust economy indicators and the rally in the U.S., this resulted in a gradual improvement in clients trading. Net revenue for the first half was ¥712.3 billion, up 4% year-on-year. Income before income taxes increased 11% to ¥160.5 billion. Retail and asset management both booked solid earnings growth spread on by improved market conditions, but wholesale reported weaker in net revenue and income before income taxes due primarily to a significant drop year-on-year in fixed income as a result; three segment income before income taxes was roughly unchanged from the same period last year at ¥126.8 billion. Income before income taxes outside of the three segment increased on gains related to affiliates and realized gain from securities held. Net income rose 1% year-on-year to ¥108.7 billion, annualized ROE was 7.7%, and earnings per share was ¥30.2. Today, we also announced the half year dividend of ¥9 per share for shareholders on record. As of the end of September, our dividend payout ratio was 29%. Today, we also result to acquire treasury stock to raise capital efficiency and ensure flexible capital management policy. The share buyback program will run from November 15, 2017 to March 30, 2018 and have an upper limit of 70 million shares of Nomura Holdings common stock or ¥50 billion. Please turn to Page 3 for an overview of our second quarter results. Net revenue declined to 3% to ¥351.5 billion as an increase in asset management revenue was not enough to offset a significant decline in fixed income revenues. Stringent cost control especially around personal expenses meant income before income taxes increased 7% Q-on-Q to ¥83 billion. Net income declined 9% to ¥51.9 billion. This is due to a higher effective tax rate of international income before income tax has dropped significantly amid the challenging environment in fixed income. Annualized salary for the second quarter was 7.3% and earnings per share was ¥14.45. Please turn to Page 6 for an overview of results in each business starting with retail. Second quarter net revenue in retail was ¥101.8 billion, net income before income taxes was ¥25.5 billion, roughly unchanged quarter-on-quarter. Sales of primary stocks increase along with bonds trading, but sales of investment trusts rose from the strong previous quarter. Quarter-end retail client assets climbed to a record high of ¥115.2 trillion, all the way booked net outflows of cash and securities of ¥77.8 billion. This is due to a large stock withdraw our transactions excluding this effect gives net inflow of more than ¥400 billion. This was driven by the Japan Post offering and inflows into low risk assets. The growth on the bottom left shows, investment trust sales and assets under management this quarter – so continued inflows into India’s stock funds and income focused low risk products. AuM in investment trust total ¥10.6 trillion at the end of September, as you’ll see on the bottom right, discretionary investment assets under management to reach ¥2.55 trillion driven by net inflows and other factors. This growth and client assets combined with market factors to drive as annualized recurring revenue to ¥84.4 billion and the recurring revenue cost coverage ratio to 28%, the highest level since we started focusing on the indicators. Turning now to asset management on Page 8; net revenue claimed 26% to ¥35.4 billion. On the bottom left, that you can see AuM reached ¥48 trillion, a record high for the fourth straight quarter, which helped to lift asset management fees. We also booked around ¥9 billion gain related to our strategic partner American Century Investments after taking into account, its profitability and the market trends. As a result, income before income taxes increased to ¥20.5 billion, a quarterly high since we first started disclosing segment information in the year ended March 2002. Please turn to Page 9, the top left shows inflows of ¥980 billion of which the investment trust business accounted for ¥890 billion with inflows primarily into ETFs and core investment trusts, Nomura asset management share of the public investment trust market was 26.4% as shown on the top right. The bottom right highlights the progress we are making in the bank channel, asset management is not only focused on improving performance, but also in expanding its distribution channels with city banks and regional banks, AuMs are gradually increasing if you look just at the regional banks channel, investment trust assets under management have increased by 35% over the past year.

Next please turn to Page 10 for Wholesale. Net revenue declined by 11% to ¥159 billion. As I said earlier, low volatility and subdued client activity in the fixed income market, led to a sluggish performance in fixed income, despite executing high profile ECM transactions, investment banking revenues declined quarter-over-quarter as revenue contributions from M&A and the other products were lower. Wholesale expenses declined 8% from last quarter to ¥142 billion, this is due to lower bonus provision, given our focus on pay for performance and because last quarter included a major portion of expenses related the deferred compensation. On a U.S. dollar basis expenses analyzed at around US$5.1 billion highlighting, our stringent control of costs. As a result, the income before income taxes was ¥17 billion, down 33% quarter-on-quarter. Please turn to Page 11 for global markets. Net revenue declined 12% from the first quarter to ¥136.1 billion. Fixed income declined 18% to ¥78.3 billion to weak performances in rates for the products in EMEA and the Americas. As you can seen in the regional breakdown on the right, AEJ was the only region showing positive momentum has created improved in emerging markets remained resilient, the other regions all reported softer revenues. Net revenues in equities towards relatively stable at ¥57.8 billion. The AEJ arrow is pointing up a resilient performance in cash equities while Japan is also up driven by primary deals. In Americas, both cash and derivatives declined. Please turn to Page 12, for Investment Banking. Net revenue declined 9% to ¥22.9 billion, gross revenue or revenues before location to other division was ¥43.5 billion, down 4% quarter-on-quarter. Large ECM transactions such as the Japan Post offering and to euro-yen convertible bond issuances by ANA Holdings contributed the strong revenues in Japan, while internationally M&A and financing related revenues declined. In the middle of the page, you can see the gross revenue for the first half of the year increased 17% over last year to ¥88.9 billion. The deal shown on the right are just some of the transactions we executed in the second quarter. We leveraged our global collaboration to execute in many large markets and margin product transactions related to M&A. International revenues increased 25% year-on-year. Page 13 shows non-interest expenses, Firmwide costs were ¥268.5 billion, down 5% or ¥15 billion. Compensation and benefits declined by 10%, which is around ¥14 billion. This is due to the factors I mentioned earlier in relation to Wholesale. First, the technical factor whereby recognition of expenses for deferred compensation, which is granted as a part of bonus, was higher than normal last quarter. And second, bonus provisions were lower given our focus on pay for performance. Information processing and communications is showing an increase due to one-off cost related to plant integration of Nomura Home Trade and Nomura Net & Call in January 2018. Page 14 shows our financial position. As of the end of September, our Tier 1 ratio was 18.4% under our common equity Tier 1 ratio was 17.4% applying the fully loaded 2019 Basel-III standard to our balance sheet at the end of September gives common equity Tier 1 ratio of 17.1%, while these ratios are down compared to the end of June. This is because Tier 1 capital denominating the equations declined due to the dividend payment on the share buybacks. At the same time, risk assets, which are the denominator in the equations increased mainly in market risk. That said, we continue to maintain a robust financial position. That concludes the review of our second quarter results. In October, the Nikkei set the new record rising for 16 straight days underscoring robust trading by retail investors. Retail performance in October has trended slightly above last quarter and asset management has continued to increase assets under management. Meanwhile, the fixed income market volatility index remains low and wholesale is trending roughly in line with second quarter performance. We will continue to tightly manage risk and cost and aim to take revenue upside when the market recovers.

We have a question-and-answer session now. [Operator Instructions] The first question comes from Mr. Muraki of Deutsche Securities. Muraki, please go ahead.

Thank you. This is Muraki. I have two questions. First regarding fixed income. In terms of the revenue share, when I look at that in the previous quarter or compared with last year, the share seems to have come down, but fixed income revenue compared with the previous level on the left side of Page 11, it used to been above ¥90 billion for the revenue to go back up to that level. What kind of macro change do we need or within Nomura what kind of changes do we need to see, or what kind of changes do we need to see in competitive landscape for your fixed income revenue to go back to the previous level. The second question is regarding equity. Firstly, if you have a number, we would like to have that, but in the equity revenue, cash, and derivative, and synthetic prime brokerage split unless the breakdown among those because you gave me those numbers. And related to that in equity, I have two questions. Second question, regarding the response to MiFID II. Previously ¥1.2 billion was paid by you to acquire Instinet and also that Lehman Brothers electronic execution platform was purchased, but now with your execution system that you have, do you believe you can respond to the requirements of MiFID II, in the future, do you need some system investment or do you need to acquire additional system in the days ahead? So those are the two major questions. Thank you.

This is Kitamura. Thank you very much Muraki. First, regarding the share, in revenue our performance indeed compared with last year or last quarter has come down, but for example on a year-on-year basis, is it that Nomura’s performance is particularly that that’s not the case. Already Muraki has analyzed I believe, but American peers, their numbers are similar and their numbers have declined just like us, and European peers numbers announced last year saw more significant year-on-year decline compared with American firms or us. In that sense, topline might have struggled, but in the sense of share, we believe we retained what we had. On the Q-on-Q basis compared with American peers, so our numbers may look behind this, but if you remember, our Q1 performance compared with others was pretty good. So the starting point of our launchpad to us higher in our case compared with others. In the first quarter and second quarter on an equalized base, our number I believe compared with others performance. Then this level of profitability, are we satisfied with that? No. We are not satisfied with the current level. This historic low volatility environment may continue for a while and the raise in interest rate may happen sometime in the future that we have an expectation or we expecting that timing to arrive, that’s first comment. And also moving forward, as you know at Nomura within wholesale fixed income as a huge proportion especially rates related to businesses have big share in fixed income. So for Nomura, the portfolio or the composition of revenue should be revisited. In that sense, global markets and investment banking are collaborating together to offer solution businesses because that’s what we’re focusing on now. Secondly, second question that you asked me Muraki. Your question, the breakdown of equity revenue, prime and brokerage, and execution and so on. What is the breakdown? The prime brokerage share is not that big, though we are not disclosing the breakdown, but research and sales, and low touch execution, including those services among all equities probably the proportion is about 50% to us, slightly above 50%. And what do you want to know regarding the research and sales which directly impacted by MiFID II. Their proportion in equity if not that high. Some kind of impact in May – there maybe some kind of impact, but the impact on the bottom, we believe it's not that big or fairly small. Also with regard to MiFID II or impact from MiFID II, as well as our response to that; firstly, I could say that with regard to MiFID II impact from regulation cannot be accurately measured as of now. But as you know, last week – at the end of last week SEC in the USA issued a no-action letter and also a European Commission issued FAQ. So we see those moves. So as for the extraterritorial implication, it seems those regulators are coming up with a pragmatic approach, but we cannot be complacent under such circumstances. How does Nomura respond by leveraging our unique strengths? That's the key we should focus on, in the case of Japan alone, Nomura securities as dominance in the market of Japan. So the extent of impact of MiFID II is not clear as of now, but we still have the possibility of being chosen by clients. As for the USA, actually passive investors – they are portfolio trading from passive trade, the passive investors, in other words basket trading. We are ranking within top five. This is surprising a number, but in that sense execution dedicated to broker maybe the perfection that’s people have about Nomura. In Europe, as explained all along, in April last year research in sales has been closed and now we are focusing on execution. And the topline is growing in some area, so Instinet execution capabilities are being highly evaluated I believe. So given all those things, research people should decline maybe a potential negative impact. But by using the existing platform of – execution platform of Instinet, I do believe we still have a chance of increasing revenue. And in the sense of Instinet, in August this year to enhance the functionalities, alternative trading system held by a BlockCross was acquired to enhance block trading and to improve the efficiency. So large sized acquisition is not on the horizon right now, but opportunistically will be in such of chances of acquiring boutique houses.

This is Muraki. Thank you very much for your clear answer.

Next question is from JPMorgan Securities, Ms. Tsujino. Ms. Tsujino, the floor is yours.

Thank you for this opportunity. There are two things. First, this time segment to others, if I look at this other portion, JAFCO ¥9 billion plus, CVA/DVA and [net bookings] evaluation gain, it's something that we can understand ¥2.1 billion, but excluding that this negative portion is quite significant, Q-on-Q changes as I look at them, FHA for litigation related additional cost is probably shown. And that’s a little more than ¥10 billion I suppose and assuming that concerning this provision or reserve, is it alright to look at either the final figure concerning this reserve? And amount somewhere close to this in the marketable securities report concerning those litigation, similar litigations, maximum even when their losses maximum, it’s ¥45 billion or so. Am I correct in assuming those or was there something more significant included, but at a closer scrutiny, this is what you have ended up was – could please let me know about the situations? That's question one. Question two. The first quarter was so good. So if you just put even [reach out] then is comparable to other peers. But by country, we have information available there we have to [indiscernible], but there was a significant dip by product where there is salient moves by product when there was a significant dip? Third question, you may now be able to talk about this, but to Frankfurt from London, looks like there are some talks of transferring people to Frankfurt approach. In terms of cost, what’s the vast estimate of cost that you saw?

There are three questions, segment other part. As you rightly supposed FHFA litigation related reserve is included there. Having said that, this litigation is still ongoing, in terms of the sale of demand, I'm afraid I cannot disclose that, I'm sorry. Having said that concerning this litigation and generally speaking, possible losses or probability of the losses is significant, the losses can be estimated based on accounting policies, the reasonable amount has been reserved. Concerning the sentencing by the Court of Appeals, from my point of view, accounting wise what has to be done has been done. That is my answer. In terms of the amount, in the marketable securities report, whether that's covered in that maximum losses regarding that question. Yes, it is included in the maximum losses. Regarding your second question, fixed income dip has been – what are the products where they saw a significant dip or decline. We already answered Mr. Muraki’s questions, at Nomura. The rates related to general macro products, the dependency on those in terms of the profitability is high compared with peers. In credit related products, we are not that dependent on them. The low volatility of interest rates, I think this is historic in terms of its lower levels volatility, but as a result of compared with peers perhaps we were exposed to that. Americas, EMEA, [indiscernible] in this regions raised related businesses suffered, Brexit, transferring people to Frankfurt regarding that issue. To be honest with you, whether it would be hard Brexit or the soft Brexit and people are talking about the transition period. So what will be the extent? We are still monitoring the discussions. On our part at the moment, it's not we have finalized our policies, but we would like to make sure that we cater to the needs of the customers, no matter what happens. We want to provide the customers with our services. New company, according to our policy, we will be established in Frankfurt. At the moment, we are not assuming a significant cost, depending on the situation, we would like to monitor the situation, and then we could perhaps come up with the more accurate estimate of cost question. You mentioned that you cannot disclose the numbers. I understand that, but the maximum loss is ¥45 billion. That’s listed in the marketable securities report. So if we go through the numbers estimated at the time, it’s something similar to what you see cost now or actually, is it actually lower than what was estimated in the marketable securities report? Could you elaborate on that?

This is Hoshino. Again, I would like to withdraw from answering that question. Tsujino, said understood. Thank you.

Next question comes from Mr. Watanabe from Daiwa Securities. Watanabe, you will have the floor.

Thank you. This is Watanabe. I have two questions. First question is about the markets business with an equity regarding clients flow and the revenue from the top positions, what’s the breakdown? The second question is regarding wholesale cost, annualized cost of ¥5.1 billion is what you communicated, but because of the deterioration of performance in USA and Europe is there a possibility for you to reduce the fixed cost base? Those are the two questions from me.

Thank you. This is Kitamura. Regarding the first question fixed income. Equity and flow and trading breakdown for fixed income from client flow about – close to 90%, and trading represent about 1%, for equity 90%, from client flow and about 10% from trading. For wholesale cost, this time it is not that performance was weak, we are reducing cost that's not the case. No matter what’s the performance is. We focused on reducing our fixed cost. The information has gone now to the media, but across the world FinTech and other technologies are advancing at a significant pace. So RPA and AI and those twos are going to be utilized, and also through location strategies, we will be revisiting that structure where we are moving stuff from high cost locations or cities. So location strategies including offshoring and near shoring and through those measures, we will be reducing cost, that's our plan. As for the personal expense, we have been executing pay for performance and we will continuously work on that.

This is Watanabe. Thank you very much. Regarding the first answer, the fixed trading decline was significant this quarter, but what’s the reason?

This is Kitamura. To give you an answer. I received similar equation from Mr. Muraki and Ms. Tsujino. But Nomura fixed income flagship product is micro or rates product. Those business lines declined even though that’s the trend witnessed across the financial industry, but the proposition of such business line to the fixed income business was high with Nomura.

This is Watanabe. Thank you very much for your clear answer.

The next question is Lui from Guoco Management. Please go ahead.

Good evening, Kitamura. I am looking at Page 20 of your PowerPoint. Page 20, if I look at the last two lines, it appears to me that the tax rate for the September quarter was very high compared with the previous quarters. Is it possible for you to shed some light on why we had a higher than usual tax rate for the September quarter? That’ my first question. And then I have a second question. Thanks.

David, thank you. More recently, for the past five, three quarters or so effective tax rate has come down. Overseas revenues have been so good, that is the major factor behind this. Regarding overseas here, deferred losses and deferred tax assets or DTA on them have not been listed. So before tax is the profit and that goes down directly to the net P&L, net profit. That was the passed tendency, but if you look at this overseas, almost breakeven plus ¥900 million or so for these past five or six quarters. We’ve had those benefits, but in this quarter, we couldn't enjoy those benefits. That's a major factor.

Okay, thank you. Let me ask my second question, which is on Page 24 of your PowerPoint. If we look at the retail brokerage commission and also the retail commission for distribution of investment trusts, they have being kind of flat to being down for the last three to four quarters. Luckily with the election results and also expectations for the ODP, when the trading volume according to the Tokyo Stock Exchange increased in the month of October, I think it was up about 18% versus the September quarter. Should we model this kind of increase in commission and/or commission for distribution of investment trust for Nomura in the December quarter? I'm talking about looking at the Tokyo Stock Exchange. It's about an 18% increase so far for the first month of December quarter?

First of all, five years ago, if you look at retail business model because of this transformation compared with the past, the leakage to the Japanese equities, I think has come down a little bit. Consulting advisory business is something that we do as a mainstream and we would like to grow them significantly then [EK] average, your trading volume simply because it increased or it goes up with the high correlation our profits to increase, that’s not the case. Of course if the market is good, obviously there are some positive factors. But I hope that you will understand this I think David and you asked similar questions there about you are looking at brokerage commission alone. Perhaps it will be difficult for you to sort of follow the – what we do in the retail I remember saying that sort of thing, if you look at October, 18% that’s better than September. Thus regarding the third quarter, the performance is good. As David already mentioned to you because as it has been in our retail, of course that will have the positive impact that is our expectation.

Okay. Thank you, Kitamura. Good evening. Bye-bye.

The next question comes from Mr. Niwa from Citigroup Japan. Niwa, please go ahead.

Thank you. This is Niwa. Regarding a shareholder return and also regarding retailer division, I have one question each. First, regarding shareholder return, so you announced the share buyback? So the level of share buyback is it an annual level or is it related to the adjustments of the capital level and stock price. So the total return ratio is it what you are referring to or are you going to be setting total return ratio targets for this year? My second question is related to the question from David that’s regarding retail division. Looking at the stock market, the market seems robust and there seems to be some of success story, but at the same time in flowing to low risk assets seems to be continuing as you explained, and in October probably overall trading trend would be net sell off. So what I want to know is in your mid-term, ¥25,000 Nikkei stock average forecast and based upon that you'll be accumulating clients’ assets and given the current inflow or pace of inflow is their alignment or risk taking by clients may not be what you’ve assumed. You've commented on those, but with regard to for clients to take risks, what is needed to happen, can you comment on those? Thank you.

This is Kitamura. Thank you very much for your question. First regarding share buyback. So regarding the buyback announced, this is not specifically for the return for the first half, but it’s a return for to correspond to this fiscal year because if anything this time capital ratio, while CET1 ratio has come down by 0.7 percentage point both will CET1 ratio and capital adequacy ratio. But from Nomura’s viewpoint, the capital ratios are still at high level, and for our stock price, relatively speaking our current stock price is considered low. So in that sense, the share buyback announced this time. We believe will contribute to improvement of shareholder value. So we set the limit for share buyback. As for the total return basis, whether or not sure whether we should consider this on the total return basis. It's difficult, but given various types of shareholder returns, total return is one thing that we consider, but it's not a major benchmark we are focusing on. We do not have our explicit policy on that whether we consider buyback as a shareholder return or investment. There are various viewpoints, but the current, given the current ROE and stock price for Nomura, buyback is rational approach. On the other hand related to your second question regarding the retail division. As you rightly pointed out, the selling pressure is pretty strong. For the first time in 20 years, Nikkei stock average reached a record high in 21 years. So for some investors they can finally sell their positions. Then in the short-term there would be a strong selling pressure. And from now towards ¥25,000, where would Nikkei average proceed? For the time being investors will try to cash in on what they have to secular profit. But as [indiscernible] mentioned success stories or successful experiences are important looking at Japan stock prices. In this historically low interest rate environment and given the performance of companies – the stock prices seen at low level. So various types of products such as saving type product, if funding flows into those products then investors will be able to experience successes. In order to proceed with business model transformation, in April this year, we’ve abolished district-based system in retail division, and retail branches of our side closest to our clients, so they've been given bigger authority. So each retail branch can implement their own strategies and tactics. Six months have passed since that changed and we are seeing pretty positive moves. Since retail branches are conducting their own actions, we feel stronger or bigger energy among retail branches, and also Nikkei’s averages is going up, so the atmosphere at branches is quite upbeat from here towards the target of expanding client’s assets. We have to strengthen the segmentation of clients and also we have to enhance the knowledge level of our sales staff. And since we cannot handle all segments of clients, so we have to optimize the segmentation of clients and we have to win trust from clients, that's a new benchmark market that we've introduced. So besides variable products, we will be focusing on saving type products, so types of products that can be easily accepted by our [matures] and investment. So I may not be directly answering your question, but through various measures, we are facing clients – to improve the satisfaction of clients and by – and listing or veining with their trust, we would like to encourage them to increase their risk appetite. So in the quarter such process we would like to conduct a thorough follow-up with our clients in building the assets.

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

[Operator Instructions] Next question is from Merrill Lynch Japan Securities is Sasaki. Sasaki, the floor is yours.

Sasaki, Merrill Lynch Japan Securities. Two questions about return to shareholders. First, this fiscal year around ¥100 billion share buyback will likely to be executed by you. But this level of share buyback, if the share price is about the current level, if the performance is comparable to current level, then in the next fiscal year as a possibility are you planning to do the share buyback in the next fiscal year? What about the probability as for the share buyback, regarding what’s you have already bought? Are you planning to actually redeem it with [item]? I would like to ask you about this policy.

October 23, the share buyback 100 million shares to ¥80 that has been said. With regard to this 2017 March fiscal period shareholder return – that for this term this ¥50 billion, that's from March 2018, this current fiscal year return for the shareholders that’s average. On the share prices and performance, if they are at the comparable level as now, we are planning to do the share buyback in this comparable level next fiscal year. Regarding that question, I wouldn't deny the possibilities. Another thing is, it concerns regulations. It has been sort of postponed and postponed and we’ll probably have more visibility then – so what happens to regulation to would be another factor. As for the share buyback, partly it is return to the shareholders on the other hand. From our side, it is also an investment as I shared with you before. In that sense, including the situation of the condition for businesses, the regulation business, those will be looked at in a comprehensive manner that would be my answer. Regarding your second question, are we going to retire or redeem build shares, as one option – in continued basis, we have been studying that regarding the timing of the retirement at the moment nothing has been decided, but this is one of the most important capital policies. So we cannot disclose when it will be done, but just suppose that it would be retired, they will be retired using press release among others. We would like to make sure that we will give you a good explanation, but at the moment nothing has been decided in this regard.

A follow-up question, if the [FRGB] the effects to become more visible and in December concerning the create risk evaluation about the flow. If we have more definite the deal matters are decided. If I look at to the CET1 ratio of your company, if it goes down to a certain level then share buyback might be difficult. If you could just share with a second yardstick, I would appreciate that.

We have already to set to the external Committee CET1 ratio 11% or higher, we would like to make sure that we will be able to maintain that. So we're going to control this Tier 1 ratio to 12.5%, minimum, we must maintain to these ratios concerning to CET1 and Tier 1 ratios.

About the BAFA, in each 12, then it will difficult in each 13. You would have to think about it. Don’t you have to think about this range? A – Masahide Hoshino: Regulations to demand much lower ratios, somewhere like 8% and putting some BAFA, and then 11% – is where we see 11%. Is this is okay. Sasaki, you asked this question. In my personal opinion, 11% that is I’m not really comfortable with that. So did I answer your question?

Sasaki said thank you for clear your answers. I fully understand. Thank you.

[Operator Instructions] Our next question comes from Mr. Ban from Morgan Stanley MUFG Securities. Mr. Ban, please go ahead.

Hello, this is Ban. I have two questions. First question is as you explained with asset that has gone up, so that – and you took some more risk, but at the same time, volatility has did low under some circumstances. We had specifically – did you see more risk taking in the past quarter? That's my first question. My second question is somehow related, but moving forward if low volatility environment continues, then you would increase solution businesses, but you also already issued this. But regarding cost base, are you going to be reducing cost base further based upon the revenue generating environment?

Thank you. This is Kitamura. Regarding the first question, the risk weighted asset, which went up by about ¥500 billion, compared with last quarter, that's how I understood your question, but the major factor is market risk. But we did not take extra risk, but there is technical factor to go into more details, under Basel rule, there is Stress VaR. In 2007 and 2008, financial crisis hit and if similar huge displacement happens in the market then that kind of scenario is the assumption used for the Stress VaR in this quarter. Coincidentally that position when up slightly, as a result risk weighted asset seems larger due to this technical reason. For Nomura, we did not take particularly big risk, but because of the calculation of technical factors, the number went up slightly. The second question you asked was about cost base, whether we are going to reduce cost base further if the current conditions continue. But as I mentioned earlier, cost reduction is not influenced by the environment, no matter what the environment will continue with cost reduction, specific measures have been explained earlier. But Mr. Ban, if your question was about restructuring of large scale, at this point in time we are not considering any significant restructuring. Stringently, we are conducting pay for performance. But as of now, we are not planning any restructuring just like the one we conducted last year. This is - I think very much for your answer. End of Q&A

[Operator Instructions] Since there are no questions, we would like to conclude the Q&A session. From Nomura Holdings, please allow us extend some of the remarks.

Ladies and gentlemen, thank you so much for staying with us until the 8, no late of 9:30. To sum up, we have been working to transform our retail business model since 2012. We’re implementing a number of initiatives to increase client assets. Second quarter net inflows of cash and securities were essentially positive and the inflows our new indicator adopted since April has grown higher each month. As I shared with you already, the Japanese stock market has valid in October and put this market environment as a tailwind. We will focus on providing consulting services to help our clients build their investment portfolios. Turning to international markets. Our international operations remained profitable despite the challenging conditions in fixed income. If market volatility picks up, we can expect to see an uptick in market participants activity. We are making progress in embedding risk culture of not taking unnecessary risks, and at the same time, we continue to tightly control our cost base. Given the second quarter revenue levels, we would have been in the [red] a few years ago. We will continue to tightly manage a risk exposure and cost base while waiting for market conditions improve. We will also focus on stepping up collaboration between global markets and investment banking to deliver more solutions to our clients. Thank you very much.

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