Thank you very much for waiting. We appreciate your participation today in the FY 2025 third-quarter financial results conference call of Daiwa Securities Group despite your busy schedules. It is time, and we will begin the conference call. Joining us today from Daiwa Securities Group is Executive Managing Director and CFO Kotaro Yoshida. I am Kana Nakamura, head of the IR office, and I will be moderating today's proceedings. Thank you for your attention. First, CFO Yoshida will explain the financial results for the third quarter of FY 2025. We will accept questions from participants after the explanation is concluded. Please note that today's conference has also been streamed via the internet and is open to the general investors. Now we will begin the explanation.
This is Kotaro Yoshida from Daiwa Securities Group. Thank you very much for taking the time to join our telephone conference today.
I will now provide an overview of our financial results for the third quarter of FY 2025, which were announced today, referring to the presentation materials available on our website. Please turn to slide four. First, I will explain the summary of our consolidated financial results. Please note that the percentage changes are in comparison to the second quarter of FY 2025. Net operating revenues in Q3 of FY 2025 were JPY 194.6 billion, up 12.8%, and ordinary income was JPY 69.5 billion, up 28.4%. Net operating revenues of JPY 194.6 billion mark a record high for the third quarter, demonstrating that our revenue base has been further strengthened. In the Wealth Management Division , asset-based revenues, a source of stable income, reached a record high of JPY 32.3 billion, an increase of 8%. Net asset inflows have continued, making the foundation of our stable earnings increasingly solid.
We view this as a testament to the deepening trust we have earned from our customers through accumulated diligent engagement. On the flow side, we successfully captured market dynamism with steady contributions from Global Markets and the M&A business. As a result, annualized ROE stood at 11%. We believe a structure is taking shape where flow revenues are accumulating in a balanced manner upon a foundation of stable profit growth. Please turn to slide eight. I would like to discuss base income, our KPI for stable earnings outlined in the medium-term management plan. Base income reached JPY 128.3 billion, up 28.2% year-on-year, expanding at a pace exceeding our initial assumptions. This strong growth indicates that our profit foundation is steadily becoming more robust. Please turn to slide 11. I will now explain the income statement. Commission received totaled JPY 128.5 billion, up 8.7%.
A breakdown of commission received is provided on slide 24. While the results are as shown, M&A-related commission reached JPY 18.8 billion, marking a record high, driven particularly by strong performance in overseas M&A. Please turn to slide 12. Selling general and administrative expenses were JPY 132.8 billion, up 8.2%. Regarding trading-related expenses, commissions paid increased. Personnel expenses rose due to an increase in performance-linked bonuses. Please turn to slide 14. Ordinary income for overseas operations was JPY 8.3 billion, up 10.2% quarter-on-quarter. In Europe, although DC Advisory Europe showed a strong recovery, performance-linked bonuses also increased. In addition, profit decreased due to the absence of gains from ESG-related funds recorded in the previous quarter. In Asia and Oceania, profits increased due to higher revenues from Japanese equities and equity method affiliate income, such as from SSI Securities.
In the Americas, profits increased driven by growth and FICC revenues. Next, I will explain the performance by segment. Please turn to slide 15. First is the Wealth Management Division . Net operating revenues were JPY 77.1 billion, up 3.2%, and ordinary profit was JPY 29.5 billion. Driven by progress in comprehensive or total asset consulting, sales amounts increased across almost all products. Equity revenues increased by JPY 2.2 billion as trading in Japanese and foreign stocks grew in a strong stock market. Fixed income revenues increased by JPY 500 million as we captured demand for bond investment, mainly from corporate clients amidst rising interest rates as well as the sales of SoftBank Group bonds. Needs for asset formation through equity investment trust became even more pronounced, leading to JPY 1.7 billion increase in distribution commission and investment trust.
Sales of Fund Wrap increased significantly in response to rising needs for inflation hedging. Wrap-related revenues grew by JPY 1.6 billion to reach JPY 16.9 billion, a record high. As shown on slide 28, asset-based revenues reached a record high of JPY 32.3 billion, driven by increases in agency fee for investment trust and wrap-related revenues. The fixed cost-coverage ratio of asset-based revenues in the Wealth Management Division was 114.6%, and the total cost-coverage ratio was 74.3%. Please turn to slide 16. This slide shows the sales and distribution amount by product in Daiwa Securities Wealth Management Division . The contract AUM for wrap account services reached JPY 5.7836 trillion, marking a new record high. Against the backdrop of rising needs to address inflation and FX risks as well as to preserve asset value, demand for long-term stable investment is steadily increasing.
We believe our Fund Wrap is a powerful solution capable of providing optimal portfolios tailored to risk tolerance and investment goals. It has been chosen by customers as a means to achieve stable growth of asset value. Both the contract amount of JPY 356.2 billion and the net inflow of JPY 224.1 billion for this quarter were record highs. Furthermore, we are advancing collaboration with external partners such as Japan Post Bank and Aozora Bank, contributing to the expansion of contracts. Next, please turn to slide 17. This covers the status of Daiwa Next Bank. Net interest income, etc., was JPY 10.1 billion, down 9.3%, and ordinary income was JPY 4.8 billion, down 15.5%. The deposit balance has expanded steadily, exceeding JPY 5 trillion in January.
As a shift to a world with interest rate is expected to expand investment spreads and investment income, we aim to continue expanding our deposit balance. Please turn to slide 18.
I will now explain about the Asset Management Division , starting off with the securities asset management. Net operating revenue was JPY 18.6 billion, up 8.6%, and ordinary income was JPY 10.2 billion, up 20.4%. In Daiwa Asset Management, AUM of publicly offered securities investment trust is now over JPY 36 trillion. With new NISA, capital inflow is continuing into iFreeNEXT FANG+ Index Fund and others. Please turn to page 19. Next is the Real Estate Asset Management . Net operating revenue was JPY 10.1 billion, up 26%, and ordinary income was JPY 10.3 billion, up 76%. Real estate asset management is a business where the profit grows in tandem with AUM.
AUM at the end of December 2025 was JPY 1.73 trillion, which was record high, making a steady progress towards our 2030 target of JPY 1.8 trillion-JPY 2 trillion. In this quarter, income increased driven by steady progress of development and sales of properties at Samty Holdings , capital gains from sales of warehousing to REITs at Daiwa Realty, as well as capital gains on property sales at Samty Residential Investment . Please turn to page 20. I will now explain the alternative asset management. Net operating revenue was JPY 3.8 billion, and ordinary income was JPY 1.6 billion. We recognize capital gains from exits from some private equity investments. Please turn to page 21. Lastly, I'd like to explain the Global Markets and investment banking division. In Global Markets, net operating revenue was JPY 45.2 billion, up 15.3%, and ordinary income was JPY 11.9 billion, up 42.2%.
Domestic equities saw steady customer flows from both domestic and foreign investors, while the market continued to trade at elevated levels. For overseas equities, flows from retail investors continued to expand. Supported by the increase in customer flows, proprietary position management remained strong. FICC posted increase in revenues by 30% quarter-on-quarter. Amid rising domestic interest rates and continued yen depreciation, customer flows from wealth management clients and institutional investors remained steady. In particular, needs towards domestic credit product increased. In derivatives, client flows increased and position management performed well. In overseas, trading revenue was generated mainly in the U.S. by capturing the U.S. rate cut environment. Please turn to page 22. I'd like to explain the Global Investment Banking . Net operating revenue was JPY 26 billion, up 21.4%, and ordinary income was JPY 5.4 billion, down 10.8%.
In M&A, domestic market continued to perform well, where we executed many cross-border deals. In overseas, M&A market is showing the sign of bottoming out. In particular, we saw the sign of recovery in Europe. This completes an explanation of the financial results for the third quarter of FY 2025. We are halfway through the current medium-term management plan. An income structure where transaction-based income accumulates in a balanced way on the basis of stable income growth is gradually taking shape. In the current fourth quarter, the shift from savings to investment and strong client needs stay unchanged at high levels. In the Wealth Management Division , the strong Q3 momentum is continuing. In market divisions such as Global Markets, active transactions of both retail and institutional investors are still ongoing. In investment banking, corporate actions and M&A needs are strong, with a pipeline being built up.
We continue to serve for clients' varieties of needs flexibly, capture market shifts appropriately, and pursue sustainable growth as the leading company in the financial market. We appreciate your continued support. Thank you very much.
This concludes our presentation. We will now move on to the Q&A session. Today's conference call is also available in English via simultaneous interpretation. If you have a question in either Japanese or English, please press the star key, followed by the number 1 on your telephone. If you wish to cancel your question, please press the star key, followed by the number 2. Please note that we will first answer questions in Japanese, followed by questions in English. When your name is called, please proceed with your question. We are now accepting questions. We would like to introduce the first question, SMBC Nikko Securities, Muraki-san. Please, Muraki-san, please start your question.
So this is Muraki from SMBC Nikko Securities. I have two questions. The first question relates to the monthly revenue for this quarter. So that is for the months of October, November, and December. If there are any ups and downs, any undulations, I would like to know for each of those months. Also, in the months of January, you have explained that the activities continue to be fairly high and brisk. But after three months, have you observed any changes? First, the second question relates to the net income. On a cumulative basis, up until Q3, it is pretty much similar to on a year-on-year basis. So last year in Q4, you have JPY 50 billion of share buyback announcement was announced last year. So this year, likewise in Q4, can we expect to see a similar activity?
Also, in terms of investment pipeline and also in terms of surplus capital, are there any changes from the previous year? We'd like to hear your thoughts.
Muraki-san, thank you very much for your question. First question relates to the Q3, the monthly trend. There was a higher resolution. We have wealth management and Global Markets. Because of the impact from the market, we would like to explain how those so in terms of the Wealth Management Division , so for the months of October, November, and December, it continued to trend at the high level, a favorable level. October, the market was quite active. So within perhaps three months, maybe October was the strongest. Having said that, the months of November, so 18 days of trading, whereas October and December was also 22 trading days. So four trading days difference is quite substantial.
So that could be that reason why November appears to be somewhat weak. But all in all, October, November, and December, we continue to trend at the favorable high level. In terms of wealth management, there's not so much of a revenue, but in terms of the stock, the asset, so that is the net increase for the Fund Wrap s and so forth, we have seen an increase towards the end of the quarter. Also, for Global Markets equity, for October, November, December, it's quite even for those three months. Maybe November was slightly better than the rest of the months. FICC for October, November, December, gradually, the revenue has been on the rise towards the end of the quarter. Also, for the trend in the months of January for wealth management, so in comparison to the quarterly average, it is pretty much equal.
So it's flat in comparison to the quarter average. That was a performance in the months of January. In terms of net increase, perhaps it was somewhat stronger than the average quarter. So, of course, we have the investment trusts and Fund Wrap s and also just the general net inflow. And so, of course, we continue to see an increase as we trend through the months. So our expectations are met given the trend. Also, the second part of your question, no change from our previous thoughts. So 50% in terms of the dividend payout and also so JPY 44, that is the bottom, the level of the dividend. So that is a four. So when you look at the second-half performance, we are actually trending the better or higher than JPY 44.
We'd like to consider this based on the full-year basis and each quarter or each term, we're going to look at whether it's viable for share buyback or not. In terms of the gross investment pipeline, we do give priorities in exploring the gross investment. Depending on the predictability, we may use those funds for share buybacks and also for the total shareholders' return. In the past 10 years, on a consecutive basis, we have conducted share buyback. Just as we have done before, we continue to employ the same yardstick. Of course, we continue to look at the financial soundness and also the share price. Those would be taken into consideration. I know the expectations are rising. Of course, if you'd like to be cautiously exploring the possibility, that is all. Thank you very much.
So I'd like to ask about the state of January. So what about Global Markets? Is it close to the quarterly average?
Global markets, yes. Apologies, I didn't answer your question. So in terms of equities, so there were some past adjustments. And also, we have some issues with the U.S. equity. So it is somewhat weaker in comparison to the quarterly average. But in terms of bond or fixed income, as you know, the JGB, the long end has been rising. But at the same time, in terms of customers' flow, continues to be quite active, both for sales and buying. So in terms of FICC revenue increase, that was increased by 30% or so. Last year in FY 2024, a quarterly average was 13%, 13%.
So it's about JPY 22 billion of FICC revenue if you look at the past 10 years, if you look at it on the quarterly basis. So it's definitely in the top 10% range. And some of the reasons why, it is not just the position control, but also the customers' flow accommodated that. So we've been able to continue this high level, especially the domestic credit and also the derivatives and also the foreign, the currency credits. Those were some of the drivers. So for the months of January, we have been able to continue the positive trend as we have seen in the third quarter. I was able to very well understand.
Thank you very much for the explanation.
Mr. Muraki, thank you so much for your questions. Next questions are from BOA Securities, Tsujino-san. Please go ahead.
Hi, thank you so much for taking my questions.
The M&A fees were very high in this quarter. But in the long term, do you expect that trend to increase continuously, the number of deals and the flow, but on a quarterly basis? Were there any major large-sized deals which pushed up the revenue? I think there's a volatility depending upon the size of M&As. In this quarter, the M&A fees were very strong. But do we need to discount that volatility of the sizes of transactions? Or considering the core income streams, do you think this is a kind of ongoing level that we can expect going forward in Q1, Q2, Q3? The fees were very different. So how should I interpret this difference of the fee levels among the quarters? My next question, as you mentioned in your explanation, FICC flow was very high in January or was high in January.
But, for example, on January 20th, when there was a sudden dislocation, the market, like 40 basis points dislocation per day. When that happens, do you think you can avoid the loss? Or in such a case, do you think the situation is very difficult? Sometimes you get a tough day for one day. But because of the high volume in January, so in all, January performed well. That's all.
Thank you so much for your questions. To your first question relating to M&A business, as you mentioned correctly, it depends on the size of the deals. That's the nature of the business. And it depends on the timing of the closing of the deals. Sometimes the revenue recognition timing is at a different pace on a quarterly basis compared to other products or other businesses.
But the driver this time, including the international business, was not because of the big contribution from a big deal, but we were able to accumulate multiple deals, which contributed to the strong revenue of the quarter. The domestic pipeline is higher compared to the last year's level by around 30%. It's about 30% already accumulated. In the U.S. and Europe, the size of the pipeline is as good as last year. With regards to the M&A business, in 2030, our target has been JPY 70 billion. On the back of the expansion of the current business, we have changed our guidance or projection of the target. Based upon the global network, Japan, U.S., and Europe, and also in Asia, we have been establishing the M&A network. We are trying to capture the cross-border mandates. We expect the deals to be accumulated going forward.
But depending upon the timing of the closing of the deals, sometimes timing may be different. But we'd like to capture continuously the opportunities in M&A. To your second question relating to FICC, as you mentioned, when the rate moves rapidly, sometimes we book a loss. But we have updated the risk management scheme or system. And we have the system where we can moderate the position movement. And that's why we were able to manage the position very well in the third quarter. But if you look at just one-day basis, on some days, we have a trading loss. But looking at January alone, there was no day when we had a large loss. Going forward, we'd like to keep our eyes on the market and try to capture the transaction-based income by capturing the market moves. Thank you.
My follow-up question relating to the wealth management: capital inflow towards December increased in September and starting from August. There was excitement driving the capital inflow up. In the business areas where you have been marketing, have worked very effectively. Fund wraps sold very well. But at the right timing or right harvesting timing, you were able to harvest well. On the other hand, you could not really plan seeds fast enough for the future. So in the future, in some quarter, do we expect some quiet quarters because of the strong harvest period that you had, you enjoyed? How do you assess the projection for the future? Thank you so much.
With regards to the Fund Wrap sales, I don't think that will happen. In the short term, the prices move in the stock market, for example, index.
We are not proposing to try to take advantage of the short-term moves. That's not what we do in the Fund Wrap business. We try to contribute in the medium to long term, helping customers to build their assets depending upon their attributes and family composition of our customers. So as long as we continue to propose such solutions, we don't think suddenly we are going to face a quiet quarter. But, of course, if our solution marketing activities stop all of a sudden, then we will lose the inflow of the business. But we've been monitoring in the wealth management division the level of activities of solution being proposed to clients on a regular basis. We are trying to make sure that we approach customers on a regular basis.
I think that's why customer satisfaction level towards our Fund Wrap product is very high because we try to serve customers to maximize their assets. For the Fund Wrap business in general, from the proposal to the conclusion of the contract, lead time is rather long because there are some customers who are not accustomed to invest. Customers say they'd like to take time to think. Sometimes they place large orders. We give thorough explanation to customers. Another characteristic of the Fund Wrap, from the new contract to three months data, they usually increase positions in many cases. In that sense, we always communicate with customers over the long period of time. AUM increases gradually over time in most of the cases. The key is to continue the high activity levels of our salespeople communicating with customers like that.
For the Fund Wrap, they usually increase positions. What is the new versus the increase of the positions? We always monitor the mix. We should not rely only on maintaining existing customers, trying to encourage them to increase positions. Or at the same time, we should not rely only on acquiring new customers. So we try to always strike a good balance between the new customers and increasing positions from existing customers. So I would like to make sure that we manage this business so that there's not so much wild volatility.
Understood. Thank you.
Thank you very much. Next question comes from JP Morgan Securities. Sato-san, please start your question.
This is Sato from JP Morgan Securities. I have two questions. First question, sorry to persist. My question relates to FICC.
So the first half of this fiscal year, Q1 and Q2, the flow activities, you've been able to confirm that in the first and the second quarter. But you had some difficulties with the position management. I think those were the comments made. Now, in turn, the third quarter, it is definitely top-notch within the past 10 years or so. Were there any factors related to the external environment? Was it entirely because of the external factors? Or perhaps internally within the company, have you proactively engaged in operational improvement and that had a positive played out? So if you can give us more concrete details as to the measures that you have taken. So that is the first part of my question. The second question relates to the securities asset management, AUM. Basically, it has been quite positive all in all.
Also, in terms of the operating income, has increased. So if you look at the margin for perhaps the earnings level, it's quite high within the past couple of years. So in terms of profitability of securities asset management, were there any reasons why the performance was better for this quarter?
Thank you very much for that question. It's related to FICC, the revenue and profit. In comparison to Q1 and Q2, there has been an improvement in the Q3, increased by 30% or so. So a couple of reasons behind that. First, relates to we are addressing not just the institutional investors, but also the individual retail customers in the wealth management division, as well as corporates and various organizations. We also have flow from those customers in terms of products. So we have the domestic credit products has contributed largely to the profit.
Also, the foreign currency credit and also the foreign bonds had a positive impact too. Also, for the domestic businesses, there are some derivative trading in order to hedge the FX move. And also, that is true for the interest rate hedge. Basically, the increase in the flow, the transaction, that was one of the drivers. Also, in Q1 and Q2, we have some difficulties with the position management. So we looked at the operation of the risk management. So we have conducted some improvement measures. But more so than our initiative, we've been able to capture some of the overseas investors. And also, we do have bases in Europe and also in Americas. We have been able to collaborate in investing into JGB. So some of the collaboration amongst the different locations have also played a positive impact. So on a consistent basis, the JGB, the rate hike.
So we are seeing some volatility in terms of the rate. So it is not as if we were in a favorable term all the time. But we've been able to manage it well all in all. Also, in terms of the securities asset management, the drivers of the earnings. So in terms of the public, the equity investment trust, that has been increasing. And that is because of the market too, but also the net inflow. So in comparison to the end of the year, there has been net inflows by 10% increase or so. So iFreeNEXT. So it is very strong within the NISA names as well. Also, other investment trust products have been strong. Also, with increase in the Fund Wrap s, the Daiwa Asset Management Funds had also increased due to the increase in the Fund Wrap s.
So the increase in AUM had positively contributed to the earnings growth and the revenue growth. Also, even on the weighted average basis, we haven't seen any significant decline. It has stayed flat and hadn't really dropped. So those have been another positive factor. So did I answer your question?
Thank you very much for that. So if that is the case, so perhaps I shouldn't look at all the details number. But securities asset management, the profitability is about 55% or so. I think that is the profitability. So this is a factor. You will not see any odd factors. And even in comparison to the past number, it appears to be fairly high. So are there any one-off factors?
Well, in comparison to last year for the securities asset management profit, if you were to compare it, so starting this year, we have within the equity method, Global X LLC. So the ordinary income is included starting this year. So this is equity method. So it's only the ordinary income is consolidated. So that would actually push up the profit margin. So the Global X contribution, perhaps you cannot disclose the exact number. But in comparison to Q1 and Q2, how was the contribution in Q3? In comparison to Q1 and Q2, pretty much similar level in terms of Global X contribution. The U.S. stock market has been rising. And so that has also had an impact.
Understood. Thank you very much.
Sato-san, thank you so much.
Next question is from Nomura Securities. Sasaki-san, please go ahead.
Hi, Sasaki from Nomura Securities. Thank you so much for taking my questions. I have two questions. One, the outlook of the headcount in the next fiscal year. In IB and in the global market, domestically and for international, what is the plan for the projection of the number of headcounts? My second question is on the wealth management, the capital or asset inflow. In your explanation, you mentioned that capital inflow or AUM has been increasing and asset inflow has been very strong. But looking at the disclosure over the past 1-2 years, the Fund Wrap has been flat at JPY 100 billion-JPY 200 billion. That is the kind of flat trend. But what was the driver for the strong asset inflow, as you explained in your presentation, which was different from the disclosure presentation?
Thank you so much for your questions.
The projection for the headcounts for the next fiscal year, there is no one particular business unit where we are trying to increase dramatically compared to other divisions, including the new graduates as well as mid-career hiring. In each business unit, to satisfy needs, I would like to recruit the talents. Overall, the total headcounts or new hiring is going to stay about the same. No major change. To your second question, the asset inflow, as I said, it's been strong. It doesn't mean that it's increasing. But I meant it's maintained at high level. For example, now we are in the world with positive interest rates. So there's deposit acquisition competition with other banks. There were some investors who locked in profits when share prices increased.
So in the environment where the stock market has been very strong, it's actually challenging to maintain the high level of asset inflow. But even in this environment, the total deposit of Daiwa Next Bank has been very strong, steadily increasing. And there is a strong level of securities buying and also investment trusts. When they sell, our people were able to make appropriate proposals so that they can buy new products. So because of those activities, asset inflow has been kept at high level. So I'm sorry. I didn't mean that it's been trending up. So that's what I meant in the disclosure material.
Thank you so much. Then, asset inflow in the wealth management, asset inflow as well as Daiwa Next Bank deposit balance. So you are disclosing on the net basis of the two items that I mentioned.
If that's the case, then I think there's some amount that is leaving your group. Am I right, roughly speaking?
Asset inflow includes the deposit ins and outs of Daiwa Next Bank. But looking at the disclosure, that's the net of the two, right?
Yes. Indeed. Understood. So now the market is very strong. But there's still an opportunity for you to really gather the deposit from retail people. While do you think it's difficult to continue to get acceleration of the asset inflow, there's a significant potential for us to see the inflow of assets from customers and retention or deposit out. We are doing marketing activities so that that doesn't happen. So we are making efforts so that they don't leave our group. Understood.
Thank you.
Thank you very much. [inaudible] question, please press the star key followed by the number 1. We are accepting questions.
We still have some time. It appears to be there are no more questions. With that, we would like to conclude the Q&A session. Thank you very much for staying with us. Until the very end, we ask for your continued support for Daiwa Securities Group. With that, we would like to conclude the telephone conference. You are welcome to disconnect. Thank you.