Earnings Call: Q1 2022

Jul 29, 2021

This is Sato of Daiwa Securities Group. Thank you very much for joining our telephone conference today to dispatch your busy schedules. Today, we released our financial results of the Q1 of FY 'twenty one. I'll now explain the results by following the earnings announcement material uploaded on our website. So please turn to Page 4. This is consolidated financial summary. The percentage of change is a comparison to the Q4 of FY 2020. Net operating revenues were JPY126,700,000,000, up 1.7%. Retail division revenues decreased. While equity revenues decreased due to the market correction, Investment Trust and RAP related revenues increased. Wholesales division saw revenue decline. In global markets, lower volatility in bond market caused FICC revenue decline. In Global Investment Banking, Equity Underwriting and M and A revenue fell, but with the contribution of several large deals, debt underwriting revenue increased. In Investment division, Daiwa Energy and Infrastructure had income gain and capital gain leading to the division's revenue growth. Ordinary income was JPY 34,900,000,000, down 1.7%. Net income attributable to owners of parent was JPY 23,500,000,000, down by 53.4 percent. Annualized ROE was 7.1% and bps JPY 866.74 percent. Please turn to Page 10 for P and L summary. Commission received was JPY 77,300,000,000, down 5.3%. The breakdown of the commission received is on Page 23. Transaction volume of domestic equities fell, thus brokerage commission was JPY 18,600,000,000, down 23.1%. Underwriting commission was JPY 10,500,000,000, up 44.1%. Distribution commission was JPY 6,200,000,000, down 2.5%. M and A related commission was JPY 7,900,000,000, down 25.5%. Other operating revenue and other operating expenses decreased compared to the previous quarter, during which period the full year impact of SPC consolidation was included. Non operating income shrunk compared to the previous quarter, during which period we benefited from equity method investment gain related to hybrid business and gaining investments in partnerships. Please turn to Page 11 for SG and A. With the decline in personnel expenses, SG and A landed at JPY 94,800,000,000, down 5.1%. Decline of personnel expenses came from earnings linked bonuses. Among real estate expenses, system equipment cost and insurance premium fell. Office cost decreased in the system related outsourcing fees. Now please turn to Page 13 for overseas operations. The ordinary income totaled JPY 1,400,000,000, down 73.4% from the last quarter. In Europe, M and A business was good last year, but this quarter, its revenue fell and both Equity and FICC struggled. Asia Oceania made high level of profit despite of revenue fell due to Asian Equity revenue decline. Americas had M and A revenue growth, but FICC revenue decreased with the falling volatility of interest rate and the region recorded revenue decline. Next is segment information. So let me start from Retail division on Page 14. Net operating revenues recorded JPY 47,300,000,000, down 4% and ordinary income was JPY 10,000,000,000, down 11.6%. Equity revenue was down as Japanese equity trading volume shrunk. Fixed income revenue was down as the sales of structured bonds were down. Investment Trust Distribution Commission was flat. Investment Trust Agency fee rose with the increase of average AUC. Threat line of other increased as Investment Advisory and Account Management fees of RAP related revenues increased. Now please move on to Page 15 for sales and distribution amounts by products of Retail division and our topics of the quarter. Sales and distribution amounts of wide range of stock investment trust increased, including the products that mainly invest in ESG and SDGs related stocks. As for rep account service, with the rise of contract amount, the contract AUM as of the end of June hit a record high of 2,701,900,000,000 yen Now please refer to Page 16. I will now explain the result of our wholesale division. First, the global market. Net operating revenue was JPY 31,600,000,000, down 26.5 percent, with ordinary income at JPY 7,700,000,000, which was down 56%. Equity revenue was down due to declining customer order flow for Japanese equity. FICC revenues for both Japan and overseas were down. In Japan, customer order flow for credit was firm, while JGB struggled. In the United States, revenue generation opportunities were reduced due to decline in interest rate volatility. Please turn to Page 18. I will now explain about our Global Investment Banking businesses. Net operating revenue was JPY 15,000,000,000, down 9.1 percent, while ordinary income was up 21.5% at JPY 3,100,000,000. As for equity underwriting, we were we acted as the global coordinator for Renesas Electronics Public Offering, the largest deal in the Q1. As for debt underwriting business, we won the lead managing role, including SoftBank Group's bond. We also manage many M and A deals in both Japan and overseas. I will now move on to Page 19. Let me now share the result of our Asset Management division. Net operating revenue was JPY 17,300,000,000, up 29.9%, while ordinary income was down 0.6% at JPY10 1,000,000,000. DYIO Asset Management's revenue was up by securing net capital inflow in stock index and trust that led to increase in average AUM during the period. Although DYIO Real Estate Management AUM grew, the revenue was down due to decrease in property acquisition fee. Please turn to Page 21. Now the Investment division. Net operating revenue was JPY 2,700,000,000 with ordinary income at JPY 1,800,000,000. Darya Energy and Infrastructure posted income gain as well as capital gain from sales of solar power station and other assets. This concludes the briefing on the financial results of the Q1 of FY 2021. So both equity and fixed income market reflected the view that the financial market that had been expressing the future of a crisis response to the COVID-nineteen pandemic was to come to an end, Coupled with a spread and conflicting view to the economy, the market direction remain uncertain. Despite of such difficulty, we managed to post JPY 34,900,000,000 in consolidated ordinary income, amid a promising start of the new midterm management plan. Investment Banking division and Investment division expanded the businesses, compensating for the slowdown of market divisions and displayed the collective strength of the group. As for the Retail division, although the trading value of the 2 Japanese markets were down by 20% as compared to the previous quarter, we managed to generate JPY 10,000,000,000 of ordinary income for the 2 consecutive quarters. As a result of taking time and care in proceeding with initiatives to transform our business to a wealth management business model, our propositions to customers became more relevant, reflecting their needs and attributes and resulted in customer satisfaction enhancement. In addition, our cost structure reform is in progress, making the business leaner and mina. Now as for the month of July, retail customers are becoming more active in anticipation of the post COVID period. The demand is particularly strong in planned wrap and stock investment trust, driving the sales level to a height comparable to the Q1. As for the wholesale division, more than ever, businesses are increasing their motivation to take some form of corporate action. The trend is especially prominent in global M and A and domestic ECM, allowing us to enjoy the record high pipeline for the entire Investment Banking division. We will strive to seize every such opportunities and accelerate our effort to transform our business to wealth management business model and to expand Hi Fei business so to build a solid profit model that is least affected by the market conditions. We would appreciate your continued support and cooperation. Thank you.