Nomura Holdings, Inc. (NMR) Q2 2023 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Nomura Holdings Second Quarter Operating Results for Fiscal Year Ending March 2023 Conference Call. Please be reminded that today's conference call is being recorded at the request of the hosting company. [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 achievement of the company to be materially different from the results, performance or other expectations implied by those projections. Such factors include economic and market conditions, political events and investor sentiment, liquidity of secondary markets, level and the 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. Takumi Kitamura, Chief Financial Officer. Please go ahead.

Good evening. This is Takumi Kitamura, CFO of Nomura Holdings. I'll now give you an overview of our financial results for the second quarter and first half of the fiscal year ending March 2023, using the document titled Consolidated Results of Operations. Please turn to Page 2. Net revenue for the six months to September was JPY617 billion, a decline of 8% year-on-year. Income before income taxes was JPY43.2 billion, down 55% compared to last year. Net income declined 64% to JPY18.5 billion. As shown on the bottom right, three segments income before income taxes was JPY49.7 billion. Market uncertainty continued during the six months period as the yen depreciated rapidly due to monetary tightening and widening of the interest rate differential between Japan and the U.S. and due to concerns of a recession. Sentiment among retail clients worsened and slow sales of stocks and investment trusts meant flow revenues dropped significantly. Investment gain loss on investment management was negatively impacted by mark-to-market valuations of shareholdings due to worse market conditions and also because the same period last year included revenue contributions from an IPO of an investee company. As a result, both divisions reported lower results compared to the same period last year. However, in both divisions, we are seeing progress in our efforts to increase assets over the medium to long term. Despite the market headwinds, retail recurring revenue and Investment Management business revenue both grew year-on-year. Wholesale performance rebounded during the first six months. Fixed income reported stronger client flows on the back of heightened interest rate and FX volatility, resulting in revenue growth driven by macro products. The absence of losses related to transactions with the U.S. client last year also contributed to improved performance. Segment other was roughly unchanged from last year. An unrealized loss of JPY5 billion was booked due to a decline in share prices of securities held for operating purposes. That concludes the overview of our first half results. In terms of shareholder returns, we announced a half year dividend of JPY5 per share for shareholders of record as of the end of September. Let's now take a look at performance in the second quarter. Please turn to Page 3. All percentage comparisons I mentioned here are quarter-on-quarter. Net revenue was JPY318 billion, up 6%. Income before income taxes was JPY31.5 billion, and net income was JPY16.8 billion, both representing improvements from last quarter. While the market uncertainty had an impact, this performance is far from satisfactory. EPS was JPY5.41 and ROE was 2.2%. Three segment income before income taxes, which represents our core businesses, was JPY31.2 billion, an increase of 69% as investment management, investment gain loss improved. Let's now take a look at second quarter business performance. Please turn to Page 6 for retail. Net revenue increased 2% to JPY72.5 billion, while income before income taxes grew 12% to JPY5.5 billion. As shown on the bottom left, recurring revenue was JPY33.9 billion, up 5% on ongoing net inflows of recurring revenue assets driven by discretionary investments and loans. Disciplined cost control resulted in a recurring revenue cost coverage ratio of 51%, marking the first time it was above 50%. Flow revenue was flat at JPY38.6 billion. Market uncertainty impacted investor sentiment leading to a slowdown in sales of investment trusts and foreign stocks. However, we are making progress in asset consulting. Consulting related revenue, which is included in flow revenue, grew by 25%, driven by insurance, real estate and advisory services. Page 7 shows sales by product. Total sales slipped 2% in the quarter to JPY4.6 trillion. For investment trust, the donation scheme of the ESG fund, Nomura Sustainable Select launched in July, gained support spreading across Japan. And while global equity funds also saw inflows, total sales of investment trusts declined 16% due to weaker investor sentiment. On the other hand, sales of stocks shown in red, increased by 9%. Primary transactions were virtually non-existent and sales of foreign stocks slowed, but sales of domestic stocks grew by over 10% on the back of our market rebound in August and buying opportunity in September as the market turned bearish. Please turn to Page 8 for an update of KPIs. Net inflows of recurring revenue assets shown on the top left as JPY127.9 billion. As you can see on the top right, recurring revenue assets at the end of September had dropped to JPY18.3 trillion, but the quarterly average actually increased and recurring revenue remained resilient after bottoming out in the fourth quarter. The bottom right shows number of services for salaried employees increased to 3.45 million, representing steady progress towards the KPI. ESOP in particular, is growing, and we are seeing cases of ESOPs being transferred to us, given the good reputation of our services and systems. Participant numbers are also increasing as we make various proposals and provide information. Please turn to Page 9 for an overview of the investment management. Net revenue was JPY26.2 billion, and income before income taxes was JPY5.6 billion, both improving from last quarter. Investment gain loss, which has had a significant impact on performance over the past two quarters, improved to negative JPY3.7 billion as ACI related loss narrowed and unrealized gain loss on investee companies of Nomura Capital Partners also improved. Business revenue remained stable at JPY29.9 billion. The asset management business was solid, booking inflows into both the Investment Trust and Investment Advisory businesses resulting in asset management fees similar to last quarter. This quarter, there was no contribution from performance fees due to issues around the timing of calculations. Please turn to Page 10. As shown on the top left, assets under management at the end of September was JPY64.8 trillion, down by JPY800 billion from the end of June due to -- due mainly to market factors. Average AUM for July to September remained higher at JPY66.2 trillion. Net inflows shown on the bottom left was JPY140 billion for the Investment Trust business. MRFs, where individuals park their idle funds, reported outflows of JPY160 billion as these funds were likely used to make new purchases during the market correction. Core investment trust shows inflows of JPY300 billion, and we also booked inflows through the Nomura Securities channel from publicly offered fund investing in U.S. unlisted REIT and the ESG fund. The bank channel and DC funds also reported ongoing inflows. The Investment Advisory business posted inflows of JPY89 billion. In Japan, we booked inflows into alternatives while internationally into equity funds. As shown on the bottom right, alternative assets under management exceeded JPY1.2 trillion and we are making progress in our push into private markets. Please turn to Page 11 for an overview of wholesale performance. Net revenue increased 3% to JPY205.5 billion. Fixed income had a good quarter driven by macro products. Investment Banking performance improved and the weaker yen also contributed. Expenses increased to JPY185.3 billion, while we were able to contain variable costs such as pay for performance bonuses and commissions and floor brokerages. The sharp depreciation of the yen and an increase in various expenses, such as business development led to higher expenses overall. As a result, income before income taxes declined 20% to JPY20.2 billion. Now please turn to Page 12 for an overview of results by business line. Global Markets net revenue was roughly unchanged from last quarter at JPY177.5 billion. Fixed income net revenue increased 3% to JPY115.6 billion. Macro Products had another good quarter with AEJ FX and emerging posting its strongest quarterly revenue in 6.5 years. Spread Products saw a slight slowdown in Securitized Products, while Credit remained solid. Equities net revenue remained sluggish at JPY61.9 billion, amid the ongoing uncertainty. Equity Products revenues were flat while execution services slowed slightly as market volumes declined. Please turn to Page 13 for Investment Banking. Net revenue increased 18% to JPY28 billion. Sustainability related and cross-border transactions contributed to the advisory business, which delivered stronger revenues in Japan, EMEA and AEJ. We worked on multiple private placement transactions, such as for GRIDSERVE Sustainable Energy shown on the top left of the right-hand side. ECM was slow as corporate shied away from fundraising and IPOs, but DCM delivered revenues in line with last quarter as we executed multiple sustainability related to bond issuances. Demand for solutions such as equities, rates and FX is on the rise, reflecting current volatile market conditions. Now let's turn to expenses on Page 14. Groupwide non-interest expenses were roughly flat at JPY286.5 billion. Overall costs were up due to yen depreciation, while other expenses declined by 26% due to lower legal expenses. Page 15 gives you an overview of our financial position. As shown on the bottom left, our Tier 1 capital was JPY3.3 trillion, an increase of over JPY80 billion from the end of June driven mainly by an increase in FX translation adjustment due to the weaker yen. Risk-weighted assets increased by JPY300 billion from the end of June to JPY17.2 trillion. As you can see in the waterfall graph on the bottom right, credit risk increased by JPY300 billion, mostly due to yen depreciation. As a result, our Tier 1 capital ratio as of the end of September was 19%, and our CET1 ratio was 16.8%, both in line with last quarter. That concludes today's overview of our second quarter results. This quarter was challenging given the market uncertainty. But as I said at the start, each of our businesses is steadily moving forward with their strategic initiatives. Retail has started a program sponsored by the Head of Retail and myself, as CFO to improve revenues and revise the cost structure. We have gained an understanding of the detailed strategy and the numbers for each segment and identified areas for cost reductions. We aim to boost revenues through this project. The market uncertainty remained through October, and we are yet to see a full rebound in performance. However, our retail channel is delivering growth -- strong growth in sales of USD bonds in terms of transactions and value through successful product marketing that taps into market movements. In Wholesale, our financing businesses faced a challenging environment, but Macro Products and Fixed Income and our Advisory and Solutions businesses and Investment Banking made revenue contributions. And overall, we were able to benefit from portfolio diversification. We also tapped into volatility around rate and FX, sales of foreign bonds to Japanese institutional investors and investments in yen bonds by international investors both increased from the prior year. In October, we saw a pause in U.S. interest rate hikes and a strengthening dollar, and our trading business was generally slow. But from November, we have several events, including the U.S. midterm election and FOMC meeting, so we see revenue opportunities ahead as volatility returns. While the market uncertainty is expected to continue for now, we will continue to stringently manage risks while providing liquidity and solutions to our clients. Thank you very much for your continued support.

Now we have our question-and-answer session. [Operator Instructions] The first question is from SMBC Nikko Securities, Muraki-san. Muraki-san, please go ahead.

Thank you. This is Muraki from SMBC Nikko. Two questions, please. First, on Page 11, the wholesale cost, wholesale expenses. Revenue increased both Q-on-Q and Y-o-Y, but the cost increased even more. And in your final comment, you touched upon it briefly, but how do you plan about the cost control in the future? Any decisions that you've made or any considering decisions that you're making at the moment? Could you share to the extent possible, please? My second question is, this somewhat overlaps with my first point. But on Page 22, the Americas business profitability, how to think about this profitability? In the Americas, the pretax loss, JPY22.4 billion. And this time, there's the SEC penalty, JPY6.7 billion, and ACI is marked down. I don't know the exact amount, but let's say that's JPY5 billion or so. So even if there were -- if it were not for these losses, there still is about JPY10 billion of loss. And the U.S., which is mainly market-related operations, the earnings environment wasn't that bad, I think. So what is the reason for this loss-making trend in the U.S.? What were the factors behind this? How do you see -- how do you -- how are you viewing this? So my point is, your peers are fundamentally reviewing their U.S. operations, and I think the U.S. business is quite capital heavy. But as CFO, how are you thinking about the capital efficiency of the overall group? And do you plan to keep operating the U.S. business as you are today? Is it okay from a capital perspective and could you share your current thoughts, please? Thank you.

Thank you, Muraki-san. This is Kitamura. Your first question about wholesale expenses. As you pointed out, the cost income ratio is 90%, somewhat high. And this is due to inflation and also the rise in fixed wages outside of Japan, which is inevitable, but we will continue to work on lowering the expenses. In Q2, there was somewhat of an extraordinary factor, and we were dragged by the market, and we had to do some markdowns. And that also was the reason why the cost was slightly higher. And if we exclude that, the cost income ratio in Q2 would have been pretty much in line with Q1. However, 87% is not that low either. So we will continue to work to lower the costs. And this cost income ratio and in order to lower the ratio, we need to grow the top line. And in this quarter and in the first half, the finance related businesses and the advisory businesses were not that strong, especially because of the very strong sluggishness in the market. So once that picks up, we expect the wholesale revenue base to improve, and that will lead to lowering the cost income ratio. Meanwhile, in terms of the amount of the expenses, from the beginning of the year, we have been working on each product and project and carefully assessing the expenses. And we have been seeing where there is the redundant costs or where there's the growth potential. With the new head, Chris Wilcox, we are communicating closely with Chris as well. And in terms of business growth opportunities, it's very important to seek such opportunities, and we need the infrastructure to support that. And we also have to invest in the control platform, which supports business growth. But because of COVID, we have been working remotely and looking to improve our productivity. So we now know where there is room for productivity improvement, better than we did in the past. Sorry for the long answer, but we will focus on growing the top line and making our business operations more productive, and we will seek to lower the expenses from both sides. Your second question about the Americas and the profitability and how we think about it? As you point out, in this quarter, there was more than JPY20 billion of loss. And there was the penalty and the ACI markdown as well. And so in this quarter, the business was very tough, very slow. And as for rates products, rates products continue to do well, but the agency mortgage business, which was impacted by the interest rate environment in the U.S. and primary issuance, was very slow. As a result, our core business, which is the agency business was affected, and we faced headwinds there, as you pointed out. And in investment banking, we, as well as our peers, who are engaged in global M&A deals, suffered a decline in the number of opportunities. And we are trying to expand the U.S. advisory business, but that turned to be difficult. And as I mentioned earlier, we were dragged down by the market factors as well, and there was the inventory markdown in loan products. So there were multiple factors, which affected our main line of business, as you pointed out. And in this first half, Americas wholesale business was somewhat tough, but in terms of global markets, we have multiple products with which we are in a very good position. For example, the securitized products, equity derivatives, we are in a very good position in these businesses. And yes, at the moment, we are facing some difficulties. But in the mid to long-term, we don't have any serious concerns about these businesses. And the Americas is the largest IB fee people. And of course, Nomura cannot cover all products and all sectors, but we will continue to expand the IB franchise in the U.S. And when it comes to IB, in Q2, things were quite tough, as you are aware. But sustainability related opportunities continue to exist and that was quite robust, and demand is becoming much more diverse in the area of sustainability. So we have set up Greentech Industrial Infrastructure, which we newly set up, we call this GII. And we are having the GII team make sure to capture opportunities and monetize in this area. And we cannot cover all industries, so we are choosing the focus areas where we will put in our efforts. And in the advisory business, I commented briefly in my presentation about private placements. We are doing that as well. And we are seeking to expand the potential buyers in this area. And yes, at the moment, things are a bit tough, but the performance over the past few years hasn't been that bad in the U.S. We don't have to be overly pessimistic, I think. Thank you.

Thank you. This is Muraki again. So at the moment, in each geography and each product, there's a capital that you have allocated to each business and product. And so you are comfortable with the current balance and you don't feel you have to do a major review of the capital and ROE was quite low in the first half. But this is, you're going to await the improvement in the market environment, is that how to think about it?

This is Kitamura. Well, we're not just going to wait. And that is not sufficient for the management, I think. So we will work on lowering the cost levels and improving our competitiveness as well as forming our mid to long-term outlook. And we may choose to withdraw from some businesses or stop the expansion of certain businesses. And this isn't just because of the current environment, we are always reviewing our businesses in that way.

Understood. Thank you very much.

The next question is from Mr. Sasaki of BoA Securities. Mr. Sasaki, please.

Thank you. I am Sasaki from Bank of America. I have two questions. First question, it's related to the previous question, but looking at the first and second quarters, the performance is not as strong as you would have liked, I believe. But you said for the time being, you do not expect much to change. But this year, we are coming closer to the end of this year. But how can we be satisfied with this situation or are we fine with the situation? But given the difficult situation, it seems to be a high time for you to start thinking seriously about cost and taking actions in order to secure a certain level of bottom line. Isn't there the opportunity or room for some cost actions? That's my first question. And second question is regarding investment overseas. What is your view toward the large-size investment overseas? There is talk that some assets or businesses are being sold overseas. But what is your risk appetite in overseas markets. Those are my two questions.

Thank you very much for your question. This is Kitamura speaking. Because of my position, I cannot be overly optimistic about outlook. But as you rightly mentioned, if market environment greatly or sharply improves, we will be very delighted, but we cannot count on that. So we would like to avoid a situation where we keep shrinking our business. So we would like to make necessary investment and secure the appropriate cost revenue structure. So in that viewpoint, we will be working on some cost actions. Firstly, in Retail division. Retail division head and myself started projects as joint sponsors. For example, MIS, strengthening for each domain and also HR strategy and IT and SG&A review, and there are various work streams that were launched. And for each area, actions have been identified for Retail division. And also, we are suppressing the new hiring and also we are revisiting various systems to control personnel expense. So naturally, we are working on those actions. And also the radical review of existing cost is unavoidable. I might have mentioned this before, but when it comes to IT or system applications, we have quite a few number of systems or applications right now. Of course, we have necessary -- they are necessary infrastructures, but some of them could be nice to have system applications, given the limited number of users for some systems or applications. So this is not just limited to Retail, but globally, regarding IT systems and applications, I am urging some stakeholders to revisit the IT systems. Cost control is what we can do proactively. So we would like to do what's necessary. Regarding your second question, our view on overseas investments. Looking at media coverage, there are media reports about some assets or businesses being sold. But generally speaking, share increased through M&A, that's always an option for us. But we are not taking random approach. So know-hows are taken products that we do not have or something that we can expect synergy from or something that gives us access to clients, if there are such opportunities, we are open to making investments. But at this point, there isn't a specific target for investment. Also, in 2024, in Japan, the Basel III finalized version will be introduced. So with a view to that, we'd like to keep a good balance between finance and investing activities. But it is not that we do not have any thinking or consideration of investment. The private area will be potential areas for investment. In the area of IB, we mentioned Greentech, but in the first half, Investment Banking itself was challenged in terms of its operating environment, but the acquisition of Greentech is evaluated as a successful case -- successful transaction. So different forms of inorganic growth could be possible. For example, digital or other core sectors, those sectors may be some sectors that we might be interested in. That concludes my answer.

Thank you very much for Mr. Kitamura for your answer.

The next question is from Citigroup Securities, Niwa-san. Niwa-san, please go ahead.

Thank you. This is Niwa from Citi. Yes. Thank you. ROE and a question related to ROE, please. And this overlaps with the questions made so far. I think it's more of a revenue issue rather than a cost issue when I look at your ROE. And it's up to the market and also the client activity, I think. And my question is, in the midterm, you say asset management, you want to grow your business and you have the -- you wanted net inflow, and you want to have the more sticky businesses, or in the origination and structured finance, you still haven't achieved results yet, but you expect them to become revenue drivers in the future. Other than Greentech, if there are any opportunities like that could you please share them with me. I'm interested in businesses that are not dependent on the market, and they may not be that flashy, but they could become pillars of revenue in the future. So if you have any opportunities like that, please mention that. And I may have some follow-up questions.

Yes. Thank you. This is Kitamura. ROE, this time 2.2%. And as you say, it is definitely a revenue issue as well. And we are working on the cost reduction as I said, and we are taking proactive action to lower our expenses. So it's definitely like we will continue our efforts on lowering the expenses, but growing the revenue is also important. And in that sense, yeah, you used the word sticky, but it depends on how we define sticky. But I guess you're referring to the income that stays over the long term and doesn't go away. And in that sense, as you say, Niwa-san, investment management, the question is how to grow the investment management business. That is a very important key in growing revenues. And we still haven't been able to achieve the positive results in terms of numbers, but we have the businesses like the Green Fund, setting up the Green Fund, or we are working with Nomura and Nomura Real Estate in the real asset joint venture. And we would like to grow these businesses over the mid to long-term. Meanwhile, the Investment Trust business, which is our core business is also a big theme for us. And Japanese government has announced its policy to try and double the asset income -- asset-based income, and Nomura is ready to support that and follow up on that government initiative. And for example, in Q2, the investment trust business, there was about JPY300 billion of inflow into the core business in Investment Trust. And recently, we are seeing steady expansion of the bank channel. In the past, Nomura's Asset Management was through Nomura Securities channel. That was the main channel, and that's the perception that many people have. But at the moment, the bank's channel and other banks, et cetera, channel is growing. And also DC -- inflow from DC is going to -- or we would like to grow more in the future. And as for the bank channel, there's a lot of money flowing into the balanced funds, and that's an area of focus for us. And for the securities channel, Sustainable Select that I mentioned earlier, these themed type products like SDGs, ESG linked products are the ones that are quite popular, or we would like to do those businesses. So that's one major theme for us. And in Wholesale, Infrastructure Finance is a business that has been starting up quite nicely, and we want to steadily grow this business. And at the moment, we don't have that much exposure. So yes, we want to certainly grow this business. And for the International Wealth Management, which we changed the leader several years ago, and we have pretty much completed the hiring process of the RMs and AUC, assets under custody, has been growing steadily as well. And the cumulative number of high net worth accounts has been growing. I think we now have 950 here. This is another area which we intend to grow in the future. So I don't know if I answered your question properly, but these are the businesses, which we position as the growth drivers. Thank you.

Yes. From a different perspective, an additional question, if I may. In 2025, ROE 8% to 10%, I believe, is your target. And do you have any plans to review this target or are you going to keep it? And in terms of run rate ROE, this is quite dependent on the market. But in terms of the midterm aspirations, is that going to be unchanged? And are you -- do you still intend to meet that target.

Yes. This is Kitamura. At the moment and based on the current situation, 8% to 10% is quite ambitious maybe, that may seem. But this is the level which we would like to continue to target as a firm. And yes, with the current environment, things are quite tough, very tough actually. But there are good times and bad times and neither last forever. So we just have to do what we have to do and seek to achieve the 8% to 10% target in 2025. Thank you.

Understood. Thanks for the detail.

The next question is from Mr. Watanabe of Daiwa Securities. Watanabe-san, please.

Thank you. This is Watanabe from Daiwa. I have two questions. The first question is regarding dividend. The midterm dividend of JPY5, what is the reason for JPY5? So 85% is the dividend payout ratio. But what kind of adjustments did you make? The second question is regarding the structured bond for retail investors, for retail -- what's the revenue contribution to the wholesale and revenue? And also privately offered product, what is your stance on selling a privately offered products as well?

Thank you for your question. Firstly -- this is Kitamura. Regarding the dividend, shareholders' expectations are what we are paying close attention to. So stable dividend payout is what we seriously want to ensure. In the first half of this year, we had some one-off factors. For example, penalties imposed by the U.S. authorities, that's booked in the first half of this year. So the bottom line adjustment happened. As a result of adjustment to the bottom line, the pool for payout -- adjusted pool for payout based upon that, so 50% of total return ratio, so based upon that, we came to JPY5 per share. So next, revenue contribution from structured bonds. At this moment, publicly offered bond sale has been suspended right now. As for privately offered products, we are continuing with sales. For privately offered and publicly offered products, those are how we define or categorize products. But at the retail division, what is the ratio of structured bonds in the -- as a percentage of the total revenue. In the first half, it's a bit above 30% contribution. Out of that breakdown between privately offered and publicly offered, publicly offered 0.2%; and 3% from privately offered products. So you are professional, so you know that for privately offered products, they are tailor-made products to cater to the needs of clients. So whenever we have needs for investment from clients, we -- our position is to offer privately offered products. On the other hand, for publicly offered products, Japan Securities Dealers Association is considering revision of guideline on structured bonds. In that context, we have suspended sales. But as I mentioned, the contribution to our revenue is only 0.2%. So the impact on revenue is minimum. That's my answer. Thank you.

Thank you very much for your answer. Regarding Wholesale, or the contribution to FICC of global markets, what's the size of contribution?

Thank you. This is Kitamura speaking. Our fixed income business is very big. So structured bonds revenue contribution to wholesale, it's less than 1% in the first half, and it's mostly privately offered products. So that's how small the contribution is.

The denominator, is it fixed or not?

No, the denominator is wholesale revenue as a whole.

Okay. Thank you very much Mr. Kitamura for your answer.

[Operator Instructions] The next question is from Mitsubishi UFJ Morgan Stanley Securities, Tsujino-san. Tsujino-san, please go ahead.

Thank you. This is Tsujino. At this time, two things. First, for the -- other than the business segments in segment Other, which is under the corporate items, there's JPY11.7 billion of negative. And the breakdown is, there's the remainder of JPY9.1 billion. And this -- every time we talk about this, but what is included here this time? And is it just onetime or is it just a one-off item or not?

Thank you, Tsujino-san. Very technical question. Yes, there's a CVDVA (ph) of JPY2.6 billion negative. And in Q2, the currency and also the short-term rates in the U.S. fluctuated very -- there was a lot of volatility. And there was some difference in the financial and managerial accounting. And also treasury related or our -- the Treasury division, which I oversee is charging each of the businesses and there is a gap that arises in that process. And there was quite a big gap this time. So I don't know if that helps your understanding. But -- so these are really technical issues actually, which caused this number in Q2.

Okay. I understand you have these internal rules and the allocation and you have this difference, I understand. But there's the economic valuation of various items, and this JPY9.1 billion, is this an actual expense or actual loss? And if that's the case, when we look at these numbers, we shouldn't keep it -- leave it aside, I think. So I was wondering how significant this JPY9.1 billion is or if it's just a technical thing? And I didn't really understand based on your explanation.

Yes. Thank you. This is Kitamura. Well, there was a sharp interest rate fluctuation, which led to this number. And the swap valuation for bond issuance, which moves, and that's the main reason for this. So usually, this doesn't really happen. And so it was a very exceptional movement in the market, which led to this number is how you should understand it. And in Q3, in the current quarter, we do not expect this kind of extraordinary or technical item.

Okay. Understood. Thank you. The other question is fund wrap and the fees for fund wrap, and the FSA has been pointing out the problem with fees. And for the low-risk products, if investors choose that, the expected returns is quite clear. And FSA is pointing out that the fund wrap fee is a bit high, considering that background. So in terms of Nomura's clients, they don't really want to buy through a fund wrap these really low-risk products, I think. So you may not have that many cases of that. But you still -- you do have a lot of exposure or balance to the fund wrap. And is there any negative spread type fund wraps according to the FSA's definition? Are there any fund wraps, which take that kind of risk? And how fund wraps of that nature do you have?

Yes. Thank you. In terms of Nomura's clients and the types of fund wraps they are selecting is part of your question, I believe, and the percentage of negative spreads. Well, I have been following the media coverage as well. And if we compare fund wrap versus interest -- investment trust with the same risk, the cost is almost the same, as I understand it. And Nomura's fund wrap is not inferior to a balanced type fund. And on the other hand, for the relatively high risk products, which are more aggressive in different style, these products have -- there are some cases where the performance is weaker than a balanced fund, but this changes from time to time. So it's quite hard to say. And with the current low interest rate environment, there are some low-risk products, which include a lot of Japan bonds. And we are temporarily lowering our fees for those products. So we are contributing to improving the performance on the client's behalf. And in terms of Nomura's fund wrap and the percentage, we have conservative and relatively conservative are the -- mix up the majority of our fund wrap products. Thank you.

Okay. Thank you. And lastly, you have the JPY5.7 billion of positive in the investment securities? And you have the plus alpha gain -- valuation gain, but if you -- even if we exclude plus alpha, I think the number was quite large this time. What has changed? What was the positive factor here? And will that have positive implications for the future or was it just a one-off for this quarter?

Tsujino-san, sorry, just to check. You're not talking about the investment securities? What are you talking about? Which P&L are you talking about?

I'm talking about the investment securities held for operating purposes -- or actually the private equity investment, sorry.

Okay, I see. Yes. This is the former merchant banking business and the investments we have. And there was an improvement in the valuations. And with COVID-19, things were a bit tough over the past few years. But COVID is coming under control and the earnings are improving, and that's why we booked this valuation gain.

Okay. So almost all of this is the valuation gain? And aside from the company I mentioned, it's mainly the gains from the valuations of the investments?

Well, actually, there are some positions from which we have exited, but it also has valuation gains, yes.

Okay. Understood. Thank you very much.

The next question is from Mr. Ban of Jefferies. Mr. Ban, please.

Thank you very much. This is Ban. Regarding expense, I have two questions. Firstly, personnel expense ratio. So you mentioned overall cost to income ratio, but the personnel expense ratio on the company-wide ratio, 47% in Q1 or 48%. But according to your explanation, there was seasonality and it's high. But my question is, based upon your explanation, even when revenue generating environment does not change much, is there the target in terms of the personnel expense ratio that you would like to achieve? Any comment that you can make? My second question is also related to expense based on your explanation. So some IT system or system applications, they may not be much to have, and you may conduct a radical review of them. But the cost increase seems to have accelerated for the IT expense. But system and telecommunication costs moving forward as an absolute amount, is it going to come down somewhat from where it stands as a result of the actions you are going to take? Could you comment on that as well.

Thank you very much. This is Kitamura speaking. Regarding the ratio of personnel expense, of course, if our revenue does not go up then it will be difficult for us to lavishly pay personnel expense. But basically, when performance is weak, then this number, personnel expense number tends to go up. Not only us, but looking at the level of industry as a whole, total compensation and personnel expense for individuals are determined. So our performance is an important factor and also the situation of our peers is something that we view as an important factor. In that sense, for example, right now, what we are focusing on is investment banking area. Last year, performance was pretty good, and the market was boosted. So that's my impression. Compared with last year, the cost to hire bankers has come down. So that -- whether we have target ratio of PE, personnel expense, when revenue goes up, the personnel expense ratio comes down, but we do not have a clear target ratio. But as a company, we are going to tightly control the personnel expense because that's an important activity. Regarding your second question regarding IT cost, I used the word radical review. So radical review, but when we do radical review? Temporarily, some costs may be incurred. For example, from accounting perspective, some loss on deposition may incur. But after that, depreciation costs will come down. So cost will be lowered. But as I mentioned, necessary investment will be done because we need a solid infrastructure because without solid infrastructure, we won't be able to support our business. So without good infrastructure, we will have to depend on manpower. And as a result, we won't be able to reduce costs. So information and telecommunication costs will be controlled to a certain extent. And at the same time, we will be controlling personnel expense, that I believe is the right approach. That concludes my answer. Thank you.

Thank you Mr. Kitamura for your answer.

It's time to finish, and we would like to conclude question-answer session. If you have some more questions, please ask our Nomura Holdings IR department. In the end, we would like to make closing address by Nomura Holdings.

Thank you. This is Kitamura. Thank you, everyone, for your questions today. There are several issues, challenges in this quarter, and we are aware of them. And we will -- we, the senior management, will face and address these issues. And in terms of the top line and also on the expenses side, we are currently working on various initiatives and I think this is absolutely necessary for the future. And some are already bearing fruit and leading to results, meanwhile some are still not realized or actualized. But we are right in the midst of reforms, and we will continue our efforts and act with speed, and we would like to show how we have changed and show you the results as early as possible and make every effort to do that. So we look forward to your continued support. Thank you very much for joining today.

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