Nomura Holdings, Inc. Earnings Call Nuggets: Fixed Income Trading, Risk Weighted Assets
On Friday, Nomura Holdings, Inc. ADR (NYSE:NMR) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Fixed Income Trading
Unidentified Analyst: I have two questions. First of all, fixed income trading. In comparison of your share against your peers and the level of revenue quarter-on-quarter basis relative shares seem to be declining at Nomura Holdings. Comparing Q3 and Q4, it is to be your practice to disclose the level of revenue which is accompanied by client trading. Could you give us those numbers? The second is on funding policy in comparison to the first half, the dividend to be paid out for the second half has been reduced. In the first half, losses were recorded and restructuring had been announced, but in the second half you’ve been able to generate approximately 40 billion of profit. Why did you decide on reduction of dividend against the backdrop of generating profits?
Unidentified Company Speaker: There is two points of extreme important, first of all on the relative position of Nomura or our share in fixed income. That was already factored into our assumption to begin with. The basic thinking is as follows. We hold relatively small positions to respond to customer requirements for market making that is the central strategy or policy between January and March. The European Central Bank had offered LTRO operations, which in turn had made a significant impact not only to fixed income, but to the equity side, which had trigger somewhat of a Global Markets in the equity market. Under such phases, in principal those who hold large positions can enjoy larger profits under such circumstances. We understand that well and that actually prevailed as a phenomenon. Based upon the way we manage our balance sheet, this was a natural outcome and we don’t have a culture of drastically tailoring significantly large position. So this is a natural phenomenon that occurs, because of our policy as such. Now, as far as revenues from the clients are concerned in fixed income I think your question was whether it’s declining. No, it is not declining service as showed. On dividend payout, first of all, the policy is to focus on how much we pay per year and the target JPY8 has now been reduced to JPY6 per share. In other words, this is not a dividend that is allocated between the two half depending on the level of profit generated. Now, why did we choose to reduce the total amount of dividend, because we are in a state of flux in terms of regulatory environment and because we believe that this change in regulations will continue. The legislation can only become more stringent and not the other way around and since the beginning of this fiscal year in April the impact from ECB’s LTRO has diminished somewhat, and therefore the European turmoil may become reemerging. There are concerns of reemergence of European crisis and there are some institutional investors that are reducing its risk position. So on top of the regulatory environment, the increased uncertainty in the European market has prevailed and that is the backdrop to our decision on dividend. So it was rather regrettable and against our policy, but we had to reduce dividend. You may feel skeptical about the financial position of Nomura. You may question whether we’d be able to comfortably achieve Basel III. There could be such voices, but I will deny any such factor within Nomura. So this is clearly to respond to the regulatory environment and our perspective on the outlook of the market. Percentage of client flow, there has hardly been any change. Q1, it’s slightly over half unchanged. So, against total revenue, client flow business accounts for about 63%in Q4. I may add fixed income client level, the amount itself is more or less flat in comparison to the third quarter. However, the ratio of client revenue in comparison to trading revenue has gone down. In other words there is strong growth in trading and therefore the amount didn’t change but that ratio had declined. On the other hand, trading revenue was robust.
Unidentified Analyst: I have a follow-up question on both point one and point 2. Q3 and Q4 order flow from clients increased according to some of your peers. Does that apply to yours or not? Is it correct to consider that there was not much activity at Nomura? But then in the month of April, your peers have found it quite difficult to capture such customer flows. What about Nomura? In comparison to the January-March quarter, how has April been? Have you seen any change in trend? That’s my first point. Secondly, surcharge under Basel III was set to become 1%. So 7% plus 1% plus 1%, that would have meant 9% as the target. That had been the general assumption. But even if we use the ’07 or 19 (indiscernible) base line. Do you think that you would need to adequately have capital of over and beyond 9%? Has your assumption changed in terms of Basel requirement?
Takumi Shibata – Group COO and Chairman and CEO, Wholesale: First of all, Q3 and Q4, the client flow in fixed income, if I could give you an overall summary, Q3 that ends in December, we were putting quite a harsh market climate and there were many financial institutions that struggled in the midst of such difficulty. Even then fortunately, we were able to quiet efficiently capture the requirements of the customers. On top of that in structured business revenues were quite strong. In addition, in Q4 LTRO was a blessing and for example, in Continental Europe, the banking sector is a financial requirement disappeared and structured business declined quite significantly, but then on the other hand FLOW product business became quite robust. You asked a comment with regards to how we feel about the performance of April. I think there are mixed situations, depending on the institution, but for ourselves we think that the beginning of this fiscal year have been relatively healthy as far as fixed-income is concerned and in equity business there has been the Easter holidays in April and risk aversion generally speaking amongst institutional investors had led to the reduction of transaction volume in the market in general. So, in that sense, for the equity business April might prove to be quite a challenging month for us as we close our books. There is seasonality in Investment Banking and the first quarter tends to be a slow quarter generally speaking. Having said so, however, April-May Japanese ECM deals or international deals in the pipeline are building up to a certain extent. For example, since last October to last March during those months in Europe seven rights offer came to the market and of those, we have been involved in five deals as manager and of them in three deals, we served as the global coordinator, and therefore, to a certain extent we do have some items in the pipeline in Investment Banking as we had assumed, thank you.
Junko Nakagawa – CFO: As for your second question about dividends and targets under Basel III and the impact on our targets. As we mentioned earlier, this is not due to changes in the way we view the targets and as we mentioned today on Page 17 of the presentation, Tier 1 ratio, Tier 1 common ratio have both been stable compared to December end. So as Mr. Shibata mentioned at the beginning, we have made decisions based on our outlook on the future.
Risk Weighted Assets
Natsumu Tsujino – JPMorgan: I have two major points. The first question is, this may be somewhat overlap with the previous discussion, but the Tier 1 common ratio under Basel III, the risk weighted assets seem to have – you have been able to cut down the risk weighted assets more than 8% as of December end. What is the current status? Based on that, the risk weighted assets under Basel III basis, the decline in risk weighted assets I think you still had some way to go in the cutting off risk weighted assets. How much progress have you made? How much further improvement can you make? My second question is based on the process or income according to the accounting income, the income seems to be quite large based on – the accounting income seems to be quite large. If you look at Page 18 of your financial statements, at the bottom section, you showed the business segment total and the accounting income or income based on accounting and you also show the breakdown. In that you have the others portion which is up JPY19 billion. In Q4 it was up JPY44.9 billion and this includes DVA. So if you deduct DVA, it’s JPY11.3 billion and JPY28.9 billion, respectively. So there’s an improvement of close to JPY40 billion. If you look at the total income of the business segments and the improvement, and if you compare that with the improvement in the accounting income, I think touched upon it briefly in your presentation but the real estate subsidiaries have been consolidated and the improvement in income as a result of that (show) the non-business segments improvements in the profits. I think this is the reason for the improvement, but what is the breakdown between the real estate subsidiary that were consolidated and the non-business segment income, (recovered) improvement.
Junko Nakagawa – CFO: Well, first of all, the way we view the Basel III. As of March end, the Tier 1 common – Tier 1 and Tier 1 common – what we call, the so-called Tier 1 capital and the Tier 1 common, have both been above 10%. So in that sense, the risk weighted assets have been reduced and we are seeing the positive results of this reduction. If you look at a presentation by typical financial institutions, they say that they will comply with Basel III by such and such a date, and in order to do that, they will reduce their risk weighted assets by a certain date and they will build up their retained earnings. This is a typical presentation by a financial institution, but as for Nomura, for both Tier 1 and Tier 1 common we have levels that are above 10%. So, we are not in a position that we have to lower our risk weighted assets. What we will do is we will control the total level of risk weighted assets and focus our assets on more productive, more efficient assets. I think that will be the challenge for us in the future.
Natsumu Tsujino – JPMorgan: If I could just add on my first question, so you say you do not need to reduce your risk weighted assets further, if you compare December to March, there has been a significant improvement. This is the positive result of the reduction in risk weighted assets, is that right? You do not need to reduce risk weighted assets further.
Junko Nakagawa – CFO: Yes, that’s precisely right. Let me address your second point. Page 18 of our financial disclosure, financial results. The other businesses, which do not belong to the business segments are, as you pointed out, it includes Nomura Real Estate, Nomura Fudosan and as you guessed, it also includes some of the other group companies and unfortunately we do not disclose the results of each specific group company. But to give you or for your information, we can explain what kind of companies are included in this others portion, for example, Nomura Trusts & Banking, Nomura Luxembourg, these banking business companies. In order to build the foundation of this banking business, these companies serve as building the foundation of the banking business and these are included Nomura Babcock & Brown, for example, are included which are based in each regions. As we pointed out, Nomura Fudosan and Nomura real estate, we have some other companies for example, within our group we have a full subsidiary, 100% subsidiary which manages our real estate properties, especially for the branches and there is a team that supports the property management, which is also included in this others portion. In Q4, all of these group companies have made some contribution to the overall revenue. So each of our group companies has generated good results and as a result, we have seen an improvement in our financial results. So, Nomura Land and Building or a Nomura Real Estate Holdings, as we mentioned earlier, this is included in the others of the business segment revenue or business segment income, and there has been an improvement or contribution of close to JPY10 billion, I think. So the remaining portion is, as you mentioned, it’s from Nomura Trust, Nomura Luxembourg, the banking related businesses. There is some hedging related valuation, P&L which you do not have to mark-to-market based on the accounting standards. Is this the correct way to understand this?
Takumi Shibata – Group COO and Chairman and CEO, Wholesale: Yes, that’s right.