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

Thank you very much for waiting, investors. We appreciate your participation today in the FY 2026 Second Quarter Financial Results Conference Call of Daiwa Securities Group Inc. despite your busy schedules. It is time, and we will begin the conference call. Joining us today from Daiwa Securities Group Inc. 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 second quarter of FY 2026. We will accept questions from participants after the explanation is concluded. Please note that today's conference has also been streamed by the Internet and is open to the general investors. Now we will begin the explanation.

Hello, everyone. This is Yoshida from Daiwa Securities Group Inc. Thank you very much for taking time out of your busy schedules to join our telephone conference today. Today, I would like to review our second quarter financial results for FY 2026 announced earlier today, following the presentation deck available on our corporate website. Please turn to Page 4. First, I will summarize our consolidated financial results. Percentage changes are compared to the first quarter, the previous quarter, FY 2026. Net operating revenues were JPY 223.9 billion, up 1.6%. Ordinary income was JPY 78.2 billion, down 11.2%. Profit attributable to owners of parent was JPY 51.4 billion, down 8.8% and annualized ROE stood at 11.3%. During the second quarter, despite headwinds from market conditions, we steadily accumulated stable earnings underpinned by stock-based recurring revenue assets. Wealth Management division at Daiwa Securities fund wrap services and equity investment trust continue to see capital inflows, driving asset-based revenues to a record high of JPY 38.3 billion. Asset Management division, sustained fund inflows lifted AUM to a record high. However, ordinary income declined mainly due to lower capital gains in alternative asset management. As for Global Markets, it solidly captured domestic and overseas client flows, though profit decreased due to lower revenues in overseas FICC. Global Investment Banking achieved profit growth driven by debt underwriting and domestic M&A. The interim dividend is set at a record high of JPY 39 per share, representing a dividend payout ratio of 50.3%. Please turn to Page 8. Base profit, our KPI for stable earnings as set out in the medium-term management plan reached JPY 62.3 billion, up 41.9% year-on-year. Base profit remained on par with the previous quarter. On a cumulative basis for the first half, it totaled JPY 125.2 billion, reached over 80% of our medium-term management plan target of JPY 150 billion. Please turn to Page 11. I will now explain our consolidated statement of income. Commissions received totaled JPY 137.7 billion, minus 4.0%. The breakdown of commissions received is detailed on Page 25. Brokerage commission was JPY 26.4 billion, down 24.4%. Underwriting and secondary offering commission was JPY 11.7 billion, down 31.2%. Distribution commission was JPY 7.7 billion, down 16.4%. M&A-related commissions, JPY 15.1 billion, up 20.5%. Please turn to Page 12. SG&A expenses were JPY 152.9 billion, up 7.1%. This increase was primarily due to the consolidation of ORIX Bank, which resulted in higher trading-related expenses, personnel expenses, office costs and depreciation. Please turn to Page 14. Total ordinary income from overseas operation was JPY 7.6 billion, down 44.6%. However, it reached JPY 20.4 billion for the first half, marking an all-time semiannual high. By region, Europe returned to profitability. Asia and Alcanna posted lower profits, reflecting declines in equity revenue and equity method investment income compared to the strong first quarter. Americas recorded lower profits due to the reduced revenue in FICC. Next, I will review performance by segment. Please turn to Page 15. First, the Wealth Management division. Net operating revenues were JPY 99.2 billion, up 12.5%. Ordinary income was JPY 39.7 billion, up 6.6%. Capital inflows from clients continued on the back of progress in total asset consulting leading to an accumulation of asset balances, primarily in equity investment trusts and fund wrap services. While floor-based revenues declined due declined due to the market volatility, asset-based revenues expanded steadily. By product equities, revenues declined by JPY 6.2 billion, reflecting a decrease in equity trading for both domestic and foreign equities compared to Q1. Fixed income captured investment demand amidst rising interest rates, maintaining solid revenue levels. Wrap-related revenues. Met client needs for stable management and portfolio diversification increased by JPY 1.6 billion to JPY 20.8 billion, setting a new all-time high. Asset-based revenues set a record high of JPY 38.3 billion, driven by ongoing net inflows into equity investment trust and fund drops. The fixed cost coverage ratio of asset-based revenues in the Wealth Management division rose to 128.4%, and the total cost coverage ratio increased to 82.1%. Net asset inflows totaled JPY 312.6 billion. The individual segment maintained net inflows for the 11th consecutive quarters with new fund flows consistently originating from yen time deposits in addition to equity investment trusts and fund wrap services. Please refer to Pages 28 and 29 for detailed figures. Please turn to Page 16. Besides present sales and distribution amount by product in the domestic wealth management division. Wrap Account Services, contract value was JPY 418.2 billion. The net increase was JPY 294.6 billion, both reaching record quarterly highs. Contract AUM climbed to an all-time high of JPY 6,946.9 billion. Equity Investment Trust sales volume was JPY 502.7 billion. with redemption remaining low. The net increase stood at a high level of JPY 165 billion. For RAP services and early equity investment trust reached JPY 459.6 billion, marking an all-time quarterly high. Please turn to Page 17. This slide shows the result of Dionex bank. Net interest income, et cetera, came to JPY 13.4 billion, up 2%, and ordinary income was JPY 7.8 billion, up 8.5% was record highs. Deposit balances declined from the end of the previous quarter as growth in time deposits, driven by our promotional campaign was more than offset by increased transfers of funds into security investments and withdraws of maturity proceeds. Please turn to Page 18. This slide shows the results of Oryx Bank, which we began consolidating this quarter. On a stand-alone basis, Orix Bank posted ordinary revenues of JPY 24.1 billion, up 8.5% and order income of JPY 8.3 billion, up 20.5%. Its contribution to the consolidated ordinary income of the Wealth Management division was JPY 6.7 billion after deducting amortization of goodwill. The loan balance was flat compared with the end of the previous quarter as an increase in investment property loans and other loans was offset by a decrease in corporate loans. Please turn to Page 19. We I will now explain the Asset Management division. First Securities Asset Management. Net operating revenues were JPY 22.9 billion, up 7.9%. and ordinary income was JPY 12.8 billion, down 18.3%. Well, revenues increased on the back of a higher AUM during the period. Profit declined due in part to valuation losses recorded on certain assets. The AUM in publicly offered investment trust at Daiwa Asset Management surpassed JPY 44 trillion, reaching a record high. Please turn to Page 20. Next, Real Estate Asset Management. Net operating revenues were JPY 12 billion, down 9.7%. And and ordinary income was JPY 9.8 billion, down 0.3%. AUM reached a new record high, reflecting the steady accumulation of assets. Ordinary income was broadly in line with the previous quarter, supported by stable AUM linked revenues and gains on property sales at Daiwa Securities Reality and Summit. Please turn to Page 21. Next, Alternative Asset Management. Net operating revenues were JPY 3 billion and 1 income was JPY 1.2 billion. Capital gains declined due to lower gains realized from investment exits. In addition, Daiwa Energy & Infrastructure recorded losses on renewable energy-related investments. Please turn to Page 22. Finally, the Global Markets and Investment Banking division. First, Global Markets posted net operating revenues of JPY 45.7 billion, down 15.1%, and owner income was JPY 11.1 billion, down 38.6%. In equity, while trading value in stock market declined globally, we steadily captured institutional investor flows and the performance remained solid. In equity derivatives, despite lower volatility, we captured plant demand and both the number and the value of new trades increased. In FICC, domestic business remains solid as we steadily captured client flows, mainly in Japanese bonds and derivatives, even amid rising interest rates. Overseas, however, grand flows decreased due to rising U.S. interest rates and challenging postal management. Please turn to Page 23. Global Investment Banking posted net operating revenues of JPY 23.4 billion, up 3.4% and ordinary income of JPY 4 billion, up 22.7%. Higher revenues from debt underwriting and the domestic M&A contributed. This concludes my explanation of our financial results for the second quarter of fiscal year 2026. Let me make some closing remarks. In the second quarter, the steady accumulation of stable asset-based income supported of our results, enabling us to secure an annualized ROE of 11.3%. With market partially collecting, meet uncertainty about the outlook, flow-related revenues declined. And ordinary income was JPY 78.2 billion, down 11.2% from the previous quarter. At the same time, we believe this quarter demonstrated that our earnings foundation remains solid as reflected in our base income level, even as tailwinds from the external environment temporarily weakened. Asset inflows from clients continue at a high level. Net sales, that is net inflows of equity investment trust and WAP account services reached a record high for a quarter. Although client activity declined due to factors such as collection in the team stocks and the rising interest rates, we view it as a significant achievement that our net inflows which are the most important factor in growing our customers' assets over the medium to long term reached a record high. Turning to the current situation. In the third quarter, even as market conditions fluctuate, we think that client demand for medium- to long-term asset building and diversified investment remains strong. Since the start of October, would management has continued to perform well. Meanwhile, Global Markets has been affected by market conditions, and is slower than in the second quarter. But in the Global Investment Banking, we are still building our deal. In addition, Bank became a wholly-owned subsidiary of DaranextBank on August 3 and has been consolidated since the second quarter. The addition of lending capabilities will diversify our driven sources and broaden the range of solutions we can offer to meet client needs. Going forward, with Wealth Management at the core of the group's growth, we will achieve profit growth by deepening and extending our relationships with our clients. We will also work to further expand asset management AUM and to create business opportunities as primary and secondary markets become more active. We'd like to ask for your continued support. This concludes my presentation. Thank you so much.

We will now move on to the Q&A session. [Operator Instructions] We would like to introduce the first question, SMBC Nickel Securities. Morales go ahead with your question.

This is Muraki from SMBC Nikko. I have 2 questions. First relates to Wealth Management and the other 1 relates to global market. So Page 17 about the next back. So because of the transfer of funds to Daiwa Securities, the deposit has come down. And in the previous page, in Page 16, in the Daiwa Securities, the equity investment trust and as the net inflow was record high. So is there a shift -- is there an acceleration of shift from savings to investment. Is that how we should interpret that? So if you can explain the reason for the fund move as well as how sustainable business. The next question relates to the Page 22 about global market. In the past 3 quarters, the profit has been at a high level, but it has been on the decline and has been slow October onwards. But for the month of July, August, September and October, how has the revenue trended in those months? If you can give us more color, that would be appreciated.

Thank you very much, Marco, for that question. The individual customers. And also for the corporate customers, for both of them. So this move away from savings to investment. It is definitely accelerating and this trend has strengthened. If you look at the number -- there are some ups and downs -- but in terms of the customer inflow for the second quarter, it was JPY 310 billion. So in comparison to Q1, there was a slight decline. But if you look at on a half-on-half basis, for JPY 800 billion for this past half last year, second half was JPY 900 billion. And also that last year's first half was JPY 700 billion in the second half of 2024 was JPY 700 billion. So actually, we're trending at a high level between JPY 700 billion to JPY 800 billion. Also in terms of the asset under management has been steadily increasing. So of course, there are some impacts related to market the value and so forth. But in various areas, we are seeing this move away from savings into investment. So where that is most contiguous is in the equity investment trust and fund wraps. So in terms of the net inflows or net increase, net sales, it was a record high. So of course, the market environment was not necessarily a tailwind, but of course, the customers are looking at asset formulation more on the mid- to long-term basis. So the needs have been very strong. So recently, our take is the customers' needs. It's about -- it's not so much of which products are they going to purchase. It's more about how they intend to basically structure their own assets and how -- so I believe the interest of the customers have shifted, especially for those high net worth customers, we believe those needs are becoming more prominent. So given this into consideration, we are promoting this total asset consulting and a result of the fund drops and the equity investment trust have been chosen by the customers. So as for the Daiwa Bank, the deposit balance has come down and as related to that. Again, the cross-sales to securities has been promoted. So for the second quarter, the corporate bonds and also JGBs, there has been more outflow to the bonds and also transferred to fund wraps. We are seeing those movements. If you were to look at 12 months ago or a year ago, so the -- some of the time deposit, which we collected about a year ago during the campaign, substantial amount has actually reached maturity in second quarter. So about 70% was the Daiwa Securities in terms of how they were able to retain. But 30% of the customers or the flow, they actually -- it was an outflow to other financial institutions. So there was an outflow to the securities or also to other banks. So if you look at 3 months only, it was a negative balance. But from the perspective of increasing the total asset under management of the customers, we believe the strong momentum is continuing. So we're not exactly seeing change in the trend. So your question related to how sustainable this trend is -- so more of this total, the asset consulting will be continuously promoted. And also, we would like to enhance the quality of consulting to the customers and hopes of gaining trust from the customers, which will lead to long-term relationship. So we would like to make sure that, that sustainability is maintained. Also related to the second part of your question, -- so for the months of July, August and September trend, as far as equity is concerned, as you may know, back in July, the AI semiconductor stocks, there was a bit of a correction in the market. And there was a recovery a little bit in August. And again, it was down again in September. So as far as Japanese equity is concerned, the Nikkei average has come down for those 3 months. However, topics went up. so there were rotations of different names. So, in the month of July and August, the volatility has come up. However, there has been a portfolio rebalanced. We have seen those both from the institutional investors and the individual investors. So on a relative basis, it was at a high level. So in terms of the proportion of July, August and September, it's about 40%, 30% and 30% in terms of the breakdown. And as far as the FICC is concerned, Q2 across the second quarter, that is -- so as far as the domestic bond business is concerned, the revenue has increased in comparison to Q1. So the interest rate -- now that interest rate is trading positive now that we're seeing an inflationary trend. So there's more needs to or bond and those products with yield. So there has been more flow towards those products. So, there has been rebalancing needs of the institutional investors. And we've been able to successfully capture those. So that is why the revenue has increased on a Q-on-Q basis. September, the month of September. So, in terms of the capital of the market, the American FICC business, the U.S. The treasury, the interest rate has come up and also with the discounting and the credit spread there has been some challenges in terms of the positioning. Also with the rise in interest rates, the U.S. residential loans has come down. Therefore, there is -- because of the decline in the funds flow, there has been some challenges in terms of the mortgage-related businesses. So FICC in domestic and overseas combined together, it's about 40%, 40% and 20% in terms of the breakdown. It's just a rough breakdown, but that's where we are. So, in comparison to the average of Q2, the month of October, of course, it is just the starting point. So, I'm just sharing with you the current image. So, it is a slow start, let's just say, for the month of October. That is all. So as far as the global market is concerned, then the month of October, the interest rate has come down. So it's not a simple explanation then. So with the interest rate going up, that is what sort of impact it has. So it's not that -- so -- and that is correct. So it is not a simple direction. We should look at the customer flow and also the positioning in anticipation of those customer flow. So there's not necessarily the correlation with the interest rate ups or nets. So the overall flow, potentially, of course, there is a possibility -- so various events in autumn, after they are completed, we are hoping that we will get back to more of a normal mode. Thank you very much.

Mr. Muraki, thank you so much for your questions. Next questions are from soon, BOB Securities.

First, marketable securities. -- profit and losses from sale of marketable securities. As you mentioned, you included alternative assets, energy and infrastructure devaluation losses, additional losses were included. And for that particular item, that is a positive impact in the segment for the whole alternative particularly. So there are losses and profit gains mixed together. So, what is the size of the losses for each one? And also it looks like tax looks high compared with the adit. So did you have some losses in the scale of some billion. So what is the image of the scale of the losses? And also, what are the specific assets for which you incurred various in Europe, in particular, I thought you cleaned them up industrial. So what are the types of assets that could generate buttonless in the future. My second question down in October and compared with September interest rates internationally have come down. So compared with September, markets recovered, Am I right?

Thank you so much for the questions. In terms of the alternative asset management gains and losses from sale of marketable securities both gains and losses -- old marketable securities, PI partners. There was a big one. And also the energy infrastructure for the renewable assets, to do the specific losses and amount is similar to the number that you have mentioned. So, it's not the amount that you may season. For renewable energy in Japan and internationally in both markets, relatively speaking, as fixed tariff generating income to generate stable income. That's the business model. But recently, due to the Middle East situation and global inflation the procurement cost, procurement price is increasing. This although the tariff is fixed, however, cost is increasing. So overall, this business model is facing the difficult situation at the moment. from the beginning of this fiscal year. So with that situation, we have revalued the vast assets are, which we do every year. In this process, sometimes we have the variation of losses or impairment -- that's why we have impact from those valuation processes. But as we have been saying from last year, we have assets in Europe. and assets in other regions, and there were multiple of assets. To your second question, strongness in October, it seems that interest rates have come down. The season is not strong for fixed income and equity because of the interest rates, as I answered the first person question, depending on the direction of the interest rates it does not directly impact the trading position directly . as you mentioned correctly, in the equity business, U.S. stocks, retail investor trading from August to September, the trading declined in volume, but just coming back at the moment for the U.S. stocks. So it's been only 1 month. So we are off to a relatively slow start, but I think we can catch up. I hope I answered your question.

I'd like to move on to the next question. Hasan from Nomura Securities.

This is Sasaki from Nomura Securities. So my first question relates to Orix bank that you have newly consolidated. So as of end of September. So looking at the explanatory materials -- so the loan-to-deposit ratio was over 100% as of end of September. So the funding for Orix Bank, what are your thoughts going forward? So is there any sort of funding? Well, are you looking aside from deposit? So will you be doing financing within the Daiwa Securities Group. So that is the first question. Also, are you talking about this the move away from savings into investment. You've talked about that. So I'd like to know about the Dionex band to Daiwa Securities. If the funds were transferred, what sort of impact would it pose on the revenue. So let's just say, the banks -- so they would have 1% or so revenue vis-a-vis the deposit. But once that is transferred to Daiwa Securities. So let's just say if it's changing to corporate bonds. On a short-term basis, I believe the revenue will not go up on a short-term basis. So when the Daiwa to Daiwa securities, if the funds are moved, what sort of impact would it pose on the revenue of the group as a whole?

Sasaki-san, thank you very much for that question. On the Orban on a stand-alone basis, the loan-to-deposit ratio exceeding 100%. So that has been the case prior to consolidating Orix bank. So because of that situation, they were facing some challenges in expanding their lending. Right now, -- so on a combined basis, with the Daiwa Next bank in terms of the loan-to-deposit ratio, it's in the 60% range, 60% range. So, what is the becoming the subsidiary of Daiwa -- so what our Daiwa next bank in the BOJ current account, they're already starting to use up for the lending for OraBank. So by leveraging on that, we believe there's still room to raise or enhance the loan-to-deposit ratio. Also the second part of your question from the next bank to the securities, if the funds are shifted, how would that impact the revenue. Of course, if it sounds as a deposit or held as the bonds or securities or investment trusts. There are different ways that revenues could be posted. So we cannot paint it was across the board the same. But we do not actually look at the profitability per product. Therefore, we should gather more funds to this particular product. That is not how we consider. Really boson to what are the needs and demands of the customers. and given the risk and return tolerance and also given the current state of the asset, we propose the best products and portfolio. That's how we proceed. And that is also reflected in the incentives of the sales person as well. So it is not the revenue of the profitability that they are incentivized to sell more particular products. Also in terms of the profitability or the revenue generation, it may depend on the interest rate and also the equity share price ups and downs. So rather than proposing a single product to the customer, we are proceeding with the total solution provision. So the spread or the margin that we can have for the deposit as opposed to individual JGB. Of course, deposit appears to be higher. But in terms of the GP, it could be considered as an entry point to further securities investment. So again, we'd like to propose products that are best fitted for our customers.

Just 1 point I forgot to ask. So you've talked about Akasaka Prince. So JPY 300 billion. So I think there has been immediate coverage, so would you be the arranger. And so you would just be providing the finance? Or would you also be making investment with your own funds? So that's just a follow-up.

So, I cannot comment on the individual deals. But as of today, what has been disclosed. So this particular property equity token, STO, about JPY 300 billion -- JPY 300 billion, so we will underwrite the ST and Daiwa Securities has been selected for that. So the securities, the demand towards real estate continues to be high. So by using the security token and more about smaller size retail, the products the needs continues to be high. And also the property has a very well known. So we believe this is significant in providing various investment opportunities to diversecute these customers. so there are some information that has not been disclosed. So we would like to reframe for making -- providing you with further information. Thank you very much.