Thank you very much for waiting, investors. Thank you for taking the time out of your busy schedule to join us today for Daiwa Securities Group's Telephone Conference for the Third Quarter of Fiscal Year 2024. It is time, and we will now begin the conference call. Kotaro Yoshida, Executive Managing Director and CFO of Daiwa Securities Group, is here with us. My name is Nakamura, General Manager of the Investor Relations Office, and I will be facilitating the entire meeting. First, our CFO, Yoshida, will explain the details of the third quarter financial results for fiscal year 2024. We will take your questions after the presentation. Now, today's conference will be open to general investors via the internet. Now, we would like to begin the explanation.
I am Yoshida from Daiwa Securities Group.
Thank you for taking the time out of your busy schedule to join our telephone conference today. I will now explain the financial results for the third quarter of fiscal 2024 announced today in accordance with the explanatory materials posted on our website. Please turn to page four. First, I will explain the summary of the consolidated financial results. Percentage figures represent changes from the second quarter of fiscal 2024. Net operating revenues for Q3 were JPY 161.5 billion, an increase of 0.3%, and ordinary income was JPY 63 billion, a decrease of 13.5%. Excluding the gain on negative goodwill arising from acquisition of Aozora Bank shares and the application of the equity method, which was recorded as ordinary profit in Q2, consolidated results showed a real increase in both revenue and profit.
In the Wealth Management Division, proposal activities based on total asset consulting have taken hold, and sales of equity investment trusts and wrap account service contracts have increased. Both asset-based revenues and flow revenues have expanded. The Asset Management Division achieved record profits. In addition to an increase in AUM, stable income gains were achieved in real estate asset management and alternative asset management. In addition, revenues increased due to the realization of capital gains from strategic portfolio replacement, which continued from the second quarter. The Global Markets and Investment Banking Division saw a significant increase in profits. In global markets, FICC saw a significant increase in revenue, and trading revenue contributed from the unwinding of cross-shareholdings. Global Investment Banking saw a significant increase in earnings, with strong growth in the ECM business and domestic M&A.
Profit attributable to owners of the parent company was JPY 46.6 billion, a decrease of 13.3%. ROE was 11.7% on an annualized basis and 10.5% for the Q3 cumulative basis. Please turn to page 8. I will explain the trends in consolidated ordinary income and base income. Base income for the first three quarters was JPY 100.1 billion, up 29.5% year-on-year, and accounted for 57.7% of consolidated ordinary income. Please turn to page 11. I will explain the income statement. Commissions received were JPY 109.7 billion, up 11.6%. The breakdown of commissions received is shown on page 26. Brokerage commissions were JPY 21.6 billion, up 2.1%.
Underwriting and secondary offering commissions were JPY 13.2 billion, up 21%. Distribution commissions were JPY 6.7 billion, up 35.2%. M&A-related commissions were JPY 16.1 billion, up 36.4%. Please turn to page 12. I will explain the status of SG&A.
SG&A were JPY 124.4 billion, an increase of 4.2%. Trading-related expenses increased due to an increase in fee commissions. Personnel expenses increased mainly due to an increase in performance-linked bonuses overseas. Please turn to page 14. This slide compares the consolidated and Daiwa Securities Wealth Management Division's net operating revenues and SG&A expenses with those of FY 2021 when the previous medium-term plan was launched. As you can see in the graph on the left, expenses have increased for both the consolidated and Wealth Management Divisions.
However, net operating revenues have increased even more, and as a result, bottom-line profit has expanded. As shown in the graph on the right, the main factors behind the increase in SG&A expenses were wage increases to strengthen competitiveness, performance-linked bonuses, transaction-related expenses with a high degree of earnings linkage, and an increase in strategic IT expenses.
In addition, on a consolidated basis, the yen depreciation led to an increase in the yen-converted amount of expenses at overseas operation. However, the impact on bottom-line profit was limited because the revenues of overseas businesses also increased due to the yen depreciation. Please turn to page 15. Next, I will explain the ordinary income of our overseas operations. The total ordinary income of our overseas operation was JPY 7.9 billion, an increase of 72.6% Q on Q. In Europe, the P&L improved as M&A revenues recovered.
In Asia and Oceania, ordinary income reached a renewed record high thanks to contributions from the Wealth Management business and strategic investments. In the Americas, FICC revenues increased, leading to a significant increase in profits. Next, I will explain the results by division. Please turn to page 16. First, I will explain the income and expenses for the Wealth Management Division.
Net operating revenues were JPY 66 billion, up 8.9%, and ordinary profit was JPY 21 billion, up 32%. Increased activity of our clients' investment activities led to a surge in transactions in Japanese and foreign equities, and the increase in underwriting deals and GIB also contributed to the expansion of equity revenues in the Wealth Management Division. Distribution commissions for investment trusts increased due to the surge in the sales of equity investment trusts for private assets as portfolio proposals from the perspective of diversified investment became more widespread.
The agency fees for investment trusts and RAP-related revenues remained high, and asset-based revenues were JPY 28.6 billion, accounting for 49.3% of the Wealth Management Division's net operating revenues. In addition, the fixed cost coverage ratio of the Wealth Management Division was 108.3%, and the total cost coverage ratio was 70.3%. Please turn to page 17.
This is the progress of our Wealth Management Business Model. Asset-based revenues for the cumulative three quarters of fiscal 2024 was JPY 83.7 billion. In addition, we continue to provide total asset consulting services, and net asset inflows were JPY 1 trillion 0.0399 trillion. The group management policy we have been pursuing this fiscal year seeks maximizing the value of customer assets. To this end, we will continue to propose optimal portfolios based on our customers' total assets and work to build a revenue base that is resilient against market fluctuations.
Please turn to page 18.
This page shows the status of product sales and the distribution amount, as well as topics of this quarter in the Wealth Management Division in Japan. Wrap account service resulted in JPY 237 billion in the contract amount, net inflow of JPY 125.7 billion.
Net increase amount declined Q on Q, which is due to the payout made in December every year from the gift support service, gifting a part of the contract assets to the family members as a part of lifetime gifting. Sales amount of top investment trusts resulted in JPY 490.1 billion, net increase of JPY 108.4 billion. Diverse ranges of products such as Daiwa Blackstone Private Credit Fund, Invesco World Best Selection Equity Open, and so on, sold very well. On the bottom left shows the trend of net inflow in the RAP account service and the stock investment trusts. Please turn to page 19. Next is on Daiwa Next Bank. Ordinary income was JPY 3.3 billion, down 22.5%.
Both net operating revenues and ordinary income declined due to factors such as the compression of spread, mostly in the U.S. on the back of the impact from the rate cut from September. Please turn to page 20. Let me explain about the Asset Management Division. First, securities asset management. Net operating revenues were JPY 15.1 billion, up 5.9%, and ordinary income was JPY 7 billion, down 1.3%. Daiwa Asset Management secured the net capital inflow of JPY 190.3 billion from publicly offered investment trusts, excluding ETFs. Publicly offered securities investment trust AUM topped JPY 30 trillion, marking the record high. Please turn to page 21. Real estate asset management. Net operating revenues were JPY 7.2 billion, down 21.3%, and ordinary income was JPY 8.8 billion, down 2.3%. We have been constantly replacing properties to improve the quality of the portfolio.
In this quarter, we secured a high level of income contributed by Daiwa Securities Realty and equity method investment income from Samty Holdings. AUM of Daiwa Real Estate Asset Management and the Samty Residential Investment Corporation expanded to JPY 1.518 trillion . Please turn to page 22. Let me explain the alternative asset management. Net operating revenues were down JPY 2.8 billion . Ordinary income was JPY 13.2 billion , up 57.4%. Daiwa Energy & Infrastructure secured high-level profits driven by exits from infrastructure investments in Europe in the process of capital recycling. Please turn to page 23. Lastly, I will explain global markets and investment banking divisions. Starting off with global markets, net revenues were JPY 40.3 billion , up 10.8%. Ordinary income was JPY 9 billion , up 37.1%. Equity revenue increased.
Domestic equities saw a decline in the flow due to investors' wait-and-see stance, although foreign equities saw an increase in the client flow on the back of a strong market environment. Sales related to unwinding of cross-shareholdings also contributed to higher revenue. FICC revenues increased. Although domestic FICC revenues struggled due to JGBs, customer flows of credit were strong. Foreign bonds saw a slowdown of customer flows. However, derivatives maintained the high level. Overseas revenues were up due to an increase in the customer flows in the United States, with higher US interest rate volatility and position management.
Please turn to page 24. Let me next explain the global investment banking. Net operating revenues were JPY 25.3 billion, up 33.1%. Ordinary income was JPY 5.5 billion, up 383.6%. The unwinding of cross-shareholdings contributed to equity underwriting.
Debt underwriting revenue was maintained at a high level, with multiple large mandates where we served as a lead underwriter. M&A revenue was up, capturing the trend of increase in corporate actions. This concludes my explanation of the results in the third quarter of FY 2024. We were able to show strong results in the third quarter, making a record high ordinary income on a cumulative basis. In particular, our group's most important KPI, the base income, topped JPY 100 billion mark.
I valued highly that this level of base income is the level we thought we would achieve in the second year in the medium-term management plan, which shows we are outpacing our original assumption in the first year thanks to accumulation of our efforts, especially in the Wealth Management Division. Sales and net increase in the investment trusts and the fund wrap or private assets grew significantly.
We were pleased to see many cases where our customers felt the merit firsthand of including diversified investments and alternative assets as a result of our consulting activities on the customer's total assets. All of this led to the increase in the customer's asset inflow and AUM. In the Asset Management Division, our business is doing well with AUM steadily increasing. In the Real Estate Asset Management and Alternative Asset Management, we have been able to book profits from capital recycling constantly. In global banking, global investment banking, M&A income reached a record high, and revenue increased driven by more underwriting mandates such as the underwriting unwinding of cross-shareholdings. Strong activities of global investment banking are contributing positively to the increase in the flow income of other divisions.
Now, looking at what is happening now in the fourth quarter, overall on the consolidated basis, I feel the trend continues to be good with the same momentum as the third quarter. We are continuously promoting customer total asset consulting, which is generating more stock assets and income from which we are also getting flows accordingly. We continue to implement capital recycling, push forward strategies set in each division sincerely, which gives me confidence in the good result overall on the consolidated basis.
As things like getting out of deflation, the shift from savings to investments, and capital efficiency improvement being well penetrated in Japanese corporates, our group is blessed with diverse business opportunities, and we are well positioned in the market where there is significant growth potential.
Our business, our service provider in the finance and capital markets, is only as good as the trust we win from customers and our whole society. Our group works to realize a virtuous cycle of winning the trust, securing healthy income as a result, and adapting to the expectation of our shareholders. It is exactly what we target in the medium-term management plan, maximizing our customers' asset values. To this end, we are committed to stay focused on the business model of each division, such as total asset consulting, to build trust from customers and the society as a whole.
This completes my explanation. Thank you so much.
This concludes our explanation. We will now take questions from the audience. Today's teleconference is also available in English via simultaneous interpretation.
If you have a question in either Japanese or English, please press the number one after the star button on your phone. To answer your question, please press the number two after the star button. Please note that we will first take questions in Japanese and then in English. Please pose your question when your name is called. We are now accepting questions. The first question comes from Daiwa Securities Regional Assemblies. So Q3, so in the investment trust, the private credit investment trust was selling very well, and also the foreign equities transaction, there was a surge in the transaction. So those were some of the factors in Q3. But the similar trend, is it continuing right now? So between Q2 and Q3, because there was a significant gap, so is the trend continuing into Q3? And this applies to global markets as well.
Global markets think Q3 was very positive, that is, in the overseas front. But the current situation, is it still continuing as we speak? See if you can give us more color related to this. And the second question, apologies for a very detailed question. So asset management division or alternative asset management division, this is a question related to that. So the profit income related to this, it is hard to understand. It is not clear. So non-operating profit. So there were a lot of gains from the exit, that is, inclusive vendor, about JPY 26 billion in terms of the impact. Now, in terms of the revenues, it was in the negative realm. So maybe there was a major project or provision that was impacting this.
So, in the course of only three months or so, the income out of the JPY 300 billion of AUM, 4 point something % was the impact in terms of the impact here. So there must be some ins and outs related to these numbers. So those who are engaging in investment business, they need to be clear about the gains from the sales or the provision is this much and so forth. Quite often, those who engage in investment businesses, they disclose those. So it is not clear in this case or your case. So it is a request that you would give us more clarity. See if you can give us a color what sort of projects that there were some provisions and so forth. We would definitely like to hear more of those. Thank you very much for the question.
The first question relates to the wealth management division. I believe the first question was related to the wealth management division, so investment trust and also the overseas transaction. So how sustainable is that? Or would there be ups and downs? I believe that was the nature of your question. So in terms of investment trusts, some of the features I'd like to highlight, so private asset and the private credit investment trust was selling quite well. So it is not as if we're trying to focus on this product, but it's more about the consulting we conduct vis-à-vis the total assets. So we do have the tool to visualize this consulting service. So we can assess how the total asset and the portfolio of the customers are, and we can engage in dialogue with the clients.
So, what sort of countries, regions, what sort of products that we can engage in. So that way, we can enhance the risk return of the portfolio. Aside from that, it could be real estate and annuities and so forth. Also, some of the asset inheritance-related consulting tools, we do have those as well. But we have been focusing specifically on the asset management tool. So after conducting analysis of the total asset, we make various consulting. For instance, the alternative asset may actually enhance the risk return, return of the customers, and this has been well accepted by the customers. So the total asset consulting, that is the idea. And because of that, there has been an increase in the number of proposals. And as a result of that, we have seen an increase in investment trust. Now, the sales of investment trust has been strong.
This is because of private credit and private assets. But aside from that, for instance, the US equity investment trust or the emerging market investment trust. So depending on the customer's state, we propose various options. So it's rather than just focusing on what was sold, it's more about our approach has been well disseminated amongst our customer base. So if our activities continue, of course, we make sure that they do continue. So this will be resilient against the market fluctuation, and we can engage in sales activities in such ways.
Also, according to the results and the materials about the investment trust and fund wraps, the net, the inflow, the net increase. So that has contributed to the AUM, and that has contributed to the asset-based revenues. So we are starting to see these positive signs taking place.
Of course, Q4 has just started as we speak, but we have been continuing with these positive activities. Now, related to foreign equities, so U.S. equities, especially U.S. equities, posed a large impact in terms of the performance. But if you look around the world, the U.S. equity is quite dynamic. And also, as you try to structure a global portfolio, you need to have a certain portion of the U.S. equities, and that is a proposal that we're making to the customers. So this appetite to invest is still quite strong. However, appetite to invest is still there. But of course, depending on the market situation, it may actually see some ups and downs. And the fund wraps have been quite positive. And likewise with other products. Also, the bonds in the U.S. and also the foreign currency.
So either the bonds or the foreign currency denominated deposit, that is another proposal. And we do have high expectations in Q4 as well. Now, for the global markets, FICC, especially, we have seen a favorable trend in the overseas. So it is not as if Q3 was only positive. Actually, Q2 and Q3, it has continued to be positive. So into the short-term repo and also the U.S. Treasury, MBS. So multiple products that we offer. And in all the products, we continue to see a favorable trend. And we do believe this is sustainable. And even as we speak, it's been reported that it continues to be positive. And the second part of your question, alternative asset management, the question related to the alternative asset management. So depending on the investment projects.
And because we invest in various forms, the returns vis-à-vis the investment assets, some may be booked to the Net Operating Revenues, and some may be booked as dividends or the gains or loss related to equity asset holdings. And some may be booked under the non-operating, the profit and loss. Therefore, in terms of the alternative asset management outcome, so rather than perhaps you can look at the Ordinary Income. That may be a better way to judge the performance of this business. So our Net Operating Revenues was in negative.
Why? Because some of the investment projects, we had some provisions in several projects, and that was the reason. Also, for the equity asset affiliates, some of the returns were quite large, contributing to the income. So that is why the Ordinary Income for the alternative investment management was quite positive. So what are specifics about the projects?
So I do understand that it has been positive, but where have you seen large gains from the sales? I might have said infrastructure or Europe or something. So what are the projects where provisioning has been conducting? So just for our reference, we definitely want to hear more. The details of the individual projects we do not disclose. But for equity assets, the gains were seen from the energy and infrastructure related. So some of the returns we have received from those investments. Also in terms of provision, so again, we do not disclose the details. Apologies, I hope you understand. Thank you very much.
Ms. Fujino, thank you so much for your questions. Next questions are from SMBC Nikko Securities, Muraki-san. Muraki-san, please go ahead.
Hi, this is Muraki from SMBC Nikko Securities. My first question is on the investment banking division, which is page 23.
ECM has been declined, but it's actually recovering in this quarter. So there's a capturing of ease from unwinding of cross-shareholdings. How are you making this recovery? You have explained to us that there's a strong pipeline, but ECM in Q4 onwards, what is your outlook? M&A revenue performed very well, but what is the situation of the pipeline going forward? That's my first question. My second question, sorry for the specific question, but commercial real estate in the United States, any indirect exposure there? Japanese insurance companies have booked a significant loss from CRE, and American banks have booked some loss related to CRE, which is not a large amount. But at the moment, is there any indirect exposure to CRE in the United States? How do you evaluate your performance in the CRE? That's my second question.
Mr. Muraki, thank you so much.
ECM business in the third quarter? As we mentioned, this relates to the unwinding of cross-shareholdings. We were able to execute those mandates of unwinding of cross-shareholdings. And the specific process within that is as follows. In Q1 and Q2 up until now, we had a pipeline. In the third quarter, we were able to execute those sale deals. So there was no extraordinary demand in the third quarter. In Q2, Q1 also, there was a strong pipeline from previous quarters, which we did not really execute, but we did execute in the third quarter. In the fourth quarter, we have a strong pipeline of those mandates: PO or sales in the market, proforma sales or commissioned sales, consignment sales. So there are varieties of formats, but we have more mandates. GIB is going to benefit from unwinding of cross-shareholdings, marketing, and global investment banking.
We expect benefits in those divisions continuously going forward. The same goes for the M&A. We have a strong pipeline for the future. Our M&A staff are quite busy at the moment, so we have a strong pipeline. To your second question, CRE in the United States or exposure? This is the matter of Aozora Bank, so we cannot really make a comment from Daiwa Securities Group. But we hear that they are on track in accordance with their plan. That's all. Mr. Muraki, thank you so much for your questions.
The next question is from Nomura Securities. So, Sasaki-san, please.
This is Sasaki from Nomura Securities. Thank you for the opportunity. So I have three questions, so if you can actually give us the answer for each one of them, a very simple one. First one, the slide, page 15.
I just want to have a better understanding of this. So, page 15, so the non-operating revenues, JPY 26.6 billion . So, what is inside here? So, for Q3, it's the private equity, energy, and infrastructure related. Was that inclusive in there? What about the real estate? The gains and loss from the real estate, is it impacting this number?
So for this, the alternative asset management, the returns from the alternative asset management investment, and also from the real estate asset management. So warehousing function for REITs, we have some gains from the sale. So those are inclusive in that number. So it's both real estate as well as private equity. Those are inclusive in here. That is correct.
Understood. Also, another question. So we never get the consolidated P&L. So in terms of the non-operating, the profit and loss, especially.
So you have some account for those under the equity asset. So because it's under the equity asset, so you don't have the majority into those investees. But from the minority investment, you have some sort of dividend. Is my understanding correct? If that is the case, then. So you haven't made the decision-making, but some GPs have made some decision-making, and you have some impact from that. So is my understanding correct related to this?
As for your second question, so the companies from equity assets, your understanding is correct. In terms of decision-making, so depending on the investing companies, of course, it differs. But those who are making the investment, sometimes we may engage in the dialogue. And so it really depends who makes the decision-making, depending case by case. So the effective tax rate has come down.
So will this come down on a perpetual basis, or is it a one-off for Q2 or Q3?
They are somewhat off factors.
So we'd like to keep a close eye on this. So this is a one-off, then?
Yes, it includes some one-off factors.
Understood. Final question, which relates to wealth management division. Within that explanation, mention about the equity-related revenues, Q1Q, there has been an increase. So on Q1Q, there's this increase. If you were to break down the factors, so was it positive from the secondary, or is it more on the primary, or is it both? So suppose primary was better, and as you have explained within the materials, so the Kansai Electric, Hepco, or Hulic, these large projects were influential, or so that is my final question.
Inclusive of primary, the performance was positive. In terms of secondary, within the results materials.
For the secondary, if you look on the Q1Q basis, there was an increase, and on a year-on-year basis, secondary was quite similar, but if it is true, primary has been contributing, so large-scale IPO, sorry, like a PO, and so those are some of the factors, and because of that, there has been an increase in the flow of revenues.
Understood. Thank you very much. So both the Q1Q Japanese equities, like I mentioned, there was an increase in the revenue, but it's more on the foreign equities. That was an increase. Do you use the balance sheet?
So yes, we've used the position to conduct the transaction, and it is just so we have conducted some US equities tradings as well.
Ms. Sasaki, thank you so much for your questions. Next question is our final. SBI Securities, Otsuka-san. Otsuka-san, please go ahead. Hi, Otsuka from SBI Securities.
Thank you so much. Can you hear me? Yes. So I have two questions. My first question, page 23, sorry for this detailed question. On page 23, in the equity explanation, you mentioned about unwinding of cross-shareholdings, which contributed to the higher revenue in this division. So this particular word, in the presentation of the second quarter, you did not mention that in the Q2 presentation. So how large was the contribution? So in the total equity operating revenue, ¥196.171 billion. So there was this unwinding of cross-shareholdings, but it did not really increase that much. So how large was the contribution?
In the GIB division, the mandates, equity offer or trading of unwinding shareholdings, which pushed up the trading income. In the third quarter, there were multiple number of mandates, although we cannot really give you the specific number.
But in the second quarter, we didn't have many of them. So in the third quarter, we had multiple mandates, which contributed positively to the revenue in this division. So a multiple. However, the profit level did not increase that much. Am I right?
You're right. Okay, understood. My second question, simple question. Share buyback was not announced today. So for November 2023, since then, you have not really announced the buyback program. What type of discussion are you having in the company on the share buyback at the moment? For example, PBR is near one. And are there any other factors that you're discussing on the share buyback?
Well. There was no one single particular reason why we have not announced the buyback since November. So we made a decision considering multiple factors. Announced with regards to the return to shareholders.
By half, we pay more than 5%, 50%, or higher return, and JPY 44 is a floor per share for the whole year, and we have the capital regulation. Soundness of the financial fundamentals is important for the buffer capital. We'd like to use it for growth investment and also shareholder return. We'd like to strike a good balance between the two, and we'd like to maintain the financial soundness, so there's no change to that. In the third quarter, our ROE surpassed 10%. At the moment, we'd like to prioritize more on the growth investments, and also we have the pipeline for potential investment in the future to solidify the customer base, and we'd like to have stronger functions as Daiwa Securities and also team investments such as open innovation.
So we have the good pipeline of investments, and we'd like to continuously watch the financial soundness, which should be sustainable in the future. Impact on capital, impact from the finalization of phase three. We considered all of those factors. Furthermore, due to the weaker yen after the exchange rate conversion, consolidated capital has increased by about 2%. If the yen strengthens, then this will be decreased by the same amount. As a financial institution, exchange rate or exchange market. Well, there are important KPIs, but there are capital items that are required by credit rating agencies. We considered all of those factors comprehensively, and we made the judgment not to conduct the buyback this time.
If that's the case, Mr.
Yoshida, considering all of those points, looking at the share price, PBR, you didn't really look at the share price or PBR, but rather you considered all of those factors. Sorry, I forgot to mention those two items. I didn't mention, but of course, I considered the share price also.
Understood. Thank you so much.
Thank you very much, Otsuka-san. The next question is from Morgan Stanley MUFG Securities. Nagasaka-san, please.
This is Nagasaka. Thank you very much for the opportunity. I only have one question. Across the board and the division has been very positive in the base income vis-à-vis the midterm outlook. We are seeing a front-loaded performance. As of March 2027, that's JPY 220 billion of ordinary income. There's a possibility this may be even higher given the current trend.
So perhaps by division, you can give us what are the reasons for the upsides and what are some of the potential concerns or risks by division. So basically, it's about the midterm outlook. Are you raising those given the current trend? That is the nature of my question.
Thank you very much for that question. Yes, we are trending better than our initial assumptions for the midterm plan. So the Base Income, the level, if you look at that. So in year three of midterm plan, JPY 150 billion is the Base Income. That is the target we have in mind. And year two, so we don't have the number disclosed for year two, but according to the image that we have for year two, we do have those internally, and we are trending as if we would reach those.
So this is wealth management and also the securities asset management and real estate asset management. That is the combination of the base income. So within the different division, it is known to secure very stable profit. And as we increase the balance, AUM, we can expect to have more steady income. So as we look towards JPY 150 billion, we are definitely front-loading some of the numbers. In addition to that, we have the alternative asset, GMIV. Those profits are combined. So on year three, we had JPY 240 billion or higher for the ordinary income. So nine months have elapsed since we have started the current midterm plan. So at this moment, as of this moment, we have no intention to revisit the assumptions.
But what we can say is the AUM or the asset-based revenue for the wealth management division, it is trending somewhat better than our initial expectation.
That is related to the market environment, and of course, we'd like to closely keep an eye on the sales activities to look at these numbers.
Very well understood. Thank you very much.
Ms. Nagasaka, thank you so much for your questions. Next question. Citigroup Securities, Niwa-san. Niwa-san, please go ahead.
Hi, Niwa from Citigroup Securities, so I have two questions which are different from financial results related to the wealth management division. First, the bank. Next, bank. I'd like to know the deposit strategy. How are you going to implement the deposit strategy at the bank? Policy rate is on the rise. So continuously, do you expect deposit as a key sourcing for the funding? Or you cannot really spend so much cost on the deposit as a source of funding? My second question. Daiwa Securities. For your employees, I'd like to know how you're monitoring your employees.
If I look at other companies, there were inappropriate behaviors. For example, when they visit homes of the customers, there was some too aggressive marketing behavior. So how do you monitor your employees to avoid inappropriate actions or behaviors of your employees in the process of sales and marketing? Any particular comments on that?
Thank you so much for your questions. Deposit funding strategy of Daiwa Next Bank. As I mentioned in the presentation, they are generating sound profit compared to the second quarter. Ordinary income in the third quarter declined a little bit. But in the second quarter, ordinary income increased because of the rate increase at the end of April. And Daiwa Next Bank has about JPY 5 trillion investment portfolio, including the deposit portfolio. So by investing, they turned that into investment. They saw an increase in the ordinary income.
Because of the rate increase in the fourth quarter, we expect further spread increasing. Of course, the funding cost is going to go up, but there is always a time lag between the rate increase and the rate increase on the ordinary income. So gradually, over time, the funding cost of the deposit will go up. So overall, their spread is expected to go up. So because of the circumstance, Daiwa Securities' wealth management deposit acquisition is such a large business opportunity. Of course, we don't want to get ourselves involved in the price competition to get the deposit, but we'd like to get referrals from our customers. We'd like to increase the interest on the deposits through the campaign to acquire more deposits through referrals. So that's our funding strategy for deposits.
One of the points of the banking business is our proposal to increase the foreign currency denominated assets of our customers, so we'd like to focus on foreign currency deposits as well. To your second question: When our employees meet our customers from the past, as a matter of course, we train them on the compliance, and we conduct trainings and education on this topic to our employees continuously, and even before this case has happened, when our employees have meetings with clients, there's a stringent rule that they have to keep them in the record, so product managers and other managers always monitor the meetings of our employees with our customers, and with regards to the senior customers, not only the salesperson, but always higher-ranking managers or companies' salespeople to make sure that there's good communication with senior customers, so trainings, compliance.
So in those areas, we have to really make sure that they are well understood. And on July 27th, January 27th, we made a public release that we have implemented the automatic recording system, recording the exchanges for communication between our employees with our employees in the marketing activities. So that's also one example of we are trying to make sure that good communication is in place.
Understood. Thank you.
Thank you very much, Mira-san. The next question. J.P. Morgan Securities. Arai-san, please. Arai-san, please write the question.
So this is Arai from J.P. Morgan Securities. I have two quick questions. First question relates to M&A revenue, M&A-related revenues. So it has been strong, but by region, what was the contribution to the revenues? So by region, how was it different? Also, for domestic and overseas, I do believe you've increased the personnel.
So if you can also give us progress on that. And the second question, Q4 and the next year outlook for cost. So range increase, that is increasing the cost, but also you're conducting the structural reforms as well. So how are you progressing in terms of structural reforms? So next year onwards, if you can comment on the cost outlook, that would be helpful. So those are the two questions. Thank you very much, Arai-san, for your question.
The first question relates to M&A-related revenues. So for domestic and overseas, it has been positive. So in terms of the contribution to the revenues overseas, 70% or just short of 70%. So 60%-70%, that's overseas.
And also in terms of the headcount increase at the overseas and domestic, those we are increasing the headcount, but slightly more so in the overseas front in terms of the increase in the personnel. The second question relates to cost reduction initiatives. In the previous midterm plan, so end of FY 2023, JPY 30 billion of reduction. So we have already achieved that number. And so those are ongoing efforts. And as we speak, the domestic wealth management, the sales operation will be made further efficient in hopes of conducting a cost reduction. Also in the overseas front, the lending and trading operation is restructured, and also we will be reducing the IT system.
Understood. Thank you very much.
I'd just to add on some information. But because we are in the inflationary trend, so various costs have been on the rise, inclusive of transaction-related and so forth.
Within that realm, of course, we may need to invest strategically wherever if it's necessary. But of course, we do need to reduce the cost given the inflationary trend. As we have mentioned in the materials, we have also disclosed some of the factors that add up to the reduction of the cost. If you have any further questions, please raise them to the IR office.
Thank you very much.
Ms. Arai, thank you so much for your questions.