Daiwa Securities Group Inc. (8601) Earnings Call Transcript & Summary

Thank you very much for your patience, investors. We appreciate your participation today in the FY 2025 First Quarter Financial Results Conference Call of Daiwa Securities Group Inc. despite your busy schedules. At this time, we will begin the conference call. Joining us today from Daiwa Securities Group Inc. is Executive Managing Director and CFO, Mr. Kotaro Yoshida. I am Kana Nakamura, Head of the IR Office, and I will be moderating today's proceedings. Thank you. First, CFO, Yoshida, will explain the financial results for the first quarter of FY 2025. We will accept questions from participants after the explanation is concluded. Please note that today's conference is also being streamed via the Internet. It is open to the general investors. Now we would like to begin the explanation.

So this is Yoshida from Daiwa Securities Group Inc. Thank you very much for taking the time to join our conference call today. I will now explain the financial results for the first quarter of FY 2025, which were disclosed today using the presentation materials available on our website. Please turn to Page 4. First, I will provide a summary of our consolidated financial results. The percentage changes shown are compared with the fourth quarter of FY 2024. For Q1 of 2025, net operating revenues were JPY 155.2 billion, down 10.9%. Ordinary income was JPY 43.7 billion, down 14.3%. Although we saw a decline in both revenue and profit due to the absence of large primary deals that occurred in the previous quarter, base income, which we regard as the key indicator of stable earnings remained high at JPY 34.1 billion. The Wealth Management Division continued to engage in comprehensive or total asset consulting even in a volatile market environment, expanded net inflows of wrap account services. In addition, we responded carefully to unauthorized access incidents to ensure our customers could continue trading with peace of mind. In Securities Asset Management, equity method income from Global X LLC also contributed to higher profits. In Alternative Asset Management, provisions and impairments recorded in the previous quarter were no longer present, leading to improved profitability. In Global Markets, customer flows and credit recovered from May onward in the FICC business. Global Investment Banking performed strongly in DCM and domestic M&A, supported by multiple large deals. Profit attributable to owners of parent was JPY 31.2 billion, up 4.3% and ROE was 7.7% on an annualized basis. Please turn to Page 8. I'll explain the trends in consolidated ordinary income and base income. Base income was JPY 34.1 billion, an increase of 10.3% year-on-year and accounted for 78.2% of consolidated ordinary income. Please turn to Page 11. I will now explain the income statement. Commissions received amounted to JPY 100.3 billion, down 12.6%. The breakdown of commissions received is provided on Page 24. Brokerage commissions were JPY 21.1 billion, down 8.2%. Underwriting and secondary offering commissions were JPY 8.9 billion, down 41.6%. Distribution commissions were JPY 4.7 billion, down 28.6%. M&A-related commissions were JPY 11.1 billion, down 32.4%. Please turn to Page 12. I will explain the status of SG&A. SG&A was JPY 119 billion, down 1.8%. Trading-related expenses decreased due to a decline in payment fees and advertising expenses. Personnel expenses declined due to a reduction in performance-linked bonuses. Please turn to Page 14. Next, I will explain the ordinary income from our overseas operations. Total ordinary income from overseas operations was JPY 3.8 billion, down 35.9% from the previous quarter. In Europe, M&A revenues declined, worsening overall profitability. In Asia and Oceania, equity method income from Wealth Management and SSI Securities contributed positively. The Americas equity revenue and equity method income from Global X LLC contributed to higher profits. Next, I will explain the results by segment. Please turn to Page 15. First, I will explain the revenues and income of the Wealth Management segment. Net operating revenues were JPY 62.9 billion, down 5.3% and ordinary income was JPY 19.7 billion, down 14.9%. Following the sharp stock market decline in April, investors became increasingly cautious due to the uncertainties surrounding President Trump's tariff policy, which led to a decrease in flow revenues, including domestic equities and equity investment trusts. On the other hand, wrap-related revenues and agency fees for investment trust remain high with asset-based revenues flat at JPY 27.5 billion. The Wealth Management Division's ratio to fixed cost was 103.7%, and its ratio to total cost was 70.1%. In addition, bond revenues increased due to the presence of multiple large primary deals. As retail investors adopted wait-and-see attitude, we focus on offering solutions through total asset consulting, resulting in increased insurance sales. Please turn to Page 16. Sales and distribution amount by product and topics this quarter in domestic Wealth Management. Wrap account service contract amount was JPY 194.9 billion, and net inflow expanded to JPY 100.3 billion. Stock investment trusts, sales amount was JPY 357.8 billion and net increase amount was JPY 88.9 billion. Through total asset consulting, we capture the needs of customers who prefer diversified investments and robust portfolios, leading to sales of wide range of investment trusts, mainly including the Invesco World Best Equity Open and the Daiwa Blackstone Private Credit Fund. The bottom left of the slide shows the net inflows of wrap account service and stock investment trusts. Please turn to Page 17. This covers the status of Daiwa Next Bank. Net interest income was JPY 9.6 billion, up 7.1% and ordinary income was JPY 4.3 billion, up 18.4%. The replacement of investment portfolios conducted in the previous quarter improved profitability, resulting in increased revenues and income. Please turn to Page 18. I will now explain the asset -- the management -- Securities Asset Management. Net operating revenues were JPY 15.1 billion, up 1.5% and ordinary income was JPY 7.5 billion, up 6.8%. Daiwa Asset Management secured a net increase of JPY 135.7 billion in publically offered stock investment trusts, excluding ETFs. In addition, equity method income from Global X LLC, in which a 20% stake was acquired through the conversion of EV bonds in February contributed to the increase in profits. Please turn to Page 19. Next is Real Estate Asset Management. Net operating revenue was JPY 9.6 billion, up 57.3% and ordinary income was JPY 6.9 billion, down 3.2%. Daiwa Real Estate Asset Management's AUM surpassed JPY 1.5 trillion, reaching a record high, while gains on the sales of properties at Daiwa Securities Realty and income from REITs under management contributed to the decrease. It was mainly due to the lower equity in earnings of Samty. Please see Page 20 now for Alternative Asset Management. Net operating revenue was JPY 3.3 billion, down 62.5% and ordinary income was positive JPY 0.3 billion. In Daiwa Energy Infrastructure, there were no provisions or impairments recorded in the previous quarter, and the results improved. In addition, the investment balance expanded mainly in renewable energy and infrastructure projects in Japan and overseas. Please continuing on to Page 21. Here, I'd like to explain the Global Markets and Investment Banking Division. In Global Markets, net operating revenue was JPY 32.5 billion, down 9.6% and ordinary income was JPY 2.6 billion, down 58.3%. In equities, Japanese equities continues to see strong order flows from overseas investors, but the retail investor order flow declined due to relatively heavy upside. On the other hand, foreign equities saw an increase in retail industry activities on the back of a recovery in share prices of semiconductor-related stock names. In the FICC, bond trading by Wealth Management Division clients increased in both yen and non-yen currencies due to the rise in domestic interest rates and the progress of yen appreciation in the month of April. In credit, revenues remained high as client order flows increased due to the rise in interest rates led by very long-term interest rates. In derivatives, position management was successful, although liquidity was reduced due to market turmoil. Now please see Page 22. Here is about the Global Investment Banking. Net operating revenue was JPY 17.2 billion, down 33.1% and ordinary income was JPY 0.9 billion, down 87.1%. Debt underwriting revenue increased due to the contribution of large deals. In M&A, domestic sales remained strong, but overseas sales declined due to a decrease in deal execution. This is the end of my explanation of the Q1 results for FY '25. The announcement of the tariff policy by the Trump administration on April 2 triggered a major turmoil in the financial markets. As you may recall, the Nikkei 225 dropped more than 4,500 marks in the 3 days from April 3 and continued to rise and fall by more than JPY 1,000 the following days. Interest rates and credit spreads have fluctuated widely as well. Some even moved to reciprocal -- reciprocate with retaliatory tariffs and financial and capital markets were shredded in uncomfortable uncertainty for a period of time. The Q1 of the year started in such an environment. Such turmoil was overcome by a series of negotiated agreements between the U.S. and the U.K. and the U.S. and China in May, and the market gradually regained its composure. In the Q1 results, even in the face of such major market fluctuations, once again demonstrated the strength of our earnings base with the base profit, which we emphasize as a stable profit indicator, remaining at a high level of JPY 34.1 billion. In order to carry out more efficient asset building and asset management in the age of inflation and the world with interest rates without being distracted by short-term market fluctuations, we believe it is important to understand midterm economic and financial trends, and we have created a strong market story, which we use as the basis for repeated conversations with our clients. We have been having a series of conversations with our clients based on this big boned and the strong market story. In addition, as in previous years, we have steadily evolved our proposal activities through consulting on customers' total assets. Although there are phases of lower client activity level during the quarter as clients took a wait-and-see attitude, the volume of activity of consultant sales increased over the previous quarter. And the results are also being confirmed. The level of activity has been increased over the previous quarter, as I said. In the Asset Management segment, the AUM grew steadily in both the securities and the real estate sectors, both reaching record highs. The inclusion of Global X in the U.S. as an equity method affiliate also made a contribution to record quarterly income. In the GM&IB segment, performance was slightly sluggish due to the impact of market volatility caused by reciprocal tariffs, but FICC credit, debt underwriting and domestic M&A activities were all brisk. As for the current situation, we have been off to a good start since July. Wealth Management Division product purchases were also well above the Q1 average and the revenue levels have recovered to the Q4 average, which was the highest quarter ever of the last fiscal year. Global Markets has also settled down. In July, the equity flows increasing for both institutional and retail investors. And FICC continues to see portfolio replacement needs as the interest rates remain at a high plateau. Well, in order to maximize the value of clients' assets, as stated in the group management policy, it is extremely important for each business area within the group to have a deep understanding of the clients' needs and the challenges and to provide the best, most appropriate and high-quality solutions. The day after the Nikkei fell -- the Nikkei Index fell sharply on April 3. After, the group management meeting held on April 3, the day after the Nikkei Index fell, the CEO gave a clear message that this policy of the company will not change in any way. We will continue to pursue a virtuous cycle in which the strong trust of our customers is reflected in assets under custody and under management as well as in the base profit, thereby meeting the expectations of our shareholders. In addition, in response to the recent incident of unauthorized access and et cetera, we will continue our efforts to provide a trading environment where customers can trade with confidence by improving our systems and engage in the detail-oriented dialogues with our customers. We would ask you for your continued support in this endeavor. Thank you very much for your attention. That's all from the presentation from ourselves. Now let us move on to the Q&A.

Today's call is served with simultaneous interpretation so that English speakers are also able to participate. [Operator Instructions] So's let's move on to the Qs. We would like to introduce the first questioner, Muraki-san from SMBC Nikko Securities. Muraki-san, please.

This is Muraki from SMBC Nikko. I have two questions. First of all, Slide 21 about the fixed income. So now we are at the phase of rate increase. So you had some challenge in terms of the position management, but there was an increase in the flows. But if you can actually give us more color, what were some of the challenges? And also, if you can give us the current state of flows as we see the interest rate hike. That is the first question. And the second question also relates to the interest rate about the Daiwa Next Bank. I believe that is Page 17 of the materials. So as a way to enhance the yield, so you have reduced the -- decreased the lending for the government by JPY 300 billion. And now you have -- so you have made some measures related to some of the borrowings and also some of the deposit in BOJ as well. So going forward, as you fund for the deposit, so let's just say BOJ, if the short-term rate raises to -- is raised to 1%, for instance? What sort of plan do you have to the deposit? So right now, in terms of the ordinary deposit, it is on a slight decline. I think that is already happening in terms of the ordinary deposit. But in terms of the interest rate of 1%, in terms of the average funding cost, what is the deposit beta that you have in mind? If you can give us more color.

Thank you very much for that question. So in terms of the challenges in the deposition management and also the flow increase, we'd like to give you more color. So especially for the month of April, so we have the interest rate volatility and credit spread volatility was in place. Because of the market turmoil, FICC within multiple products, there were some challenges in the position management. Also, the long term, the bonds -- the demand for the domestic institutional investors, there's been a gradual decline. And in lieu, we have some overseas investors coming in. So because of the turmoil in April, the overseas investors sold and now the level has exceeded 3%. And now even on a dollar basis from the overseas investors, it is much more attractive in terms of the interest rate. So now we have diverse investors making entry. That has been confirmed. So in terms of the long-term bonds, up until now, the central player were more of the domestic institutions. But now with the market change, now we have seen diverse investors making an entry. In addition to that, the flows have been on the increase. So as we see replacement of investors, we have these large flows. And in line with the order, we needed to actually conduct the position management accordingly. But of course, these customer flows were not really easy to read or anticipate. So that was the challenge. So April was tough, but in terms of May, it started to recover. And also, June is flat from May or maybe slight weaker in June for FICC. That has been the case. So Q1 -- so April was weak, recovery in May and June is similar to May or maybe slight weaker. But if you look at it by products, credit, April was tough, but May and June, we had some primary. So we have seen some increase in the revenues. Also related to the second part of the question about the Daiwa Next Bank. So last year, because of the BOJ rate hike, the spread has increased. So we have seen improvement in the net interest income. And on the past of -- last year, we conducted some portfolio replacement of the securities investment. So we have seen an increase in the carry revenues. So that is in the background. Going forward, about the deposit acquisition competition. So we do believe it is going to be fairly challenging in terms of the deposit acquisition. So Daiwa Next Bank, they will collaborate with Daiwa Securities to have more sticky funds. Various campaigns will be launched. So that is the plan.

Also in terms of deposit interest rate, so once the BOJ policy rate go to 1%, what is the deposit beta for the ordinary deposit related to that question?

From 50 basis points to 1%, I should say if it goes up by 50 basis points then.

What could be anticipated about 40% of the sensitivity or pass-through?

So that may be the deposit rate. But of course, we need to look at the competitive climate as well. So accordingly, we would like to adjust the deposit rate. Thanks to collaborating with Daiwa Securities, for instance, investment trust and fund wraps, we could have a setup plans. We have some new customers or perhaps corporate customers, specific campaign interest rate could be presented and also cross sales. So for instance, to the deposit customers, we may also introduce the bond management as well. So now we have a world with interest rate. We could engage in diverse marketing activities. Muraki-san, should -- did we answer your questions.

Related to the first part of the question, the state of July then. So Global Markets, you mentioned it is stabilized now. So in comparison to June quarter, it has -- so the fixed income is also off to a good start then.

Yes. For the month of July, that is the current state. And of course, we would like to continue this trend for August and September as well.

So next questions from JPMorgan, Sato-san. So Mr. Sato.

I'm JPMorgan Sato. I have 2 questions, too. My first question is about on Page 14 about the overseas business ordinary income, especially Europe. In Q1, because of the M&A reduction, you saw the figures that dropped actually over the previous quarter. And the GIB profit was also brought it down. But last fiscal year, in Europe, you had the personnel replacement. So there were some one-off costs that you needed to shoulder. But this time, you were talking about JPY 2.3 billion, JPY 2.4 billion in losses, including those one-off costs. But this time, even with that, you have the losses of JPY 2 billion. So by looking at this figure, you are not really making the improvement in the breakeven point. So the challenge of today, maybe the cost control, are there anything that you can talk more in details, please? That's my first question. The second is about the AM, especially the real estate and alternative. This time, the real estate, most of that income does not include the capital gain. Alternative, the same, I guess. Well, after Q2, you might have both the alternatives or the infrastructure asset, is it a possibility? Do you see the environment is going to be probably getting favorable? Or especially throughout the year, when we look at where you're going to be landing up, do you think you'll be able to get the same level of the capital gain as the other years? Or is it too much to hope for, for this year?

Sato-san, thank you for your questions. Your question number one, about the overseas ordinary income in Europe. For the market of Europe, as you say, the M&A business or DC Europe and also the securities business, DCM Daiwa Capital Market Europe, those 2 companies are the main players. And regarding the M&A, for Europe and the U.S., this June quarter was impacted by the reciprocal tariff by current administration and also the uncertainty of the interest rate. And that has led the M&A business to take longer time to execute more than ever, more than the normal time. And especially just thinking about the seasonality, normally, the June quarter does not really get a lot of profit. One part of that reason is the top line did not grow that much. And also the Daiwa Capital Market Europe, which is engaged in the securities business in Europe. So equity business as normal, but the last -- when we look at the last fiscal year, we saw some primary project that has kicked in, in the income, which did not recover for the current fiscal year. So that's the reason why we saw just a little losses in the Europe business. And for DCM, DC Europe cost to control, we have been very careful about the cost control, of course. And our original plan, the deployment of the recruitment or the replacement of the human capital, we've been working upon that right now by transferring some people or replacing some people. So for the current M&A landscape, gradually, some deals have started to go into the phase of execution. We do see that in the market of U.S. and Europe, the Americas and Europe. So in Q2 and beyond, we will make sure that we'll be able to harvest the results. Moving on to your second question, the alternative and real estate capital gain, I think you were talking about. For the Q1, for the real estate, we have more increased balance of the AUM and also the rent revenue have increased. But the privately priced funds, the exit to the private funds have given us some capital gain partly from those property sales. And also for -- together with the setting up of the private plant, we have been able to acquire some gains from the properties so that there are some movements that we are going to be monitoring and seeing continuously for the private -- for the property business. The other part you were talking about the prospect for the future. After the Q2 and beyond, at this point of time, as we normally say, we think we'll be able to get the gains as we do normally generate. But for the alternative, well, there are some fluctuations quarter-by-quarter. So that really depends. We have to see what's going to happen. That's all.

Next question comes from BofA Securities, Tsujino-san, please.

About FICC for the April and May, June, you've already shared with us the situation. The month of July, you've been facing challenges. So May was recovery, June was weak and July is weak, just as June. If that is the case, July, August, is it a similar pace? Actually, we may see a rise here. So actually, if you look at it on a monthly basis, so this is just on a hypothetical basis. So the 1st of April and May as such. And well, so July, if it actually continues that way, then Q2 is going to be very good in terms of the performance. But is that really the case? If you can give us some color as to what -- how is it progressing as we proceed through the months? That is the first question. And the second question relates to -- about PE, the pipeline. So you mentioned it really depends on the situation you said, but there are timings to divest. There must be plans as well. So as far as the plan goes, you have certain alignments through this fiscal term, but depending -- but we mentioned that it depends on the situation. The reason you say that because there are some changes in the appetite. Is that the case? So for instance, say April, the Trump administration's initiatives and so forth, because of those, you are mentioning that way. Or last year, it sold fairly well. So in terms of the pipeline, it is hard to see what should be divested as -- so that's why there's a bit of a gap. So if you can give us more colors in terms of the pipeline of the PE.

Tsujino-san, thank you very much. First of all, for FICC, on a monthly, the pitch -- so just to give you an idea on a monthly basis, FICC as a whole, so for 3 months, so let's just say 3 months is 100, then for April, May and June, 25, 40 to 35, maybe that is the breakdown. So in terms of the domestic and overseas domestic, so it's gradually its recovery as we progress through the progress. May -- overseas, May was good, but June, not so much. For the month of July, so this is just temporarily for the July only. So -- but just to give you an idea. So for domestic and overseas combined together in comparison to June, it is progressing strongly in the month of July. So really, the customers, the bond investors are more diversified -- become more diverse. So that is favorable in terms of the flows. So various investors from both in and out of Japan and also some of the middle corporates domestic and also the retail investors as well, they are conducting the portfolio replacement. And what institutional investors have sold, these retail investors are buying those under good terms. So those are the positive impact that we are expecting. So surprisingly, if the market becomes the volatile, that means the position management becomes more challenging. So for instance, futures and debt, it may not be fully able to accommodate the current state, but we need to engage in dialogue with the customers. We need to capture the needs -- investment needs of the customers, so we can, in the end, capture and make profit out of the flows. So the situation is finally subsidized. So we've been able to realize that in June. We hope that we've been able to realize that in July as well. And we're hoping that, that will continue for the months of August and September. Related to the second part of the question, PE, as you mentioned, in terms of divestiture, the timing or the plan, let's just say, for the divestiture, we do have those plans. But some of them are fairly small size or midsized or large size in terms of the potential deals, especially for mid- to large size, sometimes we may be able to exit earlier than expected or maybe later than initially expected because we also -- there's always a counterpart involved. It depends on the negotiation. So it's a case by case. So that is why we cannot have the full visibility. That was the point I was trying to make. So of course, towards exit, we do have multiple potential candidates for exits. Also, for new investment opportunities, we like to continuously capture those as well. So for the existing investees exits, and basically have the profit secured on the alternatives. So that is still pursued. Now last year, the second half of last year, I believe Q4, Daiwa Energy Infrastructure, about the energy, there are some gains and also some of the impairment and so forth. And also for Daiwa PI Partners, about the crystal, the PE investment of the corporates, operating companies and funds, they are much more sort of proactive in terms of M&A. So the exit pipelines, we do have a visibility in this front. So in the month of April, with the Trump administration impact, so it's hard to have that certainty or visibility. But how the deals have been executed, we do have better visibility. So we definitely like to have continuous communication with you. So I hope I answered your question.

Next questions are from Nomura Securities, Sasaki-san.

This is Sasaki of Nomura. I have also 2 questions. First one is about the earnings. I have some confirmation. For the ex profit, the disposal gains of the marketable securities, that's mainly the reduction of your equity held for the strategic basis and also the reduction of the effective tax rate. What's the reason for that reduction in tax rate? And the second is about the fraudulent trading. You are talking about the recovery of the losses. Anything that happened in the first quarter? Can you talk about that, please?

Thank you very much for your question, Sasaki-san. First of all, about the extraordinary profit, as you say, this is the disposal gain of the strategically held shares. That's the main. And the reduction in the effective tax rate is Q4 and the Q1 in the comparison, the ex loss was shown. So that's one reason, the ex loss in the Q1 over the Q4 of last fiscal year. And also, the equity method investments that's not subject to get the tax is giving us the merit on the tax rate itself. So that's the reason for the reduction in the tax level. On Page 3 of the presentation material, we are showing Global X LLC equity method affiliation and then amortizing the goodwill of that has been said as a nonoperational income, about JPY 3 billion. That's counted as a part of the equity method investment gain. So that's also reducing our effective tax rate. And then talking about the fraudulent access or the cost to deal with that, the people who were affected or the customer who were affected by that for making sure that we do see that those are not coming to the reason from the customer side, we are going to restore to the original position, and that's our policy. Of course, that does not apply for all the customers. However, when we think about all the customers who have had the influence by the end of June, we've been making a scrutiny one by one and then make the estimates and that has come to the expense of about JPY 2.6 billion, wherein the most recent P&L chart, we are showing that figures, but that's going to be basically the provision to be posted as JPY 600 million plus JPY 10 million. Well, depending upon how the stock price is going to be fluctuating, we might need to have a provision much bigger than that. However, it's not going to be that big if that could happen. And also starting from the 6th of this month, we are asking for the customers to do the additional proof of oneself for the personal identification. And for those people who are not doing that self personal identification is no longer able to make the successful log in. So that going forward, even from now, probably the corporate is going to do a lot of measures trying to get fraudulent access or the legal access so that we want to do a lot of the multilevel of the certificates, and so want to make sure that the customers are making the access.