Investors, thank you very much for waiting. Thank you very much for coming to Daiwa Securities Group telephone conference for the earnings announcement for the second quarter of FY 2023, amidst your very busy schedule. It is time. We would now like to begin the telephone conference. From Daiwa Securities Group, we have Senior Executive Managing Director, CFO Sato. My name is Mishiba, the IR Office Head, and I will be the moderator for the entire session. First of all, Sato will provide you with the review of the second quarter for FY 2023. We would like to receive questions from you after the explanation. Today's conference is also open to the general investors through the internet, so we would now like to begin the explanation.
My name is Sato, Senior Executive Managing Director of Daiwa Securities Group. Thank you very much for taking time out of your busy schedule to attend our telephone conference today. I will now explain our financial results for the second quarter of fiscal year 2023, which we announced today, in accordance with the explanatory materials posted on our website. First of all, please turn to page four. I will explain the summary of consolidated financial results. Percentage figures represent changes from the first quarter of FY 2023. Net operating revenues for the second quarter of FY 2023 were JPY 144.3 billion, up 7.6%, and ordinary income was JPY 40.8 billion, up 13.1%. The retail division secured ordinary income of JPY 12 billion. Contract amount of wrap account services and net inflow increased rapidly, and asset-based revenues reached a record high.
The wholesale division achieved an increase in both revenue and ordinary income. The increase was driven by higher M&A-related revenues and global investment banking. Profit attributable to owners of the parent was JPY 29.7 billion, up 25.6%, and ROE was 8% on an annualized basis. The interim dividend is JPY 19, the highest interim dividend ever paid, for a payout ratio of 51.5%. Furthermore, as part of its enhanced capital policy, the company has established a share repurchase program limit of up to 35 million shares, with a total acquisition cost of JPY 35 billion. Please turn to page 10. I will now explain the income statement. Commissions received totaled JPY 86.1 billion, up 4.5%. The breakdown of commissions received is on page 23.
Brokerage commissions were JPY 21.9 billion, up 0.9%. Underwriting and secondary offering commissions were JPY 9.2 billion, down 19.1%. Distribution commissions were JPY 3.7 billion, down 3.6%. M&A-related commissions were JPY 10.9 billion, up 37.7%. Net gains on private equity was JPY 3.2 billion, 17x higher than the previous quarter, due to an increase in income from private equity investments. Please turn to page 11. I will now explain the status of SG&A. SG&A was JPY 106.4 billion, up 3%. Trading-related expenses increased in advertising expenses related to sales promotion. Personnel expenses increased due to performance-linked bonuses and wage increases. Please turn to page 13. Next, I will explain the ordinary income of overseas operations.
Ordinary income for the overseas operations totaled JPY 3.8 billion, down 22.5% for the previous quarter. In Europe, M&A revenues recovered, and the region returned to profitability. Asia and Oceania reported a decrease in ordinary income, mainly due to a decline in primary revenues. In Americas, ordinary income decreased due to a decline in FICC earnings. Next, I will explain the results by segment. Please turn to page 14. I'll explain the revenues and income in the retail segment. Net operating revenues were JPY 49.3 billion, down 0.9%, and ordinary income was JPY 12 billion, down 11.2%. Equity revenues decreased due to a decline in equity distribution commissions from underwriting deals. Fixed income revenues decreased due to a decline in domestic bond transactions. Agency fee for investment trust increased due to an increase in the average AUM.
Wrap-related revenues increased as contract AUM increased. Asset-based revenues totaled JPY 22.8 billion, accounting for 47.2% of retail division of Daiwa Securities. The ratio of retail sales to fixed costs was 91.9%, and the ratio to total expenses was 62.6%. Please turn to page 15. This page shows the status of sales and distribution amount by product and the topics for the second quarter in Daiwa Securities Retail Division. In wrap account services, contract amount was JPY 237.3 billion, and net inflow was JPY 162.1 billion, the highest level in about eight years. The contract AUM amounted to JPY 3.5581 trillion . In stock investment trust, sales of Indian stock investment trusts and US growth equity-related investment trusts were strong.
The lower left-hand side of the slide shows a graph of the amount of sales and distribution, and net increase ratio of wrap account service and stock investment trusts. Net increase ratio was 32.9%. Next, turn to page 16. I'll explain about the wholesale division. Starting off with global markets, net operating revenues were JPY 36.9 billion, up 0.2%. Ordinary income was JPY 9.1 billion, down 6.4%. With regards to equity, although strong momentum was maintained, revenue declined on the back of lower equity distribution commission. FICC revenues increased, driven by increase in the customer flows in JGB and credit in the environment where interest rates were on the rise in Japan, as well as good position management. In overseas, the Americas slowed down from the previous quarter when their business was strong. Please turn to page 18. This page is on the global investment banking.
Net operating revenues were JPY 18 billion, up 22.3%, and ordinary income was JPY 3.2 billion, up 261.6%. Revenues from equity underwriting business declined from the previous quarter when we had large mandates, and M&A revenues increased, with domestic business maintaining the high level and overseas, where Europe recovered. Group M&A-related income, including M&A and other income, and income of equity methods affiliates, such as Green Giraffe, the M&A house in the area of European renewable energy, was JPY 11.7 billion. Please turn to page 19. Let me next explain the asset management division. Net operating revenues were JPY 18 billion, up 4.2%, and ordinary income was JPY 11.5 billion, which was up 28%.
Daiwa Asset Management net revenue and income went up due to increase in AUM or public equity investment trust, excluding ETFs, during the quarter and secured a positive net asset inflows. With regards to the real estate asset management, income was up with the improvement of equity investment gains from Samty. Please turn to page 21. Let me explain the results in the investment division. Net operating revenues were JPY 4.5 billion, up 146.6%, and ordinary income was JPY 4.7 billion, up 58%. Both net revenues and ordinary income increased due to contributions from revenues of private equity investments at Daiwa PI Partners and dividends from infrastructure investments at Daiwa Energy and Infrastructure. This completes my explanation of the results in Q2 FY 2023.
We secured a consolidated ordinary income of JPY 76.9 billion, the level for the first time in eight years. Consolidated ordinary income in the second quarter was JPY 40.8 billion, the increase in four quarters in a row. Annualized ROE expanded to 8%, reaching the level of the cost of capital that the market assumes for us. Retail, wholesale, asset management, and investment, all of the business divisions achieved strong results, which is the evidence of steady progress of the structural reform, namely more stability of consolidated results on the back of increase in stable income and diversification of income sources. This has given me more confidence in the direction of the strategies we have been working on for more than six years.
Among them, in particular, is the asset-based revenue, with a focus on the transformation of our retail business to wealth management business model, which expanded to JPY 22.8 billion, 10% increase year-on-year. Asset-based revenue total expense coverage ratio increased to 62.6%. To put this into perspective, in the first quarter in FY 2017, the asset-based revenue was JPY 16 billion, and the total expense coverage ratio was 42.2%, which indicates a steady progress, giving me more confidence. Now, turning to what's happening now in October, in spite of volatile market situations, both retail wholesale are off to a good start. In the retail division, equity is off to a slightly slow start.
However, customers' needs towards hedging against inflation and exchange rate risks are surely increasing, and sales amount of Fund Wrap contracts and investment trusts are staying at high level. In the market division, equity is off to a slightly slow start. FICC is maintaining momentum in October on the back of customer activity increase, driven by higher interest rates. In particular, FICC in the U.S. has made a progress much higher than Q2. In the investment division, bond issues continues to be at the high level, and M&A has made a steady start. Now, in Japan, facing the turning point, getting out of deflation into inflation era, the shift from savings to investment is about to accelerate, pushed by the government.
We are determined to aim at establishing more stable and a stronger income structure by simply rather focusing on our long-term strategy of transforming to wealth management business model, while promoting cost structure reform at the same time, without being swayed by the short-term market volatilities. I appreciate your continued support and cooperation to us. Thank you very much.
With that, we would like to complete the explanation. We would now like to welcome questions. Today's telephone conference, we have simultaneous interpretation, so you can also pose questions in English as well. So those with these questions, please, press one, after the star. And if you'd like to cancel your question, please press two after the star, button. So first, we would like to receive questions in Japanese, and then we would like to receive questions in English. Please start your question once your name is posed. We are now accepting questions. Mitsubishi UFJ Morgan Stanley, Tsujino-san, please. Please start your question.
I have two questions. First question relates to shareholders' return. So share repurchase, at JPY 35 billion, so about JPY 30 billion, given the share price. Could you give us the background, to which you have decided on this, plan?
So it has been trending about JPY 20 billion or so. Right now, the ROE has been on the rise in comparison to before. In terms of the appropriate level of capital, if you can share with us the management's position, perhaps there is an excess of capital. Is that the reason why you have actually reviewed the share repurchase plan? Quite often the profit for the securities business tends to be volatile. But even if the profit were to come down, can we still expect to see a large amount of share buybacks, as you have just announced?
Thank you very much for that question. In terms of the size of the share repurchase, JPY 35 billion. Yes, that was the nature of my question. So not much difference from our previous explanation.
But in terms of the share buybacks, just as before, we have our basic policy. We look at the financial soundness and also the growth and projects and the stability of the business, share price, and so forth. So we would actually, there's no change in terms of looking into different items. And back in April, so that's for FY 2022, so JPY 25 billion has been completed as of the 27 October, 2024 . So now, for the share repurchase for FY 2023, we have looked into that. So we look at the capital ratio, and also there is a similar index that is employed by the credit rating agency. Also, we look at the pipeline for the growth investment and also market risk.
So those are the factors that we have included as we conducted the simulation of the future. So in a comprehensive manner, we have decided on this particular amount. Now, for the second quarter, why have you set it this particular quarter? So 21.57%, that is the current capital ratio, and also back in May, when we conducted the business management meeting. So we will be focusing more on the profitability of the capital. So, given the fact that we have some inefficiency within the capital management. So one of the valuable management resources is the capital, and we would like to make an effective use of that.
So even with the, the amount saved for the, the growth investment within the pipeline, we can still manage, this amount of share repurchases. Also, in terms of performance, first half was quite favorable, and, also PBR is as you, it's, it's, trending at a positive level. So, it may seem somewhat of a larger size, but, we have reached this decision after a comprehensive evaluation. Now, whether this size will be maintained, going forward or not, of course, we cannot give the guidance into the future, but, just as before, we would make an integrated, comprehensive perspective in evaluating whether we, about the, the amount. And, as of June, as 21.57%, that was a capital ratio for Basel.
We still have an excess buffer of 3.5% in comparison to the target. So we have conducted the excess capital simulation. So according to the full loading of Basel III of 4%, after a fully loaded basis, JPY 300 billion or so of excess funds could be expected. But at the same time, this excess funds could be used for investment trust for the continuous enhancement of ROE. That is the top priority. So we would like to look at the pipeline for the growth investment to make the decision.
But having said that, in terms of the capital ratio or equity ratio, one of the reasons why it has been on the rise is the, in terms of the, the weaker yen imposing a positive impact. So, depending on the effects, this is expected to change. So again, that is taken into consideration as we make a decision. Apologies for the long explanation. I hope I answered your question.
Thank you very much for that. And the second question relates to, s o about, the, the Japan. So in comparison to Q1 and Q2, there's been an increase, but overseas, there's been a decline, but there's been a rise in terms of the, the domestic market. So in comparison to Nomura Securities, you are seeing much of an increase. Nomura, actually, there's been a decline for Nomura. So for Daiwa, what has been positive? And, how would that relate to the future prospect?
Thank you very much for that question. So the reason why the domestic market. So on a quarterly basis, the domestic business was positive, but in the overseas, especially in the U.S., there was a decline. But as of July, the YCC becoming more flexible in terms of the employment, so JGB volatility has been on the rise. So the market function has improved. So there has been increase in the number of participants or players. So that is true for JGB, but also for credit, because as we see more of an interest rate in existence within the market, we are seeing increase in the customer flow. Also, over the second quarter, the credit spread had tightened.
So, increase in the customer flow and, also, and the positive position management has actually led to increase in the revenues. Now, in terms of the U.S. business, in the second quarter was not well. However, the first quarter was the rate hike, and also, the volatility staying at the high level, it was positive. Q2, the same situation continued, so that was a tailwind. However, for the months of July and August, a summer vacation for U.S., and therefore there has been limited number of players, within the market, hence a lowering of the liquidity. So that is why, for the position management, in comparison to the first quarter, the revenues have come down. That is why we've seen decline in second quarter. However, as we look at the trend in October, it's, higher for longer.
So it's more a trend, more towards the longer perspective, and so it continues to be favorable. So Treasury, repo, MBS, all those across the board in the products has been favorable. So Q3 is definitely trending better than Q2 across the board.
Thank you very much for that.
Mr. Tsujino, thank you so much for your questions.
Next questions are from SMBC Nikko Securities, Muraki-san. Muraki-san, please go ahead with your questions.
Hi, thank you so much for taking my questions. My first question is on the net increase in the retail division and the asset-based revenue growth. How sustainable is it? On page 10, net increase was quite large, and as you mentioned earlier, the asset-based revenue increased by 10% year-on-year, as indicated on page 30. So it's outpacing against the long-term plan, which is 8% growth assumption. What is the reason why you have been outperforming? And target of 8% growth is actually ambitious target, but towards the achievement of this target, are there any positive news, any new developments leading up to 8% net growth? That's my first question. My second question is on Daiwa Next Bank. The number of accounts in the quarter grew quite strongly.
In the first half, if you double off, then ordinary profit was quite at the high level, and I think this is due to the foreign currency spread. But, Daiwa Next Bank foreign currency spread, how sustainable is it? And if BOJ, as Mr. Ueda mentioned in September, if they start increasing the current account interest rate, then, yen account of spread, is going to have an upside in the future as BOJ raises their current account rate?
Thank you so much. To your first question about the retail division, asset-based revenue sustainability. For example, looking at the Fund Wrap contract amount, this is not the upfront sales. So in Q2, it performed very well. And, the impact from this is only small in Q2. There's a time lag, so the asset-based, multiplied by period or duration, is the sustainability of the level of income. And JPY 22.8 billion was Q2, and if you multiply that by 4%, JPY 90-some billion . And if you multiply that by 100%, then in 2030, it's going to exceed JPY 150 billion by a lot. So sustainability, it's growing by 10% at the moment, but for example, the core product, which is Fund Wrap, let's take that as an example. For one year, net, increased 80%, and then a market value, 20%.
So that's the breakdown of factors behind the increase. And this asset-based revenue, we have the agency commission, is included. So those are the reasons for the increase, and we expect it to continue to grow in the future. To your second question, Daiwa Next Bank?
The number of accounts has been growing because of many reasons. So I'm going to mention one by one. Daiwa Connect Securities, the advertisement increased. As a result, the number of Connect new account openings, at the same time, they open, the new account with Daiwa Next Bank. And foreign currency spread. So overseas rates, it depends on the market of interest rates overseas. So the foreign currencies are not only U.S. dollar, but, we handle other currencies as well. So depending upon the interest rates in those foreign currencies, unless they decline so much, I think we can secure a good spread. And, this is the market, position or market management business model. The balance sheet is JPY 5.9 trillion at the moment, so how do we manage this asset size?
We'd like to invest in relatively high yield assets, mainly foreign currency assets, and we are generating good profits from foreign currency deposits. In the future, up until now, we did not generate much profit from yen deposit, but as BOJ announced today, the revision of YCC policy, so interest rates are going to start existing in the Japanese market. So we expect yield to go up on the investment portfolio, which will give us the upside. So balance sheet size is JPY 5.9 trillion, so 10 basis points, JPY 5.9 trillion upside on the income. So towards expansion of the spread, we'd like to work on various initiatives. Did I answer your question?
To your first question, answer to the first question about net increase, wrap accounts and investment trust, roughly speaking, the net increase is JPY 170 billion-JPY 180 billion. And how sustainable do you think this is? Because towards 2030, when I talked with overseas investors, many overseas investors are highly interested in this target. On the other hand, this, 8% increase on the income basis, there's, should be outflow of, of, asset or capital from senior citizens. So if you look at ins and outs, then, you cannot really, offset this outflow from, senior people. So looking at the trend, over several years, and it's been increasing every quarter, and it has increased quite strongly in this Q2. But, there's a outflow and, net inflow is this strong, offsetting the outflow, am I right?
Thank you so much.
So investment trusts and Fund Wrap, these are two different characteristics. For the equity investment trust, of course, there are ins and outs. They sometimes sell to lock in the profits. But for Fund Wrap products, the ratio of existing and new, new is about 40%. So we've been increasing the new clients for Fund Wrap, and also, customers' average holding period is more than 11 years. So this is the sticky balance, relatively speaking, so they don't really cancel immediately after a short period. Right now, looking at October, wrap net increase is maintained at high level, and we are not, I think, any momentum being lost. No, momentum is still continuing.
Thank you so much. I understood.
Thank you very much, Muraki-san. Next question comes from SBI Securities, Otsuka-san. Otsuka-san, please.
This is Otsuka from SBI Securities. Can you hear me?
Yes, we can hear you.
I just have one question. I'm looking at page 25, so Daiwa Securities on a standalone basis. So the fees, the commissions, I'm looking at, specifically about the stock and others for the brokerage commission. So the secondary situation, I'd like to know how the stock situation was for the second quarter. So if you just simply compare the number, so stock on QoQ basis, this but for the September quarter, we have seen a lot of decline for the face-to-face securities. So given that into perspective, I think the number you have here is quite brisk.
So you mentioned about wrap and investment trust continues to be favorable, but in terms of the secondary equity, security stock, I do believe this has been strong as well. So if you can actually give us a color on this.
Thank you very much for that question. So as you, well, you mentioned, in the retail, so, the equity, the revenue has been on the decline, but in terms of primary and the, the sales commission has been on the decline, that is the reason. However, in terms of the secondary, there has been no change. So just as to look back in Q1, on average, I start to see a recovery in mid-May onwards. So if you look at the, the average as a whole, the second quarter hasn't seen of, decline.
So, of course, there's been some ups and downs, but it is still keeping at a high level, on a relatively high level. So the customer flows continues to be rather solid. Also, in terms of transaction, of course, we have sell and buy, and we have a flow on both ends. That is why, the flow for these stocks and others, Q2 was higher in comparison to Q1.
Just to add on, so this is more of a qualitative question, shall we say? But when the market is positive, the retail customers are in good mood and good sentiment, so that is quite often the case. But according to other, securities company, even with a positive margin, an investment trust is okay, but, but there has been a focus on the investment trust, so not so much on equity.
That's what we hear from other securities company. So, depending on the product, there's a different color despite the positive performance of the overall market. But for Daiwa, in this quarter, it appears as if all the products across the board are doing well. So this is again a qualitative question.
So the wraps and investment trusts and all these products, you are seeing increase in the asset regardless of the volatility within the market. So I just assume that the relationship with the customers are becoming much more tighter and closer. That's my take on those, but what would you say about that?
Thank you very much for that question. So in terms of wrap service, the wrap accounts, it is not so much impacted by short-term volatility within the market.
It's more about the mid to long-term, the needs. So of course, this is because of the weaker, again, and also deflation. Those are the risks that the customers are perceiving, and that is why they have demand for this. So why has equity been solid then? So we don't really sell by different products. In fact, basically, depending on the risk tolerance of the customers, we propose the optimal portfolio, and we propose the most optimal, the equity. So as one of the option, we actually combine the equity option as part of that. But for brokerage, we will not be excessively dependent on brokerage business. So this is all about proposing the optimal portfolio, and because of that, Q2 performance was positive across the board. I hope I answered your question.
So this might sound rather rude, but given this phase, even you have been able to promote the equity to the customers, and you have been able to translate those into the revenues. So that's why I posed that question. As you rightly mentioned, basically, it really boils down to the customer's needs.
So we need to conduct in-depth consulting with the customers, and as a result, we have been able to have a positive result across the board. So strengthening of the relationship is definitely one of the major factors.
Thank you very much. Well understood.
Mr. Otsuka, thank you so much for your questions. Next questions are from Citigroup Securities. Niwa-san, would you please start your question, Mr. Niwa?
Hi, this is Niwa from Citigroup Securities. Can you hear me?
Yes, we can hear you.
Thank you so much. I have a question about the wholesale division. Actually, I have two. One, M&A, investment banking division, which is page 18. Group M&A related income, would you please give me sort of a cruising speed? And, the future pipeline, would you please, give me the color, on the, speed, cruising speed that you expect for the future? In other words, in Q2, there were no extraordinary factors supporting this income. Second question, allow me to ask you every time, global markets, how, much capital are you consuming? Second quarter in the future, how do you plan to consume capital?
In Q1, you decelerated at the pace of capital consumption. On the other hand, in Q2, value at risk has increased, and also, it seems like there are yen business opportunities, mainly yen income opportunities. So how much capital are you consuming in the global market? And, compared to the medium-term management plan, how are you going to manage your capital in this division?
Thank you so much. First, about M&A-related income, the pipeline, roughly speaking, compared to 2022, domestic, both the number and the volume is higher. Europe, in 2021, it was a record high. Even compared to that, our volume and amounts are higher, but it depends on the deal. It takes time to close the deal, so external environment is deteriorating. For example, we cannot really match speedily between buyers and the sellers, therefore, it takes time.
Also interest rates have increased quite a lot in Europe, so it takes time for them to fund for M&As. There are some variable factors. It slowed down in Q1, but in Q2, we saw the recovery. The Americas, compared to 2022, both the volume and amount is higher. In 2021, we achieved a record volume and amount, but for both, it's slightly lower than that. The Americas, we have a slightly cautious view. What worked very well this time, as has been the case from before, M&A business does not consume so much capital, yet we can generate quite a large income, and we do not belong to any particular group, so we are an independent investment bank.
From that position, we can give advice on M&A, and, we focus on midcap, and we are a global M&A house, specifically catering to midcap companies. So this is the established position. So especially in the midcap space, among the peers, we have well-established network. We are kind of one of only who has this much network in the midcap space. And in Q2, how much, we, are we consuming capital in this division? There's some flexibility of capital, so let me explain about the risk amount trend. In Q1, GM risk amount, compared to 2022, it declined by about 13%. And depending upon the market, it goes up and down in terms of the risk amount, and of course, the picture is different between Japan and overseas.
Within overseas market, we see business opportunities, especially FICC in the United States, so the risk amount is slightly on the rise. But Europe, it's down. As a result, in total, it's down, risk amount is down. In the medium term, as we discussed in May, when we explained our business strategy, in principle, we look at, return on capital and future growth potential and look at those factors comprehensively. And for those products where the outlook is not so good, we review, including the exit option. However, if there's good profitability and when we see good potential, we'd like to actively consume capital in those specific areas. So it depends, as we discussed in May. Sorry, as we are going to announce the new business plan in May, I think we can give you more details.
Thank you so much for that comprehensive answer. Thank you so much.
Thank you very much, Mr. Niwa. Those are the questions, please press the star button, followed by one. Please send us your questions. We still have some time. It seems as there are no more questions, so with that, we would like to conclude the Q&A session. Thank you very much for staying with us until the very end. Just to repeat, as far as the Daiwa Securities Group is concerned, as part of our long-term strategy, wealth management, the business, we would like to shift towards that and, engage in the structural, reforms of the cost, and we would like to make sure we can meet the expectations, with solid results. We ask for your continued support. Thank you all for joining us today.