Ladies and gentlemen, thank you very much for waiting. Thank you for coming and participating to Daiwa Securities Group Telephone Conference for Q1 FY 2020 Earnings Announcement amidst your very busy schedule. It is time. We would like to begin the conference. From Daiwa Securities Group, we have Sato, our Senior Managing Director CFO. My name is Fujino, Head of IR, and I will be the moderator today. First, Sato will provide you with the overview of Q1 results for FY 2020. We would like to receive your questions after the presentation. Today's conference would also be disclosed to the individual investors through internet. We would like to begin the explanation.
I am Eiji Sato, CFO of the Daiwa Securities Group. Thank you for joining us at our telephone conference today amidst your busy schedule. I would like to explain the financial results for the first quarter of FY 2020 announced today according to the financial results briefing material posted on our website.
Please turn to page four. I will explain the summary of consolidated financial results. We compared the rate of increase/decrease with the fourth quarter of FY 2019. Net operating revenues in the first quarter of 2020 were down by 4.7% to JPY 105.4 billion. Revenues in the Retail division decreased. Due to refraining from visiting customers face-to-face affected by the spread of COVID-19, sales of retail products declined, especially in April, but recovered significantly from May- June. Wholesale division revenues increased. Despite declines in M&A and equity underwriting and global investment banking, equity and FICC revenues in global markets increased. Ordinary income was up by 5.5% to JPY 21.3 billion.
Profit attributable to owners of the parent increased by 55.9% to JPY 17.5 billion. ROE was 5.8% on an annualized basis, and BPS was JPY 800.39. Please turn to page 10. I will explain the income statement. Commissions received were down by 15.5% to JPY 57.7 billion. Please see page 23 for the breakdown of the total commissions received. Brokerage commissions were down by 1.6% to JPY 17.1 billion. Underwriting and secondary offering commissions were down by 12.8% to JPY 4.4 billion due to a decrease in equity underwriting deals. The sales of stock investment trusts decreased. Distribution commissions dropped by 30.1% to JPY 4 billion. M&A related commissions were down by 67.4% to JPY 2.7 billion. Net trading income grew due to an increase in FICC revenue. Please turn to page 11. I will explain the situation of SG&A.
SG&A fell by 5.7% to JPY 88.8 billion, mainly due to a decrease in trading-related expenses and personnel expenses. Regarding trading-related expenses, in addition to advertising and promotion expenses, commissions paid and transportation expenses decreased. As for personnel expenses, earnings-linked bonuses are decreasing mainly overseas. Regarding depreciation, system-related depreciation increased. Please turn to page 13.
Next, I would like to explain the ordinary income of overseas operations. Overseas operation ordinary income fell by 12.1% year-on-year to JPY 8.1 billion, and the ordinary income remained in the black for 17 consecutive quarters. By region, in Europe, FICC revenues recovered and turned into black. In Asia and Oceania, although revenues declined in equity brokerage and IB business, wealth management business as well as recovery in FICC revenues contributed to the income. In Americas, equity revenues increased due to the continued high level of FICC revenues and expansion of trading volume of U.S. equity.
Next, I would like to explain our business results by division. Please turn to page 14. I would like to explain the revenues and income of the Retail division. Net operating revenues were down by 14.8% to JPY 35.1 billion, and ordinary income decreased by JPY 800 million. Equity revenues fell due to a decline in sales commissions from equity underwriting. Fixed income revenues decreased due to lower sales of foreign and domestic bonds. Distribution commissions for investment trusts dropped due to a decrease in sales of stock investment trusts. Agency fees for investment trusts also declined due to a decrease in the average balance during the period. In other revenues, investment advisory and account management fees, which are wrap-related income, decreased. Please look at page 15. This is the Q1 summary of sales and distribution amount by product and the major topics for Daiwa Securities' Retail division.
Due to the spread of COVID-19, the sales and distribution amount of all products decreased. When examining the first quarter on a monthly basis, as shown on the left side of the page, sales and distribution bottomed out in April, expanded in May, and improved to a level above the previous quarter in June. This improvement is due to the resumption of face-to-face meetings with the customer's consent after the lifting of the state of emergency, as well as effective information provision by emails using portable terminals and online interviews using Zoom. We believe a new successful sales style has taken off. Please turn to page 16. Next, I will explain the wholesale division. First, regarding global markets, net operating revenues were up by 45.5% to JPY 45.2 billion. An ordinary income increased by 201.8% to JPY 20.5 billion.
Equity revenues increased due to steady customer order flows for both Japanese and overseas equities and successful management of position. FICC revenues increased both in Japan and overseas. Domestic FICC revenues rose as customer order flows of JGB and credit expanded. Position management also contributed to the revenues driven by the tightening of credit spreads. Overseas FICC revenues increased due to America's continued strong performance and Europe and Asia Oceania showing recovery.
Please take a look at page 18. This page is on global investment banking. Net operating revenues were JPY 6.2 billion, down 52.8%, ordinary income was negative or loss of JPY 2 billion. In the equity underwriting business, we executed IPO mandates while the size of the market was shrinking greatly. In the debt underwriting business, we accumulated many mandates for straight bonds, samurai bonds, as well as a multiple number of benchmark bonds. With regards to M&As, we executed mandates steadily utilizing our global network in the sluggish market. Please turn to page 19. Let me next explain asset management division. Net operating revenues were JPY 12.7 billion, up 2.7%, ordinary income was JPY 7.5 billion, which was up 11.8%. Daiwa Asset Management revenue decreased with lower average AUM of public stock investment trusts, excluding ETFs, during the quarter, even though net asset remained inflow.
Revenues of real estate asset management increased, with revenues posted as a result of acquisitions and dispositions in the portfolio of Daiwa Real Estate Asset Management. Japan Rental Housing Investments Inc. merged with Nippon Healthcare Investment Corporation through absorption-type merger and changed their names into Daiwa Securities Living Investment Corporation on April 1st 2020. Please turn to page 21. Let me explain the results in the investment division. Net operating revenues were JPY 1 billion, down 75.6%, and ordinary income was JPY 100 million, down 96.3%. This completes my explanation of the results in Q1 FY 2020.
This completes the presentation. We'd like to receive questions from you. For the Q&A today, due to the circumstance, we are going to receive questions in Japanese only. For English-speaking participants, if you have questions, please contact us separately. We'd like to begin the Q&A session. When you have a question, please press asterisk one on your keypad. To cancel your question, please press asterisk two. When your name is called, please start with your question. Now receiving questions.
We would like to introduce the first question from SMBC Nikko, Mr. Muraki.
I have two questions. First question is related to page 15 about the fixed sale situation. Some of your peers also announced their results. In terms of retail sales, how would you evaluate your performance for retail's revenues? The trends beyond July. Given this trend, I believe you are making some recovery, but going forward, what will be your share in terms of the revenues? What is your impression so far? That is my first question. Second question related to investment banking. This is page 18. Equity underwriting has been on the decline, and M&A has been on the decline, both in Japan and overseas. Going forward, what is the outlook? What are some of the needs and deals possible?
Also for M&A, the number of M&A deals disclosed has been on the decline. In terms of risk control, what is your take inclusive of the overseas locations?
Thank you very much, Mr. Muraki. Related to the first question related to retail division. On the quarterly basis, we have booked deficit, but we believe this is a one-off phenomenon. On a monthly basis, we have disclosed the number. Now we're in the midst of COVID-19. We are coping with the changes, and we are definitely seeing recovery. We are seeing JPY 800 million of deficit on a full year basis. April was down by JPY 1.5 billion, and May is JPY 6 billion, and also June with JPY 1.2 billion of increase. In terms of July, we are seeing a similar trend.
As mentioned, we have been impacted by the refraining from interviews in April, and that has impacted our performance so far. We are trying to maximize the situation. We believe we are seeing recovery on a short-term basis. In terms of our activity so far, through the digital means, we have been able to expand the contact with the customers. In the Q1, the number of proposals, we have actually increased it by 1.7 times through telephone in comparison to the previous year, and that is why we were able to contain a flat trend. In terms of activities, we are continuing with the wealth management type of fee business and also a relative solution business, and we continue to conduct a steady effort into these areas. Solution business, we have seen some drop here because of the lack of face-to-face interviews.
Now we are using the digital technology. In June onwards, we have also resumed the physical meetings with customers. We believe the impact would start to show in our numbers. Related to the second part of your question about the M&A related business, as you rightly mentioned, with COVID-19 has impacted the execution of the M&A deals. In Q1, we have seen some uncertainty in terms of the guidance for the corporates, and also due diligence has taken more time. Basically, the deals are taking more time. It is not as if the deals themselves are being suspended. Therefore, in terms of the outlook, M&A going forward, it will still be impacted by COVID-19. It may actually lead to more consolidation within different industries. We may see more merger and consolidation and also business succession of the owner family related businesses.
We are receiving various inquiries so far. We would like to steadily execute those deals to increase our revenues. Within COVID-19, whether it is possible to conduct due diligence or not, in fact, we are making use of virtual data room, and we have been able to cope with certain level of due diligence. Many of the deals are conducted online using Zoom and so forth. Many of the deals have been able to close through the technology. In terms of Q1, our deals were limited, but Q2 onwards, we should start to see more deals in place, and that should improve the situation. Within COVID-19, in terms of DC year, JPY 6.8 billion deal has been acquired. Of course, in terms of investment banking, we are always conscious of cost management. Those efforts will be continued. Thank you.
Additional question related. You've talked about the physical visits. You have resumed some of the physical interviews upon the consent from the customers. After the last results announcement, you've mentioned, how would you conduct the sales, and how would you actually position the offices and so forth? You've mentioned that you would evaluate, you would visit those concept on a trial basis. That was the announcement you have made. Could you give us an update on this initiative?
Actually, we are still trying to identify the actual impact from COVID-19. We have the real and also the digital. We're trying to find out the best mix of those two channels. Even prior to COVID-19, Daiwa, we have been looking into this.
For instance, branches and office, 60% of the entire nationwide offices, we are trying to make it a smaller size or put them into second floor or higher. These initiatives were underway. As for 40% of the offices, we are also promote downsizing. In terms of downsizing of the branches and offices, in terms of the floor area, about 50% of the sales floor, we are trying to realize the downsizing, and that has been conducted. We would like to continue with this initiative. In addition to that, as we promote more digitalization, the middle and back offices, we can also downsize in those areas. For the branches, middle and back offices, we will continue with this effort this year. On a nationwide basis, we would like to converge the back and middle offices to make the operation more efficient.
By the end of this fiscal year, in terms of headcounts, we should be able to downsize and also allocate more to the customers and solution provision, more of a front office type of businesses. We would like to allocate more headcounts there.
Thank you very much.
Mr. Muraki, thank you so much. Now next questions are from Mitsubishi UFJ Morgan Stanley Securities, Tsujino San, please.
Hi. Branch in FX revenue. On the managerial accounting basis, would you please take us through what's happening there? For this Q1 to JPY 29 billion, shows a significant improvement from the Q4, but, as an image, Japan and overseas, what would be the split between the two? In comparison with Q4, what is the trend on Q-Q basis, and what is the background for that trend? My second question. This is related to the first question, but probably overseas continuously from Q4, I think business was solid. Looking at the monthly basis, April, May, and May, what's happening on the monthly basis and what is the current situation? Compared to Q1 results, what's really happening right now?
With regards to Japan, would you please give me the monthly trend, April, May, and June on the month-to-month basis in Japan as well?
Thank you so much for your questions. To your first question, FICC business, Japan and overseas. The mix or the split? Was that your question, Ms. Tsujino? Breakdown, the ratio or the absolute figure, whichever works for you. Roughly speaking, Q4, Japan accounted for roughly a little bit less than 40%. In Q1, Japan accounted for roughly 50%. Monthly trend, April, May, and June, and also at the moment, this month. In the area of FICC, April, May, and June, April was high, declined in May, and then recovered a little bit in June. That's the image of the monthly trend in FICC. Right now, at the moment in July, compared to June, I feel the level is somewhat low. Slightly slow compared to June.
Both in Japan and overseas, you mean?
Yes. This trend, first in Japan, April high, May drop, June recover. That's the trend in Japan. Overseas, in April, May, June, over month-on-month, it has decreased gradually overseas.
Thank you so much.
Thank you very much. We would like to move on to the next question from JP Morgan, Otsuka San.
Thank you very much. This is Otsuka from JP Morgan. I have two questions. I'd like to hear your answer one by one. First is confirming the numbers. You've mentioned about the retail monthly number. You have just mentioned that, I couldn't catch the numbers. You've mentioned about minus JPY 1.5 billion and so forth. Could you give us the number again?
In terms of retail division, April, JPY -1.5 billion, May, JPY -600 million, and June was JPY +1.2 billion.
This is the ordinary income?
Yes. This is equivalent to ordinary income. Yes.
For the month of June, JPY 1.2 billion. It was quite positive, but Q4 for three months, it was JPY 1.5 billion. Why on a single month basis, this performance was so strong? Also, if you were to multiply by three, could we expect this trend to continue for the rest of the year?
On page 15, we have the details on the product sales. If you can look at this number, the month of June, in comparison to the average of the quarter, it is actually quite high, as you can tell. In terms of Japanese equity, perhaps there's not much change. In terms of overseas equities, and also for investment trusts and so forth, we have seen some fairly strong numbers. The stock market has been quite brisk. That is in the backdrop, and that is the reason why we have seen some positive performance. Also, from the international diversifying investment, we have the wrap funds and also the foreign equities and foreign bonds. Those have been strong as well.
That trend continues into the month of July. Of course, going forward, we need to watch the market. Of course, it will be more impacted by the market trend. In terms of the recent months, recent week, we've seen similar trend continued from June. Also, for your information, we have been using terminals, digital technology. Through online, we can actually receive and place orders. In terms of Q1, the fund wrap has been on the decline and also structured bonds. The document for confirmation, it has to be on paper-based, so we need to have the physical documents to conclude the deals. That was one of the reasons. Right now we have been able to complete the digitalization of all the documents, therefore, all the products, the placement of order and reception of the orders could be conducted online.
That is an improvement as we speak. For the months of April, May, and June, as time progressed, telework and also sales utilizing digital technology, of course, our employees are getting used to it and of course, our customers are getting familiar with those. Therefore, the level of communication has been enhanced.
Related to the first question, JPY 1.2 billion, if that continues for three months on a quarterly basis, I think the profit level will be around JPY 3 billion-JPY 4 billion or so. If that is the case, on a hypothesis basis, how would you evaluate the management? In comparison to Q3 and Q4, the income profit level, it is better, but if you were to look at the quarterly basis, you cannot actually say that it is at an exceptional level for the retail division. How would you say that?
Thank you very much for that tough question. We believe the profit could be improved even further as we promote digitalization. We will be able to increase the revenues and also reduce the cost as well. Therefore, there's much room for the revenue and profit improvement. As far as our retail strategy is concerned, we are focusing on the business and areas and maximize the use of digitalization, and that is leading to wealth management and also inheritance and also real estate-related business. That is the way we differentiate ourselves from our peers. We'd like to make use of our consulting skills. Just to repeat myself, we need to have the best mix between analog and digital initiatives. Now in terms of cost or expenses, we have been downsizing the branches and office, and of course, we are trying to converge on the middle and back offices.
By leveraging our digital technology, we have been able to do so. By using these, we would like to make our operation more efficient.
Thank you very much. What about the second question? My second question related to share buybacks. You have not announced share buybacks this time around. What is the reason behind that? You're looking at the market in a flexible manner and of course, and the uncertainty of COVID-19, and also you've perhaps looked into some of the initiatives into the future. Was that the reason why you did not announce share buybacks?
Actually, yes. Your take is right. Our capital policy has not changed from before. We are trying to have a sound financial standing, and also we need to have enough funds for future initiatives.
If there's any surplus capital, then we will provide return to the shareholders, inclusive of share buybacks. As you know, in April, we had JPY 150 billion of AT1 bonds, and we have been able to strengthen our equity. Related to COVID-19, the market and also our performance and also the opportunities into the future, it is still posing impact. We need to really watch and see and monitor what would happen. All those elements we'll be taking into consideration when we make the decision.
Just to add on, in terms of the TSR, total shareholders return. Share buybacks based on TSR, do you have these in mind at this point or do you not really explore this?
We're not quite sure how you actually evaluate the share price, but on a relative basis in comparison to your peers, your Q1 number is not as satisfactory. The share price, if it drops, would you consider ways to enhance the TSR so that you can return to the shareholders? Do you have this concept in mind?
As we speak, we do not actually have that as our base scenario. In terms of our dividend and our capital strategy, we disclose those. We have disclosed those already, but the idea you have mentioned, we would like to explore that going forward.
Thank you very much.
Mr. Otsuka, thank you so much. Next questions are from Merrill Lynch. Sasaki-san, please.
My name is Sasaki from Merrill Lynch. I have two questions. First is related to how to interpret the numbers. When you disclose the profit by segment, I'm talking about page six, profit by segment. In Q1, looking at the breakdown of the ordinary profit, the other adjustments are the second-largest swing factor. These other adjustments, JPY -3.9 billion. What's included in JPY -3.9 billion in other adjustments line? That's my first question. My second question is related to your outlook. Looking at the appetite of the investment under the current circumstance of the market, what is the level of the appetite towards investment? What is the pipeline looking at the moment for investments?
Thank you so much. Other adjustments line. What's included in that line?
Group head office and other group companies, the gap between the financial reporting and the managerial accounting, and PL, which does not belong to any segment. Segment profit. This other adjustment is currently JPY 3.9 billion in Q1. That's actually lower, there was no particular extraordinary item. This was just accumulation of many minor items. For example, dividend received from stocks we own, which went down, and due to the lower interest rates around the world, overseas locations. A deterioration of the interest situation. Due to those factors, there were some negative factors that totaled to JPY 3.9 billion negative. To your second question, appetite of the investment division and the pipeline level of the investment division. We are aiming at being a hybrid-type securities group. Traditional securities business, we would like to create a stable revenue environment.
We would like to make growth investment if conditions are met for those objectives. We have a certain level of pipeline going forward of investments.
Does that mean that in the midterm plan, your target of the investment, do you think you can execute all of those investments? What is the density of the pipeline of the investment compared to your assumption in the midterm plan? What is the level of the investment that you can execute under the current circumstance?
For example, hybrid ratio. We have set the ratio of hybrid ratio. If you calculate backwards, this hybrid business ratio, so how much do we have to generate revenue in that area? You can calculate backward. Basically, we'd like to increase the stock-based business so that we can generate stable revenue and a stable cash flow. We have to accumulate stable revenues.
Against the target in the midterm plan, I think we are in line, in terms of the level of the pipeline that we see at the moment.
I have a follow-up question. At the beginning of the Q&A session, with the digitalization, you mentioned that you were trying to downsize or consolidate offices. When you think about the budget for the next fiscal year, usually you have to notify the landlord to cancel the lease a six month in advance. You must be, I think, talking to the landlords, if you are intending to cancel the lease contracts for some of the floors, in the offices. Are you doing that, or is your time span longer than that? Would you please comment on that?
Including branches, we are trying to reduce the real estate-related cost or property-related cost. We are considering those in the long span.
60% of the branches we would like to downsize. With that downsizing cost reduction would be JPY 2 billion-JPY 2.5 billion? Benefit of this reduction, when are we going to see that? 20%, a little bit less than 20% will be seen this year. In the next fiscal year onwards, 80% of the benefit will be seen. In the next fiscal year won't be the last year. We would like to finish this downsizing by 2023. Over that timeframe, as an image, we are expecting the reduction. To reduce 80% next year, then you have to be, I think, talking with the landlord now to cancel these contracts. You have to cancel the contract in September, otherwise you cannot reduce by 80% in the next fiscal year. We have the schedule.
In the next fiscal year, we are talking with a landlord for offices that we are intending to downsize next year.
How about head office in Yaesu? Is it included in the scope of your study?
No, we are not including Yaesu office in the scope of the study.
Understood. Thank you.
Thank you very much, Sasaki-san. Those of you with questions, please press one after the star key. With this, we would like to conclude the telephone conference. Sato will provide you with the final remarks.
This quarter was turbulent with COVID-19 pandemic shaking the global economy and capital markets. Under the circumstance, I think we were able to show our capability to respond to change in the environment, securing increase in revenues on the consolidated basis. Strong performance of global markets offset the decline in the retail and the global investment banking divisions. On the top of the benefits we saw from cost structure reform we have been working on from before, which contributed to higher consolidated income. In the retail division, we reported a loss because of significant constraints to face-to-face marketing activities with COVID-19, but I think it's temporary. Looking at the monthly trend, with the bottom in April, business has been improving gradually in May and also in June. In June in particular, the profit was a lot higher than the average of Q4 of the last fiscal year.
I am feeling that the efforts on digitalization and the revenue structure reform are gradually paying off, which gives me confidence in sustainable business recovery going forward. At present, retail division is addressing business model transformation from broker-centered business model to asset management type business model centered on stock revenues. Many investors are seeking advice from specialists with heightening uncertainties around the global economy. Now is a time when we can play a role as our social mission to empathize our customers being by their side to address their challenges on asset management and asset information. Our group interprets this global time of change as an opportunity and a step up our efforts on cost and income structure reform by promoting efficiency improvement with the best combination of digital and analog aiming at being a comprehensive hybrid type securities group. I would appreciate your continued support and cooperation to us.
Thank you so much. This completes the telephone conference call. Thank you so much for staying to the end.