Earnings Call: Q3 2021

Jan 28, 2021

Thank you very much for waiting. Thank you very much for participating in Daiwa Securities Group Telephone Conference for Q3 of fiscal 2020. It is time we would now like to begin the conference. So from Daiwa Securities Group's side, we have CFO, Sato, is here with us, and I will be the moderator for today's conference. My name is Fujino, Head of IR. First of all, Sato will provide you with the results for the Q3 of fiscal 2020. We will receive questions after the presentation is over. Today's conference would also be disclosed to the general retail investor through Internet. Without further ado, we would like to start the presentation. I am Eiji Sato, CFO of the Daiwa Securities Group. Thank you for joining us at our telephone conference today amidst your very busy schedule. I would now like to discuss the financial results for the Q3 of fiscal 2020 announced today according to our website's presentation materials. 1st, please turn to Page 4. I will explain the summary of consolidated financial results. We compare the rate of the increase and decrease with the Q2 of fiscal 2020. Net operating revenues for the Q3 of fiscal 2022 were up by 14.2% to JPY126,100,000,000. Revenues increased in the retail division. Against the backdrop of strong performance in the stock markets, transactions of both Japanese and foreign equities increased and sales of stock investment trust and bonds also increased. Revenues in the wholesale division increased. Global Markets saw increases in both equity and the FICC revenues. Global Investment Banking saw an increase in the debt underwriting and M and A revenues. Ordinary income rose by 45.3 percent to JPY 34,500,000,000. Net income attributable to owners of the parent increased by 63.8 percent to JPY 24,900,000,000. Annualized ROE was 8.0 percent and BPS net assets per share was JPY 820.74. The BPS as of the end of December was the highest lever ever. Please refer to Page 10. I will now explain the income statement. Commissions received were increased by 8.3% to JPY 76,600,000,000. Please see Page 23 for the breakdown of the commissions received. Transactions in both Japanese and foreign equities increased. Brokerage commissions were up by 23.6 percent to JPY 20,200,000,000. Underwriting and secondary offering commissions were down by 17.8 percent to JPY 11,800,000,000. Distribution commissions increased by 9.7% to JPY 4,600,000,000 due to increased sales in stock investment trust. M and A related commissions rose by 55.1 percent to JPY 8,100,000,000. Net trading income grew by 43% to JPY 32,600,000,000 due to increased customer flows for both equities and fixed income. Please refer to Page 11. I will now explain the breakdown of SG and A. SG and A rose by 3.8% to JPY 94,200,000,000, mainly due to an increase in personnel expenses. In trading related expenses, commissions related to trading volume and travel transportation expenses increased. In personnel expenses, earnings linked bonuses increased. In office costs, there was an increase in non system related office expenses. Please turn to Page 13. Next, I would like to explain the ordinary income and expenses of the overseas operations. The ordinary income was down by 25% to JPY 3,400,000,000. However, we were still able to book ordinary profit for 19 consecutive quarters. Let's look at the results by region. In Europe, profit dropped due to a decrease in primary revenues despite an increase in M and A revenues. Both primary and secondary revenues declined in Asia and Oceania, but the region maintained a high profit level. In the Americas, despite lower revenues from M and A and FICC, the region continues to drive revenues and profits in the overseas operations. I will now explain the results by segment. Please refer to Page 14. First, I would like to explain the results of the Retail division. Net operating revenues rose by 8.9 percent to JPY 44,300,000,000. Ordinary income was up by 161 percent to JPY 6,900,000,000. Equity revenues grew due to an increase in trading volume in both domestic and foreign equities. Fixed income revenues rose due to an increase in sales of structured bonds. Distribution commissions for investment trusts increased due to the growth in sales of stock Investment Trusts. Investment Trust Agency fee also rose due to an increase in the balance. In other revenues, RAP related income such as investment advisory and account management fees increased. Please look at Page 15. This page shows the sales and distribution amount by product and the major topics for Daiwa Securities Retail division. In Stock Investment Trust, asset based fee plan for Investment Trust launched on October 19th contributed to increase sales and distribution amount. The wrap account service saw a record high of JPY 2,430,000,000,000 in contract AUM as of the end of December due to the increase in the number of contracts and the rising market. Next, please refer to Page 16. The index explained about the Wholesale division. Starting off with Global Markets, net operating revenues were JPY 40,100,000,000 up 20.6 percent. Ordinary income was JPY 15,400,000,000, up 72.1%. Equity revenues increased, driven by higher customer order flows of the Japanese end point increase as well as derivatives. FICC revenues also increased. Net revenues from Japan were up on the back of higher customer order flows for credits and derivatives. Net revenues from overseas were flat Q on Q. Please turn to Page 18. This page is on the Global Investment Banking. Net operating revenues were JPY 16,900,000,000 up 18.2 percent and ordinary income was JPY 5,700,000,000 up 20.1 percent. In the equity underwriting business, we served as a lead underwriter for the large PO mandates and the Japanese first SDG's IPO, which contributed to the continued high level of net revenues. In the debt underwriting business, we accumulated many mandates for the 1st social bond of a National University Corporation, subordinate debt and others. With regards to M and A, we executed mandates both in Japan and overseas driving revenues. Please turn to Page 19. Let me explain Asset Management division. Net operating revenues were JPY 12,800,000,000 up 5.5 percent and ordinary income was JPY 7,600,000,000 which was up 3%. Bairo Asset Management revenue increased on the back of higher AUM or Public Stock Investment Trust during the quarter upon the higher stock market levels. In the Real Asset Asset Management business, AUM has increased. Management fee revenues were up with property acquisitions. Please turn to Page 21. Let me explain the results in the Investment division. Net operating revenues were JPY 3,100,000,000, down 12.9 percent and ordinary income was JPY 1,800,000,000, down 15.6%. Revenues include exits from private equity investments done by Daiwa PI Partners. This completes my explanation of the results in the Q3 of FY 2020. Now we'd like to open the line for your questions. For the conference today, we have the simultaneous translation, so you can ask questions in English. Now the line is open for your questions. We'd like to receive the first question from SMBC Nikko, Muraki san please. So this is Muraki from SMBC Nikko. I have a question related to Retail division as well as Investment Banking. First question relates to the Retail division. So Page 14 on the right hand side about the ordinary income for Retail division. So in the past 2 years, it has been sluggish around breakeven point. But for Q3, because of an increase in the fixed income and the credit has been on the decline. But all in all, the income has been improving. So going forward, would this improvement be sustainable? That is my question. That is the first question. And the second is related to Page 18 of the Investment Banking. So this time around, you have the commissions increase from M and A. So according to some of the U. S.-based banks, towards 2021, the M and A and some of the procurement related to that and also commissions related to listing has been trending at a high level. So that has been shared by these peer banks. So within your portfolio, so if you can share with us the pipeline going forward, that will be very helpful. So those are the 2 questions. Thank you very much for that question. So first question relates to the Retail division. So for the Q3, so it has been quite positive for us in terms of performance. So of course, we have a favorable market situation and of course, the structural reforms that we have been engaging, we are starting to see the outcome. So what is the specific about the Q3 is the size of the transaction has become larger and also the Fund Wrap service business has been expanding. So traditionally, as mentioned before, through net promotional score, NPS, we have been engaging in the customer oriented business. And we have the asset management approach. And also we have the new plan launched in October, the asset based plan. So we have been able to capture the needs of the customers, which have played into a positive momentum. Also in terms of digitalization, we have been able to make proposals to the customers. So in comparison to the comparison of pre COVID, it has been increased by 35% or so in terms of the proposals. Also related to structural reforms, it has been progressing better than our expectation. For instance, Q3 on an annual cost in comparison to Q3 of 2019, so this is right at the beginning of the structural reforms. In comparison, the cost has come down by JPY 1,000,000,000 or so. So the bottom line, we are able to generate more because of the reduction in the cost. Also, the successful examples of the customers have been accumulating. So the sentiment for investment has been improving. For instance, what we have been focusing on is the fund wrap service. So the customers under this service as of December end, almost across the board for all the customers. So all the so we have JPY 25,000,000,000 in terms of the unrealized gains. And of course, the gains from the investment trust have also dramatically increased. So the environment has been quite durable to us. Of course, the rest depends on the market climate going forward. But if the current appropriate environment continues, we believe the current trend will be sustainable. So in the most recent weeks months in terms of the product sales, so if you can go to Page 15 on the left hand side, so we have the added performance for the month of October, November December. As you can tell, it has been on the rise. So for January, for the month of January, it has remained at the high level as we have seen in December. There has been active transaction trading volume from the customers. Now let us move on to the S and A related question. So as far as Q3 is concerned, both domestic and foreign market has been improvement. But of course, we've seen strong performance in the overseas. So 70%, let's just say, that has been the proportion of the overseas contribution. So you might wonder why in this COVID we're able to grow. So in terms of restructuring and also infrastructure and high-tech related deals were quite robust. And of course, they were resilient. If not, they were seeing tailwinds because of COVID-nineteen. So we were able to capture that. Also for private equity funds, there has been a lot of transactions. So all in all, the deals have been quite active in terms of numbers. Also in the Japanese domestic front, of course, we are seeing improvement. In comparison to last year, the number of inquiries has been increased by 20% to 30% or so. So in terms of pipeline, it is quite full, both for domestic and also overseas front. So of course, we are seeing so as long as the pandemic doesn't spread more so than it has already, we should be able to sustain the current trend for some time. Now in terms of IPO and PO related businesses, So for the corporate actions of the customers, the needs continues to be fairly strong. So these large size deals have been quite successful and we have seen successful POs as well. So we should be able to materialize the pipeline. So did that answer your question? Thank you very much. And the first question, just to add on, about the asset base fee plan. In terms of contribution, probably it's quite minimal at this point. But what is the outlook for the contribution? At what timing would you expect to see the contribution from this new asset base fee plan? So of course, in terms of asset, in terms of balance, of course, it is quite limited right now. But by the introduction of this new plan, so the sales of the traditional investment trust has been on the rise as well. The reason why because there's more options for the customers. So the frequency of the customers engaging in transaction has been on the rise, and we were able to heighten the news of the customers. So for the plan over RMB 10,000,000, so we are seeing more of a larger size contracts or transactions. So that has been quite positive. So of course, there has been some replacement into this new plan as well. But for this new fee plan accounts for 30% of the total new contracts that we are seeking as we speak. Of course, we have every intention to extend this proposal. So in the next new inter management plan, it ends in 2023. So about JPY 1,300,000,000,000 is the amount we're looking for under this new asset based fee plan. So it will be about $11,000,000,000 in the end of contribution that we expect to see once we reach that proportion. Understood. Thank you very much. Mr. Muraki, thank you so much for your question. Next questions are from Mitsubishi F. J. Milogan Sanai, Tsujino san. Please go ahead. Thank you so much for taking my questions. First, for this quarter, FICC revenue, Japan and overseas breakdown please. I think it's about 80% coming from Japan. And October, November December, would you please give me the breakdown by month for the quarter? That's my first question. And the second question, you explained about the Retail division. The number of inquiries has been increasing. The size of the transaction has been increasing. However, for this quarter, the brokerage commission has been increasing quite a lot. And probably, the size large size of transactions were many in the second quarter, which pushed up the brokerage commission. So probably, environment was easy for you to see the increase in the brokerage commission in this quarter. So for that particular portion, it may not be sustainable going forward. How do you assess about that particular point? Thank you. First, FICC breakdown between Japan and overseas. For this quarter, 80 versus 20, 80 being Japan. Japan has done well. In Japan, the credit products sold very well. And here's the credit environment. Due to the continuation of the low interest rates, the customers' needs towards credits are high. And the OJ's asset bank operation is making the supply demand tight. And in the primary market, per year, JPY 15,000,000,000,000 has been the size that is increasing the volume in the secondary market. And the credit spread is tightening. So there are needs from investors towards the balancing. As a result, we saw a tailwind for the credit investment, which should continue in the Q4. And month 3 breakdown, FICC monthly breakdown, would you like to know both Japan and overseas by month? I think for Japan, I think it was quite even by month. But how about overseas? What was the breakdown by month for this quarter? Would you please give me some more color by month overseas? Understood. Overseas, mainly the United States, volatility is declining. So the spread is gradually coming down, which is even lower than December compared to pre COVID. So business in territories was tough. However, there are heightening needs towards treasuries. So this, by CC overseas, has become the pillar for the revenue. So that trend in total has been quite stable. In January, U. S. Rates rose, but interest rate increase was quite mild. And so this was a great opportunity. This is a great opportunity for us to acquire customer flows. That's the situation. By division, you talked about SICC of Japan, but in the Q3, it increased quite a lot. That's because of the revenue from FICC that you sold in the past. But how much of the contribution percentage wise did you see from that? And structured bonds contribution started to increase from November, but I think it increased also in January. So what was the size of the increase in January or recently? Structured bonds, we cannot disclose the details. However, the transactions of Structured Bonds were active, but presumably, you are talking about the Retail division. So there were many finance or refinance transactions. So second row transactions increased. The customer activities increased. Upon the market value, the fees increased. And for structured bonds, if the market is not as good as now, then we cannot generate so much revenue. At the current level of such market, if this type of market continues, then customers have gained success exteriors. So towards new investments and towards reinvestment, there are strong needs. And volatility is still high. So good conditions for structured bonds. So business environment for structured bonds is very good, which is sustainable, we think. Thank you very much, Suhima san. You'd like to introduce the next person from Otsuka san from JPMorgan. This is Otsuka from JPMorgan Securities. I also have 2 questions. First question, it's similar to what Sujino san just mentioned in terms of structured bonds. So for the volume you have just shared with us, but if you can give us a picture as to what has happened in Q3. So is there is it a Nikkei average or topics linked? Was that triggered by structured bonds? Or so was it triggered by some sort of those index? And so how has the sales been made? Why are people purchasing those? You mentioned about credit as well. So these structured bonds that have been redeemed, are they actually shifting the money towards this credit or not? So that is the first question. Now the second question relates to share buybacks. What is your outlook this time around? And why did you not conduct the share buybacks? If you can give us the thought process behind that, that would be helpful. Thank you very much for those questions. Let me answer about the structure bonds. In terms of the pre date redemption, prematurity redemption, of course, there's been expectation for the equity price rise. So there has been positive reinvestment. That is definitely the case. Also in terms of whether they have shifted to credit or not. In fact, in terms of investment policy or the risks, So those who are engaged in purchasing structured bonds, they are not likely to migrate to credit that easily because of the difference in investment policy. Now related to the second part of your question, share buybacks. Again, I just do reiterate our position for the share buybacks. So we look at not just the financial condition, but also the performance, the stock price and also the pipeline for the investment. So we do perceive this in a comprehensive manner to execute this on a flexible manner. So no change in terms of our policy. So historically, just to go back, now we have the capability to respond to COVID. But of course, we are seeing reinstallation of the state of emergency in Japan. But therefore, in terms of the performance outlook and also the impact on investment pipeline, we still need to assess those carefully. In any case, we look at we would like to look at the results for Q4 to make that comprehensive decision. So just to confirm for those both points then. In terms of when you say credit, you talked about the wholesale division? Yes, exactly. Related to the second part, apologies to pick on your words. But in your previous explanation, you have talked about the customers' successful examples have been on the rise. And also we are seeing a full pipeline for wholesale division. So it seems as if you are quite confident in Q2, Q3 onwards. Again, you would like to reassess the other impacts of COVID-nineteen. So perhaps you have postponed the share buybacks. But if the current situation continues in terms of the positive performance continues into Q4, would there be a higher probability of share buybacks? Or again, it really depends on the decision at the time. So how should we perceive this? That is a very difficult question to answer. In terms of the actual results, of course, that is an important factor to make that decision about share buybacks. Let us keep it that way. Thank you very much for that. Thank you so much. Mr. Otsuka? Next questions are from Bank of America, South African, please. My name is Tazaki from Bank of America. Principal Investment, PI, Global Energy Infrastructure, how does the pipeline DEI look like? From Q2, Q3, the balance is down a little bit, but how should we think about the trend going forward? Thank you so much. Energy Infrastructure, the balance is down, but that's mainly driven by the projects for thermal projects, the investments and the loans were repaid. So that's why because of the repayment, the balance is down. So these are not equity investment type of projects. Going forward, we generated energy related investments, the investments where we can generate relatively stable cash flows, we think. So I would like to be actively we would like to actively invest in those and the pipeline is rich, but we don't want to just simply increase the balance. We call it capital recycling model. Once the balance is up to a certain level, we'd like to securitize or sell to funds by inviting capital from outside by rebalancing, we'd like to increase the profit from those investments. So you said pipeline is rich. Are you talking about overseas or Japan? Both, Japan and overseas. Okay, both. So in Japan, I'm talking about onshore offshore projects, yes, as well as infrastructure projects. Thank you so much. Thank you very much, Sasaki san. Again, this will be with questions. So we'd allow Mike to switch over the system. So please wait momentarily. We would like to receive questions in English. I would like to introduce the first person from JPMorgan Asset. Hi. Yes, thank you very much for the presentation. I have one follow-up question in regards to the outlook for this year. In regards to the renewed lockdowns effective this month, how in general would that impact your retail business? The impact on the retail division, of course, it only been a couple of weeks since the reinstallment of the state of emergency. So right now, the impact is still limited. But as we explained earlier, the situation in January for the Retail division is pretty much the same as in December in terms of the sales of products. In fact, last April, last time the state of emergency was launched, the retail division is significantly different this time around in 3 points. 1st point, in April, the visit to the customers. Actually, we can make those physical visits upon the request of the customers. So this time around, we can conduct those visits. 2nd point is the progress we're seeing in digitalization and paperless operations. So last April, the paper based process was still necessary. So for instance, we're fund wrapped and structured bonds. But so it was an obstacle for us. But right now, all those have been turned into paperless operations. Also in terms of digitalization, wherever we are, we can work just as we are at the office, because we have a tablet system to all the employees. So using these new terminals, we can provide information via emails to the customers and also we would have web conferences and webinars. So even amidst this pandemic, we have been able to develop the environment to conduct our business appropriately. So that's second point. Now 3rd point, just to repeat myself, the successful examples or successful experience of the customers. So the general, the investment sentiment of the customers have been improving. So because of these three points, the retail division impact has been quite limited so far. And in addition to that, we have been progressing with the structural reforms. So even if we were to see some future impact, again, we expect to see it quite limited. Thank you. Thank you so much for your questions. We'd like to conclude the telephone conference. Mr. Sato is going to give us the closing remarks. Mr. Sato? In this quarter, the Nikkei average broke the record high to the highest in 30 years on the back of the start of vaccination, continued low interest rates and expectations towards COVID performance amid the weight from spread of COVID-nineteen. Under this circumstance, our business has recovered steadily and gradually. Consolidated revenues on a cumulative basis, up to the 3rd quarter improved to JPY 79,600,000,000, which was higher by JPY 70,200,000,000 than the full year over the last fiscal year. Now that business environment has improved, it is the very opportunity for us to transform ourselves to what we should become while maintaining revenue levels expected by the market. With our eyes on the future, we'd like to take a good balance between what works right in the short term and what is important in the long term and achieve growth. In other words, the strategy we should take is nothing but to expand the hybrid business actively by accumulating stock revenue assets while securing full revenues from the customer base and establish a strong revenue model that is not susceptible to those in the market. I would appreciate your continued support and cooperation to us. Thank you very much. This concludes our telephone conference. Thank you so much for your participation.