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

Thank you very much for participating in telephone conference for the fiscal year 2026, the first quarter earnings announcement of Daiwa Securities Group despite your busy schedule. I would like to start the meeting. From Daiwa Securities Group, we have Managing Executive Officer and CFO, Yoshida. I am the Head of IR, Nakamura. First, Yoshida will explain about the first quarter results of fiscal year 2026. We will receive your questions after the presentation. Today, this is streamed live on the Internet and general investors can view this start.

Hello. This is Yoshida from Daiwa Securities Group headquarter. Thank you very much for taking the time out of your busy schedule to join our conference call today. I will now explain the financial results for the first quarter of the fiscal year 2026, which we announced today based on the presentation materials posted on our website. Please turn to Page 4. First, I will provide a summary of our consolidated financial results. The percentage changes in figures are compared to the fourth quarter of fiscal year 2025. In the first quarter of fiscal year 2026, we achieved profit growth across all divisions with ROE reaching 12.7%. Net operating revenue was JPY 220.3 billion, up 11.4%. Ordinary income was JPY 88 billion, up 31.4% and profit attributable to owners of the parent was JPY 56.4 billion, up 13.2%. The Wealth Management division, in addition to this client activity, saw its portfolio-based proposals gain traction, resulting in record high asset-based revenue of JPY 35.8 billion. The trend of net assets -- asset inflows continues. Furthermore, not only asset-based revenue, but also flow-based revenue expanded. In the Asset Management division, against the backdrop of continued net inflows and favorable market conditions, ordinary income at Securities Asset Management reached a record high of JPY 15.7 billion. In Global Markets, client flows expanded against the backdrop of a strong market environment and equity revenues increased significantly. Global Investment Banking saw an increase in earnings driven by contributions from several large-scale deals. Please turn to Page 8. Base income, the KPI for stable earnings set forth in the midterm management plan reached JPY 62.8 billion, an increase of 83.8% compared to the same period last year. We are progressing at a pace that significantly exceeds the final year target of JPY 150 billion set in the medium-term management plan, and we are making steady progress in building an earnings base that is less susceptible to external conditions. Please turn to Page 11. I will now explain the income statement. Commission received totaled JPY 143.4 billion, an increase of 9.3%. The breakdown of commission received can be found on Page 24. Brokerage commission was JPY 34.9 billion, up 9.4%. Underwriting and secondary offering commissions were JPY 17 billion, up 86.4%. Distribution commissions were JPY 9.2 billion, up 20%. And M&A-related commissions were JPY 12.5 billion, down 27.9%. Please turn to Page 12. SG&A totaled JPY 142.8 billion, up 3.3%. Trading-related expenses increased due to higher commission payments. Personnel expenses rose due to wage increases and primarily in Japan, an increase in performance-based bonuses. Please turn to Page 14. Total ordinary income from overseas operations reached JPY 13.1 billion, up 90%, setting a new record high. By region, in Europe, the M&A business was sluggish due to geopolitical risks. In Asia and Oceania, ordinary increased driven by equity revenue, reaching a record high level. In the Americas, ordinary income rose significantly due to an expansion in equity revenues. Next, I will explain the results by segment. Please turn to Page 15. First, the Wealth Management division. Net operating revenue was JPY 88.2 billion, up 8.8%. Ordinary income was JPY 37.2 billion, up 12.4%. In addition to favorable market conditions, the widespread adoption of total asset consulting allowed us to capture a broad range of our clients' asset management needs and translate them into results. Looking at results by product. Trading volume in equities expanded driven particularly by foreign stocks, revenue increased by JPY 900 million. In the Fixed Income segment as well, by capturing investment needs in amid rising interest rates, revenue increased by JPY 800 million. Furthermore, the use of wrap account services continued to grow as a solution for inflation hedging and medium- to long-term asset management needs, resulting in a JPY 1.1 billion increase in wrap-related revenue, which reached a new all-time high. Asset-based revenue also reached a record high of JPY 35.5 (sic) [ JPY 35.8 ] billion, driven by increases in trust agency fees and wrap-related revenues. The fixed cost coverage ratio based on asset-based revenue rose to 125.7%, while the total expense coverage ratio improved to 77.3%. Detailed data is provided on Page 28, so please refer to it later. Please turn to Page 16. This page shows the status of product offerings and sales amounts for the domestic Wealth Management division. The wrap account service performed steadily with contract value reaching JPY 357.7 billion and a net increase of JPY 237.6 billion, bringing the total contracted AUM to a record high of JPY 6.765 trillion. Next, please turn to Page 17. This is the status of Daiwa Next Bank. Net interest income was JPY 13 billion, up 16.2% and ordinary income was JPY 7.2 billion, up 15.8%. Deposit acquisition progressed through collaboration with Daiwa Securities and the deposit balance expanded to JPY 5.3 trillion. Daiwa Next Bank continues to steadily fulfill its gateway function for the shift from savings to investment. In addition, the increase in the policy rate widened the interest margin, resulting in higher revenues and income. Please turn to Page 18, the Asset Management division. First, Securities Asset Management. Net operating revenues were JPY 21.2 billion, up 7.8% and ordinary income was JPY 15.7 billion, up 37.6%. AUM of publicly offered investment trust managed by Daiwa Asset Management surpassed JPY 43 trillion, a record high. Assets under investment advisory contracts, including those related to the alliance with Japan Post Insurance, continued to expand steadily, further strengthening the revenue base. Please turn to Page 19 for Real Estate Asset Management. Net operating revenues were JPY 13.3 billion, up 47.2% and ordinary income was JPY 9.8 billion, up 0.2%. AUM in Real Estate Real Asset Management surpassed JPY 1.8 trillion, achieving the FY 2030 target ahead of schedule. Gains on property sales at Daiwa Securities Realty and income from managed REITs contributed to the increase in both revenues and income. Please turn to Page 20 for Alternative Asset Management. Net operating revenues were JPY 6.3 billion and ordinary income was JPY 4.8 billion. Capital gains were recorded due to the exit from certain portfolio investments, among other factors. On Page 21. Finally, I will explain the Global Markets and Investment Banking division. In Global Markets, net operating revenues were JPY 53.8 billion, up 4.9% and ordinary income was JPY 18.1 billion, up 2.3%. In equities, client order flows from both institutional investors and wealth management clients remained solid in both Japanese and foreign equities. Despite elevated market volatility, we captured order flows effectively and combined with successful positioning of the -- position management secured a high level of revenues. In FICC, order flows in both domestic and foreign bonds declined from the previous quarter's high level but remained solid overall. Turning to Page 22. Global Investment Banking recorded net operating revenues of JPY 22.6 billion, down 6.1% and ordinary income of JPY 3.2 billion, up 52.5%. This concludes my explanation of the financial results for the Q1 of FY 2026. Just to add some comments. First quarter's revenue and income both reached historically high levels. That said, we do not view the results as simply the product of a favorable market environment. Against the backdrop of rising inflation and the growing asset building needs, we continue to see a strong structure shift of funds into the financial and capital market, including some needs to meet the respond to the corporate governance so that we believe our ability to steadily translate this shift to tangible outcomes, reflecting the group's steadfast effort and disciplined execution of these strategies. The Total Asset Consulting in the Wealth Management division is not only a method of selling investment products, but rather to identify the customers' pain points and needs and broadening the range of solution across investment management, asset succession, real estate and corporate transactions. Continuing this effort has, as a result, led to growth in both balance-based revenues and flow revenues. In the Asset Management division, the accumulated AUM has contributed to higher profitability, further demonstrating the strength of our stock-type business model. In Global Markets and Investment Banking as well, we have accurately captured structural changes such as progress in capital market reforms and shifting client needs and have stickly captured revenue opportunities. This fiscal year, the final year of our midterm management plan is positioned as a year to further drive these achievements. This first quarter marks a good start towards that goal. Regarding the current market environment, uncertainty continues to linger. Even so the wealth management is tracking at roughly the same pace as the first quarter average. In the meantime, Global Markets is off to a start below the high first quarter average, though we continue to see solid client flows. In addition, today, we completed the process of making ORIX Bank, our 100th subsidiary. We believe this represents an important step forward in advancing our growth strategy centered on wealth management. Going forward, we will continue to respond to our clients' diverse needs, contribute to the development of the financial and capital markets and pursue sustainable growth in corporate value. We thank you for your continued support. That's all from myself. Now let us open for Q&A session.

[Operator Instructions] Let's go to the first question from SMBC Nikko Securities, Muraki-san.

I'm Muraki from SMBC Nikko Securities. I have 2 questions. First, on Page 21, the equity revenue, I would like to ask you a bit in more detail. In terms of position management, you said that you were good in doing that. So April, May, June and July, I think GM has slowed down. But up until July, what has been the earnings situation? And how has the earnings been improving? So that's my first question. The second question is that besides the earnings report, the ORIX Bank in terms of acquisition, you said that you have completed the process. In the previous meets -- on the previous meeting, you had some updates that you can give us. So in terms of the capital adequacy ratio, that will have an impact of about 5%, so how about this? And from the second quarter onwards, you said that the contribution is coming in terms of profit after the goodwill amortization, how much would this contribution be? And I think the next step will be the merger. So do you have any time line? What type of cost will entail? So until the merger, the 2 bank subsidiaries, how are we going to manage these subsidiaries? If you have any update about this issue, please, I would like to ask about that.

Thank you very much for your question. First, about the first quarter Global Markets equity revenue or earnings. April, May, June for the first quarter, if we look at the trend, -- so if it's over 10, April 3, May 3 and June, April, I think it's like equal of all the 3 months, but June was slightly better. To go into more detail, April -- from April, the Japanese stocks has been on the upward trend and the overseas foreign institutional investors have been coming in and then late by that domestic investor came. For the U.S. stocks, it was good. For instance, from the retail investors from Japan, there has been a lot of orders coming for the U.S. stocks. The order flow for the Japanese stocks domestically and overseas has been at a very good state through this quarter. In July -- June was better, higher compared to April to May. July has been a slow start compared to that. But in terms of the order flow has been good. In terms of the position management, for the institutional investors, there has been a lot of inquiries of block trade has been coming up. We have been going through these order flows. Number two, about ORIX Bank on the updates. After the announcement, within Daiwa Securities Group, in terms of what we have been setting up a project, and we have been going forward. But -- so there has been some gun jumping regulations. Direct negotiations or discussions with ORIX Bank actually have not been able to do much of that. In terms of the future synergies and how we're going to respond to this, compared to what we have announced in May, we have not a major update as to date. First, in terms of profit. On the ORIX Bank on a stand-alone basis, the net income on the 5-year average is about JPY 20 billion. The goodwill amortization will happen and there will be some cost that has to be deducted. However, the interest rate has gone up, and we think that there is a possibility that we can expect some upside, but we can't talk much about these numbers. Maybe the cost of the integration and the earnings side will be offset against each other. I think there's no major update I can give you against what we have said in May. Until the merger, your question about what's going to happen. Well, for in terms of merger, we would like to conduct this as early as possible. But of course, we have to conduct negotiations and adjustments with stakeholders. That's what we are right now. But in terms of the -- we have become 100% -- the Daiwa Next Bank has become 100% subsidiary. In terms of the Next Bank to ORIX Bank, there is some funds that can flow to that bank. For this situation, I think this is a type of synergy that we can enjoy at the early timing. That has been my answer to your question.

In terms of the group headquarters, in terms of the capital adequacy ratio is going to go down, I think you talked about the option of issuing the AT1 bonds. How would that -- how do you think about that?

We have been continuing to consider this and we are planning. In terms of the schedule, it's not decided yet.

Next question is from Tsujino-san.

I have 3 questions. First is that this time, the alternative profit was big, the real estate and the PE, I guess. In the first quarter, there were some exits maybe. After the Q2, any plan for the exit or any profit growth? Any prospects that you can share with us? That's my first question. And the second question is regarding FICC. It was slightly down compared to Q4 of last year. But after June, any flash report or any news that you can share with us? The third question is about, after the integration of ORIX Bank, are there going to be any big one-off cost that you think you're going to recognize? Well, you just mentioned that there's not going to be a significant impact. However, I'd like to know about that if there's going to be any big one-off impact.

Okay. Thank you for your questions. Question number one, regarding the alternative asset management. The current situation regarding the first quarter, the real estate and PE had some exit and that made a contribution factor to push up the profit. In the Q2 and Q4 last year, we have the energy-related asset in Europe, and that did not really recur for the current fiscal year. There were several exits from this alternative asset management that generated the profits for the first quarter. A plan for the Q2,there are some plans of the exits, but there's nothing that I can share with you. That's a fair comment, I guess. And your second question about FICC. Well, the yen interest rate is also rising, so that from that point, a variety of investors, including retail investors, are showing interest, looking at the yen credit and other assets like that as well. As you know, we do have network nationwide. And among some customers, especially recently because of the interest rate volatility level is going up and also the currency is quite volatile so that there are increasing needs of hedging, and that needs has started to surge since the end of last year. Hedging those currency and the derivative income has also made a contribution -- positive contribution. After June, entering into the month of July, do we see any big change? Not a big one. But in this second quarter, August, or some corporate customers are probably going to the summer holidays, so that it may be a bit slow as a movement. The third question regarding the one-off big cost because of the integration of ORIX, we are not estimating any big one, big chunk to recognize. There will be, of course, some miscellaneous cost expenses that will be happening, but it's not going to be any big one-off cost.